Month: December 2018

Authored by Brandon Smith via Alt-Market.com,

December 19 marked the day the Fed may have decided it’s going “all in” on the idea of a “strong U.S. economy.”

The Fed locked in an increase of the Federal Funds Rate from 2.25% to 2.40%, and it will increase the primary credit rate to a full 3.00%. These December increases were pretty much anticipated back in early November.

The increases came in spite of commentary by Jeffrey Gundlach from Doubleline, who said the Fed shouldn’t have raised rates:

“I don’t think they should… The bond market is saying there’s no way the Fed should be raising interest rates.”

From here on out, things get murky, and that uncertainty could very well set the tone for 2019.

Let’s start with the Fed’s now-infamous “dot plot,” below (sourced from their December projections document):

As you can see in the “dot plot” above, chances are Federal Fund rates will be soaring over 3 percent in 2019. In 2020, there is still a good chance rates will soar even higher, nearing 3.75 percent. It also looks as though rates will stay at or above 3 percent for the foreseeable future.

That means credit is about to get (and stay) more expensive. Growth is likely to slow down, and the cost of commodities could rise dramatically.

In fact, according to the Bureau of Labor and Statistics, food and most energy prices are already on the rise (emphasis ours):

“Food prices increased 1.4 percent for the year ended November 2018. Prices for food at home increased 0.4 percent, while prices for food away from home rose 2.6 percent. In November 2018, prices for cereals and bakery products rose 1.3 percent, the largest 12-month increase among the six grocery store food groups.

Within energy, gasoline prices rose 5.0 percent for the 12 months ending November 2018, and fuel oil prices increased 16.1 percent. Electricity prices increased 0.6 percent and natural gas prices declined 2.1 percent.”

But according to the Fed’s December statement, things are “roughly balanced.” If this is “balanced”, it would be interesting to see what the Fed considers out of balance.

It seems like Fed Chairman Jerome Powell hopes that people will just take his “spoonful of sugar” to help this bad tasting economic medicine go down.

The “Poison Pill”: Real Inflation and QE Unwind

The Fed, and the U.S. Government in general, doesn’t like to report real inflation. They report CPI inflation at 2.2%, which is missing energy and food costs (see chart).

As you can see in the “adjusted” chart, inflation jumped right after the 2008 financial crisis, and then again in 2016.

The Fed likes to create the illusion that 2% is somehow an ideal target. They call it their “symmetric objective rate.”

According to the Fed, so long as this target is “out there” and decisions are being made according to it, inflation will magically stay in line.

But when we examine real inflation with food and energy costs factored in, we see a completely different picture (see BLS chart below):

As you can see, real inflation was still trending upwards to the end of November 2018. We’re getting dangerously close to levels of inflation not seen since 2011. And with the cost of commodities already going up, it doesn’t look good.

Obviously the trend could change, like it did in November 2006 before spiking over 5% during the last financial crisis. Ultimately, no one really knows how this will play out, no matter how Chairman Powell spins it. Although Jim Cramer might have an idea (emphasis ours):

“Let me put it very simply: Powell wants a slower economy than we have. He wants one that hurts Main Street… He has his reasons, but please, don’t go into denial here. The Fed is perfectly happy to gradually strangle … the U.S. economy in order to stamp out inflation.”

And speaking of spin, all of that money the Fed printed up during its Quantitative Easing (QE) phase is being shed off in a plan that started back in late 2017. Powell calls it “balance sheet normalization,” except the balance sheet appears anything but normal.

The money being unwound has to go somewhere, and a chart from ZeroHedge paints another murky picture:

As you can see, the Fed’s holdings (bottom graph) from unwinding their QE program don’t look so good. When the “piper has to be paid,” who knows what will happen.

So strap in, because 2019 is going to be a murky year.

Don’t Let the Fed’s Murky Plans Leave Your Retirement “Dead”

Wolf Richter explained the Fed’s stated objective well, and linked to their first “stability report”:

“Preventing another financial crisis – or “promoting financial stability,” as the Federal Reserve Board of Governors calls it – isn’t the new third mandate of the Fed, but a “key element” in meeting its dual mandate of full employment and price stability, according to the Fed’s first Financial Stability Report.”

If their objective is full employment and price stability, then they have a lot of work to do to ensure 2019 doesn’t make things worse.

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Leaving amid an acrimonious battle over funding for President Trump’s border wall, Chief of Staff John Kelly revealed during a candid exit interview that Trump’s promised ‘border wall’ isn’t actually a wall. In fact, the words ‘barrier’ or ‘fence’ would probably be more appropriate, as we pointed out.

“To be honest, it’s not a wall,” said Kelly – who embarked in early 2017 on seeking advice from those who “actually secure the border,” on what to do. Speaking with Customs and Border Protection agents – referred to by Kelly as “salt-of-the-earth, Joe-Six-Pack folks,” the outgoing Chief of Staff recounts “They said, ‘Well we need a physical barrier in certain places, we need technology across the board, and we need more people’.”

“The president still says ‘wall’ — oftentimes frankly he’ll say ‘barrier’ or ‘fencing,’ now he’s tended toward steel slats. But we left a solid concrete wall early on in the administration, when we asked people what they needed and where they needed it.”

President Trump was unsurprisingly less than pleased to hear Kelly once again publicly question the president’s dedication to building a wall, and in a Monday morning tweet, Trump contradicted Kelly’s assertion that plans for a concrete border wall had been abandoned during the early days of the administration after consulting with CBP agents. Instead, Trump insisted that “some sections” of the wall would be made of concrete, while other portions would be “see through” in accordance with the wishes of border patrol experts.

“An all concrete Wall was NEVER ABANDONED, as has been reported by the media. Some areas will be all concrete but the experts at Border Patrol prefer a Wall that is see through (thereby making it possible to see what is happening on both sides). Makes sense to me!”

An all concrete Wall was NEVER ABANDONED, as has been reported by the media. Some areas will be all concrete but the experts at Border Patrol prefer a Wall that is see through (thereby making it possible to see what is happening on both sides). Makes sense to me!

— Donald J. Trump (@realDonaldTrump) December 31, 2018

The tweet didn’t mention Kelly by name, but Trump’s dissatisfaction with his former chief of staff’s decision to break with the party line was obvious to all. Though whether Trump will succeed in securing funding to start construction remains to be seen, as the partial government shutdown provoked by his funding battle with Democrats enters its tenth day, halfway to tying the longest shutdown ever.

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China’s official manufacturing PMI fell to 49.4 in December, from 50.0 in November, the lowest reading since February 2016; and the weakest reading for a December since 2008.

Under the hood, it was just as ugly, as Goldman notes, both the production and new order sub-indexes fell in December. The production index declined to 50.8 from 51.9, and the new orders decreased to 49.7 from 50.4. Trade indicators continued to soften as well – the imports sub-index dropped 1.2pp to 45.9 and the new export order sub-index was at 46.6, vs. 47.0 in November. Both indexes were at the weakest levels since late 2015/early 2016. The employment sub-index edged down slightly by 0.3pp to 48.0. Inventory indicators went down – the raw material inventories index was 0.3pp lower, and the finished goods inventory index dropped by 0.4pp in December to 48.2. Inflationary pressures eased meaningfully – the input price index dropped by 5.5pp to 44.8, the lowest level since December 2015, and the output prices index was 3.1pp lower at 43.3.

Judging by the official PMI surveys, manufacturing activity growth may have softened further in December. One small caveat though is that NBS manufacturing PMI tends to fall in December (since 2010, on average NBS manufacturing PMI fell by around 0.1pp). The lower commodity prices may have also contributed to the decline in the headline manufacturing PMI reading. Trade data may have continued to slow in December, as implied in the low readings of trade indicators under PMI. Weaker external demand combined with trade tensions have contributed to the slower trade growth.

“The next few months will be crucial to the Chinese economy’s direction and policy focus. Signs of domestic demand bottoming have yet to emerge. External pressures may accumulate, with exports possibly slowing as the front-loading effect wanes.”

–Chang Shu and David Qu, Bloomberg Economics.

Of course, all this bad news prompts the stablishment’s knee-jerk goldilocks response that this is good news because government will be forced to unleash more stimulus:

Goldman: “we continue to expect accommodative policy stance to support overall growth (in particular we expect lower interbank rates and more RRR cuts in 1H next year).”

“The slowdown will continue into the next year,” said Larry Hu, a Hong Kong-based economist at Macquarie Securities Ltd.

“The weak PMI could result in more government stimulus to shore up the economy.”

However, as we noted previously, it is not working!!

All of which leave us asking – Is Trump winning?

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Authored by Tsvetana Paraskova via Oilprice.com,

Mexico’s military have taken control over 58 key fuel installations in the country, including refineries, upon orders by new President Andres Manuel Lopez Obrador, who has vowed to fight corruption and fuel theft within and outside state-run energy company Pemex.

Lopez Obrador unveiled a plan on Thursday to increase the presence of military and the use of the army in fighting rampant fuel theft that has been costing Mexico’s state firm Pemex billions of dollars annually.

According to Pemex’s own estimates, the losses from fuel theft over the past three years have reached US$7.5 billion (147 billion Mexican pesos).

According to Lopez Obrador, authorities are also involved in widespread fuel theft.

“This is the theft of national assets, of public funds, of money that belongs to all Mexicans,” Reuters quoted Lopez Obrador as saying at a regular news conference on Thursday.

On Friday, the Mexican army took control of refineries of Pemex across the country, where unionized workers were blocking the access to some of the sites, UPI reports, citing the Excelsior newspaper.

Mexican media report that three officials at Pemex, suspected of having facilitated fuel theft, had already been arrested for the alleged crimes. The three Pemex officials have been sacked and will be facing criminal charges, Mexico’s Attorney General Alejandro Gertz Manero said at Lopez Obrador’s news conference on Thursday.

Pemex’s new management are aware of the fact that company employees have been complicit in fuel theft and moved to deal with the problem, Gertz Manero said.  

Illegal taps on Mexican fuel pipelines jumped by 45 percent annually between January and October 2018, according to Pemex’s latest report on fuel theft.

Earlier this year, former Pemex chief executive Carlos Alberto Treviño Medina said that fuel theft was expected to cost the state oil company as much as US$1.78 billion (35 billion pesos) in 2018.

Apart from rampant fuel theft, Pemex also has to cope with declining domestic oil production, which hit in October one of the lowest monthly production rates since 1990 when records began. 

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It’s only fitting that the biggest geopolitical event of 2018, the US-China trade war, is also the defining factor setting the market mood on the last day of trading, and after Trump’s Saturday tweet that U.S.-China negotiations were “moving along very well” toward a comprehensive deal, global stocks and US equity futures are a sea of green. 

The euphoria returned, however briefly, even though the WSJ warned to take Trump’s tweet with a grain of salt, especially since given the market volatility Trump is liable to be exaggerating the chances of a deal, especially since trade optimism is expected to boost markets, Trump’s favorite “barometer” of his administration.

… people familiar with the state of negotiations said the president may be overstating how close the two sides are to an agreement. They note Mr. Trump has looked to calm markets, which have gyrated in recent days, in part, because of concern that the trade fight between the US and China could spin out of control.

The tweet also followed a Friday CNBC report that the White House had spoken with a prominent hedge fund investor how to halt the market rout, who responded that the president should end his criticism of Powell on Twitter, stop administration turnover and reach a trade deal with China in order to help markets.

Despite the now traditional caution surrounding any Trump tweet, Emini futures were up 0.8%, trading back over 2,500, if below Friday’s highs as at least some shorts were spooked that this time Trump may be telling the truth.

“Market seems to take quite well to the Trump tweets that we got over the weekend,” said Kyle Rodda, an analyst at IG Group Holdings Plc. While the move is likely exaggerated given low holiday trading volumes “it’s certainly indicative of the overall sentiment with one day to go in the year,” he said.

It wasn’t just the US as world stock and commodity prices rose on Monday as the weekend’s hints of progress on the Sino-U.S. trade standoff provided a rare glimmer of optimism in what has been a punishing end of year for markets globally.

Europe’s Stoxx 600 index climbed for a second day, as much as 0.4 percent, trimming its annual decline and following a strong lead by Asia. The rebound, however, will be little comfort for the European index which is on course for a drop of about 13%, its biggest loss since 2008. Miners and retailers led Monday’s advance with hopes around trade rising again, while the euro held steady after Italy’s government won final parliamentary approval for its 2019 budget.

London’s FTSE and Paris’ CAC 40 climbed 0.2 and 0.7% respectively on the day but both are down more than 11% in 2018. Ironically, it was Germany’s export-heavy DAX, that has seen more than 18% wiped off its value, one of Europe’s worst performing markets this year.

Top European News

• Italy’s Populists Pass Budget After Weeks of Market Turmoil
• Nokia Names Sandra D. Motley as President of Fixed Networks
• Gas Blast in Russia Apartment Block Kills 3 People, Many Missing
• Italy’s doBank Buys Majority Stake in Debt Servicer Altamira

Earlier, Asian stocks closed up 0.5%, with the Shanghai Composite rising 0.4% to close off a dismal year for the stock index, despite the latest disappointing print in the Chinese Manufacturing PMI as survey data showed manufacturing activity contracting for the first time in two years even as the service sector improved.

Another of the year’s the worst performers was the index of major Chinese companies which lost a quarter of its value. The only major Asian market in the black for the year was India, where the BSE was ahead by almost 6 percent.

MSCI’s broadest index of Asia-Pacific shares outside Japan closed up 0.6%, but was still down 16% for the year.

Top Asian News

• China Slowdown Deepens as Trade Truce Fails to Revive Factories
• China Dec. Manufacturing PMI at 49.4; Est. 50.0
• Rebound in 2019 Not Easy for India Bonds, Scrapped Sales Suggest
• Assets Rise as Trump Fuels U.S.-China Trade Optimism: Inside EM

Investor sentiment brightened when U.S. President Donald Trump said he held a “very good call” with China’s President Xi Jinping on Saturday to discuss trade and claimed “big progress” was being made. However, Chinese state media were more reserved, saying Xi hoped the negotiating teams could meet each other half way and reach an agreement that was mutually beneficial.

“Simply looking at the markets would suggest that the global economy is headed into recession,” said Robert Michele, chief investment officer and head of fixed income at J.P. Morgan Asset Management.

“However, while we agree the global economy is in a growth slowdown, we don’t see an impending recession,” he added, looking at the Fed to provide a policy cushion. “Already, commentary out of the Fed suggests that it is nearing the end of a three-year journey to normalise policy.”

Indeed, as noted last night, Fed fund futures have priced out any hike for next year and now imply a quarter point cut by mid-2020, even as Goldman still expects at least one rate hike in 2019.

At the same time, the Treasury market clearly thinks the Fed is done on hikes, with yields on two-year paper having fallen to just 2.52% from a peak of 2.977% in November. The Treasury market is heading for its biggest monthly rally in 2-1/2 years.

The precipitous drop in yields has undermined the U.S. dollar in recent weeks. The dollar is on track to end December with a loss of 0.8 percent but was still up on the year as a whole. Overnight, the Bloomberg Dollar Spot Index fell for a third day and headed for its steepest monthly drop since March, as the U.S. government shutdown continued into its tenth day.

The dollar also had a tough month against the yen with a loss of 2.8 percent this month, and was last trading at 110.14. However, 2018 was a pretty stable year for the pair given it spent all of it in a narrow trading range of 104.55 to 114.54.

Elsewhere, the euro is on track to end the month on a weaker note at $1.1425, nursing losses of almost 5% over the year to date.

That was a walk in the park compared with the hit oil prices have taken in the last couple of months, with Brent down almost 40% since its peak in October when Goldman was pounding the table on oil telling its clients oil was a screaming buy.

Brent rose 98 cents at $54.20 a barrel but was down 20% for the year. U.S. crude futures nudged up 62 cents to $45.95.

Meanwhile the only real safe haven, gold, is ending the year on a high note after rallying almost 5 percent in the past month to stand at $1,278.57 an ounce.

 

Market Snapshot

• S&P 500 futures up 0.8% to 2,505.50
• Brent Futures up 1.8% to $54.14/bbl
• Gold spot up 0.09% to $1,281.90
• U.S. Dollar Index down 0.1% to 96.30
• STOXX Europe 600 up 0.3% to 337.12
• MXAP up 0.5% to 146.72
• MXAPJ up 0.6% to 478.32
• Nikkei down 0.3% to 20,014.77
• Topix down 0.5% to 1,494.09
• Hang Seng Index up 1.3% to 25,845.70
• Shanghai Composite up 0.4% to 2,493.90
• Sensex up 0.05% to 36,093.05
• Australia S&P/ASX 200 down 0.1% to 5,646.40
• Kospi up 0.6% to 2,041.04
• German 10Y yield rose 1.1 bps to 0.242%
• Euro down 0.02% to $1.1442
• Brent Futures up 1.8% to $54.14/bbl
• Italian 10Y yield fell 0.5 bps to 2.384%
• Spanish 10Y yield rose 3.0 bps to 1.416%

Top Overnight News from Bloomberg

• President Donald Trump reported “big progress” in trade talks with his Chinese counterpart Xi Jinping, providing an optimistic start to what could be a make-or-break year for ties between the world’s two largest economies
• Gold is closing out 2018 on a strong note, with haven demand in the ascendant amid volatile trading in global equities, rising concern about the economic outlook and a drawn-out government shutdown in the U.S.
• The five presidents of the European Union used the euro’s 20th birthday to praise the single currency’s successes, while warning that the job isn’t yet complete
• Oil extended gains Monday on reports of the progress in trade talks
• China heads into the new year with its factories back in contractionary territory as the trade war damps sentiment
• A compromise between Trump and congressional Democrats to end a partial government shutdown could hinge on the definition of “wall” — what kind of physical barrier or other border security measures are acceptable to both sides
• The CEOs of some of Germany’s biggest companies are bracing for a difficult year in 2019 as trade conflicts, Brexit and political division could weigh on the economy, according to Bild-Zeitung
• Five presidents of the European Union used the euro’s 20th birthday to praise the currency’s successes, while saying the job isn’t yet complete

US Event Calendar

• 10:30am: Dallas Fed Manf. Activity, est. 15, prior 17.6

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Authored by Michel Snyder via The Economic Collapse blog,

Was 2018 everything that you expected it to be?  Every year contains surprises, but 2018 truly turned out to be a year that we will never forget.  Over the past 12 months we witnessed great political shaking, Wall Street experienced the worst downturn that we have seen since 2008, the crust of our planet was rattled by an increasing number of major seismic events, social decay spread like wildfire, and America continued to become even more divided as a nation.  In comparison, 2017 was rather bland and boring, and I truly believe that one day we will look back on 2018 as a major turning point.

It is amazing that 12 months has flown by already.  It seems like the years just keep getting faster, and perhaps that is because we are all getting older.

In any event, the following are 44 numbers from 2018 that are almost too crazy to believe…

#1 One study found that the average American spends 86 hours a month on a cellphone.

#2 A different study discovered that 37 percent of all Americans have eaten fast food within the last 24 hours.

#3 90 percent of the beer that Americans drink is produced by just 2 gigantic corporations.

#4 McDonalds feeds approximately 70 million people a day globally.  Pornhub gets more than 78 million visits a day.

#5 60 percent of all Americans actually believe that they have seen a ghost.

#6 The middle class continues to decline, and at this point half of all American workers make less than $30,533 a year.

#7 During the 2018 midterm elections, Democrats were able to pick up 40 seats in the U.S. House of Representatives.  Those that were forecasting a “red tsunami” were completely and totally wrong.

#8 Kevin Spacey’s incredibly creepy YouTube video entitled “Let Me Be Frank” in which he promises that he will never be held accountable for his actions has already been viewed more than 8 million times.

#9 Since 2007, the total amount of student loan debt in America has nearly tripled.

#10 The suicide rate in the United States has risen by 33 percent since 1999.

#11 Suicide is now the second leading cause of death for Americans from age 15 to age 24.

#12 Netflix recently made a deal to renew streaming of “Friends” for another year for 100 million dollars.

#13 According to the United Nations Population Fund, 40 percent of all births in the U.S. now happen outside of marriage. But if you go back to 1970, that figure was sitting at just 10 percent.

#14 13 million households in the United States do not always have enough food to eat.  So if you have enough food to eat every day, you should consider yourself to be very blessed.

#15 According to the U.S. Department of Agriculture, almost 1 out of every 4 children in rural areas is currently living in poverty.

#16 At this point, almost 52 percent of all children live in a home that receives monthly help from the federal government.

#17 Over half a million people are homeless in the United States right now.

#18 Today, a million Americans are living in their RVS, and that number is rising with each passing year.

#19 Social decay is clearly evident even in our most prosperous cities.  One recent investigation found 300 piles of human feces on the streets of downtown San Francisco.

#20 62 percent of all U.S. jobs do not pay enough to support a middle class lifestyle.

#21 In 1980, the average American worker’s debt was 1.96 times larger than his or her monthly salary. Today, that number has ballooned to 5.00.

#22 Over half the country now receives more in government transfer payments than they pay in taxes.

#23 According to one recent study, the “rate of people 65 and older filing for bankruptcy is three times what it was in 1991”.

#24 More than 100 churches in the United States are dying every single week.

#25 If you go back to 1986, just 10 percent of all young adults were “religiously unaffiliated”, but now that number has jumped all the way to 39 percent.

#26 According to one recent survey, Americans from the age of 18 to the age of 29 favor Democrats over Republicans by a 66 percent to 32 percent margin.

#27 One study found that one-third of all American teenagers haven’t read a single book in the past year.

#28 The number of married couples with children in the U.S. just reached a 56 year low.

#29 In the city of Baltimore, approximately one out of every four babies is born as an opioid addict.

#30 According to the New York Times, approximately 110 million Americans have a sexually-transmitted disease right now.

#31 It is being projected that the total amount of plastic in the oceans of the world will exceed the total weight of all fish by the year 2050.

#32 90 percent of all seabirds in the world now have plastic in their stomachs.  Back in 1960, that number was sitting at just 5 percent.

#33 In August, we learned that the number of global earthquakes over the last 30 days had risen to a level that was 50 percent above normal.

#34 In September, an all-time record high seven named storms were swirling across the globe simultaneously.

#35 In October, we witnessed the third largest single day point crash in stock market history on the exact same day that the third most powerful hurricane in U.S. history made landfall.

#36 In November, the Camp Fire destroyed 14,000 homes and businesses in northern California.  It was the most destructive wildfire in the history of the state.

#37 According to the official Twitter account of Mount Washington Observatory in New Hampshire, they had wind chills of between -70 and -75 degrees on Thanksgiving morning.

#38 In the aftermath of the magnitude 7.0 earthquake that rattled Anchorage, the state of Alaska was shaken by more than 1,400 earthquakes.

#39 In early December, the largest earthquake in 45 years hit eastern Tennessee.

#40 During the last full week before Christmas, the Dow fell 1,655 points.  That was the worst week for the stock market since the financial crisis of 2008.

#41 The National Retail Federation was projecting that total Christmas spending would surpass $465,000,000,000 in 2018. Only 25 countries on the entire planet have a GDP that is greater than that number.

#42 In 2017, the Dow was either up or down by 1 percent or more just 8 times.  In 2018, it happened 64 times.  Volatility has returned to Wall Street in a major way, and that is a really bad sign.

#43 A recent survey of corporate financial officers discovered that 82 percent of them believe that a recession will have started by the end of 2020.

#44 During 2018, the U.S. national debt increased by nearly 1.4 trillion dollars.  We are now almost 22 trillion dollars in debt, and there is no end to our debt problems on the horizon.

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Facebook’s thousands of moderators have been relying on outdated, inaccurate and biased “maze of PowerPoint slides” to police global political speech, according to a trove of 1,400 internal documents obtained by the New York Times. 

Moderators say they often rely on Google Translate to read posts, while facing pressure to make decisions on acceptable content within a matter of seconds, according to the report. 

The guidelines – which are reportedly reviewed every other Tuesday morning by “several dozen Facebook employees who gather over breakfast,” are filled with “numerous gaps, baises and outright errors,” according to the Times. 

Moderators were once told, for example, to remove fund-raising appeals for volcano victims in Indonesia because a co-sponsor of the drive was on Facebook’s internal list of banned groups. In Myanmar, a paperwork error allowed a prominent extremist group, accused of fomenting genocide, to stay on the platform for months. In India, moderators were mistakenly told to flag for possible removal comments critical of religion. –NYT

The guidelines, set by “mostly young engineers and lawyers,” must be interpreted by Facebook’s fleet of mostly outsourced moderators which employ largely unskilled workers, “many hiredo out of call centers.” 

Moderators express frustration at rules they say don’t always make sense and sometimes require them to leave up posts they fear could lead to violence. “You feel like you killed someone by not acting,” one said, speaking on the condition of anonymity because he had signed a nondisclosure agreement. –NYT

According to Facebook executives, they are working diligently to rid the platform of “dangerous” content. 

“It’s not our place to correct people’s speech, but we do want to enforce our community standards on our platform,” said Facebook senior News Feed engineer. “When you’re in our community, we want to make sure that we’re balancing freedom of expression and safety.”

The company’s head of global policy management, Monika Bickert, meanwhile, said that the company’s primary goal was to prevent harm – though perfection “is not possible.” 

“We have billions of posts every day, we’re identifying more and more potential violations using our technical systems,” said Bickert. “At that scale, even if you’re 99 percent accurate, you’re going to have a lot of mistakes.“

And since Facebook’s set of rules are more or less a patchwork of Excel spreadsheets and unorganized PowerPoint presentations, there is no single master file or reference guide. 

Facebook says the files are only for training, but moderators say they are used as day-to-day reference materials.

Taken individually, each rule might make sense. But in their byzantine totality, they can be a bit baffling.

One document sets out several rules just to determine when a word like “martyr” or “jihad” indicates pro-terrorism speech. Another describes when discussion of a barred group should be forbidden. Words like “brother” or “comrade” probably cross the line. So do any of a dozen emojis. –NYT

According to the Times, “Moderators must sort a post into one of three “tiers” of severity. They must bear in mind lists like the six “designated dehumanizing comparisons,” among them comparing Jews to rats.”

“There’s a real tension here between wanting to have nuances to account for every situation, and wanting to have a set of policies we can enforce accurately and we can explain cleanly,” said Bickert, who added “We’re not drawing these lines in a vacuum.” 

Unseen branch of government?

The Times notes that Facebook’s policing of what they consider extremism or disinformation intrudes into sensitive political matters worldwide – “sometimes clumsily.” 

Increasingly, the decisions on what posts should be barred amount to regulating political speech — and not just on the fringes. In many countries, extremism and the mainstream are blurring.

In the United States, Facebook banned the Proud Boys, a far-right pro-Trump group. The company also blocked an inflammatory ad, about a caravan of Central American migrants, that was produced by President Trump’s political team.

In June, according to internal emails reviewed by The Times, moderators were told to allow users to praise the Taliban — normally a forbidden practice — if they mentioned its decision to enter into a cease-fire. In another email, moderators were told to hunt down and remove rumors wrongly accusing an Israeli soldier of killing a Palestinian medic –NYT

“Facebook’s role has become so hegemonic, so monopolistic, that it has become a force unto itself,” said Balkans expert Jasmin Mujanovic. “No one entity, especially not a for-profit venture like Facebook, should have that kind of power to influence public debate and policy.“

During Pakistan’s July elections, Facebook handed its moderators a 40-page document describing “political parties, expected trends and guidelines,” which were used to shape conversations over the primary social media platform used for news and discussions during voting. 

The document most likely shaped those conversations — even if Pakistanis themselves had no way of knowing it. Moderators were urged, in one instance, to apply extra scrutiny to Jamiat Ulema-e-Islam, a hard-line religious party. But another religious party, Jamaat-e-Islami, was described as “benign.”

Though Facebook says its focus is protecting users, the documents suggest that other concerns come into play. Pakistan guidelines warn moderators against creating a “PR fire” by taking any action that could “have a negative impact on Facebook’s reputation or even put the company at legal risk.” –NYT

Walking on eggshells

Also of concern are moderator guidelines which misinterpret religious-based laws, such as one slide which tells moderators that any post degrading an entire religion is in violation of Indian law and should be flagged for removal. This is not accurate, according to Indian legal scholar Chinmayi Arun, who said that Indian law only prohibits blasphemy in certain conditions – such as when the speaker intends to stoke violence. 

Another inaccurate slide says that Indian law prohibits people calling for an independent Kashmir – and moderators are specifically told to watch for posts which include the phrase “Free Kashmir,” despite the common slogan among activists being completely legal. 

In the Balkans, Facebook moderators were given bad information that Bosnian war criminal Ratko Mladic was still a fugitive, despite the fact that he was arrested in 2011. 

The slides are apparently written for English speakers relying on Google Translate, suggesting that Facebook remains short on moderators who speak local languages — and who might understand local contexts crucial for identifying inflammatory speech. And Google Translate can be unreliable: Mr. Mladic is referred to in one slide as “Rodney Young.”

The guidelines, said Mr. Mujanovic, the Balkans expert, appear dangerously out of date. They have little to say about ultranationalist groups stoking political violence in the region.

Nearly every Facebook employee who spoke to The Times cited, as proof of the company’s competence, its response after the United Nations accused the platform of exacerbating genocide in Myanmar. The employees pointed to Facebook’s ban this spring on any positive mention of Ma Ba Tha, an extremist group that has been using the platform to incite violence against Muslims since 2014.

 

The hate list

Perhaps most politically significant of all the moderation materials is an Excel spreadsheet which includes the names of every group and individual Facebook has quietly deemed to be a hate figure. Moderators have been explicitly instructed to remove any post praising or supporting any listed figure. 

Anton Shekhovtsov, an expert in far-right groups, said he was “confused about the methodology.” The company bans an impressive array of American and British groups, he said, but relatively few in countries where the far right can be more violent, particularly Russia or Ukraine.

Countries where Facebook faces government pressure seem to be better covered than those where it does not. Facebook blocks dozens of far-right groups in Germany, where the authorities scrutinize the social network, but only one in neighboring Austria.

The list includes a growing number of groups with one foot in the political mainstream, like the far-right Golden Dawn, which holds seats in the Greek and European Union parliaments.

For a tech company to draw these lines is “extremely problematic,” said Jonas Kaiser, a Harvard University expert on online extremism. “It puts social networks in the position to make judgment calls that are traditionally the job of the courts.” –NYT

 The full New York Times report can be read here.

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Authored by Jeffrey Snider via Alhambra Investment Partners,

All better now. It’s a Christmas miracle, the plunge erased by market closure as if FDR had just been re-elected and taken the oath. The Dow is on everyone’s mind, so trading on December 26 has understandably stuck.

Stocks posted their best day in nearly a decade on Wednesday, with the Dow Jones Industrial Average notching its largest one-day point gain in history. Rallies in retail and energy shares led the gains, as Wall Street recovered the steep losses suffered in the previous session.

The sigh of relief is palpable all across the world. The BIS called the steep, worrisome liquidations up to now Yet More Bumps On The Path To Normal, and the rallies especially in stocks and oil have served to confirm the thesis. Just some minor, dare I say transitory discomfort on the road to paradise.

Is it though?

We have been watching eurodollar futures, well, forever but with even greater purpose and intent since mid-June. There is little the eurodollar curve won’t spill information about, and its inversion around then was a huge warning that whatever shook the global money network on May 29 was indeed nothing to just ignore.

Money curves are supposed to be upward sloping reflecting the risks of a healthy environment, including economic opportunity. For it to be distorted to the point of being upside down, that’s big. People have a hard time interpreting regular curves, so unhealthy ones are much more a mystery (thanks to Economics).

The specific contracts displaying eurodollar’s version of oil contango were those out several years, the 2020’s to 2021’s. For a time, the inversion extended into 2022. For the few who noticed, this didn’t seem too much to be concerned about; a far distant probability of some nonspecific hedging case. Surely the world can be fixed given two or three years.

That inversion has largely disappeared in December 2018. Another sign that things are getting better?

Nope. This is bad folks, right up there with the WTI shifting back into contango as far as warnings go. The eurodollar curve inversion hasn’t disappeared, it has now moved up.

What I wrote back in July showed up this month:

Yes, it is this “bad scenario” that is causing futures investors to increasingly hedge against it. For now, they are doing so in the 2020-22 contracts, but that doesn’t mean they necessarily expect those years to be exactly when all this happens. The curve shape is not meant to be taken literally.

Participants are growing concerned about a future problem that they feel requires some increasing level of protection, and it may just be those contracts are where this protection is most available at the market-clearing price. At just a few bps of inversion, what should be noted here is some future “bad scenario” whose outlines don’t yet show up on this side of the horizon. What’s going on with inflation hysteria and Jerome Powell’s intractable viewpoint only muddies that horizon.

If things continue on as they are, including yield curve flattening all over the world, it may be that the June 2020’s get bid so that they eventually invert with respect to the 2019’s…

That’s just what has happened, in a big way.

The same week that the CFTC COT records a massive spike in open interest for UST futures the eurodollar curve inversion moves to the visible side of the time horizon. Investors in perhaps the most important market in the world are no longer preparing for some non-specific distant “bad scenario” they are increasingly preparing for specific dangers now within sight.

As noted earlier this week, we’ve surely progressed from uncertainty (2020-21 inversion) into fear (2019-20 inversion, and deep at that). This curve contortion is the biggest warning yet in a month filled only with big ones.

This isn’t about the Fed at least so far as what its officials are intending to accomplish. The market has moved way past a “Fed pause” and into a full-on Fed reverse. Ask yourself, what would force Jay Powell to shift from his current stance of an unshakably “strong” economy and labor market to the exact opposite place, lowering interest rates in a desperate and futile bid for stimulus?

What happened to Bernanke between March 2007 when subprime was contained and September 2007 when the FOMC voted its first cut proving it wasn’t? 

I’m not at all claiming that the situations are exactly the same; they aren’t. This won’t be about mortgages, for one. The scenarios are different, too, when considering economic circumstances; up to 2007, there had been some actual economic growth in the world; for a long time before 2018 there hasn’t. The specific challenges will be different and ultimately that’s what the shifting inversion really means.

The global economy is very likely about to be seriously challenged. 

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The CEO of HSBC Turkey, one of the country’s most high-profile executives, is facing an investigation over allegations that he insulted Turkish President Recep Tayyip Erdogan via social media back in 2013, according to Bloomberg. The investigation is a sign that the Turkish state’s crackdown on dissent is intensifying.

The probe is related to a five-year-old retweet sent by HSBC CEO Selim Kervanci during a wave of protests against Erdogan’s rule five years ago. Investigators haven’t said where they got the information. The footage was reportedly from the 2004 German movie “Downfall,” which was set during Adolf Hitler’s last days and depicted the collapse of Nazi Germany (a scene from the movie has been popular fodder for viral Internet jokes in the west).

The demonstrations, which began in June 2013, snowballed from a small sit-in against the redevelopment of the Gezi Park in central Istanbul into a weeks-long nationwide protests against Erdogan’s rule.

Kervanci gave a deposition to Turkish police back in September. Insulting Erdogan is a crime in Turkey, and as the purge inspired by an attempted coup back in 2016 has continued, Turkish police have continued to prosecute thousands of people for allegedly mocking or insulting the president.

The attack on the prominent banker is reminiscent of Erdogan’s screeds against the “interest rate lobby” – the cabal of senior bankers he accused of pushing for higher rates in the country, to the detriment of the Turkish people.

The repression grew worse after a failed military coup in 2016. What began as a round-up of alleged followers of an Islamic cleric whom Ankara blames of orchestrating the attempted putsch has expanded into a crackdown on journalists, academics and artists opposed to the concentration of vast executive powers in the presidency, a shift approved in a 2017 referendum.

Bankers have also been the subject of Erdogan’s ire. The president has frequently accused an “interest rate lobby” of pushing for higher borrowing costs to cripple Turkey’s economic growth.

HSBC is the 15th-largest Turkish bank by assets. It has 82 branches and 2,250 employees. At one time, HSBC had planned to sell its Turkish unit but has since put those plans on hold after divesting other loss making units.

Turkey prosecuted more than 6,000 people in 2017 for insulting the president. And earlier this year, two of the country’s most popular comedy actors were taken to court over a bit that criticized Erdogan’s authoritarian rule.

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