Tag: finance

Authored by Roibert Wright via The American Institute for Economic Research,

I went with scam science in the title partly because of the alliteration but mostly because Steve Milloy already claimed junk science. His Junk Science Judo (and website), Julian Simon’s Hoodwinking the Nation, Matt Ridley’s The Rational Optimist, and Thomas Sowell’s Intellectuals and Society are must reads if you are struggling, as I continue to do, with the world’s wacky reaction to the not-so-novel coronavirus that causes COVID-19. For those with insufficient time or inclination to read a thousand pages, I offer my synthesis here.

Don’t get me wrong, COVID-19 is a very, very serious disease for the aged and those with comorbidities. But it was never serious enough to merit locking down much of the world’s economy for months on end. Even an outbreak of smallpox or the Black Death would not have merited that blunt, top-down, one-size-fits all response. (Incidentally, while smallpox has been eradicated from the wild, cases of the bubonic plague still plague the western United States. No joke! This map is from the CDC, so it “has to be” correct.) 

The socioeconomic and health effects of the lockdown are far-reaching temporally, geographically, and environmentally and will take years to sort out carefully. For example, while some cheer that fewer critters have been killed by vehicles because of the lockdown, few policymakers realize that right now in Africa a wildebeest or gazelle is being torn to shreds by a pack of ravenous dogs (Canis familiaris) that their owners can no longer afford to feed. (Fewer still realize that animals not hit by cars are likely soon to be mauled by a natural predator or killed by disease/starvation anyway. Not many expire from old age.) 

What was also not-so-novel about the COVID crisis was its origin in scam or junk science. John Ionnnidis, one of the leading critics of weak scientific work, jumped right in to alert people and policymakers about the many problems with various predictive models but he was largely ignored despite being one of the most highly-cited scientists alive. That is actually not unusual. Even before the publication of Rachel Carson’s Silent Spring in 1962, Americans have been inundated with alarmist “scientific” claims that have not held up to close scrutiny. The problem is, they always hear about false claims but almost never hear about the retractions and whispered mea culpas (Latin for “my bad”). The net effect is undue pessimism about the state of the world.

Most scientific scares are rooted in the extrapolation of current trends to the point of disaster or desolation with no thought given to the possibility of cyclicality, natural limits, or behavioral changes. Ridley jokes about the nineteenth century prediction that by 1950 the streets of London would be ten feet deep in horse manure. Unfortunately, real scam science is no laughing matter. Here is a partial list:

Love Canal and Other “Cancer Clusters:” 

Love Canal refers to a housing development built near an improperly capped toxic waste disposal site in Niagara Falls, New York, where the media reported a cluster of cancer cases. It turns out, though, that cancer clusters are random events simply more salient than places where, again by sheer luck, cancer is rare. Most cancers, it seems, are not caused by man-made chemicals. Many more carcinogens lurk naturally in foods like cabbage and coffee than in pesticides. 

Dioxin, the main chemical culprit at the Love Canal site, was claimed to be so toxic that 3 ounces of the stuff would kill one million people. When 3 pounds of it was accidentally spread over a 700-acre town near Milan, Italy in 1976, though, the worst that came of it were cases of acne, even in the resident who had the highest level of the substance ever found in a human body. A 1983 study also showed that a control group had higher levels of chromosomal damage than Love Canal residents! Nevertheless, environmentalists tried to prevent people fully aware of Love Canal’s history from moving back in.

Radon Panic: 

Radon sounds scary because it is a radioactive gas. It comes from uranium deposits and its “daughters,” the isotopes produced by its decay, like polonium, pose a real risk to uranium miners. The risk to homeowners, though, was never clear, so the media easily hyped it in the 1980s into a full blown scare labeled “The Colorless Odorless Killer” by Time. Like SARS-COV-2, radon wasn’t really novel but the ability to detect it in the small quantities found in most homes was. The so-called precautionary principle kicked in and the next thing you know the EPA mandated testing and set a limit of just 4 picocuries per liter of air even though miners exposed to 12,000 picocuries showed no adverse health effects, forcing homeowners to spend billions on radon mitigation technologies. (If you think that spending helps the economy, read this.)

Peak Oil: 

Remember when the earth was proclaimed to be just a few years away from maximum oil production and a rapid rise in oil prices followed by a production collapse due to an absolute dearth of the stuff? It didn’t happen and does not appear likely to anytime soon. Production recently declined along with prices but due to a demand shock, the covidic global economy, not vanishing reserves. The world will stop using petroleum when its price rises above the price of substitutes, just like it stopped using whale oil when its price went above that of petroleum. Likewise, the Stone Age did not end for lack of stone.

Superstorm Hell: 

Global warming was supposed to cause a spate of tropical superstorms that would wipe out coastal areas time and again. Some big storms have hit and were hyped to the sky but there is no indication that they are any larger or more frequent than in the past. 

Air Pollution Armageddon: 

For all the talk of Greens, one would think that air quality is steadily degrading. In fact, carbon monoxide, nitrogen oxide, sulphur dioxide, and various volatile organic compound emissions have been steadily decreasing for decades. Remember smog? Not many do, even in Los Angeles, the city with the worst air quality in America. But even in the City of Angels nobody dons gas masks anymore, except to slow the spread of novel coronavirus of course. 

Turns out that “acid” rain, which sent me scurrying inside as a yute in the 1970s and 80s, was just slightly more acidic than regular rain. Although some predicted that acid rain would destroy all the forests in Germany by 2002, acidic rain did little to no net environmental damage then and has since become as rarified as smog.

And what happened to the “hole” in the ozone layer that Neil Young ranted about in his 1989 song “Rockin’ in the Free World?” and that Newsweek likened to “AIDS in the sky?” It was always seasonal and limited to the earth’s three “poles” (North, South, and Himalayas) and now scientists say it is “closing,” showing that environmental “damage” need not be permanent. The ban on the main human-produced causal agent of ozone depletion, chlorofluorocarbons (CFCs), was relatively easily achieved because cheap substitutes were available. To this day, however, scientists have not shown that the “hole” was primarily man-made or that it caused any ill effects on humans or any ecological systems. And because CFC substitutes are less energy efficient, they may contribute to global warming.

And that is just “hard” sciences like chemistry and physics. When we move into the biological and social sciences and nutrition, we encounter failed prognostications like:

Overpopulation: 

In middle income and rich nations, people are having fewer children, not more. Food production has outstripped demand, leading to lower food prices and more obesity, not starvation, in richer countries. Even in poor countries, famines are now rare and caused by governments, not absolute dearth. Even the fake New York Times now says that the human population will peak earlier than expected, in 2067 at fewer than 10 billion.

Ecological destruction: 

Ecosystems were supposed to collapse, leading to mass extinction. Instead, where property-rights have supplanted open commons, as with catch shares, natural resources like fisheries have stabilized and even rebounded. Many places in the United States sport too many deer, turkey, and wild hogs. The beepocalypse had no sting. Imagine that.

Paving Paradise:

In the 1980s, the government claimed that suburban sprawl was going to swallow up most of America’s farmland, which was losing all its topsoil anyway, leaving Americans dependent on foreign nations for bread. Turns out that the USDA grossly overestimated lost acreage and soil erosion and, miracle of miracles, conversion slowed and then reversed when farm prices increased. Despite those revelations, the media continued to harp on the “farmland crisis” for years. Much like a covidic cat, it “seemed to have nine lives,” Simon said.

Death by Eggs: 

About the same time, the media made eggs seem akin to a tasty poison, like alcohol. It is okay to have one or two every now and again but if you developed an egg habit, you were a goner. Then eggs became okay as scientists began to differentiate between “good” and “bad” cholesterol. Now many consider eggs a “super food.” Would I be less fat today if I had eaten eggs as a kid instead of “healthy” food like Sugar Coated Gluten Flakes? We’ll never know.

Death by Apples: 

I also avoided death foods like apples “tainted” with Alar, an allegedly poisonous chemical applied to apples to slow their ripening. Until, that is, the manufacturer withdrew it under regulatory pressure after a slick media blitz coordinated by an environmental activist group in 1989. Turns out, though, that Alar was way less dangerous than the high fructose corn syrup I consumed instead of my daily apple juice. To induce cancer in lab rats, scientists had to have them ingest the human equivalent of 19,000 quarts of apple juice … per day, every day, throughout their lives! Who knew? Arguably scientists and the media gatekeepers should have, but money and kudos flow fastest to alarmists with no stake in the underlying reality.

Off-the-Charts Income Inequality: 

The mere framing of this concept belies its real purpose, to redistribute “income.” If framed correctly, as productivity inequality, the “problem” disappears or begs the question why a few people are so much more productive than most others and why some produce nothing at all. Hint: it is natural heterogeneity plus stochastic processes layered onto inequality-enhancing government regulations, like minimum wages, interest rate caps, and rent controls. In fact, rich countries have far less income and wealth inequality than poor ones and inequality cycles up and down rather than making a beeline towards either extreme. Most disturbing of all, it appears that some researchers are willing to distort statistics to match their doomsday scenarios. Thankfully, they have been called out repeatedly but not before their “story” had become a “stylized fact” widely accepted by the media and Twitter rage monkeys.

Why do scam science and flawed studies so consistently prevail?

For starters, the world is a complex place where parsing cause-and-effect is a tricky thing, especially where living creatures are involved. Existence does not easily yield its secrets.

Nevertheless, incentives all list toward preliminary studies with big, scary findings because that makes them novel and important and hence newsworthy. Even cub reporters know not to pitch their editors on stories with headlines like “Careful Scientific Study Replicates Previous Work Showing Small, Nuanced Causal Connection.” “Everything Will Be Just Fine If No Action Is Taken” is also a loser because it won’t sell papers or attract pageviews. Retractions of previous errors are also boring so they end up buried when published at all, leaving the impression that the alarmist hot take was correct even when it was clearly not.

“Bad Things May Happen in the Future, Unless”-type stories, by contrast, are commercial winners. If adroitly done they do not even elicit backlash, allowing their perpetuation. First, note the weasel word “may.” Next, the amount of possible destruction and the distance of the prediction in time usually vary directly. Finally, the unless provides yet more wiggle room and a segue into policy proposals. When the world doesn’t end in a decade, everyone has forgotten about the article, the reporter is long gone, s/he wrote “may” anyway so s/he wasn’t technically wrong, and besides, one of the policy proposals was kinda sorta implemented so if anything the story “saved us” from Armageddon. Pulitzers and Peabodys all round!

In 1983, ABC News reported on the unemployment situation in five states “where unemployment is most severe” without mentioning that unemployment was actually down in the other 45 states. That sounds a lot like recent COVID-19 “case” reporting by the New York Times and Washington Post. But if you intimate that such news is misleading, if not entirely “fake,” you get immediately smeared as pro-Trump.

In fact, there is a lot of misleading to fake scholarship because even scholars who took clear stances and were proven wrong beyond the shadow of a doubt — on crucial matters of policy — somehow manage to keep their reputations intact. Nobody is perfect, of course, but why do people who are routinely wrong remain relevant, and even revered? Neil Ferguson, the physics-trained mastermind behind nine of the last one pandemic, is simply one of numerous examples that include:

Rachel Carson: 

As Roger Meiners, Pierre Desrochers, and Andrew Morriss showed in their 2012 edited volume Silent Spring at 50: The False Crises of Rachel Carson (Washington, DC: CATO), any of Carson’s remaining mystique is sheer mysticism. Except for lung cancer, cancer deaths are down and were even trending that way when Carson, a marine biologist, scared the bejesus out of almost everyone about the dangers of DDT, a pesticide that extended half a billion human lives by killing disease-carrying mosquitoes. She accurately claimed that cancer was the leading cause of death among American children but failed to mention that was because other childhood diseases, especially the communicable ones, had been conquered. Ironically, she died of cancer, a viral infection, and a heart attack, but her fame lives on.

Paul Ehrlich: 

In 1968, predicted the explosion of a Population Bomb that would kill most of humanity through disease, starvation, and war before 2000. That didn’t even happen in Africa much less globally. He claimed that life expectancy in America would drop to 42 years by 1980, a surprisingly exact prediction considering how far off the mark it was. This famous entomologist (insect scientist) also bet Simon that the prices of metals would increase and, infamously, lost. Yet Ehrlich remains an environmental guru. 

Paul Krugman: 

Has been wrong about almost everything since he won the Nobel in 2008 for his work on international economic trade theory and concentrated his efforts on the newspaper columnist career he began in 2000. His biggest errors are in labor economics, including the effects of minimum wage policies. See Contra Krugman by Robert Murphy for details. 

When their views are directly challenged, such erudite individuals usually a) ignore the challenge and hope it goes away; b) belittle the challenger’s qualifications; c) label the challenge “simplistic” even though simpler explanations are generally preferred (“Occam’s Razor) and, as Sowell says, “evasions of the obvious can become very complex;” d) inaccurately ascribe to the challenge claims that are easily refuted; or, increasingly, e) insinuate that the challenger is a bigot or that her thought emanates from a presumably racist or sexist or fascist school of thought. In other words, they deflect instead of trying to defend the indefensible. That is perfectly natural as evidenced by the fact that small children also engage in such deflections, albeit more “simplistically.”

What does this all mean? We have to return to teaching people how to research and think for themselves and not just mindlessly jump on #bandwagons while falling for gross rhetorical tricks. Light rail, it turns out, is just a new term for trolleys. Call low-lying areas where stagnant water accumulates swamps or call them wetlands, they are still just sloughs where mosquitoes breed. Not everything labeled racist actually is; some claims considered “woke” are deeply racist. Calling a piece of legislation the Affordable Care Act does not mean that it will result in more affordable healthcare. Shelter-in-place orders may just be a soft form of martial law that leads to bankruptcy, default, and unemployment, not safety. Most importantly, science might sometimes scam rather than save.

More than one-third of New York rentals were discounted during the second quarter as demand continues to slump thanks to the economic effects of the COVID-19 pandemic – including the flood of workers telecommuting instead of vying for limited rental space downtown.

According to Fox Business, rent prices were discounted an average of 6.7% ($221 per month) across 34.7% of New York properties in Q2 – with rents at higher-end apartments experiencing the highest cuts “as wealthy buyers have flocked to the suburbs since March.”

“Demand will remain low as new hires, interns and students begin jobs and school remotely, and as many New Yorkers escape the city temporarily or permanently,” said StreetEasy economist Nancy Wu. “As inventory piles up due to this lack in demand, even more landlords will need to make rent cuts, and rents will likely drop even further.“

The second quarter of 2020 marked the first time since the Great Recession that there was a year-over-year rent price drop in the metro.

Meanwhile, StreetEasy saw an uptick in interest in Manhattan’s outer boroughs of Queens and Brooklyn.

Wu said remote work makes commuting an insignificant factor in choosing an apartment location, which helps explain an increase in interest in Queens and Brooklyn. That’s a trend that will continue as long as social distancing orders are in place, she predicted.

Rent prices rose in both areas during the second quarter – although at a modest and slower pace. –Fox Business

According to Miller Samuel Inc. and Douglas Elliman Real Estate, Manhattan leases dropped 35.6% in June vs. the prior year, which followed declines of 37.7% in March, a record 70.9% in April and a 62.2% drop in May. This comes as Manhattan apartment sales dropped by 54% in the second quarter, the largest percentage decline in 30 years, according to Elliman. Median sales price fell 18% to $1 million, the largest price decline in a decade.

In April, we reported that New York City lease agreements had plunged 38% in March y/y, the second largest drop in 11 years.

Weeks later, we noted how retail rents have dropped 20% across Manhattan.

And according to StreetEasy’s Wu, the Flatiron area saw the largest portion of reduced rents at 45%.

It was supposed to be a “simple” European affair, where leading politicians sat down and agreed to spend all those hundreds of billions in debt that the ECB had agreed to monetize, thus providing a boost to their crashing economies. Alas, there is no such thing as “simple” in Europe, and after a third day of “marathon summit talks” – as the FT put it and for good reason as it is already the longest EU meeting since December 2000 – over Europe’s proposed €750BN response to the coronavirus pandemic on Sunday, the European Union once again failed to overcome gulfs that have split north and south, and east and west, and may send the Euro – which has soared in recent weeks – tumbling lower as without a finalized recovery fund Europe’s economy is set to disintegrate (even more).

The protracted summit in Brussels, which began on Friday morning, has laid bare deep differences over the size, design and conditions attached to a planned multibillion-euro package of loans and grants designed to revive Europe’s economy after months of hibernation.

Yet even the biggest skeptics expected that it would be concluded by Sunday night, alas as Bloomberg reports European Union efforts to agree on the stimulus package faltered late Sunday “as leaders were unable to reconcile differences over how much of the recovery fund should be distributed through grants versus low-interest loans.”

Sunday’s chaos was to be expected after the summit in Brussels was “suspended in acrimony” in the early hours of Saturday morning, after it became obvious just how stern resistance to handing out billions in grants would be.

One direct consequence of the impasse is that the total €750BN facility has already been cut to at most €650BN as European Council President Charles Michel floated a new proposal that would reduce the size of handouts to 400 billion euros, down from an original 500 billion euros, according to a Bloomberg source. meanwhile, Dutch Prime Minister Mark Rutte, joined by his Austrian, Danish and Swedish counterparts – known as the Frugal Four – rejected the new offer, and stood by a pledge to limit grants to 350 billion euros.

The impasse is hardly a surprise, as the Covid pandemic has pitted a group of richer “frugal” member states — Austria, Sweden, Denmark and the Netherlands — against the likely biggest recipients of EU pandemic emergency funds. But leaders also clashed over how to police countries’ respect for the rule of law, with Hungary’s Viktor Orban facing off against western leaders over proposals to hardwire respect for fundamental rights into the recovery plan.

Meanwhile, the recently anti-frugal Germany, together with France, who have the backing of most of the bloc, are insistent that at least €400 billion of the package must be handouts in order to shield the fragile economies of southern Europe from the worst effects of the coronavirus pandemic.

And just as Germany was bashed by Europe’s Mediterranean states, now it is the Netherlands’ turn to become the most hated nation in Europe.  As the FT reported on Saturday quoting diplomats, “much of the ire at the summit table was directed at Mark Rutte. The Dutch prime minister’s insistence on a national veto over the spending of recovery money led to tensions with other capitals that boiled over during an ill-tempered late-evening dinner.”

The mood was summed up by a heated exchange over dinner when Boyko Borisov, the Bulgarian leader, accused Rutte of wanting to be “the police of Europe” by handing himself the right to decide if countries’ national reform plans were ambitious enough to justify EU financial support.

Rutte told journalists after the dinner that his demands left fellow leaders “more irritated” but insisted that all countries were “fighting for their view”.

Needless to say, the mood wasn’t any better by Sunday, when Italian Prime Minister Giuseppe Conte said that “Europe is being blackmailed,” as frustration with the Dutch-led group boiled over.

Still, despite the inability to find a consensus over the size of the stimulus package, there is still hope and talks continued into the evening.

Europe has long had a habit of getting “deals” done just milliseconds before the final deadline and this time is expected to follow along, especially since investors have already priced in a deal after a series of bold announcements in recent weeks, leaving leaders under intense pressure to bridge their differences before financial markets open on Monday. Yet as Bloomberg notes, “they’ve largely been going around in circles since talks began on Friday morning as they struggle to bridge the familiar fault lines between the richer North and the southern countries worst affected by the pandemic.”

“Ideally the agreement should be ambitious in terms of size and composition of the package, broadly along the lines of what has been proposed by the commission,” European Central Bank President Christine Lagarde said in response to a question from Reuters. “It is better to agree on an ambitious facility even if it takes a bit more time.”

That said, one can’t really blame Rutte for refusing to drown future generations of Europeans in massive debt. In fact, one can argue that the “Frugal four” is the last bastion of fiscal conservatism anywhere in the world.

Rutte and his allies have been trying to water down the handouts that the highly indebted South sees as critical for shoring up its finances. While Saturday proved less bad-tempered and more constructive than Friday’s gathering, it was still difficult to discern much progress.

“Until now what we have seen is the commission, the president of the council and the majority of member states making an effort to come closer to four countries,” Portugal’s Antonio Costa said. “They also have to make some effort.”

The 27 leaders are meeting in person for the first time since February, when initial talks over the EU’s seven-year, 1 trillion-euro budget also ran into the buffers. Now, facing a devastated economy, “investors are looking to the group to muster a display of unity to maintain the rally in stocks” as Bloomberg puts it because just imagine an insane world where stocks … gasp… drop!

“The will to find a compromise should not make us renounce the legitimate ambitions which we must have,” Macron said Sunday. “In the coming hours we will see if the two are compatible.”

“Things are moving in a fairer direction,” Austrian Chancellor Sebastian Kurz said. “I personally would find it a real shame if it was abandoned.”

Meanwhile, in keeping with the European tradition of herding cats, the deliberations have proven to be a baptism of fire for Michel, the former Belgian Prime Minister, and European Commission President Ursula von der Leyen, who drew up the original plan. They only took up their jobs in December and have faced stinging criticism from governments over their handling of the pandemic response.

Merkel and Macron have been pressing for an agreement before the summer but haven’t yet been able to bring their weight to bear to force a result. The bloc’s two largest economies are seen as crucial power brokers and they were photographed sitting on a sunny terrace as they searched for a breakthrough.

“We’re entering the third day of talks and it certainly is the decisive one,” Merkel said on Sunday morning. “It’s possible there will be no agreement today.” And with just a few minutes left until Sunday becomes Monday, Merkel will likely be right.

* * *

Finally, here are some less then upbeat thoughts from Saxo’s Head of Macro Analysis, Christopher Dembik, who is right in concluding that this will represent another “missed opportunity for the EU to create a powerful solidarity instrument based on debt mutualisation that would be macro-significant and constitutes a strategic move towards completing the monetary union. It also shows how deep is the EU fragmentation.”

I have been following the EUCO meeting since it has started on Friday. Clearly, this is not Europe’s Hamilton moment, but this is a great telenovela !

PM X. Bettel has just announced he is leaving EUCO for Luxembourg to lead a government council on COVID-19. He is planning to come back to Brussels later tonight…

In other words, don’t expect any agreement to be reached in the coming hours.

The best case scenario is a foul compromise in the night…It is already the longest EUCO meeting since Nice in December 2000…

I see at least three main points of disagreements:

• Over the rule of law (rift between East and West)
• Over volumes of the EU recovery plan and governance (rift between North and South)
• Over EU leadership (this meeting is also about the future balance of power in post-Brexit EU)

I acknowledge it is probably too early to jump to conclusions but I think it is safe to say that if we get a deal in the night or later on in July, the original proposal is likely to be watered down – which means that this is again a missed opportunity for the EU to create a powerful solidarity instrument based on debt mutualisation that would be macro-significant and constitutes a strategic move towards completing the monetary union. It also shows how deep is the EU fragmentation…

This is not what we have been dreaming of…

The “Robinhood effect” is not only real, but is now flourishing thanks to the government handing out free money and unemployed “traders” sitting at home all day passing the world’s worst penny stocks (and Tesla) back and forth to one another with various cryptocurrencies, engaging in a version of “pass the hot potato” that is guaranteed to end in misery for all parties involved.

But while Covid is catalyzing the change at a faster rate than ever, it was Robinhood’s introduction to app-based trading and no commissions that shook up the industry and opened the floodgates to these new traders.

In addition to an influx of new traders, it has also shaken up the model for online brokerages, who have had to match Robinhood’s “no commission” policy to retain their clients, leading to M&A from within the industry. They are doing this by selling their order flow, which means worse fills and slower service for clients while brokerage houses scramble to make up for the revenue they are losing from commissions. 

It’s also why first-time traders are stunned to learn that their online broker routinely crashes during high volatility points in the market: the brokers are too busy pawning off their order flow and trying to maintain a near-impossible business model without trading commissions to actually spend money upgrading their infrastructure and bandwidth for volatility “aberrations”. 

This shift in the industry was captured beautifully in a series of Tweets from Bloomberg’s Morgan Barna, CFA last week. 

First, she shows how trading volume has spiked significantly in Q1 and Q2 of 2020, obviously attributable to the Covid lockdown and the introduction of new “traders” who have followed the herd, led by Barstool Sports’ Dave Portnoy, into the market.

Next, she shows how Schwab has seen its revenue per trade collapse over the last 5 years, as the brokerage has tried to keep pace (or in some cases lead the charge) for lower commissions to help bring in new clients. 

For all intents and purposes, commissions no longer seem to exist for stock trades and have been almost totally priced out of the industry.

Finally, she shows that interest in creating accounts continues to rise. Among the surprises we’ve seen during the Covid lockdown has been the fact that Americans are actually saving money and paying off credit cards, instead of spending it, with the economy melting down and the government wiring them free checks.

They are also putting this money into brokerage accounts, as you can see below:

This is, of course, enabled by the Fed, behind the scenes, doing everything it can to make sure that the NASDAQ continues to hit new highs despite what has been an unprecedented economic collapse in the country.

When the average American logs on to Twitter and sees the President (or worse, Larry Kudlow) bragging about the market despite tens of millions of people unemployed, we don’t blame them from meandering toward the honeypot that our country’s public markets have become.

Unfortunately, what comes up must come down – and the new retail traders being lured into the market with promises of neverending all time highs and commission free trades – will likely be the first blood shed when the Fed’s ponzi scheme is inevitably exposed for what it truly is and comes crumbling down. 

Submitted by TeslaCharts

You might think Nikola Motor Corporation is the most overvalued pre-revenue business plan in the history of the stock market. You might think it is the poster child for the current bubble mania in green/clean technology stocks. You might think Trevor Milton, executive chairman and founder of the high-flying company, is merely taking a page from Elon Musk’s stock promotion playbook with his recent antics on Twitter.

You might not think those things after listening to him on Episode #35 of TC’s Chartcast.

To Milton’s credit, he recently sat down with noted Tesla skeptics @TeslaCharts and @Georgia_Orwell_ for a wide-ranging interview that lasted nearly two hours. With abundant energy and genuine enthusiasm, Milton fielded all questions head on. In an era characterized superficiality and empty sound bites, the conversation was refreshingly civil and comprehensive.

Can the company overcome the many execution challenges it still faces? Only time will tell.

The podcast can be found on all major platforms or directly at the link below:

Over the past three months we have obsessed over a fascinating market timing phenomenon, one which during the last 10 weeks amounted to a “risk-free” trade: S&P500 returns during the day session have been flat as a pancake since the start of May, while over the same time period, gains during the overnight session have been a diagonal line, accounting for all of the market’s upside since May 1, a whopping 314 S&P points.

Indeed, this dramatic divergence between performance during the day and overnight sessions had become the market’s worst kept secret.

To be sure, the outperformance of the overnight session is hardly new – we first pointed this out back in 2015 in “Forget The 3:30pm Ramp, Stock Gains Are All About The Night Shift” – however, as the chart above shows, rarely has the divergence been as clear as it has been since the start of May.

And having pounded the table on this divergence repeatedly over the past few months, it appears that quite a few institutional accounts have figured out that buying the cash close, and selling the cash open is all one needs to generate a roughly 40% annualized return, while ignoring all that other anachronistic investing trivia such as news, data and fundamentals.

In fact, it has gotten to the point where none other than one of the Wall Street’s most respected quants was compelled to chime in on this divergence after what we showed on Friday was “The Craziest Chart You’ll See Today“, and in a note on Friday afternoon, the author of JPMorgan’s Flows and Liquidity report, Nikolaos Panigirtzoglou, addressed the “difference in performance between regular vs. extended trading”, months after we first brought attention to it.  

While confirming that there is a clear upside bias to the overnight session, Panigirtzoglou explains it as follows: “the arrival of important news after US hours and during European trading hours, including both US and non-US economic data as well as better virus-related news in Asia and Europe, have been important in understanding the divergence in performance between regular and extended trading hours.” Which of course is far more politically correct than saying central banks and their various proxies only buy at night when most investors are sleeping.

In any case, here are JPM’s observations:

One of the characteristics of the US equity rally over the past four months has been the divergence between the  erformance during regular market trading hours i.e. 09:30 to 16:00 EST vs. the performance during extended hours i.e. after-hours and pre-market trading. This divergence is shown in Figure 1. While up until the end of March, there was little divergence, since April all of the S&P500 up move appears to have happened during extended market hours, while regular trading hours have on average acted as a small drag.

As Panigirtzoglou then notes, that this divergence since April “is raising questions about whether non-US investors, perhaps trading more actively during Asian or European hours, have been mostly responsible for the S&P500 rally since April” although the JPM quant doubts this hypothesis for two main reasons:

• First, US investors can be active during US extended market hours also, e.g. via trading futures.
• Second, JPM believes that the arrival of news has been more important during after US hours or during European regular trading hours. This is not only because important economic data such as Chinese and European PMIs or the US payroll report and US retail sales are released during extended US hours, but also because virus news emanating from Asia and Europe, regions that have been ahead of the US on the virus curve, have been important market drivers in recent months. In addition, important US news about vaccines or therapeutics in recent months or US company earnings reports were released after US hours.

We find it amusing that JPM admits that US stock markets no longer respond to news flow during regular hours, which confirms what both BofA and another JPM strategist, Oksana Aronov, told Bloomberg namely that “Central Banks Have Created A Collective Hallucination Where Valuations Are Entirely Fabricated“, a world in which neither newsflow, nor fundamental data, nor frankly anything else, matters any more. Which however is bizarre since US stocks have not really moved higher for the past 3 months during the US day session, which in turn can be explained by the relentless selling of stocks by baby boomers to central banks and/or or their own Millennial and Gen Z kids.

But we digress, so here is the rest of JPM’s analysis, which dissects US equity performance further in half-hour intervals JPM uses tick data on the S&P500 mini futures contract.

Figure 2 depicts this performance dissection for January-March vs. April-July periods. What is striking is how much less of a drag on US equity market performance was during April-July (vs. the January-March period) after hours trading, between 16:00-17:00 EST (just after NY close) and for all half-hour intervals between 19:30-23:00 EST.

What does the picture for regular vs. extended hours trading performance look like for Asian and European indices? Figure 3 to Figure 5 shows the equivalent of Figure 1 for Eurostoxx50, Nikkei and Hang Seng indices as analyzed by JPM. Figure 3 suggests that, for the Eurostoxx50 index, extended hours had a modest impact on performance and most of the market moves after or before April took place during regular European trading hours. The opposite is true for the Hang Seng index where most of the market moves after or before April took place during extended Chinese trading hours. The picture is more balanced for Nikkei, where average performance was similar during either regular or extended Japanese trading hours.

Looking at the above, JPM finds that charts 3 to 5 suggest “the most important news or flows likely took place during European regular trading hours,“ while “Figure 1 and Figure 2 together suggest that the big drag to US equity market performance seen after US hours trading in the first quarter of the year, dissipated in the second quarter.”

In addition, JPM also notes that it has become easier for the average investor to trade outside of regular hours. In the past, after-hours trading was more for institutional investors. Today, the proliferation of ECNs and other trading facilities has made it easier for individuals to trade in extended-hours sessions. This has likely facilitated the incorporation of information arriving outside of regular market hours into prices.

So what does the above data mean? Well, as JPM’s Panigirtzoglou concludes, the divergence in performance between regular and extended trading hours can be explained by “the arrival of important news after US hours and during European trading hours, including both US and non-US economic data as well as better virus-related news in Asia and Europe.”

Frankly, in a world in which even other JPM strategists admit that neither news nor data matters any more – and only central banks do – we find this explanation to be self-serving BS (after all, the last thing we want is for JPM to analyze the root causes of the massive intervention by the Fed which starting last September was to bail out none other than JPMorgan itself), but whatever is the true reason for the ongoing overnight surge in the Emini, whether it is “important news and better virus news” when US markets are closed as JPM claims, or simply because that’s when central banks are most active in propping up markets, it doesn’t matter: as long as the divergence persists, and allows those who have noticed the “worst kept secret in the market” to literally keep printing money by buying the US close and selling the open, everyone remains happy.

Perhaps it’s a coincidence that just two days after we reported that China has been rocked by an “unprecedented” surge in bank runs which forced local regulators to “publicly vouch for the soundness of its lenders as the police halted the run”, on Friday Chinese financial regulators took over a record nine financial institutions which they said broke rules and added risk to a financial system facing increasing headwinds from the coronavirus pandemic. Or perhaps the two are in fact connected, and as faith in China’s financial system sinks and more money is pulled out of the country’s insolvent banks, more banks will be bailed out or nationalized.

Whatever the case, the takeovers of four insurers, two trust firms and three securities companies that managed a combined 1 trillion yuan ($143 billion) in assets represent Beijing’s first major regulatory move this year and follows the extensively documented bailouts of several regional lenders last year. Among the companies taken over the China’s Banking and Insurance Regulatory Commission are Huaxia Life Insurance Co., Tianan Life Insurance Co., Tian An Property Insurance Co. and Yian Property Insurance Co, the regulator said on its website.

Meanwhile, China’s securities regulator said it would take over three other entities—New Times Securities, Guosheng Securities and Guosheng Futures—and two trust firms, New China Trust Co. and New Times Trust Co.

The regulators said the takeovers are aimed at ensuring “stable operations” of the firms, because well, what else can they say: most Chinese financial institutions are insolvent and this is just the beginning? Probably not.

The takeovers continue an effort launched by Chinese authorities in 2019 to prevent systemic risks by taking over failing banks – something Beijing had not done in decades over fears of sparking bank runs – while also curbing debt as the country’s growth slows.

There was another common threat among the insolvent companies. According to the WSJ, many of the newly-nationalized firms have been linked in Chinese media reports to disgraced financier Xiao Jianhua, the founder of Beijing-based Tomorrow Holding which also controlled Baoshang Bank Co., a troubled regional lender that was the subject of the highest profile seizure last year (see “Chinese Bank With $100 Billion In Assets Is Bailed Out“).

As a reminder, Xiao, who is now a Canadian national with vast holdings in Chinese financial firms and ties to China’s military, disappeared in 2017 from a luxury Hong Kong hotel. According to his company and Hong Kong police, after he entered mainland China in January 2017, he hasn’t been reachable since.

Xiao was among Chinese tycoons whose empire fell under intense regulatory scrutiny in recent years, around the time officials cracked down on conglomerates such as Anbang and HNA Group which had racked up massive debt from global acquisition sprees, forcing them to divest overseas assets such as New York’s Waldorf Astoria hotel, in Anbang’s case, and, for HNA, a stake in Deutsche Bank.

* * *

Explaining the takeover of the four insurers, the China Banking and Insurance Regulatory Commission said they had violated China’s insurance law and triggered a takeover article that calls for a government intervention if an insurer’s solvency ratio falls below regulatory requirements. The takeover took effect Friday and will last for at least one year, the statement said.

Similar to an FDIC “failure Friday” event, China’s regulator designated six big Chinese insurance companies and financial institutions to take custody of the companies’ business. When China’s central bank seized Baoshang Bank last year, it similarly asked a state bank to manage the lender’s operations.

Also similar to the Baoshang takeover, regulators said the businesses and insurance policies of the seized companies will continue during the takeover. Eventually, regulators will seek to liquidate assets in the two trust firms and introduce new investors to shore up capital bases.

Meanwhile, as the WSJ notes, analysts have been warning of rising financial risks this year after the Chinese economy slipped into contraction in the first quarter amid effects of the coronavirus. In response to the outbreak, Beijing ordered the nation’s banks to step up lending to struggling small businesses that have long been seen as risky borrowers. As a result, the amount of bad debt in the banking industry quickly piled up in the year’s first half and is expected to continue to rise for the rest of the year.

And while some economists (perhaps those who are sponsored by China) believe Beijing is better positioned to contain financial risks after China’s GDP miraculously rebounded to positive in Q2, others believe that while Beijing is parading with fake economic numbers to boost its global credibility, the reality is that behind the scenes China’s financial system gets ever closer to collase. Indeed, Shen Zhengyang, an analyst at Northeast Securities said some corners of China’s financial system could turn more vulnerable in the wake of the pandemic.

“Regulators are more eager to stabilize the financial markets as the broader economy worsens,” said Mr. Shen. “A direct takeover allows for more efficient coordination.”

Meanwhile, the toxic feedback loop of bank runs, bank failures, and bank nationalizations, leading to more bank runs, more bank failures and more bank nationalizations, will only accelerate until a critical mass is finally hit at which point Beijing will find it impossible to quietly force large, state-owned banks to bailout an increasingly greater percentage of the country’s smaller and medium banks.

Authored by Jonathan Turley,

There is a new form of protests sweeping across the country as individuals put on anti-Mask masks to defy mandatory mask rules. The anti-masks are made of thin material, mesh or even crochet and are advertised as having no protective qualities for Covid-19.  The question is whether they are legal.  They appear to be so.

A popular video shows a man wearing a mesh mask to a Tampa Walmart and saying “It was almost like not wearing a mask at all. Nobody cared. That’s because it’s not about safety. It’s all about compliance.”

Most laws like Alabama‘s only refer to a “covering” not a mask with protective qualities:

2. Facial coverings for individuals. Effective July 16, 2020 at 5:00 P.M., each person shall wear a mask or other facial covering that covers his or her nostrils and mouth at all times when within six feet of a person from another household in any of the following places: an indoor space open to the general public, a vehicle operated by a transportation service, or an outdoor public space where ten or more people.

Maryland requires masks:

“Facial coverings for individuals.

Effective July 16, 2020 at 5:00 P.M., each person shall wear a mask or other facial covering that covers his or her nostrils and mouth at all times when within six feet of a person from another household in any of the following places: an indoor space open to the general public, a vehicle operated by a transportation service, or an outdoor public space where ten or more people are gathered.”

Even that is subject to exceptions. However, consider the definition of face coverings:

“Face Covering” means a covering that fully covers a person’s nose and mouth, but is not a Medical-Grade Mask. The term “Face Covering” includes, without limitation, scarves and bandanas.”

A mesh mask does cover the fact and, since scarves can be used, there is no effort to indicate a threshold protective level or dimension.  There are vast differences between masks and stores are unlikely to want to police the sufficiency of masks, particularly if the states do not specify minimal standards.  Even creative work on the noun “cover” does not help much.  Oxford defines it as simply “a thing that is put over or on another thing.”  A permeable material still covers the mouth and nose. It just does little else.

Twitter is replete with such anti-masks with such disclaimers as “Stylish, breathable and don’t protect you from a darn thing! Masks required? No problem! Breath free while making a statement.”

Credit: Twitter

It is a statement that most people would not want to make.  However, it is probably legal.  It can bring certain notoriety with a chance of lethal contraction.

However, with cities like Miami threatening $500 fines for failing to wear a mask, more people may choose to protest with these defiant masks — defeating the efforts to curtail the spread.

Given the recent incidents of people flipping out over masks, this is not likely to make things less confrontational. The latest example is some a person named Ruby Musso who filmed herself arguing with staff after she refused to wear a face mask. Multiple employees ask her to leave and she is called a “Karen.” She in turn calls them Nazis.

The store has received threats after the posting of the video.  It has become a familiar scene:

The anti-mask mask is likely to trigger new confrontations as stores or other customers object to failure to follow the “spirit” of these orders while others claim the right to comply in their own defiant way.

By the way, the anti-masks are not the only technical workaround pandemic rules.  New York bars are now reportedly serving “Cuomo Chips” for $1 to get around the ban on alcohol without food.  This is meant to satisfy the requirement that “all restaurants and bars statewide will be subject to new requirements that they must only serve alcohol to people who are ordering and eating food.”

It’s no secret that an unprecedented implosion in US commercial real estate is underway thanks to the coronavirus pandemic. Mall operators are struggling with retailers who are unable to pay rent. 

Readers may recall, there’s been a rapid surge in newly delinquent CMBS loans, with much of stress coming from the retail industry. 

Shown here, Trepp’s latest CMBS remittance report shows CMBS delinquencies have recently risen to levels not seen since 2012. 

This brings us to Brookfield Property Partners, a company with hundreds of properties in the US, more specifically, has 168 retail shopping properties, with a total square feet around 152 million. The company’s equity has been halved since the lockdowns as retailers can no longer pay rent, due to a collapse in consumption via broke consumers. 

The C-suite executives at Brookfield Property must have been reading our posts on social distancing will revive drive-in movie theaters (dated in May). Or our latest post from early July showing how Walmart is transforming 160 parking lots into drive-in movie theaters this summer. 

That is because Brookfield Property has just signed a deal with entertainment company Kilburn Live to turn some of its parking lots into drive-in theaters and virtual concerts, reported CNBC. 

“People are desperate to leave home,” Michelle Snyder, chief marketing officer of Brookfield’s retail arm, said. 

“If we can’t rent the mall, we are going to rent other space,” she added, referring to other large-scale events. “We actually have tons of ideas for our parking lots.”

Mall operators are quickly figuring out their once abandon parking lots could be a gold mine in the age of social distancing. 

Authored by Bryce Coward via Knowledge Leaders Capital blog,

With the US dollar index recently having completed a so called “death cross”, we thought it would be a good opportunity to review the investment implications of a potential trend change in the USD. The “death cross” is a technical chart formation in which the 50-day moving average passes under the 200-day moving average. It is a simple measure of trend, but one that historically has preceded further weakness in the USD.

The “death cross” comes at a time when some fundamental forces seem to be suggesting a more durable downtrend in the USD is possible, as opposed to just a short-term reversal in trend. For example:

• The US budget deficit as a percent of GDP may reach a new record in 2020 at 15-17%. The budget deficit as a percent of GDP is highly correlated with the level of the USD in that wider budget deficits are associated with a weaker currency.

• The Federal Reserve has clearly signaled that it does not intend to raise rates until 2023 at the earliest, as the “dot plot” of individual Fed governors’ projections suggests. More Fed ease may also be on the way in the form of forward guidance, yield curve control, an inflation symmetry target, and/or a more permanent quantitative easing program. All else equal, these items support the case for a weaker currency.

• The question is weak against what? In our view the euro is one contender. As the 4th chart below shows, the interest rate differential between the Fed Funds rate and the ECB deposit rate is no longer supportive of the USD since that differential has moved from 2.75% to just 0.75% in a matter of a few months’ time.

• Furthermore, the Fed (so far) appears is creating more money than the ECB in its response to the COVID crisis. That is, the money supply in the US is growing faster than the money supply in Europe. This dynamic is supportive of a stronger euro vs the USD (see chart 5 below).

• Finally, the unemployment rate in the US is quickly moving to parity with the Eurozone (see chart 6 below). In the past, as the unemployment rate differential between Europe and the US has closed, the euro has strengthened vs the USD.

Given the above, the likelihood of a weaker USD, against the euro and other currencies, seems more probable than in years past. This too is before even considering the implications of a more solidified political union within Europe. As such, examining the asset allocation implications of a weaker USD makes sense at this point, even if the trend is not fully entrenched yet.

In the charts below, we highlight 10 major implications of a weaker USD scenario. In each chart, we plot the DXY index in blue on the right, inverted axis. In this way, when the blue line goes up, it represents a weaker USD. We then plot the relative asset comparison in red on the left axis.

There are several takeaways that are most important from this exercise:

• Technology, which has been THE leadership group over recent years, is highly unlikely to continue to lead if the USD weakens on a secular basis

• Areas of the equity market where investors are most underweight (value, international, smaller companies, EM) tended to do the best in a falling USD environment

• Hard assets outperformed stocks in falling USD periods

• Credit outperformed stocks in falling USD periods

Therefore, to the extent a falling USD becomes a reality, investors may need to pay attention to and re-familiarize themselves with those areas of the capital markets that have been out of favor (both nominally and relative to US large cap stocks) for the better part of a decade.

10 Implications of a Weak USD Scenario

1) Cyclical over defensive stocks. 

A weaker USD is often associated with rising inflation expectations and faster nominal GDP growth. Companies with high levels of operating leverage (i.e. those companies that are able to raise revenues without raising costs as fast) experience expanding profit margins when either nominal economic growth rises or they can pass along higher input costs to end customers. The materials sector is the epitome of this and the industrials sector is not far behind. At the opposite end of the spectrum are utilities and technology, which have much lower levels of operating leverage in general – the utes because of lack of pricing power and the tech stocks because of lower levels of fixed assets. One exception to this generality is the relationship between the consumer staples sector (a traditional defensive space) and the consumer discretionary sector (a more cyclical area). Staples companies tend to have more pricing power and thus greater operating leverage than do discretionary companies in a period of a falling USD/rising inflation expectations, since the products they sell are less substitutable.

2) Value over growth stocks.

An extension of item #1 is the generalized outperformance of value vs growth in falling USD periods, and for many of the same reasons. One caveat to this however, is the financials sector, which is typically associated with “value”. In previous periods of significant USD weakness, financials have done quite well on a relative basis in part because the yield curve tends to steepen (i.e. the long end rises faster than the short end as inflationary outcomes are discounted). Steeper yield curves are good for bank profits since they borrow short and lend long. However, in a world of financial repression and yield curve controls, the yield curve may be highly unlikely to steepen much at all, thus rendering bank profitability semi-permanently impaired in aggregate. Japanese and European banks are the case studies for this.

3) Small over large stocks. 

The small cap indexes tend to be more “value” oriented simply due to compositional differences compared to the S&P 500. Smaller stocks are also more cyclical than large stocks and often have significant built-in operating leverage. In a weak USD environment, we believe it makes sense to move down the cap scale, whether that be increasing one’s allocation to small cap indexes or substituting capitalization weighted exposure for equal weighted exposure. One benefit of the latter is that it may actually improve a portfolio’s risk profile insofar as exposure to a very few number of enormous capitalization stocks is mitigated.

4) Foreign over US stocks. 

Foreign stocks, due to compositional differences from US large cap stocks, benefit from similar dynamics described above. They also benefit from the currency appreciation component of a falling USD/rising local currency.

5) Emerging markets over foreign developed stocks. 

Many emerging market economies are setup in a pro-cyclical way, which is the opposite of the US economy. This is because inflation tends to be higher among EM countries, they oftentimes have large balance of payments deficits (meaning they need to import capital from abroad), the debt they assume is often denominated in USD or another currency they can neither print or earn revenues in, and they often produce commodities. Below I outline a typical pro-cyclical sequence of events for an emerging market country, which should highlight why these stocks could do well in falling USD periods.

1. Local currency rises

2. Foreign denominated debt becomes easier to repay, increasing corporate and sovereign cash flows

3. Imported inflation goes down from the rising local currency, which raises corporate and household cash flows

4. Commodity prices in USD terms rise, raising corporate cash flows in local currency terms

5. The central bank is able to cut interest rates due to lower inflation

6. Growth accelerates because of central bank rate cuts

7. Growth accelerates because of increased investment from the newly created excess domestic savings

8. The better debt and growth profile causes the local currency to appreciate even further, attracting investment from abroad

9. Rinse and repeat

EM not only outperformed US stocks in falling USD periods, but also foreign developed stocks too.

6) Within EMs, favor the countries that are the most pro-cyclical 

(i.e. those with typically higher inflation and balance of payments deficits) tended to do best in falling USD periods.

7) Precious metals & real assets over stocks. 

Little explanation needed in terms of the precious metals complex or TIPS. However, it’s important not to lump all commodities together. For example, soft commodities have largely underperformed US large stocks (and just gone down in general) regardless of the direction of the USD.

8) Copper over gold. 

Copper has tended to outperform gold in periods of USD weakness, perhaps because copper benefits from both rising inflation and real growth.

9) Credit over stocks. 

To the extent that higher corporate revenues from inflation pass-through makes debt servicing easier, credit benefited from USD weakness.

10) High yield credit over investment grade credit. 

Among credits, the most accurately indebted companies have fared the best in periods of USD weakness.