Daily Comment (August 1, 2017)

by Bill O’Grady and Thomas Wash

[Posted: 9:30 AM EDT] Global equity markets are higher this morning on the second day of Gen. Kelly’s tour as Chief of Staff (CoS).  Here are the news items we are watching:

The “Mooch” is out: Anthony Scaramucci left his role as communications director.  It isn’t completely clear if he was fired or resigned but, in reality, CoS Kelly wanted him gone.  This is a warning shot to the White House staff that a new regime is in place.  Kelly has apparently moved to restrict access to the president and to better control the processes within the White House.  This order is desperately needed.  The U.S. is facing rapidly escalating challenges and a dysfunctional executive branch is not helpful.  Kelly’s appointment is potentially the first step toward bringing order.  Sadly, a lot of political capital has been squandered and thus the administration’s ability to meet its goals is reduced.

Stepping up tensions with Russia: VP Pence is traveling in the Russian “near abroad,” speaking in Estonia and Georgia.  He spoke in both places—in the latter, he offered U.S. support for adding Georgia to NATO, and in the former, he reassured leaders there that the U.S. is prepared to continue its defense via NATO and supports putting the Patriot missile system in the Baltic state.  The Pentagon has proposed supplying Ukraine with anti-tank weapons, a move opposed by both France and Germany.  The president would have to approve the arms sales to Ukraine; we expect he will.  Pence’s comments will escalate tensions with Russia, and it isn’t obvious that the U.S. is prepared for conflict in Europe.  Meanwhile, Russia is sending up to 100k troops to the eastern edge of NATO territory as part of military exercises.

Tensions rise in Venezuela: The Maduro government, in the wake of Sunday’s election, has re-arrested two opposition leaders, Antonio Ledezma and Leopoldo Lopez.  The U.S. has applied personal sanctions on President Maduro and other sanctions are being considered.  Venezuela is moving rapidly to end democracy and install an authoritarian regime.  The key question is, “Can the country afford it?”  The Venezuelan economy is in shambles, with accelerating inflation and growing shortages of essential items.  One problem that hasn’t gotten much attention is increasing emigration.  Until recently, most of those fleeing the country have been in the upper and upper-middle classes.  Evidence of their flight can be found in Florida real estate.[1]  The next wave will likely be less affluent Venezuelans fleeing malnutrition and political chaos.  They will, at least initially, end up in neighboring countries but we wouldn’t be surprised to see them eventually attempt to come to the U.S.

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[1] https://therealdeal.com/miami/2017/07/30/venezuelan-flight-capital-takes-multiple-routes-to-south-florida/