Tag: news

It was a tough week for stock market investors but the primary driver of the chaotic crumble in small caps and tech stocks was not one of the usual suspects and even for those who consider themselves ‘hedged’ or balanced it was the worst week in 7 months.

The blame for this blight on Americans’ wealth was placed squarely on the shoulders of the bond market and its violent and high velocity lurch higher in yields.

Yields rose across the curve on the back of strong US economic data and hawkish comments from Federal Reserve Chairman Powell, forcing equity investors to reevaluate the higher rate environment.

To be sure, the absence of uncertainty has been bewildering given the fact that the US government’s budget deficit has swelled, contributing to the country’s debt load, now at $21.5 trillion. Meanwhile, corporate America has gone on a borrowing spree to take advantage of near-record low rates. In fact, according to Bloomberg, excluding financials, S&P 500 companies have more than doubled their borrowings to $5 trillion over the past decade.

“There are a lot of people waiting for the world to end because of this bond market,” said Brad McMillan, chief investment officer for Commonwealth Financial Network, which oversees $156 billion.

“Low rates will keep going forever — a lot of justification for high valuations is based on the assumption. That assumption is largely broken.”

And, as Bloomberg  notes, prophesies of doom are everywhere.

There’s billionaire investor Stan Druckenmiller, who says our “massive debt problem” will ignite a crisis.

Oaktree Capital’s Howard Marks warns that public and private debt will be “ground zero when things next go wrong.”

And Citadel’s Ken Griffin sees a credit binge ending badly.

And they are right to worry, because if interest rates rise and growth slows, companies are bound to see to their financial soundness deteriorate. More than $1 trillion of investment grade corporate bonds could be cut in the next downgrade cycle, according to analysis this week by Morgan Stanley.

“Leverage is near all-time highs, and companies used tax reform proceeds for buybacks instead of paying down debt,” said Max Gokhman, head of asset allocation for Pacific Life Fund Advisors, which manages $40 billion.

“More than triple the debt that came due in 2018 will be due each year from ’19-’21. If yields go up, there’s real concern about companies’ ability to reissue and keep their leverage.”

And that concern is starting to be priced into markets with the bond market’s ‘VIX’ – The Merrill Lynch MOVE Index tracking Treasury volatility – rose almost 20 percent this week, the biggest jump since 2015.

We await the contagion.

And if The Fed keeps up its pace of balance sheet normalization, things are about to even uglier, even faster…

Strangely, the clever talking-heads on business TV proclaim that rates are going up for the “right” reason, so have no fear average-joe-investor… we wait with bated breath for one of them to drop the ‘c’ word when this really starts falling apart – “Contained.”

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Authored by Heather Higgins, op-ed via The Hill,

Democrats were cheered by the renewed FBI investigation of Judge Brett Kavanaugh and counted it as a win. Most Republicans were dismayed that the full Senate’s vote on Judge Brett Kavanaugh’s appointment to the Supreme Court was delayed and saw this as a political misstep.

They should change places.

First, while the politically attuned understand this is just a delay game by the left, who are on record as willing to do anything to derail this nominee and force the appointment to be made after the November election, swing voters and many women do not.

For them, there is no reason to not look further. The “why rush? It’s for a lifetime” argument resonates as do their own experiences. This past week countless of men have learned from many women just how prevalent the alleged behavior and how much worse it is. This includes those in my own family who hadn’t known I was a victim of sexual assault in high school and just after college when I was the victim of rape. 

Independents, Millennials and many women want to know: Why hasn’t Mark Judge answered more questions? What do other classmates say? Is the GOP going to be fair to what they saw as sincere testimony by Dr. Ford?

President Trump is astute and understood ahead of any polling, that for these people, rushing a vote without more FBI vetting would leave Kavanaugh’s legitimacy perpetually undermined on the court.

He knows that many had real concerns that need to be addressed. The GOP should welcome this  — these non-base voters thinking the GOP handled the process fairly will be important to the GOP’s November success and thus all future policy wins.

Moreover, had Trump insisted on proceeding with a vote, that would have made him the story and given the Democrats more anti-Trump/anti-GOP ammunition among groups that still so dislike Trump personally that it makes it hard for them to focus on his policies, which they do like.

This extra time and caution also helps Republicans make clear that they do take accusations of sexual assault, abuse and misconduct very seriously.

Sen. Jeff Flake‘s (R-Ariz.) epic failure in the elevator — in which he was confronted by tearful victims of sexual violence who argued that he was betraying them, while he froze — exemplifies this problem. That situation should have been handled with great sympathy, but also certitude.

Republicans should focus on how manipulated this process has been by Sen. Dianne Feinstein (D- Calif.) and the handpicked lawyers who did not have either the process or Dr. Ford’s best interests at heart and encourage as well greater examination of the facts provided by Dr. Ford.

For example, the FBI ought to be able to get more definitive answers about how many people were present at the party, whose house this was (surely the home must have been one of the party goers? Presumably it was not their habit to go into homes with no adults present to gather and have a party in an unoccupied home?) and how she left the party.

The FBI ought to be able to get access to the therapist’s full notes, not least because we already know there are significant discrepancies between the details contained in those (late teens, mid 80’s, 4 boys), Dr. Ford’s testimony (15, ’82, 2 boys) and the deliberately ambiguous polygraph statement regarding the date.

We do know Democrats are already doing a little pre-suasion, trying to discredit the investigation before it concludes and shift the narrative from sexual abuse to alcohol abuse and perjury — indicators that they don’t think the witnesses will contradict their prior testimony. But because they don’t want a strict constitutionalist on the court, they will persist in any and every attack — and that has another consequence.

Democrats underestimate how completely terrifying this spectacle appears to ordinary people. Here is a man who volunteers in a homeless shelter and coaches girl’s basketball and has more female clerks than any other federal judge; and he is being destroyed on accusation alone. How could an ordinary person, without powerful friends, survive such an onslaught?

The same public watched #MeToo start with pretty clear cases against guys who were creeps. Now, some of the cases are much muddier. This new Kavanaugh standard the left wants to impose would mean any one could be named, his reputation and future destroyed and subjected to intense ridicule when he defends himself.

It means what you did in high school, like drinking too much or yearbook references can be a reputation and career destroyer. This terrifies people. Both men and women who have men in their lives.

This controversy could end up working in Republicans favor. The recent drama with Kavanaugh will motivate many to come out — not just the conservative base, but fair-minded Independents who recognize that Democrats have waged an ugly, opportunistic political war to personally destroy a man with a stellar reputation as a public servant and politicized and harmed the reputation of the approval process and the Supreme Court itself, all in hopes of gaining power.  

This is not how they think the Senate should behave, it is not the America they want, nor the sort of public drama they want to have to explain to their children.

The Left hopes that they have further sullied Republicans in this episode, but they have shown to many that the Republicans is the party of fairness and themselves extremists.

Democrats just killed the blue wave.

* * *

Heather R. Higgins is CEO of Independent Women’s Voice.

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There have been reports that Dagestani fighter Kabib Nurmagomedov has already agreed to a rematch with Conor McGregor after handing the Irish fighter his second UFC defeat with a fourth-round submission early Sunday morning. But while the fight will go down in infamy for the epic brawl that immediately followed, Kabib took a few moments to bask in his victory while speaking with reporters after the fight, even revealing that Russian President Vladimir Putin had already called to congratulate him and say that he was “proud of me.” 

Here’s the Daily Beast with more:

Dagestani fighter Khabib Nurmagomedov says Russian leader Vladimir Putin personally called him after his victory over Conor McGregor on Saturday to tell him how proud he was. Nurmagomedov, who jumped out of the octagon after the match and sparked mass brawls that led to arrests, was mostly unapologetic for the chaos he caused. “They call [McGregor] two-weight world champion, but today he tapped,” he told reporters after the fight in Las Vegas, saying the Irish fighter had disrespected the sport with his “trash talking” about Nurmagomedov’s religion and family ahead of the fight. “Of course, this is not what my father taught me, but it was a matter of honor,” he wrote on Instagram. He also said that while “all the press” was busy talking about McGregor’s photo with Putin at the FIFA World Cup over the summer, “the president just called me. He congratulated me and said he’s proud of me.” The Kremlin has yet to officially comment on Nurmagomedov’s win.

Putin had famously taken a photo with McGregor at this summer’s World Cup, something that incited a degree of controversy.

Putin wasn’t the only Russian leader to relish in Kabib’s victory. Chechen leader Ramzan Kadyrov praised him, saying that McGregor learned the hard way that Nurmagomedov is “a genius artist, capable of turning his face into a painting drawn in red oil paint.”

Aside from his victory over McGregor, Saturday night’s fight will go down in infamy after Kabib climbed out of the Octagon and brawled with members of McGregor’s entourage.

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Brazil’s 147 million eligible voters have begun casting ballots in Sunday’s federal election, which will help decide who will replace the wildly unpopular centrist Michel Temer as the president of South America’s largest country and economy (it will also determine the composition of the next Congress, country’s governorships, vice-governorships and state government positions).

While no candidate is expected to win an outright majority – which means the top two finishers will face off in a second-round vote on Oct. 28 – federal congressman Jair Bolsanaro, a far right candidate who has divided the country with his sympathetic comments about Brazil’s 20-year military dictatorship, has pulled ahead in recent polls, with some placing his support as high as 44%.

Meaning that after years of leftist rule, followed by a brief period of tepid centrism, a man who has embraced the label “the Brazilian Donald Trump” is poised to win a presidential election, bringing the global populist anti-establishment movement to South America.

One poll taken on Oct. 3 showed that Bolsonaro was polling at 32%, compared with 22% a month earlier, after a deranged socialist gravely wounded Bolsonaro, a former paratrooper in the Brazilian military, by stabbing him in the gut during a rally. Though Bolsonaro lost a massive quantity of blood, ironically, the attack helped galvanize his supporters. Despite being absent from a presidential vote this week, Bolsonaro still dominated.

 

Of course, the electorate’s embrace of a far-right populist candidate amid a surge of nostalgia for the military dictatorship that ruled Brazil between 1964 and 1985 is no accident. The social ills facing Brazil’s 210 million people – who only a few years ago were enjoying a period of relative prosperity – are myriad and diffuse: The unemployment rate has skyrocketed to 12%, a gaping budget shortfall, economic mismanagement and endemic public corruption have shaken the faith of international investors who have left the Brazilian real to plummet. Crime is rampant, with more than 63,000 murders last year, making people yearn for the social stability that was once a hallmark of life in the country. Schools, hospitals and roads are run down and underfunded. Because these and other factors (including his becoming ensnared in a corruption scandal just like his predecessor, Dilma Roussef) Brazilian President Michel Temer is universally despised, with an approval rating of 2%.

While the left-wing Workers’ Party presided over the most recent economic boom, it is also responsible for leading the country into an economic death spiral. And the massive “carwash” probe into corruption at state-run energy giant Petrobras, a scandal that led to the ouster of former President Dilma Roussef, has sown widespread resentment directed at the Brazilian left. Former President Lula da Silva, by some measures the most popular politician in the country, was preventing from running under the WP banner due to being imprisoned on corruption charges. Fernando Haddad, who trails Bolsanaro in the polls and will likely face him in the runoff vote, is running in Lula’s stead after a court ruled that Lula was ineligible due to a law that he himself signed during his presidency.

Bolsanaro is widely viewed as the pro-markets candidate and signs of his advancement in the polls have bolstered the Brazilian real as well as domestic assets. And despite his history of misogynistic and homophobic remarks, Bolsanaro maintains widespread support among Brazilian women, like one businesswoman from Sao Paolo who shared her views with the WSJ.

“The [Workers’ Party] has devastated the country,” said Solange Correia, a 58-year old businesswoman in São Paulo who enthusiastically supports Mr. Bolsonaro, one of the few top Brazilian politicians not tainted by graft scandals despite his 27 years in Congress.

Bolsanaro has also decried Brazil’s electoral process, which relies on electronic voting machines, as deeply suspect and has said, in a comment that echoed one made by President Trump during the 2016 campaign, that he would reject any outcome where he isn’t the winner. To ensure fairness, the Brazilian army is deploying 28,000 troops to protect the polls, while the Organization of American States is sending teams of independent observers.

Though the Economist singled-out Bolsanaro in an article warning about a return to Brazil’s military dictatorship, he’s not the only candidate who has expressed sympathy and support for authoritarian leaders. The Worker’s Party has expressed support for leftist strongmen in Cuba and Venezuela, per WSJ.

Many Brazilians fear for a return to authoritarian rule from either candidate, given Mr. Bolsonaro’s sympathy for the 1964-1985 military rule and the support for strongman regimes in Venezuela and Cuba shown by Mr. Haddad’s party. Such concerns led Chief Justice Dias Toffoli to publicly call for restraint earlier in the week, on the anniversary of the country’s 1988 Constitution. “Dictatorship, never again,” he said during a televised Supreme Court session.

Some academics have claimed that Brazil’s current obsession with strongmen leaders has reached “the point of madness.”

“We’ve reached a point of madness,” said Boris Fausto, a Brazilian historian who at age 87 witnessed two long dictatorships in Brazil come and go. “Extremism has taken the upper hand, particularly the rise of an extreme right that has no commitment to democracy.”

This may be true, but then again, the anger that Brazilians are feeling appears to be justified. Brazilian election laws mandate voting for all citizens between the ages of 18 and 70. Those who don’t vote risk receiving a small fine and other administrative penalties. For Brazilians aged 16  and 17, or 70 and over, voting is optional.

Since Brazil is divided into three time zones, the polls in the western state of Acre won’t close until 7 pm in Brasilia (6 pm in New York). Once voting has ended, Bloomberg expects the results to quickly flood in. Meanwhile, Bloomberg reported earlier this week that investors were loading up on Ibovespa puts to hedge against a weaker-than-expected showing by Bolsonaro in Sunday’s vote. If he surpasses expectations, expect domestic stocks to rally amid a flurry of short-covering.

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Authored by Lance Roberts via RealInvestmentAdvice.com,

Market Review

In last week’s missive I stated:

“There has been a pretty well defined upward trendline (gold box) since the April lows which has consistently provided better entry opportunities to increase equity exposure.”

“As stated, our existing portfolios are currently fully weighted toward equity risk as there seems to be little which can derail this market currently. We have moved stop-loss levels up to recent lows, added some defensive positioning, and have added bonds as rates have climbed above 3%.

Speaking of rates, each time rates have climbed towards 3%, the market has stumbled.”

Chart updated through Friday close.

I got lot’s of emails early last week suggesting “this time was different.” Rates were rising because of strong economic growth and as such, it wouldn’t affect the stock market. (More on this in a moment.)

If you note in the chart above, a short-term “warning signal” has been triggered which suggests that if rates remain above 3%, stocks are going to continue to struggle. The last time this occurred was in May when rates popped above 3%, stocks struggled and bonds outperformed.

Over the last couple of weeks, I have noted that after increasing equity exposure in portfolios, the short-term overbought condition needed to be resolved before the markets could make a year-end push higher to 3000.

Not surprisingly, the statement triggered a lot of questions as to why, at a time when the market was at 2950, I was only giving the markets 50-points of upside? The reason was that a pullback was needed to open up the potential for a year-end push. On Thursday and Friday, as the markets woke up to the recent surge in rates above 3%, markets sold off back to support at the January breakout highs. That sell-off does provide enough of an oversold condition to support a year-end push which has now expanded from just 1.6% last week, to 3.33% over the next couple of months.

I also noted last week, that we would be updating our pathway chart, as first shown above, which has remained unchanged for well over a month (prices have been updated through Friday’s close.) What was most surprising to me was how closely the markets had traced out the projected #2a pathway.

With this background, we can update the pathways which hold the highest probable outcomes over the next couple of months.

There has been a pretty well defined upward trendline (gold box) since the April lows which has consistently provided better entry opportunities to increase equity exposure. While there are literally thousands of potential outcomes over the next couple of months, I have refined what I think are the most likely outcomes down to four possibilities.

Pathway #1:  The market sold off to the peak of the January highs which is support. With the market now short-term oversold a rally to new highs through the end of the year is possible (20%)

Pathway #2a: The first of two most probable outcomes at this juncture is a rally from the current support at the January highs but the rally fails at 2900 which forms the right should of a “head and shoulder” topping pattern from the August left shoulder peak. The bullish outcome is a selloff back to the January highs and the market then rallies to new highs by year end. (40%)  

The bearish outcome, is a violation of the “neckline” at the January highs and the market continues to track Pathway #2b

Pathway #2b: Rising interest rates continue to weigh on stocks next week and the market breaks the January high support level. However, given the short-term oversold condition, the market rallies from the bottom of the current bullish trend (gold box) but fails to rise above the January highs and turns lower putting in a more major top for the year. (30%)

Pathway #3: The issue of rising interest combines with a break in the economic data, or another credit-related event, and sends the market heading back to test supports at 2800 and 2750. This would likely coincide with a more severe contraction in the economic data which is not an immediate threat. Nonetheless, we should always consider the risk of an unexpected, exogenous, event. (10%)

Next week, I would expect to see a rally from the short-term oversold conditions. However, it will be the breadth and strength of that rally that will be important to watch.

If it is a weak, narrow bounce with little conviction, we will use the rally to lift positions, trim losers, raise cash and potentially look at initiating some hedges.

Our bigger concern remains interest rates simply for one reason – you can NOT have higher stock prices AND higher interest rates. Period.

One or the other will have to give.

Did Something Just Break?

Over the last few days, the internet has been abuzz with commentary about the spike in interest rates. Of course, the belief was that rising rates were “okay” because the market was still rising. As noted on Wednesday by Charlie McElligott (via Zerohedge):

“Effectively the market is saying that in the absence of an ‘inflation shock’ (which would drive a front-end yield spike / ‘power flattening’ on ‘accelerated Fed),’ that we are on track to ‘grow faster than we are tightening’

Another way of putting it is that Wednesday’s ‘economic assessment upgrade’ and view that we are ‘growing faster than we are tightening’ is why we are not seeing that same ‘rate – and VaR shock’ contagion into risk-assets that defined the market in late January, early February, and which – as McElligott notes – ‘was BY-FAR the #1 client inquiry, i.e. ‘Why are higher yields not negatively impacting Stocks here?.’”

On Thursday and Friday, stocks crumbled as the reality that higher rates and tighter financial conditions will begin to negatively impact growth data. With housing and auto sales already a casualty of higher rates, it won’t be long before it filters through the rest of the economy.

The chart below shows nominal GDP versus the 24-month rate of change (ROC) of the 10-year Treasury yield. Not surprisingly, since 1959, every single spike in rates killed the economic growth narrative.

As Doug Kass noted on Friday:

“No, it’s not the economy, stupid. It’s interest rates, stupid.

Their course and trajectory have had a profound influence over time on our markets.

For as James Carville also famously stated in emphasizing the potency of the bond market:

“I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.”

Precisely when that rate influence ‘bears’ on our markets is always hard to ascertain.

Perhaps with the benefit of hindsight, we over thought what factors ultimately would debilitate the capital markets.

Perhaps concerns over possible policy issues and or policy mistakes, never-ending political surprises, continued sovereign debt crises, and other issues were simply decoys.

Perhaps it was in front of us all the time, just as it has been in almost every meaningful markdown in history. 

In a global economy that never has been more flat, interconnected and filled with multiple and interrelated dominoes, the process of a quickened rate rise becomes ever more problematic in a mountain of public and private debt as the winter cold descends upon us.”

He is absolutely correct.

In the U.S. we have dismissed higher rates because of a seemingly strong economy.

However, that “strength” has been a mirage as I noted last week:

“While the markets have been the beneficiary of the tax cut legislation, which gave a short-term boost to corporate profitability, the economy has enjoyed a boost from the massive increases to spending from what should have been more aptly termed the ‘Bipartisan Non-Budget Act of 2018.’ Notice in the chart below the pickup in economic activity has coincided with a surge in the deficit. Spending on natural disasters and defense simply ‘pulls forward’ future economic growth which gives an illusion of an economic turn.”

That illusion of economic growth has kept investors blind to the economic slowdown which is already occurring globally. As Mehul Daya and Neels Heyneke via Nedbank recently penned:

“Global bond yields are on the rise again, led by the US Treasury yields, which as we have highlighted in numerous reports, is the world’s risk-free rate.

The JPM Global Bond yield, after being in a tight channel, has now begun to accelerate higher. There is scope for the JPM Global Bond yield to rise another 20-30bps, close to 2.70%, which is the ‘Rubicon level’ for global financial markets, in our view.

If the JPM Global Bond yield rises above 2.70%, the cost of global capital would rise further, unleashing another risk-off phase. Our view is that 2.70% will hold, for the time being.

We believe the global bond yield will eventually break above 2.70%, amid the contraction in Global $-Liquidity. A stronger US dollar and the global cost of capital rising is the perfect cocktail, in our opinion, for a liquidity crunch.”

“Major liquidity crunches often occur when yield curves around the world flatten or invert. Currently, the global yield curve is inverted; this is an ominous sign for the global economy and financial markets, especially overvalued stocks markets like the US.

The US economy remains robust, but we believe a global liquidity crunch will weigh on the economy. Hence, we believe a US downturn is closer than most market participants are predicting.”

I agree.

And if they are right, this is going to leave the Federal Reserve in a tough position of having tightened monetary policy to much. With bond traders more short than at any point in history, the ultimate “reversion to the mean” in Treasury’s will drive rates towards zero.

The chart below strips out all periods EXCEPT where net-short bond positions exceeded 100,000 contracts. In every case, interest rates turned lower.

Back to Doug Kass for a moment:

“The disproportionate role of quant strategies also represents a profound market risk when rates are advancing, particularly relative to consensus disinterest and even lack of understanding of the role of this dominant market player. This is important, because if the correlations that underpin risk parity begin to fail — basically when both bonds and stocks fall simultaneously — as they have in the last week, they likely will cause an impactful unwind of risk-parity portfolios that are sizable and very leveraged.”

The recent blow out in risk parity, as noted by a surge in volatility, is evidence that something likely just broke.

History bears this out as well.

Whenever the 10-year yield has traded at, or above, 2-standard deviations above the 2-year moving average, bad things have tended to occur from recessions, to corrections, to outright crisis. Given the 2-year rate of change on the 10-year has surged to the highest level in over 50-years – if something hasn’t already broken, it likely will soon.

The table below looks at the rate of change from the preceding low to the subsequent peak and the outcome of rising rates. Again, there has NEVER been a period where both rates and stocks rose simultaneously. Also, as shown above, the current percentage change in rates is the highest since 1957.

More importantly, rising rates are NOT JUST a consideration of stocks versus bonds.

If the stock market falls, the top-20% of the economy gets a little depressed because their wealth declines a bit.

However, given the bottom 80% have very little invested in the financial markets, when RATES surge higher, it is 100% of the economy that feels the pinch. As Doug notes, interest rates run through the entirety of the financial and economic backdrop.

1. The private and public sector have inflated debt loads today. Rising interest rates raise the cost of servicing that debt and reduce spending and productive investment.

2. Private-sector activity is importantly influenced by interest rates:

   • Rising mortgage rates and higher mortgage payments reduce home affordability and hurt home turnover and refinancings.

   • Slowing home sales and reduced refinancings hurt spending on renovations and remodeling.

   • Consumer, mortgage and corporate loans that are variable rate are hurt by climbing interest rates.

   • The credit markets fall when interest rates rise, serving to have a negative wealth effect on consumers and corporations that own bonds.

   • Debt is often issued by corporations in order to buy back stock and pay dividends. Advancing rates reduce a company’s return on investment on those buybacks.

   • Corporate capital spending is partially dependent on borrowings. Higher borrowing costs could lead to lower capital spending.

3. Public-sector activity and profitability are also importantly influenced by interest rates:

   • The deficit/GDP ratio will increase as interest rates rise and the consensus expectation for lower future deficits will crumble.

4. Dividend discount models are based on future estimates of cash flow discounted back at an appropriate interest rate:

   • Rising interest rates reduce the value of those future cash flows and, in turn, the value or worth of a company’s stock.

5. There is now an alternative to stocks as the yield on the one-month bill (2.16%) and the two-year Treasury note (2.89%) compare favorably to the S&P 500’s dividend yield of only 1.77%. Further rises in interest rates will serve as an even more competitive and attractive alternative to stocks.

6. Rising interest rates in the U.S. will buoy the dollar, exacerbating the ability of weaker countries and corporations to service their dollar-denominated debt.

The issue of rising interest rates may have finally woken overly complacent investors from their bullish slumber.

We won’t know until we get a rally that fails to set a new high.

But one thing is for sure… if something hasn’t already broken, it will break soon if rates keep rising.

That day may be much sooner than most expect.

As noted above, we have tightened up stops considerably and next week will begin to start rebalancing and hedging risks accordingly.

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In their first face-to-face meeting since President Trump abruptly canceled a visit scheduled for August, Secretary of State Mike Pompeo and North Korean leader Kim Jong Un reportedly spent “several hours” together on Sunday engaging in “productive” talks that represented “another step forward” in US-North Korea relations. and progress toward achieving the agreements from the Singapore Summit The talks also yielded a verbal commitment to schedule the long-anticipated second summit meeting, according to South Koren officials, which the two sides have been working toward since the close of the historic Singapore meeting. According to the Washington Post, Pompeo and Kim met for “several hours” before eating lunch together.

During their totally natural and not-at-all-staged lunch, Pompeo and Kim shared a meal that lasted more than 90 minutes while answering questions from journalists while seated at a large round table…

…both men insisted that it had been “so nice” to have had the opportunity to chat and that their talks had yielded “significant progress.”

“It’s good to see you again,” Pompeo told Kim as the two men shook hands for the cameras before lunch. The Secretary of State then put his hand on Kim’s shoulder and the pair smiled.

“Well, I am really pleased for this opportunity. After having a nice meeting we can enjoy a meal together,” Kim said as they walked down a hallway for lunch.

As they sat for lunch, Kim said, “It’s a very nice day that promises a good future for both countries.”

Pompeo said he had had a “great visit” and a “very successful morning”, adding that Trump sent his regards. Both men spoke through translators.

Several NK officials even told US journalists that they had no foreknowledge of Kim’s decision to dine with Pompeo, suggesting that it was an “off the cuff” decision.

US & NK officials alike were surprised that KJU decided to dine with Pompeo. When I asked one NK official if they knew KJU was going to have lunch with Pompeo today he said definitely not, with wide eyes. https://t.co/CUio2Wetya

— Kylie Atwood (@kylieatwood) October 7, 2018

Though a date has not been set, the New York Times reported that the US and North Korea had agreed to hold  summit “as early as possible”, citing the office of President Moon Jae-in of South Korea, which had been briefed on the meeting.

The Times, citing an anonymous official, reported that the trip was “better than the last time”, referring to Pompeo’s disastrous July meeting with Kim. Though the two sides remain far apart on several key issues:

An American official who accompanied Mr. Pompeo said on Sunday that the trip was “better than the last time,” referring to the secretary’s trip there in July, according to a pool report. But the official, who was not identified, added, “It’s going to a long haul.”

Despite the photo-ops and effusive praise shared between Pompeo and the North Koreans, the fact remains that there has been little to no progress made toward breaking the crucial diplomatic logjam preventing negotiations between the US and North Korea from moving forward. As the New York Times reminds us, the US is sticking to its demand that the North complete the process of denuclearization before economic sanctions can be lifted. Meanwhile, the North has insisted again and again that it isn’t willing to surrender its nuclear weapons until it is completely convinced that the safety of the regime can be ensured, which is an extremely amorphous benchmark.

In a tweet published late Sunday, President Trump said he looks forward to “seeing Chairman Kim again in the near future.”

 

.@SecPompeo had a good meeting with Chairman Kim today in Pyongyang. Progress made on Singapore Summit Agreements! I look forward to seeing Chairman Kim again, in the near future. pic.twitter.com/bUa2pkq80s

— Donald J. Trump (@realDonaldTrump) October 7, 2018

 

South Korean officials and some experts quoted by the Times suggested that the US is going down a “dead end” and that, instead, it should start by holding NK to its promise to dismantle the Yongbyon nuclear complex and worry about creating a nuclear inventory, a necessary precursor to verification, to a later date.

If the United States insisted that North Korea provide a full nuclear inventory and submit to time-consuming verification first, the negotiations will derail again as they did in the past, some analysts warned.

“Going down that road is a dead end,” Siegfried S. Hecker, a former director of the Los Alamos National Laboratory, who has visited North Korea several times, said during a lecture in Seoul on Sept. 27.

Instead, he said the two sides must start with risk-reduction steps, like dismantling the Yongbyon complex, and leaving the difficult and time-consuming verification to a later phase of denuclearization, when the two sides have gained mutual confidence in each other.

Foreign Minister Kang Kyung-wha of South Korea also raised the idea of leaving inspection and verification to a later stage in remarks he made during an interview with the national broadcaster KBS on Sept. 21.

Still, there are no guarantees that the North will follow through with this promise, just as many suspect that the North’s decision to close its nuclear testing facility, a decision that was widely heralded as a breakthrough by the US media, was in reality a gesture of convenience, since the facility had already been destroyed. As relations between the US and China continue to deteriorate, it’s difficult to imagine the North defying its primary benefactor to gamble on warmer relations with the US. More likely, this is just the latest in a series of stalling tactics, as the North hopes to secure whatever concessions it can before the end of Trump’s term.

And, of course, there’s still the possibility that, once Pompeo has left the North, the regime could change their story and once again denounce the US for making “gangster-like” demands, like they did after Pompeo’s previous visit in July.

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President Trump on Saturday touted a conservative victory after his Supreme Court nominee, Brett Kavanaugh, was confirmed as the 114th Justice after a contentious and dramatic assault from the left. 

Speaking in Topeka, Kansas, Trump framed the Democratic resistance to Kavanaugh as an attempt by an “angry mob” to hijack the proceedings “in their quest for power.” 

“They threw away and threw aside every notion of fairness, of justice, of decency and of due process,” Trump said of the anti-Kavanaugh efforts. “What he and his wonderful family endured at the hands of Democrats is unthinkable, unthinkable.“

TRUMP: “I want to thank our incredible Republican senators for refusing to back down in the face of the Democrats’ shameless campaign of political & personal destruction… radical Democrats launched a disgraceful campaign to resist & demolish right from the beginning.” pic.twitter.com/lIzj3TqCC9

— Aaron Rupar (@atrupar) October 6, 2018

“Just imagine the devastation they would cause if they of their obtained the power they so desperately want and crave,” Trump added. “You don’t hand matches to an arsonist and you don’t give power to an angry left-wing mob, and that’s what they have become.” 

Trump then used Kavanaugh’s example to illustrate why conservatives need to vote during the midterm elections in four weeks so that Democrats don’t take back the House: 

“You have to vote,” Trump insisted. “On November 6 you will have the chance to stop the radical Democrats — and that’s what they have become — by electing a Republican House and a Republican Senate. We will increase our majorities. We need more Republicans. We need more Republicans.” 

“The Democrats have become too extreme and too dangerous to govern,” Trump continued. “Republicans believe in the rule of law not the rule of the mob.”

LIVE: President Trump encourages supporters at a Kansas campaign rally to vote against “radical Democrats” and praises his “energized” base #TicTocNews pic.twitter.com/FdqiBWrAZf

— TicToc by Bloomberg (@tictoc) October 6, 2018

Bonus: Feinstein impression

Trump mocks Diane Feinstein, mimics her alleged confusion in a manner similar to how he mimicked a reporter with a disability three years ago pic.twitter.com/2Mba35BwGw

— Aaron Rupar (@atrupar) October 7, 2018

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Via Golem XIV’s blog,

A couple of days ago the always good Francis Coppola wrote a piece for Forbes entitled,

The Banks That Helped Danske Bank Estonia Launder Russian Money

In it she made the simple but essential point that  while Danske Bank, through its Estonian branch, had laundered $234 billion,

…Danske Bank Estonia couldn’t do this by itself. Much of the money was paid in U.S. dollars, and for that, it needed help from other banks. Banks that had access to Fedwire, the Federal Reserve’s electronic settlement system. Big banks, in other words.

Coppola then named the banks involved.

J.P. Morgan, Bank of America and Deutsche Bank AG all made dollar transfers on behalf of the Estonian branch’s non-resident customers. And according to the Wall Street Journal, Citigroup’s Moscow branch may have been involved in some financial transfers in and out of Danske Bank Estonia.  (bold emphasis added by me)

So, Bank of America, Deutsche Bank and J.P. Morgan moved money OUT of Danske and in to dollar denominated accounts elsewhere, (see section 19 of Danske’s internal investigation). but that is only half the story. It leaves the huge unanswered question,

who moved the money in to Danske Bank’s Estonian branch in the first place?  

The accounts through which the money was laundered are non-resident accounts.  Non-resident simply means the people or entities which hold the accounts do not live in Estonia. So how did these non residents deposit their money in Danske’s Estonia branch?  Either they physically transported $234 billion dollar’s worth of their local currencies in trunks and suitcases from their own country, in to Estonia and to the bank, or it had to have been deposited electronically. Which would mean some other banks, in addition to those mentioned by Forbes, were involved.

So are there more banks than just the four listed in the Forbes article who had and perhaps still have relationships with Danske bank and who therefore could have (I’m not accusing anyone),  wittingly or unwittingly moved the money into Danske’s Estonian branch?

Ah, the joys of the internet.  Here is the list of Danske Bank ‘s Correspondent banks as of today.  (A note for all the lawyers, I am certainly NOT suggesting any of these banks laundered money. I am merely noting that it isn’t just the four banks mentioned in the Forbes article that routinely helped Danske move money around.)

For those who might not know, a correspondent bank is simply a bank that your bank has a working relationship with. So J.P.Morgan was Danske’s correspondent bank in the US. The relationship is often a bigger more international bank, which is licensed  in many countries, providing services to a smaller more regional or local bank.  But its important not to see this Correspondent relationship as being all one way.  By having a relationship the larger bank not only gets a fee for its help but becomes the international conduit for the money that its owner wishes  to move out of the small bank and its country of origin into the wider global market.

The lists of Danske’s correspondent banks shows 16 countries and territories:  Australia/New Zealand, Belarus, Canada, Switzerland, The Czech Republic, Europe, Great Britain, Hong Kong, Hungary, Japan, Norway, Poland, Russia, Sweden, Singapore, and the USA .    Bear in mind that some of these countries might be where the laundered money was coming from and some might be where that money was hoping to get to.

At the risk of insulting people when I look for the countries where the money might have been coming from I see the Czech Republic, Belarus, Russia and maybe Poland.

In the Czech Republic Danske’s correspondent bank is Obchodni Bank.  It is the largest bank in the republic but is actually majority owned by KBC Bank, part of KBC Banking and Insurance Group which  is one of Europe’s largest financial houses and it’s Belgian.  So perhaps the Belgian authorities should be concerned?

In Belarus the Correspondent bank is Priorbank JSC. This is a billion and a half euro bank, with 760 000 customers. It is in fact 87.74%  owned by Raiffeisen Bank of Austria. Now Raiffeisen and I have form, so I have to be careful here.  The link is to an article about money laundering which I wrote called “How to make the truth illegal’. What I can say is that not only does Raiffeisen’s name come up in the Magnitsky laundering case, it also comes up centrally in the infamous money laundering scandal  in which $1.2 billion was looted and laundered from Kyrgyzstan.  The best investigation of this affair I know of concluded,

…the suspicious transactions went through many banks around the world, with the largest amounts passing through Citibank in New York, the UK’s Standard Chartered and Austria’s Raiffeisen Zentralbank. These banks continued their relationship,… (My emphasis)

So perhaps the Austrian authorities should take a little look too?

In Poland Danske has its own banking network.

In Russia, where it has been assumed that most of the dirty money came from, Danske’s correspondent bank is Russia’s Central Bank.  Although things do get awfully wiggly in Russia I still think the Central Bank is an unlikely accomplice.

Danske does have its own presence in Russia. So it could have taken the dirty money directly into its own Russian subsidiary and moved it to Estonia all by itself.  But according to its web site it has only  60 employees in all of Russia so they would have been terribly busy and even they MIGHT have noticed something was odd about $234 billion coming in and going straight back out.  I also doubt every crook lined up at the same teller window week after week.

This seems to leave us with the four banks mentioned by Forbes. If so, then all the money that was laundered from Russia would have had to have been transferred into Danske by Deutsche and CITI. The other two banks which the Forbes article mentions, J.P.Morgan and Bank of America, only moved the money out, not in.  Now while I think this is entirely possible, given the feats of laundering that both Deutsche and CITI have achieved before, that they could have done it all themselves, it seems naive not to at least look to see if there were other banks involved in Russia.  So I did.

And what I found is that there is a second, larger list of correspondent banks. You get to it through the part of Danske’s web site that deals with Transaction Banking. For those of you aware of trends in Money Laundering the mention of ‘Transaction Banking’ might have started a red light flashing. Transaction or Electronic Laundering, uses fake on-line sales and is the fastest growing method of laundering.  One recent estimated is that $200 billion a year of transaction laundering occurs in the US alone.

Here is the link to the larger list.

It’s laborious to use but it reveals that several other large European banks have ties to Danske and help it to move money.

It turns out there are other banks in Russia that Danske does business with, namely Alfa Bank and Zao Unicredit Bank.

Alfa is a strange one. On the one hand Global Finance Magazine has repeatedly called it Russia’s Best Bank. On the other it has had a strategic alliance with GazProm.  America sees Gazprom as the Dark Lord Putin’s One Ring, binding European countries to its Gas supply.  Alfa has also been at the centre of the whole Trump/Russian dossier storm. And as if that wasn’t enough in December 2017, Alfa Bank’s wholly owned Dutch subsidiary, Amsterdam Trade Bank, was raided in connection with an investigation into possible money-laundering.

Zao Unicredit Bank is part of the sprawling trillion euro Italian Bank Unicredit. So this brings Italian Banking  in to our story. But it is worth remembering, however, that Zao used to be part of Bank Austria.  It was renamed when Unicredit bought Bank Austria. A purchase which, I have been told by one who worked in UniCreidt, pissed off Austrian bankers something rotten.

UniCredit still owns Bank Austria which means an Italian Bank, owns the third largest bank in Austria.  So Zao not only brings Italian banking in to the picture but links a second Austrian bank to Danske.

Danske also has partner banks in Serbia. One is Erste Bank AD Novi Sud, which is  part of Bank Erste – which is the largest bank in … Austria.   Another is RaiffeisenBank Ad Beograd. So now we have all three of Austria’s largest banks tied to Danske.  No other country has all three of its biggest banks all tied to Danske.  Might we being to wonder if there is something about Austria?

Not to be outdone The Italians are there too. Banc Intesa AD Beograd is one of the largest banks in Serbia but is 93% owned by another huge and ailing Italian bank Intesa Sanpaolo.  And UniCredit Bank Serbia works with Danske.  But again Unicredit Bank Serbia was part of Bank Austria. So is this an Italian or another Austrian connection?

Ukraine is on the list too.  Another country that routinely crops up in Money Laundering and political/banking corruption stories. In Ukraine we have Raiffeisen Bank Aval and UniCredit Bank LLC Kiev. And once again the UniCredit subsidiary used to be Bank of Austria. Hmm.

In Croatia we find among others, RaiffeisenBank Austria and  Erste & Steiermärkische Bank. While Societe General makes an appearance for the French.

In Bosnia we again have, one again, Raiffeisen and Unicredit.

While in Kazakhstan we have HSBC flying the flag for British Money Laundering banks. (Not that I’m suggesting AT ALL that HSBC might ever do anything shady in Kazakhstan).

And if we look for Middle East connections there is Banque Saudi Fransi which is Credit Agricole and Saudi British Bank which is 40% HSBC.

All of which amounts to what?  There is nothing criminal or even unusual in various banks having relations with Danske. All banks have relations with each other. But is there a pattern? There is a close connection between Dankse and all three of Austria’s largest banks and both of Italy’s largest , in countries that we might not wholly unfairly suspect of being a possible source of dirty money Is this something regulators might think important?

Russia, Bosnia, Belarus, Croatia, Serbia and Ukraine, all linked to Danske by the same Italian and Austrian banks.  And it is certainly fair to say that Austria has been a favourite place for Ukranian Oligarchs to park their billions.

Absolutely nothing I have said here is evidence of any wrong doing. But if you have a bank, Danske Bank in Estonia, which is at the centre of a vast laundering scheme surely you don’t just look at the banks that moved the money out of Estonia into dollar accounts? That is only the back half of the laundering.  Surely you should look for any banks that could have begun the laundering. And surely a reasonable pace to start, if only to rule them out, is the list of banks which Danske itself says are the banks it has close money-moving ties to?

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China’s central bank announced it would cut the Required Reserve Ratio (RRR) for most banks by 1.0% effective October 15 for the fourth time in 2018, a little over three months after the PBOC announced a similar cut on June 24, as Beijing seeks to stimulate the slowing economy amid the growing trade war with the US, a slumping stock market, a sliding yuan and a record number of bond defaults.

The People’s Bank of China announced on Sunday local time that it lowered the required reserve ratio for some lenders by 1 percentage point according to a statement on its  website. The cut, which will apply to a wide range of banks including large commercial banks, joint stock commercial banks, city commercial banks, non-county rural banks and foreign banks, will release a total of 1.2 trillion yuan ($175 billion), of which 450 billion yuan will be used to repay existing medium-term funding facilities which are maturing, and the remaining RMB 750bn will help offset the seasonal rise in liquidity demand during the second half of the month due to tax payments, according to the PBOC.

But the real reason behind the RRR cut is that it is intended to boost sentiment before the onshore equity market re-opens on Monday after the week-long holidays, as well as to support liquidity conditions at a time when global interest rates have suddenly spiked to multi-year highs..

Commenting on the cut, Goldman economists said that while they had been expecting one RRR cut per quarter in H2, “the 1pp magnitude surprised us on the upside.”

To some, the RRR cut was expected: Karine Hirn, from East Capital in Hong Kong, said that “weaker PMI, negative development in U.S.-Sino tensions, poor weekly performance in Hong Kong during the past week while the onshore equity markets were closed made most investors expect some kind of supportive announcement over the weekend ahead of the reopening on Monday.”

And, never one to disappoint markets, the PBOC delivered right on schedule.

Concerned about the US response to what will be perceived as its latest easing action, one which could lead to further yuan devaluation, the central bank argued in a separate statement that the move won’t affect the overall amount of liquidity in the economy, as it substitutes for existing instruments, and the remaining money will offset the tax-payment pressure in mid-to-late October. Additionally, the PBOC claimed that the cut won’t put depreciation pressures on the currency, although it is unclear if the US will accept that explanation at a time of escalation economic and geopolitical tensions between the two nations.

China’s central bank has been reacting to the cyclical slowdown that’s been worsened by Beijing’s anti-debt campaign and the building trade conflict with the U.S. As a result, the PBOC has maintained an accommodative monetary policy even as the yuan has continued sliding. However, the effects of Chinese policy support plus tax cuts and increased infrastructure funding have yet to fully filter through though, and economic momentum continued to lose pace in September, with the Caixin manufacturing PMI last week dropping to 50, ending 15 months of expansion and the lowest level since May 2017, while the official PMI recorded its first September drop since the PMI series was released. Reflecting the escalating trade war with the US, new export orders fell to the lowest reading since 2016.

“China’s monetary policy is still prioritizing domestic economic problems, despite the escalating trade war and Federal Reserve tightening,” said Ming Ming, head of fixed income research at Citic Securities Co. in Beijing. “The reduction will help ease domestic financing difficulties,” he said.

The RRR cut also comes at a time when China’s deleveraging campaign has resulted in a record number of bond defaults. According to Goldman, just in August and September of this year, there had been no less than 8 new defaults, a troubling trend “despite the introduction of a number of policy loosening measures in early July.” This compares to only 11 new defaults between January and July this year, with all the recent defaults coming from privately owned enterprises.

The recent cluster of defaults has brought the number of new defaults this year to 19, surpassing the previous full year record of 18 defaults recorded in 2016. In terms of the notional amount of bonds that defaulted, it has reached RMB 91.4bn, equivalent to 0.5% of corporate bonds outstanding at the start of 2018, and 69.6% higher than the RMB 53.9bn recorded for all of 2016.

The increased liquidity from the RRR cut will help support slowing bank lending and credit, and unlike the PBOC’s medium-term funding tools, it is permanent “which can help banks’ liquidity expectations”, said Wang Tao at UBS. The cut gives the market a stronger easing signal and can support sentiment, which has been negative on China and emerging markets in the past few days, she said quoted by Bloomberg.

In addition to the slowdown on the economy and in aggregate lending, as well as the decline in the stock market and the rising defaults, trade war has been a key risk for Chinese policymakers. The lack of progress in negotiations between Washington and Beijing over their trade rivalry means that there’s a good chance the current roster of tariffs on $250 billion of Chinese goods exported to the U.S. will grow, as President Trump has threatened. The US imposing tariffs on all Chinese imports is now the base case for both JPMorgan and Goldman Sachs. With little room for optimism on external demand, the outlook for China’s economy hinges increasingly on the effectiveness of targeted stimulus measures being rolled out this year.

Meanwhile, with Chinese markets shut last week due to holidays, the onshore currency hasn’t traded, although in that time the the offshore yuan has lost almost 0.3% of its value against the dollar as turmoil from sharply higher rates has hit global markets.

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