Month: September 2018

Authored by Michael Snyder via The American Dream blog,

Is it just a coincidence that many of the greatest cities in America became poverty-infested hellholes once the Democrats took charge of things?  Detroit, Baltimore, Chicago, St. Louis, Philadelphia, Oakland and Memphis were all once great cities.  But after an extended period of control by the Democratic Party, each one of them has become a festering crisis that never seems to end.  I thought that I was going to do an article about Baltimore today, but it occurred to me that the exact same things that are happening in Baltimore are also happening in a multitude of other major cities, and the common theme among all of them is that the Democrats are in control.  But even though this is the case, voters in those cities just keep choosing Democrats election after election anyway.

Let’s talk about crime first.  According to the FBI, Baltimore had the highest murder rate in the entire country last year…

Baltimore had the worst homicide rate among the nation’s 50 largest cities last year and the second-highest violent crime rate overall, according to new data from the FBI.

The grim news was the latest reminder of the sustained cycle of violence that has gripped the city since 2015, when the annual number of homicides soared above 300 for three consecutive years after the unrest that followed Freddie Gray’s death from injuries suffered in police custody.

In fact, it was the highest murder rate that Baltimore had ever seen.

So who runs Baltimore?

Democrats.

But Baltimore is definitely not alone.  When you start going down the list, you find a lot more major cities run by Democrats…

#2 Detroit – Run By Democrats

#3 Memphis – Run By Democrats

#4 Chicago – Run By Democrats

#5 Philadelphia – Run By Democrats

And this is certainly not just a recent phenomenon.  According to a broader study of major cities, there is a very strong correlation between Democratic control and violent crime…

Using U.S. cities with a population over 100,000 and the most recent FBI statistics on violent crime, USA Today formulated a list of the top ten most dangerous cities in America. Of these ten, eight are currently run by Democratic mayors and city councils, and two are controlled by Independents. Of the past ten mayors of each of the three most violent cities in America — Birmingham, Detroit, and St. Louis — eight have been Democrats. All told, the three most violent cities in this country have been under nearly uninterrupted Democratic control for more than half a century.

So the moral of the story is this – if you want more violent crime, vote for the Democrats.

Not surprisingly, there is also a very strong correlation between Democratic control and poverty.

According to the Los Angeles Times, Democratic-controlled California actually has the highest poverty rate in the entire nation…

Guess which state has the highest poverty rate in the country? Not Mississippi, New Mexico, or West Virginia, but California, where nearly one out of five residents is poor. That’s according to the Census Bureau’s Supplemental Poverty Measure, which factors in the cost of housing, food, utilities and clothing, and which includes noncash government assistance as a form of income.

But aren’t Democrats supposed to be the ones that care about the poor?

Well, they certainly throw a lot of money at the problem, but all of that money does not appear to be helping.  In fact, the Los Angeles Times has even admitted that California’s spending on anti-poverty programs “actually seems to have made it worse”…

It’s not as though California policymakers have neglected to wage war on poverty. Sacramento and local governments have spent massive amounts in the cause. Several state and municipal benefit programs overlap with one another; in some cases, individuals with incomes 200% above the poverty line receive benefits. California state and local governments spent nearly $958 billion from 1992 through 2015 on public welfare programs, including cash-assistance payments, vendor payments and “other public welfare,” according to the Census Bureau. California, with 12% of the American population, is home today to about one in three of the nation’s welfare recipients.

The generous spending, then, has not only failed to decrease poverty; it actually seems to have made it worse.

That is a stunning admission from the Los Angeles Times.

And poverty is not just at crisis levels in California.

It will probably not surprise you to learn that nine of the ten poorest cities in the United States are run by Democrats…

Referencing data collected by the U.S. Census Bureau, CBS News composed a list of the top ten most impoverished cities in the United States. The ubiquity of Democratic governance is heightened in this context, as nine out of the ten poorest cities are run by Democrats. Combining the past ten mayors of the three poorest cities — Philadelphia, Milwaukee, and Detroit — there are twenty-three Democrats, three Socialists, two Independents, and two Republicans. In essence, the three most impoverished cities in America have seen more governance in the past 50 years by Socialists than by Republicans, and the ratio of Democratic governance to Republican governance is about 12:1.

Ouch.

And even the Democratic-controlled cities that are supposedly “thriving” economically are still dealing with squalor on an unprecedented scale.

For example, one investigation found 300 piles of human feces on the streets of downtown San Francisco.  The following comes from NPR…

San Francisco’s streets are so filthy that at least one infectious disease expert has compared the city to some of the dirtiest slums in the world.

The NBC Bay Area Investigative Unit surveyed 153 blocks of the city in February, finding giant mounds of trash and food on the majority of streets. At least 100 discarded needles and more than 300 piles of human feces were also found in downtown San Francisco, according to the report.

The Democratic Party is definitely not the answer, and the Republican Party often makes the mistake of trying to lean closer to the Democratic Party in order to try to win independent voters.  But in the process, the GOP seems to have lost the values and principles that once made it so appealing to so many of us.

We need fresh thinking, and we desperately need to return to the values and principles that once made this nation so great.  This is what I am proposing, and that is what so many other true conservatives across this land are fighting for.

If we keep doing what we have been doing, we are going to keep getting the same results.

If we want different results, we need real change, and that means getting rid of most of the people that are currently holding political office all across America.

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The breakout in Brent crude prices above $80 this week has prompted analysts at the sell side banks to start talking about a return to $100 a barrel oil. Even President Trump has gotten involved, demanding that OPEC ramp up production to send oil prices lower before they start to weigh on US consumer spending, which has helped fuel the economic boom over which Trump has presided, and for which he has been eager to take credit.

But to hear respected petroleum geologist and oil analyst Art Berman tell it, Trump should relax. That’s because supply fundamentals in the US market suggest that the recent breakout in prices will be largely ephemeral, and that crude supplies will soon move back into a surplus.

Indeed, a close anaysis of supply trends suggests that the secular deflationary trend in oil prices remains very much intact. And in an interview with MacroVoices, Berman laid out his argument using a handy chart deck to illustrate his findings (some of these charts are excerpted below).

As the bedrock for his argument, Berman uses a metric that he calls comparative petroleum inventories. Instead of just looking at EIA inventory data, Berman adjusts these figures by comparing them to the five year average for any given week. This smooths out purely seasonal changes.

And as he shows in the following chart, changes in comparative inventory levels have precipitated most of the shifts in oil prices since the early 1990s, Berman explains. As the charts below illustrate, once reported inventories for US crude oil and refined petroleum products crosses into a deficit relative to comparative inventories, the price of WTI climbs; when they cross into a surplus, WTI falls. 

Looking back to March of this year, when the rally in WTI started to accelerate, we can on the left-hand chart above how inventories crossed below their historical average, which Berman claims prompted the most recent run up in prices.

Comparative inventories typically correlate negatively to the price of WTI. But occasionally, perceptions of supply security may prompt producers to either ramp up – or cut back – production. One example of this preceded the ramp of prices that started in 2010 when markets drove prices higher despite supplies being above their historical average. The ramp continued, even as supplies increased, largely due to fears about stagnant global growth in the early recovery period following the financial crisis.

The most rally that started around July 2017 correlated with a period of flat production between early 2016 and early 2018.

Meanwhile, speculators have been unwinding their long positions. Between mid-June 2017 and January 2018, net long positions increased +615 mmb for WTI crude + products, and +776 for WTI and Brent combined.  Since then, combined Brent and WTI net longs have fallen -335 mmb, while WTI crude + refined product net long positions have fallen -225 mmb since January 2018 and -104 mmb since the week ending July 10. This shows that, despite high frequency price fluctuation, the overall trend in positioning is down.

And as longs have been unwinding, data show that the US export party has been slowing, as distillate exports, which have been the cash cow driving US refined product exports, have declined. Though they remain strong relative to the 5-year average, they have fallen relative to last year. This has accompanied refinery expansions in Mexico and Brazil.

Meanwhile, distillate and gasoline inventories have been building.

Meanwhile, US exports of crude have remained below the 2018 average in recent weeks, even as prices have continued to climb.

This could reflect supply fears in the global markets. The blowout in WTI-Brent spreads would seem to confirm this. However, foreign refineries recognize that there are limitations when it comes to processing US crude (hence the slumping demand for exports).

In recent weeks, markets have been sensitive to supply concerns thanks to falling production in Venezuela and worries about what will happen with Iranian crude exports after US sanctions kick in in November.

But supply forecasts for the US are telling a different story than supply forecasts for OPEC. In the US, markets will likely remain in equilibrium for the rest of the year, until a state of oversupply returns in 2019. But OPEC production will likely continue to constrict, returning to a deficit in 2019.

Bottom line: According to Berman, the trend of secular deflation in oil prices remains very much intact. While Berman expects prices to remain rangebound for the duration of 2018 – at least in the US – it’s likely markets will turn to a supply surplus next year, sending prices lower once again.

Listen to the full interview below:

 

 

 

 

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Authored by Mike Shedlock via MishTalk,

In the wake of Kavanaugh accusations, I reviewed my high school yearbook. It seems I took my best friend’s life savings.

I confess. I am accused of taking my best friend’s life savings.

Moreover, I do not even deny the possibility. I can even provide evidence for the disbelievers.

Formal Investigation

No doubt this admission of guilt is shocking to my readers, but I confess, the incident is true.

It was even the subject of a formal investigation by the priests at my Catholic high school, Danville, Schlarman.

The image shows me proudly displaying a winning hand. The guy on my left (right of me in the image) with the bad look on his face is my best friend.

Shocking Details

This event happened at a Catholic “retreat”. We were supposed to be praying.

Mercy!

I stood accused by Father Ted. It was a subpoena of first order magnitude. Father Ted demanded to know how much we were playing for.

Caught red-handed, I immediately confessed.

“Father, we were playing 2-cent ante, 15-cent limit,” I replied.

Readers, I know this is shocking. And I sincerely apologize for playing poker at a Catholic retreat.

More Confessions

My yearbook is full of incriminating evidence. I will leave the names of the accusers anonymous to protect the innocent. I can make copies available if necessary. These are actual comments in my high school yearbook.

1. “To the king of cards with many aces in the hole”

2. “I hereby declare that I owe you $12.00 as of Aug 23, 1971”

3. “To the luckiest kid poker” That’s where it ended. I do not know who wrote that. The ink was fading and ran out.

4. “You are the finest Euchre play in history. I will never forget all the pointers on trump”

5. “To that good old card shark. I finally wised up and quit playing with you guys”

6. “Mike … I am going to clean you at poker”

7. “I never played against you due to my thriftiness, but I always admired your gambling skills.”

Outside Retreat Card Discussion

We played 15-cent limit at retreat. Outside retreat is another matter. But it was not outrageous. My favorite form of the game was 10-cent ante, $1.00 limit. High-stakes was 50-cent ante, $2.00 limit.

I did far better at $1.00 limit. Hint: think of the ante to bet ratio.

I kept detailed records, regardless of stakes.

My record at high-low games was about 90%. At straight high, it was in the low to mid 60% range. But even then, my average win was way higher than my average loss.

High-Low is easy. NEVER play for high. Seriously, I once threw away QQQ as starting three cards in 7-card stud high-low, and I assure you that is the correct play.

Amusingly, people think a pair of jacks is a good hand. JJ is NEVER good at high-low. Heck, QQQ is not good. Perhaps I can explain in an addendum.

I financed my way through college playing poker. If that sounds impossible, note that tuition at the University of Illinois was about $250 a semester in 1972.

A $150 win was over half a tuition. My average win at $2 limit was about $65. My average loss was under $20. My average win at $1.00 limit was higher and I rarely lost.

I capped my losses at $20. And I won far more than I lost, even at straight-high. Occasionally, I racked in $100 wins.

If I was ever up $40, I would quit if I dropped below +$20. I never turned a $20 ahead into a loss. This is simple money management. It’s not applicable to table stakes Hold-em.

By the way, if you think you are an excellent Euchre player, most likely you are not. Understanding the rules of the game are one thing. Knowing what to do in every form of the game (two-handed, partner, 6-card bid with 4 players, three-handed) is another.

I started a book on Euchre once, but I decided there was not enough interest. I suspect no one would answer my euchre quizzes properly.

I believe I am amongst the world’s best, while freely admitting overconfidence is extremely rampant. Anyone interested in a euchre quiz?

Fickle Water Color Memories

With poker and euchre discussion out of the way, let’s return to point 8.

“Mike, you said my party is the best you ever went to. THAT is what I will never forget” (emphasis on THAT is hers).

The person who wrote number 8 is female. At a later reunion, she did not recall what he wrote. She forgot. Totally.

So much for “THAT”.

Self-Assessment

People think they will remember things, but they don’t.

Worse yet, the vast majority of people cannot self-assess.

In general, people overestimate their recollection of things as well as their abilities.

I have a near-photographic memory of some things. I know where I was sitting in grade school and high school, in most, but not all classes. I know where I was sitting and what direction I was facing, and where everyone else sat when I played critical hands at poker, bridge, and even euchre, from decades ago.

But I am damned lousy at names. Last week I called someone Jason, when his name was Josh. I live in constant fear of introductions. Even if I know a person’s name stone cold, minutes before an introduction, I can stumble at the introduction.

I suspect fear of making a mistake causes mistakes. But that is not the point. Memory and self-assessment are the points.

People think they remember things accurately, but they don’t, and they don’t recognize what they are bad at.

Turning to the political.

Believing Ford vs Believing Ford Believes What She Says

Belief that Ford’s allegations are true are vastly different than believing Ford believes what she is saying.

Memories change. They can be planted. They can be totally imaginary. They can be dreams.

In general, people believe what they want to believe.

Vivid Dreams

I have vivid dream memories.

Currently, my most frequent dreams are being chased by someone in Danville, Illinois or Mexico.

Previously, my most common dream was that of being one credit hour short of graduating. This happened very frequently after graduation and for decades after.

I would wake up, seriously wondering how the hell I was going to hide to my employer that I never graduated.

I also had frequent vivid dreams that a girl I dated in college and who broke up with me called me and wanted to get back together.

On two occasions, I was happy all morning about phone calls that never happened.

If I can believe for hours that something happened that did not come close to happening, is it not possible for someone to perpetually believe a falsehood?

Are we really supposed to believe the memory of a 15-year-old female who may have been stone drunk at the time, when there is no other evidence?

People Believe What They Want

I suspect that 70% of the alleged MeToo allegation are in fact accurate. Perhaps another 15% or so are reasonably accurate.

If so, that makes it 85% likely such accusations are reasonably correct.

Heck, add another 5 percentage points and call it 90%.

The problem is 10% of the accused are innocent.

If there is a reliable witness, the odds have to increase. If not, they have to decrease.

In the case of Kavanugh, there is no reason to believe any of the accusers. Evidence suggests there is every reason to believe the accusations are either false memories or purposeful lies.

This is not a court of law where one is obligated to specified standards. Yet, that does nor morally justify presumption of guilt.

Benefit of the Doubt

• Let’s give Ford the benefit of the doubt because that is what the evidence suggests.

• Let’s also give Kavanaugh the benefit of the doubt because that is also what the evidence suggests.

What do you have?

False memories by Ford. That’s what.

Admit Now, Before It’s Too Late

Meanwhile, people peruse yearbooks and take things totally out of context.

Admit now or be damned forever.

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According to the latest estimates released by Edmunds, new vehicle sales for September are expected to collapse both on a monthly basis and year-over-year basis. The company predicted that 1,392,434 new cars and trucks will be sold in the U.S. in September, which makes for a estimated seasonally adjusted annual rate (SAAR) of 17 million. This will be a 5.4% decrease from last month and an 8.3% drop from September of last year.

This comes despite both Septembers facing large hurricanes, Harvey in 2017 and Florence this year. 

Jeremy Acevedo, Edmunds’ manager of industry analysis, stated: “Vehicle replacement demand following Hurricane Harvey bolstered auto sales last September, and Hurricane Florence has had a very limited impact on auto sales this month, which are the primary reasons why we’re seeing this year-over-year decline. With that said, a SAAR of 17 million is certainly not an unhealthy number — September is still shaping up to be a robust month for sales.”

The SAAR pushing above 17 million is likely a product of increased incentives which were cut sharply in recent months, and dealers getting ready to navigate sell-downs for the most recent model year, according to the report.

Acevedo continued: “Labor Day sales typically help get the month of September off to a solid start. Now that we’re heading into the fourth quarter and more 2019 model year vehicles are making their way to showrooms, automakers and dealers are likely making more of a concerted effort to address lagging inventories.”

Edmunds also noted that the number of used car sales was on the rise and that fleet transactions made up 15.2% of total sales for September 2018:

Edmunds estimates that retail SAAR will come in at 14.4 million vehicles in September 2018, with fleet transactions accounting for 15.2 percent of total sales. An estimated 3.3 million used vehicles will be sold in September 2018, for a SAAR of 39.6 million (compared to 3.4 million — or a SAAR of 39.7 million — in August).

This comes after we reported a sharp decline in deliveries back in July, even on the heels of pervasive discounts. Back then we suggested that these incentives were the dynamo that drove purchases to a plateau of between 17 and 18 million units over the past three years to begin with.  It increasingly appears that this may have been the case.

The drop in sales capped another rough month for the auto industry during which Detroit’s carmakers all revised their earnings guidance lower and Ford embarked on a five-year restructuring plan. Earlier this week, we reported that Ford’s CEO claimed that President Trump’s auto tariffs had cost the company $1 billion in profits. 

Additionally, as Bloomberg added, the July month “will [have] underscore[d] investor fears that auto sales have peaked and that, without ever-higher sales incentives to keep consumers interested, demand will continue to soften.”

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Authored by Ray Dalio via LinkedIn.com,

The following comes from Part I of Big Debt Cycles, which is available for free here:https://www.principles.com/big-debt-crises/.

Why Do Debt Crises Come in Cycles?

I find that whenever I start talking about cycles, particularly big, long-term cycles, people’s eyebrows go up; the reactions I elicit are similar to those I’d expect if I were talking about astrology. For that reason, I want to emphasize that I am talking about nothing more than logically-driven series of events that recur in patterns. In a market-based economy, expansions and contractions in credit drive economic cycles, which occur for perfectly logical reasons. Though the patterns are similar, the sequences are neither pre-destined to repeat in exactly the same ways nor to take exactly the same amount of time.

To put these complicated matters into very simple terms, you create a cycle virtually anytime you borrow money.

Buying something you can’t afford means spending more than you make. You’re not just borrowing from your lender; you are borrowing from your future self. Essentially, you are creating a time in the future in which you will need to spend less than you make so you can pay it back. The pattern of borrowing, spending more than you make, and then having to spend less than you make very quickly resembles a cycle. This is as true for a national economy as it is for an individual. Borrowing money sets a mechanical, predictable series of events into motion.

If you understand the game of Monopoly®, you can pretty well understand how credit cycles work on the level of a whole economy. Early in the game, people have a lot of cash and only a few properties, so it pays to convert your cash into property. As the game progresses and players acquire more and more houses and hotels, more and more cash is needed to pay the rents that are charged when you land on a property that has a lot of them. Some players are forced to sell their property at discounted prices to raise that cash. So early in the game, “property is king” and later in the game, “cash is king.” Those who play the game best understand how to hold the right mix of property and cash as the game progresses.

Now, let’s imagine how this Monopoly® game would work if we allowed the bank to make loans and take deposits. Players would be able to borrow money to buy property, and, rather than holding their cash idly, they would deposit it at the bank to earn interest, which in turn would provide the bank with more money to lend. Let’s also imagine that players in this game could buy and sell properties from each other on credit (i.e., by promising to pay back the money with interest at a later date). If Monopoly® were played this way, it would provide an almost perfect model for the way our economy operates.

The amount of debt-financed spending on hotels would quickly grow to multiples of the amount of money in existence.

Down the road, the debtors who hold those hotels will become short on the cash they need to pay their rents and service their debt. The bank will also get into trouble as their depositors’ rising need for cash will cause them to withdraw it, even as more and more debtors are falling behind on their payments. If nothing is done to intervene, both banks and debtors will go broke and the economy will contract. Over time, as these cycles of expansion and contraction occur repeatedly, the conditions are created for a big, long-term debt crisis.

Lending naturally creates self-reinforcing upward movements that eventually reverse to create self-reinforcing downward movements that must reverse in turn. During the upswings, lending supports spending and investment, which in turn supports incomes and asset prices; increased incomes and asset prices support further borrowing and spending on goods and financial assets. The borrowing essentially lifts spending and incomes above the consistent productivity growth of the economy. Near the peak of the upward cycle, lending is based on the expectation that the above-trend growth will continue indefinitely. But, of course, that can’t happen; eventually income will fall below the cost of the loans.

Economies whose growth is significantly supported by debt-financed building of fixed investments, real estate, and infrastructure are particularly susceptible to large cyclical swings because the fast rates of building those long-lived assets are not sustainable. If you need better housing and you build it, the incremental need to build more housing naturally declines. As spending on housing slows down, so does housing’s impact on growth. Let’s say you have been spending $10 million a year to build an office building (hiring workers, buying steel and concrete, etc.). When the building is finished, the spending will fall to $0 per year, as will the demand for workers and construction materials. From that point forward, growth, income, and the ability to service debt will depend on other demand. This type of cycle – where a strong growth upswing driven by debt-financed real estate, fixed investment, and infrastructure spending is followed by a downswing driven by a debt-challenged slowdown in demand – is very typical of emerging economies because they have so much building to do.

Contributing further to the cyclicality of emerging countries’ economies are changes in their competitiveness due to relative changes in their incomes. Typically, they have very cheap labor and bad infrastructure, so they build infrastructure, have an export boom, and experience rising incomes. But the rate of growth due to exports naturally slows as their income levels rise and their wage competitiveness relative to other countries declines. There are many examples of these kinds of cycles (i.e., Japan’s experience over the last 70 years).

In “bubbles,” the unrealistic expectations and reckless lending results in a critical mass of bad loans. At one stage or another, this becomes apparent to bankers and central bankers and the bubble begins to deflate. One classic warning sign that a bubble is coming is when an increasing amount of money is being borrowed to make debt service payments, which of course compounds the borrowers’ indebtedness.

When money and credit growth are curtailed and/or higher lending standards are imposed, the rates of credit growth and spending slow and more debt service problems emerge. At this point, the top of the upward phase of the debt cycle is at hand. Realizing that credit growth is dangerously fast, the central banks tighten monetary policy to contain it, which often accelerates the decline (though it would have happened anyway, just a bit later). In either case, when the costs of debt service become greater than the amount that can be borrowed to finance spending, the upward cycle reverses. Not only does new lending slow down, but the pressure on debtors to make their payments is increased. The clearer it becomes that debtors are struggling, the less new lending there is. The slowdown in spending and investment that results slows down income growth even further, and asset prices decline.

When borrowers cannot meet their debt service obligations to lending institutions, those lending institutions cannot meet their obligations to their own creditors. Policy makers must handle this by dealing with the lending institutions first. The most extreme pressures are typically experienced by the lenders that are the most highly leveraged and that have the most concentrated exposures to failed borrowers. These lenders pose the biggest risks of creating knock-on effects for credit worthy buyers and across the economy. Typically, they are banks, but as credit systems have grown more dynamic, a broader set of lenders has emerged, such as insurance companies, non-bank trusts, broker-dealers, and even special purpose vehicles.

The two main long-term problems that emerge from these kinds of debt cycles are:

1) The losses arising from the expected debt service payments not being made. When promised debt service payments can’t be made, that can lead to either smaller periodic payments and/or the writing down of the value of the debt (i.e., agreeing to accept less than was owed.) If you were expecting an annual debt service payment of 4 percent and it comes in at 2 percent or 0 percent, there is that shortfall for each year, whereas if the debt is marked down, that year’s loss would be much bigger (e.g., 50 percent).

2) The reduction of lending and the spending it was financing going forward. Even after a debt crisis is resolved, it is unlikely that the entities that borrowed too much can generate the same level of spending in the future that they had before the crisis. That has implications that must be considered.

Can Most Debt Crises Be Managed so There Aren’t Big Problems?

Sometimes these cycles are moderate, like bumps in the road, and sometimes they are extreme, ending in crashes. In this study we examine ones that are extreme—i.e., all those in the last 100 years that produced declines in real GDP of more than 3 percent. Based on my examinations of them and the ways the levers available to policy makers work, I believe that it is possible for policy makers to manage them well in almost every case that the debts are denominated in a country’s own currency. That is because the flexibility that policy makers have allows them to spread out the harmful consequences in such ways that big debt problems aren’t really big problems. Most of the really terrible economic problems that debt crises have caused occurred before policy makers took steps to spread them out. Even the biggest debt crises in history (e.g., the 1930s Great Depression) were gotten past once the right adjustments were made. From my examination of these cases, the biggest risks are not from the debts themselves but from a) the failure of policy makers to do the right things, due to a lack of knowledge and/or lack of authority, and b) the political consequences of making adjustments that hurt some people in the process of helping others. It is from a desire to help reduce these risks that I have written this study.

Having said that, I want to reiterate that 1) when debts are denominated in foreign currencies rather than one’s own currency, it is much harder for a country’s policy makers to do the sorts of things that spread out the debt problems, and 2) the fact that debt crises can be well-managed does not mean that they are not extremely costly to some people.

The key to handling debt crises well lies in policy makers’ knowing how to use their levers well and having the authority that they need to do so, knowing at what rate per year the burdens will have to be spread out, and who will benefit and who will suffer and in what degree, so that the political and other consequences are acceptable.

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The deluge of leveraged loans is getting increasingly difficult to regulate as it takes over Wall Street. A new report brings up a perfect example of this: Bomgar Corp., who just lined up $439 million in loans. It was the company’s third trip to the debt markets this year and estimates have the company’s leverage potentially spiking as high as 15 times its earnings going forward, raising the obvious question of the risk profile of these loans.

As rates move higher like they are now, the loans – whose interest rates reference such floating instruments as LIBOR or Prime – pay out more. As a result, as the Fed tightens the money supply, defaults tend to increase as the interest expenses rise and as the overall cost of capital increases. And because an increasing amount of the financing for these loans is done outside of the traditional banking sector, regulators and agencies like the Federal Reserve aren’t able to do much to rein it in. The market for leveraged loans and junk bonds is now over $2 trillion. 

Escalating the risk of the unbridled loan explosion, none other than Janet Yellen – who is directly responsible for the current loan bubble – recently told Bloomberg that “regulators should sound the alarm. They should make it clear to the public and the Congress there are things they are concerned about and they don’t have the tools to fix it.”

Thanks Janet.

As we noted recently, the risks of such loans defaulting are obvious, including loss of jobs and risk to companies on both the borrowing and the lending side. 

Tobias Adrian, a former senior vice president at the New York Fed who’s now the IMF’s financial markets chief, told Bloomberg: “…supporting growth is important, but future downside risks also need to be considered.” He also stated that regulators had “limited tools to rein in nonbank credit”.

But you’d never know this by listening to the Federal Reserve. According to Fed chairman Jerome Powell, during his press conference Wednesday, the Fed doesn’t see any risks right now. Powell said that “overall vulnerabilities” were “moderate”. He also stated that banks today “take much less risk than they used to”. We’ll pause for the obligatory golf clap. 

* * *

The lenders for the Bomgar deal included Jefferies Financial Group Inc. and Golub Capital BDC Inc., names that are outside the reach of the Fed. The company itself used the astounding defense that its pro forma leverage may only be “about seven times earnings”, which for some reason they seem to think is manageable, despite it obviously being an aggressive amount of leverage.

And since lenders may not ultimately wind up being the ones that pay the piper in the case of a default, the standards are lax on all sides. These types of loans are generally either bought by mutual funds or sometimes packaged into other securities that are sold to investors.

Of course, the harder that regulators squeeze to try to prevent these types of loans, the quicker that the market slips past them evolves. Trying to tighten loan standards has instead resulted in the market shifting to less regulated lenders, including companies like KKR & Co., Jefferies and Nomura. Hedge funds are next.

The history of regulating leveraged loans goes back to 2013, when the Fed and the Office of the Comptroller of the Currency and Federal Deposit Insurance Corp. issued guidance that told banks what acceptable leverage was. It restricted traditional banks from participating in the riskiest of these deals. Jerome Powell in 2015 said that this type of regulation would stop “a return to pre-crisis conditions”. Yes, the same Jerome Powell who today doesn’t see any risk. 

Of course, Wall Street lobbied against this back then, as did Republican lawmakers, declaring it as an overreach of regulation. And so now that the market has evolved in its wake, the leveraged loan market has started to run amok again.

Joseph Otting, the former banker who leads the Office of the Comptroller of the Currency is quoted as stating in February that: “…institutions should have the right to do the leveraged lending they want as long as they have the capital and personnel to manage that.”

Trying to put a favorable spin on current events, Richard Taft, the OCC’s deputy comptroller for credit risk, stated this month: “There isn’t anything going on in the market right now that would cause us to increase our supervision of that because we are always looking at that type of portfolio.”

Increased demand also means that yields won’t rise much even though loan quality has gotten worse. Investors may not be compensated for the risk that they’re taking, as we pointed out recently . We quoted Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC, who stated: “It’s not a good time to be buying bank loans”.

He also noted something troubling which we have discussed on numerous prior occasions: the collapse in lender protections which are worse than usual as there’s a smaller pool of creditors to absorb losses, and as covenant protection has never been weaker.

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Authored by Ryan McMaken via The Mises Institute,

Often, when pundits and activists look at life expectancy data, they often find that the US has a lower life expectancy at birth than other wealthy countries. The common response is to then immediately assume that the United States must have lower life expectancy rates because it lacks so-called “socialized medicine.”

Never mind, of course, that government spending on health services is higher in the US than in nearly every other country, and is anything but a “free-market” health care system. The fact that the role of the private sector is relatively larger in the US, however, often serves as a point of fixation for those who favor even greater government intervention in the US health-care markets than already exists.

Blandly pointing to life expectancy data as evidence of the superiority of government-run health care systems fails to take into account all the real factors that go into a measure like life expectancy. In truth, life expectancy and mortality are determined by numerous factors other than the delivery system of health services. These include the prevalence of smoking, physical environment, physical activity levels, the use of opiates, and obesity. That is, in a country where daily habits and social conditions foster more overweight, drug-abusing people, any health care system will be starting out with a less healthy population in general — even before any treatment options are even considered.

Moreover, the presence of an increasingly limited private sector in the delivery of medical care is hardly the only way that the US differs from a variety of other wealthy countries. One could just as easily point to two other factors in which the US tends to stand apart from its peers — and which are likely relevant to the topic at hand: obesity rates and automobile usage. Those looking to blame “not enough socialized medicine” for lower life expectancy levels must therefore ignore the possibility that daily habits around personal transportation make a difference on health.

Indeed, given that obesity is more prevalent in the United States than in nearly every other country, this factor has been especially notable in helping to explain differences in life expectancy in the US compared to other nations.

As Samuel Preston and Andrew Stokes conclude in their study “Contribution of Obesity to International Differences in Life Expectancy“: “The high prevalence of obesity in the United States contributes substantially to its poor international ranking in longevity.” Similarly, in a separate study, Preston, Stokes, and Yana Vierboom found that as Americans became heavier from 1988 to 2011, and this “has reduced life expectancy at age 40 by 0.9 years in 2011 and accounted for 186,000 excess deaths that year.” They conclude that obesity has become a significant factor in slowing down improvement in US life expectancy compared to other countries.

Some might respond to these findings that life expectancy might improve more if only there were more health care services delivered at lower prices. This purely hypothetical notion can’t be disproven, of course, but we also know from experience that frequent usage of health care services is not the key ingredient in better health outcomes when related to obesity issues.

For example, we’ve long known that many immigrant groups have lower obesity rates and higher life expectancy than the native-born population in spite of having less access to health care services. As I noted in a 2015 article on alleged links between poverty and health outcomes, new immigrant groups become more obese and less healthy the longer they are in the country. This happens in spite of the increasing income that comes after immigrants establish themselves in the new host country.

American Cars and Obesity

In an odd way, we might even conclude that immigrant groups become victims of their own success as they become more acclimated to American habits of easy calorie consumption, eating out, and sedentary lifestyles — all of which are enabled by higher incomes and more access to entertainment and consumer products.

Indeed, we see internationally that richer countries become more obese. As incomes rise to higher levels, food prices tend to repeatedly fall relative to overall income. Moreover, “the density of fast food restaurants,” “reductions in time for preparing meals,” and declines in “job strenuousness” become contributing factors, as does an increase in the abundance of snack foods and high-calorie foods such as those containing animals fats.

All of these factors tend to accompany increasing economic prosperity.

Another major factor appears to be increasing reliance on personal automobiles for personal transport. Obviously, it doesn’t take a long or complex train of logic to understand that frequent use of automobiles often leads to less physical exertion overall. Easy access to automobiles can be linked to less of a reliance on more physically demanding forms of transportation such as walking, biking, or even taking public transport — which usually requires some walking. Users of automobiles rarely need walk beyond the driveway or the curb.

In a 2011 study by Sheldon Jacobson, Douglas M. King, and Rong Yuan, the authors found that vehicle usage and national obesity rates correlated “in the 99-percent range.”

In a post-study interview, Jacobson remarked:

“If we drive more, we become heavier as a nation, and the cumulative lack of activity may eventually lead to, at the aggregate level, obesity,” he said. … Jacobson chose annual vehicle miles traveled as a proxy for a person’s sedentary time because inactivity is most obvious when you are sitting in a car.

“When you are sitting in a car, you are doing nothing, so your body is burning the least amount of energy possible,” he said. “And if you are eating food in your car, it becomes even worse.”

And just how much more do Americans drive than residents in other countries? The indicators suggest a substantial difference.

Americans have typically traveled far more miles by passenger cars than is the case in European countries:

Taking the EU as a whole, as of 2008, we find that passenger kilometers per capita in the US totaled more than 23,000 while the total was under 10,000 in the EU.

Moreover, Americans tend to walk less and use bicycles less, when not using machine transport:

These high levels of travel by passenger car are made possible in part by a high level of automobile ownership. According to Adam Millard-Ball and Lee Schipper, in a study of “eight industrialized countries,” in the “US there are about 700 cars per 1,000 people (which is more cars than licensed drivers), and about 500 cars per 1,000 people” in the other countries measured. Other studies show an even larger gap, with researcher Todd Litman concluding: “In 2009 the U.S. had 802 vehicles per 1,000 population, which is much higher than most peer countries.” Using 2016 numbers from the European Union, and from the US and Canadian governments, we find that the total number of passenger cars per capita is more than 25 percent larger than Italy, the country with the second-largest number of passenger vehicles per capita:

The takeaway here is that Americans drive much more and walk rarely, thus creating conditions more ideal for a rising obesity rate — which then leads to more disease and to higher mortality. As Jacobsen, et al., found, the combination of declining physical exercise and rising vehicle usage are likely both key in rising obesity rates, and reversing the trend would require changing both factors:

Our analysis has suggested that reductions in driving may lead to reductions in obesity and thus that efforts to reduce automobile travel may have the added benefit of reducing obesity rates. It should be noted, however, that this likely require reductions in driving to be accompanied by increased use of active modest such as walking or cycling — the substitution driving by increased use of telecommunications, or simply spending more time in bed, would not have the desired effect.

Improving Health by Accident: The Cuban Experience

In a recent article in the journal Health Policy and Planning, authors Gilbert Berdine, Vincent Geloso, and Benjamin Powell noted that one of the reasons that life expectancy in Cuba remains relatively high is due to its lack of automobile ownership.

Specifically, a lack of automobile usage leads both to fewer traffic accidents and to residents engaging in more strenuous exercise. Looking at the decline in car usage in Cuba following the collapse of the Soviet Union — which caused a severe economic crisis in Cuba — researcher Iris Borowy concluded that the forced increase in walking and bicycling accidentally improved the health of Cubans. Borowy isn’t blind to the negative effects of Cuba’s economic crisis in this period. Nevertheless, the data does suggest that the necessity of greater physical exertion in daily life in this case did lead to less obesity and cardiovascular disease.

Borowy’s research highlights one other auto-related factor as well. She notes that a decline in auto ownership led to a drop in auto accidents:

[C]ar ownership is heavily restricted in Cuba and as a result the country’s car ownership rate is far below the Latin American average (55.8 per 1000 persons as opposed to 267 per 1000). A low rate of automobile ownership results in little traffic congestion and few auto fatalities. In Brazil, where the car ownership rate is 7.3 times above that of Cuba, road fatalities reduce male and female life expectancy at birth by 0.8 and 0.2 years.

In this respect, as with physical exertion related to automobile use, the US has the opposite problem to that found in the post-Soviet Cuban contraction.

According to the World Health Organization, the United States has automobile mortality rates well above those of other countries to which it is so often unfavorably compared in terms of life expectancy.

For example, the road traffic death rate in the US per 100,000 is 10.6. Among Western European countries, the country with the highest traffic death rate is Belgium, with a rate (6.7) that’s more than 30 percent below the American rate. Even countries that one would think would have similar road traffic deaths because of similar geographies — such as Canada and Australia — have road traffic death rates well below that of the United States .

Source: Table A2, Violence and Injury Prevention tables at World Health Organization.

As with obesity, road fatalities are not an insignificant factor in overall life expectancy, and are found to be a contributing factor to declining life expectancy in both the US and the UK. A 2013 study found that “transport injuries” contributed 18 percent toward a “life expectancy shortfall” found in men under 50.

Combining the realities of automobile accidents with the widespread usage of automobiles, we end up with a fatter, more accident prone population likely to die sooner. That’s not a recipe for a longer life expectancy. But it’s also not a problem that can be solved by simply throwing a few more tax dollars at a government health-care system.

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Tesla CEO Elon Musk says he is “deeply saddened and disappointed” by the Security and Exchange Commission’s lawsuit against him, in a Thursday afternoon statement to Business Insider. 

“This unjustified action by the SEC leaves me deeply saddened and disappointed. I have always taken action in the best interests of truth, transparency and investors. Integrity is the most important value in my life and the facts will show I never compromised this in any way,” said Musk. 

***

The SEC accused Musk of misleading investors and fabricating a claim when he tweeted that he had funding lined up to take the company private.

“In truth and in fact, Musk had not even discussed, much less confirmed, key deal terms, including price, with any potential funding source,” the SEC said in complaint filed Thursday in Manhattan federal court, less than two months after Musk’s tweet.

The complaint boils down to what the SEC thinks were “false and misleading” statements by Musk, to wit:

Musk made multiple materially false statements on August 7, and taken together, his August 7 statements left market participants with the false and misleading impression that if Musk chose to take Tesla private at $420 per share, the only outstanding requirement to be satisfied was a shareholder vote….

Musk’s statements regarding specific terms of a transaction to take Tesla private created the misleading impression that these terms had been decided upon, when in fact, they had not even been investigated or determined to be possible.

The SEC also claims that Musk “Knew or Was Reckless in Not Knowing that His Statements Were False and Misleading“:

Unlike market participants reading his tweets, Musk knew that his ostensibly “secured” funding was based on a 30 to 45 minute conversation regarding a potential investment of an unspecified amount in the context of an undefined transaction structure. Musk also knew that there were many uncertainties beyond just a shareholder vote that would have had to be resolved before any going-private transaction could have been possible. As a result, Musk knew or was reckless in not knowing that his August 7 statements were false and misleading.

The SEC also accused Musk of “Omitting Material Facts”:

Musk’s statements on August 7 also omitted material information. Musk had a duty to disclose material facts necessary to make his statements not misleading.

Despite receiving numerous inquiries from journalists, research analysts, and current Tesla investors indicating that they were confused by Musk’s tweets and that the August 7 blog post had not remedied that confusion, Musk did not attempt to clarify the August 7 statements until the blog post, “Update on Taking Tesla Private,” was issued on August 13.

Finally, the SEC charges that “Musk’s Tweets Caused Market Chaos and Harmed Tesla Investors“:

As a result of Musk’s false and misleading statements and material omissions, investors who purchased Tesla stock in the period after the false and misleading statements but before accurate information was made known to the market were harmed.

What is the SEC seeking?  Simple: to bar Musk as an “officer and director”:

The Commission brings this action against Musk pursuant to Section 21(d) of the Exchange Act [15 U.S.C. § 78u(d)] to enjoin the transactions, acts, practices, and courses of business alleged in this Complaint and to seek orders of disgorgement, along with prejudgment interest, civil penalties, and an officer and director bar against Musk.

* * *

Here are some of the other highlights:

This case involves a series of false and misleading statements made by Elon Musk, the Chief Executive Officer of Tesla, Inc. (“Tesla”), on August 7, 2018, regarding taking Tesla, a publicly traded company, private. Musk’s statements, disseminated via Twitter, falsely indicated that, should he so choose, it was virtually certain that he could take Tesla private at a purchase price that reflected a substantial premium over Tesla stock’s then-current share price, that funding for this multi-billion dollar transaction had been secured, and that the only contingency was a shareholder vote. In truth and in fact, Musk had not even discussed, much less confirmed, key deal terms, including price, with any potential funding source.

…

Musk knew or was reckless in not knowing that each of these statements was false and/or misleading because he did not have an adequate basis in fact for his assertions. When he made these statements, Musk knew that he had never discussed a going-private transaction at $420 per share with any potential funding source, had done nothing to investigate whether it would be possible for all current investors to remain with Tesla as a private company via a “special purpose fund,” and had not confirmed support of Tesla’s investors for a potential going-private transaction. He also knew that he had not satisfied numerous additional contingencies, the resolution of which was highly uncertain, when he unequivocally declared, “Only reason why this is not certain is that it’s contingent on a shareholder vote.” Musk’s public statements and omissions created the misleading impression that taking Tesla private was subject only to Musk choosing to do so and a shareholder vote.

….

Musk’s false and misleading public statements and omissions caused significant confusion and disruption in the market for Tesla’s stock and resulting harm to investors

….

By engaging in the conduct alleged in this Complaint, Musk violated, and unless restrained and enjoined will violate again, Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. § 78j(b)] and Rule 10b-5 [17 C.F.R. § 240.10b-5] thereunder

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