Category: zerohedge

White House Denies It Is “Micromanaging” Kavanaugh Probe

In response to NBC News and Wall Street Journal stories claiming that the White House Counsel’s office, led by Don McGahn, has been “micromanaging” the FBI’s “limited” background check probe into Trump SCOTUS pick Brett Kavanaugh, two White House spokeswomen disputed the reports, claiming that the Senate and the FBI – not the White House – have full discretion over the probe, and that the FBI will investigate whatever “credible” allegations arise.

As Sarah Huckabee Sanders and Kellyanne Conway took to the Sunday Shows, Trump denied the NBC and WSJ reports, saying on Twitter that he wanted the FBI to interview anyone they deemed appropriate.

As a reminder, on Saturday lawyer Michael Avenatti complained that the FBI had not contacted his client, Julie Swetnick, over her allegations that federal judge Brett Kavanaugh participated in the “gang rape” of girls at drunken high school parties, and shortly thereafter reports surfaced that the White House had asked FBI investigators to focus on only the first two named women who came forward with allegations against Kavanaugh.

According to the New York Times, the FBI is also planning to question Kavanaugh’s high school friend Mark Judge, as well as Leland Keyser and P.J. Smyth, who Ford alleged also attended the party where Kavanaugh allegedly pinned her down, tried to remove her clothes and covered her mouth when she tried to scream for help, per Reuters.

The White House has reportedly asked the FBI to share its findings after it interviews Ramirez and Ford and Kavanaugh’s high school associates. After that, the president and his advisers will decide whether the accusations should be investigated further.

During an interview with Fox News Sunday, Sanders said the Senate is dictating the terms of the probe:

“The White House is not micromanaging this process,” White House press secretary Sarah Sanders said in an interview with “Fox News Sunday.”

“The Senate is dictating the terms,” she said. “The FBI, this is what they do. And we’re out of the way and letting them do exactly that.”

Meanwhile, Conway said on CNN’s State of the Union that the investigation is “not meant to be a fishing expedition” but that investigators should be looking at anything “credible”.

“The White House is not getting involved in the FBI investigation in that way,” she said. “They should be looking at anything they think is credible within this limited scope.”

Watch clips from the interview with Sarah Huckabee Sanders…

…and the full interview with Kellyanne Conway on SOTU, during which she also shocks Jake Tapper by revealing that she was a victim of sexual assault:

Meanwhile, Sen. Lindsey Graham on on ABC’s “This Week” that the three Republican senators who pushed for the probe specifically asked that it be “limited in scope” and focus on the “credible allegations” from those who haven’t testified (which suggests that Ford will largely be left out of it).

To be sure, investigators in the background check probe aren’t obligated to share their findings with the public, but it’s possible that Trump or members of the Senate Judiciary Committee could openly share them (or more likely leak them) to the press. Despite the White House’s denials, we imagine the Senate, wary of perceptions that the probe is a sham so close to the midterms, will come forward with its own denial, saying that the FBI is free to conduct its investigation as it sees fit.

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Fasanara Capital: “Nobody Cares About Market Valuations These Days”

Submitted by Francesco Filia of Fasanara Capital

How Expensive Is The Equity Market In The US

The biggest equity bubble out there is in the US: the Nasdaq and the S&P. This is no news, few disagree in market chatters. Nobody is positioned for it, though. Looking at valuation metrics, there is not the shadow of a doubt: Shiller P/E, Hussman P/E, P/Sales, P/Book, EV/EBITDA, Cash Flow Yield, Forward P/E.

At Fasanara, we add to the list the ‘Peak PEG Ratio’ (read here a full working definition), a measure of how expensive a stock is relative to its ability to generate earnings. In single stocks, the PEG ratio is commonly used, as is rationale for investors to have the will to pay higher multiples for stocks capable of generating high growth. Yet, for indexes, this is rarely done. If and when you do, this is the incontrovertible result:

We consider cyclically-adjusted earnings, like Prof Shiller institutionalized (and won a Nobel doing). To counter one of its most frequent critics, to have included non-normal conditions during the Lehman crisis, we just consider the two top quarters in earnings in the last 40. In spite of that, the resulting pic is still a NASA Space Shuttle that left the orbit.

The cartel of ZIRP, 5trn US QE, 5trn US Buybacks, and now late-cycle 1.4trn tax cuts sugar-rush did not go unnoticed in markets. The S&P qualifies as the most expensive in history and pre-history. When compared to potential economic growth, multiples on the S&P500 exceed even those seen during the Tech Bubble in 2000. When measured against potential growth, even against its peak earnings in 10 years, the S&P has never before been this expensive before. It is approx. 60% above its historical average fair value.

How Expensive Is The Bond Market In Europe

The biggest bond bubble out there is in Europe, where real and nominal rates are still negative in spite of ebullient global equities. Bond yields are historically aligned with growth and inflation rates, according to basic valuation models. Why not, then, draw their historical simple relationship to them, in ratio format. This is what the ‘Real Rate to Growth Ratio’ does (read here a full definition), no more no less. And this is the self-explanatory Chart that results:

When compared to trend growth, government bonds in core Europe have rarely been as expensive as they are today. They are 250/300 basis point away from equilibrium.

How Much More Expensive Can They Get

Not much further, perhaps. This is what we find out in our studies on market structure and what we call the Tipping Points Analysis (‘TPA’). Our analysis is available in this e-Book, and is further discussed in slides 16 and 17 in this presentation.

Nobody Cares

Let’s be clear: nobody cares about valuations these days in markets. The lack of care is visible across the spectrum of investable assets, public and private: Equities, Bonds, High Yield, Emerging Markets, Venture Capital, Private Equity, Real Estate. It seems that we live through the apotheosis of what Nassim Taleb calls the ‘Bob Rubin trade’: my profit, your losses. A perverse incentive scheme is heavily skewed for money managers to not care, and moral hazard to disseminate across. Regulators, more strangely but not uncommonly to history, turn a blind eye, as ‘you cannot know a bubble, except in retrospect’, they lament. There is crowding in Academics too, Rob Arnott would probably say. Or worse, the ‘Portfolio Balance Channel Theory’ of Ben Bernanke actively goal-sought this out, as output to the experimental model. Call it the key to kick-off ‘animal spirit’ or ‘trickle-down economics’, elegantly.

As sober investors though, we should care that nobody does. Tail Risk badly needs complacency as a basic ingredient to assert itself, and compound Systemic Risks.

In Complexity Science parlance, complacency is the lack of the negative feedback loop keeping systems at bay, in stable state. Complacency is instead propelling them further out, in thin air stratosphere, where far-from-equilibrium dynamics apply.

The Critical Transformation Hypothesis

Our thoughts are expanded upon in this video slideshow. In a big long nutshell, we believe that Systemic Risk in financial markets are best analyzed through the prism of Complexity Science, using the analytical tools available to non-linear socio-ecological systems, where a shift in positive loops comes in anticipation of a dramatic transformation.

Chaos theory and Catastrophe Theory can then help shed light on the current set-up in markets. Years of monumental Quantitative Easing / Negative Interest Rates monetary policy affected the behavioral patterns of investors and changed the structure itself of the market, in what accounts as self-amplifying positive feedbacks. The structure of the market moved into a low-diversity trap, where concentration risks of various nature intersect and compound: approx. 90% of daily equity flows in the US is today passive or quasi-passive, approx. 90% of investment strategies is doing the same thing in being either trend-linked or volatility-linked, a massive concentration in managers sees the first 3 asset managers globally controlling a mind-blowing USD 15 trillions (at more than 20 times the entire market cap of several G20 countries), approx. 80% of index performance in 2018 is due to 3 stocks only, a handful of tech stocks – so-called ‘market darlings’ – are disseminated across the vast majority of passive and active investment instruments. 

The morphing structure of the market, under the unequivocal push of QE/ZIRP new-age ideologism, is the driver of a simultaneous overvaluation for Bonds and Equities (Twin Bubbles) which has no match in modern financial history, so measured against most valuation metrics ever deemed reputable; a condition which further compounds potential systemic damages.

The market has lost its key function of price-discovery, its ability to learn and evolve, its inherent buffers and redundancy mechanisms: in a word, the market lost its ‘resilience’. It is, therefore, prone to the dynamics of criticality, as described by Complexity Science in copious details.

This is the under-explored, unintended consequence of extreme experimental monetary policymaking. A far-from-equilibrium status for markets is reached, a so-called unstable equilibrium, where System Resilience weakens and Market Fragility approaches Critical Tipping Points.

A small disturbance is then able to provoke a large adjustment, pushing into another basin of attraction altogether, where a whole new equilibrium is found. In market parlance, more prosaically, a market crash is incubating – and has been so for a while.

While it is impossible to determine the precise threshold for such critical transitioning within a stochastic world, it is very possible to say that we are already in such phase transition zone, where markets got inherently fragile, poised at criticality for small disturbances, and where it is increasingly probable to see severe regime shifts.

Fragile markets now sit on the edge of chaos. This is the magic zone, theorized by complexity scientists, where rare events become typical.

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WSJ Can’t Corroborate Kavanaugh Accuser’s “Gang Bang” Account After “Dozens” Contacted

After the FBI was instructed by the White House to interview two of the women who claim Judge Brett Kavanaugh sexually assaulted them – ignoring a third accuser represented by lawyer Michael Avenatti, The Wall Street Journal attempted to independently corroborate the 3rd accuser’s story. 

Julie Swetnick – whose checkered past has called her character into question, alleges that Kavanaugh and a friend, Mark Judge, ran a date-rape “gang bang” operation at 10 high school parties she attended as an adult (yet never reported to the authorities). 

The allegations were posted by Avenatti over Twitter, which assert that Kavanaugh and Judge made efforts to cause girls “to become inebriated and disoriented so they could then be “gang raped” in a side room or bedroom by a “train” of numerous boys.” 

To try and corroborate the story, the Wall Street Journal contacted “dozens of former classmates and colleagues,” yet couldn’t find anyone who knew about the rape parties. 

The Wall Street Journal has attempted to corroborate Ms. Swetnick’s account, contacting dozens of former classmates and colleagues, but couldn’t reach anyone with knowledge of her allegations. No friends have come forward to publicly support her claims. –WSJ

Soon after Swetnick’s story went public, her character immediately fell under scrutiny – after Politico reports that Swetnick’s 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.” Avenatti called the claims “outrageous” and hilariously accused the press of “digging into the past” of a woman levying a claim against Kavanaugh from over 35 years ago. 

Swetnick will appear Sunday night in a TV interview with Showtime’s The Circus – the first woman to levy claims against the Supreme Court nominee to do so. NBC’s Morning Joe teased a clip of the interview Thursday, in which Swetnick calls for an investigation into the allegations against Kavanaugh. 

On Saturday, Mr. Avenatti, Ms. Swetnick’s lawyer, said on Twitter that he and his client hadn’t yet heard from the FBI, despite their repeated requests for an interview. Ms. Swetnick alleged earlier this week that Judge Kavanaugh attended a party in the early 1980s where she was gang-raped and that he tried to get women drunk at several gatherings so they could be targeted for sexual assault. –WSJ

“It is critically important that the public be informed of any hidden effort to limit the scope of the FBI investigation,” said Avenatti. “The scope should be unlimited and the FBI should be tasked with determining whether an allegation is credible—as they do every day in this country.”

Kavanaugh’s first two accusers, Christine Blasey Ford and Deborah Ramirez, have accused Kavanugh of groping and exposing himself respectively. 

On Friday, Republican Senator Jeff Flake attempted to stall a Judiciary Committee vote on Kavanaugh pending an FBI investigation, only to have Chairman Chuck Grassley (R-IA) cut him off and call a snap vote, advancing the nomination to the full Senate floor. Flake then vowed to vote no on the full floor decision, and was joined by GOP Senator Lisa Murkowski of Alaska, just one day after Dianne Feinstein cornered her in a hallway for an apparent “talking to.” 

While walking into Senate Majority Leader Mitch McConnell’s office, Sen. Lisa Murkowski of Alaska, a key vote, said “yes,” when asked if she supports Sen. Jeff Flake’s proposal for a delay.

CNN asked: And do you think it should be limited to Ford’s accusations or should it include an investigation into other allegations?

Murkowski responded: “I support the FBI having an opportunity to bring some closure to this.” –CNN

An official with the Trump administration said the reopening of Kavanaugh’s FBI background check was being handled “as any update to a background investigation would be handled if new, derogatory information is introduced.” 

“The FBI field agents will investigate this as they typically do under the constraints of there being new, derogatory information,” the official said. “They’re not going to go on a fishing expedition.”

Trump told reporders on Saturday that the White House gave the FBI “free reign” in the Kavanaugh inquiry to “do whatever they had to do, whatever it is that they do.” 

“Having them do a thorough investigation, I actually think it will be a blessing in disguise,” Trump said. “It will be a good thing.”

“The White House is not micromanaging this process,” White House press secretary Sarah Sanders said in an interview with Fox News Sunday. 

That said, the Journal notes that just because the FBI wasn’t granted the authority to interview Swetnick doesn’t mean they can’t ask other witnesses about her allegations. 

Former FBI officials say they are confident an investgation can be conducted by next Friday, according to the Journal, which adds that background checks for presidential appointees or judicial nominees often need to be done within a matter of weeks. That said, “background investigations are different from criminal investigations in that they are done at the request of a “client”—in this case the White House—and investigators are unable to deploy search warrants or grand jury subpoenas. Potential witnesses are allowed to decline requests to be interviewed,” the Journal adds. 

The limitations on what the FBI will be able to investigate differed from what former officials said would be the best approach, given the level of public scrutiny and likelihood that the bureau could be accused of not chasing down every lead. –WSJ

“If I was in charge of this, I would tell [FBI] Director [Chris] Wray, we need to call up every single person on this,” Mr. Danik said. “You don’t want anyone out there who can say in a week or two, ‘They never talked to us, they never heard from us.’” 

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Higher Mortgage Rates Are Starting To Bite The Housing Market

Authored by Bryce Coward via Knowledge Leaders Capital blog,

Sooner or later, higher mortgage rates (which are keyed off of the 10-year treasury yield) were always bound to start slowing the housing market. It was more a matter of what level of rates would be necessary to take the first bites out of housing. We think the answer is playing out right in front of us. With mortgage rates recently breaching the highest level since 2011, housing data has been coming in on the weak side all year long, and may be set to get even worse in the coming months. Let’s explain…

In the first chart below we show pending home sales (blue line, left axis) overlaid on the 30 year fixed mortgage rate (red line, right axis, inverted, leading by 2 quarters). As we can see, pending home sales are closely inversely related to the level of mortgage rates, and rates lead pending home sales by about two quarters. The breakout in mortgage rates we’ve seen over the last few months portend more weakness in pending sales.

The next chart compares mortgage applications (blue line, left axis) to the 30 year fixed mortgage rate (red line, right axis, inverted) and shows that these two series are also closely inversely related. Higher rates are slowing demand for financing and demand for overall housing. Not exactly a heroic observation, but an important one nonetheless.

The home builders seem to have caught on, as we would expect. In the next chart we show the 1 year change in private residential construction including improvements  (blue line, left axis) compared to the 30 year fixed mortgage rate (red line, right axis, inverted, leading by 2 quarters). As rates have moved higher this year, new home construction growth has slowed to just 2.5% YoY. If rates are any indication, new home construction growth may turn negative in the months just ahead.

To be fair, everything housing related isn’t that bad. Inventory levels, even though they have moved up a lot over the last several years, are still at reasonable levels and well shy of peak bubble levels of 2005-2007. Even so inventory levels may no longer be supportive of housing action.

And these moderate levels of inventory have helped keep prices stable, for now.

But, housing affordability is taking a nosedive. Here we show the National Association of Realtors housing affordability index (blue line, left axis) against mortgage rates (red line, right axis, inverted, leading by 1 quarter). Up until a few months ago housing affordability was well above trend. But now we’ve moved back to into the range which prevailed from 1991-2004.

In sum, the effects of higher long-term interest rates are starting to be squarely felt in the housing space. Pending sales, mortgage applications and new construction have all been weak and look set to get even weaker in the quarters to come as the lagged effects of higher mortgage rates set in. Home prices have yet to respond since inventory levels are still moderate, but inventories aren’t the support they were just two years ago. Meanwhile, affordability levels are no longer very supportive. All this suggests that the housing sector, which has been a bright spot of this recovery over the last five or six years, may not be the same source of wealth accumulation and growth over the next few years, or as long as higher mortgage rates continue to take the juice out of this sector.

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US Hints At Naval Blockade Of Russian Energy Exports Which Moscow Warns Would Be “An Act Of War”

In a interview about fracking and the implications of making the United States less dependent on foreign sources of energy, Interior Secretary Ryan Zinke told the Washington Examiner that the US Navy has the ability to blockade Russia from controlling energy supplies in the Middle East. 

“The United States has that ability, with our Navy, to make sure the sea lanes are open, and, if necessary, to blockade… to make sure that their energy does not go to market,” Zinke said on Friday at a Consumer Energy Alliance event in Pittsburg. 

The comments came as Russia, Germany and other European partners move forward on the Nord Stream II pipeline — something President Trump has vehemently opposed because of the leverage it gives Russia over Europe, and something which US officials have discussed sanctions over if Russia decides to play dirty with the pipeline. 

Interior Secretary Ryan Zinke speaking at an industry event on Friday. Image source: State Impact Pennsylvania

Zinke continued, “Russia is a one trick pony,” and explained Russia’s ability to sell energy is paramount to its economic survival: “I believe the reason they are in the Middle East is they want to broker energy just like they do in eastern Europe, the southern belly of Europe,” he said. 

While Russia has been engaged in military action in Syria since 2015 at the request of the Syrian government, the West has long accused Moscow of seeking a permanent presence in the Middle East to ensure oil and gas access. 

In the process, Moscow and Tehran have grown closer as the two come under aggressive US sanctions and gained international pariah status. Secretary of the Interior Zinke explained of the Iran situation: “National security-wise, how are you going to deal with Iran?” Zinke asked. “Well, there are two ways.”

“There is the military option, which I would rather not. And there is the economic option,” he said. “The economic option on Iran and Russia is, more or less, leveraging and replacing fuels.”

He added, “We can do that because… the United States is the largest producer of oil and gas.”

Understandably, Zinke’s statements provoked an angry response from Moscow, which equated a potential maritime blockade to an “act of war,” while calling the internal secretary’s assumptions “nonsense.”

“A US blockade of Russia would be equal to a declaration of war under international law,” Russian Senator Aleksey Pushkov said, commenting on Zinke’s words. Russia does not currently export any energy to the Middle East, which itself is a major oil exporting region. The whole idea is an “absolute nonsense,” the Senator argued.

* * *

Meanwhile such US Naval jostling to keep sea lanes open in contested regions is already happening in the South China Sea, where China’s series of man made islands are being used of Beijing to expand and claim territory. 

According to Reuters the latest incident occurred early Sunday:

A U.S. Navy destroyer sailed near islands claimed by China in the South China Sea on Sunday, a U.S. official told Reuters, potentially angering Beijing at a time of tense relations between the two countries.

And just last week Beijing denounced recent US-B52 bomber flyovers of the South China Sea and East China Sea, calling the military maneuvers “provocative”.

The UN estimates that one-third of global shipping passes through the expansive area claimed by China — and crucially there’s thought to exist significant untapped oil and natural gas reserves.

There’s been a series of incidents over the summer involving US aircraft and ships, as well as that of regional powers like the Philippines, which have involved Chinese military warning off the foreign vessels and aircraft. 

Also last week China denied a US warship’s planned port visit to Hong Kong in what was a stunning symbolic rebuke in response to new tariffs enacted by the Trump White House.

With Russia now maintaining its own naval build-up in the Mediterranean after repeat US threats to attack Syria over the past month, we could soon see more confrontation over shipping lanes in the region and the West seeks to disrupt Moscow’s access to Middle East energy markets. 

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“Women For Kavanaugh” March On Washington In Support Of Supreme Court Nominee

As liberal groups plan mass “pussy hat” protests in the event of Judge Brett Kavanaugh’s confirmation to the US Supreme Court, a group of women has come out in support of the nominee. 

“Women for Kavanaugh” appeared on Capitol Hill during last week’s Senate testimony by Kavanaugh and a woman accusing him of sexual assault at a high school party 30 years ago – one of several women to crop up right before his confirmation, sending the proceedings into disarray. 

To Hannah King, a college senior from Bristol, Tennessee, Christine Blasey Ford’s allegations of a drunken attack by Kavanaugh at a 1982 party when both were in high school were jarring and scary. But while King expressed empathy for Ford, she also said she’s concerned about the timing of Ford’s allegations, which surfaced publicly only after Kavanaugh — already a federal judge — was nominated to the Supreme Court. –AP

“It was too timely and strategic,” said King, 21. “Anything like that makes you question how true it is.” 

“someone’s promotion isn’t something that should prompt someone to come forward.” 

The group has even made an advertisement conveying their cause: 

43-year-old Tammy Ring told the Daily Beast that she had been both sexually harassed and assaulted, and that she supports Kavanaugh despite believing that Kavanaugh accuser Christine Blasey Ford believes her account. 

“I thought she seemed credible,” said Tammy Ring, a 43-year-old Kavanaugh supporter from Cocoa, Florida, who told The Daily Beast she had been both sexually harassed and assaulted. “I don’t know that I believe that Judge Kavanaugh assaulted her, but I think that she believes that he did. She didn’t come across as somebody that was making this up or coming forward with a lie.” –Daily Beast

Other women backing Kavanaugh have noted that old memories over a lifetime of experiences can become muddied, and some people must question the power of their own recollections. 

“I remember things that happened to me as a child that I talked to my sisters about, and they remembered it totally different than I did,” said Maryland resident Debby Leach, 65, who says she was sexually abused as a child. “How I remember it versus how they remember it are two entirely different things. So I think that after a number of years go by, you believe a certain thing. You convince yourself of a certain thing.”

Others have suggested Ford’s recollection could be a case of mistaken identity – a theory floated by GOP attorney and former Scalia clerk, Ed Whelan, who posted a lengthy theory over Twitter that Kavanaugh’s high school doppelganger may in fact be responsible for Ford’s memory. Whelan has since deleted the thread. 

“It feels mistaken identity to me,” said Sonia Souza, a San Diego resident who said she experienced in her past something “slightly less serious” than the attack Ford described. “I haven’t seen these pictures, but I hear there are a couple people who look like [Kavanaugh]… It’s definitely open to misidentification.” 

Souza was also struck by a specific detail in Ford’s account: that six or eight weeks later, she had spotted the man who allegedly helped Kavanaugh attack her—and she waved at him.

“I was like, “What? Why would you say hi to him?’” Souza said, citing her own experience as a survivor of sexual misconduct. –Daily Beast

“There’s definitely a tactic here to just delay because they don’t like [Kavanaugh], or because of whatever they think is going to vote on Roe v Wade,” Souza said, referring to the landmark Supreme Court decision legalizing abortion nationwide. “There’s some left side that is definitely pushing this.“

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How Do We Change Our Lives In A System That’s Broken?

Authored by Charles Hugh Smith via OfTwoMinds blog,

Rather than fight a system designed to thwart us, we need a model for our own lives that bypasses the perverse tides and obsoletes the impediments in our path.

Everyone wants to change their lives for the better (or preserve what’s positive), and this is relatively straightforward in a healthy system with positive incentives and a transparent, productive set of rules and feedbacks.

But what if the system is broken? How do we change our lives for the better in a dysfunctional system of unearned privilege and perverse incentives? Needless to say, it’s difficult, and this is why we see a rise in inward-directed solutions.

If we can’t change the external world we inhabit, then the “solution” is to nurture an inner tranquility. It’s no wonder that Taoism–perhaps the ultimate inner-directed philosophy–arose during the Warring States era in China, when social unrest and conflict were endemic.

But what about real-world changes such as improving our health, fitness, resilience, work/career satisfaction, income security and psychological well-being? When it comes to affecting real-world changes in a broken system, it often feels like we’re swimming against the tide: the system doesn’t make positive improvements easy, despite an abundance of lip service to individual goals such as losing weight, improving our career options, etc.

There are number of reasons for this; here are a few:

1. The economy, society and systems of governance are all changing in fundamental ways. I’ve written a lot about these forces– AI, robotics, globalization, financialization, the concentration of wealth and power at the top, etc. –and how we can respond positively, particularly in my books A Radically Beneficial World and Get a Job, Build a Real Career and Defy a Bewildering Economy.

The point here is that even if our system was fair and functional, the structural dynamics are generating uncertainty, instability and a diminishing number of winners and an expanding multitude of losers.

2. But we don’t inhabit a fair and functional system; the status quo is dysfunctional, dominated by self-serving insiders, the Protected Class and various elites. Actual inflation (loss of purchasing power) is under-reported, and other metrics are gamed or distorted to improve the optics–that is, the perception.

Markets have been grossly distorted to reward the already-wealthy; stocks and housing are been transformed into signals of economic strength when in reality they are signals of excess and asset bubbles that increase wealth and income inequality.

3. Maximizing profit and convenience via marketing is the core of our economy now. Unfortunately, what’s highly profitable and heavily marketed is often unhealthy or deleterious to our physical, mental and financial health: fast food, packaged food, social media, high-cost, low-utility higher education, medications with serious side-effects, and so on.

Accomplishing changes often requires declaring war on convenience, as convenience is the enemy of everything required to swim against the tide:discipline, sustained effort, sacrifice, etc.

So how can individuals and households manage positive changes in a destructive, perverse and broken system?

One place to start is to eliminate as much marketing as possible, and as many negative, deranging distractions as possible. This means limiting media and social media exposure to a bare minimum.

Another is to focus on value rather than convenience. This goes against the tide not just of marketing but of “progress,” which is implicitly defined as an increase in convenience and a decline in drudgery, effort and discipline.

Ironically, most of life’s most rewarding things are not convenient at all:fitness, real food prepared at home, acquiring skills with steep learning curves, etc. These are all terribly, horribly, irrevocably inconvenient.

Third, look outside the mainstream and status quo “solutions.” Solutions outside the mainstream status quo tend to be inconvenient, wrenching and difficult, and there is very little institutional support for anything outside the mainstream. Rather, the entire weight and force of the status quo is put to bear in support of passive compliance with the approved “solutions.”

For example, the approved “solution” to ill health is surgery or costly medications that haven’t even been tested for interactions with other powerful medications.

The “solution” to the high cost of housing in desirable cities is to surrender the household income for the next 30 years and buy a decaying bungalow for $800,000 or more (or $1.8 million in bubble-mania neighborhoods).

These are simulacrum solutions; they only worsen the initial problem, not solve it.

As Bucky Fuller noted in his famous dictum, “You never change things by fighting the existing reality. To change something, build a new model that makes the existing model obsolete.”

This is as true of our individual lives as it is of systems. Rather than fight a system designed to thwart us, we need a model for our own lives that bypasses the perverse tides and obsoletes the impediments in our path.

*  *  *

This essay was drawn from Musings Report 25. The Musings Reports are emailed to subscribers and patrons weekly.

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Grassley Refers Potential False Kavanaugh Accuser To FBI/DOJ For Criminal Investigation

The Senate Judiciary Committee has referred an individual to the FBI/DOJ for criminal investigation after for potential “materially false statements” about US Supreme Court nominee Brett Kavanaugh. 

On Monday, Jeff Catalan of Newport, RI called Sen. Sheldon Whitehouse’s office with “allegations concerning a rape on a boat in August of 1985,” according to a transcript of the phone call. 

Catalan claimed that in 1985, “a close acquaintance of the constituent was sexually assaulted by two heavily inebriated men she referred to at the time as Brett and Mark,” reported CNN, citing the transcript and noting that the incident reportedly took place on a boat in Newport harbor. After Catalan’s friend learned about the assault, “he and another individual went to the harbor, located the boat the victim had described and physically confronted the two men, leaving them with significant injuries,” the report notes.

Whitehouse, a member of the Judiciary Committee, asked Kavanaugh about the incident Tuesday, which Kavanaugh denied. 

“No,” Kavanaugh said in a phone call with the Committee. “I was not in Newport, haven’t been on a boat in Newport. Not with Mark Judge on a boat, nor all those three things combined. This is just completely made up, or at least not me. I don’t know what they’re referring to.”

After a transcript of the call was released, Catalan recanted over Twitter, saying “Do everyone who is going crazy about what I had said I have recanted because I have made a mistake and apologize for such mistake.” 

Over an hour after Catalan recanted, CNN ran a story that included his accusation but not his recanting. Three hours later, they updated their story to include his backpedal. 

A statement from the Judiciary Committee reads: 

“One tip was referred to the committee by staff for Sen. Sheldon Whitehouse (D-R.I.). While Whitehouse referred the accuser to a reporter, the committee took the claim seriously and questioned Judge Kavanaugh about the allegations under penalty of felony. Judge Kavanaugh denied any misconduct. After the transcripts of that interview became public, the individual recanted the claims on a social media post,” reads a statement by the Judiciary Committee. 

“…when individuals provide fabricated allegations to the Committee, diverting Committee resources during time-sensitive investigations, it materially impedes our work. Such acts are not only unfair; they are potentially illegal. It is illegal to make materially false, fictitious, or fraudulent statements to Congressional investigators. It is illegal to obstruct Committee investigations,” Grassley says in the letter. 

Read the letter below: 

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Kanye West Booed During Pro-Trump Political Speech On SNL

Kanye West was laughed at and booed by the audience during Saturday Night Live’s 44th season premiere, after the rapper filled in as a last-minute replacement for Ariana Grande. 

The 41-year-old West, wearing a red Make America Great Again hat in support of President Trump, began to lecture the audience – chastising the Democratic party for creating black welfare and calling it a “Democratic plan.” 

The rant was captured on video by former SNL castmember Chris Rock, who was sitting in the audience. Rock can be heard saying “oh my God” at one point, while others in the crowd jeered the performance. 

 “I wanna cry right now, black man in America, supposed to keep what you’re feelin’ inside right now…” West rapped. “The blacks want always Democrats… you know it’s like the plan they did, to take the fathers out the home and put them on welfare… does anybody know about that? That’s a Democratic plan.“

“There’s so many times I talk to, like, a white person about this and they say, ‘How could you like Trump? He’s racist.’ Well, uh, if I was concerned about racism I would’ve moved out of America a long time ago,” West continued. 

According to an eyewitness who spoke with Variety magazine, the room fell silent for most of West’s dialogue. 

The castmembers appeared embarrassed and two performers gently shook their heads in unison as he spoke. The audience was quiet and booed him at least twice. “The entire studio fell dead silent,” one eyewitness told Variety. West concluded by thanking the show for the platform “even though some of y’all don’t agree.”

It had already been a bumpy evening: West and his accompanists veered between mediocre and bad on the three songs the show generously gave him. In the opening spot, West performed his latest single “I Love It” with Lil Pump. The pair were comically dressed as bottles of Perrier and Fiji water (respectively) that recalled Justin Timberlake’s “Liquorville” skits on the show. –Variety

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JPMorgan Sees Full-Blown US-China Trade War In “New Baseline”; Could “End US Stock Market Rally”

With US traders still blissfully ignoring the consequences of escalating trade war between the US and China, which has yet to make any material dent on either the US economy or S&P500 corporate profits, prominent sellside banks have increasingly taken to issuing louder warnings about how they see said conflict progressing. Late last week, JPMorgan became the latest to drastically revise it outlook, and in a note from strategist John Normand writes that the bank has “adopted a new baseline that assumes a US-China endgame involving 25% US tariffs on all Chinese goods in 2019.”

As a reminder of how methodically the US has been advancing a campaign some consider “random and capricious”, Normand summarizes the current state of affairs, noting that Phase I involved tariffs on $50bn of Chinese imports in July and August; Phase II levied 10% tariffs on $200bn of imports in late September that rise to 25% in January; and Phase III is the threat to impose 25% taxes on another $267bn of imports at some stage.

It is now JPM’s baseline view that the US and China will not resolve their differences this year and that the Administration will make good on its threats to escalate.

As a result of this full-blown trade war escalation, JPM has revised its China-related forecasts, expecting only a modest hit to Chinese growth – thanks to offsetting fiscal and monetary stimulus – however it now sees a far steeper devaluation in the Chinese Yuan relative to Wall Street consensus, one which will impact the rest of the EM space; finally the trade war is still expected to have only a negligible impact on the US economy, resulting in a 0.2% decline in GDP and 0.3% in core inflation. To wit:

  1. full tariffs would reduce Chinese real GDP growth (currently 6.7% yoy) by 1%, but to offset this authorities will provide additional fiscal stimulus (augmented fiscal deficit rises from -10.8% of GDP in 2018 to -11.3%) & looser monetary policy (3 cuts in reserve requirements versus a previous forecast of 2). These offsets would “almost fully compensate for tariffs” and as a result the bank cuts its 2019 China growth forecast only 0.1%, from 6.2% to 6.1%;
  2. looser monetary policy and less/no intervention should allow greater CNY depreciation of about 4.5% trade-weighted in the next 12 mths, corresponding to USD/CNY at 7.01 in Dec 2018 and 7.19 in Sep 2019;
  3. negligible reductions of 0.2% on US growth and 0.3% on core inflation.

As part of this revision, JPM cautions that “looser Chinese monetary policy ensures that the U.S. dollar will become an ever-higher yielder versus the renminbi for the rest of the cycle”, as the yield gap will favor the dollar thanks to further Federal Reserve tightening.

The cheaper yuan will also drag emerging Asian nations’ currencies lower with it, as it would be “tough for EM Asian currencies to rally if the renminbi depreciates further.” In terms of asset price impacts, these Asian currency declines “are possible constraints on regional equities,” JPM predicted, although it does see base metals prices gaining into 2019 thanks to reduced inventories.

What is most actionable for traders as part of the new JPM forecast, is that this new baseline “raises medium-term questions for the world’s most-expensive equity market (US) and one of its cheapest (China).” Specifically, JPM’s Equity strategists estimate that 25% tariffs on all imports from China could take $8 off consensus 2019 EPS projections of $179 and reduce next year’s EPS growth from 10% to 5% year-on-year

Such a downgrade would mark the first of the Trump era, and potentially end the US stock market rally even assuming a forward multiple of 17, unless some other offset materializes.

In recent weeks, Goldman Sachs has likewise been turning increasingly pessimistic.

In a Friday note from the bank’s chief equity strategist David Kostin, Goldman – which assigns a 60% probability the US will impose tariffs on most or all of the additional $267 billion of imports from China that are not covered by the tariffs announced to date – issued a warning that whereas so far S&P profits and margins have been able to avoid a direct hit, this may change soon:

Tariffs represent a threat to corporate earnings through higher costs and lower margins. For all US industry, roughly 15% of cost of goods sold (COGS) is imported. Given S&P 500 constituent firms are more global in nature and have more complex supply chains than overall industry, we estimate imports account for roughly 30% of S&P 500 COGS. This estimate is consistent with the 30% share of S&P 500 sales generated outside the US. Imports from China account for 18% of total US imports.

In the context of rising threats to US profitability, Kostin recommends shifting portfolios into companies that have “high and stable” profit margins and substantial pricing power to outlast the upcoming trade war escalation. Meanwhile, even as Goldman does not predict a severe impact to either the market or stocks, Kostin repeats an analysis he made three weeks ago, warning that if trade tensions spread significantly and a 10% tariff were implemented on all US imports – the highest rate since 1940s – the bank’s EPS estimate could fall by 15% to $145 in the “severe case”, resulting in a bear market for equities.

Finally, late last week Barclays also opined on how it sees the worst case scenario for US-China trade relations developing, however unlike JPM or Goldman, the UK bank maintained a relatively optimistic outlook. In its quantification of the scenario which now serves as JPM’s baseline, Barclays reassured investors writing that “we estimate that a 25% tariff on all US-China trade would result in a 3% decline in 2018E earnings, which appears insignificant, given our projected growth of 23% for 2018.”

Barclays may be behind the curve: in a potential red flag, last week we reported that as companies head into the end of the third quarter, 98 S&P 500 companies have issued EPS guidance for the quarter. Of these 98 companies, 74 have issued negative EPS guidance and 24 companies have issued positive EPS guidance.

The percentage of companies issuing negative EPS guidance is 76% (74 out of 98), which is not only above the five-year average of 71%, but if 76% is the final percentage for the quarter, it will mark the highest percentage of S&P 500 companies issuing negative EPS guidance for a quarter since Q1 2016 (79%).

Much of this shift in sentiment is the result of growing tariff fears. And now that “phase II” in the China trade war has been launched, and a “phase III” – tariffs on all China imports – appears imminent, the corporate outlook picture – the key driver behind the S&P’s remarkable resilience – will become increasingly more problematic.

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