iftttwall

It’s clearly time for a caption contest.

President Trump joins other world leaders in a handshake with President Rodrigo Roa Duterte,
right, during the opening ceremony of the 31st ASEAN Summit. Photo @dougmillsnyt

Also, how did Medvedev get an exemption?

via http://ift.tt/2zUJFHa Tyler Durden

Since the beginning of the year, much ink has been spilled about the Army’s increasingly desperate attempts to fill its lofty recruiting quota for fiscal year 2017-2018: That is, 80,000 new soldiers. To hit that number, the Army has repeatedly loosened its recruiting requirements. Last month, the military introduced a new policy that would forgive recruits with a history of marijuana use or certain marijuana related criminal violations…

…and now, the military is taking those efforts one step further, with USA Today reporting today that the Army has expanded its criteria for granting “waivers” to certain recruits who violate criteria related to mental-health violations like having a history of bipolar disorder, or self-mutilation. The military said this expansion is justified by the increasing availability of medical records allowing recruiters to analyze a potential recruit’s history in greater detail to make a more accurate assessment as to whether they’re fit to serve.

Here’s USA Today:

WASHINGTON – People with a history of “self-mutilation,” bipolar disorder, depression and drug and alcohol abuse can now seek waivers to join the Army under an unannounced policy enacted in August, according to documents obtained by USA TODAY.

 

The decision to open Army recruiting to those with mental health conditions comes as the service faces the challenging goal of recruiting 80,000 new soldiers through September 2018. To meet last year's goal of 69,000, the Army accepted more recruits who fared poorly on aptitude tests, increased the number of waivers granted for marijuana use and offered hundreds of millions of dollars in bonuses.

 

Expanding the waivers for mental health is possible in part because the Army now has access to more medical information about each potential recruit, Lt. Col. Randy Taylor, an Army spokesman, said in a statement. The Army issued the ban on waivers in 2009 amid an epidemic of suicides among troops.

While it's unclear how long this decision was under consideration, last year, Jeff Snow, the army major-general who is in charge of the branch’s recruiting program, revealed to AZCentral that only 3 in 10 individuals applying to join the Army actually meet the branch’s “rigorous” recruiting requirements. "The biggest challenge right now is the fact that only three in 10 can actually meet the requirements to actually join the military," said Maj. Gen. Jeffrey Snow, commanding general of United States Army Recruiting Command. "We talk about it in terms of the cognitive, the physical and the moral requirements to join the military, and it's tough. We have a very good Army; there's a desire to recruit quality into the Army."

The decision to open Army recruiting to those with mental health conditions comes as the service faces the challenging goal of recruiting 80,000 new soldiers through September 2018. To meet last year's goal of 69,000, the Army accepted more recruits who fared poorly on aptitude tests, increased the number of waivers granted for marijuana use and offered hundreds of millions of dollars in bonuses.

However, despite the Army's claims that it now possesses the tool's to conduct more advanced screenings of individual candidates, one expert on military waivers pointed out, no amount of precise data about recruits’ health history can definitively prevent those issue from resurfacing later. Self-mutilation is a particularly disruptive issue because it could set off alarms about potential suicide attempts or other similarly disruptive phenomenon.

But accepting recruits with those mental health conditions in their past carries risks, according to Elspeth Ritchie, a psychiatrist who retired from the Army as a colonel in 2010 and is an expert on waivers for military service. People with a history of mental health problems are more likely to have those issues resurface than those who do not, she said.

 

“It is a red flag,” she said. “The question is, how much of a red flag is it?

 

While bipolar disorder can be kept under control with medication, self-mutilation — where people slashing their skin with sharp instruments — may signal deeper mental health issues, according to the Diagnostic and Statistical Manual of Mental Health Disorders, which is published by the American Psychiatric Association.

 

If self-mutilation occurs in a military setting, Ritchie said, it could be disruptive for a unit. A soldier slashing his or her own skin could result in blood on the floor, the assumption of a suicide attempt and the potential need for medical evacuation from a war zone or other austere place.

In the past, recruits who received waivers have been responsible for some of the most embarrassing (and extremely heinous) incidents in recent army history. As USA Today pointed out, in 2006, an Iraqi girl was raped and her family killed by US soldiers, one of whom required waivers for minor criminal activity and poor educational background.

Still, new guidelines for screening potential recruits with histories that include self-mutilation make clear that the applicant must provide “appropriate documentation” to obtain the waiver, according to a September memo sent to Army commanders. Those requirements include a detailed statement from the applicant, medical records, evidence from an employer if the injury was job-related, photos submitted by the recruiter and a psychiatric evaluation and “clearance."

Slides for military officials who screen recruits show examples of people whose arms, legs and torsos have been scarred by self-mutilation.

"For all waivers," one memo states, "the burden of proof is on the applicant to provide a clear and meritorious case for why a waiver should be considered."

A spokeswoman for the military rigorously defended the new waiver protocol, arguing that, under the right circumstances, a waiver for self-mutilation could be justified.

“I can see a rationale that that shouldn’t be an absolute but could be a waiver,” she said.

Of course, given the escalating tension between the US and North Korea – and more recently the escalating tensions between Saudi Arabia and its chief geopolitical rival, Iran – the possibility that the US could engage in yet another armed conflict before the end of Trump's first term is looming over the Pentagon, not to mention the general public. Furthermore, Trump's decision to send another 4,000 military personnel to Afghanistan, not to mention the US's decision to send a contingent of military "advisers" to help combat terror networks in Northern and East Africa, means that the US's military entanglements have only continued to expand under Trump, despite his repeated promises during the campaign to adhere to an "America first" policy of nonintervention.

As these conflicts worsen, we doubt this will be the last time the military lowers its recruiting standards before Trump's first term is up.

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Authored by James Rickards via The Daily Reckoning,

Leland Miller, a good friend of mine, is the founder and proprietor of an economic research service called the “China Beige Book.”

The name “beige book” was borrowed from the surveys conducted by regional Federal Reserve banks of economic conditions in their regions. (In the days before the internet, the Fed issued hard-copy booklets with different-colored covers based on subject matter. The economic conditions booklet had a beige-colored cover. Hence the name.)

Lee does in China what the Fed does in its regions, except he covers the entire country. He has a diverse network of over 3,000 companies and entrepreneurs in all business sectors. He gets his information straight from the source and bypasses government channels. It’s like a private intelligence service.

In fact, Lee’s network is better than the CIA’s when it comes to economic data. The CIA actually turns to Lee for advice.

The detailed research service costs about $100,000 per year for one subscription.

But Lee publishes summaries on a quarterly basis, and they are freely available. His latest summary doesn’t paint a pretty picture.

The China Beige Book, CBB, says that China had been covering up and smoothing over problems related to weak growth and excessive debt in order to provide a calm face to the world in advance of the National Congress of the Communist Party of China, which took place last month.

CBB also makes it clear that the much-touted “rebalancing” of the Chinese economy away from investment and manufacturing toward consumption and spending has not occurred. Instead China has doubled down on excess capacity in coal, steel and manufacturing and has continued its policy of wasteful investment fueled with unpayable debt.

It’s become obvious that the first cracks are starting to appear in China’s Great Wall of Debt.

The Chinese debt binge of the past 10 years is a well-known story. Chinese corporations have incurred dollar-denominated debts in the hundreds of billions of dollars, most of which are unpayable without subsidies from Beijing.

China’s debt-to-equity ratio is over 300%, far worse than America’s (which is also dangerously high) and comparable to that of Japan and other all-star debtors. China’s trillion-dollar wealth management product (WMP) market is basically a Ponzi scheme.

New WMPs are used to redeem maturing WMPs, while most of the market is simply rolled over because the underlying real estate and infrastructure projects cannot possibly repay their debts.

A lot of corporate lending is simply one company lending to another, which in turns lends to another, giving the outward appearance of every company holding good assets, but in which none of the companies can actually pay its creditors. It’s an accounting game with no real money behind it and no chance of repayment.

All of this is well-known.

What is not known is when it will end. When will confidence be lost in such a way that the entire debt house of cards crumbles? When will a geopolitical shock or natural disaster trigger a loss of confidence that ignites a financial panic?

There was little prospect of this in the past year because President Xi Jinping was keeping a lid on trouble before the recently concluded National Congress of the Communist Party of China.

With the congress behind him, Xi is ready to undertake reform of the financial system, which means shutting down insolvent companies and banks. Now the first bankruptcies have begun to appear.

Dandong Port Group, which does business in the hot zone near North Korea, has just defaulted on its debt. This may be the opening default in a wave of defaults about to hit. The question is whether President Xi can implement his planned reforms and clear up insolvent companies without turning the process into something more dangerous that can spin out of control.

The early signs are that this restructuring process will be more difficult than Xi expects and that the potential for panic is higher than at any time since 2008.

CBB forecasts that either China will experience a significant slowdown in 2018, which will have ripple effects on world growth, or else it will face an even bigger debacle down the road. Both outcomes are bad news for the global economy.

via http://ift.tt/2zT15nS Tyler Durden

Last week, Goldman Sachs pointed out a very disturbing trend in the US labor market: where the participation rate for women in the prime age group of 25-54 have seen a dramatic rebound in the past 2 years, such a move has been completeloy missing when it comes to their peer male workers. As Goldman’s jan Hatzius put in in “A Divided Labor Market”, “some of the workers who gave up and dropped out of the labor force during the recession and its aftermath still have not found their way back in.” In fact, the labor force participation rate of prime-age (25-54 year-old) women has rebounded quite a bit and is now only moderately below pre-crisis levels, but the rate for prime-age men remains well below pre-crisis levels.

While Goldman did not delve too deeply into the reasons behind this dramatic gender gap, BofA’s chief economist Michelle Meyer did just that in a note released on Friday titled “The tale of the lost male.” As we have discussed previously, and as Goldman showed recently, Meyer finds that indeed prime-working age men – particularly young men – have failed to return to the labor force in contrast to women who have reentered. According to Meyer, while this reflects some cyclical dynamics, including skill mismatch and stagnant wages, what is more troubling is that there are several new secular stories at play such as greater drug abuse, incarceration rates and the happiness derived from staying home playing games.

The macro implications, while self-explanatory, are dire: with the labor force participation rate among young men unlikely to rebound, the unemployment rate should fall further and cries of labor shortages will remain loud, even as millions of male Americans enter middle age without a job, with one or more drug addition habits, and with phenomenal Call of Duty reflexes. Here’s why.

First the facts

The overall LFPR is at 62.7%, up from the lows of 62.4% in 2015 but still considerably below the peak in 2000 of 67.3%. BofA estimates that more than half of the decline in the LFPR is due to demographics – as the population ages, the aggregate participation rate naturally falls. However, even after controlling for demographics, the participation rate of prime-working age individuals has failed to recover. As shown by Goldman above, and in BofA’s Chart 1 below, “this reflects the fact that men have not returned to the labor force. This is not a new phenomenon as the participation rate for prime working aged men has been on a secular downshift for the past several decades. However, it stands in contrast with the participation rate of women of the same age cohort which has rebounded nicely.”

Looking at age cohorts, the weakness among men is particularly acute among 25-34 years old where the rate has continued to slip lower. This is offset by a modest uptrend in participation among men aged 45-54 years old (Chart 2). In other words, the millennial men have remained on the sidelines of the labor market.

Now the theories

Why haven’t men – particularly millennial men – returned to the labor market? According to Meyer, on the one hand, there are the typical business cycle explanations which center on the mismatch in skills. There is also the theory of stagnant wages which may discourage new entrants into the labor market. On the other hand, there are secular changes for men, including the rise in pain medication usage (opioid drug abuse), incarcerations, and prioritization of leisure (think video games).

BofA reviews each in order, starting with the story of mismatch

The recession resulted in more severe job cuts for men than for women, in part due to the nature of the downturn; indeed, male employment fell by a cumulative 6.9% vs a 3.2% drop for women. The goods-side of the economy shed workers, particularly in construction and manufacturing, which tend to be more male-dominated. Both sectors were slow to recover, leaving workers to become detached from the labor market with depreciating skills. Moreover, the destruction of jobs in these sectors discouraged the younger generation from attaining the skills necessary to enter these fields. A prime example is the construction sector: the average age of a construction worker increased to 42.7 in 2016 from 40.4 pre-crisis, reflecting the fact that there were fewer young workers becoming trained in the discipline. By mid-2013, builders started to complain about the difficulty in finding labor, particularly skilled workers. This illustrates how the Great Recession displaced workers and led to a mismatch of skills.

Logically, there is also the influence of rising wages – or the lack thereof – on the incentive to work. Wage growth has been slow to recover on aggregate with only 2.4% yoy nominal wage growth as of October. However, there are differences by education with relative weakness for less educated men (Chart 3). This shows the demand shift away from this population, leaving them on the fringe of the labor force. Accordingly, the labor force participation rate for men with only a high school diploma has declined by 6.2% since 2007 vs. the 5.3% drop in the college educated cohort.

The pain from opioids

Moving to the more depressing narratives, BofA next explores the possibility that the rise in drug abuse – particularly opioids – is leaving men unemployed and displaced from the labor force. Recent work from Alan Krueger found that the rise in opioid prescriptions from 1999 to 2015 could account for about 20% of the decline in the male labor force participation rate during that same period. Referencing the 2013 American Time Use Survey – Well-being Supplement (ATUS-WB), 43% of NLF prime age men indicated having fair or poor health, a stark contrast with just 12% for employed men. The same cohort also reported significantly higher levels of pain rating, with 44% having taken pain medication, opioids particularly, on the reference day. It is hard to prove causality – is the increase in pain causing more dependence on opioids, leading to a drop in the labor force participation, or did the lack of job opportunities lead this population to drug abuse? Either way, it seems to be a factor keeping prime aged individuals from working – both men and women, according to Kreuger’s analysis.

Incarceration on the rise

The rising number of incarcerations imposes another issue. Although prisoners are not counted toward the total civilian non-institutional population when calculating the LFPR, the problem associated with the labor market goes beyond prisons. The growing number of incarcerations has left more people with criminal records, making it difficult for them to reenter the workplace. Indeed, the share of male adult population of former prisoners has increased from 1.8% in 1980 to 5.8% in 2010 (Chart 4). The Center for Economic and Policy Research has also found that people who have been imprisoned are 30% less likely to find a job than their non-incarcerated counterparts. Not surprisingly, a look into the details by demographic cohort finds that men make up nearly 93% of all prisoners, of which one third are between the ages of 25 and 34.

Why work when you can play video games

Finally there is the question of preference – is it possible that we are seeing more young men choosing leisure over labor? According to the ATUS (time use survey), between 2004-07 and 2012-15, the average amount of time men aged 21-30 worked declined by 3.13 hours while the number of hours playing games increased by 1.67 and the hours using computers rose by 0.6 (Chart 5). Once again there is a question of causality – are young men playing video games because it is hard to find work or because they prefer it over working? Using the 2013 Supplement ATUS, Krueger finds that game playing is associated with greater happiness, less sadness and less fatigue than TV watching and it is considered to be a social activity. This can create a loose argument that the improvement in video games has increased the enjoyment young men get from leisure, putting a priority on leisure over labor. It also begs the question over whether welfare benefits for the unemployed aren’t just a touch too generous, but that is a discussion best left for another day…

Whatever the reasons behind the collapse in male – and especially Millennial – labor force participation, the undeniable result has led a number of industries to report persistent labor shortages. To get a sense of this, BofA compares the ratio of the rate of job openings to hires across major industry using the JOLTS data. All major sectors have witnessed an increase in the ratio (Chart 6). (Note that due to trend differences across industries, it is more important to look at the relative changes in ratios instead of their absolute values). The biggest relative increase was in construction followed by transportation and utilities. This is the goods side of the economy where men tend to be a larger share of the working population, therefore highlighting the challenges in the economy from the shortage of men participating in the labor force. This is consistent with Beige Book commentary which highlighted in the latest edition that “Many Districts noted that employers were having difficulty finding qualified workers, particularly in construction, transportation, skilled manufacturing, and some health care and service positions.”

There are two implications: number one, the unemployment rate is set to fall further. In October we already touched 4.1% and are just a few thousand workers away from a 3-handle on the unemployment rate. The second is that wages should be rising. As Meyer writes, while it has yet to translate to a decisive higher trend in wage inflation, “we continue to argue that further tightening in the labor market will gradually succeed in generating faster wage growth.” To be sure, modest upward pressure on wages – especially if it is felt across industries and education levels – could encourage some return of labor, but it will likely be slow given the structural challenges addressed above. The consequence: cries of labor shortages will remain loud, even as wages finally rebound from chornically, and troublingly, low levels. In fact, some speculate that the wage rebound – once it emerges – could be sharp and destabilizing, and ultimately, as Albert Edwards predicted, could result in a “nightmare scenario” for the Fed (and capital markets) which will suddenly find itself far behind the tightening curve.

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Authored by Tom Luongo,

With the calling off of the New York Agreement to force the implementation of Segwit2x Bitcoin is now at a fascinating fork in the road (all puns intended).  Bitcoin prices are falling as people leave the network and Bitcoin Cash prices are spiking.

I advised my subscribers to hedge 15-25% of their Bitcoin position with Bitcoin Cash at $400 on October 28th.  That trade has a current return of over 300% with Bitcoin Cash now trading solidly above $1200.

Even with what now looks like a blow-off, near-term top in Bitcoin prices, Bitcoin investors are still up around $600 per Bitcoin (around 12%) since that day.  So, no one should be crying in their beer just yet.

Where Winning Looks Like Losing

But, as Rhett Creighton points out in a very good article at Cointelegraph,com, Bitcoin’s newfound weakness may be structural for more than just a few days worth of healthy, technical correction.

In short, the Bitcoin Core Developer team which won the battle over Segwit2x may have lost the war.  Bitcoin needs a transaction-scaling solution.  And it needs one quick.

Bitcoin Cash is a real competitor to Bitcoin because it combines big 8MB block and quick settlement times without any of the off-chain or side-chain complications associated with segregated witness (Segwit).  

But it does have the drawback of a single core developer. But, I’m a hard-core free-market guy.  Competition is what keeps everyone honest.

This is not to say that I’m not a fan of Segwit.  I am.  But, am I a fan of Segwit on Bitcoin?  I don’t know. 

In the world of cryptocurrencies I want a reserve asset that sits at the bottom of Exter’s Monetary Pyramid that can be 1) incorruptible and 2) a standard against which all other monetary-like assets, including utility tokens like Ethereum, can be measured.

The Current Monetary System – Exter’s Pyramid with Gold as the Foundational Asset

It’s the function that gold still functions within the global monetary system, despite protestations to the contrary by everyone from central bankers like Ben Bernanke (“I don’t know?  Tradition?”) to students of history like Martin Armstrong (a hedge against government incompetence).

Bitcoin has to continue to be that asset for the cryptocurrency and crypto-token community or the community will go adrift, unmoored from the anchor of sequentially-verified transactions from previous blocks.

The Real Battle for Bitcoin

And that’s where I have a bone to pick with Rhett over the following:

I fully expect the market cap of all crypto tokens to increase exponentially over the next few years, but this is not a winner-take-all scenario. Today, mainstream media financial advisors are touting Bitcoin as “the new gold,” but it can’t ever be that. To get a sense of how it’s different, imagine a universe where anyone could create a new kind of metal with essentially the same properties of gold.

 

Expecting Bitcoin to have the majority market share of Blockchains in the future is about as ridiculous as expecting the East India Company to be more valuable than all other corporations combined today.

Nonsense. The cryptocurrency market languished for four years because there was no compelling reason to back any other coin than Bitcoin in any substantive way.  The past is littered with technologically superior coins to Bitcoin and yet Bitcoin is $6000+ and many of them are $0.001.

The market craves those unit of account and store of wealth attributes that real monies have.  Just because something has the potential to be that doesn’t mean the market has to pay it any attention.  Otherwise Feathercoin or Litecoin would have out-competed Bitcoin three years ago.

Litecoin would have never had to incorporate the Lightning Network to differentiate itself from Bitcoin.

Rhett’s own project, Zcash, wouldn’t have been looking for its niche in the privacy space.  But, the use of these coins doesn’t mean that Bitcoin can’t act like digital gold.  In fact, with the collapse of Segwit2x and maintaining its high fees and low transaction density Bitcoin has more in common with physical gold than it has ever had previously now that the cryptocurrency market is maturing into one that settles actual trade.

Crypto-Gold Mine

It’s become a bad medium of exchange, just like gold.

If you want to move money around the net Litecoin is far superior as are dozens of other coins.  But, if you want the security of the oldest blockchain with the most trust built up over time, then Bitcoin is absolutely where you store your wealth.

Just like Gold.

Bitcoin’s Flaws Become Strengths when viewed as a Foundational Monetary Asset

Do you see the similarities here?  Gold is hard to do real business in.  Who wants to weigh out 0.1 grams of gold to buy a hamburger (around $4.50)?  There’s a real cost to doing transactions using gold as a medium of exchange.  It’s a time cost.

Bitcoin now looks exactly like Gold.  It’s expensive to own and or move Gold when compared against the dollar just like it is expensive and slow to move Bitcoins when compared with Litecoin or something else.

That makes its flaws strengths as a means by which to interface the ‘real’ world with the ‘crypto’ world.  Bitcoin doesn’t need to maintain transaction market share to maintain its relevance.  In fact, it losing market share is an expression that it is becoming that foundational asset we need it to be.

What we need is the volatility of the cryptocurrency exchange rates to stabilize.  For Litecoin to trade consistently within a 10% band relative to Bitcoin.  If we begin to see that volatility of the LTC/BTC pair die down over the next 18 months or so, then remember then you’ll know what is happening.

It will prove the whole cryptocurrency thesis that lack of central control over the issuance of monetary assets will be driven by end-users not central planners.

The dollar price of these coins will continue to rise, but they will do so in concert, in relation to the foundational asset, most likely Bitcoin.  Over time, we should see one currency emerge as the standard by which all others are measured.

Bitcoin’s Competition

But, Rhett is right that Bitcoin Cash has the real potential to be the real winner here.  Why? Because it is a soft fork of that original Bitcoin blockchain with the added advantages of a it being, for now, an excellent medium of exchange — low fees, short settlement times, no side-chains.

What this means is that Bitcoin Cash can, if its backers and developers stay on mission and are honest, compete with Bitcoin for the role of foundational asset.  Litecoin can’t.  It made it’s choice by going with side-chain payment processing.

The dark horse in this race is Bitcoin Gold. But, it too has the potential to become the new crypto-gold.

What Does this Look Like?

What we don’t know at this point is what the market wants in terms of cost structure for its reserve asset.

Do we want a very liquid one or a relatively-speaking illiquid one like Gold?  It’s a good question that I don’t have an answer to today.  My guess is an illiquid one that can reflect the value of the crypto-markets versus the value of the fiat-markets better by resisting hot money flows because of the high barrier to exchange.

Either Bitcoin or Bitcoin Gold.

But what I do know is that the entire cryptocurrency market just grew up a little and real world growing pains are on the horizon.

I would be hedged accordingly amongst all of the top market-cap coins that the market is right now separating off as serving real market needs.  I believe in the division of labor.  Each will serve different niches and work to keep the foundational coin developers honest.

There is no one blockchain can rule them all.

We tried that in the ‘real world,’ it was called the petrodollar and it gave rise to a level of wealth inequality and systemic corruption orders of magnitude larger than the world has ever seen.

Why would we want to recreate that in the crypto-world?  That’s what, ideologically, the Bitcoin Core developers were fighting for against Segwit2x.

If we want to make the crypto-dollar then we’ve learned absolutely nothing.

And we’re the ones that need to grow up, not Bitcoin.

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Who blows the whistle on the whistleblowers?

Nobody – if they can help it.

In yet another example of big-government hypocrisy allegedly committed by an office meant to hold other government employees accountable, the Wall Street Journal is reporting that the watchdog for the Securities and Exchange Commission has himself become the subject of complaints by several whistleblowers. At least two employees working for SEC Inspector General Carl Hoecker have filed complaints to a different federal whistleblower-protection agency, alleging that he and his senior staff retaliated against them for calling out misconduct within the inspector general’s office, according to the Wall Street Journal.

The SEC watchdog encourages staff at the top securities regulator to blow the whistle on misconduct and fraud involving SEC employees, from insider trading to expense fraud.

The whistleblowers also reported the allegations to Sen. Chuck Grassley, chairman of the bipartisan Senate Whistleblower Protection Caucus, which focuses on laws and other issues affecting whistleblowers. A Grassley spokesman said he is “looking into the matter, and his office intends to reach out to the whistleblowers in question to see what can and should be done."

Of course, the office has vigorously denied the allegations. Raphael Kozolchyk, a spokesman for the SEC IG, said “a number of the claims contain significant factual inaccuracies, while others are grossly misleading.” He added that the office does “not comment on ongoing personnel matters."

The whistleblower-retaliation allegations stem from complaints made to Hoecker last year by at least three officials in his office. The complaints allege misconduct by two of their fellow employees. The Office of Special Counsel, whose mission is to protect federal whistleblowers, is reportedly investigating the retaliation allegations. The office has the power to prosecute cases before an independent board, which can order agencies to pay compensation to harmed employees. A spokeswoman for the office declined to comment.

Initially, the two complainants at the center of the allegations filed complaints with the head of the SEC IG office – which operates independently of the agency it’s supposed to monitor – after noticing that two employees, a senior supervisor and one of his subordinates, were engaging in what appeared to be an office affair. The two would sneak away for “long lunches” during workdays, something the whistleblowers said amounted to time and attendance fraud.

The allegations center on potential time and attendance fraud by a supervisor in the inspector general’s office and a junior subordinate. The complainants said the two employees regularly disappeared together for several hours during workdays and engaged in inappropriate conduct in the office. Neither of the two employees responded to requests for comment.

 

The SEC Office of Inspector General referred the complaints to a federal prosecutor, who declined to pursue the case, according to documents reviewed by the Journal. The office’s own civil internal investigation of the complaints found insufficient evidence to conclude the two employees had an inappropriate relationship, but noted that “the supervisor created the appearance” of such a relationship, according to a public report earlier this year that didn’t name the individuals concerned. The report said the conduct had been addressed by management with the two individuals through remediation plans.

 

The whistleblowers’ concerns focus on how Hoecker handled their complaints. Inspectors general are meant to encourage whistleblowing. The whistleblowers allege they instead suffered retaliation and that the internal investigation wasn’t sufficiently independent to be fair.

Initially, the case was assigned to two senior investigators at the agency, one of whom had hired the two employees at the center of the case. But then Hoecker intervened by assigning one of the two employees under scrutiny to rewrite the agencies procedures to remove certain sections prohibiting conflicts of interest between employees. The two whistleblowers also said they were retaliated against, though it’s not clear exactly how.

Carl Hoecker

In their initial complaint, the whistleblowers alleged that Hoecker refers to the SEC commissioners as his “bosses” – which shouldn’t be true for the supposedly independent inspector general’s office.

The SEC Office of Inspector General internal probe was initially jointly led by two senior officials in the office, including a senior investigator who hired and supervised the two employees at the center of the complaints, the people familiar with the matter said. The investigator helped interview the complainants and refer the issue to prosecutors, according to documents obtained under public-records requests.

 

Hoecker also appointed one of the two employees under investigation to help coordinate a review of procedures in the inspector general’s office, according to documents reviewed by the Journal. The review, overseen by the inspector general, removed language designed to prevent conflicts of interest affecting internal investigations, such as allegedly happened in this case, according to the documents.

 

The complaints additionally allege that Mr. Hoecker, whose office is by law independent from the SEC, regularly refers to the commissioners who run the agency as his “bosses.”

Eventually, the IG’s office referred the complaints to a federal prosecutor who declined to take action.  The office’s own civil internal investigation of the complaints found insufficient evidence to conclude the two employees had an inappropriate relationship, but noted that “the supervisor created the appearance” of such a relationship, according to a public report earlier this year that didn’t name the individuals concerned. The report said the conduct had been addressed by management with the two individuals through remediation plans.

Hoecker, 60, was appointed as the SEC watchdog in 2013. More importantly, he also serves as chairman of the investigations committee of the Council of the Inspectors General on Integrity and Efficiency, which represents more than 70 inspectors general across the federal government. The council earlier this year said it had reviewed the whistleblowers’ allegations of retaliation by Hoecker and decided not to take any action, according to documents seen by the Journal. A spokesman for the council declined to comment.

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Authored by Raul Ilargi Meijer via The Automatic Earth blog,

An entire library of articles about Big Tech is coming out these days, and I find that much of it is written so well, and the ideas in them so well expressed, that I have little to add. Except, I think I may have the solution to the problems many people see. But I also have a concern that I don’t see addressed, and that may well prevent that solution from being adopted. If so, we’re very far away from any solution at all. And that’s seriously bad news.

Let’s start with a general -even ‘light’- critique of social media by Claire Wardle and Hossein Derakhshan for the Guardian:

How Did The News Go ‘Fake’? When The Media Went Social

Social media force us to live our lives in public, positioned centre-stage in our very own daily performances. Erving Goffman, the American sociologist, articulated the idea of “life as theatre” in his 1956 book The Presentation of Self in Everyday Life, and while the book was published more than half a century ago, the concept is even more relevant today. It is increasingly difficult to live a private life, in terms not just of keeping our personal data away from governments or corporations, but also of keeping our movements, interests and, most worryingly, information consumption habits from the wider world.

 

The social networks are engineered so that we are constantly assessing others – and being assessed ourselves. In fact our “selves” are scattered across different platforms, and our decisions, which are public or semi-public performances, are driven by our desire to make a good impression on our audiences, imagined and actual. We grudgingly accept these public performances when it comes to our travels, shopping, dating, and dining. We know the deal. The online tools that we use are free in return for us giving up our data, and we understand that they need us to publicly share our lifestyle decisions to encourage people in our network to join, connect and purchase.

 

But, critically, the same forces have impacted the way we consume news and information. Before our media became “social”, only our closest family or friends knew what we read or watched, and if we wanted to keep our guilty pleasures secret, we could. Now, for those of us who consume news via the social networks, what we “like” and what we follow is visible to many [..] Consumption of the news has become a performance that can’t be solely about seeking information or even entertainment. What we choose to “like” or follow is part of our identity, an indication of our social class and status, and most frequently our political persuasion.

That sets the scene. People sell their lives, their souls, to join a network that then sells these lives -and souls- to the highest bidder, for a profit the people themselves get nothing of. This is not some far-fetched idea. As noted further down, in terms of scale, Facebook is a present day Christianity. And these concerns are not only coming from ‘concerned citizens’, some of the early participants are speaking out as well. Like Facebook co-founder Sean Parker:

Facebook: God Only Knows What It’s Doing To Our Children’s Brains

Sean Parker, the founding president of Facebook, gave me a candid insider’s look at how social networks purposely hook and potentially hurt our brains. Be smart: Parker’s I-was-there account provides priceless perspective in the rising debate about the power and effects of the social networks, which now have scale and reach unknown in human history. [..]

 

“When Facebook was getting going, I had these people who would come up to me and they would say, ‘I’m not on social media.’ And I would say, ‘OK. You know, you will be.’ And then they would say, ‘No, no, no. I value my real-life interactions. I value the moment. I value presence. I value intimacy.’ And I would say, … ‘We’ll get you eventually.'”

 

“I don’t know if I really understood the consequences of what I was saying, because [of] the unintended consequences of a network when it grows to a billion or 2 billion people and … it literally changes your relationship with society, with each other … It probably interferes with productivity in weird ways. God only knows what it’s doing to our children’s brains.”

 

“The thought process that went into building these applications, Facebook being the first of them, … was all about: ‘How do we consume as much of your time and conscious attention as possible?'” “And that means that we need to sort of give you a little dopamine hit every once in a while, because someone liked or commented on a photo or a post or whatever. And that’s going to get you to contribute more content, and that’s going to get you … more likes and comments.”

 

“It’s a social-validation feedback loop … exactly the kind of thing that a hacker like myself would come up with, because you’re exploiting a vulnerability in human psychology.” “The inventors, creators — it’s me, it’s Mark [Zuckerberg], it’s Kevin Systrom on Instagram, it’s all of these people — understood this consciously. And we did it anyway.”

Early stage investor in Facebook, Roger McNamee, also has some words to add along the same lines as Parker. They make it sound like they’re Frankenstein and Facebook is their monster.

How Facebook and Google Threaten Public Health – and Democracy

The term “addiction” is no exaggeration. The average consumer checks his or her smartphone 150 times a day, making more than 2,000 swipes and touches. The applications they use most frequently are owned by Facebook and Alphabet, and the usage of those products is still increasing. In terms of scale, Facebook and YouTube are similar to Christianity and Islam respectively. More than 2 billion people use Facebook every month, 1.3 billion check in every day. More than 1.5 billion people use YouTube. Other services owned by these companies also have user populations of 1 billion or more.

 

Facebook and Alphabet are huge because users are willing to trade privacy and openness for “convenient and free.” Content creators resisted at first, but user demand forced them to surrender control and profits to Facebook and Alphabet. The sad truth is that Facebook and Alphabet have behaved irresponsibly in the pursuit of massive profits. They have consciously combined persuasive techniques developed by propagandists and the gambling industry with technology in ways that threaten public health and democracy.

 

The issue, however, is not social networking or search. It is advertising business models. Let me explain. From the earliest days of tabloid newspapers, publishers realized the power of exploiting human emotions. To win a battle for attention, publishers must give users “what they want,” content that appeals to emotions, rather than intellect. Substance cannot compete with sensation, which must be amplified constantly, lest consumers get distracted and move on. “If it bleeds, it leads” has guided editorial choices for more than 150 years, but has only become a threat to society in the past decade, since the introduction of smartphones.

Media delivery platforms like newspapers, television, books, and even computers are persuasive, but people only engage with them for a few hours each day and every person receives the same content. Today’s battle for attention is not a fair fight. Every competitor exploits the same techniques, but Facebook and Alphabet have prohibitive advantages: personalization and smartphones. Unlike older media, Facebook and Alphabet know essentially everything about their users, tracking them everywhere they go on the web and often beyond.

 

By making every experience free and easy, Facebook and Alphabet became gatekeepers on the internet, giving them levels of control and profitability previously unknown in media. They exploit data to customize each user’s experience and siphon profits from content creators. Thanks to smartphones, the battle for attention now takes place on a single platform that is available every waking moment. Competitors to Facebook and Alphabet do not have a prayer.

 

Facebook and Alphabet monetize content through advertising that is targeted more precisely than has ever been possible before. The platforms create “filter bubbles” around each user, confirming pre-existing beliefs and often creating the illusion that everyone shares the same views. Platforms do this because it is profitable. The downside of filter bubbles is that beliefs become more rigid and extreme. Users are less open to new ideas and even to facts.

 

Of the millions of pieces of content that Facebook can show each user at a given time, they choose the handful most likely to maximize profits. If it were not for the advertising business model, Facebook might choose content that informs, inspires, or enriches users. Instead, the user experience on Facebook is dominated by appeals to fear and anger. This would be bad enough, but reality is worse.

And in a Daily Mail article, McNamee’s ideas are taken a mile or so further. Goebbels, Bernays, fear, anger, personalization, civility.

Early Facebook Investor Compares The Social Network To Nazi Propaganda

Facebook officials have been compared to the Nazi propaganda chief Joseph Goebbels by a former investor. Roger McNamee also likened the company’s methods to those of Edward Bernays, the ‘father of public’ relations who promoted smoking for women. Mr McNamee, who made a fortune backing the social network in its infancy, has spoken out about his concern about the techniques the tech giants use to engage users and advertisers. [..] the former investor said everyone was now ‘in one degree or another addicted’ to the site while he feared the platform was causing people to swap real relationships for phoney ones.

 

And he likened the techniques of the company to Mr Bernays and Hitler’s public relations minister. ‘In order to maintain your attention they have taken all the techniques of Edward Bernays and Joseph Goebbels, and all of the other people from the world of persuasion, and all the big ad agencies, and they’ve mapped it onto an all day product with highly personalised information in order to addict you,’ Mr McNamee told The Telegraph. Mr McNamee said Facebook was creating a culture of ‘fear and anger’. ‘We have lowered the civil discourse, people have become less civil to each other..’

 

He said the tech giant had ‘weaponised’ the First Amendment to ‘essentially absolve themselves of responsibility’. He added: ‘I say this as somebody who was there at the beginning.’ Mr McNamee’s comments come as a further blow to Facebook as just last month former employee Justin Rosenstein spoke out about his concerns. Mr Rosenstein, the Facebook engineer who built a prototype of the network’s ‘like’ button, called the creation the ‘bright dings of pseudo-pleasure’. He said he was forced to limit his own use of the social network because he was worried about the impact it had on him.

As for the economic, not the societal or personal, effects of social media, Yanis Varoufakis had this to say a few weeks ago:

Capitalism Is Ending Because It Has Made Itself Obsolete – Varoufakis

Former Greek finance minister Yanis Varoufakis has claimed capitalism is coming to an end because it is making itself obsolete. The former economics professor told an audience at University College London that the rise of giant technology corporations and artificial intelligence will cause the current economic system to undermine itself. Mr Varoufakis said companies such as Google and Facebook, for the first time ever, are having their capital bought and produced by consumers.

 

“Firstly the technologies were funded by some government grant; secondly every time you search for something on Google, you contribute to Google’s capital,” he said. “And who gets the returns from capital? Google, not you. “So now there is no doubt capital is being socially produced, and the returns are being privatised. This with artificial intelligence is going to be the end of capitalism.”

Ergo, as people sell their lives and their souls to Facebook and Alphabet, they sell their economies along with them.

That’s what that means. And you were just checking what your friends were doing. Or, that’s what you thought you were doing.

The solution to all these pains is, likely unintentionally, provided by Umair Haque’s critique of economics. It’s interesting to see how the topics ‘blend’, ‘intertwine’.

How Economics Failed the Economy

When, in the 1930s, the great economist Simon Kuznets created GDP, he deliberately left two industries out of this then novel, revolutionary idea of a national income : finance and advertising. [..] Kuznets logic was simple, and it was not mere opinion, but analytical fact: finance and advertising don’t create new value, they only allocate, or distribute existing value in the same way that a loan to buy a television isn’t the television, or an ad for healthcare isn’t healthcare. They are only means to goods, not goods themselves. Now we come to two tragedies of history.

 

What happened next is that Congress laughed, as Congresses do, ignored Kuznets, and included advertising and finance anyways for political reasons -after all, bigger, to the politicians mind, has always been better, and therefore, a bigger national income must have been better. Right? Let’s think about it. Today, something very curious has taken place.

 

If we do what Kuznets originally suggested, and subtract finance and advertising from GDP, what does that picture -a picture of the economy as it actually is reveal? Well, since the lion’s share of growth, more than 50% every year, comes from finance and advertising -whether via Facebook or Google or Wall St and hedge funds and so on- we would immediately see that the economic growth that the US has chased so desperately, so furiously, never actually existed at all.

 

Growth itself has only been an illusion, a trick of numbers, generated by including what should have been left out in the first place. If we subtracted allocative industries from GDP, we’d see that economic growth is in fact below population growth, and has been for a very long time now, probably since the 1980s and in that way, the US economy has been stagnant, which is (surprise) what everyday life feels like. Feels like.

 

Economic indicators do not anymore tell us a realistic, worthwhile, and accurate story about the truth of the economy, and they never did -only, for a while, the trick convinced us that reality wasn’t. Today, that trick is over, and economies grow , but people’s lives, their well-being, incomes, and wealth, do not, and that, of course, is why extremism is sweeping the globe. Perhaps now you begin to see why the two have grown divorced from one another: economics failed the economy.

 

Now let us go one step, then two steps, further. Finance and advertising are no longer merely allocative industries today. They are now extractive industries. That is, they internalize value from society, and shift costs onto society, all the while creating no value themselves.

 

The story is easiest to understand via Facebook’s example: it makes its users sadder, lonelier, and unhappier, and also corrodes democracy in spectacular and catastrophic ways. There is not a single upside of any kind that is discernible -and yet, all the above is counted as a benefit, not a cost, in national income, so the economy can thus grow, even while a society of miserable people are being manipulated by foreign actors into destroying their own democracy. Pretty neat, huh?

 

It was BECAUSE finance and advertising were counted as creative, productive, when they were only allocative, distributive that they soon became extractive. After all, if we had said from the beginning that these industries do not count, perhaps they would not have needed to maximize profits (or for VCs to pour money into them, and so on) endlessly to count more. But we didn’t.

 

And so soon, they had no choice but to become extractive: chasing more and more profits, to juice up the illusion of growth, and soon enough, these industries began to eat the economy whole, because of course, as Kuznets observed, they allocate everything else in the economy, and therefore, they control it.

 

Thus, the truly creative, productive, life-giving parts of the economy shrank in relative, and even in absolute terms, as they were taken apart, strip-mined, and consumed in order to feed the predatory parts of the economy, which do not expand human potential. The economy did eat itself, just as Marx had supposed – only the reason was not something inherent in it, but a choice, a mistake, a tragedy.

 

[..] Life is not flourishing, growing, or developing in a single way that I or even you can readily identify or name. And yet, the economy appears to be growing, because purely allocative and distributive enterprises like Uber, Facebook, credit rating agencies, endless nameless hedge funds, shady personal info brokers, and so on, which fail to contribute positively to human life in any discernible way whatsoever, are all counted as beneficial. Do you see the absurdity of it?

 

[..] It’s not a coincidence that the good has failed to grow, nor is it an act of the gods. It was a choice. A simple cause-effect relationship, of a society tricking itself into desperately pretending it was growing, versus truly growing. Remember not subtracting finance and advertising from GDP, to create the illusion of growth? Had America not done that, then perhaps it might have had to work hard to find ways to genuinely, authentically, meaningfully grow, instead of taken the easy way out, only to end up stagnating today, and unable to really even figure out why yet.

Industries that are not productive, but instead only extract money from society, need to be taxed so heavily they have trouble surviving. If that doesn’t happen, your economy will never thrive, or even survive. The whole service economy fata morgana must be thrown as far away as we can throw it. Economies must produce real, tangible things, or they die.

For the finance industry this means: tax the sh*t out of any transactions they engage in. Want to make money on complex derivatives? We’ll take 75+%. Upfront. And no, you can’t take your company overseas. Don’t even try.

For Uber and Airbnb it means pay taxes up the wazoo, either as a company or as individual home slash car owners. Uber and Airbnb take huge amounts of money out of local economies, societies, communities, which is nonsense, unnecessary and detrimental. Every city can set up its own local car- or home rental schemes. Their profits should stay within the community, and be invested in it.

For Google and Facebook as the world’s new major -only?!- ad agencies: Tax the heebies out of them or forbid them from running any ads at all. Why? Because they extract enormous amounts of productive capital from society. Capital they, as Varoufakis says, do not even themselves create.

YOU are creating the capital, and YOU then must pay for access to the capital created.

Yeah, it feels like you can just hook up and look at what your friends are doing, but the price extracted from you, your friends, and your community is so high you would never volunteer to pay for it if you had any idea.

The one thing that I don’t see anyone address, and that might prevent these pretty straightforward ”tax-them-til they-bleed!” answers to the threat of New Big Tech, is that Facebook, Alphabet et al have built a very strong relationship with various intelligence communities. And then you have Goebbels and Bernays in the service of the CIA.

As Google, Facebook and the CIA are ever more entwined, these companies become so important to what ‘the spooks’ consider the interests of the nation that they will become mutually protective. And once CIA headquarters in Langley, VA, aka the aptly named “George Bush Center for Intelligence”, openly as well as secretly protects you, you’re pretty much set for life. A long life.

Next up: they’ll be taking over entire economies, societies. This is happening as we speak. I know, you were thinking it was ‘the Russians’ with a few as yet unproven bucks in Facebook ads that were threatening US and European democracies. Well, you’re really going to have to think again.

The world has never seen such technologies. It has never seen such intensity, depth of, or such dependence on, information. We are simply not prepared for any of this. But we need to learn fast, or become patsies and slaves in a full blown 1984 style piece of absurd theater. Our politicians are AWOL and MIA for all of it, they have no idea what to say or think, they don’t understand what Google or bitcoin or Uber really mean.

In the meantime, we know one thing we can do, and we can justify doing it through the concept of non-productive and extractive industries. That is, tax them till they bleed.

That we would hit the finance industry with that as well is a welcome bonus. Long overdue. We need productive economies or we’re done. And Facebook and Alphabet -and Goldman Sachs- don’t produce d*ck all.

When you think about it, the only growth that’s left in the US economy is that of companies spying on American citizens. Well, that and Europeans. China has banned Facebook and Google. Why do you think they have? Because Google and Facebook ARE 1984, that’s why. And if there’s going to be a Big Brother in the Middle Kingdom, it’s not going to be Silicon Valley.

via http://ift.tt/2zEYPNX Tyler Durden

One of the most popular JPMorgan analysts, traders and commentators, Jan Loeys, head of global asset strategy and author of the weekly “The JPMorgan View” piece is moving on (to a different, non-client facing part of the company), and is using his last weekly address to JPM clients to recap the main lessons he has learned over his 30 year career.

For those carbon-based traders who still trade on the basis of fundamental analysis, inductive reasoning, and discounting, and forecasting the future – instead of merely relying on the fastest laser-based algos to react to the news or hoping for central bank bailouts – we have excerpted the entire piece, and are excited to note that while Loeys may be leaving, he will be replaced by two of our favorite JPM analysts and commentators, Nikos Panigirtzoglou and Marko Kolanovic, who under John Normand will take over as JPM’s new Cross-Asset Strategy team.

So, without further ado, here is the latest, and last, from JPM’s Jan Loeys, explaining “What have I learned?” after 30 years of doing this…

What have I learned?

How to forecast markets?

• The theory and empirical literature of Finance are the best starting point as they deal directly with asset prices. Next are macro economics and statistics. Markets are not Math or Engineering, but a forever learning and adapting system with all of us observing and participating from the inside. Quantitative techniques are indispensable, though, to deal with the complexity of financial instruments and the overload of information we face. Empirical evidence counts for more than theory, but you need theory to constrain empirical searchers and avoid spurious correlations.
• The starting point of Finance is the Theorem of Market Efficiency which posits that under ideal conditions what we all know should be in the price. Only new information moves the price. Hence, it is changes in expectations about the future that drive asset prices, not the level of anything.
• How to forecasts view changes? The good news is that changes in opinions about fundamentals such as growth and inflation tend to repeat. This is one driver of momentum in asset prices, and is likely driven by the positive feedback between risk markets and the economy that forecasters naturally find very difficult getting ahead of.
• I live by Occam’s Razor: If you can explain the world with one variable, don’t use two. This keep-it-simple rule does not deny that reality is complex, nor does it say anything about simple minds. It forces one to focus on the most important fundamental drivers of markets and to cut out the clutter. It reduces the risk of becoming a two-handed strategist.
• The mode and the mean. There is a fundamental difference between an asset price and a forecast. A forecast is a single outcome that you consider the most likely, among many. In statistics, we call this the mode. An asset price, in contrast, is closer to the probability-weighted mean of the different scenarios you consider possible in the future. When our own probability distribution for these different outcomes is not evenly balanced but instead skewed to, say, the upside, the market price will be above our modal view. Asset prices can thus move without a change in modal views if the market perceives a change in the risk distribution. An investor should thus monitor changing risk perceptions as much as changing modal views.

• Do markets get ahead of reality? They do, yes, exactly because asset prices are probability-weighted means and the reality we perceive is coded as a modal view. Information arrives constantly and almost always only gently moves the risk distribution around a given modal view. Before we change our modal view of reality, the market will have seen the change in risk distribution and will have started moving already.
• Are some markets faster than others? I hear frequently in one market, say equities, that they are monitoring other markets, such as credit or bonds, for early signs on what stocks will do. But I hear the reverse frequently in the bond world. I do not like either view and just assume that all markets react at the same speed as they see all information at the same time.
• Levels or direction? In our business, we are asked to forecast asset prices and returns. I have found this very hard but fortunately have had the luxury to be able to stick to forecasting market direction rather than outright asset price levels. In markets that are close to efficiently priced, what we know is already in the price and we cannot really use that same information to make a coherent case for an asset price level that much different from today. All I have been able to do is to make a case that there are mild-to-decent odds in favor of the market going in one direction rather than the other. We have been much more successful in forecasting direction than actual asset price levels, and it is the direction that is more important for strategy.
• Top down or bottom up? In assessing the outlook for a market or an economy, should you start judging individual countries, sectors, and companies and then add them up to the overall market, or should you start from the top down? As a macro strategist, I naturally think top down, arguing I sit on top of a tall building, seeing where all the traffic and capital is going. But I know that from that high up, I do not see any potholes. For that, I have been relying on my local analysts to tell what conditions prevail on their street. And they in turn ask me what I can see from high up. I have found that it is the dialogue between bottom-up and top-down thinking that is most fruitful. Our economists do this quite well: they start the global forecast from the country level up, but then look at a host of global signals to put pressure on the bottom-up forecasts.
• The US as the indispensable market. Applying this top-down thinking, should we therefore start strategy at the global level and then drill down to regions and sectors, or should we follow the more common approach of starting with the USD market and economy, and then analyze the rest of the world as a spread market? I have done the latter. This is not only because we have the longest return series in the US and the US market and economy have been more stationary than others, but also because dollar assets are half of the investable world as many non-US entities both fund and invest in dollars.
• Rules versus discretion? You need both. I have tried to have logical arguments to buy or sell certain assets, based on Finance. And I have tried to corral evidence that the signals I use have in the past had the assumed impact on asset prices. Each of these then became a rule, of the form: If X>0, buy A, and vice versa. As we collected these rules, and published them in our Investment Strategies series, the question came up naturally whether we should not simply make our investment process driven by a number of empirically proven rules, and to banish any discretion (emotion?) from the process. Over time, we converged on a mixture of the two as pure rules ran into the problem that the world is forever changing, partly as every one else figures out the same rule and then arbitrages away the profit, and partly as economic structures and regimes similarly change over time in a way that we cannot capture with simple rules.
• Much as I have been talking a lot about cycles, I do not think of the world as a stationary system described by a set of parameters that we steadily get to know more about. Instead, as economists we think of people constantly optimizing their objectives, under the constraints they face. Aside from truly exogenous shocks to the system, the main difference between today and yesterday is that today, we know what happened yesterday and that information allows us to constantly fine tune and thus change our behavior. That is, we constantly learn from the past, much to try to avoid making the same mistakes. At the macro level, this means that the system is constantly evolving. As Mark Twain said, “History doesn’t repeat itself, but it often rhymes”. As investors, we should look at the market as billons of people all learning and adapting. The best investors are those who get ahead of this by learning faster and understanding better how others are learning.
• Expectations are adaptive. Markets should be purely forward looking into the future and treat the past as just that, the past. The problem we have is that the only information we receive is from the past. Ages ago, a debate raged in economics on whether expectations for say inflation are rational, or adaptive. The term rational was meant to denote that investors plug in all the info they have into their model of what will drive the future and derive from that the most efficient forecast. That is, investors do not slavishly extrapolate the past. True in principle. But we also find that as new information arrives, all of it past, investors constantly update these rational priors as new data steadily challenge them. In effect, then, market expectations for future fundamentals on earnings, inflation, defaults and such come close to adaptive, moving averages of past performance.
• Risk premia are about risk and uncertainty. This sounds obvious, but is frequently overlooked. It means that even when nothing surprising is happening, that by itself is surprising against markets that are priced for a certain volume of surprises. When nothing happens and data come out as expected, the market updates in an adaptive sense its uncertainty, and risk premia come down.
• Flows, positions, and supply and demand. Economics teaches us that supply and demand determines price. That is true also for asset prices, and explains the high interest in information on flows. Applying this dictum is not easy, though, as we cannot measure future intended supply and demand, aside from governments’ budget plans. All we measure ex post is transactions at a price that then equated supply with demand. For every seller in the past, there was a buyer, with the price moving to create this equilibrium. Only the movement in prices can tell us whether intended demand exceeded or fell short of supply. Given that we know how prices changed, flow data do not tell us much more.
• I have a different gripe about position surveys. If you tell me that you are long or OW asset class X, then I must conclude investors are long and advise you to sell. You know that, and thus should not tell me that you are long. I thus do not “trust” survey data.
• This is not to say that flow and position data are useless. We instead find that more detailed understanding of how different types of investors, each with their own restrictions and objectives, interact with the plumbing of the system, has allowed us to make better investment decisions. It led us to start 10 years ago a dedicated Flows & Liquidity weekly managed by my colleague Nikos Panigirtzoglou that is one of our top three publications by readership.
• Central banks and QE do not “cause” asset price inflation. It is often argued, and our own language has come dangerously close to it, that easy money by central banks has massively and artificially inflated asset prices and that a QE unwind will thus deflate them. I do not like to think in those terms. Easy money may be the proximate cause of high asset prices, but is not the ultimate one. All central bankers try to do is to search for the non-inflationary equilibrium level of rates driven by the supply and demand for capital as well as inflation expectations. In this cycle, higher global savings from EM and corporates, depressed capital spending, consumer delevering and public sector austerity have created a surplus of savings over investment that is the real cause of low interest rates and high asset prices. If central money was too easy, we would have also seen much faster growth and higher inflation, which we did not get.
• Market volatility is not a mystery but should be thought of as fundamental volatility, of growth, earnings, inflation, plus technical forces which are largely due to leverage, positions, market plumbing and such. Another way of looking at vol is as a function of the number of shocks and surprises hitting the system, the propagation and contagion forces around them (mostly leverage) and the shock absorbers that counteract them (largely central banks).

Where is alpha?

• The Theorem of Market efficiency, which implies investors can’t beat the market, implies that asset prices will follow random walks, with drift and that asset price changes will be white noise, with no serial correlation. There are thus only two possible inefficiencies to be exploited: positive serial correlation, which we call Momentum, or negative serial correlation, which we call mean reversion, or Value (to become valuable, asset prices need first to go down, or fundamentals need to improve faster than the price). It is an empirical question which dominates where. At the asset class and sector level, we have found that Momentum dominates, while within the fixed income world, Value is more important.
• The Theorem of Market efficiency assumes frictionless markets. Hence, cross-sectionally, we need to focus on areas where there are frictions due to different regulations, business practices, or investment objectives. Most profitable for me have been differences between currencies and industry segmentation between HG and HY, EM and DM, and bonds and equities.
• Across time, market momentum at the macro level has been the best way to earn excess returns. I discussed above how some of this is due to the momentum in view changes. More fundamentally, in open markets, we frequently face a Fallacy of Composition according to which rational and equilibrating behavior at the micro level becomes destabilizing at the macro level. The free market is very good at motivating entrepreneurship and rational behavior at the micro level, but is subject to constant booms and busts at the macro level. Central banks try to control this instability through counter-cyclical policies but can’t undo it all.
• Trade the risk bias. Even when markets price in exactly our modal views, I find it useful to consider how prices will move on new information and then try to position on any skew in the outlook. If I find that a particular price or spread will move a lot more on bullish than on bearish news, then I will position bullishly. This works at the portfolio level if I can combine different unrelated risk biases.
• Is there now so much information that everyone sees at the same time that alpha is dead? To some extent, yes, as reflected by the inability of the hedge fund world to offer better returns than a simple bond and equity portfolio with the same volatility over the past 10 years. Still, while alpha is weaker, I don’t think it is truly dead, as allocation across asset classes is still working well, even as it seems harder to earn alpha within asset classes.
• Is passive investing destroying alpha? No. it should actually make it easier if a lot more investors choose to allocate passively and therefore leave opportunities to the reduced number of active managers. I do feel the move to passive is largely within asset classes (i.e., stock picking) and that the arrival of liquidity passive products (ETFs) has made active asset allocation a lot easier. I think many managers have moved from active stock picking to active asset allocation.
• How to analyze risk? Risk is not the same as past vol, but the surprise that will hurt your portfolio. I have never found it useful to make long list of all the things that can go wrong over the next year. Instead, I start from the premise that the big risks that will have an impact at the macro level almost always start as small ones. I have called these local brush fires, of which there are always a bunch and of which I need to decide which will become a wildfire. This does not solve the problem fully but at least reduces the number of risks to monitor.
• Geopolitics? I have generally ignored these risks, primarily as I do not have a model to understand or project them. When they do become market relevant, they typically hit us so fast that is too late to do much about them.

How to put it together?

• I like a Lego approach to TAA of one trade at the time. In theory, an active money manager should translate their ideas into expected returns and risks and then use portfolio optimization to calculate an efficient frontier of the highest return portfolios by levels of risk.
• I started that way decades ago as a young strategist and ran into numerous problems of how to assess all the necessary return, volatility and correlation parameters over multiple horizons. I found that the more assumptions you have to make, the greater the probability of putting in numbers for which you have no idea. The well-known Black-Litterman approach tries to deal with this from a Bayesian point of view, starting with the parameters implied by market outstandings, but I had problems with why these parameters would make sense, and how to dynamically change portfolios on constantly incoming new information and ideas.
• I then moved to greatly simplify my process of converting views into portfolios in two ways. First was to postulate that any active portfolio is a passive benchmark portfolio plus a number of zero sum deviations of under- and overweights against that benchmark that I think about as indifferent to what benchmark is used. That allowed me to separate the active overlay portfolio from the underlying benchmark and give each global investor the same OW/UW advice, irrespective of their benchmark.
• The second simplification was to think of each single active view as a single trade that needs to stand on its own, with its own drivers and logic. If the latter turn, I exit the trade, without changing the other trades.
• Does that mean I ignore correlations? Yes and no. When building a portfolio of active trades, I start with a target overall active risk (e.g., 1% VaR). The lower the correlations between my different trades, the higher the VaR I can allocate to each individual trade. But as we actively turn off trades and add new ones, I will not constantly move the whole portfolio around.
• This is partly as I find correlations unstable and hard to forecast. The past correlation between two assets or positions depends on what was driving them. Bonds rallying because of monetary easing will be bullish for stocks and the equity bonds correlation will be positive. Bonds gaining because of low inflation on weak growth will correlate negative with equities. I am very wary of extrapolating past correlations and will generally not base recommendations on them.
• Sizing risk by track record and hot hands. It is not only important to have the right trade on but also to make sure to have the right amount of risk allocated to each. I start with a target amount of tactical risk which I think about in Value of risk, in dollar terms or percent of AUM. I then decide whether today is a good time to take a lot of risk, or a bad time. If we are been on a roll making money, then we probably have a better sense of the direction of markets and I then take more than average risk.
• Next comes deciding where to take this risk. I look here at track records, both long term and more recent. I have found over the past 30 years that certain areas are “easier” to make money than others. They are broad asset allocation (risk on, risk off), cross country in bonds and FX, and credit spreads. The harder ones are bond duration, and country and sector selection in equities. I aim to make sure I generally take more risk in the easier areas.
• Finally, I check where we have been doing better more recently. At times, we have a cold hand in certain areas, and I then reduce their risk budget until performance picks up, and vice versa. In effect, I assume momentum in success.
• The conflict between consistency and diversification. Given how efficient markets generally are and that I do not really have superior information, I try not to get too cocky about my ability to beat the market. I assume my success rate for any individual position will be only just over 50/50. How then to get a portfolio with a success rate that is well above 50/50? The trick is to choose positions and OWs/UWs that are not correlated to each other. That is easier said than done because our mind naturally veers to creating consistency.
• I have found only one way to create diversification in trades, which is to make them go through different brains and ways of thinking. As a research strategy CIO, I had to make sure I do not dictate all trades, as they would otherwise become highly correlated. Instead, it is important to allocate trading decisions (on paper in our case) to different individuals and ways of thinking.
• How long to hold on? I find it nearly impossible to hit the exact top to take profit on a winning trade and thus had to make a choice between exiting while still going up, or only after it is already going down. Most of the time I find myself selling on the way down, and have rationalized this by the observation that we are generally underestimate how far a market can go when we have the direction right.
• What is the right investment horizon for active positions? It is almost a truism that successful trades end up becoming longer lived than expected, while bad ones becomes shorter-lived. Beyond that, I find that asset classes with positive feedback with fundamentals, like equities and credit, have much higher longevity (quarter to years) than markets with negative feedback, such as bonds and currencies (weeks, maybe months). This is why our bond floor always feels so short-termist versus our equity floor. It took me a long time to recognize that this makes sense.
• How frequently to adjust your portfolio? In theory, every time new information arrives or asset prices move. This is not practical. I have been doing it monthly, but the beauty of our Lego approach and the usage of different brains in our paper portfolio with each managing a different trade is that we are effectively changing small parts here and there of the portfolio virtually on a weekly, if not daily basis.

Final thoughts

• Cherish your errors. I have learned ten times more from being wrong than being right. Once you make a mistake, go public with it, analyze it in detail, and learn from it.
• Be your own devil’s advocate, and spend most time with people who do not agree with you, or who have a different way of looking at things. Not always easy as being with like-minded people is more comforting.
• Regrets? None really. I have been extremely fortunate having come to JPMorgan at the right time, the right place, with the right mentors and the right great colleagues to learn every day from the right clients. And the journey, and the lessons are not over. Thank you so much! You made my 30 years, and counting.

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Submitted by Shant Movsesian and Rajan Dhall MSTA of fxdailyterminal.com

USD correction done yet?

After a number of weeks of painfully tight ranges, there is little on the horizon which looks potent enough to warrant a break out.  Has the apathy in global stocks spread into FX? It looks like it, especially when looking at the carry trade.  Watching USD/JPY has been nothing short of tortuous as we currently remain hemmed into a 113.00-115.00 range.  We have been getting used to watching EUR/USD as the benchmark rate to spark off fresh activity across the currency spectrum, but despite the open 'ended-ness' of the APP come Jan 2018, the pair is now in a fresh stalemate as bids in the mid 1.1500's have only served to limit the correction which was so evidently needed once we had reached the first objective at 1.2000.  For USD/JPY, the market is pinning hopes for tax reform to take off, but the chinks are starting to show again with the corporate rate tax cut to 20% set to be delayed until 2019.  As we saw in the aftermath of president Trump's victory, there seems to be little concern over how these tax cuts are going to be paid for and perhaps move significantly greater concern as to how much they will add to GDP if/when implemented.

Scepticism set in earlier this year once we had pushed above the 116.00 mark, and while the extension stretched into the 118.00's, calls for 120.00 soon fell flat.  After the move down into the 107.00's, we have since moved back into the upper end of the 2017 range, but still looking for a move above 115.00.  There was little data to feed off in the US last week, but we have inflation and consumer data in the week ahead which will shed more light on whether the USD run is truly exhausted or not.  Little correlation with rates at the moment, with the 10yr US benchmark backing off 2.50% in recent weeks, but to little effect, but 2.30% has held since then.  

In Europe, as the turmoil in Spain calms down, divisions inside the ECB flare up again, with Germany calling for firmer guidance towards signalling an end to QE.  President Draghi and a number of his fellow members are keen to keep the Euro recovery from fizzling out, so keeping the APP open ended at this stage offers them room for manoeuvre as well as containing another impulsive EUR rally.  On the latter, they have succeeded, but in the mid 1.1500's, strong buying last week underlined the focus on a longer term recovery.  Little prospect of a surge back up to 1.2000 at this stage, but that is partly down to the USD.  

All the big names from the ECB are due to speak next week – again – but in the steady flow of rhetoric nothing will impact the near term consolidation in the EUR other than a firmer commitment towards and 'end date'.  Inflation is tailing off again as we are expected to see in the final Oct reading on Thursday, but on Tuesday we get the second reading on Q3 GDP which will need to stick at 0.6% at the very least to underpin the tentative hold in the single currency.  Flash GDP in Germany also out, and mixed readings in factory orders could seen this slip back towards 2.0% annualised.  Italy is closer to 1.5%, but Portugal and Holland are over 3% for comparison, but all from a lower base remember. 

It will be an interesting start to the week for the Pound, as we wait to see how the market reacts to news that around 40 MPs are ready to sign a letter of no confidence in Theresa May.  The PM is really struggling to get a break at the moment, in a government which we should not forget, still hasn't got majority.  As if fending off the hard Brexiteers and the 'remainers', is not hard enough when negotiating exit from the EU, recent departures from her cabinet and constant in-fighting makes here position untenable by the day, and this will continue to weigh on GBP, if not, then when we push on to higher levels, which we did at the end of last week.  

The Brexit talks offered nothing now, indeed perhaps more to be concerned about as Michel Barnier effectively gave the UK a few more weeks to commit to the divorce bill which some papers have suggested will be raised in order to get progress onto the next stage of trade talks.  Optimistic or opportunistic, the longer the EU talks, the more business investment will suffer, so arguments for buying GBP at these levels based on valuation lose credibility by the day.  Were Cable down at 1.2000 or 1.2500, this would carry more weight, but inside 1.3000-1.3500, buyers must be looking for 1.4000+ at the very least, and few can justify that with the rate perspective also dashed after the previous week's dovish hike by the BoE.  

EUR/GBP is more likely to be range bound in the meantime, but we have continued to test sub 0.8800 with little progress, but 0.9000+ is equally lethargic at this stage.  

Plenty of data though next week, with the latest inflation print on Tuesday, employment on Wednesday and retail sales on Thursday.  Notable are some of the concerns over the UK high street at the moment.  CPI above 3.0% is expected, but the BoE believe it will top out at 3.2% – lets see.  

In Australia, rising employment has been the economic saviour which keeps the hopes of wage inflation alive – as it has in the US.  We get the Oct report on Thursday.  Despite the strong gains in industrial metals price, the AUD has been clearly faltering in recent weeks, and we are not convinced that 0.7600-25 is the low just yet.  What happens when commodity prices adjust, or if the Chinese data fades again?  If the AUD cannot recover at this time, then we cannot rule out a move on 0.7500 just yet, with the market focusing on softer inflation which has seen the yearly rate slip below the 2-3% RBA range, and set to fall further after the CPI re-weighting. 

Industrial production in China is due out on Thursday, but the yoy rate is currently above 6.0%, so expectations for a drop off from 6.6% to 6.3% will likely be dismissed at this stage.  

Nothing of note for NZ however, so focus here will be on any fresh policy announcements from the new government.  RBNZ mandate reform is set to bring full employment into policy considerations, but as we have seen in the Q3 numbers, job gains are moving the right way, so any dovish implications will be held back for now. Indeed, last week's RBNZ statement was pretty positive on the outlook, with NZD softness of late also welcome.   0.7000 capping the NZD/USD rate for now though, and as with the AUD/USD rate, the base at 0.6815-20 does not fill us with confidence as yet.  

In Canada, we have to wait until Friday to get any top tier data, which will be Oct CPI.  BoC gov Poloz was focusing on this last week, in what looked to be another turnaround in policy sentiment, focusing on the inflationary impact of reaching full capacity and output.  The central bank have done well to contain the rate pricing euphoria which took the 10yr rate up to 2.20%, and USD/CAD down into the mid 1.200's, but with long end rates back below 2.00% and the spot rate back under 1.2700, the gov can afford to be a little more neutral.  1.2500-1.2700 looks to be fair value in the meantime, so expect to see rallies above 1.2900 sold into (if we test back here again) as we have seen from late Oct.  

For Norway we have Q3 GDP next week, while in Sweden it is inflation time also, but NOK/SEK is starting to threaten the upside again, which is not unsurprising given where Brent Oil is trading at the moment.   EUR rates look more congested at the present time, but looking at the weekly spot charts, we can see further USD progress has been rejected for now.   

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Authored by Sven Henrich via NorthmanTrader.com,

I feel compelled to keep documenting reality to raise awareness of the ever larger market dangers which keep lurking underneath the current bubble. Indeed I keep seeing a great void not only in awareness but also in price discovery that have propelled markets to current levels leaving investors and participants ever more lulled into a false sense of security by the current unprecedented phase of volatility compression.

Take these comments as part of an ongoing journey outlining building risk factors. You can read about additional updates/background in the Macro Corner, Market Analysis , NT Blog and the Market Analysis sections of the site..

Briefly to get everyone on the same page:

Two way price discovery, as a normal part of market functioning, has practically seized to exist. I’ve pointed out charts of this nature before, but I’ll use the quarterly $DJIA chart as an example to illustrate the point:

Several points to make here:

The $DJIA is on its 9th quarter of consecutive price appreciation. The last red candle was before the now almost $5 trillion in combined global central bank intervention since February 2016.

The $DJIA, as the $SPX, is now on its 4th consecutive quarter of not reconnecting with its quarterly 5 EMA. Such an extended disconnect has never occurred in the 100 year market history I reviewed. And believe me, I’ve looked:

The few examples of extended quarterly 5EMA disconnects I could find were associated with coming market pain.

Aside from global central bank intervention (also see Liquidity Wave) the other key contributing factor to the no 2 way price discovery equation is the unprecedented influx of passive ETF investing and plenty of data exists to illustrate this point:

What has happened? I consider it retail capitulation. For years hedge funds have underperformed central bank liquidity infested market waters yet retail investors keep seeing markets go up with no downside ever and no apparent associated risk with rising multiple expansion.

The end result: Investors are completely impervious to the building risk factors and the actual price/valuations of asset prices they indirectly own.

If there is no risk to holding stocks then who cares if the underlying asset will ever grow in its valuation? Who cares if the business models don’t match up the PEG ratios?

Price targets have now simply been rendered an exercise in FOMO expectations. Indeed Wells Fargo rightfully calls it another QE effect:

“It’s very similar to QE.” Harvey said Wednesday on CNBC’s “Trading Nation.” “With QE, you took a certain part of the Treasury market out of circulation. Now what you’re doing is you’re taking a good part of the equity market out of circulation, and you’re upsetting the supply and demand dynamics. There are fewer natural sellers.”

 

Wells Fargo’s new 2017 forecast calls for the S&P 500 to reach 2,636, which reflects about a 1.9 percent gain from current levels. The firm started the year with a 2,475 year-end target, which would have come in about 4 percent short if the year was to end now.

 

“We don’t see a lot of bad news in the short term, and so we feel it’s fairly justified,” said Harvey, who became in charge of the firm’s S&P 500 price target and earnings forecast in April. He acknowledges Wells Fargo’s initial forecast was “too conservative” and the year has been exceeding expectations.

 

According to Harvey, there’s still momentum in place for stocks to grind higher.

 

“No one wants to be the first one out of the pool. No one wants to de-risk at this point in time,” Harvey added. “You have this mindset of FOMO — fear of missing out.”

There. FOMO. I can’t disagree that this price extension or even further extension could happen. As long as there is no consequence to overpaying for assets and volatility remaining compressed with all corrective activity having been removed from markets what is to stop prices from advancing ever more?

The answer: The Great Void.

Let me explain.

Firstly let me go back to a chart I showed back in March when I discussed The Finale Wave:

Back then I said the following:

“This is actually a pretty good trend line for bulls as it keeps rising of course, hence the later price were to get to there the higher markets may extend. The bad news: If this trend line has market relevance (as it appears to looking at its history), then it suggests the following:

 

$SPX broke this trend line in 2008/2009. And despite vast global central bank intervention as well as building a global debt load to the tune of over $152 trillion, markets remain below this long term trend line. It’s still technically broken.”

This still applies to this day and here’s an updated view of the chart with the added context of the multi decade declining trend in the 10 year yield:

Why is this important: It could be argued that low yields remain the theory of everything over the past 30 years as we’ve moved from one bubble to next with central banks reacting each time by dropping interest rates to “save markets”.

Take the $DAX chart I showed the other day:

Same concept.

What’s the net effect of one way price discovery? Massive, historically unprecedented technical extensions that scream danger, incompatible with the complacent attitude of investors.

Let me show you some charts that need to be seen to believed. Frankly if ETF investors were to see these charts they may get a better sense as to where in historical context they are deciding to invest long in these markets.

Hence my quest to raise awareness and I use linear charts in some cases to really drive the point home. Linear charts make ZERO difference in regards to moving average disconnects or fibonacci retrace levels, but they can help illustrate the vastness of the void. Indeed log charts can breed a sense of complacency as often price does not appear anywhere near as extreme.

On this latter point let me give you 2 examples of two very successful companies using log charts:

$FB:

A very steady uptrend following trend lines very diligently with tags producing either rejections or bounces. The stock has had no real correction in almost 2 years. The fib levels outline the size of the corrective opportunity were markets to get shaken out of their current lull.

$GOOGL shows a similar picture:

An ever narrowing channel showing a void of any corrective activity of size.

Now let’s get to the great awakening. I’m showing you a few examples of individual large cap stocks on yearly charts in relation to basic moving averages. Note the regular proximity to the annual 5 EMA in particular.

Now look at 2017. THIS is where investors are passively adding money to markets.

How do these things end? Can these things end? Look no further to $GE to give an imminent sense of risk:

Reconnects are coming. They always do and just because markets get stretched to extreme levels it does not mean reconnects are not coming.

These disconnects have been brought to you by one way price discovery. “No natural sellers” Wells Fargo calls it. That’s right. No sellers. Markets have buyers AND sellers. If there are no sellers you don’t have a market.

No sellers means no volatility. And the extremity of the volatility compression is highlighted in its inverted product the $XIV:

On the $VIX itself all regular spikes to the weekly 500MA have been eliminated 2017. For now.

History suggests that this state will not be able to sustain itself:

2017 has shown that extreme markets can become more extreme. There is nothing new about that. We’ve seen it famously in 2000.

Extreme markets do not imply future performance. But hey help inform risk/reward.

Whether we continue to extend price discovery in a one way fashion into year end I can’t say. What I can say with affirmation is that investors appear utter oblivious as to the historic and technical context in which they allocate cash to the long side.

One way price discovery, volatility compression and over 8 years of central bank intervention has paved the way to a general attitude that investors can’t lose money being long. Price will always come back. Not only in our life times, but these days every day as no downside ever last more than a few minutes. No natural sellers.

This will change.

And it’s critical for investors to keep an eye on possible signs of change, even subtle signs. I offered some not so subtle signs in Caution Slowdown. But macro signals can take a long time to play out in a market void of any apparent negative triggers.

Friday’s first $VIX close above 10 in 8 weeks may not amount to anything, but then it may also offer a subtle sign that change is perhaps closer than we think:

Yes the 200MA is now down to a pitiful 11.14, but the weekly close puts it above it. For the first time in a very long time.

Great Voids have a way of filling. Perhaps not in space, but here on earth they generally do. It’s just a matter of time. Remember: Tops are processes.

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