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Nothing Is Guaranteed

Authored by Charles Hugh Smith via OfTwoMinds blog,

There are no guarantees, no matter how monumental the hubris and confidence.

The American lifestyle and economy depend on a vast number of implicit guarantees— systemic forms of entitlement that we implicitly feel are our birthright.

Chief among these implicit entitlements is the Federal Reserve can always “save the day”: the Fed has the tools to escape either an inflationary spiral or a deflationary collapse.

But there are no guarantees this is actually true. In either an inflationary spiral or deflationary collapse of self-reinforcing defaults, the Fed’s “save” would destroy the economy, which is now so fragile that any increase in interest rates (to rescue us from an inflationary spiral) would destroy our completely debt-dependent economy: were mortgage rates to climb back to historical averages, the housing bubble would immediately implode.

Hello negative wealth effect, as every homeowner watches their temporary (and illusory) “wealth” dissipate before their eyes.

The Fed’s “fix” to deflationary defaults is equally destructive: bailing out too big to fail lenders will spark a political revolt that could topple the Fed itself, as the populace has finally connected the dots between the Fed bailing out the banks and financiers and the astounding rise in income and wealth inequality.

Other than the phantom “wealth” of real estate and stock bubbles, the vast majority of the ‘wealth” generated by the Fed’s actions of the past 20 years has flowed to the top 0.1%. This will become self-evident once the phantom gains of speculative bubbles vanish.

The Fed’s other “trick” to halt a deflationary collapse is negative interest rates, in effect taxing savers and those holding cash and rewarding those who borrow.

Negative interest rates destroy every institution that depends on relatively low-risk interest income via bonds: pension funds, insurance companies, etc.

And how can lenders earn any return if borrowers are getting paid to borrow?Who exactly will pay borrowers to borrow more at negative rates?

As noted here many times, you can’t force people to borrow more who don’t want to borrow more, and you can’t make uncreditworthy entities creditworthy. Lending to marginal households and enterprises just for the sake of lending to somebody only increases the defaults as marginal borrowers are the first to default and own the least collateral.

Nothing the Fed could do will restore a fragile, speculation-dependent debt-bubble economy to any sort of health. Whatever the Fed does, it further distorts a massively distorted system, increasing the odds of a catastrophic re-set.

Another implicit guarantee / entitlement is that the federal government can bail us out of anything by borrowing a couple of trillion dollars–hey, make it $10 trillion or $20 trillion–and distribute the free money so everything stays glued together for another few years.

But there are no guarantees that the federal government, or any government, can borrow vast sums with no consequences. If interest rates are near-zero (so the government can borrow more trillions at low rates), then capital earns no return: a structural distortion that eventually destroys the economy as capital is forced into speculation, a move which always ends badly.

If capital earns a real return on all this rapidly expanding debt, then government soon spends most of its revenues on interest, starving all other programs, and forcing the government to a self-reinforcing debt spiral as all future interest and spending must be borrowed.

Here’s a snapshot of reality: the Fed has inflated a third and final speculative debt-fueled bubble:

And here’s how bubbles deflate: in a stairstep down of failed rallies and manic hopes dashed by reality:

There are no guarantees, no matter how monumental the hubris and confidence.

*  *  *

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This Steelmaker Looked Like a Winner in the Trade War. Now It’s Suing the Commerce Department Over Tariffs.

In March 2018, just weeks after President Donald Trump announced plans to place tariffs on imported steel, the India-based company JSW Steel announced plans to spend $500 million to expand its steelmaking plants in America.

A huge victory for “America First” economic nationalism, right?

Wrong. Less than 18 months later, the same company is now suing the U.S. Department of Commerce over the trade barriers that it once celebrated. In a complaint filed last week, JSW Steel claims it has been harmed by the steel tariffs because, as it turns out, even steel manufacturers with U.S.-based operations still sometimes have to import steel from abroad. When JSW Steel sought an exemption from the steel tariffs, the Commerce Department denied it and told them to pay up. In the lawsuit, the company argues that those exemptions should have been granted.

As I’ve written before, the tariff exemption process set-up by the Commerce Department is opaque and unaccountable. Even such rudimentary details as which Commerce Department officials are responsible for making final determinations, or the metrics by which those decisions are made, remain a secret. With little transparency or due process, the entire waiver procedure is open to abuse and political favoritism—something that businesses trying to navigate the exemption process have been complaining about for more than a year.

In its lawsuit, JSW Steel claims it applied for a tariff exemption so it could import steel slab—a type of bulk unfinished steel product—from Mexico and elsewhere. Steel slab is not produced in the United States in sufficient quantity to satisfy the company’s demand, the lawsuit says.

But the Commerce Department apparently did not care about that. The lawsuit argues that the department “yielded to the objections of three competitive domestic steel producers” (U.S. Steel, AK Steel, and Nucor Corp.) despite making “no effort to verify their claims” and failing “even to offer any reasoned basis for its decisions.”

Which, yeah, is pretty much exactly what everyone who’s looked at the Commerce Department’s tariff exemption process has concluded. It’s the sort of dense bureaucratic operation where cronyism flourishes.

In testimony to the House Ways and Means Committee last year, the executive of a Texas-based pipeline builder said the process did not allow adequate time for businesses to respond to objections raised by U.S. Steel and other manufacturers. Once an application is submitted, there is little interaction between the government and the applicant, and there is no opportunity for businesses to “state their case,” said Willie Chiang, vice president of Plains All American GP.

Those are “due process flaws that do not exist with respect to most other government procedures,” Chiang complained.

Sens. Orrin Hatch (R–Utah) and Ron Wyden (D–Ore.) sent a letter to the Commerce Department last year outlining their worries about a lack of “basic due process and procedural fairness” in the tariff exemption system. The senators held some hearings about the problems with the process, but Congress has not acted to meaningfully restrict Trump’s tariffs or instruct the Commerce Department to alter the process.

The fact that a steelmaker that once praised Trump’s tariffs is now learning a painful lesson about the realities of “economic nationalism” might seem like karma—with maybe a touch of schadenfreude too. There’s been plenty of that to go around. Aluminum manufacturers have sought protection from the tariffs that were supposed to help them. Appliance-maker Whirlpool initially cheered tariffs on washing machines before getting walloped by tariffs on steel and aluminum. And the American steel industry in general has suffered over the past year, largely because tariffs have increased prices and triggered a decline in demand—which has led to layoffs rather than the promised resurrection of American steelmaking.

But JSW Steel’s suit is a welcome development. It’s a chance for the courts to review the obvious problems with how the Commerce Department has handed Trump’s trade policies.

The lawsuit demonstrates the extent to which Trump’s trade policies are failing even for the industries that were supposed to be “winning.” More government control over trade doesn’t produce prosperity. It produces the special kind of misery that JSW Steel is now experiencing.

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Body Camera Footage Shows Officer Killing Woman While Firing at Nonthreatening Dog

Recently released body camera footage from the police department in Arlington, Texas, shows an officer fatally shooting a woman lying behind a shopping plaza after taking aim at her medium-sized, unrestrained dog.

The officer had been dispatched to perform a routine welfare check on the woman, Maggie Brooks, who was reportedly homeless and a regular at the shopping center in question. Footage shows the cop walking toward Brooks and asking her, “Are you OK?”

“Yeah, I’m fine,” Brooks replies. The dog then trots toward the officer. The video makes it clear that the animal presented no threat, but he nonetheless fires three shots toward the dog as Brooks lies mere feet away.

“Get back!” he yells at the dog, while opening fire.

“Oh my God!” Brooks screams after the officer inflicts the fatal wound. “Police shot me!”

As she cries out in agony, the officer moves back toward her and tells her to “get ahold of her dog.”

At a news conference, Police Chief Will Johnson said the 30-year-old Brooks suffered a fatal wound in the “upper torso.” The dog, weighing 40 pounds, was also struck and is currently in quarantine.

The officer on duty—who graduated from the academy this past February—is on administrative leave while the incident is under both criminal and departmental investigation. He underwent eight hours of training on encounters with canines prior to assuming his role.

While that training clearly didn’t prepare the cop in question for the routine welfare check, he is not alone in using deadly force against animals who present no imminent danger. The Department of Justice estimates that 25 to 30 dogs are killed per day in what they call an “epidemic.” As I wrote last week:

In Detroit, Michigan, 54 dogs were killed in 2017 alone. “The rise occurred at the same time Detroit is trying to fend off lawsuits from residents who say police wantonly killed their dogs during drug raids,” wrote Reason‘s C.J. Ciaramella in September. In St. Louis County, a woman received a $750,000 settlement after a SWAT team killed her dog during a raid on her home over an unpaid gas bill.

Human bystanders are sometimes caught up in the officers’ reckless behavior. A federal court recently ruled that Deputy Sheriff Matthew Vickers of Coffee County, Georgia, is protected by qualified immunity for his role in shooting a 10-year-old child in the knee while firing at a nonthreatening family dog.

Larry Hamilton, an acquaintance of Brooks, described her as a devoted caretaker to her pet. “She was a real loving person to the dog. Really caring, and you know, always made sure the dog was fed before she did,” he said. “She was a good-hearted person.”

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This Steelmaker Looked Like a Winner in the Trade War. Now It’s Suing the Commerce Department Over Tariffs.

In March 2018, just weeks after President Donald Trump announced plans to place tariffs on imported steel, the India-based company JSW Steel announced plans to spend $500 million to expand its steelmaking plants in America.

A huge victory for “America First” economic nationalism, right?

Wrong. Less than 18 months later, the same company is now suing the U.S. Department of Commerce over the trade barriers that it once celebrated. In a complaint filed last week, JSW Steel claims it has been harmed by the steel tariffs because, as it turns out, even steel manufacturers with U.S.-based operations still sometimes have to import steel from abroad. When JSW Steel sought an exemption from the steel tariffs, the Commerce Department denied it and told them to pay up. In the lawsuit, the company argues that those exemptions should have been granted.

As I’ve written before, the tariff exemption process set-up by the Commerce Department is opaque and unaccountable. Even such rudimentary details as which Commerce Department officials are responsible for making final determinations, or the metrics by which those decisions are made, remain a secret. With little transparency or due process, the entire waiver procedure is open to abuse and political favoritism—something that businesses trying to navigate the exemption process have been complaining about for more than a year.

In its lawsuit, JSW Steel claims it applied for a tariff exemption so it could import steel slab—a type of bulk unfinished steel product—from Mexico and elsewhere. Steel slab is not produced in the United States in sufficient quantity to satisfy the company’s demand, the lawsuit says.

But the Commerce Department apparently did not care about that. The lawsuit argues that the department “yielded to the objections of three competitive domestic steel producers” (U.S. Steel, AK Steel, and Nucor Corp.) despite making “no effort to verify their claims” and failing “even to offer any reasoned basis for its decisions.”

Which, yeah, is pretty much exactly what everyone who’s looked at the Commerce Department’s tariff exemption process has concluded. It’s the sort of dense bureaucratic operation where cronyism flourishes.

In testimony to the House Ways and Means Committee last year, the executive of a Texas-based pipeline builder said the process did not allow adequate time for businesses to respond to objections raised by U.S. Steel and other manufacturers. Once an application is submitted, there is little interaction between the government and the applicant, and there is no opportunity for businesses to “state their case,” said Willie Chiang, vice president of Plains All American GP.

Those are “due process flaws that do not exist with respect to most other government procedures,” Chiang complained.

Sens. Orrin Hatch (R–Utah) and Ron Wyden (D–Ore.) sent a letter to the Commerce Department last year outlining their worries about a lack of “basic due process and procedural fairness” in the tariff exemption system. The senators held some hearings about the problems with the process, but Congress has not acted to meaningfully restrict Trump’s tariffs or instruct the Commerce Department to alter the process.

The fact that a steelmaker that once praised Trump’s tariffs is now learning a painful lesson about the realities of “economic nationalism” might seem like karma—with maybe a touch of schadenfreude too. There’s been plenty of that to go around. Aluminum manufacturers have sought protection from the tariffs that were supposed to help them. Appliance-maker Whirlpool initially cheered tariffs on washing machines before getting walloped by tariffs on steel and aluminum. And the American steel industry in general has suffered over the past year, largely because tariffs have increased prices and triggered a decline in demand—which has led to layoffs rather than the promised resurrection of American steelmaking.

But JSW Steel’s suit is a welcome development. It’s a chance for the courts to review the obvious problems with how the Commerce Department has handed Trump’s trade policies.

The lawsuit demonstrates the extent to which Trump’s trade policies are failing even for the industries that were supposed to be “winning.” More government control over trade doesn’t produce prosperity. It produces the special kind of misery that JSW Steel is now experiencing.

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Carnage: Stocks Plunge Most In 2019 As China Sparks Global Turmoil

Remember a week ago – smooth sailing, record highs, goldilocks, Fed, not a care in the world. And then…

… China unexpectedly allowed the yuan to devalue dramatically in retaliation to Trump’s latest tariff hike…

And all hell broke loose…

… as Chinese stocks closed at their lows…

Elsewhere in Asia, Hong Kong Dollar forwards plunged to a level that suggests a peg breach within 12 months…

This wasn’t lost on Hong Kong stocks which amid violent protests, tear gas, a crippling strike  and the threat of an imminent Chinese invasion, tumbled 3%, erasing the year’s gains, and suffering the longest losing streak since 1997.

European stocks were also hammered – their biggest two-day drop in thee years – playing catch down to US markets from Friday and extending Friday’s biggest losses of 2019…

German DAX broke to its 200DMA…

German Bund yields crashed to new record lows -53.6bps!!!

But Germany is not alone…

 

Since Powell started speaking (and Trump’s tariffs), bonds and bullion are well bid, the USD is marginally weaker and stocks are a bloodbath…

 

US equities collapsed today – worst day of the year – with the S&P dropping over 3%, its worst drop since December 2018 before recouping some losses.

… while the Dow briefly dropped almost 1000 points, the third biggest point drop in history.

… and all sectors tumbling although homebuilders were the best of the worst:

Nasdaq is down six days in a row – its longest losing streak since before Trump was elected (Oct 2016)

Technical Support was blasted – Small Caps, Trannies <200DMA and S&P, Dow, Nasdaq <100DMA

FANG Stocks were slammed (not helped by the 8th straight down day for AMZN)…

AAPL plunged on the day, now down 13% from earnings night highs…

VIX hit 23 (doubled off its 11 handle from just over a week ago)…

And credit spreads blew wider…

Treasury yields collapsed to fresh cycle lows…

10Y Yields are back below Trump election lows, sliding as low as 1.72%, less than 30bps from all time lows…

The 3 Month-10 Year yield curve collapsed to its most inverted this cycle (most inverted since 2008)

Despite the crash in the yuan, the dollar also slipped lower, holding at pre-Powell levels…

The carnage also swept across developing markets, with the EM FX plunging to 11 month lows…

The safe haven today – in addition to Treasurys – bitcoin and other cryptos which were aggressively bid over the weekend amid the chaos in China and Hong Kong…

Pushing Bitcoin up near $12,000…

Copper and Crude lagged as PMs rallied on the day…

WTI extended losses from last week…

And gold soared on the day, despite “their” best efforts to crack into the London Fix…

Indeed, as some pointed out, in addition to soaring cryptos, silver and especially gold did just fine…

… and gold has now overtaken the S&P 500 year-to-date…

Gold in Yuan has exploded higher…

And gold in pounds remains at a new record high…

Bitcoin and Bullion are bouncing back up to the “policy-maker-idiocy indicator” as negative-yielding debt keeps soaring…

Finally, stocks have a long way to fall yet to catch down to bonds’ reality…

If and when that happens…

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John McAfee Has Some Questions About This Weekend’s Mass Shootings

With markets melting down on Monday in one of the biggest intraday point drops for the Dow in recent memory, bitcoin and crypto received an intense safe-haven bid, with the benchmark crypto token rallying nearly 10% intraday.

All the while, one of crypto’s most infamous voices chimed in: John McAfee, the cybersecurity pioneer and presidential candidate, chimed in to celebrate bitcoin’s safety bid, and raised a few questions about the series of deadly shootings that unfurled in the US over the weekend.

Amazingly, McAfee didn’t say much about markets, and instead instead raised some “fundamental questions” about acts of domestic terrorism.

As McAfee points out, 75 years ago, shootings like those that took place in Dayton and El Paso over the weekend would have been unheard of.

Still, McAfee – who is on the lam from the IRS – asks a few rhetorical questions:

“Immediately people jump on their soapboxes…first its gun control…then immigration…then race issues…this was racially motivated, psychologically motivated…before we even know what happened we are jumping on our soapboxes.”

First, McAfee said, we need to talk about guns – even though the largest act of domestic terrorism in US history wasn’t perpetrated using guns…it was committed using a home-made fertilizer bomb.

The first question – is this a coincidence? – is one question that should be asked. Though McAfee notes that he’s not a fan of coincidences.

The second – and more important questions – is what is wrong with this society? “I’m not fond of coincidence as an explanation for things…and I’m not fond of coincidence as an explanation for things,” McAfee said.

But more importantly, the more pressing question is why have people become so angry, hostile and alienated that they need to murder total strangers.

“That’s the question, people. We need to answer that first,” McAfee said.

Watch the full clip below:

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4 Reasons To Expect Even More US-China Trade (And Currency) War Escalation

As we noted earlier when summarizing some of the more notable Wall Street reactions to China’s jarring trade war escalation, we highlighted the take of Morgan Stanley’s chief US public policy strategist, Michael Zezas, who said that he saw incentives for the U.S. to escalate quickly. Specifically, referring to the now viral chart of the circular dynamic of Trump-Powell interaction…

… Zezas said that if the administration understands the Fed’s trade policy reaction function – which it clearly does after it unleashed a new round of tariffs less than 24 hours after the Fed’s rate cut which has the market now pricing 33% odds of 2 rate cuts in September (see more here) – then it may also perceive that a more rapid escalation could deliver one or more of three beneficial points ahead of the 2020 election:

  1. A quicker, potentially more aggressive Fed stimulus response that could help the economy heading into the election;
  2. More time to re-frame the potential economic downside; and
  3. A major concession by China (not our base case, but it is, of course, a possibility).”

“The dynamics of U.S.-China negotiation and macro conditions mean the next round of tariffs will likely be enacted, and investors are likely to behave as if further escalation will follow in 2019 until markets price in impacts,” Zezas wrote. “This supports our core view of weaker growth and skews the Fed dovish.”

Zezas also highlighted several key global trade risks amid the rising geopolitical uncertainty, which he expects to keep rising:

  • WTO Courts at risk
  • US/EU confrontation set to intensify
    • Nov 15th auto deadline
    • OECD negotiations
  • US/China resume escalation

Finally, referring to the final point, Zezas lists 4 reasons why he expects even more US-China escalation in the coming weeks and months: 1) China’s harder stance; 2) US’s harder stance; 3) Fed accomodation and 4) US incentive to move quickly ahead of 2020. These are summarized as follows:

The ominous conclusion: “For each side, the perception is that standing your ground is better than cooperating.”

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“Mom And Pop” Investors Crushed In ETF Rout

It’s not just institutional investors who, as we warned last weekend were massively bullish on stocks heading into the Fed rate cut and in fact had the longest net equity position in US equity futures going back to the financial crisis, are getting crushed today.

As Bloomberg writes, today’s jarring escalation of the U.S.-China trade war which sent the Dow Jones down as much as 900 points intraday, is also hammering retail investors: the reason – last week a whopping $4.4 billion flowed into two ETFs that have been favored by “moms and pops“, just in time for one of the fastest drawdowns of the decade-long bull market. The IVV, or the iShares Core S&P 500 ETF, added $3.4 billion, while the VOO, or Vanguard S&P 500 ETF, absorbed $995 million.

Oops.

This is a vivid reminder of what happens when buying the dip… fails. While BTFD may have been seemed appealing to some long-term investors after the worst week for stocks’ since the start of the year, with equities dumping more than 3% on Monday after China effectively devalued the Yuan, Bloomberg notes that “the professionals are earning their reputation as the “smart money” for sitting this one out”, even though as we showed above that is also not true, and in fact it is only a matter of time before the so-called pros are swept with the bathwater as a result of the coordinated selling by CTAs and systematic investors, which in turn are crushed by maximum negative gamma.

Other ETFs were not spared: the venerable SPY, the SPDR S&P 500 ETF Trust, one of the most-active equities in the U.S., lost $3.9 billion last week as traders bailed.

Or to summarize visually:

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When Teslas Crash, They Come Here For Auction

SCA is one of the top insurance auto auction houses in the country, with 170 locations nationwide. SCA works with insurance companies, dealerships, rental car companies, independent sellers, and leasing companies to auction automobiles that have been in an accident.

The latest trend on SCA has been an increasing number of crashed Teslas, now reaching 284 listed at current auction. Most of the cars are Model S (127) and Model 3 (113), with about 42 Model X SUVs.

After reviewing Teslas listed at current auction, a bulk of them have minor fender benders, some have electrical issues, but most have been in fender benders that if it were a standard petrol engine automobile, would be easily fixable by a local dealership.

It seems that insurance companies are slapping salvage titles on crashed Teslas because it’s “near impossible to repair them, the authorities and Tesla will prevent them being put back on the roads,” said one Twitter user who was commenting on an SCA Twitter post of a newly listed crashed Tesla for auction.

The user added: “The market for trashed spare parts has also dwindled. Scrap value? of mingled and toxic parts? It will cost money to dump ’em.”

The #TSLAQ community on Twitter has recently reported that SCA has seen increased volumes of crashed Teslas listed for auction. Some have even noted that these electric cars are going no bid on the auction site.

Another user said, it’s possible to part out these cars, but if someone wants to put one of these cars back on the road, it’s virtually impossible to find parts.

We’ve reported that long wait times for parts and a lack of reputable Tesla-approved repair centers has been a glaring problem for many owners.

Across the internet, Tesla forums are filled with angry owners who regret even buying the electric car because a basic repair could take months. Some owners have reported 4 to 5 weeks, while others said six to nine months for repairs.

For owners who need parts, it’s not yet known, or at least we haven’t seen on any forum, if any owners are crowdsourcing funds to buy crashed Teslas from SCA to part out.

As shown below, some Model 3s listed on SCA are bidding from $25 to $16,300 (as of 11 am Sunday morning).

The increased volume of crashed Teslas on SCA is occurring at a time when the electric car company’s Autopilot is under growing scrutiny, following a former NHTSA head calling for a recall after several fatal accidents associated with Autopilot.

As far as what we understand, and obviously we don’t have the insurance documentation on each Tesla listed on SCA, there was no concrete evidence that any of the cars crashed because of Autopilot.

However, in a new report by Consumer Reports, they determined that Tesla’s Autopilot was “far less competent than a human driver,” and by examining the type of crashes at SCA, it seems that some of the accidents could have been Autopilot-related.

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No, Donald Trump: Not Even Mass Shootings and Hate Crimes Justify the Death Penalty

When President Donald Trump addressed last weekend’s devastating mass shootings, he said he was “directing the Department of Justice to propose legislation, ensuring that those who commit hate crimes and mass murders have the death penalty, and that this capital punishment be delivered quickly, decisively, and without years of needless delay.” This comes on the heels of U.S. Attorney General Bill Barr’s recent announcement that the Department of Justice would resume capital punishment for the first time in nearly 20 years.

The nation’s feelings are still raw from the tragic violence. But it would be a mistake to allow any politician to use these deaths to justify an expansion of the death penalty.

As Reason‘s J.D. Tuccille noted last week, a 2014 study estimated that 4.1 percent of death-row inmates were innocent of their accused crimes—and that was the conservative estimate. By placing even more people under consideration for capital punishment, there runs a risk of even more innocent people being killed.

Trump’s call for an expedited execution process has problems too. Not only should the wrongfully convicted have a right to appeal, but the slower-paced process already has a slew of institutional problems that could only be exacerbated with less review.

Reason has covered several questionable capital punishment cases in the past year alone, which have involved possible religious and racial discrimination, executions for criminals who did not actually pull the trigger, and a death-row inmate who was tried six times for the same crime in a case filled with prosecutorial infractions. In 2017, the Oklahoma Death Penalty Review Commission recommended that the state extend a moratorium on executions after finding that it could not ensure protections against executing the innocent.

Of all the reasons to oppose capital punishment, from its high cost to its failure to deter crimes, the most important is the finality of death. An expedited death penalty reduces the chances that an innocent prisoner will be exonerated in time. For some exonerated prisoners, such as Lamar Johnson, it was more than 20 years before the reprieve came. And that was only after years of advocacy by private volunteers.

Trump ended his appeal by saying, “If we are able to pass great legislation after all of these years, we will ensure that those who were attacked will not die in vain.” If he truly wants to honor the memory of this weekend’s dead, he will not expand a broken institution that would create even innocent victims.

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