Month: October 2016

Three lessons from safari in Zimbabwe

There’s nothing quite like watching animals in the wild.

I’ve spent the past four days at an enormous game reserve in Zimbabwe with a guide who would put Bear Grylls to shame.

(Ironically, guides in Zimbabwe are the most highly qualified and well-respected in Africa– they undergo more years of rigorous training and apprenticeship than most doctors in the West.)

Whenever I come out here and watch wild animals in their natural habitat, I learn so much about our own species. Here are a few examples:

First, wildebeests have the worst herd mentality imaginable. No matter what, they’ll follow each other, even if it’s into certain death.

Like the mythical lemmings who follow each other off a cliff, a group of wildebeests will continue crossing a river in a single file line even if the one right in front of them has just been eaten by a crocodile.

Funny enough, the technical term for a group of wildebeests is a ‘confusion’, as in “Look at that confusion of wildebeests get eaten by the same crocodile!”

Then there are the baboons, a highly corrupt species that tends to congregate in large tribes.

The chief of a baboon clan expects his subordinates to do favors for him and bring him special gifts.

The cronies who please him the most are promoted higher up in the tribe and rewarded with special mating privileges… sort of like our system of government.

Then there’s the kudu, a type of antelope whose males have long, spiraled horns.

And they’re also incredibly aggressive with one another.

When male kudus fight, they lock horns… and once locked, they’re stuck. They can’t unlock their horns. So typically they just starve to death from their own aggression.

It’s amazing to see so many of the same traits in animals that our own species displays– self-destructive aggression, corruption, herd mentality.

But the one thing that I find most impressive is how animals detect and deal with risk.

Watching animals around a watering hole on a hot day, you’ll see several species congregating together peacefully.

Then, all of a sudden, they notice something. Perhaps a peculiar smell, a noise… something that just feels wrong.

Oftentimes they’re right, and there’s a predator lurking nearby just waiting to slaughter one of the animals who’s not paying attention.

The ones who pay attention to their instincts and take action are the ones who survive, and pass on their acute sense of danger to the next generation.

We humans have that same ability.

We might not be hanging around any watering holes anymore, but our species possesses a highly refined sense of danger that was passed down from our primal ancestors.

These instincts may have been tugging at you for a long time.

You may have been feeling for a while that something is seriously, seriously wrong. You can sense the danger around you.

Of course, our dangers are different. Our predators are not lions, but colossal debts, menacing politicians, incompetent bureaucracies, fiat currency, central bankers, mountains of regulations, endless wars, etc.

The problem with our species, however, is that we have too many bad influences that compel us to ignore our instincts.

We are bombarded with ‘experts’, politicians, and entire media establishments who tell us that our instincts are wrong, and that everything is fine.

Just like animals in the wild, however, this is a dangerous approach.

We have instincts for a reason, and when they tell us that there’s danger ahead, or that there’s something seriously wrong, it makes sense to listen to them… for our own sake, and for that of our loved ones.

That is the fundamental advantage to our species.

Sure, opposable thumbs are great. But it is ultimately our ability to pass on what we have accumulated to future generations that has propelled humankind this far.

Wild animals aren’t able to learn, create, and grow… and then pass down their legacy to the next generation.

But we can.

To this day we enjoy the benefits of thousands of years of accumulated knowledge, wealth, and resources.

And it works the same within our own families; we’re able to pass on everything we build and create in life to the next generation.

This raises an incredibly important question: when our instincts are telling us that something is wrong, why take the chance? Why put everything in jeopardy?

It’s 2016. We have limitless solutions to mitigate the dangers that we’re sensing in ways that make sense no matter what happens next.

For example, if you find yourself living in the most litigious society that’s ever existed in the history of the world, does it really make sense to keep everything you’ve ever earned or hope to earn in that jurisdiction?

With a few simple steps, you can legally set aside a rainy day fund that’s practically bulletproof against frivolous creditors, a vindictive ex, or much worse.

It’s also a structure that you could use to generate extra income.

So even if you never get sued, you’re still making more money.

Similarly, if your banking system is conspicuously undercapitalized, plays underhanded accounting tricks, or is implementing negative interest rates, why keep all of your money there?

Think about it– as a depositor, you are nothing more than an unsecured creditor of an institution that never misses an opportunity to screw its customers.

Not to mention you can be frozen out of your life’s savings with a phone call or mouse click by dozens of government agencies.

Why take the chance?

You could easily eliminate this risk by holding some physical cash, or moving some funds to a safe, credible, well-capitalized banking system overseas.

There’s practically zero cost to doing this. And you might even be able to generate substantially higher interest.

So if your instincts are right, your legacy will be protected.

But even if nothing bad ever happens, you can still derive tremendous benefit, and even extra income, at minimal cost.

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Welcome to the Vast Right-Wing Conspiracy, Director Comey!

James ComeyYou would think FBI Director James Comey had sent his Friday announcement to Congress on Trump-Pence letterhead the way Hillary Clinton and Democrats have responded.

To recap, for the benefit of those who spent the weekend preparing their racially and culturally tasteful and sensitive Halloween costumes instead of following the news: During the course of investigating scandal-tainted Democratic former New York Rep. Anthony Weiner and an accusation he was sexting with a minor, the FBI found hundreds of thousands of emails on a laptop he and/or his likely-soon-to-be-ex-wife Huma Abedin had been using. The metadata suggested that many of these emails might have been sent to or from Clinton’s private server.

So now the FBI has to investigate to determine whether any of these emails were classified or were connected in any way to Clinton’s previous mess. The letters may turn out to be duplicates or nothing interesting in particular. It seems very unlikely they’re going to find any new smoking guns (insert joke about dick pics here). But Comey, after previously declaring that the FBI would not recommend any charges over Clinton’s “extremely careless” handling of classified communications, decided to send a brief letter to various leaders in Congress to inform them that the FBI would be reviewing these letters to see if they were at all relevant to their previous investigation. His letter was brief (three whole paragraphs) and did not accuse Clinton of any wrongdoing whatsoever.

But, boy, has that letter opened possibly a bigger can of worms than the Wikileaks email dump somehow. To this outside observer who is completely over the election at this point, Comey’s letter looks like a simple ass-covering move so the FBI doesn’t get accused of ignoring evidence. But to Democrats and the Clinton camp and some others, that short letter is a full-on assault on the democratic republic and the sanctity of this election.

Over the weekend, dozens of former federal prosecutors signed on to letter criticizing Comey’s decision to send the letter, noting:

Director Comey’s letter is inconsistent with prevailing Department policy, and it breaks with longstanding practices followed by officials of both parties during past elections. Moreover, setting aside whether Director Comey’s original statements in July were warranted, by failing to responsibly supplement the public record with any substantive, explanatory information, his letter begs the question that further commentary was necessary. For example, the letter provides no details regarding the content, source or recipient of the material; whether the newly-discovered evidence contains any classified or confidential information; whether the information duplicates material previously reviewed by the FBI; or even “whether or not [the] material may be significant.”

Perhaps most troubling to us is the precedent set by this departure from the Department’s widely-respected, non-partisan traditions. The admonitions that warn officials against making public statements during election periods have helped to maintain the independence and integrity of both the Department’s important work and public confidence in the hardworking men and women who conduct themselves in a nonpartisan manner.

The Clinton campaign took this call for respect for non-partisan traditions and tossed it right up on their website. Former Attorney General Eric Holder Jr. signed on to the letter and also wrote a separate commentary for the Washington Post saying much of the same things. The talking points have been established. This goes against procedure! This is not the way things are done! Even Libertarian Party vice presidential nominee Bill Weld criticized Comey’s letter and said Attorney General Loretta Lynch should maybe step in and “order him to stand down” if more information gets leaked.

Of course, law enforcement officials leak information to the press all the time. In fact, that might actually be a problem here that Comey couldn’t avoid. The Wall Street Journal reports that there’s a feud within the FBI over how thoroughly the Clinton Foundation should be investigated for possible corruption, and there are internal disagreements over whether Clintons is being treated too harshly or too loosely. It’s easy to imagine some disgruntled FBI worker leaking this information out, and imagine how much more confused and possibly partisan that kind of coverage might have been.

And it’s worth reminding for the umpteenth time that this is all a mess of Clinton’s own making, due to her paranoia and obsession with avoiding transparency. This response is entirely in line with this very attitude, as well. They’re attacking transparency as something inappropriate and out of line with “respected traditions” that could impact the electoral viability of politicians, which is kind of hilarious and kind of enraging on its own. It’s not just journalists obsessed with presenting a completely unrealistic and unbelievable veneer of nonpartisanship. And, needless to say, we won’t have dozens of prosecutors signing onto a letter if somebody at the FBI leaks info about you or me or some corporate CEO who has pissed off the wrong government lawyer.

Reliably awful Democratic Party hack and outgoing Sen. Harry Reid took the whole thing to a new, terrible level by accusing Comey of possibly violating the Hatch Act through his “partisan actions,” and claimed that Comey was sitting on information about a relationship between Donald Trump and Russia. Former White House lawyer Richard Painter also accused Comey of possibly violating the Act, which bars public officials from attempting to influence the outcome of elections.

Ah, loudly attacking the character of somebody whose behavior may present a threat to Clinton’s power. That sounds familiar. This entire reaction should seem like déjà vu to anybody who lived through President Bill Clinton-era scandals. Back in the April 2000 issue of Reason magazine, as Bill Clinton’s presidency approached its end, Charles Paul Freund explained the five-step process by which the Clintons managed out outlast every scandal that came their way during that presidency. Read Freund’s piece and elements of it are eerily familiar. (declaring that the latest information is “old news”? It’s old news.) Note in Freund’s a peek at Comey’s possible fate:

This White House has responded to every major problem by introducing the character of its critics or opponents–and even its own victims–at the first opportunity, impugning those characters, and questioning motives. To the degree that it could, using allies in Congress and the press or acting directly, it has turned scandal narratives into character melodramas.

The major example of this reflex was the regular slandering of Kenneth Starr as a sex-obsessed maniac. But Starr had plenty of company; Clinton and his allies have tried to smear everybody whom they perceive as a threat. Gennifer Flowers was characterized as a gold-digging slut. Monica Lewinsky was characterized as a nutty stalker. Billy Dale of the White House Travel Office was falsely characterized as personally dishonest. Linda Tripp, thanks to a New Yorkerstory, was falsely characterized as a felon. Kathleen Willey was characterized as a delusional liar. Paula Jones was infamously characterized as trailer-park trash. UN weapons inspector Scott Ritter, who questioned the administration’s resolve to rid Iraq of weapons of mass destruction, was characterized as a petty man jealous of his superiors’ limousine perks. House Republicans were characterized as sexual McCarthyites attempting a political coup. Of course, the entire community of Clinton critics was notoriously characterized by Hillary Rodham Clinton herself as “a vast right-wing conspiracy.”

This is actually the centerpiece of the Clinton strategy of clogging Washington’s scandal machinery: Blunt every threatening story by infusing it with self-serving elements that subsequent press coverage will necessarily include. Hillary’s accusation of conspiracy, made in the course of an NBC “interview” conducted by a supine Matt Lauer, was both desperate and ludicrous, and it is likely that almost everyone in the press (and in the White House, too) saw it in just those terms. Yet in the wake of Hillary’s NBC appearance, most news-related talk shows devoted at least some time to absurd exchanges around the topic, “Is there a vast right-wing conspiracy?” At a minimum, Hillary’s statement bought time; at best, it introduced an explanation for her husband’s problems, one consistent with the rest of the Clinton scandal narrative: That he is the innocent victim, year in and year out, of dreadful people with evil motives and low characters.

Indeed, a good part of the discussion is now about Comey’s motives, not about the information itself. This, folks, is a very good preview of the kind of administration Clinton will have. Under President Barack Obama we endured condescending lectures to justify the administration’s massive expansion of executive and regulatory authority. Under President Hillary Clinton, we may endure condescending lectures telling us why we shouldn’t care about whatever stonewalling and her staff may do to keep Americans out of the loop about her behavior.

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Brazile Exclaims “Please God, Let This End Soon” As CNN Shuns Her “Uncomfortable Interactions” With Clinton Campaign

It seems DNC Chair Donna Brazile is hoping for rescue by a higher power as the net narrows around her lies and obfuscation. Following more examples of Brazile passing debate questions to the Clinton Campaign, CNN spokesperson Lauren Pratapas said in a statement that:

CNN “never gave Brazile access to any questions, prep material, attendee list, background information or meetings in advance of a town hall or debate.”

 

“We are completely uncomfortable with what we have learned about her interactions with the Clinton campaign while she was a CNN contributor.”

While there has ben no official statement from the DNC, here is Donna Brazile’s latest tweet…

As The Hill reports, CNN said it would “revisit” Brazile’s contract “once Brazile concludes her role.”

Maybe she will get a position on The Clinton Campaign too once she steps down… just like DWS!

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Risk Happens Fast

By Chris at http://ift.tt/12YmHT5

As a teenager brimming with testosterone my reptilian brain loved action movies.

Top of my list were Steven Seagal movies. Clearly it wasn’t for his acting skills, which are only marginally better than Barney the dinosaur.

What I loved about Seagal was that he was both deadly and terribly fast. His opponents had mere seconds before their arms, legs, or other bones were snapped like twigs. Or they suffered a severe beating leaving them either dead or in a bludgeoned unrecognisable mess. Fabulous stuff!

With Seagal risk happened fast. The targets of his aggression never had time to get out once the onslaught began, and then it was all over in seconds. None of this drawn out biff-baff nonsense, taking forever to finally get to where you knew things were headed anyways.

Back in January of 2015 the currency markets had a “Seagal moment”.

The Swiss National Bank (SNB) had pegged the Swiss Franc to the Euro at 1.20 and by the end of 2014 had already spent billions defending the peg.

All the numbers told us the peg was untenable. We didn’t know how long the peg would hold but we did know that with every passing day what was clearly untenable simply became more untenable. The stress was building.

Failing to participate is one of my regrets. I saw the imbalance, the fact that volatility was unbelievably cheap presenting awesome asymmetry, and instead made another cup of coffee thinking, I’ll get an entry sign. Something that allows me to identify timing. Dumber than thinking you can get out of Seagal’s way after disrespecting his mama.

Back in March of 2015 we explained why the probability of the Chinese renminbi being devalued was high and increasing daily. Five months later the PBOC shocked markets by devaluing the yuan. Here is what we said at the time when discussing the CHF:

“By pegging the CHF to the euro at 1.20 the SNB put a lid on how much it would appreciate against the euro. In doing so the SNB’s balance sheet grew faster than even the US Federal Reserve’s balance sheet, and finally in January the SNB realized it was fighting a losing battle and threw the towel in. This resulted in an “off the Richter scale” move (+30%) in a few minutes!

 

This disorderly revaluation shook the currency markets and impaired a number of financial institutions! In trying to suppress volatility and create more certainty all the SNB euro pegging efforts succeeded in doing was to achieve the exact opposite!”

At least having sat and watched the franc peg break the lesson wasn’t lost. And so when it came to watching the renminbi and the problems we’d identified in the Chinese interbank market (something we discussed on the blog as well) we could evaluate the cost of entering the short renminbi trade accordingly since volatility was priced as if it not only didn’t exist as a threat but that it would NEVER exist. We all know how that ended.

The same had been true of the Swiss franc. When it broke, the move was even more explosive.

CHF Volatility

See that long green line at the bottom of the screen?

That’s what you call complacency, trust, and faith. This made no sense given the fundamentals. It was as loony as planning a driving trip across Africa in a Lada, expecting trouble-free motoring.

Now if you look closely you’ll see the line at the very end of the chart is a 90 degree angle. This is the volatility in the EUR/CHF pair when it broke.

As reported by Bloomberg at the time in an article entitled, “No One Was Supposed to Lose This Much Money on Swiss Francs”:

“Goldman Sachs Chief Financial Officer Harvey Schwartz said on this morning’s earnings call that this was something like a 20-standard-deviation event, and while the exact number of standard deviations is of course a subjective matter, that’s the right ballpark.

Over the 12 months ended on Wednesday, the annual volatility – that is, the annualized standard deviation of daily returns – of the euro/franc relationship was a bit over 1.7 percent; over the last three months of that period the volatility was less than 1 percent. That converts to a daily standard deviation of something like 0.1 percent.

On Thursday, the euro ended down almost 19 percent, or call it 180 standard deviations, depending on what period you use.”

The chart below shows the EUR/CHF currency move which coincided with the volatility shown above.

EURCHF

The truth is that even though the situation was untenable and the cost to going long the CHF extremely low, it was unpopular since the market believed in the status quo, and its ability to sustain the unsustainable.

The Lesson

Experience has taught us that typically the greater the asymmetry, the less the opportunity for us to position when a move has already begun. There isn’t time! Risk happens fast.

The opportunities we focus on present asymmetry and often happen all at once. It is important to be positioned BEFORE the move. This requires risk management, and intelligent position sizing.

Thinking you will get to position once a move starts in a market exhibiting extraordinary asymmetry is a bit like thinking you can get out of the way when Seagal gets to work on you. It’s probably too late though perhaps I should use someone other than Seagal nowadays since the only thing “under siege” appears to be his arteries.

Discipline and patience are imperative. You will inevitably be a day or two early at the train station and waiting sucks but a minute too late and it’s a loooong walk.

What to Expect

Investing in such opportunities you can rest assured we have to suffer fools parroting phrases such as “being early is the same thing as being wrong” until a collapse demonstrates that actually no, it’s really not.

Hubris is one sign that asymmetry may exist. Volatility and the pricing of volatility is usually key. In scrounging around the global macro landscape in search of opportunity, and in speaking with the dozens and dozens of truly great investment minds, one thing that so often becomes vividly apparent is that the very best investment minds in the world are never complacent and you shouldn’t be either.

Complacency

Have a great week!

– Chris

“This kind of event is the kind of thing that will trigger volatility. This is not a one day thing now.” — Darren Courtney-Cook, Head of trading at Central Markets Investment Management on the SNB abandoning the euro peg

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Is The VIX Curve Sending A Warning Signal?

Authored by Peter Tchir via Brean Capital,

Is the VIX Curve Too Flat?

For the last couple of weeks, VIX and VIX based ETFs and ETNs (UVXY, TVIX, VXX, XIV, etc) have only been on the fringe of radar screen.  They were there, but they were only mildly interesting.

What I had noticed at the time was:

1. VIX ETPs were seeing shares outstanding increase as VIX dropped (doubling down)

 

2. Then last week as VIX was rising I commented on the fact that funds were not seeing large decreases in shares outstanding – a signal that the ‘hedgers’ were prepared to be resilient

 

3. Over the past few days I have had more and more discussions about VIX again and think the one thing worth pointing out for those who like to dismiss it as a ‘pure retail’ product is that UVXY alone has about 25% of the outstanding Nov VIX Futures contracts and almost 30% of the outstanding Dec VIX Futures contracts.  That is a large percentage of any market – let alone one where the product doubles down on direction each night to maintain its leverage balance.  It has a market cap of $800 million, but since that is 2x leveraged that represents $1.6 billion of VIX exposure.  VXX is unleveraged and seems about 6 to 8 times as volatile as the S&P 500 in terms of realized vol.  That to me, means UVXY controls roughly $10 billion of S&P 500 equivalent risk – less easy to dismiss – especially given the daily volumes, the outsized ownership of the futures and the overall complexity of the product.

Unlike Treasury VIX which I hit on last week (which I think played a roll in Treasury and Credit Market price action last week), the absolute level of VIX isn’t particularly scary – its not unusually low or at fear levels.

But the “Kiss of Death” for the VIX products is the steepness of the VIX curve not the absolute levels in any case.  That curve hammers the VIX based products (which is why the ETFs and ETNs are inevitably forced to do extremely large reverse splits).  I fully expected the VIX curve to be steep and was going to highlight that as a problem, but it was flat – eerily flat.

Flat Like August 2015?

I started to analyze the data.  The shape of the VIX curve is correlated to the absolute levels of VIX.  Whenever VIX spikes (about 20) it often becomes inverted.

Low levels of VIX tend to have the steepest curves as people hedge some event on the horizon even if there is nothing to worry about today.

So I took all the days since January 2015 when the VIX had closed between 15 and 17.5 (Friday’s close of 16.2 is a rough midpoint).

There were 110 such days.  3 days in October, including Friday, ranked in the top 14 flattest curves.  So we have a cluster of relatively flat curves given the current level of VIX.

More striking was that of the remaining 11 days that were flatter, 6 occurred in July and August 2015 – including August 19th.

VIX in the summer of 2015

Could this happen again?

Is the combination of a potentially deep and committed hedging community, coupled with self-reinforcing daily rebalancing where the election news cycle seems to be getting more surreal if anything going to lead to another spike in VIX?

I don’t know, but it is yet another thing to be cautious of.

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Where Hillary Clinton is the Spoiler Candidate

This weekend Donald Trump denounced Evan McMullin, an independent conservative candidate who’s been polling well in Utah. After declaring that McMullin had gathered his overwhelmingly Mormon support by “going from coffee shop to coffee shop” (fact check: Mormons don’t drink coffee), Trump declared that “if for some reason we lose Utah, that could have a very devastating impact” on his campaign.

That it could. Trump’s been struggling in several swing states; the last thing he needs is to lose a place that’s usually the most reliably Republican state around. And FiveThirtyEight currently gives McMullin a better shot at denying him Utah than Hillary Clinton has. He leads her in most of the state’s recent polls, and he arguably has a better chance of picking up supporters from her column than vice versa. From the Clintonites’ point of view, it would of course be ideal for the Democrat to claim the state’s six electors. But if that’s not possible, the Dems would surely rather see McMullin collect them; at least that way they won’t help Trump get the 270 electoral votes required to win.

So if you’re a Democrat in Utah, who gets your vote? The fellow with a shot at blocking Trump? Or Cinton, the spoiler candidate?

Now if that Democrat asked for my advice, I’d tell him to vote for the person who’s closest to his views. But I’m a guy who usually votes third-party. Every four years, I get an earful about how terrible this is, how I’m a foolish idealist who needs to stop letting the perfect be the enemy of the good. (For the record: I don’t think any of the candidates I voted for were perfect, and I don’t think any of their major-party opponents were good.)

Well, now the shoe’s on the other foot. If you’re a Utah Democrat who has ever sneered that Libertarians and Greens vote immaturely—if you seriously believe that the grown-up thing to do is to hold your nose and cast your ballot for the lesser evil—then you’ll have to think hard about how exactly their actions are different from voting for Hillary Clinton. If there’s a serious movement from Utah’s Democrats toward McMullin, he’ll carry the state. If they stick with Clinton, Trump’s chances of getting those six electoral votes are a lot higher.

It’s no skin off my nose; I prefer Gary Johnson anyway. But I’ll still take a little pleasure in being able to tell a Democrat, “Oh. So you’re throwing your vote away.”

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We Can Make Housing More Affordable: New at Reason

Less regulation would make housing more affordable and spur economic mobility.

A. Barton Hinkle writes:

Several factors affect housing costs, and there’s little to be done about some of them: Nobody is making more land, for instance. On the other hand, governments are making more regulations—and the price of housing would shift dramatically if they would just stop.

You don’t have to be a bleeding-heart libertarian to think that, either. Even the Obama administration has come around to that view; in September Politico reported the White House was urging localities “to rethink their zoning laws, saying that antiquated rules on construction, housing and land use are contributing to high rents and income inequality, and dragging down the U.S. economy as a whole.”

It has good reason to say so. In recent years new-home prices generally have been at least a third higher than resale prices. This summer The Wall Street Journal cited “several recent studies (that) have documented how increased regulatory and permitting costs” have driven them up. The rules cover everything from impact fees and stormwater runoff to species surveys and architectural mandates.

View this article.

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Johan Norberg: 10 Reasons To Look Forward To the Future (New Reason Podcast)

“There is always this risk that fear will become a self-fulfilling prophecy,” says Johan Norberg about the current political moment when nationalism, authoritarianism, and reactionary populism seems to be on the rise in Europe and North America. “This is exactly the moment that we have to talk about what people can do when they are free.”

Progress: Ten Reasons To Look Forward To the Future, the new book by the Swedish libertarian, is like a hot drink on a cold winter’s day: nourishing, energizing, fortifying.

In chapters covering topics such as food, sanitation, life expectancy, literacy, the environment, and equality, Norberg shows how human progress has been proceeding apace for the past century—and how we can ensure its continuation if we make sure that libertarian values linked to tolerance, capitalism, individualism, and optimism are championed and encoded in law and custom.

Grounded in a deep respect for and knowledge of history, economics, and policy, Progress is not simply a persuasive analysis or current trends but a desperately needed one in pessimistic world hell-bent on zero-sum thinking. “This book is a blast of good sense,” raves The Economist:

Norberg unleashes a tornado of evidence that life is, in fact, getting better. He describes how his great-great-great-great grandfather survived the Swedish famines of 150 years ago. Sweden in those days was poorer than Sub-Saharan Africa is today. “Why are some people poor?” is the wrong question, argues Mr Norberg. Poverty is the starting point for all societies. What is astonishing is how fast it has receded. In 1820, 94% of humanity subsisted on less than $2 a day in modern money. That fell to 37% in 1990 and less than 10% in 2015.

In a new Reason Podcast, Norberg, a senior fellow at the Cato Insitute, talks with Nick Gillespie about the ideas, attitudes, policies, and institutions that will make sure future generations are born into a world that is vastly better than the one we live in today.

Click below to listen now and scroll down to subscribe on iTunes.

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Hotel Workers’ Union Gave $100K to Management’s Fight Against Airbnb

The trade association representing New York City hotels and the union that represents tens of thousands of the city’s hotel workers rarely see eye-to-eye.

Last year, though, they found a common enemy: Airbnb.

The New York Hotel and Motel Trades Council, which represents more than 35,000 employees in the Big Apple, made a $100,000 contribution in November 2015 to the Hotel Association of New York City, a trade group that includes 280 of the city’s hotels. The contribution, which was reported as part of a mandatory Department of Labor disclosure of union spending, was given to support the Hotel Association of NYC’s “Bnb project.”

Neither the trade association nor the union would confirm it, but the contribution seems like a clear reference to the hotel association’s efforts to block Airbnb and other short-term rental services from operating in New York City. That effort scored a significant (though likely short-lived) victory earlier this month when Gov. Andrew Cuomo signed a bill that makes it illegal for New Yorkers to advertise short-term rentals on online platforms like Airbnb.

The contribution from the union to the trade association shows that both sides of the classic labor-management divide were willing to set aside their differences in order to use their political muscle against a common opponent.

According to Bloomberg, Airbnb accounted for 2.9 million overnight stays in New York City during 2015, but that was only 7.8 percent of all nightly rentals. Hotels accounted for 92 percent of all stays and brought in 95 percent of gross revenue.

Despite that huge edge in earnings, the hotel industry has been pushing for rules that ban short-term rentals—and not just in New York. The Hotel Association of New York City gave $25,000 to an organization that backed a 2015 ballot initiative to apply stricter rules for short-term rentals in San Francisco.

Voters rejected that proposal, but the hotel industry in New York had more success by appealing directly to elected officials. The Airbnb advertising ban signed this month by Cuomo would impose fines of up to $7,500 for each offense, but the law already faces legal challenges because it seems to violate both federal law and the First Amendment.

The union and hotel trade association are generally on opposite sides of hot button political issues. Currently, they are engaged in a fight over a proposal to raise the minimum wage to $15 in New York City, with the union supporting the so-called “Fight for $15” while the trade association opposes it.

As a private organization, the Hotel and Motel Trades Council is allowed to spend their money however they want, of course. Still, members of the union might be surprised to learn that $100,000 of their dues have been handed over to an organization that opposes the union on many issues.

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With Q3 Earnings Season Half Done, This Is Where We Stand

With more than half of the S&P500 reporting Q3 results so far, it appears that the earnings recession may finally be ending mostly as a result of the rise in oil prices which have pushed energy earnings higher relative to expectations on a year over year basis, and especially due to surprisingly strong results in the US banking sector.

Consensus now expects 3Q earnings growth of +1% YoY (+4% ex-Energy), the first quarter of positive growth since 2Q15. While growth is positive and accelerating across sectors such as Financials and Tech, growth is still negative in Energy (for the eighth quarter) and Industrials (for the sixth quarter). Discretionary earnings have notably weakened, driven by Autos, where earnings are expected to decline YoY for the first time since 2009. Sales trends have improved in this sector, suggesting margin compression from cost pressure. We have been concerned about margins for labor-intensive Discretionary companies due to higher wages, and evidence of this has been building in company commentary, and would likely be further exacerbated by a Democratic administration.

Some details on Q3 season from BofA: with the conclusion of Week 3, 292 companies representing 70% of S&P 500 3Q earnings have reported. Estimates climbed across all eleven sectors last week, driving bottom-up EPS to $30.77 from $30.24. This is now more than 3% above analysts’ expectations at the start of earnings season. Earnings are tracking above analysts’ expectations for all sectors except Energy, with the biggest  contributors to the beat in Banks, Capital Markets, Aerospace & Defense, Software, and Autos. Meanwhile, Oil & Gas, Metals & Mining, Media, and Industrial Conglomerates have seen the biggest downward revisions to earnings since the start of the month.

Digging into the earnings announcement, a recurring theme emerges: of the 292 companies that have reported so far, there have been at least 59 mentions of the election in earnings transcripts so far, well above the 32 mentions for the full 3Q earnings season ahead of the 2008 election, and tracking above the 85 mentions during the full 3Q12 when adjusted for the number of companies that have reported. Many companies have mentioned uncertainty over policy combined with continued Brexit uncertainty impacting sentiment as well as investment. Our economics team relatedly noted there were an increased number of mentions in the Fed’s latest Beige Book of the election creating uncertainty and delaying investments.

Another recurring theme: light guidance. The three-month ratio of above-vs. below-consensus guidance is tracking at 0.82, its highest since June and above its long-term average of 0.62. At the sector level, Financials, Tech, and Health Care have seen the most positive guidance trends, while Utilities, Materials, and Discretionary have all seen the worst trends. We note that despite the improvement in guidance, we are still seeing fewer instances of guidance than typically, with just 161 instances of guidance during October, the lowest for any October since 2000 (and well below the October average of 218) following a record low number of guidance instances in September.

And while on the surface Q3 results are good, as BofA points out, the proportion of beats driven lower by weak small and medium company results. So far, 65% of companies beat on EPS, 53% on sales and 42% on both, down from a week ago. Historically, 53% have beat on EPS, 56% on sales and 35% on both. Tech, Financials, and Health Care have seen the highest proportion of EPS and sales beats, as well as the most positive guidance trends. The aggregate EPS beat improvement but drop in the proportion of beats suggests better results from larger stocks. Results for the S&P 600 (small caps) and S&P 400 (mid caps) corroborate this theme: we have seen a lower proportion of positive surprises in both size segments versus the S&P 500, with a narrow earnings beat for mid caps (1%) and a slight earnings miss for small caps.

And here is a look at the ongoing struggle for small companies which have failed to enjoy the rebound in earnings observed among their larger peers:

So far, 159 of the S&P 600 small cap companies have reported.

  • Both Earnings and Sales are coming in slightly lower than expectations at the start of earnings season, faring worse than large cap on earnings.
  • Telecom, Tech, and Financials have seen the biggest upward revisions to 3Q earnings forecasts since the start of earnings season, while Consumer has seen the biggest cut.
  • So far, 50% of companies have beaten on EPS, 40% have beaten on sales and 30% have beaten on both.
  • Energy (just one company) and Health Care have seen the most top and bottom line beats thus far.
  • Earnings growth for the quarter is coming in at +7% YoY (+8% ex-Energy) on sales growth of +3% YoY (+4% ex-Energy)—both higher than in large caps.

 

Two last two observations from BofA focus on the lack of improvement in sales, and the cloudly outlook:

  • Still no improvement on the sales front: Despite the 3% earnings beat, sales expectations for the S&P 500 are essentially unchanged since the start of earnings season, with analysts continuing to expect sales growth of +2% YoY (+4% ex-energy). Sales are tracking below analysts’ expectations in seven of the eleven sectors. While sales growth, like earnings growth, has improved vs. prior quarters, this has been primarily due to the reversal of the headwinds from lower oil prices and a stronger dollar. Constant-currency sales growth for the S&P ex-Fins. and Energy has been slowing for two years, with a paltry 0.5ppt pick-up expected this quarter
  • Management outlook more obscured than ever by macro. While just over half of the S&P 500 companies have reported, we’ve counted more mentions of the election than during the prior two pre-election quarters (3Q08 and 3Q12) when adjusting for the number of companies that have reported. Companies have mentioned lack of clarity around US policy combined with continued Brexit uncertainty as a drag on sentiment as well as investment. The 3-month earnings guidance ratio is actually tracking above average (0.82 vs. 0.62), but this is still on fewer instances of guidance than usual. We’ve counted 161 guidance instances in Oct., the lowest for any Oct. since 2000, following a record low number of instances in Sept.

via http://ift.tt/2eMC1DJ Tyler Durden