Tesla Bursts Into Flames After “Violent Crash” In Switzerland, Killing Driver Trapped Inside

When it rains, it pours, or in the case of Tesla, it bursts in flames.

In the same week in which a Tesla Model S erupted in flames after a “horrific” crash in Ft. Lauderdale, fatally trapping the two teenagers who died inside, while a second Model S rammed a stopped Salt Lake City firetruck at 60mph, mercifully without any fatalities, the Swiss tio.ch reports that yet another Tesla burst into flames after crashing on the A2 highway near the town of Bellinzona, killing a 48-year-old German driver who was trapped inside.

According to the Swiss publication, the driver, a 48-year-old German motorist from the town of Baden-Wurtermberg, lost control of the vehicle a few meters after the Monte Ceneri tunnel, crashing into the central guardrail, an accident that was remarkably similar to an October 2017 crash in Austria, in which a Model S also burned down, however without any fatalities.

The car then overturned and caught fire, fatally trapping the driver.

According to the Facebook page of the Bellinzona fire department, the flames were once again started by the lithium-ion batteries after the crash. The Fire department explains that “the violent impact of Lithium Ion Batteries could probably have caused a phenomenon called “thermal runaway”, i.e, a rapid and unstoppable increase in temperature.“

It’s unclear if the car had its autopilot engaged at the moment of the crash, although now that both the NTSB and NHTSA are looking to last week’s tragic Tesla crash which killed two young men under similar circumstances, we are confident the answer will be available soon, if not to Matt Schwall. As we reported yesterday, Schwall, the Tesla exec who until last week had been Tesla’s “primary technical contact” with both the NTSB & NHTSA, resigned quietly and moved to Tesla’s competitor Waymo. Commenting on this departure, we wondered if it suggests that the “company’s troubles with government regulators may be set to escalate.”

Judging by the trio of crashes in just one week, two of which fatal, we are willing to go on a limb here and answer “yes.”

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Cops Have No Idea If Hate Crime Laws Stop Hate Crimes

LhamonOn Friday, I had the privilege of testifying at a U.S. Commission on Civil Rights briefing about whether the government needs to do more to prevent hate crimes. It was an informative, entertaining, and at times combative event, given that two of the eight commissioners—Gail Heriot (a Volokh Conspiracy contributor) and Peter Kirsanow—seemed to agree with me that the 2009 federal Hate Crimes Prevention Act was ill-advised.

The U.S. Commission on Civil Rights is charged with investigating and compiling reports on various civil rights issues; it relies on 51 state-based advisory committees to make recommendations. (In addition to testifying at this briefing, I am a member of the D.C. advisory committee.) The commission’s current chair is Catherine Lhamon, whose Obama-era stint as an assistant secretary at the Education Department I have criticized for undermining due process on campus. (I should note that despite our disagreements, Lhamon has been incredibly friendly to me in person.)

The event—”In the Name of Hate: Examining the Federal Government’s Role in Responding to Hate Crimes“—began with Lhamon’s introductory remarks. Then she yielded the floor to Heriot, who took a few minutes to explain why she was dissenting from the day’s proceedings.

“Let me say that I am not really a fan of most hate crime laws, which I believe have a tendency to fuel identity politics at a time when the nation needs to come together,” said Heriot. “In particular I oppose the federal hate crime statute passed in 2009.”

The 2009 law added gender, gender identity, sexual orientation, and disability status to the list of protected classes, and it established that a person no longer needed to be involved in a federally relevant activity (like voting) in order to be deemed a victim of a federal hate crime. This was a vast expansion of the federal government’s ability to prosecute people for hate crimes, and it poses significant “double jeopardy” concerns, because it gives federal officials the opportunity to re-try defendants who survived state-based prosecutions.

“The [double jeopardy] clause does not apply when both the state and the federal government seek to prosecute the same defendant,” Heriot explained.

After Heriot voiced her objections, the first panel began. The participants were several members of local law enforcement departments from around the country, an assistant attorney general, and me. In my remarks, I urged public officials and the media to avoid blurring the distinction between hate crime­—leveling additional penalties against people whose criminal actions impugned a special class—and hate speech, which is protected expression under the First Amendment. I also stressed that while we hear many pundits asserting that hate crimes are on the rise, this fact is not clearly supported by the available data. The hate crime rate has remained essentially unchanged over the last decade; moreover, the purported “Trump effect” in American schools is difficult to parse and possibly overstated. (Consider, for instance, the number of unsolved or outright hoax bias incidents on college campuses.) As I said in my remarks:

I do not suppose that a large percentage of hate crimes are hoaxes, but since perpetrators on campuses are seldom apprehended, it’s difficult to know what proportion of the incidents were exactly what they seemed to be. That makes life difficult for the authorities who are trying to compile and publicize relevant, accurate information.

In conclusion, I would urge policymakers, law enforcement, and other authorities to resist media pressure to characterize the current atmosphere in the U.S. as one of increasing hatefulness. While the government can and should continue to track and prosecute criminal activity, we must remember that our cherished First Amendment freedoms are often the first casualty of government-led efforts to crack down on undesirable behavior. There are vastly fewer protections for free expression in other countries, and we see the costs of that every time. Scotland, for instance, recently arrested and fined YouTube comedian Mark Meechan for committing a hate crime. What was this crime? The man made a joke video of his girlfriend’s dog performing a Nazi salute. He concludes the video by noting, “I’m not a racist, by the way.” He just really wanted to tick off his girlfriend.

And in Liverpool, a young woman named Chelsea Russell was reported to a hate crime unit for posting the lyrics to a rap song by the musical artist Snap Dogg on her Instagram page. She was doing this in tribute to a young man who had been struck and killed by a car and had enjoyed the song. The authorities never charged anyone in connection with the young man’s death, but they did arrest Russell. She was convicted at trial. The judge said, “There is no place in civil society for language like that.” She will have to wear an ankle monitor for eight weeks.

These hate crime arrests in the U.K. underscore the need for officials in our own country to remain cognizant of the line between hate speech and hate crime, and to avoid fatalism and pessimism when considering whether the reach of hate is growing.

While the other panelists seemed more enthusiastic about involving federal authorities in hate crimes prevention, they provided ample reason to doubt everything we think we know about the prevalence of hate crimes. Several panelists conceded that 88 percent of the police departments that bothered to submit hate crime information to the feds in 2016 reported zero hate crimes. Four municipalities that include more than 250,000 people apiece didn’t report any information whatsoever. Baltimore County—population: 831,000—reported just one hate crime.

Assuming that there was probably more than one hate crime in Baltimore County last year, this suggests there’s massive room for improvement when it comes to local hate crime reporting—and that better reporting might very well make it look like hate crimes are spiking. For instance, if the same county reported five hate crimes next year, it would seem like hate crimes had increased by 500 percent.

Some of the panelists conceded that they are often dealing with very low numbers, and with degrees of subjectivity. Chief Marc Green of the Seattle Police Department said that both “non-criminal bias incidents” and “crimes with bias elements” had risen substantially in the past year, but under questioning from Heriot he eventually admitted that non-bias crimes had risen as well.

There’s an important distinction, of course, between “non-criminal bias incidents” and “crimes with bias elements,” in that the former category includes things that are not actually crimes, though the authorities may track them anyway. And though the briefing was ostensibly aimed at combatting hate crimes, some latter participants did indeed discuss the work their organizations were doing to track and counter hate-filled speech—which is fine if you’re an advocacy group, but constitutionally suspect if you’re the government. During the panel that took place after mine, Melissa Garlick of the Anti-Defamation League said the following:

Over the past few years we’ve seen hate-filled language, memes, stereotyping, and scapegoating injected into the mainstream of America’s political and policy debate, especially through traditional and social media. Over the course of the 2017 election we saw a level of anti-Semitism and the normalization of bigotry that deeply concerned us at ADL. And now we see rhetoric which involves stereotyping and attacks based on national origin, religion, and physical appearance cemented into federal policies and executive actions that marginalize communities already vulnerable to hate crimes and deter these individuals from reporting such crimes to local police. Our recent audit on anti-Semitic incidents showed that the number of incidents remained significantly higher in 2017 compared to 2016, with an increase of 57 percent. Now, these incidents include both criminal and noncriminal acts of harassment, but they provide an important snapshot into trends of anti-Semitism in our society.

Probably the best argument against strengthening federal hate crime prevention efforts was articulated by Commissioner Kirsanow, who asked just two questions during my panel. He directed his questions to all of us, and invited anyone who possessed the information to answer.

“Are you aware of any data, studies, or other evidence, that shows designating a crime a hate crime deters, prevents, or reduces that crime, and second, whether designating a crime a federal hate crime reduces, deters, or prevents incidents of that crime?” he asked.

Neither I nor any of the other panelists were aware of such information, and so the panel fell silent.

Kirsanow continued. “Then, one other question: are you aware of any databases, study, or other evidence that shows designating a crime a hate crime, whether a municipal, federal, or state crime, assists in the resolution of that crime or the apprehension of the perpetrator?” he asked.

Again, silence.

“Thank you, Madame Chair,” he said, yielding the floor.

The entire briefing was streamed on C-Span. To watch the first part, which includes my panel, go here. Video of the rest of the briefing is available under the “More Videos from USCCR Hate Crimes” heading, midway down the page.

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SCOTUS Says Non-Authorized Rental Car Drivers Do No Automatically Forfeit Their Fourth Amendment Rights

Fourth Amendment advocates scored a limited though still important victory today when the U.S. Supreme Court ruled unanimously that non-authorized drivers of rental cars do not automatically forfeit their Fourth Amendment rights to a reasonable expectation of privacy inside such vehicles.

The case is Byrd v. United States. In 2014 a woman named Natasha Reed rented a car in New Jersey. She then gave the keys to her fiancé, Terrence Byrd. While driving the rental car in Pennsylvania, Byrd was pulled over for a possible traffic infraction. The officers on the scene asserted that because Byrd was not listed as an authorized driver on the rental agreement, they did not need to obtain his permission before searching the car—which is something that they would have needed to do had he been the authorized driver. Their subsequent search of the trunk turned up body armor and 49 bricks of heroin.

Under the federal government’s theory of the case, explained Justice Anthony Kennedy in his ruling today, “drivers who are not listed on rental agreements always lack an expectation of privacy in the automobile based on the rental company’s lack of authorization alone.” But that position, Kennedy insisted, “rests on too restrictive a view of the Fourth Amendment’s protections.”

As Kennedy pointed out, “car-rental agreements are filled with long lists of restrictions. Examples include prohibitions on driving the car on unpaved roads or driving while using a handheld cellphone. Few would contend that violating provisions like these has anything to do with a driver’s reasonable expectation of privacy in the rental car.” Yet that contention would seem to follow naturally if the Court adopted the federal government’s sweeping argument and followed it to its natural conclusion.

The Supreme Court unanimously refused to adopt the federal government’s sweeping argument. “As a general rule,” the Court declared, “someone in otherwise lawful possession and control of a rental car has a reasonable expectation of privacy in it even if the rental agreement does not list him or her as an authorized driver.”

This counts as a win for Byrd and his lawyers. But it does not count as total victory. That’s because Kennedy’s ruling concluded by remanding the case back down to the lower court, which was instructed to consider two additional arguments raised by the government: first, whether the search might still be ruled legal on grounds of probable cause; and second, whether “one who intentionally uses a third party to procure a rental car by a fraudulent scheme for the purpose of committing a crime is no better situated than a car thief.” In other words, Byrd still faces the real possibility of losing in his ultimate quest to have the evidence against him thrown out.

Fourth Amendment advocates, however, should generally be pleased. The upshot of today’s decision is that the Supreme Court has made it a little bit more difficult for law enforcement officials to search certain vehicles without a warrant.

The Supreme Court’s opinion in Byrd v. United States is available here.

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Skeptical Geologist Warns: Permian’s Best Years Are Behind Us

Authored by Tsvetana Paraskova via OilPrice.com,

Geologist Arthur Berman, who has been skeptical about the shale boom, warned on Thursday that the Permian’s best years are gone and that the most productive U.S. shale play has just seven years of proven oil reserves left.

“The best years are behind us,” Bloomberg quoted Berman as saying at the Texas Energy Council’s annual gathering in Dallas.

The Eagle Ford is not looking good, either, according to Berman, who is now working as an industry consultant, and whose pessimistic outlook is based on analyses of data about reserves and production from more than a dozen prominent U.S. shale companies.

“The growth is done,” he said at the gathering.

Those who think that the U.S. shale production could add significant crude oil supply to the global market are in for a disappointment, according to Berman.

“The reserves are respectable but they ain’t great and ain’t going to save the world,” Bloomberg quoted Berman as saying.

Yet, Berman has not sold the EOG Resources stock that he has inherited from his father “because they’re a pretty good company.”

The short-term drilling productivity outlook by the EIA estimates that the Permian’s oil production hit 3.110 million bpd in April, and will rise by 73,000 bpd to 3.183 million bpd in May.

Earlier this week, the EIA raised its forecast for total U.S. production this year and next. In the latest Short-Term Energy Outlook (STEO), the EIA said that it expects U.S. crude oil production to average 10.7 million bpd in 2018, up from 9.4 million bpd in 2017, and to average 11.9 million bpd in 2019, which is 400,000 bpd higher than forecast in the April STEO. In the current outlook, the EIA forecasts U.S. crude oil production will end 2019 at more than 12 million bpd.

Yet, production is starting to outpace takeaway capacity in the Permian, creating bottlenecks that could slow down the growth pace.

Drillers may soon start to test the Permian region’s geological limits, Wood Mackenzie has warned. And if E&P companies can’t overcome the geological constraints with tech breakthroughs, WoodMac has warned that Permian production could peak in 2021, putting more than 1.5 million bpd of future production in question, and potentially significantly influencing oil prices.

The takeaway bottlenecks have hit WTI crude oil priced in Midland, Texas, which declined sharply compared with Brent in April, the EIA said in the May STEO.

“As production grows beyond the capacity of existing pipeline infrastructure, producers must use more expensive forms of transportation, including rail and trucks. As a result, WTI Midland price spreads widened to the largest discount to Brent since 2014. The WTI Midland differential to Brent settled at -$17.69/b on May 3, which represents a widening of $9.76/b since April 2,” the EIA said.

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Opioid Death Rates Are Not Correlated With Prescription Rates Across States

Efforts to reduce opioid-related deaths by restricting access to pain medication seem to be backfiring by driving people toward more dangerous drugs. Two analyses published today provide more reason to be skeptical of this approach, showing there is no clear relationship between pain pill prescriptions and drug poisoning.

In a short piece published by the American Council on Science and Health, pain treatment activist Richard Lawhern compares opioid prescriptions per 100 people and opioid-related deaths per 100,000 people in each of the 50 states and the District of Columbia. He includes deaths involving both legal and illegal opioids. Based on data for 2016, Lawhern plots the two rates against each other, with prescriptions on the x-axis and deaths on the y-axis, and calculates a trend very close to zero. “Opioid OD death rates had no apparent relationship to opioid prescription rates from state to state,” he writes. “Any effect of medical prescribing on OD deaths was literally ‘lost in the noise’ of other factors.”

A new WalletHub post by John Kiernan reinforces the point that states with high opioid death rates do not necessarily have high opioid prescription rates, or vice versa. In 2016, Kiernan reports, the jurisdictions with “the most overdose deaths per capita” were West Virginia, Ohio, New Hampshire, D.C., and Pennsylvania, in that order. The states with “the most opioid prescriptions per 100 people” were Alabama, Arkansas, Tennessee, Mississippi, and Louisiana. Although D.C. had the lowest prescription rate, it had the fourth highest death rate. Alabama had the highest prescription rate, but its death rate was middling. Arkansas had the second highest prescription rate but ranked around 40 in opioid-related deaths. Pennsylvania had a higher death rate than many states with higher prescription rates.

Despite that messy picture, Kiernan counts a state’s opioid prescription rate as a component of its “Drug Use & Addiction” score, meaning it automatically counts as part of the problem. “These state to state outcomes suggest that the US is dealing with not one national opioid crisis but many local crises,” Lawhern concludes. “In 2016, medical prescribing contributed almost nothing to these crises.”

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These Two “Emerging Market Canaries” Just Fell Over

Over the weekend, we showed why according to Macquarie strategist Viktor Shvets, the “biggest risk facing investors over the next 12 months” was an intense appreciation in the US dollar. The key reason behind the thesis was simple: a sharp reduction in dollar supply has been observed as the Fed destroys liquidity by shrinking its balance sheet resulting in a contracting US monetary base, coupled with the seeming inability of the US to significantly widen its CA deficits (despite public sector dis-saving).

This was shown in the chart below:

Now, in a strategy note sent to us  by Neels Heyneke of South Africa’s Nedbank, the senior strategist reaches the same conclusion as Shvets, claiming that we are now entering “the beginning of a prolonged risk-off phase as global dollar liquidity has started losing momentum.“

Just like for Macquarie, Nedbank agrees that “it’s all about the dollar”, explaining that there is nothing more important than “getting the dollar right.” Here’s why:

The US dollar is still the dominant global currency, and a stronger dollar is an indication of tighter global financial conditions.

If this is the case now again, and we believe it is, then we can expect real rates (term/risk premium) to rise, which would be negative for risk assets. The tighter financial conditions would also be deflationary by nature.

We therefore expect the US10yr to rally (continuation of the 30yr bull trend), reflecting the deflationary forces of a stronger dollar and contraction in the Global $-Lliquidity – this would not bode well for risk-assets (like SA bonds/FX /equities).

One can see why Nedbank is concerned with its version of a chart we first presented three months ago:

Meanwhile, once again echoing Macquarie, Nedbank then points out that its own global $-Liquidity indicator has been losing momentum “due to the tightening monetary conditions by the US Federal reserve (and as US current deficit shrinks)”, the same reasons highlighted by Shvets previously, and largely repeating the same warning as we noted before, Heyneke writes that as “dollar liquidity slows down, it is likely to unwind the extreme positioning and enforce a strong dollar (ie de-risking).”

To be sure, if indeed a significant dollar repricing is in the works, the first place one would see the turmoil – is the same place we already have seen turmoil in response to the recent spike in the dollar: emerging markets.

A contraction in Global $-Liquidity, as reflected by a stronger dollar and tighter financial conditions, is likely to correct the distortion between deteriorating EM fundamentals and the carrytrade (portfolio allocation to EM).

And while we pointed out last week that EM had just suffered the biggest outflows since December 2016…

… should dollar strength continue, that would be just the beginning of a sharp rotation in capital away from EMs.

Ok fine… but we knew all of this already; where the Nedbank report differs from Macquarie, however, is that it lays out what its authors believe may be a trigger point, or rather “canaries in the coalmine” to determine just when the Emerging Markets inflection point hits.

As Heyneke writes, there are many “canaries” that are starting to “fall over”, which is why the strategist is “deeply concerned about current market conditions. We are faced with very large risk-on positions (ie record net long positions in oil, copper, EUR/USD etc).”

The first “canary” is that the Bloomberg EM FX carry index has finally broken out of the bull trend first launched in early 2016 with the Shanghai Accord. Here’s Nedbank:

The carry index is an important “canary” to monitor. The index has broken out of the bull trend at 260 and has rallied from the 255 neckline on Friday to test 260 from below.

The next few days will be important, as a consolidation below 260 would confirm a major reversal.

A break below the neckline at 255 and below the wave-A high at 252 would project substantial downside (to below the (red) wave-C low of early 2016). The MACD has also confirmed the break out of the bull trend.

The second “canary” is even more ominous, as it is not merely some squiggle on a chart but a direct market response to funding conditions, and suggests that a dollar shortage is already spreading among Emerging Markets.

As Nedbank shows in the chart below, the Bloomberg Barclays EM local and USD denominated debt spreads “has taken out the highs of 2016 and has broken into the late-2016 lows”, suggesting that EM funding conditions are now reminiscent to the days when every single night Chinese stocks would crash as traders panicked over China’s ongoing devaluation.

Here, Heyneke warns that the latest move sharply higher in yields “is likely to be more than just a correction phase and should target the neckline at 5.50%” for one reason:

The world, and in particular emerging markets, has been on a dollar debt binge – one that has issued over $3.5.tn (rest of world $10tn) in dollar debt. Hence our concern that a slowdown in dollar liquidity would not bode well for dollar-indebted nations/corporations.

Putting it together, Nedbank concludes that “if the EM currencies fail over the next few days to break back into the bull trend that has been in place since the start of 2016”, or in other words, if the Dollar move higher continues, “then it is just a matter of time in our opinion before the EM currencies force foreign investors out of the EM markets.”

That, incidentally, is also part of what Macquarie dubbed the “biggest danger facing investors over the next twelve months.”

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Russia Deploys Exotic New Weapon: A “Budget Surplus”

Authored by John Rubino via DollarCollapse.com,

The price of oil is rising, which is obviously good news for those who sell it to the rest of us. Russia in particular seems to be enjoying the current trend, so much so that – if I’m understanding this correctly – Moscow is now receiving more in taxes than it’s spending. This is producing something called a “budget surplus,” which is a kind of currency war weapon that can be deployed to improve a country’s geopolitical position. Here’s a quick overview:

Russia To See Oil Revenues Jump Fivefold

(Oil Price) – Due to the oil price rally, Russia expects its oil and gas revenues to jump fivefold compared to the expected revenues set in its 2018 budget, according to the Finance Ministry that now expects Russia to post a budget surplus for the first time since 2011.

Oil and gas exports account for around 40 percent of Russia’s federal budget revenues.

Russia’s revenues from oil and gas sales are now expected at US$44.4 billion (2.74 trillion Russian rubles) for 2018, up from US$8.5 billion (527.6 billion rubles), according to a budget amendment by the Finance Ministry.

Due to the unexpectedly high oil prices, Russia is currently on track to book a first budget surplus since 2011, at 0.45 percent of gross domestic product (GDP), compared to previous expectations for a 1.3 percent of GDP deficit. The previous forecasts, however, were based on assumptions that the Urals crude blend would average around $40 a barrel. Between January and April, the price of Urals has averaged $66.15.

The additional oil revenues that Russia has earned above the Urals price assumption of $40 a barrel will be allocated to reserves instead of to spending, TASS news agency reports.

Analysts commented on the proposed budget amendment that Russia will have more revenues while it continues to plan for expenditures close to the original budget law.

“This will provide a very useful cushion to lean on if there are some adverse macro or geopolitical shocks,” Ivan Tchakarov, chief economist at Citi in Moscow, told Reuters.

One way that Russia is likely to use this exotic new weapon is to buy gold. The Russian central bank is already one of the biggest buyers of the metal, increasing its reserves by nearly 500 tons in less than three years – while, remember, it was running budget deficits.

Now, with a surplus to deploy, it’s reasonable to assume that the aggressive gold buying will at least continue and very possibly accelerate. The result: An increasingly gold-backed currency in a world of un-backed fiat, something that’s more of a threat to US financial hegemony than most of the hardware in the Kremlin’s military arsenal. For more on how this might play out, see Putin: Russia Needs to Get Rid of ‘Dollar Burden’ in Oil Trade. A few relevant quotes:

A few days ago, President Vladimir Putin was quoted as saying that Russia was mulling over ways to ‘get free’ of the U.S. dollar burden in oil trade as part of a plan to boost its national economic sovereignty…

Oil is traded in dollars on the exchange, TASS news agency quoted Putin as saying. “Certainly, we are thinking about what we need to do in order to get free of this burden.”

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Malaysian Stocks, Ringgit Soar After ‘Market-Foe’ Mahathir Calms Nerves

Market watchers had expected equities to fall across the board, as well as currency weakness which was anticipated mid-week, since  Mahathir said in an interview last month with Bloomberg, when asked whether he’d consider repegging the ringgit to ward off “currency manipulators”:

“When a currency weakens, the country loses money, the people lose money and costs of imports go up and generally the economy can’t do well. Capital control would become necessary in unusual situations.”

He stood up to traders betting against his country in the 1997-98 Asian financial crisis, imposing capital controls, and berated the legendary George Soros as a “moron.” As recently as 2010, he told Bloomberg that currency trading was “silly,” reflecting his preference for the bygone era when exchange rates were fixed.

But stocks and the Ringgit are soaring as dip-buyers scream into Malaysia following his first remarks as prime minister of Malaysia, where Mahathir said he’d lead a business-friendly administration and find ways to boost the nation’s equity market.

Last week’s tumble in the currency is gone…

And the Malaysia stock market was panic bid after opening dramatically lower…

Bloomberg notes that Nestle (Malaysia) Bhd., a unit of Nestle SA, added 4.2 percent after Mahathir’s coalition pledged to abolish the nation’s current goods and services tax, along with fuel subsidies and minimum wage realignment.

However, not all Malaysian stocks soared.

Gamuda Bhd., the nation’s largest construction company, fell 17 percent — the most in a decade — after the new government said it will review the projects by the previous administration.

And a slew of companies related to former Prime Minister Najib Razak’s Barisan Nasional party tumbled… (via Bloomberg)

  • Family ties: CIMB Bank Bhd. (chaired by Najib’s brother Nazir Razak) slid 5.1 percent; Opcom Holdings Bhd., whose CEO Mokhzani Mahathir is Mahathir’s son, rallied 50 percent. Thriven Global Bhd. more than doubled in value, while Eden Inc. Bhd. surged 171 percent. The two companies’ chairman Fakhri Yassin Mahiaddin is the son of Muhyiddin Yassin whom Mahathir named home affairs minister Saturday

  • Government services providers: My E.G. Services Bhd. plunged 30 percent; Datasonic Group Bhd. slid as much as 8.4 percent

  • DRB-Hicom Bhd. fell 7 percent. The company sold a stake in national carmaker Proton Holdings Bhd. last year to China’s Geely Automobile Holdings Ltd. Mahathir was opposed to giving foreign investors control over Proton

  • Felda Global Ventures Bhd., the world’s largest palm oil producer and a vital cog in Malaysian politics, gained 12 percent

  • Media companies: Utusan Melayu (M) Bhd., Media Prima Bhd. and Star Media Group Bhd. all slid. Utusan and Star Media are owned by United Malays National Organisation and the Malaysian Chinese Association. Media Prima’s group managing director Kamal Khalid previously ran the communications unit in the Prime Minister’s office

  • Destini Bhd. tumbled 41 percent. The defense services contractor is owned by Rozabil Rozamujib Abdul Rahman, a member of the United Malays National Organisation, a party in the outgoing ruling coalition

  • KUB Malaysia Bhd. dropped 20 percent: Majority shareholder Anchorscape Sdn Bhd.’s director Abdul Rahman Mohd Redza is the incumbent state assemblyman who won the Linggi seat in the state of Negeri Sembilan.

As Bloomberg reports, while there may be turmoil yet to come, including concerns about a potential widening in Malaysia’s fiscal deficit under the unprecedented coalition that’s taken office, for now, many investors are giving Dr Mahathir some space. After all, the country has solid fundamentals — its current-account surplus and 5%-plus growth rates are the envy of many an emerging market — and he’s tapped seasoned officials for senior economic roles.

“Markets are taking this in stride,” said Richard Jerram, chief economist at Bank of Singapore Ltd. “On Thursday, people were fairly concerned, but since then they’ve made some appointments and this advisory panel of grey beards they’ve put together has given some reassurance. The incoming finance minister has a pretty solid track record.”

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Retirees Face A “Pension Crisis” Of Their Own

Authored by Lance Roberts via RealInvestmentAdvice.com,

A couple of weeks ago, I discussed the coming “Pension Crisis.”  The important point made was the unrealistic return assumptions used by pension managers in order to reduce the contribution (savings) requirement by their members.

“However, the reason assumptions remain high is simple. If these rates were lowered 1–2 percentage points, the required pension contributions from salaries, or via taxation, would increase dramatically. For each point reduction in the assumed rate of return would require roughly a 10% increase in contributions.

For example, if a pension program reduced its investment return rate assumption from 8% to 7%, a person contributing $100 per month to their pension would be required to contribute $110. Since, for many plan participants, particularly unionized workers, increases in contributions are a hard thing to obtain. Therefore, pension managers are pushed to sustain better-than-market return assumptions which requires them to take on more risk.

But therein lies the problem.

The chart below is the S&P 500 TOTAL return from 1995 to present. I have then projected for using variable rates of market returns with cycling bull and bear markets, out to 2060. I have then run projections of 8%, 7%, 6%, 5% and 4% average rates of return from 1995 out to 2060. (I have made some estimates for slightly lower forward returns due to demographic issues.)”

“Given real-world return assumptions, pension funds SHOULD lower their return estimates to roughly 3-4% in order to potentially meet future obligations and maintain some solvency.”

It is the same problem for the average American who plans on getting 6-8% return a year on their 401k plan, so why save money? Particularly when the mainstream media, and financial community, promote these flawed claims to begin with. To wit:

“Suze Orman explained that if a 25-year-old puts $100 into a Roth IRA each month, they could have $1 million by retirement.” 

Ms. Orman’s statement is correct. It just requires the 25-year old to achieve an 11.25% annual rate of return (adjusting for inflation) every single year for the next 40-years. (That’s not very realistic)

Using faulty assumptions is the linchpin to the inability to meet future obligations. By over-estimating future returns, future retirement values are artificially inflated which reduces the required saving amounts need by individuals today. Such also explains why 8-out-of-10 American’s are woefully underfunded for retirement currently.

The Real Math

As shown in the long-term, total return, inflation-adjusted chart of the S&P 5oo below, the difference between actual and compounded (7% average annual rate) returns are two very different things. The market does NOT return an AVERAGE rate each year, and one negative return year compounds the future shortfall.

When imputing volatility into returns, the differential between what individuals are promised (and this is a huge flaw in financial planning) and what actually happens to their money is substantial over the accumulation phase of individuals. Furthermore, most of the average return calculations are based on more than 100-years of data. So, it is quite likely YOU DIED long before you realizing the long-term average rate of return.

Too Simple

I get it.

I am an average American too. I don’t want to be told what I can, and can not, spend or do today because I have a required savings goal to meet future needs. After all, that is YEARS into the future and I have plenty of time to get caught up. The words “budget” and “saving” might as well be lumped into the “4-letter word” category.

We all want a simple answer. If you do “X” then “Y” will be the outcome.

See, simple. It is why our world is being reduced to sound bytes and 140-character compositions. Financial, retirement and investment planning are no different. Just give me an “optimistic” answer.

For example, as shown in the chart below courtesy of Michael Kitces, the common assumptions made in retirement planning are simple. The chart assumes a retiree has a $1,000,000 balanced portfolio and is planning for a 30-year retirement. It assumes inflation averages 3% and the balanced portfolio averages 8% in the long run. To make the money last for the entire time horizon, the retiree would start out by spending $61,000 initially and then adjusts each subsequent year for inflation, spending down the retirement account balance by the end of the 30th year.

See, that’s pretty simple. You just start with $1 million and spend no more than $61,000 annually and get a return of 8% every single year until you die.

What could go wrong with that?

The chart below expands on Kitces’ chart above by adjusting the 8% return structure for inflation at 3% and also adjusting the withdrawal rate up for taxation at 25%.

By adjusting the annualized rate of return for the impact of inflation and taxes the life expectancy of a portfolio grows considerably shorter. However, the other problem, as first stated above, is there is a significant difference between 8% annualized rates of return and 8% real returns.

The Impact Of Variability

Currently, the S&P 500 (as of 5/8/2018) is trading at 2,727 with Q1 trailing reported earnings of $116.49. (S&P Data) This puts the current trailing P/E ratio of the S&P at a rather lofty 23.4x. 

We also know that forward returns from varying valuation levels are significantly depend on when you start your investing. As shown in the chart below, from current valuation levels, forward returns from the market have been much closer to 2% rather than 8%.

This is better explained by showing the value of $1000 invested in the markets at both valuations BELOW 10x trailing earnings and ABOVE 20x.

As you can see, WHEN you start your investing, or more importantly your withdrawals, has the greatest impact on your future results.

With this understanding let’s go back to Kitces’ assumptions and change the rate of return from 8%, annualized and compounded, to real market returns based upon current valuation levels. For this exercise, using Robert Shiller’s data, I went back and located points in history when valuations exceeded 20x earnings. I then calculated real forward total returns from those points as compared to an 8% compounded rate.

As you can see, with the exceptions of 1922 (front end loaded returns) and 1934 (as the markets left the Great Depression and entered into a post-WWII secular bull market), returns fared worse than the expected 8% rate.  The next chart removes the 1934 period only for clarity purposes.

The next chart takes the average of all periods above (black line) and uses those returns to calculate the spend down rate in retirement assuming similar outcomes for the markets over the next 30-years. As above, I have calculated the spend down structure to include inflation and taxation on an initial $1 million portfolio.

As you can see, under this scenario, due to the skew of 1934 and front-loaded returns, the retiree would not have run out of money over the subsequent 30-year period. However, once the impact of inflation and taxes are included, the outcome becomes substantially worse.

The chart below shows the same as above but with the 1934 period excluded. The outcome, not surprisingly, is not substantially different with the exception of the retiree running out of money one-year short of their goal rather than leaving an excess to heirs.

Important Considerations For Retiree Portfolios

Currently, 75.4 million Baby Boomers in America—about 26% of the U.S. population—have reached, or will reach, retirement age by 2030. Unfortunately, the majority of these individuals are woefully under saved for retirement and are “hoping” for compounded annual rates of return to bail them out.

It isn’t going to happen and the next “bear market” will wipe most of them out permanently.

The analysis above reveals the important points individuals should start giving serious consideration to:

  • Lowering expectations for future returns and withdrawal rates.
  • With the potential for front-loaded returns going forward unlikely, increase savings rates.
  • The impact of taxation must be considered in the planned withdrawal rate.
  • Future inflation expectations must be carefully considered, it’s better to overestimate.
  • Drawdowns from portfolios during declining market environments accelerates the principal bleed. Plans should be made during up years to harbor capital for reduced portfolio withdrawals during adverse market conditions.
  • Future income planning must be done carefully with default risk carefully considered.
  • Most importantly, drop compounded annual rates of return for plans using variable rates of future returns.

In this Central Bank driven world, with debt levels rising globally, interest rates rising, economic growth weak with a potential for a recession, and valuations high, the uncertainty of a retirement future has risen markedly. This lends itself to the problem of individuals having to spend a bulk of their “retirement” continuing to work.

Of course, this could be why there are currently more individuals over the age of 65 still in the workforce than ever before in history.

Oh, and there also the tiny fact the majority of American’s don’t have $1 million saved for retirement. For most it is less than $250,000.

But that is an entirely different problem.

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Is This Why Trump Folded: China Holds Up U.S. Pork, Auto Imports

President Trump surprised pundits and assorted watchers of the ongoing simmering trade war between China and the US on Sunday, when he pledged to help China’s telecom giant ZTE Corp “get back into business, fast” after a U.S. ban crippled the technology company, offering a job-saving concession to Beijing ahead of high-stakes trade talks this week.

What surprised most, however, is that Trump appears to make this concession out of the blue, without any obvious pressure out of China which has been patiently biding its time until the US implements sanctions under Section 301.

Maybe not: according to Reuters, on Monday China’s customs said it had ramped up inspections of U.S. pork and had taken unspecified regulatory steps on high-risk waste imports. In a move that could potentially cripple another group of exporting US farmer, China’s General Administration of Customs said it has increased inspections of U.S. pork imports “after finding problems recently”, according to a fax it sent to Reuters.

Today’s news confirms a report from Reuters which last week, according to which Beijing had stepped up inspections of pork imported from the United States, a move that many saw as a warning by Beijing in response to sweeping U.S. trade demands made on China.

Chinese imports. Photo credit: Reuters

And while China’s customs administration denied that it was targeting the US, saying it had not taken extra steps to check imports of U.S. agricultural products, instead giving equal treatment to inspections of agricultural products from all countries and districts, the U.S. had become the largest exporter of waste that failed checks, the customs said. Surely this was purely a coincidence.

The pork halt was merely the latest quiet escalation in China’s response arsenal: the North American unit of a Chinese customs inspection firm said on May 4 it would suspend checks on cargoes of scrap metal from the United States for a month, effectively halting all imports of U.S. scrap.

Last week, Reuters also reported that imported Ford vehicles are being held up at Chinese ports, underscoring how U.S. goods are facing increased customs scrutiny in China amid a tense trade stand-off.

Three people said Ford cars and those of its premium Lincoln brand were facing unusual delays at customs, with officials asking for extra technical checks. Two of the people said U.S.-made models of some German carmakers, mainly SUVs, being brought into China, were also affected.

Ford was being asked to do extra checks on emission components, said a China-based Ford executive familiar with the matter, asking not be named because of the sensitivity of the issue.

The world’s two largest economies have been dragged into a trade spat in recent months, which has spread to the agricultural sector, fuelling worries that Beijing and Washington may plunge into full-scale trade war.

The United States has proposed tariffs on $50 billion of Chinese goods under its “Section 301” probe. Those could go into effect in June following the completion of a 60-day consultation period, but activation plans have been kept vague. China has said its own retaliatory tariffs on U.S. goods, including soybeans and aircraft, will go into effect if the U.S. duties are imposed.

However, all that may soon be moot if Trump has indeed folded on the crackdown against Chinese telecom such as ZTE, which more than anything is just a signal to Xi that Beijing may have won the war without firing a single shot.

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