Month: October 2016

Retired CIA Officer Explains Why “Hillary’s Emails Matter”

Authored by Charles Faddis (a former CIA operations officer with 20 years of experience in intelligence operations), originally posted at TheHill.com,

The 2016 presidential election, already one of the wildest in American history, has been rocked by the announcement that the Federal Bureau of Investigation (FBI) is reopening its investigation into Hillary Clinton’s use of a private email server while Secretary of State.

Apparently while investigating disgraced ex-Congressman Anthony Weiner’s transmission of sexually explicit images to a fifteen-year-old girl, the FBI discovered more emails relevant to Hillary Clinton’s own infamous case.

At the time, Weiner was married to Huma Abedin, Clinton’s personal aide, perhaps best known for her alleged family ties to the Muslim Brotherhood. The emails appear to have been found on a computer used by both Abedin and Weiner.

Where all this goes from here remains unclear. That said, in the interest of helping a scandal-weary electorate put these new developments in context, shall we review a few things?

I have worked in national security my entire life. Most of that has been in the intelligence community surrounded by classified information. For twenty years, I worked undercover in the Central Intelligence Agency, recruiting sources, producing intelligence and running operations. I have a pretty concrete understanding of how classified information is handled and how government communications systems work.

 

Nobody uses a private email server for official business. Period. Full stop.

 

The entire notion is, to borrow a phrase from a Clinton campaign official, “insane.” That anyone would presume to be allowed to do so is mind-boggling. That government officials allowed Hillary Clinton to do so is nauseating.

 

Classified and unclassified information do not mix. They don’t travel in the same streams through the same pipes. They move in clearly well defined channels so that never the twain shall meet. Mixing them together is unheard of and a major criminal offense.

 

If you end up with classified information in an unclassified channel, you have done something very wrong and very serious.

 

Accidentally removing a single classified message from controlled spaces, without any evidence of intent or exposure to hostile forces, can get you fired and cost you your clearance. Repeated instances will land you in prison.

 

Every hostile intelligence agency on the planet targets senior American officials for collection. The Secretary of State tops the list. Almost anything the Secretary of State had to say about her official duties, her schedule, her mood, her plans for the weekend, would be prized information to adversaries.

 

It is very difficult, in fact, to think of much of anything that the Secretary of State could be saying in email that we would want hostile forces to know.

As we wait for more information on the latest revelations, let’s quickly note what we already know Hillary Clinton did.

While Secretary of State, Hillary Clinton exclusively used a private email address for official business. Instead of using a State Department account, she used a personal email account, housed on a private server located in her home in Chappaqua, New York. The Department of State exercised zero control or oversight in this process. No government security personnel were involved in protecting them.

 

When the House Select Committee on Benghazi asked to see these emails, the Department of State said they did not have them. Clinton’s lawyers then went through all the emails on her server. They turned over 30,000 emails they decided were work related and deleted all of the rest.

 

How they made the decision as to which emails to share and which to destroy remains unknown. Active government officials not were involved in this process.

 

Hillary says she did not use the account to transmit classified information. This has been proven false. The FBI found over 100 messages that contained information that was classified when sent, including numerous email chains at the level of Top Secret/Special Access Programs. They don’t get any more highly classified, it’s the virtual summit of Mt. Everest. One theme pertained to the movement of North Korean nuclear assets obtained via satellite imagery. It doesn’t take a rocket scientist to figure out this is extremely sensitive information.

 

The FBI found another 2,000 messages containing information that should have been classified at the time it was sent. How much more classified information may have been in the tens of thousands of emails, which Clinton’s lawyers erased, is completely unknown.

Hillary Clinton supporters like to ask rhetorically, “Well, what about Colin Powell?” Nice try, but using your own private email address which received 2 emails determined to be classified later, is nothing like deliberately operating a home brewed server, and then see it handle thousands of classified e-mails.

It’s like asking, "what about the guy who received a stolen apple?" while equating his actions to those of bank robbers who stole $10 million.

What happens next we do not know. What we do know already is this. While serving in one of the most senior positions in the United States Government, Hillary Clinton was at a minimum, grossly negligent in the handling of classified information and when confronted with this practice, acted immediately to destroy information and prevent a full, fair and complete investigation of any damage to national security.

Anyone else who did such things in the government would long ago have been tried, convicted and sent to jail. 

You decide if you want to send her to the White House instead.

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High Yield Bond Flows Cliff-Dive As Rate-Hike Odds Soar

While the oft-heard argument that "The Fed wouldn't raise rates unless everything is awesome" has held for a few months, as risk assets (high-yield bonds) have rallied along with rising rates, it appeears that too much hawkishness (around the 70% chance of a hike)…

Chart: Bloomberg

Was too much for bulls to bear, as last week saw high-yield bond ETF outflows soared to an all-time record high…

As Bloomberg reports, outflows from the iShares iBoxx High Yield Corporate Bond exchange-traded fund (HYG), the top ranked ETF by assets in the junk bond market, set a new record on Thursday – almost eclipsing the $1 billion mark. IShares’ high-grade corporate bond ETF (LQD) also shed $785 million in assets. That brings net outflows over the past week for HYG and LQD to $1.4 billion and $1 billion, respectively.

Chart: Bloomberg

While the price of HYG has yet to fall dramatically…

 

Despite these outflows, the search for yield is still going strong, according to Bloomberg Intelligence ETF analyst Eric Balchunas. The strong selling of HYG coincided with inflows to the Powershares Senior Loan Portfolio ETF (BKLN), which tracks the performance of shorter-term, floating-rate debt. “This is a sign that investors are not as concerned about credit quality as they are about interest rate sensitivity,” he said. “HYG is a reliable bellwether for how investors are fearing higher rates.”

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Pollsters Gone Wild: “Buckle Up, 1-In-4 Chances Don’t Never Happen”

Submitted by Salil Mehta via Statistical Ideas blog,

Here we go again, about a week before the next U.S. presidential election.  The President Obama era, whose administration I meaningfully served >3 years as a public change-agent, will soon give way to either Hillary Clinton or Donald Trump.  15% of the country remains undecided, and looking to polls the same way hundreds of millions of others are.  Will it be a certain landslide?  We’ll get to that in a moment.  This article will explore the biases (i.e., purposeful errors) from the national pollsters.  We’ll see where they repeatedly have gone wrong, not just this year, but in prior elections.  The arguments we’ve made throughout this month, and read by >2 million and shared by thousands, that Trump indisputably has a >20% probability remains even as the other pollsters are only now coming around to our original assessment.  But we’ll also see, or you can as well since we freely provide all of the raw data here, that a 5-point lead by Hillary (even if believed) is merely a central point where the actual results on November 8 can vary wildly on either side and leave most pollsters horrifyingly wrong this year.

To many, a 5% lead in the polls seems like such a sure thing.  But of course in other aspects of life (roulette, weather forecast, stock markets, etc.) we know that’s slim.  This year particularly we have two twin forces wreaking havoc on normally decent pollsters: two 3rd-party candidates and a sizeable number of independents, and highly biased pollsters creating outlier views on Trump.  Most of the “probabilities” for a Trump winning were settling at ~10% until recently (here), though we have long argued (here, here, here) that such probabilities are too low.  We’ve refreshed the chart shown here that because of the Access Hollywood video leak, Trump’s probability for winning was halved from in the 40’s%, to ~20%.  And that’s it!  It’s low, but it is twice what is popularly mentioned in mainstream media kept insisting and in reality we are looking at a 1:4 chance.  So buckle up.  1:4 chances don’t never happen!

 

Also see below how the pollsters viewed the “spread”, here defined as a percentage-point Hillary lead.    

 

Let’s take an up close look at how the developing trend in pollster data impact low-frequency pollster data.  One can’t simply take high-quality averages each day, particularly since the exogenous impact of the video leak earlier this month.  What we do see though is what we’ve long argued would be a re-tightening of spreads, and in fact this is corroborated across a number of other statistics.  This is no time for anyone to be unworried since there is still an election to be had!  For this particular chart it is worth noting that the weight of the data is based on the frequency and recency of the poll, as well as a reduced weight given to the notable outliers of both ABC as well as Rasmussen.  And to be fair, there are others.  We should note that such probability adjustments didn’t change our overall conclusion that the spreads have considerably narrowed, though still remaining above the levels from before the video leak.  But momentum here in on Trump’s side.

 

Before slicing and dicing the historical polling data, it is worth looking at the amount of undecideds at this point in the campaign cycle.  They add considerable risk to pollster’s views, whether they acknowledge that or not.  We have nearly 20 million undecided voters right now, or 3 times the level at this time last election (Obama versus Romney).  These undecided voters are also not homogenously spread across the U.S.!  See the map below and you can appreciate some real wild-card locations.  Now the portion of undecideds collectively is still about 15% for the U.S., and as a reminder that implies 3 times the noise relative to the presumed signal of a 5% Hillary lead over Trump.  And these undecideds are included in large numbers, in must-win states such as Texas, Florida, and Ohio!

 

Now let’s dive into the data from national pollsters and scrutinize patterns in the errors.  Of course data and accessibility of current and historic research is difficult to come by so we developed a large dataset so that this information is now available to you, including on metrics such as reported margin of errors and demographic samples!  We look at 13 chief pollsters who also have a decent amount of polling history to create accuracy measures from.  Now see below a simply chart for each of the pollsters and their current “spread” sorted on the left, versus their historic bias (percentage points by which they have historically overestimated liberal/democratic candidates).

 

 

The evidence is fairly straight.  IBD and Rasmussen are clearly showing the most favorable results for Trump, and both generally show polls that are GOP-biased by about 2 percentage points.  On the other extreme we see some erratic noise.  A traditionally conservatively biased Monmouth last conducted a national poll a couple weeks ago, and that showed Hillary up by 12.  Are you factoring that in, because that won’t last!  Yet ABC and USAToday fits a pattern of being more liberally biased, both with a ~9-point Hillary lead; and of course both are democratically biased by about 1 percentage point.  The difference between the ABC and USAToday spreads, and the IBD and Rasmussen spreads, is gigantic and we’ll show the implications of that further below.

Now as a theoretical probability website, we’ll have to take this much deeper.  We start with the popular variance decomposition of the predictive errors using the following formula:

prediction error =  bias2 + variance of errors

We highlight though that this implies that all pollsters have the same parameters, mostly the same bias.  But they don’t per above, and hence we will need to make modifications in understanding the true distribution of pollsters’ spread, as we go further along.  Just the basic formula above shows the need to look at two lower-order errors.  The bias, but also the variance in both the model and errors as well!  So let’s see in the chart below, this same list of 13 pollsters but also plot their typical distribution of absolute errors.  In other words, Nate Silver’s FiveThirtyEight (538) may appear to be in the middle of the pack on the previous chart, in both their current spread (just over 5%) and historic bias (generally just over 1% leaning conservative).  But in the chart below (in yellow) we see that 538’s advertised margin of error is 4 percentage points (in either direction), though historically (in red) they have been a lot closer to 2 percentage points.  In other worse we can expect that instead of their 5 point spread for Hillary, using just recent history for 538’s biases alone, the true spread is generally between 4 and 8 points (2/3 of the time), and if using their current margin of error, we would have a wide range from 2, to 10 points (again 2/3 of the time).  However, for our work we’ll need to consider all pollsters collectively, including their correlations with one another.  And hence at the end of this article we’ll look at a proper bootstrap distribution that looks at the real errors made by pollsters historically, as well as the wide dispersion in biases that these different pollsters continuously bring to the table in recent elections.

 

Now putting this together with the formula above, we can now use machine learning to recognize the factors that help differentiation the high-error pollsters from the low-error pollsters.  We see that the amount of absolute error (which we show above), and even the volatility in the same, is less informative versus simply looking at the bias of the pollster to begin with.

 

 

What the illustrated output above shows is the basic clustering of 13 pollsters (into high-error and low-error) can be best done by segregating only the polling bias itself!  The pollsters within the columns below are not sorted in any meaningful way.  The point is to expose the insight that the generally more liberal the pollster is, the higher their errors tend to be.  This is something to be mindful of when aggregating polls of polls, over any length of history.

So now let’s look at trying to normalize the pollster data using probability formulas.  First we show the pollsters historical bias relative to their current spread (in green).  Next we will show how such adjustment for bias would make the current spread appear (in red).  And therein lies one of the issues with this year’s polls.  The polls this year are so damaged that even correcting for historic bias leads to exaggerated polls with very high variation among them!  Also note that the chart had been enhanced by the weight/size of the pollster in the chart reflecting how historically accuracy that pollster is.  One will notice NBC and HuffingtonPost for example, despite other flaws with the polling, with among the largest data markers and hence accuracy weights, in being balanced over time on their predicted spread.  The other pollsters certainly have work to do to be more correct, particularly Monmouth as they are single-handedly creating distortions in what would have been a fresh upward trend in the top chart below!

 

 

We do the same thing now for the pollster’s variance in bias error, again assuming no expected difference in bias.  We see that generally the variation in errors has been high, even within pollsters such as NBC or Fox, who advertise that their polls as having far less margin of error than they do.  Note that NBC is less biased in their spread though, as shown earlier, but the precision around their process in any given year is quite rough as we will see below.  So this is the result of being lucky for this pollster.  We see here as well, in conjunction with the chart above, that Rasmussen appears to be as badly behaved as ABC, though both are expressive outliers in different directions.  And organizations in the chart below, such as Princeton and CNN, that are showing high errors have still undoubtedly underestimated their actual error given how far off from the typical spread they are this year.

 

 

In the ultimate analysis of these pollsters, we want to do more than develop theoretical parameters to balance the spreads among pollsters.  So we developed a fresh and non-parametric bootstrap approach (a technique named after the self-reliance of military troops trudging through mud) in order to assess the true distribution of a spread (of the average of the polls).  Recall simply thinking the polling average is 5 points for Hillary is erroneous.  This is because the pollsters themselves are merely offering samples of their distorted reality.  Better realities could be developed using merely insights from all of the pollsters, which would be closer, and not limited to any one pollsters’ range (though that range is so large for 2016 that the lower of the two distributions below reflects the probability of the November 8 outcome itself!)  We first run over a thousand simulated spreads below, noting that any of these spreads could be the correct expected value and the actual election can still be within a certain margin of error about this.  Even prior to that though, notice the high kurtosis (the risk in fatter tails per here, here, here) versus the normal distribution below (in red)? 

 

Second each spread value, including the smallest one simulated at +2.6% lead for Hillary, still has a 2-3% margin of error expected.  But in the formula we showed above, the actual bias will have to have larger variation still and that’s taken into account only in the latter of the two charts below.  In other words, use this distribution as a guide for what’s going to happen this year.  The probability of a Trump victory is still above 20% (and unquestionably not zero).  Pollsters such as Monmouth and others are now going to aggressively play catch-up, in Trump’s favor!  And in any event, this year is proving itself to be unusual simply by observing how wild these pollsters have gone.  Recall the blue line Pollsters’ bias chart above not being flat but still at a steep angle proving the difficulty of even averaging pollsters this year.

 

This lastly, aligns with our ongoing concern that polls this year have been less accurate than normal and hence not as wise to depend on them.  The accuracy can fluctuate (and they will, given the randomness these statistics intrinsically provide).  We’ve had a string of better than average polling results before so kudos to those professionals.  Though that performance in their skill will come under pressure this year.  Like in any analysis, don’t be overconfident that these polls are benign, which would jointly be perilous for voter turnout.  Academics (such as friend Professor Gelman) we show on links above already state the margins should be nearly twice as large, and Betfair trade noted has already doubled in value in just a couple weeks!  The bottom line is that we'll see many pollsters wrong this year for sure, and while there is a 20% or so probability for a Trump victory, there is also an equally fat-tail 20% or so chance for a landslide blow-out from Hillary (something beyond what we saw for Obama versus McCain in 2008!)  Not a sure-thing there, either.

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650,000 Emails Found On Anthony Weiner’s Laptop: FBI Expects “Weeks Of Work Ahead”

Yesterday, we reported that the FBI has found “tens of thousands of emails” belonging to Huma Adein on Anthony Weiner’s computer, raising questions how practical it is that any conclusive finding will be available or made by the FBI in the few days left before the elections

Now, according to the WSJ, it appears that Federal agents are preparing to scour roughly 650,000 emails that, as we reported moments ago were discovered weeks ago on the laptop of Anthony Weiner, to see how many relate to a prior probe of Hillary Clinton’s email use, as metadata on the device suggests there may be thousands sent to or from the private server that the Democratic nominee used while she was secretary of state, according to people familiar with the matter.

As the WSJ adds, the review will take weeks at a minimum to determine whether those messages are work-related emails between Huma Abedin, a close Clinton aide and the estranged wife of Mr. Weiner, and State Department officials; how many are duplicates of emails already reviewed by the Federal Bureau of Investigation; and whether they include either classified information or important new evidence in the Clinton email probe, which FBI officials call “Midyear.”

And, as we further reported earlier today, the FBI has had to await a court order to begin reviewing the emails, because they were uncovered in an unrelated probe of Mr. Weiner, and that order was delayed for reasons that remain unclear.

More stunning is just how many emails were found on Weiner’s computer. And while one can only imagine the content of some of the more persona ones, the WSJ writes that the latest development began in early October when New York-based FBI officials notified Andrew McCabe, the bureau’s second-in-command, that while investigating Mr. Weiner for possibly sending sexually charged messages to a minor, they had recovered a laptop with 650,000 emails. Many, they said, were from the accounts of Ms. Abedin, according to people familiar with the matter.

Those emails stretched back years, these people said, and were on a laptop that both Mr. Weiner and Ms. Abedin used and that hadn’t previously come up in the Clinton email probe. Ms. Abedin said in late August that the couple were separating.

 

The FBI had searched the computer while looking for child pornography, people familiar with the matter said, but the warrant they used didn’t give them authority to search for matters related to Mrs. Clinton’s email arrangement at the State Department. Mr. Weiner has denied sending explicit or indecent messages to the teenager.

As reported yesterday, it appears that there are potentially tens of thousands of Abedin linked emails on Weiner’s computer:

In their initial review of the laptop, the metadata showed many messages, apparently in the thousands, that were either sent to or from the private email server at Mrs. Clinton’s home that had been the focus of so much investigative effort for the FBI. Senior FBI officials decided to let the Weiner investigators proceed with a closer examination of the metadata on the computer, and report back to them.

The WSJ then connects the dots between how the Weiner emails were linked to the Clinton reopening of the Clinton probe, despite Loretta Lynch’s and the DOJ’s vocal urges not to do so:

At a meeting early last week of senior Justice Department and FBI officials, a member of the department’s senior national-security staff asked for an update on the Weiner laptop, the people familiar with the matter said. At that point, officials realized that no one had acted to obtain a warrant, these people said.

 

Mr. McCabe then instructed the email investigators to talk to the Weiner investigators and see whether the laptop’s contents could be relevant to the Clinton email probe, these people said. After the investigators spoke, the agents agreed it was potentially relevant.

 

Mr. Comey was given an update, decided to go forward with the case and notified Congress on Friday, with explosive results. Senior Justice Department officials had warned Mr. Comey that telling Congress would violate well-established policies against overt actions that could affect an election, and some within the FBI have been unhappy at Mr. Comey’s repeated public statements on the probe, going back to his first press conference on the subject in July.

While much of the latest developments are known, the punchline is that the weeks if not months of upcoming work means that if Clinton wins the White House, she will likely do so amid at least one ongoing investigation into her inner circle being handled by law-enforcement officials who are deeply divided over how to manage such cases. It also means that Trump will be hounding HIllary for the remainder of the campaign as being the only presidential candidate to seek election with a recently reopened criminal probe hanging over her head. 

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Why The DOJ Is Having Trouble Accessing The Thousands Of Huma Abedin Emails

What has made Friday’s political fiasco – which started with the FBI’s announcement it has reopened its probe into Hillary’s emails – especially chaotic is that, at least officially, few official institutions have had access to the Abedin emails that are at the center of the new probe for various legal reasons as described below, and is the reason why the Clinton Campaign has been so forceful in demanding that the FBI provide additional information into what is contained among the “tens of thousands of emails” found on Anthony Weiner’s notebook, which as the NYT reported was seized on October 3.

Federal authorities had seized four devices from Abedin and her estranged husband Weiner, including a laptop the former congressman used to send the sexual messages to the fifteen-year old girl. According to The New York Post, agents did not read the e-mails seized, because their warrant only covered Weiner’s messages.

The Clinton campaign responded to the news with campaign spokesman Brian Fallon tweeting, “In other words: Comey officially does not know what he is talking about.”

It also explains why as CNN noted moments ago, Justice Department and FBI officials are working to secure approval that would allow the FBI to conduct a full search of Huma Abedin’s newly discovered emails, sources.  Government lawyers haven’t yet approached Abedin’s lawyers to seek an agreement to conduct the search. Sources earlier told CNN that those discussions had begun, but the law enforcement officials now say they have not.

According to CNN sources, government lawyers plan to seek a search warrant from a judge to conduct the search of the computer.  But what makes the issue especially complicated, is that the computer is considered to belong to Anthony Weiner, her estranged husband, and the case may raise spousal privilege legal protections for Abedin. Government lawyers hope to secure the warrant to permit investigators to review the thousands of emails.

The new search warrant is needed because the existing authorization, covered by a subpoena, related only to the ongoing investigation of Weiner, who is accused of having sexually explicit communications with an underage girl.

As previously report, investigators from the FBI’s New York field office who are conducting the Weiner investigation stumbled on the Abedin emails while they were reviewing emails and other communications on the computer, which was considered to belong to Weiner. They stopped their work and called in the team of investigators from FBI headquarters who conducted the probe of Clinton’s private email server. The investigators saw enough of the emails to determine that they appeared pertinent to the previously completed investigation and that they may be emails not previously reviewed.

And because they don’t have a warrant specific to Abedin’s emails, officials have not been able to further examine them. Justice Department and FBI officials view Abedin as cooperative with the investigation.

CNN adds, hopefully, that many of the emails are duplicates of emails they already have reviewed as part of the Clinton email server investigation and whether any of them may contain classified information. Investigators believe it’s likely the newly recovered trove will include emails that were deleted from the Clinton server before the FBI took possession of it as part of that earlier investigation.

* * *

But where things get interesting, is that as Daily Caller noted today, while the DOJ has yet to allow the FBI access through a warrant to any of the newly discovered Huma Abedin emails, that may not mean other law enforcement agencies in communication with the FBI did not have access to the new material.

The DC speculates that the New York Police Department, along with the New York U.S. Attorney’s office for the Southern District of New York, led by Preet Bharara, and the U.S. Attorney’s Office in the Western District of North Carolina, may have all very well seen the emails in question when the NYPD’s Special Victims Unit first launched their own investigation into Weiner and his sexually explicit messaging to the teenage girl.

Furthermore, as reported earlier, Anthony Weiner is said to be cooperating with the FBI probe, and as Fox News Channel’s Brett Baier reported, no warrant was necessary for the FBI to search the laptop co-owned by him and Abedin, as Weiner has given permission to the agency to search the device.

Additionally, the U.S. Attorneys offices and local law enforcement have access to the FBI laboratory to conduct “scientific examinations of evidence for any federal, state, and/or local law enforcement organization in the United States.”

Ultimately, the question may be not what is in the emails, but who is creating the bottlenecks, and why, and also just how many emails will the FBI have to go pour through seeking potential criminality on Hillary’s behalf before the election. On the other hand, as defenders of Hillary will allege…

… why – if the Abedin emails were found weeks ago – did the FBI wait just days before the election before the information was released.

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“China’s Debt Has Grown $4.5 Trillion In Past 12 Months, More Than The US, Japan And Europe Combined”

While concerns about China’s debt load, capital flows, and depreciating currency have been pushed to the backburner in recent months, perhaps facilitated by a welcome rebound in global inflation – perceived by markets and global central bankers that monetary policy is finally working –  it is worth a quick reminder of how we got here.

First, a quick trip through memory lane to remind us how much has changed in just the past year.

In a note by Morgan Stanley’s Chetan Ahya released on Sunday, the strategist reminds us that a little more than a year ago, the global economy was facing intense disinflationary pressures. Global commodity prices were declining significantly and the slowdown in China and other major commodity-producing EMs had led to some concerns that it could pull developed markets into recession and drag inflation down along with it. At the same time, in China, producer prices fell by almost 6%Y and the regime change in its currency management approach meant that China was no longer absorbing disinflationary pressures from abroad.

And while this seems like a distant memory today, thanks to China which has played a pivotal role in driving the global inflation cycle – this time on the upside – as the cyclical recovery has both lifted China’s own inflation and transmitted it globally, here is how this happened: the recovery in China has been driven by yet another round of debt indulgence. Debt in China has grown by US$4.5 trillion over the past 12 months, by far the highest amount of debt creation globally as compared to US$2.2 trillion in the US, US$870 billion in Japan and US$550 billion in the euro area. Indeed, China on its own has added more debt than the US, Japan and the euro area combined.

While we have shown the IIF’s forecast of Chinese debt countless times in recent months, here it is once again to put China’s unprecedented debt expansion in context:

 

Furthermore, as we noted last week, for the first time Chinese domestic debt liabilities crossed the 200 trillion yuan threshold, just shy of $20 trillion. This has been driven primarily as a result of an exponential increase in Chinese corporate debt which has grown from $4.5 trillion in 2008 to over $17 trillion as of 2016, even as Chinese GDP growth has been cut in half from 12% to 6% as trillions in non-performing loans – by some estimates as much as 20% of total loans – clog up the debt-growth transmission machinery.

 

For now at least, the good news is that this debt creation has at least managed to stoke Chinese inflation, if not so much economic growth. The bulk of the debt creation in China has been diverted towards infrastructure and property markets. This push to domestic demand has provided an uplift to global commodity prices and China’s commodity-related producer price segments, as Morgan Stanley calculates. Higher commodity prices, alongside the improvement in demand, have begun to translate, albeit modestly, into the non-commodity segments of the producer price index.

Outside China, the rise in commodity prices is pushing headline inflation higher in DM too. Given China’s dominant role in the global manufacturing supply chain, the dissipating disinflationary pressures in China’s producer prices should transmit more generally into tradeables (core goods) inflation. Recall that while core services inflation had been holding up well in DM, it was the core goods component which had been the key drag on core inflation.

That said, China is already slamming the brakes (or at least trying) on debt creation as much of these trillions in new debt have found their way into China’s housing market, where prices are growing at a record pace, leading to concerns for Beijing of another out of control housing bubble (which in turn has sent Chinese car sales soaring as the local asset bubble jumps from one asset to another).

And since record debt is what catalyzed the rebound in global inflation, any possibility of a slowdown in China’s debt-creation is being carefully watched. As Morgan Stanley adds, to assess the potential for any overshoot in the cyclical recovery, the key indicator to watch in this context will be China’s property sales. Fundamentally, the economy is still facing the issues of over-investment and excess capacity, which policy-makers are resolving in a gradual approach. These factors point towards a bias that disinflationary pressures will reassert themselves once the effects of the stimulus fade.

Ultimately this all goes to a topic we have discuss frequently, most recently last month, namely China’s credit impulse, which boosts both the economy and inflation expectations in the 1-2 quarter after a massive debt injections, but subsequently leads to a contraction unless offset with even more debt. Schematically, this is shown in the following Goldman chart:

Whether China’s recent debt-fueled growth fades soon is a material issue for the Fed which is set to hike rates in just over a month, a hike which like in December of 2015 may come at a time when the Chinese credit impulse pulls sharply back and lead to the next global deflationary wave just as the US is further tightening financial conditions, leading to a sharp spike in the USD and a substantial decline in the Yuan.

Further, as an indication of how intertwined China’s economic fate is with the rest of the world’s, a senior Australian politician warned, just weeks after the continent celebrated a quarter century of growth without a recession that “China’s growing debt mountain poses a risk to Australia’s financial stability.”

As the FT summarizes, China is Australia’s largest trading partner, accounting for A$150 billion of two-way trade in 2015. Beijing is also an important foreign investor in Australia, leaving Canberra potentially among the developed nations most exposed to a Chinese downturn. China’s growing debt in its local government and state-owned enterprise sector were potential vulnerabilities that could end up having an impact on the continent, Scott Morrison, Australian treasurer, said in an interview with the Financial Times.

“We are not rose-coloured-glasses optimists about China,” Mr Morrison said. “We have a practical and real appreciation about what some of their vulnerabilities are.”

 

Australia’s warning on Chinese debt follows concerns expressed by the International Monetary Fund and others, including billionaire George Soros, who have warned that adverse shocks in China fuelled by its rising debt levels could spark contagion and hit countries with a high trade exposure to the country.

 

“I am not forecasting any change in China but we are very practically minded of the vulnerabilities and what that could convert into — but equally saying they have the capacity to manage it,” he said.

It is courtesy of China, and thus its debt creation, that Australia’s economy is growing at an annual rate of 3.3%, among the highest in the developed world, and has notched up a remarkable quarter of a century of growth without a recession. Surging exports to China have played a key role in enabling its economy to continue growing even during the financial crisis in 2008, when many other countries faltered. Growth has remained robust despite a slump in commodities prices over the past five years.

Should China, whose consolidated debt/GDP is now at or above 300%, feel truly compelled to slow down its debt creation, not just Australia but the rest of the world will feel the consequences.

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James Comey, American Hero?

Submitted by Raul Ilargi Meijer via The Automatic Earth blog,

It looks like I owe you an update. Things move fast in the FBI vs Huma Abedin case. When only some 24 hours ago I started writing my article “Throw Huma Under the Bus?”, there was one thing I did not know at all, one thing I was guessing at as much as the reporters who brought it up, and one I couldn’t verify sufficiently to feel comfortable about including it in the piece.

First, what I did not know at all was the role of Department of Justice head and US Attorney General, Loretta Lynch. Nobody I had read wrote a single word about her role, and I said “Wait a minute! Anybody seen Loretta Lynch lately?”. 24 hours later we know that Lynch, and the DOJ, actively attempted to keep James Comey from writing his infamous letter to members of Congress.

These attempts were ostensibly based on a ‘longstanding’ tradition of the DOJ and FBI to minimalize any potential interference in (presidential) elections. Given that Comey didn’t have ‘enough’ solid evidence gathered from the emails, Lynch et al apparently told him he should not come forward. But it turns out there’s a dark flipside to this argument, please bear with me.

Second, there was the ‘rumor’, or whatever we may call it, that Comey faced pressure from agents (or ‘assets’) in the Bureau to either come forward or risk having details leaked into the press from within the FBI. This is still not verified, and maybe never will be, but it does fit a narrative that’s starting to take shape. Though perhaps not quite the way one might have suspected.

Third, something I couldn’t verify sufficiently, was the issue of a warrant the FBI would need to examine the emails on devices owned by, and in at least some cases shared by, Huma and husband Anthony Weiner. I had seen this, and wrote in yesterday’s Debt Rattle at the Automatic Earth that “The NY Post suggests that NBC suggests that the FBI needs a fresh warrant to study the new batch of emails..”. Nobody else mentioned it though.

But now there’s more on that aspect, and it changes the story, perhaps a lot. In an overall pretty good article, Yahoo’s Michael Isikoff has this:

FBI Still Does Not Have Warrant To Review New Abedin Emails Linked To Clinton Probe

When FBI Director James Comey wrote his bombshell letter to Congress on Friday about newly discovered emails that were potentially “pertinent” to the investigation into Hillary Clinton’s private email server, agents had not been able to review any of the material, because the bureau had not yet gotten a search warrant to read them, three government officials who have been briefed on the probe told Yahoo News.

 

At the time Comey wrote the letter, “he had no idea what was in the content of the emails,” one of the officials said, referring to recently discovered emails that were found on the laptop of disgraced ex-Rep. Anthony Weiner, the estranged husband of top Clinton aide Huma Abedin. Weiner is under investigation for allegedly sending illicit text messages to a 15-year-old girl.

 

As of Saturday night, the FBI was still in talks with the Justice Department about obtaining a warrant that would allow agency officials to read any of the newly discovered Abedin emails, and therefore was still in the dark about whether they include any classified material that the bureau has not already seen. “We do not have a warrant,” a senior law enforcement official said.

When I saw that confirmed, a whole new picture started emerging. You have on the one side James Comey who does something ‘unprecedented’, for which he knows he’ll face a lot of flack. On the other you have Loretta Lynch, a staunch Democrat not known to be nearly as impartial as Comey, trying to keep him from sending the letter.

And on top of that you have ‘negotiations’ between the DOJ and FBI about obtaining a warrant to get access to the emails. The DOJ can, and still may, refuse to grant the FBI that warrant. But that chance is a lot smaller now than if Comey had not sent his letter. By bringing the matter out into the open, he’s hugely increased the pressure on Lynch to issue the warrant.

What we have here in fact is a power struggle. And as I hinted before, this may not be Lynch vs Comey directly, but it may come from within the FBI. Where various ‘assets’ have become so frustrated with how the investigations have been conducted so far that they have put pressure on Comey that may even have taken the form of an ultimatum. “We’ll leak unless we get a warrant”.

But it’s quite possible that Comey himself is the one behind the pressure on the DOJ, it’s quite possible that he has grown as weary as his people of the ‘progress’ in the entire Hillary email proceedings.

There is no indication from the eight-page FBI report on the interview, however, that the agents ever pressed her on what has now turned into an explosive issue in the final days of the 2016 campaign: Did Weiner have access to any classified government documents on his laptop and iPhone — devices that, he apparently used to exchange sexually charged messages with women he met online, including in one alleged case, an underage teenager in North Carolina?

 

The fact that FBI agents failed to follow up on this shows that the original probe into the Clinton email server was “not thorough” and was “fatally flawed,” said Joseph DiGenova, a former U.S. attorney and independent counsel who has been a strong critic of Comey and the FBI probe. “The first thing they should have done was gotten a sworn affidavit about all her accounts and devices,” he said, adding that agents should have immediately attempted to obtain the devices, including Weiner’s.

We don’t know why the agents haven’t. The suggestion I referred to yesterday that Huma Abedin may have been granted a ‘secret immunity’ deal could have played a big part in that. After all, there must be some reason why no devices were seized in ‘part 1’ of the investigation; even if that reason is not exactly public knowledge. The ‘secret immunity’ and the lack of devices seized, of course remind us again of Lynch’s meeting with Bill Clinton on a tarmac in Phoenix back in June.

Agents may simply not have had the authority to ‘obtain’ the devices. Whether that was because the DOJ actively frustrated their investigation, or the orders came from Comey, we don’t know and we never may. But something’s changed since then. That’s what Comey’s letter, and its timing, strongly seems to suggest.

About the material found on Weiner’s devices, Hillary’s side of course has a good idea what’s in the emails. Huma has been thoroughly grilled by now, if she hadn’t been before. The FBI probably has at least a partial idea: it’s highly likely they have seen things when investigating Weiner that would now be a part of the Hillary email investigation if the warrant were issued.

Hillary and other Dems can now protest Comey’s actions all they want, and demand full openness, but they know full well that this openness depends on ‘their own Loretta Lynch’ granting the FBI that warrant. And every single second that the warrant is not issued is a dark cloud on Hillary’s campaign, and indeed on the whole of America.

Of course the Democrats would love to lift this whole thing over November 8, and that’s why they seek to play for time and focus -again- not on the content but on the process, the proceedings and the individuals involved. People inside the FBI -whether that includes Comey or not- appear to think that would not serve democracy. But they have tens of thousands of mails to dig through even if they get the warrant, and that takes time. Will they get that time?

There’s no way Comey is not smart enough to have seen coming what’s happening now. From the Democrats’ favorite son he’s become in their eyes so incompetent they even suggest he may be yet another of Putin’s assets in America.

Is he seeking to right a wrong? Did he think that no matter what he did he would be fed to either the Republican or the Democrat sharks anyway? Or was he pressured by his ‘assets’? Right now, it seems too soon to tell. But don’t be surprised if James Comey comes out of this looking like a true American Hero. Even if it costs him his job.

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How To Position For November 9th: BofA’s 4 Post-Election Scenarios

With polls still indicating that a Clinton win and split government are the most likely outcomes, we have witnessed increased complacency around election results. But, as BofA warns, risks to market multiples and to earnings growth are typically elevated in an election year, with volatility generally rising ahead of the election, and business investment typically slowing as corporations adopt a wait-and-see attitude.

Moreover, given how polarized the candidates are in the current contest, we should not rule out the possibility of an uncertainty shock in the case of a Democratic or Republican sweep, increasing the likelihood that more policy proposals are passed. At a simplistic level, the risks of a Democratic sweep are higher taxes and increased regulation; under a Republican sweep, trade wars, geopolitical risk and a higher budget deficit. And a sweep by either party suggests greater potential for fiscal stimulus, leading to stronger growth and thus higher rates, which could be detrimental to high dividend yielding stocks.

The incoming president’s impact is likely to be heavily constrained by a split government. A Clinton Presidency with Republicans controlling at least one house of Congress would likely make Clinton's upper income tax hike and legislation limiting drug prices less likely to pass. Rates could remain lower for longer (under a lower probability of significant fiscal spending), benefiting stocks with high dividend yields. Under either candidate, we see a high risk that the Trans-Pacific Partnership (TPP) does not pass and that the US Treasury could name China or another country a "currency manipulator." Military spending is likely to increase under either candidate, which could benefit Defense stocks. Under a Trump Presidency with Democrats controlling at least one house of Congress, some restrictions on immigration might be imposed, per the candidates' policy positions, but a major policy shift appears unlikely. A tax cut for the wealthy would be less probable, and only small changes in the Affordable Care Act would be likely.

With the election drawing nearer, BofA surveyed their US fundamental analysts to come up with lists of stocks that could benefit in the four general election scenarios: Clinton sweep, Clinton/split government, Trump sweep, and Trump/split government…

 

Given the proximity in time to the election, the most likely outcome may be partially priced in. Thus, it may be overly simplistic to sell Health Care under a Clinton win when the sector has already de-rated…

 

Or buy stimulus beneficiaries when these stocks appear to be discounting lofty expectations…

Note that the number of news articles citing fiscal stimulus reached a post-crisis high this summer.

Source: BofaML
 

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