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How Far Can Bond Yields Rise Before Hurting Equities? Goldman Answers

Ever since “Trumpflation” emerged as a driver of risk-assets, a tension has emerged in capital markets: how much higher can rates rise (and by implication the US Dollar) before financial conditions become so tight that the equity rally reverses under the weight of the very reflation it is pricing in. Ten days ago, SocGen became the first to attempt an answer, by providing the following table, according to which the answer was roughly 2.6% on the 10Y Treasury: a level at which equities become rich relative to bond yields.

Of course, on a simple yield comparison basis, if looking at the 10Y yield, which today is just over 2.31%, relative to overall dividend yield of the S&P500, stocks are already overvalued…

… however that is a rather simplistic take. A full analysis would take additional variables into consideration, chief among which is the so-called growth/yield trade off.

Conveniently, an answer to that question, and more broadly, to the question of how far can equities rise alongside higher bond yields, was provided earlier today courtesy of Goldman Sachs.

Not surprisingly, Goldman’s strategist Peter Oppenheimer writes that “this is a question we are asked a lot” and adds that “the inflection point this summer, where deflationary risks have faded and reflationary hopes have been rekindled, has caused the relationship between bonds and equities to change. In effect, the collapse of the ‘deflation’ risk premium has pushed up bond yields and has supported some equities, especially financials. But in reality this shift in the risk premium (and slightly improved earnings outlook) has not been sufficient to offset the speed and change in bond yields. The net effect has been a flat market but with a small de-rating in the valuation.”

This is shown in the exhibit below which shows that the market P/E has moved down by a full PE point since bond yields have increased from July.

12-month forward IBES consensus P/E for SXXP


 

Goldman then provides a broader answer to the bigger question of the “The Growth/Yield trade off” as follows:

The answer to the question about the level of bond yields that could dampen equities is not a concrete one; answering it is more an art than a science. There are several factors to consider:

1) The relative movements between bond yields and expected growth

One way to think about the range of possible outcomes is to attempt to put some possible numbers behind the ‘trade-off’ between the discount rate and long-term nominal growth expectations. We do this by using our standard DDM in the exhibit below. Here we fix the equity risk premium (ERP) and vary growth and bond yields. As a rough rule of thumb a 50bp rise in bond yields would knock around 10% off equity values without any change in the long run expected growth rate.

SXXP sensitivity to risk-free rate and growth assumptions, with a fixed ERP


2) The level of bond yields

While the correlation between changes in bond prices and equity prices is a positive one under most ‘normal’ environments, as bond yields fall to very low levels (around 3% or so) the correlation flips. That is why falling bond yields post the financial crisis have often been combined with weaker equities as they both reflect deflation risks. By association, the reverse should be true, and the rise in bond yields from trough levels has been accompanied by a rally in risky assets since the July lows this year, although in Europe equities have remained flat as they have de-rated alongside the rise in yields. However, a rise to anything over c.3% on US treasuries (see Exhibit 12) could be a significant negative, particularly given high current valuations. In fact, the speed of adjustment is also important; note from Exhibit 12 that the sharp rise in bond yields during the so-called taper tantrum in 2013 was negative for equities as well as bonds. As Exhibit 11 shows, the same relationships exist in Europe.

Another way to show this is in Exhibits 13 and 14, described in GOAL, Reflation, equity/bond correlation and diversification desperation, November 14, 2016. This shows that the correlation between German 10-year bond returns and equities is negative when there is a low level of GDP growth and low levels of inflation. The ‘tipping point’ in the correlations is typically around real GDP of c.1.5%-2.0% and CPI inflation of around 2.0%-2.5%.

3) The valuations of bonds

In addition to levels, and the rate of change of bond yields and inflation expectations, the valuations of assets are also important in determining the impact of rising bond yields on equity prices. This is a crucial point. In recent years, given fears of deflation and the impact of QE, the valuation of bond markets has increased to levels well beyond those we believe are justified by fundamentals. It is as if bonds have benefited from the deflation risk premium (while of course equities have correspondingly been held back by this risk premium). We can get a sense of excess valuation by using our bond strategy team’s so-called ‘Sudoku’ fair value model. Exhibit 15 shows that when this model shows overvaluation, the correlation with equity prices is negative: rising bond yields are good for equities. The reverse is true when the bond market is at fair value or is expensive. This is further illustrated in Exhibit 16 which shows a scatter plot of the valuation mismatch of bonds (in standard deviations from fair value) and the correlation of equities and bonds. The overvaluation of bond yields has meant that rising yields (and a diminishing deflation risk premium) has been good for equities.

But we have already moved away from the point at which rising bond yields were definitively good. Back in July, when concerns about the ramifications of Brexit on global growth and inflation had pushed yields down to extreme low levels, and consequently had pushed down equity markets, any rise in inflation expectations or growth helped to push up yields and see equities rise from the lows together. In July, the correlation between European equities and US bonds was about -80%, but even now this correlation has already moved to -40%.

* * *

All of which brings us to the one thing that really matters: the number, or rather Goldman’s estimation, above which the 10Y yield would lead to selling in stocks, all else being equal. That number, according to Goldman is…

Taking all of these approaches together we believe that the equity market is still at a level that can cope with moderately rising bond yields. We estimate that a rise in US bond yields above 2.75% or probably between 0.75-1% in Germany would create a more serious problem for equity markets: at that point we would expect the correlation between bonds and equities to be more positive – i.e., any further rises in yields from there would be a negative for stock returns.

Taking a midpoint of Socgen’s and Goldman’s estimates, it means that the 10Y can rise another ~35 bps before it starts acting as a break to further gains in the S&P500 on expectations of the Trump “reflation” trade.

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Aussie Media Push Globalists’ “Cash Is For Criminals” Narrative

"We are entering a very dark phase in this battle to retain our liberty," warns Armstrong Economics' Martin Armstrong, adding that "this is the most dangerous period we are heading into for governments will respond only to their own self-interest to survive."

The war on cash is in full swing.

First we saw India's Modi demonetize bank-notes in the interest of fighting corruption and tax avoidance in the black economy… later admitting that this will eventually lead to a cashless society.

 

Then we hear of a proposal now being whispered behind the curtain in Europe is to impose a tax on withdrawing your own money from an ATM. The banks support this measure as a whole because they see this as preventing bank runs.

And now the whispers behind the curtain are starting to get louder.

Following reports of some Aussie banks refusing to accept cash, Armstrong Economics' Martin Armstrong warns the headlines in Australia demonstrate how the press is already conspiring against the people. The new slogan rising is Cash is for Criminals. ABC of Australia ran the story:

Cash is for criminals: Why we should scrap big notes

 

A massive stash of cash may sound like a good thing, but according to one US economist, the vast numbers of banknotes in circulation around the world are making us poorer and less safe.

 

Ken Rogoff, an economics professor at Harvard, has been writing about paper money for 20 years and he says much of this cash "is used to facilitate all sorts of crime".

 

Beyond the more heinous crimes of human and drug trafficking and terrorism, some earners hoard their money to avoid tax.

 

…

 

One way for central banks to stimulate investment during a prolonged financial crisis is to apply negative interest rates.

 

However, in an economy awash with large denomination bills, sharply cutting rates could create "complete chaos", says Professor Rogoff.

 

Investments suddenly gone bad would spur a rush to convert capital into hard currency, decreasing the effectiveness of the interest rate drop (even leaving aside the problem of large amounts of money disappearing from the economy).

 

A mostly cashless society, argues Professor Rogoff, would allow central banks to dramatically cut interest rates in times of severe crisis without this chaos.

As Armstrong concludes,

Nobody will look at the direction we are headed. I am deeply concerned that these type of proposals will send the West in a real revolution not much different from that of Russia in 1917. The divide between left and right is getting much deeper and the left is hell bent on stripping those who produce of their liberty and assets.

 

This type of confrontation is in line with our War Cycle, which we will update in 2017.

 

This is the most dangerous period we are heading into for governments will respond only to their own self-interest to survive. The socialists hate those who produce. That is just the bottom line. Nobody should have wealth more than they and this is the same human emotion that has cost tens of millions of lives in civil conflicts. We will review all our models and update this after the U.S. inauguration since the socialists are trying to figure out how to steal the election from Trump. There is no way to overturn Michigan, Wisconsin, and Pennsylvania without fraud. Otherwise, California is being used to justify handing the crown to Hillary despite the fact she conceded.

 

This will not end nicely. The divide will only get bigger. The future is anything but stable and safe.

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Facebook Employees Are Quitting Because Users Are Being Censored

Submitted by Jake Anderson via TheAntiMedia.org,

The war on “fake news” embarked upon by Facebook, Google, and Twitter may be earning the media goliaths brownie points with establishment politicos, but users — and even employees — aren’t feeling as enthusiastic.

In the midst of backlash over the stunning victory of President-elect Donald Trump, which some people attribute to the preponderance of apocryphal headlines disseminated by Internet search engines and social media platforms, the companies are tweaking their algorithms in order to target specifically blacklisted sites, many of which happen to be alternative media sites that question the political and media establishment. Many of the sites are also financially dependent on ad revenue earned by organic and referral traffic directed by Google, Facebook, and Twitter.

Now, it appears Facebook’s new algorithmic censorship practices are causing some of its employees to quit. According to the New York Times, three current and former anonymous employees claim the company has had a new tool developed specifically to restrict certain kinds of posts from appearing in users’ news feeds in certain geographic areas. This form of censorship has been deployed under the auspices of facilitating Facebook’s entry into the Chinese market. Previously, the company did this in Pakistan, Russia, and Turkey, where the respective governments requested the ability for third parties to review and block posted content. Facebook granted the requests and removed approximately 55,000 total pieces of content.

The suppression software has been contentious within Facebook, which is separately grappling with what should or should not be shown to its users after the American presidential election’s unexpected outcome spurred questions over fake news on the social network.

 

Several employees who were working on the project have left Facebook after expressing misgivings about it, according to the current and former employees.

 

…

 

Over the summer, several Facebook employees who were working on the suppression tool left the company, the current and former employees said. Internally, so many employees asked about the project and its ambitions on an internal forum that, in July, it became a topic at one of Facebook’s weekly Friday afternoon question-and-answer sessions.

Now Facebook wants access to 1.4 billion people in the world’s second-largest economy, China, and they are willing to adhere to draconian censorship practices in order to do so. It could be a complete coincidence that this new push happens to coincide with Facebook’s crackdown on alternative media, which has caused several employees to tender their resignations.

A Facebook spokeswoman responded to the report in a statement:

“We have long said that we are interested in China, and are spending time understanding and learning more about the country. However, we have not made any decision on our approach to China. Our focus right now is on helping Chinese businesses and developers expand to new markets outside China by using our ad platform.”

The question now is whether there is a connection between two different but simultaneous pushes for censorship by the largest social media platform in the world.

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Uber Drivers Join “Fight For $15” Protests As Autonomous Vehicle Technology Looms

Starting tomorrow Uber drivers from around the country will join the union-backed "Fight For $15" campaign that plans to hold protests in two-dozen cities including San Francisco, Miami and Boston.  The organization's twitter feed describes the protest as a "national day of disruption" which seems slightly less than a "constructive" approach to the very serious issue of the federal minimum wage.  Per Reuters:

Hundreds of Uber drivers in two dozen cities, including San Francisco, Miami and Boston, for the first time will add their voices to the union-backed "Fight for $15" campaign that has helped convince several cities and states to raise starting pay significantly above the U.S. minimum wage of $7.25.

 

Justin Berisie, 34, drives for Uber in Denver and is joining Tuesday's protests.

 

"Someone who lives in America and goes to work every day, that person deserves a decent living," said Berisie, who has a 5-year-old daughter and is struggling to make ends meet. He said he earns $500 or less, before expenses such as gasoline, during an average week where he is on duty for 50 to 60 hours.

 

According to the "Fight For $15" website, the organization started with just a few hundred fast food workers in New York City and has since spread to over 300 cities and a variety of industries.  Meanwhile, the organization also claims to have "won" mandates for a $15 per hour minimum wage in multiple jurisdiction across the U.S. including New York and California.

The Fight for $15 started with just a few hundred fast food workers in New York City, striking for $15 an hour and union rights.

 

Today, we’re an international movement in over 300 cities on six continents of fast-food workers, home health aides, child care teachers, airport workers, adjunct professors, retail employees – and underpaid workers everywhere.

 

For too long, McDonald’s and low-wage employers have made billions of dollars in profit and pushed off costs onto taxpayers, while leaving people like us – the people who do the real work – to struggle to survive.

 

That’s why we strike.

 

When we first took the streets, the skeptics called us dreamers – said a $15 wage was “unwinnable.”

 

We won $15 an hour across New York State and California.

 

We won $15 in Seattle, and huge raises in cities from Portland to Chicago.

 

We won $15 for Pennsylvania nursing home workers and all hospital employees at UPMC – Pennsylvania’s largest private employer.

 

And we won’t stop fighting until we turn every McJob into a REAL job.

Sometimes defining a "victory" can be difficult…this doesn't look like a "win" to us:

McDonalds Kiosk

 

And while UBER's labor replacement strategy may take a little longer to implement than McDonalds' solution, drivers should probably be a bit more cautious in what they wish for as a $15 federal minimum wage will only speed the development of autonomous vehicles.

Uber

 

Of course, this latest backlash from UBER employees comes after they launched several class-action lawsuits last year claiming that UBER illegal deprived them of employment benefits by "misclassifying them as independent contractors."

Uber drivers have sued the company in several states, accusing it of depriving drivers of various employment protections by misclassifying them as independent contractors.

 

The lawsuits are a test for companies such as Uber Technologies Inc [UBER.UL], a high-profile player in the so-called "sharing economy," which say that their contractor model allows for flexibility that many see as important to their success. A legal finding that drivers are employees could raise Uber's costs and force it to pay Social Security, workers' compensation, and unemployment insurance.

Meanwhile, per Bloomberg, India's largest UBER competitor, Ola, has been forced to seek new capital at a 40% valuation discount to it's previous raise as ride-hailing services around the globe continue to burn staggering amounts of cash.

India’s foremost ride-hailing service Ola is pursuing a new round of funding that would give the company a 40 percent lower valuation than it had a year ago, according to a person with direct knowledge of the matter, as the startup tries to amass capital to stave off a challenge from Uber Technologies Inc.

 

The company is raising funds that value the company at $3 billion, a sharp reduction from the $5 billion figure during a previous financing round in November 2015. At the time it made Ola one of the nation’s four most valuable startups, alongside online retailers Flipkart and Snapdeal and digital payments operator Paytm.

 

If the deal goes through, Ola would become the first Indian unicorn — a startup valued at a billion-dollars or more — to accept funds at a lower valuation, in what’s known as a down-round.

In conclusion:

Min Wage

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The Tyranny At Standing Rock: The Government’s Divide-And-Conquer Strategy Is Working

Submitted by John Whitehead via The Rutherford Institute,

What we’re witnessing at Standing Rock, where activists have gathered to protest the Dakota Access Pipeline construction on Native American land, is just the latest incarnation of the government’s battle plan for stamping out any sparks of resistance and keeping the populace under control: battlefield tactics, military weaponry and a complete suspension of the Constitution.

Militarized police. Riot and camouflage gear. Armored vehicles. Mass arrests. Pepper spray. Tear gas. Batons. Strip searches. Drones. Less-than-lethal weapons unleashed with deadly force. Rubber bullets. Water cannons. Concussion grenades. Arrests of journalists. Intimidation tactics. Brute force.

This is what martial law looks like, when a government disregards constitutional freedoms and imposes its will through military force.

Only this is martial law without any government body having to declare it.

This is martial law packaged as law and order and sold to the public as necessary for keeping the peace.

These overreaching, heavy-handed lessons in how to rule by force have become standard operating procedure for a government that communicates with its citizenry primarily through the language of brutality, intimidation and fear.

What Americans have failed to comprehend is that the police state doesn’t differentiate.

In the eyes of the government—whether that government is helmed by Barack Obama or Donald Trump or Hillary Clinton—there is no difference between Republicans and Democrats, between blacks and whites and every shade in the middle, between Native Americans and a nation of immigrants (no matter how long we’ve been here), between the lower class and the middle and upper classes, between religious and non-religious Americans, between those who march in lockstep with the police state and those who oppose its tactics.

This is all part and parcel of the government’s plan for dealing with widespread domestic unrest, no matter the source.

Divide and conquer.

For too long now, the American people have allowed their personal prejudices and politics to cloud their judgment and render them incapable of seeing that the treatment being doled out by the government’s lethal enforcers has remained consistent, no matter the threat.

The government’s oppressive tactics have not changed.

The same martial law maneuvers and intimidation tactics used to put down protests and muzzle journalists two years ago in Ferguson and Baltimore are being used to flat-line protesters and journalists at Standing Rock this year.

The same infiltration and surveillance of ranch activists opposing the Bureau of Land Management in Oregon and Nevada over the past several years were used against nonviolent anti-war protesters more than a decade ago.

The same brutality that was in full force 20-plus years ago when the government raided the Branch Davidian religious compound near Waco, Texas—targeting residents with loud music, bright lights, bulldozers, flash-bang grenades, tear gas, tanks and gunfire, and leaving 80 individuals, including two dozen children, dead—were on full display more than 50 years ago when government agents unleashed fire hoses and police dogs on civil rights protesters, children included.

The more things change, the more they stay the same.

The sticking point is not whether Americans must see eye-to-eye on these varied issues but whether they can agree that no one should be treated in such a fashion by their own government.

Our greatest defense against home-grown tyranny has always been our strength in numbers as a citizenry.

America’s founders hinted at it again and again. The Declaration of Independence refers to “one people.” The preamble to the Constitution opens with those three powerful words: “We the People.” Years later, the Gettysburg Address declared that we are a “government of the people, by the people, for the people.”

Despite these stark reminders that the government exists for our benefit and was intended to serve our needs, “We the People” have yet to marshal our greatest weapon against oppression: our strength lies in our numbers.

Unfortunately, 318 million Americans have yet to agree on anything, especially the source of their oppression.

This is how tyrants come to power and stay in power.

Authoritarian regimes begin with incremental steps. Overcriminalization, surveillance of innocent citizens, imprisonment for nonviolent—victimless—crimes, etc. Slowly, bit by bit, the citizenry finds its freedoms being curtailed and undermined for the sake of national security.

No one speaks up for those being targeted. No one resists these minor acts of oppression. No one recognizes the indoctrination into tyranny for what it is.

As I point out in my book Battlefield America: The War on the American People, historically this failure to speak truth to power has resulted in whole populations being conditioned to tolerate unspoken cruelty toward their fellow human beings, a bystander syndrome in which people remain silent and disengaged—mere onlookers—in the face of abject horrors and injustice.

We can disassociate from such violence. We can convince ourselves that we are somehow different from the victims of government abuse. We can treat news coverage of protests such as Standing Rock and the like as just another channel to flip in our search for better entertainment. We can continue to spout empty campaign rhetoric about how great America is, despite the evidence to the contrary. We can avoid responsibility for holding the government accountable. We can zip our lips and bind our hands and shut our eyes.

In other words, we can continue to exist in a state of denial.

Whatever we do or don’t do, it won’t change the facts: the police state is here.

“There comes a time,” concluded Martin Luther King Jr., “when silence is betrayal.”

The people of Nazi Germany learned this lesson the hard way.

A German pastor who openly opposed Hitler and spent the last seven years of Nazi rule in a concentration camp, Martin Niemoller warned:

First they came for the Socialists, and I did not speak out—Because I was not a Socialist. Then they came for the Trade Unionists, and I did not speak out—Because I was not a Trade Unionist. Then they came for the Jews, and I did not speak out—Because I was not a Jew. Then they came for me—and there was no one left to speak for me.

The people of the American Police State will never have any hope of fighting government tyranny if we’re busy fighting each other.

When all is said and done, the only thing we really need to agree on is that we are all Americans.

So if this isn’t your fight—if you believe that authority is more important than liberty—if you don’t agree with a particular group’s position on an issue and by your silence tacitly support the treatment meted out to them—if you think you’re a better citizen or a more patriotic American—if you want to play it safe—and if don’t want to risk getting shot, tased, pepper-sprayed, struck with a baton, thrown to the ground, arrested and/or labeled an extremist—then by all means, remain silent. Stand down. Cower in the face of the police. Turn your eyes away from injustice. Find any excuse to suggest that the so-called victims of the police state deserved what they got.

But remember, when that rifle (or taser, or water cannon, or bully stick) finally gets pointed in your direction—and it will—when there’s no one left to stand up for you or speak up for you, remember that you were warned.

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Robertson Stephens Co-Founder Sues Theranos And Elizabeth Holmes For Fraud

In what is not the first lawsuit (and certainly won’t be the last) by naive shareholders to go after former unicorn darling-turned-fraud Theranos, its founder Elizabeth Holmes, and COO Ramesh Balwani, the co-founder of prominent dot com investment bank Robertson Stephens, Robert Colman, accused Theranos and Holmes of making false and misleading claims about its operations and technology while soliciting money from investors.

The pioneering Silicon Valley deal maker invested in the blood-testing company in late 2013 through venture-capital fund Lucas Venture Group, according to the lawsuit. The suit was filed in federal court in San Francisco and seeks class-action status. The WSJ first reported of the legal action.

In the lawsuit Colman says that he agreed to invest in Theranos after Lucas Venture Group founder Donald A. Lucas wrote in a Sept. 9, 2013, letter that Theranos invited the venture-capital firm to purchase $15 million in stock. As the WSJ adds, Lucas said it was part of a “follow-on extension” of a funding round that began in 2010, the lawsuit states. On the same day in 2013, Theranos and Walgreens announced in a joint news release what they called “a long-term partnership to bring access to Theranos’ new lab testing service through Walgreens pharmacies nationwide.” Walgreens is now a unit of Walgreens Boots Alliance Inc.

From the filing:

Companies owe a duty to potential investors to be open and honest. Even non-public companies are bound by this principle of frankness no matter how sophisticated their potential investors might be. Specifically, those who solicit investments for a company should not make statements that are designed to reach potential investors that are materially false, misleading or incomplete. Those who make statements to investors must believe them to be true and complete, have a reasonable basis for their belief, and exercise reasonable care and not know of any untruth or omission.

 

Plaintiffs bring this action because Theranos, Inc. (“Theranos”), Chief Executive Officer Elizabeth Holmes (“Holmes”), and former President and Chief Operating Officer Ramesh “Sunny” Balwani (“Balwani”) flaunted these simple rules. To them, being honest and forthright was an obstacle to their goals. Instead, beginning in July 2013, Theranos, Holmes and Balwani set in motion a widespread publicity campaign whose purpose was raising billions for Theranos and themselves and to induce investors to invest in Theranos. They told the public, knowing and intending that their statements would reach potential investors, that they had perfected “a proprietary” and “revolutionary technology” over the past ten years that would change the world of laboratory testing.

 

Holmes claimed that Theranos’ proprietary technology could take a pinprick’s worth of blood, extracted from the tip of a finger instead of intravenously, and test for hundreds of diseases—a remarkable innovation that was going to save millions of lives and, in a phrase that Holmes often repeated, “Change the world.” Based on this story, Defendant also claimed that this technology had been vetted or was being vouched for by clinics, pharmaceutical companies, experts, regulators and an all-star board of directors. And they announced that the technology was immediately being rolled-out by one of the nation’s largest drug store chains, Walgreens.

 

Holmes honed her story to near perfection. She gave hundreds of interviews in which she promoted her narrative about Theranos’ revolutionary technology. She bolstered that story by  attracting to the Theranos Board of Directors luminaries like Henry Kissinger and George Schultz. Holmes adorned the covers of Fortune, Forbes and other publications and promoted her message there and elsewhere. She also amassed a net worth of around $9 billion.

 

The truth—there was no revolutionary technology. On October 15, 2015, the Wall Street Journal (WSJ) shocked the investing world with a story that Theranos was “struggling” with turning this technology into a reality. According to the WSJ, Theranos’ employees were “leery about the machine’s accuracy” and the machine was being used for a tiny number of tests. The article also reported that some doctors didn’t trust the test results they were receiving. While Theranos vigorously attacked and denied the WSJ article and follow-on media reports—calling them “factually and scientifically erroneous and grounded in baseless assertions by inexperienced and disgruntled former employees and industry incumbents”—those reports have turned out to be largely true. Reportedly, Theranos is under investigation by the United States Department of Justice (U.S. DOJ) and the Securities and Exchange Commission (SEC).

According to the WSJ, Colman, who has retired from investment banking and lives in Idaho, declined to comment through his lawyer. Theranos and Lucas Venture Group didn’t immediately respond to requests for comment. Walgreens declined to comment. The lawsuit also includes a second plaintiff, Hilary Taubman-Dye, who alleges that she bought Theranos shares on the online exchange SharesPost Inc., which acts as a broker for shares of private companies.

Taubman-Dye allegedly agreed to buy Theranos stock at a price of $19 a share in August 2015. She tried to cancel the transaction after The Wall Street Journal published in October 2015 its first article detailing problems at Theranos. At the time, Theranos, founder Elizabeth Holmes and an unidentified third party all had a legal right of first refusal giving them a chance to buy any shares an investor chose to sell in a secondary transaction, the suit alleges.

The full lawsuit is presented below

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Morning Joe Highlights the Idiocy and Hypocrisy of the Media Over Presidential Recount

When Trump said he was going to leave his options open, in regards to accepting the results of the election — the media went apeshit, decrying him to be a dog and a scoundrel. But now that Shill Stein and Soros funded Marc Elias from the Clinton campaign decided to do it after getting defeated in the general election, there’s nothing but crickets out of them.

The double standard is palpable and is the primary reason why alternative media sites are flourishing at a time when legacy media are in the depths of hellish rebuke.

Joe and Mika weigh in on the real fake news.

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Wealthy Fashion Designers Refuse Service To Melania Trump

Submitted by Caleb Verbois via The Mises Institute,

People magazine recently reported news that a number of prominent fashion designers have refused to work with Melania Trump because they do not approve of her, or more likely, her husband’s politics and language. Given Donald Trump’s often offensive way of speaking about, well, almost everything, that is understandable. Thus, they conclude, if you design and make clothes for Melania Trump, especially the outfit she will wear to the inauguration, you are, in some small way, endorsing Donald Trump and all he stands for. So designers like Sophie Theallet have decided that because they “stand against all discrimination and prejudice,” they cannot work for Melania.

This all seems rather ironic. How can progressive fashion designers like Sophie Theallet refuse to serve anyone? In recent years it’s become first unreasonable, then politically incorrect, and lately illegal for some people to refuse service. Not fashion designers of course. They are above that. No, I’m thinking about bakers and photographers, who, because of their religious beliefs, have politely but firmly declined to provide service for gay weddings. Note that they have not declined service to homosexuals. They have just made it clear that they cannot morally provide a wedding cake or floral arrangements for a homosexual wedding, because it goes against their religious principles.

And for that, they have been pilloried in the press, sued, and threatened with a loss of their businesses and personal savings. Consider Barronelle Stutzman, a florist in Washington who has served and employed people of all backgrounds, including homosexuals, for her entire career. However, after she declined to provide flowers for a homosexual wedding, in accordance with her faith, both the ACLU and Washington state attorney general have sued not just her business, but her personally. That mirrors the situation of Oregon bakers Aaron and Melissa Klein. They baked a cake for a woman who was so happy with their work that she and her partner asked Melissa to bake their wedding cake. The Kleins politely explained that due to their faith, they could not endorse a wedding that violated their beliefs. In response, the state sued them, put a legal order on them banning them from talking about their desire to work according to their faith, and said they “needed rehabilitation.” The fine the state assessed and the subsequent hate mail and threats forced the Klein’s to close their business and led Aaron Klein to go to work as a sanitation worker to pay their bills.

Does anyone think Sophie Theallet will be sued and driven out of business for refusing to endorse Trump’s inauguration? Maybe Trump should sue for discriminatory practices. After all, one could say that turnabout is fair play. The progressives have made life difficult for Christian and religious small businesses, so now it is time to make life difficult for fashion designers. That would certainly fit with Donald Trump’s tit-for-tat attitude towards almost everything in life, especially lawsuits.

But it is the wrong approach. The problem is not that some designers have refused to work with Melania. Let’s be honest, the world does not have a shortage of overpriced dress designers. Melania can find someone else. That is also true for homosexual couples that have sued and persecuted religious florists and bakers. The country does not have a shortage of either. Moreover, while Theallet is refusing to serve Trump at all, religious photographers and bakers are more than willing to serve homosexual customers — just not at their wedding.

No, the issue has never been a lack of service providers. It has been an unwillingness to accept that other people may not endorse your behavior. Prominent fashion designers are refusing to serve Melania Trump because they do not want to appear as though they endorse her husband’s behavior. They should have the right to make that decision free from threats of lawsuits and public harassment. In just the same way, religious photographers and bakers should have the right to politely refuse to endorse the practice of gay weddings.

America has always given a very high precedence to conscientious objections, but increasingly, rights of conscience are being marginalized. Religious liberty is much more than merely having the freedom to attend church, synagogue, or mosque. It is the freedom to actually live out your religious beliefs—even ones that may not be politically correct or agreeable to high fashion designers—every day of the week.

 

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Where Are We In The Business Cycle: A Troubling Chart From Morgan Stanley

In its 2017 global strategy outlook note titled “Sparkle and Fade”, Morgan Stanley is bittersweet about the future. While on one hand, the bank – which until recent had one of the gloomiest forecasts on Wall Street (a quick walk down Adam Parker’s YTD memory lane should be sufficient) – is now recommending equities and urging the sale of Treasuries and other duration exposure, it also admits that the US is now well into the late stages of the cycle, financial conditions will tighten significantly, and that much more volatility is on the horizon: “by 2Q17, the market will confront a more hawkish Fed, a still-strengthening USD and a renewed moderation in China’s growth. Political reality may also bite, as high expectations for action by the new US administration become hard to meet.”

This is how MS summarizes its recommendations: our first theme for 2017 is the need to be flexible; the second is that the distribution of outcomes has grown fatter. The gains in a plausible bull case look larger than before, fueled by the prospect of fiscal expansion, rising earnings and a return of true ‘animal spirits’. But the downside tail has also grown. cycle models suggest that DM markets are already deep into the final expansionary stage. DM policy easing is coming to an end. The likelihood of booms and busts is far greater. And geopolitical risk looms large.

On the bullish side, MS writes a trend of rising yields, steeper curves and better earnings has been in place for months. It forecasts that this trend will continue through 1Q17, as still-easy year-over- year comparisons mean headline inflation and global earnings continue to rise. The bank also points out something the Fed is well aware off: avoid giving the market much, if any, information. Namely, “an initial lack of policy clarity from the Trump administration may actually be helpful allowing investors to believe that the US ultimately will pursue ‘good’ projects (e.g., infrastructure spending) and avoid ‘bad’ ones (trade protectionism), while dangling the possibility of large corporate tax cuts. “

However, shortly thereafter the initial optimism will fade and by 2Q17, this picture is set to change: global yields and USD to rise in 1Q as markets anticipate that better growth and inflation will cause the Fed to hike twice later in the year. That will mean a material tightening in financial conditions.

Around the same time, China growth will slow as credit-fueled stimulus is dialed back. And high expectations that the new US administration will be market-friendly raise the likelihood of disappointment. Even with expectations of fiscal stimulus, Morgan Stanley’s full year 2017 GDP forecast is just 2%.

More troubling is that the expansion, already the 4th longest in US history, and set to be the third longest by the time Trump is inaugurated…

… is very long in the tooth.

Which brings us to the most concerning observation by Morgan Stanley, according to which 2017 is a year in which the bank’s odds of a boom and bust have materially increased, a finding consistent with a late-cycle US environment. So late, in fact, that one look at the chart below shows the US cycle has not only plateaued but is now stalling and is turning over.

This, as Morgan Stanley writes, “is a change. Our long-running narrative had been “slow growth, slow reflation, and slow policy normalization”, a backdrop that we’ve seen as favorable to credit. The prospect for more fiscal stimulus in the US and elsewhere affects all three. Our new forecasts call for higher growth, inflation and policy rates than before, an uncertain cocktail for an expansion that is already one of the longest on record.”

Higher growth?  Ok fine, but based on what? An already record high debt balance and rising interest rates? Rising prices and (allegedly) wages, which eat into corporate profitability? A soaring dollar that will soon result in a sharp drop in US exports? Remember how until Nov 8 the only model everyone swore by was the “Fed Model”, according to which S&P multiples were at nosebleed levels because yields were so low, and so stock valuations are justified? Well, what happens to multiples when inflation spike and interest rates jump? Judging by the complete disappearance of any Fed Model mentions, that was a rhetorical statement.

Worse, as MS adds, its forecasts also imply the end of DM policy easing, sees higher probability of booms and busts (i.e., more volatility which traditionally is bearish) and it now expects six Fed rate hikes through YE18, with the ECB set to consider tapering in 2H17, and a shift of the BoJ’s 10yr yield target in 4Q17. Also, rather perplexingly, despit the collapse in EM currencies, Morgan Stanley believes that policy easing in 2017 is an EM story, with cuts likely in Brazil, Russia and Korea. It remains to be seen who these countries can afford to cut rates when their currencies are desparately in need of stabilization. Perhaps we will find MS’ answer in a few months.

For now, however, here are the two most likely “fat tail” outcomes:

  • Bull case: US fiscal stimulus boosts growth just as EPS growth accelerates, leading to new highs in equity markets. Animal spirits, in both corporates and investors, return in a way they haven’t so far in this cycle. Higher yields turn out to be less of a drag than assumed, at least for the time being.
  • Bear case: Higher growth and inflation could lead to a more hawkish central response than we expect. Corporate leverage is unusually high for this point in a cycle expansion. Risk premiums, while not extreme, are hardly ‘cheap’ across asset classes.

What does this mean for various asset recommendations:

  • Overall: We reduce credit from OW to EW, upgrade equities to a modest OW (+3%) and add to cash (from +1% to +3%). We maintain a modest UW in government bonds. Given our view of ‘sparkle and fade’,  we’d aim to keep exposure through liquid instruments, where possible.
  • Equities: Reasonable long-run risk premiums (ex-US), a late-cycle market and high 12m return forecasts lead us to raise equities to a modest OW. But our regional views change. We lower US and EM, given weaker ‘cycle’ scores and a strong USD hitting 12m forecasts. Japan becomes our top market, with attractive long-run valuations, some cyclical strength, and good N12M EPS growth.
  • Credit: Average risk premiums, higher odds of boom and bust and poor 12m return forecasts lead us to lower credit to EW. We forecast corporate spreads to widen, and prefer both securitized products and EM sovereign debt. In corporates, we prefer investment grade over high yield, Europe over US, and financials over non-financials.
  • Rates: Still-low risk premiums, a late-cyle market and poor 12m returns are all consistent with a modest UW for government bonds, in our view. We see US 10yr yields rising to 2.50% by 4Q17, while 10yr Bunds rise to 0.90% as the ECB discusses tapering in 2H17. We think the US curve flattens vs. forwards on a 12-month view, while the DBR curve steepens.
  • Cash: We raise our cash weight modestly, seeing this as prudent, given expectations that the next three months might require an outsized level of nimbleness.
  • FX: We see the last leg of a USD bull market. USD/JPY goes higher (to 125 by 4Q17), while KRW and CNH also weaken. High carry offsets modest depreciation in BRL, RUB and INR.
  • Volatility: We see a shift toward higher volatility. We switch from being sellers to buyers of credit volatility, and continue to like owning rate volatility, where we focus on EUR 10yr rates. We think calls are a  good way to own the S&P 500, given low vol, a steep skew and a wider range between our bull and bear case forecasts.

Finally, here is a visual summary of the key themes for the coming year according to MS, which envision no less than 6 rate hikes by the end of 2018, suggesting Fed Fund rates rise to about 2% in two years:

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