The Question For 2020: Can Fundamentals Ramp Up Before Policy Fades

The Question For 2020: Can Fundamentals Ramp Up Before Policy Fades

Authored by Morgan Stanley’s chief cross-asset strategist, Andrew Sheets

Markets are always subject to varied and shifting sets of drivers. Over the last 12 months, it has been a story of four – policy, sentiment, valuation and fundamentals. The question for 2020 is whether the last (fundamentals) can ramp back up before the first (policy) fades. It’s a race that makes us more nervous about the market after April and tactically mindful that several of our sentiment measures are now flashing red.

In the first phase of last year’s rally, policy, valuation and sentiment offset weak fundamentals. Global earnings revisions, trade volumes and manufacturing data all deteriorated sharply in early 2019. But the other three factors were still there, and in a big way. The Fed responded aggressively with easier policy via rate cuts. Valuations had adjusted meaningfully in late 2018, providing a more supportive base. And sentiment, if not universally negative, was a long way from optimistic.

Then, as markets rose, valuations fell by the wayside… By the middle of 2019, valuations for both global equities and credit had moved back above their five-year (and 10-year) averages. Fundamentals remained weak, which together with richer valuations might explain why global equities trod water between May and September. But thankfully (for the market), supportive policy and sentiment were hanging around. The Fed began increasing its balance sheet again at a US$60 billion/month clip in October, and measures of investor positioning remained subdued, reflecting continued concerns about fundamental weakness.

…and then sentiment melted away… With markets pushing higher into the new year, a wide variety of measures suggest a significant increase in optimism. Net length in S&P 500 futures contracts is the highest since 2014. The put/call ratio has plunged. Morgan Stanley’s Global Risk Demand Index (US Pat. No. 7,617,143), which measures ‘fear’ and ‘greed’, is near its highest levels in the last 10 years. And to put a human face on these datapoints, investor polling of the 160+ investors who attended our recent Global Insights Day in London this week was the most positive in years.

…which leaves policy. Whether or not the Fed intended to provide material easing when it restarted purchasing securities in October at a US$60 billion/month clip, that was the effect. Stocks rallied, credit spreads tightened further and the dollar fell, all easing financial conditions. But with valuations higher, sentiment positive and fundamentals still soft, policy is now carrying a heavy load.

And so the race with fundamentals begins

Our interest rate strategists expect the Fed to end its US$60 billion/month of T-Bill purchases at the end of April and replace them with US$15 billion/month of purchases across the Treasury curve. This ‘step-down’ in Fed support lends credence to the idea that gains in 2020 will be front-loaded.

The question will be whether fundamental improvement can get there first. Our economics team sees global growth rebounding and key parts of the manufacturing cycle picking up. But so far, we see this driving only a modest and highly uneven recovery in global earnings. One reason why we remain positive on equities in Korea and Japan is conviction that the earnings pick-up in these markets is real and can meet bottom-up consensus expectations.

But there’s also a risk that fundamental improvement has even less time. While the pace of increase in permanent assets on the Federal Reserve’s balance sheet should remain steady through April, my colleague Kelcie Gerson from our interest rate strategy team notes that the growth in reserves may be ending around now, as the Fed dials back on repo operations. If the size of reserves, rather than the balance sheet, is a better measure of policy support, fundamentals have even less time to pick up, and the current earnings season becomes more important.


Tyler Durden

Sun, 01/19/2020 – 17:05

via ZeroHedge News https://ift.tt/2R8hlsd Tyler Durden

Tyler Cowen on “State Capacity Libertarianism” II: Is it the Right Path for Libertarians to Follow?

In my last post on economist Tyler Cowen’s case for “state capacity libertarianism” (SCL), I took issue with Tyler’s claim that SCL is the wave of the future among “smart” libertarians. In this one, I focus on the more important issue of whether SCL is actually a good idea. Regardless of whether SCL is popular among libertarians now, should they adopt it? Here’s why my answer is a qualified “no.”

Before going into greater detail, it’s worth asking exactly what Tyler means by “state capacity.” He does not provide a very clear definition. But it seems to me that his SCL theory differs from more conventional libertarianism in so far as it focuses on increasing and improving the capabilities of government, including in at least some substantial areas that most other libertarians would argue should simply be left to the private sector. To the extent that SCL simply means improving government’s ability to perform those functions that even traditional libertarians (with the notable exception of anarchists) believe government should carry out, there is little difference between Tyler’s theory and other types of libertarianism.

Unfortunately, Tyler fails to specify how we measure the type of “capacity” he considers important, and also how we draw the line between issues where the right approach is improving state capacity and those where we should still aim to keep the state out (which might actually require reducing capacity, or at least keeping it more limited).

This lack of clarity is part of a more general problem with state capacity theory that goes well beyond Tyler’s piece. As critics like Bryan Caplan and Vincent Geloso and Alex Salter, point out, state capacity theorists have not done a good job of differentiating cases where state capacity is the cause of good outcomes from those where it is a result of them (e.g.—a state in a wealthier society has more capacity than on ine a poor society, even if the state did little to create that wealth). In addition, greater capacity means an increased ability to do evil as well as good, which is a highly relevant consideration when we are talking about institutions that can regulate, imprison, and kill people.

Until state capacity theorists do a better job of sorting out these baseline issues, we should be wary of making state capacity a central element of libertarianism—or, indeed, any other liberal political theory. These problems may not be insuperable. But they do require  better answers than state capacity advocates have given us so far.

While Tyler does not give us a general definition of SCL, he does present a number of specific propositions he associates with it. Some are criticisms of conventional libertarianism, while others present more of an affirmative agenda. Here, I consider several that seem distinctive to SCL. Thus, I pass over some that are likely to be endorsed by libertarians of any stripe (e.g.—”Markets and capitalism are very powerful, give them their due”).

[I]t doesn’t seem that old-style libertarianism can solve or even very well address a number of major problems, most significantly climate change.

I don’t claim libertarianism can solve all the world’s ills, or even come close to doing so. But, looking at some of the greatest evils and injustices out there, I see many that libertarianism is very well-equipped to handle. Consider such issues as immigration restrictions that inflict massive injustices on both immigrants and natives (and make the whole world far poorer than it could be), zoning rules that bar millions of Americans from housing and job opportunities, looming fiscal crises that afflict many Western democracies (including the US), the War on Drugs that blights the lives of many thousands every year,  a government too large and complicated for effective democratic accountability, and the undermining of the rule of law by the expansion of criminal law and regulation to the point where almost everyone can be charged with something.

In each of these areas, there are enormous gains to be had simply by having government engage in less of the activity that is causing the problem to begin with. Moreover, none requires the achievement of any kind of libertarian Utopia. Incremental reforms in a more libertarian direction can still achieve a lot. Even if we can’t get to open borders, we can radically transform the lives of hundreds of thousands of people for the better simply by increasing the amount of legal immigration into the US by, say, 10%. Even if we cannot abolish the entire War on Drugs, we can greatly reduce the amount of suffering it causes through legalizing just some of those drugs that are currently banned. Even if we cannot follow the example of Houston and have no zoning at all, we can liberalize zoning at the margin and thereby provide new housing and job opportunities for many thousands of people. And so on.

And none of these incremental reforms require much, if any, state capacity that doesn’t already exist. A government that can zone, restrict immigration, and wage a War on Drugs at current levels, is fully capable of doing, say, 10 or 20 percent less of each of these things. Admittedly, there are some situations where a kind of state capacity can be useful in mitigating transition problems through “keyhole solutions.” But these, too, rarely require capabilities Western democracies currently lack.

Tyler is right to highlight climate change as a problem for libertarians, one that too many of us have preferred to deny or ignore. However, libertarian environmental law experts, such as the VC’s own Jonathan Adler, have in fact developed solid proposals to address the issue, such as a revenue neutral carbon tax, prizes for relevant technological innovations, and expanding the use of nuclear power. These ideas are not fool-proof, but they have fewer risks than the command-and-control approach favored by many more conventional environmentalists, which threaten to massively expand government control over the economy and create grave risks for freedom and prosperity. I don’t know if libertarian approaches to climate change can “fix” the problem at an acceptable cost. But the same is even more true of the solutions offered by adherents of other ideologies. For example, it isn’t clear that anyone has proposed an effective way to incentivize large developing nations like China and India to greatly reduce their projected carbon emissions. The issue indeed a difficult challenge for libertarians—but also for everyone else.

There is also the word “classical liberal,” but what is “classical” supposed to mean that is not question-begging? The classical liberalism of its time focused on 19th century problems — appropriate for the 19th century of course — but from WWII onwards it has been a very different ballgame.

I don’t especially like the term “classical liberal” and it may indeed be question-begging. But Tyler is wrong to think that 19th century liberalism was only “appropriate for the 19th century.” To the contrary, there is much that modern libertarians can learn from our forbears. Among other things, nineteenth-century liberals fought against protectionism, ethnic nationalism, slavery and other forms of forced labor, and government intervention that rewards favored interest groups and suppresses competition. All of these remain among our most serious challenges today. that includes even forced labor, which is still widely practiced by authoritarian regimes, and which some even in the US seek to revive through mandatory “national service.” The French government recently imposed mandatory national service on all citizens when they turn 16.

Nineteenth century liberals also created successful mass movements in opposition to slavery and protectionism. It seems to me that modern libertarians (who have been far less effective in reaching the general public) could learn a great deal from these movements and apply some of the lessons to the present day (I give one example here).

Earlier in history, a strong state was necessary to back the formation of capitalism and also to protect individual rights (do read Koyama and Johnson on state capacity).  Strong states remain necessary to maintain and extend capitalism and markets….

A strong state is distinct from a very large or tyrannical state. A good strong state should see the maintenance and extension of capitalism as one of its primary duties, in many cases its #1 duty….

Rapid increases in state capacity can be very dangerous (earlier Japan, Germany), but high levels of state capacity are not inherently tyrannical.

Much here depends on exactly what is meant by a “strong state.” If it means a state effective within some range of functions, then few libertarians (anarchists, again,excepted) would deny its value. If it means a generally “strong” state with the ability to control most aspects of society, that’s a very different proposition. Moreover, most of these points are subject to the problems with the concept of “state capacity” already discussed above, particularly the point that state capacity is often the result of positive social developments rather than their cause. I  would add that even if “[a] good strong state” should see “the maintenance and extension of capitalism as one of its primary duties,” it doesn’t follow that it actually will. To the contrary, the more power the state has, the greater the temptation for politicians to misuse it, especially in a context where they are appealing to poorly informed voters. Moreover, the more areas a strong state can control, the harder it is for voters to keep track of all of its activities and monitor and punish potential abuses of power.

Many of the failures of today’s America are failures of excess regulation, but many others are failures of state capacity. Our governments cannot address climate change, much improve K-12 education, fix traffic congestion, or improve the quality of their discretionary spending….. I favor much more immigration, nonetheless I think our government needs clear standards for who cannot get in, who will be forced to leave, and a workable court system to back all that up and today we do not have that either….

Those problems require state capacity — albeit to boost markets — in a way that classical libertarianism is poorly suited to deal with. Furthermore, libertarianism is parasitic upon State Capacity Libertarianism to some degree. For instance, even if you favor education privatization, in the shorter run we still need to make the current system much better. That would even make privatization easier, if that is your goal.

Most of this strikes me as wrong. The problems with education, traffic congestion, and discretionary spending are not a lack of “capacity” but a combination of inherent flaws of government and poor incentives. If the libertarian diagnosis of the problems with public education is correct, the way to improvement is not trying to “make the current system much better,” but increasing competition and choice through privatization. Indeed, the failures of the status quo are one of the main driving forces behind the school choice movement. If we really could make the system much better without privatization and choice, there would be far less reason to do the latter.

Similarly, the best way to make the immigration system much better is to simply reduce restrictions and let more people in. Even if “standards” are no clearer than they are now, and even if the quality of immigration courts doesn’t improve, that would still give large numbers of people (both immigrants and natives) greater freedom and opportunity than they have now. Moreover, making legal immigration easier is actually the simplest way to alleviate pressure on courts and other state institutions at the border. Privatization is also a good strategy for alleviating traffic congestion through peak toll pricing, since the main obstacle to this simple reform is public ignorance.

There is a kernel of truth to Tyler’s claim that “libertarianism is parasitic upon State Capacity Libertarianism to some degree.”

If government is completely incapable of doing anything right, then it cannot fulfill even the basic functions that most libertarians want it to do. But, at this point in history, it doesn’t seem like the US and other Western democracies lack the capacity to do such things as provide a modicum of security and public goods. Rather, the problem is that our governments are engaging in way too many other functions, many of which are both harmful in themselves and divert resources away from the things that government should do. For example, the War on Drugs and immigration enforcement massively divert law enforcement personnel away from combating violent and property crime.

I don’t deny that there are cases where harmful government policies can be made less so without libertarian reforms (even if abolition or reduction of government intervention in these fields would be better still). But I’m not convinced that focusing on such reforms is a productive activity for libertarians. There is no shortage of non-libertarian policy experts working on incremental improvements to state institutions. The comparative advantage of libertarians (at least in most cases) is identifying ways to make improvements by reducing government intervention. Where the best available solution lies elsewhere, we can usually rely on non-libertarians to find it on their own.

Things might be different in a world where libertarians are much more numerous and influential than we are today. In that world, it would make sense for a substantial proportion of libertarian resources to be devoted to finding improvements in policy that do not involve shrinking government power.  Indeed, in that world, a much higher percentage of government activities would be ones that can be justified even on libertarian grounds, so it would be harder to find improvements by cutting back the role of the state. But we are very far from that point today.

State Capacity Libertarianism is not non-interventionist in foreign policy, as it believes in strong alliances with other relatively free nations, when feasible. That said, the usual libertarian “problems of intervention because government makes a lot of mistakes” bar still should be applied to specific military actions. But the alliances can be hugely beneficial, as illustrated by much of 20th century foreign policy and today much of Asia — which still relies on Pax Americana.

I actually agree with most of what Tyler says in this passage. For reasons I spelled out here, I am not as dovish as most other libertarians are. And we do need strong alliances with other relatively liberal nations to counter the dangerous illiberal forces in the world.

That said, the US and other  liberal democracies would have more resources available for these purposes if they weren’t doing so many other things. If, as Tyler puts it, conventional libertarianism is parasitic on “state capacity,” then state capacity to do good is also parasitic on libertarianism, in the sense that it needs tight limits on government power to prevent the state from wasting public resources on wasteful and harmful projects. Tyler’s strictures about the need for a relatively high bar for military intervention is also well-taken.

In sum, I remain largely unpersuaded by Tyler’s normative case for SCL. But I do want to commend him for for kicking off a valuable discussion, which has already attracted multiple thoughtful responses to his original post (I linked to several here). Very few blog posts stimulate high-quality public discussion as as much as Tyler did with this one. While he may not have persuaded me of the merits of “state capacity,” he has effectively  demonstrated the blogosphere’s capacity to produce valuable discourse, even in an era when blogs sometimes seem obsolete, due to the rise of crude and superficial social media.

UPDATE: As before, I am happy to commit to posting any response Tyler cares to make to either this post or my previous one on this subject.

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Tyler Cowen on “State Capacity Libertarianism” II: Is it the Right Path for Libertarians to Follow?

In my last post on economist Tyler Cowen’s case for “state capacity libertarianism” (SCL), I took issue with Tyler’s claim that SCL is the wave of the future among “smart” libertarians. In this one, I focus on the more important issue of whether SCL is actually a good idea. Regardless of whether SCL is popular among libertarians now, should they adopt it? Here’s why my answer is a qualified “no.”

Before going into greater detail, it’s worth asking exactly what Tyler means by “state capacity.” He does not provide a very clear definition. But it seems to me that his SCL theory differs from more conventional libertarianism in so far as it focuses on increasing and improving the capabilities of government, including in at least some substantial areas that most other libertarians would argue should simply be left to the private sector. To the extent that SCL simply means improving government’s ability to perform those functions that even traditional libertarians (with the notable exception of anarchists) believe government should carry out, there is little difference between Tyler’s theory and other types of libertarianism.

Unfortunately, Tyler fails to specify how we measure the type of “capacity” he considers important, and also how we draw the line between issues where the right approach is improving state capacity and those where we should still aim to keep the state out (which might actually require reducing capacity, or at least keeping it more limited).

This lack of clarity is part of a more general problem with state capacity theory that goes well beyond Tyler’s piece. As critics like Bryan Caplan and Vincent Geloso and Alex Salter, point out, state capacity theorists have not done a good job of differentiating cases where state capacity is the cause of good outcomes from those where it is a result of them (e.g.—a state in a wealthier society has more capacity than on ine a poor society, even if the state did little to create that wealth). In addition, greater capacity means an increased ability to do evil as well as good, which is a highly relevant consideration when we are talking about institutions that can regulate, imprison, and kill people.

Until state capacity theorists do a better job of sorting out these baseline issues, we should be wary of making state capacity a central element of libertarianism—or, indeed, any other liberal political theory. These problems may not be insuperable. But they do require  better answers than state capacity advocates have given us so far.

While Tyler does not give us a general definition of SCL, he does present a number of specific propositions he associates with it. Some are criticisms of conventional libertarianism, while others present more of an affirmative agenda. Here, I consider several that seem distinctive to SCL. Thus, I pass over some that are likely to be endorsed by libertarians of any stripe (e.g.—”Markets and capitalism are very powerful, give them their due”).

[I]t doesn’t seem that old-style libertarianism can solve or even very well address a number of major problems, most significantly climate change.

I don’t claim libertarianism can solve all the world’s ills, or even come close to doing so. But, looking at some of the greatest evils and injustices out there, I see many that libertarianism is very well-equipped to handle. Consider such issues as immigration restrictions that inflict massive injustices on both immigrants and natives (and make the whole world far poorer than it could be), zoning rules that bar millions of Americans from housing and job opportunities, looming fiscal crises that afflict many Western democracies (including the US), the War on Drugs that blights the lives of many thousands every year,  a government too large and complicated for effective democratic accountability, and the undermining of the rule of law by the expansion of criminal law and regulation to the point where almost everyone can be charged with something.

In each of these areas, there are enormous gains to be had simply by having government engage in less of the activity that is causing the problem to begin with. Moreover, none requires the achievement of any kind of libertarian Utopia. Incremental reforms in a more libertarian direction can still achieve a lot. Even if we can’t get to open borders, we can radically transform the lives of hundreds of thousands of people for the better simply by increasing the amount of legal immigration into the US by, say, 10%. Even if we cannot abolish the entire War on Drugs, we can greatly reduce the amount of suffering it causes through legalizing just some of those drugs that are currently banned. Even if we cannot follow the example of Houston and have no zoning at all, we can liberalize zoning at the margin and thereby provide new housing and job opportunities for many thousands of people. And so on.

And none of these incremental reforms require much, if any, state capacity that doesn’t already exist. A government that can zone, restrict immigration, and wage a War on Drugs at current levels, is fully capable of doing, say, 10 or 20 percent less of each of these things. Admittedly, there are some situations where a kind of state capacity can be useful in mitigating transition problems through “keyhole solutions.” But these, too, rarely require capabilities Western democracies currently lack.

Tyler is right to highlight climate change as a problem for libertarians, one that too many of us have preferred to deny or ignore. However, libertarian environmental law experts, such as the VC’s own Jonathan Adler, have in fact developed solid proposals to address the issue, such as a revenue neutral carbon tax, prizes for relevant technological innovations, and expanding the use of nuclear power. These ideas are not fool-proof, but they have fewer risks than the command-and-control approach favored by many more conventional environmentalists, which threaten to massively expand government control over the economy and create grave risks for freedom and prosperity. I don’t know if libertarian approaches to climate change can “fix” the problem at an acceptable cost. But the same is even more true of the solutions offered by adherents of other ideologies. For example, it isn’t clear that anyone has proposed an effective way to incentivize large developing nations like China and India to greatly reduce their projected carbon emissions. The issue indeed a difficult challenge for libertarians—but also for everyone else.

There is also the word “classical liberal,” but what is “classical” supposed to mean that is not question-begging? The classical liberalism of its time focused on 19th century problems — appropriate for the 19th century of course — but from WWII onwards it has been a very different ballgame.

I don’t especially like the term “classical liberal” and it may indeed be question-begging. But Tyler is wrong to think that 19th century liberalism was only “appropriate for the 19th century.” To the contrary, there is much that modern libertarians can learn from our forbears. Among other things, nineteenth-century liberals fought against protectionism, ethnic nationalism, slavery and other forms of forced labor, and government intervention that rewards favored interest groups and suppresses competition. All of these remain among our most serious challenges today. that includes even forced labor, which is still widely practiced by authoritarian regimes, and which some even in the US seek to revive through mandatory “national service.” The French government recently imposed mandatory national service on all citizens when they turn 16.

Nineteenth century liberals also created successful mass movements in opposition to slavery and protectionism. It seems to me that modern libertarians (who have been far less effective in reaching the general public) could learn a great deal from these movements and apply some of the lessons to the present day (I give one example here).

Earlier in history, a strong state was necessary to back the formation of capitalism and also to protect individual rights (do read Koyama and Johnson on state capacity).  Strong states remain necessary to maintain and extend capitalism and markets….

A strong state is distinct from a very large or tyrannical state. A good strong state should see the maintenance and extension of capitalism as one of its primary duties, in many cases its #1 duty….

Rapid increases in state capacity can be very dangerous (earlier Japan, Germany), but high levels of state capacity are not inherently tyrannical.

Much here depends on exactly what is meant by a “strong state.” If it means a state effective within some range of functions, then few libertarians (anarchists, again,excepted) would deny its value. If it means a generally “strong” state with the ability to control most aspects of society, that’s a very different proposition. Moreover, most of these points are subject to the problems with the concept of “state capacity” already discussed above, particularly the point that state capacity is often the result of positive social developments rather than their cause. I  would add that even if “[a] good strong state” should see “the maintenance and extension of capitalism as one of its primary duties,” it doesn’t follow that it actually will. To the contrary, the more power the state has, the greater the temptation for politicians to misuse it, especially in a context where they are appealing to poorly informed voters. Moreover, the more areas a strong state can control, the harder it is for voters to keep track of all of its activities and monitor and punish potential abuses of power.

Many of the failures of today’s America are failures of excess regulation, but many others are failures of state capacity. Our governments cannot address climate change, much improve K-12 education, fix traffic congestion, or improve the quality of their discretionary spending….. I favor much more immigration, nonetheless I think our government needs clear standards for who cannot get in, who will be forced to leave, and a workable court system to back all that up and today we do not have that either….

Those problems require state capacity — albeit to boost markets — in a way that classical libertarianism is poorly suited to deal with. Furthermore, libertarianism is parasitic upon State Capacity Libertarianism to some degree. For instance, even if you favor education privatization, in the shorter run we still need to make the current system much better. That would even make privatization easier, if that is your goal.

Most of this strikes me as wrong. The problems with education, traffic congestion, and discretionary spending are not a lack of “capacity” but a combination of inherent flaws of government and poor incentives. If the libertarian diagnosis of the problems with public education is correct, the way to improvement is not trying to “make the current system much better,” but increasing competition and choice through privatization. Indeed, the failures of the status quo are one of the main driving forces behind the school choice movement. If we really could make the system much better without privatization and choice, there would be far less reason to do the latter.

Similarly, the best way to make the immigration system much better is to simply reduce restrictions and let more people in. Even if “standards” are no clearer than they are now, and even if the quality of immigration courts doesn’t improve, that would still give large numbers of people (both immigrants and natives) greater freedom and opportunity than they have now. Moreover, making legal immigration easier is actually the simplest way to alleviate pressure on courts and other state institutions at the border. Privatization is also a good strategy for alleviating traffic congestion through peak toll pricing, since the main obstacle to this simple reform is public ignorance.

There is a kernel of truth to Tyler’s claim that “libertarianism is parasitic upon State Capacity Libertarianism to some degree.”

If government is completely incapable of doing anything right, then it cannot fulfill even the basic functions that most libertarians want it to do. But, at this point in history, it doesn’t seem like the US and other Western democracies lack the capacity to do such things as provide a modicum of security and public goods. Rather, the problem is that our governments are engaging in way too many other functions, many of which are both harmful in themselves and divert resources away from the things that government should do. For example, the War on Drugs and immigration enforcement massively divert law enforcement personnel away from combating violent and property crime.

I don’t deny that there are cases where harmful government policies can be made less so without libertarian reforms (even if abolition or reduction of government intervention in these fields would be better still). But I’m not convinced that focusing on such reforms is a productive activity for libertarians. There is no shortage of non-libertarian policy experts working on incremental improvements to state institutions. The comparative advantage of libertarians (at least in most cases) is identifying ways to make improvements by reducing government intervention. Where the best available solution lies elsewhere, we can usually rely on non-libertarians to find it on their own.

Things might be different in a world where libertarians are much more numerous and influential than we are today. In that world, it would make sense for a substantial proportion of libertarian resources to be devoted to finding improvements in policy that do not involve shrinking government power.  Indeed, in that world, a much higher percentage of government activities would be ones that can be justified even on libertarian grounds, so it would be harder to find improvements by cutting back the role of the state. But we are very far from that point today.

State Capacity Libertarianism is not non-interventionist in foreign policy, as it believes in strong alliances with other relatively free nations, when feasible. That said, the usual libertarian “problems of intervention because government makes a lot of mistakes” bar still should be applied to specific military actions. But the alliances can be hugely beneficial, as illustrated by much of 20th century foreign policy and today much of Asia — which still relies on Pax Americana.

I actually agree with most of what Tyler says in this passage. For reasons I spelled out here, I am not as dovish as most other libertarians are. And we do need strong alliances with other relatively liberal nations to counter the dangerous illiberal forces in the world.

That said, the US and other  liberal democracies would have more resources available for these purposes if they weren’t doing so many other things. If, as Tyler puts it, conventional libertarianism is parasitic on “state capacity,” then state capacity to do good is also parasitic on libertarianism, in the sense that it needs tight limits on government power to prevent the state from wasting public resources on wasteful and harmful projects. Tyler’s strictures about the need for a relatively high bar for military intervention is also well-taken.

In sum, I remain largely unpersuaded by Tyler’s normative case for SCL. But I do want to commend him for for kicking off a valuable discussion, which has already attracted multiple thoughtful responses to his original post (I linked to several here). Very few blog posts stimulate high-quality public discussion as as much as Tyler did with this one. While he may not have persuaded me of the merits of “state capacity,” he has effectively  demonstrated the blogosphere’s capacity to produce valuable discourse, even in an era when blogs sometimes seem obsolete, due to the rise of crude and superficial social media.

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The Tight Rope Market

The Tight Rope Market

Authored by Sven Henrich via NorthmanTrader.com,

None of us can know where markets would be trading without the Fed’s constant massive liquidity injections, but now that the bubble recognition has gone mainstream (BloombergFT) and acknowledged by at least one Fed president (Kaplan) I think it’s fair to say: Lower, much lower.

But while investors continue to dance on the liquidity driven momentum rally right into major resistance currently ignored data keeps suggesting that risk is much higher than anyone is willing to acknowledge. Indeed these data points suggest investors may be walking a precarious tight rope without even realizing it.

I do my best to keep pointing out these data points, but so far admittedly in vain:

Since the Fed is currently hosting the most expensive frat party of all time it’s no wonder that investors are currently ignoring everything else consequences be damned.

I’ll let the reader be the judge, but below are a few charts I think are worth documenting as they highlight what investors are entirely ignoring at this stage.

And no I’m not talking about valuations. I’ve already made that point in the Ghosts of 2000, valuations are at records highs on many measures and that goes without saying. Valuations are high during any bubble, but rather there are underlying data trends that often precede coming recessions.

What recession? Everybody has declared recession risk to have faded. Why? Because stock prices have rallied to new all time highs? When has that ever be an indication that there is no recession risk ahead? Markets made new all time highs in the Fall of 2007. The recession started in December of 2007. Markets rallied to new all time highs in 2000. Did that mean there was no recession in 2001/2002? Of course now.

If anything high optimism is always a concern as it historically it is followed by, well, less optimism:

Yield curves have un-inverted and everybody declares recession risk to be over. Why?

The steepening has traditionally been the red flag ahead of a recession. Along with a slew of other data points that everybody is again ignoring.

In order for markets to grow into excessive valuations you need growth to follow suit. In order to see growth to emerge you need to see an expansion investment and credit.

Commercial and industrial loan growth shows none of that, it continues to decline:

Often associated with coming recessions it signals that companies are not as confident as markets who are hoping for a 2016 repeat. But then we didnt have a yield curve inversion and then steepening.

In context then it’s perhaps noteworthy that suddenly job openings have dropped hard, the most in this cycle:

This cycle remains very much long in the tooth and slowing employment growth is always a red flag at the end of a cycle. Where are the great new hiring plans?

May I remind everyone there’s a US election coming and this one may have consequences. I can’t predict elections, but depending on outcome it may bring about a  change in tax outlook.

Corporations surely must know that they were handed an unprecedented gift during the Trump presidency that may not last forever:

Uncertainty breeds risk and corporations may well hold off on big expansionary plans until after the election, especially considering that there a few signs that industrial production growth is picking up at this stage:

In fact, despite being awash in cash and in a tax nirvana corporations appear to dial it back on the buyback bonanza front:

As they do when they sense growth issues ahead (see 2007 into 2008).

On that note, here’s a little watched indicator, heavy weight truck sales:

Oddly enough that one dropped hard in front of the last 2 recessions following an aggressive ramp up. And it just did as well.

These data points are by far an exhaustive list, but they show a confluent picture of data points that suggest recession risk is not off the table. If anything they show factors that are entirely consistent with previous business cycles coming to an end.

And if this rally is all Fed driven, then it’s the Fed that will have brought about the final spurt of excess that will lead to an ugly reversion that could bring about the very recession it was so scared of in the first place.

It’s not like financial asset valuations versus the the underlying size of the economy are historically outsized or anything:

The New York Fed Nowcast keeps showing less than 2% GDP growth for Q4 2019 and Q1 2020. 1.2% and 1.7% respectively.

That’s the growth we get with a $400B expansion in the Fed’s balance sheet, 3 rate cuts and a trillion dollar deficit?

It’s almost as if the Fed’s power to stimulate growth is waning:

I submit investors, drunk at the latest Fed party, are walking a very tight rope. Who’s the designated driver once the party ends?

*  *  *

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Tyler Durden

Sun, 01/19/2020 – 16:15

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Never Before Seen Market Complacency, As Everyone Goes Even More “All In”

Never Before Seen Market Complacency, As Everyone Goes Even More “All In”

Last weekend, we pointed out that according to the latest flow data as compiled by Deutsche Bank’s Parag Thatte, virtually every segment of the market – from institutional to retail investors, and systematics such as quants, risk-parity, vol-targeters, and CTAs – were essentially “all-in” stocks (if you missed it, please read “Institutions, Retail And Algos Are Now All-In, Just As Buybacks Tumble“).

Fast forwarding to today, when the S&P just had another impressive meltup week, sending the S&P more than 3% higher YTD and for the 11th consecutive year blowing the professional investing community out of the water (hedge funds have underperformed the S&P on every single day of 2020 so far)…

… we find that investors are, inasmuch as that is possible, even more “all in” stocks. So without boring readers with the same narrative as we laid out last weekend, for the simple reason that nothing has changed since then, here is a quick rundown the key charts showing just how vested (and invested) everyone is in stocks as of this moment.

We start with consolidated equity positioning, representing a weighted average of Z-scores for positioning and flows indicators used by Deutsche Bank in tracking its entire positional universe:

A somewhat simpler and perhaps more accurate take, one based on the aggregated equity futures positioning as a % of Open Interest, shows that asset managers and levered funds have never been longer!

A similar picture emerges when looking at just net positioning in S&P 500 futures among asset managers and leveraged funds.

Curiously, while Discretionary investors are almost at all time highs, if not quite, Systematic investors have now thrown all caution to the wind, perhaps as a result of the sharp drop in VIX Y/Y, and have never been more invested:

Among the systematics, the bullishness of risk parity is now almost literally off the charts.

Likewise for vol-control funds, these are at the maximum of their theoretical maximum equity allocation.

And while CTAs have had a higher beta to equities in the past, this too is rising fast and approaching the all time high.

In one ominous sign that we are taking the stairs higher and will take the parachute on the way down, the higher we get, the lower overall market liquidity gets.

Another ominous signal: hedge funds are unable to keep up with the meltup in the broader market, with hegde fund shorts dominating performance ever since the summer of 2018, and preventing the 2 and 20 community to keep up with the S&P500.

And as a result of the negative contribution from shorts which are once again outperforming the broader market, hedge fund beta is near the lowest in the four years.

As a result of aggressive central bank intervention which has effectively wiped out risk, extreme put-to-call ratios indicate near record complacency…

… as does collapsing implied vol and skew.

This has also led to near all time low short interest across single stocks and ETFs:

Meanwhile, the biggest conundrum of 2019 has carried over into 2020, as massive equity outflows persist and offset tremendous inflows in bonds as well as money market funds, suggesting the primary buyer remains stock buybacks…

… despite stable inflows into tech, real estate and utilities.

Last but certainly not least, the biggest concern for stocks is the precipitous decline in announced buybacks: without this single biggest buyer of stocks over the past 10 years, just who will propell stocks to new all time highs once sentiment reverse and marginal traders start dumping?

 


Tyler Durden

Sun, 01/19/2020 – 16:00

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US Drug Overdose Deaths Drop For First Time Since 1990

US Drug Overdose Deaths Drop For First Time Since 1990

Authored by Paula Liu via NTD.com,

For the first time in nearly three decades, the deaths resulting from drug overdose in the United States have dropped, according to multiple reports.

As reported by The New York Times, according to government data that was published on Jan. 15, the total amount of deaths resulting from drug overdose dropped around 5 percent in 2019.

“[For the] first time in almost 30 years, we’ve seen a decline in the number of Americans dying from an overdose—its a 5 percent reduction,” said Jim Carroll, the director of the Office of National Drug Control Policy, according to The Hill.

The news outlet reported that Carroll was appointed director in 2018 by President Donald Trump.

“It’s a result of everything – its working on the supply of drugs that are coming in but it’s also working on demand. It’s getting more people into treatment and its spreading the message on prevention,” Carroll said.

Carroll commended some local officials for trying to look past incarceration as a means to solve the epidemic, and instead looking for ways to offer treatment. Instead of arresting drug users, the goal is to treat and educate them as an individual. Carroll stated that this method had made a difference in the community.

According to the report, the drop was primarily attributed to the number of deaths from prescription opioid drugs, one of the drugs that had set off an epidemic in the United States. The New York Times reported that the opioid epidemic was so catastrophic that the drug had decreased the life expectancy in the country.

The Centers for Disease Control and Prevention (CDC) stated that 67.8 percent of the drug overdose deaths back in 2017 (which was 70,237 deaths) was due to opioid drugs, according to data on drug overdose deaths. In addition, on average 130 Americans die every single day from an opioid drug overdose, according to the CDC.

As a result of the epidemic, some of the states have tackled the issue head on, and created programs to help counter the amount of deaths as a form of solution, according to The Hill.

Andrew Kolodny, the co-director of opioid policy research at Brandels University said that the drop in deaths could be a turning point, calling the decrease “light at the end of the tunnel,” but said that the decrease was still nothing to celebrate because the amount of people who died from drug overdoses is still very high, according to The New York Times.


Tyler Durden

Sun, 01/19/2020 – 15:25

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MSNBC Promotes Biden Lie That Sanders ‘Doctored’ Video; Politico Debunks, Sirota Simmers

MSNBC Promotes Biden Lie That Sanders ‘Doctored’ Video; Politico Debunks, Sirota Simmers

Bernie Sanders and Joe Biden are having an old man fight.

In a January 7 newsletter, Sanders’ campaign wrote that Biden “lauded” former Republican House Speaker Paul Ryan’s efforts to cut social security – claiming “In 2018, Biden lauded Paul Ryan for proposing cuts to Social Security and Medicare.”

In truth, Biden said that Ryan was “correct” to have gone after Social Security and Medicare – as it’s “the only way” to make the numbers work, though the former VP later clarified that America needs a progressive tax code that “raises enough revenue to make sure that the Social Security and Medicare can stay – still needs adjustments, but can stay.”

Watch:

After Sanders’ campaign claimed that Biden lauded Ryan’s plan, Biden lied – claiming Sanders ‘doctored’ the video.

“PolitiFact looked at it and they doctored the photo, they doctored the piece and it’s acknowledged that it’s a fake,” Biden falsely claimed.

Politifact didn’t say the video was doctored, though they did suggest that Sanders had mischaracterized Biden’s comments. Interestingly, Politifact omits Biden’s mention that Social Security and Medicare would ‘still need adjustments.’

Sanders’ campaign hit back in a Saturday statement from Campaign Manager Fritz Shakir, who said “Joe Biden should be honest with voters and stop trying to doctor his own public record of consistently and repeatedly trying to cut Social Security,” adding “The facts are very clear: Biden not only pushed to cut Social Security — he is on tape proudly bragging about it on multiple occasions.

Biden, meanwhile, said on Saturday “It is simply a lie, that video that’s going around. And ask anybody in the press, it’s a flat lie. They acknowledged that,” adding “This is a doctored tape. And I think it’s beneath him. And I’m looking for his campaign to come forward and disown it. But they haven’t done it yet.”

Politico set the record straight on Saturday, noting that the video was not doctored, and that Biden has a “long-standing record of entertaining cuts” to the programs – only for MSNBC to peddle the ‘doctored video’ accusation on air. Sanders speechwriter David Sirota called them out over Twitter on Sunday.

In short:


Tyler Durden

Sun, 01/19/2020 – 15:00

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How The Supreme Court Could Be Pulled Into The Trump Impeachment

How The Supreme Court Could Be Pulled Into The Trump Impeachment

Authored by Jonathan Turley,

After its 2000 decision in Bush v. Gore, Justice David Souter reportedly “wept” when the role of the Supreme Court was raised in determining the outcome of the presidential election.

The court continues to grapple with the legacy – and controversy – of that decision. With the still developing Senate trial in President Trump’s impeachment, the court could soon be pulled into the flip side of Bush v. Gore, not who could be declared but who should be removed as president.

Despite what Trump counsel Rudolph W. Giuliani has declared in calling for the court to nullify the impeachment, the Constitution does not state any function of the court in impeachments other than the limited role of the chief justice as the presiding judge. That suits most justices just fine. Most justices would prefer to drink molten lead than get pulled into another presidential legitimacy case.

Yet, the Trump impeachment trial may force that cup to the lips of the justices. With a trial starting in the Senate on Thursday, the looming question over the Senate will be whether to allow witnesses. While I strongly disagreed with the House in rushing this impeachment forward rather than waiting a couple of months to complete its record, I still support a trial with witnesses in the Senate. If witnesses are called, however, the court could be forced to finally face a question more than 50 years in the making.

In 1974, the Supreme Court ruled in United States v. Nixon and ordered the release of the Watergate tapes to special prosecutor Leon Jaworski – and ultimately to Congress. Nixon resigned roughly two weeks later. That case has spawned a variety of interpretations of its rejection of executive privilege, including one interpretation I call the “Nixon fallacy.” The fallacy goes something like this:

Impeachment so exceeds in importance executive-privilege claims that the Supreme Court has already declared that criminal or impeachment investigations take precedence over privilege so any withholding of testimony or documents is per se obstruction.

In reality, the Supreme Court never said anything like that.

Yes, the court rejected what it described as the claim of an “absolute, unqualified Presidential privilege of immunity” to withhold relevant evidence in a criminal investigation. But it did not say that a president could not invoke privilege over the testimony in an impeachment proceeding or that such privilege assertions could not ever prevail. Indeed, it did not even categorically reject such claims in a criminal investigation but simply said that “without more” of a justification from Nixon, the tapes would have to be turned over to the Watergate special prosecutor.

A national security adviser speaking to a president about the delivery of military aid to a foreign country is the very definition of a core protected area of executive privilege. That does not mean the White House would win in a fight over John Bolton’s testimony. However, it does mean Trump has a viable and recognized basis for withholding information in this area – creating an issue capable of judicial review and resolution.

So, here is one scenario. The Senate crosses the Rubicon and both sides call witnesses from Bolton to Hunter Biden to give depositions. While Biden would not be able to refuse to testify absent a Fifth Amendment plea (which could be overcome by a grant of immunity), the White House would try to halt Bolton’s participation under a claim of privilege. The White House would presumably push the case into the federal district court, which would have to review each area of questioning to determine if executive privileges or congressional prerogatives should prevail. Appeals would follow. And all that assumes the Senate is willing to wait for those courts to rule.

The problem is time. It took only three months to litigate the Nixon tapes controversy from the district court to a final decision of the Supreme Court. By refusing to delay the impeachment vote, the House effectively gave up control of its own case. The Senate may have little time or patience to allow the House to correct that blunder.

In my view, Bolton should testify. Indeed, he should have been subpoenaed in the House. There are valid privilege claims to be raised, but he can clearly answer questions narrowly tailored to the issue of a quid pro quo.

The only body less eager to grapple with those claims than the Senate is the Supreme Court. The aversion is only enhanced by the possibility of recusal of Chief Justice John G. Roberts Jr. in any appeal, leaving the court with a risk of a tie vote on a critical impeachment question. Over a decade after she ruled in Bush v. Gore, Sandra Day O’Connor was still expressing regrets and wondered aloud, “Maybe the court should have said, ‘We’re not going to take it, goodbye.’”

But that may be difficult when the Senate is waiting roughly 1,500 feet away for an answer on what Bolton might say. Three branches of government would literally be locked in a constitutional hold with the curious figure of Bolton sitting in the center. Before he speaks, the court may have no alternative but to be heard.


Tyler Durden

Sun, 01/19/2020 – 14:35

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Syrian Jihadists Filmed Jet-Setting To Next Proxy War On Commercial Plane

Syrian Jihadists Filmed Jet-Setting To Next Proxy War On Commercial Plane

Turkish President Recep Tayyip Erdogan has continued warning that terrorist groups as well as a ‘flood of refugees’ will show up on Europe’s shores if the Tripoli government were to fall to renegade General Khalifa Haftar, amid his continued offensive to control the Libyan capital. Erdogan’s statement came a day before he heads to Berlin for a major peace conference which will attempt to halt the fighting. 

And yet look who’s sending actual jihadists into the already war-ravaged country on comfortable commercial jets:

Middle East media outlet Arab News describes the footage as follows:

A video has emerged showing dozens of what appear to be Syrian rebels on an Afriqiyah Airways plane headed to Libya where they will allegedly fight alongside the country’s Government of National Accord (GNA), Libyan newspaper Al-Shahid has claimed.

In the video, the men — three of whom were seen wearing military uniforms — are on their way to Libya where they will reportedly fight as mercenaries for the GNA’s militias.

The shocking video of what is supposed to be a “covert” Turkey-sponsored mission to bolster the Tripoli GNA government with both Syrian jihadist FSA mercenaries (and separately Turkish national troops) confirms new reporting in The Guardian this week.

According to the bombshell Guardian report:

Two thousand Syrian fighters have traveled from Turkey or will arrive imminently to fight on the battlefields of Libya, Syrian sources in all three countries have said, in an unprecedented development that threatens to further complicate the north African state’s intractable civil war.

The deployment came after Turkey agreed last month to come to the aid of the Libyan prime minister, Fayez al-Sarraj, who is backed by the UN, in the face of a months-long campaign by his rival, the warlord Khalifa Haftar.

This perhaps makes Erdogan’s latest ‘warning’ appear something more like a ‘threat’ in which he’s the one actually holding the trigger

“Europe will encounter a fresh set of problems and threats if Libya’s legitimate government were to fall,” Erdogan said.

“Terrorist organisations such as ISIS [ISIL or Daesh] and al-Qaeda, which suffered a military defeat in Syria and Iraq, will find a fertile ground to get back on their feet,” he continued. “Keeping in mind that Europe is less interested in providing military support to Libya, the obvious choice is to work with Turkey, which has already promised military assistance,” Erdogan added.

Erdogan has long claimed Turkey’s intervention in Libya is to “combat terrorism” — which for Ankara means defeating pro-Haftar forces. 

Meanwhile, journalist for The Sunday Times Hala Jaber has noted Turkey’s latest foreign adventurism includes sending the same “guns for hire” once used to try and oust Assad to Libya.

Or we might even say many foreign fighters are going “back” to Libya, given in the early years of the Syrian war many thousands of jihadists from North Africa were allowed to enter northern Syria via Turkey to assist in the Western/Gulf military alliance in regime change efforts there. 

* * * 

Libyan Islamists backed by the West toppled Gaddafi and destroyed much of the country in the 2011 war. Here they are posing at Tripoli’s international airport in 2014 after capturing and destroying airplanes

The rebel group Libyan Dawn in a 2014 bid to take Tripoli’s airport, via Daily Mail.


Tyler Durden

Sun, 01/19/2020 – 14:10

via ZeroHedge News https://ift.tt/37fBWRm Tyler Durden

MSNBC Slammed For Featuring ‘Body Language Expert’ Who Calls Bernie Sanders A Liar

MSNBC Slammed For Featuring ‘Body Language Expert’ Who Calls Bernie Sanders A Liar

Authored by Jon Queally via CommonDreams.org,

MSNBC and weekend anchor Joy Ann Reid came under fire from progressives and members of the Bernie Sanders campaign Saturday after airing a segment with a “body language expert” who — citing “eye level” and the turtling of the 2020 candidate’s shoulders — accused Sanders of lying earlier this week when he denied ever telling Sen. Elizabeth Warren that a woman could not be president.

“This is unhinged,” tweeted Meagan Day, a staff writer for Jacobin magazine, in response to the segment. “Genuinely divorced from reality.”

MSNBC weekend anchor Joy Ann Reid host invited Janine Driver on her show Saturday morning. Image source: MSNBC/Screenshot

The guest on Reid’s show “AM Joy” was Janine Driver, who promotes herself as an “international communications expert” and the owner and president of the Body Language Institute. The segment sparked howls of criticism aimed at Driver, Reid, and the network.

Driver, who bills herself as a “body language expert,” accused Sen. Bernie Sanders of being a liar on national television because he “turtles” his shoulders and lowers his “eye level” when he says certain things.

“So now the slant is that he’s physically intimidating too, oh and sexist,” said writer and activist Malaika Jabali. “Totally cool, normal interpretation of someone being spontaneously confronted on national TV. It’s getting outrageous.”

While both the Warren and Sanders camp have appeared desirous to put the dust-up about what was or wasn’t said during a private 2018 meeting behind them, Day — who openly supports Sanders as the better and more progressive candidate — was among those unwilling to disarm so long as the corporate media outlets continue to air such blatant and irrresponsible attacks to their massive audiences.

“I know there’s a big push to move on but if the mainstream media is gonna broadcast this fraudulent garbage,” said Day, “then I don’t feel particularly compelled to drop it.”

She was hardly alone.

“MSNBC is a fucking disgrace,” said journalist Glenn Greenwald of The Intercept. Greenwald said the use of “bullshit charlatan body language analysis” to call Sanders a liar was “appalling but typical” of the network.

Driver’s performance in the interview led many to check her credentials, political leanings, and background:

Media critic Adam Johnson noted, “just to be clear ‘body language experts’ aren’t actually a thing and MSNBC should stop having them on all the time in general.”

Johnson — who has long documented the corporate media’s bias against Sanders as a presidential candidate — added:

Sanders’ national press secretary Briahna Joy Gray also denounced the segment and said the “campaign is owed an apology” by the network.

“What are they going to do next, phrenology?” Gray said. “This is why no one trusts the media.”


Tyler Durden

Sun, 01/19/2020 – 13:45

via ZeroHedge News https://ift.tt/2TFWu1c Tyler Durden