“Biggest Quant Quake” Since Tech Blowup Era Sparks Fears Over Low/Min Vol Funds

“Biggest Quant Quake” Since Tech Blowup Era Sparks Fears Over Low/Min Vol Funds

Today’s carnage in the quant space – among the largest in history (and as big as the tech blowup era)…

Reminded us of warnings that Academy Securities’ Peter Tchir recently sent about the potential for trouble ahead from the flood into low/min vol funds over the last year.

I am increasingly concerned about the amount of money flowing into low volatility funds or minimum volatility funds. I believe that these flows represent ‘weak’ hands, clinging to the market and are highly susceptible to selling pressure on any surprise.

Low volatility funds, like the $13 billion SPLV, invest in stocks that exhibit low volatility.

Minimum volatility funds, like the $34 billion USMV, attempt to create a portfolio that is less volatile than the market as a whole. For example, the largest holding in USMV is Newmont Goldcorp Corporation (NEM). The 50-day historical volatility for NEM is 26 compared to 17 for the S&P 500. It is included, because on a portfolio level, it tends to reduce risk. It tends to zig when other stocks zag, making this relatively volatile stock an ideal pick for a minimized volatility strategy – at least when looking at past data. These strategies are clearly appealing to investors as the fund flows have been staggering.

USMV and SPLV Assets Under Management Increasing Rapidly Since September 2018

Source: Bloomberg

These two products have taken in over $23 billion since September of last year.

As flows have exited the broader market ETFs.

Source: Bloomberg

I assume, as I always do, that the ETF flows are merely the tip of the iceberg. I am not opposed to these strategies as a whole, but like everything else, they have their time and place and I’m starting to get concerned that these funds will be a weak part of the market for several reasons (they might be a really interesting hedge opportunity, especially as options are cheaper on these funds than the broad market).

I am increasingly concerned because:

1. I believe the buyers of these funds are ‘weak’ hands.

People are not buying these funds as a gateway to taking on more equity risk, but because they feel obliged to stay in the market and believe that this is a relatively ‘safe’ way to do it.

I hope I’m wrong, but I cannot stop imagining this scene playing out over and over”

Client: We’ve had a great run on stocks, but I’m nervous here, let’s sell some.

Broker: But your equity allocation is already lower than I’d like to see.

Client: Yes, but if we are headed to recession, I don’t want to give up these gains.

Broker: There might be a way to keep your equity exposure, but not the risk.

Client: Ok, that’s interesting.

Broker: We can put you into a low vol fund. Get the equity exposure but not the downside.

Client: Isn’t that too good to be true?

Broker: Yes, there are risks, but some big clients and smart people have been allocating to this and doing very well.

Client: Sure, let’s do that. Shift some out of equities into these low vol strategies.

Maybe I’m wrong, but I suspect a lot of investors aren’t fully aware of what they’ve bought and aren’t aware that these strategies at times have led the market lower and underperformed the broad market in a down market.

2. These Funds Have Underperformed in Down Markets

These funds have a good track record, especially of late, but they can lead the market down. Aside from the ‘weak’ hand theory, where I believe holders of these funds may be quicker to sell on losses than many expect, there are other reasons for this.

  • What was low volatility before, might not be low in the future. Both the low volatility and minimized volatility funds rely on historical data for portfolio selection. Past performance is no guarantee of future performance. While the ‘factor’ these funds are targeting is low volatility, they may be actually tracking other factors that over the recent past have coincided with lower volatility.

  • On the minimized volatility portfolios, I’ve spent too much time with correlation traders to be overly comfortable. Correlation is brilliant when it works and mind numbingly confusing when it doesn’t. If every investor was fully aware of what they were buying, I’d be less concerned, but to the extent I’m correct, investors who thought they wouldn’t underperform on the downside, who were already nervous about markets, might be quick to sell.

  • What if not being a meaningful component of a big ETF reduced a stock’s volatility? I haven’t been able to figure out how to run numbers to analyze this, but for instance, let’s say that not being a big component of a big ETF reduces volatility because there is less trading in a stock (not sure that is true, but doesn’t seem easy to dismiss). In that case, as these funds grow, they themselves become large ETFs which could make their components more volatile (not sure if that is a paradox or not, but it hurts my head to think about it). What we do know, with a high degree of certainty is that inflows into a fund boost the stock prices of those stocks in the ETF (all else being equal). This “momentum” effect may be masking what would otherwise be increased volatility of the stocks in that ETF, or in the worst case, sowing the seeds for their own future underperformance.

  • With these returns it isn’t difficult to understand why the strategies are attracting so much new money. These strategies often make sense, I am just starting to think it is very overdone and could be far weaker than many expect.

The contrarian in me isn’t pounding on the table, yet, but I am knocking on the door as this strategy has caught my attention again (as it had several years ago as well) and I think it could be far more susceptible to a sharp pullback than the strategy names suggest.

Since I think these funds can do worse in a downturn and options on them are much cheaper than the broad markets, I’d focus some hedging attention here.

Money for nothing? I don’t think so.


Tyler Durden

Mon, 09/09/2019 – 16:45

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My New Article on the Supreme Court’s Recent Decision in Knick v. Township of Scott—an Important Takings Case

Rose Mary Knick, the plaintiff in Knick v. Township of Scott, with her lawyers from the Pacific Legal Foundation. (Pacific Legal Foundation).

My new Cato Supreme Court Review article on the Supreme Court’s recent decision in Knick v. Township of Scott– an important property rights case that overruled a longstanding  precedent is now available for free on SSRN. Here is the abstract:

The Supreme Court’s decision in Knick v. Township of Scott put a long-overdue end to a badly misguided precedent that had barred most takings cases from federal court. The big issue at stake in Knick was whether the Court should overrule Williamson County Regional Planning Commission v. Hamilton Bank (1985). Under Williamson County, a property owner who contends that the government has taken his property and therefore owes “just compensation” under the Takings Clause of the Fifth Amendment could not file a case in federal court until he or she first secured a “final decision” from the relevant state agency and “exhausted” all possible remedies in state court. The validity of this second “exhaustion” requirement was at issue in Knick. Even after both Williamson County requirements were met, it was still usually impossible to bring a federal claim because procedural rules preclude federal courts from reviewing final decisions in cases that were initially brought in state court.

Part I of this article briefly describes the background of the Knick case and the Williamson County decision that the Court ended up reversing. In Part II, I explain why the Court was right to conclude that Williamson County created an indefensible double standard under which takings claims against state governments were effectively barred from federal court in situations where other types of constitutional claims would not be. Part III explains why overruling Williamson County is justified under the Supreme Court’s admittedly imprecise doctrine on overruling precedent. Justice Elena Kagan’s dissenting opinion is wrong to argue that overruling Williamson County also entails overruling numerous earlier precedents. Finally, Part IV assesses the potential real-world impact of the Knick decision. In many cases, it will make little difference whether a takings claim gets litigated in state court or federal court. In some situations, however, the right to bring a claim in federal court is a vital tool to avoid potential bias in state courts and procedural hoops that subject property owners to a prolonged ordeal before they have an opportunity to vindicate their rights. Claims that Knick will lead to a flood of new takings litigation are overblown. But to the extent that substantial new litigation does result, that is likely to be a feature, not a bug.

 

Star Trek fans will be happy to know that this may be the first-ever law journal to discuss the subject of changing depictions of Klingon foreheads—in the course of analyzing the notorious (and ultimately unsuccessful) “Klingon forehead” argument put forward by the federal government in their amicus brief in the case (see pp. 158-59 of my article). Sadly, I was not able to include actual pictures of the evolution of Klingon foreheads in the article. But they can be seen here. Prominent takings expert Robert Thomas deserves credit for the analogy between the government’s argument and Star Trek’s “retconning” of Klingon foreheads.

I will be speaking about the Knick decision and my article at the Cato Institute’s annual Constitution Day conference,  on Tuesday, September 17. I will be on a panel that runs from 2:15 to 3:30 PM. The event is free and open to the public.

 

 

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Democrats’ Anti-Scientific Climate Dystopias

Judging by last week’s six-hour CNN presidential candidate town hall on climate change, the rough Democratic consensus is that we’ve got 12 years until DOOM—and that we should probably ban the greenhouse-gas-reducing energy technologies of nuclear power and hydraulically fractured natural gas. Nonsense on stilts, argue Nick Gillespie, Katherine Mangu-Ward, Peter Suderman, and Matt Welch on the latest Editors’ Roundtable edition of the Reason Podcast.

The gang previews this week’s Democratic presidential debate, notes the tension between an increasingly crowded Republican race and the GOP’s decision to call off state primaries, analyzes President Donald Trump’s move to call off withdrawal talks with the Taliban, and gives the moderator an earful about his WrongThink on West Side Story.

Audio production by Ian Keyser.

Music Credit: ‘Song of Mirrors’ by Unicorn Heads

Relevant links from the show:

Four Memorable Moments from CNN’s Climate Town Hall,” by Nick Gillespie

Dems to Talk for 6 (!) Hours About Climate Change on CNN Tonight,” by Elizabeth Nolan Brown

Despite What Democrats Said at Their Debate, We’re Not Heading Toward Climate Apocalypse,” by Ronald Bailey

Democrats Debate To Determine Who Will Spend Us Into Oblivion,” by Steven Greenhut

Warren Wants ‘Big, Structural Change’ That Goes Beyond Anything Previous Democratic Administrations Have Proposed,” by Ira Stoll

Kamala Harris Is a Cop Who Wants To Be President,” by Elizabeth Nolan Brown

Biden’s Age Matters, Even if Democrats Want To Ignore It,” by Ira Stoll

Former S.C. Congressman Mark Sanford Launches Longshot Primary Bid One Day After GOP Cancels S.C. Primary,” by Eric Boehm

The GOP Deals With Trump Competition by Canceling Elections,” by Matt Welch

Joe Walsh Isn’t Running on the Issues,” by Billy Binion

Mark Sanford Gives Himself Two Weeks to Decide if He Wants to Be Trump Roadkill,” by Matt Welch

Bill Weld Raises a Pathetic $688,000 in Second Quarter,” by Matt Welch

Trump Caves to Lindsey Graham; U.S. Troops To Stay the Neverending Course in Afghanistan,” by Elizabeth Nolan Brown

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Democrats’ Anti-Scientific Climate Dystopias

Judging by last week’s six-hour CNN presidential candidate town hall on climate change, the rough Democratic consensus is that we’ve got 12 years until DOOM—and that we should probably ban the greenhouse-gas-reducing energy technologies of nuclear power and hydraulically fractured natural gas. Nonsense on stilts, argue Nick Gillespie, Katherine Mangu-Ward, Peter Suderman, and Matt Welch on the latest Editors’ Roundtable edition of the Reason Podcast.

The gang previews this week’s Democratic presidential debate, notes the tension between an increasingly crowded Republican race and the GOP’s decision to call off state primaries, analyzes President Donald Trump’s move to call off withdrawal talks with the Taliban, and gives the moderator an earful about his WrongThink on West Side Story.

Audio production by Ian Keyser.

Music Credit: ‘Song of Mirrors’ by Unicorn Heads

Relevant links from the show:

Four Memorable Moments from CNN’s Climate Town Hall,” by Nick Gillespie

Dems to Talk for 6 (!) Hours About Climate Change on CNN Tonight,” by Elizabeth Nolan Brown

Despite What Democrats Said at Their Debate, We’re Not Heading Toward Climate Apocalypse,” by Ronald Bailey

Democrats Debate To Determine Who Will Spend Us Into Oblivion,” by Steven Greenhut

Warren Wants ‘Big, Structural Change’ That Goes Beyond Anything Previous Democratic Administrations Have Proposed,” by Ira Stoll

Kamala Harris Is a Cop Who Wants To Be President,” by Elizabeth Nolan Brown

Biden’s Age Matters, Even if Democrats Want To Ignore It,” by Ira Stoll

Former S.C. Congressman Mark Sanford Launches Longshot Primary Bid One Day After GOP Cancels S.C. Primary,” by Eric Boehm

The GOP Deals With Trump Competition by Canceling Elections,” by Matt Welch

Joe Walsh Isn’t Running on the Issues,” by Billy Binion

Mark Sanford Gives Himself Two Weeks to Decide if He Wants to Be Trump Roadkill,” by Matt Welch

Bill Weld Raises a Pathetic $688,000 in Second Quarter,” by Matt Welch

Trump Caves to Lindsey Graham; U.S. Troops To Stay the Neverending Course in Afghanistan,” by Elizabeth Nolan Brown

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New York’s Liquor Authority Wants Uber Eats to Get a Liquor License

Food delivery app services like Grubhub and Uber Eats might have to get liquor licenses if they want to keep doing business in New York state.

A proposal from the New York State Liquor Authority (SLA) would require third-party vendors who charge commissions on a liquor-license-holding restaurant’s sales to be added as a principal on that liquor license, if those commissions work out be greater than 10 percent of the restaurant’s profits.

The proposed rule would reverse a ruling issued by the SLA in 2017. That decision declared that delivery apps could remain off businesses’ liquor licenses so long as their fees were less than 10 percent of the profits restaurants were making on beer sales.

The change puts food delivery app businesses, who typically charge restaurants a percentage of each order delivered, in a bit of a bind.

Businesses that are included on liquor licenses “would essentially be subject to any violations of the [alcohol beverage control] law in New York whether or not they are the guilty party so to speak,” says John Olsen of the Internet Association, a trade group that represents several food delivery app businesses.

And trying to avoid those added liabilities—either by keeping their commissions below 10 percent of a business’s profits or by switching to a flat fee—would require restaurants to share a lot more information with delivery apps, something that would probably prove logistically challenging. These same models might prove uneconomical for restaurants in regions of the state where order volumes are lower, says Olsen.

On the other side of the issue are New York City restaurants that rely on delivery apps to reach more customers but resent the high commissions they have to pay to participate on these platforms.

“This would be a major and positive change for our industry, as we currently suffer from unfair demands from companies like Grubhub-Seamless to hand over to exorbitant percentages of our sales,” said the New York City Hospitality Alliance, which represents bars and restaurants in the city, in a press release about the SLA’s proposal.

Andrew Rigie, the group’s executive director, tells Reason the rule change could curb “excessive fees some companies are extracting from restaurants as a percentage of their sales.”

The New York City government has also been looking hard at the fees charged by food delivery apps. At a June oversight hearing, the city council’s Small Business Committee grilled representatives of Grubhub and Uber Eats over their billing practices.

City Councilmember Mark Gjonaj, who chairs the small business committee, floated the idea of a restaurant association negotiating collectively with app companies as a way of lowering the fees they could charge.

Restaurants that don’t like Grubhub or Uber Eats’ business practices or who find the fees they charge excessive could, of course, simply decide to not partner with these companies. That they still continue to do so shows that they derive some benefit from being able to reach customers through these apps. But they’re happy to enlist the government in a dispute with vendors whose services they value.

The SLA’s proposal was first posted in August. It will still have to be approved by the full SLA board, which will solicit feedback on the rules at its October meeting.

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Tumbling Angel: Moody’s Downgrades Ford, And Its $84 Billion In Debt, To Junk

Tumbling Angel: Moody’s Downgrades Ford, And Its $84 Billion In Debt, To Junk

With pundits warning for years about the threat of “fallen angels”, low-rated investment grade names downgraded to junk, the market first paid attention to, then learned to ignore the warnings as credit continued to tighten,  helped in no small part by trillions in negative yielding sovereign debt – despite the ongoing threat of deteriorating fundamentals.

That however may now change as the universe of (split) junk bond names is about to become bigger by almost $100 billion after moments ago Moody’s downgraded Ford’s senior debt rating from investment grade Baa3 to junk Ba1 (stable outlook), in the biggest shot across the fallen angel bow in years.

According to Bloomberg, some $84 billion in debt is affected.

According to Moody’s, the Ba1 ratings reflect “the considerable operating and market challenges facing Ford, and the weak earnings and cash generation likely as the company pursues a lengthy and costly restructuring plan. The restructuring is expected to extend for several years with $11 billion in charges, and a cash cost of approximately $7 billion. Ford is undertaking this restructuring from a weak position as measures of cash flow and profit margins are below our expectations, and below the performance of investment-grade rated auto peers. Moreover, these measures are likely to remain weak through the 2020/2021 period including a lengthy period of negative cash flow from the restructuring programs.”

“The company does have a sound balance sheet and liquidity position from which to operate.” said Bruce Clark, Senior Vice President with Moody’s, although that will hardly be enough for any fund that has a mandate of only holding pure investment grade companies.

The silver lining: so far S&P has Ford at a BBB investment grade rating, although the rating agencies do tend to issue downgrades in pair so we expect a full junking to be completed in weeks.

Some more details from the Moody’s report:

The erosion in Ford’s performance has occurred during a period in which global automotive conditions have been fairly healthy. Ford now faces the challenge of addressing these operational problems as demand in major markets is softening, and as the auto industry is contending with an unprecedented pace of change relating to vehicle electrification, autonomous driving, ride sharing, and increasingly burdensome emission regulations.

The weak performance was driven by two principal factors, which Ford is addressing, but implementation of the initiatives will take some time. First, varying degrees of operating inefficiencies developed in almost all of Ford’s key regional markets including North America, China, Europe and South America. Second, earnings in China slid from an annual profit exceeding $1 billion in 2016 to a major loss as a result of an aged product lineup, poor dealer relations, and inattention to local market conditions.

A critical element of Ford’s plan for addressing operational inefficiencies and improving returns is the Global Redesign initiative. A major component will be the restructuring of South American and European operations. Ford has considerable expertise and a successful track record of undertaking such restructurings. Nevertheless, the scope of this restructuring plan is unprecedently large and challenging. It will extend at least into 2023.

In addition to the restructuring initiatives, the Global Redesign plan will also include efforts to revitalize the China operations where Ford has already made notable progress in lowering costs. However, efforts to regain lost share, rebuild market presence, and restore meaningful profitability will be much more difficult to achieve because the Chinese auto market is becoming increasingly competitive, and near-term growth rates are likely to be much less robust than in the past.

In North America, which remains one of the healthiest auto markets globally, Ford’s EBIT margins have fallen from over 10% in 2016 to just under 8% in 2019, largely because of the product age of large portions of its domestic portfolio. However, Ford has begun an aggressive new product launch cycle. We expect that this product renewal program, which will include the highly profitable F-Series of full-size trucks, will help Ford, over the next three years, strengthen North American margins to a level that should approach 10%.

Ford has been active in addressing environmental risks, which will remain a top agenda item in its forward planning. Nevertheless, we believe that the company’s current product portfolio leaves it vulnerable to potentially large emission penalties in 2020 and 2021. Reflecting these vulnerabilities, the new product launch will include a number of battery electric and full hybrid vehicles as important contributors in Ford’s ability to comply with increasingly challenging emission regulations in the US and Europe. However, customer acceptance of these vehicles and Ford’s ability to earn an economic return on them remains uncertain.

Additionally, the alliance with Volkswagen AG will provide important long-term benefits to Ford’s position in electric vehicles, autonomous vehicles and commercial vehicles. Nonetheless, Moody’s anticipates only minimal impact on Ford’s earnings and cash generation before 2022.

The stable rating outlook reflects Moody’s expectation that the initiatives being undertaken, particularly the Global Redesign effort and the new product rollout, will contribute to gradual improvement in the company’s earnings, margins and cash generation, albeit over a number of years. Ford’s$23.2 billion of cash, which exceeds its debt, and its conservative balance sheet afford the company the ability to fund its product development and restructuring intiatives. Moody’s notes that this level of financial flexibility is common across the auto industry because of the need to contend with severe downturns and sustain product investment. The stable outlook also anticipates that Ford will maintain a sound liquidity position as it funds the restructuring actions.

Ford’s ratings could be downgraded if the major initiatives (Global Redesign, new product rollout, and revitalization efforts in China) do not contribute to a steady improvement in key performance metrics. Metrics that would point toward downward pressure include: company-reported North American EBIT margin below 7%; the China operations unable to maintain a trajectory toward breakeven performance by 2021; automotive cash position falling below $20 billion; and free cash flow burn that exceeds $1 billion after restructuring expenditures but excluding dividends from Ford Credit.

An upgrade of Ford during the near term is unlikely. However, factors that could contribute to an upgrade include a robust progress in the initiatives that it is undertaking as evidenced by: a North American automotive EBIT margin sustained above 9%; full compliance with US and European emission requirements based on the profitability and market acceptance of its electrified vehicles; and total automotive EBIT margin exceeding 7% (excluding special items). Another element important for a ratings upgrade is an operating structure that is robust enough to sustain the total automotive margin above 4% during an approximately 20% cyclical downturn in unit shipments, while controlling the cash burn to preserve automotive cash above $10 billion.

Will this unexpected fallen angel lead to repricing in the junk bond market, which has seen massive issuance in recent months? As long as overall rates remain near all time lows, probably not, however even a mere hint of a tantrum across the bond market may result in a violent snapback wider in junk, one which could spread to investment grade and the broader bond universe.

 


Tyler Durden

Mon, 09/09/2019 – 16:25

via ZeroHedge News https://ift.tt/2HW0vb2 Tyler Durden

New York’s Liquor Authority Wants Uber Eats to Get a Liquor License

Food delivery app services like Grubhub and Uber Eats might have to get liquor licenses if they want to keep doing business in New York state.

A proposal from the New York State Liquor Authority (SLA) would require third-party vendors who charge commissions on a liquor-license-holding restaurant’s sales to be added as a principal on that liquor license, if those commissions work out be greater than 10 percent of the restaurant’s profits.

The proposed rule would reverse a ruling issued by the SLA in 2017. That decision declared that delivery apps could remain off businesses’ liquor licenses so long as their fees were less than 10 percent of the profits restaurants were making on beer sales.

The change puts food delivery app businesses, who typically charge restaurants a percentage of each order delivered, in a bit of a bind.

Businesses that are included on liquor licenses “would essentially be subject to any violations of the [alcohol beverage control] law in New York whether or not they are the guilty party so to speak,” says John Olsen of the Internet Association, a trade group that represents several food delivery app businesses.

And trying to avoid those added liabilities—either by keeping their commissions below 10 percent of a business’s profits or by switching to a flat fee—would require restaurants to share a lot more information with delivery apps, something that would probably prove logistically challenging. These same models might prove uneconomical for restaurants in regions of the state where order volumes are lower, says Olsen.

On the other side of the issue are New York City restaurants that rely on delivery apps to reach more customers but resent the high commissions they have to pay to participate on these platforms.

“This would be a major and positive change for our industry, as we currently suffer from unfair demands from companies like Grubhub-Seamless to hand over to exorbitant percentages of our sales,” said the New York City Hospitality Alliance, which represents bars and restaurants in the city, in a press release about the SLA’s proposal.

Andrew Rigie, the group’s executive director, tells Reason the rule change could curb “excessive fees some companies are extracting from restaurants as a percentage of their sales.”

The New York City government has also been looking hard at the fees charged by food delivery apps. At a June oversight hearing, the city council’s Small Business Committee grilled representatives of Grubhub and Uber Eats over their billing practices.

City Councilmember Mark Gjonaj, who chairs the small business committee, floated the idea of a restaurant association negotiating collectively with app companies as a way of lowering the fees they could charge.

Restaurants that don’t like Grubhub or Uber Eats’ business practices or who find the fees they charge excessive could, of course, simply decide to not partner with these companies. That they still continue to do so shows that they derive some benefit from being able to reach customers through these apps. But they’re happy to enlist the government in a dispute with vendors whose services they value.

The SLA’s proposal was first posted in August. It will still have to be approved by the full SLA board, which will solicit feedback on the rules at its October meeting.

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Cops Prevent Students From Advertising Fake ‘Pot’ Brownies Outside Free Speech Zone

Sixteen years ago, Western Illinois University (WIU) eliminated its “free speech zone” and announced that it would recognize students’ First Amendment rights on all areas of campus.

But the university has not lived up to this promise. Earlier this year, a campus police officer scolded a student for engaging in political speech “outside the free speech zone.”

The student, Dylan Crowl, was recruiting members of Young Americans for Liberty. He had a sign that read “Free ‘Pot’ Brownies” and invited students to take a brownie from a pot. It was a pun; the brownies did not actually contain marijuana.

According to the Foundation for Individual Rights in Education:

Within minutes, the students were stopped by two members of the WIU Police, who told Crowl that the officers were “going to give [him] an education” on the repercussions of bringing marijuana to campus. At least one of the officers noted his personal disagreement with the policy positions advocated by the students and asked them to remove the word “pot” from the sign. Crowl refused.

The officers further explained that they “came out here because people thought you were handing out actual THC brownies and, anyways, you’re outside of the free speech zone right behind the Union.”

For that reason, literal speech police shut down the event.

WIU did not immediately respond to a request for comment.

The students were well within their rights to try to recruit members of their group and to give away harmless brownies. The university should reconfirm this, and make sure its enforcers understand that after nearly two decades, the free speech zone is still dead.

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Cops Prevent Students From Advertising Fake ‘Pot’ Brownies Outside Free Speech Zone

Sixteen years ago, Western Illinois University (WIU) eliminated its “free speech zone” and announced that it would recognize students’ First Amendment rights on all areas of campus.

But the university has not lived up to this promise. Earlier this year, a campus police officer scolded a student for engaging in political speech “outside the free speech zone.”

The student, Dylan Crowl, was recruiting members of Young Americans for Liberty. He had a sign that read “Free ‘Pot’ Brownies” and invited students to take a brownie from a pot. It was a pun; the brownies did not actually contain marijuana.

According to the Foundation for Individual Rights in Education:

Within minutes, the students were stopped by two members of the WIU Police, who told Crowl that the officers were “going to give [him] an education” on the repercussions of bringing marijuana to campus. At least one of the officers noted his personal disagreement with the policy positions advocated by the students and asked them to remove the word “pot” from the sign. Crowl refused.

The officers further explained that they “came out here because people thought you were handing out actual THC brownies and, anyways, you’re outside of the free speech zone right behind the Union.”

For that reason, literal speech police shut down the event.

WIU did not immediately respond to a request for comment.

The students were well within their rights to try to recruit members of their group and to give away harmless brownies. The university should reconfirm this, and make sure its enforcers understand that after nearly two decades, the free speech zone is still dead.

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Trump Mulls Orwellian Proposal to Stop Mass Shootings by Monitoring ‘Mentally Ill People’ for Signs of Imminent Violence

The Trump administration is reportedly considering a pitch from former NBC Chairman Robert Wright, a presidential pal, for a research program aimed at preventing mass shootings by electronically monitoring people who have received psychiatric diagnoses. That Orwellian plan may or may not be defeated by its utter impracticability.

Wright has dubbed his idea SAFEHOME—an acronym for Stopping Aberrant Fatal Events by Helping Overcome Mental Extremes. The Washington Post reports that his three-page proposal imagines using “technology like phones and smart watches” to “detect when mentally ill people are about to turn violent.” The idea, the paper says, is to look for “small changes that might foretell violence.”

The Post notes that “only a quarter or less” of mass shooters “have diagnosed mental illness.” But that is only the beginning of the difficulties with this half-baked scheme.

The larger problem is that the percentage of “mentally ill people” (a group that, by some estimates, includes more than a quarter of the U.S. population in any given year) who will use a gun to commit mass murder is approximately zero. Likewise for the general population, since mass shootings are very rare events, accounting for less than 1 percent of gun homicides.

2012 study that the Defense Department commissioned after the 2009 mass shooting at Fort Hood in Texas explains the significance of that fact in an appendix titled “Prediction: Why It Won’t Work.” The appendix observes that “low-base-rate events with high consequence pose a management challenge.” In the case of “targeted violence,” for example, “there may be pre-existing behavior markers that are specifiable.” But “while such markers may be sensitive, they are of low specificity and thus carry the baggage of an unavoidable false alarm rate, which limits feasibility of prediction-intervention strategies.” In other words, even if certain “red flags” are common among mass shooters, almost none of the people who display those signs are bent on murderous violence.

The Defense Department report illustrates the problem with a hypothetical example. “Suppose we actually had a behavioral or biological screening test to identify those who are capable of targeted violent behavior with moderately high accuracy,” the report says. If “a population of 10,000 military personnel…includes ten individuals with extreme violent tendencies, capable of executing an event such as that which occurred at Ft. Hood,” a test that correctly identified eight of those 10 dangerous people would wrongly implicate “1,598 personnel who do not have these violent tendencies.”

That scenario assumes a predictive test that does not actually exist. “We cannot overemphasize that there is no scientific basis for a screening instrument to test for future targeted violent behavior that is anywhere close to being as accurate as the hypothetical example above,” the report says.

The research program imagined by Wright is aimed at developing a predictive test. But even in the unlikely event that it succeeded, the enormous false-positive problem would remain.

“According to a copy of the SAFEHOME proposal,” the Post says, “all subjects involved [in the research] would be volunteers,” and “great care would be taken to ‘protect each individual’s privacy,'” while “‘profiling of any kind must be avoided.'” It is hard to see how profiling can be avoided, since the whole premise of the project is that people who fit a certain psychiatric profile are especially prone to mass murder.

Once the research has been completed, of course, the resulting information would be pretty useless if it could be deployed only against volunteers. So how would that work? Would people with certain psychiatric diagnoses be legally required to carry electronic monitors aimed at detecting “small changes that might foretell violence”? How could such a requirement be reconciled with due process or the Fourth Amendment?

Maybe the requirement would be limited to people who pose an especially high risk of violence. But how would they be identified? Since mental health specialists are notoriously bad at predicting violence, SAFEHOME would have to develop two kinds of tests: one that identifies people who are prone to violence and one that predicts when those people are about to commit a crime. “I would love if some new technology suddenly came along that would help us identify violent risk,” Marisa Randazzo, former chief research psychologist for the U.S. Secret Service, told the Post, “but there’s so many things about this idea of predicting violence that [don’t] make sense.”

The Post also interviewed Johns Hopkins neurologist Geoffrey Ling, who advised Wright on his proposal. “To those who say this is a half-baked idea, I would say, ‘What’s your idea? What are you doing about this?'” Ling said. “The [worst] you can do is fail, and failing is where we are already.” Given the potential for mass stigma, invasions of privacy, and violations of due process, I’d say we can do a lot worse than failing.

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