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This Is How The “Everything Bubble” Will End

Authored by Nick Giambruno via InternationalMan.com,

I think there’s a very high chance of a stock market crash of historic proportions before the end of Trump’s first term.

That’s because the Federal Reserve’s current rate-hiking cycle, which started in 2015, is set to pop “the everything bubble.”

I’ll explain how this could all play out in a moment. But first, you need to know how the Fed creates the boom-bust cycle…

To start, the Fed encourages malinvestment by suppressing interest rates lower than their natural levels. This leads companies to invest in plants, equipment, and other capital assets that only appear profitable because borrowing money is cheap.

This, in turn, leads to misallocated capital – and eventually, economic loss when interest rates rise, making previously economic investments uneconomic.

Think of this dynamic like a variable rate mortgage. Artificially low interest rates encourage individual home buyers to take out mortgages. If interest rates stay low, they can make the payments and maintain the illusion of solvency.

But once interest rates rise, the mortgage interest payments adjust higher, making them less and less affordable until, eventually, the borrower defaults.

In short, bubbles are inflated when easy money from low interest rates floods into a certain asset.

Rate hikes do the opposite. They suck money out of the economy and pop the bubbles created from low rates.

It Almost Always Ends in a Crisis

Almost every Fed rate-hiking cycle ends in a crisis. Sometimes it starts abroad, but it always filters back to U.S. markets.

Specifically, 16 of the last 19 times the Fed started a series of interest rate hikes, some sort of crisis that tanked the stock market followed. That’s around 84% of the time.

You can see some of the more prominent examples in the chart below.

Let’s walk through a few of the major crises…

• 1929 Wall Street Crash

Throughout the 1920s, the Federal Reserve’s easy money policies helped create an enormous stock market bubble.

In August 1929, the Fed raised interest rates and effectively ended the easy credit.

Only a few months later, the bubble burst on Black Tuesday. The Dow lost over 12% that day. It was the most devastating stock market crash in the U.S. up to that point. It also signaled the beginning of the Great Depression.

Between 1929 and 1932, the stock market went on to lose 86% of its value.

• 1987 Stock Market Crash

In February 1987, the Fed decided to tighten by withdrawing liquidity from the market. This pushed interest rates up.

They continued to tighten until the “Black Monday” crash in October of that year, when the S&P 500 lost 33% of its value.

At that point, the Fed quickly reversed its course and started easing again. It was the Chairman of the Federal Reserve Alan Greenspan’s first – but not last – bungled attempt to raise interest rates.

• Asia Crisis and LTCM Collapse

A similar pattern played out in the mid-1990s. Emerging markets – which had borrowed from foreigners during a period of relatively low interest rates – found themselves in big trouble once Greenspan’s Fed started to raise rates.

This time, the crisis started in Asia, spread to Russia, and then finally hit the U.S., where markets fell over 20%.

Long-Term Capital Management (LTCM) was a large U.S. hedge fund. It had borrowed heavily to invest in Russia and the affected Asian countries. It soon found itself insolvent. For the Fed, however, its size meant the fund was “too big to fail.” Eventually, LTCM was bailed out.

• Tech Bubble

Greenspan’s next rate-hike cycle helped to puncture the tech bubble (which he’d helped inflate with easy money). After the tech bubble burst, the S&P 500 was cut in half.

• Subprime Meltdown and the 2008 Financial Crisis

The end of the tech bubble caused an economic downturn. Alan Greenspan’s Fed responded by dramatically lowering interest rates. This new, easy money ended up flowing into the housing market.

Then in 2004, the Fed embarked on another rate-hiking cycle. The higher interest rates made it impossible for many Americans to service their mortgage debts. Mortgage debts were widely securitized and sold to large financial institutions.

When the underlying mortgages started to go south, so did these mortgage-backed securities, and so did the financial institutions that held them.

It created a cascading crisis that nearly collapsed the global financial system. The S&P 500 fell by over 56%.

• 2018: The “Everything Bubble”

I think another crisis is imminent…

As you probably know, the Fed responded to the 2008 financial crisis with unprecedented amounts of easy money.

Think of the trillions of dollars in money printing programs – euphemistically called quantitative easing (QE) 1, 2, and 3.

At the same time, the Fed effectively took interest rates to zero, the lowest they’ve been in the entire history of the U.S.

Allegedly, the Fed did this all to save the economy. In reality, it has created enormous and unprecedented economic distortions and misallocations of capital. And it’s all going to be flushed out.

In other words, the Fed’s response to the last crisis sowed the seeds for an even bigger crisis.

The trillions of dollars the Fed “printed” created not just a housing bubble or a tech bubble, but an “everything bubble.”

The Fed took interest rates to zero in 2008. It held them there until December 2015 – nearly seven years.

For perspective, the Fed inflated the housing bubble with about two years of 1% interest rates. So it’s hard to fathom how much it distorted the economy with seven years of 0% interest rates.

The Fed Will Pop This Bubble, Too

Since December 2015, the Fed has been steadily raising rates, roughly 0.25% per quarter.

I think this rate-hike cycle is going to pop the “everything bubble.” And I see multiple warning signs that this pop is imminent.

• Warning Sign No. 1 – Emerging Markets Are Flashing Red

Earlier this year, the Turkish lira lost over 40% of its value. The Argentine peso tanked a similar amount.

These currency crises could foreshadow a coming crisis in the U.S., much in the same way the Asian financial crisis/Russian debt default did in the late 1990s.

• Warning Sign No. 2 – Unsustainable Economic Expansion

Trillions of dollars in easy money have fueled the second-longest economic expansion in U.S. history, as measured by GDP. If it’s sustained until July 2019, it will become the longest in U.S. history.

In other words, by historical standards, the current economic expansion will likely end before the next presidential election.

• Warning Sign No. 3 – The Longest Bull Market Yet

Earlier this year, the U.S. stock market broke the all-time record for the longest bull market in history. The market has been rising for nearly a decade straight without a 20% correction.

Meanwhile, stock market valuations are nearing their highest levels in all of history.

The S&P 500’s CAPE ratio, for example, is now the second-highest it’s ever been. (A high CAPE ratio means stocks are expensive.) The only time it was higher was right before the tech bubble burst.

Every time stock valuations have approached these nosebleed levels, a major crash has followed.

Preparing for the Pop

The U.S. economy and stock market are overdue for a recession and correction by any historical standard, regardless of what the Fed does.

But when you add in the Fed’s current rate-hiking cycle – the same catalyst for previous bubble pops – the likelihood of a stock market crash of historic proportions, before the end of Trump’s first term, is very high.

That’s why investors should prepare now. One way to do that is by shorting the market. That means betting the market will fall.

Keep in mind, I’m not in the habit of making “doomsday” predictions. Simply put, the Fed has warped the economy far more drastically than it did in the 1920s, during the tech or housing bubbles, or during any other period in history.

I expect the resulting stock market crash to be that much bigger.

*  *  *

Clearly, there are many strange things afoot in the world. Distortions of markets, distortions of culture. It’s wise to wonder what’s going to happen, and to take advantage of growth while also being prepared for crisis. How will you protect yourself in the next crisis? See our PDF guide that will show you exactly how. Click here to download it now.

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New Tracks From Meek Mill and Chance the Rapper Tackle Criminal Justice and Trump

|||Twitter/@MeekMillMeek Mill and Chance the Rapper both released music this week that sees the iconic hip-hop artists taking on criminal justice reform, economics, and Trump/Kanye. It’s good stuff and you can listen to it below.

Championships by Meek Mill

Oh, say can you see, I don’t feel like I’m free/Locked down in my cell, shackled from ankle to feet/Judge bangin’ that gavel, turned me to slave from a king/Another day in the bing, I gotta hang from a string/Just for poppin’ a wheelie, my people march through the city/From a cell to a chopper, view from the top of the city
—”What’s Free”

Philadelphia rapper Meek Mill dropped Championships on Friday. His first studio album since being released from prison in April, Mill’s decision to collaborate with Drake on “Going Bad” signifies the end of a long feud between the two, while “What’s Free” shows Mill riffing deeply on the wheelie that cost him his liberty.

First convicted in 2008 at the age of 19 for possessing a gun in a grocery store, Mill has spent the lat 10 years in and out of prison and on probation. His most recent stint hinged on a farcical and petty abuse of state power: a social media video showed him popping a wheelie on a motorbike. The subsequent reckless endangerment and reckless driving charges violated the terms of his probation and saw him sentenced to two to four years in prison.

Since his release, Mill has used his story to show how easy it is to become swept up in the criminal justice system. He has has vowed to lobby for criminal justice reforms, especially for those facing long probation times.

Jay-Z also addresses his own friendship struggles with Kanye West on the song. Calling out his old collaborator by name, HOV makes it clear that he won’t be donning a red MAGA hat anytime soon. As for his friendship with West, who has spent the better part of 2018 declaring his love for the president, Jay-Z’s general attitude in the song indicates that those Watch the Throne days are very much over.

New Tracks from Chance the Rapper

Don’t gifts get re-wrapped?/That shit could get sticky like tree sap/I gave you free raps, that shit sound like free facts/Which is ’bout as common as free Blacks
—”The Man Who Has Everything”

Though Chance the Rapper hasn’t released an album since 2016, he’s kept fans fed with the occasional single. We got a double delight on Friday, when Chance uploaded “The Man Who Has Everything” and “My Own Thing (feat. Joey Purp)” to SoundCloud. The songs are personal, focusing on topics like his relationship with his fiancée. In between those reflections, however, is some commentary on his decision to release music for free.

As Sean McBride wrote at the Foundation for Economic Education (FEE) in 2016, the free-music strategy is a capitalist one. By advertising his product that way, Chance’s raps become accessible to all kinds of crowds. When people begin to yearn for more, he can make up the cost, in part, with sold-out tours and merchandise sales.

While Chance himself has not used the c-word to describe what he does, he did tell the Chicago Tribune, “I put my music out there for free because I wanted people to see and notice it as a beacon for what I’m doing…” But make no mistake. Chance added that he’s never been “against” selling his product, which he believes has value.

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Putin Spokesman Confirms 15-Month-Old News That Trump Lawyer Wrote To Kremlin

It’s still unclear whether President Trump and President Vladimir Putin will meet at the G-20 this weekend (the prospects for a meeting have been repeatedly confirmed and denied by both sides), but there’s little doubt that, back in Washington, the talk of the town will focus on whether Michael Cohen’s guilty plea represents an important turning point in the Russia collusion investigation (as the Washington Post suggested in a Page 1 story published in Friday’s paper).

But as Trump lawyer Rudy Giuliani confirmed yesterday in an interview with the New York Times (and as the president himself told a group of reporters before departing for Argentina), the Cohen story is really just more of the same.

Cohen

And as if the media needed more evidence that the Trump Tower Moscow controversy has already been litigated in the public eye,  Kremlin spokesman Dmitry Peskov on Friday offered a quick reminder when he showed two of Cohen’s emails to a group of reporters, confirming a 15-month old report that Cohen had reached out to him to ask for help with facilitating the project (none was offered, and the project was eventually abandoned), the Daily Mail reported.

As a reminder, here’s what Peskov and Cohen said about Cohen’s ‘contact’ with the Kremlin at the time (per CNN). Cohen has since admitted to lying about the talks ending in January 2016, and has instead claimed that they continued – with the president’s involvement at times – until the summer of 2017.

“This email said that a certain Russian company together with certain individuals is pursuing the goal of building a skyscraper in the ‘Moscow City’ district, but things aren’t going well and they asked for help with some advice on moving this project forward,” Peskov said. “But, since, I repeat again, we do not react to such business topics — this is not our work — we left it unanswered.”
He added: “We cannot discuss with President Putin hundreds and thousands of different requests, which, by the way, come from a variety of countries.”

Cohen revealed Monday that he had made the overture to Moscow at a point well into Trump’s presidential campaign.

“The Trump Moscow proposal was simply one of many development opportunities that the Trump Organization considered and ultimately rejected,” Cohen said in a written statement.

“In late January 2016, I abandoned the Moscow proposal because I lost confidence that the prospective licensee would be able to obtain the real estate, financing and government approvals necessary to bring the proposal to fruition,” he added. “It was a building proposal that did not succeed and nothing more.”

Sound familiar?

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Laughable but Widely Cited Report on the Cost of Legalizing Pot Does Not Even Try to Measure the Cost

A new report from Colorado Christian University’s Centennial Institute claims that “for every dollar gained in tax revenue, Coloradans spent approximately $4.50 to mitigate the effects of [marijuana] legalization.” That factoid is already showing up in arguments against legalization, even though it is plainly fallacious.

Centennial Institute Director Jeff Hunt, who is also the university’s vice president of public policy, takes the approach favored by anti-pot polemicists, conflating correlation with causation and counting every purported cost to which a number can be attached, no matter how implausibly, while ignoring every benefit except for tax revenue and the increased value of Colorado homes since legalization (which suggests the state has not turned into the drug-addled dystopia predicted by prohibitionists).

Most glaringly, as Paul Danish notes in the Boulder Weekly, Hunt et al. make no attempt to isolate the impact of legalization, which is supposed to be the subject of the report. Instead they tote up supposedly marijuana-related costs without regard to whether they were caused by the change in policy the report claims to be analyzing.

“The figures, even if accurate, represent the economic and social costs of marijuana use,” Danish observes. “But the study’s supposed purpose is to identify the economic and social costs attributable to marijuana legalization, which are different [from] the overall costs (real, imaginary or theoretical) of marijuana use generally.”

In other words, if you assume (as Hunt et al. do) that marijuana makes people fat and lazy, resulting in $54,833,218 in extra health care costs related to “physical inactivity” each year, you need to estimate what share of those fat and lazy potheads would not be consuming cannabis but for legalization. The fact that Hunt does not even make a gesture in that direction says a lot about his analytical rigor and intellectual honesty.

Does marijuana make people fat and lazy? “People who use marijuana more frequently,” Hunt et al. say, “tend to be less physically active.” He assumes the difference is entirely attributable to their marijuana use, as opposed to other ways in which people who consume cannabis might be different, on average, from people who don’t. That is like observing that fans of professional wrestling are fatter than people who have never heard of Kenny Omega (I have no idea whether that is true) and concluding that watching WWE matches makes people fat.

Hunt et al. likewise assume that a correlation between marijuana use and dropping out of high school means that marijuana makes people drop out of high school, even though he notes that “these figures do not demonstrate causation.” Lost productivity related to dropping out of school, which the report puts at $423,362,337.22 (multiplying “marijuana-related drop-outs” in 2016-17 by $334,716.12, “the cost of not completing high school”) is the biggest component of the $1.1 billion annual cost that the Centennial Institute attributes to legalization. It is quite a stretch to count a high school dropout’s future loss of income as money “spent” by Coloradans in 2017, but that is what Hunt et al. do. And as with “physical inactivity,” they do not try to estimate how many of those students would have dropped out even if marijuana had never been legalized, even though the whole point of this exercise is to show what a disaster legalization has been.

The second biggest component of the Centennial Institute’s legalization bill is marijuana-related hospitalizations and emergency room visits, which the report says cost $381,915,043 in 2015. The number of these cases did rise following legalization, but it is hard to tell how much of that change represents a real increase in problems caused by cannabis consumption. Now that marijuana is legal, people are probably more willing to admit that they use it (as Hunt et al. concede) and to seek help when they run into trouble. Medical staff may also be more likely to note marijuana use in hospital records. But none of that really matters in the Centennial Institute’s analysis, because once again the report looks at the total cost, as opposed to the portion that might plausibly be attributed to legalization.

The same goes for traffic accidents, where Hunt et al. not only assume that marijuana was the cause whenever a driver tested positive for THC, regardless of whether he was actually impaired by it at the time of the crash, but also act as if there were no stoned drivers prior to legalization. Even when spending has declined since legalization, as with marijuana arrests and “treatment for marijuana use disorder,” Hunt et al. count the current cost as part of the tab for letting Coloradans use cannabis without a doctor’s note.

Hunt claims the report is “fair” and takes “a conservative approach to calculating the costs and fees associated with increased marijuana use.” In reality, it does not even attempt to calculate the costs associated with increased marijuana use. At best, it calculates the cost associated with marijuana use, period, and the manner in which it does that will not seem “fair” to anyone who does not already agree with Hunt that legalization is a huge mistake.

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Central American Migrants Begin Hunger Strike In Tijuana

A group within the 6,000 or so Central American migrants currently stuck in Tijuana have begun a hunger strike to try and pressure US and Mexican authorities to stop blocking their entry into the United States, and process their applications for asylum in the United States more quickly, according to DW. 

The group of protesters is part of the more than 6,000 migrants, mostly from Honduras, who have travelled by caravan towards the United States in the hope of applying for asylum and fleeing violence and poverty in their home countries. They are now stuck at the border city of Tijuana, Mexico.

Many of those taking part in the hunger strike are women. –DW

“Since no one is listening to us, we’ve decided as a women’s movement… to launch a hunger strike,” announced Honduran Claudia Miranda during an improvised press conference in Tijuana. 

The migrants face long wait times and an uncertain future as they line up and put their names on a list to be heard for Asylum claims – which are currently being processed at a rate of less than 100 per day. Doing the math, it could be months before the roughly 6,000 migrants holed up in Tijuana shelters and a squalid soccer field camp are processed. Not only that, there is no guarantee they will be granted asylum – as migrants have to show evidence of valid claims.

The women were initially prevented from setting up a picket in front of the border immigration offices. 

“We’re in really bad shape,” Cindy Pinera told DW. “Everything is wet and that is hard for the babies.” –DW

The migrants have been camped out at overcrowded shelters and an outdoor sports facility for the last three weeks, while Mexican authorities have begun transporting migrants to a new shelter in order to try and ease tensions and improve the migrants’ living conditions as they wait for their asylum applications to be processed – which could take months. 

In response to President Trump’s efforts to strengthen immigration policies and ban migrants who enter the country illegally from applying for asylum, many caravan members have requested humanitarian and working visas in Mexico instead. 

On Sunday, several hundred migrants attempted to breach the US border, resulting in the deployment of tear gas to stop the group from rushing the fence. Mexico vowed to deport those who “violently” charged the US border in response. 

Meanwhile, Fox News has reported that a member of the notorious MS-13 gang admitted to having traveled north with the migrant caravan before trying to enter the United States, bolstering claims by the Department of Homeland Security and President Trump that there are criminal elements among the group. 

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Lawsuit Alleges California Cops Stole Weed and Cash During Traffic Stops

A Texas man is accusing several police officers in Northern California of stealing three pounds of legal marijuana from him during a traffic stop, according to a federal civil rights lawsuit filed earlier this month. And he’s not the only one who says he was essentially robbed by a group of rogue police officers.

Zeke Flatten alleges that three police officers from the town of Rohnert Park and Hopland Band of Pomo Indians pulled him over last December while he was driving through Mendocino County. The officers were not wearing name tags or badges, and they identified themselves as federal agents from the Bureau of Alcohol, Tobacco, and Firearms, rather than local police officers, the lawsuit says.

Flatten told the officers about the marijuana and offered to show them his paperwork for it, but they seized it and left without issuing him a ticket or running his name to check for outstanding warrants.

Flatten is not the only alleged victim. The lawsuit, citing recent local news investigations, says police from the town and tribe have a pattern of using a lucrative civil asset forfeiture program to shake down motorists for marijuana and cash during traffic stops.

Rogue Rohnert Park police “conspired to expand the legitimate interdiction mission to one of personal financial gain, and over the years seized thousands of pounds of cannabis and hundreds of thousands of dollars of currency without issuing receipts for the seizures, without making arrests for any crimes, and without any official report of the forfeitures being made,” the lawsuit says.

And when arrests were made, “cash and cannabis seized was significantly underreported in furtherance of the conspiracy allowing the officers to skim off the top of even otherwise legal interdictions,” the suit continues.

Under civil asset forfeiture laws, police can seize cash, cars, and even houses suspected of being connected to criminal activity, even if the owner is not charged with a crime. Law enforcement groups argue that civil forfeiture is a vital tool to disrupt drug trafficking and other organized crime, but civil liberties groups say there are far too few due process protections for property owners and far too many perverse profit incentives for police.

“It’s the government agencies typically that have been enriched as a result of those seizures,” Flatten’s attorney Izaak Schwaiger says. “What’s different in Mr. Flatten’s case is that it’s individuals who are getting enriched—individual officers who under the color of law are abusing their authority to conduct traffic stops without the requisite legal cause and then robbing people of their cash, or in this case their cannabis.”

An independent blogger first began scrutinizing Flatten’s case in February after he contacted local police and media to complain. Although local and state police often partner with federal authorities for asset forfeiture cases, the ATF said it wasn’t involved.

Rohner Park Sgt. Jacy Tatum issued a press release and an incident report to try and justify the stop, but the report appeared to confuse Flatten’s case with another large marijuana seizure, getting several key details, such as the car make and model, wrong. “As a result his press release defended the wrong illegal seizure, and instead of diffusing the scrutiny plaintiff’s allegations had brought, it brought the allegations more clearly into focus,” the lawsuit says.

KQED, working with several other newspapers, then published an investigation this June that uncovered similar complaints by nine other motorists who say they were essentially robbed by Rohner Park police. For example, Huedell Freeman says Tatum and Rohnert Park police officer Joseph Huffaker, also named in Flatten’s lawsuit, seized 47 pounds of marijuana from him, despite Freeman’s having a permit to grow.

Tatum and another Rohner Park officer were sued for seizing $120,000 from a man in 2016 who said he was on his way to a high-stakes poker game in Las Vegas.

The stories also detailed complaints by area defense attorneys who said Tatum had earned a spot on the Sonoma County District Attorney’s Office “Brady list,” an ignominious list of officers whose history of false testimony must be disclosed if they are called as witnesses.

A month after KQED published its story, Tatum left the police department, as did the police chief of Rohnert Park. The town has hired an independent investigator to audit its asset forfeiture program, and the department ceased most of its marijuana interdiction efforts in 2017.

Northern California has for decades been the marijuana-growing capital of the U.S., and traditionally such seizures have been a lucrative and reliable revenue source for local police departments, and a more or less accepted cost of doing business for black market growers.

Tatum, Whitaker, and several other officers were part of a drug task force that seized hundreds of pounds of marijuana and a small mountain of cash. “Between 2016 and 2017, the Rohnert Park Department of Public Safety kept $1.2 million in seized funds for its own,” Flatten’s lawsuit says.

To hone their skills, the department paid to send Tatum and the other task force members to attend training sessions hosted by Black Snow, a private company that teaches police how to target and perform roadside asset seizures. It also operates Black Asphalt, a private surveillance network police can use to identify potential motorists to target.

In a 2014 investigation into how police use highway traffic stops to seize hundreds of millions of dollars from motorists without charging them with crimes, The Washington Post reported on Desert Snow:

“All of our home towns are sitting on a tax-liberating gold mine,” Deputy Ron Hain of Kane County, Ill., wrote in a self-published book under a pseudonym. Hain is a marketing specialist for Desert Snow, a leading interdiction training firm based in Guthrie, Okla., whose founders also created Black Asphalt.

Hain’s book calls for “turning our police forces into present-day Robin Hoods.”

But now marijuana is legal in California, and Schwaiger says growers who used to be cowed by the threat of felony charges are now finally able to speak up about police misconduct.

“What we’ve seen is people are proud of the fact that their industry has come out of the shadows and they feel like they should be able to operate without fear of persecution from the government,” Schwaiger says. “Years ago, when you could get a felony for growing marijuana in California, everyone just considered getting ripped off by the cops the price of doing business. Now people feel entitled to engage in legitimate commerce, and they’re willing to complain if something goes bad.”

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Former DOJ Official Admits Accepting Bribes From Fugitive Who Masterminded 1MDB Fraud

The DOJ has secured its second guilty plea in its investigation of what it alleges was a $4.5 billion fraud at 1MDB, the Malaysian sovereign wealth fund that was allegedly ransacked by corrupt officials with the help of a Malaysian financier, who allegedly paid bribes and kickbacks to Malaysian officials – including former Prime Minister Najib Razak – so they would keep quiet.

On Friday, George Higginbotham, a lawyer who left the DOJ just three months ago, pleaded guilty to one felony count of “conspiracy to make false statements” over allegations – detailed earlier this month in an ABC News report – that he sent emails lying to an unidentified US bank vouching for the source of funds funneled into the US by Jho Low, the corrupt Malaysian financier whom the DOJ has accused of masterminding the 1MDB fraud (and who met with former Goldman CEO Lloyd Blankfein and other senior Goldman bankers, despite objections from the bank’s compliance department). Low is presently a fugitive whose whereabouts are unknown, having fled before the DOJ charged him for his role in the fraud earlier this month.

He was already wanted in Malaysia for crimes related to 1MDB. Higginbotham allegedly opened accounts on Low’s behalf inside the US, into which he deposited tens of millions of stolen 1MDB funds.

Goldman

According to Bloomberg, some of the money funneled into the US by Low was intended to sway a DOJ investigation into 1MDB, though BBG didn’t specify how he intended to accomplish this, or which investigation he intended to sway.

Higginbotham allegedly plotted with two co-conspirators to “knowingly” mislead a specific financial institution about “tens of millions of dollars” in funds, according to a criminal complaint. According to BBG, Higginbotham held a “non-lawyer position” at the DOJ.

According to court documents, Low funneled cash through former Fugees member Pras Michel, who then passed money on to a political fundraiser who was identified only as Individual 2, as well as one of the fundraisers’ associates, an investment firm owner identified only as Individual 1.

Prosecutors have alleged that Higginbotham lied in the email “for the purpose of influencing [the bank’s] due diligence in connection with applications for recently opened accounts.”

More details are spelled out in a civil suit filed on Friday which is seeking to seize $74 million from Higginbotham’s law firm, and two other entities.

Higginbotham is the second person to plead guilty in the case after Goldman Partner Tim Leissner, who pleaded guilty earlier this month and agreed to cooperate with federal investigators. In his plea agreement, Leissner alleged a “culture of corruption” at Goldman that helped him circumvent the bank’s compliance department. Other Goldman employees – and possibly the bank itself – have found themselves in the crosshairs of the DOJ, including another banker, Roger Ng, who has been arrested and is being extradited to the US to face money laundering charges. A former co-head of Goldman’s investment bank is also being investigated, and has been temporarily put on leave. Earlier on Friday, Bloomberg reported that the New York Fed has launched its own investigation into how Goldman managed to evade its own compliance controls and move ahead with underwriting the three 1MDB bond deals – which netted the bank a combined $600 million.

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Weekend Reading: The Powell Put

Authored by Lance Roberts via RealInvestmentAdvice.com,

All it took was two 10% stock market corrections in a single year and some heavy “browbeating” from President Trump to reverse Jerome Powell’s hawkish stance on hiking interest rates.

On Wednesday, Powell took to the microphone to give the markets what they have been longing for – the “Powell Put.” During his speech, Powell took to a different tone than seen previously and specifically when he stated that current rates are “just below” the range of estimates for a “neutral rate.” This is a sharply different tone than seen previously when he suggested that a “neutral rate” was still a long way off.

Importantly, while the market surged higher after the comments on the suggestion the Fed was close to “being done” hiking rates, it also suggests the outlook for inflation and economic growth has fallen. With the Fed Funds rate running at near 2%, if the Fed now believes such is close to a “neutral rate,” it would suggest that expectations of economic growth will slow in the quarters ahead from nearly 6.0% in Q2 of 2018 to roughly 2.5% in 2019.

Such will also correspond with a drop in inflationary pressures, as we noted previously, which is already occurring with the drop in energy prices.

“More importantly, falling oil prices are going to put the Fed in a very tough position in the next couple of months as the expected surge in inflationary pressures, in order to justify higher rates, once again fails to appear. The chart below shows breakeven 5-year and 10-year inflation rates versus oil prices.”

But here was the key comment that suggests the recent blasting by President Trump hit home:

“Powell says moving too fast would risk shortening U.S. expansion, moving too slow could risk higher inflation and destabilizing financial imbalances.”

President Trump has been adamant that Powell’s aggressiveness was jeopardizing the economic recovery.

More interesting was when Powell reiterated they see “no major asset class, however, where valuations appear far in excess of standard benchmarks” 

I am not sure which benchmarks the Fed looks at exactly.

The real risk to the market is not valuations at historically high levels by virtually every measure, but rather the risk of a credit related event due to the impact of higher rates on an abundance of lower-rated corporate debt.

Nonetheless, in the short-term, the “bulls” got their Christmas wish as noted by Bloomberg economists

“Tim Mahedy and Yelena Shulyatyeva:

‘Powell’s comment that rates are just below neutral is a step back from his comments earlier in the fall implying the FOMC still has a ways to go. This could be the first sign that the pace of rate hikes is set to slow next year.’

However, not all economists got the same dovish message as noted by Greg Robb via Marketwatch.

“I really don’t think he was dovish, not really. He didn’t say inflation was weaker or the economy was weaker than we thought. It is a bit of a market overreaction.” -Paul Ashworth, chief U.S. economist at Capital Economics.

“The Fed has said they wanted to go above neutral. If they wanted to be neutral, they could have walked that back. He gave no hint of a pause in December.” – Avery Shenfeld, chief economist at CIBC

All the “bulls” need now is for President Trump to “cave in” on his demands on China, a problem he created in the first place, at this weekends G-20 summit. I would expect a deal that is well short of any original objective as China agrees to issues which are economically unimportant to them. However, such will “look like a win” for the Trump administration and should clear the way for “Santa to visit Broad and Wall.” 

After that, it’s anyone’s guess, but the real issues plaguing the economy and the markets have not been resolved.

Just something to think about as you catch up on your weekend reading list.

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“There is nothing like price to change sentiment.“ – Helene Meisler

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Federal Workers Warned Against Talk of ‘Impeachment,’ ‘the Resistance’

Employees of the federal government were warned this week that both praising and criticizing the Trump administration while on duty may be considered illegal. Federal workers are specifically barred from “advocating” for or against impeachment and from expressing support for the so-called “resistance” to President Donald Trump.

Such expressions could be considered violations of the Hatch Act, a 1939 law that largely prohibits federal workers from engaging in political activity while on the clock or in their official capacity as a government employee. In a memorandum released Tuesday, the Office of Special Counsel (no relation to Robert Mueller’s Russia probe) Hatch Act unit explains what kind of speech should be avoided.

There are quite a few nuances. Employees aren’t necessarily barred from praising or criticizing a presidential administration’s policies. “Whether a particular statement constitutes political activity depends upon the facts and circumstances,” the memo reads. But in general, on-duty employees must “avoid making statements directed toward the success or failure of, among others, a candidate for partisan political office.”

That’s where talk of “impeachment” comes in. The Office of Special Counsel says it’s operating under the assumption that federal officials who are impeached and later removed are disqualified from holding office again. As a result, voicing support for impeachment is considered political activity. “Advocating for a candidate to be impeached, and thus potentially disqualified from holding federal office, is clearly directed at the failure of that candidate’s campaign for federal office,” the memo states. The same goes for employees who speak out against impeachment, though the directive does not apply to speech about people who aren’t running for “partisan elected office.”

The memo goes on to warn against activity related to such words and phrases as “#resist,” “the resistance,” and “#resistTrump.” Such terms, the memo points out, are clearly associated with efforts to oppose the Trump administration’s policies. Since Trump has already announced his reelection bid, the Office of Special Counsel assumes that “the use or display of” those terms “and similar statements is political activity unless the facts and circumstances indicate otherwise.” The agency notes that there’s nothing wrong with using those words in a clearly apolitical context.

Some experts have expressed concern that the new directive could infringe on free speech. “This goes beyond past guidance about what partisan political activity is, and is more restrictive of speech of federal employees than past guidance that I’ve been able to find,” Kathleen Clark, a law professor at Washington University in St. Louis, tells The New York Times. “I think their legal analysis is wrong in this attempt to outlaw all discussion of impeachment of Trump in the federal workplace. Maybe that is a good idea, maybe that is a bad idea, but I don’t think that is what the Hatch Act requires.”

Former Office of Special Counsel employee Nick Schwellenbach, who currently serves as director of investigations at the Project on Government Oversight, also thinks the directive “goes too far.” He tells The Washington Post that “once you start talking about more-general political views, you’re starting to infringe upon people’s rights.”

But Roger Pilon, vice president for legal affairs at the Cato Institute, isn’t so sure. “This appears to be simply an effort to draw the distinctions that the Hatch Act requires, and that often involves close calls,” Pilon tells Reason. He acknowledges that the directive regarding “resistance” could “involve closer calls.” But “the distinction is drawn with reference to periods when President Trump was not and then, later, was a candidate for office.”

Ana Galindo-Marrone, who leads the Hatch Act unit, doesn’t think this directive is that different from policies already in place. “To me, it’s no different from the language we’ve used before,” she tells NPR.

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Fed & FOMO Rescue Stocks But Bond Yields, Bitcoin, & Black Gold Collapse

Trump better deliver…

China stocks eked out a modest gain on the week thanks to a late Friday liftathon ahead of this weekend’s uncertainty…

 

But Shanghai Composite closed down on the month (2nd month lower in a row)

 

European markets were oddly quiet all week aside from the buying panic at the open on Monday…(but Italy handily outperformed)

But on the month, a mixed bag with Italy and Spain green and the rest of the majors red…

 

US equities soared on the week, with Nasdaq up 5.6% leading – the best week since Dec 2011…

 

Trannies soared in November and thanks to the last few days of Powell and Trade hope, stocks were rescued from another ugly month…

 

On the day, equity moves were dominated by optimistic headlines from Buenos Aires from both Trump and Xi sources…

 

Best week for S&P since Dec 2011 and barekly managed to get above its 50DMA…

 

November was all about two big short-squeezes…

 

Goldman Sachs plunged again today to fresh 2-year lows, erasing all post-Trump gains – worst month since Sept 2011

 

FANG Stocks closed lower for the 3rd month in a row…(longest losing streak since Feb 2016)… despite panic-buying this last week…best week since January

 

Credit markets tumbled for the 2nd month in a row – the worst 2-month drop since Jan 2016 for HY and IG (wider for 4 straight months). IG Credit compressed 5bps this week – best week since June (and HY CDX biggest weekly spread compression since February).

 

Bonds and Stocks were bid in the last hour today…

 

Extending their divergence post-Powell…

 

On the week, 2s and 30s are unchanged with the belly lower in yield…

 

Treasury yields tumbled in November – 10Y yields dropped over 13bps – the biggest monthly drop since Aug 2017

10Y Yields closed the week with a 3.00% handle…

 

The short-end of the UST yield curve collapsed in November (biggest flattening since March)…7th flatter month in the last 9 (note that the curve accelerated its flattening post 10/17 FOMC Mins from Sept, and after the 11/08 FOMC statement)…

 

with 2s5s almost inverted

The dollar index ended the month practically unchanged (hovering at its highest since May 2017)

 

It was a serious rollercoaster ride of a week as Powell’s dovishness pummeled the dollar and pre-G20 trade chatter seemed to spark buying…

 

Bitcoin was down for the 5th week in a row but the 37% collapse in November is the worst month since August 2011 (Bitcoin Cash fell 60% on the month as it forked)

 

With Bitcoin back below $4000 to end the week…

 

Copper and Gold managed gains on the month, silver small losses, but crude collapsed…

 

Gold managed to close higher for the 2nd month in a row

 

But was unchanged against the yuan…

 

But WTI collapsed to its worst month since 2008…

 

Blowing back below $50 again today before spurious old news OPEC headlines sparked another ramp…

 

As it seems 5 Oz of Silver for a barrel of WTI Crude was just too much again…

 

Finally, we note that rate-hike expectations for 2019 have now collapsed to less than one!! just 22.25bps for the year (The Fed is still at 3 or 4 hikes)…

And as Gluskin Sheff’s David Rosenberg notes, this hypersensitive market is anything but healthy…

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