Liberals Still Say Austerity Poisoned the Water in Flint, Damn the Evidence

FlintFrom the second the Flint water crisis became a national story, liberal pundits have leapt at the chance to blame all their favorite boogeymen: fiscal austerity, privatization, and greedy Republicans who care more about money than sick kids.

While that narrative was seriously flawed from the beginning, it’s absolutely contradicted by significant new developments on the ground. Far from impugning limited government principles, the Flint water crisis is a quintessential example of the failures of government planning and Keynesian economic stimulus.

Enter The Washington Post’s Dana Milbank, who is still arguing that the Flint disaster was caused by austerity and Republican Gov. Rick Snyder’s “private-sector ideology.” He writes:

But the Flint disaster, three years in the making, is not a failure of government generally. It’s the failure of a specific governing philosophy: Snyder’s belief that government works better if run more like a business. …

“You cannot separate what happened in Flint from the state’s extreme emergency-management law,” said Curt Guyette, who, working for the ACLU of Michigan, uncovered much of the scandal in Flint. “The bottom line is making sure the banks and bond holders get paid at all costs, even if the kids are poisoned with foul river water.”

The emergency-manager law, Guyette argued, “is about the taking away of democracy and the imposition of austerity-fueled autocracy on cities that are poor and majority African American.”

Milbank is right that Snyder deserves some blame for what happened—but not because he imposed austerity and privatization on Flint. Quite the contrary: the state-led effort to switch Flint’s water source was never intended as penny-pinching measure—in fact, it was more expensive than sticking with the old source, according to recently revealed documents. Instead, it was a public works project intended to stimulate the local economy.

As Reason’s Shikha Dalmia reported on Monday, sources told her that the state-appointed emergency manager went along with the plan because “Genesee County and Flint authorities saw the new water treatment as a public infrastructure project to create jobs in an area that has never recovered after Michigan’s auto industry fled to sunnier business climes elsewhere.”

It would be one thing if state officials had imposed a new water source on Flint over the objections of local officials. But there’s simply no good evidence that the emergency financial manager’s decision to utilize the Flint River was actively opposed by city leadership at the time (although it is true, as Milbank points out, that once problems started arising, the city council did vote after the fact to switch back to Detroit but were overruled by the emergency manager.) Flint Mayor Dayne Walling actually toasted the decision during the Flint River facility’s grand opening ceremony, according to mlive.com. This is simply not the story of an austerity-obsessed governor forcing cheap, toxic water on an unwilling populace.

Milbank also commits the serious error of overlooking the pivotal role the Michigan Department of Environmental Quality played in the catastrophe. DEQ doesn’t even make an appearance in Milbank’s column, even though the regulatory agency’s failure to recommend phosphorous treatment when complaints about the water first surfaced exacerbated the crisis. (Read this FiveThirtyEight piece for an overview of DEQ’s errors.)

Of course, Milbank is hardly the only writer to simply ignore evidence that undermines his narrative. The Nation’s Katrina vanden Heuvel claims that, “ Decades of catastrophic austerity policies and ruinous government fealty to corporate interests are jeopardizing the people of Michigan—and the rest of the country.”

But Flint’s principal problem—one that pre-dates the water crisis by decades—is that its economically-underprivileged taxpayers can’t afford to pay the pensions of retired city workers. Excess government spending landed Flint in its current, sorry state, not austerity. Likewise, the disastrous decision to go with a more expensive water option was not austerity, but government-sponsored stimulus gone (predictably) wrong.

It’s certainly true that Michigan’s emergency financial manager system deserves renewed scrutiny given the spectacular level of government failure on display in Flint. It may be the case that local officials, left to their own devices, would have abandoned the Flint River plan sooner. But the policies of austerity and privatization have no bearing on these failures. Liberals pretending otherwise need to stop drinking the river water.

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Zika Virus Outbreak: Unleash the GMO Mosquitoes!

MicrocephalyChildPublic health officials are warning pregnant women to avoid being bitten by mosquitoes that might be carrying the Zika virus. They are concerned that the recent steep rise in cases of microcephaly in Brazil is linked to the virus. The number of cases in Brazil of this severe birth defect has increased from 150 in 2014 to nearly 4,000 in 2015. The overall rate is now around 1 in 1,000 births, but in some regions one to two percent of babies are born with the malady.

The Zika virus, like the chikungunya and West Nile viruses, originated in Africa and are now being chiefly spread by the Aedes aegypti mosquito. Until recently, Zika virus infections had been regarded as relatively mild causing joint pain and fever. Besides the association with microcephaly, Zika is also suspected of boosting the incidence of the paralyzing Guillain-Barre syndrome.

Producing a vaccine would likely take three to five years, assuming that pharmaceutical companies could be persauded to undertake the effort. Vaccines rarely yield profits and expose companies to our dysfunctional liability system.

But there is another promising way to control Zika – control the mosquitoes that carry it and other diseases like dengue, malaria, chikungunya and West Nile virus. The biotechnology company Oxitec has created male Aedes aegypti mosquitoes that have been genetically modified to pass along a gene that is lethal to their larval progeny. In fact, Oxitec has already shown considerable success in a pilot program in Brazil in which engineered autocidal mosquitoes reduced the local population of the Aedes aegypti mosquitoes by more than 80 percent. Given this record, the city of Piracicaba is now contracting with the company to release their GMO mosquitoes to help reduce Zika virus infections.

FrankenMosquitoOxitec is seeking to conduct a trial using its mosquitoes in Key West, but that proposal has been opposed by anti-biotech activists. It will be interesting to see how long that opposition lasts if there is a sustained outbreak of Zika virus there.

But even more promisingly, Oxitec’s vector-control technology could be superseded by mosquitoes that have been gene-edited to resist infection by disease organisms in the first place. Last fall, researchers at the University of Missouri reported a proof of concept experiment in which they used the fantastic CRISPR gene-editing technique to create Aedes aegypti mosquitoes that would pass along disease resistance genes to all of their progeny

The horrible consequences of a Zika virus outbreak here might be enough for the public to sweep aside anti-biotech misinformation and embrace the GMO mosquito solution to disease contol.

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The Four Scariest Charts For Energy Investors

Much has been said, and many charts shown demonstrating how collapsing oil prices equate with a recessionary (and, according to at least one Dallas Fed respondent, “depressionary“) hit for the US energy space and manufacturing sector first, and subsequently, contagion for US banks various other investors in the US shale space, and ultimately the broader economy.

Perhaps too much.

So in an attempt to simply some of the confusion, here are just four charts which, in our opinion, are among the scariest for energy investors.

First, plunging oil prices mean sliding revenues, resulting in collapsing cash flows and soaring leverage ratios…

Ratios which will likely deteriorate substantially if one takes the price of oil as a leading indicator where EBITDA will be 8 months from now:

 

Should the deterioration continue it will suggest even further widening of junk spreads, which will mean a spike in default ratios, which will result in substantial impairment charges for underreserved banks and a hit to both profitability and capital ratios.

 

This feedback loop can be short-circuited: all that would take is for the soaring trade weighted dollar – the key driver of plunging oil prices – to tumble. However,  for that to happen, Yellen will have to not only relent, but admit full blown defeat and undo the past year and half of preparation for rate hikes because the “global economy is ready”, which we now know it isn’t and virtually everyone has admitted the Fed made a mistake.

Summarizing all of the above: the vicious spiral of low oil prices, collapsing profits, impairment provisions, and economic contraction will continue until the Fed finds a way to weaken the Dollar… something it is now unable to do without losing all credibility.

In short, the Fed remains trapped and with every passing day it does not “fix” its policy error, these charts will only get scarier.

 


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Denmark Passes Law To Seize Valuables, Cash From Refugees

“Welcome to Europe. Now gimmie that watch.”

That’s the greeting asylum seekers will get when they enter Denmark from now on thanks to a new law that will allow police to search refugees on arrival and confiscate anything worth more than 10,000 kroner.

The idea, apparently, is to help offset the cost of taking the migrants in by robbing them.

Denmark’s center-right government likens the new policy to how Danish welfare recipients are treated but Klaus Petersen, professor at the Centre for Welfare State Research, University of Southern Denmark says that’s not entirely accurate. “Danish welfare claimants have to give up their savings before they receive benefits – but not their valuables, unlike refugees,” Petersen told The Guardian. “A Danish citizen could be searched in an extreme case if the municipality has a suspicion of fraud, but you need court permission to do so [whereas] for refugees, you would not need a court permission,” he adds.

And while this may seem somewhat repugnant, Prime Minister Lars Løkke Rasmussen swears it’s all a big misunderstanding. “It’s the most misunderstood law” in Denmark’s history, he insists.

But it’s difficult to see where the “misunderstanding” is. You’re either confiscating refugees’ valuables or you aren’t and if you are, well, prepare for the Nazi comparisons. “Bent Melchior, the former chief rabbi of Denmark, said in December that the initial proposal appeared ‘like it had the character of what was actually in force during the Nazis’ persecution of minorities,” WaPo writes, noting that “other commentators made similar comparisons.”

The confiscation law is part of a larger immigration bill which stipulates that authorities will allow refugees to keep certain valuable items that have “sentimental value” – like wedding rings. 

As The Local notes, the 10,000 kroner threshold was initially jut 3,000 but was lifted in response to the Nazi comparisons. “Earlier this month the amount was raised from 3,000 kroner amid a public outcry and comparisons to Nazi Germany’s seizing of gold and valuables from Jews and others during World War II,” The Local writes. “After thorny negotiations, parliamentary backing for the proposal was secured a few days later by removing any upper limits on the value of items with a sentimental value.”

Obviously, the real goal here is to deter migrants from coming to Denmark in the first place. It’s clearly not realistic to think that confiscating cash and jewellery from refugees who very often arrive with little more than the shirt on their back will make a serious dent in the cost of taking care of the legions of asylum seekers flooding across the country’s borders.

The bill contains other measures refugees might find unpalatable as well. 

“Refugees granted a lower form of protection status under Danish law, meaning people fleeing indiscriminate violence rather than individual persecution, have to wait three years instead of one year before applying for family reunifications,” The Local continues. “The waiting time has prompted allegations that Denmark will violate the European Convention on Human Rights, the UN Convention on the Rights of the Child, and the UN Refugee Convention.”

Denmark also toughened requirements for permanent residency applications.

“Our concern is that the new rule would seek to prevent the reunion of refugee families for up to three years,” Claus Juul, senior legal adviser at Amnesty Denmark said. “The real objective of this law is stop Denmark from appearing as an attractive country to asylum seekers.”

Perhaps Martin Henriksen, a spokesman for the anti-immigration Danish People’s Party put it best when he said the folloiwng about the new legislation: “We are saying that if you want to come to Europe you should stay clear of Denmark.”

Yes, “steer clear of Denmark” and also of Switzerland, where a similar law requires refugees to cough up anything they have worth more than $1,000.

This is just the latest example of what French economy minister Emmanuel Macron recently called dangerous “country-by-country” solutions to the refugee crisis. “We have a few weeks to concretely deliver our options… otherwise you have country-by-country solutions (and that is) the beginning of the dismantling for sure,” he told an audience in Davos, referencing the end of Schengen as we know it.

And so, what began with dreams of passport free travel, a single currency, and a more unified European utopia has now devolved into a series of ad hoc attempts by individual countries to lockdown their borders and confiscate the belongings of those seeking asylum. Underscoring just how desperate the situation truly is, Austrian interior minister Johanna Mikl-Leitner said simply,”Schengen is on the brink of collapse” after meeting with his counterparts in Amsterdam on Monday.

We close with the following assessment of Denmark’s new policy towards asylum seekers via Pernille Skipper, an MP and legal affairs spokesperson for Enhedslisten, a left-wing Danish party:

“Morally it is a horrible way to treat people fleeing mass crimes, war, rapes. They are fleeing from war and how do we treat them? We take their jewellery.”


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Rubio Promises to Double Number of Border Patrol Agents

At a town hall in Iowa, Republican presidential candidate Sen. Marco Rubio (Fla.) promised the federal government would “hire 20,000 new border agents instead of 20,000 new IRS agents,” according to The Guardian‘s Sabrina Siddiqui.

Rubio’s come a long way on the issue of immigration since his 2013 efforts to work on “comprehensive immigration reform” with the bipartisan “Gang of Eight.” That effort failed—the House of Representatives never brought it up for a vote, with Republicans saying “border security and interior enforcement must come first,” even though the 2013 immigration bill included 3,500 new border patrol agents, and billions of dollars for new fencing along the U.S.-Mexico border.

“Border security first” has become the standard Republican line headed into 2016, and as anti-immigration sentiments appeared to have helped propel Donald Trump to the top of Republican polls, Republican candidates are working furiously to outflank each other on immigration.

Rubio, for his part, has not been able to shake off the legacy of trying to work on immigration reform. Last month, fellow presidential candidate Rand Paul characterized Rubio’s position on immigration as “open borders.” That description, Brian Doherty noted, was outright wrong. Far from being in favor of anything resembling “open borders” (or the free movement of people and goods across the border), Rubio supports more border enforcement, immigration tracking, e-verify (requiring employers to act as immigration agents when employing), and shifting visas from family-based to “merit-based.” The policies largely mirror Paul’s, and, with respect to e-Verify, go even further.

Trump and others regularly reference Rubio’s participation in the 2013 immigration reform effort to paint him as no true Scotsman restrictionist. At a recent town hall, Rubio said he was open to allowing illegal immigrants to apply for green cards—to Breitbart that was the equivalent of supporting “amnesty.”

Rubio’s new call for 20,000 more border patrol agents would double the number of agents there were in 2011, which itself was a doubling of the number of agents since 2004. For years, Obama has touted his increase in border patrol agents, saying in 2011 that he was continuing a buildup that started under George W. Bush. While Obama argued the increased enforcement should open the door for broader reform since it representing putting “border security first,” he also acknowledged the political realities. “I suspect there will be those who will try to move the goal posts one more time,” Obama said at the time. “They’ll say we need to triple the border patrol.  Or quadruple the border patrol.”

Now Rubio’s called for doubling the border patrol again. How long before another Republican calls to triple it, painting Rubio as weak on immigration control and pushing the party further into restrictionist territory.

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Lexington Mayor Challenging Rand Paul’s Senate Seat in Kentucky

Jim GrayJim Gray, Democratic mayor of Lexington, Kentucky, the second largest city in the state (population: 308,000) has formally filed today to challenge Sen. Rand Paul for his Senate seat. The filing deadline is this afternoon, but according to WKYT in Kentucky, he was considered to be a likely challenger for a while.

Indeed, his campaign site is already up and running and features a short video. He’s promoting his history as a mayor as a plus:

Under Jim’s leadership Lexington is on the right track. Today Lexington is healthier than ever with a balanced budget. Lexington has been able to make investments in the future, investments that make a difference in the lives of people who live and work in Lexington. Critical needs like police and fire protection, increased funds for those who need help, and strengthening Lexington’s social service safety net as funding from Washington and Frankfort shrinks. Investments in infrastructure needs like roads, sidewalks, trails and bike lanes. Investments that pay dividends.

When Jim took office, unemployment stood at 8.4% in Lexington. Today unemployment is historically low after 15,000 new jobs have been created since Gray took office. The result: Lexington is an economic engine for the state – creating a third of the new businesses in Kentucky since the low point of the Great Recession. And more importantly, since that time, Lexington workers are earning 13.5% more on average.

Is there anything about him at all of interest to libertarians? He’s actually a pension reformer who has managed to scale back unfunded public employee pension liabilities in Lexington. While he didn’t go so far as to push public employees into non-pension retirement savings programs that don’t leave taxpayers on the hook for future obligations, he did hammer out an agreement where city employees would pay more into their own pensions, get smaller cost-of-living adjustments, and new employees would have to work five additional years before being able to retire with full benefits.

His background is in construction and design of large-scale manufacturing and retail buildings for a company created by his family. He’s also the first openly gay mayor in Kentucky, but doesn’t think there will be much emphasis on his sexual orientation in the race, even given the recent Kim Davis flare up.

His initial campaign video doesn’t exactly say much particularly specific and his criticism of Paul is vague. He says Paul “offers ideas that will weaken our country at home and abroad,” without indicating which ideas he’s referring to and that Paul “puts himself and his own ambitions above Kentucky,” likely referring to Paul hanging on to his Senate seat while running for president.

Kentucky’s Republican Party does not appear terribly intimidated. Recall that Kentucky just elected Republican Matt Bevin in November as governor over the state’s Democratic attorney general. From the Lexington Herald-Leader:

Greg Blair, a spokesman for the National Republican Senatorial Committee, quickly released a statement Tuesday morning that said Gray “will be sunk by Obamacare, the war on coal and the rest of Barack Obama’s toxic agenda.”

“Since their most recent wipe out in November, Democrats have been desperate to find a warm body to run for Kentucky’s U.S. Senate seat,” Blair said. “Just hours before the filing deadline, they finally convinced Jim Gray to take one for the team.”

Any statewide candidate who aligns with Democrats “has already suffered irreparable damage in the Bluegrass State,” he said.

Paul’s campaign itself responded by talking about Paul’s accomplishments and fighting against Obama’s “agenda of government overreach and job-killing policies. Read more here.

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Here Are The Stocks Emerging Markets And Wealth Funds Are Quietly Liquidating

Last weekend we explained how as a result of the dying Petrodollar and the plunging price of oil, emerging markets and Sovereign Wealth Funds such as the ones listed below…

 

… are forced to liquidate tens of billions in equities around the globe in what has become a largely indiscriminate liquidation wave.

As JPM quantified, “assuming selling in accordance to the average allocation of FX Reserve Managers and SWF across asset classes, we estimate that the sales of bonds by oil producing countries will increase from -$45bn in 2015 to -$110bn in 2016 and that the sales of public equities will increase from -$10bn in 2015 to -$75bn in 2016. There is little offset to this -$75bn of equity sales from accumulation of SWF assets by oil consuming countries, as we expect these countries to spend most of this year’s oil income windfall. “

But while over the past week it became well-known that SWFs and EMs are selling equities into the accelerating drop in global equity markets, nobody had actually done an analysis of which stocks are most at risk.

Until today.

In a report released earlier, Deutsche Bank writes “beware European stocks with high EM government ownership” adding that “Fed tightening and lower oil prices have led to EM capital outflows and falling EM FX reserves” as shown in the chart below:

It then notes the following:

While EM government ownership of the European equity market is just 0.5% of market cap, it is up to 25% for individual names. We highlight 23 European companies with EM government ownership of more than 5% of market cap, according to the latest figures available on Bloomberg. While these stocks have already underperformed the market by 18% on a equal-weighted basis over the past year, we are concerned that further capital outflows from emerging markets could lead to more downside risk.

So for those curious which European stocks are most at risk from “oil-contagion” selling by foreign reserve managers, here is the full list.

Tomorrow we will run a comparable screen for US-listed equities to get the complete picture.


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“Pipe Dreams” Of A Gently Rising Oil Price

What does the world really want from oil prices? There are conflicting views, but, as Bloomberg's Mark Cudmore notes, ultimately a stable and slowly appreciating oil price is probably best.

It’s quite clear from price action that financial markets are keen to see oil bounce. Crude (with the yuan) led the early-year rout before spear-heading the broad relief rally last week. And its capitulation yesterday has snuffed out animal spirits globally.

But, it’s important to remember that financial asset performance isn’t everything. It’s generally assumed that cheaper oil is positive as it boosts consumers’ disposable incomes, broadening consumption and spurring the real economy.

As Citigroup’s head of emerging-market economics David Lubin wrote yesterday, cheaper oil may in fact hurt more than help emerging-market crude importers. His argument is that the retrenchment of petrodollar investment in developing economies may outweigh their savings from cheaper energy bills.

That may explain why we’ve yet to see a large economic boost after 18 months of falling petrol prices. And it’s another reason to support the plea from financial markets that we really don’t want oil prices to keep falling.

But that doesn’t mean the world needs a steep oil rally. Not only would that provide a new negative shock for the real economy, but developed-market central bankers might suddenly find themselves with a lot more of the recently-elusive inflation than they’ve been hoping for.

Base effects would exacerbate this problem and global markets might then be fighting an upward battle against quickly tightening monetary policy.

So stability is the target. Or perhaps, as is the desired state for prices more generally, a gradual appreciation — ideally at a pace that’s just enough to support energy investment and capital flows.

That seems a pipe dream right now when Brent crude has moved by an average of 7.8% a week since the start of December…

 

For now it appears neither "stability" nor slow and gentle appreciation are on the cards.
 


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“ISIS Has Enjoyed Turkish Money For Oil For A Very, Very Long Time”: Israeli Defense Minister

Back in November, before the flames were even extinguished on the Su-24 Ankara shot down near the Syrian border, Vladimir Putin made a startling assertion.

Turkey, he said, is funding ISIS.

The startling part about Putin’s contention wasn’t that Turkey effectively functions as a state sponsor of terror. We already knew that. Rather, the surprising part was that a world leader was prepared to cast aside all diplomatic decorum and openly accuse a democratic country of aiding and abetting the group that the world at large knows as the greatest scourge to humanity since the Reich.

Of course Putin was provoked and under the circumstances, one might reasonably have expected him to react even more angrily than he did. After all, Turkey had just shot down a Russian warplane in what marked the first instance of a NATO member engaging a Soviet or Russian aircraft in more than a half century.

But rather than respond militarily, Putin decided to simply expose Recep Tayyip Erdogan’s Turkey for what it is: a dictatorship that funds terrorism while masquerading as a democracy and enjoying the perks of NATO membership.

In the days and weeks that followed, Moscow embarked on a truly epic PR campaign involving reels of footage depicting what The Kremlin said were ISIS oil trucks barreling across the Turkish border seemingly unimpeded. Deputy Minister of Defence Anatoly Antonov even went so far as to mock Erdogan’s “brilliant family [oil] business”, a nod to reports that suggest the Turkish President may be knowingly involved with the ISIS crude trade.

Turkey sought to downplay the accusations by suggesting that no one took Putin seriously, but little by little, the world began to question whether it is in fact Ankara that acts as Islamic State’s greatest regional benefactor.

In a testament to the fact that the world is waking up to the stunning reality that a NATO member may be Islamic State’s de facto finance arm, Israeli defense minister Moshe Yaalon today accused Turkey of backing the terrorists in a series of surprisingly candid statements to reporters in Athens where Yaalon was meeting his Greek counterpart Panos Kammenos.

(Yaalon and Kammenos on Tuesday)

“As you know, Daesh (Islamic State) enjoyed Turkish money for oil for a very, very long period of time. I hope that it will be ended,” Yaalon said.

“It’s up to Turkey, the Turkish government, the Turkish leadership, to decide whether they want to be part of any kind of cooperation to fight terrorism. This is not the case so far.”

No, it’s not the case so far, unless you count Erdogan’s absurdly transparent attempt to eradicate the Kurds in Turkey by waging a war of attrition against the PKK.

As Reuters dryly notes, Yaalon’s “assertion could hinder attempts to mend fences between Israel and Turkey after years of estrangement.” Yes, it very well could and you can bet it will prompt a decidedly indignant response from what’s sure to be a furious Erodgan.

Now we’ll just hold our breath for Washington to follow suit and admit that America’s “ally” in Ankara is the reason ISIS stays in business.


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There Are Landmines Everywhere – Just How Narrow Is This Market?

Submitted by Bryce Coward via Gavekal Capital blog,

Most stocks are down since the global equity markets peaked on 5/21/2015 (this goes without saying) and most stocks are down a lot. This puts a premium on solid active management and stock picking. But the sheer numbers are striking.

Of the 2885 companies in our GKCI All Country World Index, fully 2383 (or 83%) of them are down since the 5/21/2015 high, leaving only 502 (or 17%) of stocks up since that date. A stock-pickers market if we ever saw one! The first chart below illustrates this blunt point.

Pic1

 

As we dig into the details, however, we see just how hard it’s been to stay above water since the May 21, 2015 peak in the global equity markets. Below we show a histogram of the distribution of stock returns since the 5/21 high. Mostly what you see is red (negative returns) and within that group you see an incredible amount of dark red between the bars that read -18% through -54%.

Pic2

That is to say, most stocks that are down are down between 18-54%! In other words, there are landmines everywhere, and index tracking active mutual funds and ETFs have hit them all.


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