Tag: finance

We suspect after this weekend that liberal, Democrat, Harvard Law School professor, and civil-libertarian Alan Dershowitz will be persona non grata among the establishment cognoscenti.

Dershowitz did nothing to ingratiate himself with the ‘deep state’ when he proclaimed that there is no doubt that President Trump has the legal authority to fire Deputy Attorney General Rod Rosenstein, and then suggesting that he be grilled under oath:

“No president has to tolerate in his midst somebody who may have tried to pull off a palace coup, but we ought to have hearings on this. Put him under oath, put the other people who were in the room under oath.”

But it is his comments about the seemingly untouchable Christine Blasey Ford, who went public with her allegations of sexual abuse against Judge Brett Kavanaugh last week, that likely triggered more than a few #MeToo’ers to find their safe spaces.

TheGatewayPundit’s Jim Holt reminds us of the current situation surrounding Ford’s allegations:

• There are no witnesses who have confirmed Ford’s accusations.

• Patrick Smyth, a former high school classmate of Supreme Court nominee Brett Kavanaugh, has denied attending the alleged party where Christine Blasey Ford says Kavanaugh attempted to sexually assault her in the 1980s.

• Alleged witness Mark Judge defended Brett Kavanaugh again Tuesday in a letter through his lawyer to Senate Judiciary Chairman Chuck Grassley.

• And now, Leland Ingham Keyser, a life-long friend of Christine’s has denied the accusations.

• Judge Kavanaugh vehemently denies the allegations.

• Ford’s lawyer confirmed committed to open hearing at 10am Thursday, but notes key procedural, logistical issues remain unresolved.… “Despite actual threats to her safety and her life, Dr. Ford believes it is important for Senators to hear directly from her about the sexual assault committed against her.”

And it appears to be the latter that triggered Dershowitz, who raged about Ford and her far-left activist lawyer’s ridiculous demands in an interview on Fox Business Network.

“Every civil libertarian in the country, liberal, conservative, Republican, Democrat, led by the Civil Libertarian Union should be outraged by this demand. It is so un-American.

You’re the accuser. You get on the witness stand. You testify. You make your accusation. You get cross-examined. THEN the accused responds.

It turns the entire legal system on its head. It is INSANE to ask an accused person to deny the accusation before he has heard the accusation being made and cross-examined.

Sure, the FBI should continue its background check.

It should also call everyone else who may have been at this party.

All of that is true.

But the idea that he goes first? I want to hear from the American Civil Liberties Union. Where are they? This is the most fundamental denial of due process.“

.@AlanDersh weighed in on Judge Kavanaugh pic.twitter.com/Ohakn8UCki

— FOX Business (@FoxBusiness) September 23, 2018

 

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Bank of America is ringing the proverbial bell on the US real estate market, saying existing home sales have peaked, reflecting declining affordability, greater price reductions and deteriorating housing sentiment. In the latest weekly report from chief economist Michelle Meyer, the bank warned that “the housing market is no longer a tailwind for the economy but rather a headwind.”

“Call your realtor,” the BofA note proclaimed: “We are calling it: existing home sales have peaked.”

BofA’s economists believe the peak was seen when existing home sales hit 5.72 million, back in November 2017. From this point on, sales should trend sideways, as this moment in time is comparable to the rate the economy witnessed in the early 2000s before the bubble inflated.

And while BofA believes existing home sales have plateaued, they do not think the same for new home sales. The reason: new home sales have lagged existing in this “economic recovery” – leaving homebuilders some room to flood the market with new single-family units before a turning point in the entire real estate market is realized.

The deterioration in affordability can mostly explain the peak in existing home sales. This is due to the Federal Reserve reinflating real estate prices back to levels last seen since before the 2008 crash. The National Association of Realtors (NAR) affordability index prints 138.8, the lowest since August 2008.

Chart 1 (below) shows there is a leading relationship between the trend in affordability and in home sales — a simple regression suggests the lead is about three months. In major cities, affordability continues to be a significant problem for many Americans amid a rising interest rate environment and elevated home prices, existing home sales should remain under pressure for the foreseeable future.

Chart 2 (above right) indicates that the share of properties with price discounts is on the rise, suggesting that sellers are unloading into weakening demand. The data from Zillow reveals that 15 percent of listings have price reductions, the highest since mid-2013 when home sales tumbled last.

The University of Michigan survey (Chart 3 below) reveals a worsening mood in the perception of buying conditions for homes. Respondents noted that home prices have become too high while rates have become restrictive.

BofA said that existing home sales were quick to recover post-crisis given motivated sellers – the lenders who were sitting with millions of distressed properties.

Distressed properties made up between 30 and 40 percent of sales in the early stages of the recovery.

Home prices were discounted until they reached the market clearing price and buyers entered.

The recovery for new homes sales began one year after existing, as homebuilders stayed idol waiting for the dust to settle.

“We are now looking at a market where existing home sales have returned to a solid pace but new home sales are still below normal levels. We think that builders will continue to selectively add inventory in markets where there is demand, allowing new home sales to glide higher. Ultimately we think new home sales will peak around 1mn saar based on the historical relationship between existing and new home sales,” said BofA.

BofA asks the difficult question: If existing home sales have peaked, does it mean the rate of growth of home prices will as well?

Their answer: In the last cycle, existing home sales peaked at 6.26mn saar on September 2005, coinciding with peak home price growth of 14.4 percent the same month (Chart 5). The pre-boom historical data are generally supportive as well, as are the recent data-single family existing home sales peaked at 4.9mn saar in March this year, as did home price appreciation at 6.5 percent. The result, well, existing home sales are pressured by declining affordability, home price growth should slow from here. BofA said a contraction in home prices seems unlikely at the moment, however, if demand is not stoked soon that can all change.

While BofA makes clear the housing market is starting to stall, the Federal Reserve is conducting quantitative tightening and rapidly increasing interest rates to get ahead of the next recession. In other words, liquidity is being removed from the system and the cost of borrowing is headed higher – an environment that is not friendly to real estate, and could be the key factor explaining the weakness in housing.

Which brings up another important question: while financial assets continue to rise, these have largely benefited the Top 10% of the population; meanwhile the bulk of the US middle class net worth has traditionally been allocated to such fixed assets as real estate. And if that is now rolling over, what is the outlook for the US consumer, which remains the dynamo behind the US economy?

There is another, potentially more troubling observation. According to TS Lombard, the current period is now only the third time in US history – after 1968 and 1999 – in which equities have made up a larger percentage of net worth than real estate.

While this may be good news for holders of stocks, it may not last: as TS Lombard observes, sharp bear markets followed shortly after 1968 and even sooner after 1999. And with housing peaking – if BofA is correct – share prices remain the only driver behind continued economic growth, prompting TSL to conclude that “the US economy can not afford a bear market.”

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The Wall Street Journal editorial board has penned a scathing Op-Ed, claiming that “the Democratic standard for sexual assault allegations is that they should be accepted as true merely for having been made.” 

The Journal says that while the last-minute accusation against Supreme Court nominee Brett Kavanaugh is an “ugly spectacle” by itself – liberals have abandoned the entire notion of due process and the burden of proof in order to fit a political agenda. 

Via the Wall Street Journal: 

The Presumption of Guilt

The new liberal standard turns American due process upside down.

“As Judge Kavanaugh stands to gain the lifetime privilege of serving on the country’s highest court, he has the burden of persuasion. And that is only fair.”

—Anita Hill, Sept. 18, 2018

“Not only do women like Dr. Ford, who bravely comes forward, need to be heard, but they need to be believed.”

—Sen. Maize Hirono (D., Hawaii)

The last-minute accusation of sexual assault against Supreme Court nominee Brett Kavanaugh is an ugly spectacle by any measure. But if there is a silver lining, it is that the episode is providing an education for Americans on the new liberal standard of legal and political due process.

As Ms. Hill and Sen. Hirono aver, the Democratic standard for sexual-assault allegations is that they should be accepted as true merely for having been made. The accuser is assumed to be telling the truth because the accuser is a woman. The burden is on Mr. Kavanaugh to prove his innocence. If he cannot do so, then he is unfit to serve on the Court.

***

This turns American justice and due process upside down. The core tenet of Anglo-American law is that the burden of proof always rests with the person making the accusation. An accuser can’t doom someone’s freedom or career merely by making a charge.

The accuser has to prove the allegation in a court of law or in some other venue where the accused can challenge the facts. Otherwise we have a Jacobin system of justice in which “J’accuse” becomes the standard and anyone can be ruined on a whim or a vendetta.

Another core tenet of due process is that an accusation isn’t any more or less credible because of the gender, race, religion or ethnicity of who makes it. A woman can lie, as the Duke lacrosse players will tell you. Ms. Hirono’s standard of credibility by gender would have appalled the civil-rights campaigners of a half century ago who marched in part against Southern courts that treated the testimony of black Americans as inherently less credible than that of whites. Yet now the liberal heirs of those marchers want to impose a double standard of credibility by gender.

A third tenet of due process is the right to cross-examine an accuser. The point is to test an accuser’s facts and credibility, which is why we have an adversarial system. The denial of cross-examination is a major reason that campus panels adjudicating sexual-assault claims have become kangaroo courts.

It’s worth quoting from the Sixth Circuit Court of Appeals ruling this month in Doe v. Baum on a sexual-assault case at the University of Michigan.

“Due process requires cross-examination in circumstances like these because it is ‘the greatest legal engine ever invented’ for uncovering the truth,” wrote Judge Amul Thapar. “Not only does cross-examination allow the accused to identify inconsistencies in the other side’s story, but it also gives the fact-finder an opportunity to assess a witness’s demeanor and determine who can be trusted. So if a university is faced with competing narratives about potential misconduct, the administration must facilitate some form of cross-examination in order to satisfy due process.”

***

Consider the limited facts of Christine Blasey Ford’s accusation against Judge Kavanaugh. It concerns an event some 36 years ago that she recalls in only partial detail. She remembers the alleged assault and rooms she entered with some specificity, but not the home where it occurred. She doesn’t know how she traveled to or from the home that evening.

She told no one about the incident for 30 years until a couples therapy session with her husband. Her therapist’s notes say there were four assailants but she says there were only two. Two of the three other people she says were at the drinking party that night say they know nothing about the party or the assault, and Mr. Kavanaugh denies it categorically.

Democrats claim that even asking questions about these facts is somehow an unfair attack on her as a woman. Her lawyer is demanding that Ms. Ford testify after Mr. Kavanaugh, and that only Senators ask questions—no doubt to bar Republicans from having a female special counsel ask those questions.

We’re told Ms. Ford even wants to bar any questions about why she waited so long to recall the alleged assault and who she consulted in finally going public this year. Such a process is designed to obscure the truth, not to discover it. None of these demands should be tolerable to Senators who care about finding the truth about a serious accusation.

We don’t doubt that Ms. Ford believes what she claims. But the set of facts she currently provides wouldn’t pass even the “preponderance of evidence”—or 50.01% evidence of guilt—test that prevails today on college campuses. If this is the extent of her evidence and it is allowed to defeat a Supreme Court nominee, a charge of sexual assault will become a killer political weapon regardless of facts. And the new American standard of due process will be the presumption of guilt.

Appeared in the September 22, 2018, print edition.

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Ten years after the Lehman bankruptcy, the financial elite is obsessed with what will send the world spiraling into the next financial crisis. And with household debt relatively tame by historical standards (excluding student loans, which however will likely be forgiven at some point in the future), mortgage debt nowhere near the relative levels of 2007, the most likely catalyst to emerge is corporate debt. Indeed, in a NYT op-ed penned by Morgan Stanley’s, Ruchir Sharma, the bank’s chief global strategist made the claim that “when the American markets start feeling it, the results are likely be very different from 2008 —  corporate meltdowns rather than mortgage defaults, and bond and pension funds affected before big investment banks.“

But what would be the trigger for said corporate meltdown?

According to a new report from Goldman Sachs, the most likely precipitating factor would be rising interest rates which after the next major round of debt rollovers over the next several years in an environment of rising rates would push corporate cash flows low enough that debt can no longer be serviced effectively.

* * *

While low rates in the past decade have been a boon to capital markets, pushing yield-starved investors into stocks, a dangerous side-effect of this decade of rate repression has been companies eagerly taking advantage of low rates to more than double their debt levels since 2007. And, like many homeowners, companies have also been able to take advantage of lower borrowing rates to drive their average interest costs lower each year this cycle…. until now.

According to Goldman, based on the company’s forecasts, 2018 is likely to be the first year that the average interest expense is expected to tick higher, even if modestly.

There is one major consequence of this transition: interest expenses will flip from a tailwind for EPS growth to a headwind on a go-forward basis and in some cases will create a risk to guidance. As shown in the chart below, in aggregate, total interest has increased over the course of this cycle, though it has largely lagged the overall increase in debt levels.

The silver lining of the debt bubble created by central banks since the global financial crisis, is that along with refinancing at lower rates, companies have been able to generally extend maturities in recent years at attractive rates given investors search for yield as well as a gradual flattening of the yield curve.

According to Goldman’s calculations, the average maturity of new issuance in recent years has averaged between 15-17 years, up from 11-13 years earlier this cycle and <10 years for most of the late 1990’s and early 2000’s.

And while this has pushed back the day when rates catch up to the overall increase in debt, as is typically the case, there is nonetheless a substantial amount of debt coming due over the next few years: according to the bank’s estimates there is over $1.3 trillion of debt for our non-financials coverage maturing through 2020, roughly 20% of the total debt outstanding.

What is different now – as rates are finally rising – is that as this debt comes due, it is unlikely that companies will be able to roll to lower rates than they are currently paying. A second source of upward pressure on average interest expense is the recent surge in leverage loan issuance, i.e., those companies with floating rate debt (just 9% in aggregate for large caps, but a much larger percent for small-caps). The Fed Funds Futures curve currently implies four more rate hikes (~100 bp) through year-end 2019 (our economists are looking for 2 more than that, for a total of six through year-end 2019). While it is possible that some companies have hedges in place, there is still a substantial amount of outstanding bank loans directly tied to LIBOR which will result in a far faster “flow through” of interest expense catching up to the income statement.

While rising rates has already become a theme in several sectors such as Utilities and Real Estate, Goldman warns that this has the potential to be more widespread:

We saw evidence of this during the 2Q earnings season, where a number of companies cited higher interest expense as a headwind to reported earnings and/or guidance. Some examples:

• “… we’re anticipating an increase in interest. It’s going to be n probably up in the $3.5mm, $4mm range, depending on interest rate increases… Obviously, we are anticipating floating rate increases if you think through the rate curve, so we embed that thinking into our forecast.” – Brinker International, FY4Q2018
• “We expect net interest expense will be approximately $144 million [vs. $128 mn for the year ending February 3, 2018], reflecting an expectation for two additional rate increases as implied by the current LIBOR curve.” – Michaels Cos., 2Q2018
• “Due largely to the effects of rising interest rates on our variable rate conduit facility, vehicle interest expense increased $9 million in the quarter… We continue to expect around $20 million higher vehicle interest expense due to rising U.S. benchmark interest rates.” – Avis Budget Group, 2Q2018

What does that mean for the bigger picture?

While many cash-rich companies have a remedy to rising rates, namely paying down debt as it matures, this is unlikely to be a recourse for the majority of corporations. The good news is that today, corporate America looks extremely healthy against a solid US economic backdrop. Revenue growth is running above trend, and EPS and cash flow growth are even stronger, boosted by Tax Reform.

And while Goldman economists assign a low likelihood that this will change anytime soon, there has been a sharp pickup in the “Recession 2020” narrative as of late. Specifically, along with the growth of the fiscal deficit which will see US debt increase by over $1 trillion next year, the fact that debt growth has outpaced EBITDA growth this cycle has implications for investors if and when the cycle turns.

Which brings us round circle to the potential catalyst of the next crisis: record debt levels.

According to Goldman’s calculations, Net Debt/EBITDA for its coverage universe as a whole remains near the highest levels this cycle, if not all time high. And while the bank cannot pinpoint exactly when the cycle will turn, it is easy to claim that US companies are “over-earning” relative to their cycle average today, a key points as the Fed continues “normalizing” its balance sheet. Indeed, this leverage picture looks even more stretched when viewed through a “normalized EBITDA” lens (which Goldman defines as the median LTM 2007 Q1-2018 Q2).

There are two main factors that have driven this increase: net debt has increased while cash levels have declined:

• the % of highly levered companies (i.e. >2x Net Debt/EBITDA) have nearly doubled vs. 2007 levels (even after EBITDA has improved for a large part of the Energy sector.)
• The number of companies in a net cash position has declined precipitously to just 15% today down from 25% from 2006-2014.

Meanwhile, and touching on another prominent topic in recent months in which many on Wall Street have highlighted the deterioration in the investment grade space, i.e., the universe of “near fallen angels”, or companies that could be downgraded from BBB to junk, Goldman writes that credit metrics for low-grade IG and HY have been moving lower. If the cycle turns, the cost of debt could increase, with convexity suggesting that this turn could happen fast.

Picking up on several pieces we have written on the topic (most recently “Fallen Angel” Alert: Is Ford’s Downgrade The “Spark” That Crashes The Bond Market“), Goldman specifically highlights the potential high yield supply risk that could unfold.

Here are the numbers: currently there are $2tn of non-financial bonds rated BBB, the lowest rating across the investment grade scale. The amount has increased to 58% of the non-financial IG market over the last several years and is currently at its highest level in the last 10 years.

And for those wondering what could prompt the junk bond market to finally break – and Ford’s recently downgrade is precisely such a harbinger – Goldman’s credit strategists warn that this is important “because a turn in the cycle could result in these bonds being downgraded to high yield.”

From a market standpoint, too many bonds falling to the high yield market would create excess supply and potentially pressure prices. Looking back to prior cycles, approximately 5% to 15% of the BBB rated bonds were downgraded to high yield. If we assume the same percentages are applied to a theoretical down-cycle today, a staggering $100-300bn of debt could be at risk of falling to the high yield market in a cycle correction, an outcome that would choke the bond market and shock market participants. It is also the reason why Bank of America recently warned that the ECB can not afford a recession, as the resulting avalanche of “fallen angels” would crush the high yield bond market, sending shockwaves across the entire fixed income space.

And while such a reversal is not a near-term risk given solid sales/earnings growth and low recession risk, “it is potentially problematic given the current size of the high yield market is only $1.2tn.”

Should the market indeed turn, prices would need to adjust – i.e. drop sharply – in order to  generate the level of demand that would require a potential 25% increase in the size of the high yield market – especially at a time when risk appetite could be low.

Careful not to scare its clients too much, Goldman concedes that an imminent risk of a wave of credit rating downgrades is low, but warns that “the market could potentially be overlooking the underlying cost of capital/financial risks (high leverage, low coverage) for certain issuers based on their current access to market.“

* * *

As for the worst case scenario, it should be self-explanatory: a sharp slowdown in the economy, coupled with a major repricing of bond market risk could result in a crash in the bond market, which together with the stock market has been the biggest beneficiary of the Fed’s unorthodox monetary policies. Furthermore, should companies suddenly find themselves unable to refinance debt, or – worse – rollover debt maturities, would lead to a wave of corporate defaults that starts at the lowest level of the capital structure and moves its way up, impacting such supposedly “safe” instrument as leveraged loans which in recent months have seen an explosion in issuance due to investor demand for higher yields.

To be sure, this transition will not happen overnight, but it will happen eventually and it will start with the riskiest companies.

To that end, Goldman has created a watch list for those companies that are most at risk: the ones with a credit rating of BBB or lower that are paying low average interest rates (less than 5%), have limited interest coverage (EBIT/Interest of <5x) and high leverage (Net Debt/EBITDA>2.5x) based on 2019 estimates; the screen is also limited to companies where Net Debt is a substantial portion of Enterprise value (30% or higher). The screen is hardly exhaustive and Goldman admits that “there are much more highly levered companies out there that could be more  exposed to a turn in the cycle.” However, the bank focuses on this subset given the low current interest cost relative to the risk-free rate, “suggesting investors could be complacent around their financing costs.”

In other words, investors who are exposed to debt in the following names may want to reasses if holding such risk is prudent in a time when, for the first time in a decade, the average interest expense is expected to tick higher.

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Authored by Mark Penn, op-ed via The Hill,

Donald Trump’s Rosenstein Dilemma

Damned if you do. Damned if you don’t.

That is the dilemma President Donald Trump faces as he decides whether to fire Rod Rosenstein following revelations that the deputy attorney general allegedly talked about taping the president and rounding up Cabinet officials to invoke the 25th Amendment. 

There were several people present at this meeting in the aftermath of the firing of former FBI Director James Comey. Despite the fact that Rosenstein wrote the key memo trashing Comey for his handling of the Hillary Clinton email investigation, he reportedly was angry and uncertain after the president actually did it, using his memo as a justification. 

The prime source for this information appears to be none other than fired FBI Deputy Director Andrew McCabe, who faces investigation by a grand jury and whose memos are being declassified. McCabe appears to be even angrier at the Department of Justice (DOJ) brass who fired and humiliated him just for leaking and lying when he may have far worse on his comrades.

This is the deep state unraveling.

People bristle when I sometimes adopt and use that term: “deep state.” But as an outside observer, watching the unmasking of the actions of one official after another at the FBI, CIA and DOJ, I have come to accept that an unelected group of well-educated, experienced individuals running these departments became inebriated with their own power during the last election campaign and apparently came to believe they were on a mission to stop, defeat or remove President Trump and his associates for crimes they would find or, if necessary, manufacture.

Perhaps Rosenstein was joking when he referenced the 25th Amendment, as another meeting participant reports. But Rosenstein’s statement in response to the news accounts carefully avoids denying having discussed wiring himself or others in some effort to entrap Trump. This cabal is meeting and planning, post-Comey’s firing, despite the fact that Rosenstein himself in his memo to President Trump said Comey was “wrong” and the FBI could not regain lost public trust without a new director who understood his errors. 

It seems Rosenstein also may have believed we needed a new president. Just days into his expanded role and after these conversations, he appointed Robert Mueller as special counsel with a still-secret charter to investigate the Trump campaign and administration; the precipitating act was the very firing he recommended. 

Whether it involved sending missiles to Syria after chemical attacks on civilians, moving the U.S. embassy in Israel to Jerusalem, or firing Comey, Trump actually has moved ahead and done some of the things that Washington elites complain about but go along with out of some extreme sense of caution and timidness. And those acts are then branded as some kind of lunacy.

Perhaps the true headline item in Bob Woodward’s book, “Fear,” is that Trump was so incensed at the murdering of women and children by Syria’s Bashar Assad that he actually raised the idea of taking out the dictator responsible for the deaths of hundreds of thousands of his own people. Sheer madness? Hardly. President Obama stood idly by as mass murder happened in Syria, and President Clinton’s biggest regret is that he did too little to stop the massacres in Rwanda; he believes 300,000 lives could have been saved had he sent in troops earlier. It’s presidential inaction in the face of madness that has proven most dangerous to the world. Ask the Crimeans. 

I say this not to defend all of the actions of President Trump,  many of which I might disagree with, but to condemn the arrogance of those in the deep state who convinced themselves that they would rescue our country from ourselves. They were on a mission, it turns out, not to save our country but to undo our democracy, and Rosenstein finally has been unmasked as having the attitudes and conflicts we all suspected.

There has been an eerie pattern of events involving Rosenstein. Remember how he became downright testy in front of Congress when asked why he signed the fourth surveillance warrant against Carter Page and whether he even read it. In response to lawful demands for documents as to the origins of the investigation, he responded that he wouldn’t be “extorted” by Congress. And, in another one of his jokes (he appears to have quite a wry sense of humor), he raised turning the tables on Congress by reviewing the emails of members and staff who were there to gather information from the FBI. Just kidding. 

Until now, Rosenstein has escaped real scrutiny despite this series of defiant statements and actions. He managed to make it impossible for the president to step in and remove him, or for Congress to supervise him, claiming he reports to some higher authority that he defines as his commitment to the rule of law. 

And, yet, our laws and our Constitution set up no politically unaccountable officials in the executive or legislative branches of government. It is disappointing to see leaders like Sen. Charles Schumer(D-N.Y.) ignore the actions uncovered here in favor of anything that damages Trump, no matter how egregious the activities of these government officials.

Of course, the president is stuck here. Firing Rosenstein, even if deserved, would be spun like an act of impetuous madness just before the midterms. Attorney General Jeff Sessions, who would have the acceptable power to do so, appears unable or unwilling to act in any bold manner. All Trump can do is get out all the documents and call upon the inspector general to fully investigate these reports.

After the midterms, though, he could instruct the attorney general to appoint — or, perhaps, do so directly himself — a second special prosecutor to investigate the actions of the FBI, CIA and DOJ in the Clinton and Trump investigations. Over 70 percent of Americans in the Harvard/CAPS poll believe such a counsel should be appointed now. If Democrats take over Congress, there will be no way without that appointment to continue investigations that have turned up real malfeasance of the sort by these officials. Democrats have other plans for their investigative powers, if they get them.

Whatever you want to call these well-heeled members of the intelligence community and Justice Department, many of whom now have book and speaking contracts, it is clear they all engaged in a conspiracy to bring down this administration on the basis of unverified information, and to turn the most basic acts of presidential power, like the firing of Comey, into obstruction of justice.

The more information that comes out here, the ever more egregious the actions of all of these officials appear in the light of day.

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The saga of Einar Aas, the Norwegian trader whose 15-year golden run came to a calamitous end earlier this month when he was caught on the wrong side of a stunning blowout in power-price spreads, has ended, as many anticipated, with the liquidation of Aas’ estate and an expected bankruptcy filing. 

According to Reuters, Nasdaq’s Nordic commodities exchange has reached an agreement with Aas’ attorneys on the sale of Aas’ assets that will allow him to cover a 114 million euro ($134 million) hole in the exchange’s clearing-house buffers that nearly brought trading to a grinding halt.

Nasdaq’s Nordic commodities exchange has reached agreement on the sale of assets belonging to a private trader who defaulted on his commitments last week, it said on Friday.

Einar Aas, a Norwegian derivatives trader who made large bets on the power market, left a 114 million euro ($134 million) hole in Nasdaq’s Nordic clearing house buffers when his funds ran out.

Within just two working days of the default, members of the exchange, and Nasdaq itself, were forced to replenish the funds in order to continue trading.

[…]

Funds recovered via the process will be distributed to default fund participants on a pro rata basis, it added.

“Nasdaq would support liquidation of the assets in a swift and timely manner consistent with realization of maximum value for members and will liaise with members in relation to this matter,” the exchange said.

Aas’ lawyers added that the estate sale would likely lead to their clients’ personal bankruptcy (he has already paid out all of his liquid assets). To put his personal losses in context, just two years ago, Aas was Norway’s biggest taxpayer.

While Aas had run out of cash, he still owns real estate and other assets that could be sold.

“Nasdaq would like to inform our members and clients that Mr. Aas and his lawyers have agreed to submit to a consensual arrangement with creditors to liquidate Mr Aas’s estate,” Nasdaq Clearing Commodities said in a statement on Friday.

For readers who haven’t been following one of the most stunning cautionary tales about the failure of risk oversight and its consequences, Aas – a legendary power trader with a seat on the Nasdaq Nordic commodities exchange – wracked up a staggering loss that when the spread between German and Norwegian power prices widened by 17 times during a single trading day, an incident that Nasdaq has described as a “a true black swan event.”

The blowout was triggered by an extremely unlikely confluence of factors: A jump in the price of European carbon allowances, which caused German power prices to soar, and forecasts for unusually heavy rains in the hydropower-reliant Nordic region, which caused Nordic power prices to drop.

At the time, Aas had a huge open position betting that the spread would narrow. So when it widened by such an extreme degree, Aas was forced to surrender all of his liquid assets to cover his margin. But it wasn’t enough, and the exchange was forced to liquidate his position at a massive discount in what is typically an unusually illiquid market (European power markets, once rife with hedge funds and other traders, have seen trading activity plunge over the past two decades as volatility stabilized, eliminating the incentive for speculation).

When the dust had cleared, other exchange members were forced to contribute back-up capital to cover the loss, narrowly averting what could have been a catastrophic collapse.

“Nasdaq has dropped the ball on this one,” said Stephen Connelly, an associate professor in law at University of Warwick and a former financial litigator in London. “It’s really surprising in this day and age.

For its part, Nasdaq said it has implemented safeguards to ensure (to the best of its ability) that one monstrously sour trade won’t drive the exchange to the brink of insolvency. It’s increasing its margin requirements and hiring consulting firm Oliver Wyman.

Regulators in Sweden, where Nasdaq Nordic is based, say they are planning to investigate how Nasdaq allowed such a massive failure of oversight.

“This is a question that Nasdaq Clearing has to answer,” said Daniel Gedeon, director of financial markets infrastructure supervision at the Swedish Financial Supervisory Authority. “As a supervisor we are investigating the situation thoroughly.”

But perhaps the biggest irony here is the fact that Aas could have avoided responsibility for such staggering risk if he had only bothered to register his own trading firm – a relatively simple process, according to Aas’ old boss.

“When you operate on this scale and with this liquidity risk, I’m a bit surprised he hasn’t done anything about that,” Eckhardt said. “It would have taken him a day to register the company and maybe a week to transfer contracts.”

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The British government “expressed grave concerns” to the US government over the declassification and release of material related to the Trump-Russia investigation, according to the New York Times. President Trump ordered a wide swath of materials “immediately” declassified “without redaction” on Monday, only to change his mind later in the week by allowing the DOJ Inspector General to review the materials first. 

The Times reports that the UK’s concern was over material which “includes direct references to conversations between American law enforcement officials and Christopher Steele,” the former MI6 agent who compiled the infamous “Steele Dossier.” The UK’s objection, according to former US and British officials, was over revealing Steele’s identity in an official document, “regardless of whether he had been named in press reports.” 

We would note, however, that Steele’s name was contained within the Nunes Memo – the House Intelligence Committee’s majority opinion in the Trump-Russia case.

Steele also had extensive contacts with DOJ official Bruce Ohr and his wife Nellie, who – along with Steele – was paid by opposition research firm Fusion GPS in the anti-Trump campaign. Trump called for the declassification of FBI notes of interviews with Ohr, which would ostensibly reveal more about his relationship with Steele. Ohr was demoted twice within the Department of Justice for lying about his contacts with Fusion GPS. 

Perhaps the Brits are also concerned since much of the espionage performed on the Trump campaign was conducted on UK soil throughout 2016. Recall that Trump aid George Papadopoulos was lured to London in March, 2016, where Maltese professor Joseph Mifsud fed him the rumor that Russia had dirt on Hillary Clinton. It was later at a London bar that Papadopoulos would drunkenly pass the rumor to Australian diplomat Alexander Downer (who Strzok flew to London to meet with). 

Also recall that CIA/FBI “informant” (spy) Stefan Halper met with both Carter Page and Papadopoulos in London. 

Halper, a veteran of four Republican administrations, reached out to Trump aide George Papadopoulos in September 2016 with an offer to fly to London to write an academic paper on energy exploration in the Mediterranean Sea.

Papadopoulos accepted a flight to London and a $3,000 honorarium. He claims that during a meeting in London, Halper asked him whether he knew anything about Russian hacking of Democrats’ emails.

Papadopoulos had other contacts on British soil that he now believes were part of a government-sanctioned surveillance operation. –Daily Caller

In total, Halper received over $1 million from the Obama Pentagon for “research,” over $400,000 of which was granted before and during the 2016 election season. 

In short, it’s understandable that the UK would prefer to hide their involvement in the “witch hunt” of Donald Trump since much of the counterintelligence investigation was conducted on UK soil. And if the Brits had knowledge of the operation, it will bolster claims that they meddled in the 2016 US election by assisting what appears to have been a set-up from the start.

Steele’s ham-handed dossier is a mere embarrassment, as virtually none of the claims asserted by the former MI6 agent have been proven true. 

Steele, a former MI6 agent, is the author of the infamous and unverified anti-Trump dossier. He worked as a confidential human source for the FBI for years before the relationship was severed just before the election because of Steele’s unauthorized contacts with the press.

He shared results of his investigation into Trump’s links to Russia with the FBI beginning in early July 2016.

The FBI relied heavily on the unverified Steele dossier to fill out applications for four FISA warrants against Page. Page has denied the dossier’s claims, which include that he was the Trump campaign’s back channel to the Kremlin. –Daily Caller

That said, Steele hasn’t worked for the British government since 2009, so for their excuse focusing on the former MI6 agent while ignoring the multitude of events which occurred on UK soil, is curious. 

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Authored by Lance Roberts via RealInvestmentAdvice.com,

Bulls Push To All-Time Highs

Get out your party hats ladies and gentlemen, the markets hit all-time highs this past week.

After increasing equity exposure in portfolios on the 11th, as the markets pulled back to the previous break-out support levels, I suggested a push to new highs was likely.

“The pullback to the previous breakout support level did allow us to add further exposure to our portfolios as we said we would do last week. 

(If you want to see our portfolios they are now online at RIAPRO.net.)

Next week, the market will likely try and test recent highs as bullish momentum and optimism remain high. Also, with many hedge funds lagging in performance this year, there is likely going to be a scramble to create some returns by year end. This should give some support to the rally over the next couple of months. However, as shown above, the short-term oversold condition which fueled last week’s rally has been exhausted, so it could be a bumpy ride higher.

The breakout above the January highs now puts 3000 squarely into focus for traders.”

As shown, the breakout continues to follow Pathway #2a as we laid out almost 6-weeks ago. (Next week, I will update the pathways for the rest of this year.)

While the recent rally has been useful in getting capital successfully allocated, we are still maintaining prudent management processes.

• Stop-loss levels have been moved up to recent lows.

• We added defensive positions to our Equity and Equity-ETF portfolios.

• With yields back to 3% on the 10-year Treasury, we are looking to add additional exposure to our bond holdings.

As I noted previously, we continue to use dips in bond prices to be buyers. This is because the biggest gains over the next 5-years will come from Treasury bonds versus stocks.

This is primarily due to the analysis, I penned yesterday on interest rates:

“While the market has been rising on stronger rates of earnings growth, due primarily to tax cuts and share buybacks, that effect will begin to roll off in the months ahead. Tariffs and higher interest costs are a direct threat to bottom line profitability, particularly when combined with higher labor costs.”

“There are several important points to note in the chart above:

1. In the past 40-years, there have only been seven (7) other occasions where rates were this overbought. In each case, it was a great time to buy bonds and sell stocks. (When rates got oversold, it was time sell bonds and buy stocks.)

2. There were only two (2) other periods where rates were this extended above their long-term moving averages. The one that occurred between 1980-1982 began the long-term decline in bond prices. 

3. Economic growth has peaked every time rates got this extended. (Which shouldn’t be a surprise.)

4. Whenever rates have previously pushed 2-standard deviations of their 2-year moving average – bad things have tended to occur such as the Crash of 1974, Crash of 1987, Long-Term Capital Management, Russian Debt Default, Asian Contagion, Dot.com crash, and the Financial Crisis.”

While the markets are currently ignoring the risk of higher rates, even a cursory glance at the chart above suggests that we are near the point where “rates will matter.”

Remember, credit is the “lifeblood” of the economy and with consumer credit now at record levels, and 80% of Americans vastly undersaved, think about all the ways that higher rates impact economic activity in the economy:

1) Rising interest rates raise the debt servicing requirements which reduces future spending and productive investment.

2) Rising interest rates will immediately slow the housing market taking that small contribution to the economy away. People buy payments, not houses, and rising rates mean higher payments.

3) An increase in interest rates means higher borrowing costs which leads to lower profit margins for corporations. 

4) The “stocks are cheap based on low interest rates” argument is being removed.

5) The massive derivatives and credit markets are at risk. Much of the recovery to date has been based on suppressing interest rates to spur growth.

6) As rates increase so does the variable rate interest payments on credit cards. 

7) Rising defaults on debt service will negatively impact banks.

8) Many corporate share buyback plans and dividend issuances have been done through the use of cheap debt, which has led to increases corporate balance sheet leverage.

9) Corporate capital expenditures are dependent on borrowing costs. Higher borrowing costs lead to lower CapEx.

10) The deficit/GDP ratio will begin to soar as borrowing costs rise sharply. The many forecasts for lower future deficits will crumble as new forecasts begin to propel higher.

I could go on, but you get the idea.

The issue is not if, but when, the Fed hikes rates to the point that something “breaks.”

However, between now and then, the markets will likely continue to try and push higher as investor confidence continues to swell, pushing investors to take on ever increasing levels of risk, particularly as it appears as if the economy is firing on all cylinders.

But is it really?

Economic Growth Likely Fleeting

Economic data has certainly surprised to the upside in the U.S. as of late with unemployment numbers hitting lows, manufacturing measures coming in “hot,” and consumer confidence at record highs. As I discussed just recently, the RIA EOCI (Economic Output Composite Index) is near its highest level on record.

(The index is comprised of the CFNAI, ISM Composite, several Fed regional surveys, Chicago PMI, Markit Composite, PMI Composite, Economic Composite, NFIB Survey, and the LEI.)

But is this recent surge part of a broader, stronger, and sustainable economic recovery?

If you notice in the chart above, these late-stage surges in economic growth are not uncommon just prior to the onset of a recession. This is due to the cycle of confidence which tends to peak at the end of cycles, rather than the beginning. (In other words, when everything is as good as it can get, that is the point everyone goes “all in.”)

However, the most recent surge in the economic data has been the collision of tax cuts, a massive surge in deficit spending, the impact of the rebuilding following several natural disasters late last year, and most importantly, the rush by manufacturers to stock up on Chinese goods ahead of the imposition of tariffs. To wit:

“By plane, train, and sea, a frenzy has begun, resulting in surging cargo traffic at US ports, booming air freight to the US, and urgent dispatch of goods from Chinese companies earlier than planned. Getting in under the wire before Trump’s tariffs bite could mean hundreds of thousands saved on single shipments.

Bloomberg describes this week that cargo rates for Pacific transport are at a four-year high as manufacturers rush to get everything from toys to car parts to bikes into American stores.

This rush, which comes on top of a typically already busy pre-holiday season, is expected to continue well after next week as the tariff will leap from 10 to 25 percent after the new year. 

US importers are expected to stockpile Chinese products before the 2019 25% mark. There’s currently widespread reports of companies scrambling to pay expedited air freight fees to dodge the new tariffs, as well as move up their orders. “

This is an important point. Not only has this been the case just recently, but since the beginning of this year when the White House began this nonsensical “trade war.”

“Of course, the most likely outcome will be a return to trade at about the same level as it was just prior to the initiation of “trade wars.” However, it will be a “return to normal,” rather than an actual improvement, but it will give the White House a “win” for solving a problem it created. “

However, this is really a tale of “two economies” as the surge in the economic data is almost solely coming from the manufacturing side of the equation. As shown, the “service” side, which is more immune to the effects of tariffs, has been declining over the past several months.

Of course, while so-called “conservative Republicans” are breaking their arms to pat themselves on the back for “getting the economy going again,” the reality is they have likely doomed the economy to another decade of sluggish growth once the short-term burst from massive deficit spending subsides. The unbridled surge in debt and deficits is set to get materially worse in the months ahead as real revenue growth is slowing.

All of this underscores the single biggest risk to your investment portfolio.

In extremely long bull market cycles, investors become “willfully blind,” to the underlying inherent risks. Or rather, it is the “hubris” of investors they are now “smarter than the market.” However, there is a growing list of ambiguities which are going unrecognized may market participants:

• Growing divergences between the U.S. and abroad

• Peak autos, peak housing, peak GDP.

• Political instability and a crucial midterm election.

• The failure of fiscal policy to ‘trickle down.’

• An important pivot towards restraint in global monetary policy.

• An unprecedented lack of coordination between super-powers.

• Short-term note yields now eclipse the S&P dividend yield.

• A record levels of private and public debt.

•  Near $3 trillion of covenant light and/or sub-prime corporate debt. (eerily reminiscent of the size of the subprime mortgages outstanding in 2007)

• Narrowing leadership in the market.

Yes, At the moment, there certainly seems to be no need to worry.

The more the market rises, the more reinforced the belief “this time is different” becomes.

But therein lies the single biggest risk to the Fed and your portfolio.

“Bull markets” don’t die of pessimism – they die from excess optimism.

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Less than three months after Trump’s latest tweet slamming OPEC, in which he warned the petroleum cartel that it must “REDUCE PRICING NOW!”, Trump was at it again and on Thursday morning, with Brent hitting $80 per barrel and higher gasoline prices creating another headache for Republicans ahead of the midterm elections, the president lashed out at OPEC, saying that the US protects the countries of the Middle East, and warning these nations that “they would not be safe for very long without us, and yet they continue to push for higher and higher oil prices! We will remember.“

Trump’s latest threat, however, was summarily ignored on Sunday when OPEC leader Saudi Arabia and its biggest non-OPEC oil-producer ally, Russia, ruled out additional increase in crude output, defying Trump’s calls for action to cool the market.

“I do not influence prices,” said the Saudi Energy Minister Khalid al-Falih during a press conference in Algiers for a meeting that ended with no formal recommendation for any additional supply boost, Reuters reports.

In recent weeks, oil prices have moved back to 4 year highs, a rally that according to analysts has been mostly due to a perceived decline in oil exports from Iran due to fresh U.S. sanctions, stemming from Trump’s decision to pull out of the Iran Nuclear deal. As a result, as much as 1.5 million barrels of output are in danger of being taken off the market.

And while Falih said Saudi Arabia had spare capacity to increase oil output, he said that no such move was needed at the moment. Instead, Falih blamed refiners for not converting enough product: “My information is that the markets are adequately supplied. I don’t know of any refiner in the world who is looking for oil and is not able to get it” he said.

Still, indicating that Saudi Arabia was quite ready to steal even more market share from Iran, Falih said that Saudi Arabia was ready to increase supply if Iran’s output fell: “Whatever takes place between now and the end of the year in terms of supply changes will be addressed.”

Russian Energy Minister Alexander Novak echoed the comments, saying that no immediate output increase was necessary, although he believed a trade war between China and the United States as well as U.S. sanctions on Iran were creating new challenges for oil markets.

Separately, Oman’s Oil Minister Mohammed bin Hamad Al-Rumhy and Kuwaiti counterpart Bakhit al-Rashidi told reporters that producers had agreed they needed to focus on reaching 100% compliance with production cuts agreed in June, which means offsetting and compensating for falling Iranian production. However, Al-Rumhy said the exact mechanism for doing so had not been discussed.

Iranian Oil Minister Bijan Zanganeh also chimed in and said that Trump’s tweet “was the biggest insult to Washington’s allies in the Middle East.” Iran, understandably, is furious at Trump because without the latest round of sanctions against Tehran oil prices would be sharply lower. After agreeing to boost output by 1 million bpd in June to offset declining Iranian production – a move that Tehran sees as OPEC butting in and taking its market share – in August, OPEC and non-OPEC nations cut production by 600,000 bpd more than their pact required, mainly as a result of falling output in Iran as customers in Europe and Asia reduced purchases ahead of the U.S. sanctions deadline.

As we noted last week, Iran told OPEC its production had been steady in August at 3.8 million bpd, however, according to secondary sources such as researchers and ship-trackers, Iranian output had dropped to 3.58 million bpd.

* * *

Going back to Iran’s arch enemy, Saudi Arabia, its energy minister said returning to 100% compliance was the main objective and should be achieved in the next two-three months, he although refrained from specifying how that could be done. Then again, it was implied: Saudi Arabia is the only oil producer with significant spare capacity.

“We have the consensus that we need to offset reductions and achieve 100 percent compliance, which means we can produce significantly more than we are producing today if there is demand,” Falih said adding that “the biggest issue is not with the producing countries, it’s with the refiners, it’s with the demand. We in Saudi Arabia have not seen demand for any additional barrel that we did not produce.”

If he is right, and demand is indeed has indeed plateaued – largely due to the recent slowdown in China even with the boost resulting from the US fiscal stimulus – it could have more profound consequences for the global economy.

Finally, on Sunday OPEC also decided to change the dates of its next meeting to Dec. 6-7 from the earlier-agreed Dec. 3.The joint OPEC/non-OPEC ministerial monitoring committee will next meet on Nov. 11 in Abu Dhabi.

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Hungarian Prime Minister Viktor Orban provoked a seething response from his fellow European Union members when he decided to close Hungary’s borders and passed legislation to ban foreign influence peddling funded by billionaire financier George Soros. And earlier this month, the European Parliament voted to trigger Article 7 proceedings against Hungary for “undermining democratic values and the rule of law.” Indeed, because he’s steadfastly refused to accept migrants in according with the policies of unelected bureaucrats in Brussels, Orban has been labeled a tyrant, despite Orban’s Fidesz Party securing a majority in the country’s most recent Parliamentary elections.

Despite the “extreme bullying” to which Orban has been subjected by his European colleagues, he traveled to Brussels earlier this month to face his accusers ahead of the European Parliament vote. After Orban delivered his address to the room, MEP Nigel Farage, who famously helped orchestrate the UK’s vote to leave the EU back in 2016, stepped up to say a few words in Orban’s defense.

“Thank God there’s at least one European leader who is willing to stand up for his principles, his nation, his culture and his people in the face of such extreme bullying.”

Farage argued that the vote conjured memories of Soviet-era show trials, and likened the EU Parliament to a bunch of unelected bureaucrats hypocritically lecturing Orban – whose party holds an outright majority – about democratic principles. Specifically, Farage targeted Frans Timmermans, the unelected Dutch diplomat serving as first Vice President of the European Commission. Timmermans and the rest of the Commission backed the EU Parliament in condemning Hungary for allegedly mistreating migrants and Roma communities, arguing that “democracy and the rule of law cannot exist without the protection of fundamental human rights.”  

“All I can say, and I’m sure for Hungarians of a certain age, today will have brought back many dark memories. You’re here at a show trial where a bunch of political nonentities get up and point the finger and scream enjoying themselves with their afternoon hate, and the chief prosecutor, the commissar that comes from the unelected government, he has the audacity he has the audacity to lecture you on democracy. You don’t know what you’re talking about.”

Farage then compared Article 7 to an updated version of the Brezhnev Doctrine – the Cold War-era policy of overweening Soviet influence that led to the USSR’s brutal repression of the Hungarian Spring uprising.

“What is really happening here, Mr. Orban, is they’re just updating the Brezhnev Doctrine of limited sovereignty there’s no point pretending in this union you’re independent there’s no point pretending you’ve run your own country. An Article 7 is the new method of adopting that. They want to strip you of your voting rights. They want to stop giving you European funding and all of it because you have the audacity to stand up to George Soros, the man who was poured $15 billion all over the world in trying to break down the nation-states to get rid of our traditional forms of democracy.”

The authorization of Article 7 proceedings isn’t just an insult to Hungary – it is a direct insult to Orban personally, Farage said. He then suggested that Hungary follow in the UK’s footsteps and abandon the Union entirely.

“Mr. Orban you keep saying you want to stay a member of this European Union but it’s not just your country that’s been insulted today – you’ve been insulted. Come and join the Brexit club – you’ll love it.”

Watch the full speech below:

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