Court Rules Cop Who Shot Unarmed 15-Year-Old Is Protected by Qualified Immunity

A panel of judges for the U.S. Court of Appeals for the 9th Circuit has ruled that an officer with the Los Angeles Police Department (LAPD) is protected by qualified immunity after shooting a 15-year-old boy as he made his way to school. The decision joins a towering pile of case law upholding a legal doctrine that protects government officials from facing civil suits for actions that would land a regular person in the clink.

In February 2015, four teenagers convened near their school, forming a tight circle to dance and listen to rap music, as was their ritual prior to attending classes. Shortly after they turned off the music and began to prepare for class, Officer Michael Gutierrez fired into the crowd, striking Jamar Nicholson Green in the back. Another teen, Michael Sanders, was holding a plastic Airsoft gun replica with a bright orange tip; Gutierrez says he mistook it for a real weapon and believed Sanders was pointing it at another teen in the circle, Jason Huerta.

All four teens say that Gutierrez, who was not wearing a uniform, did not identify himself, nor did he give them verbal warnings to drop the toy gun. After shooting Green, Gutierrez and additional officers on the scene held the teens at gunpoint, face down on the ground. The teens explained that the gun was fake, but the officers still handcuffed the teens and detained them for five hours—even Huerta, who Gutierrez said he believed to be a potential victim. Green remained in handcuffs as he underwent a medical examination.

The panel for the U.S. Court of Appeals for the 9th Circuit wrote in summary that the shooting violated Green’s due process rights. “Under the circumstances, a rational finder of fact could find that Gutierrez’s use of deadly force shocked the conscience and was unconstitutional under the Fourteenth Amendment,” they said. Even so, “the panel held that because no analogous case existed at the time of the shooting, the district court erred by denying Gutierrez qualified immunity for this claim.”

In essence, because a similar case has not yet rendered a ruling applicable to Gutierrez’s actions, the judges ruled that those actions were protected by qualified immunity. The decision echoes a recent one in Georgia, where the U.S. Court of Appeals for the 11th Circuit ruled that Coffee County Sheriff’s Deputy Matthew Vickers was shielded from recourse after shooting a 10-year-old child in the knee while trying to shoot a non-threatening dog.

Both cases demonstrate the maddening nature of qualified immunity: State actors cannot be held to account unless a related precedent exists. But can how such a precedent come to be when civil servants keep hiding behind qualified immunity?

The 9th Circuit did, however, deny Gutierrez legal shielding for the teens’ 5-hour handcuffed detainment, which they said blatantly violated their Fourth Amendment rights. Writing for the majority, Judge Jacqueline Nguyen said that a jury should hear the case.

“We agree with the district court that under these circumstances, plaintiffs’ continued detention for five hours—well after any probable cause would have dissipated—and the use of handcuffs throughout the duration of the detention violated plaintiffs’ clearly established Fourth Amendment rights to be free from unlawful arrest and excessive force,” she said.

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Loan Market Freezing Up Again After 5 Deals For $1.3BN Quietly Pulled

While stocks have a ways to drop before they catch down to the December 2018 lows, one market is starting to feel dangerously similar to the late 2019 chaos. As readers will recall, the first market to get whacked in Q4 was the leveraged loan market which froze up virtually overnight as countless deals were pulled due to “market conditions.” That time is again now, because no less than five leverage loan deals for a total of $1.3 trillion have been pulled in the past few weeks, a harbinger of a far more ominous lock up in the fixed income market.

The latest deal to get pulled was a loan by Vewd Software, a streaming-service provider, which joined peers such as Golden Hippo, Glass Mountain Pipeline Holdings, Chief Power Finance and fitness-center builder Life Time, all of whom hoped to raise funds in the secured debt market, and found the market too cold.

For much of the past 3 years, the leveraged loan market grew at a breakneck pace, courtesy of the Fed’s tightening which pushed up the libor floor on loan deals, promising rates that kept up with the Fed Funds rate. As such, it quietly emerged as a favorite of private equity firms, funding payouts to partners and buyouts of targeted companies at record-low borrowing costs for a decade, doubling in size to about $1.2 trillion and even surpassing the total size of the US junk bond market.

And now, for the second time in under a year, the loan market is experiencing a “rare moment of sobriety” according to Bloomberg, as investors who smell a recession – and far more rate cuts – shy away from companies that just a few months ago might have had no problem to sell loans.

Besides deals that were pulled outright, new issuers are finding a far more hostile reception, with some borrowers forced to pay much more than they originally planned when they came to market. The trigger: now that the Fed has entered an easing cycle, further LIBOR upside is a thing of the past, while the possibility of continued rate cuts by the Federal Reserve has killed the attractiveness of floating-rate deals less attractive, while companies vulnerable to trade wars have had to promise even higher yields.

Speaking to Bloomberg, Jeff Cohen, global head of levfin capital markets at Credit Suisse said that the market has seen “widely divergent pricing outcomes.”

One example of a firm finding market conditions less than hospitable was DNA-testing firm Ancestry.com which increased the pricing of a loan financing a dividend to its private equity owners, and which also reduced the size of the payout by $200 million.

Another firm had to sharply hike the yield on its offering to find investor demand: Total Safety, owned by private equity firm Littlejohn & Co., priced a $367.5 million loan this month to finance its acquisition of Sprint Safety at a discount of 93 cents on the dollar – one of the steepest discounts this year according to Bloomberg, which also noted that the yield on the debt spied to about 10%. Banks arranging the loan offering the buyout of independent broker-dealer Advisor Group also had to sweeten terms, as did other private equity firms that launched loans with increasingly aggressive terms they later had to scale back.

That said, we are still some ways away from the total loan market freeze observed for a few weeks in December: even with the current “loan lull” which has affected some $1.3 billion in loan notional, over $28 billion of leveraged loans managed to price successfully this month as bankers cranked out deals before a late summer lull.

Yet curiously, despite the broad improvement in the leverage loan market since the December fiasco, one wouldn’t know it by looking at investor fund flows: indeed, retail fund flows have been negative for 39 straight weeks starting in late 2018 – the longest such run ever – as most retail investors have boycotted the asset class.

But if the one traditional buyer is absent, who is buying? The answer: CLOs of course, although these have a limit on how much lower-rated debt they can buy. Even so, as Drew Sweeney, a managing director at TCW Group told Bloomberg, while the appetite for lower-rated debt among managers of collateralized loan obligations will be limited, the still-expanding CLO market has plenty of cash looking for a home.

“I do think there will be demand for higher-quality paper from almost every constituent — CLOs, retail and crossover investors,” Sweeney said.

Even with the neverending CLO bid – much of which funded by Japanese pensioners – cyclical companies could have an uphill battle selling debt with recession fears buzzing, and some bankers have found themselves wrong-footed by investors’ sudden aversion to risk. One example noted by Bloomberg, includes a group of banks led by Barclays and Deutsche Bank, which held on to at least half of the $1.7 billion-equivalent of loans they arranged earlier this year for Advent International Corp.’s buyout of an Evonik Industries AG plastics division, as the banks couldn’t find enough willing investors with whom to park the debt.

What happens next? Well, there are two options: either the market freeze continues as the December 2018 “Ice-Nine” of the loan market indefinitely postpones the entire pipeline, or the more optimistic investors end up being right: they are merely waiting to approach the market after Labor Day on Sept. 2, when the liquidity – they hope – will return to the market. That’s when we will also see just how easy it will be for a consortium of banks to sell a whopping $7 billion loan to help finance the merger of T-Mobile US and Sprint.

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Court Rules Cop Who Shot Unarmed 15-Year-Old Is Protected by Qualified Immunity

A panel of judges for the U.S. Court of Appeals for the 9th Circuit has ruled that an officer with the Los Angeles Police Department (LAPD) is protected by qualified immunity after shooting a 15-year-old boy as he made his way to school. The decision joins a towering pile of case law upholding a legal doctrine that protects government officials from facing civil suits for actions that would land a regular person in the clink.

In February 2015, four teenagers convened near their school, forming a tight circle to dance and listen to rap music, as was their ritual prior to attending classes. Shortly after they turned off the music and began to prepare for class, Officer Michael Gutierrez fired into the crowd, striking Jamar Nicholson Green in the back. Another teen, Michael Sanders, was holding a plastic Airsoft gun replica with a bright orange tip; Gutierrez says he mistook it for a real weapon and believed Sanders was pointing it at another teen in the circle, Jason Huerta.

All four teens say that Gutierrez, who was not wearing a uniform, did not identify himself, nor did he give them verbal warnings to drop the toy gun. After shooting Green, Gutierrez and additional officers on the scene held the teens at gunpoint, face down on the ground. The teens explained that the gun was fake, but the officers still handcuffed the teens and detained them for five hours—even Huerta, who Gutierrez said he believed to be a potential victim. Green remained in handcuffs as he underwent a medical examination.

The panel for the U.S. Court of Appeals for the 9th Circuit wrote in summary that the shooting violated Green’s due process rights. “Under the circumstances, a rational finder of fact could find that Gutierrez’s use of deadly force shocked the conscience and was unconstitutional under the Fourteenth Amendment,” they said. Even so, “the panel held that because no analogous case existed at the time of the shooting, the district court erred by denying Gutierrez qualified immunity for this claim.”

In essence, because a similar case has not yet rendered a ruling applicable to Gutierrez’s actions, the judges ruled that those actions were protected by qualified immunity. The decision echoes a recent one in Georgia, where the U.S. Court of Appeals for the 11th Circuit ruled that Coffee County Sheriff’s Deputy Matthew Vickers was shielded from recourse after shooting a 10-year-old child in the knee while trying to shoot a non-threatening dog.

Both cases demonstrate the maddening nature of qualified immunity: State actors cannot be held to account unless a related precedent exists. But can how such a precedent come to be when civil servants keep hiding behind qualified immunity?

The 9th Circuit did, however, deny Gutierrez legal shielding for the teens’ 5-hour handcuffed detainment, which they said blatantly violated their Fourth Amendment rights. Writing for the majority, Judge Jacqueline Nguyen said that a jury should hear the case.

“We agree with the district court that under these circumstances, plaintiffs’ continued detention for five hours—well after any probable cause would have dissipated—and the use of handcuffs throughout the duration of the detention violated plaintiffs’ clearly established Fourth Amendment rights to be free from unlawful arrest and excessive force,” she said.

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Germany Seeks Migrant “Coalition Of The Willing” Repeating Merkel’s 2015 Mistake

Authored by Mike Shedlock via MishTalk,

Germany’s Foreign Minister, Heiko Maas, marches down the same path that doomed Angela Merkel.

Please consider German FM Maas Calls for EU Migrant Redistribution Coalition.

Germany should promote a “coalition of the willing” among European Union countries that are prepared to accept refugees saved in the Mediterranean Sea, Foreign Minister Heiko Maas said Saturday.

“We must now move forward with those member states that are ready to receive refugees — all others remain invited to participate,” he told the RND media group.

Germany would be willing to make a substantial contribution to the alliance and accept a set share of refugees as part of a “binding” redistribution system, he added. Maas, a Social Democrat, said that disputes between EU countries about redistributing refugees “must no longer” impede an agreement on saving migrants from drowning in the Mediterranean. “This blockade must finally come to an end,” he said.

Maas’s proposal was immediately rejected by Austria’s former chancellor, Sebastian Kurz. Kurz, whose conservative People’s Party is the frontrunner to win Austria’s parliamentary vote in September, dubbed the common refugee policy a failure, adding that all Mediterranean migrants should be sent back to their home countries.

“The distribution of migrants in Europe has failed,” Kurz said on Saturday. “We are once again discussing ideas from 2015 that have long proved impractical.”

Puking on More Europe

Hello foreign minister.

Please consider the idea that the EU is puking on both more migration and more Europe.

Germany Brandenburg Polls

Excuse me for pointing out that the anti-immigration, anti-Euro AfD party is currently poised to win the Brandenburg Election on September 1.

Not Just One Poll

Polls are just that. And while I freely admit 21% is not a majority, I would also point out that FDP and much of CDU is against “more Europe”, especially more immigration.

Merkel Supports More Immigration

On May 15, 2019 The Local reported ‘Germany’s Future Depends on Immigration and Integration’: Merkel

If you “depend” on low-skill immigration, what the hell does that say about your current population?

Yeah, let’s welcome millions of unskilled migrants, give them free money, free housing, free this, and free that while they do not speak German and have no desire to ever speak German.

Merkel’s government “grand coalition” damn near collapsed over immigration.

How is SPD Doing?

I ask “How is SPD doing” because Merkel’s foreign minister Maas is a member of SPD.

Merkel Effect

Some of the demise of SPD is simply the “Merkel Effect”.

The country is clearly sick of Merkel. And because of SPD’s affiliation with Merkel, support for SPD has plunged like a rock thrown from the Golden Gate Bridge.

The Greens are pro-immigration but look closely.

The collapse of CDU is an anti-Merkel effect. And most of the demise of SPD corresponds to the rise of AfD, not the rise of the Greens.

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Gone In 30 Seconds: Watch As A $90K Tesla Is Hacked And Stolen In Under A Minute

Tesla owners will be relieved to know that while parked idly and not spontaneously combusting, their “safe” vehicles can be stolen in less than a minute. There’s even video evidence to prove it.

Footage was posted from a security camera at home in the United Kingdom showing two hooded thieves stealing a locked Tesla in about 30 seconds by “hacking” the car‘s computer and fooling it into thinking that its key was nearby, according to the Mail.

A doorbell camera caught the security footage that showed two people using what looks to be a relay wire system to relay the key’s signal from the house to the car. Because wireless keys emit a short signal that extends about 2 meters, thieves can easily amplify the signal and relay it to the car from outside of the house.

The car’s owner said: “It was absolutely shocking how quickly it went.” You can view the video here:

We wrote just days ago about now it was now possible to many steal newer, technologically “advanced” cars in as little as 10 seconds using similar systems. In a test performed by “What Car?” magazine, seven car models with keyless entry and start systems were tested to see how quickly they could be stolen. The results? An Audi TT RS was stolen in 10 seconds and a Land Rover Discovery Sport was stolen in 30.

Security experts performed the tests using the same type of technology that’s commonly used by thieves. They measured the amount of time it took to get into the vehicle and drive it away. The BBC notes that car theft rates in places like England and Wales have reached eight year highs and that more than 106,000 vehicles were stolen in 2018 alone.

Additionally, insurance claims for stolen vehicles hit their highest level in seven years at the beginning of 2019. Claims for January to March were higher than for any other quarter since 2012, according to the Association of British Insurers. Keyless car crime was part of the blame, the ABI said, but it did not have exact figures on what proportion of claims were for keyless vehicles.

After being stolen, the cars are usually stripped for parts, which for many owners may be the only recourse to fix their broken Teslas courtesy of that famously terrible Tesla service.

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Lawsuit: Florida Inmate Thrown In Solitary for Biting Guard While Having Seizure

A 28-year-old former Florida inmate with a history of epilepsy says he was beaten and thrown in solitary confinement for seven months after he involuntarily bit a correctional officer while having a seizure.

In a federal civil rights lawsuit filed last month and first reported by The Miami Herald, Dean Higgins claims he suffered a grand mal seizure last September at the Florida Department of Corrections’ (FDOC) Desoto Correctional Institution. While the guards tried to restrain Higgins—an improper way to handle someone having a seizure—he bit one of the guards on the arm.

Higgins, who was serving two years in Florida state prison for lewd and lascivious conduct, claims he was then beaten and punished by being placed in solitary confinement for more than seven months in a tiny cell. “Sewage would backup in the units and raw sewage would seep into Higgins’ cell, at times a number of inches deep,” the suit says.

Higgins’ lawsuit alleges he was subjected to excessive force and battery, and that the conditions of his confinement amounted to cruel and unusual punishment and violations of his rights under the Americans with Disabilities Act (ADA). According to the suit, in addition to having epilepsy, Higgins is also on the autism spectrum.

“A person might be arrested for treating a dog like this,” Benjamin Stevenson, the American Civil Liberties Union (ACLU) attorney representing Higgins, told the Herald.

The FDOC declined to comment, citing the pending litigation. However, lawyers for the FDOC denied Higgins’ allegations in a reply to his complaint. According to the department narrative, correctional officers suspected Higgins was having an adverse drug reaction to “spice,” or synthetic marijuana, a common drug in prisons across the country.

Although FDOC policy requires correctional officers to turn on their body cams during use-of-force incidents as soon as possible, the FDOC admitted in its reply that body camera footage only began 38 minutes after the incident started and “that there was an approximately eight-minute interruption to change batteries.”

The lawsuit comes as the FDOC is fighting another class-action lawsuit—brought the Southern Poverty Law Center, Florida Legal Services, and the Florida Justice Institute—challenging the state’s use of prolonged solitary confinement on inmates.

“There’s a growing scientific and community consensus that solitary confinement amounts to torture—mostly psychologically, but also for physical issues as well,” says Dante Trevisani, executive director of the Florida Justice Institute. “When you deprive people of like basic human contact, it can be very devastating for them. That’s especially true with people who have existing mental illness, or have other disabilities, or are pregnant or juveniles.”

As Reason previously reported, the mental and physical effects of prolonged solitary confinement can be particularly acute for inmates with disabilities. 

Trevisani says there are about 10,000 Florida inmates in solitary confinement at any given time, about 10 percent of the overall population. Most other states, he says, average around 5 percent.

Trevisani also says that under the level one “close management” confinement that Higgins was placed into—the most severe in the Florida prison system—inmates are only allowed out of their cells three times a week to shower. After the first 30 days, they’re allowed up to three hours of recreation time a week.

“We think that this is cruel and unusual punishment under the Eighth Amendment, and so we’re trying to end the way that solitary confinement is used in Florida,” he says.

Last month, three correctional officers at Lake Correctional Institution, a state prison deep in the Florida panhandle, were arrested and charged with battery and filing false reports after cell phone video leaked by an inmate showed them viciously beating another inmate.

A 2013 report on the Tomoka Correctional Institution in Florida by HEARD, an advocacy group for deaf prisoners, documented numerous allegations of sexual assault, rape, theft, retaliation by staff, and general cruelty against inmates with disabilities.

In 2012, two Florida correctional officers put Darren Rainey, a schizophrenic inmate, in a scalding, jury-rigged shower for two hours, where he died.

Florida has the third-largest inmate population in the U.S., and despite falling admissions over the past several years, the population has stubbornly hovered around 97,000. The sticky number is partly due to the harsh mandatory minimums that the state passed during the tough-on-crime 1990s, which has saddled the state with an aging and increasingly expensive population.

A bipartisan group of Florida lawmakers has been trying to get a handle on the understaffed, underfunded prison system, but without a huge influx of money or drastic changes to how the state incarcerates people, the situation is unlikely to change in the near future.

“I think it’s just almost criminal on the state’s part that we can’t look somebody in the eye and tell them that their relative will be safe while they are a ward of the state prison facilities.” Florida Republican Sen. Jeff Brandes told Reason earlier this year. “It’s terrifying.”

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Lawsuit: Florida Inmate Thrown In Solitary for Biting Guard While Having Seizure

A 28-year-old former Florida inmate with a history of epilepsy says he was beaten and thrown in solitary confinement for seven months after he involuntarily bit a correctional officer while having a seizure.

In a federal civil rights lawsuit filed last month and first reported by The Miami Herald, Dean Higgins claims he suffered a grand mal seizure last September at the Florida Department of Corrections’ (FDOC) Desoto Correctional Institution. While the guards tried to restrain Higgins—an improper way to handle someone having a seizure—he bit one of the guards on the arm.

Higgins, who was serving two years in Florida state prison for lewd and lascivious conduct, claims he was then beaten and punished by being placed in solitary confinement for more than seven months in a tiny cell. “Sewage would backup in the units and raw sewage would seep into Higgins’ cell, at times a number of inches deep,” the suit says.

Higgins’ lawsuit alleges he was subjected to excessive force and battery, and that the conditions of his confinement amounted to cruel and unusual punishment and violations of his rights under the Americans with Disabilities Act (ADA). According to the suit, in addition to having epilepsy, Higgins is also on the autism spectrum.

“A person might be arrested for treating a dog like this,” Benjamin Stevenson, the American Civil Liberties Union (ACLU) attorney representing Higgins, told the Herald.

The FDOC declined to comment, citing the pending litigation. However, lawyers for the FDOC denied Higgins’ allegations in a reply to his complaint. According to the department narrative, correctional officers suspected Higgins was having an adverse drug reaction to “spice,” or synthetic marijuana, a common drug in prisons across the country.

Although FDOC policy requires correctional officers to turn on their body cams during use-of-force incidents as soon as possible, the FDOC admitted in its reply that body camera footage only began 38 minutes after the incident started and “that there was an approximately eight-minute interruption to change batteries.”

The lawsuit comes as the FDOC is fighting another class-action lawsuit—brought the Southern Poverty Law Center, Florida Legal Services, and the Florida Justice Institute—challenging the state’s use of prolonged solitary confinement on inmates.

“There’s a growing scientific and community consensus that solitary confinement amounts to torture—mostly psychologically, but also for physical issues as well,” says Dante Trevisani, executive director of the Florida Justice Institute. “When you deprive people of like basic human contact, it can be very devastating for them. That’s especially true with people who have existing mental illness, or have other disabilities, or are pregnant or juveniles.”

As Reason previously reported, the mental and physical effects of prolonged solitary confinement can be particularly acute for inmates with disabilities. 

Trevisani says there are about 10,000 Florida inmates in solitary confinement at any given time, about 10 percent of the overall population. Most other states, he says, average around 5 percent.

Trevisani also says that under the level one “close management” confinement that Higgins was placed into—the most severe in the Florida prison system—inmates are only allowed out of their cells three times a week to shower. After the first 30 days, they’re allowed up to three hours of recreation time a week.

“We think that this is cruel and unusual punishment under the Eighth Amendment, and so we’re trying to end the way that solitary confinement is used in Florida,” he says.

Last month, three correctional officers at Lake Correctional Institution, a state prison deep in the Florida panhandle, were arrested and charged with battery and filing false reports after cell phone video leaked by an inmate showed them viciously beating another inmate.

A 2013 report on the Tomoka Correctional Institution in Florida by HEARD, an advocacy group for deaf prisoners, documented numerous allegations of sexual assault, rape, theft, retaliation by staff, and general cruelty against inmates with disabilities.

In 2012, two Florida correctional officers put Darren Rainey, a schizophrenic inmate, in a scalding, jury-rigged shower for two hours, where he died.

Florida has the third-largest inmate population in the U.S., and despite falling admissions over the past several years, the population has stubbornly hovered around 97,000. The sticky number is partly due to the harsh mandatory minimums that the state passed during the tough-on-crime 1990s, which has saddled the state with an aging and increasingly expensive population.

A bipartisan group of Florida lawmakers has been trying to get a handle on the understaffed, underfunded prison system, but without a huge influx of money or drastic changes to how the state incarcerates people, the situation is unlikely to change in the near future.

“I think it’s just almost criminal on the state’s part that we can’t look somebody in the eye and tell them that their relative will be safe while they are a ward of the state prison facilities.” Florida Republican Sen. Jeff Brandes told Reason earlier this year. “It’s terrifying.”

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Curve Inverts As Traders Brace For J-Hole Surprise; Boeing Propels Dow Higher

In what was mostly a very quiet day, with traders refusing to trade in size ahead of tomorrow’s main event, J-Powell’s J-Hole speech, we got a glimpse of what will happen if the Fed chair disappoints the market’s expectations for committing to further rate cuts.

After spiking in early trading, stocks slumped to session lows and the VIX jumped back over the key 16 threshold, after Philly  Fed’s Harker joined other regional Fed presidents in pouring cold water on hopes for more rate cuts, and instead saying that he expects not to vote for more easing.

The unexpected hawkishness sent 2Y yield surging, as suddenly the consensus case for 2 more rate cuts this year, and another 2 in 2020 seemed in jeopardy.

The drift higher in short-term yields came even as Markit reported the first contractionary manufacturing PMI in ten years, at 49.9, while the services PMI stumbled as well, making the case for a recession that much more likely.

Also not helping the dovish case was news from Germany, that Bundesbank economists now expect Q3 GDP in Europe’s strongest economy to print -0.1%, meaning Germany has now entered a technical recession with two consecutive sub zero GDP prints.

In any case, the surprising hawkishness out of Fed presidents, and the spike in 2Y yields, meant that the 2s10s yield curve inverted again – yet another recessionary indicator – and was flipping between negative and positive for much of the day.

Looking at sector performance, banks were the clear winners despite the fresh curve inversion, with homebuilders also positive, while all other sectors were either flat or negative, with tech stocks suffering a surprising drop.

And while the S&P traded mostly flat, the Dow outperformed thanks to a Reuters report that Boeing was hoping to produce a record number of 737 planes in Q2 2020… assuming the company got clearance to fly the infamous 737 Max plane again.

Away from the US, euro-area government bonds slumped as the ECB, in its latest minutes, expressed concern that investors were losing faith in its ability to revive inflation. Investors agree, and have pushed the European 5Y5Y inflawtion swap to near record low levels.

Meanwhile, the British pound surged over 1%, its best one day return since May, as investors seized on hints from European leaders that a Brexit deal could still be reached.

And so with the S&P closing flat, Chris Zaccarelli, CIO for Independent Advisor Alliance, summarized it best: “The big question mark is just going to be Jackson Hole — what’s Powell going to say You’re seeing the market going higher and lower this week heading into tomorrow, where we could get some market-moving commentary out of Powell’s speech.”

For those curious what Powell may say, and why he will likely disappoint, read our preview of tomorrow’s J-Hole main event here.

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As Italy’s Political Crisis Worsens, Five Star Eyes Alliance With Democrats

Now that Italian President Sergio Mattarella has – at least for now – denied League leader Matteo Salvini the opportunity to become prime minister and refuses to rush into new elections that would almost certainly see Salvini emerge victorious as Italy’s next PM, Salvini’s former partner, Luigi di Maio is discussing the possibility of forming a coalition with the establishmentarian Italian Democratic Party.

The tie-up would be a strange one, even by the standards of Italian politics, as M5S (the acronym for the Five-Star Movement) has sought to market itself as an anti-establishment party – the one characteristic that it shared with Salvini’s conservative, anti-immigration League.

The Democrats expressed their desire to join forces with M5S after Mattarella gave the parties the green light on Thursday.

According to Bloomberg, Mattarella holds the power to either appoint the next prime minister or call early elections.

Luigi Di Maio

The talks follow the anticipated resignation of Giuseppe Conte, Italy’s former Prime Minister, earlier this week.

Conte’s resignation came after Salvini withdrew support for the government. After months of political uncertainty, Salvini made his bid to consolidate power by pushing for fresh elections, intended to capitalize on the League’s climbing popularity.

A coalition between the Democrats and M5S would deny Salvini his chance to become premier, at least in the short term. But the unlikely alliance between two parties that have little in common and have spent much of the past few years criticizing each other.

Opportunistic political alliances are hardly rare in Italy. But a link between the Dems and M5S would mark a compromise of M5S’s anti-establishment principles, something that could help burnish Salvini’s anti-establishment principles.

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What Happens To Bond ETFs When Interest Rates Go Negative?

Submitted by Nicholas Colas of DataTrek Research

Exchange traded funds continue to grow, exerting ever-greater influence on US capital markets. In equities, the issue is most pronounced in small caps (12-25% ownership) and real estate investment trusts (+13% for even the largest one). In fixed income, ETFs illuminate why investors put up with negative global interest rates. International bond ETFs still pay a coupon (however small), even when rates are below zero.

“US listed exchange trade funds are a market structure risk factor.” We have heard various iterations of that concern off and on for over a decade now. The basic argument goes like this:

  • ETFs promise tick-by-tick liquidity even though their underlying assets may be much less liquid.
  • As ETFs grow in popularity, this problem will only get worse.
  • If and when capital markets see another bout of volatility like 2008, ETFs will create market dislocations unseen in prior cycles.

There have been 2 notable (but brief) examples of this problem in the last 3 years:

  • The August 24 2015 flash crash of several hundred ETFs at the open. Markets were already choppy from a recent devaluation of the Chinese yuan, and many ETFs traded for +10% discounts to their NAV through much of the morning.
  • The February 5th 2018 spike in US equity volatility, which led to a vicious feedback loop between CBOE VIX-tied ETFs and the underlying contracts.

We have not heard much criticism of ETFs this month, but since we expect further market volatility today is a good time to review the US ETF ecosystem. Our usual 3-point format, headlined by questions to frame the discussions, with all data courtesy of www.xtf.com:

#1: What’s the latest on ETF assets under management and money flows?

  • US-listed exchange traded funds continue to grow in 2019.
  • AUM totals $3,944 billion across 2,295 exchange traded products (funds and notes). Fun fact: there have been more ETF launches thus far in 2019 (147) than IPOs (106).
  • Most of the total increase in AUM this year ($542 billion) has come from capital appreciation ($411 billion) rather than inflows ($131 billion).
  • YTD inflows are mostly to fixed income funds ($83 billion) rather than equities ($34 billion). Money flows are also positive for commodity/precious metals funds ($4 billion), real estate funds ($4 billion) and volatility-linked products ($3 billion).
  • Data from the Investment Company Institute – which included mutual fund money flows – shows that ETFs represent well over 100% of all equity fund inflows (MF’s are seeing redemptions), 87% of all commodity/precious metal inflows and 39% of all bond fund inflows.

The bottom line: ETFs continue to grow in popularity across all major asset classes in 2019.

#2: How much do equity ETFs own of various single stocks (i.e. how systematically important are they)?

  • The answer varies widely depending on the type of stock.
  • For the top 10 names in the S&P 500, the average ownership by ETFs is 6.8%. Among the important super cap Tech names, Microsoft is the most widely held stock by ETFs (7.0%), followed by Apple (6.5%), Amazon (6.3%) and Google/Facebook (6.2% each).
  • ETF ownership is much higher in the Russell 2000, with the top 10 names here averaging 11.4%. Dig down further, and ETF ownership percentages only rise. Stocks in the 25th percentile of the index by weight average 22.7% ownership by ETFs, for example.
  • As an asset class, Real Estate Investment Trusts have the highest percentage of ETF ownership. The 10 largest holdings in the Vanguard Real Estate Index Fund (the biggest ETF in the space by AUM) average 13.2% ETF ownership.

Bottom line: ETF ownership of US equities continues to climb (since inflows are positive and share counts go down with stock buybacks), and small caps/REITS show the largest “ETF effect”. Worth noting: US small cap ETF fund flows have been negative this year (-$886 million), and this group has underperformed US large caps, with $4 billion of inflows. There’s a chicken-egg problem with that sound bite analysis, but the relationship clearly exists.

#3: What happens to bond ETFs when interest rates go negative?

  • No need to explain why that’s a topical question just now.
  • The short answer is that negative yielding bonds still pay a coupon; the negative yield comes from principal erosion over time. Plunk down $120 for a bond that pays $1 annually and redeems at $100, and you’re out $10. That’s the negative yield, not a bill sent to every bondholder.
  • At present there are 11 international (non-US) bond US listed ETFs, with a total of $5 billion in AUM. Two – IAGG (iShares Core Intl Agg Bond) and BWX (SPDR Barclay Intl Bond) – are just over half that total.
  • By our calculation, the current yield on both is about 1.0% (BWX monthly payments have been stable, but IAGG’s are declining). Year to date price returns are 5-6% for the two.
  • ETF investors do not yet seem to be noticing the ever-lower payouts and availability of better options like US Treasury bonds. Fund flows for non-US bond funds are negative quarter-to-date, but only because of a $122 million redemption from one smaller fund (iShares IGOV). Aside from that, flows remain positive.

Bottom line: negative yielding bonds do not create negative yielding ETFs and mutual funds. Very low yields… Clearly. Principle risk… Yes, that much is actually guaranteed. But the exercise here is a useful reminder of why investors still buy “negative yielding” bonds.

Summing up: ETFs continue to grow in importance relative to how capital markets price securities. In equities, small caps and REITs are especially exposed. Bond ETFs – this year’s outsized winners in terms of inflows – are illustrative of why investors continue to buy even negative yielding bonds.

As for whether the continued rise of ETFs make markets less stable, history says they can contribute to temporary volatility. But let’s not forget that the S&P is 10% higher than last February’s VIX ETF meltdown and +30% higher than August 2016. Fundamental issues like interest rates and earnings still matter more.

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