With the Jamal Khashoggi affair shaking up Saudi-Washington relations, and with multiple Gulf countries predictably coming out in support of Riyadh’s denials that it was behind the journalist’s disappearance and apparent murder, it will be interesting to see Israel’s stance on the issue.
We fully expect Israel to do all that it can to lobby Washington toward keeping its bulls-eye ever steadfast on Iran. Indeed Prime Minister Benjamin Netanyahu appears already cognizant of Iran receding into the background of priorities for the West as the alleged gruesome death and dismemberment of Khashoggi at the hands of a Saudi hit team ordered by MbS takes center stage.
On Monday Netanyahu opened a parliamentary session at the Knesset by addressing his familiar theme of “Iranian expansion” in Syria, except that the timing is now more interesting given some of the public heat and attention has now been taken off Tehran for a time: “We must act against the Iranian regime in Syria,”Netanyahu said.
But crucially, he added a new theme — important in light of the past two weeks: “Because of the Iranian threat, Israel and other Arab countries are closer than they ever were before,” the prime minister said. This acknowledgement comes after years of Saudi Arabia joining in a covert partnership to topple the Syrian government — a project which has clearly failed.
And not only has it utterly failed, but Israel’s repeat air strikes on Syria (acknowledged recently by Israel’s military to be over 200 strikes in the past year alone), culminated in last month’s accidental downing of a Russian Ilyushin-20 reconnaissance plane with 15 crew members on board, resulting in the now accomplished transfer of the advanced S-300 anti-aircraft defense system to the Syrian government.
Concerning this, Netanyahu also addressed the ongoing diplomatic crisis with Moscow in the aftermath of the September 17th Russian aircraft downing, claiming that he “maintains a direct connection with Vladimir Putin.”
“A strong connection is important,” Netanyahu said. “This allows us to deal with all the problems in our region. It is important for the safety of Israel.” And he stressed: “But the most important connection is our alliance with the United States.”
However, by invoking Iran’s presence in Syria once again, Netanyahu is signalling that he wants the White House to keep its eye on the ball. As The Atlanticnotes the rhetoric has noticeably shifted, at least over the past week:
When the Trump administration talks about “severe punishment” for a country in the Middle East, it is generally referring to Iran, a country whose regional influence troubles both its Arab neighbors as well as the United States. Yet on Sunday, President Trump used those words to describe what could happen to Saudi Arabia— arguably the closest U.S. ally in the Muslim world— if investigations determine that the regime is complicit in the disappearance of Jamal Khashoggi, the dissident journalist.
However, these are the very Arab countries, led by Saudi Arabia, that Netanyahu in rare fashion just declared Israel in solidarity with.
The prime minister continued while referencing US sanctions on Iran, “This is once again an opportunity to thank Trump for his brave decision to renew the sanctions on Iran and to exit the Iran nuclear deal.” It was this context in which Netanyahu added that due to the Iranian nuclear threat, “Israel and other Arab countries are closer than they ever were before.”
As much of the world’s attention continues to fixate on Saudi Arabia and crown prince MbS, who has clearly lost the angelic halo that the mainstream media represented in the likes of Thomas Friedman previously bestowed on him, we fully expect Netanyahu to shout even louder about the “Iran threat” in Syria.
This brings up the possibility: should US-Saudi relations erode further over the Khashoggi case, resulting in a general or even temporary “softening” of the West’s rhetoric against Iran, perhaps Netanyahu will launch a well-timed militarily adventurous provocation or “distraction” in Syria to remind the world that Assad, Rouhani, and Nasrallah remain the real “bad guys” in the region?
A federal appeals court ruled today that Detroit police didn’t have carte blanche to shoot a woman’s dogs during a drug raid simply because they weren’t licensed.
The Sixth Circuit Court of Appeals reversed and remanded a lower court ruling in the case of Nikita Smith, who filed a federal civil rights lawsuit against the Detroit Police Department after a narcotics raid left three of her dogs dead. A federal judge dismissed Smith’s lawsuit last year, ruling that her dogs, because they were unlicensed, amounted to “contraband” under the Fourth Amendment.
In its ruling, the Sixth Circuit declared that not only was Smith entitled to some process under Michigan law before her dogs were “seized” (read: killed), but that her dogs, even if unlicensed, were still protected from unreasonable seizure under the Fourth Amendment.
“By guaranteeing process to dog owners before their unlicensed dogs are killed, Michigan law makes clear that the owners retain a possessory interest in their dogs,” the appeals court wrote. “This is particularly so in the context of everyday property that is not inherently illegal, such as some drugs, but instead is subject to jurisdiction-specific licensing or registration requirements, such as cars or boats or guns. Just as the police cannot destroy every unlicensed car or gun on the spot, they cannot kill every unlicensed dog on the spot.”
The case is the first time federal courts have considered whether an unlicensed pet—in violation of city or state code—is protected property under the Fourth Amendment. Courts have previously established that pets are protected from unreasonable search and seizure under the Fourth Amendment.
Smith’s lawsuit characterized the police as a “dog death squad” and claimed officers shot one of her pets through a closed bathroom door. Graphic photos from the raid on Smith’s house showed one dog laying dead in the blood-soaked bathroom.
In such cases, police departments typically argue that an officer’s actions were reasonable under the circumstances—and courts give much deference to those arguments. But in Smith’s case, the City of Detroit also adopted a novel legal argument: that since Smith’s dogs were unlicensed, she didn’t have a legitimate property interest in them and therefore could not bring a Fourth Amendment claim against the officers. Lawyers for Detroit compared Smith to a minor holding an alcoholic beverage.
A U.S. District Court judge agreed. “When a person owns a dog that is unlicensed, in the eyes of the law it is no different than owning any other type of illegal property,” U.S. District Judge George Caram Steeh ruled last year.
But in another Fourth Amendment lawsuit—brought by Nicole Motyka and Joel Castro, whose two dogs were shot by Detroit police during a marijuana raid—a different federal judge came to the opposite conclusion, ruling that Detroit’s argument was “misplaced.” Motyka’s lawsuit has been on hold awaiting today’s Sixth Circuit opinion.
Smith and Motyka’s cases are part of a string of lawsuits that have been filed against the Detroit Police Department for dog shootings over the past two years. A Reasoninvestigation last year found the department’s Major Violators Unit, which conducts drug raids in the city, has a track record of leaving dead dogs in its wake.
Earlier this year, Detroit paid $225,000 to settle a lawsuit brought by Kenneth Savage and Ashley Franklin, who claimed Detroit police officers shot their three dogs while the animals were enclosed behind an 8-foot-tall fence—all so the officers could confiscate several potted marijuana plants in the backyard.
There has been a lot of angst lately over the rise in interest rates and the question of whether the government will be able to continue to fund itself given the massive surge in the fiscal deficit since the beginning of the year.
While “spending like drunken sailors” is not a long-term solution to creating economic stability, unbridled fiscal stimulus does support growth in the short-term. Spending on natural disaster recovery last year (3-major hurricanes and two wildfires) led to a pop in Q2 and Q3 economic growth rates. The two recent hurricanes that slammed into South Carolina and Florida were big enough to sustain a bump in activity into early 2019. However, all that activity is simply “pulling forward”future growth.
But the most recent cause of concern behind the rise in interest rates is that there will be a “funding shortage” of U.S. debt at a time where governmental obligations are surging higher. I agree with Kevin Muir on this point who recently noted:
“Well, let me you in on a little secret. The US will have NO trouble funding itself. That’s not what’s going on.
If the bond market was truly worried about US government’s deficits, they would be monkey-hammering the long-end of the bond market. Yet the US 2-year note yields 2.88% while the 30-year bond is only 55 basis points higher at 3.43%. That’s not a yield curve worried about US fiscal situation.
And let’s face it, if Japan can maintain control of their bond market with their bat-shit-crazy debt-to-GDP level of 236%, the US will be just fine for quite some time.”
That’s not a good thing by the way.
Let’s Be Like Japan
“Bad debt is the root of the crisis. Fiscal stimulus may help economies for a couple of years but once the ‘painkilling’ effect wears off, U.S. and European economies will plunge back into crisis. The crisis won’t be over until the nonperforming assets are off the balance sheets of US and European banks.” – Keiichiro Kobayashi, 2010
While Kobayashi will ultimately be right, what he never envisioned was the extent to which Central Banks globally would be willing to go. As my partner Michael Lebowitz pointed out previously:
“Global central banks’ post-financial crisis monetary policies have collectively been more aggressive than anything witnessed in modern financial history. Over the last ten years, the six largest central banks have printed unprecedented amounts of money to purchase approximately $14 trillion of financial assets as shown below. Before the financial crisis of 2008, the only central bank printing money of any consequence was the Peoples Bank of China (PBoC).”
The belief was that by driving asset prices higher, economic growth would follow. Unfortunately, this has yet to be the case as debt both globally and specifically in the U.S. has exploded.
“QE has forced interest rates downward and lowered interest expenses for all debtors. Simultaneously, it boosted the amount of outstanding debt. The net effect is that the global debt burden has grown on a nominal basis and as a percentage of economic growth since 2008. The debt burden has become even more burdensome.”
Not surprisingly, the massive surge in debt has led to an explosion in the financial markets as cheap debt and leverage fueled a speculative frenzy in virtually every asset class.
The continuing mounting of debt from both the public and private sector, combined with rising health care costs, particularly for aging “baby boomers,” are among the factors behind soaring US debt. While “tax reform,” in a “vacuum” should boost rates of consumption and, ultimately, economic growth, the economic drag of poor demographics and soaring costs, will offset many of the benefits.
The complexity of the current environment implies years of sub-par economic growth ahead as noted by the Fed last week as their long-term projections, along with the CBO, remain mired at 2%.
The US is not the only country facing such a gloomy outlook for public finances, but the current economic overlay displays compelling similarities with Japan in the 1990s.
Also, while it is believed that “tax reform” will fix the problem of lackluster wage growth, create more jobs, and boost economic prosperity, one should at least question the logic given that more expansive spending, as represented in the chart above by the surge in debt, is having no substantial lasting impact on economic growth. As I have written previously, debt is a retardant to organic economic growth as it diverts dollars from productive investment to debt service.
One only needs to look at Japan for an understanding that QE, low-interest rate policies, and expansion of debt have done little economically. Take a look at the chart below which shows the expansion of the BOJ assets versus the growth of GDP and levels of interest rates.
Notice that since 1998, Japan has not achieved a 2% rate of economic growth. Even with interest rates still near zero, economic growth remains mired below one-percent, providing little evidence to support the idea that inflating asset prices by buying assets leads to stronger economic outcomes.
But yet, the current Administration believes our outcome will be different.
With the current economic recovery already pushing the long end of the economic cycle, the risk is rising that the next economic downturn is closer than not. The danger is that the Federal Reserve is now potentially trapped with an inability to use monetary policy tools to offset the next economic decline when it occurs.
This is the same problem that Japan has wrestled with for the last 25 years. While Japan has entered into an unprecedented stimulus program (on a relative basis twice as large as the U.S. on an economy 1/3 the size) there is no guarantee that such a program will result in the desired effect of pulling the Japanese economy out of its 30-year deflationary cycle. The problems that face Japan are similar to what we are currently witnessing in the U.S.:
A decline in savings rates to extremely low levels which depletes productive investments
An aging demographic that is top heavy and drawing on social benefits at an advancing rate.
A heavily indebted economy with debt/GDP ratios above 100%.
A decline in exports due to a weak global economic environment.
Slowing domestic economic growth rates.
An underemployed younger demographic.
An inelastic supply-demand curve
Weak industrial production
Dependence on productivity increases to offset reduced employment
The lynchpin to Japan, and the U.S., remains demographics and interest rates. As the aging population grows becoming a net drag on “savings,” the dependency on the “social welfare net” will continue to expand. The “pension problem” is only the tip of the iceberg.
If interest rates rise sharply it is effectively “game over” as borrowing costs surge, deficits balloon, housing falls, revenues weaken and consumer demand wanes. It is the worst thing that can happen to an economy that is currently remaining on life support.
Japan, like the U.S., is caught in an on-going “liquidity trap” where maintaining ultra-low interest rates are the key to sustaining an economic pulse. The unintended consequence of such actions, as we are witnessing in the U.S. currently, is the ongoing battle with deflationary pressures. The lower interest rates go – the less economic return that can be generated. An ultra-low interest rate environment, contrary to mainstream thought, has a negative impact on making productive investments and risk begins to outweigh the potential return.
More importantly, while there are many calling for an end of the “Great Bond Bull Market,” this is unlikely the case for two reasons.
As shown in the chart below, interest rates are relative globally. Rates can’t rise in one country while a majority of global economies are pushing low to negative rates. As has been the case over the last 30-years, so goes Japan, so goes the U.S.
Increases in rates also kill economic growth which drags rates lower. Like Japan, every time rates begin to rise, the economy rolls into a recession. The U.S. will face the same challenges.
Unfortunately, for the current Administration, the reality is that cutting taxes, tariffs, and sharp increases in debt, is unlikely to change the outcome in the U.S. The reason is simply that monetary interventions, and government spending, don’t create organic, sustainable, economic growth. Simply pulling forward future consumption through monetary policy continues to leave an ever-growing void in the future that must be filled. Eventually, the void will be too great to fill.
But hey, let’s just keep doing the same thing over and over again, which hasn’t worked for anyone as of yet, but we can always hope for a different result.
Back in July, Morgan Stanley’s chief equity strategist wrote that in a year in which “rolling bear markets” across such assets as volatility, Italian bonds, Chinese stocks, commodities, emerging markets, only a handful of asset classes had remained unscathed: technology stocks, as well as discretionary and growth names. It was the reason why Wilson downgraded tech and growth names at the time.
And, until last week, Discretionary, Growth, and Tech had been among the last holdouts from this “rolling bear market” thesis. That all changed following two days of violent rotations within the market as tech stocks saw a 3.8% decline last week (and about twice that over the last two weeks) with the pain sharpest in Semiconductors. The Russell 1000 growth index plunged ~5% giving up nearly a third of its year to date gains. In addition to Growth stocks and small caps, Materials and Industrials performed very poorly as well and notably didn’t recover much during Friday’s session. Meanwhile, even though defensive areas were also hit, they were relative outperformers. In short, as Wilson writes in a Monday note, “the rolling bear finally got the last holdouts and in doing so did some pretty severe damage to the entire forest.”
Furthermore, while others are “running around trying to figure out what everyone else is doing and how much might still be for sale”, Wilson says that he is going to simply stick with the narrative he has had had all year:
… we are in the midst of a rolling bear market across all global risk assets caused by a drain in liquidity and peaking growth. While we have yet to see others adopt this narrative we are confident it is the right one. Therefore, it likely is not finished until it becomes more consensus thinking.
Then, picking up on his note from the weekend (“The Hit To The P&L From Recent Moves Cannot Be Overstated“) Wilson writes that the “tipping point” catalyst for “the rolling bear to finally move into the US and take out the last holdouts” was the sharp rise in interest rates.
So, in order to decide if this move is over, we have to ask ourselves why rates shot up in the first place. While many were citing better economic data and inflation, we think the primary reason for the move higher was the widening US Treasury funding gap created by the Fed’s acceleration in its balance sheet reduction program (“Quantitative Tightening”) starting October 1st along with the ECB beginning to taper its Quantitative Easing program.
Throw in the blackout period for share buyback programs and its not difficult to see why we had a few accidents this month for risk assets.
And while various other commentators have suggested that the selling is over – including Morgan Stanley’s own quant desk – the problem as Wilson sees it is that “this liquidity issue is unlikely to get better before the end of the month when share buybacks resume in full force.”
Worse, the global liquidity issue is going to get worse as we move toward year end based on the Fed’s planned balance sheet reduction and ECB’s taper. The chart below shows the recent trajectory of global central bank balance sheet growth this year and Morgan Stanley’s projected path going forward.
As you can see, this balance sheet growth will go into negative territory by January and anytime we have see that in the past, it is typically not a happy time for risk assets.
Yet even despite the slide in multiples observed last week across most market sectors (except utilities), Growth, Discretionary, and Tech remain among the groups least impacted by the market wide derating this year (Exhibit 4). Energy, Materials, Financials, and Industrials have seen near 20% corrections in their multiples since the S&P’s valuation peak on December 18, the day before the tax bill was signed. And contrary to such financial stalwarts as JPM quant Marko Kolanovic, who last Friday was confident the market opportunity now is one where the dip is to be bought, Wilson does not think “the pain is over for Growth, Discretionary, and Tech and the rolling bear will likely be back for more.“
Reverting to the big picture, Wilson then writes that as global liquidity continues to shrink and as the “rolling bear markets” affect even formerly immune sectors, the absolute level of interest rates are the key difference between the selloff that happened during February and the one that happened this week. And while in February, rates were contained in the 2.70 – 2.90% range, the 10 year has now broken out above 3.10% and does not show signs of falling back to lower levels. What does that mean for valuation going forward? Wilson explains:
We like to think about valuation in the context of rates and the equity risk premium. The matrices shown in Exhibit 5 show the sensitivity to both. Assuming rates stay between 3.00 and 3.25, an equity risk premium of 300 to 325 puts us at a S&P multiple of 15 – 16.0x.
In short, 16.0x is now the ceiling for market multiples while it was the floor in February’s lower rate environment. If accurate, it would mean that as long as the 10Y traders between 3.00% and 3.50%, the S&P will remain range-bound between 2,580 and 2,900.
Gangs of masked left- and right-wing protestors clashed again in Portland, Oregon, on Saturday night, raising the question of whether political street violence is the new normal in the Rose City.
The weekend’s violence began with an impromptu gathering of the right-wing group Patriot Prayer—a staple of Portland’s street melees over the last couple of years—who rallied in the city’s downtown to call for the ouster of Mayor Ted Wheeler, who they accuse of surrendering the city to far-left protestors.
Pictures and video from the rally show demonstrators waving American flags and sporting MAGA and Proud Boy hats. One man wore a homemade t-shirt with the slogan “I hunt Antifa cowards.”
In attendance were Joey Gibson, leader of Patriot Prayer and unsuccessful candidate for U.S. Senate in Washington state, and Tusitala “Tiny” Toese, another prominent member of the group, who’s been charged with assault for his brawling at past protests.
Following the Patriot Prayer rally, the assembled group marched through the city’s downtown, shouting chants of “USA” as they passed a vigil for Patrick Kimmons, who was killed by Portland police last month.
According to Willamette Week, the first scuffles started shortly after the Kimmons vigil ended. One vigil attendee set fire to an American flag, which was then snatched away by a member of the Patriot Prayer crowd. Insults started to fly between the two groups, followed by squirts of pepper spray.
One video, captured by Portland freelancer Mike Bivins, shows right-wing protestors he identifies as Proud Boys and a black-clad antifa demonstrator approaching each other, fists raised, before another leftist lets loose a string of pepper spray.
The violence only escalated from there, reaching a peak at around 8 P.M. when a full-scale brawl broke out in front of the bar Kelly’s Olympian. Video shows the two sides exchanging more blows and pepper spray. One clip, again captured by Bivins, shows what appears to be a right-wing protestor repeatedly stomping on a left-wing counterdemonstrator, who’s lying prone on the ground.
Portland Police eventually intervened, firing pepper ball rounds and other non-lethal ammunition.
“We are aware that there was a large, violent encounter between opposing groups on Southwest Washington Street,” Portland Police Chief Danielle Outlaw said in a press release. “Officers responded to the scene and used less lethal munitions to break up the fight and prevent further violence. We will continue to investigate this incident and ask that anyone who was the victim of a crime to come forward and file a report.”
No arrests were made Saturday. After being broken up by police, the two sides dissipated, with the Patriot Prayer crowd chanting “Trump, Trump, Trump” as they marched away from the scene.
Violent protests are hardly an unprecedented phenomenon in Portland. The city was affectionately nicknamed “Little Beirut” in the late 1980s for the raucous protests that greeted visits by President George H.W. Bush and Vice President Dan Quayle.
Still the street warfare of the kind we saw this weekend is a relatively new phenomenon, spawned from the hysterical aftermath of Donald Trump’s election. As right and left repeatedly face off, the Portland Police have been criticized for both overpolicing and underpolicing the rallies.
And while the fighters like to present themselves either as dogged defenders of racial equality against the forces of white supremacy or as free speech warriors standing up to an intolerant leftist mob, all I really see in these street scuffles are a bunch of angry people looking for a fight.
They say “History doesn’t repeat, but it sure does rhyme.” Today, nowhere is there a singing chorus belting out remakes of the once tried and true classics from the forgotten “hits-ville” era of bull markets past than what I witnessed across what I refer to as the mainstream business/financial media.
I perused just three of the major outlets (e.g., CNBC™, Fox Business™, Bloomberg™) over this past week, not to gain any insight into the current market gyrations, but rather to see how it was being reported. I was not disappointed in entertainment value, however, the flip side of that insinuates that those that are actually looking for insight (actually, the few) are once again being told and sold the most vapid, vacant, if not deplorable analysis for what is currently taking place in the markets today. Then again – this is precisely the same styled tunes they were spinning in 2007/08 – 1999/2000 – and 1987.
The “markets” may have recovered since then, but the reputation for insight across these platforms has not, as I’ll explain.
Now to be fair, there are many people who work at these outlets which I have both admiration, as well as respect for their insights and analysis. But you rarely, if ever, see them on camera or mic. What I’m speaking to here is what I was watching across the television side which is where most, if not all, retail consumers of this type of information get their fix. And that fix is anything but.
These outlets seem to have morphed into some quasi rendition, or cross between “The Voice,” “Do You Think You Can Dance,” and the “Gong Show” with each next-in-rotation-fund-manager auditioning for the judges/hosts in hopes they’ll be called back and a ratings hit.
If there’s no contestant available (because, they may be fielding so many incoming calls from now frightened clients) fear not. The hosts of different shows will pull together in a programming crossover styled “panel of experts” and tell you what they think. Hint: Beats the Comedy Central® offerings every time.
Let me start with CNBC earlier during the week when none other than the buzzer-king, James Cramer gave his song and dance as to why he would not be selling during the nascent sell off. When the Dow Jones Industrial Average™ was at around the mid 400’s during the market rout Mr. Cramer gave his reasoning as to why he wouldn’t be a seller. Hint: The “markets” would go on to fall – another – 1000+ before recovering slightly.
I’m just going to mention two (although, in my opinion, is all one needs to know) of the most egregious examples given. As always, you should watch the clip and come to your own conclusions, but here’s mine.
First. A question was raised about whether or not this will impact housing and more, which was much of the catalyst for the last panic. The answer came back with some convoluted reasoning mixed in with a bit of whimsical expectations because, “FICO™ scores are much higher today…” As if this would be a reason why banks will still lend in an interest raising environment, coupled with an emerging pricing slump and increasing inventory as mortgage origination continues to fall and re-fi’s fell just this July to 20-year lows. (By the way, that was a report via CNBC, I guess they don’t read their own news, but I digress.)
The other “insight” Mr. Cramer gave was that he was pushing back against a circulating meme that this was ominously reminiscent of 1987. He then went on to give the reasons why his viewpoint was more valid than most proposing this, because, he was all “in cash” during that period so he understood what true scares were when they occurred and this was not that.
Fair point, but I was around in 2008 and actively trading in the markets and remember clearly his calls for calm and more including his now infamous “Bear Stearns” advice implying people’s money was safe to which Jon Stewart of “The Daily Show” mercilessly crucified him on his show. Mr. Cramer’s reputation (along with the networks) never recovered. That is, unless you watch CNBC. For they, much like many of their hosts, seem to have forgotten the financial crisis. Hint: Viewers have not. And that’s why they haven’t returned to these shows either. Just look at the ratings for clues.
In 2017 alone their viewership dropped to 22 year lows. And yet, if you listened to many a so-called “expert” such as this from 2009 you would have to conclude it was all about a “bull or bear market” nothing more. Hint: it wasn’t, and the-proof-is-in-the-pudding as they say.
Then there was a segment I watched on Bloomberg where the interviewed was none other than Brian Belski, the only investing strategist, in my opinion, that can make both Tom Lee and Tony Dwyer appear risk averse.
During his well crafted reasoning on why this time (as always seems to be the case) was the best time to own stocks for the long haul, he made a statement that falls directly into the reasoning for why this time is both different, as well as not, and it is this: He made the case that in his 30 years of being in the financial field he has never seen a market made up of more “renters” than he sees today. i.e., No one’s buying for the long haul, it’s more about momentum.
I have only one thing to say too that, in my best Gomer Pyle impersonation Well “Go-o-o-llee!” Ya think? And why does one think that might be, I’ll ask? Hint: Starts with Federal, ends with Reserve, equalling fast money, momentum chasing. Period. Yes Mr. Belski, this ain’t your mom and pop’s buying for the long haul market. Welcome to reality.
As vacant as most of the above was there was a complete knock down drag out of just who could out do the other as to keep at bay any assailing of the “BTFD” narrative and reasoning (buy the f’n dip), for that was what transpired on Fox’s “Varney & Co.” between the hosts and guests which included David Stockman.
Here, in my humble opinion, was a rendition of “The Gong Show.”
I have been asked many times why I won’t go on any of these programs and this example exemplifies precisely why. (along with I have no inkling to travel to N.Y.C.)
Mr. Stockman was a guest along with Jonathan Golub to discuss the recent gyrations. Let’s just say there were more dance moves and gyrations trying to spin the “market” news (aka music) of the day that would make a game show contestant jealous.
The discussion (and that’s being kind) morphed into a sheer free-for-all when Mr. Stockman tried to give his reasonings to counterpoint much of what was being proclaimed. It was, again, in my humble opinion, sheer financial comic relief. However, my sympathies for trying goes out to Mr. Stockman.
I wish it could stand alone for its hilarity rather, than the truly scary nature it portends for many going forward. Halloween may have a more frightening foe if what may come to pass actually does, because it is clear: the horrors of financial panics past have been relegated to the Betamax® section for market analysis and B-roll footage. i.e., “Beta…what?”
Here’s just a few of the highlights, I would advise one to watch the clip for themselves, rather than just take my words:
During the segment the overall argument is that this is nothing more than another “BTFD” moment as argued via Mr. Golub. Mr. Stockman, of course, would have none of it and was trying to argue why. And there is the key word in that sentence: trying. Because with every counter point Mr. Stockman tried to make, it was a three against one free for all of vapid reasonings against. Here are a few, all are paraphrased:
Golub: “There was no catalyst for this sell off therefore it is a buying opportunity.”
Sorry, there was a catalyst, it’s called The Federal Reserve. And when Mr. Powell confirmed not only that they were going to continue raising rates, but in conjunction left for conclusion that the balance sheet roll-off was going to be allowed not just to continue, but to accelerate to the now assumed $50Billion per month level – the markets began selling off in unison.
Show hosts: “You know David you’ve been saying this for a long time and if people listened they would not of participated in this rally!”
Again, I’m sorry, but that same type of argument was said from about 2 years leading into then right after the top of the dot-com peak. Nearly a decade later all those that participated in that “great rally” found themselves right where it all began in what seemed like no time at all. Rhymes with dot-com crash aka “The Greenspan era.”
Then, it all happened again. Only this time it was with Bernanke (are you seeing a pattern here?) where trying to correct the prior policies with tightening into weakness brought on the next crisis where that old “buy and hold” saw allowed many a holders account to be sawn leaving the equivalent of only a stump of what was then a forest of burgeoning equities and profits.
Some weren’t so lucky as many a “stump” was removed as the markets plunged lower than the original dot-com crash the preceded it.
And here we are today in the midst of not just another Fed. blown bubble, but one where all central banks followed and are still following the Fed’s lead. And now, once again, the Fed. is tightening into weakness, along with shrinking its balance sheet that equivocates to about the same, in-kind, of additional hiking measures. i.e., a 1/4 point hike, along with the continuing reductions of balance sheet normalization equates to about the same as tightening by 1/2. So in-effect and in practice the rate cycle is the equivalent of double the stated raises.
Yet, the coup de grâce for any hopes of insight came when the questions began revolving around the answer to when Mr. Stockman had sold his holdings connected with the markets. It was at that point I knew that my decision years back to no longer watch these shows for any insight was well founded. The reasoning was simple: What is the point of knowing when Mr. Stockman sold out? Does that further the conversation for insightful dialogue or, does it just make for some seemingly vacuous “got-cha” type moment for television?
Let me make this point: One could easily have disgorged all of ones holdings of stocks during the initial downdraft of 2007, which in retrospect, we now appear to be mimicking the same gyrations – and you would have not needed to experience any losses or longing look at “missed gains” till some seven years later in early 2013 when the markets first eclipsed that initial panic stages. (Don’t take my word for it, just go look at any chart via a monthly perspective.)
Just two years later in 2015 the markets were rolling over and had dipped so much that the difference between initial sell off of 2007 and the bottoming in 2015 gains were considered “minimal” in comparison to the then risks in the markets. i.e., Then Chair Janet Yellen, in no uncertain terms, flipped on her stance of running a “hot monetary policy” to a tightening via any and all short-hairs with the election of Mr. Trump.
Only the front running of the residual “hot money” contained within the markets via the expansion of the balance sheet, along with the tax policies and repatriation laws passed to allow for buy backs and more, did the markets zoom higher. i.e. That fuel has now been expended.
To reiterate: the moment, repeat, the moment the market got its first glimpse that indeed under the new Fed Chair Powell that the balance sheet would indeed begin (aka QT quantitative tightening) so too did the market react, and just like this recent sell off, caused the now moniker’d “February Scare” and now this possible expanding rout.
Just like myself, along with Mr. Stockman and a few others said it would.
There, just like today, was no reason or indicator seen for the sell off. That is: only if you don’t consider this as a market reaction to the only thing that has mattered for the last 10 years aka Federal Reserve. If you don’t – then of course you don’t see anything, which is precisely my underlying point.
Mr. Stockman is seen during the end of this interview basically throwing up his hands in disgust, for there truly was no discussion taking place. It was all just about some form of “See, we’re right and you’re wrong!” i.e., You’ve been wrong and we have this wonderful rally as to prove it too you and everyone else.”
Sounds pretty convincing until begins employing reasoned arguments to the contrary. That’s why Mr. Stockman, I assume, threw his hands in the air, i.e., There is no reasoning going on here, just narrative pushing.
Here’s just one thing to contemplate I’ll leave you with dear reader as you take what I’ve illustrated above:
If for whatever the reasoning this “market” suddenly sells off mimicking 2007-09 fashion as it seems to be giving clues of doing just that (along with, if we sold off in what is purely an acceptable, and within reasoning, to the next purely text book example or conclusion or technical area of support, which is somewhere in the area from where the now moniker’d “Trump Bump” began, circa Nov. 2016); how do you believe not just the U.S., but in unison with all the other markets globally that have been propelled on central bank stimulus – will react?
That’s the question that is not being asked across all of these platforms. Which is why I (and what seems is most others) can no longer tune in.
Actually, what may be worse is that they think it can’t ever happen again, because: “It’s different this time.”
All I’ll say to that is: “Of course it is, that’s why the old saw uses the term ‘rhyme.’”
Just a month after a Border Patrol agent in Laredo, Texas, confessed to being a serial killer, a new report reveals that his sector has some of the agency’s highest numbers of employee misconduct.
The agency’s most recent discipline overview summarizes incidents that occured in fiscal years 2016 and 2017. In 2016, Laredo’s branch of the Office of Field Operations (OFO) had the highest number of disciplinary actions in the country. In 2017, it was the second highest. And in both 2016 and 2017, the Laredo branch of the U.S. Border Patrol (USBP) made the top three. In 2017 alone, 13 percent of the sector’s OFO workforce—and 42 percent of the sector’s USBP workforce—were involved in some kind of disciplinary incident. While the offenses are not specified for each sector, 254 agents nationwide were arrested for drug- and alcohol-related crimes, domestic misconduct, abuse of power, and other crimes in 2017.
Though the report has not been updated to reflect 2018’s numbers, the Laredo sector has received unwanted attention this year for three major scandals.
In September, agent Juan David Ortiz, 35, confessed to killing at least four sex workers. The 10-year veteran was found out after a sex worker managed to escape him and alert a state trooper at a nearby gas station. Following his arrest and confession, local authorities categorized Ortiz as a serial murderer.
Another Laredo agent was charged with a separate homicide in April. Ronald Anthony Burgos-Aviles, 29, stands accused of killing the 27-year-old mother of his 1-year-old son—and of killing their son too.
In May, the Laredo sector was heavily scrutinized after an agent shot and killed Claudia Patricia Gómez González, a 19-year-old woman from Guatemala, on the border. The agency initially stated that migrants attacked an agent with “blunt objects,” prompting him to fatally wound “one of the assailants.” But an updated statement retracted that story. Now the 15-year veteran was responding to a report of “illegal activity” when he came across a group that he suspected was in the country without documentation. In this version of the story, he “ordered them to get on the ground” and then fired after they “ignored his verbal commands and instead rushed him.”
Bad as Laredo may be, misconduct is a department-wide problem—and the Border Patrol’s parent department, Homeland Security, is slow to take action against agents accused of abuse. Of the 84 complaints of coerced sexual contact between agents and immigrants from January 2010 to July 2016, the department’s Office of Inspector General has opened only seven investigations. And those investigations have not led to any documented charges.
It’s not just auto sales that are tumbling in China: according to Goldman there are “multiple signs” of rapidly slowing consumer demand in China across all products.
While this would have a dramatic impact on China’s economy, which as we noted recently has been manipulating official data to represent solid industrial profit growth even as individual companies have indicted that profits have been shrinking sharply in recent months…
… Goldman is especially concerned how this could adversely affect Apple demand in China this Fall.
Specifically, Goldman references the substantial weakness in Chinese macro indicators, with the PMI dropping to 50.8 in September from 51.3 in August and 51.5 in June, auto sales deteriorated to -12% Y/Y in September vs. -4% Y/Y in August and July, “and early Golden week indications are lackluster.”
But the punchline is that according to Goldman calculations, smartphone unit volume deteriorated by ~15% Y/Y in Q3 which is “unheard of in a typically seasonally strong Q3.” And, as Goldman analyst Rod Hall notes, though most of the smartphone weakness was in the mid and lower range “we find it hard to believe that this general environment is going to be helpful to Apple unless things improve late in the year.“
How would this plunge in smartphone demand impact Apple’s bottom line?
According to Goldman, China currently contributes ~13 million of Apple’s ~80m total iPhone unit forecast in the Dec ’18 QTR. That 13 million unit forecast implies that Apple will continue to lose share in the high end smartphone category (to 30% in Q4’18 from 32% in Q4’17) though it also assumes demand in that category is unaffected by macro.
Goldman then shows a sensitivity of Apple’s China iPhone revenue, total revenue and EPS to various market growth and share conditions. Here are the details:
In our central case, we are assuming ~$11bn of revenue from China in Dec ’18 quarter. In an even worse scenario, in which the China SP market declines 15% Y/Y in CQ4’18, our estimates for China could be 4.5% lower. We note, however, that this would have just a ~1% impact on our overall revenue growth estimate for Apple in CQ4. What we believe China really puts at risk is Apple’s ability to beat market expectations on the FQ1 to Dec. guidance. A prudent forecast here (by Apple) would likely be very conservative given market conditions while consensus expectations for Apple are generally perceived to be conservative in our view.
China iPhone revenue is 18% of total iPhone revenue in our current estimate for Dec ’18 and 12% of total revenue. In the tables below we show sensitivity of total revenue and EPS to market conditions in China discussed above.
The key takeaway from Goldman’s analysis is that Apple’s Dec ’18 EPS could end up dropping 4% in a worst case scenario if China’s weakness is indeed as bad as indicated.
Roughly 18 months after Fidelity investments started allowing customers to interface their Coinbase accounts with Fidelity’s platform, the company – which started mining bitcoin at a small profit during the 2017 boom – revealed on Monday that it had launched a separate company, Fidelity Digital Asset Services, that would handle cryptocurrency custody and trade execution for institutional investors.
For now at least, FDAS’ services are only accessible by institutions like hedge funds, endowments, and family offices. However, such a monumental vote of confidence in crypto by a member of the financial establishment could revive traders’ hopes that the long-awaited flood of institutional money could soon arrive to reinflate the prices of the largest cryptos. The company was reportedly developed out of the Fidelity Center for Applied Technology, or FCAT as employees call it.
“Our goal is to make digitally-native assets, such as bitcoin, more accessible to investors,” Fidelity Investments Chairman and CEO Abigail Johnson said in a press release. “We expect to continue investing and experimenting, over the long-term, with ways to make this emerging asset class easier for our clients to understand and use.”
While crypto prices spiked overnight, the news, which broke Monday afternoon, had little impact on the price of bitcoin and other top cryptos, which have fallen into a sustained slump since peaking at all-time highs late last year.
Long-term crypto bulls like Mike Novogratz were quick to applaud Fidelity for being “ahead of the pack” with its foray into crypto, and that others would soon follow.
Fidelity’s head of crypto said the company decided to launch the business because it saw a “need” for institutional trade-execution services in the crypto space.
“We saw that there were certain things institutions needed that only a firm like Fidelity could provide,” Jessop told CNBC, adding that it already works with 13,000 institutional clients. “We’ve got some technology that we’ve repurposed from other parts of Fidelity — we can leverage all of the resources of a big organization.”
The new company, which has about 100 employees, will be headquartered in Boston.
Perhaps the most important service being offered by the company is crypto custody, which has so far stymied institutions from holding crypto directly. Because of the ease with which crypto can be stolen by hackers, the need for a secure custody bank to hold on to institutions’ crypto had, until now, gone unmet. Fidelity said cybersecurity would be a top priority for the new company.
According to Fidelity, it already has a “pipeline” of customers, per BBG.
“Most institutions want to deal with another institution,” Tom Jessop, who is heading the unit, said a telephone interview. “We understand institutional finance.”
The firm has a “robust pipeline of customers,” said Jessop, who was previously president of Chain Inc., which offers blockchain technology to financial companies. There are more than 370 crypto funds managing as much as $10 billion in assets, according to Autonomous Research — still just a drop in the bucket in the investment universe.
But Fidelity will soon need to grapple with a handful of other high-profile entrants into the crypto custody market, including Nomura, Goldman Sachs and Northern Trust.
The new company will handle custody, or how to safely store digital assets. Crypto companies Coinbase, Gemini (run by the Winklevoss twins), BitGo, Ledger and ItBit are among those already working on similar solutions. Japanese bank Nomura also announced plans in May to offer crypto custody, and Goldman Sachs and Northern Trust are reportedly exploring custodial services. But until now, there’s been a noticeable lack of a big U.S.-based incumbent like Fidelity officially entering the space.
Part of the risk in cryptocurrency investing, which experts say has largely barred institutions from embracing them, is how to prevent these digital assets from being hacked. As of the end of June, $1.6 billion in cryptocurrency had been stolen from clients, according to CoinDesk’s 2018 State of Blockchain Report.
Fidelity will use “cold storage”, a technique whereby coins are held on an air-gapped hard drive, to secure coins in its custody.
Fidelity has a long history of dealing with enterprise security, as well as public and private key cryptography to make sure it isn’t part of that statistic. Its custody solution will involve vaulted “cold storage,” which involves taking the cryptocurrency offline, and multi-level physical and cyber controls, among other security protocols that have been created leveraging Fidelity’s security principles from other parts of the business.
“You might look at the crypto world and say ‘wow is this a new thing’ but we’ve been managing key materials for a long time,” Jessop said. “We took our learnings in how to run enterprise security, then through our exploration of bitcoin and some of the people we’ve hired, quickly developed some of the crypto native expertise and federated the two those things.”
As CNBC pointed out, college endowments have led the institutional push into crypto funds, with endowments at Yale, Harvard and several other top schools owning exposure to at least one crypto fund.
While this is undoubtedly a vote of confidence in the crypto market, it’s worth noting that the launch of crypto futures late last year was supposed to bring a flood of institutional money into bitcoin and other crypto. But so far, whatever impact they have had has done little to keep the price elevated.
Galaxy’s Mike Novogratz noted, after the announcement, that a Bitcoin price move “awaits institutions getting in” and sees a “big price move in Bitcoin in Q1/Q2.”
Donald Trump thinks routinely separating illegal border crossers from their children, a practice his administration abandoned in June amid a public outcry, was an effective deterrent. “If they feel there will be separation,” the president told reporters on Saturday, “they don’t come.”
Back in June, you may recall, Secretary of Homeland Security Kirstjen Nielsen indignantly rejected that rationale for family separation as “offensive,” saying, “Why would I ever create a policy that purposely does that?”
Nielsen’s mentor and predecessor, White House Chief of Staff John Kelly, had repeatedly explained why. In a March 2017 interview with CNN, Kelly, who was secretary of homeland security at the time, was asked if his department planned to “separate the children from their moms and dads.” His response: “Yes, I am considering it in order to deter more movement along this terribly dangerous network.” In a NPR interview last May, Kelly called family separation “a tough deterrent.”
According to Kelly, family separation was a calculated strategy of deterring unauthorized immigrants by threatening to kidnap their children. According to Nielsen, it was the unfortunate result of congressional inaction combined with the Trump administration’s determination to finally enforce the law. According to Trump, it was both:
If they feel there will be separation, they don’t come. You know, if they feel there’s separation, it’s a—it’s a terrible situation. We want to go through Congress, but the Democrats don’t want to approve anything. They’re obstructionists.
That was not the only example of immigration doublethink during Saturday’s Q&A. Trump also said he thinks legal immigrants should be able to sponsor the immigration of their relatives, as his wife did with her parents, but affirmed his opposition to “chain migration,” which is made possible (although not easy) by a policy of allowing legal immigrants to sponsor the immigration of their relatives.
A federal appeals court ruled today that Detroit police didn’t have carte blanche to shoot a woman’s dogs during a drug raid simply because they weren’t licensed.
Gangs of masked left- and right-wing protestors clashed again in Portland, Oregon, on Saturday night, raising the question of whether political street violence is the new normal in the Rose City.
Just a month after a Border Patrol agent in Laredo, Texas, confessed to being a serial killer, a new report reveals that his sector has some of the agency’s highest numbers of employee misconduct.
Donald Trump thinks routinely separating illegal border crossers from their children, a