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Authored by Charlotte Cuthbertson via The Epoch Times,

The amount of fentanyl seized while coming through the southern border during the first 5 months of fiscal year 2021 is already higher than all of fiscal year 2020, according to the latest statistics from Customs and Border Protection (CBP).

CBP has seized more than 5,000 pounds of fentanyl since Oct. 1, 2020, said acting CBP Commissioner Troy Miller during a March 10 media call.

“We are seeing a dramatic increase in fentanyl seizures this fiscal year, more than 360 percent higher than this time last year,” Miller said.

“Nationwide drug seizures increased 50 percent in February from January. Cocaine interceptions increased 13 percent, seizures of methamphetamine increased 40 percent, seizures of heroin went up 48 percent.”

Fentanyl is the synthetic opioid attributed to the escalating overdose death rate in the United States. It is most often manufactured in Mexico using chemicals supplied by China. It’s mixed with other narcotics to increase potency as well as pressed into counterfeit pain pills commonly known as “Mexican oxys.”

“The cartels are dominating the distribution of this poison and it’s really, really alarming,” Derek Maltz, former head of the DEA’s special operations division, told The Epoch Times.

“I do anticipate the crisis continuing on this escalating path. And to be honest with you, it’s really sad, because I’ve been communicating with a lot of parents who have lost their young kids, especially to the counterfeit pills. And it’s all coming from Mexico.”

Overdose deaths involving synthetic opioids (other than methadone) between 2005 and 2018. (DEA 2021 report)

The Rio Grande City Border Patrol station takes care of a 68-mile strip of international border in south Texas. It sits within the Rio Grande Valley Sector and in 2019 was the busiest of the nation’s 135 stations for drug seizures and the second busiest for illegal alien apprehensions.

Then-deputy chief Border Patrol agent for the Rio Grande Valley sector Raul Ortiz, said in March 2019 “we’re not even probably catching about 10 percent of it [drugs].”

Border experts have said it’s likely Border Patrol drug seizures will decrease as illegal immigration surges—agents will be tied up with large groups of people rather than interdicting drugs. Border Patrol highway checkpoints are also closing in many areas as agents are sent to the border to help with processing the increased numbers.

The Biden administration has said there’s no crisis on the border and urges potential migrants not to come in illegally. But the latest illegal crossing numbers show that February hit a 14-month high with more than 100,000 Border Patrol apprehensions.

Mexico’s president has expressed concern that President Joe Biden’s policies are encouraging illegal immigration and human trafficking along the border with the United States.

“They see him as the migrant president, and so many feel they’re going to reach the United States,” Mexican President Andres Manuel Lopez Obrador said of Biden the morning after a virtual meeting with his U.S. counterpart on March 1, according to Reuters.

Maltz said, “perception is reality. People around the world look at Biden as a softie on immigration.”

“The open border is a disaster. It just increases the [cartels’] ability to move drugs freely into America,” he said.

“Also, most importantly, it allows them to get their command and control operatives in the [United States] to establish the stash houses, the distribution outlets, the money collection points, so they have lots of people in America who are able to operate freely around the country.”

Areas of influence of major Mexican cartel within the United States. (DEA report 2021)

The cartels control the south side of the U.S.–Mexico border and anyone who crosses illegally has to pay them. Many can’t afford the smuggling fees and become indentured to the cartels once they reach the United States. Others realize it’s more lucrative to become involved in transnational crime rather than get a job at a fast food restaurant, for example, Maltz said.

“This didn’t start under Donald Trump. It didn’t start under Barack Obama. It didn’t start under George Bush. This drug crisis has been escalating for years,” he said.

“But they’re doing it at levels that we’ve never seen in the history of the country.”

In continuing the 12 month long stand up comedy act that the World Health Organization has been putting on (this is the organization who first told us there was no human to human Covid transmission, before then telling us we didn’t need to use masks, before taking a year to investigate Covid’s origins in China, all the while licking China’s boots), the organization is now pushing back finding the origin of Covid for “a few years”.

A member of an international team of investigators led by the World Health Organization said that, after focusing in on an animal source, we could know the origins “within the next few years,” according to the Wall Street Journal. Peter Daszak, a member of the WHO-led team, said: “I’m convinced we’re going to find out fairly soon. Within the next few years we’ll have real significant data on where this came from and how it emerged.”

Sigh.

Daszak was one of three team members who spoke on a webinar about his recent trip to Wuhan. Daszak said he learned that “meat from animals known to carry coronaviruses belonging to the same family as the pandemic virus were sold in the Huanan market”.

We also wonder if he happened to see this building off in the distance at any point during his “investigation”:

Regardless, the WHO team has “expressed frustration” with the lack of information China is giving them – as WSJ notes – “particularly regarding early Covid-19 cases that could help determine whether the virus was circulating before the first cases were confirmed.”

Sigh.

The team is expected to release a report next week that will talk about its findings and offer up recommendations for an investigation for further study. Daszak said the team’s “leading hypothesis” is that a “a bat or other wildlife species carrying a progenitor, or closely related virus, infected a farm animal or a person, who then carried it to the Huanan market.”

“I believe that’s the most likely scenario, and I think most people on both sides of the mission felt the same way,” he commented.

Dutch virologist Marion Koopmans said it was “extremely unlikely” that the virus escaped from a lab. And while committing to investigate any such links, she also said scientists were put on restriction during their visit to Wuhan: “The second phase of our trip after the hotel quarantine, we still could not freely go about. That was a disappointment for all of us.”

Daszak concluded: “There was a conduit from Wuhan to the provinces in South China, where the closest relative viruses to SARS-CoV-2 are found in bats. That’s a really important clue.”

Authored by Daniel Lacalle,

The pace of global recoveries since 1975 has been slower and weaker, consistently evey time, according to the OECD. Recoveries take longer and happen slower. At the same time, periods of crisis are less aggressive albeit more frequent than prior to 1975.  Another interesting evidence of the crises and recoveries since 1975 is that almost all economies end the recession period with more debt than before.

Global debt has ballooned to all-time highs, more than three times the world GDP. For the economy to really recover, we must stop the race of perverse incentives created by the wrong analysis of the origin of crises and the solutions that are often proposed in mainstream economics and politics.  I agree with Johan Norberg that the two main factors that have driven the phenomenal progress we have seen are free markets and openness. The freedom to innovate, experiment, create and share must come with the right incentives.

For decades, governments and central banks have always identified the problems of the economy as demand problems, even if it was not the case. If there was a crisis or a recession, governments immediately believed that it must be due to lack of demand, and subsequently decide that the private sector is not willing or able to fulfill the real demand needs of the economy, even if there was no real evidence that companies or citizens were investing or consuming less than what they needed. The entire premise was that companies were not investing “enough”. Compared to what and decide by whom? Obviously by central planners who benefit from bubbles and overcapacity but never suffer the consequences.

Governments and central banks never perceive risks of excess supply and even less predict a bubble. Why? Because most central planners see debt, oversupply, and bubbles as small collateral damages of a greater good: recover growth at any cost.

Behind the mistake in diagnosis is the obsession to maintain or grow Gross Domestic Product (GDP) at any cost regardless of the quality of its components. GDP is relatively easy to inflate. I always explain to my students that GDP is the only economic calculation in which you add what you spend with what you earn. GDP can be inflated through government spending and with higher debt-fueled expenditures. Debt is not a problem when it serves its purpose, which is to finance productive investment and allow the economy to grow, while efficiency, innovation, and technology allow us to be more productive and receive more and better goods and services at cheaper prices. It is a virtuous cycle.

The virtuous cycle of credit turns into a vicious cycle of unproductive debt when we incentivize malinvestment and prevent technology substitution by implementing massive government stimuli and liquidity injections.

Central banks justify their actions saying they do not cut rates, it is a market and private sector demand. Really? How and when did they survey that? What private sector? Crony or obsolescent companies? Highly indebted ones? Furthermore, if low rates and liquidity injections are a market demand, why not let the market set rates and liquidity instead of central banks?

Those same governments that feel the need to “increase inflation”, something that no consumer has demanded ever anywhere, do so because they benefit as the first recipients of newly created money and the only sector that truly benefits from inflation. Not even crony sectors fully benefit from inflation, the tax of the poor. Those suffer higher costs and import expenses.

By always making the same diagnosis, mistakes are repeated and accumulated. No wonder the pace of recoveries is slower, weaker and more indebted.

First, governments believe the problem is lack of demand and name themselves as the solution, using savers to finance it, via taxes and inflation. The best way to boost GDP? Massive white elephants, enormous infrastructure projects that generate a short-term boost to the spending side of GDP. Infrastructure is needed, of course, but the difference is when countries decide to use it as a subterfuge to disguise growth. Build anything at any cost. This leaves behind massive debt and a less dynamic, not stronger economy.

Second, demand-side policies perpetuate those sectors that are in process of obsolescence at the expense of savers, salaries and productive sectors. Governments will always subsidize and support the inefficient at the expense of the efficient because their objective is to maintain what they believe works and keeps jobs. It is not due to bad intentions or evil objectives, it is simply to perpetuate the past that they live off.

Third, massive liquidity injections and low rates are exactly the equivalents of indirect subsidies to the inefficient. The earliest recipients and most benefitted  from “unconventional monetary policies” will, by definition, be the most indebted and least productive. This is why productivity growth and money velocity stall during periods of government-led monetary and fiscal excess.

Fourth, the benefits of the short and long-term credit cycle are broken. Creative destruction is all but eliminated, malinvestment is promoted via unsustainably low rates and liquidity is absorbed by financial assets and unproductive sectors.

Inflation does not rise as much as central planners want because technology and efficiency are unstoppable even if they try, and because overcapacity is perpetuated through constant re-financing. Massive liquidity and low rates make zombie companies soar. The percentage of companies that cannot pay interest expenses with operating profits balloons despite ultra-low rates and alleged “growth-boosting” plans.

For decades, demand-side policies showed diminishing but not lethal results, but now the world has repeated the same policies so many times that there is simply exhaustion. Rates are unsustainably low, liquidity is excessive and there is no real fiscal space in governments that have all but consumed their ability to extract wealth from savers.

The more we hear from governments that we need to spend more and save less, the weaker the response from economic agents.

Governments and central banks create a crisis from a moderate and completely healthy slowdown by denying economic cycles and, even worse, presenting themselves as the ones that will revert them.

Promoting a debt-driven economy leads to more frequent crises, shorter economic cycles and abrupt recessions.

The rigging of interest rates by hapless central banks continues to do its job in distorting the market. In addition to boosting both bonds and stocks, it also has homeowners drawing on cash out refinancings at the quickest clip since the global financial crisis. 

$152.7 billion was cashed out in home equity last year, up 42% from 2019 and the most since 2007, according to the Wall Street Journal. At the same time, lenders originated more mortgages than ever in 2020, helped along by $2.8 trillion in refinancings. 

Some home owners chose to use the cash to re-do their homes, since they would be spending more time in them. Others just wanted the cash as a war chest against the uncertainty of Covid. 

Susan Wachter, an economist and professor at the University of Pennsylvania, told the Journal: “The support coming from home equity is unparalleled in helping smooth out the degradations from Covid. For those who are in the position to refinance, it’s a major source of support.”

In 2008, cash out refis became the enemy, since they left many people owing more than what their house was ultimately worth. Today, economists believe housing prices will continue to rise and support the idea of cashing out. Low rates also make it an obvious decision; the average rate on a 30 year fixed mortgage fell below 3% for the first time last year. 

Daryl Fairweather, chief economist at real-estate brokerage Redfin Corp., said: “There are genuinely a lot of people who want to buy homes to live in. They’re not just buying them to buy them or speculating that home prices will continue to rise. People are buying because they want them and they’re not trying to sell again the next year.”

Median home prices rose to $310,000 in December, up almost 13% from December 2019. The price increases have been felt the most in suburban and rural areas, as an exodus from cities continues. Meanwhile, the median credit score for those who refinanced has approached 800. 

Todd Kennedy of North Texas refinanced and lowered his rate by almost 100 bps. He cashed out $30,000 in the interim to help pay for some home improvements and said he considered a refi when it mortgage company reached out with an offer. His credit score is about 780.

“They said, ‘Hey, you’ve already got equity. We can do a lower rate and get cash back,’” he said.

St. Louis’ Wendi Comello also closed on a cash out refi. Her home, purchased at $95,000 in 2014, appraised for $150,000. She’s going to use the proceeds to pay off credit card debt and renovate her kitchen. Because she had a credit score in the 600s, she wasn’t able to lock in a lower rate. 

Mortgage loan officer Eric Henning said many customers have taken out “larger than usual” sums of cash for major renovations or additions: “They can’t find a house to move into, so they’ve basically decided to make their homes work long term.”

Authored by Bryce Coward via Knowledge Leaders Capital blog,

It’s no secret that money has poured into passive equity vehicles as investors seek low fees above all else. To date, that has worked out just fine since equity indexes have compounded their returns at acceptable, if not above average, rates of returns. But, the world is different now than it was 10 years ago, and the low-cost advantage of passive investing may now be outweighed by its risks.

In this quick post we’ll address three risks to passive investing that together suggest the riskiness of this strategy may well be the highest it has ever been.

1. Taking the S&P 500 as an example, the weighting toward tech-like stocks introduces significant concentration risk.

Indeed, the weighting of the technology sector + Alphabet, Amazon, Facebook, & Tesla is a whopping 38% of the total S&P 500. In other words, 38% of passive investors’ exposure is to one risk factor.

That’s a lot of chips to put on one bet.

2. The valuation for the tech-like stocks is out of control.

Taking just the tech sector as an example, it’s trading at 6.2x next year’s sales. This valuation extreme was only eclipsed (barely) in the late stages of the tech bubble.

Since valuations inform prospective returns, passive investors in the S&P 500 are basically locking in a below average rate of return since 38% of their portfolio is invested in highly valued stocks. But…the growth. Yes, valuations always need to be calibrated against prospective growth rates. However, tech sector growth rates have been trending down since 2006.

For the first time in a very long while, S&P 500 long-term growth is expected to be on par with tech sector growth.

3. Tech valuations are highly related the level of long-term interest rates.

Much of the “value” in tech stocks is the stream of cash flows that is expected many years from now, which is similar to the payoff profile of a long-term bond. When interest rates rise, the present value of those future cash flows (for bonds and high growth stocks) goes down. Since we’re in an environment in which very long-term interest rates are more likely to rise than fall, this will generally put pressure on tech valuations.

This is kind of hat trick for passive investors. Passive portfolios are highly concentrated in stocks with overlapping risk exposures, the valuation of those stocks is in the 99th percentile, and there is a catalyst for those valuations to compress. Combined, these things add up to a below average rate of return for passive portfolios, even if the average stock does just fine. But the fees are low…

As of 12/31/2021, Alphabet, Amazon and Facebook were held in a Knowledge Leaders Strategy. Tesla was not.

Over the past month, market volatility has been driven by a strong rotation out of Momentum and Growth stocks as inflation/growth expectations have soared higher. Remarkably, JPMorgan’s Delta One desk writes that its 12 month L/S Momentum index has more than given back all of its 2020 outperformance:

The February rout, which resulted in the biggest outperformance of value stocks over growth since the bursting of the dotcom bubble…

… has also hammered L/S Growth hedge funds back to Pre-Covid levels, a dramatic roundtrip as if the past 12 months never happened.

Which brings us to an interesting tangent: what exactly is momentum in this day and age?

According to JPM’s Delta One desk, for the past year, Long Momentum has been characterized by Growth, Covid/WFH beneficiaries and, more recently, some idiosyncratic themes (Crypto, Renewables, SPACs, Reddit favs etc.). As a result, some have characterized the “winners” as simply high Beta.

Short Momentum, often closely aligned with Value, has been defined by Covid Underperformers and Pro-Cyclical/Re-opening plays. However, due to the recent rotation, the definition of Momentum is evolving, and JPM now finds that 12m L/S Momentum is becoming less aligned with Growth and more aligned with Pro-Cyclical, Value. This change is also catalyzed by the fact that the Feb ’20 Covid sell-off is dropping out of rolling 12m Momentum signals.

This brings up another point: one month ago we brought you a note from JPM’s Marko Kolanovic who previewed the 1 year anniversary of the covid crash – which hits next week for most vol control funds –  and predicted that as a result of the Feb/early March 2020 VIX surge dropping out of the 12 month lookback window, we would see a major short squeeze among systematic investors in energy names, which have been the most hated sector for much of the past year, and where shorts will not only cover but turn aggressively long to keep up with the remarkable rally in crude oil.

As Kolanovic said “a further decline in volatility will likely result in larger and more stable cross-asset quant allocations. A larger momentum impact may affect Energy equities, which is the only sector that still has a strongly negative momentum signal and is hence heavily shorted in the context of factor investing.”  Indeed, until recently, oil was the only asset that was still below its covid pandemic highs. But, not any more with Brent having finally risen above its pre-pandemic highs.

That – and this was the punchline of Kolanovic’s thesis  –  will “change in mid-March, when the momentum signal for energy equities turns positive.” The Croatian quant then calculated that if one roughly assumes that there is about ~$1Tr in equity long-short quant funds and that half of these funds are not sector neutralized, “the flows could be quite significant, roughly $20-$30bn.” As shown in the chart below, the ratio of energy shares shorted vs all other S&P 500 shares shorted, closely followed the commodity supercycle. And, remarkably, the most recent number of shares shorted for energy was 4 times the S&P 500 average. This is where the systematic covering will be most acute.

To be sure, judging by the dramatic surge in energy names like Exxon which have soared 25% since the February “squeeze preview” post, many have frontrun just this upcoming quant rebalance.

One can argue that almost everyone, and certainly fast-money accounts have already jumped on board of this trade to frontrun the coming rebalance…. everyone except the quants, whose very tight vol control limits, prevent them from putting the trade on until they get the explicit green light based on historical vol metrics.

So with that in mind, and to see how these all these various momentum definition changes play out, JPM’s Delta One desk dissected the upcoming rebalance of its 12m L/S Momentum indices, which will take place exactly one week from today, on March 19th. Due to the fact that the lookback window is 12m-1m, one can very accurately forecast the changes. Here’s what will happen:

• Energy is the largest gainer in 12m L/S Momentum. This is because it moved out of the short leg, where it has been a top weight for several years. However, Energy’s representation in Long Momentum remains small, meaning there is far more upside as quants – who have by now covered shorts – now turn outright long.
• Industrials were the 2nd largest gainer, also driven by their decrease in Short Momentum.
• Staples, Health Care and Utilities were the largest decliners. This reflects the underperformance of Bond Proxies and increased risk appetite.
• Tech did not move significantly. This is due mostly to its large outperformance in ‘20 and early ‘21.
• Discretionary is now the top OW while Staples is the largest UW.

Finally, according to JPM’s Positioning Intelligence team, as the new definition of 12m L/S Momentum is OW Cons Disc and Tech and UW Defensives, it will be more correlated to broader market moves. For example, if the market sells off, assuming defensives outperform, Momentum will go down. This would be a shift from the typical behavior of Momentum being somewhat negatively correlated to broader market moves.

Going forward, JPM’s Strategy team expects that Pro-Cyclical stocks will continue to lead the market higher as the business cycle strengthens. If this occurs, these segments will continue to become a larger representation in Momentum. This broadening out of market participation and Momentum representation should make the Factor – and the broader market – less vulnerable to any tech-led selloffs as yields continue to rise in the next 12 months.