Month: September 2018

Authored by Jeffrey Snider via Alhambra Investment Partners,

There had been whispers that the FOMC would have to undertake a second “technical adjustment” this year. Is it coincidence that the eurodollar futures curve inverted on the same day, June 13, Jay Powell announced the first one? Perhaps, but given what we are talking about here there is a fair chance they are related, especially in the close aftermath of May 29.

What are we talking about? The effective federal funds rate (EFF) has spent much of this year vexing US central bankers. For reasons they can’t seem to pin down the rate has moved upward inside the policy “range.” That range is defined by the reverse repo (RRP) “floor” on the bottom. On top is, or was, IOER.

As EFF began to make officials squirm on its way up toward the upper parts of the range the FOMC in June voted for this “technical adjustment” to get it back under control, or try. IOER would be set 5 bps less than the upper bound so as to pressure the effective rate lower (under the theory of money alternatives). Thus, at the last “rate hike” RRP was raised by 25 bps while IOER only 20 bps.

In the months since, EFF has squeezed a little higher still. As of last week, it was 3 bps underneath IOER. At such a close level, some were wondering if the FOMC might vote for another adjustment to IOER the same as in June. EFF apparently needs another official push, the first one didn’t really do much.

Practically daring policymakers to do something about it, EFF moved up to 1.93% on Monday. It was the same just 2 bps less than IOER Tuesday, too (we don’t know what it was today, the last day before the current “rate hikes” are carried out, since FRBNY won’t publish the official calculations until tomorrow morning).

Though the Committee voted to raise the corridor yesterday, they will move both RRP and IOER by 25 bps – no second “technical adjustment” yet despite where EFF in all likelihood sits right now.

Why not?

To be candid, I think they are scared. After all, why make the first adjustment? The answer is any rebellion in federal funds. If EFF continues to behave independent of policy levers, corridors, and all moral suasion, then that sends the same chaotic signal as chaotic money markets have been sending since the initial breakdown in August 2007. In other words, if the Fed can’t control federal funds, what can it?

Nothing.

If they adjusted IOER a second time and EFF remained 8 bps or now 7 bps below the top, that would be 2 bps or possibly 3 bps above IOER. It would instead prove IOER is useless (not that we really need any more proof). That would further show that the Fed, by sticking with something so comprehensively and consistently ineffective, is in a tough spot with few actual control levers in just money markets – forget about anything else outside of the mechanical.

At this juncture, why risk placing a spotlight on IOER and having it blow up (again) in their faces? Better to watch EFF slowly boil up to it than to give this dysfunction signal a big push toward the wrong kind of confirmation at a crucial juncture.

Chicken hawks.

Better to be thought powerless and impotent than to adjust technically and remove all doubt. Central banks aren’t central, and you have to wonder if central bankers are finally starting to suspect this truth. 

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Despite the resistance of Italy’s finance minister Giovanni Tria who had pushed back against demands by the League and the Five Star Movement to push Italy’s budget deficit above 2% in 2019, moments ago the Italian budget negotiations reached a successful conclusion, when Italy’s Deputy Premier Matteo Salvini, and League leader, said that agreement had been reached on the 2019 deficit to be at 2.4% of GDP, as he and Di Maio demanded in recent days to fund what had emerged as key sticking point, namely Universal Basic Income for the people.

Commenting on the outcome, Italy’s other deputy premier Luigi Di Maio, said he had succeeded in a “budget for the people” adding that the budget cancels poverty thanks to “citizen’s income,” at a cost of €10 billion. He added that other measures include reform of job centers, pension reform, and a €1.5 billion fund for victims of bank crises.

Salvini and Di Maio said that Italy’s government is united on the budget goal, although it was unclear if Finmin Tria would stay on after his “fiscally prudent” position had been rejected.

Attention now turns to how Brussels will respond as it will certainly not be excited. Ahead of the decision, EU Commissioner Moscovici was quoted in la Stampa, saying that Italy’s deficit must stay below 2%, while the final number is 0.4% above this.

For now, there has been little reaction in assets, with Italian debt yields unchanged on the news after getting hit earlier, while EURUSD dipped slightly and continuing to trade near session lows.

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For ten years, two pharmacies just four blocks apart in Williamson, West Virginia, dispensed some 20.8 million prescription painkillers in a town of only 3,191 residents. Those shocking figures were released earlier this year by the congressional committee investigating the opioid crisis that has devastated the Rust Belt.

From December 2002 to January 2010, more than 335,000 prescriptions for painkillers were issued by Dr. Katherine Hoover at a small clinic in the struggling West Virginia town, a rate of about 130 per day.

In a recent interview via NBC News, Hoover argued that she did nothing wrong. “I prescribed narcotics to people in pain. I did everything I could to help people have a better life, which I told the FBI,” Hoover said. “Every prescription I wrote was justified for the person who had gotten it.”

Hoover, 68, wrote more opioid prescriptions than any other doctor in the state from 2002 to 2010, government investigators said in court documents.

As of 2016, West Virginia became one of the deadliest states for fatal opioid overdoses.

Court records show Hoover arrived in Williamson in 2002 and started working at the Mountain Medical Care Center, a private clinic which took anyone who could pay in cash.

Williamson is a small blue-collar city of some 3,000 residents just across the Tug Fork River from Kentucky. When the coal industry collapsed, it left behind many miners – many of whom were already reliant on painkillers.

Federal investigators told NBC News that Hoover and the other Mountain Medical Care employees exploited the system and reaped massive amounts of money in return. The clinic was a for-profit pill mill, charging $450 in cash for first-time clients, and investigators said doctors often did not even see the patients to whom they were giving prescriptions.

Clients who wanted a second prescription would pay $150 to a receptionist, who would hand out a new script after asking several questions, investigators claim. One investigator said, he was told by a nurse at the clinic to get an X-ray because “if the feds walk in right now, she wanted them to be able to pick up any chart that they want and find that the clinic is searching for what’s wrong with the patient.”

With a script in hand, clients would then walk down the street to either one of the two Williamson pharmacies; over the decade, some 20.8 million painkillers were dispensed.

“They called it ‘Pilliamson,’ instead of Williamson,” Mingo County Prosecuting Attorney Michael Sparks told The Charleston Gazette in 2011. “It was an open secret, you might say.”

Federal court documents showed Hoover was West Virginia’s top prescriber of controlled substances. She was described by the clinic’s owner as its “bread and butter.”

It all came to an end in 2010, however, when the government raided her clinic due to its excessive opioid prescribing. She immediately fled to the Bahamas but was not charged nor convicted for the excess prescriptions. This is different from some doctors and clinics that have been prosecuted during the opioid epidemic.

“Legal experts told NBC News that it would not have been difficult to extradite Hoover when she went to the Bahamas. But she was never prosecuted. One theory offered by legal experts and NBC News is the case against her may be difficult to prove — since she insists she did nothing wrong and took steps, like requiring patients take X-rays, to provide cover for her prescriptions. Another is that she may have been a government witness. We might never know the truth,” said NBC News.

West Virginia leads all other states in drug overdose deaths. The state had an age-adjusted drug overdose death rate of 52 per 100,000 people in 2016. Second-worst Ohio was at 39.1, nearly 25 % below West Virginia’s extraordinary rate of deaths.

In the early 2000s, the opioid crisis was in its earlier stages, first fueled by doctors like Hoover, but also well-intentioned doctors who thought opioids were the only solution to treat pain. The Charleston Gazette-Mail in West Virginia uncovered a shocking statistic: From 2007 to 2012, pharmaceutical companies dumped 780 million painkillers into the state — which has a total population of about 1.8 million.

As for Hoover’s prosecution, Valarie Blake, an associate professor at West Virginia University’s law school, told NBC News that state and federal prosecutors would face a difficult time convincing a jury that Hoover had committed a crime.

“It’s very difficult to prove these cases,” said Blake.

Pain management is very subjective, and corrupt doctors use X-rays or other documents to support their claims, Blake added.

During a recent congressional hearing of five Big Pharma executives over the deadly opioid epidemic, a Georgia lawmaker brought up Hoover’s name.

“Do you know whatever came about with Dr. Hoover?” Rep. Buddy Carter, a Republican, asked. “She fled to the Bahamas. She bought an island.”

Overprescribing triggered the opioid epidemic. Hoover like many other doctors have escaped charges. They exploited the system by playing by the book.

Yet while the government is finally cracking down on opioid abuse, the one question left is: why did the government allow pharmaceutical companies and for-profit pill mills to pump millions of highly addictive opioids into the Rust Belt in the first place?

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Authored by Mac Slavo via SHTFplan.com,

As debt and interest rates rise, the government is about to be in a disastrous situation. Very soon, they will spend more money paying interest on the national debt than they will on the bloated military budget.

By the year 2023, interest payments on the national debt could surpass the entire budget for the Department of Defense, according to the New York Times. The ballooning debt is being spurred by an inability by those who claim authority over the economy to stop spending and the hike in interest rates. With more and more money being robbed from the unborn and spent by the government and more going toward interest, political “leaders” will find it harder to do pretty much anything.

While many are worried about the crumbling infrastructure, others say it’ll be more difficult to make emergency moves like pulling the economy out of future recessions. Which is strange, because the government causes recessions and doesn’t “fix” them,they simply put band-aids on gaping wounds. This mentality that the government will save people when they are $21 trillion in debt is a delusional one, other economic experts have said.

In about 5 years, more than $900 billion in interest payments will be due annually, easily outpacing spending on several other socialist programs.

Already the fastest-growing major government expense, the cost of interest is on track to hit $390 billion next year, nearly 50 percent more than in 2017, according to the Congressional Budget Office. The inability of the government to rein in spending will eventually result in an economic meltdown the world had never seen nor is prepared for. The government literally cannot steal enough money from producers in the form of taxes to get out from under this problem anymore.

“It’s very much something to worry about,” said C. Eugene Steuerle, a fellow at the Urban Institute and a co-founder of the Urban-Brookings Tax Policy Center in Washington. “Everything else is getting squeezed.”  Gradually rising interest rates would have made borrowing more expensive even without any additional debt, but the government never cuts spending. In fact, Republicans, who are supposed to be “fiscally conservative”,  while holding all three houses of government,  approved a budget bill in February that raised spending by $300 billion over two years.  All of these problems will add to the financial pressure.

The deficit is expected to total nearly $1 trillion next year for the first time since 2012, under the Obama Administration.

Former chairman of the Federal Reserve, Ben Bernanke, has even begun to sound the alarm on the government’s spending problem. At a recent round-table discussion with reporters at the Brookings Institution, Bernanke, former Treasury Secretaries Henry Paulson, and Timothy Geithner all expressed concerns that the next economic crisis will come with policymakers being unable to do anything about it. –SHTFPlan

The trade war will also make things difficult for those already struggling to make ends meet as jobs are lost and prices are raised to cover the cost of tariffs. The economy’s immediate future is looking incredibly bleak.

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An alarming new report issued by the Department of Homeland Security (DHS) says that the government could soon push mechanisms ensuring that its TSA airport security personnel never selectively hasten the screening process in order for passengers to catch their flight on time, but that gathering biometric data through controls like facial recognition technology will soon be a requirement for all boarding procedures.

The new report on the Biometric Entry-Exit Program authored the DHS Homeland Security’s Office of the Inspector General gives a glowing review of controversial new biometric surveillance, already in a test roll out at dozens of major airports nationwide, but notes some hurdles remain to broader implementation, especially the “hurdle” of airlines insisting that passengers be allowed to make their flights on time.  

Over a year ago DHS and U.S. Customs and Border Protection (CBP) announced that they would integrate government databases with a private tech company to speed up biometric processing which involves the capturing of facial scans to match them with files already in the system. This initially rolled out only at a couple of select airports. But since that time the program has exploded to include a dozen or more international airports. 

It’s essentially what China has already implemented on a large, Orwellian scale, and involves plans for possible mandatory face scans for all travelers to foreign destinations. The new Biometric Entry-Exit Program report is among the first major reviews of the experimental program’s performance and effectiveness. 

And naturally the DHS bureaucrats’ absolute last concern is actual airport and airline timely travel and efficiency. The Intercept reports among the chief problems: “the report notes with palpable frustration, was that airlines insist on letting their passengers depart on time, rather than subjecting them to a Homeland Security surveillance prototype plagued by technical issues and slowdowns.”

The key section of the DHS report is as follows : 

Demanding flight departure schedules posed other operational problems that significantly hampered biometric matching of passengers during the pilot in 2017. Typically, when incoming flights arrived behind schedule, the time allotted for boarding departing flights was reduced. In these cases, CBP allowed airlines to bypass biometric processing in order to save time. As such, passengers could proceed with presenting their boarding passes to gate agents without being photographed and biometrically matched by CBP first. We observed this scenario at the Atlanta Hartsfield-Jackson International Airport when an airline suspended the biometric matching process early to avoid a flight delay. This resulted in approximately 120 passengers boarding the flight without biometric confirmation.

Later in the report deep concern is voiced over airlines’ consistently pushing for flights to depart in a timely manner. These pressures result in local TSA screening agents “Repeatedly permitting airlines to revert to standard flight-boarding procedures without biometric processing may become a habit that is difficult to break.”

The DHS complains about this despite that elsewhere in the report they admit, “airline officials we interviewed indicated the processing time was generally acceptable and did not contribute to departure delays.”

Citing the goal of being able to scan and capture biometric data on “100% of all departing passengers” by 2021, the report laments that current difficulties in the screening process could make this impossible, especially in light of the pesky airlines pushing for consistently timely departure. 

The report concludes that current logistical problems “pose significant risks to CBP scaling up the biometric program to process 100 percent of all departing passengers by 2021.”

In a worrisome section of the document, officials make the suggestion that “enforcement mechanisms or back-up procedures to prevent airlines from bypassing biometric processing prior to flight boarding.”

Meanwhile privacy advocates and civil libertarians have long decried the government overstep and abuse inherent in such biometric scanning.

One privacy researcher, Harrison Rudolph, who runs the Center on Privacy and Technology at Georgetown University Law School, was cited by NPR during the early phase of the program as saying: “DHS hasn’t issued a single rule under this program to protect Americans’ privacy,” and added, “So what DHS decides to do with this information tomorrow, I’m not sure. And without rules there may be few protections for Americans’ privacy.”

With such issues left completely unsettled, and with the government claiming it would never, never abuse such a technology… the consistent refrain in reports over the last year has been its fast coming to an airport near you. 

And clearly DHS and TSA could care less whether or not you actually catch your flight. 

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Authored by Vitaliy Katsenelson via RealInvestmentAdvice.com,

I simply don’t trust the fundamentals of the global economy right now. The system is built on quicksand.

Debt is growing globally and governments are running huge deficits while interest rates are still incredibly low. Looking at almost any metric, stock markets have been more expensive once in the last 100 years — just before the dot-com bubble burst. There is also another risk in a category of its own: China.

A recent Bloomberg report on Chinese real estate noted that from June 2015 through the end of last year, the 100 City Price Index, published by SouFun Holdings Ltd., rose 31% to almost $202 per square foot. That’s 38% higher than the median price per square foot in the U.S., where per-capita income is more than 700% greater than in China.

This China story gets more interesting. Most of these apartments are sitting empty because they are purchased as investments. Rental yields in China are 1.5%, while the cost of borrowing (mortgage cost) is around 5%-6%. Chinese consumer debt-to-GDP is much greater than it was in the U.S. during the 2008-09 financial crisis.

Since household real estate lending is 22% of Chinese banks’ assets, if you are the almighty Chinese government, you have a decision to make: Do you let real estate prices normalize (decline) and then suddenly discover that your financial institutions are bankrupt, or do you allow (and actually support) the inflation of housing prices?

Predictably, as the Bloomberg report relates: China is ramping up development, and rather than curtail leverage, banks are jumping into the speculative real-estate bubble: mortgage growth is now at 20%.

Which brings me to one of my all-time favorite books, “Margin of Safety,” by investing legend Seth Klarman, who writes:

“There is the old story about the market craze in sardine trading when the sardines disappeared from their traditional waters in Monterey, California. The commodity traders bid them up and the price of a can of sardines soared. One day a buyer decided to treat himself to an expensive meal and actually opened a can and started eating. He immediately became ill and told the seller the sardines were no good. The seller said, “You don’t understand. These are not eating sardines, they are trading sardines.”

Applying this to China, when an apartment becomes an unoccupied asset whose sole purpose to be used as a investment or speculation, it turns into a trading sardine. Its price will rise until — nobody knows; but at some point someone will metaphorically open that trading can and Chinese real estate prices will collapse, bringing the banking system and the nation’s economy down with them. Simply put, things that cannot go on forever don’t — it just feels like they’ll go on forever while you’re waiting for them to stop.

Today’s global investment environment is a game of musical chairs. Investors are up and marching along because the music is playing, hoping they’ll be able to grab a chair when the music stops (few will do so). Accordingly, I am investing as if the music might stop any second.

Over the past 10 years it has not paid to be cautious. Low interest rates drove prices of almost all assets higher. Pricier assets made people feel wealthier and thus magically created economic growth. Low interest rates also pushed people into riskier assets, thus creating a mismatch between the assets people hold and their true risk affordability and appetite.

So far, none of this has mattered — the more risk you took, the more money you made. It will matter when risk gets ugly, because investor reaction to it will be more irrational than usual. This is why my firm hedges our portfolios through put options.

The problem with an economy being propped up by artificially appreciated assets is that this pendulum swings both ways. At some point, prices will decline. No one knows what will cause the decline – maybe higher interest rates, maybe a presidential tweet, maybe the implosion of the Chinese economy, or maybe just because stock markets and real estate prices don’t grow to the sky. Or it could be triggered by something completely unseen today.

What is clear is that since interest rates are low and global economies are highly leveraged, central banks and governments will not have as much power to help.

This is one reason why my firm’s portfolio holds a lot of healthcare stocks, including Walgreens Boots Alliance. Healthcare companies have great balance sheets; their business is not cyclical (the demand for its products doesn’t fluctuate with the whims of the global economy); and there is a huge tailwind behind their backs in the form of the aging global population. Moreover, many of these stocks trade at highly attractive valuations.

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California psychology professor Christine Blasey Ford says she doesn’t “think” she paid for a polygraph examination concerning her sexual assault allegations against Brett Kavanaugh. 

When asked by prosecutor Rachel Mitchell Thursday afternoon who did pay for it, Ford stated that did “not yet” know who picked up the tab for the August 7 exam at the Maryland Hilton Hotel – which Ford attended after flying to Maryland. 

MITCHELL: Did you pay for the polygraph yourself?

FORD: I don’t think so.

MITCHELL: Do you know who paid for the polygraph?

FORD: Not yet, no.

Christine Blasey Ford, in Senate testimony, says she doesn’t know who paid for her polygraph test regarding sexual assault allegations against Brett Kavanaugh https://t.co/005BvMqW3Y pic.twitter.com/7aCI40i55v

— Fox News (@FoxNews) September 27, 2018

Mitchell then asked why polygraph administrator Jerry Hanafin did not conduct the exam in his Virginia office, and instead held it at a hotel next to Washington International Airport, Ford said: “I had left my grandmother’s funeral at that point at Fort Lincoln Cemetery that day and I was on a tight scheduled to get to make a plane to Manchester, New Hampshire.” 

Mitchell then asked “So you were administered a polygraph on the day that you attended your grand mother’s funeral?” to which Ford replied “Correct, or it might have been the next day.” In a subsequent hot-mic moment, Ford then turned to her attorney, Debra Katz, and said “I don’t remember the exact day.” 

Following a lunch break, Ford was once again asked who paid for the test – at which point her attorneys jumped in and said “Her lawyers” paid for it, “as is routine” he added. 

How do you not know if you paid for your polygraph or not?

— Stephen Miller (@redsteeze) September 27, 2018

I minored in psychology while in college and the idea that a professor of psychology knows NOTHING about polygraph tests is absolutely ridiculous.

If she truly doesn’t know anything about polygraph tests she shouldn’t be teaching psychology.#KavanaughHearings

— Thomas Hern (@ThomasMHern) September 27, 2018

We learned today that Ford cannot remember:
– Time/date/location of party
– Who drove her to party
– Who was at party
– Who pushed her into room
– Who drove her from party
– Date/who paid for her polygraph
– Grandmother’s funeral date?

But “100% sure” it was Kavanaugh 36 yrs ago

— Benny (@bennyjohnson) September 27, 2018 

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