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Authored by Jonathan Turley,

We have previously followed the suspensions and discipline of students under zero tolerance policies that are used by teachers to justify zero judgment or responsibility.

I have long criticized zero tolerance policies that have led to suspensions and arrests of children (here, here and here and here and here and here). Now this insanity has gone insane after a Colorado school district called police because a 12-year-old boy flashing a clearly toy gun in his own home. 

While the teacher told police the orange gun marked “Zombie Killer” was clearly a toy, the police went to the home of Isiah Elliot on a welfare check and the boy who has Attention Deficit Hyperactivity Disorder (ADHD) and learning disabilities was suspended. 

Does that make sense as opposed to a simple call to the parents?

We have been dealing with the insanity of zero tolerance rules for years. Here is a prior column on the subject (and here). Children have been suspended or expelled for drawing stick figures or wearing military hats or bringing Legos shaped like guns or even having Danish in the shape of a gun. Various criminal and disciplinary cases were opened for finger guns. Despite the public outcry over the completely irrational and abusive application of zero tolerance rules, administrators and teachers continue to apply them blindly. If you do not have to exercise judgment, you can never been blamed for any failure. Conversely, even when the public outcry results in a reversal, teachers and administrators never seem punished with the same vigor for showing no judgment or logic in punishing a child.

Now the insanity has gone virtual. Rather than change the policy when it shifted to virtual learning, the school just blindly continued to treat kids at home like they were in the classroom.

The school does not see what everyone is upset about. The Grand Mountain school said in a statement: “We follow all school board policies whether we are in-person learning or distance learning. We take the safety of all our students and staff very seriously. Safety is always our number one priority.”

Safety? It was a toy gun in the home of a kid.  They were so concerned for the child that they suspended him. 

With growth stocks getting pummeled, one would think that there is at least some rotation out of growth and into value sectors. Alas, one would be wrong, because the core commodity behind so many “value” strategies, oil, is plunging even more than the Nasdaq, with Brent tumbling below $40 for the first time since June…

… a drop of 5%, its biggest plunge since June 24 and follows a 1.5% drop on Monday.

The drop was sparked by concerns about waning Chinese demand with only four of 10 Asian refiners surveyed by Bloomberg saying they would try to buy more Saudi Arabian crude after the kingdom cut pricing for October as consumption remained below pre-virus levels. Abu Dhabi National Oil Co. also cut prices on Tuesday, the latest response to a sluggish demand backdrop in the world’s biggest oil-consuming region.

“Today’s oil-price move is a clear sign that the market now seriously worries about the future of oil demand,” said Paola Rodriguez-Masiu, senior oil markets analyst at Rystad Energy AS.

Other bearish factors noted by Bloomberg include the end of the U.S. summer driving season and more supply from the OPEC+ alliance. In addition to the plunge in spot prices, Brent’s three-month timespread is nearing the widest contango since late May, “an indication that concerns about oversupply are returning. Equity markets were also weaker on Tuesday, adding to crude’s losses.”

The growing contango in both Brent and WTI, combined with the near record plunge tanker rates, will likely spark another round of loading up oil in floating storage. Storing crude at sea has become profitable again for northwest Europe and the Mediterranean, shipbroker and exchange data compiled by Bloomberg show.

Washington has announced its latest move to punish Chinese CCP officials and mainland-based companies for enabling human rights abuses in Xinjiang, the far-western region where as many as 1 million Chinese Uighur (a Muslim minority group) have reportedly been interned in a  network of ‘forced labor camps’.

The Trump administration announced Tuesday morning that it has banned imports from three Chinese companies based in the Xinjiang region of China, retaliation for Beijing’s repression of the Uighurs.

US Customs and Border Protection on Aug. 11 issued a “withhold release order”, which is used to combat forced labor in global supply chains, against Hero Vast Group for using “convict labor and forced labor to produce the garments it manufactures.” CBP said in a statement. It issued similar orders against Lop County Meixin Hair Product Co. on June 17 and Hetian Haolin Hair Accessories Co. on May 1, according to the Tuesday announcement.

The US plans to impose similar restrictions on six more firms, targeting cotton, textiles, tomatoes, haircare products and computer parts from the area.Those should arrive by the end of this fiscal year, the CBP said (the new fiscal year for the federal government begins Oct. 1).

China and India have each accused the other of firing shots across the border along the contested Line of Actual Control (LAC) in the high altitude flashpoint region of Ladakh. 

Line of Actual Control

Beijing charged India with a “severe military provocation” after it claimed Indian troops breached the LAC and entered the Chinese to side. They then “opened fire to threaten the Chinese border defense patrol officers,” according to the PLA charge.

An Al Jazeera correspondent in Beijing reports that “According to the Chinese side, Chinese troops approached the India side for negotiations, and then they say some Indian troops fired at the Chinese side.”

“As a result, China’s military said it was forced to take countermeasures – although we don’t know what those countermeasures were, or if there were any casualties,” the report added.

A series of high level military to military talks have thus far prevented this type of escalation since the June 15 incident which saw the rival sides clash in hand-to-hand combat, resulting in 20 Indian troop deaths and a presumed unknown number of PLA casualties. 

But these talks appear to be unraveling, also as China’s state-run English newspaper, Global Times, issues its account of what happened on Monday:

Indian troops again illegally crossed the Line of Actual Control (LAC) into the Shenpao mountain region near the south bank of Pangong Tso Lake on Monday. They then outrageously fired warning shots at Chinese border patrol troops who came to negotiate, and Chinese border patrol troops were forced to take measures to stabilize the area, a spokesperson of the Chinese People’s Liberation Army (PLA) Western Theater Command said early Tuesday. 

And this was followed with a stern warning, saying, “We must warn India seriously: You have crossed the line! Your frontline troops have crossed the line! Your nationalist public opinion has crossed the line! Your policy toward China has crossed the line! You are over-confidently provoking the PLA and Chinese people – this is like doing a handstand on the edge of a cliff!”

And further, Global Times continues: 

Nationalist forces in India should think twice that if the Chinese and Indian armies change their agreement of handling friction along the border area to prioritize the use of gun, then what use of them seizing two commanding heights on the south bank of Pangong Tso Lake? Does commanding height make sense in modern military conflict? Between Indian and China, which country has more weaponry and which country has bigger military budget, can’t Indians count out?

New Delhi immediately threw the accusation back, denying that its own troops carried out the aggression, instead blaming China.

“It is the PLA that has been blatantly violating agreements and carrying out aggressive maneuvers,” the Indian army said Tuesday in an official statement.

“Despite the grave provocation, (our) own troops exercised great restraint and behaved in a mature and responsible manner,” the army added.

By Michael Every of Rabobank

When you assume, you make…

Today, the press seems to be waking up to the multiple schisms that simultaneously threatening global markets. Perhaps because they are starting to get involved directly. Yet many in markets still try to assume this is all just BAU.

US President Trump gave a speech last night in which he promised to sharply scale back the US economic relationship with China if re-elected: firms would be punished if they send jobs offshore and rewarded if they bring them back; the US will become a manufacturing giant again; and China will not be allowed to continue to grow its military with indirect help from the US. Yet is any of this a surprise? It was in a recent list of election pledges – perhaps the press didn’t read them? Of course, one can argue that this was also promised in Trump’s first term, which is true; but does that guarantee that it won’t be pursued far more aggressively in a hypothetical second given the current global backdrop? That’s a fat tail risk to assume away.

China is to refuse to extend visas for all journalists working for US organisations unless the US halts it plan to impose new restrictions on the much higher number of Chinese journalists working in the States: that even includes the Wall Street Journal and “rock no boats” Bloomberg; that is as two Australian journalists were rapidly extracted from China for their own safety, according to the FT, following late-night visits from the police. Consider the world’s two largest economies with nobody, even third parties, on the ground doing any reporting for the other.

The US had already announced that it was pressing ahead with its so-called hi-tech ‘Clean Network’ to its ensure data security from any potential Chinese threats. China has now stated that it will build its own network for itself and like-minded countries in the face of exactly the same threats (from the US?) The new ‘China Network’ was launched yesterday, which looks another huge signpost towards bifurcation of the tech space, as presumably one will not be able to be on both networks simultaneously.

On the China-India border, New Delhi says its troops crossed the Line of Actual Control (LAC) in order to thwart what it says was a looming Chinese incursion, and that warning shots were fired. (Previous casualties were all caused by melee weapons, and guns have absent for decades to reduce tensions.) The Chinese response, from the Global Times, was:

“We must warn India seriously: You have crossed the line! Your frontline troops have crossed the line! Your nationalist public opinion has crossed the line! Your policy toward China has crossed the line! You are over-confidently provoking the PLA and Chinese people – this is like doing a handstand on the edge of a cliff!

Nationalist forces in India should think twice that if the Chinese and Indian armies change their agreement of handling friction along the border area to prioritize the use of gun, then what use of them seizing two commanding heights on the south bank of Pangong Tso Lake? Does commanding height make sense in modern military conflict? Between Indian and China, which country has more weaponry and which country has bigger military budget, can’t Indians count out?

China doesn’t want a border war with India. But if the Indian side misinterprets China’s goodwill and intends to deter the PLA with warning shots, its moves will backfire. China will never concede for the sake of avoiding a war. If India’s frontline troops continue to fire shots recklessly, they must be prepared for the consequences of breaking the rule in the first place – they could be eliminated immediately in case of military conflicts.”

Meanwhile, right next to the EU, Bloomberg notes that “Turkey’s Muscle Flexing in the Med Isn’t Just About Gas” and quotes an expert in Turkish affairs based and national security based at the Naval Postgraduate School in California stating: “Not far below the surface is a much more emotive set of issues, the idea Turkey is the greatest power in the Eastern Mediterranean and should be treated as such. It perceives itself as surrounded by rivals and adversaries and it will use strength to assert itself, because it can.” The article notes Turkey continues to rapidly build up its naval strength: a light aircraft carrier will be launched next year, for example. President Erdogan is certainly not backing down from his rhetorical clash with Greece – and France, who backs it, is now basing its fighter jets in Cyprus. Risks of intra-NATO fighting remain low (hopefully). Yet even preparations are extremely costly for a struggling economy – and for a struggling currency, with TRY nearly 7.46 this morning.

Meanwhile, the UK continues to sail into what may be its own storm, or a storm in a teacup. The pro-Brexit Telegraph reports PM Johnson is to tell the EU the Withdrawal Agreement (WA) he signed “never made sense and must be rewritten”, which is explosive. The pro-EU Guardian reports internal EU warnings that: BoJo is holding back on a compromise until the last moment to achieve a “trade off”; Home Secretary Patel may try to end-run the EU by dealing with its five largest members in a meeting on 22 September; the British really do want 80% of their fish; and Downing Street are behind the kind of anti-EU stories we see in the Telegraph today.

So betrayal, or a very tough negotiating stance? Either way, it escalates the risks of No Deal. Lawyers state the dispute over the WA could end up at the European Court of Justice –the UK not wishing to recognise as having any power over it is all part of this issue– which could impose fines (which presumably the UK would not pay), suspend the WA (which the UK is already doing in a way), or start trade wars/raise tariffs (which seems to be where this would head in a worst-case anyway). Ultimately, we have to know what BoJo really wants before we know where GBP will go.

Just as we have to know the same in terms of the US, China, and India before we know where their currencies will go.

Assume you know what they want, and assume that the outcomes will be good in all cases. Just recall the old military adage: “When you assume, you make an ass out of u and me”. The potential for some sharp FX market moves in particular are still very evident.

Saudi Arabia announced Monday that eight of its citizens have been convicted by a Saudi court for the Oct. 8, 2018 grizzly slaying of journalist and Washington Post columnist Jamal Khashoggi inside the consulate in Istanbul. A prior 2019 trial had sentenced five to execution, but was later overturned.

The killing drove headlines for months and temporarily resulted in the international isolation of Crown Prince Mohammed bin Salman (MbS) during much of the year following, given it was clear that it was an officially sanctioned state hit. 

The trial has been largely secretive, with the names of the convicted yet to be revealed. The AP reports five of the eight were sentenced to 20 years in prison, two issued seven year sentences, and one to serve ten.

The court sentences are sure to drive continued outrage, some of the criticism coming from the UN over the opaque proceedings, as they are not only relatively light considering how gruesome Khashoggi’s murder and dismemberment was, but also given many see the group of convicted as mere lower level scapegoats. 

Both UN and CIA investigations have strongly pointed the finger to crown prince MbS to either ordering the killing or at least knowing about it.

AP reports of the convicted individuals’ identifies that “Among those ensnared in the killing are a forensic doctor, intelligence and security officers and individuals who worked for the crown prince’s office. The crown prince has denied any knowledge of the operation.”

Saudi court issues final verdicts in the Khashoggi murder after his family decided to forgo the death penalty: 20 years prison terms for five men each, two men get 7 years each and another man gets 10 years https://t.co/CNT2yYxYsq

— Ahmed Al Omran (@ahmed) September 7, 2020

International reports previously slammed Saudi trials related to Khashoggi as a mere exercise in scapegoating:

UN investigator Agnes Callamard concluded that Khashoggi fell victim to a Saudi state-sponsored premeditated extrajudicial execution.

She said the murder was an “international crime over which other states should claim universal jurisdiction”.

This will not happen, although both the Saudi investigation and trial have been conducted for show rather than to secure justice for Khashoggi and closure for his fiancee Hatice Cengiz.

It’s widely believed Khashoggi’s Saudi family and children came under pressure to “pardon” the killers, a right afforded them under Saudi law, which is why this new trial was not a capital case.

Since the killing Riyadh has issued multiple conflicting narratives – all of which appear crafted to shield MbS and the royal family from any ultimate blame. 

Authored by Lance Roberts via RealInvestmentAdvice.com,

Over the last few months, the markets have become engulfed by a palpable feeling of exuberance. I remember the last time investors were engulfed in a near “panic” to invest. It was 1998, where following a correction, the market began a seemingly endless run to the peak in 2000.

I’m not too fond of market analogs as no two market environments are ever the same. However, there are many comparisons currently to the late 90s to explain the current bull market. The chart is below.

Another comparison is valuations.

Currently, the S&P 500 is trading at 31x trailing CAPE earnings. For comparative purposes, I have capped CAPE at 25x in the chart above, which aligns it with every valuation peak throughout history.

The deviation in valuations above the long-term average also only occurred in the late 90s.

Late 90’s Type Speculation

In the late 90s, there was also rampant speculation in unprofitable companies simply because they were associated with the rise of the internet. Stocks like JDS Uniphase, Lucent Technologies, Global Crossing, Enron, SDLI, and a host of others would rise each trading day by 50 points or more.

Making money was so easy in the market that people quit their jobs to become day traders. Everyone from grocery clerks to barbers became stock market gurus, and making money was so easy, why not lever up?

Or even better, use buy call options to increase the buying power of your money. Today, there are more call options on stocks than we saw then.

Value Is For Boomers

Previously, I discussed the disparity in value and the deviation between value and growth.

Part of those discussions related to similarities seen at previous market peaks where investors threw “caution to the wind” and paid astronomical prices to own the “hot stocks.” 

While most young investors today assume “buying value” is for “boomers,” it is worth remembering what Scott McNealy, then CEO of Sun Microsystems, told investors who were paying 10x Price-to-Sales for his company in a 1999 Bloomberg interview. 

“At 10-times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10-straight years in dividends. That assumes I can get that by my shareholders. It also assumes I have zero cost of goods sold, which is very hard for a computer company.

That assumes zero expenses, which is hard with 39,000 employees. That assumes I pay no taxes, which is very hard. And that expects you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10-years, I can maintain the current revenue run rate.

Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those underlying assumptions are? You don’t need any transparency. You don’t need any footnotes.

What were you thinking?”

How Many Do You Own?

Currently, there are hundreds of companies trading well beyond 10x price-to-sales. Below is a list of some of the “hot stocks” young investors are piling into trading at 10x or more.

Of course, much of this is “forgotten history” as many investors today were either a) not alive in 1999, or b) still too young to invest. For the newer generation of investors, the lack of “experience” provides no basis for the importance of “valuations” to future outcomes. That is something only learned through experience.

Bubbles Are About Psychology

Just as was the case in 1999, investors believe that stocks are essentially a “one-decision” investment. You buy them, and they only go up in price. In 1999, a large majority of these companies were financially unstable or grossly overvalued at best. Today, as shown above, it isn’t much different.

Notably, In 1999, as it is today, there was “no one,” saying there was a “Tech Bubble.” As Mark Hulbert noted earlier this year, it was quite the opposite. It also smacks of current sentiment as well:

“After reading through my newsletter archives from January 2000, I was struck by the similarities between now and then. For example, one newsletter editor in mid-January 2000 said he was encouraged that the Fed was signaling that it wouldn’t be raising rates as aggressively as previously thought. Another said, “inflation is dead.” A third celebrated the strength of the economy, as evidenced by robust consumer spending in the Christmas season that had just ended.

Sound familiar? To be sure, these similarities don’t mean the U.S. market is at or near a top. It does illustrate the false comfort we gain when telling ourselves a bear market can’t happen since the economy is strong, inflation is moribund, and the Fed is accommodative.”

As Mark goes on to note, the extension of valuations is concerning. However, valuations are a poor measure of market “bubbles.” Why?  Because “bubbles” are a “psychological phenomenon” where investor “greed” completely overrides “logic” and “restraint.”

More Similarities Than You Think

The current bull market is by far and away one of the longest bull markets in history. Currently running 137 months and 2783 points from the March 2009 lows, it is one for the record books. However, it is also important to remember that it is only the first half of a full-market cycle.

Here are some similarities:

In 1999:

• Fed was providing liquidity in anticipation of Y2k problems.

• Economic growth was beginning to deteriorate.

• Interest rates were falling.

• Earnings were rising through the use of “new metrics,” share buybacks, and an M&A spree. (Who can forget the market greats of Enron, Worldcom & Global Crossing)

• Margin-debt / leverage was at the highest level on record. 

• The stock market was beginning to go parabolic as exuberance exploded in a “can’t lose market.”

• The speculative asset of choice: Dot.com stocks

In 2007:

• Fed was discussing that subprime was “contained.”

• Economic growth was beginning to deteriorate.

• Interest rates were falling.

• Debt and leverage provided a massive “buying” binge in real estate, creating a “wealth effect” for consumers, and high-valuations were justified because of the “Goldilocks economy.” 

• Margin-debt / leverage was at the highest level on record. 

• The stock market was beginning to go parabolic as exuberance exploded in a “can’t lose market.”

• The speculative asset of choice: Real Estate

In 2020:

• Fed continues to “jawbone” markets with accommodative policies.

• Economic growth has deteriorated.

• Interest rates continue to decline.

• Earnings are rising through the use of “new metrics,” share buybacks, and an M&A spree. 

• Margin-debt / leverage is pushing back toward the highest level on record. 

• The stock market is beginning to go parabolic as exuberance explodes in a “can’t lose market.”

• The speculative asset of choice: Work-At-Home Stocks

Of course, those are just some of the similarities.

As noted above, valuations in all three cases exceeded the long-term market peaks of 23x reported earnings. Furthermore, just as we saw each time previously, investor confidence is pushing extremes.

Seen This Before

Again, none of this suggests the market is going to crash tomorrow.

History suggests the markets can, and will likely continue to rise in the short-term. As I stated, momentum is a tough thing to kill.

However, I have played this game before, and as the old saying goes:

“The more things change, the more they remain the same.”

If you have been around the markets for any length of time, you can quickly spot the “pigeons at the poker table.” 

These are the ones that continually rationalize why prices can only go higher, why this time is different than the last, and solely focus on the bullish supports. Trying to “draw to an inside straight” is not impossible; it just leads to losses more often than not.

Gambling in the stock market may be fun in the short-term. However, it would be best if you always remembered why Las Vegas makes billions in profits every year.

If you play long enough, “the house always wins.” 

Summary:

• Spain cases top 500k
• UK warns “don’t kill grandma” as cases near 3k for 2 days
• US reports fewest new cases since mid-June, fewest deaths since July 4
• India reports most new deaths since June
• South Africa GDP contracts by 51% due to COVID lockdown
• South Korea says Chinese travelers test positive
• President Xi defends Chinese COVID numbers
• Vaccine makers say they will wait for Phase 3 trials to end before seeking emergency approval
• Another Russian vaccine proved safe for human use

* * *

The US reported the fewest new cases in a single day since mid-June Monday as the labor day weekend led to an expected slowdown in testing.

But while Dr. Fauci and his coterie of experts warn about a looming surge in new cases as students return to schools and more businesses reopen, deaths declined yesterday to the lowest single-day number since – oddly enough – July 4.

Is there something about federal holidays that impacts how COVID-19 deaths are counted? It certainly looks that way. But even more important than the single-day number is the 7-day average, which has declined sharply over the last day as US deaths have slowed markedly.

A similar trend is ongoing in Brazil, which ceded the No. 2 spot to India over the weekend as the number of new cases and deaths being reported per day in Latin America’s biggest economy has contined to slow.

Brazil yesterday reported the fewest new deaths since May 17.

Globally, the number of confirmed cases has reached 27,339,132 total coronavirus cases, while deaths worldwide topped 890k, to 892,443. Critically, the number of new cases reported yesterday declined to 228,588 new cases, the lowest number since Aug. 30, according to Johns Hopkins.

Deaths, on the other hand, increased by 9,104, the highest single-day total since Aug. 14.

India’s surge is largely being driven by a government testing campaign which is intensifying as public transit and subways across the country reopen this week, and other steps to reopen the economy are taken by PM Narendra Modi’s HIndu nationalist government following the worst quarterly contraction in modern Indian history.

Though India’s mortality rate has lagged other major outbreaks, the country reported its largest daily death toll since mid-June on Tuesday, with 1,133 deaths in the last day, according to JHU, lifting the total death toll to 72,775. Other sources, including Reuters, put the country’s daily death tally was the highest in a month.

The latest disappointing batch of economic data was just published by South Africa, which saw its economy contract by a staggering 51% due to a restrictive COVID-19-inspired lockdown, which still didn’t stop South Africa from becoming the worst hit country in Africa, though its daily cases have slowed markedly.

The biggest story this week is undoubtedly Europe’s second wave, which is finally in full swing, with the UK reporting an alarming surge late last week as it continues to ease restrictions on its schools and economy.

Spain reported more than 26,000 new cases over the weekend, according to JHU data, its biggest daily number yet, cementing Spain’s status as the leader of the rebound and the first western European country to surpass 500k confirmed cases.

France reported more than 19,000 new cases over the weekend.

Speaking during a ceremony in Beijing, President Xi insisted that China had been “open and transparent” about the coronavirus.

In Russia, another vaccine could be on its way to government approval, with Siberia’s Vector virology institute completing Phase II, which involves roughly 100 human volunteer test subjects, which suggests the vaccine is safe. Russia registered its first vaccine candidate, developed by Moscow’s Gamaleya Institute, back in August, and is currently aiming to finish up Phase 3 testing by the beginning of November. The final round of trials, involving some 40,000 participants around the world, were launched last week, and on Tuesday. Russia reported 5,099 new coronavirus cases , pushing its national tally to 1,035,789, the fourth largest in the world.

Authorities confirmed 122 deaths in the last 24 hours, bringing the official death toll to 17,993.

After the UK reported just under 3k new cases in a single day twice in a row over the weekend…

…HMG is reviving its efforts to encourage young people to behave responsibly. “Don’t kill your gran,” Health Secretary Matt Hancock warned. 

In a bombshell accusation that calls China’s COVID-19 numbers into question, South Korea reported that five passengers arriving in South Korea from China have been tested positive for coronavirus since Aug. 16. Among the five, two were South Korean citizens and three were Chinese nationals. All showed no symptoms. However, in a major speech on Tuesday, President Xi insisted that Chinese data were accurate.

Finally, in the US, amid growing pressure on the FDA to ensure that any vaccines receiving emergency approval still meet rigorous standards, the top vaccine makers in the west said Tuesday that they’ll wait until Phase 3 trials have been finished before requesting emergency approval for their vaccines.