Month: August 2018

Authored by James Howard Kunstler via Kunstler.com,

Be careful about what you see in the foreground of the news vis-à-vis what’s in the background. Sunday, the cable networks were on fire over the 30-or-so white nationalists marching across Washington DC — with much larger hordes of masked, black-clad Antifa street-fighters following them around, and an army of DC cops in fluorescent green riot vests following the Antifas and the white nationalist knuckleheads.

The event was a billed as an attempt to commemorate the clash that happened between the same contestants in Charlottesville, Virginia, a year ago in the uproar over Confederate statues. That fiasco ended in the death of a bystander named Heather Heyer. Not a whole lot has changed since then, except perhaps the Left has become more strident in its calls to penalize white people for their crimes of “privilege,” no doubt further inflaming the Unite-the-Right crew. (And the anti-statue campaign has dropped down the memory hole.)

There was plenty of “hate” to go around on both sides Sunday. But those who were waiting for a climactic bloodbath in Lafayette Park must have been disappointed after a long day of tension when a big blob of rain hunkered over the District at suppertime and the theatrics concluded. Both the Antifas and the Unite-the-Right marchers had to go home and get out of their wet clothes. At least they could agree on that.

The cable TV anchors had issued the usual calls for “national unity,” exhorting President Trump to emerge from his Bedminster, New Jersey, golfing bunker and “bring the country together,” a sadly fatuous proposition. There is nothing to come together within. There’s nothing left of an American common culture besides a few Disney movies and that’s not nearly enough. That’s what happens when you opt for multiculturalism as your number one political principle. It automatically negates shared values, so why even expect any agreement between groups contending for dominance?

The animosity will only grow sharper, and it will happen because of things that are roiling in the background now — namely, the unraveling global financial system. Some fireworks commenced at the end of last week when the Turkish Lira slumped. Who cares about the currency of a second-rate player in the global economy? A lot of SIFIs (“systemically important financial institutions”) otherwise known as Too-Big-To-Fail banks. That’s who. Deutsche Bank’s stock dropped over 6 percent when the Turkish Lira tanked on Friday.

Turkey’s nickname since the collapse of the Ottoman Empire in the 1920s has been “the sick man of Europe” and Deutsche Bank in the post-2008-crash era is widely regarded as the sick man of SIFI banks. One analyst wag downgraded its status a year ago to “dead bank walking.” Its balance sheet was a Cave of Winds littered with the moldering skeletons of malinvestment.

If the European Central Bank (aka Germany) has to bail out DB, all bets are off for the Euro, which was showing serious signs of distress Friday. And who is going to bail out Turkey? If the IMF is your go-to vehicle, then you mean US taxpayers. Anyway, Turkey’s Lira is only one of several Emerging Market currencies whose hands have been called at the global poker table, where the four-flushers are getting flushed out. The Russian ruble was another one, ostensibly to the delight of America’s Destroy-Russia-at-All-Costs faction.

China is also having to play a round of super Three Card Monte with its currency, the yuan. President Trump’s tariff monkeyshines are shoving the Chinese banking system up against a wall of utterly irresolvable insolvency problems and threatening the stability of Xi Jinping’s one-party government. The Chinese export trade is at the heart of the world’s current economic arrangements. If you pull it out of the globalism machine, the machine will stop. It is going to stop one way or another anyway, but the gathering crisis of autumn 2018 will hasten that.

All of this is happening because the whole world can’t handle the debts it has racked up, and the whole world knows it. And knowing it, they also know that their debt-based currencies are worthless. And knowing that, they also know that absolutely everybody else is broke and unable to meet their obligations. That is some dangerous knowledge. For the moment, this dynamic appears to be working in the USA’s favor, with our dollar rising and what remains of credible foreign wealth seeking shelter here. But the time will come when that delusion goes up in a vapor, too, and the USA will find itself without the means to carry on, just like everybody else.

In the meantime, we entertain ourselves with the antics of Unite-the-Right and Antifa, two acting troupes composed of young people who have no idea what they will do with their lives when the economic condition of the land reveals itself to be more desperate than they ever imagined. The truth is, they’ll be fighting ever more desperately, not over abstractions but over the table-scraps of history.

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While the Turkish managed to stabilize (if that’s the right word), it appears Europe’s close has refocused attention on South American EM as the peso and and real plunge…

First, Argentina is attempting to force its banking system to shift away from short-term funding and cancels the daily dollar auction (and banning banks from buying Lebacs (bills)) offering 1-year notes and beyond instead.

Additionally the central bank just unexpectedly hiked 7-day rates by 500bps to 45%. The peso is crashing…

And then the Brazilian FinMin said he saw no need to intervene in FX markets and the real plunged to the day’s lows…

The Mexican, Chilean, and Colombian Pesos are all tumbling too…

EM FX is pushing towards new lows…

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Do you know who the real ‘turkey’ is?

That is the underlying message of today’s note from former fund manager and FX trader Richard Breslow as he points out the utter hypocrisy and irony of today’s Turkey crisis and its potential to spark global contagion.

Via Bloomberg,

There have been no dearth of articles detailing everything Turkey has done wrong. Suddenly everyone is an expert on, or more laughably, an advocate for, responsible, long-run economic management. Lessons we are meant to have learned from past economic crises are tortured into Dear Abby type columns detailing the bitter medicine which now must be taken. Those who advised feeding on anything with a yield advantage are now cautioning about contagion and being properly rewarded for risk.

If Turkey is causing global markets a problem, we’ve done it to ourselves. Train investors to buy everything in sight regardless of quality. Make it a fact of life that failure to do so risked grossly underperforming and being fired. Treat our friends like enemies and always opt for the nuclear option in any disagreement. Destroy a functioning inter-bank market and pretend liquidity exists. Have central banks become activist investors in markets negating the need for prudent portfolio construction. And then pretend to be shocked that we should come to this.

We’ve spent the post-financial crisis period with virtually zero interest rates and an insatiable appetite for buying dollar-denominated debt from anyone prepared to print up a prospectus. Now we get to pay the real cost of that allegedly free money.

The contagion we are witnessing around emerging, and even developed, markets isn’t because of trade, central bank independence or some other basic economic issue. It’s because the cost of dollars is going up and the availability down.

Turkey can jack up rates all they want, but the only solution to the larger problem is for the Fed to keep flooding the global market with liquidity. And that hasn’t been happening. The FOMC has been modeling an insular global economy that no longer exists. Turkey has done some unfortunate things, but until now, it’s done so with our blessing. And they aren’t alone.

On Friday, markets were shocked when the ECB cautioned that various banks within the EU had significant exposure to the Turkish market. Now that’s a stunner. It also tells you that regulators need to stop pretending they can run, or even understand, these businesses for management. The only way to have a stable banking system is to require adequate, as in large, capital buffers. With all due respect, doing whatever it takes can’t be perpetual manipulation of the capital key. The ECB should look at the 30-basis point yield on bunds and be ashamed.

There are indeed many lessons to be learned here. But to think this is just about Turkey would be misguided. And to think we have put the financial crisis behind us and it is back to business as usual is a convenient and dangerous narrative. We broke it and we own it. I wonder if we will have the “Courage to Act”. Or just write about it.

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Authored by Kevin Daley via The Daily Caller,

Who presides over the impeachment trial of a state Supreme Court justice if the entire state Supreme Court is being impeached?

It’s an absurd constitutional hypothetical West Virginians are left to grapple with, after the West Virginia House of Delegates Judiciary Committee drafted articles of impeachment against four justices on the state’s highest court.

Five justices sit on the state Supreme Court in West Virginia. The state legislature has drafted articles of impeachment against Chief Justice Margaret Workman and Justices Robin Jean Davis, Beth Walker, and Allen Loughry. The court’s fifth justice, Menis Ketchum, retired in late July. Ketchum will plead guilty to two federal corruption charges on Aug. 29.

Loughry was placed on unpaid administrative leave in June after a state commission lodged a 32-count complaint against him, alleging pervasive violations of the state ethics code. He has since been indicted in federal court for fraud, witness tampering, and making false statements to investigators.

The remaining three justices — Workman, Davis, and Walker — face impeachment for wasting government resources and failing to effectively administer the state courts. All three spent large sums of taxpayer dollars on lavish improvements to their chambers in the state capital, which cumulatively totaled almost $750,000, and allegedly abused state travel resources. Workman and Davis also allegedly authorized compensation for other state judges in excess of the amounts allowed by West Virginia law.

“There appears to be, based on the evidence before us, an atmosphere that has engulfed the court of cavalier indifference to the expenditure of taxpayer funds, to the protection of taxpayer-paid assets, and an almost incomprehensible arrogance that for some reason they are not a coequal branch but a superior branch of government,” Delegate John Shott said during a judiciary committee hearing on Aug. 7.

West Virginia’s constitution provides that the chief justice shall preside over impeachment trials in the state Senate. As Chief Justice Workman herself, however, is subject to impeachment, she is ineligible to preside, as are the rest of her colleagues.

Workman appointed Cabell County Circuit Judge Paul Farrell to the high court on an interim basis late Friday. Farrell will serve in Loughry’s seat, pending the election of a successor in November. Farrell will also preside over impeachment proceedings in the legislature — though Walker disputes his power to do so.

In a short statement issued late Friday, Walker argued against Farrell’s installation as the presiding officer for impeachment.

“I believe it is improper to designate any justice as acting chief justice for impeachment proceedings in which I or my colleagues may have an interest and that have not yet commenced in the Senate,” she wrote.

Prior to this summer’s abrupt turn of events in West Virginia, Davis was cited in the press for possible ethics violations in unrelated matters. The Daily Caller News Foundation reported in March 2017 that a series of contributions made to her 2012 re-election campaign strongly resemble an illegal straw donation scheme, conducted at the behest of an attorney defending a $92 million civil judgment in the state Supreme Court.

That attorney, Michael Fuller of the McHugh Fuller Law Group, also purchased the Davis family private jet in December 2011.

Davis issued a ruling in 2014 preserving a large portion of Fuller’s $92 million award.

GOP Gov. Jim Justice will appoint new justices if any of the court’s current members are impeached.

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Peter Strzok, who spearheaded the agency’s investigations into both the Clinton email “matter” and the investigation into Russian interference in the 2016 election, has been fired from the FBI according to The Washington Post. 

Aitan Goelman, Strzok’s lawyer, said FBI Deputy Director David L. Bowdich ordered the firing on Friday — even though the director of the FBI office that normally handles employee discipline had decided Strzok should face only a demotion and 60-day suspension. Goelman said the move undercuts the FBI’s repeated assurances that Strzok would be afforded the normal disciplinary process. –Washington Post

“This isn’t the normal process in any way more than name,” Goelman said.

Strzok’s termination follows a June report that he was physically escorted out of an FBI building despite still being employed by the agency. 

News – FBI special agent Peter Strzok was escorted out of the FBI building on Friday, source familiar tells me; as of today, he is still employed; he’s been stationed in Human Resources since dismissal from Mueller team.

— Laura Jarrett (@LauraAJarrett) June 19, 2018

Shortly after the report, Strzok’s Goelman confirmed the report saying that Strzok was escorted from the building amid an internal review of his conduct.

“Pete has steadfastly played by the rules and respected the process, and yet he continues to be the target of unfounded personal attacks, political games and inappropriate information leaks,” his attorney Aitan Goelman said in a statement.

In the same letter, Goelman complained about the “impartiality of the disciplinary process, which now appears tainted by political influence.”

In other words, Peter Strzok – who vowed to “stop” Trump, was the victim of political bias according to his attorney.

Goelman also wrote that “instead of publicly calling for a long-serving FBI agent to be summarily fired, politicians should allow the disciplinary process to play out free from political pressure.” We are confident that everyone will be very interested in watching the “impartial” disciplinary process play out fully in the coming months.

Goelman’s conclusion: “Despite being put through a highly questionable process, Pete has complied with every FBI procedure, including being escorted from the building as part of the ongoing internal proceedings.”

Developing…

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While the world remains focused on ground zero of the latest emerging markets crisis, Turkey, and whether contagion from its plunging currency will further pressure global assets, a new – well old – threat has emerged.

In an unexpectedly sharp attack on the ECB, in two separate posts on Twitter, Claudio Borghi who is the euroskeptic head of the budget committee in Italy’s lower house, stressed that not only is Italy’s spread with German bonds widening, but also the ones of other nations like Spain are doing so. He added that “either the ECB will provide a guarantee or the Euro will be dismantled” as “there is no third option.”

Vediamo se oggi cominciano ad accorgersi che salgono anche gli spread di Spagna e c. e che solo un fesso poteva pensare che con BC inattiva potesse salire solo lo spread di un paese?

— Claudio Borghi A. (@borghi_claudio) August 13, 2018

Io sono sereno come l’arcobaleno… ormai credo che il meccanismo sia innescato. O arriverà la garanzia Bce o si smantellerà tutto… Non vedo terze vie.

— Claudio Borghi A. (@borghi_claudio) August 13, 2018

Commenting on the interview, several sellside desks have cautioned that this seems like something the ECB is unlikely to do as it represents a destabilizing stance and is thus bearish for the EUR.

In a subsequent interview, moments after his tweet, Borghi said that “there cannot be a system at the mercy of market movements” without any shields by the central bank – in other words, Borghi appears to be very much against a free and efficient market in which price discovery is allowed especially on such assets as Italian bonds – and noted that “it is significant that an external event like Turkey that has nothing to do with Italy unleashes such an effect.”

Borghi warned about the upcoming end of the ECB’s QE which as we noted previously has been the sole buyer of Italian debt, and whose absence threatens to send Italian bond yields sharply higher: “Nowadays there is a system that has a residual amount of quantitative easing, but with everybody knowing that this is being phased out and will come to an end soon”

He also shared a vivid image of what will happen once the market realizes it is free to short Italian bonds again without an ECB backstop: “all know the fence that protects the prey will soon be lifted and financial speculators easily sees the periphery’s debt as an easy target and are positioning ahead of the next developments.”

While Italian bonds moved wider today on the latest slide in Turkish assets and Lira, they have yet to respond to Borghi’s provocative comment, with the EUR largely unchanged as a result.

 

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Submitted by Viktor Shvets, Macquarie commodities and global markets head of Asian strategy

Are politics & economics on a suicide course?

Key points

• An illiberal global order is being compounded by CBs draining liquidity.
• The flashpoint is now Turkey but the prospect of contagion is real.
• While Asia ex is less exposed, trade disruption, less liquidity, rising US$ and falling Rmb are a deadly combination. It could go beyond Turkey & South Africa.

Tocqueville strikes again – stress leads to illiberal answers

This week’s Economist had a timely article on Alex de Tocqueville whose classics ‘Democracy in America’ and ‘The Old regime and the French Revolution’ were the reference books for liberals like John Stuart Mill and autocrats like Xi Jinping. They guided democrats how to avoid destruction of liberal order while being equally useful to autocrats on how to avoid revolutions.

What has it to do with emerging markets? EM equities do best when volatilities are low, environment is predictable, capital flows freely and trade expands. However, as we have been highlighting, this outcome is becoming increasingly less likely. As de Tocqueville warned, while liberal order requires democracy, democracy does not necessarily lead to free and liberal order. When pressures rise, democracies frequently turn to xenophobic and protectionist policies. In such times, people do not want freedom, they want help. In our view this explains recent trend towards more illiberal causes and politicians, whether in the US, Turkey, Poland, Hungary, Italy, Mexico, Phil or India. It is not relevant whether a country lurches to the left (Mexico) or right (Turkey), the outcomes are less freedom, greater state control and international disruption.

Turkey is a canary in the coal mine; watch global liquidity & China

While history does not repeat itself, it does rhyme, and while de Tocqueville could not envisage CBs role in economic and political life, he did warn about dangers of state centralization. This brings us to Turkey. For the last decade, Turkey’s political and economic climate has become less liberal and more centralized. A hopeful spring of early 2000s, when Turkey seemed to have a realistic chance to escape never ending cycles of extreme lurches between free markets and statism and between inflationary/currency crises and periods of technocratic management, is all in the past. While in 2010, there was still a question whether Turkey would continue along liberal path, by now it has become clear that the answer is no. Also, worryingly, this time, illiberal Turkey is meeting an illiberal US and an increasingly autocratic and illiberal world.

Economic mismanagement (twin deficits are ~9% of GDP while inflation is ~15%), and ‘strong man’ stand-off between US and Turkey, has driven TRY to an unheard of levels of 7:1, raising a realistic prospect of capital controls, defaults and greater interference in CB policies, capital flows and businesses. As in the case of Greece, the danger of Turkey is not its own debts (even Eurozone banks’ impact is likely to be manageable) but contagion. As usually, the weakest (e.g. SA) are the first in the line of fire. The good news for Asia ex is that even most exposed (Indo, Mal, Phil & India) are far better positioned.

The concern is that lurches towards protectionism and trade wars are now compounded by Fed policies to drain liquidity and raise cost of capital, almost irrespective of consequences for a wider world. Even ECB and BoJ are being reluctantly dragged along. At the same time, China is caught in the middle of its de-leveraging, and it clearly uses Rmb to help economy and reduce trade drag. Less liquidity, rising US$ & declining Rmb are deadly for EM equities. Turkey might just provide a trigger. Watch China and how it manages liquidity

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Authored by Omid Malekan via Medium.com,

I’ve already written about how the trend towards decentralization is going to change the nature of investing, but that was before Facebook’s stock took a historic pummeling on account of bad earnings and Apple became the first trillion dollar company on account of good. The violence of both moves set off my ex-trader’s spidey sense that this might be the kind of volatility that precedes a change.

Markets are devious, and love sucking everyone into a particular investing thesis right before proving it wrong. In the year leading up to the financial crisis, bank stocks were soaring (because home prices could never go down) and the price of oil was spiking (because supply could never go up). The housing crash and fracking boom swiftly proved otherwise.

Today, it’s almost impossible to imagine a world where the FAANGs  – Facebook, Apple, Amazon, Netflix and Google  –  aren’t dominant. That’s why it’s a good a time to start selling, and diversifying into the decentralized platforms that will eventually replace them.

I know that this is a bold and seemingly hyperbolic statement, and I usually prefer not to give investment advice. But this particular setup is too sweet to ignore, so bear with me as I lay it out.

Companies like Facebook and Google get a lot of criticism for being too big, but that’s a political opinion, not an investment thesis. Dominance might be bad for society, but it’s good for business. The better reason to sell is because the fundamental structure of those companies is slowly becoming obsolete.

Their kind of corporate structure made sense during the industrial era, when you needed a centralized hierarchy to deliver complex durable goods like a car. It still made sense as we transitioned to the service economy, because branding and a homogeneity of experience mattered. But the model that work for GM or McDonald’s doesn’t work for a digital platform, because it leads to a misallocation of resources.

Think about the difference between a privately owned fleet of taxis and Uber. A fleet can enjoy economies of scale by raising capital, buying cars, having its own repair shop, and so on. Uber doesn’t do any of that. It just provides a convenient platform for drivers (who have their own cars and pay their own mechanics) to be hired by users.

So Uber is not a taxi company. It’s a platform for countless little taxi companies, each of which has to do all the work AND take all the risk. And yet, Uber still takes as big of a cut as a traditional fleet operator.

But hey, at least Uber still pays most of the revenues to its drivers. Companies like Facebook and Google pay virtually nothing to those doing the heavy lifting. Somehow, even though it’s their users that invest resources to create their content, the platform ends up capturing most of the profit. A video like Psy’s Gangnam Style clearly required a heavy investment of time and money to make. If it had been a dud, the failure would not have cost YouTube a cent. So why did Google take most of the profit when it turned out to be a hit?

All social media platforms  –  not to mention the iTunes ecosystem and Amazon’s digital services  –  have an asymmetric risk/reward profile, so it’s worth asking why we as users put up with them. The answer, until recently, was because there was no other way.

The internet has lacked a proper business model from day one, as anyone who worked in the music business 20 years ago could attest. Today’s centralized platforms were the first solution to that problem. We can criticize iTunes for the paltry fees it pays musicians to stream their music, but it’s still an upgrade over Napster.

The mistake was forgetting that this was only a temporary solution. A system where a large corporation captures almost all the value created by users is not good for anyone  –  except shareholders. A decentralized platform solves this problem, because the platform user and owner become one. There is still plenty of risk, but at least the rewards now go to those who deserve it, as has been the case with the first economically viable decentralized platform.

Bitcoin is different things to different people, but technologically, it’s just a decentralized content platform — – for payments  –  that’s worth over $100b. Miraculously, all of that value is captured by its users. There’s no Bitcoin Inc. benefiting from someone else’s foresight.

That model of decentralization is now being applied to every other kind of content company out there. To me, it’s not a question of whether such platforms will eventually cannibalize today’s centralized counterparts. It’s a question of which, and when.

Which brings me back to your FAANG stocks. Even if you aren’t ready to sell, I recommend hedging your investment with a small investment in their decentralized counterparts, each of which is represented by a coin. If you don’t know which coins to invest in, then allow me to introduce you to BEEStMoD: The two Bitcoins, Ethereum, EOS, Stellar, Monero and Dash.

These coins represent the most important blockchain projects being developed today. Most of them focus on decentralized payments, cloud computing, or some combination thereof, which makes sense, as those are the two pillars of any successful online platform.

As an added bonus, you can currently buy into these platforms at recent lows, while selling your FAANGs near all-time highs. My two cents (or Satoshis) have at times cost others a lot more than that, but I’m confident that five years from now, $10,000 invested in BEEStMoD will have done much better than the same money invested in FAANG.

In fact, I’m willing to bet on it, and to do so publicly, buy doing the very technology I recommend investing in. In my next post, I will describe how.

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