FIG Topics of Interest



The idea of bringing down U.S. drug prices is universally popular. The hard choices, trade-offs and political fortitude needed to actually do it, however, are a harder sell. So here we are, with a drug-pricing plan so toothless that biotech shares soared as it was unveiled by President Donald Trump on Friday afternoon.
Some of Trump’s initiatives will be only mildly impactful, like changes to the Medicare Part D drug benefit that might slightly lower costs to the government and seniors. Other proposals are vague and may never be pursued, like changes to the drug-rebate system. Still others are nonsensical political theater, like the notion that other countries can be compelled to raise drug prices, and that this will somehow lower U.S. prices.
The few immediate  actions outlined in the plan — like ending a rule that makes it hard for pharmacists to steer patients to lower-priced options and forcing drugmakers to include the list price of drugs in advertisements — will be visible in a campaign year and allow the administration to claim it is taking action. But they won’t actually stop soaring drug spending.
Trump’s plan could have had more teeth if he followed through on a policy he once endorsed, and has been criticized for not pursuing: allowing Medicare to directly negotiate drug prices. But here again is another example where trade-offs would be required. Nine out of 10 Americans are in favor of giving the government the power to negotiate, according to a Kaiser poll. But that number would drop precipitously if they knew what the government would have to do in order to make the policy effective.
To gain any leverage with drugmakers, the government would need to be able to refuse Medicare coverage of certain medications because they are too expensive, and firmly steer patients to cheaper treatments. That is, the more restrictive the government is allowed to be, the bigger the potential impact on prices. But enacting such restrictions would be enormously unpopular. It’s one thing when it’s a private company making you jump through hoops, it’s another entirely when Uncle Sam is telling your grandmother she can’t have a potentially lifesaving medicine.

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Israeli Prime Minister Benjamin Netanyahu issued a statement Thursday saying: "Iran crossed a red line. We responded accordingly. The IDF carried out a very wide-ranging attack against Iranian targets in Syria." He added: "Whoever hurts us — we will hurt them sevenfold.
Israel bombed more than 35 sites in Syria — both Iranian and Syrian — early Thursday in response to a rocket attack it said was launched by Iran just after midnight local time.
Amid a rapid escalation of regional tensions, the strikes have thrust a simmering shadow war out into the open.
The Israeli Defense Forces (IDF) claimed it struck nearly all of Iran's military infrastructure in Syria, dramatically ramping up hostilities between the two longtime adversaries that until now were largely fought out by proxies.
Ahmad Majidyar, director of the IranObserved Project at the Middle East Institute, effectively summarized the new developments: "While neither side wants an all-out war, miscalculation and overreaction may culminate in a more dangerous situation, triggering a wider war between the two arch-enemies and thrusting the Levant region into more chaos and instability."
Israeli missiles targeted an Iran-linked army base south of Syria's capital of Damascus. Israeli strikes had killed at least seven Quds Force advisers in the weeks prior to Thursday's strike, but until this week Tehran was notably muted in its response — likely owing to the embarrassment of an Israeli blow to its forces, and a reluctance to trigger greater conflict. Now, however, analysts say Iran is less likely to hold back.
"We should be prepared for continued airstrikes and exchange of fire along the border," said Ryan Turner, senior risk analyst at PGI group, adding that both terrorist and cyber-attacks targeting Israeli interests cannot be discounted. Meanwhile, Israel, emboldened by the Trump administration and tacit support from Gulf monarchies, will likely step up its aerial campaign against Iranian targets.
U.S. Ambassador James Dobbins, a senior fellow at RAND Corporation who served in crisis management posts for the Clinton, Bush and Obama administrations, agreed, adding that a full-scale war is still less probable. "Iran and Israel are likely to continue clashing in Syria," Dobbins told CNBC. "Strikes from Israel all the way to Iran or vice versa seem less likely, although possible if the local conflict becomes more intense."

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How much would it cost to keep the peace on the Korean Peninsula? Around $2 trillion over ten years.
That’s according to Stephen Jen and Joana Freire at Eurizon SLJ Capital Ltd. in London who estimated what resources would be needed to ensure a denuclearized North Korea is economically viable. They drew on the example of Germany’s unification, noting that transfers from the West to East totaled more than 1.2 trillion euros, or around 1.7 trillion euros using today’s value.
By population, the relative size of North Korea to South Korea is meaningfully larger than East Germany was to West Germany. North Korea is also much much underdeveloped compared to East Germany, which had a well established industry base.
"Given the threat presented by the nuclear arsenals, Mr Kim Jong Un is in a position to demand a very large financial commitment from the rest of the world to secure complete denuclearisation," Jen and Freire wrote in a note. "We stress that we are not arguing that North Korea should or will demand such a large financial assistance. We are merely thinking out loud about what the order of magnitude of that figure might be."

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U.S. President Donald Trump’s plan to withdraw from the 2015 accord to curb Iran’s nuclear program poses fresh uncertainty although Bloomberg Economics reckons that and similar supply shocks account for half of oil’s recent rise.
1. What does it mean for global growth?

The world economy is enjoying its broadest upswing since 2011 and higher oil prices would drag on household incomes and consumer spending, but the impact will vary. Europe is vulnerable given that growth and industrial activity already are moderating and many of the region’s countries are oil importers. China is the world’s biggest importer of oil and could expect an uptick in inflation -- prices already are tipped to increase 2.3 percent in 2018 from 1.6 percent in 2017. For a sustained hit to global growth, economists say oil would need to push higher and hold those levels. Seasonal effects mean energy costs often increase during the first half of the year before easing. Consumers can also switch energy sources to keep costs down, such as biofuels or natural gas.
2. How will Iran impact the the market?
Oil prices have risen 14 percent this year -- half of this increase reflects stronger global demand, a Bloomberg Economics model suggests. The rest is likely due to heightened tensions with Iran and other supply shocks. The return of U.S. sanctions could crimp Iranian oil exports, but the global supply shock might be mitigated by increased pumping elsewhere, according to the analysis. Here’s a chart.
3. Who wins from higher oil prices?
Most of the biggest oil-producing nations are emerging economies. Saudi Arabia leads the way with a net oil production that’s almost 21 percent of gross domestic product as of 2016 -- more than twice that of Russia, which is the next among 15 major emerging markets ranked by Bloomberg Economics.
Other winners could include Nigeria and Colombia. The increase in revenues will help to repair budgets and current account deficits, allowing governments to increase spending that will spur investment.
4. Who loses?
India, China, Taiwan, Chile, Turkey, Egypt and Ukraine are among those on the worry list. Paying more for oil will pressure current accounts and make economies more vulnerable to rising U.S. interest rates. Bloomberg Economics has ranked major emerging markets based on vulnerability to shifts in oil prices, U.S. rates and protectionism.
Analysts at RBC Capital Markets created an “oil sensitivity index” to judge the economies most exposed in Asia. They warn that Malaysia, Thailand, China and Indonesia could face the most volatility from an oil-price spike.
5. What does it mean for the U.S. economy, the world’s biggest?
A run-up in oil prices poses a lot less of a risk to the U.S. economy than it used to, thanks to the boom in shale oil production. The old rule of thumb among economists was that a sustained $10 per barrel rise in oil prices would shave about 0.3 percent off of U.S. GDP the following year. Now, says Mark Zandi, chief economist at Moody’s Analytics, the hit is around 0.1 percent. And that all but dissipates in subsequent years as shale oil production is ramped up in response to the higher prices. The Baker Hughes U.S. rig count already is at a three-year high. 
As the U.S. nears the tipping point between net oil importer and exporter, some forecasts are less upbeat. Gregory Daco, the U.S. chief for Oxford Economics, estimates that if WTI crude prices average $70 a barrel this year, U.S. growth will lose half the 0.7 percentage point gain it would otherwise earn from tax cuts passed earlier in 2018.
Oil-producing states such as North Dakota, Texas and Wyoming should benefit from higher extraction activity, though Daco warns that productivity enhancements could limit that upside. Poorer households have the most to lose. They spend about 8 percent of their pre-tax income on gasoline, compared to about one percent for the top fifth of earners.
6. Will it lead to higher inflation around the world?
Energy prices often carry a heavy weight in consumer price gauges, prompting policy makers including those at the Fed to focus simultaneously on core indexes that remove volatile food and energy costs. But a substantial run-up in oil prices could provide a more durable uptick for overall inflation as the costs filter through to transportation and utilities and other associated industries.
7. What does it mean for central banks?
If stronger oil prices substantially boost inflation, central bankers on balance will have one less (big) reason to keep monetary policy on hold while the Fed moves ahead in its tightening cycle.

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The prospect of the U.S. withdrawing from the landmark seven-party agreement to limit Iran's nuclear program, formerly known as the Joint Comprehensive Plan of Action (JPCOA), has ramped up energy market fears of an imminent supply shock.

"The geopolitical consequences of a possible dismantling of the JCPOA would likely to play a larger and long-lasting role in pushing oil prices higher than short-term policy uncertainty," Michael Cohen, Barclays director of energy market research, said in a research note published Monday.

Trump is likely to either announce he will not be renewing a waiver on Iranian sanctions or reaffirm his firm opposition to the global pact, Barclays analysts said. However, regardless of Tuesday's announcement, they predicted the current Iran nuclear deal would "not survive under President Trump."

"And in the next couple of years, this more hawkish foreign policy could fuel already elevated tensions in the Middle East, specifically in Iraq, Syria, and Yemen, as the hostilities between Iran and Saudi Arabia escalate," Cohen added.

Iran's oil production has rebounded to nearly 4 million barrels a day since world powers opted to ease sanctions over its nuclear program. However, external observers have warned that re-imposing sanctions could reduce Iranian oil exports by up to 1 million barrels a day — just the type of supply shock that could be price supportive.

"We would expect an inevitable jump in oil prices should the sanctions return," Cliff Kupchan, chairman of Eurasia Group, a Washington-based political consulting firm, said in a research note.

"We return to the possibility that the president's looming verdict may — to a significant extent — be a negotiating ploy and hence should not be considered a final verdict on the deal… Trump is regularly underestimated, and it's not over."


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“They’re two separate highways, but both need to exist,” said John Coleman, managing director of the fixed-income group at R.J. O’Brien & Associates, a futures brokerage in Chicago. “There has to be a channel for unsecured lending. Libor must continue. Whether it continues as the A-list rate remains to be seen.”

Ultimately, the market will determine Libor’s successor. Coleman says a better replacement for the unsecured benchmark would be the average rate from the Federal Home Loan Bank system, where thousands of lenders already transact every day. Another option is Ameribor, the brainchild of Richard Sandor, an economist who pioneered interest-rate futures and derivatives at the Chicago Board of Trade. Ameribor is a new interbank rate that reflects borrowing costs based on the transactions of members of the American Financial Exchange.
“Libor will go away and we need a rate that hundreds of trillions of dollars of contracts can migrate to, New York Fed President William Dudley said Friday at an event at Bloomberg headquarters in New York. “Eventually we’ll get a term curve for SOFR, and then the heavy lifting will occur, which is when we move the existing set of contracts that we have today that reference Libor onto SOFR.”

“For now Libor is still preferred as it’s the most liquid and deepest set of contracts that we have,” said Chris Sullivan, chief investment officer at the United Nations Federal Credit Union, which manages over $2 billion in U.S. fixed-income assets. “But we will be watching SOFR pretty closely just to see how its received, managed and traded. We want to see how it’s received and what the major risks are with it.”

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In a document entitled “Balancing the Trade Relationship,” the U.S. government made a series of demands from China at the outset of meetings in Beijing this week to resolve a simmering trade dispute between the world’s two biggest economies.

The document, seen by Bloomberg News, is divided into eight sections, ranging from trade-deficit reduction to tariff barriers to implementation. Here’s a synopsis of its key points:

Trade Deficit Reduction:

  • The U.S. wants China to cut the two nations’ trade deficit by at least $200 billion by the end of 2020 from 2018 levels.
  • Chinese purchases of U.S. goods will represent at least 75 percent of a commitment to a $100 billion increase in purchases of U.S. exports for the 12 months beginning June 1, 2018, and at least 50 percent of China’s commitment to an additional $100 billion increase in purchases of U.S. exports in the 12 months beginning June 1, 2019.

Protection of American Technology and Intellectual Property

  • China to immediately cease providing subsidies and government support that fuels excess capacity in industries targeted by the Made in China 2025 plan.
  • Specific policies and practices linked to technology transfer are eliminated.
  • A cessation of government-sponsored cyber intrusion and cyber theft.
  • Strengthened intellectual property rights protection and enforcement.
  • By Jan. 1, 2019, China will eliminate provisions of the Regulations on the Administration of the Import and Export of Technologies and the Regulations on the Implementation of the Law on Chinese-Foreign Equity Joint Ventures identified in the U.S.
  • By July 1, 2018, China will withdraw its request for WTO consultations in United States – Tariff Measures on Certain Goods from China and take no further action on the matter
  • The document also calls on China to take no retaliatory action in response to actions taken or to be taken by the U.S.

Restrictions on Investment in Sensitive Technology

  • A demand that China does not “oppose, challenge, or otherwise retaliate against the United States’ imposition of restrictions on investments from China in sensitive U.S. technology sectors or sectors critical to U.S. national security.”

U.S. Investment in China

  • A demand that China does not distort trade through investment restrictions and any restrictions are narrow and transparent
  • U.S. investors in China to receive “fair, effective and non-discriminatory market access and treatment, including removal of the application of foreign investment restrictions and foreign ownership/shareholding requirements.”
  • China to issue an improved nationwide negative list for foreign investment by July 1, 2018. Within 90 days the U.S. will identify existing investment restrictions that deny U.S. investors market access. China is then to remove all identified investment restrictions on a timetable to be decided by both nations.

Tariff and non-tariff barriers

  • By July 1, 2020, China will reduce tariffs on all products in non-critical sectors to levels that are no higher than the levels of the U.S.’ corresponding tariffs
  • China to remove specified non-tariff barriers and recognizes that the U.S. may impose import restrictions and tariffs on products in critical sectors, including sectors identified in the Made in China 2025 industrial plan.

U.S. Services and Services Suppliers

  • A demand for China to improve market access in specified ways

U.S. Agricultural Products

  • A demand for China to improve market access in specified ways


  • Both countries to meet quarterly to review targets and reforms
  • If the U.S. declares China is not complying with the framework, the U.S. can impose tariffs or other restrictions on Chinese products or restrict supply of services
  • A demand that China does not “oppose, challenge or take any form of action against the United States’ imposition of additional tariffs or restrictions.”
  • China to withdraw its WTO complaints regarding designations of China as a non-market economy and will refrain from future challenges
  • Within 15 days of receiving written notice of a prohibited product that may have been transshipped through one or more countries, China will provide full details of every shipment. Failure to do so will trigger tariffs.
  • If China fails to uphold commitments the U.S. will impose tariffs on imports from China and will confiscate counterfeit and pirated goods or levy tariffs to compensate for lost technologies and intellectual property.
  • A demand that China does not take any retaliatory action in response.
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“On examination, it turns out that the phrase excess capacity is slippery — rhetorically useful, but hard to pin down, even harder to operationalize, and at the same time woefully misleading.”
The United States, the European Union and Japan have accused China of trading unfairly by subsidizing bloated steel and aluminum sectors and flooding the world with cheap exports.

U.S. President Donald Trump has used China’s mammoth steel and aluminum sectors as justification for imposing tariffs on global supplies, causing an outcry from many countries.
Global Trade Alert has cataloged global trade policies since 2009 to gauge trends in protectionism, following a pledge by the G20 group of countries in November 2008 not to resort to trade protectionism as a response to the financial crisis.

There was no question that the steel sector was plagued by trade distortions, the study said, but G20 governments had grossly under-reported their own use of trade-distorting policies.
“Even before the recent steel tariffs were imposed by the U.S., the cumulative effect of the 144 American actions to limit steel imports still in effect today covered 96.8 percent of U.S. steel imports,” the report said.
Targeting excess steel capacity was “a fool’s errand”, because measuring it was very difficult, and estimates of China’s steel production capacity varied enormously, it said.

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“How they choose to alter the characterization of inflation is important,” said Stephen Stanley, chief economist at Amherst Pierpont Securities. “They have been saying for a long time it’s running below target. There are shades of gray” in their portrayal.
A matter-of-fact description of the price gains would suggest the FOMC is confident in its gradual approach to raising rates and doesn’t see urgency in increasing its pace. Likewise, maintaining its description of the inflation goal as “symmetric” -- included in every FOMC statement since March 2017 -- could reinforce the view that the Fed can be patient.

Characterizing 2 percent as a symmetric target, rather than a strict ceiling, conveys the idea that the committee would be equally concerned if inflation were running persistently above or below its objective.

Officials could also say “inflation is now essentially at target and that they expect to be able to keep it in that vicinity,” said Jonathan Wright, an economics professor at Johns Hopkins University in Baltimore and a former Fed economist. “Some such language allows for a small overshoot which seems likely.”

The committee is also likely to debate how to characterize the U.S. economic expansion, which on Tuesday became the became the second longest on record. In March, the FOMC downgraded its view of growth to “moderate” from “solid.” Gross domestic product rose at a slightly quicker-than-expected 2.3 percent rate in the first quarter, making it a close call between those choices.

The labor market may continue to be described as “strong” even with data showing some unevenness. Just 103,000 jobs were added in March, according to the Labor Department, though economists surveyed by Bloomberg estimate that employment picked up in April.

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“$60 is like the new $100,” said Dallas Fed economist Michael Plante in a mid-April interview.
After a two-year crash, the price of crude CLc1 began to recover in 2016 and pierced $60 a barrel early this year. But oil is still far cheaper than at the peak of the previous eight-year boom that began in 2006 North Dakota’s Bakken oil patch and supercharged the city of Williston.
In the Permian basin, which stretches across West Texas and eastern New Mexico, the latest boom is being helped by advances in technology that allow drillers to extract much more from each acre.
Breakeven costs are now as little as $25 per barrel, according to the Dallas Fed’s most recent survey, so energy companies here no longer need $100 oil to make lots of money.
“It is a full-fledged boom,” says Dale Redman, chief executive of Propetro, a Midland, Texas, firm that supplies heavyduty horsepower to drill sites, where energy companies coax crude from the ground with sand and water.
To Midland Mayor Jerry Morales, “It’s a good story right now.” He says the city is trying to keep up with the drop in housing inventory and rise in rents by approving new apartment complexes and working with developers to put in water and sewer pipes.
“Companies are making enough money to be able to afford to pay higher wages,” he said.

Unemployment was 3.2 percent in Odessa and 2.5 percent in Midland in February. Average weekly earnings in March hit records in both towns, which have a combined population of about 250,000. Sales tax receipts have soared.
“You have people that move in, you train them and then someone else offers them a job: there is constant raiding going on,” says Jeff Sparks, chief operating officer of family-owned Discovery Oil in Midland, who has only recently shifted to the more efficient and capital-intensive drilling techniques that have pushed per-barrel extraction costs down so steeply.

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