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“It Can Only Go Up From Here”

Authored by Lance Roberts via RealInvestmentAdvice.com,

This past weekend, I discussed the correction last Friday as concerns over “Turkey Turmoil” grabbed headlines.

“The market did indeed attempt to test all-time highs this past week, but, as noted, the overbought condition provided the fuel for a correction given the right catalyst.

That catalyst appeared on Friday as the Lira plunged and Turkey edged closer to an economic crisis.”

However, as of this morning, all seems to have been quickly forgotten as the market is set to open higher. The money flows into FAANG stocks have also once again resumed. (Where do you put your money when there is nowhere else to put your money? The 5-biggest market cap Technology stocks, obviously. #SafeAsCash #WhatCouldGoWrong.)

The reality, however, is that nothing has been “fixed” with respect to Turkey, and as I noted in the newsletter, the backstop of Federal Reserve liquidity which supported the markets during the “Greek Crisis” does not exist currently, in fact, it’s running in reverse.

But therein lies the danger. Despite the bullish short-term optimism, longer-term conditions currently persist which have led to extraordinarily sharp market reversions in the past. 

Regardless, the market is currently ignoring such realities as the belief “this time is different” has become overwhelming pervasive. Importantly, such levels of exuberance have NEVER been resolved by a market that moved sideways.

Importantly, traders are once again piling into the same trades on several fronts which we can see by viewing the “Commitment of Traders” report data.

As Bob Farrell’s Rule #9 states:

“When all experts and forecasts agree – something else is going to happen.” 

Positioning Review

The COT (Commitment Of Traders) data, which is exceptionally important, is the sole source of the actual holdings of the three key commodity-trading groups, namely:

  • Commercial Traders: this group consists of traders that use futures contracts for hedging purposes and whose positions exceed the reporting levels of the CFTC. These traders are usually involved with the production and/or processing of the underlying commodity.

  • Non-Commercial Traders: this group consists of traders that don’t use futures contracts for hedging and whose positions exceed the CFTC reporting levels. They are typically large traders such as clearinghouses, futures commission merchants, foreign brokers, etc.

  • Small Traders: the positions of these traders do not exceed the CFTC reporting levels, and as the name implies, these are usually small traders.

The data we are interested in is the second group of Non-Commercial Traders.

This is the group that speculates on where they believe the market is headed. While you would expect these individuals to be “smarter” than retail investors, we find they are just as subject to human fallacy and “herd mentality” as everyone else.

Therefore, as shown in the series of charts below, we can take a look at their current net positioning (long contracts minus short contracts) to gauge excessive bullishness or bearishness. With the exception of the 10-Year Treasury which I have compared to interest rates, the others have been compared to the S&P 500.

Volatility Extreme

Leading up to the January peak there had been a pervasive speculative short position in volatility. In early February, those “shorts” were forced to cover in a spectacular fashion leading to a sharp reversion in early February and into March. However, that “fear” soon subsided and it didn’t take long for those plagued with “recency bias” to engage in shorting volatility once again.

Currently, speculative net short positions have once again grown sharply over the last couple of months despite the fact the market has been unable to break out to new highs. Given the right catalyst, reversals of net-short VIX positioning have previously resulted in short to intermediate-term declines.

More importantly, the recent pop in volatility was confined to the cyclical downtrend in overall market volatility. What we need to be watching for is the reversal of the long-term cyclical downtrend into the next cyclical uptrend. With volatility extremely oversold on a monthly basis, it is worth noting that reversals have been violent with “no quarter”given to investors.

Crude Oil Extreme

The rise in crude prices from the lows has also been primarily responsible for the uptick in both economic growth and inflationary readings. However, higher oil prices are also a “double-edged sword” which also acts as an additional tax on consumers as well as corporate profit margins. The push above $70/bbl led to a massive surge in crude oil speculators chasing price but also provides the “fuel” for a sharp reversal as well.

For investors, it is also worth noting that crude oil positioning is also highly correlated to overall movements of the S&P 500 index and earnings growth. With crude traders currently extremely “long,” a reversal will likely coincide with both a reversal in the S&P 500 and oil prices being pushed back towards $55/bbl. 

While oil prices could certainly fall below $55/bbl for a variety of reasons, there is reasonable support around $50-55/bbl barring an economic recession.

Given the extreme long positioning on oil, a reversion of that trade will likely coincide with a “risk off” move in the energy sector specifically. With oil at extremely overbought levels, the historical tendency has been a reversion back to the long-term moving average which also coincides with the support level of $50-55/bbl.

US Dollar Extreme

Following the equity rout in February, money has flowed into the U.S. dollar, as we previously suggested, as global investors searched for safety. The reversal in the dollar has also helped importers profit margins despite tariffs from the current Administration. However, a stronger dollar also hurts exporters as it increases their costs to foreign consumers. Given exports make up roughly 40% of corporate earnings, look for a strong dollar to be an excuse used in many forthcoming earnings reports.

As shown above, and below, with long-dollar positioning increasing, it suggests the dollar likely has more room to run in the short-term.

Currently, the dollar has completed a 50% retracement from the recent lows. Our current target on a rally is 97.63 on the index but any further weakness in the S&P 500 or a global economic event (like Turkey) could easily push to the dollar back to the highs from last year.

It is also worth watching the net-short positioning the Euro-dollar as well which has also begun to reverse in recent weeks. Historically, the reversal of the net-short to net-long positioning on the Eurodollar has often been reflected in struggling financial markets. The reversal is still early, but worth watching closely.

Interest Rate Extreme

One of the biggest conundrums for the financial market “experts” is why interest rates fail to rise. Apparently, traders in the bond market failed to get the “memo.” The reversal of the net-long positioning in Treasury bonds will likely push bond yields lower over the next few months. This will accelerate if there is concern of a “contagion” from Turkey or a resurgence of a “risk-off” rotation in the financial markets.

The chart below shows the periods where “net short” contracts exceeded 100,000. Currently, traders have never been this short Treasuries which suggests a reversal of that positioning would lead to substantially lower interest rates.

More importantly, yields are now approaching levels which have historically been significant in relation to major market events. Or, in other words, the market is currently at levels where returns on a bond portfolio have significantly outperformed stock portfolios. 

Conclusion

As I noted above, with few exceptions, investors are very “one-sided” in their positioning. The overwhelming belief is that stocks and yields can only go up from here. Such overly complacent, and crowded positioning, has had historically poor outcomes.

Despite the correction earlier this year, positioning remains extremely bullish across a variety of measures.

“Even our composite fear/greed index which is a combination of AAII, INVI, MarketVane and the VIX is registering extreme greed on a rolling 4-week basis.”

Not surprisingly, investors continue to believe the market is essentially devoid of risks. The inherent problem with much of the mainstream analysis is that it assumes everything remains status quo. But data, markets, economies, and liquidity are never the same.

With the markets still clinging to all-time highs, there seems to be little that can dislodge the bulls currently. Because of this, we remain almost fully allocated to the markets currently. However, we are also becoming much more wary of the risks as we move into the last quarter of this year.

Pay attention, have a plan, and act accordingly.

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American Military Investigation Into Civilian Deaths in Afghanistan Clears American Military of Fault

In the days following an airstrike that killed 14 people in the northern Afghan city of Kunduz last month, official reports of the incident followed a familiar but disturbing routine.

Initially, the Afghani military claimed responsibility for the strike, but denied that the victims were civilians. “It is propaganda by the enemy,” an Afghan army officer told The New York Times, before suggesting that perhaps it was the Taliban who were responsible for the deaths.

But reports from the scene soon punched holes in that story. The attack had targeted a house where 20 people lived, including women and children—at least thee of whom were killed in the attack. Not even a few days later, the strike was revealed by local and U.S. military officials to be an American airstrike. The U.S. military opened an investigation.

That investigation ended last week, with the Pentagon absolving itself of responsibilty for the attack.

“After carefully considering all relevant and reasonably available information, which included a review of the Afghan government’s report of findings, our investigation found no credible information to corroborate the allegations,” U.S. Army Lt. Col. Martin O’Donnell, U.S. Forces-Afghanistan spokesman, said in a statement to Reuters.

The confusion and disarray following the attack is aggravated by the fact that the Afghan Ministry of Defense corroborated the civilian status of the victims, according to the Times, and issued an apology for the attack. Additionally, the dead included eleven women and children, with one as young as three years old, hardly fit for fighting. Since the Taliban do not admit women fighters, it seems unusual that so many of them would be killed in an attack supposedly aimed only at insurgents. The New York Times reports that this is the third such event since 2016 in which American airstrikes were blamed for the loss of civilians. One of these events even involved the bombing of a Doctors Without Borders hospital that killed 42 and even warranted an apology from the president.

While the reports differ on who did the killing and who was killed, there’s no doubt that civilian deaths in Afghanistan continue to rise. The United Nations found that there was a 52 percent increase in the number of civilians killed by airstrikes in the first half of this year. Recently, the U.S. has embraced a policy of conducting more airstrikes in an effort to force the Taliban to come to the negotiating table, but the policy has been to no avail.

America has been involved in Afghanistan since 1978 when it funded and armed anti-communist revolutionaries, many of whom would take up these same arms against the United States in 2001. Despite this long history in the region, we have remarkably little to show for it but more government lies, more debt, and more civilian deaths.

It’s estimated that taxpayers will pay $45 billion this year for America’s efforts in Afghanistan, about half of which will go to bureaucratic waste and corruption. A BBC report found that, even with this spending, the Taliban operates in 70 percent of Afghanistan and the Islamic State is more active in the area than it’s ever been.

How is this possible, one might ask? Turns out dropping bombs on innocent people doesn’t do much for their morale and, in fact, pushes people towards radical fringe movements like the Taliban. Displacing innocent civilians and killing local noncombatants is a surefire recipe for powerful Taliban propaganda that only solidifies the already powerful anti-American sentiments present throughout the Afghan mountains.

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Sen. Rand Paul Stresses Nuclear Weapon Negotiations as Key Reason for His Russia Trip

“I think it’s important that we have dialog between countries that control 90 percent of the nuclear weapons in the world,” said Sen. Rand Paul (R-Ky.) in a press conference call this morning, responding to critics who see something sinister in a U.S. senator traveling to Russia for meetings with politicians there, given that Russia is accused of meddling in U.S. elections.

Paul visited Russia to meet with members of the Russian Federation Council (the nation’s upper legislative body) and Duma, and to deliver a message from President Donald Trump to Russian President Putin, as well as meet with former Soviet leader Mikhail Gorbachev.

He was “excited to announce” that Russian legislators agreed to “continue these discussions” by “coming to Washington after our November election.”

Because of existing U.S. sanctions, some specific Russian legislators cannot enter the United States, a policy Paul hopes to change. He also hopes to to be able to meet further with such barred legislators “in a third party neutral country.”

Paul summoned memories of Reagan’s diplomacy with the Soviet Union in the last days of the Cold War when mentioning his own pow-wow with Gorbachev.

In addition to the nuclear weapons question, Paul also spoke of cooperation in fighting terrorism as a good reason for high-level, continual, and friendly interactions between the U.S. and Russia.

“Ways to resolve military conflict in the Middle East” are another area in which he thinks we need open lines with Russia, since “many say that the war in Syria will not come to a military conclusion with complete victory or loss to any party” and “we have to get to the point where we can find some peace in Syria.” That’s another reason he thinks those who “want to diplomatically isolate us to not have relations with Russia are making a big mistake.”

Perhaps as a jab back at those who insult aspects of Paul’s peace-oriented foreign policy as “isolationist,” Paul made frequent references to those against dialog with Russia as represented by his Russia trip as “diplomatic isolationists.” He criticized Democrats who let partisan dislike for the Trump administration blind them to the dangers of refusal to have decent relations with Russia, especially as it relates to nuclear arms control.

The New START nuclear arms treaty with Russia will be expiring in 2021, and Paul hopes that some form of agreement on the curbing of nuclear arms possession with the two countries can continue. He grants that Trump himself has spoken out against New START in the past, and when it comes to that and the 1987 INF (Intermediate-range Nuclear Forces) treaty, there are “allegations that both sides have done activities that violate either the spirit or details of New START or INF.”

Still, the “only way to figure out nuclear arms agreements’ complicated details” is to get the people involved in dialog. Not just politicians, but nuclear arms negotiators “need to be talking to each other” and if Trump believes aspects of the existing treaties are a bad deal, getting down to the specifics of why and what to do about it needs to be discussed openly.

Paul did discuss his trip to Russia with Trump before leaving, he says. In addition, “we were briefed by the State Department several times in advance of our meetings in Russia” and Paul will also brief them on his return tomorrow.

Paul being the most prominent legislator openly on Trump’s side regarding relations with Russia has helped mark him as a “comeback” kid when it comes to foreign policy influence, with some crediting him with keeping Trump on the peace side of U.S. conflicts with Iran.

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New Mexico Judge Releases Jihadi Terrorist Camp Suspects Despite Pleas By Sheriff, FBI

A New Mexico judge on Monday agreed to release five suspects arrested on child abuse charges at a New Mexico camp, against the wishes of both the sheriff’s department and the FBI, which described the group as “heavily armed and considered extremist(s) of the Muslim belief.” 

Judge Sarah Backus ordered the suspects – Siraj Ibn Wahhaj, 40, Lucas Morton, 40, Jany Leveille, 35, Hujrah Wahhaj, 37, and Subhannah Wahhaj, 35 – released on $20,000 bond each Monday evening, reports the Taos County Sheriff’s Office. They will be required to wear ankle monitors and maintain weekly contact with their attorneys, and were ordered to cooperate with the New Mexico Children Youth and Families division (CYFD) where the eleven children the sheriff says were being trained to commit school shootings, are being held in protective custody.

Despite authorities finding a dead child’s remains on the compound, and an alleged letter sent from one suspect to his brother inviting him to come to New Mexico and die as a martyr, Judge Backus ruled that the state failed to meet the burden of showing the suspects were a danger to the community after several hours of testimony.

 

State prosecutors outlined evidence suggesting that at least some of the suspects could have been planning some sort of attack. They said Siraj Wahhaj – who also faces child abduction charges from Georgia after allegedly taking his 3-year-old son – took several weapons classes before coming to New Mexico, and books found on the compound focused on how to build firearms at home.

Various weapons and ammo were found during the raid on August 3, and several more firearms were discovered in subsequent searches. The children were allegedly taught how to load and fire assault rifles.

The 11 kids found at the compound ranged in age from 1 to 15, authorities said. Since the raid they have been placed in the protective custody of state welfare workers with the Children, Youth and Families Department. –KOB.com

According to FBI agent Travis Taylor, according to interviews with two teens from the compound, Siraj Wahhaj would lead rituals while reading from the Quran, which centered on his now-dead son – who he kidnapped from his mother in Jonesboro, Georgia in order to perform an exorcism to cure his seizures. 

We’re sure Judge Backus’s ruling has nothing to do with the fact that the training camp’s ringleader, Siraj Ibn Wahhaj, is the son of a famous New York Imam, Siraj Wahhaj – an alleged unindicted co-conspirator in the 1993 WTC bombing, who testified as a character witness for the notorious “blind sheikh” Omar Abdel Rahman – who was convicted in 1995 of plotting the attack, according to CBS News. The senior Wahhaj was also described by Women’s March founder and liberal Islamic activist Linda Sarsour as a “mentor,” and an “amazing man.” 

Taos County Sheriff Jerry Hogrefe said that during the initial serving of the search warrant, their tactical team came upon children holding boxes of ammo, and at least one child was armed when he was found. 

While cross-examining of Hogrefe, the suspects’ defense attorneys each took their chance to try and distance the suspects as far from the weapons as possible, and the connotations of violence they imply. One defense attorney suggested it’s “prudent” that children learn how to use firearms safely, which Hogrefe agreed to.

The sheriff also confirmed that Alcohol, Tobacco and Firearms is investigating the legalities surrounding the occupants’ possession of firearms. 

Another defense attorney pointed out, and Hogrefe confirmed, that the compound’s occupants did not shoot at the tactical team as they raided the compound. He did say, however, that Morton was “struggling” and “resisting” while being arrested by deputies. –KOB.com

In reaction to Judge Bacuss’s decision, New Mexico Governor Susana Martinez said she “strongly disagreed” with the outcome of the hearing, stating “Unfortunately, it highlights how extreme the New Mexico Supreme Court has been in dictating pretrial release for all kinds of dangerous criminals.” 

Read the Sheriff’s August 4 statement here: 

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These people lost one-third of their savings in a single week (not in crypto)

Let me say up front– I know I’ve been a bit quiet lately.

It happens every year around this time when I hold the annual Liberty and Entrepreneurship Camp that I’ve been sponsoring for the past nine years.

The event is incredible: I bring in top entrepreneurs and business executives, plus students from all over the world– places like Ivory Coast, Brazil, Singapore, Russia and the United States.

It’s five days of mentorship that seemingly goes round-the-clock. It’s exhilarating… but exhausting.  And the Notes from the Field schedule always suffers as a result.

I’ll tell you more about the event later this week.  But in the meantime, I thought it was more pressing to talk about the unbelievable situation currently unfolding in Turkey… because it’s pretty extraordinary what’s happening right now.

As you may know, Turkey has imprisoned a US pastor named Andrew Brunson for alleged terrorism and espionage.

Obviously the US government wants him back. So Uncle Sam has slammed Turkey with economic sanctions.

Turkey’s economy was already wobbly before the sanctions. The country is suffering the effects of debilitating debt and persistent recession.

Now the economy is getting absolutely destroyed.

Turkey’s currency, the lira, is down some 45% this year. Just yesterday the lira was down a whopping 7%.

If you don’t speculate in currencies very much, a 7% move in a single day is basically unprecedented. It almost never happens. So this is a pretty big deal.

And over the past week, the currency was down as much as 35%.

Think of it this way: in just one week, the savings of the Turkish people lost over one-third of its value.  

I often write about the overwhelming amount of debt in the economy today and the negative effects it can have on currencies.

And Turkey is an important reminder of the consequences: In a matter of days, a third of your savings can vanish.

Bottom line: things like this CAN and DO happen.

This is why I write so much about the importance of having a Plan B. If you have 100% of your assets and 100% of your income domiciled in a single country, you’re taking on a lot of risk.

Think about it– even the most diligent savers and investors in Turkey who have been responsibly socking away plenty of money and investing in safe, quality businesses, are being nearly wiped out as a result of this crisis…

… because they didn’t diversify.

Leaving all of their assets in Turkey means that, if something happens to Turkey, they’re in for a LOT of pain… no matter how safe their local investments might have been.

This is a critical lesson to learn. It always makes sense to diversify some of your assets and income abroad to safer, more stable countries—ESPECIALLY if your home country is drowning in debt.

It’s a simple idea when you think about it: don’t keep 100% of your livelihood in a bankrupt country.

 Yet this concept of international diversification often defies human nature.

We tend to focus on our own backyards and are often indoctrinated with a sense that anything outside of our home country is garbage… or inherently risky.

Obviously this is completely ridiculous.

The world is a big place full of lucrative opportunities and sensible safe-havens. And it’s easier than ever to explore the available options.

You can acquire physical gold and store it overseas, for example, without leaving your living room. (And this can be a GREAT insurance policy against potential problems with your home country’s currency.)

You can invest in safe, highly-profitable foreign businesses denominated in foreign currencies with a few mouse clicks.

Smart, sophisticated people have been diversifying abroad for literally thousands of years.

Today, thanks to modern technology, it’s never been easier to take advantage of these options.

But even still, there’s nothing more important than taking action. Because by the time a major crisis occurs, like we’re seeing in Turkey today, it will be too late.

Source

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Forget About Turkey: Asia Is The Elephant In The Room

Back in November 2016, the BIS picked up on a topic we have discussed often over the years namely the critical role of the dollar abundance (or shortage) in defining market stress, and went one further, and in a research note made the striking claim that while the VIX was dead as an indicator of market risk, it had been since replaced with the value of the dollar. This is what the Bank of International Settlement said then:

Just as the VIX index was a good summary measure of the price of balance sheet before the crisis, so the dollar has become a good measure of the price of balance sheet after the crisis. The mantle of the barometer of risk appetite and leverage has slipped from the VIX, and has passed to the dollar.

What explains the dollar’s role as the summary measure of the appetite for leverage? In a nutshell… there is a tight “triangular” relationship between (1) the dollar, (2) cross-border bank capital flows in dollars and (3) the deviation from CIP. The key to understanding this relationship is that dollar cross-border capital flows closely track the leverage decisions of global banks. The triangular relationship says volumes about the role of the US dollar in the global banking system, and ultimately how the monetary policy backdrop determines global financial conditions.

Fast forward to this June, when the head of the Reserve Bank of India, Urjit Patel, made a solemn appeal to the Fed: stop shrinking your balance sheet because in combination with the soaring US budget deficit (which requires a surge in new Treasury issuance), you are draining precious USD-liquidity out of the market.

This was the first time this cycle that a prominent foreign central banker accused the Fed of stirring trouble for emerging markets, with its ongoing tightening:

Global spillovers did not manifest themselves until October of last year. But they have been playing out vividly since the Fed started shrinking its balance sheet. This is because the Fed has not adjusted to, or even explicitly recognised, the previously unexpected rise in US government debt issuance. It must now do so.

Patel’s advice? Immediately taper the tapering, or rather, the Fed should “recalibrate its normalisation plan, adjusting for the impact of the deficit. A rough rule of thumb would be to reduce the pace of its balance-sheet contraction by enough to damp significantly, if not fully offset, the shortage of dollar liquidity caused by higher US government borrowing.”

Incidentally, the various pathways described by Patel were conveniently laid out by Deutsche Bank’s Aleksandar Kocic earlierthis year, and which we explained in “Why The Soaring Dollar Will Lead To An “Explosive” Market Repricing.”

Patel’s punchline: if left unchecked, the EM turmoil “might hurt the US economy as well. Circumstances have changed. So should Fed policy. It would still reach the same destination, but with less turmoil along the way.”

Two months later, the turmoil among emerging markets raging, with the currencies of Turkey, Argentina, Brazil, Russia and even China sliding against the dollar. So far the only part of his prediction that has not manifested, is the contagion from EMs to the US economy.

But that may be only a matter of time, especially if the Turkish crisis spills over into the European banking sector, and from there it crosses the Atlantic.

Meanwhile, focusing on the gloomy reality facing Emerging Markets – and their addition to dollars – is the latest note out of Nedbank’s Neels Heyneke and Mehul Daya, who warn about the troubling fate facing EMs, writing that excess liquidity usually leads to the misallocation of capital, masking any balance sheet constrains. And as this tide of excess liquidity recedes it reveals the misallocation of capital and the mispricing of risk. The two caution that as EMs have benefited the most from this misallocation of credit, yet as the tide of excess liquidity recedes, “EMs will begin to pay the heavy price of this misallocation of credit.” The “spread” between capital misallocation and reality is shown in the chart below.

Where we go full circle with the warnings from both the BIS and Urjit Patel, is that one way to monitor the ebb and flow of excess liquidity is by looking the changes in the value of the USD. As long as the dollar remains the reserve currency and most of the foreign owned debt is denominated in US dollars, for example in the carry trade, the dollar will remain king. Stated simply, “a weaker USD is associated with  a stable and healthy global environment whereby the global supply of USD’s is abundant. A stronger USD is usually associated with volatility and a risk-off phase as liquidity contracts” which is basically the point made by the BIS nearly 2 years ago.

As a result of Quantitative Tightening and rising interest rates, since the start of the year the supply of USDs has become scarce amid escalating tit-for-tat trade policies, slowing credit growth in China, and weaker commodity prices. This can be seen clearly in Nedbank’s Global Broad $-Liquidity indicator, shown below.

Going back to Emerging Markets, while until recently investors were eager to attribute sharp drops in various EM nations to idiosyncratic factors, the recent widespread turmoil has become increasingly systemic. Confirming this, Nedbank notes that a number of studies have emerged pointing out that the role of global factors has increased relative to country/corporate specific factors.

This indicates that investors need to place more emphasis on the role of global liquidity (the changing pool of money and credit).

And while investor attention has been captivated by Turkey in recent weeks, Nedbank has some words of advice: “Forget about Turkey’s woes, Asia is the elephant in the room.“

The reason is that South East Asia again stands out as in 1997/8, with a large amount of USD denominated debt outstanding. The only difference is then Asia had fixed exchange rates and now they are floating! Furthermore, Asia’s USD debt, relative to international FX reserves and exports, has risen significantly since 2009. This leaves these nations susceptible to a shortage in USDs (which would manifest itself in a sharply higher dollar price). Meanwhile, the Asian nations that have amassed record amounts of USD debt are also home to the largest technology companies i.e. Tencent (China), Alibab (China), TSNC (Taiwan), Samsung (S.Korea). The tech sector is now 28% of the MSCI EM index.

So between the rally in the US Dollar, dented global growth prospects, slowing Chinese credit growth and escalating political tensions from the US, leaves these nations very exposed to a shortage in USDs. Which is why, in Nedbank’s view, “we believe Asia will be the next source of downside systemic risk for financial markets.“

To be sure, one look at the chart below demonstrates that changing financial conditions have been the major driver of EM asset prices over the last several years.  The risk-on phase ended in January and all EM assetss old-off. EM-FX are however now taking the lead and the next few days will indicate whether this will spillover into the other asset classes.

So putting all of the above together, how to determine what happens next? Simple: keep an eye on the dollar… and stick the following EM contagion transmission chart on your wall:

If the dollar keeps rising aggressively at a time when China (which for now has a nice, thick capital controls firewall) is devaluing while other EMs are scrambling to contain capital flight by aggressively hiking rates (such as Argentina’s shocking 45% rate hike yesterday) in the process sending their economies into recession, should the Fed fail to contain the dollar surge, the outcome may well be another Plaza Accord. But not before global markets crash first.

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Are Omarosa’s White House Recordings Even Legal?

|||Carlo Allegri/REUTERS/NewscomDrama on this season of the White House has doubled in size thanks to revelations from Omarosa Manigault Newman, former director of communications for the Office of Public Liaison and star of President Trump’s Celebrity Apprentice. After finding herself fired by Chief of Staff John Kelly in December, Manigault Newman exacted her revenge on the Trump administration with damning revelations about the administration in her new tell-all, UNHINGED. But her use of audio recordings in the book have raised legal questions.

Manigault Newman claimed that she recorded conversations in the White House, even a few with the president. Armed with the recordings, she said she had proof that Trump used the n-word on the The Apprentice, despite Trump’s numerous proclamations that he is the “least racist person” one could ever meet.

On Tuesday, CBS played audio of high-profile Trump campaign staffers, like former spokeswoman Katrina Pierson, figuring out ways to spin the potential release of a recording that possibly features the president using the racial slur. In one recording, Pierson allegedly says, “He said it. No he said it. He’s embarrassed.”

As the public reacts to the news of the potential tape, questions of the legality of Manigault Newman’s recording loom. As The Daily Beast reported, the White House conversations Manigault Newman claims to have are conversations that include herself. This small detail is important when taking into account wiretapping law in the District of Columbia.

According to D.C. Code § 23-542, D.C. is a one-party consent state. This means that only one person in a conversation needs to consent to being recorded—the participant can be the recorder or can give permission to another person to record. If Manigault Newman was, in fact, part of the conversations she recorded, she would be well within the confines of the law. If for some reason Manigault Newman recorded conversations that she was not part of without consent from those involved, she would be in violation of the law.

As details of the latest White House scandal come out, the Trump campaign has explored other legal actions to take against Manigault Newman. Earlier, she claimed to have refused $15,000 in hush money from the campaign. Records from the campaign reportedly confirmed that other former staffers were offered the same amount of money in exchange for their silence. Whether or not she took the money, the Trump campaign announced on Tuesday that it would be taking her to court for breaching a non-disclosure clause in the campaign contract she signed in 2016.

Actor Tom Arnold once said that he was in possession of a tape on which Trump said “every bad thing ever, every offensive, racist thing ever.” He said the comments were made during outtakes of The Apprentice and included him “saying the N-word, saying the C-word, calling his son a retard, just being so mean to his own children.”

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Kaspersky Lab Contest Reveals Ease Of Hacking An Oil Refinery

Authored by Herman Wang and Katherine Dunn via S&P Global Platts’ “The Barrel” blog,

In October, four South Korean hackers in Shanghai spent seven hours attempting to infiltrate an oil refinery’s corporate network to gain access to its control systems and shut the facility down.

Another 15 minutes or so, and they likely would have succeeded.

Fortunately for the industry, the attack was not real. It was performed in a live-televised cybersecurity competition put on by Internet security firm Kaspersky Lab. The competition pitted teams from around the world in a race to breach a model of a real oil refinery that is one of the company’s clients.

None of the three teams in the final managed to bring the refinery down; the South Korean team came closest and won the contest. But as the organizers note, real-world hackers do not operate under such tight time restrictions.

“The contest demonstrated once again that, by exploiting weaknesses in the corporate network’s protection and network configuration faults, a remote threat actor can gain unauthorized access to the industrial segment of the network,” Kaspersky’s industrial control system vulnerability research group manager, Vladimir Dashchenko, said.

This was the third annual cybersecurity competition that Kaspersky has held. The 2016 contest invited hackers to penetrate the network of a model power plant.

The competition highlights the vulnerabilities of critical infrastructure, including oil refineries, as the stakes of cyberwarfare grow. The environmental and human toll of a cyber-induced disaster could be significant, to say nothing of the disruption to oil and gas markets.

“Oil and gas is one of the industries that is essential to how societies and economies function,” Dashchenko said.

The Moscow-based company earlier this year said it discovered malware infecting a control system installed at more than 1,000 gasoline stations that would have allowed hackers to shut down fueling systems, change fuel prices and cause leakages, among other acts of sabotage.

Kaspersky itself has faced allegations of helping the Russian government spy on its customers, as the US has banned the use of its products on federal networks and reportedly is weighing sanctions against the company.

The company denies the charges and says it is “caught in the middle of a geopolitical fight” between the US and Russia.

Malware lurking

Most sophisticated cyberattacks on oil refineries and other critical infrastructure are multipronged.

Hackers will first try to infiltrate the facility’s distributed control system (DCS) or supervisory control and data acquisition system (SCADA) by installing malware that collects intelligence on its operations, security features and other sensitive information.

They will often also try to gain access to the plant’s independent safety control system, usually with the intention of being able to override automatic shutdowns.

The malware installed to gather this data can lurk on systems for years undetected.

Then, when assailants have gleaned enough information on the facility’s vulnerabilities and the time is right for an attack, they will unleash the targeted, sophisticated code they have developed to bring down the refinery – or worse, cause a catastrophe, such as an explosion that was narrowly averted at a Saudi petrochemical plant last year.

Investigators say that attack was foiled because of a glitch in the malware that had targeted the plant’s safety system.

“Most of the activity seen has been reconnaissance penetrating systems to try to understand these SCADA systems, such that when the attack is made, it’s effective,” said Daniel Quiggin, a fellow at Chatham House who studies energy systems.

To reduce the risk of being hacked, many facilities are “air gapped,” or isolated from public networks. But air gapping is not foolproof, as hackers can still use creative methods to exploit security holes and access secure internal networks. For example, they could steal personal information from an on-site vending machine that uses a wireless internet signal to transmit data and use it to breach the refinery’s secure operating and safety networks, or program a security camera’s infrared LEDs and sensors to transmit information.

“It’s good to have isolation, but there’s no such thing that could secure you with isolation,” said Beyza Unal, a senior research fellow with Chatham House’s International Security Department. “Now we are in an age where the legacy systems can’t cope with today’s needs. There are so many cases where we know air gapping wasn’t enough.”

Once the air gap is breached, facilities are as good as hacked. Companies are largely focused on protecting the perimeter of a plant from hacking, but have relatively few tools to detect or prevent an attack once the hacker is inside the system, experts say.

Capture the flag

In the Kaspersky contest, the teams had to solve several tasks to breach the perimeter of the model refinery’s corporate network. Once they had accomplished that, they would be required to figure out the internal industrial system’s communication protocols and command the refinery to shut down.

The South Korean team was at the final stage of the corporate network level, the most difficult part of the competition, when time expired.

Had they gotten past it, the rest of the job would have been “very easy compared to the previous tasks,” Dashchenko said. “Based on our estimation, they were just 15-20 minutes away from completing it.”

The event did not reveal any previously unknown security holes, known as zero-day vulnerabilities, as happened in Kaspersky’s previous two contests. But these exercises, known as “capture the flag” or CTF, are a crucial step for testing the security of computer systems, as the conditions closely model real-life scenarios.

“Everything that happens at a CTF site can also happen to real critical infrastructure and industrial systems,” Dashchenko said. “Cybersecurity risks [for oil refineries] are still high, and the industry should still take proper security measures for better infrastructure protection.”

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West Virginia’s Entire Supreme Court Just Got Impeached

West Virginia’s House of Delegates has impeached all four of the state’s Supreme Court justices, who allegedly abused their authority and used taxpayer funds for personal gain.

Fourteen articles of impeachment were brought up against Chief Justice Margaret Workman and Justices Allen Loughry, Robin Davis, and Elizabeth Walker of the Supreme Court of Appeals of West Virginia. Eleven of those articles were officially adopted last night and this morning, putting the justices’ fates in the hands of the state Senate. Davis has already retired from her post. Another former justice, Menis Ketchum, resigned last month and admitted to defrauding the state.

Of the four justices impeached this week, Loughry is probably in the most trouble. According to the articles of impeachment, he wasted more than $363,000 of taxpayer funds on office renovations, including a $32,000 couch. He’s also accused of misusing government vehicles and computer equipment, taking a desk from his office home with him, and lying to the state’s House Finance Committee when questioned about his alleged wrongdoing.

Loughry is facing something worse than just removal from office. In June, he was indicted on multiple counts of fraud. His case is somewhat ironic, considering that he’s the author of a 2006 book about political corruption in West Virginia.

Davis, meanwhile, allegedly spent $500,000 to renovate her office. Workman and Walker were also accused of unnecessarily spending large amounts of state funds to remodel their offices ($111,000 and $131,000, respectively). But they were cleared, as those sums were considerably less than what Loughry and Davis allegedly spent.

The justices aren’t just accused of overspending on themselves. The House of Delegates also approved impeachment articles charging Loughry, Workman, and Davis with overpaying senior status judges (who are retired but still preside over some cases) for their work.

Walker was the last of the justices to be impeached. The House said that she, along with her colleagues, failed “to provide or prepare reasonable and proper supervisory oversight” of the Supreme Court of Appeals and its “subordinate courts.”

“This is indeed a sad day and certainly no cause for anyone to celebrate,” Del. John Shott (R–27), chairman of the state’s House Judiciary Committee, told The New York Times. “But it is our duty, and I think the public demands it.”

There is also a significant timing issue at play with the impeachment proceedings and subsequent state Senate hearings. As NPR notes, West Virginia has until the end of today to set up a special election to replace any departing justices. If that deadline isn’t met, Gov. Jim Justice, a Republican, will be able to appoint judges to fill the open seats.

In announcing her retirement, Davis explained that she wanted West Virginians to “be afforded their constitutional right to elect my successor in November.” State officials have already scheduled a special election to replace Ketchum.

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Goldman Reportedly Had No Mandate When Musk Tweeted

Following Elon Musk’s tweet last night, claiming that:

“I’m excited to work with Silver Lake and Goldman Sachs as financial advisors, plus Wachtell, Lipton, Rosen & Katz and Munger, Tolles & Olson as legal advisors, on the proposal to take Tesla private”

As Bloomberg notes, such a statement from a public company CEO typically signals a formal agreement.

However, Bloomberg reports that, according to people with knowledge of the matter, Goldman Sachs hadn’t been formally tapped as a financial adviser by Tesla when Musk revealed plans last week to take the automaker private and said he’d secured the funding for the transaction.

It would seem Goldman (and for that matter, Silver Lake) may be CYA-ing in case The SEC actually begins to sniff around Musk’s miasma and wants a timeline.

Tesla shares are modestly lower on the day – and remain well below the “funding secured” levels from last week…

 

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