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Authored by Antony Sammeroff via The Mises Institute,

I’m sitting in the pub after a Skeptics Society meet up. I don’t go very often, but there was a famous author speaking, and living (as most of us do these days) in something of a social media bubble, this is a rare opportunity for me to actually get a window into what thinking people outside of my circle have to say on some of the issues of the day. A warm chat ensues over a pint with a couple of the other attendees, when miraculously the conversation at my table turns to the universal basic income (UBI). My neighbour gushes with vigour over its merits. He eagerly vows that it will solve innumerable problems facing our civilisation and I get the feeling he has been spreading the gospel at every available turn because this idea is the crucial one. If only he can get enough people to believe it…

I abstain from mentioning my book as I don’t want to prejudice his answers to any of my questions. I politely wait my turn, and then ask a simple question: “What do you think the potential disadvantages of the basic income would be, then?”

He replies, “There aren’t any.”

Trade-Offs Are Inescapable

Despite the heated disagreements between economists on just about every issue under the sun, there is probably one point that they are all actually unanimous on. That is the fact that every policy has winners and losers. Given that human wants are infinite but our means towards attaining those wants are limited, policies, by their nature, advantage some groups at the expense of others.

But the universal basic income seems unaffected. It’s going to cure poverty, eliminate stress, reduce crime, unleash entrepreneurship, emancipate women, save us from AI, and fight climate change. I’m not not exaggerating. I googled, and there are multiple articles claiming that, not only will the UBI save the economy from flatlining due to a lack of consumer demand by increasing consumption, but somehow also put a halt to global warming as well — contradictory as these two aims may seem.

Is the UBI is a flying unicorn that poops rainbows?

Perhaps so. Perhaps the laws of economics will be nullified around the good intentions of its advocates. Such is the strength and cavalier nature of the latter’s idealism.

Perhaps I’m being a little harsh on budding idealists, though. After all, this lad doesn’t have a background in economics, does he? He’s just looking for an easy way to save the world. Surely I should pick on someone my own size. Professional advocates of the UBI are bound to be more evenhanded in their consideration of the comparative advantages and disadvantages of the program and present a more nuanced view, aren’t they?

Well, not according to the titles of their books …

Rutger Bregman comes right out and calls his book advocating the UBI Utopia for Realists.

Annie Lowrey’s book Give People Money carries the subtitle “How a Universal Basic Income Would End Poverty, Revolutionize Work, and Remake the World.”

Andy Stern and Lee Kravitz’s book Raising the Floor carries a subtitle claiming the UBI will, “Renew Our Economy and Rebuild the American Dream.”

Phillipe Van Parijs and Yannick Vanderborght entitled their book Basic Income: A Radical Proposal for a Free Society and a Sane Economy.

This boundless idealism scares me.

The Russians were also offered utopia after the tsars, as were the Chinese when Mao came to power. So if I deviate from my so-far-ecumenical tone in this new coda, it’s in part because people seem to too readily forget what the road to hell is paved with.

Trusting the World’s Regimes to Do Good?

Most people agree that politics is a dirty game and that political powers will inevitably be used to further the agenda of officeholders and their cronies. That said, despite being immersed in the current thinking regarding UBI for three years now, I have seen precious little worrying as to what the government — or a future government — might actually do once it has seized control over everyone’s purse strings.

After all, these governments are composed of the same people who launched a permanent war in the Middle East, wasting trillions of dollars on destroying millions of lives. These governments bailed out the banks from the public purse and gave themselves raises after telling the rest of the nation we had to tighten our belts. They have robbed the young of the opportunity to own a home by sending house prices through the roof and mean to leave them a nation in ruinous debt. They continue locking away huge numbers of people for decades for victimless crimes, leaving their children to be raised single-handed. They created an oligopoly of higher education provision forcing generations into student debt that cannot be defaulted on, and healthcare systems that are so restrictive that people must pay inordinate sums to get care or are otherwise forced onto government waiting lists so long that many of their conditions are chronic or untreatable before they are seen to.

Am I the only one who thinks these powers may be used for evil rather than good?

China’s “Credit System”

One such cautionary tale may be found in China.

If we take a look across to China, where they are instituting a “social credit system,” we might glean some insight into what may be in store for us with the UBI.

Under the Chinese social credit system the government judges their citizens’ behaviour and trustworthiness in order to assign each person a rating out of one thousand which the state can then improve or dock. If people play their music too loud, don’t pay a court bill, owe the government money, or are caught jaywalking, for example, they can lose certain rights, such as booking flights or train tickets. The government can have an individual’s internet speed throttled, or exclude a person from getting the best jobs. Parents can have their children banned from the best schools, be excluded from the best hotels, be publicly named and shamed as “bad citizens,” and even have the family dog taken away.

Now a basic income guarantee may begin universal, but as the years wear on and it proves expensive to provide, it might be that corners have to be cut in order to ensure its continued fungibility. Hardly anyone will object to the UBI being withdrawn from criminals, for example. And then perhaps for antisocial behaviour. People may have their universal basic income docked for committing petty crimes like littering the street. A few might moan that this is the beginning of a government social engineering program, but to most people this will seem like a quite a sensible and reasonable measure. After all, we all “benefit” from the benevolence of society providing our roads and schools, and now our basic income. So if some choose to repay society in disrespect, with such vulgar behaviour as littering, throwing away the ends of cigarettes, spitting on the street, failing to remove their dog foul, or what have you, why should society continue to furnish them with the fullness of a basic income? Besides, if their basic income is docked for several months they are unlikely to repeat the crime — they will soon learn their lesson. It will save money on law enforcement, lengthy court trials, and prison sentences as well, all of which are costly. Clipping people’s basic income will soon seem the most sensible and appropriate response to many crimes and misdemeanours. People may be sanctioned for things like not sorting out their recycling. After all, the government provides garbage disposal for us, and the environment is at stake. Governments are already looking at sanctioning people for this kind of behaviour, so the step would not be much of a leap. These steps will simply be designed to acclimatize people to the idea of being “nudged” in the right direction before more radical measures are taken to use the UBI to shape their behaviour.

In China people can have their social credit score docked for buying too many videogames. Under the UBI, there are bound to be complaints that some people are taking advantage of the system but are not contributing, and that that is bad for them as well as for society. It will therefore seem sensible to save money, and encourage people into better habits, by docking their universal basic income if they spend too much time playing on the computer, on clicking around on social media. The government will likely have many bright ideas as to what kind of activities they should be getting up to instead. They may soon also want to reward people for good behaviour, like contributing to charity or volunteering. But how long can such a system remain impartial? How long before people start creating malignant causes to launder and take advantage of free government money? How long before the government starts to select which causes are worthy and which are not? The government rewarding specific activities with public funds supplants the market system with a “bribocracy” where people can climb the ladder not by directly providing goods and services that others are willing to pay for, but by finding out what the government approves of and collecting brownie points. If spying on neighbors and reporting their so-called antisocial behaviour qualifies, then the government will have found a role for the new class of sycophants — the idea becomes all the scarier. It would not be the first time governments have called upon their citizens to tell on their neighbor.

In China people can have their social credit score docked for posting fake news online. We may, of course, ask, fake according to whom? After all, the Chinese government maintains that the Tienanmen Square Massacre of 1989 was “fake news” drummed up by the West to undermine the regime. Closer to home, the mainstream media was entirely complicit in selling the war on Iraq to the public, but I very much doubt we will see people being sanctioned for posting news from mainstream sources such as the BBC or MSNBC. Our leaders are above falsifying our historic records and sending embarrassing incidents down the memory hole for permanent deletion. The purse strings of the universal basic income also present a grave threat to freedom of speech. Anyone who has been following the “woke wars” on Twitter and other social media platforms will have heard of people receiving lifetime bans for tweeting things like “Men are never women.” Now whether you believe such a message is transphobic or otherwise, you may at least believe that someone has the right to tweet it, and be duly educated as to the wrongs of their action by other users. The universal basic income could easily become the new weapon to wield against those who hold unpopular opinions or those that are simply no longer politically correct. It will be first used to strike against unpopular groups such as racists, misogynists, homophobes, and bigots. Not many people will come to their defense when they lose their basic income for spreading hate. But one day you yourself may hold an unpopular opinion that is relatively benign. Maybe you will say that people shouldn’t have their basic income docked just because they say unpopular things on the internet. You will not just be slapped with a Twitter ban, you will potentially lose $1000 a month.

Conservative Charles Murray states in Losing Ground, his book advocating the UBI, that it would require people to have a “universal passport” and “known bank account.” I don’t think it’s unrealistic to imagine that people may soon be forced to accept a mandatory government ID card in order to claim their basic income. Before long they will be asked to show it in order to get into venues and government buildings. Then at the airport to get on a plane. Then simply to board a train or a bus. Then to get into a bar. Then to get into a restaurant. Then show it to any policeman who asks to see it. Before long, every public place we go we’ll be asked to show our ID card. Failure to produce it may result in a penalty to our UBI. You will need to show your ID card in order to vote, and before long not voting may result in a penalty to your UBI as well. In a time of war you will be asked to enlist in the military or risk losing your UBI for denying your patriotic duty. Just as states freeze the assets of suspected fraudsters, they will soon be freezing the “known bank accounts” of political dissidents. By the time they come for those with radical ideas about freedom from government tyranny there will be precious few left to speak out for us.

Far from creating a futuristic utopia where — once our security needs are met — we are all liberated to pursue our dreams, become great scientists, scholars, artists, and entrepreneurs, the universal basic income threatens a totalitarian horror the likes of which we are used to seeing imagined only on The Twilight Zone and The Outer Limits.

Certainly the poor, who depend solely on their handouts to survive, will quickly become very cautious of what they say and do, but even reasonably affluent people will think twice before risking a sum that is high enough to live on. The UBI will institutionalise the state as each of our patrons — and us as wards of the state. Once this relationship is established we will enter into a frightening era where the government is our provider and the UBI can easily be weaponized by our rulers to shape us into compliance.

A former US marine who was dishonorably discharged a decade ago for “serious offenses” was busted last week for posing as a member of President Trump’s security team in a bid to get near Marine One – the president’s helicopter.

37-year-old Brandon M. Magnan of Naples, FL – a registered sex offender – was driving a Honda Pilot with an unidentified male passenger around 3pm on January 5, when he bluffed his way through two security checkpoints using falsified credentials bearing the seals of the Marines and the Marine Corps Executive Flight Detachment, according to the New York Times.

Magnan was attempting to breach protective zone established around Atlantic Aviation – which provides hangar space, jet fuel and flight support services – ahead of President Trump’s planned departure from Palm Beach to Washington.

It wasn’t clear why Mr. Magnan was trying to get near the helicopter. Marine One, which is piloted and protected by the Marine Corps unit known as HMX-1, is used to transport the president for shorter trips, the Secret Service said.

Mr. Trump was spending his winter vacation in Palm Beach, Fla., at his private Mar-a-Lago resort at the time of the episode with Mr. Magnan. –NYT

Magnan was charged January 6 for impersonating an officer or employee of the United States, according to a criminal complaint filed by the Secret Service. The former marine – who was dishonorably discharged after being convicted at a court-martial for “serious offenses” – was spotted by a Sheriff’s deputy who noticed that he was not wearing a Marine Corps uniform, as is standard during presidential travel.

The deputy contacted Trump’s actual security detail, who identified Magnan’s credentials as fake. When he was confronted by law enforcement, he said that he was a retired member of HMX-1, the official designation for Marine One.

Mr. Magnan is listed in the Florida Department of Law Enforcement Sex Offender registry for convictions in 2010 in military court related to abusive sexual conduct and sodomy.

In one case, a lance corporal testified that he fell asleep in a hotel room with Mr. Magnan after the Marine Corps ball and awoke to find Mr. Magnan’s hand in his pants and over his boxer shorts, according to military court records.

Mr. Magnan was released on a $100,000 bond, according to court records. –NYT

If convicted for the security breach, Magnan faces a maximum of three years in prison and a fine of $250,000 as well as a year of supervised release. A hearing is scheduled for January 27.

 

Authored by Morgan Stanley’s chief equity strategist, Michael Wilson

The Other 1 Percenters

Income inequality has become a hot topic. The top 20% has done exceptionally well over the past several decades, while the average American has not kept pace. Though this is a political issue, it’s also an economic one. As legend has it, Henry Ford paid his workers more so they could afford to buy his cars. Whether that was his real goal or it was just PR, paying employees a better wage is good for the economy, if not the bottom line.

American workers did pretty well during the second half of the 20th century with regard to getting their fair share. Based on the National Income and Products Accounts, employee compensation as a percentage of Gross Value Added held fairly steady between 61% and 65%. But after 2001 that all changed, and labor’s share began to drop until it reached below 57% in 2012.

What happened? While I wouldn’t attribute all of the decline to just one factor, a big driver was globalization. Companies also faced increasing pressure to be more efficient in a world of deflationary pressures. Since 2012, employee compensation has climbed back the the low end of the old range. As the economy recovered from the financial crisis, labor markets tightened and workers have gotten more of the pie. But we’ve also seen a backlash against globalization and further outsourcing. This reaction has resulted in legislation to increase the minimum wage by 20-50% in many states, with inflation-indexed increases in the future.

We have written a great deal about the rise in labor costs over the past year and the negative impact on corporate margins. In fact, this is the primary reason why earnings growth in 2019 was negative for most US companies while the economy enjoyed another strong year of growth driven by, you guessed it, the consumer. In fact, this shift of profits from capital to labor has led to an unbalanced economy in which consumption boomed in 2019 but capital investment growth actually went negative in the second half of the year.

The bottom line is that the average worker is doing well, thanks in part to the higher ratio of corporate earnings coming their way and a tax cut that benefited the middle class more than the rich, given the $10,000 limitation on real estate and state income tax deductions. Generally speaking, this is a good-news story that suggests we are in the process of dealing with income inequality, even if it’s long overdue and may be happening too slowly.

There’s another form of inequality – corporate – that is much less appreciated.

In a world of low growth, limited pricing power and now rising costs, it’s clear that bigger is better and scale matters. This is also the main reason why we’ve been underweight US small caps since July 2018, a relative trade that is now up close to 20%. Small-cap companies can’t offset rising labor costs with technology as easily as large caps, nor do they have the same access to the record-low cost of capital.

Finally, the rising regulatory and cyber costs over the past decade favor larger-cap companies, who can spread such costs across a larger revenue base. Against this backdrop, it should come as no surprise that new business formation is still well below pre-crisis levels. In short, the big get bigger as they continue to eat the small guy’s lunch. To me, this is unsustainable and potentially a bigger risk to the economy and markets than the very important issue of individual income inequality.

Markets understand this dynamic, which is why small caps have underperformed so significantly over the past 18 months and, quite frankly, over this entire cycle. But this phenomenon is manifesting itself in other ways. Capital concentration is following corporate inequality like never before. Currently, the top five companies in the S&P 500 (the other 1 percenters) make up 18% of the total market cap.

A ratio like this is unprecedented, including during the tech bubble. During 2019, the net income concentration for the 1 percenters didn’t keep pace with their market cap concentration, similar to what happened during the 1999 concentration peak.

I think this divergence is the result of the extraordinary liquidity being provided by the world’s central banks, which is flowing to the most liquid and largest names in the S&P 500. This also recalls 1999, when the Fed expanded its balance sheet at the end of the year and early in 2000 as a precaution against Y2K disruption.

The bottom line: this income/market cap divergence looks likely to continue over the near term, given the Fed’s expected balance sheet expansion through April. More importantly, if we’re right, these companies will then need to deliver on the income side of the inequality divide or risk a sharp decline in price.

When late last week President Trump first referenced a Soleimani-directed plot to “blow up” the US embassy in Baghdad, which during a Friday Fox interview became in the president’s words “I believe it would’ve been four embassies” — senators which had been given a classified briefing Wednesday balked, saying no such intelligence was referenced but should have been if there was evidence.

And now no less than Secretary of Defense Mark Esper appears to have publicly contradicted the White House’s rationale for taking out the “imminent” threat of Qasem Soleimani. Esper told CBS’ Face the Nation on Sunday that he “didn’t see” specific evidence for embassy attacks, while adding that he still believes such an attack was likely.

Defense Secretary Epser: “I didn’t see” specific evidence that showed Iran planned to strike four U.S. embassies. pic.twitter.com/4j2GgIIirL

— Kyle Griffin (@kylegriffin1) January 12, 2020

“The president didn’t cite a specific piece of evidence. What he said was he believed,” Esper said. 

“What the president said was that there probably could be additional attacks against embassies. I shared that view,” Esper said. “The president didn’t cite a specific piece of evidence.”

When pressed on whether intelligence officers offered concrete evidence on that point he said: “I didn’t see one with regards to four embassies.” — Reuters

During a separate CNN interview on Sunday, the Pentagon chief continued to awkwardly dance around the question of whether specific intelligence showed such an attack was being planned. Esper described that Trump merely “believed” it to be the case, while refusing to confirm any particular intelligence. 

But earlier statements of Secretary of State Mike Pompeo, who before reporters defended Trump’s assertion about the IRGC targeting the embassies, suggested there was specific intelligence. 

When Pompeo was pressed on Friday by reporters over the nature of the “imminent threat” claims, he said: “We had specific information on an imminent threat and that threat stream included attacks on U.S. embassies. Period. Full stop.” And asked about what made it imminent, Pompeo simply said: “It was going to happen.”

The #Trump lie about intelligence for the #Soleimani hit has now completely disintegrated. Esper admits he never saw intelligence show a threat to U.S. Embassies, but “shared the president’s view that probably…they were going to go after our embassies.” https://t.co/SFVTnEcnyF

— Gareth Porter (@GarethPorter) January 12, 2020

At first it was unclear whether President Trump was claiming to have seen specific intelligence outlining such a threat, or perhaps was just speaking generally and in his usual hyperbolic style (“blow up” the embassy) of the pro-Iranian mob’s actions besieging the US embassy in Baghdad days prior to the Soleimani assassination.

The demonstrators had been filmed setting the outer walls of the compound on fire during the chaotic events nearly two weeks ago which resulted in a contingent of Marines rapidly deploying from Kuwait to bolster embassy security. 

Let’s be clear – if there was evidence of imminent attacks on four embassies, the Administration would have said so at our Wednesday briefing. They didn’t.

So either Fox News gets higher level briefings than Congress…

or…wait for it…

there was no such imminent threat.

— Chris Murphy (@ChrisMurphyCT) January 10, 2020

So now Esper appears to be saying it was Trump’s personal belief, while Pompeo appeared to base it on “specific information” — in other words direct intelligence. But which is it?

It can’t be both ways. 

Like the Bush administration’s famously evolving rationale for the war in Iraq, are we witnessing the narrative on Iran made up on the fly? 

Authored by Mike Shedlock via MishTalk,

Let’s investigate the possibility no Democratic candidate will amass 50% of the votes resulting in a brokered convention…

It’s not posted yet anywhere I can find, but I am told those are the results of the latest California poll taken in January.

Regardless, let’s assume something like that represents the current state of affairs.

How would that impact the the Democratic primary process?

Proportional Voting

Republicans have winner-take-all rules but the Democrats generally have some sort of proportional allocation typically with a 15% threshold.

In California, 35% of the votes are statewide, the rest by district.

15% Threshold

The above chart is from Nate Silver 538: 15 Percent Is Not A Magic Number For Primary Delegates.

Democrats allocate their delegates proportionately among candidates who get 15 percent or more of the vote in a given state or district. So, for instance, if Bernie Sanders gets 42 percent of the vote in a certain state, Kamala Harris gets 18 percent, Joe Biden gets 14 percent, Pete Buttigieg gets 11 percent, Cory Booker gets 10 percent and Marianne Williamson gets 5 percent, then only Sanders and Harris would get state-level delegates, with Sanders getting 70 percent of the delegates and Harris getting the other 30 percent.

The part that’s easy to miss is in that term state-level delegates. In the Democratic primaries, only about 35 percent of delegates are actually allocated at the state level. The remaining 65 percent are allocated by district — usually by congressional district, although some states use different methods such as by county (Montana and Delaware) or state legislative districts (Texas and New Jersey).

The following discussion explains the weird looking chart and the big jump that happens precisely at 15%.

California Rules

According to the California Democratic Party 2020 Delegate Selection Overview, the California Delegation will send a total of 495 delegates the Democratic National Convention comprised of 416 Pledged Delegates and 79 Unpledged Delegates.

Of the pledged delegates, 90 are at-large (statewide) delegates. Another 54 are pledged party leaders (mayors, legislators, state officials, etc.) committed to candidates who get at least 15% of the vote.

(90+54)/416 = 35%

Of the pledged delegates, 326 are allocated by district. The 15% rule comes into play, but at the district level.

Let’s run the above math based on the latest California poll.

California Statewide Math

• 24 + 21 + 20 = 65

• Sanders would get 24/65ths of the statewide delegates (37%)

• Warren would get 21/65ths of the statewide delegates (32%)

• Biden would get 20/65ths of the statewide delegates (31%)

• Sanders would get 33 statewide delegates.

• Warren would get 29 statewide delegates.

• Biden would get 28 statewide delegates.

Those are the statewide allocations.

Pledged Delegate District Math

Sanders would get 24% minimum of 326 district delegates.

Warren would get 21% minimum of 326 district delegates.

Biden would get 20% minimum of 326 district delegates.

Those are approximations for two reasons.

Although there is a 15% minimum, that also applies at the district level. It’s possible that Sanders, Warren, or Biden would not get 15% in every district.

It is also possible some candidates get 15% in some districts without hitting the 15% statewide threshold.

Consider the possibility Buttigieg got 15% in half the districts but only 11% statewide. In that case he would get about 7.5% of the 326 or 24 delegates.

Projections

Project something similar three-way splits across Texas, Illinois, Florida, and New York. Guess what? You have no overall winner and thus a “Brokered Convention“.

The Democratic Party’s 1968 convention might have been brokered if Robert F. Kennedy had not been assassinated. He had won four of the primaries including California, but not enough delegates were then selected by primaries to determine the presidential nominee. President Lyndon B. Johnson, who had decided against running for a second full term, still controlled most of the party machinery and used it in support of Vice President Hubert Humphrey, who did not contest the primaries, although two surrogates won their home states. If Kennedy had lived, the convention likely would have been divided between his and Humphrey’s supporters.

The last brokered conventions were Adlai Stevenson (of the 1952 Democratic Party) and Dwight Eisenhower (of the 1952 Republican Party).

A friend of mine says there will never be another Democratic brokered convention.

I think the odds may be as high as 20% this year. Nate Silver has them as a 15% chance right now.

What Would It Take?

Nearly any three-way or four-way split that lasts long enough.

If Sanders, Biden, and Warren hold a 20% threshold through the California primary, that would likely do it.

Even 15% might be enough.

And it would not even take the same three.

For example, Buttigieg might get 15% in Iowa, Illinois, and Indiana. Perhaps Bloomberg gets 15% in New York and Texas. Give Warren 15-20% in California, Illinois, Iowa, etc.

There you have it, a brokered convention.

The government of Iran signaled that they would prefer to de-escalate tensions with the United States following 10 days of military skirmishes during which Tehran shot down a civilian aircraft.

Iranian President Hassan Rouhani told the visiting emir of Qatar that de-escalation is the “only solution” to the regional crisis sparked by the US killing of Iran’s top general, Qasem Soleimani, according to AFP citing the emirate’s ruler.

“This visit comes at a critical time in the region,” said Emir Sheikh Tamim bin Hamad Al-Thani, adding “We agreed… that the only solution to these crises is de-escalation from everyone and dialogue.”

Rouhani, meanwhile, said “Given the importance of security of the region… we’ve decided to have more consultations and cooperation for the security of the entire region.”

Also on Sunday, Hossein Salami, commander of Iran’s Revolutionary Guards, said the missiles it fired last Wednesday on Iraqi bases hosting US troops were not aimed at killing American personnel.

“Our aim was not really to kill enemy soldiers. That was not important,” he told parliament.

The US said no American personnel were harmed in the attacks.

Across the border in Iraq, the military said rockets slammed on Sunday into Al-Balad, an Iraqi airbase where US forces have been stationed, wounding two Iraqi officers and two airmen. –AFP

While millions of Iranians turned out for the funeral of Solemani, Iran’s call to de-escalate comes as waves of anti-government protesters have taken to the streets to demand that Iran’s leaders, including Ayatollah Khamenei, step down over their initially concealing the truth about the airline downing.

#IranianProtesters face off the security forces in #Tehran Tehran. Amazing photos by @MonaHoobehfekr @Isna_Int #IranAttacks #IranPlaneCrash #iranprotest pic.twitter.com/rShSe0DXwj

— Maziar Bahari (@maziarbahari) January 11, 2020

After several days of denial, Rouhani on Saturday admitted that “human error” was to blame after a Ukraine International Airlines Boeing 737 was shot down two minutes after taking off from Tehran, killing all 176 people on board. The Guards’ aerospace commander General Amirali Hajizadeh has accepted full responsibility, however demonstrators quickly filled the streets during a Saturday evening memorial at Tehran’s Amir Kabir University and shouted “death to liars!“

Tehran Amir Kabir university students chanting anti-government slogans after officials accepted they accidentally shot-down a Ukrainian flight with a missile. (Video from my source in Tehran) #IranPlaneCrash ✈️ pic.twitter.com/1cz56DW6Kz

— Negar Mortazavi (@NegarMortazavi) January 11, 2020

On Sunday, President Trump tweeted: “To the leaders of Iran – DO NOT KILL YOUR PROTESTERS. Thousands have already been killed or imprisoned by you, and the World is watching,” adding “Turn your internet back on and let reporters roam free! Stop the killing of your great Iranian people!”

To the leaders of Iran – DO NOT KILL YOUR PROTESTERS. Thousands have already been killed or imprisoned by you, and the World is watching. More importantly, the USA is watching. Turn your internet back on and let reporters roam free! Stop the killing of your great Iranian people!

— Donald J. Trump (@realDonaldTrump) January 12, 2020

The protests, meanwhile, have gotten bloody;

#Update: Just in – At least 7 people were shot and bodies were reportedly been dragged away on the street of #Azadi in #Tehran in #Iran. pic.twitter.com/cChjzzmk9X

— Sotiri Dimpinoudis (@sotiridi) January 12, 2020

#Breaking: Just in – People in #Tehran running away from the sounds of gunshots being shot by regime forces in #Iran. pic.twitter.com/LrPNAFYMng

— Sotiri Dimpinoudis (@sotiridi) January 12, 2020

Seems like Iran sees the writing on the wall and is trying to head off another colorful revolution courtesy of Regime Change, Inc.

Update: President Trump has also noticed the ridiculous choice of Kris as FBI overseer…

You can’t make this up! David Kris, a highly controversial former DOJ official, was just appointed by the FISA Court to oversee reforms to the FBI’s surveillance procedures. Zero credibility. THE SWAMP! @DevinNunes @MariaBartiromo @FoxNews

— Donald J. Trump (@realDonaldTrump) January 12, 2020

The President appears to be referencing Maria Bartiromo’s report from earlier this morning:

.@DevinNunes tells @MariaBartiromo the ICIG was actually a lawyers for some of the people involved in the FISA abuse scam. The ICIG in theory works for the Congress. So it wouldn’t be hard for them to get the documentation of their stupidity. pic.twitter.com/t4NfErFw7C

— The Dirty Truth “Josh” (@AKA_RealDirty) January 12, 2020

*  *  *

Sharyl Attkisson, via SharylAttkisson.com,  reports that on Friday, the FISA Court posted an order naming anti-Trump lawyer David Kris to “assist the court” in assessing the FBI’s response to the court-ordered cleanup of lapses and abuses identified by Department of Justice Inspector General (IG) Michael Horowitz.

In a report released last month, the IG found FBI officials violated rules, policies and law in their applications to wiretap former Trump volunteer Carter Page. Horowitz testified the FISA surveillance process needs to be fixed “from top to bottom.”

To some, the appointment of Kris is as mysterious as why the FISA Court’s judges failed to flag the FBI abuses on their own.

In social media posts, Kris has called Republican Congressman Devin Nunes “a politicized, dishonest [Intelligence Community] overseer who attempts to mislead.”

“The Nunes memo was dishonest,” said Kris.

“And if it is allowed to stand, we risk significant collateral damage to essential elements of our democracy.” 

He tweeted that Trump and his advisors should be “worried” that the “walls are closing in on him” regarding the Mueller probe.

Kris also bought into the now-disproven conspiracy theory about Trump colluding with Russia and Putin.

But even more importantly, since that time, Kris has advocated for President Trump’s removal.

Kris’s vocal opinions on President Trump and politics present numerous, obvious conflicts of interest.

Regardless, however, America is now faced with a very stark choice: do we want to be a country in which elected officials can use their governmental power to attack political opponents? If not, it’s pretty simple: Trump has to go. 5/5

— David Kris (@DavidKris) October 3, 2019

In addition, Kris writes for the anti-Trump blog “Lawfare” and called Lawfare’s chief, Benjamin Wittes, “incisive.” Wittes is the man who wrote of the need for an “insurance policy” against Trump prior to Trump’s election.

[O]ur democracy needs a health insurance policy…The courts have a few obvious advantages, starting with hundreds of independent judges of both parties whom Trump cannot remove from office and who don’t have to face his supporters in forthcoming elections…The goal…will be to offer a systematic defense of the values the Coalition of All Democratic Forces holds in common and to have the ability to respond rapidly to actions that threaten those values: to forestall such actions in court as long as possible, to whittle them down, and to block those that can be blocked. The goal is to use the courts to render Trump’s antidemocratic instincts as ineffectual as possible.

Benjamin Wittes, blogger, “Lawfare,” Oct. 24, 2016

Wittes is also a friend of ex-FBI Director James Comey who was referred for criminal charges for mishandling and leaking government information in his anti-Trump efforts. (The Justice Department passed up charges, with officials stating they didn’t believe Comey meant any harm.)

IG Horowitz flagged 17 mistakes in the FBI’s surveillance applications against Page and testified, “I think it’s fair for people to … look at all these 17 events and wonder how it could be pure incompetence.”

Likewise, one could look at the FISA Court’s appointment of Kris to help fix things… and wonder whether it could be pure incompetence. 

The latest FISA Court action could be construed as a moment of chilling charity in the ongoing questions about how these abuses could have occurred, and the challenges with fixing them.

“He’s not going to do anything because in the end Kris doesn’t believe there was anything wrong with what went on at the FBI,” said a former law enforcement official.

“His selection by the FISC is how bureaucrats protect themselves and could care less about the American people or the Constitution.”

Additionally, House Intelligence Committee Devin Nunes’ told SaraACarter.com Sunday, that:

“It’s a ridiculous choice. The FBI lied to the FISC, and to help make sure that doesn’t happen again, the FISC chose an FBI apologist who denied and defended those lies. The FISC is setting its own credibility on fire.”

Read the FISA Court order naming Kris below:

With the S&P meltup accelerating into the first full week of the new year, Friday’s modest pullback on the subpar December jobs report notwithstanding, sellside strategists are tripping over themselves to come up with even more reasons to justify the risk surge higher despite S&P valuations (price to sales and EV/EBITDA) which are now at all time highs, surpassing the prior dot com peak (which prompted Bloomberg to write “S&P 500 Bulls Make Peace With Valuations at 2018 Meltdown Levels“)…

… even as retail, institutional, and systematic (CTA/risk parity/vol targeting) investors are now all in the market, just as buybacks are rapidly fading.

Sure enough, in his latest Weekly Kickstart note, Goldman’s chief equity strategist, David Kostin writes that “the combination of accommodative monetary policy, low interest rates, range-bound oil prices, and continued economic expansion is constructive for US equities.”

Still, with the massively overbought SPX rapidly approaching not just his (3,400) but the consensus S&P target (3,318) for the end of 2020 less than half a month into 2020, the risk of a “Feb 2018”-like swoon grows with every passing day of the the melt up euphoria, which is probably why to hedge his bets, Kostin lays out four macro risks – and associated equity strategy implications – that can derail the S&P on its path to Goldman’s year-end target of 3,400 (which is less than 4% away from Friday’s close of 3,265), namely

1. What if the US and Iran enter into a prolonged conflict and oil prices rise?
2. What if interest rates rise rapidly in 2020?
3. What if the dollar strengthens this year?
4. What if economic growth is weaker than we expect?

Below, we take a detailed look at each of these “biggest risks”:

1. What if there is a sustained period of conflict between the US and Iran and higher oil prices? Oil prices initially rose by 4% alongside US-Iran tensions. But Goldman’s commodity strategists believe the current risk premium is already elevated and they expect Brent oil prices will be roughly flat at $63/bbl during the next 12 months. According to Kostin, oil price shocks should have limited impact on S&P 500 returns, given offsetting impacts from higher Energy earnings and higher gasoline prices for consumers. Separately, in terms of geopolitical risk, the S&P 500 shrugged off the developments this week but a prolonged conflict could eventually weigh on US equities. Using the national security component of the US Policy Uncertainty Index, Goldman finds a loose negative relationship between changes in uncertainty and S&P 500 returns (Exhibit 1).  However, previous notable examples of national security uncertainty also coincided with other exacerbating macro events (the first Gulf War and recession, the September 11th attacks and the Tech Bubble unwind).

And while energy stocks have given back their gains, suggesting little investor belief in higher long-term oil prices, Defense and Cybersecurity stocks have rallied. Energy – the cornerstone of all value investing strategies – was the worst-performing sector last year, lagging the S&P 500 by 20%. Here Goldman points out that although Energy equities have diverged from spot oil prices, they trade roughly in line with 10-year oil prices (Ex. 2).

For this reason, Energy sector rallies alongside the Saudi Arabia facility bombing and the most recent US-Iran tensions, which lifted spot prices but not long-dated prices, have been short-lived. Without a sustained supply shock that impacts long-term oil prices, Goldman maintains its underweight recommendation in Energy stocks. In contrast, Aerospace & Defense and cybersecurity firms with business models more clearly linked to geopolitical conflicts have each rallied by 2% (here Goldman notes the stocks with the fastest 2020E EPS growth: FEYE, RPD, MIME, SAIL, and HII).

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2. What if bond yields rise rapidly in 2020? Needless to say, near record low bond yields have been a boon to equity valuations, driving more than 90% of the S&P 500 return in 2019. Although valuations are elevated in absolute terms, Goldman’s macro model suggests that equities trade at roughly fair value relative to the low level of bond yields (which is ironic because most “experts” claim that while bonds are in a massive bubble, equities aren’t, even though you can’t have one without the other). Goldman’s economists expect the Fed will remain on hold in 2020 and the 10-year US Treasury yield will gradually rise to 2.25% by year-end. For equities, Goldman (and UBS) previously found that the speed of rate changes matters more than the level of rates. Historically, equities have been able to digest gradual increases in bond yields of less than 1 standard deviation in a month (16 bp in today’s terms). However, when bond yields rise by more than 2 standard deviations in a month (34 bp), S&P 500 returns have typically been negative.

Here Goldman points out that its interest rate sensitive basket has lagged since early 2019, consistent with a falling rate environment; the bank’s sector-neutral basket comprises 50 S&P 500 stocks with the highest positive stock price sensitivity to changes in the 10-year US Treasury yield. The basket has continued to underperform since late November even as rates moved higher, reflecting skepticism that rates will rise substantially. However, these stocks should outperform if interest rates rise sharply (even as the broader market tumbles).

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3. What if the US dollar reverses course and strengthens in 2020? The dollar fell by 2% in December as US-China trade tensions eased and global economies showed signs of improvement. And alongside virtually every other Wall Street desk, Goldman’s FX strategists expect the trade-weighted dollar to fall by another 2% during the next 12 months. Why? Because a stronger dollar would pose a headwind to S&P 500 sales, particularly within industries with high non-US sales such as semiconductors. Based on Goldman’s top-down earnings model, the bank estimates that every 10% change in the trade-weighted dollar equals roughly $3 (2%) of S&P 500 EPS.

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4. What if economic growth is weaker than expected? Perhaps the $64 trillion question, Goldman admits that economic data in the US have been mixed. While the ISM non- manufacturing index was above consensus, the ISM manufacturing index unexpectedly declined to the lowest level since 2009. Goldman economists expect US real GDP growth will equal 2.2% in 2020, above consensus of 1.9%, as the easing in financial conditions lifts economic activity; as a result of central bank easing in 2019, the forward P/E multiple expanded from 15x to nearly 19x. Looking forward, Kostin believes economic and earnings growth will drive stock prices higher. Every 1 pp change in US real GDP growth equals $5 (3%) in S&P 500 EPS. Ironically, the muted outperformance of cyclical equities, in particular Industrials, suggests limited growth optimism in equity markets, which in turn means that traders are betting that central banks will again push stocks to new nosebleed highs in 2020. Here Kostin notes that Goldman’s Cyclical (GSSBCYCL) and Defensive (GSSBDEFS) baskets closely track changes in the GS US Current Activity Indicator (Exhibit 4).

And as we have extensively pointed out in recent weeks, the S&P 500 has surged but Cyclicals have only modestly outperformed Defensives, as “bullish” strategies actually generated a negative return in 2019. In Goldman’s view, “receding trade tensions rather than overly optimistic growth expectations have driven equity returns”, which is amusing because the real driver have been central banks. In any case, Goldman sees scope for upside to Cyclicals in the near term if growth reaccelerates towards its economists’ forecast, and as such the bank recommends an overweight in Industrials.

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One final point: just as Deutsche Bank noted yesterday, Goldman confirms that investor positioning in US equities is close to “stretched” territory and could exacerbate equity price moves if one of these risks materializes. Goldman’s Sentiment Indicator (“SI”) combines six weekly and three monthly indicators of stock positioning across institutional, retail, and foreign investors. As equities rallied during the final weeks of 2019, investors added length, bringing the SI to 1.8 standard deviations above the 52-week average. This is notable because as Kostin concludes, “readings in “stretched” territory above +1.0 standard deviations have typically corresponded with below-average equity returns during the subsequent eight weeks.”