Category: zerohedge

In the age of e-commerce — particularly the Amazon effect — shopping malls across the nation are experiencing challenging times 

The Detroit Free Press toured shopping malls across Metro Detroit to gauge their health. What it found was that an epidemic of shuttered storefronts, and liquidating department stores continues to plague much of the city’s economic zones. “We are definitely over-malled, and the malls are too big,” said retail analyst and consultant Ken Dalto, who is based in Bingham Farms, Michigan.

The collapse of shopping malls is the result of explosive growth in internet shopping and more closures of traditional mall anchor stores such as Macy’s, JC Penney, Sears and Carson’s. Some retail analysts have forecasted that 25% of malls nationwide could shut their doors by 2022.

As for Detroit, many malls have lost their department store anchors that have not been replaced, including Eastland Center in Harper Woods, Westland Shopping Center, Laurel Park Place in Livonia, Lakeside Mall in Sterling Heights and Fairlane Town Center in Dearborn. That list would expand dramatically if Sears, still an anchor at several large malls, closes more Michigan stores…. or files for bankruptcy.

Retail experts indicate that at least a dozen of Detroit’s enclosed malls will be forced to redevelop the land. That does not include two large malls that have been dead for years: Summit Place Mall in Waterford and Northland Center mall in Southfield.

“Not every mall is going to survive,” Dalto said.

The Detroit Free Press warned that every mall in Detriot is experiencing pain to some degree, even Somerset Collection in Troy that is situated in a high-income area, which has storefront vacancies in its north and south wings. Nate Forbes, the managing partner for The Forbes Co., which owns Somerset Collection, said in a statement that vacant storefronts in the mall often are for store remodels or expansions.

“When these remodels and reinvestments occur, or when we prepare for major announcements such as when we introduced a two-story Zara to Michigan last year, it causes barricades to be placed in front of retail facades,” Forbes last week. “For Somerset Collection, barricades represent progress and growth, not vacancy.”

“The worst-off mall is Eastland mall, which lost the last of its large-footprint anchor stores this year after Target and Burlington closed. It is mostly down to small local stores and lower-end national chains. Plagued through the years by gang violence and parking lot muggings, Eastland defaulted on its mortgage three years ago and will be offered to the highest bidder in a two-day public auction that begins Oct. 9,” said The Detroit Free Press.

Most of the struggling malls in Metro Detroit are being supported by sportswear and sneaker stores.

“Mall owners in many instances lowered rents as foot traffic fell and key tenants left. Leasing rates in the region’s so-called “Class B” and “Class C” malls have dropped about 20 to 25% since 2009,” according to Dalto. Detroit’s “Class A” enclosed malls have been stable, which are generally considered to be Somerset, Twelve Oaks Mall in Novi and Great Lakes Crossing Outlets in Auburn Hills.

Local governments have unveiled transformative plans for redeveloping distressed malls in their economic zones. Some plans call for demolishing indoor malls and transforming the properties into a millennial playground, with new office or light industrial complexes, apartment buildings, civic spaces, and entertainment attractions.

One thing is certain: the 20th Century-style mall is dead. The economy is shifting. Millennials – and their online shopping habits – will be a majority of the labor force in the next 6 to 8 years, and are currently reshaping the real economy.

 

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Authored by James Howard Kunstler via Kunstler.com,

The Kavanaugh hearing underscored another eerie condition in contemporary USA life that offers clues about the combined social, economic, and political collapse that I call the long emergency: the destruction of all remaining categorical boundaries for understanding behavior: truth and untruth, innocent and guilty, childhood and adulthood, public and private.

The destination of all this confusion is a society that can’t process any quarrel coherently, leaving everyone unsatisfied and adrift, and no actual problems resolved.

One element of the story is clear, though. The Democratic party, in the absence of real monsters to slay, has become the party devoted to sowing chaos, mainly by inventing new, imaginary monsters using the machinery of politics, the way the Catholic Church manufactured monsters of heresy during the Spanish Inquisition in its attempt to regulate “belief.”

“I believe her” is the new totalitarian rallying cry, conveniently disposing of any obligation to establish the facts of any ambiguous matter. It was stealthily inserted in our national life during the Obama years, when Title IX “guidelines” originally written to correct imbalances in college sports funding for men and women were extended to adjudicate sexual encounters on campus.

The result was the setting up of officially sanctioned kangaroo courts where due process was thrown out the window — by people who have should have known better: college presidents, deans, and faculty. That experiment produced not a few spectacular injustices, such as the Duke Lacrosse team fake rape fiasco, the University of Virginia fake rape fraternity incident (provoked by a mis-reported storey in Rolling Stone Magazine), and the Columbia University “Mattress Girl” saga — all cases eventuating in punishing lawsuits against the institutions that allowed them to spin out of control.

The spirit of the kangaroo court has since graduated into business and politics where it has proven especially useful for settling scores and advancing careers and agendas dishonestly. Coercion has replaced persuasion. Coercion is at the heart of totalitarian politics. Do what your told, or else. Believe what we say, or else. (Or else lose your reputation, your livelihood, your friends….) This plays neatly into the dynamics of human mob psychology. When the totalitarians set up for business, few individuals dare to depart from the party line. It’s the perfect medium for cultivating mendacious ideologies.

And so many Americans may be wondering these days whether the ideas and principles that have held this country together, even through a disastrous civil war, can endure through a long emergency of exogenous events so overwhelming that we dare not even debate them publicly. These are climate change, the crack-up of a debt-based money system, the winding–down of techno-industrial economy, and the ecological destruction of the only planet that human beings call home.

Of course, the lives of societies, like everything else in a living universe, unfold emergently. Which is to say that circumstances are in the driver’s seat taking us where they will whether we like it or not. What humans can do is decide how to ride these events. For the moment, America has opted for a grand circus of sexual hysteria. It’s really an easy, lazy choice because sex is full of easily manipulated tensions and ambiguities prone to melodramatic misrepresentation.

Next on tap for this beleaguered nation will be a constitutional crisis and a financial crisis. It’s difficult to predict the order of their unfolding, except to say that these will open up a maelstrom of losses which will then be hard to either adjudicate or correct, once our system of law is compromised. As this occurs, all the raging hysteria over sex will be overshadowed by real existential issues as the people lose their homes, incomes, and futures and desperately search for a way out of more chaos than they bargained for.

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In the rational world of textbook investing, investors should pay up for safety and be compensated for risk, but for the past 20 years, the opposite has been the case in US equity markets.

As BofA’s Savita Subramanian notes, the market has tried to get rational, but, as the chart below shows, each time it was thwarted by some plunge-protection-driven fiscal or monetary stimulus.

But that ‘irrational’ gap has finally closed…

High quality trades in line with low quality for the first time since ’99.

Now what?

Despite the fact that high quality stocks have outperformed low quality stocks in recent years, fund managers are still more overweight low quality stocks (B or Worse) than high quality stocks (B+ or Better) although their hedge may be a slight overweight  in A+ ranked companies.

So there is plenty of ammo for this to run with a push towards ‘high quality’, and further, as BofA notes…

Assuming upward pressure on the cost of capital as the Fed and other central banks shift from quantitative easing (QE) to quantitative tightening (QT), cash-rich self-funded companies are likely to re-rate and trade at premia to their levered,super-cyclical counterparts.

As we noted above, investors should pay up for safety and be compensated for risk, and as the chart at top shows, in the decades before the Tech Bubble, high quality stocks traded at fairly consistent premia to the market (and low quality traded at a discount) for the majority of that time.

And in times of volatility, high quality stocks have outperformed…

And judging by the yield curve – which has historically predicted cyclical volatility – it would appear quality is the best hedge.

Volatility is driven by factors that the yield curve forecasts, like growth and risk. A steepening yield curve typically reflects increasing growth expectations and risk appetite, which have a dampening effect on volatility; a flattening yield curve typically reflects decreasing growth expectations and building risk aversion, which tend to have an amplifying effect on volatility.

So – simply put – the ‘dash for trash’ lottery ticket-style investing of the past two decades has perhaps run its course and with vol set to reappear, safety in safe-haven quality may be the right move – of course – as we have also seen for the last two decades, if things go a little pear-shaped, The Fed will likely step and whiplash back to QE, driving another manic bid for the weakest, worst quality stocks in the market…

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Submitted by Omid Malekan, author of “The Story of the Blockchain, a Beginner’s Guide to the Technology Nobody Understands.”

In November 2010, as the Federal Reserve embarked on its second round of bond buying, Omid Malekan uploaded to YouTube a cartoon called “Quantitative Easing Explained,” which was critical of the central bank’s response to the financial crisis. Within weeks, millions of people had viewed it. Here, nearly eight years later, he says that he got it largely wrong.

It has been 10 years since the collapse of Lehman Brothers marked the unofficial start of the financial crisis. For those of us in finance who lived through that period, and the countless others affected by it, it remains hard to think of it as just a moment in history. A decade removed, the experience feels more like a mass injury that — grateful as we are to have survived — still lingers, and often manifests itself in the ongoing controversy over the government’s response.

I am a small part of that controversy, thanks to a YouTube cartoon I published in 2010 criticizing the Federal Reserve’s bond-buying program, known as quantitative easing. The popularity of that cartoon surprised me. Like most things that go viral, it was more a testament to what was on people’s minds than the quality of the work. Nevertheless, terms used in the cartoon like “The Bernank” entered the economic zeitgeist, resonating with people who knew that they didn’t like what was happening but lacked the technical vocabulary to express why.

Most of the targets of my cartoon, including Ben Bernanke, the former chairman of the Federal Reserve, have defended their actions and maintained that their work was effective in keeping the economic harm from worsening. I’m inclined to agree. Quantitative easing worked, just not in the way it was intended. Before I explain why, I need to admit what I got wrong.

Contrary to what one of my cartoon characters predicted, Q.E. didn’t “blow up the global economy.” Instead, both economic growth and the financial markets have been remarkably steady. If anything, the expansion of central bank balance sheets has dampened volatility. It’s still possible that the reversal of those policies will have a destabilizing effect, but even if that does happen — and I hope it doesn’t — I was still way off the mark.

The current economic expansion is one of the longest in history, and that too has surprised me. If you had asked me to predict the odds of another major recession eight years ago, not only would I have called it likely, I probably would have added that the very policies used to deal with the 2008 financial crisis would cause it. I was wrong about that, too.

So what did I get right? There’s a false belief in some circles that my cartoon was among the chorus of critics that predicted an inevitable debasement of the dollar — a belief possibly spurred by Mr. Bernanke’s reference to my work in his memoir. But my focus, as can still be seen in the cartoon, was on the mechanics of Q.E.

Ironically, those mechanics are something that Mr. Bernanke and I have always agreed on. He has often defended his actions by arguing that Q.E. is not the same as printing money because it only affects reserves in the banking system. Leaving aside the obvious overlap between the two concepts, I believe he’s right. Q.E. was, first and foremost, a policy designed to enrich banks. In that sense, it worked remarkably, and tragically, well.

Thanks to the one-two punch of the bailouts (some of which were also financed by the Fed) and Q.E., our banking system came back from the brink of collapse in just a few years. In 2010, Wall Street managed near-record profitability and paid near-record bonuses. This was no accident. As Mr. Bernanke argued in a Washington Post op-ed in late 2010 (and exactly one week before the publication of my cartoon), the two primary outcomes of Q.E. are lower interest rates and higher asset prices. Nobody benefits from either of those more than Wall Street does.

Left unmentioned in the op-ed were those guaranteed to not benefit, like the substantial portion of the population that doesn’t own any assets, or the countless people that could never get a loan. Lower rates are viewed as desirable in a downturn because they spur borrowing. But that belief — held by the vast majority of economists — leaves out the inconvenient truth of who it is that gets to borrow in the first place, especially in the aftermath of a crisis. The millions of people who lost their homes in foreclosures, for example, don’t. Nor do the millions more who lost their jobs.

Who does benefit? All the parties that have done disproportionately well in the past decade, like investment funds, large corporations and the wealthy. Debt levels have exploded among those groups, as have the valuations of the assets they tend to own: private companies, premium real estate and stocks. For this, I give Mr. Bernanke credit. History turned out almost as he predicted in his op-ed:

“Lower corporate bond rates will encourage investment. And higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

“Almost” because the only thing missing from his prediction were the words “for some people.” One of the great ironies of monetary debates over the past decade is the consensus that you should not just print money and hand it out to ordinary citizens. That, as Mr. Bernanke argued in a series of essays published by the Brookings Institution a few years ago, should only be considered as a last resort. It is better, he argues, to send money to the banks.

According to government data, almost a fifth of the United States population is either “underbanked” or entirely disconnected from the financial system — a percentage that grew after the 2008 crisis. These are the people who have suffered the most in the past decade. Their existence outside the banking system almost guaranteed that they would not benefit from policies like lower interest rates.

Quantitative easing worked, but not for those who needed it most.

There was one other thing that I got wrong about the government’s response to the financial crisis. I assumed that the effects, and side-effects, would be felt in the economic realm. But today, it’s the political, social and even technological consequences that stand out.

The growing wealth gap, which we now understand to be at least partially caused by such policies, has fueled many political and social movements. In this era of political polarization, the one belief that the far left and the far right increasingly share is that our economic system is somehow rigged. That perception has played a part in everything from the insurgent campaign of Bernie Sanders to Donald Trump’s presidential victory.

Most surprising of all, though, is that there is now a new kind of money — one borne out of the chaos of the financial crisis and the controversial policies enacted thereafter.

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Did Trump drink Trudeau’s milkshake?

 

China is closed for golden week, and while stocks weren’t trading, yuan slipped back to crucial support levels…

 

European markets were dominated by Italiian weakness…

 

As Italian banks collapsed…

 

Futures markets show the overnight exuberance at the trade deal.. and how it faded once Europe closed…

Nasdaq drifted into the red by the closed but the Russell 2000 Index of small-cap stocks is the worst-performing major index today (worst day in over 2 months), and that comes hot on the heels of the index’s worst monthly retreat since February.

Bloomberg notes that Small Caps may be feeling the sting of a steady stream of Fed hikes, which is increasing the cost of capital. Small companies may also be seeing some outflows as investors may now need less of a hedge against a trade war with the new USMCA deal.

GE soared after the ouster of the CEO… (but faded off early highs as dividend cut questions arose)

 

TSLA (stocks and bonds) soared after Musk settled with SEC…

 

FANG Stocks managed to cling to gains but basically did a huge roundtrip on the day…

 

But Tech is still dominating financials…

 

Treasury yields chopped around on the day but notably sold off as stocks sold into the last hour (long-end underperformed)…

 

Which pushed the yield curve up to on-week steeps…

 

The dollar index managed to hold on to gains, erasing Friday’s losses…

 

Of course today’s big movers were the Loonie (highest since May) and Peso (highest since August), but the latter was less impressed by the close…

 

Cryptos were mixed with Ripple and Ether higher, Bitcoin and Bitcoin Cash and Litecoin lower…

 

Commodities were dominated by a spike in crude oil as the rest of the space drifted modestly lower…

 

Brent topped $85… highest since Nov 2014…

 

WTI topped $75…highest since Nov 2014…

The irony of these oil spikes is that they occurred after headlines suggested Trump spoke with the Saudi King once again (presumably about keeping prices down).

Gold was unable to get back to $1200…

 

And finally, all of this exuberance happened as The IMF warned that global growth has peaked…

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Just a few months after Elon Musk stunned auto industry experts by erecting a tent at the company’s Fremont facility to handle Model 3 production, Tesla is at it again.

Flying in the face of any scientific and engineering knowledge, Elon Musk says his ad-hoc assembly line is state-of-the-art. In fact, it’s an embarrassment. Here it is, ladies and gentlemen, aerial footage of Tesla’s “alien dreadnaught”. https://t.co/jZuAD8vVmW

— skabooshka (@skabooshka) June 27, 2018

According to Bloomberg, which tracked down a new permit application filed last month with the city of Fremont, CAl, the electric-car maker has applied to build a 4,000-square-foot tent where vehicles will be wrapped in protective material for transit. The new structure will be constructed for the south lot of Tesla’s outbound logistics yard.

Just four months ago, in June, Tesla built a general assembly line for the Model 3 sedan underneath a massive outdoor tent near its Fremont vehicle factory’s paint shop. While the move was widely derided by auto-manufacturing experts, it played a key role in boosting production beginning late in the second quarter. It also appears to have resulted in a subpar final product which is exposed to the elements and has led to numerous complaints about the Model 3’s quality control and build status.

The wrapping tent will seek to address a recurring criticism lobbed at the company by the same short sellers who CEO Elon Musk has publicly expressed a desire to “burn”, and did so with his fraudulent attempt to boost TSLA stock price by announcing a non-existant going private deal.

In recent months, Tesla skeptics – this site included – have shown images of parking lots packed with Tesla vehicles that are uncovered and exposed to the elements as the carmaker has been going through what Musk recently said on Twitter was “delivery logistics hell.”

pic.twitter.com/pcnv5eXPIa

— PermanensUrsus (@grierhiggins) July 19, 2018

Unwrapped Teslas have also been photographed on trailers that are transporting them to stores.

Tesla is slated to report third-quarter production and delivery figures early this week. Optimism about the results and the outcome of Musk’s settlement with the Securities and Exchange Commission requires him to step down as chairman – but remain as CEO – sent the company shares soaring as much as 18 percent Monday, the biggest intraday jump since February 2014.

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Authored by Daniel Lacalle via DLacalle.com,

The government of Mauricio Macri lived a week of apparent tranquillity, but the resignation of Luis Caputo as President of the Central Bank and a new IMF deal triggered the end of calm.

It was essential for the government to understand that these periods of calm are what it needs to carry out structural reforms, not to think that “everything is discounted” and continue regardless.

The appointment of Guido Sandleris has not been the change that Argentines and markets expected. His profile is perceived as more than continuity, more a defender of the past monetary policies that have led the country to stagflation and a supporter of the price controls that have eroded consumer and investor confidence.

The alarm signals remain. The reserves of foreign currency of Argentina are below the level at which they were after the agreement with the International Monetary Fund.

No agreement is going to work if structural reforms are limited to some minor and insufficient adjustments.

The reforms that have been so far announced should be strengthened or the “placebo” effect of the IMF deal can turn against the government.

An important factor in understanding the apparent calm period seen in the past week was the effective disarmament of the Lebacs. It was important to end these short-term sources of monetary instability in the days when the exchange rate of the peso vs the US dollar was relatively quiet.

However, the disarmament of the Lebac cannot be solved with gradual measures. Substituting the increase of money supply in pesos of more than $ 231,000 million with more debt in other instruments and reducing the reserves of US dollars, can generate a serious funnel effect. Raising the Leliq rate to 65% is kicking the can forward that does not solve the Argentine monetary problem.

If the disarmament of the Lebac is solved selling dollars and extending the debt at very high rates and increasing duration, while the net financing needs of the state increase, it is just a kick in the can forward that would not work because it depends on external factors. With the US 10-year bond above 3.05% and the Argentine economy in contraction, going to extensions in duration is an aspirin that does not cure a more serious illness.

In fact, the concern among international analysts with the new appointment in the Central Bank is that the government may stop the timid structural reforms and maintain a monetary policy that has been a global failure. The promised reduction in political spending is simply insufficient, in a country that has such high public spending. Therefore, it is risky to disguise the funding hole because it may appear as a major problem in a few months.

In reality, such aggressive monetary expansion will always generate a higher negative effect in the medium term.

Obviously, the Central Bank does not make fiscal policy, but its perennial monetary expansion has been the major driver of the stagflation problem of the country.

The government cannot deny that the announcement of emergency measures is only a small fraction of a much more serious problem that was generated with the brutal monetary expansion of the years of Cristina Fernández de Kirchner.

This enormous expansion of the monetary base and a giant political spending bill that doubled in a few years is the reason why Argentina is going from stagflation to crisis and back to start.

The government must urgently think of true dollarization. Convertibility was not dollarization, it was a disguise of rising imbalances with an artificial peg made with an unrealistic exchange rate from the beginning. Convertibility only delayed the devaluation by hiding the monetary hole with an artificial and unreal change ratio.

Dollarization is not a currency board or a promise of fixing a dollar-peso change decided by political power and waiting for the world to believe it. Dollarization means abandoning a monetary policy that has destroyed the credibility of the peso among the Argentine citizens themselves. 

My good friends in Argentina are the best foreign currency traders in the world because since they are children, they learn to preserve their savings and the purchasing power of their salaries by selling pesos. That destruction of the credibility of the peso is not the fault of Macri or Dujovne, but it is undeniable.

Argentina does not need to have monetary policy flexibility, because history shows that the government and the central bank use it only to expropriate wealth and purchasing power via inflation and devaluation. Argentina does not have to worry about the “lower supply of pesos when confidence increases”. It is a problem that has never existed in seven decades. 

Argentina does not have to worry about the impulse that having its own currency can create. It has never existed.

Argentina does not have to worry about entering into debt and deficits if it dollarizes. It already has that problem.

The defenders of the peso do so by denying the reality of a currency that has no validity as a reserve of value and means of exchange for most domestic economic agents and even less for foreigners. The peso is a failed currency that disguises an unsustainable level of spending.

Dollarization saved Ecuador and El Salvador from a Venezuelan-style hyperinflation, and the euro saved Spain from those atrocious “competitive devaluations” that never improved competitiveness, neither structural unemployment nor the productive model. Dollarization may have a small impact on short-term debt, but it would avoid the evidence of defaults and stagflation.

Of course, dollarization highlights the need to implement reforms that some governments prefer to avoid. After all, for a government, it is easier to put the blame of inflation on any invented external enemy than to admit it is a direct consequence of its insane monetary policy.

If Macri does not recognize the evidence that any Argentine citizen knows, that confidence in the peso has all but disappeared due to political abuse, then the bleeding of the economy. The peso has not been attacked. Governments killed it by destroying its purchasing power for years.

A rich and educated nation like Argentina cannot continue to be impoverished through a destructive monetary policy and an extractive political sector.

Massive political spending, high inflation and insane printing of pesos are one and the same. Policies that have expropriated the wealth and savings of Argentine citizens. It must be stopped. The only solution is dollarization.

via RSS https://ift.tt/2xQ3HjG Tyler Durden

The White House has instructed the FBI to expand its investigation into allegations of sexual misconduct by Supreme Court nominee Brett Kavanaugh, according to the New York Times, citing two people briefed on the matter. The new directive comes on the heels of a contentious Monday afternoon Rose Garden press conference held to discuss the new trade deal with Canada and Mexico. 

“I think the FBI should interview anybody that they want, within reason,” Trump says, including Kavanaugh. “That’s up to them” #tictocnews pic.twitter.com/hfBGSS6tkT

— TicToc by Bloomberg (@tictoc) October 1, 2018

Earlier in the presser, Trump became visibly annoyed at questions from CNN’s Kaitlan Collins, telling her “Don’t do that” when she began with Kavanaugh questions. 

Trump to CNN’s Kaitlan Collins when she asked about Brett Kavanaugh: “Don’t do that” pic.twitter.com/D49Q4eZuum

— TPM Livewire (@TPMLiveWire) October 1, 2018

Trump came under fire over the weekend for limiting the scope of the investigation to the first two Kavanaugh accusers, while not pursuing a third – Julie Swetnick, who accused Kavanaugh of running a date-rape gang-bang scheme at 10 high school parties in which boys were “lined up” outside of rooms to rape inebriated women. 

Less than 24 hours after her attorney, Michael Avenatti, revealed Swetnick’s salacious claim, Politico reported that her ex-boyfriend, Richard Vinneccy – a registered Democrat, took out a restraining order against her, and says he has evidence that she’s lying. 

“Right after I broke up with her, she was threatening my family, threatening my wife and threatening to do harm to my baby at that time,” Vinneccy said in a telephone interview with POLITICO. “I know a lot about her.” –Politico

“I have a lot of facts, evidence, that what she’s saying is not true at all,” he said. “I would rather speak to my attorney first before saying more.”

Trump said during Monday’s press conference “It wouldn’t bother me at all” if Swetnick were interviewed by the FBI, adding “Now I don’t know all three of the accusers. Certainly I imagine they’re going to interview two. The third one I don’t know much about.”

The President ordered the one-week FBI investigation on Friday after lame-duck GOP Senator Jeff Flake of Arizona cast the Senate floor vote into disarray by refusing to vote “yes” on Kavanaugh unless the more than three-decade-old claims were investigated. 

The White House, however, limited the inquisition to just four individuals; Mark Judge, P.J. Smyth and Leland Keyser – high school friends of Kavanaugh’s that accuser Christine Blasey Ford says were at a party where she was groped – and who have all denied any knowledge of the incident. The fourth person to be questioned is Deborah Ramirez, another accuser who says Kavanaugh exposed himself to her at a Yale party at which she admits she was extremely inebriated. 

In interviews, several former senior F.B.I. officials said that they could think of no previous instance when the White House restricted the bureau’s ability to interview potential witnesses during a background check. Chuck Rosenberg, who served as chief of staff under James B. Comey, the former F.B.I. director, said background investigations were frequently reopened, but that the bureau decides how to pursue new allegations. –NYT

“The White House normally tells the F.B.I. what issue to examine, but would not tell the F.B.I. how to examine it, or with whom they should speak,” said Rosenberg. “It’s highly unusual — in fact, as far I know, uniquely so — for the F.B.I. to be directed to speak only to a limited number of designated people.” 

In his Monday comments, Trump said that he would reconsider Kavanaugh’s nomination if the FBI turned up any evidence that warranted it. 

“Certainly if they find something I’m going to take that into consideration,” said Trump, adding “Absolutely. I have a very open mind. The person that takes that position is going to be there a long time.“

In a five-page assessment, Rachel Mitchell – the veteran sex crimes prosecutor used by the Senate Judiciary Committee to question Kavanaugh and Ford, she notes: that a “‘he said, she said’ case is incredibly difficult to prove. But this case is even weaker than that.”

Michell writes: “I do not think that a reasonable prosecutor would bring this case based on the evidence before the Committee. Nor do I believe that this evidence is sufficient to satisfy the preponderance-of-the-evidence standard.” 

We assume the same can be said for Kavanaugh’s other accusers, however we’ll just have to wait to see what the FBI concludes – along with what new claims will be brought in the interim, as we seem to get a new one every couple of days. 

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Senator Jeff Flake (R-AZ) admitted Sunday night on 60 Minutes that he wouldn’t have thrown the Kavanaugh confirmation into disarray if he was running for office again. 

The retiring Senator demanded an FBI investigation into 11th hour claims by several women that the Supreme Court nominee sexually assaulted them, despite the fact that the accusers have foggy memories and dubious, uncorroborated accounts. 

When asked if he would have asked for the new probe if he were up for reelection in the November midterms, Flake responded: “Not a chance,” adding “There’s no value in reaching across the aisle… there’s no currency for that anymore. There’s no incentive.” 

After failing to convince the Judiciary Committee to abstain from voting pending an FBI investigation, he insisted that he would vote “no” on the full Senate floor – and was joined by Alaska GOP Senator Lisa Murkowski – one day after she was seen being badgered in a hallways by Sen. Dianne Feinstein (D-CA). 

Flake and Murkowski’s gambit meant that the Senate wouldn’t have the majority required to advance Kavanaugh. 

In the meantime, the left continues to pound on Kavanaugh’s record, while the FBI probe has bought time for new accusers to emerge. As we reported Sunday, with Washington in a frenzy over the FBI’s probe of Judge Kavanaugh, which according to Judiciary Committee Chairman Chuck Grassley would be no more than a week long and would be limited solely to “current credible allegations”, a new and potentially explosive allegation has emerged.

Late on Sunday, Charles Ludington, a former varsity basketball player and friend of Kavanaugh’s at Yale, told the Washington Post that he plans to deliver a statement to the FBI field office in Raleigh on Monday detailing violent drunken behavior by Kavanaugh in college.

Ludington, an associate professor at North Carolina State University, provided a copy of the statement to The Post.

In it, Ludington says in one instance, Kavanaugh initiated a fight that led to the arrest of a mutual friend: “When Brett got drunk, he was often belligerent and aggressive. On one of the last occasions I purposely socialized with Brett, I witnessed him respond to a semi-hostile remark, not by defusing the situation, but by throwing his beer in the man’s face and starting a fight that ended with one of our mutual friends in jail.”

What prompted this latest last minute memory “recollection” by a peer of Kavanaugh’s? According to the report, Ludington was deeply troubled by Kavanaugh appearing to blatantly mischaracterize his drinking in Senate testimony.

“I do not believe that the heavy drinking or even loutish behavior of an 18 or even 21 year old should condemn a person for the rest of his life,” Ludington wrote. “However … if he lied about his past actions on national television, and more especially while speaking under oath in front of the United States Senate, I believe those lies should have consequences.”

The NYT also got an interview out of Ludington, and reported that Ludington said he frequently saw Judge Kavanaugh “staggering from alcohol consumption” during their student years. He said he planned to tell his story to the F.B.I. at its office in Raleigh, N.C., on Monday.

Kavanaugh told outside counsel Rachel Mitchell during the hearing that he has never “passed out” from drinking. “I’ve gone to sleep,” he said. “But I’ve never blacked out, that’s the allegation. And that’s, that’s wrong.“

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Authored by Lance Roberts via RealInvestmentAdvice.com,

Last week, James Rickards posted an interesting article discussing the risk to the financial markets from the rise in passive indexing. To wit:

“Free riding is one of the oldest problems in economics and in society in general. Simply put, free riding describes a situation where one party takes the benefits of an economic condition without contributing anything to sustain that condition.

This is the problem of ‘active’ versus ‘passive’ investors.

The active investor contributes to markets while trying to make money in them.

A passive investor is a parasite. The passive investor simply buys an index fund, sits back and enjoys the show. Since markets mostly go up, the passive investor mostly makes money but contributes nothing to price discovery.”

Evelyn Cheng highlighted the rise of passive investing as well:

“Quantitative investing based on computer formulas and trading by machines directly are leaving the traditional stock picker in the dust and now dominating the equity markets, according to a new report from JPMorgan.

‘While fundamental narratives explaining the price action abound, the majority of equity investors today don’t buy or sell stocks based on stock specific fundamentals,‘ Marko Kolanovic, global head of quantitative and derivatives research at JPMorgan, said in a Tuesday note to clients.

Kolanovic estimates ‘fundamental discretionary traders’ account for only about 10 percent of trading volume in stocks. Passive and quantitative investing accounts for about 60 percent, more than double the share a decade ago, he said.

‘Derivatives, quant fund flows, central bank policy and political developments have contributed to low market volatility’, Kolanovic said. Moreover, he said, ‘big data strategies are increasingly challenging traditional fundamental investing and will be a catalyst for changes in the years to come.’”

The rise in passive investing has been a byproduct of a decade-long infusion of liquidity and loose monetary policy which fostered a rise in asset prices to a valuation extreme only seen once previously in history. The following chart shows that this is exactly what is happening. Since 2009, over $2.5 trillion of equity investment has been added to passive-strategy funds, while $2.0 trillion has been withdrawn from active-strategy funds.

As James aptly notes:

“This chart reveals the most dangerous trend in investing today. Since the last financial crisis, $2.5 trillion has been added to “passive” equity strategies and $2.0 trillion has been withdrawn from “active” investment strategies. This means more investors are free riding on the research of fewer investors. When sentiment turns, the passive crowd will find there are few buyers left in the market.

When the market goes down, passive fund managers will be forced to sell stocks in order to track the index. This selling will force the market down further and force more selling by the passive managers. This dynamic will feed on itself and accelerate the market crash.”

He is correct, and makes the same point that Frank Holmes recently penned in Forbes:

“Nevertheless, the seismic shift into indexing has come with some unexpected consequences, including price distortion. New research shows that it has inflated share prices for a number of popular stocks. A lot of trading now is based not on fundamentals but on low fees. These ramifications have only intensified as active managers have increasingly been pushed to the side.”

“This isn’t just the second largest bubble of the past four decades. E-commerce is also vastly overrepresented in equity indices, meaning extraordinary amounts of money are flowing into a very small number of stocks relative to the broader market. Apple alone is featured in almost 210 indices, according to Vincent Deluard, macro-strategist at INTL FCStone.

If there’s a rush to the exit, in other words, the selloff would cut through a significant swath of index investors unawares.”

As Frank notes, the problem with even 35% of the market being “passive” is the liquidity issues surrounding the market as a whole. With more ETF’s than individual stocks, and the number of outstanding shares traded being reduced by share buybacks, the risk of a sharp and disorderly reversal remains due to compressed credit and liquidity risk premia. As a result, market participants need to be mindful of the risks of diminished market liquidity, asset price discontinuities, and contagion across asset markets.

The risk of a disorderly unwinding due to a lack of liquidity was highlighted by the head of the BOE, Mark Carney.

“Market adjustments to date have occurred without significant stress. However, the risk of a sharp and disorderly reversal remains given the compressed credit and liquidity risk premia. As a result, market participants need to be mindful of the risks of diminished market liquidity, asset price discontinuities and contagion across asset markets.’”

In other words, the problem with passive investing is simply that it works, until it doesn’t.

You Only Think You Are Passive

As Howard Marks, mused in his ‘Liquidity’ note:

“ETF’s have become popular because they’re generally believed to be ‘better than mutual funds,’ in that they’re traded all day. Thus an ETF investor can get in or out anytime during trading hours. But do the investors in ETFs wonder about the source of their liquidity?’”

What Howard is referring to is the “Greater Fool Theory,” which surmises there is always a “greater fool” than you in the market to sell to. While the answer is “yes,” as there is always a buyer for every seller, the question is always “at what price?” 

More importantly, individual investors are NOT passive even though they are investing in “passive” vehicles.

Today, more than ever, advisors are actively migrating portfolio management to the use of ETF’s for either some, if not all, of the asset allocation equation. However, they are NOT doing it “passively.”

The rise of index funds has turned everyone into “asset class pickers” instead of stock pickers. However, just because individuals are choosing to “buy baskets” of stocks, rather than individual securities, it is not a “passive” choice, but rather “active management” in a different form.  

While the idea of passive indexing works while all prices are rising, the reverse is also true. The problem is that once prices begin to fall – “passive indexers” will quickly become “active sellers.” With the flood of money into “passive index” and “yield funds,” the tables are once again set for a dramatic, and damaging, ending.

It is only near peaks in extended bull markets that logic is dismissed for the seemingly easiest trend to make money. Today is no different as the chart below shows the odds are stacked against substantial market gains from current levels.

The reason that mean-reverting events have occurred throughout history, is that despite the best of intentions, individuals just simply refuse to act “rationally” by holding their investments as they watch losses mount.

This behavioral bias of investors is one of the most serious risks arising from ETFs as the concentration of too much capital in too few places. But this concentration risk is not the first time this has occurred:

• In the early 70’s it was the “Nifty Fifty” stocks,

• Then Mexican and Argentine bonds a few years after that

• “Portfolio Insurance” was the “thing” in the mid -80’s

• Dot.com anything was a great investment in 1999

• Real estate has been a boom/bust cycle roughly every other decade, but 2006 was a doozy

• Today, it’s ETF’s 

Risk concentration always seems rational at the beginning, and the initial successes of the trends it creates can be self-reinforcing.

Until it goes in the other direction.

The sell-off in February of this year was not particularly unusual, however, it was the uniformity of the price moves which revealed the fallacy “passive investing” as investors headed for the door all at the same time.

It should serve as a warning.

When “robot trading algorithms”  begin to reverse, it will not be a slow and methodical process but rather a stampede with little regard to price, valuation or fundamental measures as the exit will become very narrow.

Fortunately, while the price decline was indeed sharp, and a “rude awakening” for investors, it was just a correction within the ongoing “bullish trend.”

For now.

But nonetheless, the media has been quick to repeatedly point out the decline was the worst since 2008.

That certainly sounds bad.

The question is “which” 10% decline was it?

Regardless, it was only a glimpse at what will eventually be the “real” decline when leverage is eventually clipped. I warned of this previously:

“At some point, that reversion process will take hold. It is then investor ‘psychology’ will collide with ‘margin debt’ and ETF liquidity. It will be the equivalent of striking a match, lighting a stick of dynamite and throwing it into a tanker full of gasoline.

When the ‘herding’ into ETF’s begins to reverse, it will not be a slow and methodical process but rather a stampede with little regard to price, valuation or fundamental measures.

Importantly, as prices decline it will trigger margin calls which will induce more indiscriminate selling. The forced redemption cycle will cause catastrophic spreads between the current bid and ask pricing for ETF’s. As investors are forced to dump positions to meet margin calls, the lack of buyers will form a vacuum causing rapid price declines which leave investors helpless on the sidelines watching years of capital appreciation vanish in moments. Don’t believe me? It happened in 2008 as the ‘Lehman Moment’ left investors helpless watching the crash.

Over a 3-week span, investors lost 29% of their capital and 44% over the entire 3-month period. This is what happens during a margin liquidation event. It is fast, furious and without remorse.”

Make no mistake we are sitting on a “full tank of gas.” 

While “passive indexing” sounds like a winning approach to “pace” the markets during the late stages of an advance, it is worth remembering it will also “pace” just as well during the subsequent decline.

So, what’s your plan for when the real correction ultimately begins?

“If everybody indexed, the only word you could use is chaos, catastrophe. The markets would fail.” – John C. Bogle.

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