The Second Half Of 2018 In One Word

Submitted by Nicholas Colas of DataTrek Research

Let me offer up a one-word summary of how I see the second half of 2018 for equities: “Recession”.

Don’t worry – this isn’t a doom and gloom prediction. Rather, it is the three-syllable description of the fulcrum issue for stocks. And since correlations tend to rise during periods of volatility all this also applies more or less to global equities as well.

Here’s our thinking:

#1) Corporate managers live at the margin when it comes to planning incremental hiring and capital expenditures. Tax reform is baked into their numbers for 2018 and 2019, making the uncertainty around trade and tariffs their primary planning headache. So even though corporate earnings are +20% in 2018 because of lower tax rates, managers may start to reduce hiring and capex plans if they begin to fear the impact of a trade war on their business. Spook them enough, and they will start to reduce headcount. That could turn into a self-reinforcing cycle that ends up in recession.

Conclusion: the current administration may win some trade battles, but it will be up to the private sector to determine the economic outcome of a trade war. Markets will have their hands full assessing that trade-off of political headlines and micro fundamentals in the second half of 2018.

#2) “As good as it gets” syndrome. Expect someone to come up with a FOMO-like acronym for this one – the notion that US economic and corporate earnings growth both hit their peaks in the first half of 2018. Q2 earnings, for example, will likely show “only” 20% earnings growth versus 25% in Q1. Back half GDP will not likely be as strong as the +3.0% number most expect for Q2. And when growth slows, multiples contract. Stock prices decline, corporate managers start to fire, and the cycle we mentioned in #1 kicks into high gear.

Conclusion: for such a squishy concept, we do worry about this one. The offsetting positive for US stocks is that European growth is even slower, and Emerging Markets will struggle with the trade war issue. So investors with fixed equity exposure will still have to own something, and this calculus points to US stocks. This limits the damage to domestic equity prices, and the US could be spared a recession as a result.

#3) Federal Reserve policy. The decline in the difference between 2 and 10 Year Treasuries since the start of the year is remarkable. The spread today – just 31 basis points – is the tightest since July 2007. History is clear about what happens when that number goes to zero: a recession is on the way. In cases where there is a geopolitical shock, the combination of that event and a flat yield curve makes the contraction in economic output even worse.

Conclusion: expect to hear the chorus warning of a “Fed Mistake” in the second half of 2018 to grow as loud as the finale of an Italian opera. What they may be missing: how would the US stock market respond if Chair Powell did admit to concerns about the economy and slowed the pace of rate hikes? Our prior points describe one potential negative feedback loop that makes this a potentially risky option. Which means this debate will rage through 2H 2018.
Summing up: we don’t see a recession in 2018 or 2019, but we believe the dominant market narrative will revolve around this topic in the back half of 2018

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Is Jonah Goldberg Turning Into a Libertarian? It Sure Sounds Like It. — New at Reason

In his new book, Suicide of the West, National Review‘s Jonah Goldberg talks about what he calls “the Miracle”—the immense and ongoing increase in human wealth, health, freedom, and longevity ushered in by the Enlightenment and the Industrial Revolution. At turns sounding like Karl Marx, Joseph Schumpeter, and economist Deirdre McCloskey, Goldberg writes, “In a free market, money corrodes caste and class and lubricates social interaction….Capitalism is the most cooperative system ever created for the peaceful improvement of peoples’ lives. It has only a single fatal flaw: It doesn’t feel like it.”

As his book’s title suggests, Goldberg isn’t worried the world is running out of resources. He’s troubled by our unwillingness to defend, support, and improve customs, laws, and institutions that he believes are crucial to human flourishing.

“Decline is a choice,” he writes, not a foregone conclusion. While he lays most of the blame for our current problems on a Romantic left emanating from Rousseau, he doesn’t stint on the responsibility of his own tribe of conservative fearmongers and reactionaries.

In a wide-ranging conversation with Reason, Goldberg talks about his new book, his persistent opposition to Trump, how his thinking has evolved on a number of culture-war issues, and why he can’t just admit once and for all that he’s becoming a libertarian.

Interview by Nick Gillespie. Edited by Alexis Garcia and Austin Bragg.

Click here for full text and downloadable versions.

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U.K. Mayor Dons Sombrero ‘in Solidarity With Mexicans,’ Bans Trump From City

The mayor of Sheffield, England, has “banned” Donald Trump from his city ahead of the president’s visit to the United Kingdom next week.

Sheffield Lord Mayor Magid Magid, who at 28 is the youngest mayor in the city’s history, announced the ban while chairing a city council meeting on Wednesday. At the meeting, Magid sported a T-shirt declaring Trump a “wasteman” and a sombrero, which he told the London Independent he wore to show “solidarity with Mexicans, other Latinas and all people suffering at the hands of the Trump regime.”

Magid told the world about the ban on Twitter. “I Magid Magid, Lord Mayor & first citizen of this city hereby declare that not only is Donald J Trump (@realDonaldTrump) a WASTEMAN, but he is also henceforth banned from the great city of Sheffield!” he wrote before declaring July 13, the date Trump is set to arrive in the U.K., to be “Mexico Solidarity Day.”

Magid’s attempt to ban Trump from Sheffield is symbolic. As CBS News noted, there’s no reason to believe Trump will stop in Sheffield during his U.K. visit. And even if Trump wants to see the city, Magid doesn’t actually have the power to ban him, Sheffield’s city council told the BBC. Still, Magid felt he needed to speak out against Trump, who he told The Independent is a “spurting cesspit of hate, stoking divisions between communities while scapegoating minorities.”

“We need to be honest, bold and courageous in our viewpoints,” Magid told the BBC. “As a world leader he has a lot of weight and we have to fight that hate.”

In a Twitter post on Wednesday, Magid listed several reasons he considers Trump a “wasteman.” He took issue with Trump’s ban on travelers from several Muslim-majority countries as well as his decisions to withdraw the U.S. from the Paris climate accord, move the U.S. embassy in Israel to Jerusalem, enforce the “imprisonment of children at borders,” and defend “the violence and actions of White Supremacists.”

Magid, a Somali immigrant who came to the U.K. at the age of 5, is not the only critic planning to protest Trump’s visit to the country. Tens of thousands of people are expected to demonstrate against Trump’s policies in London next week, according to CBS. On Twitter, Magid encouraged people to participate in those demonstrations and support organizations “combating Trump and his politics.”

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Stocks Pop On Trade-War Ceasefire Hopes, Yield Curve Crushed As ‘Policy Error’ Looms

Just seemed appropriate…

China stocks continued their rout overnight…

 

European Auto stocks soared today on the heels of an unsubstantiated report on zero tariffs from a German paper…

 

US Equities also gained on the day – on hopes that trade war talks with Europe are progressing…Small Caps went vertical in the last few minutes…

 

And are up on the week…

 

Another tough day for Tesla as Elon Musk’s warnings to the ‘bears’ are losing right now…

 

The Mega-Tech stocks rebounded on the day…

 

Treasury yields were very mixed today with everything but 30Y higher in yield on the day (and dramatically flattening)…

 

2s30s tumbles below 40bps for the first time since July 2007…today was the biggest absolute flattening in the curve in two months…

 

2018 has been a one-way street of collapse in the yield curve…

 

The Dollar Index fell for 3rd day in a row (5th of last 6) to 3-week lows – and closed at the spike high of the June Fed day…

 

The offshore Yuan is starting to drift lower after the PBOC intervention…

 

Cryptos slid on the day but remain higher on the week…

 

 

PMs were flat as the dollar slipped lower but Copper and Crude tumbled…

 

Copper was clubbed like a baby seal today – plunging by the most since December to the lowest in 12-months…

With copper down 15 of the last 18 days, we have still yet to hear any ‘commentator’ note that Dr.Copper is signaling anything but a global synchronous recovery.

 

Some relatively high volatility in the energy complex today but WTI/RBOB ended the day below the close from Tuesday…

 

Finally, there is only one question that really matters…

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Trump Says Scott Pruitt Has Resigned From The EPA

The Scott Pruitt saga is finally over: moments ago president Trump tweeted that he has accepted the resignation embattled EPA administrator Scott Pruitt, adding that “within the Agency Scott has done an outstanding job, and I will always be thankful to him for this.” 

Trump also said that the Senate-confirmed Deputy at EPA, Andrew Wheeler, “will on Monday assume duties as the acting Administrator of the EPA.”

Trump concluded that he has “no doubt that Andy will continue on with our great and lasting EPA agenda. We have made tremendous progress and the future of the EPA is very bright!”

According to CAP Action (via Medium.com), there are now nineteen official open investigations on Pruitt’s actions, even after only a year in office.

To help monitor these ongoing investigations, this site will be tracking and updating the status of each. We will be updating this page as new investigations are opened or open ones are completed, so check back frequently for updates.

Open Investigations*

EPA Inspector General Investigations:

1. Inspector General (IG) investigation to explore the frequency, cost, and extent of Pruitt’s travel: On August 28, 2017, the EPA IG’s Office announcedthat it would be opening an investigation into the frequency of Pruitt’s travels to Oklahoma. The investigation was also intended to determine “whether EPA policies and procedures are sufficiently designed to prevent fraud, waste and abuse with the Administrator’s travel that included trips to Oklahoma.” The probe was expandedin January 2018 to include Pruitt’s travels through the end of 2017, including to Morocco, a trip which cost $100,000.

2. IG investigation into Pruitt’s meeting with an industry group: EPA IG opened an investigation in December 2017 to analyze Pruitt’s April 2017 meeting with a coal mining industry group, the National Mining Association. Reportedly, Pruitt urged association members in the meeting to request that President Trump pull the U.S. out of the Paris climate deal. Democrats from the House Energy and Commerce Committee released a letter from EPA IG Arthur Elkins Jr. confirming the review of the meeting.

3. IG investigation into Pruitt’s spending on a secure phone boothIn response to a request from House Oversight Committee Ranking Member Frank Pallone, the EPA IG in December 2017 opened an investigation into how the agency decided to spend “more than $25,000 installing a secure, soundproof communications booth” for Pruitt’s office. Since the start of the investigation, new spending details have been released indicating that the booth actually cost closer to $43,000. In a hearing before the House Energy and Commerce Committee, Pruitt claimed that he had no knowledge of the booth’s cost during its construction process, but rather that his staff had signed off on it.

4. IG investigation into Pruitt’s use of Safe Drinking Water Act hiring authorityIn January 2018, the EPA IG’s Office began an investigation into “the Office of the Administrator’s use of its authority to fill administratively determined positions created pursuant to the Safe Drinking Water Act Amendment of 1978.” Pruitt or his staff had used this specialized authority, intended for hiring experts quickly, to hire a number of political staff for his personal office.

5. IG investigation over questionable spending on Pruitt’s security detail:In April 2018, it was reported that the EPA IG was conducting a previously undisclosed probe into “questionable spending by [Pruitt’s] swollen security detail.” The team tasked with protecting Pruitt had been accruing expenses upward of $3 million from salary, overtime, and travel expenses, far morethan Pruitt’s predecessors.

6. IG investigation to audit compliance with Trump’s 2-For-1 order:In April 2018, the EPA IG’s office opened an investigation into the agency’s compliance with Trump’s executive order that directed agencies to retire two regulations for an new regulation issued.

7. IG investigation into Pruitt’s conduct in office:In April 2018, Congressman Ted Lieu and Don Beyer released an EPA IG letter to the public that confirmed his office was reviewing Pruitt’s conduct while in office. This includes a look into Pruitt’s $50-a-night condo rental from a lobbyist, and the agency’s ex post facto ethics approval of the arrangement.

8. IG investigation into Pruitt’s use of security detail on personal trips to Disneyland and the Rose BowlAfter a request from Senator Whitehouse, the EPA IG office confirmed in April of 2018 that they were looking into Pruitt’s use of a taxpayer-funded security detail on vacation to Disneyland, the Rose Bowl, and on other personal trips.

9. IG investigation into Pruitt’s condo rentalSeparate from #7, the EPA IG’s office confirmed in April 2018 that they were reviewing Pruitt’s $50-a-night condo rental and lease. This was after Democrats from both the House and Senate called on the IG to review the arrangement, which was between Pruitt and the wife of a lobbyist with energy clients who had business before the EPA at the time Pruitt lived in the condo.

10. IG investigation into Pruitt’s use of multiple email accounts: EPA’s IG Arthur Elkins released a letter on May 15 saying his office would investigate whether Pruitt complied with EPA policy and federal law when using multiple email accounts, in response to a request from Democratic Senators Tom Carper (DE) and Jeff Merkley (OR). The investigation will also explore whether all of Pruitt’s accounts were searched in response to Freedom of Information Act (FOIA) requests.

EPA Inspector General Reviews:

11. IG review of EPA political appointee Samantha Dravis’ employment recordsAfter it was brought to light that EPA political appointee Samantha Dravis may have been absent from the agency for a number of months between November and February of 2017–2018, the EPA IG confirmed that he would open a review into whether she had reported for work or not while still receiving compensation.

U.S. House Investigations:

12. House Oversight Committee investigation into Pruitt’s first class flights and spendingHouse Oversight Chairman Trey Gowdy began investigating Pruitt in February of 2018 for his many taxpayer-funded first class flights. In April, the committee expanded its review to cover ethical questions around Pruitt’s $50-a-night condo rental on Capitol Hill.

Executive Office of the President Investigations:

13. White House internal investigation of Pruitt’s behavior: In April 2018, the White House began a review of Pruitt’s actions generally, after reports surfaced about his below-market-rate condo rental from the wife of an energy lobbyist.

14. Office of Management and Budget (OMB) investigation into Pruitt’s soundproof phone boothThe White House’s OMB opened an investigation into Pruitt and his agency’s spending of more than $43,000 on a secure, private phone booth in Pruitt’s office. OMB Chief Mick Mulvaney announced this investigation after a Government Accountability Office (GAO) report found that Pruitt had violated the Anti-Deficiency Act with the phone booth spending.

Government Accountability Office (GAO) Investigations:

15. GAO investigation into Pruitt’s involvement in a video with an outside stakeholder groupIn November of 2017, the GAO began examining whether Pruitt violated legal provisions that prohibit lobbying and propaganda that uses agency resources when he appeared in a video produced by the National Cattlemen’s Beef Association. The video requested that the Association’s members submit comments to EPA on its Waters of the United States rule revision.

16. GAO investigation into Pruitt’s role in choosing members of Science Advisory BoardsAfter Pruitt essentially dissolved EPA’s Science Advisory Board and appointed a number of industry scientists instead, Senate Democrats requested that GAO open an investigation to examine Pruitt’s actions regarding the board more closely. The GAO accepted this request.

17. GAO investigation into EPA Tweet on Andrew Wheeler’s Confirmation:When Pruitt appeared in front of the Senate Appropriations Subcommittee on Interior and the Environment on May 16, 2018, Senator Udall asked GAO to review an April 13th tweet from the official EPA twitter account that included the phrase, “The Democrats couldn’t block the confirmation of environmental policy expert and former EPA staffer.” GAO has agreed to review the tweet given its partisan nature, to see if it violated laws against the use of government appropriations for publicity or propaganda.

U.S. Office of Special Counsel (OSC) Investigations:

18. OSC investigation into Pruitt’s potential retaliation against staff:The U.S. OSC, an independent investigative agency, is looking into whether Pruitt may have retaliated against EPA staffers questioning his excessive spending, and other decisions. As many as six EPA staffershave claimed that Pruitt has sidelined them after they questioned a spending or travel decision, either through demotions, reassignments or even firing.

And finally today (via The Daily Caller):

19: Two Democratic congressmen are seeking an investigation by the Environmental Protection Agency (EPA) into Scott Pruitt’s “secret” calendars, where he allegedly hid and altered records.

House Reps. Don Beyer (D-VA) and Ted Lieu (D-CA) wrote a letter to the EPA’s Inspector General on Thursday calling for the investigation into whether the actions of Pruitt’s office were in violation of the Federal Records Act.

Pruitt and his aides maintained the “secret” calendars and schedules in an effort to prevent controversial calls and meetings with industry representatives from becoming public, according to a report by CNN.

Pretty impressive – a rate of more than 1 per month since taking office.

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Is This Why Tesla Executives Are Fleeing?

Via AdventuresInCapitalism.com,

Tesla Is The New Theranos (With A Curious Nazi Twist)

I originally started following Tesla as I felt it was a structurally unprofitable business nearing a cash crunch as hundreds of competing products were about to enter the market.

As I’ve studied Tesla more closely, I’ve come to realize that Elon Musk appears to be running a Ponzi Scheme disguised as an auto-manufacturer; where he has to keep unveiling new products, many of which will never come to market, in order to raise new capital (equity/debt/customer deposits) to keep the scheme alive. The question has always been; when will Tesla collapse?

Tesla’s Bullshit Conversion Cycle is the key financial metric underlying this scheme (from @ProphetTesla)

As part of my research on Tesla, I decided to read Bad Blood by John Carreyrou, the journalist who first uncovered the Theranos fraud. It is the story of how Elizabeth Holmes created Theranos and then lurched between publicity events in order to raise additional capital and keep the fraud going, despite the fact that the technology did not work. The key lesson from Theranos for determining when a fraud will implode is that there are always idiots willing to put fresh money into a well marketed fraud – so you need a catalyst for when the funding dries up.

The other salient fact was that most senior employees actually knew that something wasn’t quite right, but feared losing their jobs or getting sued if they did anything about it. Therefore, employee turnover was off the charts but no one was willing to risk their career by saying anything publicly. However, when Theranos started risking customers’ lives, the secret got out pretty fast. This is because most people are inherently ethical – especially when they know that their employer is doing something immoral, like releasing flawed lab results to sick patients. Eventually, some employees felt compelled to become whistle-blowers and started to reach out to journalists and regulators. This started a cascading event.

First, one intrepid journalist took the career risk to write about the Theranos fraud. Then other whistle-blowers felt emboldened to step forward and contact this first journalist, as they also wanted their story told – especially as they had already reached out to government regulators who were too scared to investigate a politically powerful company.

Once a few good articles had been written about Theranos, the dam broke open and the feeding frenzy began. Other journalists, smelling page-clicks rapidly descend on Theranos; more workers spoke out, more incriminating evidence came to light and then there was a sense of voter outrage. Finally, the regulators who were first contacted by the whistle-blowers many months previously, felt compelled to act – at which point the fraud collapsed and the money spigot shut off.

Executives Fleeing Tesla Is A True Bull Market “Up And To The Right”

We’ve already seen the mass exodus of senior Tesla executives. When they say they “want to spend time with their family,” it really means they “want to spend less time in prison.” Next, we have the first whistle-blowers—there will be MANY more. Currently there are at least 3 different ones feeding information to journalists. Using past frauds as a guide, once we get to this point of the media cycle, the fraud usually unravels pretty fast.  Given the perilous state of Tesla’s finances, they are in urgent need of new capital. The question is; who would want to invest new capital when Tesla is now admitting to knowingly selling cars without testing the brakes in order to hit some arbitrary one week production target? When a company admits that it will sacrifice vehicle quality and even risk killing its customers to win a twitter feud and start a short squeeze, regulators must step in. The question is; what else has Tesla done illegally to hit its targets? We know that Tesla long ago passed over the ethical threshold of selling faulty products that have killed people—what other allegations will soon come to light? Elon Musk demanded that Tesla stop testing brakes on June 26. Doug Field, chief engineer, resigned on June 27. Is this a coincidence? Of course not—Doug Field doesn’t want to be responsible for killing people. I think Tuesday’s article will speed up the pace of Tesla’s bankruptcy quite dramatically and I purchased some shorter dated puts after reading it.

Tesla is the fluke stock-promote that found a way to address society’s fascination with ‘green technology’ and the ‘next Steve Jobs.’ Elon Musk eagerly stepped into the role of mad scientist and investors gave him a free pass. It now increasingly seems that everything he’s done for the past few years was simply designed to keep the share price up, keep the dream alive and raise more capital – as opposed to creating shareholder value. Along the way, customer safety has been ignored in order to hit production targets and appease the stock market. In addition to not testing brakes, a recent whistle-blower has accused Tesla of installing over 700 dangerously defective batteries into Model 3 vehicles.

I suspect there will be many more allegations as whistle-blowers come out of the woodwork. It really is the Theranos of auto makers. I suspect it will all end soon. Theranos and Enron both collapsed within 90 days of the journalists getting up to speed. The reporters now know the right questions to ask and Tesla will be out of cash by the time they are all answered.

Stock Promotion In Overdrive Lately. What’s Elon Trying To Distract People From?

Besides, Elon Musk isn’t even all that innovative. Hitler already tried this same automotive customer deposit scam 80 years ago (From Wages of Destruction)

Disclosure: Long various put spreads and puts. Various strikes and expirations.

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‘Confiscation Is Coming’ As Iranian Cops Crackdown On “Gold Hoarder” Who Collected 250,000 Coins

As the collapse of the Iranian rial has led to soaring inflation, leading to protests and civil unrest,  authorities are beginning to crack down on “gold hoarders” as Iranians scramble to preserve their wealth by swapping rials for gold, which has the added effect of exacerbating the already troubled currency’s decline.

Rial

In a move that will send a message to others who’ve buying up large quantities of gold, Iranian police have arrested a man they accused of hoarding two tonnes of gold coins with the intention of manipulating the local market. Tehran Police Chief Gen Hossein Rahimi said the unnamed 58-year-old had collected an estimated 250,000 coins over the past 10 months, working in concert with several accomplices. Police dubbed him “Sultan of Coins.”

Gold

The rial has bounced off its all-time lows to trade at roughly 81,000 to the dollar on unofficial currency markets on Wednesday, according to the BBC.

Iran

In a scene that mirrored the protests that rocked Tehran in early January, merchants from Tehran’s sprawling Grand Bazaar shuttered their stores in what state media described as “a protest against rising prices and a weakened currency.” During times of unrest, authorities often try to redirect public anger away from the government by creating a scapegoat – like “hoarders” – and blaming them for the country’s economic ills… and – after seeing the chart below, is a full declaration of gold confiscation coming?

But with protests continuing in the capital, we’ll see if that approach works, or if police will need to fall back on their initial plan: Tear gasing everybody.

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Conservative Actor James Woods Says ‘Liberal’ Agent Dropped Him on Fourth of July

Actor James Woods says he was dropped by his agent on Independence Day, and the outspoken conservative thinks his political views are to blame.

Early Thursday morning, Woods posted an email he said he had received from his “liberal” agent, Ken Kaplan. “It’s the 4th of July and I’m feeling patriotic,” the email read. “I don’t want to represent you anymore. I mean I could go on a rant but you know what I’d say.”

Woods also shared his response to Kaplan:”Dear Ken, I don’t actually. I was thinking if you’re feeling patriotic, you would appreciate free speech and one’s right to think as an individual. Be that as it may, I want to thank you for all your hard work and devotion on my behalf. Be well.”

If Woods’ story is true, this incident is just the latest in a trend involving people who refuse to do business with companies or individuals for political reasons. Late last month, for example, White House Press Secretary Sarah Huckabee Sanders was asked to leave a Virginia restaurant due to her position in the Trump administration. Many conservatives responded with outrage, leaving a bevy of unflattering reviews for the restaurant on Yelp and protesting on social media.

This week conservatives were on the other end of the stick. A group of right-wing Twitter users, enraged that Walmart’s website would dare sell clothing imprinted with the phrase “Impeach 45,” launched a #BoycottWalmart campaign, even though the retail giant also sells a variety of pro-Trump hats and shirts.

For his part, Woods didn’t exactly complain about losing his agent, but he has taken something similar into the public arena before. The actor, who often takes to Twitter to express his conservative and pro-Trump views, said in February he was “blacklisted” by the Hollywood Foreign Press Association after saying he wouldn’t vote for Hillary Clinton “if she ever ran for president.”

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Defying Congress, Jeff Sessions Keeps Blocking Medical Marijuana Research

It’s been almost two years since the Drug Enforcement Administration (DEA) began accepting applications for new growers of research cannabis, and two dozen applicants are still in regulatory limbo.

Since the DEA announced in August 2016 that it would end the federal monopoly on producing cannabis for scientific research in the United States, growers, investors, researchers, applicants, and even members of Congress have sought to understand why a relatively simple licensing review process has stretched on for nearly two years. The answer is pretty straightforward: Attorney General Jeff Sessions, for reasons he has not publicly disclosed, decided to intervene in a process that has historically not involved the attorney general in order to stop the DEA from issuing licenses to growers.

While the Controlled Substances Act gives the attorney general regulatory authority over scheduled drugs, that authority has historically been delegated to the DEA, which is part of the Justice Department. The DEA has a whole division, in fact, dedicated to “investigat[ing] the diversion of controlled pharmaceuticals and listed chemicals from legitimate sources while ensuring an adequate and uninterrupted supply for legitimate medical, commercial, and scientific needs.”

Members of Congress are not happy with Sessions’ obstruction of the licensing process. In April, Sens. Orrin Hatch (R–Utah) and Kamala Harris (D–Calif.) sent the attorney general a letter in which they asked him to provide the Senate with a timeline for processing applications from potential manufacturers of research marijuana. They also asked the DOJ to update applicants on the review process. Both actions, Hatch and Harris suggested, should be completed by May 15, 2018. Not only did the DOJ miss that deadline, but it doesn’t seem interested in playing catch-up.

Four license applicants I interviewed in late June told me they’ve received no official updates from either the DEA or the DOJ in months. Applicants who have spoken to congressional offices working on this issue say their contacts are equally frustrated by Sessions’ obstruction of the DEA’s licensing process.

(Reason obtained the identities of the 26 initial applicants through a Freedom of Information Act request to the DEA. Reason is not identifying which applicants provided information for this story so as not to jeopardize their chances of approval. )

“No ‘formal’ communication for months,” one applicant told me by email. “They do answer questions I’ve asked, although on a limited basis.”

“No formal communication,” another told me. “Hoping to hear more soon.”

“Just silence,” a third applicant told me over email.

The Hatch-Harris letter captures both the widespread support for studying cannabis and the disproportionate power Sessions has to maintain the status quo. “Expanded research has been called for by President Trump’s Surgeon General, the Secretary of Veterans Affairs, the FDA, the CDC, the National Highway Safety Administration, the National Institute of Health, the National Cancer Institute, the National Academies of Sciences, and the National Institute on Drug Abuse,” the senators wrote. “In order to facilitate such research, scientists and lawmakers must have timely guidance on whether, when, and how these manufacturers’ applications will be resolved.”

The rapid pace of marijuana legalization at the state level, meanwhile, might seem to lessen the need for federally licensed growers of research cannabis. Can’t researchers just use the myriad cannabis products available in the 30 states that allow recreational or medical use? They cannot.

Researchers who want to test cannabis products in humans must comply with federal regulations governing the handling of Schedule I controlled substances. Those regulations require researchers who would like to use domestically produced marijuana to obtain their material from a federally licensed grower. For decades now, there has been only one such grower: Mahmoud ElSohly at the University of Mississippi, who operates under a contract with the National Institute on Drug Abuse (NIDA). The hundreds of researchers who are licensed by the federal government to study marijuana in the U.S. must use material obtained from NIDA, despite credible concerns about quality control and the agency’s ability to provide material that reflects the diversity of products available to consumers in medical and recreational dispensaries across the country.

No other field of drug research or development requires that all pharmaceutical companies and academic institutions that would like to source their materials domestically get them from one person chosen by the federal government. To see the impact on the U.S. drug industry, one need look no further than the U.K., which produced Epidiolex, the first marijuana-derived drug to ever be approved by the Food and Drug Administration.

Could GW Pharmaceuticals, the maker of Epidiolex, have brought its drug to market if its research had used cannabis grown at the University of Mississippi? Stephen Schultz, the company’s vice president of investor relations, wouldn’t speculate. He did say, however, that the U.K.’s cannabis regulations are essential to the company’s drug development strategy. “We develop medicines that have a very specific cannabinoid profile,” Schultz said. “So it is very important that we be in complete control of creating our medicines, from growing to extracting.”

What’s more, it won’t be possible to get FDA approval for a cannabis-derived medicine made in the United States until new manufacturers are approved, since the material used in Phase III clinical trials must be identical to the material used in the medicine. In other words, NIDA marijuana cannot be used in Phase III trials.

In August 2016, it seemed like the U.S. might finally allow a market for research cannabis. That month, the DEA, which for years had resisted attempts to create such a market, announced that it would begin accepting applications for additional licenses to manufacture research marijuana. “Although no drug product made from marijuana has yet been shown to be safe and effective,” the notice in the Federal Register said, the DEA “fully supports expanding research into the potential medical utility of marijuana and its chemical constituents.”

Some two dozen entrepreneurs and companies submitted lengthy applications in the months that followed that announcement. Many submitted additional information at the DEA’s request. Two applicants told me they’d raised millions in funding, and several others said they’d made intellectual property arrangements with cannabis growers and researchers overseas. Plots of land were scouted and buildings were leased.

But enthusiasm quickly gave way to anxiety after Sessions was confirmed as attorney general in February 2017. That August, anxiety turned to dread when The Washington Post reported that Acting DEA Administrator Chuck Rosenstein had resigned after butting heads with Sessions over research cannabis. Rosenstein was reportedly in favor of approving new licenses, but Sessions brought the review to a screeching halt.

The Washington Post story eventually made its way to Hatch, who asked Sessions at a hearing in October 2017 why the DOJ had yet to license new growers of cannabis for pharmaceutical research. During their brief exchange, Sessions told Hatch it would be “healthy to have some more competition in the supply” of research marijuana, but the DOJ was not going to approve all 26 applicants. I contacted Hatch’s office twice for comment but received no response.

Sessions suggested that the DEA lacked the capacity to supervise even a handful of additional cannabis manufacturers. That claim sounds spurious considering that the DEA routinely approves applications to manufacture Schedule I and II substances other than marijuana. The agency approved eight such manufacturing applications in June 2018, seven in May 2018, eight in April 2018, and three in February 2018. (One applicant familiar with the DEA’s licensing process told me the cost of supervising additional license holders is probably marginal.)

Senators questioned the attorney general again in April 2018. At that hearing, Sessions came up with another excuse for not allowing the DEA to move forward. This time, he claimed approving additional marijuana growers might violate a United Nations treaty signed by the U.S. This claim is almost certainly not true even under the most literal and conservative reading of that treaty.

One more deadline looms. Hatch and Harris would like to see Sessions act on all outstanding applications, either approving or rejecting them, by August 11, 2018, the two-year anniversary of the DEA’s announcement in the Federal Register. By comparison, it took the DOJ less than six months to process the controlled substance manufacturing applications it approved in June, one of which was for making synthetic marijuana.

If Sessions blows the August deadline, he won’t just be smiting a crop of would-be cannabis entrepenuers. He will be standing in the way of medical progress and punishing patients and their families in the process.

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Michael Pento: This Is “The Most Dangerous Market Ever”

Via Greg Hunter’s USA Watchdog.com,

Money manager Michael Pento is sounding the alarm because we are getting very close to something called a “yield curve inversion.” Pento explains, “Why do I care if the yield curve inverts?”

“Because 9 out of the last 10 times the yield curve inverted, we had a recession… The spread with the yield curve is the narrowest it has been since outside of the start of the Great Recession that commenced in December of 2007… The last two times the yield curve inverted, we had a stock market drop of 50%. The market dropped, and the S&P 500 lost 50% of its value.”

Can we keep partying in the markets like it’s 1999 or is there an expiration date for the good times? Pento says,

“Well, I have put a check on the calendar for October because of the fact the rate of quantitative tightening goes to $50 billion per year, because the trade war will reach a crescendo, then because I believe, unfortunately because I am conservative, the Republicans lose the House of Representatives, because the Chinese credit boom will be in full reverse by October.

It is a confluence of events coming in October… we’ve already entered into the beginnings of a bear market around the world. The top 22 banks in the world are in a bear market. There are many, many examples of banks around the world that are in a bear market. You have a bear market in Chinese shares. 20% of the S&P 500 is in a bear market. This is an incipient bear market that is already beginning. I believe it manifests clearly to even the people on CNBC by October.

Where is there going to be the biggest trouble? Pento says,

“I have identified the nucleus of the next recession/depression to be corporate debt and not the housing market. We have a record amount of corporate debt outstanding right now. It is 45% of GDP. It has never ever been higher, but the quality of that debt… BBB, which is the lowest rung… of investment grade debt accounts for 50% of investment grade. The number of zombie companies is at a record high

So, there is a record amount of debt, the quality of the debt is at a record low, and you have a record amount of companies just existing as zombies. They have to issue debt to pay back existing debt… The amount of zombie companies is going to surge when we get the next recession. The amount of credit defaults is going to surge…

The construct of corporate debt is so dangerous that when we hit a recession, defaults are going to skyrocket like we have never seen before. You will be talking about the layoffs and the plunge in the market and economic growth on a global basis.”

Pento also predicts,

The U.S. is not an island. The U.S. is not going to have 4% GDP growth while the rest of the world implodes… I look at the data, and data says this is the most dangerous market ever. This is the most precarious GDP on a global basis that we have ever had. Global central banks have never before printed $12 trillion…

We have never before had that happen, and the reason why they did it is to take sovereign debt into zero and negative territory so we can go on this inflation quest so asset prices don’t implode. That is all turned on its head. They have reached their inflation and it’s starting to unwind, and this whole thing is going to collapse.

When it collapses, the primary beneficiary is going to be the gold market… You should always have 5% to 10%, and if you are waiting, you are running out of time to get it cheaply. . . . I don’t think there is much downside to buying physical gold here, and you are running out of time if you have no position at all.”

Join Greg Hunter as he goes One-on-One with Michael Pento, founder of Pento Portfolio Strategies.

(This interview will talk about the coming recession and the inverting yield curve, record amounts of corporate debt and gold and silver in physical form as financial protection.)

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After the Interview:

Michael Pento added another omen for the markets. Pento says, “NYSE margin debt is at record high levels and cash is at record low levels. This means people will be wiped out more quickly and more thoroughly than ever before.” There is free information, analysis and podcasts on PentoPort.com.

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