I have been writing about ABA Model Rule 8.4(g) for nearly five years. Now, for the first time, a court has weighed in on the constitutionality of this measure. Today, Judge Chad F. Kenney (E.D.Pa.) ruled that Pennsylvania’s version of Rule 8.4(g) violates the Free Speech Clause First Amendment. I blogged about the case back in August. And Eugene excerpted some portions of the court’s opinion. This passage, I think, summarizes the constitutional argument:
There is no doubt that the government is acting with beneficent intentions. However, in doing so, the government has created a rule that promotes a government-favored, viewpoint monologue and creates a pathway for its handpicked arbiters to determine, without any concrete standards, who and what offends. This leaves the door wide open for them to determine what is bias and prejudice based on whether the viewpoint expressed is socially and politically acceptable and within the bounds of permissible cultural parlance. Yet the government cannot set its standard by legislating diplomatic speech because although it embarks upon a friendly, favorable tide, this tide sweeps us all along with the admonished, minority viewpoint into the massive currents of suppression and repression. Our limited constitutional Government was designed to protect the individual’s right to speak freely, including those individuals expressing words or ideas we abhor.
The constitutional defects with Rule 8.4(g) have been patent since the beginning. Defenders of the rule have taken one of three approaches. First, some defenders were quite candid, and admitted that the need to eliminate bias in the profession justifies pushing forward with this rule, even if it constitutionality is in doubt. Second, other defenders contended that the Bar could be entrusted to enforce the statute is in a constitutional manner, even if there was a theoretical risk of abuse. Trust us! Third, other defenders simply ignored binding Supreme Court precedent. For example, ABA Standing Committee on Ethics and Professional Responsibility issued Formal Opinion 493. But the opinion did not cite NIFLA v. Becerra–a case that formed the centerpiece of Judge Kenney’s analysis.
Now, the landscape has changed. Those defending Rule 8.4(g) have the burden of responding to Judge Kennedy’s opinion. And they must do so by engaging NIFLA and other precedents. The response can no longer be “trust us.”
Eugene speculates that Pennsylvania may appeal the adverse ruling. The bar would be better suited to go back to the drawing board. Adopt a rule that prohibits legal bias in the practice of law that does not sweep so broadly to chill protected speech. And other states should take notice.
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The Centers for Disease Control and Prevention’s (CDC) Advisory Committee on Immunization Practices (ACIP) voted last week to recommend that the first doses of a coronavirus vaccine be given to an estimated 21 million health-care workers and 3 million residents and staff of nursing homes and other long-term-care facilities. Protecting health care workers makes sense since we want to make sure that our hospitals and physicians’ offices remain adequately staffed as the winter surge of COVID-19 infections and hospitalizations rises.
In addition, the CDC ACIP panel voted to prioritize the vaccination of long-term care residents because their risk of serious medical complications and death from the coronavirus infections is vastly higher than it is for younger Americans. However, one panel member, Vanderbilt University infectious disease researcher Helen Keipp Talbot, dissented from that decision. Why?
At an earlier ACIP meeting, Talbot warned, “There is such a high mortality rate in long-term-care facilities. There will be a number of patients who receive immunizations for Covid and will pass away. And it will be regardless of the vaccine.” As a result of nursing home deaths that just happen to occur shortly after a resident has been vaccinated, Talbot fears, “we’re going to have a very striking backlash of ‘my grandmother got the vaccine and she passed away,’ and they’re not likely to be related, but that will become remembered and break some of the confidence in the vaccine.”
Talbot pointed out that no randomized controlled trials have been conducted among nursing home residents. However, when she was asked by the biomedical newsletter STAT if she had higher safety concerns about the vaccines for that population she responded, “Any more than anyone else? No. But I think what we have for the adult population in general is a randomized control trial to look at the safety data.”
In fact, the just-released Food and Drug Administration staff analysis of the Pfizer/BioNTech vaccine that is likely to be issued an Emergency Use Authorization soon finds that it is essentially equally effective at preventing COVID-19 infections for all age groups, including age cohorts 65 to 74 years and 75 years and over.
Still, Talbot is right to warn against the likely spate of anguished news stories, Facebook posts, and tweets recklessly asserting the adventitious deaths of older relatives were triggered by the COVID-19 vaccines they had just received. Basically, Talbot is cautioning people not to commit the post hoc ergo propter hoc fallacy, which means, after this, therefore because of this. In other words, the fallacy goes, Granny died after she got vaccinated, therefore the vaccine killed her.
“I fear a loss of confidence in the vaccine,” Talbot told STAT. “That the vaccine will actually truly be safe, but there will be temporally associated events and people will be scared to use the vaccine. And we won’t be able to get our kids back in school and people back at work—the things that are important.”
Here’s a message that everybody needs to hear: Don’t let fallacious reasoning prevent you from being vaccinated in the coming weeks and months to protect your family, your neighbors, and yourself from the COVID-19 virus.
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Billionaire Ray Dalio Holds Reddit AMA To Discuss Rise Of China, Threats To Dollar’s Reserve Status Tyler Durden
Tue, 12/08/2020 – 14:50
For the past few years, as Bridgewater, the titanic hedge fund, mostly continued on autopilot with the computers handling most of the investing, the firm’s founder and longtime leader, Ray Dalio, has been refining his thesis about the next major turning point in global history, which Dalio believes will be precipitated by the growing tensions between a rising China and falling America.
That empires rise and fall is nothing new to history, Dalio says. He even produced a helpful chart that illustrates the waxing and waning standing and influence of the world’s ‘Great Powers’ dating back to the 1500s.
Using a handful of metrics measuring national performance in areas including education and innovation, Dalio produced a chart breaking down this ‘decline’ in American Greatness – so to speak. Though declines in “education” and “trade” are at the lowest levels relative to history, other critical indicators – including “innovation and technology” and “reserve status” (which allows America to borrow so heavily without driving surging interest rates and inflation) – have – according to Dalio’s analysis – only just turned over.
Looking back across the vast sweep of history, Dalio claims that dissolution of empires is almost always driven by a handful of factors, including unsustainable debt & money printing and growing political animosity and unrest. Sound familiar?
Of course, with US stocks pressing back toward record highs on Tuesday, investors are signaling that all is well in the US. In fact, despite a brutal pandemic and one of the worst economic crises in a century, things have apparently never been better. Well, at least for the roughly half of Americans who are lucky enough to own stocks.
This is why Dalio re-upped his warnings a few days ago about the US being on the cusp of another civil war or revolution. Both people and politicians are “at each other’s throats” with an intensity that outweighs anything Dalio has seen before during his 71 years on this planet. Whether this dynamic gets worse, or better, will have profound implications for the future of the country, according to Dalio’s latest LinkedIn essay.
“People and politicians are now at each other’s throats to a degree greater than at any time in my 71 years,” Dalio wrote noting that disorder is rising in a number of countries. “How the U.S. handles its disorder will have profound implications for Americans, others around the world, and most economies and markets.”
As it happens, Bridgewater fanboys and/or frustrated bears eager for a heavy dose of FUD will have yet another opportunity to question Dalio directly about his views, when he signs on to Reddit later on Tuesday for a 90-minute AMA to discuss his China thesis. The live Q&A, which will take place here, is set to begin at 1500ET, and run through 1430ET.
As many of you know, I’ve been studying the forces behind the rise and fall of great empires and their reserve currencies throughout history, with a focus on what that means for the US and China today. Many of the things now happening the world… (1/3) pic.twitter.com/JECV5Q9Gwo
…like the creating a lot of debt and money, big wealth and political gaps, and the rise of new world power (China) challenging an existing one (the US)—haven’t happened in our lifetimes but have happened many times in history for the same reasons they’re happening today. (2/3)
Today, I’ll be doing a Reddit AMA from 3-4:30PM EST, where I can discuss this with you and we can explore the patterns of history and the perspective they can give us on what is happening today. You can join here: https://t.co/5MK9URu76L (3/3)
Interested parties will need a reddit account to ask questions. We imagine this Q&A might generate more interest than in the past as the dollar’s recent weakness has spurred plenty of speculation about whether the dollar’s reign as the unchallenged global reserve currency has finally come to an end.
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Chinese Spy Links To CA Rep. Swalwell Exposed After Leaked Video Claims “Compromised People At Top Of US Power & Influence” Tyler Durden
Tue, 12/08/2020 – 14:30
Shortly after John Ratcliffe, the director of national intelligence, revealed in an op-ed for The Wall Street Journal last week that Chinese agents have targeted U.S. lawmakers more than any other country, including Russia and Iran, in order to shape U.S. policy in favor of Beijing; Fox News’ Tucker Carlson exposed a leaked video deleted from Chinese social media of a professor saying that China “has people at the top of America’s core inner circle of power and influence.”
As The Mental Recession blog detailed, Carlson begins by noting that “the very people who ranted so hysterically about Russia, were, even as they were yelling about Vladimir Putin, in fact, they were doing precisely what they claim to decry… They were working on behalf of a foreign power. Our chief global rival, the government of China. The Russia hoax effectively was a diversion, it hid something that’s not a hoax at all but is real and threatening to all of us…”
“We will spend the foreseeable future reporting on the relationship between America’s political-financial elites and the communist government of China that made many of them very rich. But, we want to start tonight with the evidence, with a remarkable video…”
“This video recorded over a week ago on November 28th. The man you’re about to see speak is a professor from Beijing. The video comes from an appearance he made on a Chinese television show about Wall Street and international trade. He works at a university in Beijing. He’s like so many in academia and a servant of his country’s government. This video was deleted from Chinese social media soon after being uploaded. There’s a reason for that as you will see…”
Full Transcript:
>> [Speaking in a foreign language] [Laughter]
>> Tucker: There’s a lot of garbage floating around, and a lot of fake things. That video is real and those subtitles are accurate. Checks in with two different Chinese speakers and they confirmed it. But he just said, when you read on the screen tells the story. This is close to a smoking gun as we’ve ever seen. “We have people at the top of America’s core inner circle of power and influence. According to the man you just saw, that’s been true for decades. How many people work in media and government? He didn’t say precisely. At one point of the video he described a Chinese agent working as a top Wall Street financial institute.I can’t say more without making political trouble.
He did tell his audience that one agent in particular was especially useful. He goes on at some length about her. He describes her as an American who’s worked abroad for many years, who is now a Chinese citizen. This seems to baffle him a little bit. At the Chinese government doesn’t allow dual citizenship, what would they? Why would anyone? He seems pleased that the U.S. Government is foolish enough to allow it. He explains that this American agent who at lives part of the year in Beijing helps with the propaganda operation in the city of Washington in 2015. He goes on to describe in some detail. The Obama Administration was easy to manipulate, he suggests, they helped. The Chinese had many friends among the Obama people. The problem came when Donald Trump was elected after that he says, everything changed.
>> [Speaking in a foreign language]
>> Tucker: Since the 1970s, he said, he is in the in economics professor, Wall Street has had an enormous over the way the United States operates over American policy. The Chinese government he says has enormous influence on Wall Street. And the arrangement works very well for a long time. Then Donald Trump unexpectedly was elected in 2016. Wall Street was infuriated. Wall Street can’t fix Trump, he said, but they tried. This solves the mystery. If you’re wondering why the political class has stood by and allowed the Chinese government to degrade this country and our way of life, why they stood by as a Chinese government flooded the United States with deadly opioids that killed hundreds of thousands of people, or stood by as the Chinese government ripped off billions of intellectual property from the companies. There’s your answer. This year, the chairman of Harvard’s chemistry department was arrested for taking $50,000 a month from the Chinese communist party intern for sending secrets and referring top scientists to Beijing. It barely rated as a scandal. You might not be aware it happened. Why? Because so many are on the take. Donald Trump was an impediment to the very lucrative arrangement. For that reason, he explains in the video, America’s most powerful elites, he calls them gnats, got to work on electing a new president. Again, read the words at the bottom of your screen as he speaks.
>> [Speaking in a foreign language] [Laughter] [Applause]
>> Tucker: Ohl, Donald Trump you know it’s because the Chinese do pay close attention, Donald Trump has complained about Hunter Biden. His ties to the Chinese government. Those are real, he just confirmed. So, now you know why you weren’t allowed to talk about Hunter Biden’s laptop. Why big business aligned as one, the tech companies and the rest, to suppress that story. Because they were implicated in it. Back in October we interviewed a man called Tony Bob Linsky, interviewed him because nobody else would. 20 Paul Belinsky was a business partner of the Bidens. If he was when he told us about China.
>> In the document you guys had and I think has been provided the world, the Chinese reference that because of their trust in the Biden family, the chairman and director were excited about moving forward in this. In the documents, they reference loaning $5 million to the family. The bd family is the Biden family.
>> What are the implications of this going forward if Joe Biden is elected president which could very well happen.
>> Tucker: How does this constrain his abilities to work with China?
>> I think they’re compromised.
>> Tucker: I think Joe Biden and the Biden family are compromised, with China. I think he’s right about that and the Bidens are far from the only ones being compromised.
And just in case you feel that this is merely a “debunked conspiracy theory from some alt-right conspiracy media discussing a conspiracy,” a year-long investigation by no lesser liberal media outlet than Axios has found that a suspected Chinese spy developed close relationships with U.S. politicians as a way to gain access to and influence U.S. political circles.
As Annaliese Levy reports for SaraACarter.com, Christine Fang, also known as Fang Fang, was able to gain access to politicians through campaign fundraising, extensive networking and romantic or sexual relationships, according to Axios. She became particularly close with Democratic California Rep. Eric Swalwell, the report noted.
Fang enrolled as a student at California State University East Bay in 2011. She became involved in politics and went to extraordinary lengths to meet and befriend U.S. politicians.
She came into contact with many of California’s most prominent political figures.
Fang reportedly interacted with Swalwell at several political events, helped fundraise for his re-election campaign and put at least one intern into his office.
Fang also fundraised for Democratic Rep. Tulsi Gabbard, as well as had a romantic or sexual relationship with at least two midwest mayors, according to the report.
Fang’s activities became suspicious and she was put under FBI surveillance.
“The fact that she was traveling around the country” getting close to U.S. politicians “was a big red flag,” an FBI official told Axios. “She was on a mission.”
Fang portrayed herself ‘to be the connector between the Asian American community and members of Congress,’ sources told Axios.
A source also told Axios that Fang served as a ‘bundler’ during Swalwell’s 2014 Congress re-election campaign on his behalf, meaning she convinced others to donate to his campaign operations.
In 2015, FBI agents reportedly became alarmed at Fang’s activities. They alerted Swalwell and he immediately cut off all ties to Fang, according to a current U.S. intelligence official.
Fang left the country unexpectedly in 2015 amid the investigation.
Many of Fang’s political contacts were surprised about her sudden disappearance, Axios explained.
She reportedly had plans to attend a June 2015 event in Washington D.C., but suddenly said she couldn’t make it and needed to return to China.
“She disappeared off the face of everything,” Gilbert Wong, former mayor of Cupertino, California, told Axios.
Swalwell’s office provided a statement to Axios that said:
“Rep. Swalwell, long ago, provided information about this person — whom he met more than eight years ago, and whom he hasn’t seen in nearly six years — to the FBI. To protect information that might be classified, he will not participate in your story.”
Since the Fang probe, the FBI has prioritized investigations into Chinese influence operations. The agency created a unit dedicated to countering Beijing’s operations at state and local levels in May 2019.
U.S. national security officials believe the threat posed by China has only grown with time.
“She was just one of lots of agents,” said a current senior U.S. intelligence official, according to Axios.
U.S. officials supposedly believe Fang’s real reason for being in the U.S was to gather political intelligence and to influence rising U.S. officials on China-related issues.
Fang has not returned to the U.S. and has appeared to have cut off contact with her networks she spent years building in California, Axios reported.
“Fang’s case shows how a single determined individual, allegedly working for Beijing, can gain access to sensitive U.S. political circles,” Axios reported.
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Without question, Brown, Roe, and Obergefell are among the most important Supreme Court decisions of the last century. Why are they important? These decisions are not models of clear judicial reasoning. Nor do these cases establish doctrine that could be applied generally in other cases. Rather, these cases are important because of the outcome reached. Brown declared unconstitutional segregated public school education. Roe declared unconstitutional certain restrictions on abortion. And Obergefell declared unconstitutional prohibitions on same-sex marriage.
Most supporters of these decisions could care less what came between the caption and “It is so ordered.” The reasoning was irrelevant. Every year when I teach these, students are shocked at how thinly reasoned Brown is. They are surprised that Roe actually reads like a piece of legislation. And they struggle to identify the precise holding of Obergefell.
Justice Scalia speaks for me, at least:
If, even as the price to be paid for a fifth vote, I ever joined an opinion for the Court that began: “The Constitution promises liberty to all within its reach, a liberty that includes certain specific rights that allow persons, within a lawful realm, to define and express their identity,” I would hide my head in a bag. The Supreme Court of the United States has descended from the disciplined legal reasoning of John Marshall and Joseph Story to the mystical aphorisms of the fortune cookie.
It is not surprising that law professors feel compelled to “rewrite” these decisions. I admire Jack’s project. He and his colleagues are trying to bolster the work of Justices who could not, or perhaps would not, write strongly reasoned legal decisions. Every franchise needs a reboot. Maybe Christopher Nolan can take a look at the Eleventh Amendment.
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The press has been filled with praise for President-elect Joe Biden’s foreign policy team. Antony Blinken, tapped to head the Department of State, has beenlauded for his pledge to restore aid to the Northern Triangle countries—Guatemala, Honduras, and El Salvador—that account for the majority of migration across the U.S.-Mexico border. These funds were largely cut during the Trump administration.
Blinken also brings an immigrant background to the table, which Biden sees as a uniquely qualifying factor for a secretary of state. While announcing his foreign policy nominees, Biden declared, “I know him and his family, immigrants and refugees, a Holocaust survivor, who taught him to never take for granted the very idea of America as a place of possibilities.”
“America is back!” Bidenexclaimed during the announcement.
Back to what, exactly?
For all the differences between Barack Obama’s and Donald Trump’s approaches to immigration, both administrations tried to discourage immigration from Central America. Blinken appears poised to continue that under Biden: The reason he wants to restore aid to Northern Triangle nations is to encourage would-be migrants to stay home. As The New York Timesputs it, the point is “to persuade migrants that they will be safer and better off remaining home.”
That was the Obama approach. In those days, then–Vice President Biden helped broker a bipartisan deal to send $750 million in aid to those countries, hoping to stem the outflow of migrants by spurring economic improvement, rooting out corruption, and cracking down on violent crime.
“Obviously, the problems in those countries when it comes to crime and gang violence, drugs, lack of economic opportunity, among other things, are huge drivers,” Blinken said in a July interview with the Hudson Institute. “The idea that someone wakes up in the morning and says, ‘Gee, wouldn’t it be great fun today to give up everything I know, where I live, my family, my friends, my comfort and go to someplace that may not want me where I may not even know the language or have family or friends. Wouldn’t that be a great thing to do?'”
But did the aid package really change that calculation? According to the Council on Foreign Relations, Obama’s tenure saw the deportation of around 3 million people, outpacing the number under President George W. Bush. And amajority of those deportees came from the Northern Triangle.
“I doubt the Biden administration will try to make migration from Central America easier,” says Stephen Yale-Loehr, immigration law attorney and professor at Cornell University. “At most they hope to manage it better.”
The Global War on Drugs
Worse yet, some of the aid billed as a cure for the Northern Triangle’s violence might have exacerbated it instead. Much of that Obama-era assistance was tied to the War on Drugs, which has had a destabilizing effect on the region. In a directive issued halfway through his second term, Obama argued that “U.S. engagement in Central America” needed to include “intensified counternarcotics efforts.”
Biden seems eager to continue that approach. In 2019, he described his immigration policy by boasting about his role in Plan Columbia, an early-’00s package of assistance to the Colombian government. “You do the following things to make your country better so people don’t leave, and we will help you do that. Just like we did in Colombia,” Biden told CNN. But Plan Columbia was aimed mostly at stopping the production of cocaine, and it helped prop up a violent regime as long as the government claimed to be fighting the “war on drugs and terror.”
Back in 1988, a RANDreport found that interdiction efforts abroad have little impact on drug consumption in the U.S. In fact, prohibition made the black market more profitable. As Ethan Nadelmann, founder of the Drug Policy Alliance, wrote that same year in Foreign Policy, black-market drug profits pay for the bribes—to authority figures ranging from low-level cops to federal judges—that help facilitate the drug trade. The functionaries who resist are killed. If drugs were legal, Nadelmann noted, the trade would instead “function not unlike the international markets in legal substances such as liquor, coffee and tobacco.”
More than 30 years later, Nadelmann says those gangs have diversified their business, entering sectors ranging from cattle farming to the construction industry. But illicit drug trafficking still drives a lot of violence, and prohibition continues to backfire.
“It’s analogous to alcohol prohibition,” he tells Reason. “When you prohibit a transnational commodities market, the result is to have all the negative implications: organized crime, violence, corruption.” Washington’s interdiction efforts are not just futile; they’re dangerous. “Drug interdiction operations pursued by DEA and others…may immobilize a particular gang or route, but they tend not to pay attention to the fallout. Sometimes you knock out one criminal organization, and a more powerful one takes its place.”
But while Biden appears open to softening domestic enforcement of marijuana laws, he isn’t interested in cutting the link between foreign aid and the drug war. During a vice presidential visit to Mexico and Honduras in 2012, Biden slapped down leaders’ hopes that the U.S. might consider legalizing drugs. (“It’s worth discussing, but there is no possibility the Obama/Biden administration will change its policy on [drug] legalization,” hesaid after meeting with Mexican President Felipe Calderón.) Eight years later, a drug crackdown is a central component of his foreign policy team’s plan to improve conditions in Guatemala, Honduras, and El Salvador.
Open Borders?
Biden and Blinken do appear to want a more humane immigration policy than Trump’s. And it’s hard to beat the inhumanity of the outgoing president’s “zero tolerance” effort to contain migration by separating children from their parents. But can’t the Democrats do better than a failed strategy that steps up a militarized drug war—and still tries to discourage migration from the region, albeit with more carrots than sticks? Isn’t there a better way?
Bryan Caplan, an economist at George Mason University, has long advocated open borders. He acknowledges that this is an even harder sell than usual during a pandemic, but he hopes that will change once a vaccine is widely distributed and the virus abates.
Caplan expects Biden’s immigration strategy to be preferable to Trump’s, but he argues that curtailing freedom of movement is ultimately a lost cause. What’s more, he says it’s a bad cause: Freedom of movement, he argues, is a good thing. Not just for the immigrants, but for almost everyone.
“When you let people move from places where there’s labor unproductivity to places with more productivity, there’s so much to gain,” Caplan says. “If anyone could work anywhere on earth, the production of humanity could double. Let human talent move.”
Trying to stop that, he adds, leads to tragedy. U.S. Customs and Border Protection estimates that 7,216 people died trying to cross the border from 1998 and 2017. The most common causes of death were exposure and drowning.
“Rather than having to separate from family, leaving kids, risk dying in the desert,” Caplan says, “someone could take a $30 bus ride from their country into the U.S.” Instead, Biden and Blinken seem committed to the policies that earned Obama the nickname deporter-in-chief.
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Judge Sullivan Folds: Flynn Case Dismissed Months After DOJ Dropped Tyler Durden
Tue, 12/08/2020 – 14:03
The case against Gen. Michael Flynn has finally been dismissed by Judge Emmet Sullivan as Moot, months after the Justice Department filed to dismiss the case in light of FBI misconduct during the agency’s investigation of the former Trump National Security Adviser.
Flynn News –
Judge Sullivan has granted the DOJ Motion to Dismiss as Moot (due to pardon).
Sullivan: “ORDERED that this case is DISMISSED AS MOOT.”
During the past couple of weeks, I have discussed the rising levels of bullishness in the markets. We have pointed to indicators like extreme investor positioning, put/call ratios, etc. However, the current surge in margin debt also confirms market exuberance.
First, we have to step back a bit. We previously discussed why the 35% decline in March was only a “correction” and not a “bear market.” As noted in “March Was Only A Correction,” there is a significant difference.
“The distinction is essential.
‘Corrections’ generally occur over short time frames, do not break the prevailing trend in prices, and are quickly resolved by markets reversing to new highs.
‘Bear Markets’ tend to be long-term affairs where prices grind sideways or lower over several months as valuations are reverted.
Using monthly closing data, the “correction” in March was unusually swift but did not break the long-term bullish trend. Such suggests the bull market that began in 2009 is still intact as long as the monthly trend line holds.
Margin debt also confirms the correction and the recent exuberance.
Everything Is At An All-Time High
Before we dig further into what margin debt tells us, let’s begin with where we are currently. Greg Feirman recently summed it up nicely.
“Friday was an absolute breakout to new ATHs-fest (All-Time Highs). The S&P closed at a new all-time high just below 3,700. The Russell tacked on another 2.37% and closed just below 1900. Junk bonds and regional banks are super strong. Of course, if the indexes are breaking out, so are a lot of individual stocks.”
“Fear of missing out has taken over from the fear of losing money. If people are risk-tolerant and afraid of being out of the market, they buy aggressively, in which case you can’t find any bargains. That’s where we are now. That’s what the Fed engineered by putting rates at zero.
“,,,we are back to where we were a year ago—uncertainty, prospective returns that are even lower than they were a year ago, and higher asset prices than a year ago. People are back to having to take on more risk to get return. At Oaktree, we are back to a cautious approach. This is not the kind of environment in which you would be buying with both hands.
The prospective returns are low on everything.”
The Issue Of Margin Debt
This exuberance requires “fuel,” which brings us to margin debt. As I explained previously:
“Margin debt is not a technical indicator for trading markets. What margin debt represents is the amount of speculation that is occurring in the market. In other words, margin debt is the ‘gasoline,’ which drives markets higher as the leverage provides for the additional purchasing power of assets. However, ‘leverage’ also works in reverse as it supplies the accelerant for more significant declines as lenders ‘force’ the sale of assets to cover credit lines without regard to the borrower’s position.”
The last sentence is the most important. The issue with margin debt, in particular, is that the unwinding of leverage is NOT at the investor’s discretion. It is at the discretion of the broker-dealers that extended that leverage in the first place. (In other words, if you don’t sell to cover, the broker-dealer will do it for you.)When lenders fear they may not recoup their credit-lines, they force the borrower to either put in more cash or sell assets to cover the debt. The problem is that “margin calls” generally happen all at once, as falling asset prices impact all lenders simultaneously.
Margin debt is NOT an issue – until it is.
Event Risk
It is when an “event” causes lenders to “panic” that margin becomes problematic.
We have seen margin liquidation events twice in the last 15-years. The first was during the 2008 financial-crisis that forced Lehman into bankruptcy.
The second time was in March of this year.
How do we know that March was a “Margin Call?”
There are two reasons.
The Fed rushed to the rescue of the banks (again) as credit risk went parabolic; and,
The chart below of “free credit” balances shows the massive liquidation of margin debt as brokerage firms called in credit lines.
Free credit balances are crucial as it is the difference of “unused margin plus cash,” which gets subtracted from “outstanding margin.” In other words, like a credit card with a zero balance, when the lined gets paid off, there is a positive free cash balance; when it is negative, it shows the utilization of the “credit.”
The chart below overlays the two:
The actual level of margin debt, and;
The level of “free cash” balances.
The sharp reversal of margin debt from the March lows shows the speculation level, which has ensued in the markets due to the Fed’s interventions. (Margin debt lags by 2-months, so I have used the average margin debt growth rate from March to estimate the last 2-months. Given the rapid surge in the market in November, I am probably underestimating current levels.)
Margin Debt Confirms The Exuberance
As noted, when markets are rising and investors are taking on additional leverage to increase buying power, margin debt supports the advance. However, the magnitude of the recent surge in margin debt also confirms the current levels of investor exuberance.
The chart shows the relationship between cash balances and the market. I have inverted free cash balances, so the relationship between increases in margin debt and the market is better represented.
Note that during the 1987 correction, the 2015-2016 “Brexit/Taper Tantrum,” the 2018 “Rate Hike Mistake,” the “COVID Dip,” the market never broke its uptrend, AND cash balances never turned positive.
Both a break of the rising bullish trend and positive free cash balances were the 2000 and 2008 bear markets’ hallmarks. Such is another reason that March was just a “correction.”
Had such occurred, the positive free cash balances, and significantly reduced valuation levels, would have supported the beginning of a longer-term bull market. However, with negative cash balances surging and extreme deviations from long-term means, investors are likely once again set up for another reversion. Such is not even to mention the long-term correlations to valuations.
As noted in “Why This Isn’t 1920,” the highest correlation between stock prices and future returns comes from valuations.
Overbought
Margin data goes back to 1959 to get a long-look at margin debt and its relationship to the market. The chart below is a “stochastic indicator” of margin debt overlaid against the S&P 500.
The stochastic indicator is a momentum indicator developed by George C. Lane in the 1950s. The chart shows the position of the most recent margin debt level relative to its previous high-low range. The indicator measures the momentum of margin debt by comparing the closing level with the range over the past 21-months.
The stochastic indicator represents the speed and momentum of margin debt level changes. Such means the stochastic indicator changes direction before the market. As such, it can be considered a leading indicator.
Currently, the indicator is back to overbought levels, which suggests market risk has risen also. Our stochastic measures of the market itself are confirming much the same.
It’s All Coincident
I want to make a critical point here. Margin debt, like valuations, are “terrible market timing” indicators and should not be used as such.
Rising levels of margin debt are a measure of investor confidence. Investors are more willing to take out debt against investments when shares are rising, and they have more value in their portfolios against which they can borrow. However, the opposite is also true as falling asset prices reduce the amount of credit available, and the liquidation of assets must occur to bring the account back into balance.
I agree and disagree that margin debt levels are simply a function of market activity and have no bearing on the outcome of the market.
As we saw in March, the double-whammy of collapsing oil prices and economic shutdown in response to the coronavirus triggered a sharp sell-off fueled by margin liquidation.
Currently, the majority of investors have forgotten about March. Or worse, assume it can’t happen again for a variety of short-sighted reasons. However, the “gas tank” is full once again as investors are more exuberant now than at the peak of the market in 2000, as noted by Sentiment Trader yesterday.
Excuses Won’t Work
Sure, this time could indeed be different. That has remained the “sirens song” of investors since March. However, as Sentiment Trader summed up the last time we wrote on this topic, such is usually not the case.
“Whenever some of this data fails to lead to the expected outcome for a few weeks or more, we hear the usual chorus of opinions about why it doesn’t work anymore. This has been consistent for 20 years, like…
Decimalization will destroy all breadth figures (2000)
The terror attacks will permanently alter investors’ time preferences (2001)
The pricking of the internet bubble will forever change option skews (2002)
Easy money will render sentiment indicators useless (2007)
The financial crisis means relying on any historical precedents are invalid (2008)
The Fed’s interventions mean any indicators are no longer useful (2010 – present)
All of these sound good, and for a time it seemed like they were accurate. Then markets would revert and the arguments would get swept into the dustbins of history.”
It’s not too late to take action to preserve capital now, so you have the money to invest with later.
A Lot Like Sex
While we remain long-biased in our equity portfolios, we have begun to reduce some of our big winners (take profits) and adding to our more defensive-oriented positions. While we certainly want to participate in the market’s current upside, we will also give up some gains to protect against the eventual reversion.
While it certainly may “feel” like the market “just won’t go down,” it is worth remembering the sage words of Warren Buffett.
“The market is a lot like sex, it feels best at the end.”
In the short-term, holding higher cash levels will indeed provide some drag between our portfolio and the major market index. However, when the first “cold snap” washes across the markets, our preparation should protect us against the “bite.”
We remain “bullish” on the markets currently as momentum is still in play. However, just as any farmer is keenly aware of the signs “Winter” is approaching, we are just taking some precautionary actions.
To spin a bit of Warren’s quote:
“If you engage in the market in an unprotected fashion, you may not want the unexpected surprise.”
via ZeroHedge News https://ift.tt/3lTqXn7 Tyler Durden
