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Consumers In Surprising Places Are Borrowing Like Crazy

Authored by John Rubino via DollarCollapse.com,

The Money Bubble is inflating at different speeds in different places. But apparently no culture is immune:

Household Debt Sees Quiet Boom Across the Globe

(Wall Street Journal) – A decade after the global financial crisis, household debts are considered by many to be a problem of the past after having come down in the U.S., U.K. and many parts of the euro area. But in some corners of the globe—including Switzerland, Australia, Norway and Canada—large and rising household debt is percolating as an economic problem. Each of those four nations has more household debt—including mortgages, credit cards and car loans—today than the U.S. did at the height of last decade’s housing bubble.

At the top of the heap is Switzerland, where household debt has climbed to 127.5% of gross domestic product, according to data from Oxford Economics and the Bank for International Settlements. The International Monetary Fund has identified a 65% household debt-to-GDP ratio as a warning sign.

In all, 10 economies have debts above that threshold and rising fast, with the others including New Zealand, South Korea, Sweden, Thailand, Hong Kong and Finland.

In Switzerland, Australia, New Zealand and Canada, the household debt-to-GDP ratio has risen between five and 10 percentage points over the past three years, paces comparable to the U.S. in the run-up to the housing bubble. In Norway and South Korea they’re rising even faster.

The IMF says a five percentage-point increase in household debt over a three-year period is associated with a hit to GDP growth of 1.25 percentage points three years down the road. The historical record suggests that large debts lead to a short-term economic boost but long-term struggles, as a greater share of the economy’s resources go to servicing the spending binge associated with high debts. The IMF also finds rising household debts are associated with greater risks of banking crashes and financial crisis.

“When household credit goes up too fast, the fact is, it doesn’t end well,” said Guillermo Tolosa, an economist at Oxford Economics.

The disparate economies on this debt list, though far apart geographically, actually have much in common. They are mostly wealthy with well-developed financial systems and avoided the worst of last decade’s global financial crisis. Their housing markets didn’t collapse dramatically. They weren’t the focus of fiscal debt crises. When nearly the entire world was in recession in 2009, Australia, New Zealand and South Korea managed to keep growing.

Compared with the euro area, the U.S., or Japan they looked like little outposts of stability.

But as economist Hyman Minsky once said, stability can be destabilizing. They attracted capital and their interest rates followed the rest of the world’s rates lower, sparking housing booms that are now a source of risk.

During the U.S. housing bubble, home prices nearly doubled from 2000 to their peak in 2006, according to the Case-Shiller home price index. In Canada, Australia, New Zealand and Sweden home prices have more than tripled by some measures.

Collectively, those 10 economies have $7.4 trillion in total economic output and a household debt stock about the same size. Taken as a whole, that’s more than the output of Germany or Japan. Moreover, many of them have a large stock of adjustable-rate mortgages that could suddenly become more costly to service should global interest rates rise.

Note that this article’s first sentence — “A decade after the global financial crisis, household debts are considered by many to be a problem of the past after having come down in the U.S., U.K. and many parts of the euro area.” — was outdated before it was written. As the chart below illustrates, US consumers are back to borrowing like it’s 2006. November was a credit card orgy and December was about twice the year ago level.

And has there ever been a case of a country’s house prices tripling in a decade without causing a crisis? That kind of data doesn’t seem to be available but it’s a safe bet that the answer is either “rarely” or “never.”

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What’s Going Down in China is Very Dangerous – Part 1

I’m sure all of you are aware of the dramatic power play pulled off over the weekend by China’s Communist Party to eliminate term limits for both the president and vice president. Prior to the move, Chinese leaders have stuck to two five-year terms since the presidency of Jiang Zemin (1993-2003), but that’s about to change as wannabe emperor Xi Jinping positions himself as indefinite ruler of the increasingly totalitarian superstate.

While the weekend announcement was illuminating enough, I found the panicked reactions by Chinese authorities in the immediate aftermath far more telling. The country’s propagandists took censorship to such an embarrassing level in attempts to portray the decision as widely popular amongst the masses, it merely served to betray that opposite might be true.

China Digital Times compiled a fascinating list of words and terms banned from being posted or searched on Weibo. Here’s just a sample of some I found particularly interesting.

continue reading

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AG Sessions Responds To Trump’s Twitter Taunt

It looks like all those Saturday Night Live sketches portraying Jeff Sessions as an obsequious diminutive imp have gotten to the attorney general.

In a stiffly-worded response to President Trump – who earlier today castigated the AG for ordering the Justice Department’s inspector general, an Obama-era holdover, to investigate FISA abuses – Sessions defended his handling of the FISA investigation by saying he followed the “appropriate process” by ordering the IG to investigate and that, as long as he remains attorney general, he will “continue to discharge my duties with integrity and honor.”

 

 

 

Of course, as one twitter user reminds us, Senate Republicans have said they will not confirm another AG nominee if Sessions is forced out.

 

 

The statement elicited a wave of incredulous responses from twitter users, who were surprised by Sessions’ strongly worded response.

 

His response begs the question: Will their spat end here? Or will we soon hear from a (no doubt infuriated) Trump?

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BofA Fires Two Amid Growing Sexual Harassment Scandal Involving Jon Corzine Advisor

Two months ago, when the world was feverishly following every twist of the growing Harvey Weinstein sexual abuse scandal, we predicted that it was only a matter of time before the it hit Wall Street front and center, where some of the stories heard in recent years would make even Harvey blush.

Today, that scandal hit home for two Bank of America staffers who were fired by the bank for not sufficiently disclosing information related to allegations against a prime brokerage executive who left last month following a complaint of inappropriate sexual conduct.

According to Bloomberg, Joe Voboril and Valerie Ludorf worked under Omeed Malik at the bank’s prime brokerage unit. Malik left the firm in January, a month after a woman in her 20s claimed that he had made unwanted advances.

Omid Malik, center

Omid Malik,38, left the bank after a roughly three-week inquiry, which included interviews with other staff, turned up additional concerns, a person with knowledge of the situation said last month.

On Wall Street, Malik was known as a charismatic figure with close ties to the hedge fund world.

His renown grew in part because of his attendance at prominent hedge fund conferences. He also threw splashy parties, including a birthday party for himself that featured a number of celebrities — photos of which were posted online by several well-known celebrity photographers.

This is how the NYT reported his departure one month ago:

A senior executive at Bank of America in New York departed last week after an internal investigation into a young female banker’s accusation of inappropriate sexual conduct, according to people at the bank who were briefed on the investigation.

The executive, Omeed Malik, 38, was a powerful figure in the hedge fund world. He was a managing director and helped run the prime brokerage business that raises money for hedge funds.

Among his roles, Malik was an adviser to Jon S. Corzine, the former New Jersey governor and United States senator, as Mr. Corzine started a hedge fund, and he was a speaker at a high-profile hedge fund conference organized by Anthony Scaramucci.

Malik, a former lawyer at Weil Gotshal & Manges, a prominent New York firm, also was a member of the Council on Foreign Relations.

Malik’s close ties to Corzine were forged while Malik worked at MF Global, the big commodities trading firm that collapsed in bankruptcy under Corzine’s leadership. Last year, Corzine sought to return to Wall Street with a hedge fund that Malik helped promote.

The young woman, who is employed by Bank of America as an analyst, complained about Malik in January, the NYT reported. The bank then opened an investigation. Officials from human resources interviewed as many as a dozen people who have worked with Mr. Malik. He left roughly two weeks before annual bonuses were to be handed out.

“Joe fully cooperated with the investigation and did all that was asked of him. He was fully forthright and the firm never told him that he failed to disclose information or cover anything up,” said Kim Michael, a partner at Wechsler & Cohen LLP and counsel for Voboril. “We believe the real reason he was terminated was part of Bank of America’s attempt to discredit anyone whose truthful answers didn’t fit into the bank’s narrative about Omeed.”

Allegations of sexual harassment and discrimination have cropped up at Bank of America in the past. Two years ago, it reached a settlement with a female managing director in its fixed income group who had filed a lawsuit claiming the bank fostered a “bros’ club” culture, mistreated female employees and paid them less than men in comparable jobs. The terms of that settlement were not disclosed.

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House Passes ‘Anti Sex-Trafficking’ Bill Opposed by Both DOJ and Trafficking Survivors

With bipartisan enthusiasm, the U.S. House of Representatives has just passed a bill that would endanger sex workers, make life even worse for human trafficking survivors, put both free speech and social media in serious jeopardy, and drastically expand federal prosecutorial power.

The bill, H.R. 1865, is euphemistically named the “Allow States and Victims to Fight Online Sex Trafficking Act” (FOSTA), despite the fact that there’s nothing stopping state authorities from punishing sex traffickers and their allies at present and despite the fact that trafficking victims can already sue abusers in civil court. FOSTA’s actual targets are adults consensually engaging in prostitution as well as web platforms that allow user-generated content.

One of many similarly misleading bills that have gained traction in recent years, FOSTA amends Section 230 of the federal Communications Decency Act to hold online publishers, apps, and services legally liable for the actions of people who post there or connect through them. What this means in practice is that social media sites such as Snapchat and Facebook, classified ad sites such as Craigslist and Backpage, chat apps, search engines, and many other communication tools could be both criminally charged and sued in civil court—by individuals or by states—anytime anyone uses them to meet someone with whom they would eventually engage in commercial sex.

As Rep. Sheila Jackson Lee (D-Texas) explained on the House floor yesterday,

H.R. 1865 creates the new offense of intentional promotion or facilitation of prostitution while using or operating a facility or means of interstate or foreign commerce, such as the internet. A general violation of this offense will be punishable by a sentence of upwards of 10 years.

The bill, sponsored by Rep. Ann Wagner (R-Missouri), has had bipartisan support in the House from the get-go, despite objections from a wide range of stakeholders, from victims’ advocacy organizations to the U.S. Department of Justice, which has already declared the bill “unconstitutional.”

On Tuesday, it passed the House with 388 votes in its favor.

Ivanka Trump and a host of liberal Hollywood celebs, government-funded nonprofits, and former #Pizzagate conspiracy theorists cheered.

But the response from sex workers, sex-trafficking survivors, free speech advocates, human rights activists, tech companies, due process proponents, and many others was much less positive.

The bill “marks an unprecedented push towards Internet censorship, and does nothing to fight sex traffickers,” the Electronic Frontier Foundation (EFF) declared yesterday. “Facing huge new liabilities, the law will undoubtedly lead to platforms policing more user speech,” going out of business, or failing to launch in the first place.

“The tragedy is that FOSTA isn’t needed to prosecute or sue sex traffickers,” the EFF continued. “As we’ve said before, Section 230 simply isn’t broken. Right now, there is nothing preventing federal prosecution of an Internet company that knowingly aids in sex trafficking. That includes anyone hosting advertisements for sex trafficking, which is explicitly a federal crime” already thanks to the 2015 “SAVE Act.“

Voting against FOSTA were just 14 Republicans and 11 Democrats. Among them were staunch criminal justice reform advocate Rep. Bobby Scott (D-Virginia), pro-Trump Republican Rep. Matt Gaetz (Florida), longtime women’s rights and anti-violence advocate Rep. Barbara Lee (D-California), and most of the House Liberty Caucus, including Reps. Justin Amash (R-Michigan), Thomas Massie (R-Kentucky), and Mark Sanford (R-South Carolina).

In a statement, Rep. Scott explained that he voted against the bill because it “establishes an overly-broad federal crime that is not limited to the advertisement of sex trafficking victims, which is already illegal, and punishes conduct which is much less serious than what is ordinarily viewed as ‘sex trafficking.'”

“By targeting prostitution broadly, [FOSTA] may also force markets for consensual commercial sexual activities offline, which would increase risks of violent crime against vulnerable populations,” said Scott.

The House Liberty Caucus warned that the bill would subject sites like Facebook, Twitter, and Yelp “to substantial liability unless they’re able to continuously remove all illegal content—which is effectively impossible to do.” FOSTA, in its initial or amended form, “will significantly burden the rights of hosts and users” while increasing “risks of violent crime against vulnerable populations.”

It’s also all sorts of unconstitutional, the Liberty Caucus notes.

FOSTA “violates the Tenth Amendment by establishing a broad new federal crime for using or operating a website with the intent to promote or facilitate the prostitution of someone else,” which is “not limited to the advertisement of sex trafficking victims” (already illegal). Rather, the bill “covers prostitution broadly, which the Constitution does not permit the federal government to regulate through criminal laws.”

The caucus adds that on amendment to FOSTA “violates the Constitution by allowing states to use the bill’s changes retroactively to prosecute conduct that states could not prosecute at the time it occurred.” This goes against Article 1 and the Rule of Law, which forbid “ex post facto laws that retroactively apply criminal liability to actions that occurred before the law is passed.”

Rep. Bob Goodlatte, chair of the House Judiciary Committee, spoke against this retroactive facet of the bill on the House floor yesterday. “Though I applaud my colleague’s dedication to this issue and fully appreciate the suffering of victims, I have concerns about this amendment which states that the provisions of the bill apply regardless of whether the conduct alleged occurred or is alleged to have occurred before, on, or after such date of enactment,” said Goodlatte. “I hope we have an opportunity to fix this problem as we move forward with the bill.”

During a private call last week, a source in the House said Goodlatte’s office was upset about the situation with FOSTA but wouldn’t seriously try to fight it. Another source said on background that Goodlatte’s decision not to fight followed an “expletive-laden exchange” between the Judiciary Committee and House leadership in which Republican Reps. Paul Ryan of Wisconsin and Kevin McCarthy of California made it clear that they were going ahead with the bill as written despite Judiciary’s concerns.

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Dick’s Sporting Goods Drops ‘Assault-Style Rifles,’ Because Loss and Grief

Today Dick’s Sporting Goods announced that it will no longer sell “assault-style rifles, also referred to as modern sporting rifles,” in its Field & Stream hunting and outdoor recreation stores. The company had already stopped carrying such guns in its flagship chain of stores, following the Sandy Hook massacre in 2012. Dick’s CEO Edward Stack said the company was expanding the policy in response to the February 14 attack in which a 19-year-old gunman used a Smith & Wesson M&P 15 rifle to kill 17 people at a high school in Parkland, Florida.

“Based on what’s happened and looking at those kids and those parents, it moved us all unimaginably,” Stack said on ABC’s Good Morning America this morning. “To think about the loss and the grief that those kids and those parents had, we said, ‘We need to do something.'” Well, this is indeed something. Whether it is something that makes logical sense (as opposed to emotional, P.R., or symbolic sense) is another matter.

The statement from Stack’s company notes that Nikolas Cruz, the former student charged with carrying out the Parkland massacre, legally purchased a shotgun from a Dick’s store in 2017. “It was not the gun, nor type of gun, he used in the shooting,” the company says. “But it could have been.” If Cruz had used a shotgun in the attack on Marjory Stoneman Douglas High School, would Dick’s have stopped selling shotguns? Probably not. So what distinguishes the guns that Dick’s not only has stopped selling but wants Congress to ban?

Here we immediately get into murky territory, made murkier by confused and confusing press coverage. The New York Times story about the Dick’s decision, which as I write is running at the top of the paper’s website, says the new policy applies to “all AR-15s and other semiautomatic rifles.” It adds that “Dick’s is not the first retailer to stop selling the semiautomatic guns.” That makes it sound as if the selection of rifles at the company’s stores will be limited to single-shot models from now on.

If so, that would probably please New York Times columnist Andrew Rosenthal, who (like his colleague Gail Collins) favors “banning the possession of semiautomatic weapons by civilians.” Such a policy would prohibit the most popular guns for self-defense, weapons the Supreme Court has unambiguously said Americans have a constitutional right to possess, along with many popular hunting rifles, leaving mere civilians a choice of revolvers or single-shot firearms.

The selection at Dick’s, of course, will be much broader than that, because “modern sporting rifles,” known to their detractors as “assault weapons,” are just one category of semiautomatic rifles, albeit a popular one. The problem with these guns, C.J. Chivers and two other Times reporters explain in a sidebar, is that they allow mass shooters to “attack with the rifle firepower typically used by infantry troops.” What does that mean? Chivers note that AR-15-style rifles are “fed with box magazines” that “can be swapped out quickly, allowing a gunman to fire more than a hundred rounds in minutes.”

But neither the ability to accept a detachable magazine nor rate of fire is a distinguishing characteristic of “assault weapons,” which are defined by legislators based on features such as folding stocks, threaded barrels, and barrel shrouds. Those features do not increase “rifle firepower.”

Chivers et al., in any event, cannot seem to make up their minds about whether a faster rate of fire makes a gun more deadly. They concede that AR-15-style rifles, unlike military weapons, fire just once per trigger pull, but they minimize the significance of that distinction:

For decades the American military has trained its conventional troops to fire their M4s and M16s in the semiautomatic mode—one bullet per trigger pull—instead of on “burst” or automatic in almost all shooting situations. The weapons are more accurate this way, and thus more lethal.

The National Rifle Association and other pro-gun groups highlight the fully automatic feature in military M4s and M16s. But the American military, after a long experience with fully automatic M16s reaching back to Vietnam, decided by the 1980s to issue M16s, and later M4s, to most conventional troops without the fully automatic function, and to train them to fire in a more controlled fashion.

If reducing the rate of fire allows better control, increasing accuracy and therefore lethality, why do Chivers et al. emphasize that detachable magazines (which, again, are not unique to “assault weapons”) enable a shooter to fire “more than a hundred rounds in minutes”? Why do they think it’s important to note that Cruz “fired his AR-15 as quickly as one-and-a-half rounds per second”?

By contrast, Chivers et al. say, “the military trains soldiers to fire at a sustained rate of 12 to 15 rounds per minute, or a round every four or five seconds.” The implication is that Cruz could have killed more people if he had fired more slowly and carefully. That observation makes a hash of the obsession with counting rounds fired per minute during mass shootings as evidence to support the case for new gun restrictions—including the case for banning bump stocks, which embody the tradeoff between speed and accuracy that the Times says makes shooters less rather than more deadly.

Regardless of how important rate of fire is, it has nothing to do with the debate about a new federal ban on so-called assault weapons, which fire no faster than guns that do not qualify for that label. Even if a mass shooter can no longer buy a “modern sporting rifle” at Dick’s Sporting Goods or a Field & Stream store, he will have plenty of equally deadly options from which to choose. Likewise if Congress follows the company’s recommendation by imposing its policy on the whole country.

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Is This The Dumbest Bet In Finance?

Authored by John Coumarianos via RealInvestmentAdvice.com,

In this past weekend’s Real Investment Advice Newsletter, I wrote about financial advisor Larry Swedroe’s excellent article on the “Four Horsemen of the Retirement Apocalypse:”

  • low stock returns,
  • low bond yields.
  • increased longevity; and,
  • higher healthcare expenses.

In his article, Swedroe mentions that high yield (junk) bonds won’t save investors, who haven’t historically been rewarded well for taking on their risk.  Swedroe also says high yield bonds correlate well with stocks, which means they don’t provide much diversification.  Swedroe writes from the point of view of modern portfolio theory, which looks for ways to increase volatility-adjusted returns in a portfolio. In this post, I’ll treat junk bonds a little differently, showing why now is a terrible time to own them. My analysis doesn’t completely contradict Swedroe’s though; it supports his thesis that stocks and junk bonds are highly correlated.

Unlike Swedroe, I don’t dislike junk bonds per se. These loans to decidedly less-than-blue-chip companies are just like any other asset class.

They can be priced to deliver good returns, as they were in early 2009, or not.

Right now, they’re not.

Everyone looks at junk bonds initially by observing the starting yield or yield-to-maturity. Right now, the iShares High Yield Corporate Bond ETF (HYG) is yielding 5.53%. That can look attractive to some investors. After all, where else can you get over 5%?

Other people look at the spread to the 10-Year U.S. Treasury. 5.53% is around 2.7 percentage points more than the 2.8% yield of the 10-year U.S. Treasury. That might look find to some too. Of course, a little bit of research shows that spread is lower than the historical average of around 5.7 percentage points.

Still, investors seeking higher yield may be undisturbed by a historically low spread. Some people need the extra yield pick-up over Treasuries, however small it might be by historical standards, and that’s enough for them to make the investment.

Yield Isn’t Total Return

There’s one extra bit of analysis, however, that should make investors think again about owning junk bonds – a loss-adjusted spread. The problem high yield investors often fail to consider is that junk bonds default. And that means the yield spread over Treasuries isn’t an accurate representation of what high yield investors will make in total return over Treasuries. It’s easy to forget about defaults and total return because defaults don’t occur regularly. They tend to happen all at once, giving junk bonds a kind of cycle and encouraging complacency among yield-starved investors during calm parts of the cycle.

Default rates for junk average about 4.2% annually, according to research from Standard & Poor’s. And investors have typically recovered 41% (or lost a total of 59%) of those defaults, according to this Moody’s study from 1981 through 2008. That results in an annual loss rate for an entire portfolio of around 2.5%. So the iShares fund’s 5.53% yield isn’t quite what it seems to be. In fact, if we subtract 2.5 from 5.53, the result is 3.03, meaning investors in junk bonds are likely to make only 20 basis points more than the 2.8% they could capture in a 10-Year U.S Treasury currently.

Now, a more careful analysis should consider an “option-adjusted” spread, which accounts for the fact that issuers can call bonds prior to maturity and lenders or bondholders can sell bonds back to the issuer at prearranged dates. This adjustment usually adds something to the spread, making higher yielding bonds slightly more attractive. So we took the options adjusted spread data, and adjusted it for an annual loss rate of 2.5 percentage points. Remarkably, there have been times such as immediately before the financial crisis when investors weren’t making anything on an options-adjusted basis above Treasuries to own junk bonds. Now at least it’s around 1 percentage point.

Still, even with the option adjustment, one percentage point over Treasuries is still very little, especially considering that the option-adjusted spread we used compares a junk bond index with Treasuries. In other words, the 0.50% expense ratio of most junk bond ETFs isn’t factored into the equation. At a 0.50% or so yield pickup over Treasuries, investors just aren’t making enough from junk bonds to justify owning them. Also, advisors pushing junk bonds on yield-hungry clients aren’t doing much due diligence. The mark of a good advisor is one who can say “No” to a client and bear the risk that the client will go to another advisor doing less due diligence.

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Teacher In Custody After Shots Fired At Georgia High School

A teacher was in custody after police responded to reports of shots fired at a high school in Georgia.

The Dalton Police Department tweeted at about 12:30 p.m. that a subject, believed to be a teacher, was barricaded in a classroom at Dalton High School.

No children were hurt or in danger, the police later said.

The police said there is “No info to release right now about identity of the subject who was barricaded or what caused the situation.”

Dalton High School is located in northwest Georgia, near the Tennessee-Georgia border, about 90 miles (145 kilometers) north of Atlanta.

The incident comes two weeks after a gunman opened fire at a high school in Parkland, Fla., killing 17 people and injuring several others.

 

 

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Is Bitcoin Really A Leading Indicator For The Entire Market?

At the start of February, just before the great vol-quake, we highlighted  that a curious correlation was emerging between the VIX – and therefore the broader market as would be confirmed just days later – and bitcoin. We referenced a recent note from Deutsche Bank according to which “cryptocurrencies are closely watched by retail investors, affecting their risk preferences for stocks and other risk assets.” It continued:

Although institutional investors recognize that stocks and other asset valuations may have entered bubble territory (US equities’ average P/E is around 20x), they cannot help but continue their risk-taking. Now, a growing number of institutional investors are watching cryptocurrencies as the frontier of risk-taking to evaluate the sustainability of asset prices. The result is that institutional investors, who are supposed to value assets using their sophisticated financial literacy, analysis, and information-gathering strengths, are actually seeking feedback about the market from cryptocurrency prices (which are mainly formed by retail investors). 

Adding to this, we pointed out the correlation that had emerged between bitcoin and the VIX…

… and added that “the correlation between Bitcoin and VIX can increase as more institutional investors begin trading Bitcoin futures.”

Last year, cryptocurrencies experienced “melt-up,” a situation where prices surged, irrespective of fundamentals, because a flood of investors seeking capital gains outstriped supplies. If the current “triple-low environment” persists, and inflation rate and the likelihood of a recession remains low, we believe this “melt-up” phenomenon could spread to other products, creating massive asset bubbles.

Two weeks later, and just days after the first market correction in years which some say was presaged by the crash in cryptos just prior, none other than Bank of America’s Chief Investment Strategist Michael Hartnett made the same, apocryphal for some, observation namely that “the next lead indicator is…Bitcoin.”

Continuing this theme, last Friday “bond king” Jeff Gundlach spoke to CNBC and said that “if you want to know where stocks are going, watch bitcoin.”

“Strangely, bitcoin seems to be the poster child for social mood and market mood,” Gundlach said: “We had a vertical rise from Sept. 7 which was led and epitomized by bitcoin. Bitcoin started at about $4,500 and went up to about $20,000 or so.”

“Bitcoin peaked out in mid-December and it crashed. That sort of presaged the volatility in the stock market,” he said, noting the cryptocurrency has stabilized recently. “If stocks are going to take another tumble, I think it would be preceded by a bitcoin decline.”

And the punchline: “Weirdly, I’m actually using the sentiment regarding speculative assets like bitcoin as a guide to maybe what the future will bring.”

Which brings us to the 64,000 bitcoin question: are cryptocurrencies really a leading indicator for the entire market, as not only we, but some of the biggest financial luminaries now think?

The answer is, at best, limited: after all there is very limited historical data to use for statistical analysis purposes, and the correlation in peaks and subsequent drop be simply a case of spurious correlation. Still, some like DataTrek’s Nicholas Colas see a distinct pattern emerging.

As Colas wrote in a letter to clients this week, “the notion that bitcoin is a “Stub” asset (the riskiest piece of a capital structure) in global capital markets is getting some traction lately.” The idea, in a nutshell, is that crypto currencies are increasingly part of the financial mainstream (numerous haters notwithstanding) and their fortunes are inherently tied to the risk tolerances that support all assets. “Higher price correlations should therefore follow, even if bitcoin remains a very volatile asset.”

These starting parameters prompted him to update his statistical work on the relationship between bitcoin’s price and the S&P 500.

This is what he found:

Short-term price correlations (measured in 10 day rolling averages) during the recent selloff in US stocks absolutely exhibit a high degree of linkage, but we need to call out a few caveats as well:

  • The 10-day historical correlations between bitcoin and the S&P 500 reached 0.79 on February 6th, right in the middle of the sharp decline in US stocks. For those of you with a statistical bent, that is an R-squared (coefficient of determination, rather than correlation) of 62%. Not bad for a one-variable model, to be sure.
  • This 10-day measure also shows that the relationship between bitcoin and stocks declined rapidly in the days that followed. By February 21st they had turned negative. As of today, the correlation was just 0.37.
  • It is also worth noting that 10-day price return correlations between bitcoin and the S&P have been high several times in recent years, and long before it was widely followed by the financial press. Examples include: February 22, 2016 (0.77 correlation), July 14th 2016 (0.80), April 21st, 2017 (0.81), and September 8th (0.80).

Bottom line: high short-term correlations between bitcoin and stocks are nothing new. (And one word of explanation: financial services professionals typically refer to correlations in percentage terms, even though they are obviously an index between -1.0 and +1.0. We follow that convention in our other work, but we find that bitcoin gets a lot of attention from math/stats people who are real sticklers about percentages reflecting R-squared data. In deference to them, we use their convention in this note.)

Now, over the longer term, there is a statistical story about bitcoin and US stocks being increasingly tethered to the same market appetite for risk. The data here:

  • We’ve included two charts below. One shows the 90-day correlation between the S&P 500 and bitcoin, the other highlights the correlation between US large cap Tech stocks (using the XLK exchange traded fund) and the crypto currency.
  • With this longer-term timeframe, you can see that bitcoin now shows a much higher correlation to US stocks than for much of the last 2 years (the graph starts in January 2016). The lift-off point was in August 2017 when bitcoin went from a history of almost complete non-correlation to a 0.10 correlation coefficient and (more recently) 0.25-0.30.

  • Statistically minded people will note that this translates only to a 6-9% R-squared. Markets people will look at the chart and say “the trend is not the friend” of considering bitcoin as a non-correlated asset going forward.
  • Since bitcoin is a technology as well as a crypto currency, a comparison between it and US large cap Tech stocks is also worth a look. The data shows essentially the same relationship between bitcoin and US stocks, although a modestly tighter fit during last Fall.

As Colas concludes, the upshot here is twofold:

  • Bitcoin seems to track US stocks when they fall (witness earlier this month) more than when they rise. That makes sense to us. A sudden shift in risk tolerances pulls capital out of all risk assets. The same thing happened with gold during the Financial Crisis, when the yellow metal was down in 2008 along with everything else.
  • Over time, bitcoin’s price will be set not by equity prices but by its own fundamentals. The long run correlations show that well enough, and it makes intuitive sense as well.

In other words, while major inflection points in crypto may indicate to a distinct shift in risk-mood, one which can then affect other risk assets, in the long-run the correlation become negligible, it will be up to bitcoin – and stocks, or rather central banks – to justify they prices, whether bubbly or crashy.

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Workplace Discrimination Against Gays Is Covered Under the Civil Rights Act, Says a Second Federal Court

rainbow flag and gavelTwo federal courts have now decided that Title VII of the Civil Rights Act protects people from workplace discrimination on the basis of sexual orientation, even though the law does not specifically use those words. A third federal court had previously ruled the opposite, and the current Department of Justice does not agree that federal antidiscrimination law covers sexual orientation. So there’s a good chance one of these cases will end up before the Supreme Court within the next couple of years.

On Monday the 2nd U.S. Circuit Court of Appeals, which covers Connecticut, New York, and Vermont, reversed a previous panel decision and concluded, in a 10–3 opinion, that discriminating against a person on the basis of sexual orientation is a type of sex-based discrimination forbidden under federal law.

The Civil Rights Act of 1964 does not mention sexual orientation, and when it was first passed it certainly was not assumed to cover sexual orientation. But over time, as court precedents and case law have hammered out the contours of what “discrimination based on sex” means in practice, the door has opened to a broader understanding of the phrase. One of those precedents, a Supreme Court decision from 1989, ruled that punishing an employee on the basis of whether he or sh exhibited stereotypical gender traits is a form of forbidden sex discrimination.

That ruling is now being used to argue that anti-LGBT discrimination essentially punishes an employee on the basis of not engaging in stereotypical gender traits, as in entering relationships with somebody of the opposite sex (or in transgender cases, living as the opposite sex). The majority decision on Monday agreed with this argument, noting in part:

To determine whether a trait operates as a proxy for sex, we ask whether the employee would have been treated differently “but for” his or her sex. In the context of sexual orientation, a woman who is subject to an adverse employment action because she is attracted to women would have been treated differently if she had been a man who was attracted to women. We can therefore conclude that sexual orientation is a function of sex and, by extension, sexual orientation discrimination is a subset of sex discrimination.

With this ruling, the 2nd Circuit is on the same page as the 7th Circuit, which covers Indiana, Illinois, and Wisconsin. The 7th Circuit ruled in a similar fashion for similar reasons last spring. But this ruling is at odds with the 11th Circuit Court, which covers Alabama, Georgia, and Florida, and which has ruled that the Civil Rights Act does not cover sexual orientation.

The Supreme Court had the opportunity to hear an appeal of the 11th Circuit case and settle the matter, but in December it turned the case away.

Now we have two federal districts disagreeing with a third. Furthermore, we’ve got the Department of Justice at odds with the U.S. Equal Employment Opportunity Commission, which has been supporting the argument that the Civil Rights Act covers workplace discrimination on the basis of sexual orientation and gender identity.

At some point the Supreme Court is going to have to take a case to hear this argument. It seems untenable for workplace discrimination against LGBT people to be a violation of federal law in New York but not in Georgia. This isn’t about a difference in what classes are covered by each state’s own laws. This is an inconsistent application of federal law.

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