File 026794
Deutsche Bank Global Political and Regulatory Risk Analysis 2015-2016 (File 026794)
Deutsche Bank's November 2015 analysis of global political and regulatory risks for 2015-2016, examining US economic policy, tax reform, banking regulation, and geopolitical factors affecting markets.
Summary
This Deutsche Bank report by Francis J. Kelly provides a comprehensive outlook on political and regulatory risks in the global economy for 2015-2016. It analyzes US legislative priorities including tax reform, regulatory relief for banks, housing market developments, and the emerging NAFTA energy renaissance. The document discusses key geopolitical uncertainties, short-term policy objectives, and implications for financial markets, particularly regarding corporate tax repatriation, banking regulation under Senator Shelby's bill, and the strategic importance of North American energy independence.
Deutsche BankGlobal Public AffairsGlobal Political and Regulatory Riskin 2015 and 2016: What to WatchNovember 4, 2015Francis J. KellyManaging Director &Global Coordinator, Public Affairs11/10/2015 2010 DB Blue template“There cannot be a crisis next week. My schedule is already full.”- Former US Secretary of State Henry Kissinger“Any idiot can face a crisis. It’s day to dayliving that wears you out.”- Anton Chekhov“Formula for success: rise early, work hard, strike oil.”- J. Paul Getty, US businessmanDeutsche BankGlobal Public AffairsFrancis J. Kellyfrancis.j.kelly@db.com111/10/2015 2010 DB Blue templateThe world is moving rapidly from the model we havelived within for 25 years. The where, why and what…LONG TERM OUTLOOK:- Geopolitical events are increasingly pressuring global markets and will continue to doso for the remainder of 2015 and well into 2016.- Middle East serves as locus for key uncertainty and chaos. We continue to believe theregion is at risk of remaining in turmoil for 30+ years .- We continue to see NAFTA nations as being seen as economic and political “safehavens” in large part to “Energy Renaissance.”- China is going through intense political, economic and societal transformation – all ofwhich could potentially overwhelm the chances of a successful outcome.SHORT TERM (3-10 month) OUTLOOK:- In the coming three to six months, three key events will likely happen and have a longterm positive impact on markets:‣ Approval and implementation of Iran nuclear negotiations‣ Congressional approval of Trans-Pacific Partnership (TPP)‣ US will approve repeal ban on export of crude oil/natural gasDeutsche BankGlobal Public AffairsFrancis J. Kellyfrancis.j.kelly@db.com211/10/2015 2010 DB Blue templateThe US: Washington’s 2015-2016 agenda - what toexpect and why it will be important• Despite the contrary and dramatic press accounts,Washington has been getting things done, a positivefor the political process and the nation. It may havebeen messy but here is what they have gotten doneso far this year:o Trade Promotion Authority (TPA)o A federal budgeto Iran nuclear dealo Debt ceilingo Medicare Payment & CHIP fundingo Homeland Security fundingo Debt ceiling raiseBut big policy items are unfinished:o Appropriations (by December 11 th )o Repealing oil export bano Highway billo Corporate Tax reformo The Trans Pacific Partnership (TPP)Deutsche BankGlobal Public AffairsFrancis J. Kellyfrancis.j.kelly@db.com311/10/2015 2010 DB Blue templateUS corporate tax reform: have the seeds beenplanted and is there a deal to be done?- The US Senate has worked on a possible taxpackage since January. But no clear consensushas emerged on a larger package.- The real focus is on corporate tax reform,spurred on by the inversion debate.- In the Senate, a bipartisan bill was offered toencourage corporate profits abroad to repatriateat a significantly lower rate (the Portman-Schumer bill).- In the House, a plan was offered in late Julythat would allow corporations to repatriate at alower rate if they invested in “research anddevelopment” (the Boustany-Neal bill). Therevenue from the deal would pay for theHighway Trust Fund – which needs money.- What is interesting for both bills is what did nothappen: The White House remained silent.- Could Congress (in league with US Treasury)slip a major corporate tax report into theappropriations bill using the “Reconciliation”process?Deutsche BankGlobal Public AffairsFrancis J. Kellyfrancis.j.kelly@db.comSource: OMB411/10/2015 2010 DB Blue templateShould hedge funds and private equity funds beworried about Washington? No.- There continues to be chatter about dealing with carried interest. But chatter does notmean action and we see little actual movement toward raising the rates on carriedinterest through 2016.- The new “tax reform” focused on hedge funds is projected to raise $11 billion a year.Somehow this gets done by allowing the IRS to audit hedge funds and find this amountof unreported revenue annually. Good luck with that.- Private Equity has also been a focus of political chatter – maybe we see new regulationon the burgeoning “Shadow Banking” sector? Again, chatter is not action. There is littlechance Congress or regulators will move aggressively in this space through 2016.- But “Big Banks” continue to take it on the chin: In an effort to raise revenue for theHighway Trust Fund, Republicans have legislation moving forward that would drop theguaranteed interest rate banks receive for “investing” in the Federal Reserve – whichthey are required to do by law - from 6 percent to 1.5 percent. This will result in asignificant drop in revenues for some of the biggest banks in the US.Deutsche BankGlobal Public AffairsFrancis J. Kellyfrancis.j.kelly@db.com511/10/2015 2010 DB Blue templateCan US banks get some regulatory relief? Taking careof small- and mid-sized banks and reforming the FedSenator Richard Shelby (R-AL), chair of the US Senate Banking Committee, has put forward aregulatory relief bill which:- Raises the “Systemically Important” bar from $50 billion to $500 billion; Re-define small banks from$10 billion to $50 billion;- Provides an exemption for banks under $10 billion of assets from the Volcker Rule;- Requires the Federal Open Market Committee to release quarterly reports on economicconditions around the country, though the Fed chair would still testify before Congresssemiannually;- Creates an independent commission to evaluate the structure of the Federal Reserve Boardsystem, including a review of the number and structure of the Fed's 12 districts and requires theFederal Reserve to publish a study every two years on its regulation and oversight of nonbanks;- Requires the Government Accountability Office (GAO) to study the Federal Reserve’s regulation ofsystemically important institutions (SIFIs);- Requires the President of the Federal Reserve Bank of New York to be nominated by the Presidentand confirmed by the Senate. Also require3 the Fed to speed up the release of Fed minutes.Some observers have suggested this bill will go nowhere; but we would notwrite it off so fast. Shelby is the master of the legislative process and there issome bipartisan support already for parts of his bill.Deutsche BankGlobal Public AffairsFrancis J. Kellyfrancis.j.kelly@db.com611/10/2015 2010 DB Blue templateHousing reform: 2015 be the year of GSE reform?- After initial movement on bi-partisan legislation last year, this is a dead effort as indicated byBanking Committee member and advocate for GSE reform, Senator Bob Corker (R-TN): “Congresswill ignore GSE overhaul for next 16 months.”- Meanwhile, the housing market is moving on a number of fronts (we’ve seen this horror moviebefore):��Fannie Mae launched their “HomeReady Mortgage” program: You can (again) use the incomefrom non-borrower household members.Freddie and Fannie are working on a common Securitization Platform. Just for them (for now)but will eventually allow other participants. Question as to whether this is a transition tosomething new or simply securing the monopoly/duopoly of the GSE’s.Existing Home Saleshas increased 53.9%from its lowest level of3.45 million in July 2010.Source: Deutsche BankDeutsche BankGlobal Public AffairsFrancis J. Kellyfrancis.j.kelly@db.com711/10/2015 2010 DB Blue templateThe “Americas Decades” - The energy revolutionkeeps moving forward, the implications are enormous- The NAFTA Bloc (US, Canada, Mexico) is emerging as a new “Super Bloc” for business,finance and energy.- Combined, the NAFTA Bloc is comprised of more than 500 million people, a $19trillion economy and the largest energy capability in the world. Not to mention USand Canadian military superiority and reach globally.- Mexican government “got it” and amended their constitution; Canada has “gotten it” forquite some time (i.e. oil sands, Keystone Pipeline, etc.). US Congress now seeingstrategic imperative (not to mention massive federal revenues).- The local, national, regional and broader geopolitical implications of greaterhemispheric energy independence are extraordinary and are already creating significantpolicy changes – and ruptures globally (i.e. Russia, Middle East, Venezuela, China, Iran).‣ Case in point: If the Ukrainian crisis has done anything, it has intensely focused Washington(and Mexico City and Ottawa) on the need to rapidly build out natural gas and crude oildevelopment and export capabilities.‣ And, in the near future, can tariffs and fees on overseas sales help deal with the US deficit?There are a growing number of members of Congress who think it can. And will.Deutsche BankGlobal Public AffairsFrancis J. Kellyfrancis.j.kelly@db.com811/10/2015 2010 DB Blue templateThe 2016 US electioncampaigns have begun…Deutsche BankGlobal Public AffairsFrancis J. Kellyfrancis.j.kelly@db.com911/10/2015 2010 DB Blue templateYes, of course, we are already talking about the 2016presidential elections…. A multi-billion dollar race?RepublicanEx-Gov. Jeb Bush (R-FL)Gov. Scott Walker (R-WI)Senator Rand Paul (R-KY)Dr. Ben CarsonSenator Ted Cruz (R-TX)Gov. Chris Christie (R-NJ)Gov. John Kasich (R-OH)Senator Marco Rubio (R-FL)Senator Lindsey Graham (R-SC)Ex-Gov. George Pataki (R-NY)ex-Senator Rick Santorum (R-PA)Ex-HP CEO Carly FiorinaEx-Gov. Bobby Jindal (R-LA)Donald TrumpEx-Gov. Jim Gilmore (R-VAEx-Gov. Rick Perry (R-TX)DemocratHillary ClintonSenator Bernie Sanders (D-VT)Ex-Gov. Martin O’Malley (D-MD)Harvard Professor Lawrence LessigSen. Elizabeth Warren (D-MA)Ex-Senator Jim Webb (D-VA)Ex-Governor Lincoln Chaffee (D-RI)Vice President Joe Biden (?)Deutsche BankGlobal Public AffairsFrancis J. Kellyfrancis.j.kelly@db.com1011/10/2015 2010 DB Blue templateSo who would win if the general election were heldtoday? Strangely, closer than you might think.The November 4 th RCP* average of major polls shows a surprisingly tightrace between various Republican candidates and Democratic frontrunnerHillary Clinton.GOP Candidatevs. Hillary ClintonMarco Rubio Clinton +0.4 (45.0 - 44.6%)Jeb Bush Bush +1% (44.6 – 43.6%)Donald Trump Clinton +2.2% (46 – 43.8%)Ben Carson Carson +5.2% (48.6-43.4%)Carly Fiorina Fiorina +1% (43.5-42.5%)*RCP = Real Clear Politics Aggregate Poll of major pollsSource: Realclearpolitics.comDeutsche BankGlobal Public AffairsFrancis J. Kellyfrancis.j.kelly@db.com1111/10/2015 2010 DB Blue templateHow does Clinton do vs. Republican opponents? And,please, tell me what you really think of Mr. TrumpDeutsche BankGlobal Public AffairsFrancis J. Kellyfrancis.j.kelly@db.comSource: Quinnipiac College1211/10/2015 2010 DB Blue templateWhipsawed! Democrats may be poised to regaincontrol of the Senate in 2016- 23 seats have Republican incumbents, 7 seats with Democratic incumbents- There are 4 open seats: California, Maryland, Indiana and NevadaDeutsche BankGlobal Public AffairsFrancis J. Kellyfrancis.j.kelly@db.comSource: National Journal1311/10/2015 2010 DB Blue templateAnd remember: The primaries are six months away…StateIowa CaucusesNew HampshireColorado/Minnesota/New York/UtahNevadaSouth CarolinaNorth CarolinaMichiganFlorida/Massachusetts/Oklahoma/Tennessee/Texas/Vermont/VirginiaLouisianaAlabama/Mississippi/OhioIllinois/MissouriArizonaDateJanuary 18 thJanuary 26 thFebruary 2 ndFebruary 6 thFebruary 13 thFebruary 16 thFebruary 23 rdMarch 1 stMarch 5 thMarch 8 thMarch 15 thMarch 22 ndDeutsche BankGlobal Public AffairsFrancis J. Kellyfrancis.j.kelly@db.com1411/10/2015 2010 DB Blue templateThe geopolitical outlook: Growing regional tensionswill not get any better in 2016Deutsche BankGlobal Public AffairsFrancis J. Kellyfrancis.j.kelly@db.com1511/10/2015 2010 DB Blue templateIran: US Congress will not stop nuclear deal; EUalready moving forward – fast. What’s next?- P5+1 and Iran reached a deal. Bigobstacle has been overcome: Enough USSenators support to ensure it can moveforward.- Saudi Arabia “supports” the deal. TheSaudi king was in DC last month. US hasquietly promised nuclear protection andmassive weapons sales.- Market implications of a deal aresignificant, especially for Europeancorporates eager to get back into Iranmarketplace (i.e. Italian PM Renzi alreadyvisited Tehran as has German FM).- Iran wants to build 400 four & five starhotels in next five to ten years.- But do not expect any significant oilexport increase and/or sales into Iran for atleast 8 – 10 months. Iran must first complyand set up systems for inspections.Deutsche BankGlobal Public AffairsFrancis J. Kellyfrancis.j.kelly@db.comSource: IIF; IMF1611/10/2015 2010 DB Blue templateYemen in crisis: a new global choke-point?-13 percent of world’s oil travelsthrough Gulf of Aden as it travels upthrough Suez Canal – almost all of itheading to Europe.- Almost 8 percent of all world tradevia shipping goes through SuezCanal.- Iran is seen to be trying to build a“Shia Crescent.”- Iran sees/fears being encircled by“Sunni Crescent.”- If Yemen falls completely to Houthitribal control – de facto, becoming anIranian satellite – what threat does itpose to Saudi Arabia?- Question: will a nuclear deal withIran empower them regionally? Orwill it further spur the Sunni nations toincrease their defense efforts?Yemen: IranBacking theHouthi rebelsSomalia’s Al ShababDeutsche BankGlobal Public AffairsFrancis J. Kellyfrancis.j.kelly@db.com1711/10/2015 2010 DB Blue templateLibya: Is there any hope for peace or will it become ahub for regional instability and violence? No and yes-The US/EU/NATO toppling of long-timestrongman Muammar Gaddafi has led to acycle of instability and continuous violence.- It has also led to severe cuts in oil productionand loss of significant revenue.- More importantly, Gaddafi’s massive weaponsstocks have directly flowed to Boko Haram inNigeria, terrorist groups in Mali and to armother movements in Tunisia – as well asfinancing them via the sales and trading ofthese weapons.- The US and EU seem to have no strategy todeal with the situation. White House sourcestell us “it has literally fallen off the table” as anissue of focus. Is this now Egypt’s problemthrough which the US will sendmoney/weapons?Deutsche BankGlobal Public AffairsFrancis J. Kellyfrancis.j.kelly@db.com18Conflict in Ukraine: is it all over but for the shooting?- Moscow got what it wanted: securingthe naval port in Sevastopol and creatinga buffer state between Ukraine andRussia as well as keeping Kiev weak andunstable.- But there has been a cost: Sanctionsare crushing the Russian economy andCrimea has become a giant money pit forPutin to pour rubles into. A completeeconomic mess.- However, do not exclude possibility ofmore violence in Ukraine or elsewhere inthe region.- Still waiting for any significant financialaid or military relief from EU or US. Wordto the wise: do not hold your breath.- One other conflict is now drawing inRussian troops: Syria. Russian pilots arenow flying missions with Syrian Air Force.Ukraine Lines of WithdrawalRussian vs. Ukrainian Speakers in UkraineDeutsche BankGlobal Public Affairs11/10/2015 2010 DB Blue templateFrancis J. Kellyfrancis.j.kelly@db.comSource: Washington Post; IIF, National Bank of Ukraine1911/10/2015 2010 DB Blue templateRussia: Return of the empire or death of a nation?- Russia covers nine time zones andalmost 7,000 miles end to end.-The current Russian population:143million. With the annexation of Crimea:146 million.- By 2030, the Russian population willhave shrunk to136 million.- By 2050, it will likely have shrunk tobelow 120 million and perhaps as low as115 million (roughly the size of Mexicoor Philippines today).- Putin has also promised to increasemilitary spending by $770 billion betweennow and 2020.- Putin has also overseen the building orreconstruction of 23,000 RussianOrthodox Churches. And urgedRussians to have lots of children(offering financial incentives).Natural population growth of Russia since 1950Birth rate Death rate Natural growthSources: United Nations; American Enterprise Institute; Globe & MailDeutsche BankGlobal Public AffairsFrancis J. Kellyfrancis.j.kelly@db.com2011/10/2015 2010 DB Blue templateWashington is watching this deal: A Sino-Russian oiland gas alliance?Russian President Putin inked a $400 billion deal with China in May 2014Source: GazpromDeutsche BankGlobal Public AffairsFrancis J. Kellyfrancis.j.kelly@db.com2111/10/2015 2010 DB Blue templateChina’s Siberian energy plans: 7,000 km of new pipeDeutsche BankGlobal Public AffairsFrancis J. Kellyfrancis.j.kelly@db.comSource: Chatham House Paper: Through the Dragons Gate? 12/132211/10/2015 2010 DB Blue templateChina goes big in Pakistan… $46 billion big…- China, in an effort tocounter India, buildadditional shippingpoints and expandtrade, has just arrangedfor a $46 billioninvestment in pipelinesfrom one end ofPakistan to the coastalcity of Gwadar.- India is not happy andwe suspect al-Qaedaand ISIS in the northernregion are not happyabout this, either.- Will China build anaval port, too? Webelieve so.Where the bad guyslive…Deutsche BankGlobal Public AffairsFrancis J. Kellyfrancis.j.kelly@db.com2311/10/2015 2010 DB Blue templateChina and the evolution of revolution: Rise of radicalMuslims in China’s western provinces- China now has a rapidly growing radical Islam problem: Ethnic Uyghur’s – whoare Turkic speaking – feel badly repressed and left out of the Chinese economicgrowth.- They have become increasingly radicalized. Uyghur’s are fighting with ISIS and al-Qaeda. More importantly, they are conducting more and more terrorist strikes withinChina. China now is seeking to engage in Afghanistan. And they have become a keypartner to Pakistan in recent years.Deutsche BankGlobal Public AffairsFrancis J. Kellyfrancis.j.kelly@db.com2411/10/2015 2010 DB Blue templateThe new frontier: Drilling in the Arctic and race withRussia and China- Once cold and forbidding, climate changehas allowed multiple countries to see it asa massive new and untapped region fornatural resources and critically importantgeopolitical/military vantage point.- President Obama visited this week andboth called for renewed climate strategy aswell as ramping up Coast Guard capabilitiesto operate in the Arctic.- Russian President Putin has placed greatemphasis on Russian military presence inthe Arctic. China is also trying to lay claimto region as part of their never-endingsearch for oil.Deutsche BankGlobal Public AffairsFrancis J. Kellyfrancis.j.kelly@db.com2511/10/2015 2010 DB Blue templateCuba: we showed you the love, now show us themoney- President Obama’s historic re-opening ofdiplomatic relations has set the stage forpotentially significant new investmentopportunities in Cuba. But we stress“potentially” as the Castro Brothers nowseem to be slowing considerably withrespect to any reforms.- Meanwhile, the US Congress is going tomake sure there is no funding of the USEmbassy and will be vigilant on any newbusiness licenses granted by US Treasuryfor banking or foreign trade with Cuba.- What to watch for: Pope Francis – who wascritical to the success of the negotiations –just finished visit to Cuba and US. Willthere be further agreements to hasten betterrelations.“That hoard of capitalist investor’s should bearriving…just… about… now.”Deutsche BankGlobal Public AffairsFrancis J. Kellyfrancis.j.kelly@db.com2611/10/2015 2010 DB Blue templateArgentina: Elections in October bring little clarity tofuture- The August 9 th mandatory open primaries (PASO) brought little clarity as to who willsucceed President Cristina Kirchner in the October 25 th elections. She has held officesince 2007 and, before that, her husband held the presidency from 2003-06.- Kirchner’s handpicked successor, current governor of Buenos Aires province, DanielScioli (of the Peronist faction) leads in the elections held last week. But the 2 nd and 3 rdplace finishers could band together to pull off a victory.- The Argentine economy has seen zero growth this year. FDI has declined 41 percentand inflation stands at 30 percent. Voters remain deeply divided over which candidateand which economic policy to support. We expect continued problems for theforeseeable future.“You’re only going to get this much back. . .”Inflation and recession are clobbering theaverage Argentinean.Deutsche BankGlobal Public AffairsFrancis J. Kellyfrancis.j.kelly@db.comSource: Straftor2711/10/2015 2010 DB Blue templateVenezuela: The spiral widens and intensifies… butthere is some good news- The Venezuelan legislative elections are only one month away (December6 th ) and the country continues to be wracked by dysfunction, corruption andshortages of food, toilet paper, medicines, etc.- The government has also banned a number of leading opposition figuresfrom running for office and/or has placed them under house arrest.- In the first half of 2105, their were reports of 132 lootings of stores and 2,800protests*.- Inflation is now estimated at over 800 percent, making it the highest in theworld.- Meanwhile, President Maduro has revived old border disputes with Guyanaand closed the border with Columbia, causing significant social unrest.- So what is the good news? There is a new and serious dialogue underwaybetween the United States and Venezuela. Multiple high-level diplomaticvisits have been undertaken in the last six months. A by-product of the US-Cuba rapprochement?*source: Venezuelan Observatory for Social ConflictDeutsche BankGlobal Public AffairsFrancis J. Kellyfrancis.j.kelly@db.com2811/10/2015 2010 DB Blue templateContact:Francis J. KellyManaging Director &Global Coordinator, Public AffairsDeutsche Bank801 17 th Street, N.W.Suite 300Washington, DC 20006DC Office: 202-626-7022NY Office: 212-250-7253Email: francis.j.kelly@db.comThis material is provided to you for informational purposes only and absent written consent from Deutsche Bank, may not betransmitted in whole or in part in any format to any other party. This material was prepared by Corporate Communications and PublicAffairs within Deutsche Bank AG or one of its affiliates (collectively “Deutsche Bank”). No representation or warranty, either express orimplied, is provided in relation to the accuracy, completeness or reliability of the information contained herein, nor is it intended to be acomplete statement or summary of the securities, markets or developments referred to in the materials. This material is based uponinformation that Deutsche Bank considers reliable as of the date hereof. Assumptions, estimates and opinions contained in thisdocument constitute our judgment as of the date of the document and are subject to change without notice. Deutsche Bank is notresponsible for updating any of the information contained herein. This material is intended for your personal use and Deutsche BankIs not soliciting the purchase or sale of any security or transaction, or participation in any particular trading strategy. 022545 111015Deutsche BankGlobal Public AffairsFrancis J. Kellyfrancis.j.kelly@db.com2911/10/2015 2010 DB Blue templateFrancis J. KellyManaging Director & Global Coordinator, Public AffairsHead, Government & Public Affairs – North and South AmericaFrank Kelly is Global Coordinator for Public Affairs as well as head of Government & Public Affairs for North andLatin Americas. In this role, he manages and coordinates relationships with elected officials and political andlegislative bodies globally.Additionally, he heads up the Bank’s U.S. Direct Investment Advisory Group (DIAG) providing strategic counsel tonon-US companies engaged in cross-border mergers and acquisitions requiring regulatory and political approvals.Mr. Kelly also serves as the Bank’s Chief Political Risk Strategist advising clients on geopolitical and domestic riskissues and their impact on markets and industry sectors.Previously, he was Head of Communications & Public Affairs – Americas overseeing legislative and regulatorymatters, corporate and internal communications, branding and advertising and conferences and events forDeutsche Bank in the Western Hemisphere.Prior to joining Deutsche Bank, Mr. Kelly held senior positions at both Charles Schwab & Co. and Merrill Lynch &Co, Inc.Before joining the private sector, Mr. Kelly served at the U.S. Securities and Exchange Commission as ChiefSpokesman as well as the US Department of Justice as Assistant to the Director for Policy Development.Prior to these posts, he served in both the George H. W. Bush and, earlier, the Reagan White House where hestarted as a writer for President Reagan.Mr. Kelly is a member of the Council on Foreign Relations and the International Institute of Strategic Studies. Heserves as a member of the Board of Directors of the American Council on Germany and the Atlantic Council of theUnited States.Mr. Kelly, his wife, Maura, and their two living children resides in Great Falls, Virginia.Deutsche BankGlobal Public AffairsFrancis J. Kellyfrancis.j.kelly@db.com30