by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT]

Fed rate decision: Today, the Federal Reserve is expected to leave interest rates unchanged, but rising inflation and steady economic growth has led many to speculate that the Fed could raise rates as early as next month.[1]

Presidential subpoena?  In early March, Special Counsel Mueller threatened to issue a subpoena to the president if he did not cooperate with the investigation, according to the president’s former attorney, John Dowd, who resigned later that month. The release of this report adds to the complexity of the ongoing investigation into Russian meddling. Yesterday, questions that Mueller planned to ask President Trump were leaked to the NYT, which drew the ire of Trump who called the leak disgraceful. Although negotiations are still ongoing for a possible interview between Trump and Mueller, it appears that the president’s counsel is trying to apply public pressure in order to gain leverage in negotiating the terms of the interview. A former assistant to Mueller claimed—citing grammatical errors as evidence—that the leak could have come from the president.[2] Furthermore, there has been growing speculation that Trump will try to shut down the investigation prematurely, possibly by removing the official overseeing the investigation, Deputy Attorney General Rosenstein. That said, we are confident a meeting between both sides will eventually take place. So far, markets have not reacted to the reports surrounding the president’s potential interview, but we will continue to monitor the situation.

Heightened trade tensions: There is growing speculation that trade tariff exemptions for U.S. allies will expire on June 1 unless each country agrees to a new trade deal. At a meeting of steel industry executives, White House Trade Adviser Peter Navarro stated that all countries receiving a trade exemption will face an import quota or other restrictions. This development will likely not go over well with the European Union, which has stated it will not negotiate until the exemption is made permanent. In the event that the U.S. imposes tariffs on European steel, the EU has made plans to retaliate in kind by imposing $3.5 billion worth of tariffs on U.S. goods. Although no goods were named specifically, the EU plans to target U.S. steel, industrial products and agricultural products.[3]

Brexit impasse: The likelihood of a “hard” Brexit has increased as pro-Brexit members of Parliament have placed pressure on PM May to drop her plan for a “customs partnership” model, which is one of the two models being discussed in the Brexit cabinet subcommittee meeting. Under the customs partnership model, the U.K. would collect tariffs set by the EU on goods coming into the U.K. on behalf of the EU. If these goods did not leave the U.K. and U.K. tariffs were lower, companies could claim a refund for the difference. The other plan would require the use of technology that would allow countries to pay duties in bulk every few months for access to the U.K. market. Brexit supporters describe the customs partnership as very complicated, unworkable and likely to leave the door open for the U.K. to rejoin the customs union in the future. On the other hand, proponents of the customs partnership model believe it will make it easier to strike future trade deals and satisfy the Irish border problem. The appointment of Sajid Javid as home secretary, who campaigned on remaining in the EU but is now believed to be in favor of Brexit, will likely be a determining factor in the decision.

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[1] Correction: in yesterday’s Daily Comment we reported the rate decision was yesterday.

[2] http://thehill.com/homenews/news/385602-muellers-former-assistant-says-grammatical-errors-prove-leaked-questions-came

[3] https://www.reuters.com/article/us-usa-trade-europe-measures-exclusive/exclusive-eu-may-target-3-5-billion-of-u-s-imports-for-trade-retaliation-sources-idUSKCN1GE2FO

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT]

Tariff extensions: Last night, President Trump announced he would extend the deadline for temporary trade tariff exemptions for U.S. allies by an additional 30 days. Earlier this year, citing national security concerns, President Trump placed trade tariffs on foreign steel and aluminum. The president wants U.S. allies to accept either quotas on steel or a deal on industrial goods tariffs in exchange for permanent exemptions. Deals with Argentina, Brazil and Australia are close to being finalized, while Canada and Mexico are also close to a deal.[1] Meanwhile, the European Union is reluctant to begin discussions without a permanent trade exemption first, claiming the temporary exemptions cause market uncertainty that affect business decisions. The temporary trade exemptions come as the U.S. prepares to send representatives to China to discuss trade.

Nuclear plans in Iran? Yesterday, Israeli Prime Minister Benjamin Netanyahu revealed an archive of stolen nuclear plans from Iran to prove that Iran lied about its nuclear program. The archive did not include any evidence that Iran has broken the nuclear agreement since it took effect in 2016. In response to the accusation, France Foreign Minister Agnes von der Muhll stated that this new information could provide leverage for getting additional assurances from Iran in order to keep the deal in place, but cautioned that the archived information will be studied before there is a final decision. Although there is still a lot of uncertainty about whether President Trump will pull out of the deal, it has been reported that he knew about the archive as early as March 5. Therefore, we do not believe the president’s position has changed.

Mueller interview: This morning, questions that special counsel Robert Mueller would like to ask the president were leaked to the NYT. Currently, the president’s lawyers are negotiating the terms of a possible interview between President Trump and Mueller in order to speed up the investigation. Although most of the questions were related to accusations of obstruction of justice due to the president’s handling of James Comey, there were also questions about the president’s ties to Russia and the relationship he had with his advisers. That said, impeachment is still very unlikely and the Russia investigation appears to be headed to a close.

Taiwan in retreat: The NYT reports that China was able to convince the Dominican Republic to sever diplomatic ties with Taiwan in exchange for increased trade. The deal will likely lead to further isolation of Taiwan, which China still considers a part of its territory. The relationship between Taiwan and China has become tenser with the election of Tsai Ing-wen, who has earned the ire of China after refusing to endorse the “one China” policy. In response to Ing-wen’s rejection, China has pressured countries to cut diplomatic ties with Taiwan in order to force her government to reconsider its stance. As of right now, it appears China will use soft power to force Taiwan back into its orbit but this approach may change as China is becoming more assertive throughout the Pacific. We will continue to monitor this situation.

Fed rate decision: Today, the Federal Reserve is expected to leave interest rates unchanged, but rising inflation and steady economic growth has led many to speculate that the Fed could raise rates as early as next month. As a result, the dollar has strengthened against peer currencies.

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[1] https://www.theguardian.com/australia-news/2018/may/01/australia-avoids-trumps-steel-tariffs-as-deadline-passes-reports

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Happy Monday!  It’s the last day of April (which felt more like early March temperature-wise).  Here is what we are watching today:

Trade week: There is a lot of trade action scheduled this week.  First, the trade delegation is in China this week.  Treasury Secretary Mnuchin, NEC Director Kudlow, USTR Lighthizer and NTC Navarro will discuss trade with Chinese negotiators.  This team is divided; the first two tend to support free trade, while the latter two usually want trade impediments.  It’s not clear if much will come of these negotiations.  Since they don’t face a deadline, we would be surprised by a breakthrough.  China will likely try to divide the group, which would appear to be an easy task.  It is interesting to note that Lighthizer didn’t want this trip now.[1]  He wanted to focus on other trade negotiations.  This brings us to the second trade event this week, the steel tariff exemptions, which are expected tomorrow.  Commerce Secretary Ross told Bloomberg that not all nations will get an extension of tariff relief.[2]  Currently, Australia, Argentina, Brazil, Canada, the European Union, Mexico and South Korea were granted temporary tariff exemptions.  South Korea is the only nation on this list that has been granted permanent relief due to its agreement on steel and car imports.  The EU has indicated it will retaliate if steel and aluminum tariffs are applied to the group.  Third, NAFTA negotiations were expected to wrap up this week but it doesn’t appear that will happen, in part, because Lighthizer is in China.  We still expect a deal with NAFTA to be completed soon.

May trouble: PM May has seen her inner circle move to a harder stance on Brexit after her home secretary, Amber Rudd, stepped down and was replaced by Sajid Javid.  Rudd was involved in the Windrush scandal, where the descendants of Caribbean immigrants from Commonwealth nations, originally brought to the U.K. in the 1960s, were subjected to deportation due to their lack of clear documentation.  Rudd misled Parliament on the scale and scope of the deportations.  Rudd was a “soft Brexit” supporter, who leaned toward joining the EU customs union.  Javid is considered a hard liner on the issue.  The shift has contributed to recent GBP weakness.

Iran nuclear deal: There is growing speculation that the Trump administration will likely pull out of the Iran nuclear deal.  President Trump has been a frequent critic of the deal, calling it “the worst deal ever” because it allows Iran to install more centrifuges after 10 years at its Natanz facility as well as enrich uranium at its Fordo facility in 15 years.  In addition, new Secretary of State Mike Pompeo expressed over the weekend a distrust for Iran, describing its activities in the Middle East as “destabilizing.”  EU leaders are trying to keep the deal together; if the U.S. does end the pact, it isn’t clear whether Europe will cooperate on sanctions.  And, it is almost certain that China will not.

A looming threat: President Trump has indicated he will shut down the government in September if Congress doesn’t give him more funding for his Mexican border wall.  Although it’s too early for the financial markets to care, by mid-summer this could become an issue, especially so close to the midterms.  Historically, such turmoil in front of elections hurts the instigating party but this time around we are not so sure it would be all that harmful to the GOP.  The upcoming elections will be “base v. base” and actions that enthuse base voters may be more important than wooing independents.  A case in point:

This is a chart we ran last week that shows the S&P 500 along with Trump’s approval rating. The low in his approval rating came around the time the tax bill passed.  Note that the president’s approval rating has improved as the administration has shifted toward trade impediments.  The congressional GOP wants to run on the tax cut; this data suggests that such a plan probably won’t work because the right-wing populists were not impressed with that bill because most of the benefits go to the right-(and left-)wing establishment.  On the other hand, “going to the mattresses” on the border wall will likely energize the right-wing populists.  Although President Trump’s negotiating style is to stake out an extreme position and then move to a more conciliatory agreement, the secret of his success is that he has no problem with watching the other party become uncomfortable in negotiations. [3]  Thus, the chances of brinkmanship and shutdown threats could become quite rampant by late summer.

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[1] https://www.wsj.com/articles/china-plans-trade-offers-for-u-s-envoys-on-high-stakes-trip-1525029506

[2] https://www.bloomberg.com/news/articles/2018-04-29/ross-says-u-s-to-extend-duty-relief-to-some-allies-but-not-all

[3] https://www.axios.com/one-trick-pony-inside-trumps-negotiating-style-3b60acf3-76e1-4c7d-9c6b-8792ad38479b.html

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] It’s a busy Friday.  Here is what we are watching:

Korean leaders meet: In a historic event, the leaders of North and South Korea met and Kim Jong-un became the first DPRK leader to visit the South since the war.  The two leaders vowed to work on denuclearization (with a strong dose of strategic ambiguity) and promised to actually draft a peace accord, which would officially end the Korean conflict.  Currently, the armistice that ended the war is in place but a formal peace has never been negotiated.  The symbolic importance of this meeting should not be underestimated.  It is an important development; not too long ago we were preparing for war.

However, what it means in the end remains in doubt.  One issue to remember is that Koreans, in general, would prefer to reduce outside influence.  The peninsula is valuable land; throughout history, China and Japan have controlled the area to project power.  The U.S. also has an interest.  A potential outcome is one that enhances the independence of both Koreas at the expense of China, Japan and the U.S.  The next big event is the U.S./North Korea summit.

The other big meeting: Overshadowed, but in many ways just as important, is the meeting today between Chairman Xi and PM Modi in Wuhan, in the Hubei province of China.  Relations between the two countries have been tense recently.  There was a flare-up on the northern border several months ago over disputed boundary areas.  India is concerned about rising Chinese investment in its arch-rival Pakistan and is also worried about the one belt, one road (OBR) project that seems to be engulfing the region.  India is facing a difficult path.  If it joins the OBR, it will receive welcome investment and likely gain access to China’s growing consumer market but it will also become a Chinese satellite.  Unfortunately, India does not have a strong enough military or economy to hold out against being surrounded by Chinese allies (purchased with investment from OBR).

Under normal circumstances, India would ally with the U.S.  Geopolitically, this would be a win/win for both nations.  India’s position in the region would be a potential barrier to the OBR and would allow the U.S. to threaten Chinese expansion.  But, the U.S. is in withdrawal mode and Washington may not be reliable.  India’s historical default position is non-alignment.  It was one of the founders of the Non-Aligned Movement and thus would prefer to not team up with either China or the U.S.  Unfortunately, for Modi, remaining non-aligned is probably not an option.  Even if India resists China’s “charms,” it will face a growing threat from Pakistan which will be fueled by Chinese investment.  And, India’s neighbors are increasingly acquiescing to Chinese OBR pressure.  We doubt a resolution will come from this meeting today but the pressure on India is rising.

And yet another meeting: President Trump and Chancellor Merkel meet today in Washington.  Unlike Macron, Merkel does not have a warm personal relationship with President Trump so we would expect a businesslike meeting.  Criticism of Germany’s trade surplus is likely.

A portrait of discontent: A recent Pew poll[1] shows that the political divide is hardening.  Democrats have traditionally preferred officials who compromise.  We believe that’s because Democrats generally see government as a force for good and thus want to see government work, which entails compromise.  The majority of Republicans oppose compromise.  However, this recent polling suggests the majority of Democrats now oppose compromise, a significant hardening of position that will make it very difficult to govern under conditions of gridlock.  But, the most significant finding was that two-thirds of Americans believe their side “loses” more than it “wins” in politics.  Some of this is probably due to a hardening of partisanship; getting partial wins when you think you should get everything you want seems like a “loss.”  But, the most likely reason for this finding is that Americans seem to believe the entire system doesn’t work for them and thus whomever is in office won’t lead to a “win.”  This would explain the attraction of rogue candidates like Obama and Trump.  Our contention is that the voters in 2008 who favored Obama thought they were getting Sanders.  The disappointment was palpable and if the GOP had not run the poster child of the establishment in 2012 then Obama would have been a one-term president.  We would not be at all surprised to see the Democrats repeat the “Romney error” in 2020.

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[1] http://www.pewresearch.org/fact-tank/2018/04/26/key-findings-on-americans-views-of-the-u-s-political-system-and-democracy/?utm_source=newsletter&utm_medium=email&utm_campaign=newsletter_axiosam&stream=top-stories

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT]

ECB: The statement was dovish.  It indicated that balance sheet expansion is scheduled to end in September but actual tapering won’t start anytime soon.  Interest rates were left unchanged and forward guidance was generally left unchanged, meaning rates are expected to stay low even after tapering begins.  The initial reaction to the statement was muted; the EUR was up modestly before the statement and held its levels after the report.  Market action suggests the markets were expecting a dovish statement.  The press conference did not offer any major surprises.  The lift in the EUR suggests the market was leaning bearish going into the meeting and thus we are seeing some short covering.  In addition, we have seen a drop in U.S. interest rates and a rise in commodity prices.  Those moves are consistent with dovish monetary policy.

China trade negotiations: Treasury Secretary Steven Mnuchin, NEC Director Larry Kudlow, Director of Trade Peter Navarro and USTR Bob Lighthizer are going to China next week to discuss trade.  It’s an interesting group.  The first two are establishment figures and support free trade, while the latter two are protectionists.  If the Chinese can’t divide this group, it will be a diplomatic own goal.  We doubt anything will come of these meetings but headline volatility is possible because the free traders and the protectionists will have different takes on Chinese concessions.  Sending a group that is this divided is unusual for most presidents but not a huge shock for this one; Trump likes improvising and thus sending a group that can’t possibly agree gives Trump room to deal with Xi directly.

Macron recap: The personal chemistry between Macron and Trump appeared very warm.  However, Macron’s comments were diametrically opposed to Trump’s worldview.  Using Mead’s archetypes, Macron is probably closer to Wilsonian, while Trump is almost pure Jacksonian.  These views of foreign policy are completely incompatible.  However, it’s important to remember that Mead’s archetypes are relevant for American administrations.  It’s easy for foreign governments to be Wilsonian when they don’t bear the costs of enforcing human rights across the world.

Confirmation: The South China Morning Post[1] confirms reports that have been circulating that Mt. Mantap has been severely compromised by recent nuclear tests and is no longer safe to use for such tests.  In fact, the article suggests the most recent blast has created a “chimney” that could allow radioactive fallout to rise into the atmosphere.  Thus, the decision to end nuclear tests may not fully reflect a change in policy by North Korea but a necessity brought on by test site conditions.

Energy recap: U.S. crude oil inventories rose 2.2 mb compared to market expectations of a 2.3 mb draw.

This chart shows current crude oil inventories, both over the long term and the last decade.  We have added the estimated level of lease stocks to maintain the consistency of the data.  As the chart shows, inventories remain historically high but have declined significantly since last March.  We would consider the overhang closed if stocks fall under 400 mb.

As the seasonal chart below shows, inventories are usually rising this time of year.  This week’s rise in stockpiles is normal.  We note that next week’s report is usually the seasonal peak in inventories.  If we follow the normal seasonal draw in stockpiles, crude oil inventories will decline to approximately 422 mb by September.

Based on inventories alone, oil prices are undervalued with the fair value price of $64.31.  Meanwhile, the EUR/WTI model generates a fair value of $74.12.  Together (which is a more sound methodology), fair value is $70.86, meaning that current prices are below fair value.   Using the oil inventory scatterplot, a 422 reading on oil inventories would generate oil prices in the high $70s to low $80s range.  At present, we have no reason to believe that inventories won’t follow their usual path so, barring an increase in supply or a sharp rise in the dollar, the case for higher oil prices is improving.

Another factor we are watching is that Yemeni rebels are reportedly[2] targeting Saudi oil facilities using missiles and drones.  So far, the kingdom has been able to intercept the incoming weapons before they do any damage.  However, if we see a successful attack, we would expect a strong upward price move due to current tightness in oil markets.

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[1] http://www.scmp.com/news/china/diplomacy-defence/article/2143171/north-koreas-nuclear-test-site-has-collapsed-and-may-be-why-kim-jong-un?utm_source=emarsys&utm_medium=email&utm_content=20180425&utm_campaign=scmp_china&aid=190131336&sc_src=email_2220763&sc_llid=6483&sc_lid=151052347&sc_uid=U5LNF58jFg&utm_source=emarsys&utm_medium=email

[2] https://www.wsj.com/articles/yemens-rebels-step-up-attacks-on-aramco-oil-facilities-1524656858?mod=ITP_world_0&tesla=y

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Equity market weakness continues this morning after a sell-off yesterday.  The dollar is rising, boosted by the 10-year T-note definitively breaking 3%.  Here is what we are watching this morning:

Did Macron save the Iran deal?  Probably not.  Although it isn’t obvious what “plan B” is if the U.S. kills the agreement, President Trump seems inclined to do so.  We view the Iran deal as flawed.  It doesn’t cover Iran’s missile program or its covert actions in the region.  In other words, it is limited to the nuclear program and it only delays its progress.  However, it has been our position that President Obama viewed the deal as a first step in normalizing relations with Iran to anoint Tehran as the regional hegemon so the U.S. could shift its focus to the Far East.  When Clinton lost to Trump, that extension became impossible (and there is little evidence to suggest Clinton would have followed Obama’s path anyway).  Still, by all accounts, Iran is living up to the letter of the agreement.  So, why end it?  In part, the president’s base loves it whenever Trump kills an Obama era policy.  On the other hand, if the problem is Iran’s behavior in the region then addressing that issue would make sense.  To some degree, Macron also pressed Trump to keep a military presence in Syria.  If the U.S. really wants to curtail Iran’s behavior, it should put more military assets in Iraq and Syria, ally with Turkey and break the “Shiite arc” that is being built from Iran to Lebanon.  However, that policy move would undermine the president’s Jacksonian principles, which is essentially isolationist except when honor is besmirched.  May 12^th is the deadline for reaffirming the current treaty.  If the U.S. withdraws, U.S. sanctions will return.  Of course, the Europeans may decide not to follow U.S. lead, which would undermine the effectiveness of sanctions.  Iran will likely begin the process of restarting its nuclear program.  We would expect oil prices to rise, although some of the current increase is due to the market discounting the potential for an end to the agreement.

Financial markets: The dollar has been rising, while Treasury yields and equities are continuing to struggle in the face of strong earnings.  The key issue is whether or not these trends are the start of a major trend change or simply a short-term situation.  For now, we tend to think much of this is short term.  We note that liquidity levels remain elevated.

This chart shows the level of retail money market holdings along with the S&P 500.  In this bull market, the index tends to stall when money market levels fall below $920 bn.  Current money market levels are just over $1.0 trillion, meaning there is ample liquidity for investors if they choose to purchase equities.  Of course, every indicator exists in an environment of conditions and one of those conditions in this bull market has been very low interest rates.  If equities fail to rally despite ample liquidity, it could mean that rates have increased to a point where cash is seen as an alternative to fixed income or equities.  If that is the case, then this indicator may not be as bullish as it looks.  We believe it’s too early to make that case; the national rate of checking account interest is 5 bps and retail money markets are at a whopping 11 bps, so it is hard to see that as a viable alternative.

However, there is another observation that does raise our concern.  The chart below overlays the president’s approval rating with the S&P 500.  Two items are worth noting.  His approval rating steadily slumped into late December when the GOP was putting the finishing touches on the tax bill.  One would think that passing a historic tax cut would have been popular with the public, but it doesn’t appear that was the case.  Second, as the president has moved to impede trade, his approval ratings have risen sharply while the equity market has corrected.  This should signal to the president that what makes voters like him isn’t a roaring stock market but hope that workers won’t be competing with foreigners.  Protectionism is clearly not popular with equities as evidenced by the slump in the index that coincides with the move toward trade restrictions.   The lesson the president should take from this is that a weaker equity market doesn’t hurt his political stature.

The other longer term takeaway, which has been a concern of ours for a while, is that populism isn’t going to be good for financial markets.  Populism, which eventually entails de-globalization, re-regulation of the economy and higher taxes, will lead to more inflation and weaker margins over time.

This chart shows the shares of national income that go to labor and capital.  One of our contentions is that when communism collapsed, the political class concluded it no longer had to prove that capitalism offered a better life for most people compared to communism.  The constraints on capital, in the form of regulation, were steadily lifted leading to rising capital income and falling labor income in each business cycle.  The share of national income going to capital is now at a postwar high.  The social trends we are seeing suggest this trend may be reaching its acme, meaning margins will begin falling with each business cycle going forward.  We don’t know this with certainty.  As we like to say, “they don’t call it the establishment for nothing,” but when politicians see their approval ratings rise when they push populist policies it is reasonable to expect more of such policies.  This is a long-term problem for equities; the big question we often ponder is when does the long-term become the present?  We don’t think we are there yet, but it is hard to believe we won’t be there in the next five to 10 years.

China’s #MeToo: A backlash is brewing against sexual harassment in China.  Students at some of China’s most respected universities are engaging in coordinated protests against officials who have attempted to cover up scandals on campus.  These protests bear watching because President Xi has been aggressive in quashing any organized activity that isn’t sanctioned by the CPC.  The most reasonable response for Xi will be to try to co-opt the movement, which would mean giving voice to the victims while using the party to crack down on the miscreants.  If past behavior is any guide, Xi will not tolerate an organized movement outside the party so look for a crackdown if the students insist on independence.

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by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] It was an unusually quiet night.  After a barrage of tweets recently, the president appears occupied with his French visitor for now, which might account for the current “tweet silence.”  Earnings are coming in stronger than expected (see above), while Treasury yields remain elevated.  Here is what we are watching today:

Early look at the ECB: The ECB meets on Thursday.  We don’t expect too much new information.  Recent economic data out of Europe has been soft, in part due to the strength of the EUR over the past year.  We expect Draghi to have little new to say on forward guidance or tapering.  Reports that the ECB may delay the decision on the timetable for ending QE until July are probably responsible for recent EUR weakness.  Overall, we don’t expect much from this meeting and the drop in the Eurozone currency has probably already discounted that outcome.

Regulation and privacy: The NYT[1] opines that new EU privacy regulations may end up strengthening the market power of the incumbents.  To some extent, this is public policy 101.  Regulation drives up the cost of doing business which acts as a barrier to entry for potential new firms coming into the business.  This article suggests another twist to the idea—regulation may enhance the existing brands because the new regulations will put the idea of privacy into the minds of consumers and make them prone to stay with the familiar, the current dominant firms.

In public policy, there are generally two broad theories of managing excessive market power.  The first is to use anti-trust laws to break up large firms into parts.  This method has drawbacks; some firms are difficult to unwind.  In a vertically integrated firm, some parts may not be able to function as standalone entities.  The classic example of anti-trust is the breakup of Standard Oil in 1911 that created 34 firms.  Several did exceedingly well in the aftermath, suggesting the breakup was good public policy.  The other theory is to allow the monopolist to exist but regulate it heavily.  The original AT&T (not the current one) is the most obvious example.  The key decision input that should decide which policy to deploy is if the industry is a “natural monopoly” or not.  A natural monopoly is an industry with increasing returns to scale; the bigger one gets, the faster the profits.  Industries where redundant infrastructure is inefficient is a good example.  So, for telephones, having competing firms all hanging wires to phones and being unable to send voice “across” different firms’ wires meant that the first mover could gain scale by crowding out new entrants.  It is unclear if the social media firms are natural monopolies.  There is evidence to suggest that due to learning curve costs or grouping (all my friends use a certain social media platform precluding the use of others) they have the characteristics of natural monopolies.  On the other hand, there is a bit of Yogi Berra’s famous line, “Nobody goes there anymore; it’s too crowded.”  We notice that social media platforms rise and fall in popularity, suggesting these markets are not natural monopolies after all.  If they are not natural monopolies then anti-trust would be a better solution.  We suspect the firms would prefer to be regulated on the assumption that they can continue to run their businesses as they see fit and, via regulatory capture, manage the regulatory environment to their advantage.  Anti-trust takes years to implement, whereas regulation can come quickly.  Therefore, the most likely short-term outcome is more regulation on social media which may not necessarily be bad for these firms.

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[1] https://www.nytimes.com/2018/04/23/technology/privacy-regulation-facebook-google.html?emc=edit_mbe_20180424&nl=morning-briefing-europe&nlid=567726720180424&te=1