Facebook Admits To Soros Smear; Denies Paying For “Fake News” As Outgoing Scapegoat Offers Mea Culpa

Facebook has admitted to paying a Republican PR firm to cast liberal critics as operatives for liberal financier George Soros, following a shocking exposé in the New York Times last week which shed light on a wide scope of questionable damage control techniques employed by the social media giant in the wake of several scandals. 

We hired Definers in 2017 as part of our efforts to diversify our DC advisors after the election. Like many companies, we needed to broaden our outreach. We also faced growing pressure from competitors in tech, telcos and media companies that want government to regulate us.

This pressure became particularly acute in September 2017 after we released details of Russian interference on our service. We hired firms associated with both Republicans and Democrats — Definers was one of the Republican-affiliated firms. -Elliot Schrage

The admissions come from the company’s outgoing Head of Communications and Policy, Elliot Schrage, who is appears to be the company’s chosen scapegoat. 

In a Wednesday release, Facebook admits that they used the Washington, DC PR fiirm Definers for several purposes, which included the Soros smear. 

Did we ask them to do work on George Soros?

Yes. In January 2018, investor and philanthropist George Soros attacked Facebook in a speech at Davos, calling us a “menace to society.” We had not heard such criticism from him before and wanted to determine if he had any financial motivation. Definers researched this using public information.

Later, when the “Freedom from Facebook” campaign emerged as a so-called grassroots coalition, the team asked Definers to help understand the groups behind them. They learned that George Soros was funding several of the coalition members. They prepared documents and distributed these to the press to show that this was not simply a spontaneous grassroots movement. –Facebook

In response to the Times article, Soros adviser Michael Vachon and the Open Society Foundation president, Patrick Gaspard, penned angry responses to the Times article, lambasting Facebook for smearing Soros amid “a concerted right-wing effort the world over to demonize Mr. Soros and his foundations.” 

Facebook also admitted to having Defenders “respond to unfair claims where Facebook was been [sic] signaled out for criticism,” referring to claims that Definers coordinated with a third party company to publish negative articles on Google and Apple which called out questionable business practices, in an effort to downplay Facebook’s responsibility in the data harvesting and Russia scandals. 

Mr. Kaplan prevailed on Ms. Sandberg to promote Kevin Martin, a former Federal Communications Commission chairman and fellow Bush administration veteran, to lead the company’s American lobbying efforts. Facebook also expanded its work with Definers.

On a conservative news site called the NTK Network, dozens of articles blasted Google and Apple for unsavory business practices. One story called Mr. Cook hypocritical for chiding Facebook over privacy, noting that Apple also collects reams of data from users. Another played down the impact of the Russians’ use of Facebook.

The rash of news coverage was no accident: NTK is an affiliate of Definers, sharing offices and staff with the public relations firm in Arlington, Va. Many NTK Network stories are written by staff members at Definers or America Rising, the company’s political opposition-research arm, to attack their clients’ enemies. –NYT

Schrage said that responsibility lied with him, and that “Mark [Zuckerberg] and Sheryl [Sandberg] relied on me to manage this without controversy.

I knew and approved of the decision to hire Definers and similar firms. I should have known of the decision to expand their mandate. Over the past decade, I built a management system that relies on the teams to escalate issues if they are uncomfortable about any project, the value it will provide or the risks that it creates. That system failed here and I’m sorry I let you all down. I regret my own failure here. -Elliot Schrage

COO Sheryl Sandberg added the following: 

Thank you for sharing this, Elliot.

I want to be clear that I oversee our Comms team and take full responsibility for their work and the PR firms who work with us. I truly believe we have a world class Comms team and I want to acknowledge the enormous pressure the team has faced over the past year.

When I read the story in New York Times last week, I didn’t remember a firm called Definers. I asked our team to look into the work Definers did for us and to double-check whether anything had crossed my desk. Some of their work was incorporated into materials presented to me and I received a small number of emails where Definers was referenced.

I also want to emphasize that it was never anyone’s intention to play into an anti-Semitic narrative against Mr. Soros or anyone else. Being Jewish is a core part of who I am and our company stands firmly against hate. The idea that our work has been interpreted as anti-Semitic is abhorrent to me — and deeply personal.

I know this has been a distraction at a time when you’re all working hard to close out the year — and I am sorry. As I said at the All Hands, I believe so deeply in the work we do and feel so grateful to all of you for doing so much every day. Thanksgiving seems like the right time to say a big thank you once again.

And there you have it – Facebook casually admits to smearing detractors as Soros operatives and using Definers to attack Apple and Google with factual information, as opposed to “fake news.”

via RSS https://ift.tt/2FyW0EL Tyler Durden

Hussman On The Three Great Delusions: Paper Wealth, A Booming Economy, & Bitcoin

Authored by John Hussman via HussmanFunds.com,

“Let us not, in the pride of our superior knowledge, turn with contempt from the follies of our predecessors. The study of the errors into which great minds have fallen in the pursuit of truth can never be uninstructive.”

– Charles Mackay
Extraordinary Popular Delusions and the Madness of Crowds

Delusions are often viewed as reflecting some deficiency in reasoning ability. The risk of thinking about delusions in this way is that it encourages the belief that logical, intelligent people are incapable of delusion. An examination of the history of financial markets suggests a different view. Specifically, faced with unusual or extraordinary price advances, there is a natural tendency (particularly in the presence of crowds, feedback loops, and potential rewards) to look for explanations. The problem isn’t that logic or reason has failed, but that the inputs have been distorted, and in the attempt to justify the advance amid the speculative excitement, careful data-gathering is replaced by a tendency to confuse temporary factors for fundamental underpinnings.

While true psychological delusions are different from financial ones, a similar principle is suggested by psychological research. Delusions are best understood not as deficiencies in logic, but rather as explanations that have been logically reached on the basis of distorted inputs. For example, individuals with delusions appear vulnerable to differences in perception that may involve more vivid, intense, or emotionally-charged sensory input. While those differences might be driven by neurological factors, the person experiencing these unusual perceptions looks to develop an explanation. Maher emphasized that despite the skewed input, the delusions themselves are derived by completely normal reasoning processes. Similarly, Garety & Freeman found that delusions appear to reflect not a defect in reasoning itself, but a defect “which is best described as a data-gathering bias, a tendency for people with delusions to gather less evidence” so they tend to jump to conclusions.

The reason that delusions are so hard to fight with logic is that delusions themselves are established through the exercise of logic. Responsibility for delusions is more likely to be found in distorted perception or inadequate information. The problem isn’t disturbed reasoning, but distorted or inadequate inputs that the eyes, ears, and mind perceive as undeniably real.

Let’s begin by examining the anatomy of speculative bubbles. We’ll follow with a discussion of three popular delusions that have taken hold of the crowd, and the premises that drive them: the delusion of paper wealth, the delusion of a booming economy, and the delusion that is Bitcoin.

The anatomy of speculative bubbles

Across centuries of history, speculative financial bubbles have repeatedly emerged from the seeds of distorted financial environments, where speculative behavior increasingly produces self-reinforcing feedback. Specifically, the speculative behavior of the crowd results in rising prices that both impress and reward speculators, and in turn encourage even greater speculation. The more impressed the crowd becomes with the result of its own behavior, the more that behavior persists, and the more unstable the system becomes, until finally the flapping wings of a butterfly become sufficient to provoke a collapse, launching a self-reinforcing feedback loop in the opposite direction.

The 1929 bubble was built on the foundation of real economic prosperity during the roaring 20’s, but the late stages of that boom were largely fueled by debt and easy money. Observing the persistent market advance, investors largely ignored the contribution of their own speculation in producing that advance. Rather, as traditional valuation measures became increasingly stretched, the first impulse of investors was to try to justify the elevated valuations in novel ways, which gradually became nothing but excuses for continued speculation. As John Kenneth Galbraith wrote decades ago in his book, The Great Crash 1929:

“It was still necessary to reassure those who required some tie, however tenuous, to reality. This process of reassurance eventually achieved the status of a profession. However, the time had come, as in all periods of speculation, when men sought not to be persuaded by the reality of things but to find excuses for escaping into the new world of fantasy.”

Keep in mind that yes, the economy was strong, business was booming, and money was easy. The problem was that investors stopped thinking about stocks as a claim on a very, very long-term stream of discounted cash flows. Valuations didn’t matter. It was enough that the economy was expanding. It was enough that earnings were rising. Put simply, the trend of earnings and the economy, not the actual level of valuation, became the justification for buying stocks. Graham & Dodd described this process:

“During the latter stage of the bull market culminating in 1929, the public acquired a completely different attitude towards the investment merits of common stocks… Why did the investing public turn its attention from dividends, from asset values, and from average earnings to transfer it almost exclusively to the earnings trend, i.e. to the changes in earnings expected in the future? The answer was, first, that the records of the past were proving an undependable guide to investment; and, second, that the rewards offered by the future had become irresistibly alluring.

“Along with this idea as to what constituted the basis for common-stock selection emerged a companion theory that common stocks represented the most profitable and therefore the most desirable media for long-term investment. This gospel was based on a certain amount of research, showing that diversified lists of common stocks had regularly increased in value over stated intervals of time for many years past.

“These statements sound innocent and plausible. Yet they concealed two theoretical weaknesses that could and did result in untold mischief. The first of these defects was that they abolished the fundamental distinctions between investment and speculation. The second was that they ignored the price of a stock in determining whether or not it was a desirable purchase.

“The notion that the desirability of a common stock was entirely independent of its price seems incredibly absurd. Yet the new-era theory led directly to this thesis… An alluring corollary of this principle was that making money in the stock market was now the easiest thing in the world. It was only necessary to buy ‘good’ stocks, regardless of price, and then to let nature take her upward course. The results of such a doctrine could not fail to be tragic.”

– Benjamin Graham & David L. Dodd, Security Analysis, 1934

The 2000 tech bubble featured the same process in a slightly different form. The inputs and premises that investors observed were valid, but incomplete. Economic growth and employment were strong, and money was easy. The internet did indeed have tremendous growth prospects. But again, as the advance became more speculative, investors largely ignored the impact of their own speculation in producing that advance. Instead, their first impulse was again to try to justifythe elevated valuations in novel ways (recall “price-to-eyeballs”). By March 2000, on the basis of historically reliable valuation measures, I projected that a retreat to normal valuations would require an -83% plunge in tech stocks. In the 19 months that followed, that estimate turned out to be precise for the tech-heavy Nasdaq 100 Index.

The mortgage bubble leading up to the global financial crisis was built on the same sort of distorted inputs, this time fueled by the insistence of the Federal Reserve to hold interest rates at just 1% after the tech collapse. As yield-starved investors looked for relatively safe alternatives to low-yielding Treasury securities, they turned to mortgage securities, which had to-date never experienced major losses. Wall Street responded to the appetite for more “product” by creating new mortgage securities, which required the creation of new mortgages, and led to the creation of no-doc, zero-down mortgages and the willingness to lend to anyone with a pulse. All of this produced a glorious period of temporary prosperity and rising prices. As usual, instead of recognizing the impact of their own speculation in producing the advance, the first impulse of investors was to try to justify why elevated asset and housing valuations made sense.

As the bubble expanded, Janet Yellen, then the head of the San Francisco Federal Reserve, offered this benign assessment of the risks:

“First, if the bubble were to deflate on its own, would the effect on the economy be exceedingly large? Second, is it unlikely that the Fed could mitigate the consequences? Third, is monetary policy the best tool to use to deflate a house-price bubble? My answers to these questions in the shortest possible form are, ‘no,’ ‘no,’ and ‘no’ … It seems that the arguments against trying to deflate a bubble outweigh those in favor of it. So, my bottom line is that monetary policy should react to rising prices for houses or other assets only insofar as they affect the central bank’s goal variables—output, employment, and inflation.”

Missing from Yellen’s benign assessment was the fact that the speculative distortion and debt buildup enabled by the bubble itself would be the primary driver of the worst economic collapse since the Great Depression. The Fed appears to exclude such risks from its thinking, despite the fact that the worst economic collapses in history have generally gone hand-in-hand with episodes of financial speculation and their inevitable collapse.

In the apparent attempt to bookend her term as Fed Chair by brushing aside the current progression toward financial collapse with an equally benign and milquetoast risk assessment, Janet Yellen observed on December 14, 2017:

“If there were an adjustment in asset valuations, the stock market, what impact would it have on the economy, and would it provoke financial stability concerns? … I think when we look at other indicators of financial stability risks, there’s nothing flashing red there, or possibly even orange.”

Despite risks that I fully expect to devolve into a roughly -65% loss in the S&P 500 over the completion of the current market cycle, it’s absolutely critical to distinguish the long-term effects of valuation from the shorter-term effects speculative pressure. Historically-reliable valuation measures are remarkably useful in projecting long-term and full-cycle market outcomes, but the behavior of the market over shorter segments of the market cycle is driven by the psychological inclination of investors toward speculation or risk-aversion. The most useful measure we’ve found of that psychological inclination is the uniformity or divergence of market internals across a broad range of individual stocks, industries, sectors, and security types (including debt securities of varying creditworthiness). When investors are inclined to speculate, they tend to be indiscriminate about it.

In the recent advancing half-cycle, the speculation intentionally provoked by zero-interest rate policy forced us to elevate the priority of market internals to a far greater degree than was required during the tech and mortgage bubbles. It was necessary to prioritize the behavior of market internals even over extreme “overvalued, overbought, overbullish” features of market action. Those syndromes were effective in other cycles across history, but in the advancing half-cycle since 2009, our bearish response to those syndromes proved to be our Achilles Heel. The process of adaptation was very incremental, and therefore painful in the face of persistent speculation. We’ve adapted our investment discipline so that without exception, a negative market outlook can be established only in periods when our measures of market internals have also deteriorated. A neutral outlook is fine when conditions are sufficiently unfavorable, but establishing a negative outlook requires deterioration and dispersion in market internals.

Faced with extreme valuations, the first impulse of investors should not be to try to justify those valuation extremes, but to recognize the impact of their own speculative behavior in producing and sustaining those extremes. It then becomes essential to monitor market conditions for the hostile combination of extreme valuations and deteriorating market internals. At present, we observe that combination, but would still characterize the deterioration in market internals as “early,” in the sense that it’s permissive of abrupt market losses, but not severe enough to infer a clear shift from speculation to risk-aversion among investors.

The delusion of paper wealth

Across history, the evaporation of paper wealth following periods of speculation has repeatedly taught a lesson that is never retained for long. Unfortunately, the lesson has to be relearned again and again because of what J.K. Galbraith referred to as “the extreme brevity of the financial memory.” Speculation is dangerous because it encourages the belief that just because prices are elevated, they must somehow actually belong there. It encourages the belief that the paper itselfis wealth, rather than the stream of future cash flows that investors can expect their securities to deliver over time.

On Saturday, December 16, the St. Louis Fed posted a rather disturbing tweet: “Negative interest rates may seem ludicrous, but not if they succeed in pushing people to invest in something more stimulating to the economy than government bonds.”

This tweet was disturbing because it reflects a strikingly flawed understanding of financial markets. A moment’s reflection should make it obvious that once a security is issued, whether it’s a government bond or a dollar of base money, that security must be held by someone, at every point in time, until that security is retired. The only way to get people to invest in something “more stimulating to the economy” than government bonds is to stop issuing government bonds.

It takes only a bit more thought to recognize that securities, in themselves, are not net wealth. Rather, every security is an asset to the holder, and an equivalent liability to the issuer. If Joe borrows dollars from Mary to buy something from Bob, Joe issues an IOU to Mary, Mary transfers her dollars to Joe, and the dollars end up in Bob’s hands. The IOU is a new security, but it doesn’t represent new economic wealth. It’s just evidence of the transfer of current purchasing power from Mary to Joe, and a claim on the transfer of future purchasing power from Joe to Mary.

Neither the creation of securities, nor changes in their price, create net wealth or purchasing power for the economy. Yes, an individual holder of a security can obtain a transfer of wealthfrom someone else in the economy, provided that the holder actually sells the security to some new buyer while the price remains elevated. But in aggregate, the economy cannot consume off of its paper “wealth,” because in aggregate, those paper securities cannot be sold without someone else to buy them, and those paper securities must be held by someone until they are retired.

What actually matters, in aggregate, is the stream of cash flows. Specifically, the activity that produces actual economic wealth is value-added production, which results in goods and services that did not exist previously with the same value. Value-added production is what actually “injects” purchasing power into the economy, as well as the objects available to be purchased.

I’ve detailed the mechanics of “stock-flow accounting” in previous commentaries, so it will suffice here to cut to the bottom line. If one carefully accounts for what is spent, what is saved, and what form those savings take (securities that transfer the savings to others, or tangible real investment of output that is not consumed), one obtains a set of “stock-flow consistent” accounting identities that must be true at each point in time:

1) Total real saving in the economy must equal total real investment in the economy;

2) For every investor who calls some security an “asset” there’s an issuer that calls that same security a “liability”;

3) The net acquisition of all securities in the economy is always precisely zero, even though the gross issuance of securities can be many times the amount of underlying saving;

4) When one nets out all the assets and liabilities in the economy, the only thing that is left – the true basis of a society’s net worth – is the stock of real investment that it has accumulated as a result of prior saving, and its unused endowment of resources. Everything else cancels out because every security represents an asset of the holder and a liability of the issuer. Securities are not net wealth.

Conceptualizing the “stock of real investment” as broadly as possible, the wealth of a nation consists of its stock of real private investment (e.g. housing, capital goods, factories), real public investment (e.g. infrastructure), intangible intellectual capital (e.g. education, knowledge, inventions, organizations, and systems), and its endowment of basic resources such as land, energy, and water. In an open economy, one would include the net claims on foreigners (negative, in the U.S. case). A nation that expands and defends its stock of real, productive investment is a nation that has the capacity to generate a higher long-term stream of value-added production, and to sustain a higher long-term standard of living.

Understand that securities are not net economic wealth. They are a claim of one party in the economy – by virtue of past saving – on the future output produced by others. When paper “wealth” becomes extremely elevated or depressed relative to the value-added produced by an economy, it’s the paper “wealth” that adjusts to eliminate the gap.

Several years ago, I introduced what remains the single most reliable measure of valuation we’ve ever developed or tested, easily outperforming popular measures such as the Fed Model, price/forward operating earnings, the Shiller CAPE, price/NIPA profits, and a score of other alternatives. From the above discussion, it shouldn’t be surprising that this measure is based on the ratio of equity market capitalization to corporate gross-value added. Specifically, the chart below shows the market capitalization of U.S. nonfinancial equities, divided by the gross value-added of U.S. nonfinancial companies, including estimated foreign revenues. This measure is shown on an inverted log scale (blue line, left scale). The red line shows actual subsequent S&P 500 average annual nominal total return over the following 12-year period. We prefer a 12-year horizon because that’s where the “autocorrelation profile” of valuations (the correlation between valuations at one point and valuations at any other point) reaches zero. Presently, we estimate negative total returns for the S&P 500 over the coming 12-year period.

Among the valuation measures we find best correlated with actual S&P 500 total returns in market cycles across history, the S&P 500 is currently more than 2.8 times its historical norms. Importantly, this estimate of overvaluation is not somehow improved by accounting for the level of interest rates. The reason is that interest rates and economic growth rates are highly correlated across history. Lower interest rates only “justify” higher market valuations provided that the trajectory of future cash flows is held constant. But if interest rates are low because growth rates are also low (which we’ll establish in the next section below), no valuation premium is “justified” at all.

So even given the level of interest rates, we expect a market loss of about -65% to complete the current speculative market cycle. That’s a much different proposition, however, than saying that this collapse will occur right away. If you watch financial television, you’ll hear a great deal of chatter about the “fundamental support” below current prices. But attend carefully, and you’ll find that nearly all of these arguments reduce to a list of factors that make the investment environment feel good at the moment. These feel-good factors are being extrapolated into the future just as surely as Irving Fisher did in 1929 when he proposed that stocks had reached “a permanently high plateau.”

The best place to watch for cracks in this narrative is not valuations; they are already extreme, and are uninformative about near-term outcomes. Rather, it’s essential to monitor the uniformity of market internals across a wide range of individual securities (when investors are inclined to speculate, they tend to be indiscriminate about it). We’ve already observed deterioration in our key measures of market internals, but I would still characterize that deterioration as “early.”

Extending our focus beyond immediate conditions, the chart below shows the total market capitalization of nonfinancial and financial U.S. corporations, along with three lines. The lowest red line shows total gross-value added (GVA) of U.S. corporations. The green line shows 1.2 times total GVA, representing the pre-bubble norm around which market capitalization has historically traded. That green line is the level historically associated with S&P 500 total returns of roughly 10% annually, though the same level today would be associated with lower expected future returns, because structural economic growth is lower today than in the past. The purple line is essentially the most “optimistic” value-line, in that no bear market in history, including the 2002 low, has failed to reach or violate that level.

The upshot is this. At present, U.S. investors are under the delusion that the $37.3 trillion of paper wealth in their equity portfolios represents durable purchasing power. Unfortunately, as in 2000 and 2007, they are likely to observe an evaporation of this paper wealth. Nobody will “get” that wealth. It will simply vanish. If a dentist in Poughkeepsie sells a single share of Apple a dime lower than the previous trade, over $500 million dollars of paper wealth is instantly wiped from the stock market. That’s how market capitalization works. Over the completion of this market cycle, we estimate that between $19.8 and $24.2 trillion in paper “wealth” will evaporate into thin air.

While our immediate market outlook remains only moderately negative, based on the still-early deterioration we observe in market internals, recognize that from a valuation perspective, we are now witnessing the single most offensive speculative extreme in history. The chart below shows my variant of Robert Shiller’s cyclically-adjusted P/E, which substantially improves the correlation with subsequent market returns by accounting for variation in the embedded profit margin. The current extreme exceeds both the 1929 and 2000 highs.

The chart below shows the correlation of our Margin-Adjusted CAPE with actual subsequent S&P 500 total returns, in nearly a century of market history. As we observe with MarketCap/GVA, the Margin-Adjusted CAPE presently implies negative expected S&P 500 total returns over the coming 12-year horizon.

The delusion of a booming economy

A second delusion, unleashed by exuberance over the prospect of tax reductions, is the notion that U.S. growth has even a remote likelihood of enjoying sustained 4% real growth in the coming years. The most frequent reference is to the years following the Reagan tax cut, followed closely by references to the Kennedy tax cuts. This particular delusion is undoubtedly an example what Garety & Freeman described as “a data-gathering bias, a tendency for people with delusions to gather less evidence.”

The central feature of both the Reagan and Kennedy tax cuts was that they were enacted at points that provided enormous slack capacity for growth. In particular, the Reagan cuts were enacted at a point where the unemployment rate had hit 10%, and an economic expansion was likely simply by virtue of cyclical mean-reversion. The Kennedy tax cuts (which brought the top marginal tax rate down from 90%) occurred as baby-boomers were just entering the labor force, again providing enormous capacity for growth.

Presently, the situation is the reverse. The structural drivers of U.S. economic growth are likely to constrain real U.S. GDP growth to less than 2% annually in the coming years, even in the unlikely event that corporate tax cuts encourage increased gross domestic investment. Corporate profits are already near record levels. The effective U.S. corporate tax rate (taxes actually paid as a fraction of pre-tax income) is already at 20% even without tax cuts. We know from the 2004 repatriation holiday that tax breaks on foreign profits encouraged little but special dividends and share buybacks. Already, the available corporate surplus is being primarily driven into dividend payouts, share buybacks, and mergers and acquisitions, rather than real investment.

Frankly, the notion that corporate tax cuts will unleash some renaissance in U.S. real investment and growth would be laughable if the bald-faced corporate giveaway wasn’t so offensive. The policy not only vastly favors the wealthy, but is even more preferential to wealthy individuals who take their income in the form of profits rather than wages. The current tax legislation isn’t some thoughtful reform to benefit Americans. It’s a quickly planned looting through a broken window in our nation’s character.

On the subject of economic growth, an examination of the structural drivers of economic growth will illuminate the current situation. Real economic growth is the sum of two components: employment growth plus productivity growth. That means growth in the number of employed workers, plus growth in the level of output per-worker.

We can further break employment growth into “structural” and “cyclical” components. The structural part is determined primarily by demographics, particularly population growth and the age distribution of the working-age population. The cyclical part is determined by fluctuations in the unemployment rate (which is equal to 1-civilian employment/civilian labor force). If civilian employment grows faster than the civilian labor force, the unemployment rate falls. If the civilian labor force grows faster than civilian employment, the unemployment rate rises.

Let’s take a look at these components, and how they’ve changed over the decades. You’ll quickly see that while a quarterly pop in GDP growth is always possible, expectations of sustained 4% real GDP growth fall into the category of “delusion.”

The first chart below shows the civilian labor force, on a log scale (so trendlines of different slopes represent different growth rates). For much of the post-war period until about 1980, the growth rate of the civilian labor force averaged about 1.8% annually. That growth slowed to 1.2% until about 2010. That 2010 figure is 1945 plus 65; the year that the first post-war baby-boomers hit retirement age. Since then, the growth rate of the civilian labor force has dropped to just 0.4% annually. That’s demographics.

Now let’s take a look at productivity growth. In the early years of the post-war era, labor productivity increased at a rather explosive 2.6% annual growth rate. Growth then gradually slowed to about 1.9% annually, though in fits and starts, until about 2003. Over the past 14 years, U.S. productivity growth has slowed to just 0.6% annually.

One of the core drivers of long-term productivity growth is expansion in net U.S. domestic investment (in excess of depreciation). As a general rule, booms in real U.S. investment are closely associated with deterioration in the trade deficit, because we export securities to foreigners in order to finance the boom. Because payments have to balance, this means we also export fewer goods for any given level of imports. The bottom line is that investment booms tend to be associated with larger trade deficits, so not surprisingly, booms in U.S. real investment typically emerge from a position of near-balance or surplus in the U.S. current account.

Now, add the current 0.4% growth rate in the civilian labor force to 0.6% growth in productivity, and you get the current “structural” growth rate of the U.S. economy; that is, the growth rate we would observe in the absence of changes in the unemployment rate. That structural growth rate has deteriorated to just 1% annually. The labor force component of structural growth is largely baked in the cake due to demographics, which in the absence of a substantial increase in the rate of immigration, leaves productivity growth as the main factor that could raise structural U.S. growth.

Still, given civilian labor force growth of just 0.4%, even a steep acceleration of productivity growth from the current rate of 0.6% to the 1972-2008 rate of 1.9% would still produce only 2.3% structural economic growth. Anything greater than that would have to be driven by a decline in the unemployment rate from the already low level of 4.1%.

It’s worth noting that U.S. economic growth has expanded at a rate of 2.1% annually in the 7-year period since 2010 (I’ve chosen a 7-year period to confine growth to the recent expansion, without including data from the global financial crisis). What’s remarkable about this is that nearly half of this growth is attributable to a decline in the U.S. unemployment rate, which is a wholly cyclical factor.

The chart below shows what’s going on. The blue line shows actual 7-year real growth in U.S. GDP across history. The red line shows the “structural” component of GDP growth, excluding the effect of changes in the unemployment rate. The green line shows the contribution to 7-year growth from changes in unemployment. Put simply, in the absence of further declines in the U.S. unemployment rate, U.S. real GDP growth is likely headed toward 1% annually, not 4% annually.

If our policy makers are interested in boosting long-term structural U.S. GDP growth, they should be providing direct and targeted tax incentives for real investment, education, research & development, and other factors that could, over time, increase our nation’s productive capacity. Instead, they’ve opted for a giveaway to corporations and wealthy individuals, which will likely expand the deficit while doing virtually nothing for economic growth. Since 1950, the U.S. unemployment rate has been below 4.5% about 20% of the time. Over the following 5-year period, real federal tax revenues grew at an average rate of less than 1% annually. Given current structural economic constraints, and barring a further decline in the unemployment rate from an already low 4.1%, there’s a significant likelihood that government revenues will actually contract in the coming years.

The delusion of Bitcoin

“We find that whole communities suddenly fix their minds upon one object, and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first”
– Charles Mackay

With regard to Bitcoin, my view is that the Blockchain algorithm itself is brilliant. Bitcoin itself, however, is just one application of Blockchain, and a rather awkward one. It’s not unique, meaning that other competing “cryptocurrencies” can be established just as easily. It’s not fiat, meaning that no country requires it to be used as legal tender. But beyond anything else, its inefficiency is so mind-boggling that the continued operation of the Bitcoin network could plausibly contribute to global warming. So be careful to distinguish Blockchain from Bitcoin. The Blockchain algorithm will undoubtedly become a useful component of validating transactions, tracking supply chain movements, and all sorts of other applications, but Bitcoin itself is likely to become the same thing to cryptocurrencies as Visicalc was to spreadsheets, or if you’re younger, what MySpace was to social networking.

Bitcoin essentially uses a decentralized network of computers (anyone can join) that “listen” for transactions that are broadcast over the network. Each computer can accept and attempt to validate any “block” of transactions, which is done by discovering a particular “hash” for those transactions. The hash is a long string of ones and zeros corresponding to the input, and has to satisfy the current level of “difficulty” (specifically, a certain number of leading zeros). The difficulty is set so that only one block of transactions is validated every 10 minutes or so, across the entire network. The maximum size of a Bitcoin transaction block is 1MB, which is about 2000 transactions. That’s the total number of Bitcoin transactions that can be processed worldwide in any 10-minute interval.

When you’re trying to validate a block of transactions, an extra transaction is included which designates a reward to your own account if you’re successful. Whoever discovers a hash that validates their block gets a reward, in Bitcoin. That’s what “mining” means. The validated block is added to the Blockchain – essentially a running ledger of every transaction ever made. The header for the next block has to contain the hash of the previously validated block (which is what creates the block “chain”).

But here’s the thing. Every time a block is validated, a single node in the network gets a reward, and everyone else’s computing time is completely wasted. Those required computations already absorb the same amount of energy as the entire country of Denmark. Some people will get mad at that statement, arguing that it may only be half of Denmark. Ok. Ireland, along with more than 150 other countries. We can wait a few months to include Denmark.

So ultimately, the Bitcoin features a combination of breathtaking inefficiency and constrained scalability. The system already features a rather steep cost per transaction, and hardly any of those transactions are for the purchase of goods and services. I’ve regularly observed that the value of a currency is essentially the present value of the stream of “services” that the currency can be expected to deliver over time, either by serving as a means of payment or as a store of value. That depends greatly on the willingness of other individuals to hold it and accept it into the indefinite future. My sense is that, as with all speculative bubbles, buyers are conflating “rising price” with “store of value.” Meanwhile, there’s little evidence to suggest that Bitcoin will ever be an efficient means of payment for ordinary goods and services.

Episodes of speculation can persist for some time, so there may be some speculative profit potential in Bitcoin yet. Looking over the very long-term, it may also be worth something in the future, because value is always ascribed to things that have some combination of scarcity and usefulness. To the extent that Bitcoin is assured to have a limited supply, and is undoubtedly being used for money-laundering already, I doubt that the future value of Bitcoin will be identically zero, assuming governments refrain from any regulatory effort. There will likely be numerous alternative cryptocurrencies launched in the future, each one constructed to first enrich its originator with a large number of units, and then released in the hope that it will catch on. In evaluating these alternatives, efficiency and scalability will be worth considering.

A final note

While I have little to offer in support of speculative delusions about paper wealth, improbable growth expectations, or Bitcoin, I’d be remiss to write a commentary without acknowledging the many things that can be fully embraced. From an investment standpoint, every market cycle in history has ended at valuations consistent with prospective future market returns of at least 8% annually, and more often well above 10% annually. Even if the future will be permanently different, and even 8% return prospects will never ever be seen again, the prospect of negative12-year returns is likely to be resolved in far fewer than 12 years (as similarly poor prospects were within 2 years of the 2000 market peak).

The strongest expected market return/risk classifications we identify emerge when a material retreat in valuations is joined by an early improvement in market action. While we can’t identify when that opportunity will occur, I expect that the cumulative market return between now and that point will be negative, because even a gradual 2-year improvement in prospective 12-year S&P 500 returns to just 4% would require a market loss of more than 20% over that 2-year period. In my view, a defensive posture here is an optimistic stance, because it recognizes the likelihood that prospective returns will again be positive before too long. I actually expect a much more substantial improvement in prospective market returns, but as in 2000 and 2007, that would require much deeper market losses than investors seem to contemplate.

So if there is something in the financial markets to be optimistic about, it’s the prospect of opportunities that will evolve over the completion of the current market cycle. Despite extreme valuations in this cycle, we’ve learned to limit negative market outlooks to periods featuring deteriorating and divergent market internals. We observed that shift last month, but I’d still call it “early” deterioration; permissive of abrupt losses but not yet encouraging aggressive downside expectations. We’ll respond to market conditions as they change.

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Get Out Now: SocGen Releases The Most Bearish 2019 Forecast Yet

Last November, when one bank after another was releasing its optimistic 2018 market forecast following a stretch of record low, single-digit VIX prints and an S&P500 that refused to even think of dropping, one bank bucked the bullish trend, predicting that the S&P would end 2018 at 2500, about 350 points below the average sellside consensus.

Almost exactly one year ago, we reported that SocGen’s equity strategist Roland Kaloyan predicted – correctly- that with bond yields rising, there was effectively no upside left in stocks, which coupled with the prospect of a US economy recession in 2020 would “crimp returns in 2019” Furthermore, in light of what then was a record short in various volatility products, SocGen predicted that vol positioning could “strongly deteriorate the risk reward profile of equity markets.”

The S&P 500 has reached our target for the end of this cycle (2,500pts) and is now entering expensive territory. Indeed, on all the metrics, US equities are trading at levels only seen during the late-90s bubble. Since Trump’s election, the US equity market has risen 24%, but only half of this came from earnings growth. The other half has been driven by P/E expansion. According to our calculations, the US equity market is already pricing in potential tax reform. The rise in bond yields and Fed repricing should be headwinds against further US equity rerating.

Kaloyan also warned that upside on the S&P 500 was limited as “the US equity market is already pricing in a rebound in growth and inflation. The rise in bond yields and Fed repricing should be a headwind against further US equity rerating.”

One year later, with the S&P just 150 points above his year-end target from last November, and far below the rest of the sellside herd’s optimistic consensus, his gloomy assessment was proven correct (there is still over a month left in the year for his bearish forecast to be hit). Furthermore, in a stroke of serendipity, Kaloyan also correctly predicted the February VIXtermination event:

Equity volatility, both realised and implied, has been edging ever lower for quite some time now. Being invested in a simple systematic short VIX future volatility has been strongly rewarding: +290% over the last two years. However, when the tide turns (i.e. VIX spikes), the drawdown can be significant. The quantity of short positioning on VIX open in the market (see right chart) would potentially amplify any spike of the VIX.

Fast forward to today when with the rest of Wall Street once again released price targets that are notably higher than where the S&P currently trades, Kaloyan unveiled SocGen’s latest full year forecast, and – not surprisingly – he is just as bearish as he was last year. The report, predictably, begins with a modest victory lap: “This time last year, in our European Equity Strategy 2018 Outlook report, we presented a bearish view for equity markets in 2018. Since then, the MSCI World has lost 9% from its January high, and, while we have identified a handful of factors that could provide some relief to equities in 1H19, longer term, the bear is still here.”

The spectre of a US recession in early/mid-2020 would impact equity markets in 2H19.

Looking at US markets in 2019, Kaloyan expects another challenging year for global equities, with “downside potential to global equity indices for the next 12 months, with poor performance expected to be concentrated in 2H as investors discount the next US recession” which the French bank expects will hit in mid-2020. The punchline:

Our end-2019 index targets call for an S&P 500 at 2,400pts, the EuroStoxx 50 at 2,800pts and the Nikkei 225 at 21,400pts.

In a nutshell, in SocGen’s view, the challenge will be “to balance the risks of a prolonged economic cycle (resulting from continued central bank liquidity injections) against the opportunities offered by solid companies and undervalued (sometimes oversold) segments.” Of the two options, the bank can’t help but be more more bearishly inclined.

Here are some more details from SocGen’s global projections starting with the US, where Kaloyan expects “a more restrictive monetary policy to push equity valuations lower, while political gridlock and trade tensions will likely be a source of volatility.” That said, the equity strategist, has revised his S&P500 target for end-2019 somewhat upward (from 2,000 to 2,4000) as the bank’s economics team has ‘postponed’ its US recession call by two quarters.

Factoring in a mild recession in the US in early/mid-2020, our valuation model indicates that the S&P 500 could dip to 2400pts by end-2019 and come out flat in 2020 overall. We would expect the market to bottom some time in 2020.

SocGen is somewhat more optimistic on the eurozone economy, where after a series of disappointing quarters, the end of trade tensions and/or a Brexit deal “could support eurozone equity valuations in early 2019.” However, even here upside would likely “be limited as earnings momentum has now entered negative territory.” Looking further ahead toward the second half of the year, an ECB rate hike in September would be a source of volatility and push the EUR and the cost of debt higher. In the UK, SocGen is surprisingly upbeat and its base case scenario is for a Brexit deal with the EU, yet even under this favorable scenario, it warns that the subsequent strengthening of the GBP would be a headwind for an FTSE100 index full of exporters.

The “challenging” theme continues in the last region, because whereas Kaloyan expects Asia equities to recover in 2020, “2019 could be another challenging year due to an extended growth slowdown in China, a bear market in tech hardware and a correcting US equity market.” That said, a ceasefire in the US-China trade conflict is the upside risk.

The bank’s global equity forecasts are summarized below:

Focusing on the US, like last year, Kaloyan believes that the year ahead will be one of risk for US stocks, among which:

1. Risk of political gridlock in the US. As SocGen preciously noted, the results of the US midterm elections have changed the political picture in the US as Congress is now split, wiith the House of Representatives now having a majority of Democrats, while the Senate remains controlled by Republicans. Why is this important:

this could have serious market and economic consequences, such as potentially more frequent government shutdowns, impeachment considerations and general uncertainty. At this late stage in an already lengthy expansion period, uncertainty could be more damaging. The growing US deficit does not leave much room in the event of an economic slowdown.


2. More restrictive US monetary policy. Here too, things are changing: US financial assets benefited from an ultra-accommodative monetary policy for a decade, with Fed funds below the core inflation rate, since 2008. That is now over.

Our scenario assumes three more rate hikes, lifting the Fed funds to 3% by June 2019, putting pressure on equities through three channels:

1) it would push higher the WACC (weighted average cost of capital) and  thus lower the valuation of equities (see below);

2) flow wise, investors would reallocate into cash in USD out of other assets (including equities);

3) the Fed funds rise is a typical sign of the end of the cycle (flattening/inversion of yield curve…).

3. US recession in early/mid-2020. The one place where SocGen comes closest to consensus, is its forecast that the US economy looks set to enjoy its last leg of expansion in 2019, making this cycle the longest in history (in June 2019). Meanwhile, the fiscal stimulus has postponed the date of the next US recession, which SocGen now expects in early/mid-2020:

As a consequence, markets should price in the recession a few months ahead of time. This suggests that cyclical concerns could be a major market driver in the 2H19, when GDP growth is already expected to decelerate (1.6% in 3Q19 and 1.1% in 4Q19). The jump in productivity in mid-2018 contained unit labour costs and raised margins, but looking forward, tight labour, rising wage costs and the difficulty of passing on these costs to consumers should narrow margins and reduce incentives for investment and hiring.


4. Avoid the Russell 2000: On a more granular level, while SocGen is not too crazy about either the S&P or the Dow, it hates the Russell, which “would be of the worst performers in the event of a US political gridlock, as US small caps would not benefit from the potentially weaker USD.”

Furthermore, whereas mega cap valuations have been within historical parameters, US small caps are now trading at high valuation ratios (trailing P/E ratio of 30.2x vs 20.9x for US large caps) and have near record leverage ratios (net debt to EBITDA of 3.1x vs 1.5x for US large caps).

Thus, US small caps are more at risk from the rising cost of debt (higher rates or higher credit spread – or both) and asset rotation (illiquid segment).

5. S&P 500 to 2,400pts by end-2019. While Kaloyan sees the prospects for the S&P 500 as slightly better than for the Russell, it’s not much: the assumption underlying his year-end 2019 target for the S&P 500 of 2,440 points is a decline in sales growth in 2019, and a mild contraction of 5.0% in 2020e.

This decline in activity is consistent with our economists’ forecast of 2.4% GDP growth in 2019e and 0.4% in 2020e, versus +2.9% this year. We then apply margin forecasts to our sales estimates to work out the earnings. Our economists’ team’s chart (see p.13) implies that, at the end of the cycle, profit margins are likely to narrow by c.200bp on average. Hence, we are looking for a margin contraction from 12.0% this year to 10.0% by end-2020.

Applying these sales growth and margin forecasts to current sales and earnings for the S&P results in flat EPS growth in 2019, and a 17% EPS contraction in 2020. Additionally, as a result of Fed action, Kaloyan expects some multiple contraction (chart p.4). Amusingly, the French strategist here notes that “we take into account in our forward P/E assumption the fact that the IBES consensus usually never forecasts an EPS contraction. Indeed, since 1990, the 12-month forward EPS growth has never been below 5% except during the worst of the 2008-09 crisis when it reached -5% (vs -30% looking
at trailing EPS).” As a result, SocGen expects the forward P/E to hit a low of less than 14x by mid-2020, just as the next recession begins according to the bank.

Away from the US, SocGen has 5 key calls on European equity markets: i) Liquidity to dry in the market; ii) Focus on robust earnings; iii) Look for opportunities in trade war casualties; iv): A Brexit deal still likely; v) Hedge against political noise.

Finally, when looking at individual sectors, SocGen writes that while its recession call is not for now, it is already gradually repositioning portfolios for the end of the cycle. SocGen’s analysis highlights which sectors appear more at risk and which historically have proven to be more immune to the coming recession. The bank also factors in the impact on sector allocation of last quarter’s changes in the economic, rates and political backdrop. This leads SocGen to its our sector allocation as follows:

  • Consumer Staples upgraded from Underweight to Neutral
  • Consumer Discretionary switched from Overweight to Underweight
  • Information Technology cut from Overweight to Neutral
  • Overweight maintained on Healthcare, Oil & Gas, Financials and Basic Industries
  • Underweight maintained on Industry, Real Estate, Utilities and Telecoms

In short, another bearish prediction, and while this one seems a little more contained than SocGen’s 2018 wildly contrarian forecast released exactly one year ago…

… this time, the bear is now all grown up.

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Rickards: Multiple Risks Are Converging On Markets

Authored by James Rickards via The Daily Reckoning,

One of the questions I am asked most frequently in my global travels is what will be the cause of the next financial crisis. This question is asked by those who understand that this crisis is coming but want to pin down the date or a specific turn of events that will help them know when to react.

My answer is always the same: We can be certain the crisis is coming and can estimate its magnitude, but no one knows exactly when it will happen or what the specific catalyst will be.

The second part of my answer is to prepare for the crisis now. When it happens, it could unfold very quickly. If you’ve been paying attention to the stock market lately, you know how quickly selling fever can spread once it starts. Just look at these past two days alone.

We’ve had multiple days since October when the Dow loses several hundred points, with the other major indexes posting similar losses on a percentage basis.

There may not be time or opportunity in the middle of the crisis to take defensive measures. That’s why I keep reminding my readers that the time to prepare by increasing allocations to cash and gold is now.

With that said, it is useful to consider the most likely flash points for the next crisis and to monitor events as a way to improve one’s chances of seeing a crisis at the early stages.

In yesterday’s Daily Reckoning, I made the case that the next crisis could begin in the junk bond market. But there are a number of other possibilities.

You recall that the financial panic of 2008 actually started in 2007 with massive loan losses in subprime mortgages. Those losses caused certain hedge funds and money market funds to close their doors. Investors scrambled for liquidity to cover their mortgage loan losses. This led them to sell equities, bonds and gold to raise cash to meet margin calls.

The panic was subdued in late 2007 but came back to life in 2008 with the collapse of Bear Stearns, Lehman Bros., AIG and others. The Fed and Treasury intervened to provide guarantees and liquidity, but not before everyday investors saw half their net worth wiped out. The crisis was not confined to the U.S., but spread worldwide to Europe, China and Japan.

Now a new loan loss crisis is unfolding. The new crisis is not in mortgages but in student loans.

Total student loans today at $1.6 trillion are larger than the amount of junk mortgages in late 2007 of about $1.0 trillion. Default rates on student loans are already higher than mortgage default rates in 2007. This time the loan losses are falling not on the banks and hedge funds but on the Treasury itself because of government guarantees.

Not only are student loan defaults soaring, but household debt has hit another all-time high. Student loans and household debt are just the tip of the debt iceberg that also includes junk bonds (again, as I explained yesterday), corporate debt and even sovereign debt, all at or near record highs around the world.

Meanwhile, the trade war remains a great risk to markets.

When the trade wars erupted in early 2018 I said that the trade wars would be long-lasting and difficult to resolve and would have significant negative economic impacts.

Wall Street took the opposite view and estimated that the trade war threats were mostly for show, the impact would be minimal and that Trump and China’s President Xi Jinping would resolve their differences quickly. As usual, Wall Street was wrong.

Trump’s top trade adviser Peter Navarro recently delivered a speech making it clear the trade wars will not be resolved soon. He also tells Wall Street to “get out” of the policy process.

He said, “If there is a deal, if and when there is a deal, it will be on President Donald J. Trump’s terms, not Wall Street terms.”

Navarro warns that prominent Americans such as Hank Paulson, former secretary of the Treasury, and Blackstone chief Stephen Schwarzman may be acting as “unregistered foreign agents” as a result of their lobbying activities on behalf of China.

This could subject these principals to criminal prosecution. Investors should expect lower earnings per share from Apple, Sony and entertainment companies dependent on the Chinese market or Chinese manufacturing to make their profits.

Companies such as Caterpillar are also caught in the crossfire. Get ready for a long and costly trade war. It has already started and won’t be over soon.

But I’ve been warning for months about an even more disturbing possibility: that currency wars and trade wars can easily spill over into shooting wars. This happened in the 1930s and it seems to be happening again.

One of the most dangerous hot spots in the world today is the South China Sea. There are six countries with recognized claims to parts of the South China Sea. Yet China itself claims the entire sea except for small coastal strips and claims all of the oil, natural gas and fish that can be taken from the sea.

China has ignored international tribunal rulings against it. The U.S. is backing up the other national claims including those of the Philippines, which is a treaty ally of the U.S. China has built small reefs into large artificial islands with airstrips and sea bases to support its claims.

The U.S. has increased naval vessels in the area to enforce rights of passage and the equitable sharing of resources. Both sides are escalating and the risk of a shooting war or even an accident at sea is increasing. The South China Sea is mostly out of the headlines at the moment, but it bears watching as a possible catalyst for the next international crisis with global financial implications.

We should look for slower growth and possibly a recession as the trade and currency wars play out. Let’s hope that history does not repeat and that we don’t end up in a Third World War, as the currency/trade wars of the 1930s helped lead to WWII.

Warnings of economic collapse are no longer confined to the fringes of economic analysis but are now coming from major financial institutions and prominent economists, academics and wealth managers. Leading financial elites have been warning of coming collapses and dangers.

These warnings range from the IMF’s Christine Lagarde, Bridgewater’s Ray Dalio, the Bank for International Settlements (known as the “central banker’s central bank”) and many other highly regarded sources.

Just when we think we’ve seen enough of these, another one arrives. This time it’s the legendary Paul Tudor Jones, who manages Tudor Investment.

I’ve met Jones; he’s a cerebral yet polite and mild-mannered manager from Tennessee who has not lost his Southern accent despite decades in Connecticut and an estate on Maryland’s Eastern Shore.

What gives Jones’ voice added authority is his longevity in the fund investment world. He’s managed through the 1987 stock crash, the 1994 Mexican crisis, the 1998 Long Term Capital meltdown, the 2000 dot-com crash and, of course, the 2008 financial panic.

Jones knows that panics happen, but he also knows they don’t happen all the time. Panics take years to build and usually have specific triggers (even though endpoints can spin wildly out of control).

Jones does not treat the possibility of a financial crisis lightly, so his warning deserves close consideration.

Jones warns that the next crisis is likely to be triggered by excessive debt, specifically corporate debt, which can be more difficult to manage or bail out than sovereign debt.

At the same time, other gurus are warning that the next panic will emerge from the foreign exchange market, overvalued equities or commercial real estate. Perhaps the real message is that all of these areas are vulnerable and the next crisis will seem to come from everywhere at once.

That’s the danger. We’re looking at another debt crisis and global financial panic. Only this time it won’t come from mortgages alone but from all directions at once.

So let me repeat what I said earlier: the time to prepare by increasing allocations to cash and gold is now.

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Trump Fires Back At Chief Justice Roberts Over “Obama Judges” In Ongoing Spat

President Trump fired back at US Supreme Court Chief Justice John Roberts over whether or not there are “Obama judges” who “have a much different point of view than the people who are charged with the safety of our country.” 

Trump added that US Court of Appeals for the 9th Circuit – which also blocked his executive order banning immigration from a list of Muslim-majority countries which he said were state sponsors of terror, was a “disgrace,” and that the San Francisco-based appeals court is “making our country unsafe!” Trump asked Roberts, a George W. Bush appointee,  to “Please study the numbers, they are shocking.”  

Roberts issued a short statement to the Associated Press on Wednesday after Trump told reporters outside the White House that he would file a “major complaint” against an “Obama judge” who temporarily blocked his administration from temporarily denying asylum to a migrants gathered at the southern US border, reports MarketWatch

Roberts said Wednesday the U.S. doesn’t have “Obama judges or Trump judges, Bush judges or Clinton judges.” He commented in a statement released by the Supreme Court after a query by The Associated Press.

Roberts said on the day before Thanksgiving that an “independent judiciary is something we should all be thankful for.” –AP

On Tuesday, President Trump took a shot a tthe 9th circuit during the annual presidential turkey pardon – telling two birds he pardoned that they would spend the rest of their lives at “Gobbler’s Rest” on the Virginia tech campus, adding “Unfortunately, I can’t guarantee that your pardon won’t be enjoined by the 9th Circuit. Always happens.” 

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Stocks Pop But Confidence Drops Ahead Of Black Friday Buying-Bonanza

This seemed to appropriately reflect the last few weeks of global market ‘turmoil’…

China stocks trod water overnight…

European markets rallied though with Italy and Brexit hope…


US equities rallied on the day, peaking around the European close then dumping into the US close with Dow, S&P giving up most of the day’s gains…

The on-and-off again sell-off in both crude and stocks since the beginning of October met some holiday relief amid a bounce in risk assets after MNI reported the Fed is considering ending a cycle of interest rate hikes as early as the spring. Optimism also rose for a positive meeting between President Trump and China’s President Xi after the administration decided to exclude White House trade adviser Peter Navarro from the meeting.

A slightly different angle shows that US equity futures ramped to yesterday’s cash session highs and then faded…


As one would expect on the day before Thanksgiving, equity volumes were well below average…

And here’s what the corporate bond volume as reported by Trace looks like compared to the average at time of day


Of course, the US equity gains were all driven by a short-squeeze, but that ended when Europe closed…



FANG stocks managed gains but it was an unimpressive bounce…


Bank stocks got hit hard into the close…


Stocks caught down to bonds into the close…


High yield bonds record losing streak is over…


But notably – after the initial opening dump, both HY and IG spread widened and there was no bid for IG credit even as VIX slumped…


Just as we saw bonds sell off with stocks selling off yesterday, today saw bonds bid as stocks rallied…



The Dollar limped back lower after tagging Friday’s highs…


Offshore Yuan rallied back into the green for the week…



Most cryptos managed gains on the day but Bitcoin Cash continued to slump…


The dollar weakness lifted PMs and copper…


WTI Crude bounced off $54 after a surprise crude build, pumped and dumped, but ended the day green, offering more hope that the worst is over…


Despite gold’s lackluster week in USD, it is surging against the Yuan…


Finally, we give thanks for Gluskin Sheff’s David Rosenberg:

And then there’s this…

And finally, if you needed something else to worry above, the fate of the world’s developed stock markets may be more dependent than ever on U.S. shares.

This year, the U.S. weight in the MSCI World Index has risen as much as 3.6 percentage points to 62.8 percent, according to data compiled by Bloomberg.


Happy Thanksgiving everyone.

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Crypto-Mining Firm Giga Watt Files For Bankruptcy, Faces Eviction In Washington County

Authored by Helen Partz via CoinTelegraph.com,

Major U.S. crypto mining and blockchain firm Giga Watt has filed for bankruptcy on Monday, Nov. 19, Washington daily newspaper Wenatchee World reported yesterday, Nov. 20.

image courtesy of CoinTelegraph

The top-five crypto mining firms entrant has reportedly filed for Chapter 11 protection in the Eastern District of Washington bankruptcy court, claiming that the firm is “insolvent and unable to pay its debts when due.”

According to the court documents, Giga Watt is holding between zero to $50,000 worth of assets, with estimated the number of creditors accounting for not more than 50, while liabilities are evaluated between $10 million to $50 million.

Apart from bankruptcy, the crypto mining company is also facing eviction in Douglas County, as the Port of Douglas County has reportedly launched an eviction process.

Giga Watt’s managing director George Turner, who managed the company’s mining initiatives in East Wenatchee and Moses Lake, claimed that the filing has been made by the firm’s board of directors and haven’t passed through his office, according to Washington-based iFiberOne news agency. Turner stated that he advocated Chapter 11 “many months ago,” and this news came to him “as a surprise.”

Washington-based Giga Watt, formerly known as MegaBigPower company, was reportedlyestablished in 2012 by former Microsoft software engineer Dave Carlson, who had discoveredBitcoin in 2010. The company has also conducted an Initial Coin Offering (ICO) token sale back in July 2017. According to iFiberOne, Giga Watt’s tokens intended to raise money for a construction of mining equipment using “more than 30 megawatts of electricity,” as well as a private energy substation.

In March 2017, Dave Carlson claimed that the company “didn’t need” to register with the U.S. Securities and Exchange Commission (SEC) to conduct an ICO, arguing that the company “created a token offering in which people can get access to the electrical infrastructure that powers their miners.”

In March 2018, the Silver Miller law firm launched a federal court lawsuit related the ICO promoted by Giga Watt, alleging that the firm violated securities laws by selling investments in its crypto mining business without registering investments with the due regulatory entities.

In September this year, iFiberOne reported that Carlson had “quietly” left Giga Watt as CEO in mid-August.

Cointelegraph released an analysis in November on how the crypto bear market affects the profitability of crypto mining.

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Director Jason Reitman on The Front Runner, Gary Hart, and the Private Lives of Politicians: New at Reason

“We live in a culture that kind of revolves around shame,” says director Jason Reitman. “If you’re someone who experiences shame, you drop out of the race. If you’re someone who doesn’t experience shame, not only do you stay in, but you thrive.”

Reitman’s new film, The Front Runner, starring Hugh Jackman, is based on the true story of Gary Hart’s 1988 democratic presidential campaign, which was derailed on allegations that Hart was having an affair with model Donna Rice.

The director Reitman—a self-described libertarian whose prior credits include Thank You For Smoking (2005) and Juno (2007)—also co-wrote the screenplay with political reporter Matt Bai and former political operative Jay Carson. It chronicles Hart’s doomed campaign through the experiences of his family, campaign aides, and a press corps wrestling over whether the candidate’s sex life should be treated as newsworthy.

Reason’s Meredith Bragg sat down with Reitman, Bai, and Carson to discuss the film, how the interest in Hart’s scandal changed the way the media covers political figures, and the filmmakers’ search for a “reasonable conversation.”

Click here for full text and downloadable versions.

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Interior Secretary Zinke Blames California Wildfires On “Radical Environmental Groups” 

Interior Secretary and former Montana congressman Ryan Zinke has blamed “radical environmental groups” for a lack of forest management in California which he says paved the way for tinderbox conditions that led to the recent wildfires which have killed more than 80 people, while over 700 are still missing. 

Zinke told reporters on a Tuesday conference call that “lawsuit after lawsuit by, yes, the radical environmental groups that would rather burn down the entire forest than cut a single tree or thin the forest” prevented the state from safely managing its forests. 

“This is where America stands. It’s not time for finger-pointing. We know the problem: it’s been years of neglect, and in many cases, it’s been these radical environmentalists that want nature to take its course,” Zinke said in the Sunday interview, according to CNN. “We have dead and dying timber. We can manage it using best science, best practices. But to let this devastation go on year after year after year is unacceptable.”

In August, Zinke called out “extreme environmentalists” in an interview with KCRA, while he also lambasted “environmental terrorists groups that have not allowed public access, that refuse to allow harvest of timber” in an interview with Breitbart Radio the day before. 

This did not age well

The Daily Caller‘s Michael Bastasch noted in August: 

Zinke is taking the conversation away from global warming and bringing it back to land management, including the litigation and environmental laws that keep officials from actively managing the forests.

Instead, activists focus on global warming, arguing human-caused warming has expanded wildfire season due to longer hotter, drier conditions in the western states. At the same time, these groups often oppose efforts to clear forests of debris and dead wood that fuel fires when hot, dry weather sets in every year.

“I’ve heard the climate change argument back and forth,” Zinke told the Sacramento-based KCRA. “This has nothing to do with climate change. This has to do with active forest management.”

Wildfire experts tend to see land management and urban growth as prime drivers of wildfires.

Many experts also see global warming as a factor in the rise of fires, but admit the relationship is more complicated than the media lets on.

“The story can’t be a simply that warming is increasing the numbers of wildfires in California because the number of fires is declining. And area burned has not been increasing either,” University of Washington climate scientist Cliff Mass wrote in a recent blog post.

In fact, the recent National Climate Assessment special report gave “low to medium confidence for a detectable human climate change contribution in the western United States based on existing studies.”

Most wildfires are caused by humans, mostly unintentionally. Sparks from vehicles or equipment, power lines, arson and cigarettes are some of the ways humans cause massive blazes. Lightning is the cause of wildfires humans don’t spark.

In California, for example, humans caused 95 percent of all wildfires, with power lines and utility equipment becoming a growing problem. Research also shows that wildfire season has primarily grown from population growth in fire-prone areas, increasing the chances of a fire-causing spark.

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The “Hedge Fund VIP” List: These Are The Stocks That Caused Nightmares On Wall Street

The end of Q3 was unique for investors in that while stocks had yet to suffer their post Oct. 3 tumble, when Fed Chair Powell infamously warned the Fed’s rate hikes may overshoot the neutral rate, it provided a glimpse of portfolio holdings just before the most violent stock market selloff in years. It also took place just before one of the worst periods for the hedge fund community whose concentrated positioning resulted in a dramatic hit to performance, sending the hedge fund space down 4% for the year

…. as a result of handful of stocks widely held by most professional investors, the so-called Goldman Hedge Fund VIP basket.

… which as Goldman wrote overnight led to a “vicious downward cycle” between returns and leverage.

So what were the stocks that were the cause of so much pain and nightmares on Wall Street in the past two months, and which as of September 30 would lead to a violent plunge in the market just a few weeks later?

Below we show the 50 stocks that make up the Goldman “Very Important Positions” basket for hedge funds, and where not surprisingly, all 5 of the top 5 names were all tech stocks. While we have to wait until February 15 to see how these positions have changed in the current quarter, something tells us that tech is no longer Wall Street’s most beloved sector.

And obviously, if the most loved names were the source of steep losses, then it stands to reason that for yet another quarter, the most hated – or most shorted – stocks, were the source of substantial alpha, and sure enough that’s precisely what happened when on several occasions of vicious short squeezes, it was these names that soared even as the broader market continued its downward drift. Courtesy of Goldman, here are the 50 stocks representing the largest short positions:

Finally, here are the stocks that saw the largest change in popularity in Q3, i.e., the names with the largest increase and decrease in number of hedge funds owners.

Based on the above, our advice, as every other quarters, is simple: buy the most shorted names, short the biggest longs, and fade anything that the hedge fund sector has been rotating into while pairing that with long from the list of companies with the largest negative change in popularity. This “strategy” alone has generated positive alpha for all but one of the the past 14 quarters.

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