#15 – A lighter post… NFL and it’s weak corporate governance..

To best demonstrate the Corporate Governance challenges faced by major Corporations and businesses today, there is no better example than the NFL. A public institution that is held dear by many Americans, suffers greatly from a poorly designed Governance framework. As revenue for the NFL continues to rise, and pay for the commissioner Roger Goodell reaches new heights[1]; recent issues call into question actually how protected players, fan’s and other contractual stakeholders are in the NFL’s governance framework. Whether it was conduct related issues (e.g., Ray Rice sexual abuse charges), medical related (e.g., concussions and impact on NFL player’s long term longevity) or even now just sheer ratings declines, Roger Goodell the commissioner has been the sole arbiter or what punishments, policies and actions were taken. At the center of the paper is whether Roger Goodell is inherently conflicted? This paper will further explore how the governance and accountability structure around Roger Goodell has impacted recent decisions, and will further set out suggestions to arrive at a fairer and more balanced governance structure.

Section 1: What is the NFL’s Current Governance Framework?

The NFL is largely run day to day by the Commissioner. The NFL does not hold elections for the commissioner. He is voted on (once initially) by the owners of the 32 NFL teams, and his appointment remains until death, retirement or removal.[2] He does not work for the fans, players or any other stakeholders. He answers only to the owners. The NFL through the commissioner largely governs the league by setting policy and procedure that teams need to comply with. As an example; “The Game Operations Manual is one of the league’s three comprehensive policy manuals for member clubs — the other two are for administrative and business operations, and media and public relations — and, by necessity, it is often military-like in its precision and astonishing in its thoroughness”[3] Compliance with these manuals is carried by out by various offices reporting into the Commissioner (e.g., NFL Operations Office), attempting to ensure a level playing field exists for all NFL teams. Further, when issues arise, the Commissioner has the sole power to discipline, and adjudicate matters, this authority was further clarified the league’s collective bargaining agreement (CBA) in 2011, “NFL Commissioner Goodell is not only judge, jury and executioner, but also lead investigator, prosecutor and the court of appeals”[4]. There is no formal job description or mandate of the NFL Commissioner on the NFL’s website, this is largely all that is said “As the league’s chief executive, the commissioner has a great deal of influence. But he still must answer to the owners, who by executive committee vote have the power to remove him”[5] Piecing together the various responsibilities agreed to in the CBA, we can simply summarize that Roger Goodell, is the sole overseer of the sport – reporting and only accountable to the 32 owners. The executive committee is the 32 owners, there is no independent Board,

Section 2: What are the challenges with the current NFL Governance Framework?

Three recent issues spanning ethical, safety and performance areas, highlight the inherent conflict of interest and governance challenges that the NFL is currently grappling with.

Example 1: Ethics and Conduct

Ray Rice a running back for the Baltimore Ravens was charged with simple assault of his wife in February 2014. Over the course of several monthes the Ravens and Roger Goodell deliberate and meet with Ray Rice and others involved in the incident[6]. On July 24^th the penalty was formalized and announced by the NFL, a two game suspension. While these deliberations were occurring and the penalty formalized, more footage was being leaked to the public that showed Rice had probably done more than just a simple altercation (including dragging his wife out of an elevator). On September 8^th additional video was released that showed that Rice had actually punched his wife[7]. Fans, players and other wondered, how could the NFL miss this? Didn’t they see the video? What did their investigation actually uncover? Left many wondering why these questions were never asked”. On September 9th, Roger Goodell denied seeing the Rice video, “We had not seen any videotape of what occurred in the elevator,” Goodell said. “We assumed that there was a video, we asked for video, we asked for anything that was pertinent, but we were never granted that opportunity”[8] Following the video releases and subsequent statements provided by Goodell, a formal independent investigation was launched, refuting the notion that Goodell was unaware of the video, and that Rice did disclose the extent of the abuse. In November of 2014, Ray Rice win’s the appeal and as a result was the Judge forced the NFL to reinstate him. We do not have all the finer details of the meetings Goodell had in his role as de facto Judge (in determining the appropriate length of time Rice should be suspended), but we know his decision and we know the outcome. Goodell clearly never investigated the matter fully, nor did it seem like he wanted to. By virtue of the questions he had asked, one can safely assume, Goodell wanted this matter to away. Compliance Week writes,

The conflicting priorities here are clear: protecting the brand value of the NFL, versus enforcing a high standard of conduct for a very public business. All evidence points to the NFL instinctively pursuing the former at the expense of the latter. Or if you want to view the NFL’s problems through the lens of the COSO framework, it fails to meet the very first principle of internal control—demonstrating a commitment to integrity and ethical values. The NFL has demonstrated a commitment to protecting its brand value.[9]

The Commissioner seemingly was making up rules on the fly and prioritized making the matter go away over upholding the NFL’s policies, which clearly dictate penalties for code of conduct violations. However when looking at the accountability and reporting structure of the Commissioner, we should expect that he is incentivized to make the matter go away. It hurts the brand of the NFL to have a messy matter

Example 2: Safety

There has been a heated debate over NFL player’s safety, and the extent to which the NFL has properly protected and disclosed the risks of playing football to NFL players. One must wade into this debate carefully, given the heated viewpoints. If we look at the fact pattern, we can at least conclude that over the past 20+ years the NFL has had several large mis-steps in protecting NFL players, highlighted by settlements with players and flaws in research.

• The NFL in 2013 agreed to a $765 million settlement with retired players who were accusing the NFL of covering up the risks of concussions[10]
• A NYT investigation in March of 2016 highlighted extensive flaws in concussion research conducted by the NFL last decade. From 1996–2001, over 100 concussions were omitted from official data that was used in important concussion research.[11] The NFL league’s commissioner at the time, Paul Tagliabue, acknowledged the need for “independent scientific research” to better understand the risks of concussions[12]

Regardless of one’s views on the issue. We can ask questions that drive how the governance was working or not working, on why was there such a bias in the research performed on concussions? Through the research and reporting performed on this topic, we know now that data and research performed was misrepresented. There was not an interdependent view being put forward on the impact of concussions in players. Should we expect more of the Commissioner? No, not with the current governance framework. The Commissioner is incentive to protect the brand of the NFL to maximize revenue and dollars from Corporate Sponsors flowing to the NFL’s owners. The Commissioner is only indirectly accountable to its players. With the current system of checks and balances, we shouldn’t expect more.

Example 3: Deflate Gate Further drawing the NFL’s governance process into center stage, was the issue of whether Tom Brady intentionally deflated footballs to improve his performance. Roger Goodell, controlling the entire end to end process, found and then confirmed his own finding when he served as the arbitrator that “that Tom Brady “engaged in conduct detrimental to the integrity of, and public confidence in, the game of professional football.”[13] Goodell concluded with a four game penalty without pay. Fast forward and Brady appeals the decision based upon a generalized argument that Goodell was making up rules on the fly, the case is brought to Federal Judge Berman. The NFL’s main argument that via the CBA (a private agreement), the players have bargained away their rights, that the only opinion that matters is the Commissioner. Berman ruled “that Goodell was “fundamentally unfair’’ to Brady when he refused to turn over the notes from the investigators from the Paul, Weiss law firm who produced the Wells Report. He also ruled that Goodell was wrong for refusing to let the NFLPA question NFL general counsel, Jeff Pash, whom the judge said played a key role in the Wells Report investigation”[14] Ultimately, the NFL appeals Berman’s decision and wins on a 2-1 decision. Regardless, the episode again highlights the unilateral nature of the decision making process and the lack of checks and balances,

Section 3: Suggestions for future improvements

As we analyze the various stakeholders and how they interests are represented in the NFL’s governance process, we clearly see the dominant influence of Corporate Sponsors and their pressure on the owners / and the NFL directly. There is clear bias from the owners to protect the brand thus indirectly protecting their TV rights deals, and other sponsorship deals. With no election for the Commissioner, public pressure and a large enough outcry is the only mitigation to remove the Commissioner. Evidence highlights through Deflategate, Ray Rice and the Concussion issues that it takes a fair amount of damage to remove a Commissioner (as even with declining ratings, Goodell remains). In summary my view, some of the core aspects of Corporate Governance are missing from the current processes

• Provide a mechanism for players and fan’s to weigh in on the performance of the Commissioner. Even if it does not correlate to directly influencing whether the Commissioner remains, the public data would provide transparency on stakeholders interests and viewpoints
• Consider establishing an independent board that is not biased / or directly conflicted (as is the Executive Committee, which represents the 32 owners). This Board would provide the NFL with a body that can provide effective oversight and management challenge.
• Separate management duties from disciplinary duties at the management level to prevent a situation like Deflate gate where the Commissioner ruled on the action, and then was the arbiter of the action. Revisit general best practices on Enterprise Risk Management and COSO and implement areas of independent control / monitoring at the management level to better ensure decisions are in line with policies and procedures. There is no clearly no separation of duties, no controls to ensure that the policies and procedures set forth by the NFL are followed without biased. This recommendation will result in the increase in resources that are dedicated to Compliance, Risk Management and Audit,

 

The NFL a bedrock institution of America, is not a shining example of Corporate Governance. It does however provide a lens into some of the challenges institutions face in creating an effective governance system that protects the various stakeholders (Fans and Players included). It will likely only take a major crisis for Congress or other governmental stakeholders to act on rectifying some of these flaws.

 

Appendix

Works Cited

Alan Schwarz, Walt Bogdanich and Jacqueline Williams. “N.F.L.’s Flawed Concussion Research and Ties to Tobacco Industry.” The New York Times. The New York Times, 24 Mar. 2016. Web. 07 May 2017.

Bien, Louis. “A Complete Timeline of the Ray Rice Assault Case.” SBNation.com. SBNation.com, 23 May 2014. Web. 07 May 2017.

Cannon, Patrick. “Emperor Goodell Must Go.” Emperor Goodell Must Go. CBS DC, 03 Nov. 2016. Web. 07 May 2017.

Gaines, Cork. “Roger Goodell’s Pay Has Skyrocketed In Recent Years.” Business Insider. Business Insider, 25 Sept. 2014. Web. 07 May 2017.

Kelly, Matt. “The NFL’s True Problem: Misplaced Priorities Trumping Ethics & Compliance.” The NFL’s True Problem: Misplaced Priorities Trumping Ethics & Compliance. Compliance Week, 15 Sept. 2014. Web. 07 May 2017.

“League Governance.” League Governance | NFL Football Operations. NFL, n.d. Web. 07 May 2017.

Neumeister, Larry. “Key Excerpts from Judge Berman’s Ruling in Favor of Tom Brady in His ‘Deflategate’ Battle with the NFL – The Boston Globe.” BostonGlobe.com. Boston Globe, 03 Sept. 2015. Web. 07 May 2017.

Ornitz, Darren. “Does the NFL Enjoy Absolute Power?” Does the NFL Enjoy Absolute Power? Newsweek, 20 July 2015. Web. 07 May 2017.

 

[1] http://www.businessinsider.com/chart-roger-goodell-salary-nfl-revenue-2014-9

[2] http://washington.cbslocal.com/2016/11/03/emperor-goodell-must-go-elect-a-new-nfl-commissioner-every-four-years/

[3] http://operations.nfl.com/football-ops/league-governance/

[4] http://www.newsweek.com/deflategate-does-nfl-commissioner-enjoy-absolute-power-364565

[5] http://operations.nfl.com/football-ops/league-governance/

[6] http://www.sbnation.com/nfl/2014/5/23/5744964/ray-rice-arrest-assault-statement-apology-ravens

[7] http://www.sbnation.com/nfl/2014/5/23/5744964/ray-rice-arrest-assault-statement-apology-ravens

[8] IBID.,

[9] https://www.complianceweek.com/blogs/the-big-picture/the-nfl%E2%80%99s-true-problem-misplaced-priorities-trumping-ethics-compliance#.WQ-Zu16GOUl

[10] https://www.nytimes.com/2016/03/25/sports/football/nfl-concussion-research-tobacco.html

[11] IBID.,

[12] IBID.,

[13] http://www.newsweek.com/deflategate-does-nfl-commissioner-enjoy-absolute-power-364565

[14] https://www.bostonglobe.com/metro/2015/09/03/key-excerpts-from-judge-berman-ruling-favor-tom-brady-his-deflategate-battle-with-nfl/otHrD9NxJsREqR2UYWW2kJ/story.html

#14 – Amazon Domination

Wow. Amazon’s stock just hit $950, Q1 2017 earnings topped $33bn and retailer after retailer is collapsing. Previously I wrote in #4 – Will Amazon take over the world?, that Amazon was destroying brick and mortar retailers. A refresh of the analysis, highlights the trend is not slowing down.  Amazon’s revenue in 2012 (60bn) vs. 2016 (140bn) against 9 large retailers (best buy, sears, macy’s, jc penny etc.) highlights this incredible change in the retail landscape.

 

 

 

 

#13 – Reflections on American Leadership and the US Constitution

After finishing a great read on the life of Benjamin Franklin, I have been consistently inspired by how incredibly gifted and astute our founding fathers were. Their foresight and the ability to craft complex compromises that still stand and protect America’s citizens today is incredible, being the single force that has enabled and propelled our nation to develop into what it is today. After enjoying the read on Franklin, it led me down a path of other great American leaders who were truly able to see the big picture, understand what made America unique, and enable its citizens to have hope and believe in the values that were critical to our country’s foundation.

Franklin puts it well in his final speech at the closing of the Constitutional Convention in 1789 which took place in Philadelphia. His honesty, humility, and incredible self-awareness speak volumes about who Franklin was.

” For having lived long, I have experienced many Instances of being oblig’d, by better Information or fuller Consideration, to change Opinions even on important Subjects, which I once thought right, but found to be otherwise. It is therefore that the older I grow the more apt I am to doubt my own Judgment, and to pay more Respect to the Judgment of others”[1]

While even doubting his own views, Franklin knew what they had accomplished was incredible.

“I doubt too whether any other Convention we can obtain, may be able to make a better Constitution: For when you assemble a Number of Men to have the Advantage of their joint Wisdom, you inevitably assemble with those Men all their Prejudices, their Passions, their Errors of Opinion, their local Interests, and their selfish Views. From such an Assembly can a perfect Production be expected? It therefore astonishes me, Sir, to find this System approaching so near to Perfection as it does; and I think it will astonish our Enemies, who are waiting with Confidence to hear that our Councils are confounded”[2]

Washington in his first inaugural address, April 30^th, 1789, understood the importance of being the first President, and the great care he had to take in setting a precedent, given the general anxiety of US citizens after just throwing out the British Monarchy.

“no event could have filled me with greater anxieties than that of which the notification was transmitted by your order”[3]

Washington reflected on the special nature of America, invoking religious undertones, on a theme that would be repeated in many inaugural speeches years later.

“Every step, by which they have advanced to the character of an independent nation, seems to have been distinguished by some token of providential agency”[4]

Lincoln years later, constantly came back to the core values of our US constitution. After the battle of Gettysburg in November of 1863, Lincoln delivered one of the most monumental speeches in American history;

“Four score and seven years ago our fathers brought forth on this continent, a new nation, conceived in Liberty, and dedicated to the proposition that all men are created equal”[5]

During the dark days of the Great Depression and reflecting upon the general mood and spirits of the American people, FDR delivered a soaring speech in his first inauguration on March 30^th, 1933:

“Happiness lies not in the mere possession of money; it lies in the joy of achievement, in the thrill of creative effort. The joy and moral stimulation of work no longer must be forgotten in the mad chase of evanescent profits. These dark days will be worth all they cost us if they teach us that our true destiny is not to be ministered unto but to minister to ourselves and to our fellow men”[6]

FDR stressed the importance of our constitution as the foundation in which America is great.

“Action in this image and to this end is feasible under the form of government which we have inherited from our ancestors. Our Constitution is so simple and practical that it is possible always to meet extraordinary needs by changes in emphasis and arrangement without loss of essential form. That is why our constitutional system has proved itself the most superbly enduring political mechanism the modern world has produced. It has met every stress of vast expansion of territory, of foreign wars, of bitter internal strife, of world relations”[7]

Years later, after escalations in tension with Russia, and multiple global conflicts (Korean War, rising tensions in Vietnam)… JFK reminds us again, what we stand for us as a people.

“And yet the same revolutionary beliefs for which our forebears fought are still at issue around the globe–the belief that the rights of man come not from the generosity of the state but from the hand of God.

We dare not forget today that we are the heirs of that first revolution. Let the word go forth from this time and place, to friend and foe alike, that the torch has been passed to a new generation of Americans–born in this century, tempered by war, disciplined by a hard and bitter peace, proud of our ancient heritage–and unwilling to witness or permit the slow undoing of those human rights to which this nation has always been committed, and to which we are committed today at home and around the world.

Let every nation know, whether it wishes us well or ill, that we shall pay any price, bear any burden, meet any hardship, support any friend, oppose any foe to assure the survival and the success of liberty”[8]

Where is this leadership today? Lost in the shuffle of all the political rhetoric and noise, have we lost our grounding and foundation? Have we lost what has made us so special?

These great American leaders and our incredibly flexible and dynamic US Constitution  were the core reasons the US has been able to out innovate and out pace the rest or the world. Creating an environment that promoted equality, opportunity and liberty.

Hopefully, we will not do too much damage in these next few years…to ruin the foundation and core values that make America special.

 

References

[1] http://www.pbs.org/benfranklin/pop_finalspeech.html

[2] IBID.,

[3] https://www.archives.gov/exhibits/american_originals/inaugtxt.html

[4] IBID.,

[5] http://www.abrahamlincolnonline.org/lincoln/speeches/gettysburg.htm

[6] http://www.presidency.ucsb.edu/ws/?pid=14473

[7] Ibid.,

[8] http://www.presidency.ucsb.edu/ws/index.php?pid=8032&

#12 – Italy… the domino that ignite the next global economic downturn..

As I continue to focus on some of the upheaval and implications of the populism that is sweeping the US and Europe, this briefing will focus on the political risk posed by Italy and the corresponding investment climate.

Economic Landscape

The Italian economy is struggling. Total GDP is still lower today than it was in 2008, pre financial crisis. Italy Government Debt to GDP in 2016 was 132% (the highest it’s ever been), youth unemployment is projected at greater than 40% and Italy experienced an entire year of deflation in 2016, its’ first in 70 years[1]. Contributing to the challenge is a low birth rate (lowest since the state was founded in 1861), and a historic focus on low cost manufacturing that is increasingly being moved to more competitive cost environments (e.g., China). There are large questions of whether Italy’s businesses are keeping pace and innovating with the rest of the world. Enter Italy’s fragile banking system, with more than 331bn in Non-Performing Loans in 2016 (more than 21.4% of loans are bad)[2] and some of the weakest global banks in the world. “As Italy and Europe more broadly struggle to come to grips with an escalating problem with bad loans, a new paper by economists connected to the Center for Economic Policy Research, highlights the extent to which Italy’s main banks — known to be the weakest in the Eurozone in terms of cash reserves — have stepped up their lending to the country’s most troubled companies”[3].

Potential future stresses on the Italian financial system are not unforeseeable. It was just four years ago when the 2012 Eurozone crisis occurred and Italian CDS spiked to near 700 making the feedback loop between sovereign debt and banking institutions not completely in the rear-view mirror. Do Italy’s political institution’s (and the greater European system) have the capacity and resiliency to weather a future potential banking/debt crisis?

Political Landscape

While the world is watching the drama of the French, German and Dutch election (and processing the after-shocks of Brexit). Italy is dealing with its own unique soap opera that has substantially reduced the political capacity of its governmental institutions to address a fiscal crisis. Matteo Renzi, the young charismatic leader who attempted to pursue through a referendum, was dealt a blow in December 2016 after voters “dismissed his plans for constitutional reform in a crushing referendum that saw close to 60% of voters opt for no”[4]. Renzi would later resign after the referendum loss dismantling his left-right coalition. While Italy attempts to pick up the pieces, Sergio Mattarella, the current president, is facing calls to have an early election well in advance of the planned May 2018 date. Recently, Italy’s constitutional court revised parts of law approved by Renzi that raised the chance of early elections this year (which may also result in one-round of voting vs. two rounds). Adding fuel to calls for an early election are Renzi’s Democratic Party and the anti-establishment populist Five Star Movement (M5S). Rising in popularity the M5S now nearly garners 30% of the vote in a mock election, is an increasing force in Italian politics, and is in a virtual dead heat with Renzi’s Democratic Party. Part of the puzzle will be whether the M5S can garner enough votes to offset the requirement to have 40% majority vote (favoring political groups such as PD who are more likely to form a coalition). The M5S has the potential to shake up Italian politics significantly, furthering the populist trends across Europe. While this is going on, there is still a debate of whether Renzi will maintain his positioning with PD (as party lead) after his resignation and whether the traditional political parties will further fragment.

Who is the M5S?[5]

Founded in 2009 by comedian Beppe Grillo and web strategist Gianroberto Casaleggio, the party was based on “the twin ideas of a new form of direct democracy and popular disgust with the political elites,” according to politics professor James Newall. Most of the leadership from the M5S, comes from the left, but it has picked up voters in both directions with voters who are generally disenfranchised with the status quo. The party’s platform is based on five issues: publicly owned water, sustainable (eco-friendly) transport, sustainable development, right to internet access, and environmentalism. The party’s policies don’t fit traditional political parties[6]. It has a flavor of anti-establishment, anti-immigration, pro-green and is overall skeptical of the European Project. Recent successes in the 2013 election, garnered more than 100 seats for the M5S, including the Mayor of Rome. Some of this has not been without growing pains, including 18 resignations and a rocky start for the Mayor of Rome (she has been rocked by a scandal with over 4 resignations).

So what’s the call?

MP5 will win in an early election (one-round of voting) and have enough votes to govern as Italians are seeking a change and are more willing to vote for a change than present circumstances. This will follow populist trends across Europe.

1. MP5 will win the election and have enough of majority to govern (40%)
2. MP5 will win the highest percentage of votes but will fall short of a governing %. PD will form a coalition with the right and Renzi will be back in power. This occurs in two rounds of voting. (35%)
3. PD will win the highest percentage of votes and form a coalition government with the right. This occurs in round of voting (this occurs in the second round). (20%)

 Outcomes (for the most likely scenario and our call)

• MP5 will pursue an agenda on a wide eclectic range of issues, none of which are focused on fixing governance issues with the Italian governmental system, or addressing the underlying challenges in the banking system.

• MP5 will underestimate the complexity in governing a large country leading to some rocky steps in the first 100 days of their administration. This will lead to a reduction of market confidence in Italy’s ability to sustain high debt to GDP ratio, and provide private/public solutions to banking system issues.

• All the while, the ECB and other European governmental actors will have a full plate. Dealing with the fall-out of other European crises (e.g., Brexit, French elections, Greece etc.)

 

Client Implications

Italian asset classes will under-perform broader European countries, as well as other developed countries around the world. Until additional political stability is achieved, many of the necessary solutions to address fundamental economic challenges will not be possible. Other countries in Europe should be explored for investment opportunities.

Supporting Visuals

[1] http://www.tradingeconomics.com/italy/government-debt-to-gdp

[2] http://www.pwc.com/it/it/publications/npl-market.html

[3] https://www.nytimes.com/2016/08/19/business/dealbook/italian-banks-continue-to-lend-to-stagnant-companies-as-debt-pile-mounts.html?_r=0

[4] https://www.theguardian.com/world/live/2016/dec/04/italian-referendum-and-austrian-presidential-election-live

[5] http://www.thelocal.it/20161202/what-is-italys-five-star-movement

[6] Ibid.

#11 – Expand our minds.. of what is possible.

I started this blog nearly a year ago with reflections and a few predictions on the incredibly turbulent times ahead (this was before Donald Trump and Brexit, see blog #1). As I have been reading and I have been taking an incredibly insightful class on Political Risk, featuring some of the brightest minds at the Eurasia Group, I thought it would be worth the time to summarize and paraphrase some of the more astute comments. The bottom line is we have to expand our notion of what is possible. Increasing nationalism and weak leadership across the globe is increasing the range of potential outcomes. Buckle up, we all need to be prepared!

1^st story – Donald Trump. No surprise here, but we need to go deeper.

There is not a lot of global leadership in the world. We have more wildfires than we used to have. No Global Leader want’s to accept the cost and risks of putting them out. When we talk about the #1 Geopolitical risk we need to start with Donald Trump. We have to be able to talk about Donald Trump in an analytical way. Some people think of him as a savior, or as a man-child. We need to go beyond that.

Why is Donald Trump different? He is the first person to serve as US president without serving in the Gov’t or in the Military. Most of the time you have a track-record, a voting record. With Donald Trump we are still trying to piece what types of decisions he will make, and what drives him; and he is probably trying to piece it together it himself.

He is the first president since the 1930’s that does not think that Global Leadership means US leadership. Go back to the Marshall Plan – was it the smartest move in the US politics / or was it a bail-out for Europe? He doesn’t believe the US has to be playing that leadership role. He believes that the US guarantees the security of Japan and Germany. These are the two of the world’s richest countries, why is the US still doing that? The counter argument is that there are advantages to the US playing that role.

Would Donald Trump start something if China went after Taiwan? Will the US support NATO? What about Mexico? Mexico is still thinking this guy is building a wall. Does he have to build the wall? He can’t take that back?

We haven’t had to ask these questions in some time! They are moving markets, adding risk! Whether you think he is an agent of change, or a tyrant… he is moving markets, he is opening up possibilities of change.
2^nd story – all of our assumptions on oil are changing.

July of 2008, – Oil was selling for $170 a barrel. Folks were writing articles about how this was going to 500. With India, China etc., demand is only going higher. Are we going to run out of oil? Nope. We used to think that we would run out of oil, now many experts believe this may never happen!

Here is what happened: Fracking and technology has now allowed for oil to be pulled from the earth, that no one was thought was possible. Electric and renewable energy is adding energy sources that are not dependent on oil. If you go all the way back to 1980, the only thing that Regan and Carter could agree on was to end foreign oil dependence. If you compare the known reserves of 1980 to today (2 and half more times oil today). We can find new oil, we can produce it, and we can produce it a lower cost.

There are a lot more US oil companies in the market that are able to compete, drill and sell when price goes up. These companies also are able to bounce back quickly, when the price drops they go into bankruptcy. When the price rises, they re-enter the market and add rigs to drill more oil. It’s not just the big oil companies that are adding to the over-supply it is these nimble smaller companies that are adding to the pressure of over-supply (given the technology advances, and the costs of producing oil have dropped).

We are now back in the low 50’s with the price of Oil. Countries that export oil, that really need the money, are in really bad trouble in the long term. When OPEC cuts production they are just trying to establish a floor. When American companies see price going up, companies pop up… We are stuck in this range of 45-65 on oil prices…

If you are Saudi Arabia and Russia they won’t have a problem in 2017, or 2018… but maybe 2019. Venezuela has a problem right now. Venezuela, is in real trouble. Venezuela used to rely pretty heavily on the US given the crude they were producing required a significant refining capability. Their natural partner was the United States.

When does Russia really get in trouble? When does Saudi Arabia really get in trouble?

Saudi’s solution is vision 2030. A project that is trying to modernize the Saudi economy. How much of the human capacity can you use is the question most countries will face? How much talent can you use? Most graduates of university of Saudi are women, yet only 22% of women are employed. Iran is not under any sanctions anymore. There is intense competition between Iran and Saudi on influence and leverage. Saudi’s are losing oil share and losing influence (Syria will stay in power – Iran will not win Yemen conflict). UAE and Oman, allies of Saudi, don’t really want to stir up conflict they want to make money. Saudi doesn’t really have the same friend on the US that it did with GW Bush (given our lack of independence).

Putin has an approval rating of 82%. Putin hovers above the government and finds people that are to blame. 90% of people get their news from state media. Central bank has some independence and credibility. So there are a two rainy day funds: the reserve fund which is almost gone, and the national welfare fund (a lot of that money is liquid). The state of these funds are the leading indicators to judge whether Russia has a problem. After Putin wins the election in 2017 they will need to start talking about cuts… then you want to look at the price of oil, to see if Russia is in much greater trouble.

3^rd story – ISIS may be losing territory, but don’t forget about them.

ISIS is going down. ISIS is losing Mosul. If you define ISIS by territory, then they are going down. That’s not the only way to define ISIS, however. It is a brand. People are around the world may look up on the internet and claim they are ISIS.

Once the territory goes away, the ISIS fighters will be dispersed along in the world, and will not quite go away. Who is vulnerable? Europe, Southeast Asia, Middle East countries close by. We can expect that there will be another ISIS (just like ISIS popped after Al Qaeda).

4^th story – Europe – It just takes one

Europe has 47 challenges. Not just one 1. There are so many risks that you can make the argument that they will likely manage them, but just one of them has to go badly for things to turn ugly quickly.

• Brexit. Article 50 next week. Britain wants to discuss divorce and future agreements. Europe wants to discuss just discuss divorce. This will play out over 2 years. Can end ugly.
• Le Pen (far right) is running for election in France. Macron likely to win (centrist party). The story here is neither center-left nor center-right will win. Risk is likely overrated.
• Merkel not inspirational. Formidable leader. Close election in Geramny. Bottom line is the next government will be pro-European.
• Early elections in Italy, Five Star making populist moves in Italy.  Italy dealing with significant economic challenges.
• Early Elections in Greece, and overall state of Greece bail-out, Grexit still possible?
• Europe has a delicate relationship with Russia- Delicate relationship with Turkey. Erdogan – referendum in Turkey (desires power similar to Russia). Germany and Turkey at odds, tension in media. Turkey and Netherlands tension as well (Netherlands refused to provide Erdogan with airport access). The leverage and deal that is in focus, is teal on migrants that the EU struck with Turkey. Turkey is holding a substantial amount of migrants in Turkey that would have traveled to the EU, and getting paid by the EU to do so. Only 10% of the flow that occurred in 2015 has occurred in 2016 because of this deal.

 5^th story – and China?

So much is going on in the world that we forget how big of a year it is for China. 19^th election, they will replace 5 out of the 7 people of the politburo committee. They make all the decisions. The stakes are enormous. It moves markets. The bottom line: 7 people make all the decisions, decisions that we can’t see. This has never happened before where we cannot see the decision making process! For a country that moves the markets tremendously, to not be able to understand this process will increase volatility for world markets.

 

#10 – An Awakening… Reflections from Trip to China

They say that you only know what you know. That what you read, consume and surround yourself shapes your perspective on how you look at issues and interact with the world. After visiting major corporations resident in Hong Kong (e.g., HSBC), Schenzen (e.g., Huawai) and Macau (e.g., Sands) – this couldn’t be any truer, and I could not feel more naïve after the trip reflecting. I was in a bubble – of European and American politics, culture and business. Surrounded by a nation caught up in the saga of Donald Trump in the US, walking around in China, I realized how sorely I was missing perspective. I like to think I read a fair bit from various sources – Bloomberg, Financial Times etc, yet what I realized I was also reading from a Western bias. Always trying to put the Chinese Company or consumer into my vantage point (of what a Westerner would expect), and frankly having little understanding of a part of the world where more than half the world’s population lives and is responsible for most of the world’s global growth over the past two decades.

Being in the country, opened my eyes, to what was really happening on the ground. It was fascinating watching the hungry, ambitious and entrepreneurial mindset of the Chinese. The huge strides they have made in short time span, The size of these major global companies (e.g., Alibaba, Huawai) that we as American consumers have not really come across yet. Couple this, with the incredible demographics (1.2bn people, rapidly growing economy etc.) and natural business opportunities afforded many within the firewall of China (that is if you are supported the Chinese Government) – China is truly a dynamic and emerging economy. One that is now rapidly moving from an export oriented – low value chain producer, to an innovator of some of the most advanced technologies on the marketplace today. It now longer can be viewed as a “copy cat” or “lowest cost producer”. This would be a mistake.

Key Trends

Many of these trends were things that I understood prior to visiting China, but were further validated and enriched:

• Access to internet is rising tremendously in China and other emerging economies (more than 50% of China now has access to internet) and this is growing rapidly.[1]Mobile. Mobile. Mobile. Forget Desktops and Land Lines. Online retailers/customer interaction platforms are dominating customer time and money. Wechat, Alipay, Amazon – are spreading into different aspects our life
• Where needs are not being met in emerging economies (e.g., lack of basic banking services for more than 50% of Chinese[2]) than innovative solutions that leapfrog existing technology are being deployed (e.g., Wechat). I would strongly recommend all watch an overview of Wechat’s capabilities if you have not already: https://www.nytimes.com/video/…/china-internet-wechat.html
• Demographics create a competitive advantage for businesses that are growing and have a foothold in China. India and China have nearly 2.6bn people. In the vicinity you have Indonesia, South Korea etc. As the middle class grows, as more get access to internet and get cellphones – the market will just keep growing! Asia has to be front and center in every multi-national with ambition of growing global footprint.
• Reduction of cost of goods/raw materials through technological gains (e.g., 3D printers) that allow every day citizens to create and innovate has leveled the playing field and provided massive gains to productivity
• China’s firewall of protecting there state sponsored companies has created a breeding ground for companies that have grown and innovated unfettered (Alibaba, Tencent) and creating ecosystems and products that are nowhere in the market. Can American companies compete with this model?
• More and more competition between countries is through their major multinational companies, put simply the battleground is between Microsoft, Apple, Google, Amazon and Facebook vs. Alibaba, Baidu, Tencent, Huawei and JD
• Given China’s unfair advantage it provides Chinese Companies due its firewall/protection provided, and nature of the mature and hyper competitive US market – it appears that countries like India is where ground zero will be. A democratic country with free elections that allows foreigners to invest with some controls. Already major investments by Amazon and Alibaba should provide

So what’s the insight?

• If you are not watching what China is innovating and doing, then you might not adapt (personally and professionally)
• Recognize the pro’s and con’s of the different governmental styles being deployed in the US, Hong Kong, China and other Asian nations to support business growth and the well-being of citizens and the corresponding business models that adapt. An example is the Chinese care less about data privacy then Americans, therefore facilitating the ability for Wechat to combines nearly all the features of Facebook, Venmo, Spotify in one App. There are practical implications that can be applied to businesses trying to succeed in China
• To be determined if the strong central planning, allocation of resources and protection afforded by China proves to be a better model than Democracy for the long run in the 21^st century. One will need to watch for potential bubbles where competition from the broader marketplace does not exist in certain sectors of the economy, as well as the general quality of life / happiness of the populace
• Recognize the demographics at play, how they are adapting and where China/India and other Asian nations have significant more head room to grow (a natural advantage for the long haul)
• Watch India!

So where to invest?

It is still quite difficult to invest in China. Certain companies have listed on the NYSE or the Hong Kong Stock Exchange, yet with some broader questions on the level of disclosure (may still exist). But as noted above there are some broader trends at play globally. Namely, mobile and internet usage is rising, and consumer buying preferences are rapidly changing. The starkest is brick and mortar retail vs. ecommerce. Take a simple look even in the US, Amazon Revenue from 2012 to 2015 vs. Macy’s revenue picture, doing it with less employees and no retail footprint.

Company	Metric	2015-12	2013-12
Amazon	Revenue ($, bn)	107,006	74,452
	# of Stores	0
	# of Employees	250,000
Macys	Revenue ($, bn)	27,079	27,931
	# of Stores	850
	# of Employees	160,000

In summary – tech companies that provide a disruptive growth story with exposure to Asia, are going to be ways to play longer term trends that are changing the way consumers behave and purchase goods.

 

 

#9 – 2016 the rise of asset prices

As we reflect upon the economic impacts of what happened in 2016 (from the whipsaw we saw through Brexit and Donald Trump), and what is in store or 2017. I thought it would be useful to visually see some of the developments.

Clearly the most transformative year in some time, as expectations and economic benchmarks across the spectrum: inflation, the currency markets, commodities, equities and interest rates all increased rapidly as the market

Some highlights:

•  A surge in inflation five-year US forward swaps — a measure of the average inflation expectation over five years beginning in five years.
• Rising inflation expectations also revised projections for the Fed, as investors anticipate a faster tightening cycle to counter the prospect of a hotter economy and increasing consumer prices
• US banks were among the chief beneficiaries of higher Treasury yields and a steeper yield curve. Financials are expected to earn more money from lending as long-term fixed rates for loans and mortgages climb further above overnight and short-term borrowing costs (as well as benefit from regulation)
• European bank stocks enjoyed a powerful rally after a battering in the first half of the year, when news of looming legal penalties, negative interest rates, the UK’s Brexit vote and fears over the Italian banking sector sunk share prices
• The closely followed three-month Libor rate — a global floating interest rate benchmark that trillions of dollars of corporate loans, credit cards and derivatives contracts are tied to — neared 1 per cent for the first time since the US emerged from recession in 2009.
• Higher commodity prices provided the ballast for the US energy sector’s rebound, with Brent crude — the international oil benchmark — up more than 90 per cent from its February low.

Hold on to your seats for 2017, the first 100 days of the Donald Trump administration will be likely volatile, as the sky high expectations of the market (for Donald Trump and his ability to deliver on tax reform, and infrastructure spending) will come into focus. Happy new year to all!

#8 – Framing is everything.

Framing is everything. The way an issue is presented, can dramatically influence how someone perceives what follows. We often (even sometimes unconsciously) have a bias towards how we approach issues. It begins with what we learned in school, what we watched as we grew up and the culture all around us. Recently, over the holidays through the generosity of my wife’s grandmother, inherited Goodrich’s “History of the United States” – published in 1852, and “The Centennial History of the United States” published in 1872 by J.D McCabe. Leafing through these books, I wanted to take an example of something that children in America were taught, and compare to what we know today. This is not just a US phenomenon, we know history books in other cultures often reflect the bias of that nation.

 I believe that it is in incumbent on us to challenge bias, bottom out facts and understand the full perspective. A healthy dose of skepticism is needed. Often time’s racism and prejudice are embedded deeply in these issues. And as we know history often repeats itself, so understanding how these biases are rooted can be useful to prevent them from happening again in the future.

The Trail of Tears.

Let’s take an example and juxtapose against these old US history books that I recently obtained. We know how awful the trail of tears was during Andrew Jackson’s tenure as President of the United States in the 1830s. At the beginning of the 1830s, nearly 125,000 Native Americans lived on millions of acres of land in Georgia, Tennessee, Alabama, North Carolina and Florida–land their ancestors had occupied and cultivated for generations. By the end of the decade, very few natives remained anywhere in the southeastern United States. Thousands more were killed.[1]

White Americans, particularly those who lived on the western frontier, often feared and resented the Native Americans they encountered: To them, American Indians seemed to be an unfamiliar, alien people who occupied land that white settlers wanted (and believed they deserved).

Working on behalf of white settlers who wanted to grow cotton on the Indians’ land, the federal government forced them to leave their homelands and walk thousands of miles to a specially designated “Indian territory” across the Mississippi River. This difficult and sometimes deadly journey is known as the Trail of Tears.

State governments joined in this effort to drive Native Americans out of the South. Several states passed laws limiting Native American sovereignty and rights and encroaching on their territory. In a few cases, such as Cherokee Nation v. Georgia (1831) and Worcester v. Georgia (1832), the U.S. Supreme Court objected to these practices and affirmed that native nations were sovereign nations “in which the laws of Georgia [and other states] can have no force.” Even so, the maltreatment continued. As President Andrew Jackson noted in 1832, if no one intended to enforce the Supreme Court’s rulings (which he certainly did not), then the decisions would “[fall]…still born.” Southern states were determined to take ownership of Indian lands and would go to great lengths to secure this territory.

Andrew Jackson largely ignored the US Supreme Court, and instead work with congress to pass the Indian Removal Act. The Indian Removal Act, gave the federal government the power to exchange Native-held land in the cotton kingdom east of the Mississippi for land to the west, in the “Indian colonization zone” that the United States had acquired as part of the Louisiana Purchase. (This “Indian territory” was located in present-day Oklahoma.)

The law required the government to negotiate removal treaties fairly, voluntarily and peacefully: It did not permit the president or anyone else to coerce Native nations into giving up their land. However, President Jackson and his government frequently ignored the letter of the law and forced Native Americans to vacate lands they had lived on for generations

So what happened?

The Choctaw: In 1831, the Choctaw, became the first nation to be expelled from its land altogether. They made the journey to Indian Territory on foot (some “bound in chains and marched double file,” one historian writes) and without any food, supplies or other help from the government. Thousands of people died along the way. It was, one Choctaw leader told an Alabama newspaper, a “trail of tears and death.”

The Creeks: In 1836, the federal government drove the Creeks from their land for the last time: 3,500 of the 15,000 Creeks who set out for Oklahoma did not survive the trip.

The Cherokees: By 1838, only about 2,000 Cherokees had left their Georgia homeland for Indian Territory. President Martin Van Buren sent General Winfield Scott and 7,000 soldiers to expedite the removal process. Scott and his troops forced the Cherokee into stockades at bayonet point while whites looted their homes and belongings. Then, they marched the Indians more than 1,200 miles to Indian Territory. Whooping cough, typhus, dysentery, cholera and starvation were epidemic along the way, and historians estimate that more than 5,000 Cherokee died as a result of the journey.

What did our history books teach kids growing up in 1850s-1890s (Goodrich – a History of the United States 1852)

So what then did our history books note to students growing up in the US around this time? (in 1852 and 1972) 20 years and 40 years after these events took place?

Charles A. Goodrich begins with some background in the early chapters on US History and Native Americans and notes the following:

“War was the favorite employment of the savages of North America. It roused from the lethargy into which they fell when they ceased from the chase, and furnished them an opportunity to distinguish themselves, and to achieve deeds of glory and taste the sweets of revenge” (Goodrich, pg. 22)

Note the usage of “savages” and the sweeping generalizations and assumptions “roused from the lethargy”

Further as he describes the Trail of Tears, notes the following:

“We shall only add that in May 1938 a military force of several thousand men under the command of General Scott was assembled on the Cherokee territory, for the purpose of removing the nation to the territory assigned theme, in accordance with the policy recommended by General Jackson, to remove all Indian tribes”.

Goodrich makes no mention of the losses that the Cherokee suffered. He spends very little time covering the range of forced removals and there impacts on the Native Americans.  Or that the US Supreme Court had ruled  that Georgia’s removal of Cherokees was unconstitutional, and that Jackson’s policy was not well supported by the US constitution or recent Supreme Court rulings. Goodrich also seems to paint this episode in US history as a rather small after-though “we shall only add”, and spends very little time on examining what happened to the Native Americans.  Goodrich, largely reflects Jackson’s years as triumphant and a resume of his accomplishments.

In JD McCabes “Centennial history of the United States” more time is spent examining the policies of Andrew Jackson, yet still frames the issue as

“The first important act of the new president was to recommend to Congress the removal of all the Indian tribes remaining east of the Mississippi to new homes west of that stream. Such a measure he contended would give to them a broader range, and one more suited to their wants” Yet it makes no mention of the Supreme Court decision, or perspective on why Jackson was recommending the policy. After reading much of these chapters, it would often seem logical that the Native Americans should be removed?

Challenge the status quo and ensure your understanding of what is factual is actually the full set of facts.

 

[1] The following summary of the trail of tears is leveraged from http://www.history.com/topics/native-american-history/trail-of-tears

#7 – how bad can it get with Trump?

The last few blogs have focused on some of the upside that might come to our personal finances as a result of Trump’s economic plan to spend and cut taxes. Much less time in this blog has been spent on the unintended consequences of his trade policies (if pursued). You all probably have seen one of his controversial tweets, shooting off the hip in response to the day’s developments (whether it his tweet regarding the China capture of a US drone, or the most recent horrific terrorist act in Germany). Trump’s discussion of his proposed tariff’s and his trade approach with China might even be scarier.

A recent article by Tim Worstall in Forbes sum’s it up well.

“The Chinese government is a despicable, parasitic, brutal, brass-knuckled, crass, callous, amoral, ruthless and totally totalitarian imperialist power that reigns over the world’s leading cancer factory, its most prolific propaganda mill and the biggest police state and prison on the face of the earth”

That is the view of Peter Navarro, the man chosen by Donald Trump to lead a new presidential office for US trade and industrial policy. This same guy has put forward policy proposals which run counter to all modern views of economics. That trade is a zero sum game, and that VAT (Value added Tax) favors  export economies.  Both of these notions are incorrect. Trade is a voluntary exchange in which both parties partake in; if it was a zero sum game – would anyone participate? A VAT system is entirely neutral upon the source of goods and services–it is a tax upon the place of consumption and thus has no effect upon place of supply at all.

The reason these ideas are scary, is this could be the basis for which Trump and other support tariffs and taxes to protect US made goods (the rationale for pursuing a protectionist agenda). This in the end could hurt overall growth and GDP – as consumer prices will be driven up as a result of US consumers being forced to buy US goods (which are not competitive on a global basis)

 I have been looking closely at previous presidencies who have echoed much of the same rhetoric as Trump.

Let’s unpack the Make America  Great theme – cut taxes? spend? and protect American made goods? Let’s take a look at Reagan and Hoover. Two presidents that campaigned on aspects of this same message.

Are we on the cusp of Hoover like outcome? or could it be more positive…. such as the Reagan years?

Hoover

Following  Calvin Coolidge’s 1922 Fordney-McCumber Tariff act. Tariffs were increased on foreign imports.  Hoover  in the first 90 days in offices, passed the Smoot-Hawley Tariff which protected American agricultural goods. Hoover believed it was essential to balance the budget despite falling tax revenue, so he raised the tax rates.

At first, the tariff seemed to be a success. According to historian Robert Sobel, “Factory payrolls, construction contracts, and industrial production all increased sharply.” However, larger economic problems loomed in the guise of weak banks. When the Creditanstalt of Austria failed in 1931, the global deficiencies of the Smoot-Hawley Tariff became apparent. U.S. imports decreased 66% from $4.4 billion (1929) to $1.5 billion (1933), and exports decreased 61% from $5.4 billion to $2.1 billion. GNP fell from $103.1

And yet  the economy kept falling and unemployment rates rose to about 25%. We know that Hoover was likely dealt a tough hand with the Stock Market Crashed in October 1929, and the Great Depression that followed. Yet, the Smoot-Hawley Tariff clearly did not help.  This downward spiral, plus his support for prohibition policies that had lost favor, set the stage for Hoover’s overwhelming defeat in 1932 by Democrat  Franklin D. Roosevelt who promised a New Deal.

Figure 1 – Timeline and Key Economic Indicators from Hoover’s Years

Reagan

Entering the presidency in 1981, Reagan implemented sweeping new political and economic initiatives. His policies, dubbed “Reaganomics” advocated tax rate reduction to spur economic growth, control of the money supply to curb inflation, economic deregulation, and reduction in government spending.

Over his two terms, the economy saw a reduction of inflation from 12.5% to 4.4%,

While Reagan did enact cuts in domestic discretionary spending, increased military spending contributed to increased federal outlays overall, even after adjustment for inflation

Figure 2 – Timeline and Key Economic Indicators from Hoover’s Years

This sums it up well, over the first two years, while Hoover was successful in reducing the trade balance (closed it by 68 %), GDP tanked (with the economy shrinking by more than 20%). While in Reagan’s case it took a bit longer for the S&P to grow yet, GDP maintained a steady upward track.

Figure 3 – Comparison of Performance (Hoover and Reagan first two years)

Change over first 2 years in office	Change in S&P	Change in P/E Ratio	Change in GDP	Change in Trade Balance
Hoover	-24%	19%	-21%	68%
Reagan	8%	27%	13%	-139%

Figure 4 – so what is going to be?

Trump is off to a better start than Reagan and Hoover, but anything can happen!

 

Sources:

http://www.shmoop.com/reagan-era/timeline.html
http://www.usnews.com/news/history/articles/2009/03/12/the-first-100-days-reagan-pushed-his-agenda-of-tax-cuts-and-less-government
http://www.multpl.com/s-p-500-historical-prices/table/by-month
https://www.thebalance.com/fed-funds-rate-history-highs-lows-3306135
http://www.econdataus.com/tradeall.html
https://en.wikipedia.org/wiki/Herbert_Hoover

 

 

 

 

 

#6 – Monitoring for Inflation and Trump Economic Indicators

After analyzing and monitoring a couple key indicators (e.g., oil, mortgage rates) that we laid out in the previous post on what a Trump presidency will mean for your personal finances, I am further of the belief, that many of these impacts will be fairly pronounced. To recap some of the biggest near term considerations that may impact your personal finances.

• Interest rates will rise (and are rising), which will impact the demand for housing prices, which should normalize the  housing market and likely mitigate a housing bubble (less buyers willing to spend $$ on higher interest rates), but challenge’s the overall timing of whether to buy or rent.
• Money will be spent, and a lot of it. Monitor where these infrastructure projects will be undertaken, and where an additional impact on the real estate market will occur (as a result of new railroads and infrastructure projects)
• Rising tide of equity prices – driven by infrastructure spending, tax cuts and Trump’s de-regulation agenda (get into equities! and have some exposure)
• Rising yield curve and impact on Fixed Income investments (reduce allocation in Fixed Income)
• Monitor appetite of US debt securities (from foreign holders of US debt – e.g., China) (keep an eye on this)
• Monitor Tax deduction / credit changes and how you can optimize to meet these potential changes

Below is a brief update of those indicators and some analysis to support the above observations.

Figure 1: Update of Inflation Indicators

Reviewing the last year (and namely in the last month) of Inflation Indicators, since Trump was elected we can see a marked increase in the yield curve and change in mortgage rates (3% increase month over month) and the ten year treasury yield curve (up 14%)

Figure 2: Correlation of Indicators

As Treasury Yield Curves have increased or decreased, Gold has moved in the opposite direction (-.90 strength)

As the Baltic Index has decreased or increased – Crude Oil has followed a similar path (.87 strength)

As you would expect as mortgage rates  increase they are highly correlated with the same direction moves from the Treasury Yield Curve (.92 strength), and a decline in

Figure 3: Summary of Foreign Holdings of US Debt

 

Figure 4: Top Holders of US Debt

China and other countries including Japan continue to trim there US Debt Holdings. Will be key to watching as Trump spends more, whether appetite for US treasuries will change.

Source for above data is US Treasury Reporting and Bloomberg.