Month: September 2019

Submitted by Eric Peters, CIO of One River Asset Management

“We’re approaching a redistribution,” said the macro CIO, swinging through NY. We were discussing trades, themes, the big picture. “What lies behind us were all good things for asset owners, and what lies ahead is in many respects the opposite.” We were eating at some Greek place. “Investors rode a trend based on stock buybacks, high profit margins (which are the inverse of low wages), low taxes, and loose regulation of technology,” he said, holding up four fingers. “Now think about what lies ahead.” And he lowered each finger into a closed fist.

We hit peak inequality and it sparked a political response across the globe, I said. And it occurred at a time when monetary policy has largely hit its limit – those two things are obviously related. So now markets bump along with investors scrambling for sources of scarce yield, accepting more risk for less return, until something goes wrong – then the profound changes that are happening beneath the surface become clear. That’s when we see an enormous fiscal response, whether we call it MMT or not won’t matter. That’s what’s coming next.
 
“I spend a lot of time in Tokyo,” said the same CIO, dropping heavy names from his recent visit. “I’ve been pressing them for years to get seriously aggressive. When the government can borrow for 20-years at -0.20% in a nation filled with so many smart scientists, how can you not issue bonds and invest massively in primary science? Surely you’ll earn a positive return on that kind of investment – that’s not building bridges to nowhere,” he said. “But my contacts there can’t seem to wrap their heads around anything that challenges their orthodoxy.”

Established economic and political interests created myths about how economies work, I said in response. Entrenched interests fear change and will do everything possible to maintain the status quo. They created what we now call economic orthodoxy. But according to it, all this QE would have sparked massive inflation. Japan’s 250% Debt/GDP would have provoked economic collapse. But these things haven’t happened, because the myths are not truths. And as the faith in orthodoxy melts, established interests will fall, real change will come.

“When will the redistribution process really begins to manifest in markets? That’s the question,” said the CIO. “When it begins, there will be big trends to ride and leverage. That’s what happens in phase shifts. Until then there’s probably a tradeable move in bunds when yields jump on fiscal stimulus. That’ll be short lived, then rates will grind more and more negative until we hit the crisis,” he said. “Until then, it’s a hard trade, because all the pieces are in place but they haven’t come together in a way that forces investors to materially change their portfolios.”

You need to be buying volatility, I said. People are focused on interest rate vol, but central bankers are terrified of rates rising. They’ll try to engineer negative real rates for a decade or more to get us all out from beneath this debt pile. That means the volatility will surface elsewhere. FX implied volatility is near all-time lows and in a world where central banks are scared to hike to defend their exchange rates, currencies are where the volatility should first appear, and then the vol in equities will explode. That’s where the biggest structural shorts are.

Anecdote:

“I’m not yet sure how to think about the conflict,” said the same macro CIO. “I can imagine a world where East and West coexist peacefully, but I know some powerful people here who think the window is closing on America’s ability to contain China and maintain military superiority,” he said.

“That’s the kind of worldview that leads to kinetic conflict. But the US misunderstands China. Ironically, it is strong now but will grow brittle as time passes,” he said. “Their surveillance state is now firmly established and will only get stronger, more sophisticated. But there will be costs to that – to the dynamism of their society, economy. They may be able to anticipate dissent and crush it, but they’ll expose themselves to cracks and divisions from within,” he said.

“The deal was always that guys like Jack Ma could make billions, but the state would take most of it. When he started buying property overseas, you knew the process had started – this is an example of something that will undermine their economic strength,” he said. The real window that I see closing is different, I explained. Advances in processing speeds, artificial intelligence, weaponry and proliferation mean we’re approaching a point where there will be so little time to respond to an overwhelming military attack that we’ll need to turn our defensive systems over to machines. As we approach that moment, it’s conceivable that some nation will conclude that its most rational course of action is to strike preemptively.

So ironically, technology is closing the window on our ability to coexist peacefully. We need a radical rethink in terms of how we interact with one another to avoid catastrophe. And I often wonder if the reason we’ve not discovered signs of life in the universe is because the features that allow intelligent life to advance contain the seed of self-destruction.     

Authored by Michael Tracey via RealClearPolitics.com,

If Donald Trump were on the phone with the president of Angola or Singapore appearing to solicit foreign assistance, it would barely register on the outrage meter. That his latest purported infraction involves Ukraine makes all the difference, because it provides narrative continuity with the broader “Russian interference” saga that has consumed American politics for three years.

Democrats who recently came out for impeachment in droves have been explicit in drawing this connection.

Explaining his newfound embrace of impeachment, freshman Rep. Antonio Delgado (D-N.Y.) expressed outrage that the Trump administration would “withhold military aid that Ukraine needed to fend off Russian aggression.”

Rep. Brendan Boyle (D-Pa.), also endorsing the march toward impeachment, declared that “what Trump has done is sacrifice America’s defense of Europe against Russia. It is deeply unpatriotic.”

Neither of these statements would be intelligible but for the way in which they relate back to Robert Mueller’s special counsel investigation, which was endlessly hyped as the smoking gun that would take down Trump’s presidency. It failed to deliver, but Democrats (including almost every presidential candidate and more than half of the House caucus) nonetheless latched onto aspects of the Mueller report to further their impeachment ambitions. Prior to the Ukraine fracas, House Judiciary Committee Chairman Jerrold Nadler (D-N.Y.) had already been undertaking what he’d termed an “impeachment investigation” that focused on Mueller’s findings. It was trudging along somewhat uneventfully, with hearings and lawsuits that failed to produce anything especially new or revelatory. Then came the news of Trump’s phone call with Ukrainian President Volodymyr Zelensky, which was exactly the “spark” that Democrats needed to breathe new life into their impeachment dream.

But it would be a mistake to view the Ukraine developments as somehow separate from all that preceded it by way of Mueller, as some Democrats now reportedly want to do as a matter of tactical maneuvering. (Speaker Nancy Pelosi reportedly favors “narrowing the focus” of the impeachment inquiry exclusively to the Ukraine issue.) For one thing, Nadler and others had long maintained that the alleged infractions contained in the Mueller report alone were sufficient for impeachment, and had spent months engaged in investigative efforts to that end. Suddenly discarding all that work would be a tacit admission that the pre-Ukraine case for impeachment was weaker than they had so ardently insisted.

Even if Democrats were to “narrow the focus” along the lines Pelosi suggests, the foundation provided by the Mueller report and the years-long Trump/Russia saga will inevitably provide the narrative underpinnings of their impeachment drive. The anonymous “whistleblower” complaint released Thursday alleges that Trump sought to “solicit interference from a foreign country” for political gain. That was the core animating theme of the Mueller report, and the current charges have to be viewed through the same prism.

The idea that Trump sought to “solicit interference” from Russia in 2016 was effectively debunked by Mueller, but that didn’t stop Democrats from continuing to depict Trump as hell-bent on “collusion” in some form. That the “collusion” theme had been so relentlessly trumpeted for years in the media was a necessary prerequisite for the current Ukraine allegations to have any narrative purchase. Sen. Kamala Harris confirmed this when she declared on MSNBC that Trump “confessed that he is attempting to collude with a foreign government to yet again manipulate the elections process of our country.” Embedded in that premise is that Trump once before attempted to collude with a foreign government to manipulate the U.S. electoral process. The premise is wrong, but it’s integral in contextualizing why the Ukraine issue spurred such rapid and dramatic movement by Democrats.

Whatever the party leadership might be saying now by way of tactics, the Trump/Russia saga — despite its embarrassing, anticlimactic failure to dredge up “collusive” wrongdoing by Trump — will necessarily play a central role in how impeachment is framed, whether in the media, Congress, the presidential campaign, or elsewhere. As it now gets repeated to the point of cliche, impeachment is a “political process” and therefore the political arguments that give the Ukraine developments such political weight are integral to assessing whether the “high crimes and misdemeanors” threshold has been reached. The long fixation on Trump/Russia and Mueller have already provided the contours of that argument. Democrats simply needed a new “hook.”

This latest development is best understood as a Mueller report aftershock, a continuation of the dominant theme of Trump’s presidency. “Ukrainegate” now provides Democrats an opportunity to revive and reframe the previous Russia-specific allegations, because they’re part of the same overarching narrative. Elizabeth Warren, now arguably the most influential Democrat in the country, continues to maintain that the Mueller report alone provided enough material to justify impeachment, and is only mentioning Ukraine as an afterthought. That’s because for the Democratic audience it’s already self-evident how this relates to all that preceded it vis-a-vis Mueller. If Trump withheld military aid to Ukraine, it can be depicted as having served the interests of Russia, even if Russia is no longer the ostensible focus. Democrats are furiously invoking “national security” and Trump’s lack of “patriotism” — also core tenets of the Russiagate melodrama. Trump even mentioned Robert Mueller himself in the phone call with Zelensky, ensuring that the special counsel’s shadow will continue to hang over all future proceedings.

None of this excuses or justifies Trump’s behavior, which (as usual) is stupid, self-defeating, and corrupt in a variety of respects. But any forthcoming impeachment will be inescapably tied to what came before it in the narrative timeline. The Ukraine phone call is not a singular event, whatever Democrats might now want to claim — it is the latest iteration of the “collusion” saga that brought such spectacular humiliation to the political and media class.

Five Chipotle restaurants in the Dallas area are going to be adding drive-thrus, according to the Dallas News. It’s a rarity for the Mexican chain that’s better known for its long, slow moving lines inside. 

And like any idea somebody else has done a million times before, they are slightly changing it, repackaging it and calling it by their own gimmicky name: a “Chipotlane”. 

The drive-thru area is going to be specifically set up for customers who order their food online or on the app only, and won’t be like a traditional drive-thru where customers place orders at a menu board. 

As of now, there is only one “Chipotlane” in North Texas, with a second about to open this week. Three more are going to be installed this winter, with more in the Dallas-Fort Worth area potentially on the agenda. 

“Our region will continue to be a focus in 2020,” a Chipotle spokeswoman said.

The lanes come at a time when digital ordering is at all-time highs. Across the industry, third party delivery has never been bigger and delivery sales are soon expected to eclipse on-premise restaurant sales by 2023. Chipotle currently uses delivery services like DoorDash, Postmates and Tapingo. As of February, digital sales made up about 13% of the company’s total business.  

The new drive-thru lanes will be set up to benefit these delivery services. The company said in a statement: “…with Chipotlanes, our delivery partners will have a faster way to pick up orders and get them in the hands of hungry customers.”

Earlier this month, we wrote about how McDonald’s was replacing more humans by using drive-thru AI and, in July, we also talked about how drive-thrus would soon be using license plate recognition to help customize menu choices and track customers. 

The feud between “Middle Class” Joe and “Mayor” Rudy is getting intensely personal.

Joseph Biden’s presidential campaign reached out to top television anchors and networks on Sunday to “demand” they stop booking Trump’s personal lawyer, Rudy Giuliani, because of what it called misleading comments and “debunked conspiracy theories” about the Biden family and Ukraine.

“We are writing today with grave concern that you continue to book Rudy Giuliani on your air to spread false, debunked conspiracy theories on behalf of Donald Trump,” top Biden campaign advisers, Anita Dunn and Kate Bedingfield, wrote in the letter.

The note was sent to executives and top political anchors at ABC, CBS, CNN, Fox News and NBC, including interviewers like Jake Tapper, Chuck Todd and Chris Wallace. In it, the Biden campaign argues that Giuliani’s appearances on television allow him to mislead the viewing public.

“We write to demand that in service to the facts, you no longer book Rudy Giuliani, a surrogate for Donald Trump who has demonstrated that he will knowingly and willingly lie in order to advance his own narrative,” the letter continued. “Giving Rudy Giuliani valuable time on your air to push these lies in the first place is a disservice to your audience and a disservice to journalism,” the advisers wrote.

“Giuliani is not a public official, and holds no public office that would entitle him to opine on the nation’s airwaves,” the Biden campaign wrote. “The decision to legitimize his increasingly outlandish and unhinged charges and behavior — calling it ‘news’ — rests solely with you.”

The letter, as Bloomberg noted, marked an escalation from Biden’s campaign. The former vice president, at a news conference in Delaware on Tuesday, dismissed allegations of about wrongdoing in Ukraine as a “smear.”

The full letter is below:

Dunn and Bedingfield said comments made by Giuliani about the work the former vice president’s son, Hunter Biden, and suggestions that Biden had improperly intervened in the affairs of Ukraine to protect his son, were “baseless.”

Giuliani, whose name featured in the letter by the infamous CIA whistleblower, made public last week and which confirmed that it was merely a collection of third party speculation and hearsay with virtually no actual first-person observations, has been a ubiquitous presence on television news in recent days, including several appearances on Sunday. Advocating on Trump’s behalf, Giuliani has repeatedly alleged that Biden, while serving as vice president, intervened in Ukraine to assist his son Hunter Biden’s business interests. While no evidence has surfaced that Mr. Biden intentionally tried to help his son in Ukraine, Biden has been recorded on tape admitting he would withhold $1 billion in aid for Ukraine under the Obama admin, unless the prosecutor tasked with probing his son was fired.

MUST WATCH: Here’s Joe Biden in 2018 bragging about using his power to hold up $1 BILLION in U.S. loans unless Ukraine fired the prosecutor investigating Burisma – a corrupt Ukrainian oil company paying his son $50,000 a month.

Biden needs to explain his conflict of interest! pic.twitter.com/bDhaKjFNZN

— Ronna McDaniel (@GOPChairwoman) September 25, 2019

It was unclear why Biden was taking an approach seeking to silence Rudy – the former vice president could slap him with a libel or slander lawsuit if Giuliani is distorting the truth, or he could simply appear on networks to defend himself, prompting some to ask what is “Biden so afraid of.”

What is Joe Biden so afraid of? https://t.co/QdfCHebbDI

— Ryan Saavedra (@RealSaavedra) September 29, 2019

Incidentally, as the Daily Wire’s Ryan Saavedra also points out, the flipside to Giuliani’s complaint is that since Biden’s campaign put the demand in writing “it all but guaranteed that the networks would have to invite Guiliani on because if the letters ever got out the networks would be accused of colluding with the Democrats.“

Indeed, as Trump’s personal lawyer, however, Mr. Giuliani remains a highly newsworthy figure and a coveted booking for television journalists covering the burgeoning impeachment inquiry, which centers on Mr. Trump’s attempts to seek information on Mr. Biden’s dealings in Ukraine.

Meanwhile, as the Democrat impeachment juggernaut rolls on, questions about the Bidens’ role in Ukraine continue to grow, despite the less than impartial media’s attempts to squash any potential investigation into the role Obama’s vice president played in the corrupt former Soviet nation.

Facts:
Hunter Biden’s investment firm partners at the time former secretary of state John F. Kerry’s stepson believed that joining the board of Burisma Holdings was a bad idea and ended his business relationship with Biden … https://t.co/mUjMEYnNJd

— FxMacro (@fxmacro) September 29, 2019

While Giuliani has yet to make an official comment as of late Sunday afternoon, he did tweet a screenshot from the letter shortly after 5pm from his iPhone…

… however only to delete his tweet moments later.

Having tumbled on Friday due to a headline that Washington was considering severe restrictions on China capital inflows to the US, specifically the possible delisting of China stocks in the US, futures have just opened higher following the official denial over the weekend.

US stock futures have erased Friday’s gap down losses…

Yuan has also rebounded…

Source: Bloomberg

 

 

 

Authored by Michael Wilson, Morgan Stanley chief equity strategist

Deja Vu

As we head toward the end of the third quarter, I can’t help but think it feels very similar to last year in many ways. The S&P 500 is near its all-time high at 3000, while the MSCI EM Index and the Topix sit 20% and 15% below their highs and the Eurostoxx is 7% lower, leaving all these indices exactly where they traded a year ago. Growth stocks are still the most crowded part of equity managers’ portfolios – and the love affair may be stronger than ever at this point. But there are important differences too. Cyclical stocks have completely fallen out of bed and trade 20% lower than last September, while long-duration sovereign debt has been the best investment by far over this period, with 10-year Treasury yields 50% lower than just 12 months ago. To put this into context, over the past 50 years such a dramatic move in yields over the prior 12 months has only happened twice – during the global financial crisis in 2008 and the European sovereign debt crisis of 2011-12.

With many citing new highs for the S&P 500 as evidence of a resurgent bull market, something seems amiss. A well-balanced global equity portfolio has made little progress over the past year and is actually down over the past 20 months. Sure, growth and defensive stocks have done well but neither has bested a risk-free portfolio of long-duration Treasuries, which leads me to my next point. In the past year, defensive stocks and bonds have been the place to be, not growth stocks, particularly on a risk-adjusted basis. While growth stocks resumed their leadership during the first half of the year, they relinquished it again in mid-July, which is when the positive correlation between bonds and stocks reversed. That was right before the Fed began cutting interest rates and jibes with my view that a Fed pause is good for stocks, but Fed cuts, if they’re the start of a full-blown rate-cutting cycle, are bad.

My view remains that the risk in Fed scenarios is weighted towards significantly more cuts because growth is slowing much more than many seem willing to acknowledge, and the risk of a recession has increased materially. As noted above, an equity manager has made money over the past year in just two types of stocks – growth or defensively oriented ones. In July, that began to change, and we have been recommending a long defensive/short secular growth pair as a way to capture what could be the next move in this cyclical bear market – pricing a recession whether we have one or not. In short, we’re moving from the perception that this is late-cycle to a belief that it’s end of cycle. When that shift occurs, defensive stocks outperform secular growth stocks (Exhibit 1).

Indeed, that’s precisely what has been happening since July, first during the growth scare in August and then further in the momentum reversal in early September. During the most recent growth scares in late 2015/early 2016 and 4Q18, the defensive cohort outperformed secular growth by 25%. So far, the outperformance has been around 12%, or about half of what I expect to see before it’s over.

In addition to the material increase in US recession risk, one more thing has changed from last year that’s worth considering. The recent failure of We Company to go public is reminiscent of past corporate events marking important tops in powerful secular trends:

• United Airlines’ failed LBO in October 1989, which effectively ended the high yield/LBO craze of the 1980s.
• The AOL/TWX merger in January 2000, bringing the Dotcom bubble to a close.
• JPM’s take-under of Bear Stearns in March 2008, which signaled the end of the financial excesses of the 2000s.

So if this is THE event, what are we ending? In my view, the days of endless capital for unprofitable businesses. It was one heck of a run, but paying extraordinary valuations for anything is a bad idea, particularly for businesses that may never generate a positive stream of cash flows. If you ask me, that’s just common sense and it’s a good thing if the markets go back to a more disciplined mindset. The problem is that some stocks in the public markets still need to fall back to earth, and they reside in the secular growth category. The good news is that this adjustment is already under way and may not have that much more to go. However, these stocks may not come roaring back the way they did earlier this year if the new-found market discipline is here to stay.

Authored by Vincent Caruso via IllinoisPolicy.org,

Federal agents raided the offices of three suburban villages, including one governed by a mayor who doubles as a Cook County commissioner. All three are in the district of state Sen. Martin Sandoval, also the subject of a federal raid.

A trio of west suburban villages in Cook County were the latest subjects of an escalating federal corruption probe in Illinois, with all three in the district of a state senator who also was the target of federal raids two days earlier.

On Sept. 26, FBI agents raided government offices in the villages of McCook, Lyons and Summit, accompanied by officers from the IRS’ Criminal Investigation Division, according to the Chicago Tribune.

Federal agents searched the village halls of each of the three suburbs, in addition to Getty Insurance, where Lyons Mayor Christopher Getty is president. Getty’s family owns the firm, according to the village’s website.

An FBI spokesperson in a statement described the McCook and Lyons raids as “authorized law enforcement activity,” according to the Tribune, which the agency distinguished from the “investigative activity” conducted in Summit.

McCook village attorney Gary Perlman told the Chicago Sun-Times the search warrant sought information concerning “various contractors that have done work with the village.” McCook Mayor Jeff Tobolski, who has held the village’s top public office since 2007, has simultaneously served as a Cook County Board commissioner since 2010.

Tobolski has a history of using his mayoral role to dole out patronage hires, having “hired numerous family members for village jobs,” according to the Sun-Times. His brother currently serves as McCook’s village treasurer.

Lyons’ village history is also rich with corruption, as retold in a May report from the Better Government Association. Getty’s father was mayor and went to prison for stealing from the village.

The trio of raids were the latest in Illinois to involve authorities from both the FBI and IRS, conducted on Sept. 24 just two days after raids on the home and offices of state Sen. Martin Sandoval, D-Chicago. McCook, Lyons and Summit are all within Sandoval’s senate district.

Federal authorities confirmed they’re investigating allegations that Sandoval had used his political office to award government contracts to at least one company in exchange for kickbacks. Sandoval played a leading role in passing Gov. J.B. Pritzker’s massive capital plan that was supported in part by doubling the state gas tax. Infrastructure bills are notorious hotbeds of political favoritism, and many of Sandoval’s political donors are “engineering, planning, construction and related companies,” Crain’s Chicago Business noted.

The Chicago Tribune reported in April that state Rep. Jay Hoffman, D-Swansea, had acknowledged this form of horse trading explicitly, saying, “A capital bill is helpful for people being able to take votes so they can show that these (other) votes were worth it for their district.” Hoffman is assistant House leader under House Speaker Michael Madigan and a former House Transportation Committee chairman.

These latest raids appear to be part of an ongoing federal investigation into Illinois and Chicago political power brokers. The investigation appeared to peak in May when federal prosecutors brought a 14-count indictment against powerful Ald. Ed Burke, 14th Ward, Chicago’s longest-serving alderman.

The investigation into Burke revealed former Chicago Ald. Danny Solis had worn a wire to record Burke, in cooperation with the FBI. Weeks following the Burke indictment, FBI agents raided the ward office of Ald. Carrie Austin, 34th Ward; and a federal court sentenced former Ald. Willie Cochran to one year in prison on corruption charges – the 30th Chicago alderman since 1972 convicted of a felony related to his official duties.

Moreover, a series of federal raids on the homes of high-ranking political insiders appears to be circling in on Madigan, the nation’s longest-serving Statehouse speaker. Madigan confidants have all been the subject of high-profile federal raids including former state lawmaker and lobbyist Mike McClain, former Chicago Ald. Michael Zalewski and former Madigan political lieutenant Kevin Quinn.

In August, a federal indictment against state Sen. Tom Cullerton, D-Villa Park, on embezzlement charges became the latest political corruption bombshell to drop. Cullerton has pleaded not guilty to those charges.

Gov. J.B. Pritzker and Chicago Mayor Lori Lightfoot both campaigned on promises to fight corruption and clean up state and local government, respectively. Lightfoot has moved the city closer to those goals by empowering the city watchdog and limiting conflicts of interest, as well as introducing reforms to the city’s controversial workers’ comp program and ticketing-and-towing scheme.

Pritzker is the subject of a federal investigation into a scheme to save $331,000 on property taxes by removing the toilets from a neighboring mansion he owns on Chicago’s Gold Coast so it could be deemed uninhabitable and the value drop from about $6.25 million to about $1.1 million. He paid the taxes after the story became public.

His promises to fight corruption have so far gone unfulfilled.

Rep. Alexandria Ocasio-Cortez (D-NY) has been ordered by a Brooklyn Federal Judge to appear in person to explain why she has blocked several people over twitter, according to the NY Daily News. 

“I think she has to testify here,” said Judge Frederic Block during a Thursday hearing to discuss a case brought by former politician Dov Hikind, who AOC banned from her Twitter feed. 

Block, after seeing hundreds of pages of tweets entered into evidence, said he believed hearing from the freshman member of Congress was necessary to decide whether to toss the suit or let the case proceed. Ocasio-Cortez boasts a staggering 5.4 million Twitter followers — even without Hikind.

The former state Assemblyman took on the media-savvy Ocasio-Cortez when she gave him the Twitter boot in a spat over her description of federal immigration detention centers as “concentration camps.” He griped that AOC was violating his First Amendment rights, citing a recent decision declaring President Trump’s blocking of Twitter trolls was unconstitutional. –NY Daily News

On Thursday, Hikind testified that he doesn’t personally send the tweets in his account, rather, a staffer does the “clicking” once he’s formulated “the wording.” 

Also discussed was the fact that AOC has two Twitter accounts; a personal / campaign account, and a government-issued account. 

AOC’s lawyers noted that Hikind doesn’t live in her district – rather, he live in Rep. Jerry Nadler’s Manhattan-Brooklyn district. 

“So you’re not a constituent of Congresswoman Ocasio-Cortez?” asked AOC attorney Joseph Sandler. 

“I’m a citizen of the United States,” replied Hikind. 

“So you’re not directly …” Sandler continued.

“Not technically, yes,” Hikind replied. 

Judge Block, meanwhile, said he doesn’t use Twitter and doesn’t plan to – telling the court “I’m afraid to use it. I haven’t posted anything on it. It scares me.”