Month: March 2019

Sen. Mike Lee’s Bill To Limit Trump’s Emergency Powers Doesn’t Actually Address the Immediate Problem

Come Thursday, the Senate is expected to vote on a resolution terminating President Donald Trump’s national emergency declaration, something that has put Senate Republicans in a tough position.

Voting yes on the resolution, which passed the House in late February, would reaffirm their rhetorical commitment to containing executive overreach and check a naked power grab by the president. It would also risk pissing off Trump and the GOP base, who’re depending on the current emergency to fund the president’s border wall.

Fortunately, Sen. Mike Lee (R–Utah) may have given these lawmakers an out. On Tuesday, the Utah senator introduced a new bill that would leave Trump’s current emergency declaration intact, while placing restrictions on the future exercise of emergency powers.

Lee’s bill—the awkwardly named Assuring that Robust, Thorough, and Informed Congressional Leadership is Exercised Over National Emergencies (ARTICLE ONE) Act—would automatically terminate an emergency declaration within 30 days.

Congress would have to pass a resolution explicitly endorsing an emergency declaration to prevent it from sunsetting. The bill would also give Congress the power to limit or amend the scope of any emergency declaration, and require the president to report how exactly his emergency powers are being put to use.

The idea, says Lee, is to claw back some of the powers Congress’ has ceded to the executive branch over the years.

“If Congress is troubled by recent emergency declarations made pursuant to the National Emergencies Act, they only have themselves to blame,” Lee said in a statement. “If we don’t want our president acting like a king we need to start taking back the legislative powers that allow him to do so.”

Whatever the intentions of the legislation, however, its introduction now could well enable the president’s use of emergency powers in the short term. Lee’s bill would allow senators to vote to keep Trump’s wall-funding emergency in place, while also claiming that they are checking future abuses of executive emergency powers.

Sen. Thom Tillis (R–N.C.)—one of four Republicans who’ve said explicitly they would be voting in favor of terminating Trump’s emergency declaration—is already wavering on that commitment following Lee’s unveiling of his bill, according to The New York Times.

His defection alone could be enough to sink the House’s resolution.

“If you would have asked me before…then I would have said, in the Senate, the president is going to lose,” Sen. Joe Kennedy (R–La.) told the Times. Now, he’s not so sure. “A lot of people are trying to think of a way to express their support for the president, but at the same time express their concern” about executive overreach, he said.

In addition to possibly preserving Trump’s current wall-funding emergency declaration, it’s also questionable how much Lee’s legislation would limit the future ability of any president to declare national emergencies.

While the bill would automatically terminate these emergencies within 30 days, the president could still circumvent Congress by simply re-declaring a national emergency every month.

A spokesperson for Lee’s office told Reason that while there’s nothing in the senator’s bill to prevent this kind of behavior, “such obvious shenanigans would be politically unsustainable.”

That’s certainly possible. But given that Congressional Republicans largely lack the political will to check Trump’s current invocation of national emergency powers (powers many of them think the president shouldn’t have in the first place), one wonders if they’ll be more willing to check future excesses that still technically conform to the letter of the law.

“The history of these big framework statutes doesn’t give you a lot of reason to hope that a new framework statute is going to solve the problem of lack of Congressional will to fight the executive branch on these things,” says Gene Healy, Vice President of the libertarian Cato Institute and an expert on presidential powers.

Healy points to the War Powers Act—which puts limits on the ability of the president to deploy into foreign conflicts without Congressional authorization—as an example of a well-meaning statute that presidents have nevertheless managed to ignore or skirt without repercussion.

Nevertheless, Healy says that Lee’s bill is a good first step toward reigning in presidential emergency declarations.

“I think it’s a start. It would be better if these things are time-limited,” he tells Reason. Healy also praised the bill’s requirement that Congress approve an emergency for it to continue. The current National Emergencies Act allows emergencies to continue unless Congress explicitly votes to terminate them.

A more comprehensive approach, says Healy, would be to pare back the powers a president can unlock with an emergency declaration.

A Brennan Center paper from December 2018 found 123 statutory powers the executive can unlock by unilaterally declaring an emergency. There are currently 31 active national emergencies, some of which date back to the Carter Administration.

The New York Times reports that over a dozen Republican senators have said they’d support Lee’s bill. House Speaker Nancy Pelosi (D–Calif.) today said that even if the ARTICLE ONE Act passed the senate, she would not bring it up for a vote in the House.

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China Offers To Help Venezuela Restore Power As Maduro Accuses Trump, Guaido Of “Sabotage”

China offered on Wednesday to help Venezuela repair its power grid after the country was plunged into its worst blackout on record, now in its sixth day, reports Reuters. 

With the power blackout in its sixth day, hospitals struggled to keep equipment running, food rotted in the tropical heat and exports from the country’s main oil terminal were shut down.

Speaking in Beijing, Chinese Foreign Ministry Spokesman Lu Kang said China had noted reports that the power grid had gone down due to a hacking attack.

“China is deeply concerned about this,” Lu said. –Reuters

“China hopes that the Venezuelan side can discover the reason for this issue as soon as possible and resume normal power supply and social order. China is willing to provide help and technical support to restore Venezuela’s power grid,” added Lu.

President Nicolas Maduro, who retains control of the country’s military and has the support of both Russia and China, has accused US President Donald Trump of cyber “sabotage.” 

“The United States’ imperialist government ordered this attack,” Maduro said in a 35-minute televised address on Monday night accusing the White House of launching an imperialist “electromagnetic attack.” 

“They came with a strategy of war of the kind that only these criminals – who have been to war and have destroyed the people of Iraq, of Libya, of Afghanistan and of Syria – think up,” Maduro added. 

Maduro claimed that the Trump administration conducted the attack in coordination with “puppets and clowns” from the Venezuelan opposition in order to bring about a “a state of despair, of widespread want and of conflict” to justify a foreign invasion. 

Caracas-based political analyst Dimitris Pantoulas tweeted on Tuesday that Maduro appeared “worried, anxious and absolutely desperate,” adding that it’s clear that the government is not in control of the situation. 

Venezuela’s chief prosecutor meanwhile has asked the country’s supreme court to open an investigation into opposition leader Juan Guaidó – who has been accused of being involved in the blackout, according to The Guardian. 

Tarek Saab announced the inquiry on Tuesday, a day after the embattled president, Nicolás Maduro, accused Donald Trump of masterminding a “demonic” plot with the country’s opposition to force him from power.

Guaidó – who most western governments now recognize as Venezuela’s legitimate interim leader – is already under investigation for allegedly fomenting violence, but authorities have not tried to detain him since he violated a travel ban and then returned home from a tour of Latin American countries. –The Guardian

On Tuesday, foreign minister Jorge Arreaza ordered US diplomats to leave the country within 72 hours. “The presence on Venezuelan soil of these officials represents a risk for the peace, unity and stability of the country,” reads a government statement. On Monday night US Secretary of State, Mike Pompeo, announced that Washington was withdrawing all remaining diplomatic staff from Caracas. 

Power had returned to some parts of the country on Tuesday according to witnesses and social media, however it remains out in parts of the capital city of Caracas, as well as the western region bordering Colombia. Information minister Jorge Rodriguez said that power was restored to the “vast majority” of the country, however evidence suggests otherwise. 

As independent journalist Sotiri Dimpinoudis reports, looting is taking place across the country – including the city of Maracaibo which suffered an electrical substation explosion. 

According to Reuters, the “non-sabotage” version of the blackout is that it was likely caused by a technical problem with transmission lines linking the Guri hydroelectric plant in southeastern Venezuela to the national power grid. 

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Paul Manafort Sentenced to Nearly Four Additional Years in Federal Prison Just as New York Files New Charges

Paul ManafortPaul Manafort will serve a total of seven and a half years in federal prison for various tax frauds and lies he told to government officials, and it now looks like prosecutors in New York are looking to increase the tally with state charges.

U.S. District Judge Amy Berman Jackson on Wednesday added 43 months to Manafort’s federal sentence. Last week’s sentence covered multiple cases of bank and tax fraud. Today’s sentence covered Manfort’s lies to the Justice Department about his lobbying efforts in Ukraine, his failure to register as a foreign agent, money laundering, and witness tampering.

Almost immediately after Jackson handed down the rest of Manafort’s sentence, Manhattan District Attorney Cy Vance announced 16 new charges against Manfort. Manafort stands accused of mortgage fraud, falsifying business records, and conspiracy, with Vance’s office alleging that he profited millions off providing false information while applying for loans. These alleged crimes all took place between December 2015 and March 2016.

Because these are New York charges and not federal charges, that means President Donald Trump cannot pardon Manafort if he’s convicted; which, intentional or not, gives this new indictment a feel of political motivation. Manafort is 69 years old and will spend most of his 70s in prison. There’s very little justice to be served by extending that prison time even further. The New York Times reported that he faces up to an additional 25 years if convicted of state charges.

The Times notes that prosecutors had previously decided to move forward with this case regardless of whether Trump pardoned Manafort, and the paper predicts that Manafort’s lawyers will argue it would count as double jeopardy to try him again in state court for the same crimes he was tried and convicted of in federal court.

Jacob Sullum noted last year that New York’s Democratic attorney general is outraged at the idea that the president can use his power to pardon people she doesn’t like (if the president in question is Donald Trump), and that she considers it a terrible legal “loophole” that Manafort couldn’t be charged again for these same crimes by state prosecutors.

Read the details of the new indictments here.

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Sterling Rallies As UK Parliament Votes To Reject No-Deal Brexit, 312 To 308

Cable was extending its gains as the UK parliament headed into its vote on a no-deal brexit.

Bloomberg’s Emma Ross-Thomas points out, while lawmakers are set to walk away from the cliff’s edge by taking the threat of a no-deal Brexit off the table, in some ways the recent events amount to an “own goal” (in football parlance) for Brexiteers. For those wanting a clean break from the EU, nixing May’s deal raises the potential for a “soft” Brexit down the line, or even a second referendum on leaving at all.

So what is the government motion being voted on tonight? Here it is, in its own words:

“That this House declines to approve leaving the European Union without a Withdrawal Agreement and a Framework for the Future Relationship on 29 March 2019; and notes that leaving without a deal remains the default in UK and EU law unless this House and the EU ratify an agreement.”

And the vote is in – the UK parliament rejects a No-Deal Brexit by 312-308.

Sending Cable higher…

U.K. Prime Minister Theresa May is now planning to ask the European Union for an extension to the March 29 Brexit deadline lasting about two months, according to people familiar with the matter.

May is planning to set out next steps and how the extension to the Article 50 deadline will work with Parliament due to vote on whether to extend the deadline on Thursday.

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US Economy “Muddles Through” As Thin-Air-Spending-Power Slumps

Authored by Daniel Nevins via FFWiley.com,

TSP Indicator Update: Criss-Cross, Flip-Flop and Remembering 1966

William McChesney Martin, the ninth and longest-serving Chairman of The Fed

In November, we argued that the business cycle rests heavily on certain types of incremental spending—namely, spending that doesn’t require prior savings. We used the term thin-air spending power (TSP) to describe spending that’s financed by external “injections” instead of prior savings.

As part of our argument, we shared the chart below, which compares TSP-derived spending on the left (financed by fresh bank credit) to spending that merely recycles savings, such as the prior domestic savings category on the right.

We also shared a diagram that puts the argument in pictures, illustrating how bank credit boosts economy-wide spending.

As shown, bank credit stands apart because it doesn’t require savings from prior income. Rather, it creates fresh TSP, which again represents spending power that materializes from “thin air.” (See articles here and here for further explanation.)

Measuring TSP

But banks aren’t the only source of TSP. Investment gains and losses can also boost or dampen spending in ways that leak into the circular flow depicted above. Recognizing the similarities between these TSP sources, we can build a highly predictive indicator from only two components:

  • Real new bank credit. Inflation-adjusted new bank credit aggregated over four-quarter periods and expressed as a percent of final domestic demand in the prior period.

  • Real holding gains. Inflation-adjusted holding gains (household and nonprofit gains from equities, mutual funds, real estate and pensions) aggregated over four-quarter periods and expressed as a percent of final domestic demand in the prior period

The chart below shows the indicator’s average path during the last nine business-cycle expansions. Note that we’re mapping a path through two dimensions—one for each of the two primary TSP sources—by connecting data sequentially.

And here’s the early 2000s expansion on its own.

As shown in the last chart, TSP tends to cycle through three phases: recovery, financial inflation and financial deflation:

  • Recovery. TSP meanders upwards and rightwards as the financial economy heals from the prior recession.

  • Financial inflation. TSP enjoys the big air of the upper-right triangle.

  • Financial deflation. TSP completes the cycle by becoming scarce once again, dropping below a diagonal recession warning.

In other words, TSP normally triggers a recession warning shortly before the onset of a recession, anywhere from one to five quarters before. (Note that we use a ten-to-one ratio for our recession warning, meaning we expect a dollar of additional bank credit to have about ten times the effect on spending as a dollar of real asset holding gains—see the earlier TSP article for explanation.)

Remembering 1966

All of which brings us to our TSP indicator update, which begins with a look-back to 1966. After our November article, TSP carved a path that’s occurred only once before in the indicator’s 65-year history—during the 1960s expansion. As shown below, TSP breached the recession line in the midst of a 1966 credit crunch only to restore financial inflation one quarter later, completing a criss-cross that had much to do with monetary policy.

In the year and a half leading up the 1966 criss-cross, the FOMC was actively tightening policy—raising bank reserve requirements, pressuring credit growth and lifting the discount rate in December 1965 in an action that famously earned Fed chief Martin an invitation to LBJ’s Stonewall, Texas ranch.

But not for the first time and certainly not for the last, the financial sector responded to the monetary tightening in some ways that were expected and others that weren’t. On the expected side of the ledger, banks sold Treasuries to meet reserve requirements. But by the summer of 1966 they had few Treasuries left to sell, so they began dumping municipal bonds while removing their usual support for new municipal issues, an unexpected response that weighed heavily on municipalities while rattling confidence throughout the financial sector. A mini–financial crisis with convulsions in the muni market was hardly the result the FOMC was seeking.

And how did the Fed react?

On September 1, 1966, the Fed’s regional bank heads sent the same letter to all member banks in their regions—they asked those banks to restore the flow of credit to municipal issuers. The letter also encouraged banks to replenish reserves with borrowings at the discount window, and the FOMC then sharply increased its Treasury purchases during Q4, again with an aim of replenishing reserves and reversing prior policies.

In other words, the Fed’s 1966 flip-flop explained the TSP criss-cross. Perhaps not surprisingly, the economic expansion then continued for another three years. (Besides the Fed’s archives, you can find an interesting account of the 1966 credit crunch in Hyman Minsky’s Stabilizing an Unstable Economy.)

Fast-Forwarding to Today

With that story as background, here’s a chart showing TSP’s path during the current expansion, using last week’s flow-of-funds data for Q4 2018 and our preliminary estimate for Q1 2019.

And here’s the same data in just one line, equating $1 of new bank credit to 10 cents of asset holding gains as in the rationale behind the recession-warning line. (Again, see the earlier TSP article for explanation.)

You can think of the Q1 estimate as like a GDP tracker—the final figure will surely be different but possibly not much different.

(As an aside, if you’re interested in more frequent TSP updates along with further detail on the underlying inputs, join our mailing list for indicator updates. You can do this by sending an email with “indicator updates” in the subject line to queries@nevinsresearch.com. Note that this is different to our blog subscriptions—we only update indicators on the blog when we find the time to write an article about them, meaning the blog doesn’t report most of our research.)

So TSP grazed the recession line and then almost certainly jumped back into financial inflation in Q1 (barring a market crash in the next two weeks). This most recent instance is less criss-cross than ricochet, but it’s still reminiscent of 1966. In both cases, TSP reversed direction just after the Fed sharply changed course. It’s almost as though the Powell Fed waited for TSP to touch the recession-warning line before unleashing a flurry of statements that walked back a prior commitment to policy tightening.

Conclusions

It’s not hard to spot risks to the U.S. economy in early 2019 – most obviously: tepid auto sales and housing data, a sharp drop in retail sales, and continued weakness in Europe and Asia – but the Fed’s policy flip-flop has helped restore a degree of financial inflation.

So as weak as Q1 GDP is likely to be (see, for example, the Atlanta Fed tracker), we expect the expansion to muddle through, reaching the third quarter to become the longest on record at over ten years.

That said, we can’t rule out another TSP reversal, especially as stock prices remain vulnerable, the housing market grinds ever slower and the recent resurgence in bank credit appears to be leveling off. As we argued in November, TSP bears watching. It might once again prove to be the best indicator for timing the next recession.

For the full TSP chartbook, click here. For a deeper dive into the underlying philosophy, see Economics for Independent Thinkers.

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US Markets Extend Drop As Trump Warns “Not In A Rush” For China Trade Deal

Dow Industrials and Transports began the drop on Boeing’s demise, but the rest of the US equity markets began to tumble when President Trump said that he “was not in a rush” to complete a US-China trade deal.

  • *TRUMP: ‘NOT IN A RUSH’ TO MAKE DEAL WITH CHINA ON TRADE

  • *TRUMP: U.S. HAS OTHER TRADE DEALS `COOKING’

  • *TRUMP: CHINA HAS NOT BEEN DOING WELL, WANTS TO MAKE A DEAL

And that extended the markets drop…

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Exposing The Fed’s CONfidence Game

Authored by Sven Henrich via NorthmanTrader.com,

The global economic landscape remains weak yet there appears to be no concern on the side of bulls and investors alike, so firm is the belief that the earnings recession that is unfolding is temporary, so firm is the belief that dovish central bankers can once again prevent any downside.

I get it, it has worked for 10 years and it’s worked again seemingly since the December lows. Why pretend it is anything but central banks?

After all Jay Powell is rapidly proving to be the market’s biggest thrust driver to the upside in 2019:

From my variant perch it’s a sign of deep underlying weakness. There is no bull market without central bank intervention or jawboning. Plain and simple.

The underlying premise of it all:

There. They print money and buy assets and in process they distort the entire global price discovery process. Why? Because they have to in order to keep confidence up.

The world is one sell-off away from a global recession because market performance translates directly into consumer confidence and spending. Don’t believe me? Check this out:

In Q4 household financial assets dropped hard for the first time in a long time.

Why? Because markets dropped hard. What else dropped? Retail sales dropped 1.6% in December the biggest decline since September 2009.

Coincidence? You tell me:

Is it the economy that’s leading the horse here? Or is it the other way around? Q1 GDP is much worse than Q4 yet retail spending is higher in January. The case can be made that it is market performance and related confidence that leads spending. No accident then that retail sales bounced back a bit in January, after all we saw a massive rally following the big global central bank flip flop.

None of this is new. Indeed if you look at a longer term chart comparing growth in financial assets and growth in retail sales one can observe an apparent correlation:

The message: Consumer confidence and spending is directly related to how markets perform which is ironic as nearly 90% of stocks are in the hands of the top 10%.

The larger conclusion: If markets drop for an extended time a recession is unavoidable. That’s how closely markets and the economy are now linked. No wonder the Fed always jumps in and quickly so, it is the unspoken prime mandate:

That’s why ever new highs are needed to keep the construct going. And that’s why ever more debt is needed because without more debt the fantasy does not sustain itself.

It’s the prefect bubble spiral that will eventually collapse under its own weight.

And at what cost? It all comes at a steep price.

Via Holger Zschaepitz:

“Global debt of corporations, governments & households hit fresh record at $178tn. Debt has risen by almost $60tn since the great financial crisis, meaning that the economic rebound of the past decade, which brought a global GDP increase of $20tn, has been bought at a high price. 3 dollars of debt translated into 1 dollar of growth”:

It’s inefficient and it eventually comes with enormous consequences.

But for now they keep succeeding in keeping the boogeyman at bay. And it takes ever more debt and ever more accommodative central bankers. No new highs without dovish central bankers. And ever more debt with dovish central bankers. And that’s the big CON in confidence. Because confidence must be maintained at all costs. Or else.

*  *  *

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Elizabeth Warren Wants To Run Your Business for You: Podcast

“I am a capitalist,” says Massachusetts Sen. Elizabeth Warren, who is also a leading contender for the 2020 Democratic Party presidential nomination. “I believe in markets.”

She’s got a funny way of showing her faith. Last week, she unveiled her plan to break up tech giants such as Facebook, Amazon, Google, and Apple. She’s called for a “wealth tax” that would target households with over $50 million in assets and introduced the Accountable Capitalism Act, which would force corporations with over $1 billion in annual revenue to get a national charter and give employees the right to vote in 40 percent of a company’s board of directors. She was also the driving force behind the creation of the Consumer Financial Protection Bureau, an Obama-era agency that was widely assailed by free-market analysts as overly intrusive and unaccountable.

To get a sense of where Warren’s ideas come from, I talked with Todd Zywicki, a longtime critic of Warren. Zywicki teaches law at George Mason University and is the former director of the Office of Policy Planning at the Federal Trade Commission. Zywicki says Warren is a direct ideological descendant of Louis Brandeis, the Progressive Era lawyer and Supreme Court justice who attacked what he called “the curse of bigness” in business and pushed for a massively regulated economy. Warren, says Zywicki, has thoroughly absorbed Brandeis’s distrust of large firms, as well as his belief that “disinterested” bureaucrats can smooth out any and all issues with free markets. What she doesn’t understand, he says, is that the regulatory agencies championed by Brandeis were routinely captured by the businesses they regulated or diverted by the idiosyncratic whims of commissioners, leading to the increasing ossification of the U.S. economy through much of the 20th century until deregulation took hold first during the Carter years and later under Ronald Reagan. More recently, notes Zywicki, the Dodd-Frank laws passed in the wake of the 2008 financial crisis to limit the power of banks have actually increased concentration in the financial sector.

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Photo credit: Alex Edelman/picture alliance / Consolidated/Newscom

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Want to End Urban-Rural Conflict? Stop Looking for a Victor: New at Reason

There’s a spreading revolt against city-spawned restrictions on self-defense rights by the residents of sparsely settled counties and the officials who represent them. The issue “has largely underscored the rift between rural and urban areas,” the Wall Street Journal noted over the weekend.

It’s a rift, writes J.D. Tuccille, that’s widening as the political divide in the United States takes on a strongly geographical character—less along state or regional lines than at the borders between dense populations and open country.

With hostile people from divergent cultures and political affiliations glaring at each other across the nation’s city limits, it’s time to reconsider the tendency towards centralization of power in our country that leaves so many people groaning under laws and policies they find abhorrent. If we really want to defuse tensions, argues Tuccille, we should devolve decision-making as far down the political food chain as possible.

View this article.

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Largest Credit Hedge Fund Bets $1 Billion On Next “Big Short”

One week ago, when remarking on the sudden slide of the US retail sector into the post-Amazon abyss of irrelevance, when in the span of just 48 hours several big names in the American mall industry announced they would be slashing store counts to the tune of over 300 stores, we said that “the relapse of the sector suggests animal shorting spirits may soon re-emerge” noting that “back in 2017 we, and others, dubbed these U.S. retail store closures as the next “big short”. We said that “just like 10 years ago, when the “big short” was putting on the RMBX trade, and to a smaller extent, its cousin the CMBX, some were starting to short CMBS through the CMBX, a CDS index which tracks the values of bonds backed by various commercial properties.” We explained our reasoning for putting on this short through CMBX versus stocks:

The trade, as we discussed before, is not so much shorting the equities where a persistent threat of a short squeeze has burned the bears on more than one occasion, but going long default risk via CMBX or otherwise shorting the CMBS complex. Based on fundamentals, the trade indeed appears justified: Sold in 2012, the mortgage bonds have a higher concentration of loans to regional malls and shopping centers than similar securities issued since the financial crisis. And because of the way CMBS are structured, the BBB- and BB rated notes are the first to suffer losses when underlying loans go belly up.

To be sure, the trade lost some of its vigor in early 2018, when it seemed that the lows in CMBX BBB- may have been hit with the tranche trading in a tight range for the past 2 years; however we predicted that once the new wave of bankruptcies flows through the mall P&L and a new wave of distress hits the mall sector, we fully expect new lows to be observed in this trade which is basically an inverse bet on Amazon’s continued success in stealing market share from pretty much evereyone.

Well, we were right, because just ten days later, the largest credit hedge fund in the US, Beverly Hills’ Canyon Partners told Bloomberg that it is betting in excess of $1 billion against low-rated debt on U.S. commercial real estate over concerns that valuations are stretched and economic conditions are deteriorating.

“It’s enough to provide a fair bit of insurance in downturns,” Canyon Co-Chairman Josh Friedman said in a Bloomberg Television interview Wednesday in Beverly Hills, California.

While we have been saying that the BBB- tranche of CMBX Series 6 is the next “big short” since 2017, largely due to its overexposure to US malls which are rapidly turning into the next Chinese ghost cities, Canyon’s trade is slightly different.

Canyon, which has $25 billion in assets, is also shorting the BBB- tranche of CMBX, but instead the Series 6, it is targeting the recently introduced Series 11, because, as Friedman told Bloomberg, “properties are highly leveraged and at risk of default”, while some parts of the commercial real estate market are oversupplied.

“We just don’t need all that retail space,” the former Goldman and Drexel banker said.

While nowhere near as dramatic as the 2017 plunge in the Series 6, the BBB- tranche of the CMBX S.11, which debuted in January 2018, slumped late last year but has since recovered. The index traded at 94.9 cents on the dollar, up from 92.5 cents a month earlier. Meanwhile, according to ISDA, traders have wagered a net total of $1.8 billion on the BBB- portion of the index as of Feb. 8, with Canyon likely responsible for roughly half of this total.

While the Canyon co-founder described the CMBX short as a hedge against a weakening economy – it outperformed in December when stock prices swooned and credit spreads widened – it is really just another wager on the secular decline in conventional bricks and mortar retailers who are filing bankruptcy at a record clip with 35 major retail chains, and countless smaller ones, filing for Chapter 11 since 2016….

… coupled with a bet against the US consumer, who as we discussed recently has rarely been in worse shape.

Just as troubling for the market is that Friedman, whose Los Angeles-based firm has long been seen as one of the best value investors in the US, increased Canyon’s cash holdings to “well over 20 percent” amid concern that assets are overpriced.

Meanwhile, amid the rising rate environment, the firm’s portfolio moved away from exposure to interest rates by shortening duration; Friedman also warned that there is a lot of “late market behavior,” such as litigation and disputes among different debt holders, that occurs when investors reach for yield and “maybe eat each other.”

“When you see that, you usually know that you’re at the end of the cycle,” he said. “It’s not that different from the end of civilization when people treat each other really bad.” Or, just after the end of civilization, eat each other. 

And with that doom and gloom visual, it’s time to go all in on the pre-apocalyptic market meltup.

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