One of the world’s last great boomtowns

[Editor’s note: Our Chief Investment Strategist Tim Staermose is filling in for Simon today from Yangon, Myanmar.]

Since so much of Asia is on holiday for the Lunar New Year, I decided to travel to Myanmar to check out how the economy is developing.

Myanmar was once the wealthiest economy in Southeast Asia. But decades of isolation and military rule have turned it into the poorest.

Myanmar is, no doubt, the Cuba of Southeast Asia.

For the last few years, however, the country has started emerging from this isolation. The military government has begun to relax its stranglehold and play nice with the rest of the world.

Just since my last trip to the country a few years ago, I can hardly believe the extraordinary progress.

A few years ago there was hardly any mobile phone coverage. All bandwidth was strictly controlled by the Army, and we pitiful civilians had no access to the network.

As late as 2013, only 7 in 100 people had a mobile phone. Now every second person in Yangon has one– usually a new Chinese-made smart phone.

A local SIM card, with 1GB of data, valid for one month can be purchased for about $6.

(That might sound cheap, but $6 is expensive in Myanmar compared to local wages. But mobile service prices are falling fast.)

Mobile technology is becoming an indispensable part of the economy.

Yesterday we stumbled upon an enterprising young lady from the Dala district, on the south side of the Yangon River from the downtown area, who offered to take us on a tour of the district.

She was able to line up rickshaws, make appointments, and keep in touch with all the people we met along our route, all from her smartphone while in the pedicab.

This was an impromptu tour, completely unplanned by us, so she had to think quickly and get things done as we travelled along.

Just three years ago, this would have been completely impossible.

ATMs and credit cards also work now.

Before, not even the few 5-star hotels in Yangon could accept credit card payment.

That was partly due to international sanctions against Myanmar (so VISA, AMEX and MasterCard were banned from doing business with the country), and partly due to lack of payments processing technology.

But, that’s all changed, too. My friends and I have been regularly withdrawing cash from foreign bank accounts at the ATMs here.

To be clear, there are still plenty of challenges for the country, as it struggles to emerge from over 50 years of isolation and disastrous economic policies.

Wandering around the derelict shells of what used to be magnificent, colonial style buildings in downtown Yangon, it serves as a clear reminder of how civilization can, and sometimes does decline.

The stench coming from the open sewers next to the pavements was a pungent reminder that the basic infrastructure of the city has not changed a great deal since the 1960s.

(On the positive side, there is a certain old world charm to Myanmar that doesn’t exist in too many other places around the world. In this respect it is very reminiscent of Havana.)

One thing above all is clear to me, though. For all its richness in oil, gas, timber, minerals, gems, soil, water, etc., Myanmar’s greatest asset is its people.

I have found people from all walks of life here to be open, honest, friendly, and, in most cases, hardworking and industrious.

Given the right tools, technology, and sufficient investment capital, this country truly does have an exceptionally bright future.

Fortunes will be made here, both by enterprising locals, as well as foreigners who have the foresight to invest wisely in one of the world’s last great boomtowns.

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“Someone” Desperately Intervened to Save Stocks Yesterday

The Central Banks are getting desperate. The interventions are so obvious now you’d have to be on drugs not so notice them.

 

On Monday afternoon, at 3PM “someone” stepped in to prop up stocks. They did it again yesterday at 10AM. These were obvious interventions.

 

How do we know this was intervention and not real buying?

 

Because no real buyer guns the markets 20+ points higher in a matter of minutes.

 

Real investors carefully try to buy stock without gunning the market higher. If the market explodes higher, you get a worse entry point.

 

Why are Central Banks desperately trying to “save” stocks?

 

Because the markets have lost faith in their abilities.

 

The Bank of Japan launched Negative Interest Rate Policy or NIRP two Fridays ago. Japanese stocks rolled over and crashed just one day later. They’ve since lost over 6%.

 

 

Consider that for a moment. The Bank of Japan, launched NIRP for the first time in history, and instead of exploding higher, stocks collapse.

Japan ALSO had to cancel a bond auction for the first time in history because investors didn’t want to buy bonds at negative rates.

The End Game has begun for Central Banks. Desperate interventions may push stocks higher temporarily, but the next Crisis has officially begun.

Smart investors are preparing now.

We just published a 21-page investment report titled Stock Market Crash Survival Guide.

 

In it, we outline precisely how the crash will unfold as well as which investments will perform best during a stock market crash.

 

We are giving away just 1,000 copies for FREE to the public.

 

To pick up yours, swing by:

http://ift.tt/1HW1LSz

 

Best Regards

 

Graham Summers

Chief Market Strategist

Phoenix Capital Research

 

 

 

 


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WTI Crude Plunges Back Below $28 After Yellen Disappoints

WTI Crude futures are tumbling as Yellen’s prepared remarks offered little for the doves and played down growth due to “financial strains.” Back in the red after some overnight hope from Europe, WTI is back to a $27 handle once again…

 


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Trump and Sanders Take New Hampshire, Social Justice Activist Kills Himself Outside Ohio Statehouse, FBI Can’t Unlock San Bernardino Shooters’ Phones: A.M. Links

  • Donald Trump and Sen. Bernie Sanders were the big winners in New Hampshire last night, taking 35 percent and 60 percent of the Republican and Democrat vote, respectively. Rounding out the top five GOP candidates were Ohio Gov. John Kasich with nearly 16 percent of the vote, Sen. Ted Cruz with 11.6 percent, Jeb Bush with 11.1 percent, and Sen. Marco Rubio with 10.6 percent. 
  • The Supreme Court temporarily blocked the Obama administration’s regulations on emissions from coal-fired power plants.
  • A 23-year-old Black Lives Matter and anti-hunger activist who was honored at the NAACP Image Awards in Los Angeles last week shot himself in the head on the steps of the Ohio Statehouse Monday.
  • California pregnancy-testing and counseling centers are fighting a rule that would require them to post a sign about state abortion, contraception, and prenatal care programs for low-income women.
  • A former federal judge is asking President Obama to pardon a man he sent to prison for 55 years after making three marijuana sales to a police informant.
  • The FBI has been unable to unlock the phones of the couple responsible for the December mass shooting in San Bernardino, California, because it’s encrypted—fueling government demands for a “backdoor” into encrypted phones.
  • The Ferguson City Council is asking the Justice Department for changes to a proposed consent decree meant to address local law enforcement practices. 
  • Shorter Hillary Clinton: Citizens United was a bad decision because it allows Republicans to criticize her. 
  • In San Francisco, 77 percent of security cameras on BART trains are fake or don’t work. 

Follow us on Facebook and Twitter, and don’t forget to sign up for Reason’s daily updates for more content.

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Yellen Hints At Slowing Economy, Dropping Stocks But Does Not Go Full Dove

With world markets begging for moar, Janet Yellen's prepared Humphrey-Hawkisn Testimony was a disappointment:

  • *YELLEN: FED EXPECTS ECONOMY TO WARRANT ONLY GRADUAL RATE RISES (everything is fine)
  • *YELLEN: JOB, WAGE GAINS SHOULD SUPPORT INCOMES AND SPENDING (everything is awesome)
  • *FED REPORT: LEVERAGE RISKS IN FINANCIAL SECTOR `REMAIN LOW' (so don't worry about banks)
  • *YELLEN: FINANCIAL STRAINS COULD WEIGH ON OUTLOOK IF PERSISTENT (so, there's chance)

The bottom line this is simply a rerhash of the Jan FOMC Statement and does not offer enouigh dovishness for the market.

As we detailed last night,

The dovish surprise is if she explicitly removes March from the hiking calendar (which would be Draghi-esque in front running the FOMC), broadly hints at a delay or expresses concern on downside risk to long term inflation or structural stagnation. The intention would be to show US households, business and investors that the Fed has their back.

This is not what she gave, and markets are disappointed.

Full statemenmt:

 


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JPM’s Striking Forecast: ECB Could Cut Rates To -4.5%; BOJ To -3.45%; Fed To -1.3%

One week ago, in the aftermath of Japan joining the NIRP club, we wondered how low Kuroda could cut rates if he was so inclined. The answer was surprising: according to a Nomura analysis the lower bound was limited by gold storage costs. This is what the Japanese bank, whose profit was recently slammed by Japan’s ultra low rates, said:

“theoretically, negative interest rates’ lower bound depends partly on the cost of holding cash in the form of physical currency. When people hold cash out of aversion to negative interest rates, they risk losses due to theft and the like. The cost of avoiding this risk could be a key determinant of negative interest rates’ lower bound, but it is hard to directly quantify. As a proxy for the cost of holding physical currency, we estimated the cost of storing gold based on gold futures prices. This cost has averaged an annualized 2.4% over the past 20 years, though it has varied widely over this timeframe.”

 

Which, in conjunction with Kuroda’s promises that “Japan will cut negative rates further if needed”, raised flags: once the global race to debase accelerates, and every other NIRP bank joins in, will global rates be ultimately cut so low as to make a “gold standard” an implicit alternative to a world drowning in NIRP?

According to a just released report by JPMorgan, the answer is even scarier. In the analysis published late on Tuesday by JPM’s Malcolm Barr and Bruce Kasman, negative rates could go far lower than not only prevailing negative rates, but well below gold storage costs as well.

JPM justifies this by suggesting that the solution to a NIRP world where bank net interest margins are crushed by subzero rates, is a tiered system as already deployed by the Bank of Japan and in some places of Europe, whereby only a portion of reserves are subjected to negative rates.

Which leads to the shocker: JPM estimates that if the ECB just focused on reserves equivalent to 2% of gross domestic product it could slice the rate it charges on bank deposits to -4.5%. Alternatively, if the ECB were to concentrate on 25% of reserves, it would be able to cut as low as -4.64%.  That compares with minus 0.3% today and the minus 0.7% JPMorgan says it could reach by the middle of this year as reported yesterday.

In Japan, JPM calculates that the BOJ could go as low as -3.45% while Sweden’s is likely -3.27%.

Finally, if and when the Fed joins the monetary twilight race, it could cut to -1.3% and the Bank of England to -2.69%.

As Bloomberg adds, easing the fall is that the JPMorgan economists bet that banks are unlikely to be able to pass on the cost of the policy to borrowers, reducing potential repercussions. They also see limited pressure on bank profits or for a need to stash cash. On the other hand, DB has suggested that it is time to pass on NIRP to depositors in the most aggressive forms possible.

While Barr and Kasman still expect policy makers to tread carefully, such analysis may temper the recent fear of investors that after seven years of interest rates around zero and bumper bond-buying, central banks are now out of ammunition. Indeed, a fuller embrace of negative rates could “produce significant reductions in market rates,” said the economists.

 

“It appears to us there is a lot of room for central banks to probe how low rates can go,” they said. “While there are substantial constraints on policymakers, we believe it would be a mistake to underestimate their capacity to act and innovate.”

Here are the key observations by JPM:

  • Sluggish growth and low inflation is building the case for further DM monetary policy stimulus. With term premia and forward rate expectations compressed, the benefits of additional QE and forward guidance is likely to be limited.
  • The alternative of negative interest rate policy (NIRP) has been viewed as constrained as banks, corporates and households can increase holdings of zero-yielding physical currency when rates move negative.
  • Innovations by central banks in Europe and Japan have enabled central banks to push policy rates well below zero. Using a tiered deposit scheme, deposit rates have fallen as low as -0.75% in Europe with no significant signs of a move into cash.
  • Our analysis suggests that the use of these schemes could allow for considerably lower policy rates without undue pressure on bank profitability or creating a powerful incentive to move into cash.
  • Calibrations based on Swiss experience suggest that with modest changes to the reserve regime, the policy rate in the Euro area could, in principle, go as low as -4.5%.
  • Estimated bounds for the US (-1.3%) and UK (-2.5%) are higher, reflecting their larger bank reserve to asset ratios. We believe this bound is not binding and that rates could fall further in both cases.
  • To date, markets price only a small probability of sustained NIRP of -0.75% or lower in the G4. This suggests that a strong signal that policymakers are willing to actively use NIRP could produce significant reductions in market interest rates.
  • The actual transmission of NIRP is likely to be muted as we expect household deposit rates to remain sticky around zero which will limit pass-through of NIRP through the retail banking sector.
  • Central banks are also likely to move cautiously into NIRP as they are sensitive to the uncertain consequences of these policies on local markets. This suggests their response to weakness may prove slower than in the past.
  • Having put in place a three tiered deposit system and facing a significant inflation undershoot, the Bank of Japan is expected to lower its deposit rate to -0.5% alongside additional QQE this year.

Recall that JPM yesterday set the bogey on the one event that could prompt Yellen to go NIRP: a recession. Here is the latest take by JPMorgan on this:

With IOER at 0.5% and the Fed maintaining concerns about US money markets, the US is not close to considering NIRP. However, if recession risks were realized, the need for substantial additional policy support would likely push the Fed towards NIRP.

In other words, once the Fed makes up its mind, all that will be needed is for economic “data” to turn even more severely southward thus giving Yelen the required political cover to join the final lap of the global race to debase.

Finally, here is the summary table of where to look for the real negative lower bound.


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Profit At World’s Largest Shipping Company Plunges On Collapsing Global Trade, Sinking Crude Prices

Back in November, Nils Smedegaard Andersen, CEO of Maersk, the world’s largest shipping company, gave the world a reality check when it comes to global growth and trade.

“The world’s economy is growing at a slower pace than the International Monetary Fund and other large forecasters are predicting” Andersen told Bloomberg. “We believe that global growth is slowing down [and that] trade is currently significantly weaker than it normally would be under the growth forecasts we see.”

That amounted to a harsh indictment of the IMF’s “built in optimism bias” (to quote HSBC), a bias which leads the Fund to perpetually revise down its estimates for global growth once it’s no longer possible to deny reality. “We conduct a string of our own macro-economic forecasts and we see less growth – particularly in developing nations, but perhaps also in Europe,” Andersen added. “Also for 2016, we’re a little bit more pessimistic than most forecasters.”

His comments came on the heels of a quarter in which Maersk’s profits fell 61% Y/Y. On Wednesday, we got the latest numbers out of the shipping behemoth and the picture is most assuredly not pretty.

For 2015, profits fell a whopping 84% to $791 million from $5.02 billion in 2014. Analysts were looking for a profit of $3.7 billion. 

For Q4, the net loss came in at $2.51 billion, far worse than the Street expected. Shares of Maersk fell sharply in repsonse.

Not helping matters was Maersk’s oil unit, which took a $2.5 billion impairment charge. “Given our expectation that the oil price will remain at a low level for a longer period, we have impaired the value of a number of Maersk Oil’s assets,” Andersen said. The company needs $45-55 a barrel to break even. Obviously, we’re a long way from that. 

The outlook for Maersk Line – the company’s golden goose and the world’s largest container operator – racked up $182 million in red ink last quarter and the outlook for 2016 isn’t pretty either. The company now sees demand for seaborne container transportation rising a meager 1-3% for the year. “Freight rates in 2015 averaged a monthly $620 a container on the key Asia to Europe trade route, with the break even level at more than $1,000,” WSJ notes. “In February the cost of moving a container from Shanghai to Rotterdam fell to $431, according to the Shanghai Containerised Index, barely covering fuel costs.”

“Guidance,” Citi wrote in a note this morning, “implies no respite for 2016”: 

“2016 guidance for an underlying net profit significantly below 2015 (US$3.1bn) vs. US$3.4bn consensus. Maersk Line significantly below 2015 (US$1.3bn); Maersk Oil a negative underlying result (breakeven at an oil price US$45-US$55); APMT flat and lower in other divisions. Heavy CAPEX continues at c.US$7bn. We expect consensus to reflect guidance.”

“Maersk Line expects an underlying result significantly below last year as a consequence of the significantly lower freight rates going into 2016 and the continued low growth with expected global demand for seaborne container transportation to increase by 1-3%,” the company said in its annual report out Wednesday.

Here’s a look at how swings in crude and freight rates affect the company’s bottom line:

Addressing the global deflationary supply glut, the company said it’s being “severely impacted by a widening supply-demand gap”. “The demand for transportation of goods was significantly lower than expected, especially in the emerging markets as well as the Group’s key Europe trades, where the impact was further accelerated by de-stocking of the high inventory levels,” Maersk noted. “In 2015, global economic conditions remained unpredictable and our businesses and long-term assets were significantly impacted by large short-term volatility.”

Right. So as we’ve said on too many occasions to count, global growth and trade has simply flatlined and one look at the Baltic Dry certainly seems to suggest that there’s no “recovery” anywhere on the horizon. Indeed we learned last month that in November, US freight volumes suffered their first Y/Y decline since 2012 and before that, the recession.

So once again, central bankers had better learn how to print trade or else it will be time to start “liquidating” excess inventory. And we mean “liquidating” in the most literal sense of the word…


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Frontrunning: February 10

  • Global Stocks Bounce Back After Market Selloff; Asia Stumbles (WSJ)
  • New Hampshire Bucks the Establishment to Back Trump and Sanders (BBG)
  • Trump shows his U.S. presidential bid is no mere publicity stunt (Reuters)
  • Clinton Is Outdone by a Competitor Once Considered a Fringe Candidate (WSJ)
  • Deutsche Bank Jumps as Lender Said to Consider Bond Buyback (BBG)
  • Bank Executives Leading Surge of Insider Buying Amid Stock Rout (BBG)
  • Morgan Stanley Trading Executive Provides Grim Picture for Wall Street (WSJ)
  • Carlyle starts $200m share buyback as quarterly profits drop (FT)
  • Deutsche Bank’s Short-Term Fix (BBG)
  • Russia’s Biggest Oil Producer Skeptical on Output Deal With OPEC (BBG)
  • Credit Suisse chief says bank sector sell-off ‘not justified’ (FT)
  • Turkish soldiers clash with Kurdish militants crossing from Syria (Reuters)
  • Nomura head blames SWFs for Japan sell-off (FT)
  • Supreme Court blocks Obama carbon emissions plan (Reuters)
  • No easy way out for Deutsche Bank as investors ‘lose faith’ (Reuters)
  • Dollar Bulls Await Yellen as Citigroup Says Pessimism May Reign (BBG)
  • Spain’s Abengoa asks for loan of up to 750 mln euros (Reuters)
  • U.S., Russia Make Syria Diplomacy Push as Assad Gains Ground (BBG)
  • Pimco Boosts Government Debt as Treasuries Rally to Top Place (BBG)
  • U.S. 10-Year Sale’s Lowest Yield Since 2012 May Diminish Demand (BBG)

 

Overnight Media Digest

WSJ

– Donald Trump seized his first victory in 2016, winning the New Hampshire Republican presidential primary by a decisive margin, while the rest of the party’s presidential field was left as murky as ever. (http://on.wsj.com/1Wd3zhE)

– U.S. Supreme Court on Tuesday temporarily blocked the Obama administration’s initiative to limit carbon emissions from power plants, dealing an early and potentially significant blow to Obama’s efforts in fighting climate change. (http://on.wsj.com/1TRiY8z)

– U.S. Federal health officials sent more Zika virus kits to test to the state of Florida, while Delaware, Indiana, Ohio, Pennsylvania and Tennessee reported their first cases of the mosquito-borne virus. (http://on.wsj.com/1Wd2fez)

– Sumner Redstone’s lawyers say he cut his former companion Manuela Herzer out of his will, depriving her of a $70 million inheritance, on the same October day that he removed her as his healthcare agent, according to court documents filed Tuesday.(http://on.wsj.com/1Wd5WAW)

– U.S. Patent and Trademark Office is gearing up to rule nearly 13 years after Coke first tried to register “zero” in the U.S., triggering a challenge from Dr Pepper Snapple Group , which also has a diet drink named Zero. (http://on.wsj.com/1Wd68jG)

 

FT

* Deutsche Bank AG is looking to buy back several billion euros worth of its debt in an effort to reverse the falling value of its securities and is expected to focus its emergency buyback plan on senior bonds, of which it has about 50 billion euros ($56.44 billion) in issue, according to the bank.

* European Union antitrust regulators are investigating several banks for possible rigging of the $1.5 trillion government-sponsored bond market and have sent questionnaires focusing on the price of supra-national, sub-sovereign and agency (SSA) debt to a number of market participants as part of an early stage investigation.

* Ministers are looking at launching a review of tidal power, with talks leading nowhere over government support for a proposed tidal lagoon in Swansea. DECC Officials will examine the potential for tidal energy across the UK in the review, to be announced on Wednesday.

* Channel 4 is to spend an additional 10 million pounds a year on films, as the broadcaster seeks to define its public service credentials in the face of government moves to privatise it.

 

NYT

– The turmoil engulfing Viacom deepened on Tuesday as weak earnings and concern over the company’s leadership sent shares down more than 21 percent, the lowest level in more than five years. (http://nyti.ms/1oqxkRp)

– Speeding past Wall Street’s expectations, Disney on Tuesday reported a 28 percent increase in quarterly profit, with the “Star Wars” franchise as the primary engine. (http://nyti.ms/20KcJZt)

– US Foods disclosed on Tuesday that it intended to go public, less than a year after its planned merger with a rival, Sysco, collapsed because of opposition from government regulators. (http://nyti.ms/23W2hgH)

– Barclays said on Tuesday that Paul H. Compton, who most recently served as JPMorgan’s chief administrative officer, would join Barclays in May as chief operating officer. (http://nyti.ms/1TRoh7O)

 

Britain

The Times

Shepherd and Wedderburn has reported a bumper year for deal activity, after the law firm worked on transactions worth a total of 5.4 billion pounds ($7.81 billion), including some of the biggest takeovers and fundraisings in Scotland. (http://thetim.es/1TR6Pk3)

Jes Staley, the new Barclays Plc boss, has further enhanced his power base with another recruitment from JPMorgan Chase, his former employer. Paul Compton, who worked with Staley at the Wall Street bank, will join Barclays in May as chief operating officer, replacing Jonathan Moulds. (http://thetim.es/1TR7odt)

The Guardian

London black-cab drivers have rejected an apparent olive branch from Uber Technologies Inc as a “PR stunt” after the taxi-hailing app company said it would extend its service free to the traditional trade. (http://bit.ly/1TR5w4G)

British Airways is to launch services from Stansted this summer, the first time the flag carrier has operated from the airport. The airline will launch flights at weekends from May 28 to four holiday destinations- Faro, Malaga, Palma and Ibiza. (http://bit.ly/1TR5Hgi)

The Telegraph

The founder of easyJet Plc has accused the budget airline of taking a “scattergun” approach to dividends that confuses investors, ratcheting up the pressure on the carrier just days before its annual general meeting. (http://bit.ly/1TR7NNe)

UK’s communications watchdog is investigating how Vodafone Group Plc handles customer complaints amid fears the telecoms giant could have mishandles disputes. (http://bit.ly/1TR7ZvN)

Sky News

Age UK says it is suspending its fixed-price energy deal with Big Six gas and electricity provider E.ON. The charity said the two-year fixed tariff would no longer be available for new and renewing customers. (http://bit.ly/1TR5kCk)

U.S. Internet tycoon Barry Diller is in advanced talks to sell PriceRunner, one of the first price comparison websites to allow British shoppers to select online deals from leading high street retailers. (http://bit.ly/1TR5rhh)

The Independent

Scotland would see its budget “systematically” reduced by almost 3 billion pounds ($4.34 billion) within 10 years under UK government’s proposed devolution funding settlement, Nicola Sturgeon has said, as she acknowledged that time was running out to reach a deal. (http://ind.pn/1TR89Dn)


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Lawsuit Says ‘Scarlet Letter’ Passports for Sex Offenders Are Unconstitutional

A bill that President Obama signed into law on Monday requires that passports used by registered sex offenders carry a “conspicuous” mark to ensure the bearers are properly scrutinized, shunned, harassed, and stigmatized wherever they might travel. A federal lawsuit filed yesterday in San Francisco argues that the so-called International Megan’s Law (IML), which passed both houses of Congress on voice votes without any real debate, violates the First Amendment, the Fifth Amendment, and the Ex Post Facto Clause.

The IML, which Lenore Skenazy and Elizabeth Nolan Brown covered here recently, is supposedly aimed at people who visit other countries to have sex with children. That seems to be a pretty rare crime. According to Justice Department data cited in the complaint, about 10 Americans are convicted of “sexual crimes against minors in other countries” each year. As the IML itself notes, the State Department already had “authority to deny passports to individuals convicted of the crime of sex tourism involving minors.” The IML provision requiring “unique passport identifiers” sweeps much more broadly, covering any registered sex offender who was convicted of a crime involving a minor, regardless of the details, when the crime occurred, or whether the offender poses an ongoing threat. 

The Americans whose passports will brand them as international child molesters include people who committed their offenses as minors and even people who still are minors (as are more than a quarter of registered sex offenders). They include people who as teenagers had consensual sex with other teenagers. They include people convicted of misdemeanors as well as people convicted of felonies. They include people who committed their crimes decades ago and have never reoffended. They include people convicted of noncontact offenses such as sexting, streaking, public urination, and possession of child pornography. The IML, which requires the State Department to cancel the passports of covered sex offenders so they can be issued new ones that make their pariah status clear to anyone who looks at them, treats all of these people as a menace to children everywhere.

“The United States has never before used passports to differentiate among citizens or to otherwise mark or stigmatize a specific group of disfavored individuals,” the lawsuit says. “The IML imposes a proverbial Scarlet Letter and compels speech in violation of the First Amendment by forcing Covered Individuals to identify themselves publicly as ‘sex offenders’ on their United States passport, which serves both as a primary form of identification within the United States [and] an essential international travel document.”

That label is not just unwanted but in the vast majority of cases inaccurate, to the extent that it suggests the people to whom it applies are on the prowl for children to rape. The lawsuit notes that recidivism rates for sex offenders are much lower than commonly thought. According to the California Department of Corrections and Rehabilitation (CDCR), the complaint says, “The re-offense rate for California registrants on parole is 0.8 percent, the lowest re-offense rate for any crime except murder.” The CDCR also reports that 96 percent of arrests for sex crimes involve “first-time offenders” who have never been listed in a registry.  

The four plaintiffs who brought the lawsuit are subject to the IML’s passport requirement or a separate, potentially broader provision authorizing the State Department to notify foreign officials of sex offenders traveling to their countries even if the offenders are no longer required to register. One plaintiff, who “was convicted of a felony sex offense involving a minor over twenty-five years ago,” is “an officer of a corporation with facilities and customers in Europe and Asia, and routinely travels to various countries within Europe and Asia for business purposes.” Another plaintiff, a lawyer who in 1998 “pled guilty to felony sex offenses involving a teenaged minor” that were later reduced to misdemeanors and ultimately expunged, “routinely travels to countries in Europe, Asia, and Latin America in connection with his legal representation of clients.” He is no longer required to register as a sex offender but is still subject to the IML’s notification provision.

The plaintiffs worry that the “Scarlet Letter” and “international travel blacklist” created by the IML will subject them and their traveling companions to harassment and possibly assault—a concern that is not at all implausible given the experiences of registered sex offenders in the United States, which have included “dozens of reports of vigilante reprisals, physical attacks, and even murders.” The lawsuit argues that the IML impinges on the freedom to travel, to earn a living, and to associate with family members in other countries, depriving covered individuals of liberty without due process of law.

The plaintiffs also argue that the IML imposes ex post facto punishment—a claim that seems plausible but is unlikely to fly, since courts have held that registration itself, which imposes similar burdens, is regulatory rather than punitive. The lawsuit’s claim that the IML violates the Fifth Amendment’s implicit guarantee of equal protection likewise seems doomed to fail. Generally speaking, a legal distinction passes an equal protection challenge as long as it has a “rational basis,” a highly permissive standard.

The plaintiffs argue that heightened scrutiny is appropriate in this case because “individuals convicted of sex offenses constitute a discrete and insular minority that is uniquely subject to public and private discrimination, and whose rights are uniquely subject to unconstitutional deprivation by state action, including by state action that is motivated by malice, that is arbitrary and capricious, that bears no rational relationship to any legitimate government purpose, and that is not sufficiently tailored to serve a legitimate government purpose.” All of that is true, but for the same reasons no court is likely to agree. 

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High-Tech Ted Cruz: New at Reason

John Stossel is skeptical about Ted Cruz’s messaging:

Politicians tailor their messages to different audiences. Facing New Hampshire’s primary, Ted Cruz talked more about “free-market principles” and a “commitment to the Constitution” and said “no one personality can right the wrongs done by Washington.” Politico ran the headline “Ted Cruz, born-again libertarian.”

I’m skeptical. Campaigning in Iowa, Cruz had emphasized religion and social conservatism.

But politicians no longer just target voters state-by-state—they target by person.

View this article.

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