FBI Chief Insists Kavanaugh Background Probe Was “Consistent” With Other Investigations

Despite the fact that Supreme Court Justice Brett Kavanaugh sailed through his confirmation hearing with bipartisan support (he did receive one Democratic vote from West Virginia Senator Joe Manchin III), Democrats plan to continue hounding him as some speculate that an effort to impeach Kavanaugh could begin shortly after the midterms. Given their hostility, it’s hardly surprising that one of the senators who led the opposition to Kavanaugh’s nomination seized the opportunity to grill FBI Director Chris Wray during what was supposed to be routine testimony about national security.

Wray

But when pressed by California Democrat Kamala Harris about how much direction the FBI received from the White House about the scope of its probe, Wray affirmed that the Kavanaugh expanded background check probe had been “consistent” with other similar investigations overseen by the bureau, per the Washington Post.  Wray insisted that his “supplemental update” to the previous background check investigation was “limited in scope” and that this was “consistent with other investigations going back a long ways.”

The Kavanaugh probe, Wray insisted, was “consistent with the standard process for such investigations going back quite a long ways.”

Asked if he could turn over any written communications between the White House and the FBI relating to the investigation, Wray said he would need to check to see if that would be appropriate. He also refused to comment on what role, if any, was played by White House counsel Don McGahn in shaping the scope of the investigation, saying only that the probe was coordinated between the FBI’s background investigations specialists and the White House’s security division. He also refused to comment on who, specifically, communicated with the FBI regarding the probe.

“I have spoken with our background investigations specialist and they have assured me that this investigation was consistent in scope with our usual process.”

When Harris pressed him who determined the FBI’s decision not to interview some 40 witnesses, including Kavanaugh himself and Dr. Christine Blasey Ford, he said only that the investigation was “very specific in scope and limited in scope” (the FBI ultimately interviewed nine witnesses during the extended investigation). Harris closed by asking whether the FBI looked into allegations that Kavanaugh lied under oath during his confirmation hearing.

“That’s not something I could discuss here,” Wray said.

Clips of the exchange soon circulated on social media:

As a member of the Senate Judiciary Committee, Harris was one of the most vocal opponents of Kavanaugh’s nomination, and praised Ford’s bravery for speaking out publicly against him at great personal risk. During a Senate floor speech last week that the probe was “not a search for the truth, this was not an investigation, this was an abdication of responsibility and duty.”

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Desperate to Keep His Seat, Ted Cruz Gets Dumber and Dumber on Criminal Justice

When Ted Cruz ran for the 2016 Republican presidential nomination, he executed a striking about-face on sentencing reform, opposing legislation that was less ambitious than a bill he had cosponsored just eight months before. The Texas senator’s explanation, which featured the sort of tough-on-crime demagoguery he had previously resisted, was utterly illogical but made political sense as part of an effort to attract conservative primary voters. Now that he is running a surprisingly close re-election campaign against Texas congressman Beto O’Rourke, who supports marijuana legalization as well as sentencing reform, Cruz is doubling down on the dumb authoritarian rhetoric in the hope of motivating his supporters to vote by painting O’Rourke as a dangerous radical.

Last month Cruz, who boasts about his support among cops, claimed on Twitter that O’Rourke “sides against the police” at every opportunity. Nine minutes later, Cruz posted a video of O’Rourke speaking at a Dallas church after the September 6 shooting of Botham Shem Jean. Amber Guyger, the off-duty Dallas police officer who shot Jean, said she mistook him for a burglar after mistaking his apartment for hers. Here is what O’Rourke had to say about the incident:

How can it be, in this day and age, in this very year, in this community, that a young man, African American, in his own apartment is shot and killed by a police officer? And when we all want justice and the facts and the information to make an informed decision, what is released to the public? That he had a small amount of marijuana in his kitchen. How can that be just in this country? How can we continue to lose the lives of unarmed black men in the United States of America at the hands of white police officers? That is not justice. That is not us. That can and must change. Are you with me on this?

Cruz, who captioned the video “In Beto O’Rourke’s own words,” clearly was presenting it as evidence of his opponent’s anti-cop bias. That’s absolutely bonkers, given that Guyger’s shooting of Jean was so egregious that it was condemned by commentators across the political spectrum. Even if you take her account of the shooting at face value, she was guilty of deadly carelessness at the very least.

Cruz’s tweet about the Jean shooting cannot be dismissed as a one-time gaffe. A week before, he had told a local TV station that O’Rourke was jumping to conclusions when he said the Dallas Police Department should fire Guyger. While Jean’s death was a “tragic situation where everyone is horrified by what happened,” Cruz said one day before Guyger was arrested for manslaughter and two days before she was fired, “I wish Beto O’Rourke and Democrats weren’t so quick to always blame the police officer.” Not to put too fine a point on it, but when a cop enters someone’s home with no legal justification and shoots him dead, there is no mystery about who is to blame.

“If there was ever a justified national WTF moment regarding police brutality, the Botham Shem Jean shooting was it,” Jack Hunter observes at The American Conservative. “O’Rourke was right to call for the officer’s firing. How many times have conservative Republicans called for government bureaucrats to be fired for basic incompetence? (And they should!) A government agent who happens to wear a badge unquestionably deserves due process but not special treatment.”

Cruz also has attacked O’Rourke for his critique of mass incarceration and racial bias in the criminal justice system. During a September 19 campaign event, O’Rourke alluded to Michelle Alexander’s book on that subject, The New Jim Crow, calling the phrase “an apt description.” As the Houston Chronicle noted in an editorial, Sen. Rand Paul (R-Ky.), Cruz’s erstwhile ally on sentencing reform, has used similar language. Yet at a September 21 debate, Cruz presented O’Rourke’s comments as further evidence that he hates cops, falsely claiming that “Congressman O’Rourke described law enforcement, described police officers, as modern-day Jim Crow,” adding, “That is not Texas.”

Cruz’s criticism of O’Rourke’s views on drug policy have been only slightly more nuanced. To his credit, Cruz still takes a federalist approach to marijuana, saying states should be free to legalize it without interference from Washington. That stance is consistent with Cruz’s avowed respect for the Constitution and with public opinion. Last year a Quinnipiac University poll found that 75 percent of Americans, including 59 percent of Republicans, opposed “enforcing federal laws against marijuana” in the 29 states that “have already legalized medical or recreational marijuana.” Another Quinnipiac survey conducted last April found that 61 percent of Texas voters think recreational use of marijuana should be legal. Even the Texas Republican Party has endorsed eliminating criminal penalties for marijuana possession.

Rather than swimming against the marijuana tide, Cruz portrays O’Rourke as a crazy extremist who wants to legalize all drugs. “Reasonable minds, perhaps, can differ on whether marijuana should be illegal,” Cruz told reporters in May, “but what Congressman O’Rourke introduced was a resolution for the City Council to take up legalizing all narcotics, legalizing everything, legalizing heroin, legalizing deadly opioids….This country is facing a crisis—an opioid crisis…and in light of that growing tragedy, Congressman O’Rourke’s radical proposal to legalize all narcotics is a suggestion that might be very popular up at Berkeley. It might be popular in far-left circles, but it doesn’t reflect the values of Texans. Texans don’t want to see heroin and deadly opioids legalized and our kids able to just walk in to the corner store and buy them.”

Cruz was referring to O’Rourke’s support, as an El Paso city councilman, for an “honest, open national debate on ending the prohibition on narcotics.” O’Rourke added that recommendation to a 2009 resolution about drug war violence, and here is how he explained it at the time: “I’m not saying that we need to do that—to end the prohibition. I think we need to have a serious discussion about doing that, and that may, in the end, be the right course of action.” In his 2011 book Dealing Death and Drugs: The Big Business of Dope in the U.S. and Mexico, O’Rourke claimed he mainly had in mind marijuana, which he erroneously referred to as a “narcotic” (consistent with longtime government practice). Although I wish O’Rourke were mounting a broader critique of the war on drugs, it clearly is not accurate to say he wants to “legalize all narcotics,” and Cruz’s bit about kids buying heroin at the corner store makes him sound like a mindless drug warrior circa 1985.

This sort of cheap fearmongering is not just disappointing from a politician who has shown he is capable of discussing criminal justice in a more thoughtful way. Attacks like these can have a real impact on the prospects for reform, already threatened by an administration that is more interested in ratcheting up penalties than in making the system less mindlessly punitive.

“While they may address the issues from different perspectives, Democrats and Republicans have worked together in fighting mass incarceration and refocusing efforts toward rehabilitation,” the Chronicle notes. “This cooperation included an unspoken detente on scaremongering and race-baiting campaigns. Without the fear of cheap attacks, politicians and policymakers have been free to discuss the failings of our criminal justice system in stark, earnest terms. Historically low crime rates certainly contributed to that political truce. In his campaign for re-election, Cruz has shattered that truce.”

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Morgan Stanley: “This Dynamic Is The Ultimate Bear Case For Risky Assets”

As we discussed moments ago, the price action in fixed income has driven dramatic shifts in ETF flows over the last week, suggesting that material moves are taking place under the surface. :

  • Government Bond and Credit (largely HY) ETFs posting 3 to 4 z-score outflows
  • Growth and Momentum equity products saw 1 to 2 z-score outflows
  • US equity sector flows also show sensitivity to rates with Utilities and Real Estate positing ~3 z-score outflows, even more than Technology which saw 2 z-score outflows

And, as Morgan Stanley’s quantitative derivatives strategist Chris Metli explains in a note to clients, the direction of these flows is not all that surprising – but it’s helpful to put into context the magnitude of the flows. Across all fixed income ETFs, the last week saw the biggest outflows since the taper tantrum.

Credit products saw more outflows than government bond products, although given that HY has traded reasonably well the outflows are likely motivated more by the rate than the spread component.

Yet contrary to market speculation, within equities there does not appear to be a huge rotation into Value – the more notable flow is selling of Momentum and Growth ETFs, which we noted earlier. 

Similarly on the sector level ‘Value’ sectors like Financials, Materials, and Staples have not seen big inflows – the more notable flow is selling of Technology (in-line with the Momo and Growth outflows) as well as outflows from the rate-sensitive Real Estate and Utilities sectors (note for the below charts the flow over the last week is on the horizontal axis, while the positioning vs the last year is on the vertical axis).

What is even more curious, is that the outflows from Utilities and Real Estate do not line up with price action over the last week – in fact Utilities and Real Estate actually outperformed what a simple sector model based on SPX and 10y rates would have predicted. As we noted earlier this week, MS equity strategist Mike Wilson said that these moves suggest investors are taking the view “that the rate spike is ultimately growth negative in that it destroys demand.”

Here’s why this matters: according to Morgan Stanley, for now, the rotation into defensives – despite the rate move – is keeping a lid on correlation between stocks and is slowing a move lower in the broader indices. But if the rate impact starts to dominate the defensive bid and the flows out of defensive ETFs continue there are important implications – dispersion between stocks will fall, correlation will rise, and volatility for multi-asset investors (including risk parity funds) will spike.

As Morgan Stanley warns in parting, “this dynamic –  that there could be no safe haven within equities to turn to as rates rise – is the ultimate bear case for risky assets.”

While price action indicates we are not there yet, these flows suggest that unless the violent rotation fades, “extreme caution for stocks is still warranted here.”

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U.K.’s Top Court Sides with Baker in Gay Cake Case

Bert and ErnieThe United Kingdom’s highest court ruled Wednesday that a baker cannot be forced to bake a cake with a pro-gay message on it.

The U.K. doesn’t have the First Amendment speech protections familiar to United States citizens, but it does have many protections for freedom of expression under the European Convention of Human Rights. Citing those protections, the five judges on the U.K. Supreme Court ruled unanimously that a baker cannot be forced to sell a cake that included a message he or she found objectionable.

The case revolved around a bakery in Belfast, Ireland, and the religious couple who owned it. A customer came to them in 2014 asking them to make a cake that said “support gay marriage,” and included a picture of Bert and Ernie from Sesame Street. The owners did not support gay marriage for religious reasons and therefore declined to make the cake.

The customer complained to the Equality Commission of Northern Ireland, claiming discrimination on the basis of his sexual orientation, religious belief, or political opinion. Lower courts found for the customer, concluding that the bakers had discriminated against him.

Not so, says the U.K. Supreme court in its ruling. The bakery did not refuse to serve the customer on the basis of him being gay. The bakery refused to add a message onto the cake that they objected to. They would have rejected the cake regardless of the sexual orientation of the customer. The U.K.’s free speech protections, much like ours in the United States, also protect a person’s right to refuse to communicate a message they oppose. The ruling even makes note of the recent Masterpiece Cakeshop Supreme Court decision from the United States:

The important message from the Masterpiece Bakery case is that there is a clear distinction between refusing to produce a cake conveying a particular message, for any customer who wants such a cake, and refusing to produce a cake for the particular customer who wants it because of that customer’s characteristics. One can debate which side of the line particular factual scenarios fall. But in our case there can be no doubt. The bakery would have refused to supply this particular cake to anyone, whatever their personal characteristics. So there was no discrimination on grounds of sexual orientation.

The reason for the ruling has, as has been typical, falling on the deaf ears of the “Just bake me a cake!” crowd. In The Guardian, the customer in the case complains, “I’m very confused about what this actually means. We need certainty when you go to a business. I’m concerned that this has implications for myself and for every single person.”

This isn’t confusing at all, and this is pretty much how free speech has generally been applied. Admittedly I’m not familiar with all of the relevant precedents in U.K.’s courts, but in the United States there are a number of court cases that prohibit the government from compelling most forms of speech or expression.

In other words, you don’t get certainty. Doing business with your fellow humans does not require that every other human do whatever you ask of them. The great thing about a robust free market is that it’s easy to find alternatives when a baker or printer doesn’t want to say what you want them to.

Read the court ruling here.

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James Murdoch Slated To Replace Elon Musk As Tesla Chairman

Media mogul James Murdoch is at the top of the list to replace Elon Musk as the chairman of Tesla, according to the Financial Times, citing two people briefed on the discussions. Murdoch has reportedly signaled that he wants the job. 

Mr Musk agreed to leave the chairman’s post to settle a Securities and Exchange Commission lawsuit alleging he broke securities laws in August when he wrote on Twitter that he had “funding secured” to take Tesla private. He will remain chief executive.

Two people briefed on the discussions said Mr Murdoch, who is currently a non-executive director of Tesla, was the lead candidate for the job, which is required by the SEC to be an independent chairman. Another person said external options were still being considered. –FT

Musk, on the other hand, favors Tesla’s lead independent director, Antonio Gracias, for the role – however Musk has been told that Gracias may not be sufficiently independent due to his history of long-term involvement with SpaceX. 

Gracias’s firm, Valor Equity Partners, invested in Tesla in 2005 – selling its IPO shares in 2010. He is currently an investor in SpaceX. 

Murdoch will step down as CEO of 21st Century Fox following the media group’s sale of entertainment assets to Walt Disney, and is considering setting up a technology investment fund. Murdoch previously stepped down as chairman of Sky following its acquisition by Comcast. 

“The Tesla chairman job is perfect for James,” said one person briefed on the conversations. “He’s working on this fund and will be sitting next to Elon . . . he’s going to get access to so much deal flow.”

Murdoch recently spoke highly of Musk at a recent Goldman Sachs conference. 

“It’s been a really fascinating experience,” said Murdoch, adding. “What’s exciting about the company and about Elon is the goals are so audacious. He’s an entrepreneur who has some really audacious goals about what can be created and what can be settled for.”

Mr Murdoch, who is a friend of Mr Musk, joined Tesla’s board last year as one of two new independent directors brought in to strengthen a group that has frequently been criticised for bowing to Mr Musk’s wishes. However, the appointments have had no effect on the mercurial Mr Musk this year, and Mr Murdoch has participated in recent decisions that have brought the board additional criticism. –FT

The Tesla board has yet to come to a decision on Musk’s replacement and may also turn to an external candidate. Musk has until mid-November to find a replacement after having agreed to a 45-day window to step down as part of the settlement agreement with the SEC. That said, the enforcement agency will extend the deadline upon request. 

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Don’t Fight The Fed, 1994 Edition

Submitted by Nicholas Colas of DataTrek Research

How much is 2018 like 1994? The most notable common factor: a US Federal Reserve regularly hiking interest rates with no end in sight. After that, the story gets complicated. We were in the business in 1994; our full thoughts on this “then and now” comparison below.

One of the most vivid recollections I have after 30 years on Wall Street is April 18th 1994. I covered the auto industry for Credit Suisse at the time, and everything I had recommended over the last 3 years had gone straight up. But on that day, the Fed hiked rates for the third time that year – 75 bp in total since January. All of a sudden, cyclicals were out of fashion. And no one wanted to hear about autos.

Things didn’t get any better for the remainder of the year. The Fed went again in May and August, by 50 basis points each. Then the capper… A 75 bp move in November. For the year as a whole, Fed Funds rose from 3.0% to 5.5%. Needless to say, auto stocks had a rough time.

Since it has become fashionable to compare markets today to 1994 given the Fed’s more aggressive posture of late, let’s dig a little deeper into the analogy. A few points here:

#1. US stocks were actually higher on the year in 1994, but barely so. On a price basis, the S&P 500 declined by 1.5%, but dividends brought the total return to 1.3%.

#2. The rapid-fire increases in Fed Funds allowed the central bank to essentially go on hold from 1995 to 1999. Rates peaked at 6.0% in April/May 1995. After that they remained range-bound between 4.6% and 6.0% until April 2000.

Remember how Chair Jay Powell enthused about Alan Greenspan’s constancy during the mid-late 1990s in his Jackson Hole speech in August? That stretch of do-nothing rate policy only came after the flurry of increases of rates in 1994. Perhaps Powell sees the current environment as his “1994” – get rates to neutral (3.0% or so) and then go on autopilot…

#3. US stocks more than doubled from 1995 to 1997. S&P returns were 37.2% (1995), 22.7% (1996) and 33.1% (1997). No, we don’t think 2019 – 2021 will resemble this experience, however… The chief reason is that long-term interest rates fell from 7.9% in November 1994 to 5.7% in December 1997. That is a discount rate tail wind we don’t expect to see this time around.

#4. One other way 1994 is like 2018: 10-year Treasury yields spiked when the Fed made it clear short rates were on their way higher. Ten-year Treasuries started 1994 with a 5.7% yield. By December, they were 7.8%. As mentioned in the previous point, they did decline after that.

#5. Just as now, 1994 began the year with a very low VIX reading of just 11.7. It closed March at 20.5. By December 1994 it was 13.2 and didn’t move convincingly over 20 until 1997.

Two takeaways from this brief history lesson:

  • First, 2018 has been a lot easier on US stocks than 1994 because the rate of change in Fed Funds is much slower. The odds of a 50 or 75 bp move at an FOMC meeting (commonplace in 1994) are low. If inflation picks up dramatically, that may still happen. But it is neither our nor the Fed’s base case.
  • Second, the 1994 experience refutes the notion that rapid Fed Funds increases always cause a recession. Yes, we worry about rising deficits because the 1990s playbook clearly shows that narrower budget gaps keep long-term rates on the right path (lower). But “Don’t fight the Fed” is an aphorism that needs a very large asterisk next to it.

Summing up: 2018 is enough like 1994 to take one key lesson to heart. Expect more volatility, to be sure. But look beyond the current Fed rate cycle.

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Tom Woods: The Making of an Anti-War Libertarian: New at Reason

Tom Woods stands accused of many things, but laziness is not one of them.

A senior fellow at the Ludwig von Mises Institute, Woods is the author of a dozen books, including The Politically Incorrect Guide to American History. He’s written curricula for the Ron Paul homeschool program; he co-hosts, along with economist Robert Murphy, the weekly Contra-Krugman podcast, which dissects columns by New York Times Nobel laureate Paul Krugman; and he posts a new episode of the popular Tom Woods Show every day.

I sat down with Woods recently to talk about his ideological journey, his plans with the Libertarian Party, his past associations with such controversial entities as the League of the South, and his assessment of Donald Trump, among many other topics.

Click here for full text and downloadable versions.

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“Alarming” Bond ETF Outflows Spark Cracks In Credit Nirvana Narrative

This has never happened before…

Blackrock’s broad bond-market ETF (AGG) suffered a nearly $2 billion outflow yesterday – the most ever…

And, as Bloomberg’s Lisa Abramowicz reports, it appears that money is flying out of corporate debt, from the riskiest to the safest bonds, at least based on ETF flows.

These are pretty huge weekly outflows among the biggest credit ETFs, and they seem to be accelerating:

All fixed-income ETFs have seen $5.5 billion in outflows in the past week, “about 4 to 5 times worse than any other week in recent memory,” according to Bloomberg Intelligence’s Eric Balchunas.

“The ETF flows are pretty volatile, with professional speculators contributing a lot of the volatility,” said Martin Fridson, chief investment officer at Lehmann Livian Fridson Advisors. “Those up and down swings have washed out over longer periods.”

As Abramowicz asks, the question is: are these flows a harbinger of more pain in U.S. corporate debt as benchmark Treasury rates rise? Right now it seems like this is a growing risk, since investors aren’t getting compensated that much for the extra risk they’re taking to own corporate debt over U.S. government bonds – especially given how high corporate leverage has become…

 

However, Fridson remains convinced this is a storm in a teacup and surging leverage is nothing…

“Forecasts are for default rates to be lower over the next 12 months than over the last 12 months, so investors are not too worried,” said Fridson.

We wonder what those forecasts were like in 2007?

As BofA notes, HYG was one of the primary casualties among risky assets last week (and that pain is continuing). For instance, its 1.4% sell-off since 1-Oct-18 represents a 3.4 sigma drawdown on a vol-adjusted basis (near historic records)…

HYG has done worse less than 10% of the time (using rolling 1w returns), and its move last week outperformed its typical beta vs. SPY, IWM (small caps) and LQD (IG credit)… In other words, the selling pressure is HY bonds is notably more aggressive for now than in the equity and IG credit markets…

But that is sparking some notably wide divergence from equity markets…

Stocks have only just begun to catch down to reality.

“Corporate earnings will be a problem going forward,” said Noel Hebert, high-yield strategist at Bloomberg Intelligence. “With tailwinds gone and with headwinds like tariffs and full valuations already, high yield will be adversely impacted — even with favorable technicals — if equities get hit.”

And finally, if you’re worried enough yet that the nirvana narrative in US corporate credit is not cracking, the breadth in the US Corporate High Yield Bond market has never…ever… been worse…

Yep – more new 52-weeks lows for HY bonds than in 2008!

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