Are We In A Bear Market? One Chart May Have The Answer

By now even those living under a rock know that October was a brutal month for equities, and while the US briefly entered into a correction, it was global stocks – and especially emerging markets – the suffered the bulk of last month’s beatings.

Last Thursday, we showed “a quite fascinating statistic” from Deutsche Bank, namely that as of the end of October, 89% of assets that the German Lender collects data on for its annual long-term study, had a negative total return year to date in dollar terms. This was the highest percentage on record based on data back to 1901, eclipsing the 84% hit in 1920.

What about at the index level?

Take the broadest, MSCI World index, which after a turbulent February correction had another, similarly large drawdown in October, before starting to recover into November.

But whether one measures the recent peak-to-trough drawdown at 10%, or when measured from the January 26 high at 12%, drawdowns within bull markets of 10% or more (but less than 20%) are not uncommon according to Goldman, which found 22 such corrections – but not bear markets – for the S&P 500 since 1945. In these, the average correction peak to trough is 13% and lasts 4 months.

What did surprise Goldman, is that both the current pullback and that in February have been much sharper than usual in corrections. To be sure, in both cases technical factors likely played a role  – systematic strategies linked to volatility and options hedging might have exacerbated downward pressure, balanced funds and risk parity strategies may have suffered from bonds not buffering equity losses and there has been a material momentum unwind within equities. At the same time, vol of vol has shifted higher since the GFC and corrections are sharper and faster as a result

Additionally, there was a significant regional divergence in the recovery from the February drawdown – while the S&P 500 was at new all-time highs before the recent drawdown, non-US equities underperformed materially due to the significant growth divergence YTD. With US growth decoupling from the RoW, helped by US fiscal stimulus, the Dollar strengthened (again both DM and EM FX) and the Fed repricing accelerated, which further tightened financial conditions in EM, according to Goldman’s Christian Mueller-Glissman. In addition the trade war and European political risks have weighed on non-US equity markets.

Which brings us to the question: is this just another garden variety 10% correction in a rising bull market, or is this the start of a bear market? 

The answer can be found in the following chart, which shows the average trajectory of the MSCI World from a year before the start of a drawdown, through the actual drawdown and subsequent 10% drop, and then follows the two average paths: one of recovery, and the other of sliding into a bear market.

What the chart shows, is the through today, global stocks are tracking the trajectory of the average bear market almost to the tick. Whether or not this will change will depend on what happens to stock in the next several weeks, when either the MSCI World manages to find a support, or if it will continue to slide, dropping 20% over the next 12 months, and the continuing to slide lower.

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No Matter How You Vote, The New Congress Won’t Represent You

Authored by Ryan McMaken via The Mises Institute,

One of the most foundational assumptions behind modern democracy is that the elected officials somehow represent the interests of those who elected them.

Advocates for the political status quo flog this position repeatedly, claiming that taxation and the regulatory state are all morally legitimate because the voters are “represented.” Even conservatives, who often claim to be for “small government” often oppose radicalism of any kind — such as secession — on the grounds that political resistance movements such as the American Revolution are only acceptable when there is “taxation without representation.”The implication being that since the United States holds elections every now and then, no political action outside of voting — and maybe a little sign waving — is allowed.

This, position, however, rests on the idea that elected officials are truly representative. If taxation with representation makes government legitimate – as some argue – then we must first establish that the government’s claims of representation are believable.

On a theoretical level, Gerard Casey has already cast serious doubt on these claims. Casey draws on the work of Hanna Pitkin, who admits it is plausible that:

Perhaps representation in politics is only a fiction, a myth forming part of the folklore of our society. Or perhaps representation must be redefined to fit our politics; perhaps we must simply accept the fact that what we have been calling representative government is in reality just party competition for office.

After all, as Casey points out, representation in the private sector usually means there is an agent-principal relationship in which the agent is legally bound to attempt to represent the material interests of a clearly defined person or group of people. Clearly, this does not describe political representation. Not only is is unclear what the material interests of the voters — as a group — are, but the supposed agent in the relationship — the elected official — is not legally bound to represent the interests of the voters he supposedly represents.

To conclude therefore, that any specific voter has consented to, say, a tax increase because his “representative” approved it, is an extremely sketchy endeavor, at best.

Nor is there any reason for us to expect that such a scheme of representation could possibly be meaningful under modern conceptions of representative government and democracy. Neither the system itself, nor the sorts of people who run for office, give us any reason to believe in the viability of such a system.

Two Ways Representation Doesn’t Work

Specifically, there are two ways that real-world political representation doesn’t fit the population notions of how it all works.

First of all, even if a politicians wanted to faithfully represent the people within his constituency, this would be impossible. It is impossible because the politicians can’t know the views of the whole population of his constituency. And it’s impossible because the more diverse a constituency becomes, the more unlikely it is that any legislation can be crafted to serve the interests of all members of the constituency equally.

Secondly, we must not fall into the trap of assuming that political representatives even try to respond to the policy desires of the district voters. The idea that government coercion is made legitimate through political representation leans heavily on the idea that politicians adhere to a delegate model of political representation in which they try to advance or protect the interests of their constituents. Unfortunately, this is a bad assumption.

The Impossibility of Representing “the People”

Casey illustrates that even at a very basic level, political representation does not work on a theoretical level. But let us be “practical” types for a few minutes and imagine that we could, in theory, put together a constituency of people with similar economic, cultural, and religious interests. We could then at least entertain the idea that it might be possible to represent this group. That is, with a constituency that is highly homogeneous, we could at least make a claim that we can understand and pursue the interests of the group.

But even if this is our standard do such legislators even exist?

Limiting  our analysis to the United States, we might find examples in some small, culturally homogeneous areas. This may be true at the level of a county commission or in the legislature of a small state like New Hampshire, where legislators represent only a few thousand people per district.

At the Congressional level, however, where a single district typically includes hundreds of thousands people, claims of homogeneity are obviously nonsense. And, the larger the constituency, the worse it gets. As Frances Lee and Bruce Oppenheimer note in their book Sizing Up the Senate:

Large states … will encompass more political interests than small states, all other things being equal. … [A]lthough small population does not guarantee homogeneity, large population does result in heterogeneity.

It logically follows, then, that a more heterogeneous population is unlikely to have a political representative who actually shares many of their ideological views. In his book Congressional Representation and Constituents, Brian Frederick concludes:

[A]n expanding constituency size is not an insubstantial contribution to House members’ level of ideological divergence from their constituents. … In smaller, ideologically cohesive constituencies it is easier for legislators to satisfy the policy desires of the citizenry. The growth in House district populations seems to have increased the distance between the representative and constituents of the area of policy representations.

Consequently, it’s not surprising that once we get to the level of the US Senate, representatives show virtually no congruence with the ideologies of the people they’re supposed to represent. In his empirical study of representation, Michael Barber writes :

[S]enators’ preferences diverge dramatically from the preference of the average voter in their state. The degree of divergence is nearly as large as if voters were randomly assigned to a senator.

Naturally, this can be affected by factors other then mere heterogeneity of the population — such as the need to cultivate relationship with those who can provide campaign funds. Nevertheless, the impossibility of representing the interests of such a large population drives a legislator to pick and choose whose interests he decides to listen to. In the case of the Senate, Barber finds those who do get represented are often the constituents “who write checks and attend fundraisers.”

But it’s not necessary to conclude that legislators listen to wealthy donors for cynical reasons. Even if a Senator under these circumstances wanted to represent all five million of his constituents (as would be the case in a medium-sized state like Minnesota or Colorado) It’s important to reiterate that this is simply an impossible task under the delegate model of representation.

Trustees Versus Delegates

Up to this point, we’ve been assuming that elected officials imagine themselves largely as delegates of the populations they represent. This, after all, is the assumption behind the basic framework of Madisonian political theory: that different socioeconomic and cultural groups will be represented in Congress by elected officials, and these different groups will pursue their own interests, thus providing checks and balances against each other.

But what if elected officials don’t view themselves this way?

What if they view themselves as trustees whose job it is to do what’s “best” for the people in their district regardless of what the voter preferences actually are?

Those who have worked with elected officials will see little novelty in this suggestion. If I may be permitted a personal anecdote, I will note that in my days working with state legislators, it was not uncommon to be told by a legislator that he or she was torn as to whether vote in a way “the voters want” or to do “the right thing.” The “right” thing, in the mind of a legislator, is simply that which comports to his or her personal ideology.

If the legislator chose to overrule what he or she perceived to be the opinion of “the people,” then at least onthat day, the legislator was acting as a trustee rather than as a delegate.

There a numerous studies suggesting that such behavior in hardly rare. The political science literature showing a disconnect between the votes of legislators and constituent opinion has been mounting for years. On particularly interesting study is a 2017 paper from John Matsusake in which he concluded:

[W]hen legislator preferences differed from district opinion on an issue, legislators voted congruent with district opinion only 29 percent of the time. The data do not show a reliable connection between congruence and competitive election, term limits, campaign contributions, or media attention. The evidence is most consistent with the assumption of citizen-candidate model that legislators vote their own preferences.

There is, of course, no such thing as a “district opinion,” but the general idea is clear enough: when confronted with how to vote on an issue, a legislator, at least in Matsusake’s study, usually votes according to his own ideological views — even when he suspects a majority of his own voters prefer otherwise.

While its certainly possible to defend legislators who vote according to personal principal on various grounds, we cannot also claim that this sort of governance is a “representative” system in line with popular notions of how political representation is equivalent to voter consent for various political agendas.

If elected officials are in the habit of voting to suit their own ideologies — even when it means overriding the ideological preferences of many voters — then its hard to see how we can also call this “representative” or a system that transmits “consent” from the voters to their political representatives.

And yet, in spite of all the evidence that elected officials neither know the preference of voters, nor vote in accordance with them, we continue to be told that governments must be respected and obeyed because they have legitimacy granted to them by the fact they are “democratic” and “representative.”

For centuries, this myth of representation has served to quash opposition to government abuse, and to claim that submission to government is ‘voluntary’… It’s time to abandon the myths.

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America’s Largest Bridal-Chain Prepares For Bankruptcy After Skipped Debt Payment

After missing an October interest payment on $270 million in unsecured notes, America’s largest bridal-chain is making preparations to file bankruptcy if they can’t reach an out-of-court deal with creditors, according to Bloombergciting people with knowledge of the matter. 

At issue is an overall debt load of around $760 million which carries a pre-negotiated restructuring plan. The wedding-gown merchant has less than two weeks before their next interest payment is due on Nov. 14.

As we reported last month, the missed payment following failed negotiations with three creditors set into motion a 30-day grace period with debtholders before the company is in default. Active discussions are said to still be underway and the situation “remains fluid,” according to Bloomberg‘s sources. 

David’s and three creditor groups have gone back and forth with out-of-court restructuring proposals for weeks. Early discussions contemplated a rights offering backed by existing noteholders including Solace Capital Partners and Oaktree Capital Group, a majority bond and loan holder, the people said. Those talks broke down after the financing from the funds did not materialize and creditors failed to agree on the pricing and terms of the proposed new debt structure, the people said. –Bloomberg

“We are engaged in discussions with our lenders in order to reach a mutually agreed-upon resolution designed to strengthen our balance sheet so we can increase our financial flexibility and further invest in our business,” a David’s rep told Bloomberg over email. 

David’s has no plans for major store closures or liquidations, “and the business would keep operating regardless of a court filing.” 

The bridal-chain missed an October 15 payment on its 7.75% unsecured notes which are due in 2020 at the request of creditors in order to allow negotiations over restructuring the company’s debt could continue. The talks reportedly include the company and advisers for both loan and bondholders. 

Based on Conshohcken, Pennsylvania and owned by private equity firm Clayton Dubilier & Rice since 2012, David’s has been working with Evercore investment bank and legal counsel Debovoise & Plimpton LLP. Oaktree, which holds the lion’s share of the company’s $491 million unsecured and term notes, is working with financial adviser Moelis & Co. on the deal, and is represented by law firm Paul Weiss Rifkind Wharton & Garrison LLP. 

The company suffered from issues during a 2016 website redesign that dropped the search rankings of some products – while competition with Amazon and other online retailers has also added to the company’s woes – resulting in a 30% drop in earnings since 2012. 

David’s – which introduced new CEO Scott Key earlier this year, has struggled for a long time with declining sales and a troubled balance sheet. Analysts see a specialty retailer beset by problems in its sector, capital structure and of the company’s own making. Increasing competition and “casualization” are challenging the wedding sector, according to Moody’s.

One proposed scenario that could keep things out of bankruptcy court would include a paydown of David’s existing bank debt with the use of cash from a rights offering backed by existing noteholders, in conjunction with an extension of the company’s bank debt. Existing bondholders are probably looking at taking equity as part of the deal. 

An in-court restructuring, on the other hand, would probably leave bond holders with a little more than the currently very depressed market value of their holdings. Senior lenders might be offered equity in lieu of being made fully whole on their investments.

However, we wonder what the long-term viability of this entire business is given the ongoing collapse in interest (among Millennials now) in getting married at all…

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Johnstone: Midterms Would Be A Walkover If Dems Had Not Wasted 2 Years On ‘Russiagate’

Authored by Caitlin Johnstone via Medium.com,

I haven’t been writing about the US midterms much, because I don’t care about that nonsense anymore. The whole thing’s a fake pro wrestling performance staged every couple of years to give a heavily armed populace the illusory sense that they have some degree of control over the things their government does.

By this I do not mean that the votes aren’t real or that the outcomes are predetermined, I simply mean that both mainstream parties are controlled by plutocrats who benefit from the status quo and are only interested in their own power and profit. No matter who wins on Tuesday, the wars are guaranteed to continue, the oligarchs are guaranteed to keep siphoning more and more money out of the pockets of ordinary Americans, opaque and unaccountable intelligence agencies are guaranteed to continue expanding intrusive surveillance practices and narrative control psyops in collaboration with powerful Silicon Valley corporations, and we’re guaranteed to keep hurtling toward climate catastrophe on the back of an economic system which requires infinite growth on a finite planet. The only thing that might change a tiny bit is America maybe temporarily having a government which pretends to care about oppressed minorities sometimes.

But there’s a sharp tension in the air about this performance. Whenever I mention how it’s all an act staged to profit nobody but Vince McMahon, I get a bunch of people yelling and cursing at me, with even those those who kind of know it’s fake saying “Okay, but you still gotta cheer for The Undertaker though, come on!”

That tension is there because on paper the outcome of the 2018 midterms is still uncertain. The slight lead Democrats held in polls has narrowed furthertoday, with some analysts going so far as to predict Republicans retaining control of both houses.

Which is, on its surface, bizarre. It is bizarre not only because a new president almost always takes congressional losses at this point in their administration (the only exceptions being the historically significant years of 1934 and 2002), but also because the Republican Party is under the leadership of the most despised presidential candidate of all time.

If US politics were real, this would not be happening. If the Democratic Party were a real political party, a party which advances popular agendas in order to get its members elected to the government the way kids are taught in school, it would be on the cusp of a massive landslide of victories in both the House and the Senate, instead praying Hail Marys that they at least gain a slight advantage in the House. The last two years would have been spent promoting the virally popular agendas of the Bernie Sanders movement like single payer healthcare and getting money out of politics, after a thorough and radically honest autopsy of everything that went so catastrophically wrong in 2016.

Instead, what did Democrats do? They spent the last two years babbling about Russiagate conspiracy theories, and then in a tacit admission that they’ve never believed a word of that nonsense suddenly went completely silent on the issue before midterms and switched to the “We’re not Trump” platform. Oh yeah, and they’re telling Green Party candidates to drop out.

Democrats have done almost nothing in the last two years to fight the Republicans in any way that will ensure victory. Using his personal Twitter account, conservative media lackeys and an army of sycophants, Trump has completely dominated the narrative that his presidency has been a godsend for the economy. Fighting this narrative should have been Democrats’ first and foremost priority from day one, which would have been extremely easy to do since the narrative is entirely false. Job growth has continued on the trajectory it’s been on since 2012 and ordinary Americans don’t have any more money in their pockets than before; the wealth has stayed at the top no matter how much the economy has grown. An entirely factual counter-narrative about money being siphoned upward to the dollar-hoarding billionaire class with the help of Republican tax cuts would have been an extremely easy sell, but hardly anybody has attempted to do this.

Or war. It’s simply taken for granted that Democrats aren’t going to campaign against war, but how easy would it be for them to win elections if they did? There is no shortage of footage and statistics which could be used to attack this administration’s unforgivable rate of civilian casualties from airstrikes, its expansion of military presence in Syria, Afghanistan and Africa, its horrifying escalations against a nuclear superpower in Russia, its continued facilitation of the worst humanitarian crisis in the world in Yemen, and its depraved implementation of starvation sanctions against Iran. Democrats could have been shoving these horrors into the public eye since January 2017 and it would have not only galvanized liberals and leftists against Trump but also crippled his appeal with the anti-interventionist paleocons, libertarians and nationalists on the right. But, of course, they did not, because that would have alienated their war profiteer sponsors.

Instead of advancing popular positions to win the votes of the majority as kids are taught happens in school, all Democrats are doing currently is attacking the Republicans over Trump’s obnoxious tweets and generally successful anti-immigrant fearmongering. Since both parties support all oligarchic agendas in essentially the same ways, the only wiggle room Democrats have left is on issues the billionaire class doesn’t care about, like racism and other forms of bigotry. Plutocrats don’t care if gay people get married or if the president says racist things, they only care about power and profit, so civil rights and opposition to racism are the only means by which Democrats can significantly distinguish themselves from Republicans in a way that helps them get elected. The fact that both parties support the same oligarchic agendas which hurt disadvantaged groups first and worst goes unmentioned by either side.

It was telling when the Democrats lost to the single most beatable presidential candidate of all time in 2016. It was even more telling that they chose to spend two years spouting gibberish about Russia instead of building an actual platform with actual positions that actual people care about. The fact that there is any doubt whatsoever about the donkey party making gains in 2018 proves conclusively that they have been making zero effort to help advance the interests of Americans.

They do not care. It should be as clear as day to everyone by now. And why don’t they care? Because a pro wrestler gets paid the same whether his character wins the match or loses it.

US politics work nothing remotely like how kids are taught in school. The difference is night and day. If the American education system really wanted kids to learn about the way their electoral system actually functions, teachers would bribe student government candidates with Monopoly money to betray the interests of their classmates, and whichever candidate accepted the most bribes would get advertised on the school PA system as the clear and obvious choice to vote for.

By all means go ahead and vote on Tuesday, my American readers, in whatever way you feel might make some difference. But please also remember that you are ultimately participating in a game rigged for your oppressors, and that you deserve a much better system than this.

That’s where the real fight is.

*  *  *

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Christian Group Clarifies That Trump Is Not Jesus

President Donald Trump is not Jesus Christ.

He’s not the savior of the world who came to Earth to atone for the human race’s wrongs. He was not crucified. Bankruptcies aside, he has never come back from the dead. Trump is a man, nothing more.

Or is he? It seemed like that was the question residents of St. Louis County, Missouri, were supposed to ask when they looked up at a large billboard featuring a picture of Trump along with the phrases: “The Word Became Flesh…” and “Make the Gospel Great Again:”

The ad, which has been taken down, appeared on an electronic billboard owned by DDI Media. The company wouldn’t say who had paid for it, but an organization called “Make the Gospel Great again” has claimed credit.

“The Word became flesh” is a reference to the Book of John. Chapter 1, Verse 14 says that the Word (Jesus) took human form and “dwelt among us” on Earth.

So was the ad claiming that Trump and Jesus are one in the same? Some people weren’t sure. “I didn’t know what to make of it,” local resident Sherri Chisholim told KMOV. “I didn’t know what message it was trying to send but I felt like it was somewhat offensive, I didn’t know if they were trying to equate Donald Trump to Jesus.”

In a Facebook post today, Make the Gospel Great Again clarified that the “billboard IS NOT equating Jesus with” Trump. But the group does consider Trump to be a messenger sent from God:

[J]ust as King David liberated the faithful in his day, President Trump is doing this today through his protection of the unborn, defense of our land against foreign invaders and standing up for Israel. He surrounds himself with champions for Christian Rights –Mike Pence, Neil Gorsuch, and Brett Kavanaugh. Compared to the disaster of a president we had in Obama, how is this not the “word become flesh” for Americans? As Christians we must not stand against God’s will despite the persecution we face for doing so.

It’s safe to say they probably could have been a bit clearer.

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Miami Polling Station Runs Out Of Ballots As Early Voting Soars

Democrats in swing states like Florida, where polls suggest their parties’ candidates for state-wide and US Congress have a slight edge, are, we imagine, already bracing to call for recounts as the first in what we imagine will be a rash of election-related delays and malfunctions plague polling places in heavily Democratic districts. To wit, the Miami Herald reported on Sunday that a polling place in northern Miami briefly ran out of ballots on Sunday thanks to “malfunctioning printers”.

The logistical nightmare that followed led to long lines on the final day of early voting, with some voters waiting more than three hours to cast a ballot.

As the sun set on the 14th day of early voting in the largely black neighborhood, more than 200 voters were in a line that snaked around half a block outside the North Miami library. “I would have stayed in line eight hours if I had to,” Joas Laurent, 37, said as he walked out of the library at 7:20 p.m., about three hours after he said he arrived.

Florida has an idiosyncratic system set up for early voting, relying on printers to issue “customized” ballots to each voter based on their home district. In Sunday’s fiasco, the printers stopped working, forcing poll workers to distribute prefabricated ballots. When those ran out, campaign workers scrambled to order more from a local voting district. One seasoned poll worker said Sunday was the only time she could remember Miami-Dade running out of ballots.

Because any voter in Miami-Dade can vote early in any of the county’s 28 early-voting sites, poll workers print out a customized ballot with the state and municipal questions that apply to a voter’s precinct. For some reason, all of the North Miami printers went down at once, White said. Unable to print customized ballots, poll workers had to revert to the contingency plan: unlocking a cabinet with pre-printed ballots for each of the hundreds of precincts within Miami-Dade.

And while the county assured the press that this was only a minor hiccup…

“Nobody waited more than 45 minutes” for their replacement ballot to arrive, she said. “Which I know is a long time.”

…voters who waited out the ordeal complained that, in reality, the wait times were more than four times that.

Francesca Petite, 19, arrived at the North Miami site around 4 p.m. to vote in her first election. She didn’t leave the voting site until 7:45 p.m. “The lines could have been quicker,” she said. But joined by her older sister, Evelyn, Petite said the crowds kept them entertained in line and that volunteers handed out water bottles. “Overall,” she said, “It was a positive experience.”

Why are these delays significant? Because Northern Miami has been one of the busiest areas during a cycle where early voting has risen by more than 150% compared with the previous gubernatorial election in 2014.

North Miami looks to be the biggest stumble in an early-voting cycle that has seen records broken for a gubernatorial election, and a pace that’s approaching what Miami-Dade sees during presidential years. Early voting is up more than 150 percent from 2014 levels. Through Saturday, Miami-Dade voters cast about 504,000 ballots in person and through the mail. That puts turnout at just under 36 percent as Sunday voting began, compared to 21 percent at the same time in 2014.

In 2016, turnout had already topped 50 percent when the final day of early voting arrived. And while the 2018 midterm election isn’t matching the 2016 pace, some early-voting sites in Miami-Dade actually surpassed presidential turnout in recent days.

The Coral Gables library, the busiest of Miami-Dade’s 28 early-voting sites, saw 80 more voters than it did on the last Saturday of early voting in 2016. The Coral Reef and Lemon City libraries both saw roughly 300 more early voters on Saturday than they did two years ago. The North Dade Library in Miami Gardens has the smallest drop-off from its 2016 levels, down just 13 percent from the presidential pace of 2016.

North Miami recently climbed to the Top Five list of Miami-Dade’s busiest early-voting sites, but hasn’t passed its 2016 totals on any day, according to county statistics. Even so, the Elections Department expected a surge of voters Sunday in the Democratic stronghold during the Democratic Party’s traditional “Souls to the Polls” get-out-the-vote effort with churchgoers on the final Sunday of early voting. Numbers released Monday morning showed 1,939 people voted Sunday at North Miami, the busiest day for the site this year and a pace of about 160 voters an hour.

Workers on Andrew Gillum’s campaign swarmed the polling station as the 7 pm close of voting approached, handing out water and pizza to entice voters to stick around for their chance to cast a ballot in the “Desiline Victor Voting Wing,” which was named after a 102-year-old woman who waited for hours in 2012 to vote for Barack Obama amid an epic delay that attracted national attention. Voting continued at the site well after the polls closed at 7 pm, with the line finally reaching zero an hour later.

So far, the story hasn’t attracted much attention from the national press. But if Gubernatorial candidate Andrew Gillum and Senator Bill Nelson lose by small margins, expect an epic round of finger-pointing.

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The Hottest Midterm Race Is Milton Friedman Versus Marc Benioff: New at Reason

Of all the high-profile political contests on the ballot this week—Ted Cruz versus Beto O’Rourke in Texas, Stacey Abrams versus Brian Kemp in Georgia, Dean Heller versus Jacky Rosen in Nevada—the one that may be the most consequential, long-term, is Marc Benioff versus Milton Friedman.

Benioff is the new owner of Time magazine and is the founder and chairman of Salesforce, a software company based in San Francisco. Bloomberg estimates his wealth at about $6 billion. Friedman is the Nobel Prize winning economist who spent a career teaching at the University of Chicago and then joined the Hoover Institution at Stanford. He died in 2006 in San Francisco.

Neither Benioff’s name nor Friedman’s is on the ballot. What is on the ballot, though, at least in the City of San Francisco, is Proposition C, which would raise business taxes there by an estimated $250 million to $300 million a year for the purpose of providing housing and services to homeless people. And that question, writes Ira Stoll, pits against each other two ideological perspectives on the role of businesses in public life.

View this article.

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Midterm-Mania Sparks Chaos In Quiet Markets

This just seemed appropriate…

China was mixed overnight despite extremely weak PMIs, thanks to an incessant bid in the afternoon session…

 

And European markets went sideways all day…

 

US Markets saw low volumes – over 20% below average…

 

Futures show the quiet overnight session… and a panic-bid spiked stocks at 1415ET after Rasmussen polls showed the GOP retaining the House…

 

Cash markets show that Small Caps and Trannies got back to even, Nasdaq almost made it but Dow and S&P led the way today…

 

The surge in buying was very evident in TICK…

 

Also of note, after a few weeks of incessant huge gap opens, the last few days have seen negligible overnight moves…

 

The Dow made it back to its 100DMA, bouncing almost perfectly off its 200DMA (rest of the majors remain well below 200DMA)…

 

FANG stocks suffered again early but were panic-bid after the Rasmussen headlines…

 

But, despite the surge in market, AAPL was the big loser, and remains well below its 100DMA…

 

As AAPL Catches down to its FANG friends freefall…

And also  note that AAPL never caught a bid when the markets ramped on the poll headlines…

 

Despite broad market gains (yes, Nasdaq was lower), bonds were also bid with 30Y outperforming

 

The Dollar faded after overnight gains, completing the right shoulder of a head-and-shoulders pattern…

 

Yuan was weak overnight after dismal PMI data…

 

Cryptos were higher on the day with Bitcoin Cash surging 20% from Friday’s ‘close’…

 

Despite dollar weakness, it appears the China headlines weiughed on copper and gold and silver slipped lower…

 

As Trump unleashed Sanctions on Iran, WTI crude jumped and then dumped back below a $63 handle…

 

Gold in Yuan remains glued around 8500…

 

Finally, we note that the exodus in so-called ‘Smart’ money continues to accelerate…

 

And VIX’s term structure remains inverted for the 21st day straight…the longest streak since Sept 2011…

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Howard Marks: “Market Conditions Make This A Time For Caution”

Authored by Christoph Gisiger via Finanz Und Wirtschaft,

Few investors get paid such deep respect as Howard Marks. The Co-founder and Co-Chairman of the Los Angeles based investment boutique Oaktree Capital not only stuns Wall Street with his exceptional track record, but he’s also highly regarded for his sober-minded notes on the ever-changing moods of the global financial markets. The essence of his investment philosophy is unveiled in his new book, entitled «Mastering the Market Cycle: Getting the Odds on Your Side». It was released earlier this month, is well written and belongs in the library of every prudent investor. During our conversation, the legendary value investor addresses the recent turmoil in stocks and bonds, explains why conditions demand a defensively calibrated portfolio, and reveals how investors can successfully position themselves in the market cycle.

Mr. Marks, when you speak, investors around the globe listen up. What’s the key to your investment strategy?

I believe that everything an investor can try to do to improve performance falls under one of two headings: Asset selection and cycle positioning. Asset selection consists of owning more of the things that will do better and less of the things that will do worse. Cycle positioning consists of having more investments and more aggressive investments when the market is poised to do well and fewer investments and more protective investments when the market is poised to do poorly.

That sounds quite simple. But how does cycle positioning really work?

Let’s assume your goal is to have defense at the right time and offense at the right time. There are two possibilities to achieve that: Number one, have a forecast of what’s going to happen. You can do this by predicting psychology and guessing at how people are going to feel about things a year from now: How they will feel about the market, the economy, company performance, the administration in Washington and so forth. But I do not think that this can be done successfully.

Why?

Because our world is too uncertain to permit certainty. We don’t know what’s going to happen and we don’t know how the market is going to react to it. Let’s go back two years to October of 2016. There were two things most investors were certain of: Hillary Clinton would win the presidency and, if by some fluke Trump won, the market would crash. But what happened was Trump won, and the market went up. If that’s not enough to convince you that forecasts don’t work I don’t know what will.

Many investors were also taken by surprise by the recent setback in the stock market. What are your thoughts on the latest financial markets turbulences?

Just a month ago, everything was «cool». Everybody said, «the economy is good, companies are doing well, the tax cuts make everybody rich, and we’re settled with the North Koreans». But then the market had a few very bad days and the main explanation was because long-term interest rates picked up. But how could this have come as a surprise? The Federal Reserve said three or four years ago that interest rates should go up. They have been raising rates on the short end and it shouldn’t be a surprise that the rates on the long end finally woke up and started going up. And yet, if it’s expectable as it should have been, how can it be the source of so much volatility? To me, that just shows you how nutty the market is.

What can investors do to make better investment decisions?

As I make the case in my new book, you have to have a sense for where the market stands in its cycle. That’s what’s determines the odds. When the market is attractively positioned, low in its cycle, then the expected return is above average, and you want to play offense. In contrast to that, when the market is unattractively positioned, high in its cycle, then the expected return is below average, and you want to play defense. When you get this judgment right, then your results will be better than average.

But how exactly do you do that?

The main factors which influence where the market is in its cycle are fundamentals and investor psychology. The market tends to reflect how the economy has been doing and how companies have been doing. But most investors think naively that if good things happen, stocks will go up, and if bad things happen, stocks will go down. But sometimes the opposite is the case. If expectations are too high you can have good things happen, but investors are disappointed, and stocks go down. Or, you can have unpleasant events but if they’re not as bad as expected the market can go up. Every event can be interpreted positively or negatively. For instance, rising interest rates can be a bad thing because it could crush businesses. But it also can be viewed as a good thing because it signals that the economy is strong.

Why is investor psychology so important?

Investors are not good at taking all the factors into account and balancing them. Usually they look only at the positives or only at the negatives. I made this point in my memo from January 2016 entitled «On the Couch»: In real life, things fluctuate between «pretty good» and «not so hot». But in the market, attitudes fluctuate between «all good» and «all bad». That’s what happened a few weeks ago when interest rates on the long end started to rise. So it’s not enough to know what you think is going to happen event-wise. You also have to think about psychology and emotion, because where the market stands and what the market does is the result of the interaction of what events occur and how people react to them. If you can understand what expectations are factored into the market and where emotion and psychology stand, then you have a better chance of getting the odds on your side.

How do you get the odds on your side?

Think of a bowl full of lottery tickets. The makeup of the tickets changes as the market moves in its cycle. Let’s say, normally there are 60% winning tickets and 40% losing tickets in the bowl. But when the market is low in its cycle it may be 90% winning tickets and 10% losing tickets. And when the market is high in its cycle it’s 30% winning tickets and 70% losing tickets. So before you decide to buy a lottery ticket, wouldn’t you like to know the composition of the tickets in the bowl? In other words: If you think clearly about the composition of the tickets you can get the odds on your side. However, even when you have the odds on your side it doesn’t tell you what’s going to happen. You can have a bowl with 90% winners and 10% losers and you reach in that bowl and you pull out a loser. All you can do is get the odds on your side, so your probability of success is better than neutral. And if you can do that repeatedly in the long run you will come out ahead.

How do you improve your odds when it comes to cycle positioning?

It’s very hard to make predictions of the future but it’s not so hard to assess the current environment. That’s how you can improve your results, and it comes down to one question: is the market hot or cold? Are investors optimistic, greedy and risk tolerant? Or are they fearful, pessimistic and risk averse? When it’s the latter category, that’s when we want to buy. We want to buy when everybody discounts the positives and overrates the negatives. And if the opposite is the case, then we want to reduce our risk.

What’s the temperature of the market right now?

I believe we are high in the cycle. For instance, P/E ratios on stocks are above average. They are not as crazy as they were in 2000, but they are above average. Also, interest rates on bonds are below average, yield spreads are at historic lows and credit conditions are weak in terms of looser covenants. What’s more, we are in the tenth year of an economic recovery and there has never been a recovery of more than ten years. That doesn’t mean this recovery can’t continue, and frankly, it feels like this one will go more than ten years.

What does this mean for investors?

The longer the cycle has gone up, the closer we probably are to the point when it turns down. We’re in the tenth year of a bull market and the S&P 500 has quadrupled from the low of March 2009. That’s why I would argue that the easy money has been made. The market environment is not as attractive as it was ten years or five years ago, and that means the chances of extreme positive performance are low. So given where we are in the cycle and what has happened, you can’t argue that we should take on more risk today than we did five years ago.

One thing that has changed since the beginning of October is that market volatility has increased. Where do you spot the most dangerous risks today?

First of all, I believe that risk is not volatility. Risk is the probability of losing money. That’s the most important risk. Volatility is academic. The academics use volatility because there is nothing else they can use to measure risk which is quantifiable.

So where are the real risks?

As I explain in my latest memo, entitled «The Seven Worst Words in the World», there is too much money chasing too few deals. People are eager to invest because they can’t stay out of the market. They have a lot of money in their hands and they don’t want to put it in the money market or in Treasuries because the return is so low. So they’re trying to get into aggressive risk asset classes, and that drives up the prices, drives down the returns and drives up the risks. Conditions are probably worse in credit than they are in equities. It’s not like equities are horribly priced. They are a little more expensive than average. But just to be clear: I’m talking about the average stock, not the FAANGs or other high-risk equities whose prices incorporate lofty expectations for future growth.

How dicey could things get in the credit market if the cycle turns down?

When there is a lot of money which wants to go into the market, then people make investment decisions in terms of «I will take less return, I will take less safety» and so forth. There has been a lot of that behavior going on in the world of credit. But it’s important to note that credit is by nature safer than equities. All but the very worst credit investments are not going to collapse and lose money. What they are going to do is to produce subpar returns with more risk than was expected. So I don’t think there is going to be some disastrous crash. But the experience just will not be a good one.

Given this backdrop, what would you advise a Swiss investor to do when it comes to portfolio allocation based on cycle positioning?

Before people start investing at all, the first thing they should do is to ask what the right posture for them is. This depends on your age, your financial situation, the number of dependents, whether you want to retire soon and – very importantly – your psychological makeup: If there’s a decline, can you stand it and hold? Or are you likely to panic and sell? Everybody has to figure out their normal risk posture. Then, based on what has happened and where we stand in the cycle, you have to ask: Is the outlook average, below average or above average? In other words: Should your risk today be above normal, normal or below normal? That’s how you calibrate your positioning. You do it not with absolute precision, but directionally.

And how should your calibration look like today?

In my view, market conditions make this a time for caution, a period more for defense than offense. More defense means more bonds than stocks, high quality stocks rather than low, big companies rather than small ones, value strategies rather than growth strategies, stable companies rather than cyclicals, developed world rather than emerging markets. I believe people can improve their investment results by adjusting risk based on where we are in the cycle, and how other investors are behaving. But it’s important to keep in mind that cycle positioning is not a daily activity. We cannot expect to do this properly every day or every month. In my life, I’ve made four or five major calls correctly in fifty years. If investors do this at market extremes, it’s likely to work. In between the conclusions aren’t compelling, which means people shouldn’t try to adjust portfolios hyper-actively.

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What Wall Street Thinks Of The Midterms

The consensus view expects a split Congress outcome with a largely muted market reaction, though many are not ruling out a surprise.

In order to assess the medium-term market impact of the midterms and recommend trade ideas, SocGen economists, strategists and analysts have worked under three different scenarios according to the election outcome.

  • Scenario 1: Gridlock – GOP Senate and DEM House (most likely): Markets would fear that economy would be more vulnerable from now on with the absence of any further economic stimulus in the event of economic slowdown.

  • Scenario 2: Blue Wave – DEM Senate and DEM House: Markets would stir on speculation of a lame duck presidency and potential impeachment proceedings. Potential upside risk on Infrastructure.

  • Scenario 3: Red Wave – GOP Senate and GOP House (least likely): The least expected scenario for the market, which would probably trigger a short-lived risk-on environment. Trade tensions and Fed tightening will quickly be back in the market focus

SocGen’s US economist has provided potential policy outcome stemming from these three potential elections outcomes:

 

Stocks

Largely representing consensus, Deutsche Bank’s equity strategists believe that the environment is ripe for an equity rally into year end. Markets have historically rallied around midterm elections, though this is equally due to historic coincidence (growth has tended to be strong around elections) as the actual elections. They expect this scenario to repeat, as growth looks strong, positioning is light, and Democratic gains could act as a check on the president’s trade war policies. On the other hand, some Democratic politicians have expressed support for President Trump’s trade war, so they may actually support an escalation against China.

As Deutsche Bank explains, the base case is the Democrats taking over the House and holds the potential to reduce downside risks from trade policy friction. We see a variety of possible channels through which the administration’s agenda on trade is likely to be curtailed by a switch in majority. Congressional investigations and potential impeachment proceedings, even though nominal, would likely use up significant bandwidth while a growing number of Democrats and even Republicans are likely to attempt reducing Presidential power in dealing with trade. If trade frictions reduce, that allows the market focus to shift back on strong US growth; and also ease pressure on global growth and in our view would lead to a stronger eventual rally. The market is currently pricing in almost no growth implying significant scope for a catch up rally.

If Republicans keep control of both the House and the Senate that would be interpreted by the administration and the market as public support for the trade war, likely leading to further escalation. In the very short term while the market might rally due to the aforementioned base of investors who attribute strong growth to the Republicans’ policy, we think it prolongs the period of trade uncertainty and hurts growth.

The Economy

Goldman seems to represent well the consensus Wall Street opinion that the result of the US midterms won’t change the economic outlook significantly.

The upcoming US midterm elections look likely to result in a split Congress, with Democrats capturing the House and Republicans holding onto the Senate. In that base case, political divisions should leave the overall direction of policy broadly unchanged. But investors should watch out for the tail scenarios.

  • A Republican sweep could bring incremental action on tax, propping up stocks sensitive to taxes and regulation.

  • On the other hand, a Democratic sweep could be disruptive for those slices of the market.

And as our chart of the week shows, it could also deliver a hit to Pharma stocks, since Democrats have a better shot at healthcare policy changes if they control both chambers.

A Democratic sweep in the House and Senate could hit Pharma stocks

Source: FactSet, PredictIt, Goldman Sachs Global Investment Research.

But no matter how the elections shake out, we don’t think they’ll change the US growth outlook in any meaningful way. The same goes for US-China trade tensions, at least in the near term. We still think it’s more likely than not that the White House imposes tariffs on the remaining $267bn of Chinese imports.

So while political noise around the midterms will eventually subside, policy risk probably won’t.

Bonds

However, as Bloomberg points out, votes in the U.S. midterm elections Tuesday may be more front of mind than those cast later this week in the FOMC meeting, some rates strategists wrote in weekly research reports.

Bank of America (Carol Zhang, Nov. 2 report)

  • Split Congress and muted market responses expected out of midterms, though a Republican sweep would push higher yields and steeper curves

  • Remain bearish duration and in 2s10s curve steepeners; BofA closed long 5y TIPs breakeven trade amid recent weakness in energy and housing markets

  • “Lack of reserve manager demand puts pressure on real yields”

  • Chinese officials may elect a “passive UST portfolio roll-off” amid domestic growth concerns

  • In 2019, lower tax revenue could be a risk for a higher budget deficit given market performance across asset classes this year

BMO (Jon Hill, others, Nov. 2 report)

  • Midterms will be a bigger driver for markets than the Nov. FOMC meeting on Nov. 7-8

  • If 2s10s curve breaks flattening resistances in 26.5bp-27.3bp range, expect an upward-sloping trend line to come in near 25bp, then a “swift move” toward 18.3bp session flat

  • “Bearish momentum picture across the curve has failed to drive rates to a significantly higher territory”

  • BMO exited 10s/bunds trade at the end “overdone move largely played out,” but sees good opportunity ahead amid “ever-changing geopolitical and monetary policy landscape”

JPMorgan (Alex Roever and Matthew Jozoff, Nov. 2 report)

  • Little market reaction expected from midterm elections if Democrats take House but Republicans retain the Senate, though other less likely outcomes could sway markets

  • Either a red or blue sweep could steepen curve on risk of increased fiscal stimulus, but likely wouldn’t have lasting effects

  • Recommends staying short 3Y USTs and holding 10s30s flatteners

  • Macro data point to “further policy normalization, and cyclical dynamics supportive of higher yields”

SocGen (Subadra Rajappa and Shakeeb Hulikatti, Nov. 1 report)

  • Short the 5Y in 2s5s10s fly and stay in 2s10s flatteners

  • Most likely U.S. midterm outcome is split Congress, with a Dem. House and GOP Senate, and “minimal” impact on Treasuries markets, which will return to a bearish trade bias

  • Blue wave scenario could cause bearish sentiment to “fizzle as risky assets are likely to come under renewed pressure” and investors may return to the safety of bonds

  • A Republican sweep would renew positive risk sentiment and cause yields to rise, though uncertainty over tariffs and trade wars could have a “negative impact on growth in a rising inflation environment”

Barclays (Rajiv Setia, others, Nov. 2 report)

  • Barclays turns tactically neutral on long 10Y USTs and 2s10s curve flattener trades as U.S. midterms are an event risk, but looks to “reinitiate them later”

  • “While a Republican sweep looks unlikely based on the polling data, so did the election of President Trump based on the then polling data”

  • Baseline midterm election scenario sees a Democratic House and Republican Senate, which would have little market impact but lead to a Congress “unlikely to pass any significant legislation leading to a gridlock”

  • “Knee-jerk” reaction to a Republican Congress would be higher yields on potential for more fiscal stimulus

  • If Democrats take control of Congress, expect a “knee-jerk risk off leading to lower yields”

  • Still, long-term yields are at attractive levels given geopolitical and global economic environments

Morgan Stanley (Matthew Hornbach, Nov. 2 report)

  • Midterms will be bigger for markets than the FOMC meeting later this week

  • MS is neutral on both duration and curve shape ahead of midterms and FOMC meeting

  • Environment isn’t there to monetize negative term premium in the short end of the yield as well as positive term premium in the long end

Citi (Jabaz Mathai, others, Nov. 2 report)

  • Status of U.S.-China trade dispute is a bigger market driver than U.S. midterm elections, and a near-term “compromise deal” would be a “boost to risk sentiment” and have bearish implications for USTs

  • Divided Congress — with a blue House and GOP Senate — would have little effect on markets, though other scenarios would have bigger market impact

  • Republican sweep: “Treasury sell-off on expectation of further tax cuts”

  • Democrats take both chambers: “Treasury rally on resistance to White House policies and tail risk of impeachment proceedings”

  • 10s30s are too steep and flattening lays ahead in next three months, though 30s may cheapen as we approach the 30Y auction on Nov. 7

Deutsche Bank (Steven Zeng, Nov. 2 report)

  • November’s refunding announcement is “on the margin biased toward a steeper nominal curve, a flatter yield curve and steeper breakevens”

  • Treasury supply will “slow notably” easing upward pressure on yields; but in near-term, DB still sees 10Y yields ending 2018 at 3.50%

  • Dealers generally see Fed’s balance-sheet normalization ending in early 2020

TD (Gennadiy Goldberg and Priya Misra, Nov. 2 report)

  • Fed is looking to relax banking system regulation, especially for smaller banks, by proposing to ease LCR and NSFR rules for banks with $250bn-$700bn in assets and eliminate LCR, NSFR and SLR rules for banks between $100-$250

  • Effective fed funds rates will rise slower because smaller banks tend to be the “prevalent borrowers” of that market

  • Near-term, TD sees a 5s30s steepener amid equity market weakness, followed by a medium-term flattener as Fed hikes continue

*  *  *

Finally, a graphical look across asset-classes at typical US election and midterm performance…

And a more nuanced look at Midterms, depending on outcome…

 

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