Here Comes The Hangover: Consumer Loan Demand Plunges As Interest Rates Spike

How do you know an economy is growing? To answer that question fully would require for more time than most readers can dedicate to an article here, as there are simply too many indicators to mention, some objective, others less so, but there is one clear cut sign confirming an economy is not growing: if the consumers in said economy have no demand for loans – an indicator of stagnation and/or disinflation – or worse, are actively deleveraging their existing debt exposure, a precursor to outright deflation and money destruction, the bane of every central bank.

Well, if one uses the “exclusion” indicator, the US may have a big problem.

Following the passage of tax reform in late 2017, the previous Fed Senior Loan Officer Survey released three months ago noted a meaningful pick-up in loan demand. Then, according to the Fed’s weekly H.8 data on bank balance sheets, this rising oan demand spurred acceleration in actual bank C&I lending for the first time since the general elections in the last part of 2016 (recall that on several occasions in 2017, loan demand was on the verge of going negative Y/Y, traditionally a leading recession indicator).

And then… something snapped, because even though C&I lending has continued through April at a brisk clip, the latest, just released Senior Loan Officer Survey now shows the worst possible case (as per above): loan demand just turned collapsed, and not just for C&I loans but across the board.

What is even more bizarre is that this sudden revulsion toward new loans took places even as lending standards are becoming increasingly easy! As BofA notes, in the latest April survey a net 11.3% and 3.0% of banks reported easing lending standards over the previous three months for loans to large/medium C&I firms and small C&I firms, respectively, up from 10.0% and net unchanged in the prior.

And yet, despite easier access to credit, in terms of demand a net 7.0% and 1.5% of banks reported weaker demand for loans to large/medium C&I firms and small C&I firms, respectively, compared to net 2.9% and 6.0% reporting stronger demand in January. For CRE loans the net share reporting weaker demand decreased to 7.7% in April from 3.9% in January. Oops.

It wasn’t just C&I loans.

The same pattern was observed within the mortgage pipeline, where banks continued to ease lending standards for residential mortgage loans: a net 3.4% and 9.7% of banks reported loosening lending standards for GSE-Eligible and QM-Jumbo mortgages, respectively, compared to a net 8.3% and 1.6% in January, respectively.

Yet just like with C&I loans, this easing of standards merely underscored the decline in demand, as the net share of loan officers reporting weaker demand for GSE-Eligible and QM-Jumbo mortgages increased to 18.6% and 16.1% in April, respectively, further deteriorating from a net 15.5% and 11.5% reporting weaker demand for GSE-Eligible and QM-Jumbo mortgages in January.

At this point it will probably not come as a surprise that at the same time as C&I and resi loan demand slumped, US consumers expressed no interest for consumer loans either, as a net 9.6% and 6.6% of banks reported weaker demand for credit card and auto loans, compared to unchanged and a net 8.5% of banks reporting weaker demand for auto loans in January, respectively. Ominously, the demand for credit card loans tumbled to match the lowest print in the past 6 years, an indication that US consumers may have finally hit their peak for credit cards demand; if so, and with the US savings rate near all time lows, the US household’s purchasing power – that driver behind 70% of US GDP – is about to collapse..

Banks tightened lending standards for both credit cards and auto loans, according to the fresh April survey (net 9.4% and 6.5% of banks, respectively). This compares to net 1.9% and 4.9% tightening lending standards for credit cards and auto loans in the prior (January) survey (Figure 13).

Interestingly the Fed reported that: “Most domestic banks that reported experiencing reduced C&I loan demand indicated that customers shifting their borrowing to other sources of credit and increases in customers’ internally generated funds were important reasons for weaker demand”. Translated, this means that customers are not only not looking to grow their debt balances, but are effectively deleveraging.

Why? Very simple: thanks to the recent surge in Libor, the interest expense on loans has more than doubled this year, and what happens when households no longer find it economic to pay the interest on their debt? They dig deep, i.e. “shift their borrowing to other sources of credit” and repay existing loans.

If this is accurate, expect to see a plunge in the annual growth in C&I loans in the next few months as the collapse in demand translates into a mothballing of the loan pipeline as US consumers rebel against higher rates.

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Senators Want to See Secret Torture Memo Before Haspel’s Confirmation

Senators on both sides of the aisle are calling for the release of a classified memo that could give lawmakers—and the general public—a better understanding of the role Gina Haspel played in the CIA’s torture program. Haspel is Donald Trump’s nominee to run the spy agency, and a key Senate committee is set to vote this week on her confirmation, which could go to the full chamber before the end of the month.

A potential stumbling block to her appointment is the so-called Durham Report, written at the conclusion of an Obama-era Justice Department’s investigation into “whether federal laws were violated in connection with the interrogation of specific detainees at overseas locations.” Haspel ran one of those secret prisons in Thailand for several months in 2002, and she oversaw the torture of at least one detainee: Abd al-Rahim al-Nashiri, who was involved in the 2000 bombing of the U.S.S. Cole. Three years later, she drafted a memo ordering the destruction of videos showing the interrogation and torture of detainees.

The full report has never been released, and a Senate memo describing the parts of the report that concern Haspel’s career is also being kept secret. The classified document, prepared by Democratic staffers on the Senate Intelligence Committee, includes “details some senators and aides have found disturbing,” NBC reports, citing four sources familiar with the document.

“I have never in my life wished that more classified information could be available to the public,” Sen. Claire McCaskill (D-Mo.) told a Huffington Post reporter last week after she’d viewed the classified documents.

McCaskill can see the documents because she’s a member of the Senate Intelligence Committee, which will vote Wednesday on whether to recommend Haspel’s confirmation to the full Senate. But the rest of the chamber will be left in the dark, it seems, since the classified report has been removed from Senate servers in an apparent attempt to prevent leaks.

“It is critical that all senators have access to information detailing Ms. Haspel’s role in the 2005 destruction of videotapes belonging to the CIA,” Sen. Jeff Flake (R-Ariz.) wrote in a letter to the Justice Department last week, requesting the release of the Durham Report. “It is critical that all senators have access to the same important, relevant information regarding the person nominated to the lead the CIA.”

Will the memo change the course of Haspel’s confirmation? Unnamed sources tell NBC that there is “nothing explosive” in the report capable of derailing her nomination, while The Intercept cites “people briefed on the contents of the memo” who say “it is not possible to read it and come away without serious doubts about whether Haspel ought to be confirmed.” It would be nice to be able to read it and judge for ourselves.

During her confirmation hearing last week, Sen. Ron Wyden (D-Ore.) pressed Haspel about whether she would object to the release of the Durham investigation.

“I haven’t seen it, so I haven’t read it, so I don’t know,” Haspel replied.

“So far, the American people have only been given information that is designed to help you get confirmed,” said Wyden. “Everything else has been classified.”

Sens. John McCain (R-Ariz.) and Rand Paul (R-Ky.) are the only two Republican senators to declare their intent to vote against Haspel’s confirmation, but their opposition could be canceled out by two Democrats, Sens. Joe Donnelly (D-In.) and Joe Manchin (D–W.Va.), who say they will vote for Haspel. Sen. Mark Warner (D-Va.), the ranking Democrat on the Intelligence Committee and potentially a key swing vote, announced today that he would support Haspel’s confirmation after getting a letter from the nominee clarifying her views on the torture program.

McCain’s opposition to Haspel is a both personal and political. A torture survivor himself, McCain says Haspel’s “refusal to acknowledge torture’s immorality is disqualifying.”

In her hearing, Haspel admitted that she did not believe torture “worked,” but she blurred the line a bit by defending the long-standing claim that the CIA’s torture program produced useful intelligence and valuable leads in the early days of the War on Terror. Defenders of torture have long argued that it helped produce key details in the search for 9/11 mastermind Osama bin Laden, despite a lack of evidence to back up that claim.

“When bin Laden finally met the fate he deserved, the apologists for torture appeared in numbers on cable news shows and in the newspapers claiming bin Laden wouldn’t have been found without intelligence gained through the use of [enhanced interrogation],” McCain says in his just-released book The Restless Wave.

“In truth, most of the CIA’s claims that abusive interrogations of detainees had produced vital leads to help locate bin Laden were exaggerated, misleading, and in some cases, complete bullshit,” McCain writes.

McCain explains that he came to those conclusions—ones that “angered” him—only after being able to review other classified reports on the CIA torture regime. More than a dozen years after Haspel ordered the destruction of the interrogation tapes, it’s time for everyone else to have a chance to see the evidence.

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What Do Cannabis Entrepreneurs Owe Victims of the Drug War?

“As public opinion has shifted toward legalization, rich white men like [former Rep. John] Boehner and the mega-corporations they serve are trying to cash in,” writes New York gubernatorial candidate Cynthia Nixon. “We can’t let them rake in profits while thousands of people, mostly people of color, continue to sit in jail for possession and use.”

Those prisoners shouldn’t be sitting in jail. But Nixon goes off track when she starts looking for ways to help the black and Hispanic communities that have been disproportionately harmed by prohibition. Rather than just calling for full legalization, she calls for

models similar to those created in places like Oakland, which sets aside half of its marijuana licenses for low-income residents who have been convicted of a marijuana-related crime or who live in a community targeted by the drug war. And in Massachusetts, the new statewide marijuana equity program provides additional support, including loans and technical support to applicants from impacted communities.

Using government licenses to privilege blacks and Hispanics over “rich white men” seems like a recipe for turning the industry into a tool of patronage politicians. There’s also a long history of white contractors gaming rules that are supposed to help minority-owned businesses (here’s an example from 1979 and another from 2013), and I don’t think applying that template to the cannabis industry is going to do any more to reduce urban poverty. Better to lift the caps and open the market to all.

And yes: As in most other licensed industries, legislators in legal pot states prohibit many people with criminal records from working in the marijuana biz. Nixon is right that those restrictions should be abolished, but why limit that action to marijuana jobs?

Nixon also criticizes the New York Medical Cannabis Industry Association for suing the New York Health Department to stop the agency from doubling the number of licensed medical cannabis growers. The association argued that New York’s law caps the number of growers at five, and that to expand the number of licenses (to 10) would make it harder for the incumbent license holders—backed by more than $50 million in venture capital—to turn a profit.

This kind of rent-seeking is infuriating, and she’s right to denounce the suit. Yet I’m not sure the racial problems that Nixon notes would be solved by doubling (or tripling or quadrupling) the number of licensed growers in New York and requiring that some of them be people of color. Denver has 720 retail cultivators and 509 retail dispensaries, and yet the city continues to disproportionately arrest black and Latino residents for marijuana offenses. The same is true in Washington, D.C., where pot arrest rates have fallen but black residents still bear the brunt of enforcement.

So long as there are laws around who can grow and sell marijuana, people of color will be arrested for violating marijuana laws. If there are abundant jobs in the legal marijuana sector (as in Denver) or no constraints on who can grow marijuana (as in D.C.), the police can still disproportionately arrest people of color for public consumption and underage possession. Diversity quotas for licensing and public financing for minority entrepreneurs are shiny, low-impact proposals for a problem that will likely outlive the drug war writ large.

Nixon comes much closer to proposing something genuinely radical when she quotes Michelle Alexander on reparations:

“Here are white men poised to run big marijuana businesses, dreaming of cashing in big—big money, big businesses selling weed—after 40 years of impoverished Black kids getting prison time for selling weed, and their families and futures destroyed. Now, white men are planning to get rich doing precisely the same thing?”

“I think we have to be willing, as we’re talking about legalization, to also start talking about reparations for the war on drugs, how to repair the harm caused.”

Sen. Cory Booker (D-N.J.) tried to advance something like this in the Marijuana Justice Act of 2017. His proposal: a $500 million-a-year Community Reinvestment Fund, appropriated by Congress, to be spent on costs related to expungement as well as “public libraries, community centers, and programs and opportunities dedicated to youth.” I didn’t care for Booker’s bill because it contains provisions almost certain to drive conservatives and law enforcement away from the bargaining table. I also think the aforementioned fund would end up benefiting politically connected developers more than at-risk kids.

But I think we should at least debate the merits of (and mechanisms for) compensating people who have served time for drug offenses. Last year, transhumanist Zoltan Istvan made the case here at Reason:

It wasn’t just the defamatory criminal sentence many of us received. The government confiscated my Jeep Comanche and my beloved Honda motorcycle during the ordeal. What little money I had I spent on lawyers and judicial filings in our convoluted court system. My total financial loss a quarter of a century ago was $20,000 dollars. Had I been able to invest that money in the stock market, for example, I’d have over $100,000 now.

Some of us also want compensation for the financial damage forced upon us—for the literal theft of our property. Maybe that means a class action lawsuit insisting on government reparation for all damage caused, maybe in the form of tax credits or proceeds from the sale of unused Federal land, so as not to abuse the American taxpayer further over the drug war. It’s safe to say—given the damage caused and the lives affected—such a suit would likely be in the billions of dollars.

Jonathan Rauch wrote about reparations for Reason back in 2001, arguing that we should compensate blacks who were forced to attend segregated schools just as we compensated Japanese-Americans who’d endured internment. (The Civil Liberties Act of 1988, which ordered compensation for living Japanese-Americans, turns 30 this August.) Rauch’s argument against reparations for slavery—that we cannot punish living whites for the sins of their dead ancestors—does not undermine the case for compensating prisoners of the drug war, who were incarcerated by the political choices of their free neighbors. Straight cash seems like the right way to go about it.

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Tom Wolfe Is Dead but the ‘Me Decade’ Lives On (and That’s a Good Thing)

Tom Wolfe, the celebrated reporter, ethnographer, and novelist, is dead at the age of 87.

With his passing, we’ve lost the individual who more than any other writer transformed the practice of journalism since he first started writing for the late, lamented New York Herald Tribune in 1962. I’ll leave it to others to assess Wolfe’s contributions to literary style; the validity of his popular polemics on art, architecture, race relations, sexuality, and neuroscience; and the relevance of his caustic but illuminating feuds with such other major writers as Norman Mailer, John Updike, and John Irving. These are all fun to talk about, but they are ultimately ephemeral.

Wolfe’s enduring—and fundamentally libertarian—contribution to contemporary discourse is the insight at the heart of his 1976 New York essay that christened the 1970s as the “Me Decade.” Writing during a time when most wise men (and they were mostly men back then) were obsessed with inflation, unemployment, and other measures of macroeconomic malaise, Wolfe was nearly alone in underscoring that consumer goods and lifestyle options had been radically democratized in postwar America. Forget the soul-killing depredations of the Cold War, giant corporations, cheap money, rising taxes, and government’s expansion into every nook and cranny of life, he counseled. Wolfe focused on the pent-up psychic demand for freedom, individualism, and meaning in a country that had recently withstood a decade-plus of Great Depression and World War. The only thing worse than the impending apocalypse due to nuclear war, environmental catastrophe, overpopulation, or the Second Coming was that the world wouldn’t end and we’d have spent our time on Earth punching the clock for a soul-killing job with great dental benefits. In the goddamn Bicentennial Year, Wolfe argued, Americans were done with building Maslow’s pyramid of needs for other people, especially their social betters. Who among us was going to follow slow-witted concussion-cases like Jerry Ford or lusting-only-in-his-heart Jimmy Carter into the twilight’s last gleaming? It was our time to shine, baby!

The postwar economy had

pumped money into every class level of the population on a scale without parallel in any country in history. True, nothing has solved the plight of those at the very bottom, the chronically unemployed of the slums. Nevertheless, in Compton, California, today it is possible for a family at the very lowest class level, which is known in America today as “on welfare,” to draw an income of $8,000 a year entirely from public sources. This is more than most British newspaper columnists and Italian factory foremen make, even allowing for differences in living costs. In America truck drivers, mechanics, factory workers, policemen, firemen, and garbagemen make so much money—$15,000 to $20,000 (or more) per year is not uncommon—that the word proletarian can no longer be used in this country with a straight face. So one now says lower middle class. One can’t even call workingmen blue collar any longer. They all have on collars like Joe Namath’s or Johnny Bench’s or Walt Frazier’s. They all have on $35 Superstar Qiana sport shirts with elephant collars and 1940s Airbrush Wallpaper Flowers Buncha Grapes and Seashell designs all over them.

As he did later in his most (and perhaps only) successful novel, The Bonfire of the Vanities, Wolfe rooted his observations in detailed reporting on the reality of money and the trappings of class in everyday life. The passage above could never be written by other “New Journalists” such as Hunter Thompson and Norman Mailer because they were fundamentally obsessed only with themselves. Wolfe, like Joan Didion at her best, wanted first and foremost to understand and grasp social reality that transcended the self.

The turn to self-actualization deeply upset and offended both old-school, puritanical commies and starched-shirt Protestants who deeply believed in Max Weber even if they had never read him. Wolfe understood that the United States was shifting radically from a stratified, button-down society to one where everybody—rich and poor, black and white, male and female—not only had the means to live however the fuck they felt but had the moxie to do so. One of his early pieces for the Herald Tribune covered the introduction of macrobiotic dieting to the U.S.; it exemplifies his interest in how everyday people, long thought by eggheads and scolds not to have any autonomous interest in aspirational living, were starting to explore all sorts of freaky-deaky subcultures. His major works of the ’60s, including The Electric Kool-Aid Acid Test, explored how people create meaning in a mass-cult world, sometimes by drug-fueled ecstasy and dropping out, more commonly by modifying production-line cars, clothes, and suburban activities such as grilling to their own individual desires.

My God, the old utopian socialists of the nineteenth century—such as Saint-Simon, Owen, Fourier, and Marx—lived for the day of the liberated workingman….He didn’t look right, and he wouldn’t…do right! I can remember what brave plans visionary architects at Yale and Harvard still had for the common man in the early 1950s. (They actually used the term “common man.”)…By the 1960s the common man was also getting quite interested in this business of “realizing his potential as a human being.” But once again he crossed everybody up! Once more he took his money and ran—determined to do-it-himself!…

Once the dreary little bastards started getting money…they did an astonishing thing—they took their money and ran. They did something only aristocrats (and intellectuals and artists) were supposed to do—they discovered and started doting on Me! They’ve created the greatest age of individualism in American history! All rules are broken! The prophets are out of business! Where the Third Great Awakening will lead—who can presume to say? One only knows that the great religious waves have a momentum all their own. Neither arguments nor policies nor acts of the legislature have been any match for them in the past. And this one has the mightiest, holiest roll of all, the beat that goes…Me…Me…Me…Me….

Wolfe was not uncritical of the turn to “Me…Me…Me…Me…” but unlike such scolds as Christopher Lasch, David Frum, and Robert Putnam, who saw only narcissism and social pathology in the democratization of liberation, the rise to ubiquity of aristocratic privilege, and the assertion of a universal right of exit, he could laugh at its excesses while respecting and reporting out its various mutations. Wolfe’s is a world characterized by what later writers have identified as “bourgeois equality” (Deirdre McCloskey), “plenitude” (Grant McCracken), and “cultural proliferation” (me). It is individualism on steroids—or maybe on poppers, bio-dynamic wine, and grass-fed elk—but it also traffics in new ways of community, from the libertarian communalism of Whole Foods to the blockchain fantasies of your friendly neighborhood cypherpunk. Amid the breakdown of old institutions, modalities, and coalitions ranging from the Republican and Democratic Parties to NATO to old-line churches to broadcast media, we won’t be changing addresses anytime soon.

For all the problems of the world that Wolfe mapped for us, it is not only vastly preferable to what came before it—go ask your ditch-digger grandpas and piece-work grandmas if they lived fulfilling lives—it is fantastically more interesting and promising too. Tom Wolfe was the Amerigo Vespucci of our time and, like all important dead people, he will be forgotten even as we still elaborate the maps he drew for us long ago.

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The Stock & Bond Markets Have Not Disagreed This Much Since 2008

While the yield curve has steepened the last two days, the recent relationship with stocks is holding up as the almost unprecedented negative correlation is confirmed by weakness in stocks…

And that has driven the correlation between stocks and the yield curve to its most negative since October 2008…

This short-term negative correlation means simply that the stock market’s view of inflation and growth the most ‘positive’ relative to the extreme ‘negative’ view of future inflation and growth of the bond market.

This broad death cross of rationality has existed for a few years, but the last few months have seen a regime change (since The Fed started to normalize its balance sheet)…

 

The tricky bit is that the last time the bond and stock market disagreed this much, bonds were right and the stock market tumbled over 35% in the next few months…

For now, the overwhelming speculative positioning is betting that bonds are wrong and stocks are right…

 

And all of this as we note that the odds of 3 or more Fed rate-hikes for the rest of the year just overtook the odds of 2 more hikes…

 

 

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Tesla To Shutter Model 3 Production, Stock Extends Losses

Tesla share price continues to tumble down towards its bond price following headlines from Reuters, citing sources, that the car-making company will shutter production of the Model 3 from May 26th to 31st for “fixes.”

  • *TESLA PRODUCTION SHUTTERED FROM MAY 26-MAY 31, REUTERS SAYS

  • *TESLA IS SAID TO PAUSE MODEL 3 PRODUCTION FOR FIXES: REUTERS

This follows the previous production halt on April 17th to make “on-the-fly fixes.”

And TSLA is extending losses…

Catching down to the bond’s weakness…

 

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North Korea Cancels Meeting With South Over Military Drills

North Korea has abruptly canceled talks with South Korea that had been set for Wednesday – and is threatening to walk away from talks with the US – over joint US-South Korea military drills, according to Yonhap

Repeating a familiar line, North Korea’s Central News Agency said the “Max Thunder” drills involving South Korea and the US air force were a “rehearsal for an invasion” of the North and an unnecessary provocation amid warming inter-Korean ties.

Kim

The North has already made several gestures of sincerity, including releasing three US hostages and “closing” its ruined nuclear testing facility.

South and North Korea were expected to discuss “follow-up measures” after the two warring neighbors reached an historic agreement late last month. The talks were scheduled to take place on the southern side of Panmunjom, the village where the Korean War Armistice was signed, and where last month’s inter-Korean summit took place. 

The North had said it would send a five-member delegation led by Ri Son-kwon, chairman of the Committee for the Peaceful Reunification of the Country, according to Yonhap.

The delegation was to include Kim Yun-hyok, vice railroad minister, and Won Kil-u, vice sports minister, and will be accompanied by more than 20 staff and journalists, the North Korean ministry said.

Meanwhile, South Korea’s five-member delegation was set to be led by Unification Minister Cho Myoung-gyon. Cho would’ve been accompanied by four other officials, including Kim Jeong-ryeol, vice transportation minister, Roh Tae-kang, vice cultural minister, and Ryu Kwang-soo, vice minister of Korea Forest Service.

The meeting would’ve marked the first time that officials from the two countries had met following last month’s summit, where South Korean President Moon Jae-in and Kim Jong Un signed an agreement vowing to cease military hostilities. They also agreed to allow families separated by the Korean War to reunite.

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Feminist Group Demands Spotify’s New ‘Hate Content’ Policy Be Applied to Red Hot Chili Peppers, Eminem

When Spotify introduced its new “hate content and hateful conduct” policy—which promises to suppress songs for violent or hateful lyrics or offstage behavior—I predicted that the streaming service would soon be caught between users wanting easy access to popular music and activists demanding that artists be scrubbed from the platform.

Sure enough, the feminist group Ultraviolet has now sent a letter to Spotify thanking it for the initial steps of removing R. Kelly and XXXTentacion from official playlists— and asking that the company go further.

“These two men are not the only abusers on your platform,” writes Ultraviolet’s Shaunna Thomas. “We implore you to take a deeper look at the artists you promote.” She goes on to call for the company to exile Eminem, Nelly, Don Henley of the Eagles, Steven Tyler of Aerosmith, Chris Brown, rapper Tekashi 6ix9ine, Ted Nugent, and the Red Hot Chili Peppers.

“Every time a famous individual continues to be glorified despite allegations of abuse, we wrongly perpetuate silence by showing survivors of sexual assault and domestic violence that there will be no consequences for abuse,” says Thomas. “That has a cultural effect far beyond one individual artist.”

Let’s be clear: All these performers have done, or at least been accused of doing, awful things.

The Red Hot Chili Peppers’ lead singer, Anthony Kiedis, admits to having sex with a girl he knew to be 14 years old in his autobiography Scar Tissue. (He was 23 at the time, and the incident later became the inspiration for the song “Catholic School Girls Rule.”) Brown was convicted of battering his then-girlfriend Rhianna in 2009. Eminem pled guilty to a weapons charge in 2001. 6ix9ine received three years’ probation for charges stemming from a film he made of himself performing sexual acts with a 13-year-old. Don Henley, Steven Tyler, and Ted Nugent have all either admitted or been accused of sleeping with underage girls.

Let’s be clear about this too: Whether or not Ultraviolet is right that these musicians are “glorified” by virtue of appearing on Spotify-generated playlists and promotions, Thomas has a point when she argues that it’s inconsistent to refuse to promote R. Kelly’s music but not Brown’s or Kiedis’s. If the company is actually serious about this new policy, it’ll have to go a lot further than R. Kelly and XXXTentacion.

And I mean a lot further. Ultraviolet’s list just scratches the surface. Whether it’s Jerry Lee Lewis marrying his 13-year-old cousin or David Bowie taking the virginity of a 14-year-old, a lot of pop stars’ escapades don’t conform to modern norms of affirmative consent and gender equity. There’s no shortage of articles (start with this listicle from the Phoenix New Times) retelling tales of statutory rape and sexual assault by beloved rockers and rappers.

It doesn’t stop there. A fair number of rappers have been convicted of murder, manslaughter, or some other violent crime. Dig into the history of Norwegian black metal and you’ll learn that members of such foundational bands as Burzum, Gorgoroth, and Mayhem have been found guilty of church burnings, torture, and murdering bandmates.

And at least two out of four Beatles—John Lennon and Ringo Starr—were domestic abusers.

Needless to say, just because this kind of behavior is common in the music scene doesn’t make it OK. But it does raise the question of what a music streaming service can really be expected to do about it. Indeed, blacklisting these bands make many Spotify’s features functionally useless. What classic rock playlist would exclude the Beatles?

How to treat the work of artists who have done terrible things is a difficult question. It’s made no easier by the fact that fans often cheer on musicians’ worst behavior, even reveling in the idea that the violence and hedonistic excesses found in their lyrics is at least partially authentic.

It’s also a question that companies like Spotify are ill-equipped to answer. Acting as the moral arbiter, as its new policy requires, will only erode the value of its service while leaving individual listeners less able to make moral judgements for themselves.

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Prop Trading Returns As Volcker Rewrite Allows Banks To Engage In Short-Term Trades

And just like that, after a ten year hiatus, prop traders are about to become the most desired job on Wall Street (now that hedge funds are replacing their trading desks with algos).

As a reminder, the main component of Volcker Rule which was implemented in 2010 in response to perceived shortcoming from the financial crisis to limit risk-taking by commercial bank trading desks, had banned prop trading, which contrary to “flow”, allowed banks to trade for their own accounts rather than for clients.

Well, as Bloomberg reports, Wall Street is set to win the biggest reprieve since the implementation of the Volcker Rule nearly a decade ago, as U.S. regulators are set to scrap the key restrictive presumption that most short-term trades violate the post-crisis regulation. Specifically, as part of the anticipated overhaul of Volcker, the Fed and other regulators will drop an assumption written into the original rule that positions held by banks for less than 60 days are speculative, and therefore banned.

Instead, it will be up to banks to determine and conclude that their trades comply with the rule, putting the onus on regulators to challenge such judgments; the architect? A former Goldman banker of course: Steven Mnuchin.

Many of the Volcker revisions under consideration adhere to a blueprint issued last year by Trump’s Treasury Department, which advised doing away with many of the rule’s more subjective demands. Asking banks to figure out the purpose of each purchase or sale of an asset “effectively requires an inquiry into the trader’s intent at the time of the transaction, which introduces considerable complexity and subjectivity,” Treasury argued. Its report said the rule’s complexity had caused banks to be overly conservative in their trading activity, a contention also made by industry lobbyists.

Of course, banks had previously found numerous loopholes to engage in prop trading, the most infamous of which was JPM’s 2012 “London Whale” fiasco, when billions in prop CDS trades masked as “hedges” went spectacularly wrong, resulting in huge losses for the bank, numerous terminations, lawsuits, and even Jamie Dimon appearing in Congress. JP Morgan was eventually slapped on the wrist with a token fine.

Fast forward 6 years, when while banks will still be allowed to prop trade, at least they won’t have to come up with silly ways to pretend they aren’t.

The result: banks are delighted and as the American Bankers Association said in a Sept. 21 comment letter to the OCC, presuming all short-term trades are prohibited transactions “has undercut banks’ ability to serve customers, out of concern that such services would be deemed proprietary trading.”

To be sure, opinions were mixed about the Volcker ban: while on one hand the rule was meant to limit excessive risk-taking by restricting speculative trading by banks, and curtailing lenders’ investments in hedge funds and private-equity firms, the offset was a collapse in liquidity across Wall Street, as banks no longer held securities in inventory making procurement problematic and costly, while expanding bid/ask spreads; all this in addition to being overly complex and is difficult to comply with.

Meanwhile, demonstrating just how political every financial regulation really is, the same Fed which led the implementation of Volcker, was just as fast in undoing it: and while the Fed led the rewrite, there is broad agreement among all five agencies responsible for Volcker on how to proceed. Accoridng to Bloomberg, the other watchdogs involved in the process are the Securities and Exchange Commission, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corp. and the Commodity Futures Trading Commission.

Additional changes the regulators intend to propose include making it easier for banks to stockpile assets that their customers may want to buy in the near term and dialing back compliance burdens for smaller lenders, the people said. The agencies expect to release the proposal by the end of the month — a timeline confirmed publicly by Joseph Otting, the former banker who leads the OCC. Spokesmen for the five agencies declined to comment.

It’s not just the big banks’ trading floors that will benefit from the revision: a separate objective that’s also making headway in Congress is to easy life for smaller banks. The Senate passed a bill earlier this year that would exempt all lenders with less than $10 billion from Volcker and the legislation is expected to clear the House as soon as next week.

As Bloomberg notes, criticism of Volcker hasn’t been limited to Republican regulators nominated by Trump. Former Fed Governor Daniel Tarullo, who frequently battled with Wall Street over post-crisis rules, said before he stepped down last year that it was “too complicated” and may hurt banks’ ability to make markets for customers. And Martin Gruenberg, the current head of the FDIC who was appointed by former President Barack Obama, has cited Volcker as an example of a good place to start simplifying regulations.

The best news, however, is for junior hedge fund traders and PMs, who have become disenchanted with the buyside: instead of having to do something actually socially constructive with their lives, traders and portfolio managers will be given one last chance to make a killing by investing deposits in the latest and greatest super risky investment, with the hopes that it either soars, or if it crashes, that enough banks are invested in it that another government bailout will follow.

 

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Return Of The Bull? Or Bull Trap?

Authored by Lance Roberts via RealInvestmentAdvice.com,

In this past weekend’s newsletter, I updated our previous analysis for the breakout of the consolidation process which has been dragging on for the last couple of months. To wit:

“From a bullish perspective there are several points to consider:

  1. The short-term ‘sell signal’ was quickly reversed with the breakout of the consolidation range.

  2. The break above the cluster of resistance (75 and 100-dma and closing high downtrend line) clears the way for an advance back to initial resistance at 2780.

  3. On an intermediate-term basis the “price compression” gives the market enough energy for a further advance. 

With the market close on Friday, we do indeed have a confirmed breakout of the recent consolidation process. Therefore, as stated previously, we reallocated some of our cash back into the equity side of our portfolios.”

It’s now time to make our next set of “guesstimates.”

With the market back to very short-term “overbought” territory, a bit of a pause is likely in order. We currently suspect, with complacency and bullish optimism quickly returning, a further short-term advance towards 2780 is likely.

  • Pathway #1 suggests a break above the next resistance level will quickly put January highs back in view. (20% probability)

  • Pathway #2a shows a rally to resistance, with a pullback to support at the 100-dma, which allows the market to work off some of the short-term overbought condition before making a push higher. (30% probability)

  • Pathway #2b suggests the market continues a consolidation process into the summer building a more protracted “pennant” formation. (30% probability)

  • Pathway #3 fails support at the 100-dma and retests the 200-dma. (20% probability)

Again, these are just “guesses” out of a multitude of potential variations in the future. The reality is that no one knows for sure where the market is heading next. These “pathways” are simply an “educated guess” upon which we can begin to make some portfolio management decisions related to allocations, risk controls, cash levels and positioning.

But while the short-term backdrop is bullish, there is also a rising probability this could be a “trap.” 

“But, while ‘everyone loves a good bullish thesis,’ let me restate the reduction in the markets previous pillars of support:

  • The Fed is raising interest rates and reducing their balance sheet.

  • The yield curve continues to flatten and risks inverting.

  • Credit growth continues to slow suggesting weaker consumption and leads recessions

  • The ECB has started tapering its QE program.

  • Global growth is showing signs of stalling.

  • Domestic growth has weakened.

  • While EPS growth has been strong, year-over-year comparisons will become challenging.

  • Rising energy prices are a tax on consumption

  • Rising interest rates are beginning to challenge the valuation story. 

“While there have been several significant corrective actions since the 2009 low, this is the first correction process where liquidity is being reduced by the Central Banks.”

In 2015-2016 we saw a similar rally off of support lows which failed and ultimately set new lows before central banks global sprung into action to inject liquidity. As I have stated previously, had it not been for those globally coordinated interventions, it is quite likely the market, and the economy, would have experienced a much deeper corrective process.

While the markets have indeed gone through a correction over the last couple of months there is no evidence as of yet that central banks are on the verge of ramping up liquidity. Furthermore, the “synchronized global economic growth” cycle has begun to show “globally synchronized weakness.” This is particularly the case in the U.S. as the boost from the slate of natural disasters last year is fading.

More importantly, on a longer-term basis, the recent corrective process is the same as what has been witnessed during previous market topping processes.

In each previous case, the market experienced a parabolic advance to the initial peak. A correction ensued which was dismissed by the mainstream media, and investors alike, as just a “pause that refreshes.” They were seemingly proved correct as the markets rebounded shortly thereafter and even set all-time highs. Investors, complacent in the belief that “this time was different” (1999 – new paradigm, 2007 – Goldilocks economy), continued to hold out hopes the bull market was set to continue.

That was a mistake.

The difference, in both previous cases, was the Federal Reserve had shifted its stance from accommodative monetary policy, to restrictive, by increasing interest rates to combat the fears of “inflation” and a potential for the economy to “overheat.”

As stated in our list of concerns above, the Federal Reserve remains our biggest “flashpoint” for the continuation of the “bull market.” 

Furthermore, the surge in stock buybacks to pay for “stock option grants” is also worrisome. While such activity will boost the markets in the short-term, there is a longer-term negative consequence. As noted by Barron’s:

“Standard & Poor’s 500 companies are on track to announce $650 billion worth of buybacks this year, according to a Goldman Sachs estimate, smashing the previous record of $589 billion set in 2007.”

But as noted by Societe’ General (via Zerohedge) those buybacks may boost stock prices temporarily but are not likely to show up in the economy longer-term.

“We recognize that calculating the stock option effect is an educated guess as we look at the amount repurchased versus the actual reduction in the share count and assume the difference is the option issuance effect (though issuance can be for other reasons).

It looks like the bulk of last quarter’s repurchases went on stock options (aka wages). But looking at the table below it appears as if buybacks have indeed gone to pay higher wages, but we suspect not in the way policymakers hand in mind.”

Such is a critical point considering that ultimately revenues are driven by economic growth of which 70% is derived from consumption. Boosting wages for the top 20% of wage earners, is not likely to lead to stronger rates of economic growth.

With year-over-year earnings comparisons set to fall beginning in the third quarter of this year, another support of the bull market thesis is being removed.

The biggest challenge of portfolio management is weaving short-term price dynamics (which is solely market psychology) into a long-term fundamentally and economically driven investment thesis.

Yes, with the breakout of the consolidation process last week, we did indeed add exposure to our portfolios as our investment discipline dictates. But such does not mean that we have dismissed our assessment of the risks that currently prevail.

There is a rising possibility the current rally is a “bull trap” rather than the start of a “new leg” in this aging bull market.

This is why we still maintain slightly higher levels of cash holdings in our accounts, remain focused on quality and liquidity, and keep very tight risk controls in place.

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