For months, Sen. Elizabeth Warren (D—Mass.) has hedged on the question of whether she would raise middle class taxes to pay for Medicare for All, the single-payer health care plan she says she supports. Warren has stuck with a talking point about total costs, saying that the middle class would pay less, while critics, political rivals, and even liberal economists friendly to single payer have argued that the enormous additional government spending required by such a plan would inevitably hit the middle class.
Today, Warren released a plan to finance Medicare for All at a total price tag of nearly $52 trillion, including about $20 trillion of new government spending (an estimate that is probably low). Although her plan declares that no middle-class taxes will be necessary to finance the system, it includes what is effectively a new tax on employers that would undoubtedly hit middle-class Americans.
Today, American health care is financed by a mix of public and private payers. Under a single-payer system—what Warren and rival presidential hopeful Sen. Bernie Sanders (I–Vt.) call Medicare for All—virtually all health care spending would instead run through the federal government.
Right now, Warren’s plan says, employers spend about $9 trillion a decade on health insurance coverage. Her plan aims to move the private spending onto the federal budget. Under her proposal, large employers who currently pay for health coverage would be required to pay a comparable amount (equivalent to 98 percent of what they pay now, adjusted for the number of workers they employ) in order to help finance Medicare for All.
Warren shies away from calling this a tax, and she even claims “we don’t need to raise taxes on the middle class by one penny to finance Medicare for All.” Instead, she refers to it as an employer Medicare contribution, under which companies “would send payments to the federal government for Medicare.”
But there is a commonly accepted term for a plan that requires companies to send payments to the federal government in order to finance government programs. That word is tax. And that is essentially what this is—a nearly $9 trillion payroll tax (or, perhaps, a head tax with some small-business carve outs). It is thus hard to see this as anything other than a massive middle-class tax hike.
That is the argument that former Vice President Joe Biden, another Democratic presidential hopeful, is already making, with a campaign staffer responding to the release of her plan by saying, “For months, Elizabeth Warren has refused to say if her health care plan would raise taxes on the middle class, and now we know why: because it does. Senator Warren would place a new tax of nearly $9 trillion that will fall on American workers.”
Warren and her defenders will likely try to shift the discussion back to total costs, but that’s just a way of repeating the dodge that has dogged her campaign for much of the year. Warren will no doubt claim that costs would go down under her plan, but there are reasons to doubt this, including an analysis from health care economist Kenneth Thorpe finding that under a Sanders-style plan, more than 70 percent of people who currently have private insurance would see costs increase, as well as an Urban Institute analysis projecting that single-payer plans would raise national health care spending by $7 trillion over a decade.
Nor is this the only problem with her plan. As The Washington Postreports, “some analysts have warned that companies would have strong incentives, in the years before such a law’s enactment, to make it appear their health-care costs are low. Businesses may be encouraged to split off into two entities, one of which might be able to avoid the required health-care contributions because it had none the year before the program kicked off.” At minimum, the incentives and feedback effects of Warren’s plan would be complex and difficult to predict.
Warren’s plan includes other new taxes as well: a six percent tax on billionaires beyond the wealth tax she has already proposed, an increased tax on capital gains, and a 35 percent tax on corporate earnings earned overseas. She also proposes raising trillions in tax revenue through increased enforcement—far exceeding what mainstream experts have suggested is possible.
For comparison, CBO says that increasing IRS enforcement by 35% would generate…. $55 billion in revenue over a decade.
Indeed, much of Warren’s plan is based on unlikely, and at times outright fantastical, assumptions about what sort of additional revenue could be raised, what health care costs could be contained, and what might be politically feasible. Among other things, she proposes raising $400 billion by passing comprehensive immigration reform, which, given the politics of immigration policy, is only a little more realistic than planning to pay off your mortgage by winning the lottery. The Washington Examiner‘s Philip Klein has published a useful roundup of Warren’s less plausible ideas; the takeaway is that even if Warren somehow managed to raise the enormous amounts of tax she proposes, it probably would still not be anywhere close to enough to finance her plan. (More on this in a future post.)
In some ways, Warren’s plan amounts to a list of technically sophisticated magic asterisks. It is as much an attempt to obscure the economic and political feasibility of passing and implementing a single-payer health care plan as an attempt to describe what it would require.
Yet in another way, it reveals something about both Warren and the economic reality of single-payer: Despite running a campaign based on wonky academic credentials and detail-oriented policy chops, Warren has, until now, repeatedly refused to directly answer questions about precisely how she would finance Medicare for All and whether she would foist new taxes on the middle class. Turns out she didn’t dodge the question because the answer was complex or hard to explain. She dodged it because the answer was so simple it could be expressed in a single word: yes.
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Texas Gov. Greg Abbott posted a video last week of a man repeatedly throwing metal poles at a stopped car in downtown Austin. Abbott, a Republican, wasted no time attacking Mayor Steve Adler, a Democrat, and his city’s approach to homelessness, tweeting: “Austin’s policy of lawlessness has allowed vicious acts like this.”
There were a couple of notable problems here. One is that the incident initially occurred in February 2018, well before Austin implemented more permissive, less punitive policies on homelessness. After this was pointed out to Abbott (and after the account that had initially posted the video tweeted a clarification of the timeline, to its credit), Abbott failed to correct it, choosing instead to dig his heels in:
Thanks for making my point.
That video was before you altered the homeless policy that made public safety WORSE.
You fool no one. Everyone knows the dangers downtown.
Then there’s the other problem. Texas Monthly spoke to Krista Chacona, the lawyer who had represented the pole-throwing man in court, and confirmed that the man was not—and had never been—homeless. Rather, he has “developmental and intellectual disabilities.”
“He was never able to articulate to me what was going through his mind that day,” Chacona noted to Texas Monthly, who added that the man was “arrested for felony criminal mischief” and “ruled incapable of standing trial.”
Abbott was wrong to suggest this person was homeless. He was also wrong to act as if Austin’s policies on homelessness had enabled violence: Damaging someone else’s property is already illegal in Austin, whether you’re homeless or not. But most of all, he was wrong—and seemingly serving a blindly partisan agenda—to refuse to correct the record after he himself spread misinformation. Ironically, just a day after the above tweet, he was tweeting his dismay at The Washington Post‘s inability to issue a proper correction.
The homelessness policy Abbott was attacking was passed in late June, when the city revoked ordinances that banned camping, sitting, and lying down in public areas. Now it’s actual “obstruction” that’s banned, not merely sitting or sleeping in the “pedestrian right-of-way.” So homeless encampments under bridges and on sidewalks are permitted, though camping in public parks remains illegal. The city also legalized panhandling, provided it’s not aggressive. And it changed a statute to specify that a homeless person must be “given a reasonable opportunity by a law enforcement officer to correct the violating conduct.”
The narrowing of prohibited activity is intended to lead to fewer negative encounters between homeless people and police and, more broadly, to the decriminalization of homelessness. Piling up tickets and fines—or worse, jail time—when you already cannot pay for food or housing is wholly counterproductive to getting homeless people back on their feet.
Municipal and state officials are at odds about how to curb the city’s homelessness problem. Despite—or perhaps because of—the city’s less harsh approach, the Texas Department of Transportation will start clearing the tents, clothing, and personal effects of the homeless people who have been living under Austin’s highway underpasses. The crackdown is scheduled to start this coming Monday.
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A Louisville, Kentucky, SWAT team looking for marijuana broke into a home and terrorized the family living there, based on claims police easily could have debunked if they had been doing their jobs properly, according to a lawsuit filed last week. The cops “continued to detain Plaintiffs, with rifles drawn on them, even after it became clear that the Residence was a family household—not a drug dealer’s lair,” the complaint says.
Ashlea Burr and Mario Daugherty say more than a dozen SWAT officers stormed into their home without warning on the morning of October 26, 2018, breaking the front door, setting off “exploding devices” (presumably flashbang grenades), and shouting commands while threatening them and their three teenaged children with “assault rifles.” The family initially thought they were being robbed, and one of the children, a 13-year-old girl identified as “Z.S.” in the lawsuit, “ran through the back door and into the yard in an effort to reach her grandmother’s house next door.” The cops sprang into action:
Officers drew their assault rifles on her, yelling commands at her to get on the ground….Z.S. was extremely frightened, began crying and submitted [by kneeling on] the ground. It was cold and rainy, and Z.S. was not wearing any socks, shoes or a jacket. She repeatedly requested to be taken to her grandmother’s next door, but the Officers refused the requests, kept her in the cold, wet conditions, and kept their rifles on her.
The girl can be heard sobbing in a video of the raid’s aftermath. “Hold on, hon, we’re almost done, OK?” says one of the officers. “We’ll get you back inside. You’re not hurt, right? You’re just scared? I’m sorry.”
Burr and Daugherty’s lawyer, Josh Rose, says police initially denied they had any video of the raid. After he pointed out that the SWAT officers were required to wear body cameras, he says, the Louisville Metro Police Department (LMPD) released a highly expurgated copy of the footage.
In his application for a warrant to search the house, Detective Joseph Tapp claimed the LMPD received a tip from someone who reported that “a black male named Anthony McClain is growing marijuana and has multiple bags of marijuana packaged for sale in the front bed room.” According to Tapp, the tipster “also stated a white female named Holly was [McClain’s] girlfriend and owned the house.”
If Tapp had bothered to look up the property records, he would have seen that the house is in fact owned by a man named Kevin Hyde, who rents it to Burr and Daugherty. The lawsuit also notes that “nobody named Anthony McClain or Holly lived at the house at or near the time of the raid,” that “Ashlea is not white,” and that “nobody in the house was growing marijuana or had multiple bags of marijuana packaged for sale.”
Aside from this obviously erroneous tip, the search warrant was based on three brief visits to the house. During his first “surveillance,” on October 5, Tapp saw “a Black male” enter the house and leave 10 minutes later. Tapp then “approached the house to conduct a knock and talk.” When he “stepped on the open porch,” he said, “the smell of fresh marijuana could be smelled.” He knocked on the door, but no one answered, so he left.
During his second “surveillance,” on October 22, Tapp saw “a black male” arrive in a “gray Jaguar” with an Indiana license plate and enter the house. The car was registered to Daugherty, whom WDRB, the Fox TV station in Louisville, describes as “a local artist whose work has been featured at the Kentucky Derby Museum and on local news.” The car was not registered to “a black male named Anthony McClain” or to a woman named Holly, which really should have given Tapp pause. The next day, three days before the raid, Tapp “approached the house and again was hit with a strong smell of fresh marijuana coming from within the house.”
Tapp argued that the tip, “the witness of the short stay,” and “the strong fresh smell of marijuana on separate occasions,” combined with his “training and experience,” provided probable cause for a search. Yet the tip was demonstrably false, visiting a house for 10 minutes is not inherently suspicious, and apparently there is something wrong with Tapp’s nose, since police found no evidence of marijuana cultivation at the house.
Burr and Daugherty argue that “the raid was not supported by probable cause.” They say it exemplifies lax training and oversight by the LMPD that results in “the issuance of search warrants in predominantly African American neighborhoods without probable cause and/or in an unreasonable manner in violation of the Fourth Amendment.”
The plaintiffs also argue that the search was executed recklessly. “It is completely unreasonable to execute a warrant that vaguely mentions someone potentially smoking marijuana at a residence with a SWAT team of 14 officers, exploding devices, forced entry, and assault rifles, particularly when no investigation was done to determine who lived in the Residence and given the other false statements and omissions in the affidavit,” they say. “Defendants’ misconduct could have very easily resulted in the death of a parent or child for no good reason,” and it “did result in the violation of Plaintiffs’ constitutional rights and significant emotional damage.”
Burr and Daugherty, who are asking for a jury trial in Jefferson County Circuit Court, are seeking compensatory damages, punitive damages, and legal fees. I called the LMPD for comment and will update this post if and when I get a response.
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Potential for the data deterioration theme to pause in the next quarter
Phase 1 US-China deal could pivot Manufacturers from inventory destocking to restocking
Key manufacturers talking about this potential on earnings calls
This underappreciated catalyst could cause a temp bounce in the economic data, lift stocks and curve steepeners even higher – classic end of the cycle melt up
WARNING: This note contains content more positive than the past 10 months and may not be suitable for readers who are expecting a perma bear.
I jest obviously but the theme all year has revolved around the idea of data deterioration. The question from those tired of that notion is always “what would change your view” and the answer is consistently:
1) CB’s adding liquidity
2) China-US trade war progress
3) EU fiscal stimulus
For the first time all year, all three potential catalysts emerging at the same time which risks a Q4 melt up in risk assets and (I hope you are sitting down) an improvement in some of the economic data – mainly the manufacturing sector.
Central Banks pumping liquidity once again
This has been THE driver of the cyclical “up crash” first kicked off around October 8th when Fed Chair Powell noted that the Fed will soon announce steps to add to reserves over time through the purchases of T-bills. Around the same time, as we discussed previously, many Fed officials began setting up the Oct cut which many thought was in question (Rosengren, Evans).
That powerful force of a coming Fed liquidity injection + another Fed cut to sustain the expansion caused a key reversal in the macro landscape where:
USD topped out and depreciated lower
Cyclical equities/commodities bottomed and started to break out higher
Interest rates bottomed and started pricing out future Fed cuts
Yield Curves like 2s10s, that had been dormant, began to steepen
Dollar liquidity got a further boost when Italy for the first time since 2010 issued a $7b USD denominated bond on Oct 9th. That drove the likes of 1yr EU/US basis swaps higher which is atypical into year-end, and a signal that USD liquidity is improving.
Liquidity injection causing a positive cyclical feedback loop
And if you are wondering why yields are rising, basis swap widening is your “tell.” The Fed (and ECB), are adding liquidity and that is driving global yields higher as confirmed in the QI macro PCA model which shows that for both US and China 10yr yields; rising basis swaps (ie: systemic liquidity) are causing nominal yields to rise.
China 10yr yield sensitivities to macro factors indicate basis swaps/systemic liquidity is causing rising yields…
Same story in the US and to show it a different way, the sensitivity to systemic liquidity has been increasingly positive since Oct. 8th…
Then, those rising yields are causing commodities like copper to rise. Copper’s macro sensitivities show rates are the top positive drivers…
And lastly, rising commodities, and the feed through to inflation expectations, is causing the S&P rally and the curve steepening.
So there you have it, the liquidity injection by the Fed’s “don’t call it QE” program is causing a very QE like reaction. Call it a positive cyclical feedback loop.
That’s “the where we have been,” but now let’s look forward. Is there further impetus for this theme to follow through beyond the Fed’s reaction function? YES.
IMPORTANT – Upside growth potential in Q4/Q1
The market rhetoric over the past couple weeks has been stabilizing PMI’s. The Markit Manufacturing PMI for example bounced from a low of 50.3 two months ago to a modest 51.3 now – no big growth surge. However, the main positive in the report was the rise in New Orders and the decline of Inventories. In today’s ISM, we saw New Orders and Inventory both rise. This is the theme I want to highlight today: the potential that destocking in the Manufacturing sector is largely over and the potential for restocking.
As we saw in the Wholesale Inventory data on Monday, the current inventory drawdown is down to levels where you start to see restocking…
What differentiates this note from others is the willingness to do some dirty, bottoms up research like listening to earnings calls. What is MOST notable is that companies are commenting on this inventory dynamic in their earnings calls this quarter which is indication that we have reached a pivot point.
Let’s start with a global chemical company (often thought to be early cycle indicators) offering many different types of chemical products that operates in 30 different countries. They have exposure in North America, Europe, Middle East, and most importantly, China. This is about as good of a read through as you can get for cyclical stocks and on this destocking/restocking theme. What did they say in their earnings call on October 25th?
“We believe that the destocking we reported impacting the first half of the year in polyurethanes is finished most specifically in China.”
“We continue to see customer destocking with such a deep supply chain this business (textiles) has seen more volume pressure than our other businesses. We believe there is little if any destocking left in the chain.”
“Its volume that is hurting the bottom line and I suspect that volume will obviously be coming back as the economy starts to stabilize or even if the economy doesn’t stabilize when you see a lot of the de-inventorying, destocking that is out there taking place.”
”And I think that’s probably the first quarter in the last three quarters or so where we have seen a return to growth in China. So I’m not here to say that China is off to the races and we are going to great guns there but I do think that it has more to do with the idea that we’re done with destocking on a large basis in China.”
“While we’ve experienced real growth within this region demand in China remains well below average and erratic. We believe this will remain unchanged until trade discussions have some form of resolution thereby helping customer confidence and visibility.”
In other words, there is significant upside risk to rebuild inventories if at least some of the uncertainties can be removed, and China growth is better but still not robust.
How about a major global manufacturer of construction machinery…
“In the fourth quarter, we now expect end-user demand to be flat and dealers to make further inventory reductions due to global economic uncertainty.”
“…improved lead times, along with these dealer inventory reductions, will enable us to respond quickly to positive or negative developments in the global economy in 2020.
They are basically saying their dealers are still running down inventory, but if economy picks back up; they are coiled and ready to go.
One more company talking about how they are aggressively reducing inventories is a well-diversified manufacturer of everything from electronics to industrial products to consumer products…
“First, the biggest impact to Q3 margins was the year-on-year decline in organic volume, along with our actions to lower production volumes and reduced inventories to improve cash flow in the quarter.”
You get the idea. Large manufacturers have been running down inventory to build free cash flow. Typical in a slowdown but now will have inventory levels so low, that any improvement in growth prospects will leave them scrambling to rebuild.
Why is this inventory story important?
Critical point -> manufacturing companies have reduced inventories in the face of the China slowdown. Those same companies are indicating that a rate of change improvement in geopolitical risks (Trade Wars and to a lesser extent Brexit) could lead to a restocking. That restocking would give you more than just optimism the market has priced in. That’s real, hard economic growth which the market is not priced for. Dare I say the potential for green shoots.
Since the restocking is reliant on improved geopolitics, let’s address the two biggies.
US-China trade war progress
News last week that China passed a law that will protect IP rights of foreign businesses operating in the country
The fact they passed this is a very positive signal that China is willing to bend on a major sticking point in the negotiations
Pledge to open up Financial Services market
Reports that the Phase 1 deal is basically completed and to be signed Nov 17 in Chile
China requesting the US cancel some of the existing tariffs
Bottom line: a much more positive tone in the talks than we have seen all year. The ball is now in Trump’s court. The size of the reversal in the data will depend on the scope of the tariff roll backs. Most likely outcome is Trump simply does not impose the December tariffs but keeps all the prior tariffs in place until all phases of the deal are completed. That would mean a temporary bounce in the data but the long-term uncertainty will remain. Upside would be a rollback of previous tariffs especially those that hit the consumer.
Ignore the hype in yesterday’s headline regarding a long term deal with Trump. As our China watcher Jessica Sun is pointing out, China would rather make a deal with Trump than Warren, and despite long-term hurdles; China is “forging ahead” to prep for Phase 2.
EU fiscal stimulus
Two thing are driving the rising probabilities of fiscal stimulus currently:
Continued degradation in the German economic data – Manufacturing PMI still printing a depressed 41.9
Angela Merkel’s CDU party losing another regional election to the right wing AfD – the AfD advocates fiscal spending to boost the working class they tend to represent (similar to Trump in the US, Bolsonaro in Brazil etc.)
Bottom line: What used to be a long shot is now moving to possible. Germany, with their current account surplus, has had room to add stimulus but the German public generally has had disdain with running a current account deficit which made fiscal stimulus impossible. That is changing given the poor economy and rising prospects of the CDU losing power.
What does this do to the data deterioration theme?
It could pause it. Or to say it differently; it could cause a tactical economic bounce inside the larger data slowdown trend.
Note that despite the “beat” that the street set the market up for in today’s NFP, payrolls is growing at a 6m average of 155 down from 230 just one year ago. So growth in general is still soggy with the risk that the labor slowdown eventually bleeds into the consumer (strong consumer is THE most consensus thought – at risk).
Does this change the view on duration and curve shape?
In the front end, the Fed just “floored” Eurodollar pricing when Powell said they are not even thinking about hikes as inflation undershoots and AIT comes into their mindset mid-2020. Therefore, Eurodollars are the optimal hedge for cyclical longs as the Fed will not reverse the cuts. Additionally, the ironic thing about this potential economic bounce is if yields (long end) do rise more; it will push the economy right back into the data deterioration theme.
We are already seeing sectors levered to rates like the housing data start to fade (“misses” in Existing Home Sales, New Home Sales, Housing Starts, FHFA Home Price Index this month) so the point is rising yields will once again work to choke off an economy very sensitive to higher yields (too much debt, can’t have that bubble burst). Therefore, avoid shorting the front end and instead look to buy the dip as long-term indications are for further weakness in the US economy (as seen in forward indicators like CEO surveys). Use ED’s as your hedge against a Phase 1 breakdown.
Therefore, the long end is more exposed to a broader correction if the restocking theme does kick in. That obviously argues for additional curve steepening.
US 2s10s: the inverse head and should pattern that formed in the summer is still in motion. The target is 25bps…
Are we being too short sighted though? Given all the catalysts, a larger move to the upper end of the range should be considered – new target 50bps?
Does this embolden the buy S&P upside/cyclical melt up thesis?
Definitely. Most of the positioning data I can find says the market is ill prepared for a rate of change improvement to the economic data. This “offsides” setup was apparent in the technicals which continue to indicate further price gains ahead.
S&P mini’s have broken out of its neckline of its bullish inverse head and shoulder pattern. Target is 3,185…
And obviously you can consider positions that are levered to China including EM equity indices, Euro Stoxx, and Copper.
To succinctly recap:
Inventory levels for the Manufacturing sector have been brought down to a level that makes it susceptible to reverse quickly if there is any surprisingly positive news on trade wars
With a Phase 1 deal looking done, that restocking risk is also growing which would be a near term boost for the global economy – Manufacturing PMI’s bounce
Additionally, German fiscal is finally looking like a possibility
The benefits of lower rates + higher stocks add an additional growth tailwind
That all means upside risk in risk assets and to some extent yields (long end)
Rising yields into the US election cycle (which will add uncertainty in 2020) will make this only a tactical bounce; the data deterioration theme will likely reemerge especially as the more difficult parts of US-China talks drag on
Continue to recommend:
S&P upside (ESH0 3300/3400 call spread)
Hedged with front end upside (2EG0 98.875/99.375 call spread now screening on top)
Sell Fed Fund spreads that have priced out cuts: FFM0/FFU0
Texas Gov. Greg Abbott posted a video last week of a man repeatedly throwing metal poles at a stopped car in downtown Austin. Abbott, a Republican, wasted no time attacking Mayor Steve Adler, a Democrat, and his city’s approach to homelessness, tweeting: “Austin’s policy of lawlessness has allowed vicious acts like this.”
There were a couple of notable problems here. One is that the incident initially occurred in February 2018, well before Austin implemented more permissive, less punitive policies on homelessness. After this was pointed out to Abbott (and after the account that had initially posted the video tweeted a clarification of the timeline, to its credit), Abbott failed to correct it, choosing instead to dig his heels in:
Thanks for making my point.
That video was before you altered the homeless policy that made public safety WORSE.
You fool no one. Everyone knows the dangers downtown.
Then there’s the other problem. Texas Monthly spoke to Krista Chacona, the lawyer who had represented the pole-throwing man in court, and confirmed that the man was not—and had never been—homeless. Rather, he has “developmental and intellectual disabilities.”
“He was never able to articulate to me what was going through his mind that day,” Chacona noted to Texas Monthly, who added that the man was “arrested for felony criminal mischief” and “ruled incapable of standing trial.”
Abbott was wrong to suggest this person was homeless. He was also wrong to act as if Austin’s policies on homelessness had enabled violence: Damaging someone else’s property is already illegal in Austin, whether you’re homeless or not. But most of all, he was wrong—and seemingly serving a blindly partisan agenda—to refuse to correct the record after he himself spread misinformation. Ironically, just a day after the above tweet, he was tweeting his dismay at The Washington Post‘s inability to issue a proper correction.
The homelessness policy Abbott was attacking was passed in late June, when the city revoked ordinances that banned camping, sitting, and lying down in public areas. Now it’s actual “obstruction” that’s banned, not merely sitting or sleeping in the “pedestrian right-of-way.” So homeless encampments under bridges and on sidewalks are permitted, though camping in public parks remains illegal. The city also legalized panhandling, provided it’s not aggressive. And it changed a statute to specify that a homeless person must be “given a reasonable opportunity by a law enforcement officer to correct the violating conduct.”
The narrowing of prohibited activity is intended to lead to fewer negative encounters between homeless people and police and, more broadly, to the decriminalization of homelessness. Piling up tickets and fines—or worse, jail time—when you already cannot pay for food or housing is wholly counterproductive to getting homeless people back on their feet.
Municipal and state officials are at odds about how to curb the city’s homelessness problem. Despite—or perhaps because of—the city’s less harsh approach, the Texas Department of Transportation will start clearing the tents, clothing, and personal effects of the homeless people who have been living under Austin’s highway underpasses. The crackdown is scheduled to start this coming Monday.
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A Louisville, Kentucky, SWAT team looking for marijuana broke into a home and terrorized the family living there, all thanks to claims police easily could have debunked if they had been doing their jobs properly, according to a lawsuit filed last week. The cops “continued to detain Plaintiffs, with rifles drawn on them, even after it became clear that the Residence was a family household—not a drug dealer’s lair,” the complaint says.
Ashlea Burr and Mario Daugherty say more than a dozen SWAT officers stormed into their home without warning on the morning of October 26, 2018, breaking the front door, setting off “exploding devices” (presumably flashbang grenades), and shouting commands while threatening them and their three teenaged children with “assault rifles.” The family initially thought they were being robbed, and one of the children, a 13-year-old girl identified as “Z.S.” in the lawsuit, “ran through the back door and into the yard in an effort to reach her grandmother’s house next door.” The cops sprang into action:
Officers drew their assault rifles on her, yelling commands at her to get on the ground….Z.S. was extremely frightened, began crying and submitted [by kneeling on] the ground. It was cold and rainy, and Z.S. was not wearing any socks, shoes or a jacket. She repeatedly requested to be taken to her grandmother’s next door, but the Officers refused the requests, kept her in the cold, wet conditions, and kept their rifles on her.
The girl can be heard sobbing in a video of the raid’s aftermath. “Hold on, hon, we’re almost done, OK?” says one of the officers. “We’ll get you back inside. You’re not hurt, right? You’re just scared? I’m sorry.”
Burr and Daugherty’s lawyer, Josh Rose, says police initially denied they had any video of the raid. After he pointed out that the SWAT officers were required to wear body cameras, he recounts, the Louisville Metro Police Department (LMPD) released a highly expurgated copy of the footage.
In his application for a warrant to search the house, Detective Joseph Tapp claimed the LMPD received a tip from someone who reported that “a black male named Anthony McClain is growing marijuana and has multiple bags of marijuana packaged for sale in the front bed room.” According to Tapp, the tipster “also stated a white female named Holly was [McClain’s] girlfriend and owned the house.”
If Tapp had bothered to look up the property records, he would have seen that the house is in fact owned by a man named Kevin Hyde, who rents it to Burr and Daugherty. The lawsuit also notes that “nobody named Anthony McClain or Holly lived at the house at or near the time of the raid,” that “Ashlea is not white,” and that “nobody in the house was growing marijuana or had multiple bags of marijuana packaged for sale.”
Aside from this obviously erroneous tip, the search warrant was based on three brief visits to the house. During his first “surveillance,” on October 5, Tapp saw “a Black male” enter the house and leave 10 minutes later. Tapp then “approached the house to conduct a knock and talk.” When he “stepped on the open porch,” he said, “the smell of fresh marijuana could be smelled.” He knocked on the door, but no one answered, so he left.
During his second “surveillance,” on October 22, Tapp saw “a black male” arrive in a “gray Jaguar” with an Indiana license plate and enter the house. The car was registered to Daugherty, whom WDRB, the Fox TV station in Louisville, describes as “a local artist whose work has been featured at the Kentucky Derby Museum and on local news.” The car was not registered to “a black male named Anthony McClain” or to a woman named Holly, which really should have given Tapp pause. The next day, three days before the raid, Tapp “approached the house and again was hit with a strong smell of fresh marijuana coming from within the house.”
Tapp argued that the tip, “the witness of the short stay,” and “the strong fresh smell of marijuana on separate occasions,” combined with his “training and experience,” provided probable cause for a search. Yet the tip was demonstrably false, visiting a house for 10 minutes is not inherently suspicious, and apparently there is something wrong with Tapp’s nose, since police found no evidence of marijuana cultivation at the house.
Burr and Daugherty argue that “the raid was not supported by probable cause.” They say it exemplifies lax training and oversight by the LMPD that results in “the issuance of search warrants in predominantly African American neighborhoods without probable cause and/or in an unreasonable manner in violation of the Fourth Amendment.”
The plaintiffs also argue that the search was executed recklessly. “It is completely unreasonable to execute a warrant that vaguely mentions someone potentially smoking marijuana at a residence with a SWAT team of 14 officers, exploding devices, forced entry, and assault rifles, particularly when no investigation was done to determine who lived in the Residence and given the other false statements and omissions in the affidavit,” they say. “Defendants’ misconduct could have very easily resulted in the death of a parent or child for no good reason,” and it “did result in the violation of Plaintiffs’ constitutional rights and significant emotional damage.”
Burr and Daugherty, who are asking for a jury trial in Jefferson County Circuit Court, are seeking compensatory damages, punitive damages, and legal fees. I called the LMPD for comment and will update this post if and when I get a response.
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Trump-Ukraine Whistleblower Suddenly Won’t Testify; Lawyers Break Off Negotiations Amid New Revelations
A CIA officer who filed a second-hand whistleblower complaint against President Trump has gotten cold feet about testifying after revelations emerged that he worked with Joe Biden, former CIA Director John Brennan, and a DNC operative who sought dirt on President Trump from officials in Ukraine’s former government.
According to the Washington Examiner, discussions with the whistleblower – revealed by RealClearInvestigations as 33-year-old Eric Ciaramella have been halted, “and there is no discussion of testimony from a second whistleblower, who supported the first’s claims.”
Ciaramella complained that President Trump abused his office when he asked Ukraine to investigate corruption allegations against Joe Biden and his son Hunter, as well as claims related to pro-Clinton election interference and DNC hacking in 2016.
On Thursday, a top National Security Council official who was present on a July 25 phone call between Trump and Ukrainian President Volodomyr Zelensky testified that he saw nothing illegal about the conversation.
“I want to be clear, I was not concerned that anything illegal was discussed,” said Tim Morrison, former NSC Senior Director for European Affairs who was on the July 25 call between the two leaders.
Tim Morrison
And now, the partisan whistleblowers have cold feet;
“There is no indication that either of the original whistleblowers will be called to testify or appear before the Senate or House Intelligence committees. There is no further discussion ongoing between the legal team and the committees,” said the Examiner‘s source.
The whistleblower is a career CIA officer with expertise in Ukraine policy who served on the White House National Security Council during the Obama administration, when 2020 Democratic presidential candidateJoe Biden was “point man” for Ukraine, and during the early months of the Trump administration. –Washington Examiner
In other words, House Democrats are about to impeach President Trump over a second-hand whistleblower complaint by a partisan CIA officer, and neither he nor his source will actually testify about it (for now…).
On Thursday, the House passed a resolution establishing a framework for Trump impeachment proceedings, belatedly granting Republicans the ability to subpoena witnesses, but only if Schiff and fellow Democrats on the Intelligence Committee agree.
Mark Zaid, who along with Andrew Bakaj is an attorney for both the original whistleblower and the second whistleblower, told the Washington Examinerthe legal team was willing to work with lawmakers so long as anonymity is ensured. “We remain committed to cooperating with any congressional oversight committee’s requests so long as it properly protects and ensures the anonymity of our clients,” Zaid said.
On Wednesday, Zaid and Bakaj declined to confirm or deny in a statement to the Washington Examiner that Eric Ciaramella, 33, a career CIA analyst and former Ukraine director on the NSC, was the whistleblower after a report by RealClearInvestigations. –Washington Examiner
In September, House Intelligence Committee Chair Adam Schiff, who lied about contacts with Ciaramella (and hired two Ciaramella associates as staffers) said that the whistleblower “would like to speak to our committee.”
We have been informed by the whistleblower’s counsel that their client would like to speak to our committee and has requested guidance from the Acting DNI as to how to do so.
We‘re in touch with counsel and look forward to the whistleblower’s testimony as soon as this week.
Once Ciaramella’s status as a CIA officer and his links to Biden emerged, however, Schiff backtracked. On October 13 he changed his tune, saying “Our primary interest right now is making sure that that person is protected.”
Attorneys for Ukraine call whistleblower new statement on speculation about the intelligence community employee’s identity. pic.twitter.com/UdsmSQ226P
Meanwhile, once the House impeaches Trump – which it most certainly will – the tables will turn in the Senate, which will hold a mandatory trial. Not only will the GOP-Senators controlling the proceedings be able to subpoena documents and other evidence, they’ll be able to compel Ciaramella, the Bidens, Chalupa and any other witnesses they desire as we head into the 2020 US election.
Nancy Pelosi saw this coming and caved to her party anyway. There isn’t enough popcorn in the world for what’s coming.
The SPX recorded new highs this week. Investors appear to be excited about the U.S. – China Phase 1 trade agreement, which only goes so far in ending the trade war. Plus, the Fed is cutting interest rates, injecting $100 billion in repo financing over the next month, and embarking on a new round of QE. So, is it clear sailing for corporate America? Maybe companies are not as financially viable as record SPX levels would indicate.
Let’s look at the lifeblood of a company, cash flow. Goldman Sachs analysis of corporate cash flows shows that SPX companies are actually running, in aggregate, negative cash flow at 103.8% while keeping stock buybacks and dividends flowing to shareholders. Debt is up 8% squeezing corporate cash flow to the point where aggregate cash flows are down 15% versus the prior year.
Source: Goldman Sachs – 7/25/19
Cash is the lifeblood of a company, but a company can’t borrow money forever without being a viable profitable entity able to pay back debt.
Non-financial corporations have taken on record debt at 47% to GDP. The last time corporations approached this level of debt was during the Great Recession. Yet, default rates have not gone up.
Sources: Federal Reserve Bank of St. Louis, Edward Altman – 8/5/19
Is this time for debt payment defaults different? It would seem this is a ‘benign credit cycle’ when defaults don’t rise. However, a more likely cause is that corporate cash flows are being pumped up by low interest rate loans. This corporate financial cliff maybe one reason the Fed is moving quickly to keep overnight and interest rates low. The Fed has said it is concerned about high levels of corporate debt. What is wrong with corporate debt at 47% of GDP?
The issue is when profits sink due to the trade war or as consumer spending slows, companies will no longer qualify for low interest loans. Banks and investors will hesitate to take on risky loans to companies raking up continuous losses. Without low cost loans to provide needed cash flows, sales decline will result in a freeze on hiring, the layoff of full time workers, and a closure of offices and plants. Management will take these measures to try to keep the company open until sales turnaround.
The profit margin squeeze has been happening over the past 4 ½ years, well before the trade war started. Profits were flat for the past nine years, supported by a huge corporate tax cut from the Tax Cut Bill of 2018. The contraction in profit margins has been the longest one on record since WWII. Note how recessions usually follow steep declines in profit margins at 1 to 4 years.
Source: Oxford Economics, The Wall Street Journal, The Daily Shot – 10/28/19
Why have margins been contracting? Margins can be increased by investing in automation, lowering material costs, deploying productivity enhancements, and other efficiencies. Instead of investing in margin increasing activities, corporate executives have been spending available cash from profits and debt on stock buybacks totaling $1.15 trillion in 2018. Stock buybacks are a way to boost corporate stock prices thereby increasing the income of shareholders and executives. Executives have squandered over the past ten years the opportunity to use profits for investments in research, productivity enhancements, raising wages, or cutting costs. Management has focused on short term stock gains at the cost of long term corporate viability. The chickens are finally coming home to roost.
In addition, profit margins are declining due to declining international sales. It is difficult to maintain healthy margins when sales are falling due to base spending for sales, support, and transportation to reach a certain sales threshold of profitability. Major corporations face increasing trade headwinds. For most S & P 100 corporations 50 to 60% of their sales come from overseas with prior growth rates from 15 – 25% per year in emerging markets. The Asia – Pacific region is the fastest growing sales region for many companies. Yet, the accumulating tax of trade tariffs and trade uncertainty is stifling sales growth.
Sources: U.S. Census Bureau, Tariffs Hurt the Heartland, USTR Office, The Wall Street Journal, The Daily Shot – 10/28/19
Since January of 2018, U.S. companies have paid about $34 billion in tariffs. To hold price levels and market share, companies largely paid tariff costs themselves rather than passing them onto customers. Taking tariff costs onto corporate ledgers has squeezed profit margins. The loss of decent margins in high growth markets is creating a huge profit challenge for companies.
While the Phase 1 agreement with China may provide a pause to the trade war, breaking up into two major trade blocks. Corporations will have to navigate selling into two opposing markets with focused sales, support, and product features and pricing. For more details, see our post Navigating A Two Block Trade World to see how companies plan on changing supply chains, and the implications for investors.
Corporate executives see a loss of profits and margin tightening in the future. A recent CEO survey showed confidence levels of SPX CEOs at recession levels. The survey results indicate a possible SPX decline beginning as soon as four months from now.
Sources: USA CEO Confidence Survey, Macrobond, The Wall Street Journal, The Daily Shot – 10/18/19
The concerns that CEOs see in revenue and profitability were borne out in 3rd quarter reports of 40% of S &P companies. Companies with more than 50% of sales in international markets report a 9.1% decline in profits and a 2.0% decline in revenue. All S &P companies report a 3.7% slip in earnings thus far for 3rd quarter of 2019.
Source: Factset – 10/25/19
Are equity markets recognizing the decline in profits for corporations? The chart below shows the SPX rising despite flat national corporate profits since 2013, with a huge divergence emerging in the past four years. The SPX soaring to new heights tells us that stock marketcomplacency is at record levels in appraising stock valuations versus actual corporate profits. The chart below shows how wide the gap has become which is about twice the gap size just before the Dotcom decline into 2002 from a peak in 2000.
Source: Soc Gen – Albert Edwards – Marketwatch – 10-28-19
The economic storm corporate executives see on the horizon is likely to be a future economic reality, and not liquidity fueled soaring valuations. Executives are closest to economic reality because they have to make the economic system work for their company day in and day out.A reversion of equity valuations to the reality of falling corporate profits is coming. The only question remaining is: when will the SPX reversion happen?
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Patrick Hill is the Editor of The Progressive Ensign, https://theprogressiveensign.com/ writes from the heart of Silicon Valley, leveraging 20 years of experience as an executive at firms like HP, Genentech, Verigy, Informatica and Okta to provide investment and economic insights. Twitter: @PatrickHill1677.
Netflix Slides After NBC Weighs Free Streaming Service To Everyone
Netflix is sliding into late session after Comcast’s NBCUniversal is “considering giving away the ad-supported version of its streaming service Peacock for free to everyone,” sources told CNBC.
The battle for online streaming services, which includes companies like Netflix, Amazon Prime, Hulu, and Playstation Vue, seems to be heating up as subscriber growth for many of these platforms are peaking.
NBC offering Peacock streaming service for free is a massive blow to Netflix.
WeWork CEO Adam Neumann Accused Of Pregnancy Discrimination
Adam Neumann is apparently still creating problems for WeWork, even after being ushered out of the CEO role by the company’s latest “investors”.
Medina Bardhi, described as “chief of staff” to WeWork co-founder Adam Neumann, is now suing the ousted CEO for pregnancy discrimination, claiming she was marginalized and derided by Neumann after becoming pregnant, according to the New York Times.
In 2016, Bardhi informed Neumann she was pregnant and told him that she wouldn’t be able to accompany him on business trips “due to his penchant for bringing marijuana on chartered flights and smoking it throughout the flight while in an enclosed cabin.”
From there, she is alleging a pattern of discrimination from Neumann, including him calling her maternity leave a “vacation” and “retirement”, according to a complaint she filed with the Equal Employment Opportunity Commission in New York on Thursday. Bardhi’s lawyer said he hoped that the EEOC would file a class action charges against the company.
“Wow, you’re getting big,” another high-level company official, Jennifer Berrent, reportedly said to Bardhi in front of another WeWork executive.
Bardhi was demoted both times she was pregnant while working at the company, the complaint says. She was then fired in early October, shortly after Neumann’s departure, when she was told there was “no longer a role” for her.
The complaint says: “This assertion and supposed justification rings hollow, as Ms. Bardhi already had been pushed out of Mr. Neumann’s office. It is clear that Ms. Bardhi’s firing was motivated by the Company’s sustained discriminatory bias and retaliatory animus against her and other female employees who become pregnant, take maternity leave, and/or complain about gender-based discrimination.”
Bardhi also says in the complaint that the discrimination started at a job interview in October 2013, when Neumann “unlawfully and intrusively” asked if she planned to get married or become pregnant. The question left her “stunned and uncomfortable,” she claims.
After she first became pregnant, three years later, she claims Neumann replaced her with a male employee who was paid more than twice as much. After she got the job back, she became pregnant a second time, and another male employee was hired to replace her. She was “sidelined” when she returned back to work.
“She was given no information about what her new role would be,” the complaint said. “This was obvious retaliation for her taking maternity leave and discrimination against a pregnant employee and new mother.”
“I hope you enjoyed your vacation,” Neumann allegedly said to her while driving back from a meeting on September 16.
The news flies in the face of promises made by Neumann to champion women at the company. “We like to say that right now we’re bringing in the most talented women in the world at an early stage,” Neumann said in 2017.
And over the last year, other women at WeWork have filed lawsuits accusing the company of gender discrimination. Neumann’s leadership has been singled out, as a result, and he has been criticized for maintaining a lavish lifestyle and giving family members, including his wife Rebekah, too much power at the company.
A WeWork spokeswoman said the company “intends to vigorously defend itself against” the complaint.
The statement continued: “We have zero tolerance for discrimination of any kind. We are committed to moving the company forward and building a company and culture that our employees can be proud of.”
Recall, Neumann stepped down as the company’s CEO in September after its IPO imploded on itself like a dying star. Neumann, on the other hand, will make out just fine. After cashing out over $600 million as CEO, he is now set to receive $185 million to work as a consultant to the company for four years.
