Month: July 2018

Authored by Jonathan Rochford via Narrow Road Capital,

When considering where the global credit cycle is at, it’s often easy to form a view based on a handful of recent articles, statistics and anecdotes. The most memorable of these tend to be either very positive or negative otherwise they wouldn’t be published or would be quickly forgotten. A better way to assess where the global credit cycle is at is to look for pockets of dodgy debt. If these pockets are few, credit is early in the cycle with good returns likely to lie ahead. If these pockets are numerous, that’s a clear indication that credit is late cycle.

This article is a run through of sectors where I’m seeing lax credit standards and increasing risk levels, where the proverbial frog is well on the way to being boiled alive.

Global High Yield Debt

Last month I detailed how the US high yield debt market is larger and riskier than it was before the financial crisis. The same problematic characteristics, increasing leverage ratios and a high proportion of covenant lite debt, also apply to European and Asian high yield debt. Even in Australia, where lenders typically hold the whip hand over borrowers, covenants are slipping in leveraged loans. The nascent Australian high yield bond market includes quite a few turnaround stories where starting interest coverage ratios are close to or below 1.00.

Defined Benefit Plans and Entitlement Claims

For many governments, deficits in defined benefit plans and entitlement claims exceed their explicit debt obligations. The chart below from the seminal Citi GPS report uses somewhat dated statistics, but makes it easy to see that the liabilities accrued for promises to citizens outweigh the explicit debt across almost all of Europe.

In the US, S&P 500 companies are close to $400 billion underfunded on their pension plans. This doesn’t seem enormous compared to their annual earnings of just under $1 trillion, but the deficits aren’t evenly spread with older companies such as GE, Lockheed Martin, Boeing and GM carrying disproportionate burdens.

Latest forecasts have US Medicare on track to be insolvent in 2026. At the State government level Illinois ($236 billon) and New Jersey ($232 billion) both have enormous liabilities, mostly pension and healthcare obligations. If you want to understand how pension and entitlement liabilities have grown so large, my 2017 article on the Dallas Police and Fire Pension fiasco and John Mauldin’s recent article “the Pension Train has no Seatbelts” are both worth your time.

US State and Municipal Debt

Meredith’s Whitney’s big call of 2010 that US state and local government debt would suffer a wave of defaults is generally considered a terrible prediction. However, after the 2013 default of Detroit and the 2016 default of Puerto Rico history might ultimately record her as simply being way too early. Illinois is leading the race to be the first default over $100 billion in this sector, but New Jersey and Kentucky could make a late surge. When the next crisis strikes and drags down asset prices, these states will see their pension deficits further blowout. At that point, there’s no guarantee they will continue to be able to rollover their existing debt.

The key lesson from Detroit’s bankruptcy was that bondholders rank third behind the provision of services and pensioners in the order of priority. Recovery rates of less than 30% should be expected when defaults occur. The key lesson from Puerto Rico was that just because a state or territory isn’t legally allowed to default, doesn’t mean that the Federal Government won’t intervene to allow creditors to suffer losses.

US Mortgage Debt

In the 2003-2007 housing boom, subprime residential lending was largely the domain of private lenders. Fast forward to today and the government guaranteed lenders are busy repeating many of the same mistakes. Borrowers with limited excess income and little or no savings are again getting loan applications approved. Fannie Mae and Freddie Mac remain undercapitalised with their ownership status unresolved, leaving the US government to pick up the tab again when the next wave of mortgage defaults arrives.

Developed Market Housing

It’s not just the US with excessively risky housing debt, Canada, Australia, Hong Kong and the Scandinavian countries are all showing signs of some borrowers taking on too much debt. Canada deserves a special mention as it combines skyrocketing house prices with second lien, HELOCs and subprime debt. It’s hard not to make comparisons with the US, Ireland and Spain pre-crisis when you see those factors present.

US Subprime Auto

The occasional articles claiming that US subprime auto debt is this cycle’s version of subprime residential debt are substantially overstating the potential damage that could lie ahead. Cars cost an awful lot less than houses with auto securitisation volumes today running at around 7% of subprime home loan volumes in 2005 and 2006. This isn’t an iceberg big enough to sink the Titanic but it is a warning of the presence of other icebergs.

The quality of subprime auto loans is poor and getting worse with minimal checks on the borrower’s ability to afford the loan. Whilst unemployment has been falling, default rates have been increasing, a clear indication of how bad the underwriting has been. Lengthening loan terms and higher monthly payments are some of the ways lenders have been responding to the rate increases by the Federal Reserve. Some debt investors aren’t too worried though, recent deals have sold tranches down to a “B” rating. In 2017, issuance of “BB” rated tranches were sporadic but as margins on securitisation tranches have fallen investors have pushed further down the capital structure.

US Student Loans

The chart below from the American Enterprise Institute breaks down US CPI into the various components. Textbooks and college tuition are the standout items with childcare and healthcare also notable. Soaring education costs have had to be paid by students, who ramped up their use of student loans. A handful of former students have managed to end up owing over $1 million. Total student debt owing is now $1.49 trillion up from $480 billion in 2006, more than credit card balances and auto loans.

Remember that many students never finish their degrees and others end up working in positions that don’t require degrees. This helps explain why over a quarter of student loans are in some form of default, deferment or forbearance. Most loans are owed to the US government, leaving taxpayers to foot the bill for defaults. Private lenders tend to cherry pick the better borrowers, often waiting until borrowers have graduated and found work before offering to refinance and consolidate their loans at a lower interest rate.

Emerging Market Debt

Whilst the developed market debt to GDP ratio has increased modestly in the last decade, emerging market debt levels have rapidly increased. China certainly skews these ratios with its extraordinary debt binge, but many other emerging markets have followed a similar pathway. The graph below from the IIF shows the combined ratios, but there’s a different make-up for developed and emerging markets. In developed markets the financial crisis led to soaring government debt to GDP ratios as governments ran deficits and bailed out banks and corporations. In emerging markets consumers, corporates, governments and banks have all increased their use of debt.

Debt markets are starting to wake-up to the risks with Argentina, Turkey, Mozambique and Bahrain all attracting the wrong sort of attention this year. This is a change from last year when I wrote about Argentina and Iraq selling bondseven though their prospects of repaying their debts appeared low. There’s been a long period of loose lending in much of the Middle East, South America and Africa similar to the conditions before the Asian financial crisis and the Latin American debt crisis.

Developed Market Sovereigns

The European debt crisis kicked off in 2009 with frequent flare ups since then. Greece’s default and restructure in 2012 saw private sector lenders take a haircut and contributed to Cyprus’s bailout later that year. The rolling series of ECB and IMF negotiations with Greece show that it’s structural problems are far from resolved and another default is likely in the long term.

Italy recently saw its cost of borrowing spike after the political parties that formed the new government considered asking the ECB for €250 billion of debt forgiveness. Both Greece and Italy have very high government debt to GDP ratios, consistently low or negative GDP growth and precarious banking sectors. Other developed nations most at risk are Japan and Portugal, ranked first and fifth respectively on their government debt to GDP ratios.

European Banks

The link between banks and sovereigns is critical to their solvency. Failing banks are often bailed out by governments, further increasing government debt levels. Failing governments often bring down their banks, as banks typically use government debt for liquidity purposes often treating it as a risk free asset. Europe has both problematic governments (Greece, Italy and Portugal) and problematic banks, mostly in Greece, Italy, Spain and Portugal. Deutsche Bank stands out for its size, high leverage and losses in each of the last three years. Given Deutsche Bank’s market capitalisation is little more than 1% of its asset base and it has shown an inability to generate a decent profit, a bail-in of senior debt and subordinated capital is arguably the only way to rectify its perilous situation.

Chinese Corporate Debt

The rapid growth of debt in China since 2009 is dominated by the corporate sector. The chart below from Ian Mombru shows that China has the highest corporate debt to GDP ratio of any country. Close to half of the debt is owed by property companies and property linked industries. This is a major risk as Chinese property is overpriced relative to incomes and there’s widespread overbuilding, especially in the ghost cities. As with almost all debt in China, there’s several issues that make risk assessment far murkier than it should be.

First, many Chinese corporates have a material level of government involvement; by direct shareholding (state owned entities), shareholdings by high ranking communist party officials, direct and indirect government guarantees of debt, communist party representatives on committees or by having local or the national government as a major supplier or customer. The distinction between corporate debt and government debt, and whether government will support a corporate that gets into financial trouble is near impossible for outsiders to accurately assess.

Second, Chinese corporates often engage in guaranteeing or lending to other corporates. Guarantees range from non-binding letters of comfort to enforceable guarantees with the existence of these guarantees often undisclosed. The potential for one corporate default to trigger a wave of others is a known unknown.

Third, corporates have engaged in substantial margin lending of their own stock. One-third of A share companies have pledged more than 20% of their stock for loans, a substantial risk in itself. Yet this is made far worse when some of the companies pledging shares have little or no profit or are trading on P/E ratios above 100. The potential for a stock market crash to trigger widespread margin calls is a known known.

Chinese Banks and Shadow Banks

It’s often forgotten that China is still an emerging market in many characteristics, with the quality of credit assessment one of those. Credit assessment in China is often based on connections and the prospective return, rather than a thorough assessment of cash flows and collateral. Whilst the default rate has ticked up this year, it remains unusually low by international standards as weak borrowers are allowed to rollover their debts. Chinese banks continue to lend to marginal state owned entities and the shadow banking sector continues to support speculative private sector borrowers.

The bank and shadow bank sectors are linked in two key ways. First, banks often package, sell and guarantee shadow bank products, typically selling them to retail buyers as a higher return alternative to bank deposits. Second, banks provide leverage to shadow bank products in order to increase the product’s headline return. When China faces its first material test of lending standards since the 1990’s, the transmission mechanisms between banks and shadow banks will allow defaults to quickly spread. The prevalence of short term lending will also serve as an accelerant.

The Main Driver of Dodgy Debt

It’s frequently noted that recessions in the US typically occur after a series of Federal Reserve rate increases. The standard response is to assume that if rate increases were delayed or occurred at a slower pace then recessions could be avoided. This misguided thinking confuses cause and effect, ignoring the three ways that low interest rates encourage the build-up of dodgy debt;

(i) cheap debt allows a dollar of repayments to support a higher loan amount, allowing projects that wouldn’t normally proceed to receive the go ahead, inflating economic growth;

(ii) cheap debt causes a short term, temporary increase in investment returns (valuations increase in long dated bonds, equities, property and infrastructure) leading some to underestimate investment risks;

(iii) the above two factors combine to drag down prospective long term returns, leading to yield chasing as investors shift from safer assets to riskier assets to meet return targets.

This process is evidenced by last cycle’s credit and property bubbles in the US. After the 2002/3 recession began, the Federal Reserve reduced overnight rates to 1%, kick starting the cycle of yield chasing and malinvestment. By the time interest rates returned to neutral levels in 2006, speculative activity was widespread. Despite the obvious impacts of low interest rates in this and many previous cycles, central banks chose to set interest rates even lower and embark on quantitative easing in 2008. The alternative of a period of cleansing of excessive debt was deemed unpalatable. The inflated economic growth levels before the crisis were a benchmark that had to be exceeded. It’s no surprise the US, Europe and Japan have all experienced unusually slow recoveries from the last crisis as the necessary debt cleansing process has been avoided or protracted.

Conclusion

In reviewing global debt, twelve sectors standout for their lax credit standards and increasing risk levels. There’s excessive risk taking in developed and emerging debt, as well as in government, corporate, consumer and financial sector debt. This points to global credit being late cycle. Central banks have failed to learn the lessons from the last crisis. By seeking to avoid or lessen the necessary cleansing of malinvestment and excessive debt, this cycle’s economic recovery has been unusually slow. Ultra-low interest rates and quantitative easing have increased the risk of another financial crisis, the opposite of the financial stability target many central bankers have.

For global debt investors, the current conditions offer limited potential for gains beyond carry. With credit spreads in many sectors at close to their lowest in the last decade, there is greater potential for spreads to widen dramatically than there is for spreads to tighten substantially. Keeping credit duration low, staying senior in the capital structure and shifting up the rating spectrum will cost some carry. However, the cost of de-risking now is as low as it has been for a long time. If the risks in the dirty dozen sectors materialise in the medium term, the losses avoided by de-risking will be a multiple of the carry foregone.

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Peter Strzok’s attorney says the beleaguered FBI agent may decline a House Judiciary Committee invitation to testify on July 10, despite previously expressing interest in doing so – over what his attorney Aitan Goelman said would be a trap.

Strzok testified last Wednesday in a closed door session a week after declaring he would do so “without immunity” and without invoking his Fifth Amendment right not to incriminate himself. None of that mattered, however, as those present say “It was a waste after Strzok kept hiding behind a “classified information” excuse, while DOJ attorneys prevented Strzok from answering anything remotely entering productive territory. 

Now, Goelman says the committee has “sharpened their knives behind closed doors” and will spring a trap on Strzok by seizing “on any tiny inconsistencies” with last week’s testimony “to ‘prove’ that he perjured himself or made false statements,” Goelman wrote in a letter to the panel somehow obtained by CNN.

“Having sharpened their knives behind closed doors, the Committee would now like to drag back Special Agent Strzok and have him testify in public — a request that we originally made and the Committee denied,” Goelman wrote.

Sounding suspiciously like Rudy Giuliani, he continued: “What’s being asked of Special Agent Strzok is to participate in what anyone can recognize as a trap.”

In his email, Goelman wrote that it was “generous to characterize many of these inquiries as ‘questions’” — suggesting instead that the GOP’s closed-door queries had been “political theater and attempts to embarrass the witness” through various leaks.

Among the questions Goelman complained Republicans put to Strzok were one about whether he loved Lisa Page, the recipient of his anti-Trump texts with whom he was having an affair, and another asking “what DO Trump supporters SMELL like, Agent?” — a reference to an August 2016 text Strzok sent in which he told Page he could “SMELL the Trump support” at a Walmart in southern Virginia. –WaPo

Goelman also called for a transcript of last week’s 11 hours of testimony, and while he didn’t rule out testimony in front of other committees, it is unclear whether Strzok will accept the House Judiciary Committee’s invitation to testify unless the transcript is released. 

Goelman anticipated that Strzok would be criticized for refusing to testify on July 10, writing that Strzok “is willing to testify again, and he is willing to testify publicly. Any suggestion that he is trying to avoid doing so is an outright lie.”

But Goelman suggested that he would not consider Strzok to be bound by the Judiciary Committee’s demands that he not speak to other congressional panels before their work was done — leaving an opening for other congressional panels to attempt to schedule interviews with Strzok. –WaPo

Perhaps Goelman realized how absurd it would look if Strzok kept de-facto pleading the fifth with the phrase: “On the advice of FBI counsel, I can’t answer that question.” 

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Authored by William Hartung via TomDispatch.com,

Other than shouting about building a wall on the U.S.-Mexico border, one of Donald Trump’s most frequently proclaimed promises on the 2016 campaign trail was the launching of a half-trillion-dollar plan to repair America’s crumbling infrastructure (employing large numbers of workers in the process). Eighteen months into his administration, no credible proposal for anything near that scale has been made. To the extent that the Trump administration has a plan at all for public investment, it involves pumping up Pentagon spending, not investing in roads, bridges, transportation, better Internet access, or other pressing needs of the civilian economy.

Not that President Trump hasn’t talked about investing in infrastructure. Last February, he even proposed a scheme that, he claimed, would boost the country’s infrastructure with $1.5 trillion in spending over the next decade. With a typical dose of hyperbole, he described it as “the biggest and boldest infrastructure investment in American history.”

Analysts from the Wharton School at the University of Pennsylvania — Trump’s alma mater — beg to differ. They note that the plan actually involves only $200 billion in direct federal investment, less than one-seventh of the total promised. According to Wharton’s experts, much of the extra spending, supposedly leveraged from the private sector as well as state and local governments, will never materialize. In addition, were such a plan launched, it would, they suggest, fall short of its goal by a cool trillion dollars. In the end, the spending levels Trump is proposing would have “little to no impact” on the nation’s gross domestic product. To add insult to injury, the president has exerted next to no effort to get even this anemic proposal through Congress, where it’s now dead in the water.

There is, however, one area of federal investment on which Trump and the Congress have worked overtime with remarkable unanimity to increase spending: the Pentagon, which is slated to receive more than $6 trillion over the next decade. This year alone increases will bring total spending on the Pentagon and related agencies (like the Department of Energy where work on nuclear warheads takes place) to $716 billion. That $6-trillion, 10-year figure represents more than 30 times as much direct spending as the president’s $200 billion infrastructure plan.

In reality, Pentagon spending is the Trump administration’s substitute for a true infrastructure program and it’s guaranteed to deliver public investments, but neglect just about every area of greatest civilian need from roads to water treatment facilities.

The Pentagon’s Covert Industrial Policy

One reason the Trump administration has chosen to pump money into the Pentagon is that it’s the path of least political resistance in Washington. A combination of fear, ideology, and influence peddling radically skews “debate” there in favor of military outlays above all else. Fear — whether of terrorism, Russia, China, Iran, or North Korea — provides one pillar of support for the habitual overfunding of the Pentagon and the rest of the national security state (which in these years has had a combined trillion-dollarannual budget). In addition, it’s generally accepted in Washington that being tagged “soft on defense” is the equivalent of political suicide, particularly for Democrats. Add to that the millions of dollars spent by the weapons industry on lobbying and campaign contributions, its routine practice of hiring former Pentagon and military officials, and the way it strategically places defense-related jobs in key states and districts, and it’s easy to see how the president and Congress might turn to arms spending as the basis for a covert industrial policy.

The Trump plan builds on the Pentagon’s already prominent role in the economy. By now, it’s the largest landowner in the country, the biggestinstitutional consumer of fossil fuels, the most significant source of funds for advanced government research and development, and a major investor in the manufacturing sector. As it happens, though, expanding the Pentagon’s economic role is the least efficient way to boost jobs, innovation, and economic growth.

Unfortunately, there is no organized lobby or accepted bipartisan rationale for domestic funding that can come close to matching the levers of influence that the Pentagon and the arms industry have at their command. This only increases the difficulty Congress has when it comes to investing in infrastructure, clean energy, education, or other direct paths toward increasing employment and economic growth.

Former congressman Barney Frank once labeled the penchant for using the Pentagon as the government’s main economic tool “weaponized Keynesianism” after economist John Maynard Keynes’s theory that government spending should pick up the slack in investment when private-sector spending is insufficient to support full employment. Currently, of course, the official unemployment rate is low by historical standards. However, key localities and constituencies, including the industrial Midwest, rural areas, and urban ones with significant numbers of black and Hispanic workers, have largely been left behind. In addition, millions of “discouraged workers” who want a job but have given up actively looking for one aren’t even counted in the official unemployment figures, wage growth has been stagnant for years, and the inequality gap between the 1% and the rest of America is already in Gilded Age territory.

Such economic distress was crucial to Donald Trump’s rise to power. In campaign 2016, of course, he endlessly denounced unfair trade agreements, immigrants, and corporate flight as key factors in the plight of what became a significant part of his political base: downwardly mobile and displaced industrial workers (or those who feared that this might be their future fate).

The Trump Difference

Although insufficient, increases in defense manufacturing and construction can help areas where employment in civilian manufacturing has been lagging. Even as it’s expanded, however, defense spending has come to play an ever-smaller role in the U.S. economy, falling from 8%-10% of the gross domestic product in the 1950s and 1960s to under 4% today. Still, it remains crucial to the economic base in defense-dependent locales like southern California, Connecticut, Georgia, Massachusetts, Michigan, Missouri, Ohio, Pennsylvania, Texas, Virginia, and Washington state. Such places, in turn, play an outsized political role in Washington because their congressional representatives tend to cluster on the armed services, defense appropriations, and other key committees, and because of their significance on the electoral map.

A long-awaited Trump administration “defense industrial base” study should be considered a tip-off that the president and his key officials see Pentagon spending as the way to economincally prime the pump. Note, as a start, that the study was overseen not by a defense official but by the president’s economics and trade czar, Peter Navarro, whose formal title is White House director of trade and industrial policy. A main aim of the study is to find a way to bolster smaller defense firms that subcontract to giants like Boeing, Raytheon, and Lockheed Martin.

Although Trump touted the study as a way to “rebuild” the U.S. military when he ordered it in May 2017, economic motives were clearly a crucial factor. Navarro typically cited the importance of a “healthy, growing economy and a resilient industrial base,” identifying weapons spending as a key element in achieving such goals. The CEO of the Aerospace Industries Association, one of the defense lobby’s most powerful trade groups, underscored Navarro’s point when, in July 2017, he insisted that “our industry’s contributions to U.S. national security and economic well-being can’t be taken for granted.” (He failed to explain how an industry that absorbs more than $300 billion per year in Pentagon contracts could ever be “taken for granted.”)

Trump’s defense-industrial-base policy tracks closely with proposals put forward by Daniel Goure of the military-contractor-funded Lexington Institute in a December 2016 article titled “How Trump Can Invest in Infrastructure and Make America Great Again.” Goure’s main point: that Trump should make military investments — like building naval shipyards and ammunition plants — part and parcel of his infrastructure plan. In doing so, he caught the essence of the arms industry’s case regarding the salutary effects of defense spending on the economy:

“Every major military activity, whether production of a new weapons system, sustainment of an existing one or support for the troops, is imbedded in a web of economic activities and supports an array of businesses. These include not only major defense contractors such as Lockheed Martin, Boeing, General Dynamics, and Raytheon, but a host of middle-tier and even mom-and-pop businesses. Money spent at the top ripples through the economy. Most of it is spent not on unique defense items, but on products and services that have commercial markets too.”

What Goure’s analysis neglects, however, is not just that every government investment stimulates multiple sectors of the economy, but that virtually any other kind would have a greater ripple effect on employment and economic growth than military spending does. Underwritten by the defense industry, his analysis is yet another example of how the arms lobby has distorted economic policy and debate in this country.

These days, it seems as if there’s nothing the military won’t get involved in. Take another recent set of “security” expenditures in what has already become a billion-dollar-plus business: building and maintaining detention centers for children, mainly unaccompanied minors from Central America, caught up in the Trump administration’s brutal security crackdown on the U.S.-Mexico border. One company, Southwest Key, has already receiveda $955 million government contract to work on such facilities. Among the other beneficiaries is the major defense contractor General Dynamics, normally known for making tanks, ballistic-missile-firing submarines, and the like, not ordinarily ideal qualifications for taking care of children.

Last but not least, President Trump has worked overtime to tout his promotion of U.S. arms sales as a jobs program. In a May 2018 meeting with Saudi Crown Prince Mohammed bin Salman at the White House (with reporters in attendance), he typically brandished a map that laid out just where U.S. jobs from Saudi arms sales would be located. Not coincidentally, many of them would be in states like Pennsylvania, Michigan, Ohio, and Florida that had provided him with his margin of victory in the 2016 elections. Trump had already crowed about such Saudi deals as a source of “jobs, jobs, jobs” during his May 2017 visit to Riyadh, that country’s capital. And he claimed on one occasion — against all evidence — that his deals with the Saudi regime for arms and other equipment could create “millions of jobs.”

The Trump administration’s decision to blatantly put jobs and economic benefits for U.S. corporations above human rights considerations and strategic concerns is likely to have disastrous consequences. Its continued sales of bombs and other weapons to Saudi Arabia and the United Arab Emirates, for example, allows them to go on prosecuting a brutal war in Yemen that has already killed thousands of civilians and put millions more at risk of death from famine and disease. In addition to being morally reprehensible, such an approach could turn untold numbers of Yemenis and others across the Middle East into U.S. enemies — a high price to pay for a few thousand jobs in the arms sector.

Pentagon Spending Versus a Real Infrastructure Plan

While the Trump administration’s Pentagon spending will infuse new money into the economy, it’s certainly a misguided way to spur economic growth. As University of Massachusetts economist Heidi Garrett-Peltier has demonstrated, when it comes to creating jobs, military spending lags far behind investment in civilian infrastructure, clean energy, health care, or education. Nonetheless, the administration is moving full speed ahead with its military-driven planning.

In addition, Trump’s approach will prove hopeless when it comes to addressing the fast-multiplying problems of the country’s ailing infrastructure. The $683 billion extra that the administration proposes putting into Pentagon spending over the next 10 years pales in comparison to the trillions of dollars the American Society of Civil Engineers claims are needed to modernize U.S. infrastructure. Nor will all of that Pentagon increase even be directed toward construction or manufacturing activities (not to speak of basic infrastructural needs like roads and bridges). A significant chunk of it will, for instance, be dedicated to paying the salaries of the military’s massive cadre of civilian and military personnel or health care and other benefits.

In their study, the civil engineers suggest that failing to engage in a major infrastructure program could cost the economy $4 trillion and 2.5 million jobs by 2025, something no Pentagon pump-priming could begin to offset. In other words, using the Pentagon as America’s main conduit for public investment will prove a woeful approach when it comes to the health of the larger society.

One era in which government spending did directly stimulate increased growth, infrastructural development, and the creation of well-paying jobs was the 1950s, a period for which Donald Trump is visibly nostalgic. For him, those years were evidently the last in which America was truly “great.” Many things were deeply wrong with the country in the fifties — from rampant racism, sexism, and the denial of basic human rights to McCarthyite witch hunts — but on the economic front the government did indeed play a positive role.

In those years, public investment went far beyond Pentagon spending, which President Dwight Eisenhower (of “military-industrial complex” fame) actually tried to rein in. It was civilian investments — from the G.I. Bill to increased incentives for housing construction to the building of an interstate highway system — that contributed in crucial ways to the economic boom of that era. Whatever its failures and drawbacks, including the ways in which African-Americans and other minorities were grossly under-represented when it came to sharing the benefits, the Eisenhower investment strategy did boost the overall economy in a fashion the Trump plan never will.

The notion that the Pentagon can play a primary role in boosting employment to any significant degree is largely a myth that serves the needs of the military-industrial complex, not American workers or Donald Trump’s base. Until the political gridlock in Washington that prevents large-scale new civilian investments of just about any sort is broken, however, the Pentagon will continue to seem like the only game in town. And we will all pay a price for those skewed priorities, in both blood and treasure.

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As Trump’s trade war with China escalates, and is set to go live this Friday when $34 billion in Chinese exports are hit with a 25% tariff, exhausted traders and concerned investors are wondering where the next surprise from the Trump administration will come from: after all, after backing off on ZTE (to get China’s blessing on the North Korea summit) Trump then promptly pivoted and nearly blocked all Chinese investments in the US, prompting a furious response from Beijing. Meanwhile, the White House somehow threatened to impose over $600 billion in tariffs on Chinese imports even.

Meanwhile, as part of the verbal escalations, the White House has proposed nearly $800 billion in tariffs on Chinese imports, which would cripple the global economy and unleash a global depression if fully implemented.

And now according to Bloomberg, on Monday Trump is going back to the Huawei/ZTE playbook, after on the Trump administration moved against letting another Chinese telecom giant, China Mobile, enter the U.S. telecommunications market, saying the state-owned enterprise would pose national security risks.

According to a filing distributed on Monday by the National Telecommunications and Information Administration (a branch of the Commerce Department), the Federal Communications Commission should deny China Mobile’s application, submitted in 2011. China Mobile said it wanted to offer international voice traffic between the U.S. and foreign countries, but didn’t intend to offer mobile service within the U.S., according to the NTIA filing.

Like in the case of ZTE and Huawei, the NTIA filing said that the US intelligence community and other officials found that China Mobile’s application “would pose unacceptable national security and law enforcement risks.”

China Mobile, owned by China Mobile Communications Corp., “is wholly owned by a sovereign state, the People’s Republic of China,” the agency said in the filing.

Of course, China Mobile is also something else: it was the world’s largest mobile phone operator in 2011, with more than 649 million subscribers, according to filing (and is probably that 7 years later).

In April, Trump blocked Chinese telecom gear maker ZTE Corp.’s access to U.S. suppliers in April, saying the company violated a 2017 sanctions settlement related to trading with Iran and North Korea and then lied about the violations. Last month, the U.S. reached a deal to allow ZTE to get back in business after the Chinese telecommunications company pays a record fine and agrees to management changes.

Now, following yet another targeted attack at a prominent Chinese company, it is only a matter of time before China responds in kind, and considering the size and prominence of China Mobile, one wonders how long until China takes aim at none other than the world’s largest company, Apple.

The full NTIA filing is below:

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Authored by Shannon McConaghy of Horseman Capital

Japan is at the very centre of the global financial system. It has run current account surpluses for decades, building the world’s largest net foreign investment surplus, or its accumulated national savings. Meanwhile, other nations, such as the US, have borrowed from nations like Japan to live beyond their own means, building net foreign investment deficits. We now have unprecedented levels of cross-national financing.

Much of Japan’s private sector saving is placed in Yen with financial institutions who then invest overseas. These institutions currency hedged most of their foreign assets to reduce risk weighted asset charges and currency write down risks. The cost of hedging USD assets has however risen due to a flattening USD yield curve and dislocations in FX forwards. As shown below, their effective yield on a 10 year US Treasury (UST) hedged with a 3 month USDJPY FX forward has fallen to 0.17%. As this is below the roughly 1% yield many financial institutions require to generate profits they have been selling USTs, even as unhedged 10 year UST yields rise. The effective yield will fall dramatically for here if 3 month USD Libor rises in line with the Fed’s “Dot Plot” forecast for short term rates, assuming other variables like 10 year UST yields remain constant.

As Japanese financial institutions sell US Treasuries, which are considered the safest foreign asset, they are shifting more into higher yielding and higher risk assets; foreign bonds excluding US treasuries as well as foreign equity and investment funds. This is a similar pattern to what we saw prior to the last global financial crisis. In essence, Japan’s financial institutions are forced to take on more risk in search of yield to cover rising hedge costs as the USD yield curve flattens late in the cycle.

Critically as the world’s largest net creditor they facilitate significant added liquidity for higher risk overseas borrowers late into the cycle.

I follow these flows closely. One area I think is rather interesting is US Collateralised Loan Obligations (CLOs) which Bloomberg reports “ballooned to a record last quarter thanks in large part to unusually high demand from Japanese investors”. CLOs are essentially a basket of leveraged loans provided to generally lower rated companies with very little covenant protection. Alarmingly, some US borrowers have used this debt to purchase back so much of their own stock that their balance sheets now have negative net equity. A recent Fed discussion paper shows in the following chart that CLOs were the largest mechanism for the transfer of corporate credit risk out of undercapitalised banks in the US and into the shadow banking sector. Japanese financial institutions have been the underwriter of much of that risk in their search for yield.

There are many other risky areas where Japan has become a large buyer, including; Australian Residential Mortgage Backed Securities, Emerging Market Bonds, and Aircraft Leases. Japan’s financial institutions have desperately sought the higher yields on offer not only to compensate for higher hedge costs but also their dire domestic earnings outlook as the Bank Of Japan (BOJ) suppresses domestic interest rates below the break-even rates that many of these institutions need to remain profitable. A former BOJ Board member Takahide Kiuchi warns “there is no doubt that as a side effect of monetary easing, financial institutions are taking excessive risk”. (Japanese) Banks are investing in products that yield too little relative to the risks involved. You tell banks to stop it, and then they go elsewhere to find opportunities — it’s whack-a-mole”. Importantly, Japan’s Financial Services Agency is now instructing regional banks, to not only stop adding foreign higher risk assets but also to aggressively sell existing positions as soon as they begin to turn sour.

Unfortunately, this doesn’t resolve the problem as restricting financial institutions like regional banks from buying higher yielding foreign assets removes their ability to offset their deteriorating domestic businesses. The situation will likely worsen, as even the BOJ Governor Kuroda himself acknowledges that continuously supressed interest rates will increasingly deteriorate domestic banking earnings over time as old higher yielding assets continue to roll-over onto lower rates. There is limited prospect of the BOJ meaningfully lifting interest rates to slow that deterioration. All of the BOJ’s measure of underlying inflation have deteriorated this year. In addition, as the chart below shows, currency effects, which had brought some limited inflationary pressures to Japan earlier in the year, are now set to bring deflationary pressures.

An unstated objective of the BOJs monetary policy has been to weaken the Yen. As suppressed domestic interest rates also creating carry trade outflows from some Japanese investors who are willing to take unhedged currency risk. The 2016 commitment to keep interest rates pegged below zero out to 10 years, via yield curve control, has again pushed the Yen to near extreme levels of devaluation against its long-term average real effective exchange rate. The Yen is currently 23% undervalued against its export partners.

We can use purchasing power parity to specifically measure the undervaluation of the Yen versus the USD. The current 30% undervaluation implies a fair value of USDJPY 77. Surveys of Japanese exporters estimate  that they only break-even on average at above USDJPY 100.5. It is clear that the BOJ would be desperate not to trigger a reversal of carry flows and push the Yen back up to fair value by raising interest rates.

The BOJ has to make a choice and there are no good options.

If the BOJ raises interest rates they risk triggering a tsunami of Japanese money flowing back home, strengthening the Yen and amplifying the coming deflationary pressures. In addition, much of that money is currently propping up higher risk overseas debt markets like US CLOs. If Japan, the world’s largest creditor, brings its money back home that would bode extremely poorly for the global credit cycle, which Japanese financial institutions are now more than ever directly exposed to.

If the BOJ doesn’t raise interest rates, which I think is the likely outcome, then some Japanese financial institutions  will simply not be able to survive as privately owned listed entities in their current form as their domestic earnings will fall increasingly negative and they are restricted from seeking overseas earnings.

Regional banks are the entities which are suffering most and conditions have continued to deteriorate further since I wrote earlier in the year of policies in place already that would allow these entities to be resolved into more viable formats. Essentially, the cost of continuing current policy would be to zero the shareholders in some of these banks, a cost Japan has proved willing to bear on a number of occasions in recent decades already. I can see this as being the most politically palatable choice, out of a range of bad choices and see continued appealing returns in Japanese regional bank shorts.

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Former Obama Treasury Secretary and Council on Foreign Relations distinguished fellow, Tim Geithner, who condemned predatory lenders – is now a predatory lender. 

“I’m still embarrassed by some of the things I did there.” -Former employee

Geithner – who lobbied against capping $165 million in executive bonuses at AIG while it was taking TARP money, is now the president of New York Warburg Pincus – a private equity firm which owns predatory lender Mariner Finance, reports the Washington Post. 

The firm raised $550 million through bond sales last year – using the proceeds to make high-interest-rate loans to low income individuals. 

The check arrived out of the blue, issued in his name for $1,200, a mailing from a consumer finance company. Stephen Huggins eyed it carefully.

A loan, it said. Smaller type said the interest rate would be 33 percent.

Way too high, Huggins thought. He put it aside.

A week later, though, his 2005 Chevy pickup was in the shop, and he didn’t have enough to pay for the repairs. He needed the truck to get to work, to get the kids to school. So Huggins, a 56-year-old heavy equipment operator in Nashville, fished the check out that day in April 2017 and cashed it.

Within a year, the company, Mariner Finance, sued Huggins for $3,221.27. That included the original $1,200, plus an additional $800 a company representative later persuaded him to take, plus hundreds of dollars in processing fees, insurance and other items, plus interest. It didn’t matter that he’d made a few payments already. -WaPo

“It would have been cheaper for me to go out and borrow money from the mob,” said Huggins before his first court hearing in April.

“It’s basically a way of monetizing poor people,” said former Nashville Mariner Finance manager trainee John Lafferty, who worked for the company for four months in 2015. Lafferty’s misgivings echoed the sentiment of other former employees contacted by The Washington Post. “Maybe at the beginning, people thought these loans could help people pay their electric bill. But it has become a cash cow.”

That said, Mariner does reduce their highest borrowing rate of 36% in states with usury laws.

“Consumer installment loans”

The types of lending Mariner engages in – “consumer installment loans” – has grown rapidly in recent years as federal regulations have significantly hobbled payday lending services, according to nonprofit group Center for Financial Services Innovation. To fill the void, private equity firms have invested billions in the space. 

Among its rivals, Mariner stands out for the frequent use of mass-mailed checks, which allows customers to accept a high-interest loan on an impulse — just sign the check. It has become a key marketing method.

The company’s other tactics include borrowing money for as little as 4 or 5 percent — thanks to the bond market — and lending at rates as high as 36 percent, a rate that some states consider usurious; making millions of dollars by charging borrowers for insurance policies of questionable value; operating an insurance company in the Turks and Caicos, where regulations are notably lax, to profit further from the insurance policies; and aggressive collection practices that include calling delinquent customers once a day and embarrassing them by calling their friends and relatives, customers said. -WaPo

Long arm of the law

Another major aspect of Mariner’s business is its collections enforcement arm – a busy legal operation funded in part by the customers themselves: “The fine print in the loan contracts obliges customers to pay as much as an extra 20 percent of the amount owed to cover Mariner’s attorney fees, and this has helped fund legal proceedings that are both voluminous and swift,” reports The Post. 

In Baltimore alone, Mariner filed nearly 300 lawsuits last year. In some cases, lawsuits have been filed within five months of the check being cashed.

Explosive growth

Mariner’s expansion has been rapid – growing eightfold since 2013 according to a financial statement obtained by The Post. Compay representatives describe themselves as “a business that yields reasonable profits while fulfilling an important socia lneed.” 

“The installment lending industry provides an important service to tens of millions of Americans who might otherwise not have safe, responsible access to credit,” John C. Morton, the company’s general counsel, wrote. “We operate in a competitive environment on narrow margins, and are driven by that competition to offer exceptional service to our customers. . . . A responsible story on our industry would focus on this reality.”

Mariner would not discuss an affiliated offshore company that handles insurance, citing competitive reasons – however they sell insurance policies that ostensibly cover a borrower’s loan payments in the event of such mishaps as accidents, death, unemployment and similar situations. 

“It is not our duty to explain to reporters . . . why companies make decisions to locate entities in different jurisdictions,” Morton wrote.

Former employees spill the beans

In order to get a better handle on just how predatory Geithner’s company is, WaPo chatted with a dozen former employees. Ten of them had issues with the company’s sales practices – “describing an environment where meeting monthly goals seemed at times to rely on customer ignorance or distress.” 

“I didn’t like the idea of dragging people down into debt — they really make it a big deal to call and collect and not take no for an answer,” said Asha Kabirou, 28, a former customer service representative in two Maryland locations in 2014. “If someone started to fall behind on their payments — which happened a lot — they would say, ‘Why don’t we offer you another $200?’ But they wouldn’t have the money the next month, either.”

“Were there a few loans that actually helped people? Yes. Were 80 percent of them predatory? Probably,” said one former branch manager who was at the company in 2016. He spoke on the condition of anonymity, saying he did not want to antagonize his former employer. “I’m still embarrassed by some of the things I did there.”

“The company is here to make money — I understand that,” said Mauricio Posso, 28, who worked at a Northern Virginia location in 2016 and said he viewed it as valuable work experience. “At the same time, it’s taking advantage of customers. Most customers do not read what they get in the mail. It’s just little tiny type. They just see the $1,200 for you. . . . It can be a win-win. In some situations, it was just a win for us.” -WaPo

Mariner says that nobody’s forcing people to take out loans – however in many cases lack of English skills and general knowledge about lending has led many to accept deals with the devil. 

“I wanted to go to my mother’s funeral — I needed to go to Laos,” Keo Thepmany, a 67-year-old from Laos who is a housekeeper in Northern Virginia, said through an interpreter. To cover costs, she took out a loan from Mariner Finance and then refinanced and took out an additional $1,000. The new loan was at a rate of 33 percent and cost her $390 for insurance and processing fees. -WaPo

After Thepmany fell behind on her payments, Mariner filed suit against her last year for $4,200 – which included $703 for attorney’s fees. The company sought to garnish her wages. 

Barbara Williams, 72, a retired school custodian from Prince William County, in Northern Virginia, said she cashed a Mariner loan check for $2,539 because “I wanted to get my teeth fixed. And I wanted to pay my hospital bills.”.

She’d been in the hospital with three mini-strokes and pneumonia, she said. Within a few months, Mariner suggested she borrow another $500, and she did. She paid more than $350 for fees and insurance on the loan, according to the loan documents. The interest rate was 30 percent. -WaPo

“It was kind of like I was in a trance,” Williams said of decision to take out the loan. Despite paying back some of the money, and Mariner sued when she fell behind – winning a court judgment against her in April for $3,852, including $632 in fees for Mariner’s attorney.

“You think they’re helping you out — and what they’re doing is they’re sinking you further down,” said Stephen Huggins. “They’re actually digging the hole deeper and pushing you further down.”

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Submitted by Far Left Watch

The Democratic Socialists of America recently got a major boost when one of their endorsed candidates, Alexandria Ocasio-Cortez, beat out incumbent Democrat Rep. Joe Crowley in a primary last Tuesday for New York’s 14th Congressional District.

This far-left political organization previously made headlines when leadership from their Iowa State campus chapter encouraged people to shoot president Trump and when leadership from their University of Georgia Chapter called for the execution of house GOP members. Now multiple DSA leaders are publicly endorsing communism, an ideology responsible or the oppression, incarceration, and murder of tens of millions of people.

Here is the original tweet from Olivia Katbi Smith, who is the co-Chair of the Portland DSA chapter:

As a DSA chapter co-chair I just wanna set the record straight for a minute: communism is good

— Olivia Katbi Smith🌹أوليفيا كاتبي (@livkittykat) June 30, 2018

Shortly after, other DSA leaders weighed in with their endorsement of communism.

The Charlottesville DSA co-chair:

as a dsa chapter co-chair, i would like to cosign this pro-communist statement. https://t.co/xFTDXJQJH6

— molly 🌹 (@socialistdogmom) July 1, 2018

The Hudson County DSA co-chair:

As a DSA branch co-chair, I would like to sign onto this with a small amendment: Communism is very good. https://t.co/We1AUMZYTZ

— Free Palestine/Abolish ICE (@ThatNJSocialist) July 2, 2018

The Seattle DSA co-chair:

As a DSA chapter co-chair as well, I extremely second this. https://t.co/cO1elllluD

— Keaton ☭ 🌹 (@Keatronn) July 1, 2018

An Officer for the Queens DSA chapter:

As a previous branch co-chair, and a current elected rep of @QueensDSA‘s electoral working group, I second this statement#CommunismIsGoodActually#MultitendancyLeft https://t.co/ybj7rAzvBl

— Justine Medina 🌹 (@jnmedina8989) July 1, 2018

Since her win, legacy media has rolled out the red carpet for Alexandria Ocasio-Cortez and for “democratic socialism”. She has done interview after interview and appears to be starting her “late night comedy” circuit but for some reason, her affiliation with an organization whose members have openly called for the murder of their political opposition and who are now endorsing a violent authoritarian ideology has not been brought into question. Why is that? Consider the alternative: a Republican winning a primary and being endorsed by an organization whose members advocated for the murder of Democrats and whose leadership said “Nazism is good.” How differently would that play out?

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With his street low TSLA price target of $93/share, Vertical Group’s Gordon Johnson has rightfully earned himself the nickname of most bearish Tesla analyst on Wall Street, and according to some, Johnson was instrumental in facilitating today’s bizarre $30 intraday swing in TSLA’s stock price from a 6% spike at the open on the “surprise” news the company had “hit” its 5000 Model 3 quota, to a confounding 3% drop shortly after noon.

Speaking on Bloomberg TV, Johnson expressed numerous concerns about the company, mostly about its continued cash burn: “If they run out of cash, the stock will fall quickly. We think that is around the corner.” But more apropos to today’s Q2 delivery release, Johnson questioned whether some cars that left the factory were counted as produced but still needed further work prior to consumer delivery, the so-called “factory gated”, whose interpretation has prompted a mini scandal within the Teslarati on twitter.

Following his interview, and right around the time we learned that Tesla’s chief engineer Doug Field was not coming back from his “family time sabbatical”, Johnson sent out a note to clients in which he explained that out while much had been made of TSLA hitting the all-important milestone of 5,000 Model 3 cars produced in the last week of June, he found 6 key aspects of TSLA’s numbers concerning.

Here are his concerns:

1. Using FactSet numbers, Consensus was calling for 2Q18 TSLA Model 3 sales of 27.980K units, and total sales of 51.120K units; TSLA reported Model 3 sales of 18.440 units (a 34% shortfall) and total sales of 40.740 units (a 20% shortfall); stated differently, this represents Model 3 demand of just 1.418K cars/week in 2Q18; consequently, as we’ve stressed, as TSLA runs through its backlog of Model 3 reservations, we believe the company will become demand constrained rather than supply constrained (we expect this to occur at some point in 4Q18/1Q19 – see attached spreadsheet); stated differently, despite all the focus on Model 3 cars produced/week by the media today, we stress to our readers that just because TSLA makes a Model 3 car – with competition coming and buyers tired of “waiting” – does not mean demand for that car exists.

2. TSLA mentioned that it reached 5,031 Model 3 cars of “factory gated” production in the last week of June; while the company said it has used the “factory gated” terminology all along, we were not able to find this term in any SEC filings or public transcripts; however, looking to Linkedin, it seems “factory gated” may mean cars that require further testing and quality inspection upon leaving the factory floor (Exhibit 1) – this would mean these cars are likely not “full production vehicles” in the traditional sense of auto industry terminology;

Exhibit 1: Linkedin Review Suggests “Factory Gated” Produced Cars
May Require Further Inspection/Testing

3.  Excluding the 5,031 cars TSLA produced in the last week of June (i.e., before its “boost week” – link), the weekly output rate of Model 3 cars over the first 84 days of 2Q18, based on TSLA’s reported numbers (link), was 1,962/week – i.e., (28,578 – 5,031 = 23,547; 23,547 ÷ 84 = 280.32; 280.32 × 7 = 1,962 Model 3 cars/week of production); surprisingly, 1,962 Model 3 cars produced/week in the first 84 days of 2Q18 is ACTUALLY below the 2,000 Model 3/week production rate TSLA highlighted in its 1Q18 production report published 4/3/18 for the first week of 2Q18 (yes, you heard that right) – link; furthermore, in yet another massive miss to intra-quarter guidance provided by Elon Musk via Twitter (for which it seems there is no penalty for being wrong), the avg. rate of 1,962 Model 3 cars produced/week leading up to the last week of June 2018 is also materially below the 3,000-to-4,000 Model 3 cars/week of production Elon Musk noted TSLA would achieve in May following a brief shutdown in April (link);

4. TSLA’s net reservations were listed at 420K cars as of today (7/2/18), while they were listed at 455K 8/17 (link), and “above 450K” 5/18 (link); additionally, to date, TSLA has delivered 28.386K Model 3 cars; thus, as we warned last week, and as TSLA management told us, new orders have essentially been 0 for ~1 year now (i.e., no new reservations) – due, according to TSLA, to long lead-times to get the car; as such, when considering net reservations have been flat at ~455K cars since 8/2/17, as well as TSLA’s comment to us last week that new orders for Model 3 cars have been nonexistent for roughly a year, we believe today’s data confirms lackluster new reservation demand for Model 3 cars for some time now;

5. When subtracting total Model 3 cars delivered (i.e., 28.386K) from total Model 3 cars produced (i.e., 41.029K) one arrives at 12.643K Model 3 cars “in transit”; be that as it may, when comparing this number to TSLA’s reported Model 3 cars in transit as of 2Q18 of 11.166K, it seems there are ~1,477 excess Model 3 cars unaccounted for (Exhibit 2); while Elon Musk has said the numbers can be off by 0.5%, this is a 13% gap; while we cannot say with certainty what these “unaccounted” cars represent, it seems to reason that they are comprised of production cars requiring re-works sent to delivery centers (which could also suggest Model 3 cars produced/week may be a bit overstated); and

Exhibit 2: Excess Cars Suggest Demand May be a
Problem (with 420K in Net Reservations, how are
So many cars in Unaccounted for)

Source: Company filings, Vertical Group.

6. Based on our analysis, there were roughly 175 less Model S/X vehicles in transit at the end of 2Q18 vs. 1Q18 (link), but >9K more Model 3s were in transit, meaning just under $500mn in extra finished goods inventory (i.e., cash burn) – assuming a Model 3 ASP of ~$55K/car and Model S/X ASP of ~$105K/car; while this will be partially offset by TSLA’s offer to configure to all of its Model 3 ~420K net reservation holders last week – at $2.5K in additional configuration costs, assuming every one configured (which is highly unlikely, as we believe the bulk of Model 3 reservation holders are buyers seeking the $35K/car option), this would be $1.05bn in additional cash inflows – we still expect TSLA to display another sizeable cash burn in 2Q18 (when factoring in EBIT losses ~$600mn/qtr, as well as ~$150mn in interest expense and $450mn in depreciation).

* * *

Johnson’s conclusion:

We expect TSLA’s 2Q18 earnings report to be a downside catalysts for the shares. We would be adding to short positions today with TSLA’s 2Q18 production report now out of the way. We maintain our SELL rating and $93/share year-end 2019 price target.

To this we’ll just add one more thing: traditionally Tesla stock price has been unabashedly forgiving of any bad news.  today however, for the first time TSLA stock dropped on what was supposed to be good news. If this is the start of a trend in which shareholders demand more than just eloquent promises and verbal glitter, Elon Musk may have a huge problem on his hands.

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This article was originally published via Disobedient Media.

UPDATE: 7/1/18: Shortly after publication, it came to our attention that the Campaign to Stop Rape and Gender Violence in Conflict had incorrectly referred to Joel Davis as a volunteer coordinator, when in fact he served as the Director of the Campaign. This article has been updated to reflect that change.

Disobedient Media recently reported on the arrest of Joel Davis, Executive Director of Youth to End Sexual Violence and former Director of the Campaign to Stop Rape and Gender Violence in Conflict, who was arrested on charges related to child pornography as well as an attempt to arrange the rape of a nine-year-old and two-year-old.

In the wake of our initial report, astounding questions have been raised about Davis’s history as well as that of the organization he founded. Disobedient Media has learned that Davis, 22, is a two-time college drop out, (from both American University and Columbia University) and was pursuing a third attempt at completing his undergraduate degree at the time of his arrest.

Upon examination, it appears that Youth to End Sexual Violence (Davis’s NGO) is no longer a registered 501c charity. Records show that the 501c status of Youth to End Sexual Violence was revoked in May 2017 due to the group failing to submit relevant tax forms for three consecutive years.

Given the fact that the organization was founded in 2014, it would follow that the group never submitted the 990-series form required by the IRS. This finding adds to the general lack of concrete information given by the NGO’s website, which provides no identification regarding staff, no address, and generally appears to have been run by Davis himself with the contribution of a handful of international bloggers.

Such revocation may not seem all that surprising given recent events surrounding Davis. However, the importance of the NGO’S defunct 501c status extends far beyond Davis’s charity and his reputation.

In 2017, the International Campaign to Stop Rape and Gender Violence in Conflict, a coalition of highly reputable humanitarian aid groups, put themselves under the leadership of Davis’s (defunct) Youth To End Sexual Violence charity, and at an unknown date, had appointed Davis as Director of the entire Campaign. This decision to “restructure” under the leadership of the Charity Davis headed occurred in the same year that this same NGO lost 501c status.

As previously noted by Disobedient Media, the coalition’s Steering Committee includes highly respected organizations, such as: Human Rights Watch, Physicians for Human Rights, the Dr. Denis Mukwege Foundation, the Nobel Women’s Initiative, the Global Fund for Women, Youth to End Sexual Violence, The Italian Mine Campaign, Promundo, Every Woman Everywhere, Sofepadi, and Change Center for Health and Gender Equity. In addition to the involvement of these respected entities, the coalition itself was said to be made up of 5,000 organizations and individuals.

The Campaign to Stop Rape and Gender Violence in Conflict released the following statement in the wake of Davis’s arrest, in which they failed to address the leadership role of his defunct charity at the head of the entire coalition and incorrectly described him as a volunteer coordinator, despite having earlier described him as Director of the Campaign.

 

Although the press release describes Davis as a: “Former volunteer coordinator of the International Campaign to Stop Rape and Gender Violence In Conflict,” this appears to be an outright fabrication. The Campaign referred to Davis as the Director of the Campaign as recently as April of this year, when he gave a TEDx lecture where he also referred to himself as Director of the Campaign.

The press release also fails to discuss the fact that the already-defunct charity served as the helm of their entire coalition. Press reports have repeatedly described Davis as the Chairman of the Campaign, and it is unclear at this time whether the moniker was incorrectly applied, or referred to his role at the head of the NGO which led said Coalition. In 2015, NBC reported that Davis had been appointed to the Board of the Directors of the Campaign to Stop Rape and Gender Violence.

 

Lars Anderson, the media contact included in the press release, is a co-founder of BlueDot Strategies according to his LinkedIn profile. BlueDotdescribes Anderson and fellow co-founder Moira Whelan as: “Former Federal Government insiders with international communications experience.” According to BlueDot, Anderson held: “Several senior-level appointments in the Obama Administration, most recently as the deputy chief of staff and counselor to the administrator at the Federal Emergency Management Agency.” Blue Dot adds that Anderson also served as director and spokesman for USAID, and was the NATO spokesman in Sarajevo, Bosnia-Herzegovina.

At the time of writing, the Campaign’s website still states: “In 2017, Campaign members voted unanimously to reorganize and restructure under the leadership of Davis’s Youth to End Sexual Violence, the first international organization of young survivors working in conflict countries.” That the coalition states that they unanimously voted to restructure under the leadership of Youth To End Sexual Violence in 2017 is astounding.

In light of all this, it is unavoidable to ask questions, including: How was it possible for a two-time college dropout to be appointed as the Director of a vast coalition of thousands of groups and individuals, with many member-organizations possessing entire legal departments and staff who could have easily recognized that Davis’s charity did not have 501c status?The Campaign describes itself as: “The first ever global collaboration between Nobel Laureates, NGOs, and Humanitarian experts to end sexual violence in conflict.”

We do not know at this time what financial relationship, if any, existed between Davis’s Youth to End Sexual Violence and the 5000 members of the Campaign coalition after their 2017 decision. However, the fact that they describe themselves specifically as restructuring under the leadership of Davis’s defunct group, with Davis formerly serving as the Director of the Coalition itself, raises damning questions about their vetting process, financial oversight, and how that restructuring happened given the revocation of Youth to End Sexual Violence’s 501c status that year.

 

Even if there was no financial relationship between the members of the coalition and Davis’s NGO, questions remain as to why the unanimous decision was made to place these prestigious organizations under the leadership of his group, and his Directorship given his total lack of experience or even a college degree.

Did no one at Human Rights Watch, the Global Fund For Women, the Nobel Women’s Initiative, Promundo, Amnesty International, Women’s Centre for Legal Aid and Counseling, or others take the time to read Davis’s CV? Surely their vetting process in choosing the entity and individual to head their coalition should have balked at his lack of experience, much less the revocation of his NGO’s 501c status?

Again: How, did a vast group of highly prestigious and respected NGO’s gather together under the banner of Davis’s defunct charity and his leadership? What vetting if any was done that preceded this “unanimous”decision by such a vast number of people and entities, the likes of which have worked with some of the most well-known humanitarians of our era?

It seems unavoidable, at this juncture, not to question whether Davis’s NGO may have acted as a front organization of some kind. If not, are we to believe a college dropout was capable of swindling the top humanitarian aid groups on the planet? If so, how were they swindled so easily?

Questions have also been raised about the legitimacy of Davis’s claim to have been nominated for the Nobel Peace Prize in 2015. According to NobelPrize.org, the list of nominees for the prestigious award are officially sealed for 50 years after the award is given. Press reportssurrounding Davis’s supposed nomination do not provide any source that verifies the nomination occurred other than Davis himself.

While it is technically possible that one of Davis’s college professors did nominate him, his lack of corrorobation raises serious questions as to the legitimacy of his claim. If Davis fabricated the story, it would be a perfect deception in the sense that it can’t be proven or disproven in fifty years – a timeframe that would help him create a veneer of respectability with which he could access and abuse children with little likelihood of repercussion.

Shortly after Disobedient Media published our initial coverage of this issue, TEDx deleted the video of Joel Davis’ talk, delivered just two months ago at TEDx Columbia University.

Disobedient Media has duly preserved the video. The importance of Davis’s lecture is not only that he was able to groom respected groups in the humanitarian community, but also the fact that he included the fatal rape of a six-month-old girl in his talk. He also clearly states in the video that he became the Director of a coalition of over 5,000 NGO’s, a clear reference to the International Campaign to Stop Rape and Gender Violence In Conflict. It is important to preserve the historical record surrounding Davis’ ‘humanitarian’ activities and the depth of hypocrisy he was able to maintain prior to his arrest.

All of this begs the following questions: What would have happened if Davis had not been caught at such a young age? How many children would he have had access to over the ensuing decades in a humanitarian career based on lies and defunct charities? How many monsters like Davis slip by unnoticed within the humanitarian aid industry? If a 22-year-old can fake his way into a position of trust at the head of a coalition of the most prestigious aid groups on the planet, and work alongside the likes of Angelina Jolie, how can we trust that this case is not the tip of a silent, lurking, monstrous iceberg?

Why did the Campaign to Stop Rape and Gender Violence in Conflict lie about Davis’s role in their press release in response to his arrest? Does truth and accountability mean nothing in the world of humanitarian aid?

A serious discussion on vetting and accountability in charity work musttake place as a result of this arrest and the multiple questionable and outright duplicitous aspects of Joel Davis’ “aid work” that went unnoticed and unquestioned by the NGO world. This must serve as a wake-up-call and lead to demands for drastically increased accountability – otherwise, this horrendous norm is doomed to repeat itself ad infinitum.

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The federal government is ramping up scrutiny of Facebook’s role in the Cambridge Analytica data privacy scandal as yet another federal agency – the Securities and Exchange Commission – has joined the Federal Trade Commission, the FBI and the DOJ in their investigation of the tech giant, according to the Washington Post.

The involvement of so many agencies confirms that the investigation is broadening in scope. To wit, the addition of the SEC suggests that the emphasis has shifted to whether “representations” made by the company “square with the underlying facts.”

While the report didn’t include any specifics about the investigation, Facebook CEO Mark Zuckerberg, who sat for a grueling two-day testimony before Congress in April, has since been called out by at least one Democratic Congressman for possibly lying, or otherwise misleading Congress, when he claimed Facebook users had “complete control” over who sees their data. In reality, the New York Times reported that Facebook had given at least 60 major device manufacturers nearly unfettered access to user data. To wit, WaPo reported that Zuckerberg’s testimony is being “scrutinized.”

Representatives for the FBI, the SEC and the Federal Trade Commission have joined the Justice Department in its inquiries about the two companies and the sharing of personal information of 71 million Americans, suggesting the wide-ranging nature of the investigation, said the people, who spoke on the condition of anonymity to discuss a probe that remains incomplete.

These people added that the emphasis has been on what Facebook has reported publicly about its sharing of information with Cambridge Analytica, whether those representations square with the underlying facts and whether Facebook made sufficiently complete and timely disclosures to the public and investors about the matter. The Capitol Hill testimony of Facebook officials, including chief executive Mark Zuckerberg, also is being scrutinized as part of the probe, said people familiar with the federal inquiries.

Facebook told WaPo that it’s cooperating in the probe, and that it had received questions from federal agencies and is working to provide answers as best it can. In a separate probe, the DOJ is also investigating Cambridge Analytica, the data analytics firm that purportedly accessed the data of 71 million American Facebook users without Facebook’s – or the users’ – consent. The FTC disclosed in March that it had launched an investigation into whether Facebook had violated a consent decree over its handling of personal data – a violation that could potentially lead to more than $1 trillion in fines.

And given that the SEC is now involved, it’s possible that the timing of CEO Mark Zuckerberg’s stock sales has also come into play.

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