Category: zerohedge

Authored by Mac Slavo via SHTFplan.com,

The United States’ trek towards complete Communism is well on its way.  Thanks to the alleged Russian election meddling, citizens living in what hasn’t been the land of the free in over a century have even fewer freedoms than they did a mere two years ago according to a report.

According to an independent watchdog that measures political rights and democratic institutions around the world, Americans now have less freedom since electing Donald Trump and because of the alleged Russian election interference, reported Business Insider.

“The United States’ political rights rating declined … due to growing evidence of Russian interference in the 2016 elections, violations of basic ethical standards by the new administration, and a reduction in government transparency,” according to Freedom House.  Overall, the US’s freedom rating dropped from 89 to 86 because its political rights dropped from 36 to 33, according to the annual Freedom House report. The “land of the free” only the 58th freest country in the world, making it a joke to even pretend we are free.

The report stated that the current administration’s defiance of ethical standards and Robert Mueller’s Russian election meddling investigation heating up are the specific reasons American citizens have become less free.

In terms of defying ethical standards, Freedom House specifically mentioned Trump refusing to release his tax returns, “promoting his private business empire” in office, and “naming his daughter and son-in-law as presidential advisers.”

As for making major policy decisions with little consultation or transparency, Freedom House mentioned Trump’s January 2017 executive order banning seven Muslim-majority countries from traveling to the US, and his July 2017 executive order banning transgender people from the military. –Business Insider

Read Freedom House’s 2018 Freedom in the World report here, and its explainer of the US’s freedom here.

This is not to say that we do or do not agree with how Freedom House determines the level of freedom, because taxation (government theft and the most obvious violation of basic human civil rights) rates were obviously not a factor in their rankings. Nor were the number of government services the public is forced to fund at gunpoint whether they use them or not taken into account.  It appears they judge only on a few very social layers. But read the reports and see for yourself.

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Former Fed governor Kevin Warsh warned on Thursday that the US-China relationship is “probably as poor as” it has ever been since former President Richard Nixon and Henry Kissinger developed strategic relations between both countries in the early 1970s.

“We’re at the risk of a real cold war” between the world’s two largest economies, said Warsh who had been on President Trump’s list for Fed chairman before Jerome Powell was chosen. “The last 30 years we’ve been living and breathing globalization as if it’s an inevitable force,” but now, it seems the six-decade-long bubble has finally popped.

Bank of Americas says trade wars and deteriorating relations with China have been some of the reasons for the decline in globalism. Especially, US tariff duties collected, % of total imports have surged under the Trump administration.

“Protectionism has cross-party support in the US, and nationalist parties continue to gain in Europe. Further action on China ($200bn), autos ($350bn), NAFTA ($690bn) could raise US tariff revenue as % total imports to levels not seen since 1946,” said BofA.

 

During the CNBC interview, Wash used the term “cold war” to describe the economic standoff, not the decades-long “mutually assured destruction” nuclear stalemate with Russia.

“We are probably on the precipice of a brand new relationship with the Chinese,” Wash told CNBC.

He asked: “Could we be at the beginning of a 10- or 20-year cold war?” If so, an economic cold war between the countries could have major implications for the global economy like causing a global growth scare and repricing risk assets.

What is next? 

The return of a bipolar world: “Five or 10 years from now we might see two poles: a Chinese-centric world and an American-centric world. And the [other global] economies and countries will have to plug into one or both,” he said.

“Great power relationships are not about how many soybeans you’re going to buy [or how] many Boeing airplanes you’re going to buy. It’s about your core interests,” he added.

“I suspect that there will need to be between [Chinese President Xi Jinping] and President Trump a great summit, among great powers. And that requires two countries that want to have that discussion,” said Warsh, who was a Fed governor during and in the aftermath of the 2008 financial crisis.

While Wash made no reference about a military “cold war” between the countries in the CNBC interview, it is likely that a continued breakdown in US-China relations will likely transform into a new arms race starting in the early 2020s.

“Trade war should be recognized for what it is…1st stage of a new arms race between the US & China to reach national superiority in technology over long-term via Quantum Computing, Artificial Intelligence, Electronic Vehicles, Robotics, and Cyber-Security. 

China strategy to ensure that 40% of China’s mobile phone chips, 70% of industrial robots, 80% of renewable energy equipment are “Made in China” by 2025. China First strategy will be met head-on by an America First strategy. Note military spending by the US and China is forecast by the IMF to rise substantially in coming decades, to $4tn in China & $3tn in the US,” said Bank of America.

With the threat of a full-blown trade war in 2019, and relations between both economic superpowers to worsen. It is only a matter of time before a hot war develops.

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Authored by Alice Salles via The Mises Institute,

As Gallup reports that more Americans expressed support for Supreme Court nominee Brett Kavanaugh during the week he denied being guilty of sexual assault, it’s clear that whether accuser Dr. Christine Blasey Ford is speaking the truth, the public might not be ready to accept the allegations without evidence. But if you were to rely solely on most news outlets , you would think Kavanaugh had been charged and convicted.

While the outspread concern over a Supreme Court nominee is warranted , mainly due to the power justices have over our lives, the conversation was never about how Kavanaugh saw the PATRIOT Act as “measured, careful, responsible, and constitutional,” despite the law’s mockery of the Fourth and Fifth Amendments. Democrats also never bothered to mention Kavanaugh once ruled that “the Government’s metadata collection program is entirely consistent with the Fourth Amendment” while sitting in the U.S. Court of Appeals for the D.C. Circuit. Before the allegations of sexual assault, all they seemed to worry about was how Kavanaugh would rule on an abortion case, apparently frightened that states would have to pick up where they left off before Roe v. Wade. But ever since Ford entered the picture, offering a compelling story of assault but also one with gaps and no evidence , the focus is back on one thing and one thing only: We must believe all women, no matter what.

The #MeToo movement has long been co-opted by politicians and Americans who identify as Democrats in the President Donald Trump era. Perhaps because accusations of sexual assault boost ratings . If news outlets can link anything back to Trump, then they’re sitting on a goldmine.

But there’s also another unintended consequence to the movement, one that seemed clear from the get-go as the #MeToo hashtag went viral in Oct. 2017.

Then, America’s left-leaning influencers , politicians , and celebrities made it clear that believing all women was always the right thing to do, automatically abandoning due process and trashing any presumption of innocence in the name of fairness.

In this very public court of opinion, accusers were seen as infallible while the accused, when formerly charged, had already been convicted long before appearing before a court. But as libertarian writer and feminist Wendy McElroy wrote recently, the damage of #MeToo-style public “prosecution” lies in how it’s made us all ignore nature.

“‘Believe the accuser’ runs up against human nature,” McElroy wrote. “People are not only fallible, but they [are] also capable of bad behavior, such as lying.”

Imagine that! As if women could ever lie .

But perhaps, what’s even more damaging to the left’s own cause, if you consider they are genuinely concerned about women’s welfare, is how the “believe all women” theme in the Kavanaugh hearings could damage an entire generation of young women.

Coming of age in a world that teaches you ought to expect being protected and treated with respect no matter where you go might sound like the ideal scenario, but it doesn’t reflect real life.

While we live in a much safer world than our grandparents did, the reality is that the world remains a big place, filled with people of different backgrounds and sometimes, ulterior motives. Ignoring this reality is to ignore truth itself.

For poor and low-income women in urban areas, for instance, dealing with harassment and abuse is all too common . Knowing how to deal with these situations ends up being part of who they are .

But for middle- and upper middle-class girls, harassment is also a possibility. Understanding that there are risks and knowing how to avoid them will better prepare these girls so they may grow into stronger, more capable, and yes, more self-resilient women .

Needless to say, it’s heartbreaking that in the United States young women (and men) are in constant danger of being victims of sexual assault. Nevertheless, it is our duty — and right — to defend ourselves when necessary, and to act accordingly if the risk outweighs the benefits.

As professor and famed feminist author Camille Paglia once explained, feminism to her generation meant having the freedom “to risk rape.” Those women were not saying they wanted to be shielded and treated like precious porcelain dolls, quite the contrary — they were stating they were ready to fight back.

Not too long ago, after punk rocker Mia Zapata was violently raped and murdered in a dark Seattle alley, Grunge musicians of the time such as Nirvana, Pearl Jam, Soundgarden, and Heart came together to raise funds for a campaign called “ Home Alive ,” which organized self-defense classes for local women. Singer Joan Jett joined the movement, writing the song “ Go Home” and releasing a video depicting a woman successfully fighting her attacker.

But the spirit doesn’t live on with the younger generation, at least it doesn’t seem like it does as many today will often say that no, women should not have to defend themselves from attackers. This is particularly true among those who defend restrictions on firearm ownership, claiming that guns don’t deter sexual assault while real life cases prove otherwise .

Regardless, the reality is that as Kavanaugh is accused of having attacked Ford, the accuser is seldom pressed to provide more evidence while the Supreme Court nominee feels compelled to continuously prove his innocence. But while Ford’s account might as well be true, the reality is that we’re turning this charade into the main story, and we’re judging Kavanaugh on the basis of an unproven claim, not real policies he’s supported and that continue to impact all men and women in America.

To young girls witnessing the spectacle on TV, girls whose parents may say they have no doubt they know what happened in that room in 1982 and who are, perhaps, pro-gun control activists and even Hillary Clinton supporters — as strange as it may seem — the message couldn’t be clearer: The world owes you your safety.

As Paglia wrote in 1991 about then-Supreme Court nominee Clarence Thomas and his accuser, Anita Hill, Hill made uncorroborated allegations that served Democrats with a very clear agenda: abortion rights.

While Ford’s and Hill’s stories are different in nature, it is as true today as it was then that Democrats are using allegations to push an agenda, choosing to talk about uncorroborated claims instead of the Supreme Court’s power over our lives. And that’s not a bug in the system, as both Democrats and Republicans will take any opportunity to have more control over the narrative. Still, this showdown has real-world consequences, as young people are largely influenced by what they see on social media. And you can’t go through one day online without seeing celebrities , politicians , and news personalities discussing the Kavanaugh allegations as facts.

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After overcoming the temptation to publish under a pseudonym, former Google PR executive Jessica Powell has finally dropped her long-awaited satirical novel/memoir “The Big Disruption” last week. In the highly anticipated book – and in an accompanying personal essay published on Medium – Powell offers what may be one of the most scathing critiques of Silicon Valley from a former executive at one of its biggest and most influential companies.

Some of her claims are nothing short of shocking – like when she admitted in her essay that she quit Google last August (she was the company’s top PR executive, reporting directly to CEO Sundar Pichai) not to go back to school to study creative writing, as was reported at the time, but because she “got tired” defending the company’s unscupulous actions. In particular, she cited YouTube’s argument to UK lawmakers that it couldn’t censor all of the far-right and jihadist recruitment content posted on its platform because of the sheer volume of content – a claim that Powell said was an outright lie, per the Daily Mail.

Memorably, there were some instances where Google even paid some of the accounts that posted terrorist content.

Google has been widely criticised for allowing jihadists, far-Right extremists and other hate preachers to post content on its YouTube video platform. In some cases, it funnelled cash from advertisers to the extremists posting videos.

But the firm has repeatedly told MPs it cannot stop problem content because of the sheer volume of videos that are uploaded to YouTube.

Miss Powell was in charge of the company’s response to the criticism, reporting directly to Google’s chief executive Sundar Pichai.

Her decision to quit the lucrative role in August last year surprised many in the industry. At the time, Miss Powell claimed she was leaving to go back to university to study creative writing.

However, in her essay, published for free on the Medium website, she admitted she needed to ‘take a break from the issues that I got tired of defending at parties’.

She said: ‘On the surface, things seemed really important and exciting. We were doing big things! Bringing the internet to the developing world! But also, on some level, it all felt a bit off, like when you go on vacation and find yourself wondering when it’s going to feel like the Instagram pics other people have posted.’

While Silicon Valley insiders probably think they’re among the most noble people on the planet as they fight to expand Internet access in the developing world and support other similarly “noble” causes, Powell argues that there’s a certain cognitive dissonance that arises from tech industry excuses about its failures to combat election hacking and its unwillingness to be transparent about how user data is monetized.

“This is an industry that takes itself far too seriously, and its own responsibility not seriously enough.”

[…]

“You can’t tell your advertisers that you can target users down to the tiniest pixel but then throw your hands up before the politicians and say your machines can’t figure out if bad actors are using your platform.”

“You can’t buy up a big bookstore and then a big diaper store and a big pet supply store and, finally, a big grocery store, national newspaper, and rocket ship and then act surprised when people start wondering if maybe you’re a bit too powerful.”

Powell urged Silicon Valley to “end the self-delusion” and “fess up to reality” or work toward holding itself to a higher ethical standard.

“I want Silicon Valley to end the self-delusion and either fess up to the reality we are creating, or live up to the vision we market to the world each day. Because if you’re going to tell people you’re their saviour, you better be ready to be held to a higher standard.”

Of course, no Silicon Valley tell-all would be complete without details of the sexual harassment that’s reportedly rampant in the valley. And Powell’s essay is no exception.

Should I start with the early stage companies? Like the time I was at a startup and the founder I was working for — a guy who owned a hundred shirts in the same color and quoted Steve Jobs on a daily basis — asked me whether we should hand out dildos as company swag or consider converting our social media platform into an anonymous sex club. (We even whiteboarded it.)

Or maybe I could start with the money — all the absurd valuations with seemingly little basis in reality. Or the time a partner at a VC “jokingly” offered up my female friend, his employee, as an enticement for a founder to work with his firm.

To be sure, Powell isn’t saying anything new. All of these criticisms of Silicon Valley have been lodged in the past – but mostly by outsiders. The fact that she was a senior executive working her tech – and that she walked away from the money because she became disillusioned – is almost as relevant as the details of her story.

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Submitted by Priceonomics

Today, the opioid crisis in America has become a public catastrophe. Drug overdose, many due to the abuse of opioids is the new leading cause of death among Americans under the age of 50, overtaking automobile accidents and heart disease.

What’s perhaps most shocking about the crisis, is its cause is widely considered to be the overuse and over-prescription of legal painkillers, namely Oxycontin. Today opioid use has expanded beyond prescription narcotics to illegal (and often times deadly) drugs like heroin and fentanyl.

Given the known risk of prescription opioid drugs, are their sales on the rise or decline America? And in which states are legal opioids sold at the highest (and lowest) rates and how does that compare to drug overdose rates?

Along with Priceonomics customer Consumer Protect, we decided to analyze government data provided by the Drug Enforcement Agency of controlled substances sales to look at the per capita opioid sales by state and over time.

We found that opioid sales today have more than doubled versus in 2000. However, sales today have declined 28% since 2010. Today, the states with the highest rate of opioid sales are Tennessee, Oklahoma and Nevada, in that order. The places with the lowest rates of opioid sales are Washington DC, Minnesota and Illinois.

We found that the current rate of opioid sales was mostly uncorrelated with drug overdoses today. However, we found a much stronger relationship between past sales in 2010 and current levels of overdoses. 

Put differently, where “legal” sales of prescription opioids were high in the past, today we see their consequences in the form of drug overdoses.

***

To provide some context, first let’s look at the rate of legal opioid sales in the United States over the last almost two decades. The data is provided by the Drug Enforcement Agency which tracks the sales of the two main variants of prescription opioids: Oxycodone (Oxycontin, Percocet) and Hydrocodone (Vicodin, Norco).

From 2000 to 2011, the rate of opioid sales per 100,000 people in the United States more than triples from 10.6 to to 33.9. By 2011, however, as the harmful addictive side-effects of the drugs become more well publicized, crackdowns on “prescription mills” began.

Today, still 24.4 kilograms of opioid drugs are sold per 100,000 people in America, more than twice as much as in 2000, though 28% less than the peak of 2011.

While the national average in 2017 was 24.4kg opioids sold per capita, that figure varies dramatically by location. The chart below shows each state ranked from most to least opioids sold.

In Tennessee, a state with a full blown opioid crisis, has the highest rate of opioid prescription pharmaceuticals sales in the country. In Tennessee, nearly twice as many opioids are sold as the national average. Oklahoma and Nevada round out the top three states with the highest rate of opioid sales. On the other hand, the District of Columbia has the nation’s lowest rate of opioid sales, followed by Minnesota and Illinois.

Over the last two decades, where did opioid sales in America explode the fastest? Opioid sales increased everywhere, but in some states, they grew much faster than others.

Kansas ranks #1 as the state with the highest rate of opioid sales growth in the country, with sales increasing by 259% versus year 2000. All of the top 10 states with the fastest growth in opioid sales increased more than 200%. Even in DC, Massachusetts, and Maine (the states with the slowest growth) have seen opioid sales expand approximately 50%.

Is there any good news? Well, since the beginning of the decade, the rate of opioid sales have declined. The following charts show the states making the most and least progress on curbing sales of these drugs.

During this decade, states like Florida, Maine and Delaware have seen their rate of opioid sales decline. During this time period all states have had a reduction in legal opioid sales, with the exception of Idaho, Wyoming and Arkansas where sales are up modestly.

***

Is there any relationship between the level of prescription opioid sales and the amount of drug overdoses? Next, we looked at drug overdose data for 2016 as compiled by the CDC compared to opioid sales.

At first, we compared today’s opioid sales in a state to its death rate and found it had a near zero correlation. Next, however, we looked at today’s death rate versus the rate of prescription opioid sales at the beginning of the decade when sales were peaking.

Did the proliferation of “legal” opioids in the past result in more widespread deaths from drug overdose today? The following chart shows the relationship:

While further analysis is required, we found a positive relationship between past legal opioid sales and fatal drug overdoses in 2016 (the most recent year the data is available). The data provides some credence to the thesis that legal sales of prescription drugs in the past helped hasten the dramatic crisis going on today. What’s more, this data highlights the magnitude of the opioid epidemic in places like West Virginia where the death rates from drugs are nearly off the chart.

***

Today’s opioid epidemic in large part has been catalyzed by the proliferation of drugs like Oxycontin in the 2000s and 2010s. 

While sales of this drug have recently been reigned in, their rate of sale continues to be much higher today than two decades ago with states like Tennessee, Oklahoma, and Nevada having the highest rate of sales in the nation. Most recently, Illinois, Minnesota, and Washington DC have the lowest rate of opioid sales.

In the last decade, the rate of legal sales has slowed down in all states except Arkansas, Wyoming and Idaho. However, the opioid epidemic has worsened even as prescription drugs have become harder to come by. Legal prescriptions may be less available, but users have switched to illegal drugs like heroin and fentanyl, which are cheaper and more deadly.

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In the midst of the chaos that has taken place in the world of Tesla over the last week – with Elon Musk now publicly and repeatedly mocking the Securities and Exchange Commission (and, of course, short sellers) in his latest series of unsupervised tweets – the investing world may have missed that the company released a first-of-its-kind third-quarter vehicle safety report on October 4. Similar reports are going to be released on a quarterly basis going forward.

Since Tesla has already released its production and delivery numbers for the quarter, this seems to be the only piece of information that the company had left to make public aside, of course, from its Q3 financials. 

The company’s first vehicle safety report appeared to show high marks for the company, and for its semi-autonomous autopilot feature. It revealed that, over the past quarter, Tesla recorded one crash or near miss for every 1.92 million miles driven in its vehicles. That number gets even lower – down to one per every 3.34 million miles – when the vehicle’s Autopilot feature was on. Both of these rates, on their face, appear to be far better than the one per every 492,000 miles driven number last reported by the National Highway Traffic Safety Administration.

A resounding success, right? Maybe not.

Immediately, some statisticians and experts pointed out obvious anomalies that led them to believe that Tesla’s analysis of its own data is flawed. Put simply, the company has way too small and way too homogeneous of a data set to fairly compare itself to NHTSA averages.

For example, Tesla has only sold under half a million vehicles worldwide. NHTSA data is inclusive of 271 million passenger vehicles in total. This means that Tesla’s data set is 0.18% the size of the NHTSAs. Also of concern is the fact that Autopilot is supposed to only be used on limited access highways and the NHTSA total accident figures cover vehicles on all types of roads and conditions.

As if those two differences weren’t enough to clearly disqualify Tesla’s comparisons, the NHTSA data includes vehicles that have been on the road for years, sometimes decades. Tesla owners are generally more affluent drivers that have much newer cars than average.

In other words, the data sets appear to favor Tesla.

Experts on the subject agree. The Los Angeles Times quoted Nidhi Kalra, a senior technology policy advisor with Sen. Kamala Harris, as saying that “when it comes to injuries and fatalities, we won’t be able to know [the answers] until we’ve had hundreds of millions or billions of miles” of driving history.

Kalra has been on the frontlines of trying to help establish driverless vehicle laws in California and emphasized that “statistics about safety should be used honestly and accurately to reach the best policy decisions.”

So, if the results of Tesla’s study are difficult – if not outright impossible – to fairly compare to the NHTSA averages, why would Tesla do it? The simple answer – yet another PR tactic – comes to mind.

Additionally, one wonders why Tesla has chosen to start releasing these skewed numbers now, at the end of what is arguably the most crucial quarter in the company’s history? After revealing its delivery and production numbers and then watching the stock fall on Friday after CEO Musk’s Twitter tantrum, Tesla appears to be running out of quick fixes to the increasingly bizarre behavior of its CEO.

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Submitted by Viktor Shvets of Macquarie Research

EMs in the crosshairs: Between war games, fake news and bonds

From military exercises to trade wars, the fury is intensifying. At the same time, global liquidity is compressing while rates are rising. Growing uncertainty, contracting liquidity & rising cost of capital will continue to place non-US assets (and in particular EMs) in the crosshairs.

“Wag the Dog” showed the power of ‘fake news’ but…

In the 1997 movie ‘Wag the Dog’, a spin doctor was hired to help distract people from sex scandals by staging a televised ‘fake war’ in the lead-up to the Presidential elections. It was the first time that Hollywood described what has recently become known as meddling or convincing people that ‘white is black’. These days there are far more efficient and potent ways of targeting voters & disseminating fake news than Brean (spin doctor) could ever have imagined.

Ever since then the life has been imitating art. From John Kerry’s swift-boat controversies in ’04 to data dumps and fake accounts in ’16, the avalanche of bots and news (fake or otherwise) has become so overwhelming that people have no chance to process it, and separate the wheat from the chaff. As societies no longer agree on what truth is, there is no need for verifiable facts.

…it could all go badly wrong while liquidity continues to tighten

This brings us to the latest news that the US Seventh fleet might conduct military exercises in the South China Sea. Although there are real issues at stake (freedom of navigation), there is clearly considerable room for accidents and unexpected turns. The same applies to use of blunt instruments like tariffs & sanctions. After all the fury, the new NAFTA is not that much different to the old (albeit more protectionary) and the same applies to the new KORUS, while oil prices are now as much reflection of sanctions as fundamentals. Investors seem to be relieved when the fury merely subsides rather than because new agreements are better. It is like starting a war, and then declaring a victory.

However, as in the movie, there is always a possibility that the plot might just go terribly wrong. Whether, it was calling a ‘slam dunk’ referendum on Brexit, or agreeing on limits on Italian deficits (even as no one believes its veracity) or a possibility of accidents at high seas, politics is reflecting public confusion, and cries for help. It leads investors into dark corners of  deglobalization and Balkanization, rising identity politics and inability to find compromises. We view ‘trade wars’ not as occasional occurrences but rather as a ‘trench warfare’ that would last for decades. The same applies to geopolitical & social tensions.

As if this is not enough, markets are also likely to be impacted by declining global liquidity (all of our indicators are falling). There can be no synchronised growth and asset price supports unless US & China see eye to eye (political, fiscal & monetary). Instead, we are getting a lopsided growth in one part of the globe (US) which threatens to suck the life out of the rest of the world. As  the Fed decided to put back ‘accommodative’ into discourse, we have seen a knee-jerk reaction in global rates, with US 10Y reaching ~3.2%. As long as the Fed views the world through local lenses, global liquidity would contract.

Ultimately, neither China, the Fed nor the US is in a ‘mutual suicide pact’; either there is a robust & global private sector recovery (unlikely), or the Fed, US & China would need to pull back. The question is how much non-US (and later US) pain would need to be endured? EMs remain in the cross-hairs; but also we should not underestimate impact on the high-yield markets.

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In a shocking twist to an already mysterious and bizarre saga, Turkish investigators say they believe that prominent Saudi journalist Jamal Khashoggi was murdered inside the Saudi consulate in Istanbul after he entered on routine business four days ago. 

Khashoggi’s fiance, who was waiting outside at the time of his disappearance on Tuesday, said he simply never came out. Since that time there’s been an international outcry and search for the missing journalist — a Washington Post columnist and former editor of a couple major Saudi newspapers — who had a reputation as an outspoken critic of Saudi Arabia’s rulers. He was initially widely reported “detained” inside the consul premises by Saudi authorities.

Saudi officials have vehemently denied having ever detained Khashoggi and have repeatedly said he freely left the embassy not long after he entered. The Saudi crown prince (MBS) himself on Friday invited Turkish authorities to enter the building to conduct an investigation, telling Bloomberg: “We are ready to welcome the Turkish government to go and search our premises,” he said of the consulate which is Saudi sovereign territory. “We will allow them to enter and search and do whatever they want to do…We have nothing to hide,” MBS added.

But Turkish police, after initiating their search of Saudi diplomatic compound on Saturday, unexpectedly reached the following shocking conclusion, according toThe Washington Post:

Turkey has concluded that Jamal Khashoggi, a prominent journalist from Saudi Arabia, was killed in the Saudi consulate in Istanbul earlier this week by a Saudi team sent “specifically for the murder,” two people with knowledge of the probe said Saturday.

Likely this will set off a major diplomatic scandal between Ankara and Rihadh as no doubt the Saudis expected a clean bill of health, otherwise they would have never made such an offer to search the heavily guarded and fortified compound in the first place.  

Early in the day Saturday Turkey’s Anadolu news agency announced the Istanbul public prosecutor’s office was formally probing the disappearance, and though yet to reveal any specific evidence to back the murder charge, concluded that a 15-member team “came from Saudi Arabia. It was a preplanned murder,” according to sources privy to the investigation cited in The Washington Post.

The Post noted further of its own disappeared and allegedly murdered columnist:

Khashoggi, who writes for The Washington Post’s Global Opinions section, visited the consulate Tuesday to obtain documents related to his upcoming wedding, according to his fiancee and friends.     

The killing, if confirmed, would mark a stunning escalation of Saudi Arabia’s effort to silence dissent. Under direction from the crown prince, Saudi authorities have carried out hundreds of arrests under the banner of national security, rounding up clerics, business executives and even women’s rights advocates.

Starting in 2016 Arabic media began reporting that Khashoggi had been banned by the Saudi state from writing in newspapers, appearing on TV and attending conferences, after a series of criticisms leveled at Donald Trump at a sensitive time when Riyadh was set to embark on a new and close relationship with the incoming US president. 

Since then, the prominent journalist who had previously served as editor for the popular Arab Times and Al-Watan, increasingly became persona non grata for authorities in the kingdom.

Saudi leadership likely considered his criticisms, which have increased over the past year related to such issues as the arrests of women activists, as especially dangerous due to his speaking from within the Saudi establishment and having been an adviser to a former Saudi intelligence chief. 

developing

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Foreign automakers have signaled that they will shift more of their manufacturing to the United States, Canada and Mexico thanks to the recent US trade deal with Canada and Mexico, reports the Wall Street Journal. 

Following the United States-Mexico-Canada Agreement (USMCA) or simply “Nafta 2.0” – BMW AG CEO Harald Krüger said this week from the Paris Motor Show: “We will allocate more U.S. production for the U.S. market,” adding that the German automaker already sources a variety of parts in the region.

Deiter Zetsche, CEO of Daimler AG said that the new agreement might force them to move engine manufacturing to the US, where it already builds cars and SUVs at their Tuscaloosa, Alabama factory. 

The impact on foreign auto makers’ North American operations from the newly named United States-Mexico-Canada Agreement, which still has to be approved by Congress, remains unclear. But many in the auto industry see the pact as evidence of President Trump’s tough approach to trade, at a time when he is threatening new tariffs on European and Japanese auto imports.

Industry consultants say auto makers are growing increasingly nervous that more restrictions could emerge as Mr. Trump turns to trade talks with Japan and the European Union. –Wall Street Journal

“These companies are now seeing that there is an element of political risk to operating in the U.S.,” said globam management consulting exec, Johan Gott.

Following the 1994 Nafta deal, automakers worldwide established supply chains based on low or no tariffs within North America – a deal with then-candidate Trump promised to dismantle upon his election after arguing that it eroded the US manufacturing base, sending jobs to Mexico where labor is cheaper.

Nafta 2.0, on the other hand, requires automakers to assemble at least 75% of a car’s value in North America in order to retain duty-free status, up from 62.5% at present. On top of that, automakers must ensure that 40-45% of the vehicle is made by workers who make at least $16 an hour – a provision designed to shift work back to the US and generate more manufacturing jobs. 

The new rules will be phased in over the next two to five years, about the time it takes to develop a partially or fully revised car model. Car makers are likely to look at moving engine and transmission production first, because those parts make up roughly 30% of a car’s value and thus represent what would be a big step toward the stricter content thresholds, manufacturing consultants say. –Wall Street Journal

Moreover, annual auto imports from Canada and Mexico are to be capped at a combined 5.2 million vehicles – while just 4.1 million vehicles were sent into the US from the two countries last year. Cars which don’t comply with the new pact will face a 2.5% tariff – though light trucks such as pickups are exempt from the caps. 

According to Autodata Corp, foreign-based cars made up 56% of light-vehicle sales last year, while manufacturing utilizes a significant number of parts sourced overseas – including expensive engines and transmissions. These will likely be at risk of noncompliance under Nafta 2.0 for many vehicles already made in the United States, hence the shift. 

The new trade deal will impact vehicles built in Mexico with lots of foreign parts before being shipped to the US, such as Volkswagen’s Golf, Honda’s Fit, and the Nissan Sentra. 

Carlos Ghosn, head of the Renault-Nissan-Mitsubishi alliance, said the new North American trade pact would spur the car-making group to invest more in both the U.S. and Mexico, but didn’t provide details. Honda and Volkswagen said in separate statements that they are still analyzing the potential impact of the deal on their local operations.

Mazda Motor Corp. , which relies on Japan for engines and transmissions, would also struggle to meet the higher content requirements on its Mexico-built Mazda3 compact car. –Wall Street Journal

“Naturally, it will change since we haven’t reached 75%” local content,” said Akira Marumoto, CEO of Mazda. “Components that have to be made within the Nafta region will increase.”

US automakers, GM, Ford and Fiat Chrysler don’t expect to suffer significant impacts under Nafta 2.0 since most of the vehicles they make and sell in the US are likely to meet the local content and wage requirements. That said, some cars such as Fiat Chrysler’s Mexican-made Fiat 500 may require a few manufacturing changes, as its transmissions are imported from Germany, Italy or Japan depending on the model. 

One has to wonder how quickly we will see the increased manufacturing costs translate to the average MSRP. 

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Earlier this week, the euphoria over US junk bonds hit new post-crisis highs when amid a sharp slowdown in supply, a rise in the oil price and generally solid economic conditions, insatiable buyers sent the Bloomberg Barclays Corporate high yield spread to the lowest since before the financial crisis, dropping as low as 303bps, the tightest level since late 2007 before drifting somewhat wider during the late week bond rout.

Yet while the US high yield market remains remarkably resilient in the face of sharply higher yields, the same can not be said of European junk bonds where the bubble may have finally burst.

As Bank of America’s Barnaby Martin writes in his latest research note, in stark contrast to shrinking US spreads, European high-yield spreads have blown out by 70bp wider, with total returns just +13bp, a far cry from the average annual returns of +11% observed over the last decade. Putting this dramatic reversal in context, at the start of the year Euro HY spreads were 80bp tighter than US spreads. Now they are 35bp wider, in large part due to the deterioration in the Italian backdrop, concerns about the end of the ECB’s QE and the recent deterioration in the European economy.

As Martin shows in the chart below, “one has to go back to late 2012 to find that last time that Euro HY spreads were this wide to US spreads.” Also note the variance in quality: 41% of the US HY market is single-B versus just 24% in Europe.

What has prompted this curious reversal in the fates of the European and US junk bond markets? According to Martin, a key theme for European risk assets in general is that Quantitative Tightening by the Fed has made simple “cash” in the US a competitive asset class again.

We think this dynamic is likely to weigh on European high-yield spreads and also act as a barrier to meaningful retail inflows returning in Europe.

This dynamic is laid out in the chart below, which shows the yield on European BBs versus the yield on US 6M Bills. Martin highlights that bill yields have acted as a “lower bound” to European high-yield spreads this year (the US Dollar has also been rising since mid-April ’18). If that is the case, yields will only drift wider as US cash rates become even more attractice as 3M USD Libor is increasing again, and the Fed will likely hike rates at least another 3 rate hikes by the end of ‘19, to the detriment of the European high-yield market.

Two other reasons for European junk bond weakness are the result of composition, namely i) the high weighting of Italian names in Euro HY (17%) and ii) the prevalence of credits with EM revenue exposure. As a result of the current volatility in both of these
corners of the market, Martin believes that there will be even more headwinds to Euro spreads. Chiart 4 shows the implied impact of blowing out Italian yields on European junk, while Chart 5 shows that Euro HY spreads have had a reasonably high correlation to EM FX volatility over the last few years (BofA’s strategist also notes that the recent jump in the US Dollar will likely lead to another round of EM currency weakness shortly).

Another major difference between US and European conditions, is that whereas the US economy is roaring ahead, overstimulated by Trump’s $1.5 trillion fiscal stimulus, in Europe the economy has already slowed meaningfully in less than a year. Towards the end of ‘17, the Eurozone economy was annualizing a 2%-2.5% growth rate. Fast forward to today, and that number looks closer to a 1%-1.5% annualized growth rate, prompting the ECB last week to leak that its next assessment may focus on “downside risks.” Ironically, like China, here too Trump’s tariffs are having a more adverse impact than on the US (for now):

The European economic slowdown has been broad based and for a variety of reasons. The decline in global trade has crimped the German recovery, for instance. Yet the rise in the oil price has slowed French economic momentum (France is a more closed economy than Germany, so consumer spending has suffered).

What is remarkable is that Euro HY spreads have tended to reflect this economic slowdown very accurately: the next chart from Martin compares the z-score of the OECD leading indicator for Europe versus the z-score of Euro HY spreads. “As can be seen, although Euro HY spreads are wider YTD, they look to have widened less than the slowdown in the European economy would otherwise suggest. Also of note: the latest PMIs for Europe point to even slower economic activity ahead (the PMI new
orders index fell to 50.2 in Europe, the lowest since Oct ’14).

Aside from rate differentials and fundamental economic considerations there also positional drivers behind the recent move.

Case in point, retail outflows remain an important reason why Euro credit markets have been exhibiting greater signs of “fragility” since Q2 this year according to BofA which again notes that “attractive “cash” yields in the US are hindering the return of retail inflows into European assets (not just credit).”

Perhaps it is the sharp rise in US cash yields that explain why year-to-date, Euro-domiciled HY funds have experienced “a painful $33bn of outflows (12% of assets).” Compared to high-grade, though, the good news in high-yield is that the outflow story looks to be past its peak (and recent weeks have seen a tentative return of some retail inflows). As the next chart shows, the inflows into European HY witnessed in the “ECB era” (2012 onwards) have now been withdrawn.

Yet any celebration that the outflows are ending may be premature if the EM FX rout makes a dramatic return, due to the “demand-sapping effect of EM volatility on European high-yield.” 

Chart 9 in particular shows the high correlation between EM FX vol and fund flows into European high-yield markets. We believe a period of US Dollar strength would be most bullish for signalling the return of Euro credit inflows.

Finally, since the report was authored by the same analyst who back in June issued a loud warning about the dangers of roughly €800 billion in BBB-rate bonds which will likely be downgraded to junk during the next Eurozone recession, i.e. nearly $1 trillion in potential fallen angels, in his latest report Martin updates of European high-yield fundamentals, which tracks leverage, coverage ratios, earnings and debt levels across BBs and single-Bs.

Martin finds that leverage has been broadly stable over the last quarter – although there are signs that it has begun to tick-up again for BBs (72% of the market). Extrapolating from this, weakening fundamentals in BBs would suggest that the Rising Stars story in European high-yield will draw to a close soon. As chart 12 shows, the European high-yield market has seen net Rising Stars since 2017, albeit modest. And as the chart also shows, the upgrade to downgrade ratio has also been slowing this year and is now only slightly above 1x. This means that the “angels” are about to start falling…

Putting these observations together, it is becoming increasingly clear that the European junk bond bubble popped some months ago, and is currently deflating at an accelerating pace, prompted by Euro-specific factors such as Italian political and budget instability, rising cash differentials with the US, concerns about the end of the ECB’s QE, EM contagion and an overall slowing Eurozone economy. Perhaps the only question is how long before Europe’s credit weakness contagion jumps the Atlantic and a similar set of adverse factors materializes in the US, where the junk bond bubble remains impervious to virtually everything that has been thrown at it.

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