Never Mind Volatility: Systemic Risk Is Rising

Authored by Charles Hugh Smith via OfTwoMinds blog,

So who’s holding the hot potato of systemic risk now? Everyone.

One of the greatest con jobs of the past 9 years is the status quo’s equivalence of risk and volatility: risk = volatility: so if volatility is low, then risk is low. Wrong: volatility once reflected specific short-term aspects of risk, but measures of volatility such as the VIX have been hijacked to generate the illusion that risk is low.

But even an unmanipulated VIX doesn’t reflect the true measure of systemic risk, a topic Gordon Long and I discuss in our latest program, The Game of Risk Transfer.

The financial industry has reaped enormous “guaranteed” gains by betting against volatility. As volatility steadily declined over the past two years, billions of dollars were reaped by constantly betting that volatility would continue declining.

Other “guaranteed” trades have been corporate buybacks funded by cheap credit and passive index funds Central bank policies–near-zero interest rates and “we’ve got your back” asset purchases that made buying every dip a no-brainer trading strategy–have changed as banks attempt to dial back their stimulus and near-zero rates, and as a result volatility cannot continue declining in a nice straight line heading toward zero.

Higher interest rates have introduced a measure of uncertainty in another “guaranteed gains” trade–betting that interest rates would continue declining. All of these trades were “guaranteed” by central bank stimulus and intervention. In effect, price discovery has been reduced to betting that central banks will continue their current policies–‘don’t fight the Fed.”

Now that central banks have to change course, certainty has morphed into uncertainty, and risk is rising, regardless of what the VIX index does on a daily basis.

Here is what a “guaranteed gains by buying the dip” market looks like: just bet that central banks will buy every dip and suppress volatility, and you’re a genius.

Until the recent spot of bother that destroyed the short-volatility trade, betting on declining volatility “guaranteed gains”:

Meanwhile, back in the real-world economy, wage earners’ share of the economy continues stair-stepping down as every risk-asset bubble eventually pops:

Back in the good old days, corporate profits were the foundation of rising stock valuations. But corporate profits have stagnated while stocks have soared.

Gordon and I discuss the inconvenient reality that risk cannot be destroyed, it can only be transferred to others. So who’s holding the hot potato of systemic risk now? the short answer: every participant holding risk assets, which now includes virtually every asset class.

Suppressing volatility does not mean risk has vanished; rather, it means that risk is increasing as accurate information on systemic risk is being suppressed. The global financial system is becoming increasingly fragile and thus more prone to collapse, and an artificially low measure of volatility doesn’t change this reality.

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My new book Money and Work Unchained is $9.95 for the Kindle ebook and $20 for the print edition. Read the first section for free in PDF format. If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.

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InfoWars’ Bureau Chief YouTube Account Terminated With No Explanation

InfoWars’ Washington D.C. bureau chief was permanently kicked off of YouTube Thursday after receiving two warnings under the platform’s bullying and harassment policy.

Dr. Jerome Corsi, the 71-year-old Harvard PhD who has become a permanent fixture at InfoWars, had been on the verge of a permanent ban last week alongside a host of other conservative or “conspiracy” channels critical of the response to the Parkland, FL school shooting. In particular, Corsi received two strikes this week for the videos DOES the TRUMP COUNTERATTACK start NOW? YES, and Trump Wins Narrative on FL School Shooting.

The cause of his third strike and permanent ban are unknown. 

Corsi has called out YouTube and parent company Google over the termination, noting that they “Stole my FEB EARNINGS.” 

According to YouTube policy, accounts which receive three strikes within any 90 day period are terminated. 

Corsi is known for espousing “conspiracy theories,” which – as is often the case in the fullness of time, can become conspiracy fact. His opinions on subjects from President Obama’s country of origin to a 9/11 government coverup have painted a target on the Harvard PhD’s back – particularly as Corsi’s popularity has grown alongside InfoWars, founded by Alex Jones. 

Over the last week, The Alex Jones channel was issued two strikes – however the second one was unexplicably  removed just hours later. 

Corsi’s ban follows several other accounts known for conservative or non-mainstream opinions, including Anti-School, Bombard’s Body Language, Charlton, Charles Walton, Defango, Dustin Nemos, David Seaman, Destroying The Illusion, Ron Johnson, Richie Allen, and Titus Frost.

Earlier in the week, Google announced that “newer members” of its recently hired moderation team of 10,000 employees had “misapplied” some of YouTube’s policies and mistakenly removed videos and issued strikes against conservative content creators. 

“As we work to hire rapidly and ramp up our policy enforcement teams throughout 2018, newer members may misapply some of our policies resulting in mistaken removals,” wrote a YouTube spokesman in an email. “We’re continuing to enforce our existing policies regarding harmful and dangerous content, they have not changed. We’ll reinstate any videos that were removed in error.”

Far-left activist groups flagging YouTube content

Meanwhile, as we reported yesterday, the Daily Caller revealed that Google has also enlisted the left-wing nonprofit Southern Poverty Law Center (SPLC) to participate in its “trusted flaggers” program. The SPLC notoriously branded African American presidential candidate and neurosurgeon Dr. Ben Carson as an “extremist,” while gaining a reputation for finding creative ways to label conservatives as “hate groups” in general. 

Another “trusted flagger” partner is the Anti-Defamation League (ADL) – which is headed by former Obama Admin aide Jonathan Greenblatt. Greenblatt previously directed an initiative at the George Soros-financed, far-left Aspen Institute.

Jonathan Greenblatt, CEO of the ADL

While YouTube is a private subsidiary of Google (which is a subsidiary of Alphabet) and can therefore choose how they enforce their “bullying and harassment” policies, some have wondered if there’s a legal case to be made for the growing number of conservatives who are now deprived of a source of income due to their divergent beliefs, secondly, will Google lose a sizable portion of conservative users in retaliation, and finally, what happens when ideological (and/or shareholder) winds change – for whatever reason – and it is liberal accounts that are shuttered next.

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The U.S. Cattlemen’s Association Has a Beef with Lab-Grown Meat

The U.S. Cattlemen’s Association (USCA) wants the government to hobble the coming competition from “clean meat” startups—companies that specialize in creating lab-grown meat products that don’t involve animal slaughter. The association has petitioned the United States Department of Agriculture (USDA), claiming that the words “beef” and “meat” should not be used to describe lab-grown and alternative meat products, since they are not derived from the flesh of animals.

The USCA insists that such labels confuse or mislead the customer. In a press release—headlined “Meat is Meat, Not a Science Project”—USCA President Kenny Graner said:

Consumers depend upon the USDA Food and Safety Inspection Service to ensure the products they purchase at the grocery store match their label descriptions. We look forward to working with the agency to rectify the misleading labeling of “beef” products that are made with plant or insect protein or grown in a petri dish. U.S. cattle producers take pride in developing the highest quality, and safest beef in the world, and labels must clearly distinguish that difference.

While lab-grown meats are not yet commercially available, clean meat startups have garnered considerable investment in recent years. Lab-grown meat may hit the market as early as 2020, the petition suggests.

Tyson, Bill Gates, and Richard Branson have all invested in Memphis Meats, a company the specializes in the creation of cultured meats. Other startups—Impossible Foods, Beyond Meat, Just Meat—have also attracted attention. Ethan Brown, the founder of Beyond Meat, thinks lab-grown meat is an innovation on par with the automobile or the iPhone.

Why is the USCA, a major player in the traditional beef industry, interested in this semantic distinction? Food policy expert Baylen Linnekin offers some clarity.

“I think the USCA is worried about competition and is trying to make sure lab-grown foods are distinguished from those that come from a living animal,” Linnekin tells Reason. “I don’t think use of the terms ‘meat’ or ‘beef’ is anything the government generally or the USDA in particular should regulate. If the USCA has a problem with its competitors trying to use those words, they should sue. The Supreme Court has already held, in POM Wonderful v. Coca-Cola, that beef producers or, perhaps, an industry group such as the USCA can sue competitors over misleading statements. Hence, this is properly a legal rather than a regulatory matter.”

It’s too early to say whether consumers would be mislead by using the word “meat” to describe lab-grown beef. Indeed, removing the label could be more confusing.

“When government defines terms like ‘meat’ or ‘beef’ or ‘natural’ or ‘organic,’ it can stifle innovation and, consequently, harm consumers and innovators,” said Linnekin. “Here, there’s no reason for lawmakers or regulators to get involved. The courts are perfectly capable of protecting consumers from being misled.”

But perhaps that’s not the sort of protection the beef producers really want.

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College Adds ‘Ne’, ‘Ve’, & ‘Ey’ As Gender-Neutral Pronouns

Authored by Toni Airaksinen via CampusReform.org,

The Kennesaw State University LBGT Resource Center recently produced a new pamphlet that adds “ne,” “ve,” “ey,” “ze,” and “xe” to the list of gender neutral pronouns.

The “Gender Neutral Pronouns” pamphlet, a copy of which was obtained by Campus Reform, tells students that “some people don’t feel like traditional gender pronouns fit their gender identities,” and thus lists alternatives that students can use instead.

These pronouns are accompanied by a conjugation chart listing how they might be used as a subject, object, possessive, possessive pronoun, and reflexive. For example, to refer to a student who identifies as “ne,” one could say “Ne laughed” or “That is nirs.” 

To refer to a student who identifies as “ve,” the pamphlet explains that one would say “Vis eyes gleam” or “I called ver.”

The pamphlet – which lists seven different types of gender neutral pronouns – encourages students to ask their friends, classmates, and coworkers how they identify before making any assumptions. 

The guide does warn, however, that students “may change their pronouns without changing their name, appearance, or gender identity,” and suggests that preferred pronouns be re-confirmed regularly during “check-ins at meetings or in class.” 

“It can be tough to remember pronouns at first,” the guide notes. “Correct pronoun use is an easy step toward showing respect for people of every gender.”

The guide was first discovered by Francis Hayes, a freshman studying computer science at Kennesaw State, who told Campus Reform that the pamphlet was distributed Tuesday by administrators in the school’s Student Center. 

“It is a disgrace, because I thought that my school was one of the few schools left that weren’t teaching these things. But when I found this, I felt really disappointed,” he told Campus Reform. “Why is this university entertaining something as useless as this?” 

Hayes also criticized the pamphlet for potentially confusing impressionable students, claiming that Kennesaw State is “in the early stages of Cultural Marxification.”

“The guide will confuse students regarding what gender they are,” he speculated, adding that “none of those pronouns exist in the English language, so it’s pretty much ridiculous that they’re trying to teach this.” 

Kennesaw State media officer Tammy Demel acknowledged a request for comment from Campus Reform, but did not respond in time for publication. 

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The Good Doctor Frankenstein

Let me tell you about a fiery individualist with an uncompromising vision. A fierce defender of reason and innovation. A brilliant scientist who defies superstition and evades the law to conduct his experiments in secret. A heroic figure whose work is feared by the clerisy and whose property is seized by the authorities but who refuses to bend the knee to his oppressors.

Let me tell you about Dr. Victor Frankenstein, as portrayed by Peter Cushing in the 1964 film The Evil of Frankentein.

The movie was produced by Hammer Film Productions, the British studio that made some of the most enjoyable horror pictures of the 1950s, ’60s, and ’70s. In theory, it is a sequel to The Curse of Frankenstein and The Revenge of Frankenstein. In practice, it creates a new backstory and an entirely new persona for the title character, who in other Hammer Frankenstein films is immoral and contemptible but here becomes entirely sympathetic. Don’t be misled by the ironic title: The evil forces in this film are the people who keep accusing the title character of being evil.

More specifically, the evil forces are the church and the state. Business occupies a more complicated position. An entrepreneur—to be precise, a carnie with an unlicensed mesmerism act—forges an alliance with Dr. Frankenstein, his fellow victim of police harassment. But the businessmen’s pursuit of his own self-interest eventually puts him and the doctor at odds. I don’t want to give away too many spoilers, so I’ll just say he turns out to be susceptible to non-market incentives.

Look, I’m not going to tell you that there aren’t any holes in this plot. And no, director Freddie Francis isn’t quite as skilled as Terence Fisher, the man who helmed most of Hammer’s Frankenstein series. But how often do you get to see a Frankenstein picture where the so-called mad scientist is the hero? “Anything they don’t understand, anything that doesn’t conform to their stupid little patterns, they destroy,” Cushing’s character complains at one point. “They have to destroy it! But they haven’t beaten me.”

To watch the movie, click on the image:

(For past editions of the Friday A/V Club, go here. For an appreciation of the Mary Shelley novel that launched a thousand Frankenstein tales, read Ron Bailey’s essay in the April edition of Reason, available on better newsstands.)

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John Kelly Says He Was Aware Of Security Clearance Problems Last Year

A day after Chief of Staff John Kelly joked that his job is a “punishment from God” during a speaking even in Washington, Kelly reiterated to a group of reporters on Friday that he first became aware of the West Wing’s reliance on interim security clearances shortly after accepting the job. He also insisted that former Staff Secretary Rob Porter resigned Tuesday evening, contradicting the White House’s timeline, which said Porter left the following morning.

Though Kelly declined to provide an exact number of staffers who were working with interim clearances, he conceded that the total number was “more people than I was comfortable with.” He told reporters he later approached the FBI with several questions about the process in the hope that it might get resolved.

Kelly

As the Washington Examiner points out, Kelly’s candor about the number of administration officials who spent months accessing classified information without permanent clearances comes days after more than 30 aides to the president were reportedly downgraded from top secret interim clearances to lower-level “secret” clearances. Among those who lost their high-level clearances was presidential son-in-law and senior adviser Jared Kushner.

Kelly also insisted that his version of events jibes with an explanation offered by FBI Director Christopher Wray during routine Congressional testimony two weeks ago.

While Kelly said he had his “eyes opened” pertaining to the security clearance issues in September, he didn’t explain why he opted to wait until February to issue his memo (aside from the assumption that he was only motivated to handle the problem once it became the focus of public scrutiny).

Kelly also reiterated his claim that former Staff Secretary Rob Porter resigned on Tuesday, Feb. 6, shortly after news reports about allegations of domestic violence from two ex-wives, contradicting the White House’s previous account that Porter quit the following day.

Kelly said in a briefing for reporters on Friday that within six weeks of joining the White House last summer “it came to my notice that the kind of things I was used to in DOD in terms of the handling of classified material wasn’t up to the standards I had been used to.”

After surviving his political opponents’ attempts to oust him during the wake of the Porter scandal, Kelly, a former marine general, has been working on yet another purge. yesterday, we highlighted a report that Kelly and Defense Secretary James Mattis (himself a former general) were scheming to push National Security Adviser HR McMaster out of the West Wing.

Kelly also declined to grant Trump son-in-law and senior adviser Jared Kushner a waiver that would’ve allowed him to view top-secret intelligence briefs, including President Trump’s daily security briefing.

If Kushner and his wife Ivanka Trump opt to leave the West Wing, something a Wall Street Journal editorial recently suggested would be the responsible move, Kelly will have pushed out all of his rivals in the West Wing – allowing him to consolidate his power, further cementing his position as the essential staffer in one of the most shambolic White Houses ever.

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The Great Firewall Of China – Government Bans Orwell’s Animal Farm & The Letter ‘N’

The Chinese government has banned George Orwell’s dystopian satirical novella Animal Farm and the letter ‘N’ in a wide-ranging online censorship crackdown.

As Mike Krieger has recently noted (here and here), what China is doing is dangerous:

Narrative is particularly important to lunatics who run a global empire, and the U.S. media’s almost always happy to oblige. For example, the media’s enthusiasm to swallow government propaganda is what led to the Iraq war disaster, in addition to so many other societal tragedies I write about here on a daily basis. While the marriage between U.S. government propaganda and a complicit corporate media has been a demonstrable danger to the world, we shouldn’t for a moment think American propaganda is the only threat. Other powerful governments use it as well, and China is no exception.

With Russia obsession dominating almost every domestic media headline these days, Americans are woefully ignorant regarding the explicit intentions the Chinese government has for the world.

And as The Independent reports, experts believe the increased levels of suppression – which come just days after the Chinese Communist Party announced presidential term limits would be abolished – are a sign Xi Jinping hopes to become a dictator for life.

The China Digital Times, a California-based site covering China, reports a list of terms excised from Chinese websites by government censors includes the letter ‘N’, Orwell’s novels Animal Farm and 1984, and the phrase ‘Xi Zedong’.

The latter is a combination of President Xi and former chairman Mao Zedong’s names.

It was not immediately obvious why the ostensibly harmless letter ‘N’ had been banned, but some speculated it may either be being used or interpreted as a sign of dissent.

This censorship is fortified by the Great Firewall of China – a term which refers to the combined force of technological and legislative measures which tightly control the internet on the mainland.

Why should you care about China’s seemingly totalitarian shift? Krieger concludes poignantly:

The reason is because a major shift in the polices of the second largest economy in the world, populated with over a billion people and run by leadership intent on establishing a far more dominant position on the world scale militarily and politically, will affect everyone.

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Trump Wants to Meet with Video Game Industry Leaders to Complain About Gun Violence That’s Not Their Fault

Donald TrumpPresident Donald Trump, who has complained bitterly that safety rules have made professional football less violent and dangerous, apparently plans to meet with video game companies to “see what they can do” about school violence.

This came as news to the video game industry’s trade organization, the Entertainment Software Association (ESA), which told the press the White House had not contacted it about a meeting. The White House subsequently said it would be sending out invitations soon.

The answer to the question of what video games can do about school violence is “nothing,” because studies have consistently shown that these games have no meaningful relationship with real-world violence. The ESA notes that these same violent video games are played all across the world in countries that do not have a problem with school shootings.

Trump told politicians earlier this week that they need to stand up to the National Rifle Association (NRA), but blaming video games for gun violence actually plays right into the gun group’s tactics. The NRA is quick to toss the First Amendment under the bus in order to protect the Second.

It’s nothing new for politicians to blame video games for violence as an excuse to try to regulate them, but there are fortunately limits to what they can actually accomplish. The Supreme Court intervened when California attempted to put age restrictions on video game sales, ruling that games are protected under the First Amendment. (An amusing bit of trivia: The anti-gun lawmaker responsible for getting violent video game restrictions passed in California was subsequently arrested and charged with being a gun smuggler. He pleaded guilty to racketeering.)

As Reason‘s Jesse Walker has documented, pretty much the entire history of video games has been mired in moral panics that politicians from both parties have attempted to commandeer for their own gains. Sen. Dianne Feinstein (D-Calif.) has also been big on trying to regulate video games, so seeing her grinning next to Trump at the prospect of using government regulations to suppress citizens’ freedoms should concern more than just gun owners.

Trump also raised the issue of a ratings system for games. He is apparently ignorant of the fact that one already exists and has for quite a while. Due to some of the aforementioned political pressure, the video game industry instituted the Entertainment Software Ratings Board (ESRB) in 1994 to inform consumers and parents about what sorts of violence (and other types of mature content) a game might contain. These rating operate much like movie ratings, and they appear on labels affixed to video games sold in stores. The ESRB site allows people to search for games by name to see their ratings. There is no reason for any consumers to be surprised by violent video game content, unless they decide not to pay attention.

We ultimately shouldn’t expect much to come from this meeting with video game publishers, and that’s a good thing. They’re not responsible for gun violence and they’re certainly not responsible for coming with a solution for it.

Fun Friday pop culture bonus: One of those early arcade games that prompted moral panics about extreme violence was Narc, released in 1988. In it, players represent law enforcement officers from a fictional narcotics unit who are sent to the street to stop drug trafficking by slaughtering hundreds of dealers without due process. Frankly, that sounds like the kind of violence that would make Trump happy. Watch the game below (and marvel at the tight jeans technology of the 1980s):

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Beware, There Is No Liquidity In This Market, Morgan Stanley Warns

As the recent swoon in the S&P showed, the lasting pain from the February vol unwind has combined with multiple policy shocks to weigh on markets. We showed the concurrent impact of the various catalysts leading to the current risk off environment with the following DB chart:

However, while the early Feb swoon was largely the result of the “Quant Quake”, the transmission mechanism in this move lower is no longer systematic funds / vol target strategies, according to Morgan Stanley’s Chris Metli. Instead, the MS executive director notes that this time selling has come from more fundamental/discretionary investors – the MS PB Content team has noted that there were multiple large sell days from L/S HFs this week (versus buying the week of Feb 5th ) – exacerbated by a lack of liquidity.

Here the lack of liquidity is important. 

As the MS Futures team has been pointing out since the start of the year, available size at the top of the book in the US equity futures market – i.e. how many futures can trade without impacting price – has deteriorated sharply and has remained depressed since Feb 5th. In fact as shown in the chart below, using that metric, market liquidity is now the worst since the financial crisis. There are similar signs of reduced size / wider spreads in cash and options markets as well.

As MS notes, part of the decline in liquidity is a natural function of higher volatility – spreads usually widen and available size drops when volatility increases.  But the recent decline in liquidity is sharper than typically happens when volatility spikes – based on data since 2011, available size in ES futures is 3 standard deviations too low right now versus where VIX says it should be.

There are several potential drivers of the liquidity deterioration.  The first is that market makers took substantial losses on the vol shock.  In the options market, dealers likely had to buy over $100mm of vega to cover short vol positions that were moving against them.  When market makers take losses, the natural step is to pull back and provide less liquidity.

The second cause for plunging liquidity is that there is less vol supply now, which means volatility moves higher faster as spot declines, which then feeds back into liquidity, etc.  The increase in volatility and unwind of short vol exposures in early February meant that volatility sellers took losses, and as a result have pulled back on supplying volatility to the market.

The third reason is more structural – as markets have become more fragmented and more volume has shifted to closing auctions, there is less natural liquidity during the trading day.

The final potential culprit are tighter financial conditions/higher cost of capital, especially in the form of surging FRA-OIS which we have documented in recent days. Whether this is actually impacting the ability of market makers to provide liquidity is unclear – but tighter financing certainly increases the fragility of the market. The bear case, MS notes, is that this is a function of a more hawkish Fed combined with the end of QE (which most market participants have stopped talking about).

Yet while liquidity is abysmal, there risk of violent moves as a result of systematic fund deleveraging is also lower. That said, there is some risk remaining from the systematic / vol community though according to MS:

  • Of all of the systematic funds, risk parity funds likely remain the most levered, and could bring supply – but the key risk for them is higher stock-bond correlation, which QDS does not think is likely just yet (see Don’t Fear a Little Inflation, Yet from Feb 26th 2018)
  • Institutional short volatility strategies have largely remained invested throughout the last month – should volatility remain higher for longer (as QDS thinks it will) there could be covering here

So what happens next? As Morgan Stanley summarizes, to some extent this selloff is following the usual playbook – when market participants feel enough pain from the initial shock, markets retest the lows and volatility stays higher for longer.  The path forward in spot will be driven by:

  • How fundamental investors weather this storm – no signs of panic yet, but as they give up more and more performance their resilience will be tested
  • Financial conditions and whether market makers can get some relief

The bank’s conclusion: “given the instabilities and lack of liquidity in the market, investors should be wary to catch a falling knife and wait for some stability before aggressively buying.  With VIX already in the high 20s, QDS continues to think longer-dated and forward volatility is a better buy.“

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Trumpism’s Legacy for the GOP: 24/7 Culture Wars : New at Reason

The GOP and the Tea Party spent the Bush-Obama years erecting bulwarks against precisely the kind of spend thrift apostatyPissing Trump that Trump has engaged in. They abolished earmarks, imposed sequesters, and insisted on the debt ceiling. But none of that mattered when the gale force wind that is Trumpism came along. All of their best laid plans collapsed like a House of Cards. Trump has exploded the country’s debt and deficits to the extent that even presidents fighting wars and slaying recessions never managed to do, notes Reason Foundation Senior Analyst Shikha Dalmia. And the party’s stalwarts and mavericks alike did nothing to stop him.

So the question is where will the GOP go from here?

It’ll embrace some version of Trump’s populist attack on America’s institutions—and an economic agenda that is rife with nativism and mercantilism. In other words, the GOP’s economics will become an extension of its culture wars.

View this article.

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