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State and local governments are already setting up for what is likely going to be one of the most difficult elections to manage in decades due to the pandemic. Compounding the issues that come with the coronavirus is the fact that many states and municipalities are also facing budget cuts, suffocating their ability to make the changes necessary to keep voters safe in November.

States remain on different footing with how they want to approach November. For example, in Ohio, election officials want to equip polling places with safety measures to constrain the virus. In Georgia, officials are considering making absentee ballots easier to get.

Regardless, across the nation, it’s a situation that could lead to “chaos” in November, Reuters reports.

Tina Barton, the city clerk and chief elections official in Rochester Hills, Michigan, a tightly contested election area, said: “What kind of price tag are you going to put on the integrity of the election process and the safety of those who work it and those who vote? Those are the things at risk.”

At the very least, elections will simply cost more this year: face masks, face shields and other virus-proofing equipment will need to be purchased in addition to a normal election budget. There are also costs associated with a larger volume of more mail-in ballots. Across the U.S., election officials are warning that they don’t have what they need to do the job properly. 

Myrna Perez, director of the elections program at New York University’s Brennan Center for Justice, says there could be “widespread disenfranchisement,” as a result. “We run the risk of people really questioning the legitimacy of the election,” she commented.

Congress has already approved $400 million in federal funding to help states hold the elections as part of the CARES Act. But that is 10% of the $4 billion that experts believe will be necessary to hold “safe and fair” elections this year. Postage alone for mail-in ballots will cost almost $600 million. 

An aid bill passed in May in the House included $3.6 billion in new election funding, but the bill has no chance of passing the Senate as Republicans have taken exception with mail-in voting rules changes that were included in the bill. Republicans remain worried that mail-in voting will encourage fraud and will favor the Democrats. 

Hans von Spakovsky, a former Republican member of the Federal Elections Commission, thinks the answer is simply keeping polling places safe instead of switching to mail-in voting: “I’m not saying that this is easy but it is not going to be as difficult as all these people are predicting.”

Amy Klobuchar, the senior Democrat on the Senate rules committee that oversees federal grants for elections, says that money that is supposed to be used for election security is now being used for cleaning supplies: “That’s not a one-or-the-other choice. We need voters to be safe and we need our elections to be secure.”

Still some state and local governments are trying their best to make changes despite a combined $360 billion revenue loss over the next 36 months due to the Covid outbreak. According to Reuters:

• Georgia sent absentee ballot requests to all voters ahead of its June 9 elections, which officials cited in local media estimated would cost at least $5 million
• Philadelphia is faced with an election budget of $12.3 million, instead of $22.5 million and has already spent more than its expected CARES grant holding during its June 2 primary.
• Ohio’s Lucas County has simply ruled out buying safety equipment like Plexiglas sneeze guards for more than 300 polling stations that the county hopes to operate.

Finally, the budget cuts mean that election results may be in much later in the evening than we are currently used to. In places like Michigan, where election boards need machines to count ballots faster, there remains budget shortfalls in the tens of millions. Secretary of State Jocelyn Benson concluded: “This means … that election results may not be available until long after election night.”

Authored by Mark Glennon via Wirepoints.org,

Let’s start with a central claim Governor JB Pritzker made Wednesday in his testimony about COVID-19 policy before the United States House Committee on Homeland Security:

“We instituted [his mandate to wear masks] in Illinois on May 1st, one of the first in the nation, and it aligns with our most significant downward shifts in our infection rate,” he said.

That’s simply untrue and his own administration’s data show why. Infections turned down well before his mask order went into effect on May 1. We laid it out in detail in early June.

The evidence of the day-to-day course of the virus closest to being timely is hospitalizations for it, as Pritzker himself has said. Deaths provide another index. However, hospitalizations and deaths lag the actual course of the virus, and that lag time is provided directly by the Center for Disease Control. Adjusting for those lags shows that the virus peaked in Illinois around April 15 or April 18 – before the mask order even went into effect.

Progress from the mask order would not have shown up until mid-May, which is when Pritzker’s “science and data” projected the virus would peak. Those projections are now proved to have been wrong even before they were announced. Our full analysis, using the state’s own numbers and the CDC adjustments, includes the details.

Gov. JB Pritzker testifying remotely

And what about Pritzker’s suggestion for going forward, which made national headlines — a federal mask mandate for the whole nation?

In his testimony Pritzker said,

“If there’s one job government has, it’s to respond to a life-threatening emergency. But when the same emergency is crashing down on every state at once, that’s a national emergency, and it requires a national response.”

But remember what he said in April when President Trump and Vice President Pence were roundly rebuked – properly – for claiming that the federal government could override state emergency orders and reopening plans? Pritzker was among the critics.

“Well, I think [Trump] is going to issue some advice about it, but it is true that it’s up to the governors to make decisions about the executive orders we put in place,” Pritzker said.

And Pritzker says Trump alone should issue the national mask order, with no legislation. Executive authority for that is highly questionable. On executive power, at least he is consistent. It’s also his position that he can micromanage much of the state through an emergency order he claims can be renewed for as long as he alone chooses.

Watch the video of the rest of his testimony and you will see that the gist of it is that, when the federal government failed, it was his administration that stepped up with the right response, which is how much of the press summarized his testimony. When asked later to elaborate on what lessons Illinois officials gained from handling the pandemic, Pritzker offered no specifics, saying only, “There’s an awful lot of learning that’s taken place from March until now, so yes I think we’ve created a path for someone in the future to follow.”

His leadership showed the country how to do it, in other words.

But here’s what Pritzker didn’t tell Congress: Illinois has suffered 42% more deaths per capita than America as a whole. Per 100,000 of population, 58 Illinoisans have died from the virus but just 41, nationally. Yes, the virus is spiking in states like Florida, Texas and Arizona, but their deaths per capita remain far behind Illinois’ at 19, 10 and 28, respectively, per 100,000.

Given that record so far, nobody should be telling Congress that Illinois provides the model for others to follow.

Another matter Pritzker omitted is the growing question of whether lockdown orders make a difference at all. As we have often written, many experts have found it hard to match state and national success fighting the virus with current or prior emergency rules; the virus seems to have a life of its own, often surprising the experts.

A good, current illustration is California, which is also among the states where the virus is surging, though it has had strict lockdown rules.

The latest evidence on that issue is particularly intriguing. It’s a study authored by two University of Chicago economists, one of whom is Austan Goolsby, who served on the Council of Economic Advisors during the Obama Administration.

They concluded that it’s individual choice that determines how people have conducted themselves during the pandemic, not rules. Legal shutdown orders account for only 7 percentage points of what was a 60 percentage points drop in consumer traffic due to the virus, they found.

That conclusion is consistent with another recent study in Wisconsin that we wrote about. It found virtually no change in social distancing behavior after the Wisconsin Supreme Court voided the state’s shutdown order on May 13.

*  *  *

The truth is that the verdict is still out on much of what works, and Illinois is certainly not in a position to be telling Congress that it knows. What we can say for certain is that the entire nation at all levels of government – as well as most educational institutions and many businesses — were tragically unprepared. That failure most clearly includes the absence of any planning for what levels of government are responsible for what – the very issue on which Pritzker plays both sides.

Let’s hope that, when this is over, a quality review is undertaken that produces a useful assessment akin to the 911 Commission’s report. Hopefully, it will be free of self-aggrandizing politicians who have plagued the debate so far.

While Morgan Stanley continues to cheerlead some imaginary V-shaped recovery that is increasingly just in the heads of its research analysts who are running out of time to convince the bank’s clients to buy everything the bank’s prop desks have to sell (while pointing to the market’s surge as if central bank manipulation in the form of trillions of money printed is somehow equivalent to discounting the future, something which the market used to do before central banks took over “price discovery”), Goldman has increasingly become the bearish foil to Stanley’s mind-numbing cheerleading, and in his latest note, Goldman’s chief equity strategist David Kostin looks at Q2 earnings, writing that “investors seek answers about the size of the downturn and the scope for recovery”, and warns that the earnings reality about to be revealed will be far uglier than even the pessimists expect.

Which is why, unlike consensus which expects an already catastrophic 44% drop in Q2 EPS Y/Y, Goldman is even more downbeat with Kostin predicting that “earnings will fall by 60% in the quarter“, the worst print since the financial crisis.

As was the case in Q1, when historical earnings reports were largely ignored, investors will be looking below the surface of aggregate results to better understand the earnings impact of shutdowns and how quickly earnings can recover as the world reopens. Given the recent resurgence of COVID-19 cases in the US, we expect management commentary will prove more important to gauging the forward path of earnings than actual 2Q results. That is, assuming that companies will not eliminated guidance for the second quarter in a row.

We’ll find out as soon as Tuesday, when the largest US Banks, including C, JPM, WFC, and BAC, report second quarter results, with 66% of S&P 500 companies set to report earnings during the two-week period between July 20 and July 31.

Here are some more details from Goldman on why an already dismal consensus will likely end up being overly optimistic:

Consensus expects S&P 500 earnings will decline by 44% in 2Q, but aggregate results will mask wide dispersion by sector. Equity analysts forecast S&P 500 sales will decline by 12% and net profit margins will contract by 400 bp to 6.8%.  If realized, 2Q 2020 EPS growth would be the weakest since 4Q 2009 (-65%).

Energy and Consumer Discretionary are expected to post outright losses in the quarter due to the sharp decline in oil prices and direct impact from coronavirus shutdowns. Financials results will also be weak as Banks build additional reserves ahead of an expected surge in bankruptcies and nonperforming loans. Goldman’s Banks team expects earnings to decline by 69%.

At the other end of the distribution, analysts expect Info Tech EPS to decline by just 9%. The defensive Utilities is the only sector expected to grow EPS in 2Q (+2%).

Looking at the big picture, Goldman believes Q2 earnings results will be worse than consensus currently forecasts. With economic growth the primary driver of S&P 500 EPS growth; 65% of the variation in quarterly year/year EPS growth can be explained by US economic activity in the quarter. Goldman’s US Current Activity Indicator averaged -12% in 2Q, improving from -25% in April to -1.4% in June. The bank forecasts S&P 500 EPS will decline by 60% year/year.

The S&P 500 comprises large, profitable firms and should be insulated from the economic damage relative to smaller firms. Analyst estimates show Russell 2000 EPS falling by 120% in the second quarter.

Investors continue to look through 2020 EPS and focus on the earnings outlook for 2021 and 2022. Many investors expect the coronavirus-induced collapse in profits will be concentrated in 2020.

In order to shift attention even further away from the current collapse in profits, Goldman believes FY+2 earnings and valuation multiples “more accurately reflect the investing environment” and the bank “adjusts our baseline forecast for S&P 500 2020 EPS to $115 (-30%) from $110, maintain our 2021 EPS estimate of $170 (+48%), and introduce a 2022 EPS estimate of $188 (+11%).”

Goldman’s 2021 EPS forecast is 4% above realized 2019 EPS, while in 2020, Goldman assumes average annual US GDP growth of -4.6%, average Brent crude oil price of $41/bbl (-35% year/year), and a 5% stronger trade-weighted US dollar relative to 2019.

The bank’s 2021 and 2022 forecasts incorporate expectations of modestly higher oil prices, a weaker USD, and US real economic growth that averages +5.8% in 2021 and +3.5% in 2022. The bank’s economists also expect slack to persist in the labor market through 2022, providing additional flexibility for corporate profit margins.

According to Kostin, “more of the 2020 decline in earnings is driven by margin contraction than by a drop in sales” as many companies have adjusted their revenue models (e.g., online, curbside) but are experiencing increased costs to reopen safely. Excluding Financials and Utilities, Goldman forecasts S&P 500 sales growth of -8% in 2020, +13% in 2021, and +7% in 2022, and net profit margins of 8.6% (-205 bp) in 2020, 11.1% (+250 bp) in 2021, and 11.5% (+40 bp) in 2022.

While Goldman is especially downbeat on Q2 earnings, it is far more optimistic looking at the year ahead, and its estimates for 2021 and 2022 remain above bottom-up consensus and most buy-side estimates. Consensus continues to look for a rebound in earnings through 2022 following a 24% decline in 2020. However, revisions have been steadily negative in the past month. Consensus now expects 2021 EPS of $162 (+30%) and 2022 EPS of $187 (+15%), both below Goldman’s top-down estimates.

What if Goldman is – as usual – wrong about everything? Well, in a downside scenario, Kostin expects that S&P 500 EPS would equal just $105 in 2020, $135 in 2021, and $160 in 2022, with the downside estimates implying EPS growth of -36% in 2020, +29% in 2021, and +19% in 2022, meaning 2022 EPS would remain 3% below 2019 levels.

These estimates are broadly consistent with the downside scenario outlined by Goldman’s economists and represent a “check-mark” rather than a “V-shaped” recovery. The bank expects this downside scenario to occur if reopening plans are meaningfully pushed back because the virus is uncontained or if damage to the labor market and businesses becomes more long-lasting in nature. For example, large company bankruptcies have increased sharply in the past few weeks. Based on Goldman’s top-down model, every 100 bp change in US GDP growth equates to $6 of S&P 500 EPS.

On the other hand, if a vaccine were approved and distributed rapidly, it would generate only modest upside to the bank’s optimistic baseline 2021 EPS estimate.

The election wildcard: The 2020 elections add to the earnings uncertainty created by the coronavirus. The odds of a Democratic sweep in November have increased substantially since February and now stand above 50%.

If enacted, the Biden tax plan would reduce our S&P 500 earnings estimate for 2021 by $20 per share, from $170 to $150.

This estimate includes raising the statutory federal tax rate on domestic income from 21% to 28%, doubling the GILTI tax  rate on certain foreign income, imposing a minimum tax rate of 15%, adding an additional payroll tax on high earners, and a drag on US GDP of a similar magnitude to the boost the TCJA created in 2018.

Outside of tax reform, Goldman sees regulation, infrastructure, and trade policy represent potential upside and downside risk to S&P 500 EPS. It’s not just bad news from a Biden beat: Kostin reminds us that this week, Biden outlined a $700 bn economic plan focused on fiscal stimulus. Large fiscal expansion would likely provide a tailwind to economic growth and S&P 500 EPS. Meanwhile, JPMOrgan has published a matrix showing that no matter if Trump or Biden wins, the outcome will be bullish for stocks in either case.

 

Authored by Elias Marat via TheMindUnleashed.com,

It was only to be expected that in an already brutal year, the summer of 2020 was going to be the absolute worst.

And now, it appears that a sizzling “heat dome” will be frying most of the continental United States for several weeks starting this weekend.

What this means is that over 80 percent of the U.S. population – encompassing 265 people – can expect sweltering heat over the next week with highs exceeding 90. Another 45 million people will be facing highs in the triple digits.

Additionally, we can expect a full season of lethal heat ranging from 90°F to 121°F, not to mention extreme tropical storms, wildfires, and extreme weather related to La Niña conditions, reports the Independent.

On Friday, the National Weather Service issued excessive heat watch alerts for “dangerously hot conditions” and forecast that between Friday and Tuesday, over 75 record high temperatures would be reached or exceeded, with heat expected to increase in the following week.

Summer is in full swing! Tropical Storm Fay formed in the Atlantic. Thunderstorms, some severe, in the Plains and Upper Midwest. Excessive heat up to 121 F possible in the Desert Southwest into early next week. Critical fire weather threats continue for portions of the West. pic.twitter.com/iUODiRglYd

— National Weather Service (@NWS) July 10, 2020

On Saturday, temperature in Las Vegas reached a sweltering 112°F with the temperature expected to increase to 114°F on Sunday, while in Phoenix temperatures hit 115°F with Sunday expected to bring a withering 116°F before coasting at or above 110°F through the next week.

The new extremes sharply raise the danger of heat-related illness and death, further adding to the woes of hospitals struggling with surging COVID-19 infections in hard-hit regions and states like Arizona, California, Nevada and Texas.

“The heat wave will be very long-lived, lasting multiple weeks in some areas with only a few days of near-normal temperatures during that span,” Jeff Masters, Ph.D. and founder of the popular site Weather Underground, told CBS News.

 “This will increase the odds of heat illness and heat-related deaths.”

Indeed, that’s the highest I see—although their record only goes back to 1949. https://t.co/CIRg2Px5V1

— Bob Henson (@bhensonweather) July 11, 2020

And for those who may be feeling a little bored sheltering at home, there could be some excitement in store for you in the form of thunderstorms in the Midwest and Northeast, hurricanes in the South, and wildfires in the Southwest and West Coast.

This less-than-good news comes as the east coast buckles down and braces itself for Tropical Storm Fay, which is set to thrash the New England region, deluge New York, and inundate parts of New Jersey with flash floods.

Those dew points in the mid to upper 70’s in Oklahoma and Texas making it feel like the 110’s! ☀️🔥 pic.twitter.com/MLBARPM0Kb

— Collin Gross (@CollinGrossWx) July 11, 2020

The news comes as many are already struggling to stay cool during the COVID-19 lockdown without air conditioning, or even the jobs and income to keep their AC units operational if they do have them.

Heat domes occur when the atmosphere keeps hot ocean air trapped as if it were under a lid or cap, with the end result being conditions of persistent high pressure and sustained heat for a prolonged period of time, sprawled over massive geographical regions.

To make matters worse, the larger the heat dome becomes, the hotter and more longer-lasting it will be.

According to a team of National Ocean Services researchers who set up the Modeling, Analysis Predictions and Projections program to figure out why heat domes occur, they found that the primary cause was strong changes in ocean temperatures from west to east in the tropical Pacific Ocean during the prior winter.

“This happens when strong, high-pressure atmospheric conditions combine with influences from La Niña, creating vast areas of sweltering heat that get trapped under the high-pressure ‘dome’,” the ocean service said.

Warnings of the brutal heat dome come one day after the NWS issued a La Niña watch Thursday predicting a 50 to 55 percent chance that the phenomenon would develop in the coming months, ensuring an intensification of the Atlantic hurricane season and a growing number of hurricanes and tropical storms.

Make no mistake about it: no matter what your take on the coronavirus pandemic, most people seem to understand that the media is likely making the situation out to be far more dire than it is. And why wouldn’t they – most media outlets spend 24 hours a day, 7 days a week of live coverage looking for anything possible to undermine the Trump administration.

As it relates to coronavirus, the media rarely ever offers details when it touts awful sounding things like the “death count”. MSM outlets never take the time to detail the age group and underlying health conditions – and even the primary cause of death – behind all of the deaths included in the coronavirus death count. They report every time a celebrity tests positive for the virus, but never cover when someone recovers from the virus. The reporting on the virus is selective, to say the least. 

Which is why we weren’t the least bit surprised to read that NBC News spent weeks documenting the coronavirus “journey” of one of its contributors with Covid-19 – despite the fact that he never tested positive for the virus!

The contributor, Dr. Joseph Fair, believed he had the virus, according to the Daily Wire, and subsequently appeared on the air on NBC several times to discuss his struggle with the illness in May and June.

“I had a mask on, I had gloves on, I did my normal wipes routine … but obviously, you can still get it through your eyes. And, of course, I wasn’t wearing goggles on the flight,” Fair said in the appearance on the “TODAY” show from the hospital.

Host Hoda Kotb said during the segment about the tests:

“Every time it came back negative, but clearly you have it.”

A negative test indicates the patient does not have the virus.

But last week, Fair admitted that he never tested positive for the virus and also tested negative when he was administered and antibody test. 

He Tweeted out last week: “My undiagnosed/suspected COVID illness from nearly 2 months ago remains an undiagnosed mystery as a recent antibody test was negative. I had myriad COVID symptoms, was hospitalized in a COVID ward & treated for COVID-related co-morbidities, despite testing negative by nasal swab.”

Fair said he had a myriad of COVID-19 symptoms, was hospitalized in a ward along with other patients with the new disease, and treated for “COVID-related co-morbidities.”

“I was severely ill for 2 weeks, 4 days of it in critical condition, resulting in pneumonia, diffuse lung injury & 18lbs of weight loss. My path forward is a 2nd AB test, & follow-up with a pulmonologist & tropical medicine specialist in an effort to diagnose what made me so ill,” he wrote.

He said he plans to take another antibody test.

Fair said he was humbled by what happened and hit back at his critics, writing in a missive:

“I have absolutely nothing to hide. I got really sick, brought up my test results upfront, and reported the follow-up. A somewhat funny irony is that no one would have ever known I had any negative tests had I not reported them.”

But back in May, Fair had suggested on the air on the “Today” show that he may have gotten the virus through his eye during a flight that he took. He gave the interview from a hospital bed in New Orleans.

Even better, NBC knew about the negative tests and failed to mention them, according to the Daily Wire. They wrote: “During a June 14 interview with Chuck Todd on ‘Meet the Press,’ no one noted that Fair had already tested negative at least five times.”

Steve Krakauer, author of the “Fourth Watch” newsletter, wrote: “In the end, NBC’s viewers were left with two very alarming – and false – impressions. First, that an expert virologist can take every precaution but can still catch COVID-19 through his eyes. False. Second, that tests can be so untrustworthy that you can have multiple negative tests and still have coronavirus.”

Authored by Morgan Stanley chief global economist, Andrew Sheets

Will there be a V-shaped global recovery? Probably no financial question is more important, or more poorly defined. The intensity of investor debate over which letter the economy will resemble, with no broad agreement on what those letters mean, remains a major challenge. Morgan Stanley’s forecast for a V-shaped recovery has US and DM growth returning to pre-recession levels by 4Q21, faster than consensus and much faster than the recuperation from the global financial crisis. But it will still be 18 months before growth returns to normal; even a V-shaped recovery takes time.

That slog would seem to stand in sharp contrast to action in the financial markets, which, free to look ahead, have roared back from the lows. Global equities are up almost 40% since late March, causing a healthy amount of scepticism that “markets have run ahead of the fundamentals”. We see this concern in investors’ positioning, read it in the financial press, and hear it in client conversations. There’s just one problem with this view: if markets are pricing a ‘V’, they’re going about it in an odd way.

Since there’s no common definition for ‘V-shaped’, we’re going to support the home team and use Morgan Stanley’s above-consensus economic forecasts. They assume a modest second wave of infections this winter, widespread availability of a vaccine in the US by mid-2021, and continued support from fiscal and monetary policy. They expect that pent-up savings will support consumer spending next year even as businesses are slower to respond, and that the global economy won’t suffer a lasting, deflationary shock.

Markets have other ideas. Cross-asset valuations suggest that the market is deeply suspicious of growth returning to normal, worries about ongoing market volatility, and expects deep scarring in the US and global economy for years to come. There are many ways to describe such a scenario, but ‘V’ isn’t among them.

Let’s start with expected growth. Greater optimism on the recovery should boost demand for smaller, more cyclical businesses, which have more gearing to economic activity. It should reduce the discount for lower-quality companies and credits, as a rising tide lifts more boats. It should lead to higher yields, as economic normalcy removes the need for extremely accommodative policy.

That’s not exactly happening. Relative valuations for global small caps versus large caps are well below average, and low-quality stocks have almost never been cheaper to high-quality ones.  The basis between BBB and A rated credit, and B and BB rated credit, remains elevated. And developed market yields are still within a whisker of all-time lows, despite the improvement in stock markets and economic indicators.

Volatility markets also suggest scepticism about a return to normal. Implied equity and credit vol sit in the top 15% of all observations of the last 20 years (the very opposite of ‘normal’), while skew, a measure of how much extra investors are willing to pay for disaster protection, has rarely been higher. Neither suggest a market that’s pricing a return to normal any time soon.

And then there’s the long term. Looking beyond 2021 may feel like a luxury, but what market pricing implies is still remarkable: a Fed that won’t raise interest rates until 2024. A US 10-year yield that’s sub-2% past 2035. US CPI inflation averaging ~1.6%Y, well below the Fed’s inflation goal, through 2050.

All this means that we don’t think markets are priced for our economists’ forecasts for a V-shaped recovery. It also makes three events this month important:

• 2Q earnings season kicks off next week, and my colleague Mike Wilson thinks it will more likely help than hurt. Companies should be able to report a better trajectory of business since the March lows, leading to a sustainable bottom in earnings revisions. Banks, which have lagged the market, will be among the first to report.
• The European recovery fund, which my colleagues Reza Moghadam and Jacob Nell expect to be approved by the end of the month, and which my colleague Graham Secker sees as a positive catalyst for European equities.
• Further US fiscal stimulus, which my colleague Michael Zezas believes will amount to another ~US$1 trillion, to be approved near month-end. The failure of such a measure would mean significantly higher risk for markets.

After July, these catalysts will be behind us and the tactical environment looks more challenging: First things first; we think that positive events still lie ahead over the next several weeks, and among the various risks facing markets, ‘priced for a V’ isn’t at the top of our list.

Iran has made a key announcement revealing shocking details behind the tragic downing of Ukraine International Airlines Flight 752 shortly after it took off from Tehran Imam Khomeini International Airport on January 8. All 176 passengers and crew were killed when it exploded in the sky after direct missile impact. 

Recall that the Islamic Republic and the US were on the brink of war over the US assassination by drone of IRGC Quds Force chief Qassem Soleimani in Baghdad days prior, and that two surface-to-air missiles took out the passenger aircraft, mistaking it for an inbound American attack. 

After six Iranians were arrested in June over the accidental shoot down, with no details or identification given, Tehran officials announced Saturday that it was ultimately triggered by human error related to monitoring defensive radar. Personnel “forgot” to make a crucial radar adjustment after resetting the defensive system, Iran’s Civil Aviation Organization (CAO) said.

Bloomberg writes of the new findings: 

An Iranian air defense unit that “forgot” to adjust its radar system triggered a chain of communication and human errors that led to the deadly downing of a Ukrainian passenger jet in January, according to a report from Iran’s Civil Aviation Organization.

The report further underscored that it was an isolated but devastating error that did not pass through the chain of command.

“The operator of the air defense system launched a missile at what it had detected as a hostile target without response from the command center,” CAO said its report, which also detailed that authorities were not informed before the launch.

The two missiles were fired about 30 seconds apart, targeting what ground units thought was a cruise missile. Data from the passenger airline’s black box is not expected to be decoded starting until July 20.

At the time Iran was fully expecting to come under attack given soaring tensions with the US in neighboring Iran and stated threats with warnings of “red lines” out of the Trump administration. 

Authored by Eric Peters, CIO of One River Asset Management

“We’re not close to knowing how this election goes down,” said the CIO, Nov 3rd just 114 days away. “Trump’s hope to rely on a robust recovery took a major blow this week,” he continued, the nation hitting successive daily record infections, economic activity slowing. “And that leaves two darker options; a domestic civil conflict and/or a Chinese conflict.”

The only thing uniting Americans is a belief that China is an adversary. Now Bannon says we’re building a case that Covid was caused by a lab leak. “Trump just chose to double down on a culture war.”

“Will civil conflict rise to a level where it justifies a powerful military intervention to restore order?” asked the same CIO. “Will this allow Trump to position himself as civil society’s defender and paint Biden as an anarchy advocate?” he asked.

“My instinct is yes, but only if the images of chaos are so bad that they shake suburbanites to their core,” he said. “If that fails, there’s always China, perhaps those cards can be played together.” And in the distance, Biden laid low, playing a cautious hand, his teleprompters compensating for cognitive decline.

“So if those are the obvious cards, what are the others?” continued the CIO. “Throw Pence under the bus for failing to deal with Covid-19 and replace him with Nikki Haley?” The Indian-American former South Carolina governor, UN Ambassador, would be America’s first female VP and a credible 2024 presidential candidate.

“Beyond that there are wildcards like Kanye and his latest stunt. Nefarious stuff like voter suppression. The left could overplay its hand and somehow blow itself up, but it’s hard to paint Biden as a revolutionary.”

PredictIt.com allows you to bet on politics. It’s imperfect, inefficient, but tradeable. The probability of Dems winning the presidency trade at 64%. Dem’s odds of winning the key four states Trump won in 2016 by less than 2% of the vote (and Obama won in 2012) are as follows: Florida 62% probability of Dems winning presidency, Pennsylvania 71%, Wisconsin 71%, and Michigan 76%. The odds of Dems winning a clean sweep (presidency, senate, house) is 56%. And the odds of Kanye West running for president spiked to 47% on July 4th and are now 22%.

House Speaker Nancy Pelosi (D-Calif.) suggested on Saturday that the House may introduce a bill to limit presidential pardon power following President Donald Trump’s decision to commute the sentence of his longtime associate and former adviser Roger Stone.

Pelosi, along with many of her Democrat colleagues, excoriated the president for providing clemency for Stone, who was scheduled to report to prison next Tuesday. The top Democrat leader called the decision “an act of staggering corruption,” while vowing Congress would take steps to prevent similar actions in the future.

“Legislation is needed to ensure that no President can pardon or commute the sentence of an individual who is engaged in a cover-up campaign to shield that President from criminal prosecution,” Pelosi said in her statement.

Stone, 67, was sentenced on Feb. 20 to three years and four months in prison. He was convicted in November 2019 on all seven counts he was charged with in relation to an investigation into Russia’s interference in the 2016 election, including obstruction, witness tampering, and making false statements to Congress.

The political consultant and lobbyist had recently escalated his bid to delay the start of his prison sentence by filing an emergency request asking the appeals court to push back the date of his self-surrender. He argued that his age and undisclosed medical issues would leave him vulnerable in the prison system amid the CCP (Chinese Communist Party) virus pandemic.

The appeals court rejected Stone’s request saying that Stone is “not legally eligible for further postponement of his reporting date” under the law he was requesting his delay.

“Because Stone has failed to show, as a matter of law, that he is eligible for release under Section 3145(c), the motion must be denied,” the judges wrote (pdf).

The ruling was quickly mooted as Trump signed an Executive Grant of Clemency commuting Stone’s sentence later in the day. The White House said in a statement that Stone was “a victim of the Russia Hoax” that had been perpetuated for years by “the Left and its allies in the media” in efforts to undermine the Trump Presidency.

“The collusion delusion spawned endless and farcical investigations, conducted at great taxpayer expense, looking for evidence that did not exist,” the statement said.

When the prosecutors from the Special Counsel’s office was aware that the investigations would not bear fruit, the prosecutors then turned to investigate wrongdoing against associates of Trump, the White House claims.

“These charges were the product of recklessness borne of frustration and malice. This is why the out-of-control Mueller prosecutors, desperate for splashy headlines to compensate for a failed investigation, set their sights on Mr. Stone,” the statement said.

Then-special counsel Robert Mueller spent about two years investigating allegations of Russian interference in the 2016 presidential elections. His report concluded that while Russia did attempt to interfere in the election, there was no evidence to establish that any members of the Trump campaign “conspired or coordinated” with Russia ahead of the election.

Trump defended his decision to grant clemency to Stone in a statement on Saturday, saying that the 67-year-old was targeted in “an illegal Witch Hunt that never should have taken place.”

“It is the other side that are criminals, including Biden and Obama, who spied on my campaign—AND GOT CAUGHT!” the president wrote.

The president’s power of executive clemency is granted by the U.S. Constitution and allows him to pardon sentences for federal criminal convictions or grant clemency in the form of commutation, amnesty, remission, and reprieve, except in cases of impeachment. A presidential pardon sets aside the punishment for a federal conviction, while a commutation of a sentence could reduce a sentence either totally or partially without wiping out the felony convictions.

Presidential pardons have long been a subject of debate and presidents using this power in the past have attracted criticism and accusations of misconduct. President Gerald Ford’s controversial decision, for example, to pardon former President Richard Nixon for involvement in the Watergate scandal was not popular at the time and resulted in allegations that Ford had made a secret deal for Nixon’s resignation.

Similarly, the 140 pardons and 36 commutations issued by President Bill Clinton during his final hours in office triggered a criminal investigation.

[ZH: As a reminder, Barack Obama ended his presidency having granted clemency to more people convicted of federal crimes than any chief executive in 64 years…]

[ZH: And Democrat Presidents have dominated the league tables for most clemencies issued…]

Congress has previously made attempts to amend the presidential pardon power in an effort to prevent self-serving pardons. Some proposals include limiting the pardon power during a lame-duck period, and allowing Congress to vote by resolution to disapprove the granting of a pardon within 180 days of its issue, according to legal scholars (pdf).

More recently, Rep. Adam Schiff (D-Calif.) introduced the Abuse of the Pardon Prevention bill in 2019 to prevent presidents from “abusing the pardon power for their own personal benefit or to obstruct justice.”

Schiff’s proposed bill requires the attorney general to submit material of an investigation related to any individual who is pardoned, if the individual was convicted on a charge that arose from an investigation in which the president or a member his or her family is the target, subject, or witness.

A bill that limits the presidential power of clemency is expected to face an uphill battle given that Republicans hold a majority in the Senate.

[ZH: Additionally, as Jonathan Turley wrote, there is lots to criticize in this move without pretending it was a pristine power besmirched by a rogue president. Indeed, Trump should have left the decision to a successor or, at a minimum, to the attorney general. But compared to the other presidents, this commutation is not even a distant contender for “the most corrupt and cronyistic act” of clemency.]

One by one the world’s legendary deflationists are taking one look at the following chart of the global money supply (as shown most recently by DB’s Jim Reid) and after seeing the clear determination of central banks to spark a global inflationary conflagration, are quietly (and not so quietly) capitulating.

One month ago it was SocGen’s Albert Edwards, who after calling for a deflationary Ice Age for over two decades, finally threw in the towel and conceded that “we are transitioning from The Ice Age to The Great Melt” as “massive monetary stimulus is combining with frenzied fiscal pump-priming in an attempt to paper over the current slump.”

At roughly the same time, “the world’s most bearish hedge fund manager“, Horseman Global’s Russell Clark reached a similar conclusion writing that “all the reasons that made me believe in deflation for nearly 10 years, do not really exist anymore. China looks okay to me, and potentially very good. Commodity supply is getting cut at a rate I have never seen before. The US dollar is strong but will likely weaken from here. And it is clear to me Western governments will only ever attempt fiscal austerity as a last resort, not a first. The conditions for both good and bad inflation are now in place.“

And now, it is the turn of another iconic deflationist, Russell Napier, who in the latest Solid Ground article on his Electronic Research Interchange (ERIC) writes that “we are living through another deflation shock but [he] believes that by 2021 inflation will be at or near 4%.”

Why the historic shift in monetary perceptions? Because similar to Albert Edwards’ conclusion that MMT, i.e., Helicopter Money, is a gamechanger, Napier writes that “what has just happened is that the control of the supply of money has permanently left the hands of central bankers – the silent revolution.” As a result, “the supply of money will now be set, for the foreseeable future, by democratically elected politicians seeking re-election.” His conclusion: “it is time to embrace the silent revolution and the return of inflation long before such permanency is confirmed.“

What does this mean for asset prices? According to Napier, “a trading opportunity does now exist in European equities in particular. With the impact of bank credit guarantees not yet fully positively impacting broad money growth, we can expect Eurozone broad money growth to go even higher. Eurozone M3 is already growing at 8.9% year on year and in just a few months will likely exceed its peak of 2007.”

An even more dramatic picture emerges in the US (see top chart), where Napier highlights the surge in M2 which is now the biggest since the Great Depression:

In short, money creation is shifting away from central banks and is being handed off to governments. And that, in a word, will have catastrophic consequences:

This explosion in money supply will eventually have an impact on interest rates with Napier’s best guess is that “ten year bond yields will have to be forced to settle between 2% and 3%. This level comes from working backwards from the highest rate of inflation that governments might dare target to bring escalating debt-to-GDP ratios under control. At levels of annual inflation above 6% there is a growing risk that the velocity of money could shift markedly higher and the prospects of controlling inflation thus reduce.”

The take home here, is that Napier expects inflation to approach 4% by 2020 with velocity of money troughing soon and then surging to 1.4x.

Does the coming surge in inflation mean buy stocks hand over fist? Yes… and no: as Napier explains, “at this stage it is probably best to hold equities as the market begins to discount the silent revolution and, with a lag, inflation itself begins to rise. Should you hold them for the entire journey to 4%? The Solid Ground is skeptical that the rise in equities will last for the duration of inflation’s journey to 4%.“

But what if rates are simply capped a la Japan or the US ca. 1943, with the help of Yield Curve Control? Surely such a disconnect between the yield curve and inflation expectations would be beneficial for stocks? Here, too, Napier pours cold water:

… at some stage in the reflation the government will have to move to cap yields in the knowledge that it is probably too risky to allow inflation to rise above 6%. Many investors seem to believe that this combination of a capped yield curve and rising inflation will be positive for equity prices. That will depend upon what savings institutions are selling in order to fund their compelled purchases of government debt. The most likely asset for liquidation will be equities and, as yields are to be capped possibly for decades, that liquidation could be prolonged.

Needless to say this is clearly at odds with prevailing convention wisdom that yield curve control would “unleash a mindblowing stock rally.” And incidentally Napier seems to agree with this, at least in the short-term:

Time will tell whether that is a good or a bad guess but for now inflation is low, long-term inflation expectations are ridiculously low and equities will benefit from the change in inflationary expectations that are still before us.

While there is much more in the full report below, here are his conclusion:

And so, without further ado, here is Russell Napier and his latest ERI-C note:

Equities & The Rise of Inflation: How Much Inflation Before Repression? (07/07/20)

In 1Q 2009 The Solid Ground called for the bottom of the bear market in equities and then went on to recommend that investors should hold US equities until inflation reached around 4.0%. This proved to be good advice for those who followed it but unfortunately your analyst was not one of them! By 2011 The Solid Ground saw problems ahead for the global banking system in boosting credit growth and thus, with the likelihood that broad money growth would remain anemic, inflation would decline and deflation was likely. Inflation did peak just below 4% in 2011 and by early 2015 the US was indeed reporting mild deflation. The problem was that the journey of inflation from close to 4% back to just below zero was not negative for US equities. Only in the latter period of that journey, when inflation went below 1% and corporate earnings declined, did the S&P500 index decline. The original advice from mid-2009 – hold US equities until inflation nears 4%, even if you think it will subside from that level back towards zero – was the best advice. Now we are living through another deflation shock but The Solid Ground believes that by 2021 inflation will be at or near 4%. Can your analyst take his own advice this time and learn to stop worrying and love the early reflation?

In the 4Q 2019 report (Inflation, Disinflation & Deflation: Their Impact on Equities & Problems for Europe) The Solid Ground revisited the advice from mid-2009 and concluded that those who believed in rising inflation should buy European equities. While that quarterly report forecast a deflation shock, it was clear that European equities would be a major beneficiary of rising inflation if that forecast proved to be wrong. Since the publication of the 4Q report we have had a deflation shock, with probably some expected deflation to come, and equity prices and inflation break-evens on Indexed Linked Bonds (ILBs) have moved sharply lower. If European financial markets were pricing in prolonged low inflation in December 2019, they are pricing in even lower inflation now. So if The Solid Ground is correct in expecting inflation, even in the Eurozone, to near 4% by next year, there must be an opportunity to profit from a rise in European equity prices?

A trading opportunity does now exist in European equities in particular. With the impact of bank credit guarantees not yet fully positively impacting broad money growth, we can expect Eurozone broad money growth to go even higher. Eurozone M3 is already growing at 8.9% year on year and in just a few months will likely exceed its peak of 2007. Most investors your analyst has spoken to in the past few weeks then expect bank loan growth and money supply growth to subside, as emergency lending ends, and this brief surge in broad money growth to become an historical aberration with almost no impact on inflation. While that is possible, The Solid Ground believes it is not probable as politicians fully recognize the possibilities of commercial bank balance sheet control and launch a series of new initiatives, probably focused on guarantees on loans for green initiatives. The more the duration of this guaranteed lending extends, the more investors will come to realize that there is nothing temporary regarding governments use of commercial banks balance sheets to create credit and in the process to create money. Already the Spanish government’s bank credit guarantee programme has been extended from EUR100bn to EUR150bn. While cautious investors will want to wait to see the permanency in the bank credit guarantee policy, your analyst suggests it is time to embrace the silent revolution and the return of inflation long before such permanency is confirmed.

It is now probable that deflation will be reported across the developed world. It might also be somewhat irrelevant for investors. If The Solid Ground is correct what has just happened is that the control of the supply of money has permanently left the hands of central bankers – the silent revolution. The supply of money will now be set, for the foreseeable future, by democratically elected politicians seeking re-election. Imagine two economies, identical in every way, except that in one an independent central banker seeks to control the supply of money while in another a democratically elected government directly determines the supply of money through commercial bank balance sheet control. Would these two economies have the same level of long-term interest rates? The Solid Ground’s answer to that question is that they would not and it is because they would not that long-term interest rates should now rise – even if the near term outlook is for deflation. The 2Q 2020 report (The Birth of the Age of Inflation: Why It Is Now and What to Own) shows just how governments have seized control of money creation and thus your analyst believes that financial markets will soon be pricing in this silent revolution long before the inevitable inflation, governments so crave, has actually been created.

So at this stage it is probably best to hold equities as the market begins to discount the silent revolution and, with a lag, inflation itself begins to rise. Should you hold them for the entire journey to 4%? The Solid Ground is skeptical that the rise in equities will last for the duration of inflation’s journey to 4%. The key reason for that skepticism is that it seems highly unlikely that governments will accept the likely long-term interest rates that would probably follow if inflation reached 4%. With total debt-to-GDP ratios just below record highs before the COVID-19 crisis, they are now spiraling even higher – in both the government and private sectors. These record high debt levels risk crushing any reflation if the cost of interest rises dramatically in any recovery. The Solid Ground has long forecast that no such rise in interest rates will be permitted — see Capital Management in An Age of Repression: A Handbook (3Q 2016). So when might government action begin to stop such a rise in interest rates and what does it mean for equity prices?

Judging what level of long-term interest rates will be deemed unacceptable by policy makers is one of the most difficult calls in investment. It is probable that policy makers do not currently know the answer to that question themselves. They might not know the answer until there are negative economic impacts from higher long-term interest rates and only then might repressive action be triggered. Your analyst’s best guess is that ten year bond yields will have to be forced to settle between 2% and 3%. This level comes from working backwards from the highest rate of inflation that governments might dare target to bring escalating debt-to-GDP ratios under control. At levels of annual inflation above 6% there is a growing risk that the velocity of money could shift markedly higher and the prospects of controlling inflation thus reduce. Perhaps some governments might flirt with higher levels and of course there is always the risk of over-shooting any economic target, whether of a government or a central banker. However if we conclude that governments will not want to risk inflation rising above 6%, what level of long-term interest rates would they need to pull off a successful financial repression? Perhaps they could allow long-term interest rates to reach 3% but as the success of a repression is based primarily upon the gap between inflation and interest rates, any smaller gap might just slow the process of inflating away debts by too much. These are very clearly back of an envelope calculations but they suggest that even if inflation is permitted to rise as high as 6%, investors should expect aggressive moves to repress long-term interest rates once they are even as low as 2% to 3%. Allowing interest rates to rise to higher levels risks too slow a de-leveraging or a need for a rate of inflation that is too destabilizing.

In the last newsletter (The Silent Revolution: How To Inflate Away Debt… With More Debt) The Solid Ground explained why central bankers would not be able to control long-term interest rates in a world of rising inflation expectations. Such a cap on interest rates would only be possible by forcing savings institutions to buy government debt at the targeted yields. So at some stage in the reflation the government will have to move to cap yields in the knowledge that it is probably too risky to allow inflation to rise above 6%. Many investors seem to believe that this combination of a capped yield curve and rising inflation will be positive for equity prices. That will depend upon what savings institutions are selling in order to fund their compelled purchases of government debt. The most likely asset for liquidation will be equities and, as yields are to be capped possibly for decades, that liquidation could be prolonged.

The conclusion from all of the above is that equities will benefit on the road to higher inflation. That will occur even if deflation happens first as markets begin to discount the impact from the shift in the powers of money creation from central bankers to governments. However the move to cap interest rates between 2% and 3% may well come before inflation hits 4%. As one would normally expect long-term interest rates to be above the rate of inflation, a forced purchase of government bonds by savings institutions is likely before inflation reaches 4%. If the move to force savings institutions to cap yields occurs before inflation reaches 4%, then the mass liquidation of equity portfolios by those institutions also begins before inflation hits 4%. That does not suggest that equity prices can rise ever higher into the financial repression and the liquidation may be met by high equity issuance in a period when non-bank debt availability will be significantly curtailed (see The Silent Revolution: How To Inflate Away Debt… With More Debt).

Is your analyst guilty of once again ignoring his own advice? Perhaps, but tactically the advice is the same. Equities can be held as long as the markets continue to discount higher rates of inflation and only when the move to the forced purchase of government debt securities is likely is that upward movement in equities likely to end. We cannot be sure when that will be but should receive some warning on the timing as higher longer term interest rates begin to impinge on the economic recovery. Your analyst, seeing this move as part of a much longer financial repression, would be surprised if long-term interest rates were allowed to rise above the 2% to 3% level, given the implications for the acceptable rate of inflation. Time will tell whether that is a good or a bad guess but for now inflation is low, long-term inflation expectations are ridiculously low and equities will benefit from the change in inflationary expectations that are still before us.