Homeland Security and Florida Cops Spied on Chinese Massage Workers for Months but Still Couldn’t Find Evidence of Human Trafficking

By now, the idea that Florida police busted up an international sex slavery ring operating through Chinese massage parlors has firmly taken hold in the national narrative, even though most of the charges, including those levied at Patriots owner Robert Kraft, were misdemeanors for soliciting prostitution. A closer look at the arrests in this operation reveals just how shoddy the reporting on the case has been—and just how little the police statements on TV resemble what they’ve put in their actual reports.

No one in this case was arrested on suspicion of sex trafficking, forced labor, compelling prostitution, or any other charge that implies force, fraud, or coercion in the arrangement.

Of the workers we know of from police documents (including those who were arrested and those who weren’t), all have official massage therapy licenses in good standing. The Asian-owned massage and spa businesses raided across four counties were also licensed and in good standing with the state of Florida.

Police from Vero Beach said in a press release that one woman had been arrested for human trafficking, and Florida news outlets are still running with that story. But a simple check of county court records shows that this is not the case. Like her colleagues, the woman is charged with engaging in prostitution herself, “deriving support” from prostitution, and “racketeering,” which sounds serious but just means working with others to accomplish something illegal.

Mutually Trafficking Each Other?

All of the women who were arrested in these stings are being charged with prostitution themselves. They’re also facing felony charges for participating in and earning money from each other’s sex work. In this way, police have found a sort of loophole that allows them to bring felony charges against sex workers simply for working together.

Some of the women arrested were managers or owners at one of the 10 spas targeted, but others simply worked there themselves, giving massages and sometimes something extra, and occasionally accompanied their managers on errands like going to the store or bank. (Police suggest these instances of them traveling together could mean workers were victims who couldn’t be let out of eyesight, and yet they also charge the workers with felony crimes for going along on these tasks.)

Not counting clients like Kraft, nine women and one man are currently facing charges in conjunction with these stings, which come from two separate but similar operations carried out simultaneously on Florida’s southeast coast. One involved the participation of Homeland Security Investigations, the Vero Beach Police Department, and the Indian River Beach County Sherriff’s Office, while the other included authorities from nearby Martin and Palm Beach counties.

The Palm Beach County and Martin County Stings

The Palm Beach/Martin operation has been getting the most attention, since it’s the one that snagged Kraft. Some have extrapolated from his arrest to assume that all the customers at these massage parlors were rich, white men, and to insinuate that this is isolating them from more severe charges. But by all evidence, soliciting prostitution was the extent of their criminal conduct. And according to the arrest records, at least half of those arrested were men of color. Their listed occupations include an array of manual labor jobs, including “dog grooming,” “mover,” “roofer,” and “painter.”

All of the businesses targeted in Palm Beach and Martin Counties were legally registered and licensed in the state of Florida; one had opened in 2012, the others in 2016–2018. Orchids of Asia and Sequoia Apple Day Spa both list Hua Zhang as their owner; the other three (Florida Therapy Spa, Cove Day Spa, and Bridge Spa) were owned or run by Ruimei Li.

After at least six months of surveillance and undercover operations at these businesses, police wound up arresting Zhang, Li, and two other women on prostitution and prostitution-related charges. All of the women arrested were Chinese nationals in their late-thirties through fifties, and all of them came to the U.S. legally.

The Indian River Beach County and Orange County Stings

The stings in Indian River Beach and Orange counties netted more than 100 solicitation arrests for customers plus the arrest of six people (five women, one man) associated with the massage businesses. The man is accused of serving as a driver for women who worked temporarily at the spas while visiting from out of town; he has been charged with racketeering. The women are charged with prostitution, racketeering, and deriving support from the proceeds of prostitution. One is also charged with “unlawful transport for the purpose of prostitution.”

There is no evidence in initial complaints, the arrest affidavits, the arrest warrants, or subsequent court documents that any of those arrested were using force or deception at the massage businesses. On the warrants, the victim is listed as the State of Florida.

The police documents detail the lengths local cops and federal agents went to in order to show that some men were getting jerked off after their massages. In Orange and Indian River Beach, the investigation dates back to at least August 2018 and involved East Sea Spa, AA Massage, A+ Massage, and East Spa.

First, an undercover Homeland Security agent received massages and asked about add-on sexual services. A police report said that the agent kissed and had his penis touched by the worker but left before anything else could happen.

Then they staked out the businesses, went through their trash and tested it for semen, interviewed men who exited, and followed around the women who managed and worked at the spas. (One very detailed section of arrest affidavits describes two of the arrested women buying condoms.)

Then they got warrants to install hidden cameras in massage rooms and captured weeks’ worth of video evidence from within.

If abusive antics were an issue at these places, weeks of hidden camera footage should at least have hinted at it. Instead, nothing on the extensive surveillance footage yielded charges for sex trafficking or other abusive behavior. What it did catch was a bunch of regular massages being given and sometimes additional sexual activity—mostly hand jobs.

Cops Can’t Do Math (or Truth)

Police have suggested that “victims” at these businesses were sexually serving 1,500 men per year. But according to arrest documents, their cameras caught an average of about one sexual customer per employee every three days.

Those that were arrested stand accused of engaging in between 3 and 16 paid sex acts apiece throughout the 40-day surveillance period.

Police originally relied on two details to spin the trafficking narrative in the press: Some of the women were living at the massage parlors, and they “weren’t allowed to leave.” But Martin County Sheriff William Snyder later admitted that the part about not being allowed to leave was false.

Included as evidence that they lived there was the presence of “food and condiments” in a kitchen fridge—pretty standard for workplace kitchens, no? In addition, one of the places had two extra rooms, in which police found beds made with sheets and pillows and dressers holding personal belongings. Police later told reporters these women were sleeping on “cots” and in “squalor,” but that’s not what their official report says. (It’s also worth noting that the one woman police say for sure was briefly staying at one of the spas is also facing the most prostitution charges, so in practice police don’t really seem to think sleeping there equates to victimhood.)

In any event, the fact that some women may have temporarily lived in the spare bedrooms needn’t speak to anything untoward. Police suggest that some of the workers came in for a short time from other U.S. cities; these rooms could have been temporary crash pads while they were there.

Because these are Asian immigrant women, many people are quick to see visiting from other cities as something salacious and horror-filled. But sex workers (including those unquestionably on the high end of the empowerment and independence spectrum) often “tour” when work is slow in their cities, or to exploit the novelty factor to make money in a concentrated time period elsewhere. The fact that Chinese-American masseuses and sex workers may work together and have informal community ties doesn’t make them a vicious sex-slaving conspiracy.

Prices at the different spas varied—they were owned and staffed by different people—but they do not suggest overall that these women were operating at the most desperate level. At the Indian River Beach spas, a regular massage cost $50 and a “happy ending” (manual stimulation of the genitals) was $60 on top of that. Oral sex was an additional $100, and full sex $160. At others spas, women offered different arrangements and prices, which suggests they were setting their own terms.

Most of the women arrested are still being held in county jail. Their bonds have been set in the $200,000 to $800,000 range, and any money they earned working at the massage parlors (as far we know, their only source of income) cannot be used to pay this balance. So far, at least three have entered pleas of not guilty and are asking for jury trials.

The more that comes out about this case, the more it looks like police are just using human trafficking fears to justify their months of undercover massages and their big press announcement about arresting Kraft.

The authorities may eventually find illegal dealings beyond consensual commercial sex, but they certainly haven’t yet. Apparently, they chose to go on a national media offensive with the sex-trafficking story before even having a shred of evidence to that effect.

But now that Kraft has made headlines and the national media have milked the story, how many people will care if cops quietly drop the bit about the transnational sex cabal? Will anyone even notice what ultimately happens to these women that police stalked, made secret porn films of, and then locked in cages?

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Mike Lee: ‘Every Conceivable Partisan Combination’ Has ‘Deviated From’ Federalism

Sen. Mike Lee (R–Utah) said today that under both Republicans and Democrats, the United States has “deviated from” the principles of federalism and separation of powers.

In a speech to the Conservative Political Action Conference (CPAC), the Utah senator did suggest that things have gotten better since Barack Obama left the presidency. But he still thought there was plenty of blame to go around. Praising both “the vertical protection of federalism that keeps most of the power close to the people at the state and local level” and “the horizontal protection of separation of powers that says we’re going to have one branch that makes the laws, another branch that enforces them, and yet another branch that interprets them,” Lee warned that America has “deviated from both of those principles under the leadership of Houses of Representatives, of Senates, and White Houses of every conceivable partisan combination.”

Lee took particular issue with Obama, noting his actions regarding U.S. involvement in Libya and the Deferred Action for Childhood Arrivals program. Lee didn’t single out Donald Trump’s attempt to use a national emergency declaration to build a wall on the U.S.–Mexico border. He did point out that Democrats blasting Trump’s move on constitutional grounds, such House Speaker Nancy Pelosi (D–Calif.) and Senate Minority Chuck Schumer (D–N.Y.), did not similarly criticize Obama.

“This isn’t a partisan issue,” Lee said. “This is a constitutional issue, and it is an absolute imperative for our freedom.”

Lee has previously said he believes Trump’s national emergency declaration is likely legal. “Whether or not it should be legal is a different matter,” he said in a statement earlier this month. “Congress has been ceding far too much power to the exec. branch for decades. We should use this moment as an opportunity to start taking that power back.”

Bonus link: In July, Lee spoke with Reason‘s Matt Welch on a variety of topics, including congressional dysfunction:

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Huawei Makes First Court Appearance In Trade Secrets Case

Huawei’s day in court has finally arrived.

As analysts struggle to parse what the failed US-North Korea summit means for China trade talks (could it possibly strengthen Beijing’s hand by pressuring Trump to pull punches in the hopes of winning support for a deal with North Korea?), Huawei is preparing to appear in a Seattle Courtroom on Thursday, where court proceedings on charges that it stole trade secrets from T-Mobile are set to begin.

Huawei

Here’s more from Bloomberg:

China’s biggest smartphone maker and its U.S. affiliate are set to appear in federal court in Seattle at 9 a.m. to face charges that they engaged in a scheme to steal trade secrets from T-Mobile US Inc. They are expected through lawyers to plead not guilty to trade-secret theft, wire fraud and obstruction of justice.

One day later, a Canadian court must decide whether the company’s CFO, Meng Wanzhou, should be extradited to the US, where she is wanted on charges of fraud and sanctions violations. If it rules to begin the extradition process, that will set in motion a legal proceeding that could take months or even years.

The arraignment comes just a day before Canada’s deadline to decide whether to officially order the start of extradition hearings against Huawei Chief Financial Officer Meng Wanzhou, who is wanted in the U.S. on fraud charges. In a separate indictment filed in Brooklyn, U.S. prosecutors allege she lied to banks to trick them into processing transactions for Huawei that potentially violated Iran trade sanctions.

According to BBG, history suggests that Canada will approve extradition.

If history is any guide, Canada will probably start extradition proceedings, which will set in motion a process that promises to be long and politically explosive. China has demanded that Canada release Meng and, since her December arrest in Vancouver, has detained two Canadians on national security grounds and sentenced a third with a death sentence for drug trafficking in China.

Meng, meanwhile, won’t appear in court again until March 6.

The case against Huawei in Seattle revolves around whether Huawei stole technology from T-Mobile headquarters in Bellevue, specifically regarding its robotic phone-testing system, a robot hand nicknamed “Tappy.”

The US says it has evidence, including e-mails, showing that Huawei encouraged its engineers to steal technology from US firms.

In the trade-secrets case, prosecutors said in a January indictment that from 2012 to 2014 Huawei stole information from T-Mobile’s Bellevue, Washington, specifically technology related to T-Mobile’s phone-testing robot, Tappy.

The U.S. says it uncovered Huawei email messages showing it offered bonuses to employees for information stolen from companies worldwide. Huawei faces fines of more than $5 million, or three times the value of T-Mobile’s secrets, according to the government.

The company has denied any wrongdoing and said it expects to be found innocent in court.

Prosecutors and lawyers for the company may discuss Thursday what pretrial information sharing they’ve done or is required, schedule the next hearing, and possibly set a trial date.

Robert H. Westinghouse, James F. Hibey and Brian M. Heberlig have indicated in court filings they will represent Huawei.

The case is set to begin at 9 am Pacific Time. Of course, if Beijing gets the sense that US prosecutors are seeking to throw the book at Huawei (particularly as the US has largely failed in its efforts to convince western allies to abandon Huawei technology), that could potentially disrupt the trade talks.

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WTI Tumbles Back Below $57 After US Offers To Sell Oil From SPR

Having failed to push the Saudis to stem prices (in fact being largely ignored), the Trump administration, according to Bloomberg headlines, has decided to counter high oil prices by offering to sell 5mm barrels from the SPR…

WTI dropped on the headlines…

We will see how long this dip holds as Russia’s Energy Minister Alexander Novak and his Saudi Arabian counterpart Khalid Al-Falih discussed bilateral and multilateral cooperation on the phone, Russian ministry says in a statement on its website.

 

 

 

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How Individuals Can Reset The Financial System

Authored by Tom Chatham via Project Chesapeake blog,

We have often heard the predictions that the currency system will be reset at some point when the bankers can no longer keep the current ponzi scheme going. The current scheme involves the ability of the bankers to convince the population that pieces of paper rolling off a machine or digits created on a computer screen are real wealth. The education system has been successful in that regard.

Very few people actually understand what real wealth is or anything about economics. They have been led to believe that these things are too complicated for them to understand and it should be left to the experts. These same experts get richer as everyone else gets poorer. That is the way they have rigged the system.

Resetting the system and taking these con artists out of the loop can be as easy as refusing to accept paper or electronic money and only accepting gold and silver for payments. This sounds crazy on the surface but it is not impossible to do and it must be done before they can transition completely into electronic payment systems. Once they transition into electronic payments they will be able to control everything you do and buy.

If they do not want you to own guns or ammo they can simply ban all of these types of transactions. If they do not want you to buy gold or silver they can ban those transactions. If they do not want you to stockpile food they can limit how much you buy from week to week. With no way to buy outside of the electronic system, you will be totally under their control even more than you are now.

The simple way to bypass the control mechanisms meant to control you is to have a medium of exchange that is universal so it cannot be controlled by any one person or group. Many people see the blockchain system as a good way to go because it is secure but there is something you need to keep in mind. This system requires the use of electronic systems to process and transmit these digital units. Those who control the electronic systems control the flow of digits. You may have a wallet full of coins but if you cannot connect to the person you want to trade with, how much are they really worth?

A system that cannot be controlled by anyone has been around for millennia. That system is gold and silver. The free market constantly adjusts the value of these metals when they are used as money. They are time tested and proven methods of exchange and stores of wealth.

A population that wishes to rid itself of the corrupt money makers has only to begin using gold and silver as the primary means of exchange. To be useful these metals must be present in sufficient quantities to act as an exchange mechanism in society. This means that individuals must exchange some of their fiat currency for these metals while they still can. With as little as two ounces of gold and twenty ounces of silver per household, the population of an area would have the quantities necessary to transition to a pure monetary system. At current prices three thousand dollars per household would set the population free of bankers and rigged monetary systems.

While this much gold and silver may not sound like very much you need to remember that since 1913 the dollar has been devalued by over 97%. The value of this much gold and silver one hundred years ago was quite substantial for a household to have. With the elimination of inflated currency the prices of goods can return to their real value in terms of gold and silver.

The only thing standing in the way of a new monetary system based on gold and silver is the population itself. The lack of understanding by the average person will ultimately doom society to the poverty and loss of freedom defined by fiat currencies. Until this changes, society will continue to suffer at the hands of those who control the production and flow of currency.

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‘Soft’ Data Surge Continues As Chicago PMI Spikes To Dec 2017 Highs

Echoing the v-shaped recovery in the stock market – despite plummeting earnings and macro data – US ‘soft’ survey data has staged a dramatic recovery with China purchasing managers the latest to suggest exuberance is back.

Against expectations of a modest rebound to 57.5, Chicago PMI surged back to its highest since Dec 2017 at 64.7…

 

This is six standard deviations above expectations…

Under the hoods:

  • Prices paid rose at a faster pace, signaling expansion

  • New orders rose at a faster pace, signaling expansion

  • Employment rose at a faster pace, signaling expansion

  • Inventories fell and the direction reversed, signaling contraction

  • Supplier deliveries rose at a slower pace, signaling expansion

  • Production rose at a faster pace, signaling expansion

  • Order backlogs rose at a faster pace, signaling expansion

All of which is evident in the following chart as ‘real hard’ economic data contonues to disappoint but ‘soft survey’ data rebounds dramatically…

Is this putting Powell further in the corner?

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Ralph Northam’s Wife Schools Black Kids On Slavery Using Raw Cotton

Virginia’s first lady Pam Northam has come under fire after handing raw cotton to two black eighth-graders during a tour of the Governor’s mansion, and suggested the students imagine what it was like under slavery to pick said cotton, according to the Washington Post. One of the students was the daughter of a Virginia state employee. 

According to Leah Dozier Walker, director of the state education department’s Office of Equity and Community Engagement, Northam singled out the only black kids out of 20 young people who had served as pages during the state Senate session.  

The incident comes less than a month after Virginia Governor Ralph Northam (D) came under fire for a racist 1984 medical school yearbook photo showing him either in blackface or a  KKK outfit. While Northam initially apologized for the photo, he later said he wasn’t in the photo – though he then admitted that he wore blackface for a San Antonio dance competition in his youth. 

“The Governor and Mrs. Northam have asked the residents of the Commonwealth to forgive them for their racially insensitive past actions,” said Walker. “But the actions of Mrs. Northam, just last week, do not lead me to believe that this Governor’s office has taken seriously the harm and hurt they have caused African Americans in Virginia or that they are deserving of our forgiveness.” 

Northam’s office and the parent of one of the other students claims that Pam Northam did not single out the black student, and was handing out cotton to the group. 

A spokesperson for the governor’s office told The Hill that Northam hosted 100 legislative pages at the mansion, and invited them all to touch products displayed in the mansion’s historic kitchen, including tobacco, produce and cotton. Northam did not single any of them out, according to the spokesperson.

Northam has been trying to mount a rehabilitation campaign after the “blackface” incident – however it got off to a rocky start when the student government at Virginia Union University asked him not to attend a civil rights commemoration there. Members of the Virginia Black Caucus, meanwhile, say Northam has not done enough to help underprivileged minorities in the state budget. 

The turmoil among Virginia’s Democratic leadership extends beyond the Northams – with state Attorney General Mark Herring admitting to also wearing blackface in his youth, and Lt. Gov. Justin Fairfax standing accused of sexual assault by two women.

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No Deal for Trump in North Korea: Reason Roundup

A “friendly” departure but no agreement. This time yesterday, President Donald Trump was being heralded for his meeting with North Korean leader Kim Jong Un, the second in a series meant to seal Kim’s approval for nuclear disarmament and other good deeds. That didn’t pan out.

Instead, talks between Trump and Kim “abruptly ended” Thursday morning, The New York Times reports, “with the two leaders failing to agree on any steps” toward any of U.S. goals.

“Sometimes you have to walk,” Trump told reporters at a press conference afterward. “It was about the sanctions. Basically they wanted the sanctions lifted in their entirety, but we couldn’t do that.”

But the exit wasn’t in anger, Trump said. “This wasn’t a walkaway like you get up and walk out. No, this was very friendly. We shook hands.”

“Context matters,” tweets Will Ruger, research and policy VP at the Charles Koch Institute. “U.S.-North Korean relations are in a better place than they have been historically and certainly better than 2017 when there was talk of conflict. Good to see that we are meeting and talking rather than fighting. Diplomacy > war with NK.” He continued:

QUICK HITS

This is horrifying: The Office of Refugee Resettlement got more than 4,500 complaints about sexual abuse of minors being held at immigrant detention facilities from 2014 to 2018, according to a new report from the Department of Justice (DOJ). From these complaints, 1,303 were referred to DOJ, including 178 accusations of sexual assaults by adult staff members.

A bright spot for conservative media in the #MAGA era? Longtime National Review writer Jonah Goldberg will be leaving to help start a new “reporting-driven, Trump-skeptical” media company with former Weekly Standard editor-in-chief Steve Hayes, reports Axios. The yet-unnamed effort “will begin with newsletters as soon as this summer, then add a website in September, and perhaps ultimately a print magazine.”

#MomoChallenge: The latest baseless parental panic is about a character called MoMo who purportedly induces kids to commit suicide.

#CPAC2019: The Conservative Political Action Conference starts today just outside of D.C.

Polling PSA: “Everyone should stay calm and take some deep breaths before concluding that the landscape of abortion politics in the United States has dramatically shifted in a single month, no matter how crazy that month was for coverage of the issue,” writes Washington Post columnist David Byer about a new poll showing a dramatic shift in abortion attitudes.

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Sell Today? Risk Vs. FOMO

Authored by Lance Roberts via RealInvestmentAdvice.com,

The market is downright bullish. 

There is little reason to argue the point given the bullish trend since the December 24th lows. Of course, such is not surprising given the Fed’s dovish turn from tightening monetary policy to quietly putting the “punch bowl” back on the table.

But yet, this rally is occurring at a time where Europe’s earnings growth rates for the just reported Q4-period stands at a -1% annualized, which is the lowest since Q2-2016, and the U.S. is on the verge of an earnings recession as well as declining economic data.

Something doesn’t quite jive. As Morgan Stanley’s Mike Wilson noted (via Zerohedge):

“The US is also about to enter an earnings recession, ironically after one of the strongest years for corporate profits on record, the picture of American companies is not much better. Not only is an above average number of companies issuing negative EPS guidance for Q1 2019 (of the 93 companies providing official guidance, 68 or 73%, have issued negative EPS guidance), but consensus EPS for Q1 is now deep in the red. According to Factset, the average Wall Street forecast now projects Q1 earnings per share to decline by 2.7% Y/Y, worse than a consensus -0.8% forecast drop three weeks ago, and starkly lower than the +3% EPS growth expected for Q1 at the start of the year.”

“In a troubling twist, this EPS drop is taking place even as companies continue to buyback record amounts of stock (according to BofA’s client tracker, corporate repurchases are running 98% YTD compared to the same period last year when as a reminder, total announce buybacks topped a record $1 trillion). More perplexing is that the EPS drop will take place even as S&P500 revenue is still expected to post a solid 5.2% Y/Y growth, suggesting that profit margins peaked some time in 2018 and are now declining, as the following chart from FactSet shows.”

As noted, the economic data is also deteriorating markedly in recent weeks as shown in the latest GDP NowCast from the Atlanta Fed.

Of course, if you have been reading our missives, this drop in the forecast was already evident by the sharp decline in our composite EOCI index.

(The index is comprised of the CFNAI, Chicago PMI, ISM Composite, All Fed Manufacturing Surveys, Markit Composite, PMI Composite, NFIB, and LEI)

As shown, over the last six months, the decline in the LEI has been sharper than originally anticipated. Importantly, there is a strong historical correlation between the 6-month rate of change in the LEI and the EOCI index. The downturn in the LEI predicted the current economic weakness back in July of 2018 and suggests the data will likely continue to weaken in the months ahead. As of January, the 6-month percentage change was at ZERO and will likely go negative in the next quarter.

The next chart is the EOCI index versus GDP. As we have noted several times previously, the bump in economic growth was from 3-massive hurricanes and 2-devastating wildfires in late 2017. The effect of those natural disasters has quickly dissipated as expected and GDP growth, which is a lagged indicator, will quickly follow.

But despite the underlying economic and fundamental data, the markets have surged back to extremely overbought, extended, and deviated levels.

The chart table below is published weekly for our RIA PRO subscribers (use code PRO30 for a 30-day free trial)

You will note that with the exception of bond prices, every market and sector is more than 5% above its 50-day moving average and year-to-date performance is pushing more historic extremes both in price and in extreme overbought conditions.

Those overbought conditions are more prevalent in the chart below. On virtually every measure, markets are suggesting the fuel for an additional leg higher in assets prices is extremely limited.

The markets are not immune to the “laws of physics.” While the price action is indeed bullish in the short-term, the shorter-term moving averages act like “gravity” on prices. Given the current extension and deviation above the 50-dma the odds of a pullback, before a continued advance, is a high probability.

The same is shown in the chart below. Note the current overbought conditions are the same has they have been previously just prior to a corrective action.

Furthermore, investor complacency has quickly returned to the markets despite the fact investors just took a beating last year.

Importantly, record levels of complacency have been previously associated with short-term market peaks rather than the beginnings of bull markets. Unsurprisingly, VIX call buyers have gone on a shopping spree to lock in profits on recent gains as, despite hopes to the contrary, the risk of a price correction has risen markedly.

Here is the point to all of this.

As shown in the table below, it is very likely that if you sold everything today, and went to cash, that you would miss little over the balance of the year. In other words, the bulk of the gains have likely already been made for the year.

“What? I might miss out on a move higher?”

Yes, but at what risk?

Investing is alway about measuring risk versus reward. Currently, the risk to investors is a correction over the next couple of months followed by a rally into year end which culminates in a total return which is LESS than where you are today.

I know. That is a hard concept to grasp when the media is telling you to not only stay invested, but you better “buy more” now as the “bull market is back.”

I can’t disagree that the long-term trend of the market remains bullish, which is why we continue to have portfolios allocated toward equity risk. As shown below, the market has recently touched on the 3-year moving average confirming the longer-term bull trend of the market. The same occurred in 2015-2016 prior to global central banks leaping into action to flood the system with liquidity in advance of the “Brexit” referendum.

With the current advance already approaching historically high deviations from the long-term mean, again, the risk of a correction greatly outweighs the possibility of a continued advance.

While the intermediate-term market remains bullishly biased, the longer-term monthly dynamics are worrisome. From a purely technical perspective, the monthly backdrop for equities remains bearish and despite the sharp rally over the last two months, the market remains below its long-term bullish trend line. If the current rally fails beneath the long-term trend line, which is being tested now, such has been the hallmark of the change from a bullish to bearish market and suggests much more defensive positioning.

It is also worth noting that on a monthly basis the rally in the market has done little to reverse the declining relative strength of the market (top panel) or the monthly “sell signal” (bottom panel) which both suggest portfolios should remain hedged currently.

“History is replete with examples of major recoveries following big sell-offs, many of which turn out to be head fakes otherwise known as bear market rallies. At the end of the trading day, it’s still fundamentals that should drive investing decisions.”- Danielle DiMartino-Booth

As shown above, I agree with that view which is why, for now, we are holding a higher than normal level of cash. Slightly higher levels of cash in portfolios, not to mention hedges, certainly won’t detract significantly from portfolio performance in the short-term but provide an opportunity to take advantage of panicked sellers later.

Investing is ultimately about understanding the risk to invested capital at any given time. As noted previously, the risk currently outweighs the potential for reward by a significant margin. As Danielle concluded:

“This may be a bear market rally for the ages, but that shouldn’t imply investors should do anything other than rent it. Owning it promises to end in tears.”

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Stocks Shrug As Best GDP In 14 Years Spikes Dollar, Bond Yields

US equity market roundtripped to practically unchanged but the biggest annual economic growth since 2015 prompted a spike the dollar and US Treasury yields…

 

Stocks shrugged…

 

The Dollar spiked…

 

And 10Y Yields have well and truly broken out of their recent triangle range…

 

As the market’s expectations for 2019 rate-changes shifted hawkishly… (but remains uber-dovish at -11bps)

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