Watch Live: GOP Senators Hold Press Conference To Discuss Kavanaugh Confirmation

Senate Judiciary Committe Chairman Chuck Grassley (IA) and Senate Majority Leader Mitch McConnell (R-KY) will be joined by GOP Senators Orrin Hatch (UT), John Cornyn (TX), Mike Lee (UT) and Thom Tillis (NC) for a Thursday afternoon press conference to discuss the nomination of Judge Brett Kavanaugh to the US Supreme Court. 

Watch: 

Earlier Thursday, GOP holdouts Jeff Flake (AZ) and Susan Collins (ME) backed an FBI report after the agency reopened its background investigation on Kavanaugh at their insistance – virtually guaranteeing Kavanaugh’s confirmation to the Supreme Court. 

“I think Susan Collins was quoted saying it was very thorough but no new corroborative information came out of it. That’s accurate,” Flake told reporters after viewing the FBI report in the Capitol Visitor Center’s secure compartmentalized information facility (SCIF) on Thursday. 

Democrats, meanwhile, are throwing a fit – as Democratic leaders Chuck Schumer (NY) and Dianne Feinstein (CA) held a press conference of their own earlier Thursday in which they said that the FBI report “looks to be the product of an incomplete investigation,” and refuted Grassley’s statement that there was “no hint of misconduct.” 

The odds of Kavanaugh’s confirmation, meanwhile, have shot up to 88% on PredictIt

Two weeks ago Kavanaugh’s odds of confirmation dropped as low as 36% (with an intra-day low of 26%). 

 

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Liquidity Crisis Looms As Global Bond Curve Nears “The Rubicon” Level

Authored by Mehul Daya and Neels Heyneke via Nedbank,

The first half of 2018 was dominated by tighter global financial conditions amid the contraction in Global $-Liquidity, which resulted in the stronger US dollar weighing heavily on the performance of risks assets, particularly EM assets.

GLOBAL BOND YIELDS ON THE MOVE AMID TIGHTER GLOBAL FINANCIAL CONDITIONS

Global bond yields are on the rise again, led by the US Treasury yields, which as we have highlighted in numerous reports, is the world’s risk-free rate.

The JPM Global Bond yield, after being in a tight channel, has now begun to accelerate higher. There is
scope for the JPM Global Bond yield to rise another 20-30bps, close to 2.70%, which is the ‘Rubicon level’ for global financial markets, in our view.

If the JPM Global Bond yield rises above 2.70%, the cost of global capital would rise further, unleashing another risk-off phase. Our view is that 2.70% will hold, for the time being.

We believe the global bond yield will eventually break above 2.70%, amid the contraction in Global $-Liquidity.

GLOBAL LIQUIDITY CRUNCH NEARING AS GLOBAL YIELD CURVE FLATTENS/INVERTS

A stronger US dollar and the global cost of capital rising is the perfect cocktail, in our opinion, for a liquidity crunch.

Major liquidity crunches often occur when yield curves around the world flatten or invert. Currently, the global yield curve is inverted; this is an ominous sign for the global economy and financial markets, especially overvalued stocks markets like the US.

The US economy remains robust, but we believe a global liquidity crunch will weigh on the economy. Hence, we believe a US downturn is closer than most market participants are predicting.

GLOBAL VELOCITY OF MONEY WOULD LOSE MOMENTUM

The traditional velocity of money indicator can be calculated only on a quarterly basis (lagged). Hence, we have developed our own velocity of money indicator that can be calculated on a monthly basis.

 

Our Velocity of Money Indicator (VoM)is a proprietary indicator that we monitor closely. It is a modernised version of Irving Fisher’s work on the Quantity Theory of Money, MV=PQ.

We believe it is a useful indicator to understand the ‘animal spirits’ of the global economy and a leading indicator when compared to PMIs, stock prices and business cycle indicators, at times.

The cost of capital and Global $-Liquidity tend to lead the credit cycle (cobweb theory), which in turn filters through to prospects for the real economy.

Prospects for global growth and risk assets are likely to be dented over the next 6-12 months, as the rising cost of capital globally will likely weigh on the global economy’s ability to generate liquidity – this is already being indicated by our Global VoM indicator

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Judge Rules Against Woman Mauled by Police Dog Because She Wasn’t the Intended Target

|||Janahorova/Dreamstime.com

On a Thursday night in July 2015, an Indianapolis police dog named Scooter was chasing a suspect on foot. After the suspect ran into Mara Mancini’s yard, she heard her own dogs barking and stepped onto her back porch to investigate. That’s when Scooter attacked Mancini, who was seven months pregnant at the time. He bit her repeatedly, tearing pieces of flesh out of her arms and thighs. She underwent several surgeries as a result of the attack.

Last week a federal judge rejected a lawsuit in which Mancini claimed the dog attack violated the Fourth Amendment’s ban on unreasonable searches and seizures. “Mancini and her son K.C. suffered horrendous injuries and a grievous lack of discretion by the officers,” wrote Judge Tanya Walton Pratt of the U.S. District Court for the Southern District of Indiana. But Pratt concluded that the attack was not a constitutional violation because Mancini was not the intended target of the chase.

Under Indiana Code 15-20-1-3, the owner of a dog that bites a person without provocation is liable for all damages. But the statute makes an exception for dogs owned by and performing duties on behalf of law enforcement agencies.

Jon Little, Mancini’s attorney, said she may appeal Pratt’s ruling. A state lawsuit related to he incident is still pending. Until then, Mancini will have to deal with irreparable nerve damage to her arm and medical bills that may force her into bankruptcy.

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Private Equity Is Turning Into “Musical Chairs” As Secondary LBOs Skyrocket

The concept of private equity firms buying and selling companies to and from one another has become far more pronounced over the last decade. Increasingly, PE firms find themselves passing around the same company multiple times, tacking on leverage in the process while often paying themselves hefty dividends.

FT highlighted some great examples of this in a recent article. For instance, Gala Bingo – an online bingo and casino company listed in London – merged with a rival in 2005 and was passed around Europe for nearly 10 years, undergoing five different sales between 2002 and 2015. In the process, its leverage continued to increase while successive owners paid themselves handsomely.

A timeline of the company’s history, provided by FT, is as follows:

  • 2002 – Charterhouse buys Coral in a £860m deal, or 10 times ebitda

  • 2003 – Candover and Cinven become new owners of Gala in £1.24bn deal, or 8.6 times ebitda, and a total debt ratio of 5.8 times ebitda

  • 2005 – Candover and Cinven receive dividends of £275m. Permira buys 30 per cent of Gala. Coral is then sold to Gala

  • 2008 – Gala Coral’s net debt reaches 7.4 times ebitda

  • 2010 – A group of lenders led by Apollo takes control of Gala Coral

  • 2011 – The group’s ebitda drops 15 per cent year on year

  • 2015 – Ladbrokes bought Gala Coral in a deal that valued the business at 9.5 times ebitda and net debt at 4.1 times. 

  • 2018 – In March GVC acquired Ladbrokes Coral Group. The Gala and Coral brands now trade separately.

Up until about the time of the global financial crisis, the business was performing well. After that, the past decade has been spent cutting back on locations and laying off employees as a result of market conditions and their leverage. The company eventually went under in 2016, but was rescued by Ladbrokes, who themselves were purchased by GVC Holdings, earlier in 2018.

At a time when you would expect these types of deals to come as a warning sign to the market, it appears the opposite is happening. FT states that in the last year, the industry performed 576 secondary style deals, wherein a private equity firm sells a stake in a company or a whole company, to another private equity firm. This compared to 394 of these transactions prior to the crisis in 2007. Obviously, as interest rates rise and we continue to test the limits of this bubble, the risks of such deals become more pronounced.

Because these deals drain companies of cash and increase their leverage, even small increases in interest rates can have profound aftershocks. A study performed by the Said Business School at Oxford University recently showed that these secondary deals have lower returns than other deals when done by a firm that’s under pressure to deploy capital. The study analyzed 2,137 companies owned by 121 private equity firms.

In essence, what is happening is a dangerous game of musical chairs with these companies.

Neel Sachdev, a leveraged finance partner at the law firm Kirkland & Ellis, told FT: “Every time a company is sold between private equity funds there is a risk that you are taking off some of the potential upside as the business may have been optimised through acquisitions or operational improvements. So there may be less potential upside every time you pass it on. The risk is really that there is not that much juice in the lemon to squeeze.”

Simmons Bedding in the United States is another example of these types of transactions. It was bought and sold seven times over the course of two decades by numerous private equity companies. It filed for Chapter 11 in 2009 and the company had to lay off 25% of its workforce as a result. Regardless, the former owners still made a profit of $750 million through special dividends.

Private equity likes these types of secondary deals because a lot of the due diligence is already done. All you have to do is apply the leverage and take your cut. Per Stromberg, a professor of finance and private equity at the Swedish House of Finance, told FT: “Buyout groups like secondaries because they are buying an asset from a peer and it feels like there is not much work to do. But often this leads to them paying too much.”

Of course, those in the industry like Paul Dolman, a partner at London-based law firm Travers Smithwho has worked on 60 of these types of deals over the past 15 years, make the argument that they’re just fine.

“The key is to work out why the house is selling. If it is because they are under pressure to return money to investors, then you can understand that is a credible reason. If it is because they think the market is about to turn and they have sweated the asset as much as they can, then that is clearly not a good reason,” Dolman stated.

The people who advocate for these deals argue that private equity can bring in necessary injections of capital to help out these companies at their worst points. They point also to successful deals, like vehicle leaser Zenith, who has returned to post great numbers after being owned by four private equity companies. Of course, that wasn’t before one of its private equity owners tripled their initial investment before selling to another firm. Advocates for these deals also argue that they are just part of an industry that is cash flush.

Joana Rocha Scaff, head of European private equity at the investment management firm Neuberger Berman, has a different take.

“When rates rise, pay attention because it may put significant liquidity pressures on these firms. In some cases liquidity is not being fully understood. People are putting a great amount of focus on the capital structure. But where is the cash?” she asked.

Lionel Assant, the European head of private equity at Blackstone (believe it or not) stated that these types of secondary transactions deliver meager returns.

“If the economy slows a bit, the multiples contract and I think investors are going to have very average returns . . . especially on secondary deals. The idea that because you can lever up a business at six or even seven times EBITDA today at a very cheap cost of debt and that you’re going to re-lever with cheap cost of debt in five years from now is obviously ludicrous,” he stated.

We hope, in the future, he takes his own advice.

He also concluded by stating the obvious: the game of musical chairs is fine when companies are being flipped around quickly in a euphoric economic environment, but in a recession, when the music stops, things can quickly go wrong.

“We don’t want to be in this game,” he concluded.

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Netflix Jail Documentary Misses the Big Question: Why Is This Happening?

'First and Last'Nobody in the Netflix documentary First and Last asks why Tyna, 20, and Keith, 23, are serving 180- and 30-day jail sentences entirely for personal marijuana use, or whether that’s the appropriate response for consumption of a substance that is now legal in several states.

In fact, despite spending days documenting the lives of about two dozen people detained in Georgia’s Gwinnett County Jail, First and Last is strangely incurious about the larger picture of America’s incarceration problem. More troubling, the documentary is totally silent about serious accusations (and lawsuits) against the jail claiming abusive behavior by guards against people detained there.

First and Last, released on Netflix in September, gets its name from its gimmick: The six-episode docuseries focuses entirely on individuals as they are processed into the jail after being arrested and their final hours before they are released (and in some cases, what follows afterward).

The concept can be compelling when handled well. And at times, First and Last hits the mark, particularly when following folks like William, a homeless alcoholic who has been in the jail 46 times, who insists he’s going to get clean and then almost immediately slips back into drinking after some passersby give him beer money at the gas station right outside the jail. Nobody needs to spell it out when we see guards confiscating all the toothpaste and soap that the other inmates have donated to William, and then releasing him in his filthy old clothes.

Mostly, though, First and Last cleaves closely to the familiar reality show documentary style seen on cable television. People who have been detained or are serving sentences talk to each other and to the camera about how the experience makes them feel. We witness what these moments in jail are like, and it certainly seems miserable. Nobody will come away from First and Last wanting to get arrested or seeing it as an inconsequential experience.

But reducing all these stories and experiences into brief slices of time also has the effect of completely removing valuable context that should make the viewer question why this system operates the way it does. When people get arrested and brought to Gwinnett County Jail, they are processed and bluntly given bail amounts based on a schedule connected to the criminal charges. If they cannot pay the money, they’ll be processed into the jail as a prisoner and put in with the same population who are serving short sentences for low-level crimes. They are presumed innocent, and often are neither dangerous, nor have they even committed crimes where there are “victims.” Nevertheless, if they can’t find somebody to cover the bail requirement, or afford to pay a bondsman to cover it for them, they may end up in jail for days before even seeing a judge.

The thoughtless, mechanized nature of jail intake is highlighted by Angela, 62, who was arrested after a tenant in her home accused her of assault in a dispute. Angela says the man is a con artist who fraudulently accused her because she was going to throw him out. Her claim of innocence seems to be supported after she’s released, when narration blandly informs us her charges were dropped and the man who accused her was subsequently arrested and brought to that very same jail.

But before can she go free, Angela’s told she has to pay a $1,300 bond. She’s thoroughly dehumanized (she was brought in wearing her bathrobe, having been arrested by police in the middle of the night, apparently) and says, “It doesn’t matter what your situation is. You’re a criminal once you come through those doors.”

But Angela’s not a criminal, and First and Last is mostly indifferent to the fact that half of the people they’re documenting have not been convicted, merely arrested. One guard thinks Angela’s anger at being arrested in the first place is hilarious. Nobody asks the guard what Angela, who has never been arrested before, is supposed to feel after being cuffed and caged over a petty argument, and then told she has to pay money to get out of jail.

A sad sack named Benjamin, 46, an unemployed and depressed alcoholic, is arrested for falling three months behind in his child support. He owes $4,600. So his bond is set for $4,600, higher than almost everybody else highlighted in the series, including some others arrested for assault. “I need help,” he says. “This is not help. This is hell.” Benjamin spends 22 days in jail because his brother won’t help him bail out, insisting that this experience is some sort of tough love. Benjamin’s brother instead helps Benjamin sell his home in order to pay the child support. Nobody asks whether there were ways to achieve this same outcome—paying child support!—without tossing Benjamin in jail.

The documentary does not engage in any way with the current push to abolish the use of cash bail as the sole means to determine who ends up stuck in jail prior to having their cases heard, even though nearby Atlanta is reforming its system to try to make it less harsh on the poor. The people who run the prison aren’t asked about any of this.

Instead, the guards and employees at Gwinnett County Jail are often deployed as talking heads to explain how the system works. And it ends up leading to some strange moments where the viewer is left wondering if the jail’s staff should be looking in the mirror before lecturing inmates. Cedric, 26, serving a short sentence for shoplifting, says he’s bipolar and requested medication during his stint (he received none). A member of the jail’s medical staff explains how the system provides treatment for inmates, but we never really get an explanation as to why Cedric never got his pills, other than a vague “falling through the cracks” reference.

And Cedric is far from the only Gwinnett Jail inmate complaining that his medical needs were ignored. The jail is also being sued by the family of Chris Howard, who died in the jail in 2017 after guards initially refused to give him medical treatment after a seizure caused by his extremely low blood sugar. Kira Lerner notes at The Appeal that there’s a federal grand jury investigation into the behavior of Gwinnett County Sheriff R.L. “Butch” Conway’s office.

Morgan, 19, sentenced to 30 days entirely for traffic violations (driving without a license and then a second charge later for speeding while he was on probation for the first charge), ends up serving much of his sentence in solitary confinement for “being disrespectful and standing at the door” to his cell. A member of the jail staff explains tells us why Morgan was put in solitary, considered by many human rights activists to be a form of torture, but nobody ever tackles the tough questions of proportionality, the danger posed by these disrespectful actions, or whether Morgan has a right to be surly.

“Worse than Guantanamo,” reads the headline for a story at The Appeal, published on Monday, describing complaints by dozens of Gwinnett County detainees who say they were physically abused or subjected to excessive force by jail guards. The jail is being sued in federal court for its use of physical restraints and a SWAT-style “Rapid Response Team” that responds to those deemed “disruptive” with excessive force.

None of these complaints or problems are referenced at all in First and Last. A viewer of the series would have no idea that people have levied some serious charges about the way the guards behave. At no point does the series show the Rapid Response Team dealing with “disruptive behavior,” nor is there any acknowledgement that such a team even exists. Rather, Conway and the jail staff are extended special thanks in the show’s end credits.

The series also regularly name-drops Securus, the company who provides phone service to those detained at this jail and many other detention centers (and has recently gotten some bad publicity for allegations of recording phone calls between inmates and lawyers and for data breaches). Securus and the jail’s phone systems are referenced frequently enough to feel like a form of product placement (and we are permitted to listen in to the phone calls of those who agreed to participate in the documentary). A representative from the company did not return a call from Reason to ask whether they played any role with the filming of the documentary. A media representative for Netflix’s non-fictional shows also did not return an email requesting further information.

The conclusion of the series features a number of the detainees and prisoners talking about what they’ve learned from their time in the jail, with a heavy emphasis on “going straight” and fixing up their lives. At no point does anybody question whether these people should have been imprisoned for these minor misdemeanors, or even arrested, in the first place. The viewer is left with the unsettling feeling of the jail as an uncontrollable machine that is to be avoided, not a tool that’s supposed to actually protect public safety. And maybe that’s not the wrong message, given what else we know about what’s going on in Gwinnett County.

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Tesla Shares Tumble As Judge Asks SEC To Justify Musk’s Sweetheart Deal

Every Tesla bear who watched in disbelief as the company’s shares rocketed higher on Monday should be thanking U.S. District Judge Alison Nathan.

That’s because Nathan, who is ultimately responsible for ratifying Musk’s sweetheart deal with the SEC, has reportedly asked both Musk AND the SEC to explain “why [the deal is] fair and reasonable.” An explanation that – we’re sure – many market participants and securities law experts would also be eager to hear.

Tesla

Tesla shares dropped 5.3% on the news, which has reopened the possibility that Musk might be outed as Tesla CEO, threatening the considerable “Musk premium” that has for years been the most relevant factor in determining the value of Tesla stock.

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Exposing The Fallacy Of Synchronized Growth

Authored by Daniel Lacalle via DLacalle.com,

Please find the complete interview here.

The fallacy of synchronized growth.

We have been hearing from international bodies, from central banks that we were living in a synchronized growth territory. That we were seeing developed markets grow faster than what was typical while emerging markets were also growing in tandem. And that the economies were much healthier, that everything was much better, and that 2018 was a year in which we would see the confirmation of that synchronized growth trend and the reflation trade.

Well, it wasn’t the case. The case actually was that what we were being told was synchronized growth was actually synchronized debt growth. And that massive increase in debt that led to the highest level relative to GDP in history last year was creating massive problems, internal problems, in many economies that were getting used to cheap and easy money.

A very small, minuscule and completely moderate reduction in the balance sheet of the Federal Reserve of less than $260 billion, has created this reckoning. This reckoning that the reality that we were seeing globally was not a reality of higher growth, better
productivity, and more positive surprises. But the reality that it was just debt led bump up of a much clearer trend of secular stagnation.

So what happens is that we will likely see solutions that, instead of cleaning the system, will be solutions that will basically lead to more secular stagnation. Why?

Because what most central banks, what most governments will be doing, will be to try to avoid the pain. Avoid the pain of improving the economy.

What will they do then? What they will likely do is to perpetuate the problem via more demand-side policies. Therefore, this constant bailout of the less productive parts of the economies is actually more likely to be the “solution”.

What this leaves is higher debt because the misallocation of capital is actually incentivized, and malinvestment is actually promoted. Central banks being way behind the curve and at the same time, potential growth is being eroded.

We get out of crises in each of those countries with less growth than before and with higher
debt. It’s a very, very difficult combination because if you think about what would be an ideal solution, it would be for governments to do less of what they are used to do. And governments never see the problem as a problem of excess supply. And even less, a problem of excess spending.

Governments always see the problems of economies as a problem of demand, making a wrong diagnosis. Then they incentivize malinvestment and excess debt expecting that the collateral damage of higher debt will end up in a little bit more growth.

We will continue to have governments that see that the critical part is not incentivizing saving and incentivizing adequate investment, but credit growth at any cost.

And so if we put it all together, the reason why in 2018 we are seeing markets react aggressively to global imbalances is not that this is news to anybody. It’s because, in 2017 and 2016, the consensus was building to believe that magic actually existed. And that synchronized growth, all this beautiful central planning magic, was actually going to happen.

But the reality is that there is a longer-term trend, which is that rising debt, more demand-side policies, and constantly subsidizing and bailing out the lower productivity sectors in order to avoid pain, generates lower growth, low productivity, and obviously, higher debt. Secular stagnation.

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Black Man Cuffed on His Own Property While Moving Into New Home

A black military veteran is calling foul after Kansas police handcuffed him on his own property. His infraction? Moving into his new home.

Karle Robinson, 61, can understood why a Tonganoxie police officer was suspicious in the first place. It was past 2 a.m. in the morning, and he was trying to move a flat-screen TV into his house. What Robinson doesn’t get is why, after offering to retrieve documentation proving it was really his house, he was treated like a criminal.

“If I’d been a white man, you know that wouldn’t happen,” Robinson told The Kansas City Star while watching body camera footage of the incident. The video, along with Robinson’s interview with the Star, can be seen below:

In the footage, the officer, who’s alone, asks Robinson to stand against the side of the house. “Place your hands on top of your head for me,” the officer says before cuffing him.

Robinson didn’t resist, but he wasn’t happy. “I’m being handcuffed right here on my own damn property,” he told the Star. In total, Robinson was in handcuffs for about eight minutes. After backup arrived, two officer went into his house and found the paperwork proving his ownership. Police uncuffed him, apologized, and even helped him move the TV inside.

But he wasn’t about to let it go. Robinson filed a complaint with the Tonganoxie Police Department and spoke with Police Chief Greg Lawson. As a black man, he told the Star, “you’re guilty until proven innocent.”

Nothing came of his complaint, and Lawson defended his officer’s actions. “If I were on that call, by myself, no matter the race of the person, they would have been handcuffed,” Lawson said.

Reached for comment by Reason, Lawson says the officer was not in violation of department policy. “The department policy is that we’re going to follow the law as far as when we detain people…based upon reasonable suspicion or probable cause,” he says, explaining that it “primarily goes back to officer safety.”

So did the officer believe himself to be in danger? Not necessarily, Lawson says. But in cases like these, officers “want to be cautious and they want to make sure that they’re preventing any injury to themselves or the person that they’re actually confronting.”

Lawson went on to explain there had been “10-12 burglaries to autos” in the same timeframe, so police “were on alert to be looking out for anything overly suspicious.”

As Robinson noted, the problem in this case isn’t that the officer was suspicious. It’s the fact that in the absence of evidence, a law-abdiding citizen was treated llike a criminal on his own property.

And Robinson is not alone. Last month, I wrote about Akil Carter, a black teenager who was handcuffed by police even though he didn’t do anything wrong. A concerned couple had flagged down police because they thought he might be robbing two white women. In reality, one of the women was his grandmother, and the three of them were simply driving home from church.

Neither Robinson nor Carter were hurt. But it’s an affront to their constitutional rights when they’re handcuffed not because there’s evidence linking them to a crime, but because police want to be on the safe side.

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McElligott: This Is Why Yesterday’s Monster Selloff Was Different

There was something different about yesterday’s furious rate selloff.

That’s the post-mortem take from Nomura’s cross asset strategist Charlie McElligott, who notes that amid yesterday’s “Monster” rates selloff, overall volatility was surprisingly mundane (although it is certainly ticking up today, now that the liquidation has gone global.)

The difference also manifested itself in a violent repricing of economic expectations, which followed yesterday’s ADP print, which according to McElligott was a +3.5 std dev surprise while the record ISM Non-Mfg print was a whopping +5.8 std dev surprise.

As a result of the spectacular economic data, which followed the September monster average hourly earnings beat (and ahead of tomorrow’s NFP print which based on the ISM index could print as high as +500K jobs), as well as last week’s Fed meeting “that really accelerated this interest rate sensitivity to the economic data, when Chairman Powell iterated just how data-dependent the Fed’s policy normalization path will be going-forward, as opposed to auto-pilot“, the “growth skepticism” has – for now- evaporated as evidenced in Eurodollar futures calendar spreads, where as recently as late August, the market had only priced-in 1.5 hikes (~33.5bps) for all of 2019 versus the Fed’s projected 3 hikes (75bps); now, as of this morning, EDZ8Z9 has gapped wider and is now pricing-in over a full two hikes now (57.5bps).

In light of the above, the market also appears to have aggressively repriced the market’s long-run neutral rate (aka r-star) projection – a process which according to Nomura began in late Aug, but was kicked into overdrive from the early Sep, and which has now, according to McElligott who quotes Spinal Tap, “gone up to 11.”

Why is the higher r-star estimate a critical component of the latest market phase transition?

Because, as McElligott explains, “the higher the neutral rate projection, the more (theoretical) ability to digest additional rate hikes before Fed policy goes to outright “restrictive”—and as such, this has then caused investors to “push back” / delay their “end of cycle” projections from sometime in mid-2020 to now potentially into 2021, creating the recent positive “Cyclical Bullishness” in U.S. risk assets.”

It also explains the abovementioned lack of a volatility spike, because the inflection from “bear flattening”, which defined the yield curve for much of 2018, to “bear steepening” is sending an important message for stocks, as it’s this upgrading of R-star / neutral rate which is re-pricing the long-end of the curve.

Effectively the market is saying that in the absence of an “inflation shock” (which would drive a front-end yield spike / “power flattening” on “accelerated Fed),” that we are on track to “grow faster than we are tightening”

Another way of putting it is that Wednesday’s “economic assessment upgrade” and view that we are “growing faster than we are tightening” is why we are not seeing that same “rate – and VaR shock” contagion into risk-assets that defined the market in late January, early February, and which – as McElligott notes – “was BY-FAR the #1 client inquiry yday, i.e. ‘Why are higher yields not negatively impacting Stocks here?!’.”

Of course, had clients waited one more day, they would realized that perhaps it was just a question of the market’s delayed response. 

Which also brings us to another key question: if equity markets were not selling off – at least not until the last hour of trading (perhaps triggered by JPM’s late downgrade of Chinese stocks) – then who was dumping bonds?

McElligott’s answer is interesting: observing the open interest in the long bond future (USZ) which jumped 33k yday on 2x’s volume and on a day when the 2-5-30 UST Butterfly (shown below) richened 7bps — he notes there is some intrigue as to potential sources of yesterday’s massive selling—and is indicative of 1) foreign “real money” (i.e. China?) 2) risk-parity funds (Dalio) or 3) both. Of note: no CTAs have participated in the selloff yet. This could be a key catalyst as to when the next, and even greater, round of selling kicks in.

Sellers aside, another consequences of the upgrade in r-star is that yesterday’s move was opposite to the risk-negative steepening scenario which McElligott has pegged as a mid- 2019 potential, “where the steepening would conversely be driven by the front-end rallying, as “tighter financial conditions” in theory would negatively impact growth data and in-turn, cause market expectations of Fed hikes to the be REMOVED from the front-end.”

This is the dreaded “tightening into a slowdown” scenario.

Unfortunately for the bulls, it is this scenario that is manifesting itself today. It emerged overnight when rate weakness spilled over into equities, first in Asia, then Europe and finally in the US where the S&P has slipped to a 3 week low and the Nasdaq is down 2% amid a rout in tech shares.

To the Nomura strategist, there are two immediate reasons explaining the delayed response in stocks”

  • Higher “data-dependence”  also means an “asymmetric bias to react to positive data more than negative data”—i.e. the risk of “too good” of data means heightened potential for a Fed “policy error” / “over-tightening”
  • Chair Powell’s comments yesterday then underscored the Fed’s willingness to “go past neutral,” which means running beyond “restrictive” policy – meaning they are prepared to “pump the breaks” on an “overheated” economy via “accelerated tightening” policy

McElligott then brings up something we highlighted yesterday, namely that as a result of Powell’s determination to keep hiking, the risk is that the Fed Funds rate will eventually rise (well) above the neutral rate. To justify this point, he points out that March ’19 hike probabilities are now at 71% (was down at just 45% at the end of August) communicating that both Dec and Mar are now “done’ in the markets’ eyes. And, as we noted yesterday, two more hikes would put us above the (rising) neutral rate.

What happens at that point? As we laid out yesterday, and as McElligott notes, nothing good:

Historically, tightening cycles (especially where the effective Fed Funds rate runs north of the neutral rate) has meant some form of markets’ crisis along the way: Continental Bank failure / Latam debt crises in the early 80s; the Savings & Loans / Junk bond / Black Monday crises in the mid-to-late 80s / early 90s; the EM crises (Peso, Asia and Russia default) throughout the 90s into LTCM failure in ‘98; the dot-com bubble bursting in ’00; and of course the GFC in ’07-’08

But it’s not just the US that is at risk: one can argue that as EM rush to catch up to the Fed, they are becoming increasingly exposed to a major event. Indeed, with U.S. 5Y “Real Yields” at the highest since ’09, the U.S. Dollar nearing 1 year highs, Wage Pressures building domestically and Crude Oil at four year highs (in classic “late-cycle” fashion), the Nomura analyst writes that “it is now (perversely) more likely than any other point this year that we see an proliferation of “accidents” from EM economies to forward-looking US corporate cost-driven margin compression.

All of the above leads McElligott to conclude that while being-able to trade sentiment and seasonality tactically month-to-month, “the “Financial Conditions Tightening Tantrum” phase 2 is well under-way…ESPECIALLY now that Fed’s actions are dragging rest-of-world along for the ride”:

  • Five hikes globally last week for the first time ever (since data began being tracked in 2001)
  • ECB now being forced to “policy converge” as well, with ERZ9Z0 now pricing in 41.5bps of hikes from what was just 29bps in mid-August
  • Even the “last of the easy money holdouts” at the BoJ can now allow for even more curve steepening / rate vol to take advantage of the YCC range extension, while our Japanese strategists believe will be widened further to 40bps come January (TOPIX Banks hellooooooo)

So what is the take home message here?

Recall that we started with pointing out the key difference between yesterday’s, and the January rate selloff – the lack of rate volatility.

Looking out past the October “Cyclical Melt-Up” trade that McElligott advocated as recently as two days ago, he will be watching for “Rate Vol to overshoot perhaps at end of month / start of Nov on:

  1. this fundamental re-pricing of Rates,
  2. the capitulation from real-money longs and
  3. the massive month of October “QT impulse”—with high potential to see near-term Equities concerns escalate as “real rates” accelerate and “tighten” financial conditions  

Finally, and going back to the lack of CTA selling, the Nomura strategist notes that the bank’s CTA model in SPX futs has been “100% Max Long” although today we see sell pressure under 2939 to get down to “96% Long” as the 2m window flips. Which means that anyone wonder when the equity selloff will really kick in, “we’d expect more selling under 2892 to get to just “58% Long” as the 1m window would flip.

We are now just 3 S&P points away from this key – for the CTAs – support level, at which point the October selloff could easily mutate into the dreaded January plunge…

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Venom Feels Like a Relic From When Hollywood Didn’t Know How To Make Superhero Movies

At almost every moment, Venom feels dated, tired, like a movie hidden in a vault since 2005, updated with some slapdash computer-generated effects, then dumped into theaters in 2018, when everyone has learned to expect better. It plays like a relic from an earlier era—a second-tier superhero movie from before Hollywood figured out how to make second-tier superhero movies that are actually good.

It’s difficult to remember, but the Marvel Cinematic Universe, currently Hollywood’s most consistently successful franchise, is built around second-tier characters: Iron-Man, Thor, Captain America, and Hulk—the core heroes who comprise the Avengers—were B-list properties. Even some comic book nerds barely knew who the Guardians of the Galaxy were before the 2014 movie. Marvel (and eventually Disney, after it bought the comic book company) had to make due because it had sold off the rights to more well-known characters like Spider-Man and the X-Men, which, by the time Marvel started making its own movies, had already appeared in successful films.

In the 00s, Marvel’s secondary characters—lesser known figures like Ghost Rider, Daredevil, and Punisher—also made big-screen appearances. But the movies, while not entirely lacking in pulp-flick charm (any movie featuring Nicolas Cage as a vengeful stunt-biker whose head turns into a flaming skull is worth watching), were pretty bad. Venom feels like one of those movies, but without as much charm. It’s plodding and graceless, save for a few intermittent flashes of wit in the form of Tom Hardy’s antic, Vaudeville-esque performance as the alien symbiote title character and his human host, journalist Eddie Brock.

Honestly, though, it’s a chore to sit through, and I spent most of movie’s (blessedly short) running time thinking about Spider-Man.

That’s partly because in the comics, Venom was essentially Spider-Man’s evil twin; Brock and the symbiote were joined together by their hatred of the webslinger, and their stories were almost always intertwined with his. A Venom story without Spider-Man is like a cocktail missing its primary ingredient. The comic-book Venom was a quasi-villain who saw himself as a hero. He was a dark reflection of Spider-Man, even in stories where the hero wasn’t physically present. He doesn’t really work in a world where Spider-Man doesn’t exist.

But I also found myself thinking about Spider-Man because, well, he’s been on my mind a lot recently, thanks to the excellent new video game, Marvel’s Spider-Man. The PS4 exclusive (sorry, Xbox fans) captures Spidey (and his alter-ego Peter Parker) as I have known him for most of my life: He’s a scrappy New York kid, struggling to juggle both the extraordinary responsibilities and opportunities of being a superhero and the mundane challenges of being a socially awkward young man. In the game’s first act, Spidey puts Kingpin in jail, stops Shocker from robbing a bank, works in a research lab with Dr. Otto Octavius, meets up with his old flame, Mary Jane Watson, attends a birthday party for his aunt, and gets evicted from his tiny, sad Manhattan apartment.

The core appeal of Spider-Man has always been that he’s just a regular guy struggling in a relatable manner with family, work, and relationships—who also happens to be a phenomenally powerful superhero in his off hours. Although he is broadly popular these days, the core of the target audience is people who feel some sort of demographic kinship to Peter Parker—specifically, nerdy guys—and who are attracted to the fantasy they could also be Spider-Man. Marvel’s Spider-Man captures that appeal, and then collapses the distance between fan and character even further. In the game, you’re not just watching Spider-Man, imagining yourself in his place. You are Spider-Man.

You control the way he swings through New York, where he goes and what tasks he chooses to complete. You can decide whether to detour from your objective to fight low-level street crime or stick to pursuing the more eclectic villains from Spider-Man’s rogues’ gallery. You can take on missions that involve cleaning up the environment—Spidey has always been civic minded—that showcase the complex array of acrobatic movements the game puts at your disposal.

More than anything else, the game excels at letting you move like Spider-Man, whether swinging through the city or taking down legions of video game baddies. The combat borrows heavily from the timed, action-reaction combo brawling of the Assassins Creed and Batman: Arkham Asylum games, which often feels a bit like dancing, but it’s even more fluid, more refined, and—in some ineffable way—more Spider-Man-like. All of the things that Spider-Man could do in the comics, all the ways he might move, respond, use his body or the environment, are available to you, the player, and over time you become better at choosing among various options and chaining them together, to fight, to dodge, to swing gloriously through the game’s virtual mock-up of New York.

The game is a Spider-Man simulator that teaches you to view the physical environment around you as a space that presents a wide array of unique tactical options that you—as the game’s web-slinging hero—can use to your advantage. It teaches you, in other words, to think like Spider-Man.

Once upon a time, a licensed game like this would probably have been a cheap knock-off, a way of quickly cashing in on the Spider-Man brand by changing the look of some boring punching game. But over the last decade or so, game developers have begun taking licensed properties more seriously. Much of the credit goes to Batman: Arkham Asylum, which brought on writing and voice talent from Batman: The Animated Series to give depth to the game’s story and characters. Similarly, the voice acting in Marvel’s Spider-Man is excellent, and the story is co-written by Dan Slott and Christos Cage, key writers of Spider-Man comics in recent years.

The point is, the developers at Insomniac Games took Spider-Man seriously. They got the character right, got the moment-to-moment feel of the gameplay right, and—perhaps most important—located Spider-Man within his world: a sprawling New York-as-urban-playground, populated by street criminals and operatic supervillains.

Roughly speaking, that’s the same approach Marvel took when it built its B-list cinematic universe: by treating B-listers like A-listers (which is what they eventually became). They took the characters seriously, replicated the particular feel of how they interacted with their environments, and situated the characters within a giant, interconnected world, packed with easter eggs and in-jokes for fans. They’re movies, not video games, so they weren’t quite simulators, but over time, they gave you, the viewer, a world to explore.

Which brings me back to Venom—a solo superhero film that does none of these things, or at least not well. Tom Hardy’s performance is the movie’s only saving grace, but its comic physicality is both at odds with the grimdark tone of the rest of the movie—think Jim Carrey in The Mask for reference—and a departure from the tortured, angry anti-hero of the comics. The action sequences are, for the most part, dull and poorly shot, especially in the CG-heavy finale half hour. And aside from a handful of references and a mostly predictable sequel tease at the end, there’s little in the way of connection to any larger world. It’s a second-rate cash-in.

I have argued, at times, that superhero movies should focus more on delivering clear, self-contained stories than on setting up expanded universes. But Venom, the character, is so intimately connected to Spider-Man that he loses all definition in a world without his opposite number. He’s Spidey’s shadow, and without him, he’s just a globular, computer-generated Tyler Durden, another opportunity for Tom Hardy to mumble and grumble weirdly to himself. (His performance is less impressive if you’ve seen Upgrade, a cheap but clever sci-fi/horror film that worked from a notably similar premise earlier this year.)

The only part of Venom that really, truly works comes at the very, very end, in a second post-credits sequences, which—spoiler!—teases the upcoming animated film, Spider-Man: Into the Spider-Verse. In about three minutes, it packs in more wit, emotion, and thrilling action than in all of Venom, including the existence of multiple Spider-Mans from different universes.

Like the new Spider-Man video game, the animated teaser is a reminder that there are still plenty of fresh, fun ideas to be found in the superhero genre. Venom may be stuck in the past, but Spider-Man fans can swing happily into the future.

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