Gone In 30 Seconds: Watch As A $90K Tesla Is Hacked And Stolen In Under A Minute

Tesla owners will be relieved to know that while parked idly and not spontaneously combusting, their “safe” vehicles can be stolen in less than a minute. There’s even video evidence to prove it.

Footage was posted from a security camera at home in the United Kingdom showing two hooded thieves stealing a locked Tesla in about 30 seconds by “hacking” the car‘s computer and fooling it into thinking that its key was nearby, according to the Mail.

A doorbell camera caught the security footage that showed two people using what looks to be a relay wire system to relay the key’s signal from the house to the car. Because wireless keys emit a short signal that extends about 2 meters, thieves can easily amplify the signal and relay it to the car from outside of the house.

The car’s owner said: “It was absolutely shocking how quickly it went.” You can view the video here:

We wrote just days ago about now it was now possible to many steal newer, technologically “advanced” cars in as little as 10 seconds using similar systems. In a test performed by “What Car?” magazine, seven car models with keyless entry and start systems were tested to see how quickly they could be stolen. The results? An Audi TT RS was stolen in 10 seconds and a Land Rover Discovery Sport was stolen in 30.

Security experts performed the tests using the same type of technology that’s commonly used by thieves. They measured the amount of time it took to get into the vehicle and drive it away. The BBC notes that car theft rates in places like England and Wales have reached eight year highs and that more than 106,000 vehicles were stolen in 2018 alone.

Additionally, insurance claims for stolen vehicles hit their highest level in seven years at the beginning of 2019. Claims for January to March were higher than for any other quarter since 2012, according to the Association of British Insurers. Keyless car crime was part of the blame, the ABI said, but it did not have exact figures on what proportion of claims were for keyless vehicles.

After being stolen, the cars are usually stripped for parts, which for many owners may be the only recourse to fix their broken Teslas courtesy of that famously terrible Tesla service.

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Lawsuit: Florida Inmate Thrown In Solitary for Biting Guard While Having Seizure

A 28-year-old former Florida inmate with a history of epilepsy says he was beaten and thrown in solitary confinement for seven months after he involuntarily bit a correctional officer while having a seizure.

In a federal civil rights lawsuit filed last month and first reported by The Miami Herald, Dean Higgins claims he suffered a grand mal seizure last September at the Florida Department of Corrections’ (FDOC) Desoto Correctional Institution. While the guards tried to restrain Higgins—an improper way to handle someone having a seizure—he bit one of the guards on the arm.

Higgins, who was serving two years in Florida state prison for lewd and lascivious conduct, claims he was then beaten and punished by being placed in solitary confinement for more than seven months in a tiny cell. “Sewage would backup in the units and raw sewage would seep into Higgins’ cell, at times a number of inches deep,” the suit says.

Higgins’ lawsuit alleges he was subjected to excessive force and battery, and that the conditions of his confinement amounted to cruel and unusual punishment and violations of his rights under the Americans with Disabilities Act (ADA). According to the suit, in addition to having epilepsy, Higgins is also on the autism spectrum.

“A person might be arrested for treating a dog like this,” Benjamin Stevenson, the American Civil Liberties Union (ACLU) attorney representing Higgins, told the Herald.

The FDOC declined to comment, citing the pending litigation. However, lawyers for the FDOC denied Higgins’ allegations in a reply to his complaint. According to the department narrative, correctional officers suspected Higgins was having an adverse drug reaction to “spice,” or synthetic marijuana, a common drug in prisons across the country.

Although FDOC policy requires correctional officers to turn on their body cams during use-of-force incidents as soon as possible, the FDOC admitted in its reply that body camera footage only began 38 minutes after the incident started and “that there was an approximately eight-minute interruption to change batteries.”

The lawsuit comes as the FDOC is fighting another class-action lawsuit—brought the Southern Poverty Law Center, Florida Legal Services, and the Florida Justice Institute—challenging the state’s use of prolonged solitary confinement on inmates.

“There’s a growing scientific and community consensus that solitary confinement amounts to torture—mostly psychologically, but also for physical issues as well,” says Dante Trevisani, executive director of the Florida Justice Institute. “When you deprive people of like basic human contact, it can be very devastating for them. That’s especially true with people who have existing mental illness, or have other disabilities, or are pregnant or juveniles.”

As Reason previously reported, the mental and physical effects of prolonged solitary confinement can be particularly acute for inmates with disabilities. 

Trevisani says there are about 10,000 Florida inmates in solitary confinement at any given time, about 10 percent of the overall population. Most other states, he says, average around 5 percent.

Trevisani also says that under the level one “close management” confinement that Higgins was placed into—the most severe in the Florida prison system—inmates are only allowed out of their cells three times a week to shower. After the first 30 days, they’re allowed up to three hours of recreation time a week.

“We think that this is cruel and unusual punishment under the Eighth Amendment, and so we’re trying to end the way that solitary confinement is used in Florida,” he says.

Last month, three correctional officers at Lake Correctional Institution, a state prison deep in the Florida panhandle, were arrested and charged with battery and filing false reports after cell phone video leaked by an inmate showed them viciously beating another inmate.

A 2013 report on the Tomoka Correctional Institution in Florida by HEARD, an advocacy group for deaf prisoners, documented numerous allegations of sexual assault, rape, theft, retaliation by staff, and general cruelty against inmates with disabilities.

In 2012, two Florida correctional officers put Darren Rainey, a schizophrenic inmate, in a scalding, jury-rigged shower for two hours, where he died.

Florida has the third-largest inmate population in the U.S., and despite falling admissions over the past several years, the population has stubbornly hovered around 97,000. The sticky number is partly due to the harsh mandatory minimums that the state passed during the tough-on-crime 1990s, which has saddled the state with an aging and increasingly expensive population.

A bipartisan group of Florida lawmakers has been trying to get a handle on the understaffed, underfunded prison system, but without a huge influx of money or drastic changes to how the state incarcerates people, the situation is unlikely to change in the near future.

“I think it’s just almost criminal on the state’s part that we can’t look somebody in the eye and tell them that their relative will be safe while they are a ward of the state prison facilities.” Florida Republican Sen. Jeff Brandes told Reason earlier this year. “It’s terrifying.”

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Lawsuit: Florida Inmate Thrown In Solitary for Biting Guard While Having Seizure

A 28-year-old former Florida inmate with a history of epilepsy says he was beaten and thrown in solitary confinement for seven months after he involuntarily bit a correctional officer while having a seizure.

In a federal civil rights lawsuit filed last month and first reported by The Miami Herald, Dean Higgins claims he suffered a grand mal seizure last September at the Florida Department of Corrections’ (FDOC) Desoto Correctional Institution. While the guards tried to restrain Higgins—an improper way to handle someone having a seizure—he bit one of the guards on the arm.

Higgins, who was serving two years in Florida state prison for lewd and lascivious conduct, claims he was then beaten and punished by being placed in solitary confinement for more than seven months in a tiny cell. “Sewage would backup in the units and raw sewage would seep into Higgins’ cell, at times a number of inches deep,” the suit says.

Higgins’ lawsuit alleges he was subjected to excessive force and battery, and that the conditions of his confinement amounted to cruel and unusual punishment and violations of his rights under the Americans with Disabilities Act (ADA). According to the suit, in addition to having epilepsy, Higgins is also on the autism spectrum.

“A person might be arrested for treating a dog like this,” Benjamin Stevenson, the American Civil Liberties Union (ACLU) attorney representing Higgins, told the Herald.

The FDOC declined to comment, citing the pending litigation. However, lawyers for the FDOC denied Higgins’ allegations in a reply to his complaint. According to the department narrative, correctional officers suspected Higgins was having an adverse drug reaction to “spice,” or synthetic marijuana, a common drug in prisons across the country.

Although FDOC policy requires correctional officers to turn on their body cams during use-of-force incidents as soon as possible, the FDOC admitted in its reply that body camera footage only began 38 minutes after the incident started and “that there was an approximately eight-minute interruption to change batteries.”

The lawsuit comes as the FDOC is fighting another class-action lawsuit—brought the Southern Poverty Law Center, Florida Legal Services, and the Florida Justice Institute—challenging the state’s use of prolonged solitary confinement on inmates.

“There’s a growing scientific and community consensus that solitary confinement amounts to torture—mostly psychologically, but also for physical issues as well,” says Dante Trevisani, executive director of the Florida Justice Institute. “When you deprive people of like basic human contact, it can be very devastating for them. That’s especially true with people who have existing mental illness, or have other disabilities, or are pregnant or juveniles.”

As Reason previously reported, the mental and physical effects of prolonged solitary confinement can be particularly acute for inmates with disabilities. 

Trevisani says there are about 10,000 Florida inmates in solitary confinement at any given time, about 10 percent of the overall population. Most other states, he says, average around 5 percent.

Trevisani also says that under the level one “close management” confinement that Higgins was placed into—the most severe in the Florida prison system—inmates are only allowed out of their cells three times a week to shower. After the first 30 days, they’re allowed up to three hours of recreation time a week.

“We think that this is cruel and unusual punishment under the Eighth Amendment, and so we’re trying to end the way that solitary confinement is used in Florida,” he says.

Last month, three correctional officers at Lake Correctional Institution, a state prison deep in the Florida panhandle, were arrested and charged with battery and filing false reports after cell phone video leaked by an inmate showed them viciously beating another inmate.

A 2013 report on the Tomoka Correctional Institution in Florida by HEARD, an advocacy group for deaf prisoners, documented numerous allegations of sexual assault, rape, theft, retaliation by staff, and general cruelty against inmates with disabilities.

In 2012, two Florida correctional officers put Darren Rainey, a schizophrenic inmate, in a scalding, jury-rigged shower for two hours, where he died.

Florida has the third-largest inmate population in the U.S., and despite falling admissions over the past several years, the population has stubbornly hovered around 97,000. The sticky number is partly due to the harsh mandatory minimums that the state passed during the tough-on-crime 1990s, which has saddled the state with an aging and increasingly expensive population.

A bipartisan group of Florida lawmakers has been trying to get a handle on the understaffed, underfunded prison system, but without a huge influx of money or drastic changes to how the state incarcerates people, the situation is unlikely to change in the near future.

“I think it’s just almost criminal on the state’s part that we can’t look somebody in the eye and tell them that their relative will be safe while they are a ward of the state prison facilities.” Florida Republican Sen. Jeff Brandes told Reason earlier this year. “It’s terrifying.”

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Curve Inverts As Traders Brace For J-Hole Surprise; Boeing Propels Dow Higher

In what was mostly a very quiet day, with traders refusing to trade in size ahead of tomorrow’s main event, J-Powell’s J-Hole speech, we got a glimpse of what will happen if the Fed chair disappoints the market’s expectations for committing to further rate cuts.

After spiking in early trading, stocks slumped to session lows and the VIX jumped back over the key 16 threshold, after Philly  Fed’s Harker joined other regional Fed presidents in pouring cold water on hopes for more rate cuts, and instead saying that he expects not to vote for more easing.

The unexpected hawkishness sent 2Y yield surging, as suddenly the consensus case for 2 more rate cuts this year, and another 2 in 2020 seemed in jeopardy.

The drift higher in short-term yields came even as Markit reported the first contractionary manufacturing PMI in ten years, at 49.9, while the services PMI stumbled as well, making the case for a recession that much more likely.

Also not helping the dovish case was news from Germany, that Bundesbank economists now expect Q3 GDP in Europe’s strongest economy to print -0.1%, meaning Germany has now entered a technical recession with two consecutive sub zero GDP prints.

In any case, the surprising hawkishness out of Fed presidents, and the spike in 2Y yields, meant that the 2s10s yield curve inverted again – yet another recessionary indicator – and was flipping between negative and positive for much of the day.

Looking at sector performance, banks were the clear winners despite the fresh curve inversion, with homebuilders also positive, while all other sectors were either flat or negative, with tech stocks suffering a surprising drop.

And while the S&P traded mostly flat, the Dow outperformed thanks to a Reuters report that Boeing was hoping to produce a record number of 737 planes in Q2 2020… assuming the company got clearance to fly the infamous 737 Max plane again.

Away from the US, euro-area government bonds slumped as the ECB, in its latest minutes, expressed concern that investors were losing faith in its ability to revive inflation. Investors agree, and have pushed the European 5Y5Y inflawtion swap to near record low levels.

Meanwhile, the British pound surged over 1%, its best one day return since May, as investors seized on hints from European leaders that a Brexit deal could still be reached.

And so with the S&P closing flat, Chris Zaccarelli, CIO for Independent Advisor Alliance, summarized it best: “The big question mark is just going to be Jackson Hole — what’s Powell going to say You’re seeing the market going higher and lower this week heading into tomorrow, where we could get some market-moving commentary out of Powell’s speech.”

For those curious what Powell may say, and why he will likely disappoint, read our preview of tomorrow’s J-Hole main event here.

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As Italy’s Political Crisis Worsens, Five Star Eyes Alliance With Democrats

Now that Italian President Sergio Mattarella has – at least for now – denied League leader Matteo Salvini the opportunity to become prime minister and refuses to rush into new elections that would almost certainly see Salvini emerge victorious as Italy’s next PM, Salvini’s former partner, Luigi di Maio is discussing the possibility of forming a coalition with the establishmentarian Italian Democratic Party.

The tie-up would be a strange one, even by the standards of Italian politics, as M5S (the acronym for the Five-Star Movement) has sought to market itself as an anti-establishment party – the one characteristic that it shared with Salvini’s conservative, anti-immigration League.

The Democrats expressed their desire to join forces with M5S after Mattarella gave the parties the green light on Thursday.

According to Bloomberg, Mattarella holds the power to either appoint the next prime minister or call early elections.

Luigi Di Maio

The talks follow the anticipated resignation of Giuseppe Conte, Italy’s former Prime Minister, earlier this week.

Conte’s resignation came after Salvini withdrew support for the government. After months of political uncertainty, Salvini made his bid to consolidate power by pushing for fresh elections, intended to capitalize on the League’s climbing popularity.

A coalition between the Democrats and M5S would deny Salvini his chance to become premier, at least in the short term. But the unlikely alliance between two parties that have little in common and have spent much of the past few years criticizing each other.

Opportunistic political alliances are hardly rare in Italy. But a link between the Dems and M5S would mark a compromise of M5S’s anti-establishment principles, something that could help burnish Salvini’s anti-establishment principles.

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What Happens To Bond ETFs When Interest Rates Go Negative?

Submitted by Nicholas Colas of DataTrek Research

Exchange traded funds continue to grow, exerting ever-greater influence on US capital markets. In equities, the issue is most pronounced in small caps (12-25% ownership) and real estate investment trusts (+13% for even the largest one). In fixed income, ETFs illuminate why investors put up with negative global interest rates. International bond ETFs still pay a coupon (however small), even when rates are below zero.

“US listed exchange trade funds are a market structure risk factor.” We have heard various iterations of that concern off and on for over a decade now. The basic argument goes like this:

  • ETFs promise tick-by-tick liquidity even though their underlying assets may be much less liquid.
  • As ETFs grow in popularity, this problem will only get worse.
  • If and when capital markets see another bout of volatility like 2008, ETFs will create market dislocations unseen in prior cycles.

There have been 2 notable (but brief) examples of this problem in the last 3 years:

  • The August 24 2015 flash crash of several hundred ETFs at the open. Markets were already choppy from a recent devaluation of the Chinese yuan, and many ETFs traded for +10% discounts to their NAV through much of the morning.
  • The February 5th 2018 spike in US equity volatility, which led to a vicious feedback loop between CBOE VIX-tied ETFs and the underlying contracts.

We have not heard much criticism of ETFs this month, but since we expect further market volatility today is a good time to review the US ETF ecosystem. Our usual 3-point format, headlined by questions to frame the discussions, with all data courtesy of www.xtf.com:

#1: What’s the latest on ETF assets under management and money flows?

  • US-listed exchange traded funds continue to grow in 2019.
  • AUM totals $3,944 billion across 2,295 exchange traded products (funds and notes). Fun fact: there have been more ETF launches thus far in 2019 (147) than IPOs (106).
  • Most of the total increase in AUM this year ($542 billion) has come from capital appreciation ($411 billion) rather than inflows ($131 billion).
  • YTD inflows are mostly to fixed income funds ($83 billion) rather than equities ($34 billion). Money flows are also positive for commodity/precious metals funds ($4 billion), real estate funds ($4 billion) and volatility-linked products ($3 billion).
  • Data from the Investment Company Institute – which included mutual fund money flows – shows that ETFs represent well over 100% of all equity fund inflows (MF’s are seeing redemptions), 87% of all commodity/precious metal inflows and 39% of all bond fund inflows.

The bottom line: ETFs continue to grow in popularity across all major asset classes in 2019.

#2: How much do equity ETFs own of various single stocks (i.e. how systematically important are they)?

  • The answer varies widely depending on the type of stock.
  • For the top 10 names in the S&P 500, the average ownership by ETFs is 6.8%. Among the important super cap Tech names, Microsoft is the most widely held stock by ETFs (7.0%), followed by Apple (6.5%), Amazon (6.3%) and Google/Facebook (6.2% each).
  • ETF ownership is much higher in the Russell 2000, with the top 10 names here averaging 11.4%. Dig down further, and ETF ownership percentages only rise. Stocks in the 25th percentile of the index by weight average 22.7% ownership by ETFs, for example.
  • As an asset class, Real Estate Investment Trusts have the highest percentage of ETF ownership. The 10 largest holdings in the Vanguard Real Estate Index Fund (the biggest ETF in the space by AUM) average 13.2% ETF ownership.

Bottom line: ETF ownership of US equities continues to climb (since inflows are positive and share counts go down with stock buybacks), and small caps/REITS show the largest “ETF effect”. Worth noting: US small cap ETF fund flows have been negative this year (-$886 million), and this group has underperformed US large caps, with $4 billion of inflows. There’s a chicken-egg problem with that sound bite analysis, but the relationship clearly exists.

#3: What happens to bond ETFs when interest rates go negative?

  • No need to explain why that’s a topical question just now.
  • The short answer is that negative yielding bonds still pay a coupon; the negative yield comes from principal erosion over time. Plunk down $120 for a bond that pays $1 annually and redeems at $100, and you’re out $10. That’s the negative yield, not a bill sent to every bondholder.
  • At present there are 11 international (non-US) bond US listed ETFs, with a total of $5 billion in AUM. Two – IAGG (iShares Core Intl Agg Bond) and BWX (SPDR Barclay Intl Bond) – are just over half that total.
  • By our calculation, the current yield on both is about 1.0% (BWX monthly payments have been stable, but IAGG’s are declining). Year to date price returns are 5-6% for the two.
  • ETF investors do not yet seem to be noticing the ever-lower payouts and availability of better options like US Treasury bonds. Fund flows for non-US bond funds are negative quarter-to-date, but only because of a $122 million redemption from one smaller fund (iShares IGOV). Aside from that, flows remain positive.

Bottom line: negative yielding bonds do not create negative yielding ETFs and mutual funds. Very low yields… Clearly. Principle risk… Yes, that much is actually guaranteed. But the exercise here is a useful reminder of why investors still buy “negative yielding” bonds.

Summing up: ETFs continue to grow in importance relative to how capital markets price securities. In equities, small caps and REITs are especially exposed. Bond ETFs – this year’s outsized winners in terms of inflows – are illustrative of why investors continue to buy even negative yielding bonds.

As for whether the continued rise of ETFs make markets less stable, history says they can contribute to temporary volatility. But let’s not forget that the S&P is 10% higher than last February’s VIX ETF meltdown and +30% higher than August 2016. Fundamental issues like interest rates and earnings still matter more.

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Preview Of Powell’s Jackson Hole Speech: Brace For Disappointment

While the full program of this year’s Jackson Hole symposium will be released tonight at 8pm ET, what we do know is that Chair Powell will address the symposium on Friday, August 23,at 10AM ET. Powell is widely expected to preface his prepared remarks with an update on current conditions that acknowledges continued risks from trade and global growth, similar to the July statement, however he may disappoint markets which are expecting a far more explicit commitment to future rate hikes.

Indeed, as noted earlier, following surprisingly hawkish comments from Philly Fed president Harker, Kansas City President Esther George and Boston Fed president Eric Rosengren, all of whom voiced their opposition to additional cuts, the market-implied odds of a 50bps rate cut in September has tumbled to just 2% as of this afternoon, down from 41% a week ago, resulting in yet another inversion in the 2s10s curve as 2Y Treasury yields spiked.

If anything, today’s hawkish tone was a reminder that it is premature to expect a signal on the size of the Fed’s September move something which the market desperately wants; In fact, as Morgan Stanley writes, Powell will certainly choose to maintain flexibility on size by reminding us the Fed “will act as appropriate to sustain the expansion.”

Furthermore, there’s been no gathering since the July FOMC, the few policymakers who have since spoken publicly have either been surprisingly hawkish, or have underscored that there is no pressing need to take additional action… and there’s still more data to get through ahead of the next meeting.

Key risks: As Morgan Stanley’s Ellen Zentner writes, watch for the use of “somewhat” when Powell is describing further adjustments. Investors may associate the word “somewhat” with 25bp. Acknowledgment that downside risks have increased with no characterization of “somewhat” could be taken as confirmation that it is likely the Fed makes a larger cut in September, although that now appears unlikely.

Some more details

Despite the Fed’s efforts to play down the spectacle that the Annual Economic Policy Symposium had become—first cutting out Wall Street’s attendance in 2014,and then Ben Bernanke’s absence in his final year as Chair and Chair Janet Yellen’s periodic absence—because the gathering in Jackson Hole, Wyoming was used several times by several central bank leaders to signal upcoming changes to monetary policy since the financial crisis it will forever be the punctuation mark of the summer.

And in the aftermath of the July 31 FOMC announcement, investor expectations once again appear to be high that Chair Powell could indeed deliver some signal of how the FOMC might be leaning ahead of its September 17-18 meeting when he
delivers prepared remarks on Friday, August 23at 10AM ET (8AM MT).

While some anticipate a further dovish relent by Powell, Morgan Stanley expects Powell to confirm the Committee’s easing  bias (“act as appropriate”), but provide no definitive tilt towards a larger 50bp cut. Asa a result the chance for disappointment in Powell’s message is rising, enough though odds of a 50bps cut has been effectively extinguished after today’s barrage of hawkish comments from Jackson Hole participants.

That, however,  does not mean we won’t get there, and a cut of that magnitude cannot be ruled out, but as Zentner writes, “Powell signaling it at Jackson Hole is highly unlikely.”

We had called for a 50bp cut at the July meeting; we were wrong. We had also warned if the Fed did not deliver it would erode market confidence and drag the Fed into possibly delivering more cuts than if ithad not kept its powder dry when facing material downside risks to the outlook. And indeed, following the Fed’s underwhelming delivery, we pulled on an additional cut to the expected path for a total of 75bp in easing this year (see FOMC Outlook: More Cuts Are Coming, August 12,2019).

So what’s changed since the July FOMC meeting? For one, there’s been increased market volatility around an announcement of a new round of tariffs slated to go into effect September 1. That announcement came just one day following the July 31 FOMC statement and press conference in which Chair Powell noted that one of the positive developments was the Committee’s judgment that trade policy tensions appeared to have “returned to a simmer.”

The Committee has made clear, however, that it will not calibrate monetary policy around trade and the incoming data since the July FOMC meeting have been mixed. For example, two of the regional manufacturing surveys—the NY Fed’s Empire State survey and the Philadelphia Fed’s Business Outlook survey—remained strong on an ISMadjusted basis in August and together set early expectations that the August ISM will hold up well. The trend in weekly initial jobless claims has remained ultra-low, forward looking indicators of housing activity have been strong—keying off the sharp drop in mortgage rates,as were job gains and retail sales.

To be sure, a sizable drop in consumer sentiment in the University of Michigan’s preliminary August reading is the only ominous data point that could portend weaker consumer spending ahead. The drop in consumer sentiment was very clearly driven by the announcement of further tariffs and to some extent the resulting stock market volatility, but it was also driven by the Fed’s July rate cut itself, which US households took as an indication that recession could be around the corner.

And herein lies the rub: The results of the August survey highlighted the so-called “informational risk” from delivering the July rate cut. No doubt the FOMC debated this informational risk at its July meeting. In past cutting cycles the transcripts show this debate playing out—what kind of message is the Fed sending when it cuts rates? If it is an insurance cut, then they must deliver it with a positive tone that provides comfort. This would have been one of the reasons for pushback from the Committee on delivering a larger 50bp cut, or indeed delivering a cut at all. Indeed, Chair Powell’s Q&A was intended to convey optimism and comfort—i.e., only a small adjustment is needed; the US economy is mid-cycle.

Unfortunately, as the UMichigan narrative showed the delivery fell far short of providing a sense of comfort to financial markets, and US households took the fact that the Fed cut rates at all as ominous, to wit:

The main takeaway for consumers from the first cut in interest rates in a decade was to increase apprehensions about a possible recession. Consumers concluded, following the Fed’s lead, that they may need to reduce spending in anticipation of a potential recession. Falling interest rates have long been associated with the start of recessions. Perhaps the most important remaining pillar of strength for consumer spending is favorable job and income prospects, although the August survey indicated some concerns about the future pace of income and job gains

While the Committee has made clear that it will be contemplating both the “timing and size of future adjustments” to the policy rate, there’s simply not been enough data to convince the Committee broadly, at this early stage, that a larger cut is needed. That said, the escalation in trade policy and resulting downside risks is likely enough to at least get consensus around a follow-up 25bp cut at the September meeting.

Until today, we had heard from three of the voters since the July meeting. On August 2, Esther George, President of the Kansas City Fed and one of two dissents at the July meeting in favor of no cut, acknowledged risks to the outlook emanating from trade policy uncertainty and slowing global growth, but did not see it as necessary to cut rates given that the incoming data simply confirmed her expectation for the US economy to slow toward trend. On August 6 in a Fox Business interview, James Bullard, President of the St.Louis Fed, and one of the most vocal Fed doves, said it is too soon to determine what further action may be needed, citing the drop in interest rates this year that is still working its way positively through the economy (a view no doubt bolstered by the surge in refis this year). On August 19 in a Bloomberg interview, Eric Rosengren, President of the Boston Fed and the second dissenter at the July FOMC in favor of no cut, said, “We have to be careful not to ease too much when we don’thave significant problems…[I] don’t see a lot of need to take action” with rates right now.

Making matters even more complicated for the “dovish” Powell, all three regional Fed presidents who spoke today with CNBC’s Steve Liesman were especially hawkish.

As a result, it is unlikely that Chair Powell would have the appetite to box the Committee into action when there is still a proper debate to be had at the September meeting, nor would he need to, according to Morgan Stanley.

If Chair Powell is already convinced the consensus will vote to cut rates again at the September meeting, he need only deliver the neutral message which would keep market expectations high for action but retain more flexibility on the size.

Of course, if Powell wishes to, he can clearly set market expectations in his messaging:

  • One is to again employ the use of the word “somewhat” when describing further adjustments. This word was used several times by several policymakers leading up to the July FOMC meeting, such that now it is likely the market has determined the word “somewhat” to mean 25bp.
  • Alternatively, acknowledgment that downside risks have increased with no characterization of “somewhat,” could be taken as confirmation that it is indeed possible the Fed makes a larger cut in September.

Bottom line: the scope for disappointment from Powell’s speech is substantial in a market that until earlier this week was pricing in non-trivial odds of a 50bps rate cut three weeks from today. Furthermore, should Powell underscore that “mid-cycle adjustment” narrative, potentially putting a third rate cut in 2019 under question, that could hammer stocks which have now priced in as much as 4 rate cuts over the next 12 months.

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Democrats Love To Promise Free College, but Why Did U.K. Recently Started Charging Tuition?

It’s not easy keeping track of exactly who has promised what to whom in the race for the Democratic nomination. Two of the most prominent candidates, Sen. Bernie Sanders (I–Vt.) and Sen. Elizabeth Warren (D–Mass.), have made “free” college and student debt forgiveness central pillars of their presidential bids. 

But the U.K. has moved in the opposite direction, with astonishing results. After nearly 40 years of offering free college, starting in 1998 students in England were asked to pay about $1,200 per year. Since then, tuition has risen to $11,000 per year. Students in England now leave college with around $60,000 of debt on average. A government-backed loan scheme means graduates only start repaying that debt once they are earning more than $30,000. Any debt that remains after 30 years is forgiven altogether. (The Scottish government has devolved power in this area and operates a different system.)

Yet today the number of university students from poor backgrounds is larger than it has ever been. The story of why the British government opted to end a policy similar to those proposed by leading Democrats—and what has happened to higher education in the U.K. since—is instructive for the American debate. 

The case for free college is simple enough: higher education should be for the many, not the few. In the U.S., today’s eye-watering costs prevent that from being the case. Sanders called it “a national disgrace” that many Americans don’t attend college “not because they are unqualified, but because they cannot afford it.” Counterintuitive though it might seem, a desire to broaden access and increase the number of young Brits in college was exactly why the U.K. opted for the opposite course from the one Sanders is proposing.

Before the introduction of tuition fees, government resources could not keep up with increased demand for university education. Per-student funding dropped by 40 percent in the last two decades of the tuition-free system. In order to keep costs under control, the government spent less per student and rationed the number of spots available. But costs continued to balloon. What’s worse, students from better-off backgrounds were more likely to grab one of the limited number of spots, so it was students from poor backgrounds who suffered, with the gap in degree attainment between rich and poor widening.

Britain faced a choice: an elitist university system in which the state subsidized the education of a select few who managed to perform well on high-stakes tests, or giving many more people the opportunity to earn a university degree by shifting part of the financial burden from the state to the individual; it opted for the latter. 

Today, students pick up the bill for, on average, around 65 percent of the cost of the education they receive, with taxpayers plugging the gap. More students are enrolled than ever before and those students benefit from more per-student funding than the generations that paid nothing for college. 

Democratic presidential hopefuls say they want to get more students from poor backgrounds enrolled in college. In the U.K., the best way to do that was by charging, not by making college free. In the last decade, the number of 18-year-olds from “low participation”––poor––neighborhoods going to college has increased by 75 percent. And over that period of time, funding per student has risen by a quarter. There have never been more young Brits who qualify for free school meals going to college. 

As in America, the question of how to fund higher education in Britain is far from settled. Jeremy Corbyn, the leader of the left-wing Labour Party, backed the abolition of tuition fees at the last election. A recent government review of the system proposed a series of modest reforms to address concerns over the current system. One concern centers around the affordability of the current system, given that the government can’t know with any certainty how much of the tab it will have to pick up. A report published earlier this year by the London-based conservative think tank Onward forecast that just 17 percent of graduates will fully pay back their loans.

There are persuasive principled objections to taxpayer-funded college. If the individual accrues the lion’s share of the benefits of a college degree, why shouldn’t he or she bear the cost? Asking taxpayers to fund universal free tuition means asking, for example, a farm worker who earns the minimum wage to pay for the education of a student from a wealthy household en route to a high-flying career in law or finance. You don’t need to be an avowed free marketeer to see the problem here; none other than Karl Marx raised a similar objection when he said “If higher education institutions are also free that only means in fact defraying the cost of education of the bourgeoisie from the general tax receipts.” 

But let’s assume that those problems aren’t fatal to the case for free college. The problem for the likes of Sanders and Warren is that they cannot escape the affordability dilemma that makes it very hard for free college to live up to its promise. Either other public spending priorities face the squeeze to fund universities, or the number of spots available at publicly funded schools must be capped. 

In other words, students paying their own way need not be a barrier to achieving the stated aims of the tuition abolitionists. Sanders and Warren use “free education” and “universal education” interchangeably. The U.K. story is a reminder that that often those aspirations aren’t complimentary, but contradictory. 

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‘We Will Not Find A New Deal’ – Macron Pours Cold Water On Brexit Compromise

Prime Minister Boris Johnson has just completed his first full rotation on the withdrawal agreement merry-go-round. And unfortunately for him and his Conservative Party, it doesn’t look like he accomplished much, other than winding down the clock toward Oct. 31, the new – and some claim final – ‘Brexit Day’.

To try and make some progress ahead of this weekend’s G-7 Summit in Biarritz, Johnson embarked on a brief tour of the Continent this week, where he met with German Chancellor Angela Merkel, and embattled French President Emmanuel Macron, to discuss whether an alternative to the current withdrawal agreement might be found. 

On Thursday, Johnson met with Macron, and the two delivered a joint statement in Paris, following an overly lengthy and incredibly awkward handshake between the two men.

The pound rallied after Macron sounded slightly more optimistic about a new withdrawal agreement, stoking hopes that a deal might be reached to avert a ‘hard’ or ‘no deal’ Brexit, something for which the market has been bracing for months,as Johnson has insisted – unlike his predecessor – that he will gladly lead the UK over the ‘no deal’ cliff if a deal isn’t done before then.

But whatever cause for optimism that traders found in Macron’s comments, it’s doubtful that it will be maintained, as Macron pointed out that putting together a ‘substantially different’ withdrawal deal is doubtful. it’s more likely that GBP is moving based on comparisons between the French government’s comments from Wednesday vs. Macron’s on Thursday.

“Let me be very clear: We will not find a new withdrawal agreement within 30 days which will be very different from the existing one,” Macron said, before reiterating that Brexit “was not the choice of the European Union” and “we have to respect what was negotiated” under Theresa May.

The biggest snag, as it has been for the past ~2 years, is the Irish backstop, which is reviled by Conservatives who fear that the EU might use it to legally bind the UK to certain systems like the Customs Union. Both Macron and BoJo stuck to their guns this week: BoJo insisted that the EU must get rid of the backstop, something the bloc has repeatedly insisted it will never accept.

Macron claimed the backstop is a vital component of a deal.

“The Irish backstop (clauses) are not simply technical constraints but vital guarantees for the preservation of stability in Ireland and the integrity of the single market which is the basis of the European Project,” Macron added.

But BoJo insisted that if the two sides tried hard enough, a compromise could be reached, even if the vaguely technological solutions outlined in a white paper put together by a group of conservative MPs have been repeatedly dismissed by the bloc. Critics inside and outside the UK have dismissed many of these options as “unicorns” – ideas that

“Where there’s a will, there’s a way,” Johnson said.

Yesterday, Merkel suggested that a new deal might be reached if Johnson could find more realistic solutions, prompting Johnson to praise her “can-do spirit.”

But as BBG pointed out, “while Merkel and Macron have been polite and offered encouraging words to Johnson, behind the smiles it’s clear they’re not prepared to change the fundamentals of the Brexit deal. That suggests that unless Johnson backs down, a no-deal departure still looks like the most likely scenario.”

Meanwhile, Johnson is reportedly planning to join President Trump for breakfast on Sunday morning before the president heads back to Washington.

Then again, as we and others have pointed out, even if the Irish Backstop stays, the bloc’s “insurance policy” is practically unenforceable. Both the UK and the Republic of Ireland have vowed to never reinstate physical barriers between Northern Ireland and the RoI, which is the only major land barrier between the EU and UK.

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Democrats Love To Promise Free College, but Why Did U.K. Recently Started Charging Tuition?

It’s not easy keeping track of exactly who has promised what to whom in the race for the Democratic nomination. Two of the most prominent candidates, Sen. Bernie Sanders (I–Vt.) and Sen. Elizabeth Warren (D–Mass.), have made “free” college and student debt forgiveness central pillars of their presidential bids. 

But the U.K. has moved in the opposite direction, with astonishing results. After nearly 40 years of offering free college, starting in 1998 students in England were asked to pay about $1,200 per year. Since then, tuition has risen to $11,000 per year. Students in England now leave college with around $60,000 of debt on average. A government-backed loan scheme means graduates only start repaying that debt once they are earning more than $30,000. Any debt that remains after 30 years is forgiven altogether. (The Scottish government has devolved power in this area and operates a different system.)

Yet today the number of university students from poor backgrounds is larger than it has ever been. The story of why the British government opted to end a policy similar to those proposed by leading Democrats—and what has happened to higher education in the U.K. since—is instructive for the American debate. 

The case for free college is simple enough: higher education should be for the many, not the few. In the U.S., today’s eye-watering costs prevent that from being the case. Sanders called it “a national disgrace” that many Americans don’t attend college “not because they are unqualified, but because they cannot afford it.” Counterintuitive though it might seem, a desire to broaden access and increase the number of young Brits in college was exactly why the U.K. opted for the opposite course from the one Sanders is proposing.

Before the introduction of tuition fees, government resources could not keep up with increased demand for university education. Per-student funding dropped by 40 percent in the last two decades of the tuition-free system. In order to keep costs under control, the government spent less per student and rationed the number of spots available. But costs continued to balloon. What’s worse, students from better-off backgrounds were more likely to grab one of the limited number of spots, so it was students from poor backgrounds who suffered, with the gap in degree attainment between rich and poor widening.

Britain faced a choice: an elitist university system in which the state subsidized the education of a select few who managed to perform well on high-stakes tests, or giving many more people the opportunity to earn a university degree by shifting part of the financial burden from the state to the individual; it opted for the latter. 

Today, students pick up the bill for, on average, around 65 percent of the cost of the education they receive, with taxpayers plugging the gap. More students are enrolled than ever before and those students benefit from more per-student funding than the generations that paid nothing for college. 

Democratic presidential hopefuls say they want to get more students from poor backgrounds enrolled in college. In the U.K., the best way to do that was by charging, not by making college free. In the last decade, the number of 18-year-olds from “low participation”––poor––neighborhoods going to college has increased by 75 percent. And over that period of time, funding per student has risen by a quarter. There have never been more young Brits who qualify for free school meals going to college. 

As in America, the question of how to fund higher education in Britain is far from settled. Jeremy Corbyn, the leader of the left-wing Labour Party, backed the abolition of tuition fees at the last election. A recent government review of the system proposed a series of modest reforms to address concerns over the current system. One concern centers around the affordability of the current system, given that the government can’t know with any certainty how much of the tab it will have to pick up. A report published earlier this year by the London-based conservative think tank Onward forecast that just 17 percent of graduates will fully pay back their loans.

There are persuasive principled objections to taxpayer-funded college. If the individual accrues the lion’s share of the benefits of a college degree, why shouldn’t he or she bear the cost? Asking taxpayers to fund universal free tuition means asking, for example, a farm worker who earns the minimum wage to pay for the education of a student from a wealthy household en route to a high-flying career in law or finance. You don’t need to be an avowed free marketeer to see the problem here; none other than Karl Marx raised a similar objection when he said “If higher education institutions are also free that only means in fact defraying the cost of education of the bourgeoisie from the general tax receipts.” 

But let’s assume that those problems aren’t fatal to the case for free college. The problem for the likes of Sanders and Warren is that they cannot escape the affordability dilemma that makes it very hard for free college to live up to its promise. Either other public spending priorities face the squeeze to fund universities, or the number of spots available at publicly funded schools must be capped. 

In other words, students paying their own way need not be a barrier to achieving the stated aims of the tuition abolitionists. Sanders and Warren use “free education” and “universal education” interchangeably. The U.K. story is a reminder that that often those aspirations aren’t complimentary, but contradictory. 

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