Month: November 2018

Chatter this morning, reported by MNI’s well-placed anonymous sources within The Fed, suggests The Fed may end its rate-hike cycle as soon as this coming spring (which ironically is pretty-much what the market also believes judging from money-markets).

However, while leaks like this are extremely unusual (even for a divided Fed struggling with being the ‘one’ to bring the third mega-bubble down in two decades), Goldman Sachs latest note suggests those hoping that tumbling asset values in stocks and corporate bonds will be enough to stop The Fed in its tracks… will be deeply disappointed.

Via Goldman Sachs,

How Does Fed Policy React To Stock Market Declines?

The equity market sell-off since the beginning of October has led to questions around whether the Fed will maintain its current path of rate hikes. Historically, the Fed appears to have responded with more accommodative policy after stock market sell-offs, on average (Exhibit 1). This has led some to conclude that there is a Fed “put,” in which the Fed responds to large stock market declines with accommodative policy, but does not change course when faced with small declines or increases in stock prices.

Exhibit 1: Historically, Sell-Offs in Stocks Have Preceded More Accommodative Fed Policy

Source: Federal Reserve Board, S&P, Haver Analytics, Goldman Sachs Global Investment Research

The Fed might react to stock market sell-offs for two reasons. First, stock price declines can serve as a financial market signal of lower growth in the future. Second, stock price declines and FCI tightening can cause a drag on future growth, for instance through wealth effects on consumer spending.

…

We find that stock market sell-offs are more likely to worry the Fed if they occur in tandem with a broader tightening of financial conditions or in an environment of weak growth. Looking at the sample of FOMC meetings that follow stock market sell-offs, we find that the Fed is more likely to decrease the fed funds rate when credit spreads are widening simultaneously (Exhibit 2, left). We also find that the Fed is more accommodative when current growth is weak relative to potential (Exhibit 2, right). Such cases of stock market sell-offs correspond to times of elevated recession risk, suggesting the possibility that the Fed responds more aggressively to address downside risks. Today, in contrast, credit spreads have widened only moderately, and growth remains significantly above potential, with limited recession risk over the next year.

Exhibit 2: The Fed Only Responds to Stock Market Sell-Offs That Happen At the Same Time as Widening Credit Spreads or Growth Significantly Below Potential

Source: Federal Reserve Board, Congressional Budget Office, S&P, Haver Analytics, Goldman Sachs Global Investment Research

In fact, the Fed responds to stock market declines differently depending on whether the economy is currently in recession or not. Exhibit 3 shows that most cuts in the fed funds rate after stock market declines occurred in recessions or the immediate recovery after a recession.

Exhibit 3: Fed Policy Is Less Accommodating After Stock Market Sell-Offs in Non-Recession Periods

Source: Federal Reserve Board, S&P, Goldman Sachs Global Investment Research

We next look at specific historical examples of the Fed’s policy response to equity market sell-offs outside of recessions to help understand how the Fed might react today in a non-recession environment.

The current environment most closely resembles two instances in which the Fed continued rate increases amidst a broader hiking cycle.

In May 1994, the Fed hiked 75bp despite a 6% stock market decline in the prior months, and in August 2004, the Fed continued with a 25bp hike. In both cases, the pace of growth was over 1.5pp above potential and credit spreads did not widen significantly, and the Fed continued to hike in order to slow growth.

The Fed did respond in a dovish way to an equity market sell-off in two notable instances. In September 1998, the Fed cut the policy rate by 25bp, and in early 2016, the Fed held off on further rate hikes. In both cases, growth was below potential. The 1998 cut came alongside a broader financial panic, and late 2015 and early 2016 also saw a significant widening of credit spreads and a significant worry about recession. This left little room for the Fed to tolerate a large decline in the stock market and a corresponding tightening of financial conditions.

Taken together, the evidence from these historical examples and our empirical analysis suggest large differences in the Fed’s response to stock market declines, depending on broader financial conditions as well as growth. With other financial conditions such as credit spreads still at moderate levels, and with growth running well above potential, the Fed is likely to continue with their current pace of tightening despite the decline in equity markets.

This supports our view that the Fed will hike in December, with a subjective probability of 90%. Beyond this, we expect four hikes in 2019 to a terminal funds rate of 3¼-3½%, with risks that are broadly balanced.

Goldman’s projections are extremely hawkish (especially compared to the market – see first chart above), and an increasing number of analysts still believe The Fed will pause next year:

“I wouldn’t be surprised if the Fed backs away from the three hikes it has built into 2019,’’ said Donald Ellenberger, a senior portfolio manager at Federated Investors Inc.

“The debate right now isn’t whether they go in December,” Bank of America’s Harris said. “It’s about when do they pause next year. That’s going to be increasingly data dependent and it’s going to be a game-day decision to some degree as we go into next year.”

“December is probably too early for pause, but we could certainly see it in the first half of next year,’’ said Gene Tannuzzo, fund manager and deputy global head of fixed income at Columbia Threadneedle Investments. “Markets need to adjust to lower and slower, both in terms of growth and interest-rate increases.”

So, whether MNI’s report was a well-placed hype note to squeeze stocks higher ahead of Black Friday is unclear, but for now, The Fed seems heart-set on popping bubbles and normalizing rates and balance sheets (remember how many times the asset-gatherers told us that the market is not the economy?).

Indeed, as Bloomberg notes, comparing today’s conditions with the end of 2015 when the Fed raised rates for the first time in this cycle, credit spreads are a lot tighter now; and ISM manufacturing is around 58, as opposed to sub-50 three years ago…

Simply put, while this drop has felt painful for those in the most momo of momo stocks, financial and economic conditions have to worsen much further for the Fed to have a change of heart.

Additionally, as Bloomberg reports,  any scaling back in the Fed’s rate projections would face complications. President Donald Trump has vociferously and repeatedly criticized the Fed’s rate increases. “We have much more of a Fed problem than we do with anyone else,’’ he told reporters in Washington on Tuesday.

The last thing that Powell and his colleagues probably want is to be seen as caving in to the president’s demands. That would undermine the central bank’s credibility and could cripple its ability to steer the economy.

The Fed also likely wants to avoid being seen as rushing to the rescue of the beleaguered stock market. Powell said last week that equity price moves were only one of many factors that the Fed takes into account in setting policy.

Finally, we note that if The Fed wants to start changing tack from its hawkish trajectory, then next week offers a number of opportunities:

• Nov. 27: Clarida speaks in New York

• Nov. 28: Powell speaks at Economic Club of NY

• Nov. 29: Minutes of last meeting released

• Nov. 30: Williams speaks on the global economy at G-30 meeting

• And then on December 5, Powell goes before the Joint Economic Committee in Congress.

“If there’s ever a time to signal a change in the 2019 rate path, this is a prime opportunity,” writes Societe Generale economist Omair Sharif, who takes a dim view of the idea that the Fed will slow the pace of rate hikes. The Fed has shown no qualms about jawboning the markets to get back in line with its hawkish path, and so the next two weeks could be all about removing the dovish pricing that’s recently coursed through the markets.

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Authored by Irina Slav via Oilprice.com,

Albertan oil producers need to become warier of overbooking already filled to capacity oil pipelines creating what’s commonly called “air barrels” as these contribute to the huge discount Canadian crude is trading at to WTI and other benchmarks. This is the message from Alberta’s Premier Rachel Notley, as reported by the Calgary Herald.

The oil industry in Alberta has been scrambling to find a way out of the discount that has eaten deeply into producers’ bottom lines. Since new pipelines are far from likely to come into operation in the foreseeable future, other options are being considered, including, most recently, deliberately cutting production, OPEC-style, to prop up prices.

Producers, however, are divided on this. While Cenovus is all for government-initiated cuts in production, Suncor, an equally large producer, is against it.

“We’re probably producing about 200,000 or 300,000 barrels per day of oil in excess of our ability to get that oil out of the province, either by pipelines or by rail,” Cenovus’ CEO Alex Pourbaix told Canadian media earlier this month.

On the other hand, “Our position is that government intervention in the market would send the wrong signals to the investment community regarding doing business in Alberta and Canada. And we really do need to take a long-term view and allow the market to operate as it should,” a Suncor spokeswoman said.

The provincial government, meanwhile, is considering closer scrutiny of pipeline and railway shipments in order to see which producers are guilty of creating “air barrels”. It could then hold them accountable. The problems with this approach are that it cannot be deployed immediately and that it will have a limited scope, as the provincial government could only give itself the powers to track shipments within Alberta itself.

While the industry and the government are trying to come up with some sort of solution to the price problem, Western Canadian Select was trading at US$15.20 a barrel at the time of writing, compared with US$56.96 a barrel for West Texas Intermediate.

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In her just released forecast for 2019, BofA equity strategist Savita Subramanian echoed what Goldman said yesterday, when it advised its clients to “lift cash allocations“, with Subramanian stating that TINAA – or There Is Now An Alternative – is the new TINA.

Specifically, the BofA strategist writes that for much of this cycle, the “TINA” argument (“There is no alternative”) held for stocks: bonds’ elevated rate risk and zero-yielding cash allowed stocks to handily win the asset class beauty contest. But cash is now competitive and will likely grow more so (assuming the Fed keeps hiking which is increasingly in doubt).

BofA calculates that cash yields today are higher than the dividend yield for 60% of S&P 500 stocks, and the bank’s Fed call which sees the Fed continuing to hike for much of 2019, puts short rates close to 3.5% by the end of 2019, well above the S&P 500’s 1.9% dividend yield.

What does this mean for stocks? Here Subramanian writes that she expects equities to peak next year, but bearish positioning and weak sentiment in stocks present upside, especially if trade risks subside.

As a result, Subramanian expects upside to equities through year-end and into next year and thus maintains its 2018 year-end target outlook for 3000 on the S&P 500 as a result of “still-supportive fundamentals, still-tepid equity sentiment and more reasonable valuations keep us positive.”

But in 2019, BofA now sees elevated likelihood of a peak in the S&P 500; not helping is BofA’s rates team calling for an inverted yield curve during the year (same as Goldman which expects the yield curve to invert in the second half), and with homebuilders peaking about one year ago and typically leading equities by about two years, the bank’s credit team is forecasting rising spreads in 2019.

The punchline: 2019 will end modestly below 2018, making 2019 the peak of this cycle, to wit:

Assuming the market peaks somewhere at or above 3000, our forecast is for modest downside in 2019.

How does BofA get its 2019 target? It explains below:

Our S&P 500 target model incorporates fundamental, technical and sentiment models, and as investor focus shifts toward longer-term growth, we increase the weight of our Fair Value Model and Long-term Valuation Model, and decrease the weights of our shorter-term sentiment model as well as our technical model. The weighted average of these models implies a 2019 year-end value of 2900 (+8% from today, but below our 2018 year-end target of 3000).

“What if we’re in a bear market?”

And while BofA provides several upside scenarios to its base case, the more interesting question the bank asks is what if Morgan Stanley is correct, and we are in a bear market?

To answer this question, BofA flags thatits bear market signposts briefly flagged 79% triggered in early October, and notes that “whereas credit conditions, sentiment, positioning and the yield curve would suggest we’re not done yet, it is worth considering that we are in a bear market now, and if so, what makes sense”

Next, the bank puts bear markets in context, and provides historical context of S&P 500 bear markets (20%+ price declines) since 1929. Across all these events, the market has seen a median peak-to-trough price decline of ~30%, with trailing P/E compressing to 12x at market trough from 18x at market peak.

Bear markets have historically lasted about a year and half, and the peak of the market has generally preceded an economic recession (if one occurred) by three quarters. EPS peaks have varied but have occurred on average two quarters after the market peak. EPS recessions (which have not occurred in every bear market) have seen an average ~20% peak-to-trough decline.

These observations are summarized below:

Here, the most relevant observations is that while not every bear market coincides with a recession, but the most painful ones do. The S&P identifies 13 bear markets since 1928, 10 of which have coincided with US recessions. The exceptions were 1961, 1966 and 1987, which were relatively short-lived and followed by swift recoveries.

How to think about recession timing: the general rule of thumb is that the stock market leads the economy by 1-2 quarters, and on average, the market has historically peaked 7-8 months before a recession. But the range has been wide: for example, in 1948 the market peaked 2.5 years before the start of the recession.

Another good timing indicator: keep an eye on the homebuilders, which as noted above, led market peaks by 2 years in last two cycles. In the current cycle, they peaked one year ago.

So if indeed we are in a bear market, what sectors should investors focus on? This is tricky because according to BofA, bear market returns for sectors might be different this time.

Historically, Health Care, Consumer Staples and Utilities have been the best performers during bear markets, while Industrials, Financials, Tech and Materials have fared most poorly. But the changing composition and fundamentals of sectors suggests that relationships for factors may be more consistent than sectors, and a historical framework may not necessarily apply. For example, as shown in the tables, below:

• Financials have typically lagged during bear markets, but held up better during non-financial driven downturns (e.g. +15% during the 2000 tech bubble). BofA believes that the sector can hold up better this cycle as well, with much healthier balance sheet and low risk of another financial crisis.
• Tech underperformed during 1990 and 2000 bear markets, but the sector is more mature and stable now. Valuations look more attractive at 16.7x forward P/E vs. 52.6x during the tech bubble and margins are double what they were in 2000-2007. It is the only sector with net cash, which can support stocks in the next downturn.
• Industrials have been a typical laggard during bear markets and were recently hit by escalating trade tensions with China and rising rates. The sector can outperform once trade issues resolve next year, according to BofA. The bank’s Political Control Model shows the midterm election result of a Republican Senate and Democratic House was the best outcome for defense spending. A potential infrastructure bill could also boost the sector outlook.

BofA concludes the analysis on two distinct notes, a positive and a negative one.

The first one is that despite the risk of a bear market, according to the bank’s economics team, even though by July 2019, this cycle will surpass that of the 1990s to become the longest in post-war history, recession risk remains low, according to their models, with the highest pointing to a 26% probability, although it concedes that “these can adjust rapidly.”

How do time the recession? BofA recommends watching jobless claims (which has historically jumped double-digits ahead of recessions) as a key indicator. In their view, a recession likely originates in the corporate sector (where high leverage represents a sign of “excess”), vs. in the household sector where leverage and housing investment are low.

The bad news? BofA expects the VIX to double by 2021, by referencing a popular correlation between the volatility index and the flatness of the yield curve. Specifically, a flattening yield curve signaled a withdrawal of liquidity and over the last three cycles has preceded rising volatility by a few years, 

To hedge, BofA notes that volatility is not always synonymous with equity losses. From 1993 to 1998, the VIX rose from ~15 to ~25 amid S&P 500 total returns of 21.6% per annum. Between Jan 94 and Aug 98 (trough to peak in vol), High Quality stocks (S&P Quality Ranks of B+ or Better) have outperformed the Low Quality stocks (B or Worse) by 19.3ppt, or 3.9ppt per annum.

Then again, a sustained increase in the VIX traditionally correlated with a sharp drop in risk assets, which – whether the S&P is in a bear market or not – remains the biggest risk.

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Authored by Richard Rosso via RealInvestmentAdvice.com,

The concept was so simple it was genius. Create a fund that mirrors the stocks of the S&P 500.  In 1974, Nobel prizewinning economist Paul Samuelson suggested the concept, a year later John Bogle from Vanguard made it reality.

Recently, I had an interview with KPRC’s Channel 2 reporter Bill Spencern index funds. I’m proud his segment won the 10pm timeslot. However, we didn’t spend much time on the pitfalls of indexing. Briefly, I’ve outlined several dangers investors need to understand.

The Wall Street marketing machine has morphed and twisted the definition of indexing.

Indexing in its purest sense seeks to replicate a market-cap weighted index and is best for most investors, especially novices. Think the S&P 500, the Wilshire 5000, MSCI EAFE Index, and the Russell 2000. “Smart” alternatives where stocks out of an index are equal weighted, selected for growth, value, momentum, technical analysis, dividends, dividend growth, buybacks (not kidding), to name a few, can provide benefit if researched.

However, with all the methods used to slice and dice markets today, investors are left confused and have a difficult time selecting smart choices on their own. The performance of smart strategies can deviate dramatically over long periods when compared to the market-cap weighted brethren. Therefore, unwitting investors will be stumped how they sought to capture the returns of the market and fall way short.

Smart indexing is designed to BEAT the broad market and comes with higher costs than traditional market-cap weighted index alternatives. Beating the market goes against exactly why you own index funds in the first place.

Instead of focusing on personalized returns an investor requires to meet specific financial goals, Wall Street cajoles investors to focus on a carrot they shouldn’t chase or can rarely obtain – beating the market. It’s like an emotional seductress for investors to beat the market; all this misguided focus does is get investors to chase performance and pay too much for the products Wall Street distributes.

If you believe in smart indexing, seek assistance from a financial partner. Preferably, a fiduciary.

I’ve explained this before – let me do so again.

1) Indexing should be considered an ACTIVE, not PASSIVE strategy.

Passive may sound all warm and cuddly but it’s the equivalent of hugging a rattlesnake. I’m extremely tired of active investing to mean money managers or funds that seek to beat the market. Passive sounds too, well, passive and the word is greatly misleading.

Over the last decade, “passive” has become a hot button for Wall Street. As global central banks have pumped unprecedented liquidity into the system and kept interest rates lower for longer, a great tailwind has filled the low-cost sails of index investing. The dilemma for Wall Street was how to capitalize on the investor hunger for indexing.

So, if passive is what clients want, passive is what they shall receive, but in a manner that can be delivered and scalable by a financial retailer in a CYA/fiduciary manner. It’s time efficient to get cash fully invested in an asset allocation at once; buy full in to the story that it’s time in the market not timing the market, regardless of current valuations or expected returns, especially as corrections appear more as distant memory than reality.

The asset-allocator factory box designers create investment packages positioned as products or “solutions,” thus forging a path perhaps we haven’t walked so passionately before.

The demand for pretty boxes filled with a colorful palate of panacea in the form of passive investments, have made stocks expensive. This sausage is successfully marketed to a new breed of adviser who perceives passive as safe, has never witnessed a correction or bear market and shockingly believes bear markets are ‘no big deal,’ and not detrimental to financial health.

The popularity of indexing has severed the investment vs. valuation connection. The re-connect is going to be marked by turbulence and disappointment. Asset-allocation solutions are being positioned to ‘pros’ as simple, third-party adjuncts to an overall financial planning experience. The intoxicating promise of ease and low cost which places what you pay in the form of valuations in a clean-up spot, or makes it an afterthought (if that), is incredibly alluring. Buy it up now, let it grow, harvest later.

2) Passive investing is not safe.

To clarify: Passive is an investment type. It is NOT an investing process nor a manner to which RISK is managed. Readers of RIA should be smart enough to understand and re-associate passive to investments like individual U.S. Treasury securities, fixed annuities and possibly certificates of deposit. Everything else, is active. And with stocks – RADIO-active. There’s no escape-risk-free card for passive investors or any investors who choose to take on risk.

3) The “slice and dice” of indexing using exchange-traded funds has been nothing short of silly.

Never underestimate Wall Street’s ability to produce worthless and on occasion financially-dangerous products.

Want to track an index that covers companies involved in streaming entertainment? Sure! How about the Quincy Jones Streaming Music Media and Entertainment ETF (QJ)? So, want to invest in products and services of an aging population? The Long-Term Care ETF (OLD), was created just for you!

Recently, ProShares debuted a stock index related to the pet-care industry. Symbol PAWZ (isn’t that catchy?), invests in companies (you guessed it), that serve the growing pet food and care industries. Listen, I’m a big dog lover but it’s ridiculous to carve the market like this and offer it up for investors with cute symbols. Generally, these products are thinly-traded (which means they may not track the stocks they’re seeking to track) and come with unattractive internal expenses.

I hope you enjoy my interview with Bill.

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President Trump’s chief of staff John Kelly signed a memo late Tuesday allowing troops stationed at the border to act in a law enforcement capacity and use lethal force, if necessary, according to Tara Copp of Military Times. 

The new “Cabinet order” was signed by White House Chief of Staff John Kelly, not President Donald Trump. It allows “Department of Defense military personnel” to “perform those military protective activities that the Secretary of Defense determines are reasonably necessary” to protect border agents, including “a show or use of force (including lethal force, where necessary), crowd control, temporary detention. and cursory search.”

…

Kelly said in the signed directive that the additional authorities were necessary because “credible evidence and intelligence” have indicated that the thousands of migrants who have now made their way to the U.S. checkpoint near Tijuana, Mexico, “may prompt incidents of violence and disorder” that could threaten border officials. –Military Times

Approximately 5,900 active-duty troops were deployed to the southern US border along with 2,100 national guard to reinforce the border and bolster enforcement efforts as thousands of asylum seekers from Central America arrive in Tijuana, Mexico in the hopes of pushing into the United States. 

The Trump administration’s move may raise concerns over the 1878 Posse Comitatus Act, which prohibits the use of federal military persojnnel to enforce domestic policies within the United States.  

Some of those activities, including crowd control and detention, may run into potential conflict with the 1878 Posse Comitatus Act. If crossed, the erosion of the act’s limitations could represent a fundamental shift in the way the U.S. military is used, legal experts said.

The Congressional Research Service, the non-partisan research agency for Congress, has found that “case law indicates that ‘execution of the law’ in violation of the Posse Comitatus Act occurs (a) when the Armed Forces perform tasks assigned to an organ of civil government, or (b) when the Armed Forces perform tasks assigned to them solely for purposes of civilian government.” However, the law also allows the president “to use military force to suppress insurrection or to enforce federal authority,” CRS has found. –Military Times

That said, US military forces always have the inherent right to self defense. Moreover, troops have been given a wider scope of authority in recent years to assist border agents with various actions such as drug interdictions. 

According to Military Times, defense officials say that hte language in the new directive was “carefully crafted to avoid running up against the bedrock legal limitations set in Posse Comitatus.” That said, “Even [an executive order] couldn’t overcome Posse Comitatus,” says Willaim Banks, author of “Soldiers on the Home Front: The Domestic Role of the American Military” and the former director of the Institute for National Security and Counter-terrorism at Syracuse University’s College of Law.

The new report appears to contradict a story from Tuesday in the Los Angeles Times that the Trump administration would begin withdrawing the troops. In fact, it appears that the pulled troops would primarily consist of engineering units which have finished their task of installing razor wire and physical obstacles at border crossing points – while the original scope of the mission had authorized a deployment until December 15, unless the Department of Homeland Security requested an extension. 

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Even as the scandal surrounding Saudi Arabia’s role in the killing of journalist Jamal Khashoggi threatened one of the US’s most important strategic alliances in the Middle East, Defense Secretary James Mattis remained conspicuously tight lipped about who bore responsibility for the killing, saying only that diplomatic crisis undermined stability in the region.

Well, one day after President Trump declared that the CIA could still very well determine that Saudi Crown Prince Mohammad bin Salman didn’t know anything about the killing – despite Friday’s Washington Post report claiming that the agency strongly believed that the order to kill Khashoggi came directly from the prince – Mattis defended his boss during a Pentagon press conference, saying that neither the CIA nor the Saudi government have “fully established” who was behind the killing. And even if the CIA could find definitive proof, it wouldn’t change the fact that it’s in the US’s interest to work with the Saudis.

Because presidents don’t always get to work with “unblemished” strategic partners, Mattis said. Furthermore, it’s the president’s duty to balance competing interests, and that Khashoggi’s killers must be held accountable – but that the US must also work with the kingdom to end the humanitarian crisis in Yemen.

MATTIS to reporters in the Pentagon: “On the Khashoggi affair, presidents don’t always get the freedom to work with unblemished partners in all things.”

— Katie Bo Williams (@KatieBoWill) November 21, 2018

Meanwhile, Saudi Foreign Minister Adel al-Jubeir played down reports about a rumored coup in Riyadh and said rumors about changing the line of succession were  “ridiculous” and “way out of line,” according to CNBC.

Given these remarks, and Trump’s tweet from earlier Wednesday, we can expect oil prices to take another leg lower.

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Authored by Ryan McMaken via The Mises Institute,

The news in Latin America this year has brought two reminders that Latin America’s stringent gun controls have not stemmed the growing homicide problem in many parts of the region.

• The first is that homicides reached new highs in Mexico this year , reaching record levels not seen since the country began keeping records twenty years ago.

• Secondly, violent crime became a significant issue in this year’s presidential race, with president-elect Jair Bolsonaro running on a platform of fighting crime, pledging to “use the army” if need be.

In both cases, crime continues to soar in spite of the fact that that both Brazil and Mexico are anything but what we might call “laissez-faire” when it comes to gun ownership. Indeed, both employ stringent gun control regimes — as do most of Latin America’s states.

These fact have long presented a problem for advocates of gun control, of course, since their arguments often rely on the idea that reducing gun ownership will bring lower crime rates.

Fewer Guns — More Crime?

Looking at gun laws, of course, only tell us some of the story when it comes to the prevalence of civilian firearms in a society. One must also take a look at illicitly-owned firearms, and the total number of firearms to be found overall.

In this years’ update to the Small Arms Survey, published by the Graduate Institute of International and Development Studies in Geneva, we find that civilian gun prevalence — legal and illegal — is not especially widespread in Latin America, even by European standards.

Source: Small Arms Survey.

For example, according to the Survey’s estimates, there are only 12.9 civilian guns per 100 people in Mexico. Brazil’s total is even smaller, at 8.3 per 100 people.

Compare these numbers to any number of other countries with significantly lower homicide rates, whether Canada, Austria, Switzerland, or even Germany. (We need not even bring the US into it, which, of course, has a much, much higher gun prevalence, with relatively low homicide rates by global standards.) No Latin American country, with the exception of relatively-low-crime Uruguay, matches these totals in terms of gun prevalance.

Source: Small Arms Survey, World Bank.

Looking at these numbers, we simply don’t see a cause and effect relationship between gun prevalence and a lack of homicide. Clearly, there are other factors at work, and homicides can’t actually be explained in convenient claims of “fewer guns, less crime.”

Source: World Bank.

This reality in Latin America, however, is steadfastly ignored. As I’ve explained in past, the enduring high crime in Latin America, in spite of numerous gun controls, has often been explained away by use of the soft bigotry of low expectations. We’re told that Latin Americans can’t be expected to respond to a legal environment the same way a a more “civilized” person in Europe might. Thus, we should just expect Latin Americans to behave like barbarians and engage in large amounts of homicide regardless of gun laws. Once the Latin Americans can be ignored, we can then more easily claim the US has higher homicide rates than the Europeans because — and only because — of the US’s liberal gun laws. All other factors are ignored. It then become a self-evident “fact,” that all industrialized or “developed” countries with stringent gun control laws have low crime — assuming we ignore Russia, of course.

Myths of Latin American Gun Ownership

This position, convenient it might be for gun-control advocates, fails to satisfy anyone who regards Latin Americans as full-fledged human beings. After all, with the exception of Venezuela and some areas of Central America, Latin America is not a region of failed states or civil war. This is a region mostly at peace, and one that shares much in common — in terms of history, immigration, and ethnic diversity — with the United States.

Some gun-control advocates have attempted to get around this problem by claiming, without evidence, that Latin America really has large amounts of guns. For instance, in a bizarre 2015 article for Salon, the author claimed that Honduras, with its remarkably high homicide rate, is a pro-gun libertarian dystopia where anarchists have “load[ed] the country up with guns” and allowed people to obtain weapons freely. The result, we’re told, is non-stop violence.

This notion that Honduras is a place where enormous numbers of people carry guns, however, is pure fiction. According to the Small Arms Survey, the total number of guns per person in Honduras, at 14.1 per 100 people, is only a small fraction of what it is in the United States, and less than half what it is in Canada.

Similarly, some have tried to argue that Mexico’s homicide woes can be explained away by Mexico’s proximity to the United States. We’re told Texas is exporting huge numbers of illegal guns to Mexico.

Yet, research by Stratfor and the Small Arms Survey have shown that illegal guns in Mexico are usually brought into the black market by Mexican police and military personnel — from native stockpiles. They’re not imported by American gun runners.

Moreover, the Small Arms Survey includes illicit weapons, as well. And even counting these weapons, the total number of firearms in Mexico is very small compared to the US.

Although we hear relentlessly in this country that more guns lead to more crime, the experience of Latin America certainly doesn’t lend much credence to the idea. Advocates for gun control try to ignore Latin America and focus strictly on Europe, where they claim that low crime rates are synonymous with low levels of gun ownership. (Even this claim must exclude Russia, Switzerland, Ukraine, and the Baltics to be true.) By expanding our analysis to the Americas, however, we quickly find these claims are anything but self-evident.

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