Category: zerohedge

After Bill Ackman hinted that he would unveil his latest investing play at the Grant’s Interest Rate Observer fall conference in New York City, the Pershing Square founder didn’t disappoint. In his first major new position since unveiling his Lowe’s stake in May, Ackman said during an afternoon presentation that his firm had taken a $900 million stake in Starbucks.

Starbucks shares surged more than 5% on the headline:

Since exiting his disastrous Herbalife short earlier this year, the embattled investor, who was forced to lay off 20% of his firms’ staff in early 2018 after three consecutive years of losses, has focused instead on taking long positions in more well-established firms in the retail and food-service space (though his firm notably trimmed its Chipotle position during the second quarter after the bet proved profitable).

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Authored by Lance Roberts via RealInvestmentAdvice.com,

In this past weekend’s newsletter, I discussed the fact the markets had finally awoken to the reality that rates have once again broken above 3%.

“Speaking of rates, each time rates have climbed towards 3%, the market has stumbled.”

However, I also noted that on a very short-term basis, the market was oversold enough to generate a bounce. Importantly, with market testing the January breakout highs this is a “make or break” point for the markets. There are two things currently that are worth paying attention to from a portfolio management standpoint.

1. There is a defined trendline the market has held since the April lows. (Blacked dashed line) In July, the market broke that trendline but quickly recovered. A failure to get back above that trendline on this bounce, and a failure to attain new highs, will continue what appears to be an early topping pattern. 

2. The momentum sell signal, which signaled a “risk off” market in early February, is very close to triggering. As shown this signal was very close to triggering in July but the market rallied strongly enough to keep that from occurring. Can it do the same this time?

If we add interest rates to the equation we can see where rising rates have contributed to a pickup in volatility in the equity market.

So far, the markets have been able to fend off the impact of higher rates and tariffs on the back of strong earnings results and the strength in the economic data.

However, those two things are coming to an end.

As I discussed in “Debts & Deficits”, much of the economic “boom” has been derived from a massive boost in fiscal spending due to a series of natural disasters last year.

“While the markets have been the beneficiary of the tax cut legislation, which gave a short-term boost to corporate profitability, the economy has enjoyed a boost from the massive increases to spending from what should have been more aptly termed the ‘Bipartisan Non-Budget Act of 2018.’ Spending on natural disasters and defense spending increases ‘pull forward’ future economic growth which is an illusion of an economic turn.

 Currently, the government is running one of the largest deficits, in both dollar terms, and as a percentage of GDP, in history.”

As the spending on natural disasters slows down by the end of the year, the surge in the deficit will begin to erode economic growth going into 2019. With the rise in rates, combined with higher oil prices, weighing on consumption growth, particularly as higher rates slow housing, auto sales, and increases debt payments, the impact to the economy will likely show up sooner than anticipated.

Secondly, higher rates and tariffs are already impacting the forward outlook for earnings estimates. Since the beginning of this year, forward expectations have already started falling as economic realities continue to impede overly optimistic projections. However, just since May, estimates for the end of 2018 have fallen by more than $10/share.

But it isn’t just this year where estimates are falling, but into 2019 as well. The chart below shows the changes in estimates a bit more clearly. It compares where estimates were on January 1st versus April, June and September 1st. Currently, optimism is exceedingly “optimistic” for the end of 2019.

As stated, the risk to current estimates remains higher rates, tighter monetary accommodation, and trade wars. More importantly, year over year comparisons are going to become markedly more troublesome even as expectations for the S&P 500 index continues to rise.

With the number of S&P 500 companies issuing negative EPS guidance is now the highest since 2016, it is only a function of time until we see forward estimates into 2019 begin to revised substantially lower.

Given a large bulk of the surge in earnings was due to the “one-time” repatriation of overseas profits of $300 billion which flowed directly into share buybacks. Going forward, earnings growth will be more muted.

“Balance of payments data show that U.S. firms repatriated just over $300 billion in 2018:Q1, roughly 30 percent of the estimated stock of offshore cash holdings. For reference, the 2004 tax holiday, which provided a temporary one-year reduction in the repatriation tax rate, resulted in $312 billion repatriated in 2005, of an estimated $750 billion held abroad.”

The chart below shows the dramatic decline in shares outstanding as compared to the rise in reported EPS. As of the end of Q3, total shares outstanding have continued to decline.

While the bull market thesis continues to be that earnings expansion will justify higher valuations, such may not be the case. The rise in rates, a strong dollar, and the impact of tariffs could derail much of the earnings “Cinderella”story in the months ahead.

Becoming More Cautious

As shown in the first chart above, the recent sell-off has likely exhausted much of the short-term downside risk. While the market opened lower this morning, it is where the market finishes the week which is most critical.

The chart below is a WEEKLY chart going back to the 2015-2016 lows.

While there is certainly a pick up in volatility as rates have spiked higher as of late, the longer-term bullish trend clearly remains intact.

At the moment, there is nothing signaling that a change to the market trend is imminent and the pickup in market volatility was previously addressed:

“While we are long-biased in our portfolios currently, such doesn’t remain there is no risk to portfolios currently. With ongoing ‘trade war’ rhetoric, political intrigue at the White House, and interest rates pushing back up to 3%, there is much which could spook the markets over the next 45-days.”

Well, that has certainly been the case. With the market trying to cling to support at the previous breakout levels, we are also sitting on support at the short-term moving average. That moving average also coincides with the January highs. The next chart zooms in for a closer look at the details.

The vertical red and green lines were very short-term buy/sell signals which show when price momentum is favorable for increasing or reducing equity-related risk. While that signal is currently on a “buy” it is deteriorating and suggests it may not be optimal to increase equity risk currently.

It will be imperative the market maintains support and musters a rally by the end of the week. Otherwise, there is a high probability the market will retest the bullish trend line from the 2016 lows. With the longer-term moving average currently running along that trend line, a break below that level changes the entire dynamic of the market to a “risk off” mode. 

With that said, and while many will just simply assume I am “bearish,” I want to remind you the trend of the market is still “bullish.” This is why our portfolios still remain primarily fully exposed to the market with respect to equity-related risk. 

However, being exposed to the market also means we are:

1. Are managing our exposure levels,

2. Maintaining trailing stop-loss levels; and

3. Taking profits by reducing overweight allocations back to portfolio weights.

It also does not mean our allocations will not be aggressively adjusted downward at some point; it is just not needed as of yet.

As noted in the final chart below, the bullish trends of the previous two bear markets were violated relatively early in the reversion process. For those paying attention, there was plenty of opportunities to exit the markets while retaining a bulk of the previous gains. As noted, the current bullish trend has not been violated as of yet which keeps portfolios currently allocated toward risk.

As I have repeatedly discussed over the last several weeks, prudent portfolio management practices reduce inherent portfolio risk thereby increasing the odds of long-term success. Any rally that occurs over the next few days from the current levels should be used as a “sellable rally” to rebalance portfolios and related risk. These practices align with the most basic investment rules/philosophies that have been followed by every great investor/trader in history. To wit:

• Sell positions that simply are not working. If they are not working in a strongly rising market, they will hurt you more when the market falls. Investment Rule: Cut losers short.

• Trim winning positions back to original portfolio weightings. This allows you to harvest profits but remain invested in positions that are working. Investment Rule: Let winners run.

• Retain cash raised from sales for opportunities to purchase investments later at a better price. Investment Rule: Sell High, Buy Low

There is no magic formula for long-term investment success. It has always been achieved by following simple processes and disciplines that have managed investment risk thereby reducing emotionally driven decisions during times of increased volatility.

As Warren Buffett once quipped:

“There are two rules to investment success

1) Never lose money;

2) Refer to rule #1.”

It really doesn’t get much simpler than that.

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The Washington Post had previously sketched out all the ways that the scandal of its own allegedly murdered columnist Jamal Khashoggi could damage US-Saudi relations at a crucial time for crown prince Mohammed bin Salman, but late Monday we caught of a glimpse of just how much damage will be done given the White House and State Department’s first official statements: likely none at all. 

On Monday President Trump for the first time addressed the Khashoggi disappearance and widely reported news about this murder by the Saudis at their consulate in Istanbul: “I am concerned about that. I don’t like hearing about it and hopefully that will sort itself out.”

The president said further of rampant speculation over his disappearance: “Right now nobody knows anything about it. There’s some pretty bad stories about it. I do not like it.” And Vice President Mike Pence said he was “deeply troubled” over the reports.

Meanwhile, according to CBS News, “The Washington Post published a surveillance image Tuesday showing its missing Saudi contributor walking into the Saudi Consulate in Istanbul a week ago, just before he disappeared. Turkish officials have said they fear the columnist was killed there, and announced on Tuesday that they would be searching the consulate as part of their ongoing investigation into Khashoggi’s disappearance.”

Adding to Trump’s it “will sort itself out” statement, the State Department addressed the Khashoggi issue with only few more words as it essentially called on Saudi Arabia — the presumed murders — to investigate themselves, as WikiLeaks aptly noted. The statements reads: “We call on the government of Saudi Arabia to support a thorough investiagtion of Mr. Khashoggi’s disappearance and to be transparent about the results of that investigation.”

US State Department calls on the alleged murderers of Washington Post columnist and US resident #JamalKhashoggi, to investigate themselves, and to announce the result. pic.twitter.com/8jNOZBwPrH

— WikiLeaks (@wikileaks) October 9, 2018

This was precisely the reaction of the State Department when Saudi Arabia bombed a packed school bus in Yemen in the early part of August, killing 25 children. At that time the US also asked for the Saudis to investigate themselves, and naturally nothing came of it.

In related news Thomas Friedman has written a strange column entitled Praying for Jamal Khashoggi — likely spurned by embarrassment over his prior fawning endorsement of MbS — wherein he pretends to have always been a wise longtime critic of Saudi Arabia.

While Friedman doesn’t at all rescind his earlier endorsement of MbS, he did manage to out Khashoggi as a prior source. Khashoggi, who is well-known to have had “insider” status in Riyadh, had been an “anonymous” source for Friedman’s prior commentary on MbS.

No one knows for sure if Khashoggi is dead and Friedman revealed him as an anonymous source who provided quotes critical of the Saudi government with no concern for Khashoggi’s friends and family who could be targeted in retaliation. Unbelievably careless. https://t.co/S03D7GYfwK pic.twitter.com/hVmHGcxmtg

— Sulome Anderson (@SulomeAnderson) October 8, 2018

Yet Friedman has decided to out his source even as Khashoggi’s fate is anything but settled.

Despite Turkish investigators believing that the Saudi journalist was brutally murdered inside the consulate, and his body cut into pieces after which it was taken in bags out of the embassy and flown back to Saudi Arabia, there’s much speculation that Khashoggi could have been kidnapped and is being detained much like last year’s Ritz-Carlton imprisoned princes ordeal.

Should it turn out that Khashoggi is still alive, Friedman’s outing Khashoggi as a prior anonymous source will be used against him and could serve to seal his fate.

Other journalists slammed Friedman for both his self-serving narrative and outing Khashoggi at this crucial time. 

So deeply irresponsible, not to mention unethical, to name Jamal Kashoggi as his anonymous source. Shame. Opinion | Praying for Jamal Khashoggi – The New York Times https://t.co/vD2TmOLDh2

— Nicole Gaouette (@NicoleCNN) October 8, 2018

Friedman went so far as to ask MbS to “pray for Jamal Khashoggi” in this bizarre column…

Why is Friedman asking MBS to pray for Jamal Khashoggi what is going on https://t.co/CVo0DE52Yo pic.twitter.com/239oNWVyiv

— Nesrine Malik (@NesrineMalik) October 8, 2018

It seems there’s not a single Friedman supporter out there at the moment, even among the usual synchopantic mainstream press.

Just in case Khashoggi is still alive, Tom Friedman is doing his best to endanger him. Normally gripes with Friedman & the NYT op-ed page are about how it’s just bad writing/ideas; this is actually dangerous and amateurish. https://t.co/1QQWPSKcO1

— Dan O’Sullivan (@Bro_Pair) October 8, 2018

Now with photographic proof that Khashoggi did actually enter the embassy at the time his fiance said he did, only to never emerge again, things are about to get a lot more interesting. 

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Authored by Timothy Terrell via The Mises Institute,

The 2018 Nobel Memorial Prize in Economic Science was awarded for the 50th time today, to William D. Nordhaus of Yale University and Paul M. Romer of New York University. Although Austrian school economists might find common ground on a few aspects of Nordhaus and Romer’s work, such as Romer’s criticism of “mathiness” in economics, there is not much for Austrians to celebrate about this year’s prize.

Both economists see an expanded role for the State.

• Romer is known for his suggestions that government invest in research and development and employ patent laws to foster economic growth.

• Nordhaus believes that government should act to prevent adverse changes in climate.

He is not a zero-carbon-growth fanatic – he has argued against a policy that would stop global warming entirely, saying that allowing up to a 2.3 degrees C global temperature increase would be optimal, given the costs that climate policy would entail. And Nordhaus has rightly criticized some climate studies for their use of inappropriate discounting over time. But Nordhaus, avocal critic of skepticism on global warming science , and has argued for global, universally imposed carbon taxes as a centerpiece of his recommendations on climate policy.

Carbon taxes and quantitative restrictions on carbon emissions (e.g., “cap and trade”) both start with problematic assumptions. An emissions tax assumes, among other things, that the government can know what the gap is between the marginal cost of a production process to the pollution emitters, and the marginal cost of the production process to everyone else. The tax would be imposed to span this gap and induce polluters to rein in their pollution to the optimal level. Since the economy does not stand still for economists, the gap would constantly change – and therefore the appropriate tax. Similarly, a quantitative cap on emissions assumes that the government can know the quantity of pollution where the marginal costs to everyone equal the marginal benefits to everyone (“benefits” of pollution being mainly the products of the activity that generates the pollution). Rather than intervening by changing the price with a tax, the government would intervene by dictating the quantity of pollution. With “cap and trade” policy, government would create permits for the pollutant and allow those emitters which find it expensive to reduce emissions to buy permits from those who find it cheap to do so. It is a market mechanism, but one which begins with the untenable assumption that the government knows how many permits should be in the market. And with phenomena like climate change that have benefits and costs over a very long period of time, that knowledge would have to include some remarkable foresight.

To be sure, both avoid the shortsighted and likely more costly approach of having government dictate the specific emissions-reduction technologies that should be used, or encourage one control technology over another with subsidies. But Nordhaus has also suggested government support of greenhouse gas-reducing technologies, arguing that free markets would underinvest in technologies with positive externalities. And he has suggested policies that he believes will create benefits to society apart from climate benefits, such as subsidies of urban tree-planting. The thinking is that tree-planting might be an effective carbon repository – and who doesn’t like more trees in among the concrete and steel of an urban center? These policies are called “no regret” policies, but we run into the same knowledge problem again. How can we know that the resources expended in planting trees could not have been used in some other way that would have produced an even greater benefit to human life? By directing resources according to a politically determined plan rather than the decentralized ordering of the marketplace, the information provided by a price system is discarded. The priorities of free individuals fall by the wayside, replaced by what political figures imagine to be optimal. More urban trees might mean less money for vacations, less money for education, fewer resources for cancer research, and/or less adaptation to climate change. “No regret” policies could easily turn out to be policies we should regret very much.

Even if we were to assume away these immense problems, environmental policy is not out of the woods. If we were to devise a way for accurate scientific data and the information of the free marketplace to somehow be gathered and communicated instantaneously to the policymakers (along with continual updates), we could have no confidence that the policies would not become a tool of the policymakers’ ambitions – and the ambitions of the politically well-connected. Replacing individual priorities with what policymakers believe is optimal for society might be far too optimistic, as it turns out. How can we be sure that environmental policy would not be used to promote re-election or a bureaucratic empire rather than climate improvement? Would a carbon tax really not be set higher than what is optimal so as to enrich industries that compete with coal or oil? Could a subsidy or regulatory mandate accelerating the adoption of energy-efficient light bulbs be a tactic used by some firms to improve profits and avoid loss of market share ?

Finally, as Murray Rothbard has pointed out in his essay “Law, Property Rights and Air Pollution,” the goal of efficiency is itself an ethical norm which is imported into policy proposals, often without comment or justification. In asserting that property rights should be abridged or transferred in the search for efficiency, economists like Nordhaus condemn ethical systems based on human liberty. Why should efficiency – however that is conceived – supplant liberty, and why should externalities be internalized above all other considerations? Rothbard asks.

Granting the Nobel to Nordhaus and Romer has already encouraged new attention to “market failure.”

As University of Michigan economist Justin Wolfers tweeted, “the Nordhaus-Romer pairing makes sense, because they each point to contradictions at the heart of capitalism. It’s all about market failure. Left alone, markets will generate too much pollution (Nordhaus) and too few ideas (Romer).”

But free markets have been among the most powerful forces for cleaner technology and new ideas. Innovation, wealth creation, and healthier people are to be found among the most economically free parts of the world. Unfortunately, the economics Nobel this year neglects the problems at the heart of the State – the government failures that pollute and impoverish.

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A major US telecommunications company found “manipulated” hardware from Super Micro Computer Inc. in its network in August – bolstering claims in a Bloomberg report last week alleging that China installed bugging devices on hardware bought by Apple, Amazon and a host of other companies. 

According to a new report by Bloomberg, the unnamed telecom company hired former Israeli Intelligence Corps security expert Yossi Appleboum, now of Maryland-based Sepio Systems, who provided “documents, analysis and other evidence of the discovery” following last week’s report detailing how China’s intelligence agencies had ordered subcontractors to install malicious chips in Super Micro motherboards between 2013 and 2015. 

Sepio Systems’ board includes former Mossad director, Tamir Pardo, and its advisory board includes former CIA chief information security officer Robert Bigman. 

Israeli Army Intelligence Corps and is now co-chief executive officer of Sepio Systems in Gaithersburg,  Maryland. His firm specializes in hardware security and was hired to scan several large data centers belonging to the telecommunications company.

Bloomberg is not identifying the company due to Appleboum’s nondisclosure agreement with the client. Unusual communications from a Supermicro server and a subsequent physical inspection revealed an implant built into the server’s Ethernet connector, a component that’s used to attach network cables to the computer, Appleboum said. –Bloomberg

Appleboum says that Super micro “is a victim — so is everyone else,” and that he has seen “similar manipulations of different vendors’ computer hardware made by contractors in China,” according to Bloomberg. He adds that his concern is that there are numerous points in the supply chain in China where hardware can be manipulated – which are virtually impossible to track down. “That’s the problem with the Chinese supply chain,” said Appleboum. 

Based on his inspection of the device, Appleboum determined that the telecom company’s server was modified at the factory where it was manufactured. He said that he was told by Western intelligence contacts that the device was made at a Supermicro subcontractor factory in Guangzhou … The tampered hardware was found in a facility that had large numbers of Supermicro servers, and the telecommunication company’s technicians couldn’t answer what kind of data was pulsing through the infected one, said Appleboum, who accompanied them for a visual inspection of the machine.

…

The manipulation of the Ethernet connector appeared to be similar to a method also used by the U.S. National Security Agency, details of which were leaked in 2013. In e-mails, Appleboum and his team refer to the implant as their “old friend,” because he said they had previously seen several variations in investigations of hardware made by other companies manufacturing in China. –Bloomberg

In response to the new evidence, Supermicro said in a statement: “The security of our customers and the integrity of our products
are core to our business and our company values. We take care to secure the integrity of our products throughout the manufacturing process, and supply chain security is an important topic of discussion for our industry. We still have no knowledge of any unauthorized components and have not been informed by any customer that such components have been found. We are dismayed that Bloomberg would give us only limited information, no documentation, and half a day to respond to these new allegations.”

Shares of Super Micro dropped as much as 27% in Tuesday trading, and are down approximately 45% since October 3, before the initial Bloomberg story hit the next day. 

Super Micro strongly refuted the initial Bloomberg report, while both US and UK intelligence officials put out statements over the last several days in support of Amazon, Apple and Super Micro – who say it never happened. 

As Bloomberg notes – the new manipulation is different from the one described last week, however it shares key characteristics: “They’re both designed to give attackers invisible access to data on a computer network in which the server is installed; and the alterations were found to have been made at the factory as the motherboard was being produced by a Supermicro subcontractor in China.” 

Appleboum said that he’s consulted with intelligence agencies outside the U.S. that have told him they’ve been tracking the manipulation of Supermicro hardware, and the hardware of other companies, for some time.  In response to the Bloomberg Businessweek story, the Norwegian National Security Authority said last week that it had been “aware of an issue” connected to Supermicro products since June.  It couldn’t confirm the details of Bloomberg’s reporting, a statement from the authority said, but it has recently been in dialogue with partners over the issue. –Bloomberg

Manipulated hardware is extremely difficult to detect, which as led intelligence agencies around the world to invest billions of dollars in such sabotage. The United States is known to have implemented extensive programs to “seed technology headed to foreign countries with spy implants,” according to revelations by former CIA employee Edward Snowden – however China now appears to be sneaking their own versions onto hardware made within their borders. 

Three security experts who have analyzed foreign hardware implants for the U.S. Department of Defense confirmed that the way Sepio’s software detected the implant is sound. One of the few ways to identify suspicious hardware is by looking at the lowest levels of network traffic. Those include not only normal network transmissions, but also analog signals — such as power consumption — that can indicate the presence of a covert piece of hardware. –Bloomberg

The goal of the spy implants is to establish a “covert staging area” within sensitive networks, which is what Appleboum says was happening in the new case. Once the implant was identified and the server removed, Sepio’s tream was unable to perform further analysis on the chip. 

One problem, according to national security experts, is that in a cybersecurity industry approaching $100 billion in revenue, very little effort has been made to inspect and detect hardware tampering. This has allowed intelligence agencies around the world to manipulate hardware virtually unfettered. 

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“We won’t ever solve the world’s problems if dead-cat bounces keep being hailed as that obvious dip to buy,” writes former fund manager and FX trader Richard Breslow, and this morning’s panic-bid bounce in tech stocks is a perfect anecdote for that…

One quick glimpse at the Nasdaq’s manic rise and it’s evident, as Breslow notes, that someone (or something), seriously bel;ieves that “why would the bounces happen if solutions to our woes aren’t in hand?“

As Breslow notes, wasn’t it bad enough that for a decade we measured all economic success based on the level of equity prices. Main Street to follow. That may no longer be the best campaign line, because equity markets look awfully soggy, right across the board. And that’s a global observation.

It’s time to read the actual news rather than the intraday stock charts.

Via Bloomberg,

Secretary of State Mike Pompeo had a visit to China that was, at best, embarrassing. Everyone is wondering about next week’s currency manipulation report from the U.S. Treasury. Europe’s trajectory is worrisome. The Middle East isn’t getting any better. I’ll stop there.

We spend much time debating the safe havens du jour. The dollar has emerged as one. And don’t count out the Swiss franc and Japanese yen. What hasn’t been working is Treasuries and bunds, and that merits attention.

Ten-year Treasury yields made a new cycle high just this morning. It means you have safety valves contributing to market stresses. Take a gander at the MSCI Emerging Market Index and it points to the fact that there is something much bigger going on.

The IMF is busy cutting growth forecasts and central banks realize they must have higher rates to prepare for the next recession.

Yet, in the course of today, I’ve been assured that markets are relieved that Chinese equities have regained their composure. And the government has things under control. After a 3.5% drop yesterday, a minuscule bounce today would suggest that the jury may still be out. But, as is inevitably the case, the most optimistic commentary was written when the Shanghai Composite was up 0.5%, and if you extrapolated those gains, this thing could go to the moon.

The same happened with Italy. The MIB and BTP markets opened higher. Hurrah, cooler technocratic heads will prevail. Calm is being restored through the back channels. Ignore the people who think they are in charge. What debt death spiral? If it weren’t for the banks in the stock index, things would be looking much calmer. Take out a couple of other stocks that have been getting eviscerated and things would be looking positively sanguine. We have to stop thinking like this.

We are all trying to suss out the big trades for the rest of the year. Perhaps the best prescription for being in a position to take advantage of them, when they eventually appear, is to first, do no harm. It’s hard not to feel the calendar breathing down our necks, but patience may be a virtue equally as important as clever analysis.

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Authored by Patrick Buchanan via Unz.com,

After a 50-year siege, the great strategic fortress of liberalism has fallen. With the elevation of Judge Brett Kavanaugh, the Supreme Court seems secure for constitutionalism – perhaps for decades.

The shrieks from the gallery of the Senate chamber as the vote came in on Saturday, and the sight of that bawling mob clawing at the doors of the Supreme Court as the new justice took his oath, confirm it.

The Democratic Party has sustained a historic defeat.

And the triumph is President Trump’s.

To unite the party whose nomination he had won, Donald Trump pledged to select his high court nominees from lists prepared by such judicial conservatives as the Federalist Society. He kept his word and, in the battle for Kavanaugh, he led from the front, even mocking the credibility of the primary accuser, Christine Blasey Ford.

Trump has achieved what every GOP president has hoped to do since the summer of ’68, when a small group of GOP senators, led by Bob Griffin of Michigan, frustrated and then foiled a LBJ-Earl Warren plot to elevate LBJ crony Abe Fortas to chief justice in order to keep a future President Nixon from naming Warren’s successor.

Sharing the honors with Trump is Majority Leader Mitch McConnell.

Throughout 2016, McConnell took heat for refusing to hold a hearing on Barack Obama’s nominee, Judge Merrick Garland, to fill the chair of Justice Antonin Scalia, who had died earlier that year.

In 2017, McConnell used Harry Reid’s “nuclear option” to end filibusters for Supreme Court nominations, and then got Judge Neil Gorsuch confirmed 54-45.

Last week, in one of the closest and most brutal court battles in Senate history, McConnell kept his troops united, losing only Sen. Lisa Murkowski, to put Kavanaugh on the court by 50-48. McConnell will enter the history books as the Senate architect of the recapture of the Supreme Court for constitutionalism.

This was a huge victory for conservatism and for the Republican Party. And the presence on the court of octogenarian liberals Ruth Bader Ginsburg and Stephen Breyer, both appointed by Bill Clinton, suggests that McConnell may have an opportunity to ensure the endurance of his great achievement.

The ferocity and ugliness of the attacks on Kavanaugh united Republicans to stand as one against what a savage Senate minority was trying to do to kill the nomination. And at battle’s end, the GOP is more energized than it has been all year for this fall’s election.

How united is the GOP? Conservatives are hailing the contributions of Sens. Jeff Flake, Lindsey Graham and Susan Collins, who delivered a masterful summation of the Kavanaugh case Saturday afternoon.

For the Democratic Party, the Kavanaugh battle was the Little Bighorn, as seen from General Custer’s point of view.

Unable to derail the judge during the regular confirmation process, they lay in the weeds until it was over, and then sandbagged the judge by leaking to The Washington Post a confidential letter Dr. Ford did not want released.

They thus forced a public hearing of charges of attempted rape against a nominee, demanded the FBI investigate all charges of sexual misconduct when Kavanaugh was a teenager, and ended up losing anyway.

Then the Dems watched protesters dishonor the Senate in which they serve by screaming from the gallery. It was among the lowest moments in the modern history of the Senate, and it was the Democratic minority that took it down to that depth.

Understandably, they are a bitter lot today.

And the #MeToo movement has been set back. For many of its champions were, in Kavanaugh’s case, demanding a suspension of the principle of “innocent until proven guilty,” and calling for the judge’s rejection in disgrace, based solely on their belief in a wholly uncorroborated 36-year-old story.

So where are we going now?

While Republicans are united and celebrating a great victory, the left and its media auxiliary are seething with rage and doubly determined to deliver payback in the elections four weeks away, where Democrats could pick up the two dozen seats needed to recapture the House.

Should they do so, however, they will face two years of frustration and failure. For the enactment of any major element of their liberal agenda – a $15 minimum wage, “Medicare-for-all” – would die in a Republican Senate, or in the Oval Office where it would face an inevitable veto by Trump.

So, what does 2019 look like, if Democrats capture the House?

Speaker Nancy Pelosi.

A House Judiciary Committee headed by New York’s Jerrold Nadler who is already howling for impeachment hearings on both Kavanaugh and Trump.

And, by spring, a host of presidential candidates, none of whom looks terribly formidable, led by Cory (“I am Spartacus”) Booker, trooping through Iowa and New Hampshire, trashing President Trump (and each other), and offering themselves as the answer to America’s problems.

Bring it on!

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Morgan Stanley calls them “rolling bear markets“; to others they are just occasional sharp, sometimes harrowing, price drops across various asset classes which however fail to drag down the entire market.

Starting in January with the sharp spike in rates, then continuing with a big drop in tech names, a spike in Italian bond yields which then morphed into an EM selloff and commodity plunge due to trade wars, the sequence of selloffs culminated last week with the sudden rise in US rates during the first week of Oct which led global risk assets to sell off pushing cross asset risk metrics higher over the month.

Meanwhile, continued concerns around Italy have caused the Italian-German bond spread to trade at 5y highs and added pressure to European assets. But while rates have arguably been a major source of risk this month, global rates vol is still the least stressed cross asset vol historically. And since that may change if Morgan Stanley – which warned today that current market conditions are dangerously similar to what happened in the fall of 1987 – Bank of America notes that with most hedge costs still comfortably below long term median levels, it remains historically inexpensive to hedge.

Before we look at BofA’s hedging suggestions, a quick walk through the main risk events we have observed in 2018, when markets have been considerably more shock-prone in 2018 compared to last year. As BofA’s Benjamin Bowler notes, of the 34 assets in the bank’s screen, six have experienced a top-10 drawdown year-todate, up from none in 2017 (Chart 3).

And as Morgan Stanley has repeatedly discussed in recent months, the sources of these shocks have spanned multiple regions and asset classes: the five prevailing risk themes for 2018 YTD, along with assets closest to these sources of risk, are shown in Chart 4. These are i) US interest rates-led sell offs; ii) tech stocks “hedge fund hotels”, iii) political instability in Italy; iv) jittery emerging markets, and last but not least, v) trade wars.

To be sure, the chart above does not represent an exhaustive list of risk sources or at-risk assets, and in some cases multiple assets can be considered as barometers for a given risk (e.g., Trade wars, EM weakness). On the other hand, there are known risks that simply have not flared-up thus far this year. For example, the possibility of a ‘no-deal’ Brexit – while clearly a risk for markets – has not led to specific large drawdowns for major assets YTD.

Which brings us to BofA’s second, and for investors more critical point: how to hedge against these (recurring) risks, and more importantly, do so cheaply.

Using the representative assets in Chart 4, Bowler identified drawdown periods relating to each of the five sources of risk (shown as shaded regions in the chart). He then calculated crash returns during these five periods for 35 cross-asset hedges relative to their current 3M 25-delta implied volatilities.  The results are as follows:

• NIKKEI and FTSE puts screen as best value for a US rates-led risk-off event
• NDX and S&P500 puts screen well for US Tech concerns
• SX7E and EURUSD puts rank as good value Italian sovereign hedges
• HSCEI and CADUSD puts rank best for hedging further EM downside
• Copper and HSCEI puts screen well for potential trade war escalation
• Overall, puts on EM equities (KOSPI, HSCEI, HSI and EEM) and commodity-linked assets (Aluminum, Copper and AUDUSD) screen as best value based on their average hedge benefit across the five risk-off periods we have identified

And shown in table format:

Finally, before showing the full hedging screen, it is worth noting that the Feb-18 risk-off episode in which US 10y rates rose by almost 60bps precipitating a sell-off in US equities (and an unraveling of the short VIX ETP complex), also had a large effect on the majority of assets in the BofA screen. Specifically, the green markers in Chart 5 are most to the right for 12 out of 35 assets. Given the most recent spike in US rates on 3-Oct, Bowler’s warning to BofA clients is simple: “it is timely to seek efficient hedges for another potential spill-over of US rates into broader markets.“

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Authored by Mac Slavo via SHTFplan.com,

For some reason, many millennials (and even some older adults, like the actor Jim Carrey and politician Bernie Sanders) believe that capitalism is the cause of all of America’s woes, and that socialism is the solution.

Those who advocate for socialism fail to accept Venezuela as a cautionary tale, claiming that “other” problems caused the collapse of that country. Funny, because even Venezuela’s President Nicolas Maduro has admitted that his socialist economic model has “failed” amid food and medicine shortages and failing infrastructure. The inflation rate in Venezuela is forecast to reach 1,000,000% by the end of 2018, and the country’s GDP is set to plummet 18%.

Proponents of socialism often claim that Nordic countries like Sweden are examples of socialism “working”, but what they do not understand is that those nations actually are “capitalist societies with a welfare state,” as Daniel Lacalle explains in Face It, Nordic Countries Aren’t Socialist. In Nordic countries, Lacalle writes, “Private property is guaranteed by law and citizens’ savings are fully private and free of government control. All Nordic countries have been lowering the tax wedge and — until the recent US tax cuts — had lower corporate tax rates than the US.”

In a recent interview with Yahoo Finance’s Julia La Roche, Ken Langone – the billionaire investor, businessman, and philanthropist co-founder of Home Depot – cited the market crash that followed the demise of Lehman Brothers as the reason many millennials have a negative view of capitalism.

To the millennials who favor socialism, Langone has a message:

“I’ll put you in my plane and I’ll fly you down to Venezuela, and let’s see how good socialism is doing down there.”

Lagone, whose new book, I Love Capitalism! was published in May, explained that the criticisms many millennials have of capitalist systems were likely borne out of growing up through the Great Recession. One of the most visible effects in the wake of the recession has been the increasing burden of student loan debt, which has caused some young people to delay life milestones.

“But that wasn’t capitalism,” Langone said of the market crash and recession. “That was a system that’s gone amok.”

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Deputy Attorney General Rod Rosenstein wasn’t joking when he told former FBI officials Andrew McCabe and Lisa Page that he wanted to secretly record President Trump and use the tapes to remove him from office, according to the FBI’s former top lawyer. 

Fox News reports that James Baker, who served as the FBI’s General Counsel before he was reassigned and then quit, told congressional investigators during a closed-door deposition last week that Page and McCabe relayed the same account of Rosenstein’s remarks – and that he was absolutely serious at the time. 

“As far as Baker was concerned, this was a real plan being discussed,” reports The Hill‘s John Solomon, citing a confidential source. 

“It was no laughing matter for the FBI,” the source added. 

Solomon points out that Rosenstein’s comments happened right around the time former FBI Director James Comey was fired. 

McCabe, Baker’s boss, was fired after the DOJ discovered that he had leaked self-serving information to the press and then lied to investigators about it. Baker, meanwhile, was central to the surveillance apparatus within the FBI during the counterintelligence operation on then-candidate Trump. 

As the former FBI general counsel, Baker was a senior figure with a pivotal position who had the ear of the FBI director.

Baker also is at the heart of surveillance abuse accusations, many from congressional Republicans. His deposition lays the groundwork for a planned closed-door House GOP interview with Rosenstein later this week.

Baker, formerly the FBI’s top lawyer, helped secure the Foreign Intelligence Surveillance Act (FISA) warrant on former Trump campaign adviser Carter Page, as well as three subsequent renewals. –Fox News

Meanwhile, the Times also notes that McCabe’s own memos attest to Rosenstein’s intentions to record Trump – which led to Rosenstein reportedly tendering a verbal resignation to White House chief of staff John Kelly. 

Rosenstein is set to be interviewed in private on Thursday by the House Judiciary Committee.

On September 21 the New York Times reported on Rosenstein’s alleged comments. The MSM – citing anonymous officials – immediately spread the narrative that he was simply joking. Rosenstein’s office has tried to downplay the comments as a joke, insisting that he never gave an order to record Trump, and that he doesn’t believe Trump should be removed from office. 

Let’s see if Rosenstein tells Congressional investigators the same thing on Thursday, under oath, under penalty of felony. 

Baker’s account to lawmakers this month clearly complicates an already complicated picture for Rosenstein before Congress, assuming he shows up for Thursday’s interview.

But even more so, Baker’s story lays bare an extraordinary conversation in which at least some senior FBI officials thought it within their purview to try to capture the president on tape and then go to the president’s own Cabinet secretaries, hoping to persuade the senior leaders of the administration to remove the president from power.

Even more extraordinary is the timing of such discussions: They occurred, according to Baker’s account, in the window around FBI Director James Comey’s firing. Could it be that the leaders of a wounded, stunned FBI were seeking retribution for their boss’ firing with a secret recording operation? –The Hill

Solomon points out that “This wasn’t a president who was incapacitated at the time. He was fully exercising his powers — but in a way the FBI leadership did not like.” 

Keep in mind, this is the same FBI that, a few months earlier during the 2016 election, had its top counterintelligence agent Peter Strzok talking to Page — his lover and the top lawyer to McCabe — about using their official powers to “stop” Trump in the election and having an “insurance policy” against the GOP nominee. That insurance policy increasingly looks like an unverified dossier created by British intelligence operative Christopher Steele — a Trump hater himself — that was bought and paid for by the Democratic Party and Hillary Clinton’s campaign through their mutual law firm. –The Hill

Let’s also recall that this is the same FBI which employed Stephan Halper – a Cambridge professor and longtime US spook – to infiltrate and perform espionage on the Trump campaign. 

“You walk away from the Baker interview with little doubt that the FBI leadership in that 2016-17 time-frame saw itself as far more than a neutral investigative agency but actually as a force to stop Trump’s election before it happened and then maybe reversing it after the election was over,” said Solomon’s source “directly familiar with the congressional investigation.” 

Baker’s other admissions

Solomon also reports that Baker told congressional investigators that a DNC attorney gave him information in the Russia investigation, and that he received a version of the infamous Steele Dossier from liberal journalist David Corn of Mother Jones magazine – which he then forwarded to Strzok’s team. Corn says this happened in November 2016, just after the election. 

That transaction is significant for two reasons. First, at the time Steele had just been fired from the FBI probe for leaking to the media and he wasn’t supposed to be further assisting the probe. So Corn essentially acted as a back door to allow information to continue to flow.

Secondly, the FBI was using the news media as an investigative source outside the normal chain of evidence. –The Hill

Rosenstein and Trump met for approximately 30 minutes aboard Air Force One. Prior to the flight, Trump told reporters that he has no plans to fire Rosenstein. 

“I actually have a good relationship — other than there’s been no collusion folks, no collusion,” Trump said. 

JUST IN: President Trump tells reporters he has no plans to fire Deputy AG Rosenstein, says they will be talking on Air Force One as they travel to Florida. pic.twitter.com/2JOusTob30

— MSNBC (@MSNBC) October 8, 2018

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