By Mish Shdlock of MishTalk

Immigration won’t decide the election. Polls have not yet captured what will. This may come as a surprise, but the top issue housing. More explicitly, it’s shelter costs.

The Economy

The economy is a very broad category that encompasses inflation, jobs, unemployment, wages, rent, and housing.

Other polls split the economy in various pieces, such as inflation and jobs. Not a single poll mentioned housing specifically.

Q: What is it that young voters really have on their minds?
A: Rent

The CPI Rose Sharply in March Led by Shelter and Gasoline

The CPI rose 0.4 percent in March. Rent was up another 0.4 percent with gasoline up 1.7 percent. Together, the pair was about half of the total rise.

Rent of primary residence, the cost that best equates to the rent people pay, jumped another 0.4 percent in March.  Rent of primary residence has gone up at least 0.4 percent for 31 consecutive months! 

The “rents are falling” (or soon will) projections have been based on the price of new leases and cherry picked markets. But existing leases, much more important, keep rising.

Only 8 to 9 percent of renters move each year. It’s been a huge mistake thinking new leases and finished construction would drive rent prices.

Rent does not really go up every month. The BLS smooths things out over time. Instead, rent has surged once a year more than wages have kept up.

Immigration Not the Key Issue Where It Matters

I sympathize with the view that immigration is the key issue, and perhaps it is to voters nationally.

Mayors in Chicago, Denver, and New York city are all bitterly complaining. So are governors Greg Abbot in Texas and Ron DeSantis in Florida. Add in California for good measure.

Those six states provide 188 of the 270 electoral college votes but none of them are in play.

The six swing states are Wisconsin, Michigan, Pennsylvania, Nevada, Georgia, and Arizona. Immigration is only a hot issue in Arizona where abortion is also in play.

Blacks Abandon Biden

A WSJ Swing State Poll show blacks, especially black males, are abandoning Biden in huge numbers.

In the swing states, 30 percent of black males now support Trump. That’s up from 12 percent in the 2020 election. Trump support from black females is up from 6 percent to 11 percent.

The numbers are not directly comparable because the 2020 numbers are national. However, the numbers flash a huge warning sign.

The WSJ poll confirms the NYT/ Siena poll from last October: Trump Leads in 5 Critical States as Voters Blast Biden, Times/Siena Poll Finds

Young Voters Say Their Discontent Goes Deeper Than Israel and Gaza

Israel is a big issue in Michigan, likely more so than immigration.

But across the board, Young Voters Say Their Discontent Goes Deeper Than Israel and Gaza

Generational Homeownership Rates

Who Are the Renters?

The answer is younger voters and blacks. The Apartment List 2023 Millennial Homeownership Report shows Millennial homeownership seriously lags other generations.

Generation Z homeownership is dramatically lower still. And according to the National Association of Realtors, the homeownership rate among Black Americans is 44 percent whereas for White Americans it’s 72.7 percent.

That’s the largest Black-White homeownership rate gap in a decade.

Home Prices Hit New Record High

The latest Case-Shiller housing data shows home prices hit a new record high.

Adding insults and costs, the 30-year mortgage rate ended last week at 7.30 percent according to Mortgage News Daily.

Those looking to buy a home are very angry about being priced out while watching rent soar for nearly three years.

Explaining the Polls

The homeownership discrepancy (Black/White, and Young/Old) fully explains the polls. Yet not a single pollster or economist is in tune with relationship.

A high percentage of blacks and young voters are likely vote for Biden, but the shift vs 2020 is what will matter.

President Biden and economists in general keep singing the praises of the economy.

On average the economy is doing OK. And asset holders have generally fared well in this economy. But averages will not decide the election.

The Abortion Issue Comes Alive in Arizona

On April 17, I wrote The Abortion Issue Comes Alive in Arizona, It Could Cost Republicans Dearly That’s still my position with an emphasis on the word “could”.

What About Trump’s Legal Issues?

Trump will lose some Republicans and undecided voters who may sit the election out on grounds that Trump was part of an insurrection or contributed to one. However, The Need to Prevent a Biden Economic Collapse Outweighs Charges Against Trump

Republicans are willing to look the other way on the charges against Trump.

So, if current trends hold, it’s the economy that will matter.

Specifically, the election will be decided by extreme unhappiness in the block of voters who rent but want to by a home, concluding things were better under Trump.

In what’s becoming an annual ritual, the IRS has once again waived required minimum distributions for the current year for people who inherited an IRA from someone who died in 2020 or after. That’s welcome news, but some uncertainty still hangs over a growing number of people whose inherited IRAs are subject to new rules precipitated by the SECURE Act, which was passed in December 2019.  

That law killed the so-called “stretch IRA” — which let beneficiaries minimize distributions by spreading them out over their life expectancies. The SECURE Act now requires most non-spouse beneficiaries to completely empty an inherited IRA by Dec. 31 of the year containing the 10th anniversary of death. For example, a child who inherited an IRA from a parent who died on Oct. 20, 2021 has until Dec. 31, 2031 to take all the money out. 

That all seemed straightforward and simple enough. Tax professionals and financial planners universally assumed that people with inherited IRAs subject to the SECURE Act’s “10-year rule” could take out as little or as much as they wanted until the 10th year, when the remainder would have to be withdrawn. 

Aggravatingly, the IRS had other ideas. When it drafted the regulations to enforce Congress’s “10-year rule,” the despised organization needlessly complicated things for situations where the deceased retirement account owner was old enough to have been subjected to RMD requirements.  

Specifically, it decreed that — during Years 1 through 9 — heirs would have to take annual required minimum distributions (RMDs) based on their life expectancies and calculated with a factor from an IRS table. Then, in Year 10, they’d have to withdraw whatever’s left. 

Proposed Regs.: If decedent was subject to RMDs, you might need to take distributions every year for 10 years from a non-spousal inherited IRA.

IRS in 2022, 2023 and 2024: Nah, do whatever you want. Maybe we’ll let you know for 2025. (Notice 2024-35)https://t.co/WS8HIqwwbb

— Justin Miller (@justinmilleresq) April 17, 2024

The IRS didn’t issue those proposed regulations until 2022 — which meant affected people who hadn’t taken RMDs in 2021 had broken a rule that hadn’t been created yet. That unjustness combined with a broad uproar from taxpayers, tax advisors and financial institutions over the complexity of the proposed regs prompted the IRS to announce that it would waive the penalty for not taking RMDs in 2021 and 2022.

As the IRS continued wringing its hands over its mess — and as IRA heirs continued wondering if the final regulations might turn out mercifully simpler — the IRS issued another RMD-penalty waiver for 2023. On Tuesday, the IRS similarly announced there’d be no penalty for failing to take RMDs from affected accounts in 2024.

All the while, the wait for final regulations continues. With its announcement of the 2024 waiver, the IRS said those final regs are expected to apply to RMDs for 2025, which implies they’ll be published later this year — close to five years after the legislation that triggered the need to lay out new rules for taxpayers. 

Generally speaking, withdrawals from traditional IRAs are fully taxable as ordinary income. While we’re conditioned to defer taxation, there may be some circumstances where it’s not in your best interest to wait until Year 10 to take most of the money out.

For example, if the account is big enough, a large, single withdrawal could push you into a higher tax bracket, or have a domino affect on other elements of your tax return that key off your adjusted gross income. Then there’s the question of what future tax rate you’ll be subjected to in a late-stage empire that’s $34.7 trillion in debt.

If the IRS goes forward with requiring distributions in Years 1 through 9, you’ll be responsible for making sure you take out at least the right amount; you can take more if it suits your tax-planning. In the first few years after the SECURE Act passed, many financial institutions threw up their hands on inherited IRA RMD calculations, merely telling investors ask a tax advisor. Now, they’re starting to come around. Vanguard, for example, offers an online, inherited IRA RMD calculator that anyone can access.  

Two final points of emphasis:

• The 10-year rule only applies to IRAs inherited from owners who died in 2020 or later. Earlier-inherited accounts use the old rules, which allow for “stretch IRA” distributions over their lifetime.
• The same grandfathered treatment generally applies to IRA-inheritors who fall into any of five classes of “eligible designated beneficiaries”: Surviving spouses, minor children of the account owner, disabled people, the chronically ill, and people who are either older than or not more than 10 years younger than the deceased IRA owner. 

Imprisoned former CNN demigod Michael Avenatti has come out in support of Donald Trump, telling the NY Post that he’s willing to testify on Trump’s behalf after being in contact with Trump’s legal defense team about his willingness to testify against his former client, Stormy Daniels.

“The defense has contacted me,” Avenatti told the Post in a phone call from Terminal Island, a minimum-security federal prison in Los Angeles where he’s serving a 19-year sentence for extortion, tax evasion, fraud, embezzlement and other federal crimes.

“I’d be more than happy to testify, I don’t know that I will be called to testify, but I have been in touch with Trump’s defense for the better part of year,” Avenatti continued.

A person close to the former president confirmed the ongoing discussions.

While Avenatti made his name as one of Trump’s most ferocious critics — and even publicly called for Trump’s indictment in 2018 — the defense attorney sang a different tune from the clink.

“There’s no question [the trial] is politically motivated because they’re concerned that he may be reelected,” Avenatti said. “If the defendant was anyone other than Donald Trump, this case would not have been brought at this time, and for the government to attempt to bring this case and convict him in an effort to prevent tens of millions of people from voting for him, I think it’s just flat out wrong, and atrocious.

“I’m really bothered by the fact that Trump, in my view, has been targeted. Four cases is just over the top and I think there’s a significant chance that this is going to all backfire and is going to propel him to the White House,” he added. –NY Post

According to Avenatti, “Depending on what happens, this could constitute pouring jet fuel on his campaign.”

Avenatti captured national attention in 2018 while representing Stormy Daniels, the porn star who alleges she had an affair with Trump in 2006, and was paid $130,000 by former Trump attorney Michael Cohen in 2016 in order to allegedly buy her silence.

In November 2018, however, Avenatti’s world began imploding after he was booked on charges of domestic violence. Less than 18 months later he was convicted of trying to extort Nike for up to $25 million. And in 2022, he was found guilty of pilfering $300,000 in book advance money from Daniels – and pleaded guilty to federal fraud and tax charges in the same month.

Authored by Savannah Hulsey Pointer via The Epoch Times,

The Biden administration’s overhaul of Title IX met with pushback today from lawmakers in favor of preserving female-only spaces.

Rep. Virginia Foxx (R-N.C.) speaks during a House Committee on Oversight and Reform hearing

Among the dissenters was Rep. Virginia Foxx (R-N.C.), who serves as the Education and the Workforce Committee Chair. Ms. Foxx asserted that the Department of Education’s final Title IX rule puts a radical agenda of left-wing ideologues over the safety of women and girls.

“The Department of Education has placed Title IX, and the decades of advancement and protections for women and girls that it has yielded, squarely on the chopping block,” Ms. Foxx said in a press release from the committee.

On April 19, the rule overhauling Title IX was finalized by the Biden administration. As a result, universities and colleges nationwide have only a few months to revise their policies regarding the handling of sex discrimination complaints in light of the expanded definition of sex.

The Title IX Act, which is federal legislation, explicitly forbids any form of sex discrimination in funded educational programs or activities, including sexual harassment and sexual violence.

The new rule defines sexual harassment as including harassment based on sex stereotypes, sex characteristics, pregnancy, sexual orientation, and gender identity.

In her castigation of the changes, Ms. Foxx went on to say:

“This final rule dumps kerosene on the already raging fire that is Democrats’ contemptuous culture war that aims to radically redefine sex and gender.

“The rule also undermines existing due process rights, placing students and institutions in legal jeopardy and again undermining the protections Title IX is intended to provide. Evidently, the acceptance of biological reality and the faithful implementation of the law are just pills too big for the Department to swallow—and it shows.”

According to the U.S. Department of Education, this redefining of sex is intended to be in accordance with the logic of the U.S. Supreme Court’s decision in the case of Bostock v. Clayton County, which was issued in 2020. In that case, a child welfare worker was purportedly terminated after his employer discovered that he was gay.

In its decision, which was reached by a vote of 6–3, the Supreme Court provided a broad interpretation of Title VII, the federal law that prohibits sex discrimination in the workplace. The court came to the conclusion that it is unconstitutional to take into consideration sexual orientation and gender identity when making employment choices.

U.S. Secretary of Education Miguel Cardona said in an April 19 press release, announcing the change:

“For more than 50 years, Title IX has promised an equal opportunity to learn and thrive in our nation’s schools free from sex discrimination.

“These final regulations build on the legacy of Title IX by clarifying that all our nation’s students can access schools that are safe, welcoming, and respect their rights.”

On his first day in office, President Joe Biden issued a comprehensive executive order that directed all federal agencies to apply the Bostock framework to all of their operations, including Title IX enforcement. This was despite the fact that Justice Neil Gorsuch wrote in the majority opinion that Bostock would only narrowly apply to Title VII.

“Children should be able to learn without worrying about whether they will be denied access to the restroom, the locker room, or school sports,” President Biden’s day-one order stated.

“Adults should be able to earn a living and pursue a vocation knowing that they will not be fired, demoted, or mistreated because of whom they go home to or because how they dress does not conform to sex-based stereotypes.”

The department’s new rule does not address the issue of transgender athletes competing in high school and college sports, which is now the subject of a rule-making process that is still ongoing. It is considered improbable that a comprehensive sports rule will be established before the general election later this year.

The White House did not immediately respond to The Epoch Times’s request for comment.

Construction jobs in Philadelphia could plunge soon as a result of a “glut” of residential projects finishing up with questionable demand waiting behind them, according to a new report from BisNow. 

In fact, some developers are calling for a “hard crash” after a rush to capitalize on the city’s 10-year tax abatement program “temporarily sent activity into the stratosphere”.

Construction is bustling along the city’s main thoroughfares as teams tackle a large backlog of projects permitted before the expiration of a key tax abatement program in January 2022. Over 26,000 units were approved in 2021, a significant increase from 2020, with the work expected to conclude within the next 18 months, the report says. 

Driven by low interest rates and the rush to meet the tax break deadline, a surge in construction began in 2022. Last year saw over 10,000 units hit the market, with another 16,000 upscale units expected to finish in the next 18 months.

However, new housing permits have dipped significantly, with only 949 issued in January and 986 in February across the Philadelphia-Camden-Wilmington region, per census data.

Vince Jolly, founder and president of CVA Commercial Group, said: “It’s not even anticipating a downturn. The downturn’s already here.” 

He continued, telling BisNow: “I think construction workers, obviously, are going to get hit hard. Because once these jobs dry up, I mean, what else are they going to do?”

Construction employment in the city increased by 1.5% from 2021 to 2023, with 121,000 local workers in the trade by late last year, according to census data. However, new apartment construction starts have dropped over 30% from their late 2022 peak, and 99 projects comprising 17,000 units have been halted at the proposal stage, as per CoStar data.

The Riverwards Group Managing Partner Mo Rushdy commented: “That glut of apartments will solve itself, let’s say, by May 2025. The real problem is, No. 1, jobs. We hear from our friend in the trade unions and from others that projects are going to dry up in terms of the residential industry and when it comes to new jobs coming from the pipeline of ’26 and ’27.”

“I’ll tell you from experience, we’re not even seeking financing,” Rushdy added.

“I see the bigger players are starting to be impacted. Companies that were very profitable for the past couple of years are barely making it,” Calvin Snowden, founder and managing partner of Philadelphia-based construction management firm BDFS Group said.

“I’m an engineer, not an economist, [but] I know there’s a problem. I know the interest rates have to come down since the projects don’t make sense anymore. The numbers just don’t work.”

Despite nearly 100 multifamily projects being put on hold, such as Alterra Property Group’s 352-unit building in University City, some large projects are continuing. Notably, Tower Investments is progressing with its 1,111-unit project in Center City, which represents 6.5% of all units currently under construction in the metro area and is the nation’s 11th-largest ongoing apartment project.

However, large projects are becoming rare. Mark Cartella of Alterra Group suggests that the industry may see a decline in large-scale projects before smaller ones. Meanwhile, redevelopments are driving activity for Benchmark Construction Group, with projects underway in Fishtown and other areas of high demand like South and North Philadelphia, focusing on both new construction and existing housing.

Authored by Catherine Yang via The Epoch Times,

After weeks of trying to secure a bond and arguing to an appeals court that a $454 million bond was “impossible,” former President Donald Trump secured a $175 million bond to stay judgment only to now have to make the case all over again why this should satisfy the New York Attorney General and stop her from seizing his properties.

On April 22, New York Supreme Court Justice Arthur Engoron, the trial court judge who set the $454 million judgment, will hear the attorney general’s challenge to the sufficiency of President Trump’s bond.

The $175 million figure had been set by the appellate division of the New York Supreme Court, and President Trump has frequently criticized Justice Engoron for “ignoring” appeals court orders, such as when he allowed evidence past the statute of limitations set by the appellate division during the trial.

Who’s Backing the Bond?

The attorney general has sought to cast doubt on the stability of LA-based Knight Specialty Insurance Company (KSIC), calling it a “small insurer” and arguing it is not authorized to do business in New York.

They argued that KSIC has never before written a surety bond, and has “a total policyholder surplus of just $138 million.”

Amit Shah, president of the insurance company, demanded the court compel the attorney general to show cause, or prove the allegation that the insurance company is not sufficient.

Mr. Shah submitted a sworn affidavit explaining that KSIC now has control over a bank account of President Trump’s that will maintain $175 million cash for the duration of the appeal. The insurance company entered into a collateral agreement with the Donald J. Trump Revocable Trust. Mr. Shah submitted documents establishing that his company is in “good standing” and was approved for excess line eligibility in New York in June 2021.

“As an eligible excess line insurer in the state of New York, KSIC is, therefore, properly authorized to issue the surety on behalf of Defendants,” he stated.

This authorization stands as long as the insurance company meets the Excess Line Association of New York’s requirement of maintaining a minimum $47 million policyholder surplus, and Mr. Shah stated his company is maintaining a $48 million surplus minimum.

He added that as of the end of 2023, the insurance company had $539 million in assets and $138 in equity, and its parent company, Knight Insurance Company, had on a consolidated basis $1 billion in assets and $1 billion in equity. The parent company also maintains $56 million in cash and $937 million in marketable securities to support reinsurance obligations.

“At my direction, KSIC also performed diligence to confirm its legal authority to act as surety before issuing the subject bond,” Mr. Shah stated.

“Although KSIC had not before placed a surety bond in New York, KSIC is an excess line insurer in the state of New York.”

The attorney general also took issue with the fact that KSIC does not have “exclusive right” to the account containing $175 million in cash, and highlighted the fact that it would need “two days’ notice” to move that cash.

State attorneys urged the court to “not rely on KSIC’s financial summary” because the insurance company “sends 100% of its retained insurance risk to affiliates in the Cayman Islands,” which they argued “artificially bolsters its surplus.”

They argued that excess line insurers are only authorized if the management is found “trustworthy and competent,” and KSIC did not qualify because “its management has been found by federal authorities to have operated affiliated companies within KSIC’s holding company structure in violation of federal law on multiple occasions within the past several years.”

Knight is under The Hankey Group of financial companies, which includes the affiliate Westlake Financial Services LLC. The attorney general argued that Westlake was found to have “violated numerous federal laws by pressuring borrowers through the use of illegal debt collection tactics, including using phony caller ID information, falsely threatening to refer borrowers for investigation or criminal prosecution” in 2015 by the U.S. Consumer Financial Protection Bureau. The company was fined and provided $44 million in restitution to consumers.

The attorney general is requesting that President Trump be required to post a replacement bond within seven days.

30 Companies Said No

The bond required was originally $454 million, but attorneys for President Trump argued that they had employed four brokers who for weeks negotiated with the largest sureties in the world to no avail.

Some 30 companies would not fill the bond, they argued, because sureties normally will not take hard assets—like real estate, Trump Organization’s primary asset—as collateral.

Instead, they would require the bond amount in cash, plus additional premiums given the unusually large size, totaling to what they estimated to be more than $550 million cash.

On the eve of the deadline for posting bond, President Trump took to social media to claim that he had close to $500 million in cash, but had planned to use much of it on his reelection campaign and did not want to hand it over to a New York court as he fights to keep his buildings.

He further claimed in a follow-up press conference that the $454 million figure was one the attorney general and judge arbitrarily settled on because they had seen a number similar to it in his bank accounts, which have been disclosed to the court during the course of the civil fraud case.

The attorney general had originally sought $250 million, which increased to about $370 million by the end of the trial. Plus backdated interest, President Trump was ordered to pay $454 million in all.

Trump attorneys submitted a sworn affidavit from one of the brokers hired to negotiate the $454 million bond, who explained that in the surety world, $100 million was a large bond, and hardly issued to private individuals. He stated that only a “handful” of sureties are even authorized by the federal government to issue bonds that big, and many had internal policies limiting bonds they issue to $100 million. He also affirmed that sureties do not take hard assets as collateral, because they are not designed to quickly liquidate them in the event a bond has to be paid.

The attorney general urged the court not to take these affidavits at face value, calling into question the lawyer and broker’s credibility by claiming they had prior connections with President Trump. The state attorneys suggested that the reason President Trump could not fill the bond was instead because his companies may not be in as good standing as he claimed.

Trump attorneys pointed out that a court-appointed monitor has given the attorneys and court full access to Trump Organization finances since 2022, and the finances have been transparent.

By Peter Tchir of Academy Securities

Should I Stay or Should I Go?

Coming up for air after what was an intense week on the geopolitical and market side of things, I’m really being forced to reconsider my current recommendations (bearish bonds, stocks, and credit).

I keep thinking:

If I go, there will be trouble
And if I stay, it will be double

Bearish rates has worked well from the start. We turned negative on credit right near the lows, so that too has worked. On equities, by the time we turned bearish, it definitely moved against us. We had some drawdowns, and they seesawed back and forth between potentially making sense and looking very stupid (sometimes, on the same day). Well, the Nasdaq 100 (the main focus of our ire) is now down 7% since April 11th (6 trading days). We saw a rather nasty 2% drop on Friday (even after it had largely recovered from overnight Geopolitical concerns) and is now only up 1%. Our call had been that the market was highly susceptible to a rapid 5% to 10% decline, which we stretched to 10% as it continued to “defy” gravity. Remember, for all the hype about “all-time highs” and “tech is all you need”, the Nasdaq 100 closed above 18,300 all the way back on March 1st and barely got any higher than that in what is now almost 2 months.

We’ve updated this chart since we sent it around in an “informal” report, and the story is even more bleak, though not as bleak as it would have been had the markets closed at 3:45pm when this index was below 17,000.

Based on closing pricing, no one who bought the Nasdaq 100 since January 18th has made money. If you started the year long, you are now sitting on a relatively measly 1% gain – which just does not seem at all consistent with the hype.

In Thursday’s T-Report – We Can Drive it Home, With One Headlight, we reiterated our bearish views, while devoting much of the space to the section “AI valuations seem questionable.” There are some big stocks (some in the AI space) down around 10%. If you are keeping track at home, the leveraged single stock ETF that has caught my attention actually had net inflows on Friday, despite being down 20% – indicating that we haven’t seen a wipe out. I also distinctly remember headline after headline when we had record-setting market cap gains for individual companies, yet crickets on what had to be a historic drop in market cap. Another sign that we have not seen a washout.

But before we go through our analysis and recommendations coming into this week, I have to admit, “Should I Stay or Should I Go” isn’t close to being my favorite song by the Clash. But, I’ve already used “Magnificent Seven”, “Clampdown” seemed too harsh, “Lost in the Supermarket” would have made more sense when inflation was spiking, and “Death or Glory” sadly seems destined to pop up in a piece on geopolitics (the way the world is going). I did want to do I Fought the NDX and I Won, but the Clash cover stuck to the traditional title, and it was the Dead Kennedys who changed it to “I won” rather than “the law won.” But in the end it hasn’t been a resounding win, and I didn’t want to jinx myself too badly if I come out still bearish (spoiler alert, I am).

Equities

Today we will focus on what is “new” as the bear case was well covered in the previously referenced One Headlight piece.

The most bullish thing I can say is that equities are now 5% to 7% cheaper than a week or so ago. So, if you were planning on “backing up the truck” and loading up on stocks, you have that opportunity. You literally have missed nothing by not being massively overweight the Nasdaq 100 since the start of the year. Two issues fighting this come to mind:

• There have been multiple small dips this year, so how much dip buying capacity remains?
• My view is that when people say “I would load the boat if that stock drops 5%”, what they really mean is “I would load the boat if that stock drops 5% in otherwise calm markets, for no apparently good reason, basically letting me buy the same story, but 5% cheaper”. Well, the story and market dynamics have changed. Geopolitical risk has risen. Questions about valuation, easily dismissed when stocks seemed to be up every day (they weren’t but that was the narrative), are not so easily dismissed. As the chart highlights, anyone who bought this year is now likely under water on their new investments in this index (or ETFs like QQQ). Don’t get me started on ARKK, my “go to” proxy for “innovation” and “disruption,” which is down 20% on the year now. I will admit, Bitcoin might be a haven for some of the riskiest risk takers, as it is up strongly on the year, though it too has done very little (except cost buyers money) since the end of February. The “halving” is supposed to take it to the next level. How paying someone 50% less (for the same work that they did) helps the price is beyond me. I mean, I get the miners in particular are incentivized to jack up prices, but the “bitcoin always goes higher after the halving” arguments are based on such a small sample size, that I think it will not work this time as the entire crypto universe seems to think it will.

But anyways, I digress, I just think that enough has changed and enough dips have been bought, that there is no trove of “rescue” money about to flood the market with new buying liquidity.

Since AI remains too important, I will add one thing to the laundry list from Thursday:

• Using Google trends, searches for things like ChatGPT are down and declining. Same for some broader themes on AI. You cannot have FOMO without the Fear of Missing Out and I don’t think we are ripe with Fear any longer. If anything, maybe it is the fear that valuations have gotten ahead of themselves.

Earnings will be important, and we will get several from very important companies this week.

• Maybe it is my imagination (it could be, since there are few data points so far), but the “reaction function” to earnings seems to have changed. As we rallied late last year and at the start of this year, it seemed that the market focused on positives and dismissed negatives. It also seemed to rally on the “same” news, day after day. One stock in a sector would report positives and the market would take the sector significantly higher. A day or two later another company in the sector would give the market something to cheer about and the entire sector would pop again. Wasn’t some of that good news already priced in? I believe we have much higher hurdles this time and the markets are looking for excuses to sell, rather than to buy. I could be wrong on the reaction function or earnings could all beat by so much that we get a reversal, but I’m skeptical on that.

Think like an algo.

• I tend to be a “profit” taker (and “double downer”). When things work, I like to take chips off the table. What I constantly need to remind myself of is that algos are often wired in the opposite direction. They press winners. They tend to follow momentum. They tend to be quick to stop themselves out. I believe algos/quantitative trading models have been exiting stocks. Are they out? Possibly, we have seen higher volumes on this down move. Have they turned from buyers to sellers and are happy to establish shorts and push those? That I don’t know, but my fear of “systematic” trading systems (often described simply as CTAs, but a universe much bigger than that) makes me want to stay bearish.

In the end, I’ve started to reduce shorts, but remain bearish, and think that the correct strategy is to sell bounces and keep reloading shorts, until something occurs that forces me to change my views.

Bond Yields

In the end, on equities, it turned out to be “more of the same” (maybe slightly less pounding on the table), but bonds are far more interesting in terms of “staying” or “going” from a bearish perspective.

We’ve been bearish on yields for most of this year and it has largely worked. Not a one-way street by any stretch of the imagination, but not bad. In fact, we’ve raised our range on the 10-year yield, from 4.2%-4.4% to 4.3%-4.5% and then from 4.4%-4.6%. I don’t think we’ve officially changed the band, but it is implicit that if 10-years are at 4.62% and I’m still bearish (though far less so than at 3.9% where we started the year), the band must be higher. Do we raise the range again? That is always a dangerous game, as many equity analysts, who felt compelled to raise price targets in the past few months, can tell you. Were we too low originally? Have things changed that significantly? Take the win? I’m not sure if repeatedly raising your bands is something that should be considered in current analysis, but it makes sense (at least for me).

Aside from many specific reasons to be bearish, we had the catch-all of “nothing that was in place to push 10s to 5% last fall has been resolved.” That is still true.

What is the bull case for bonds?

• Inflation. While I was never part of the “Super Users” group, I think I can relate to my understanding of the “gist” of the story – wanting more data to better understand what the heck the BLS actually comes up with for inflation. Let’s for the moment assume that inflation has “become sticky” around 2.5% (to pick a number). Then lets think about all the issues with measuring inflation. Hedonic quality adjustments. Substitution. Difficulty measuring. Flawed measurements (housing and rent, while ignoring the always “curious” use of Owners Equivalent Rent, have a lag effect built in, for gosh knows what “useful” reason). Last month, in at least one of the reports, it all came down to auto insurance. So, let’s assume that any given month is within 0.2% of being an accurate representation for that month (somehow, I feel I’m generous). Then it is at 2.4% annualized. So if we are centered around 2.5% (or 0.2% per month), then we could easily see a month with no inflation that annualizes to “problem solved.” While I believe on-shoring, near-shoring, geopolitical inflation, and the realization that we need to build out traditional and new energy sources, etc., will be inflationary, I would have to bet on seeing what would now be considered a surprise (a month where inflation data looks really good), especially given the current levels of expectations. One big fear I have about remaining bearish, is that not only would I not be surprised to see some good inflation data before the June meeting, but also I would be shocked if we didn’t. More about measurement and reporting than any real change in the underlying inflation rate.

• Carry. Yes, the path to hell is paved with carry (or interest), but it is real. The back-up in yields provides more protection. While I’m constantly aware that selling can beget more selling (see my equity concerns), the case for “buying the dip” in bonds is stronger. More yield. Interest coming in every month that can be re-invested. Less inversion, making the decision between 2s and 10s more complicated even for “yield hogs” who focus more on yield than duration.

• “No Bounce” and “American Exceptionalism” have become so consensus that it wouldn’t take much to tip the apple cart and put some level of fear about the state of the economy back on the table. I think earnings, and more importantly outlooks, may paint that picture for us.

I am worried about “faux” liquidity, even in the Treasury market. Electronic trading and a multitude of platforms tend to make liquidity appear more abundant than it really is. There aren’t 50 people sitting on the bid. There are 10, they just happen to all put them on 5 platforms, assuming they can yank the bid in time. There are really only 5 buyers, the other 5 just “see” them buying, so are along for the ride hoping to scalp some money and thinking they can pull their bids if necessary. That is why we get “air pockets” in pricing and will continue to do so. Positioning is better than it was (not everyone is long), but this “gap” risk is real – in both directions.

I like the 2-year at 5% and am “tolerant” of 10s at 4.6%.

Credit

Credit spreads for me are now largely just a proxy for equites. Yes CDX, credit spreads, and even high yield held their own on Friday amidst the debacle of an equity market, but that will be difficult to sustain.

I see no fundamental problems in credit, but it is difficult to remain bearish on equities and like credit. Also, the aforementioned “faux” liquidity is even more obvious in credit markets and creates far more gap risk. While that gap risk is usually somewhat symmetric, I think the gap risk to much wider is higher than the risk to a gap tighter. Still like 65-70 as range on CDX.

Geopolitical Base Case

Academy Securities has sent a lot out on the current situation in the Middle East. We’ve done what we can with our team of retired Generals and Admirals. Not just via written word (please see the “new” Daily Brief that we’ve been sending on Bloomberg), but also through more video calls than I can keep track of.

Even with their expertise, there is a range of “error” or “doubt” centered around “what has happened” let alone “what might happen.”

There have been some fast and furious discussions about deterrence and General (ret.) Ashley highlighted this Rand publication – Understanding Deterrence from 2018. Academy’s game theory centric piece – Geopolitical Chicken – is worth reading if you haven’t already.

Anyways, my base case is:

• Iran’s attack on Israel was not just symbolic. They planned to cause damage and are really concerned that they didn’t. I’m agreeing with the argument that you send “a handful” of drones/missiles (all of the lowest quality) if you want to ensure that they don’t get through. Sending 100s with a range of capabilities, was an actual attack that failed. Others make the case that it was symbolic and designed to be destroyed en route. I find that argument less plausible, hence, not my base case.

• Therefore, much like Russia, they have to recalculate their war effort. If the attack was somewhere between Fail and Epic Fail, you need to rethink your strategy. It is far too early for them to have understood what went wrong, let alone how to “correct” it, so of course they will downplay the Israeli attack on Iranian soil. You cannot afford to have a second failed attack. You might convince the world that you launched a “second symbolic” attack, but that’s a stretch of the imagination.

Therefore, my base case is that Iran is trying to figure out how to attack again, which may take some time, and a lot could change between now and then, but the current “quiet” is more about a failed attack than any meaningful de-escalation.

That may or may not be your base case, and even by working so closely with our Geopolitical Intelligence Group, you can find support for a range of “base cases,” but this is my working assumption. This means that I think possible shocks are still on the table. From Hedging Geopolitical Risk I think any shock will be bad for equities, temporarily good for bonds (but fade that quickly), and good for oil.

Bottom Line

There is very little I can find in equities. I’m not even “loving” long China (for a trade) versus short Nasdaq 100 (though I’d be remiss to point out for the past 3 months, FXI is up 10.8% while QQQ is down 1.4%). Remember, I think that as time goes by, more people will question whether slower sales into China are a function of problems with the Chinese economy or part of a broader strategy to suppress sales of Western brands in favor of domestic brands – The Threat of Made by China 2025.

• I still own energy and commodities but biased towards owning the equities (not the underlying commodities). It is interesting that the equities (looking at XLE) did so well on Friday. Maybe reduce some positions here, but this is my favorite sector. Iran seems unlikely to respond soon, given my base case, and my bet is that we see some signals of a slowing economy emerge from earnings calls.
• Neutral to mildly bullish Treasuries. There, I’ve done it. I’ve flipped. For now, buy some Treasuries. Stick to a 4.45% to 4.6% band on 10s. This is for a “trade” rather than a fundamental shift. If there is any market where deep out of the money options make sense, it could be here, as faux liquidity makes me fear a “flash crash” type of scenario. If this “bull case” sounds tepid, it is because it is tepid, but I’ve flip-flopped here to the bull side (again, for a trade, tepidly, and acknowledging the risk of a gap to much higher yields).
• Credit. Moderately bearish, based primarily on having a bearish outlook on equities. I don’t see fundamental issues, but that doesn’t matter for the next 10 bps on IG credit. Rising Treasury yields have helped credit spreads (got the higher yield on IG and even High Yield without having to demand wider spreads). If I’m correct and Treasuries bounce, then spreads are likely to feel a little bit of pain as you see a “flight to quality” (as opposed to a “flight to safety”).

Hopefully, by the time you read this report it is still relevant in a world where countries don’t adhere to a policy of attacking only during U.S. trading hours!

Good luck navigating this and please feel free to use Academy’s resources, as we as a firm are at your disposal!

Authored by Jonathan Turley,

The London police are under fire this week for threatening to arrest a man wearing a kippah near a pro-Palestinian march.

Officers inform Gideon Falter, head of the Campaign Against Antisemitism watchdog, that he was “antagonizing” the protesters by being “openly Jewish” near such a march. He was told that, if he tried to cross the street while being “openly Jewish,” he would be arrested for breach of the peace.

In the video, one police officer said: “You are quite openly Jewish, this is a pro-Palestinian march, I’m not accusing you of anything but I’m worried about the reaction to your presence.”

Another officer then added later: “You will be escorted out of this area so you can go about your business, go where you want freely or, if you choose to remain here, because you are causing a breach of peace with all these other people, you will be arrested.”

Falter was also told that being openly Jewish near such a march was “antagonizing”.

“You are quite openly Jewish. This is a pro-Palestinian march. I am not accusing you of anything, but I am worried about the reaction to your presence.”

Enough is enough. It is time for a major change.

On Saturday 27th April — the next anti-Israel march — we are asking you,… pic.twitter.com/lfJr7UZnif

— Campaign Against Antisemitism (@antisemitism) April 18, 2024

Activists have long protested the dangers of “driving while black” in prompting stops by police and threats of arrest. Falter appears to have established a danger of “walking while Jewish” in London.

The Metropolitan Police later apologized, but had to issue a second apology after saying in a now deleted statement that

“In recent weeks we’ve seen a new trend emerge, with those opposed to the main protests appearing along the route to express their views. The fact that those who do this often film themselves while doing so suggests they must know that their presence is provocative, that they’re inviting a response and that they’re increasing the likelihood of an altercation.”

Calling an openly Jewish man “provocative” only reaffirmed the original statements made by the officers.

As a result, the police had to issue a new statement, which said that the previous one had “been removed. We apologize for the offense it caused.”

What is equally disturbing is the threat to arrest a man who was doing nothing wrong based on his identity.

These threats were being made as protesters were hurling abuses at him because he is Jewish.

Notably, the United Kingdom has embraced a wide array of criminalized speech, arresting people for hateful or denigrating comments made against groups or individuals.

A man was convicted for sending a tweet while drunk referring to dead soldiers. Another was arrested for an anti-police t-shirt. Another was arrested for calling the Irish boyfriend of his ex-girlfriend a “leprechaun.” Yet another was arrested for singing “Kung Fu Fighting.” A teenager was arrested for protesting outside of a Scientology center with a sign calling the religion a “cult.”

We also discussed the arrest of a woman who was praying to herself near an abortion clinic. English courts have seen criminalized “toxic ideologies” as part of this crackdown on free speech.

I have opposed those laws.

Yet, this incident illustrates the arbitrary enforcement of such laws. The police simply ignored the anti-Semitic comments being leveled at Falter and confronted him on being openly Jewish. 

That is not to say that I favor the enforcement of criminal speech laws. Rather, it shows the added danger of such laws in their selective enforcement.

We’re being told that Bidenomics is working and that inflation is under control.

Yet, when we see articles about shoppers in America paying $7 for an apple, it’s hard to make peace with the narrative the current administration is trying to convince its populace of. 

That was the case last week when a Boston-based influencer took to Tik Tok to claim that she paid $7 for an apple – and only an apple – at a Whole Foods, according to a report by the NY Post. 

“Literally just did grocery shopping at Whole Foods and look at this. Guess how much this is. This is an apple, it’s called a Sugarbee f–king apple apparently and look at it,” she said. 

She continued: “The size of my palm. I thought it was like probably 2 to 3 dollars. I scanned this motherf–ker I scanned it — 7 f–king dollars, 7!”

The user @via..li shared a video of her expensive purchase on social media, which has been widely re-circulated. The video, now deleted from her account, featured her removing an apple from a bag outside an unnamed Whole Foods store.

As the Post notes, Whole Foods’ website prices the Organic Sugarbee Apple at $3.99 per pound across most Boston areas, though rates can differ by location. In her video, the TikToker even confirmed the price with a store employee.

She added: “Genuinely what economy are we all f–king living in that it costs 7 dollars to buy an apple? I could have sworn that some other like apple that I bought was not 7 f–king dollars. It’s crazy, like 7 dollars for a latte? OK. This apple better be tasting so f–king good.”

Viewers responded with an array of comments, with some supporting the influencer and others questioning her. One user wrote: “On average a pound will give you 2-3 apples. Maybe her anxiety was leaning on the scale.”

Another added: “Even more insane when you realize that’s almost an entire hour of labor for some people even in the US. Imagine working an entire hour in exchange for 1 apple…”

Authored by Charles Hugh Smith via Substack,

One of our primary survival traits is the ability to anticipate the future to avoid threats and reap higher yields. We seek a vantage point to view the road ahead, or even better a road map to what’s ahead.

Is there a road map to what’s ahead?  An enormous amount of research and projections are issued daily, proposing answers to the question: what happens next?

In my view, a good starting point is to recall that there are critical differences between open systems and closed systems. A clock is a closed system, and so its functions are predictable.  An ecosystem is an open system, and so predictions are contingent on an unknowably large number of potential changes in inputs, processes and feedback: new invasive species may arrive and displace native species, predators might be decimated by a new disease, etc.

But even open systems operate according to principles we can discern, and so they are not entirely unpredictable or chaotic. For example, when a keystone species is wiped out, the entire ecosystem collapses.

The immense powers of modern technology, engineering, cheap energy and mass media have created an illusory aura of human agency, that we can control our future in the same way we control machinery. This aura has also created a sense that human leaders or elites control our world with god-like powers of precision. This too is an illusion, as the contingencies, forces, feedbacks and second-order effects of open systems are beyond the control of any human leadership.

Consider the collapse of marriage and birthrates globally; leaders recognize the threat this poses and have tried to reverse the tide, with little effect.  Some propose that these dynamics are the result of secret agendas to reduce the human populace, but the causal links required by this theory are not persuasive: people don’t abandon marriage and raising a family lightly, and there are many factors at work: mating, marriage and having children is an open system, and demographics can’t be dialed up or down at will.

So what road maps do we have for inherently unpredictable and not entirely controllable open systems?

One is the cycles of human history, which reflect that our Wetware 1.0 instantiated around 200,000 years ago leads us to respond in a very limited number of ways to threats and windfalls. I’ve often recommended the book Global Crisis: War, Climate Change and Catastrophe in the Seventeenth Century as evidence that the present has many similarities to the 1600s, which was beset by climate change, scarcities, wars and political conflicts.

Another is how leaders and populaces respond economically to scarcities and threats.

Yet another is human psychology, which maps how we respond to scarcities and threats via denial, magical thinking, cognitive biases, etc.

A fourth map is based on cultural and sociological dynamics embedded in communities, tribes and nation-states.

Let’s take a brief look at each of the three, all of which are worthy of entire volumes.

My colleague Gordon Long published this road map of how economic-financial leaders respond to the stagnation of growth: Gordon calls the entwined trajectories Monetary Malpractice and Moral Malady: financial deceptions (low inflation, etc.) lead to distortions which then generate delusions: our economy can grow forever, as there are no limits on our powers.

This path is paralleled by a decline in ethics, as the deceptions and distortions require misinformation as a means to manipulation (securities no longer marked to market, etc.) which leads to malfeasance, mispricing (of risk) and malinvestment.

These two dynamics generate moral hazard (the disconnection of risk and consequence), unintended consequences (system fragility) and dysfunctional markets (bubble economies, etc.) The end state is instability, failure and collapse, as the ethical and factual foundations of economic decision-making have been gutted to protect the status quo.

The irony is striking: to save us from any sacrifice, we undermine the system so it veers into instability and collapse, generating extremes of sacrifice.

A similar destination appears in this chart of the psychology of collapse: we avoid the pain of sacrifice and convince ourselves that something or other will magically create a secure future without us having to take responsibility or make sacrifices. In the current era, this something is technology: AI will do all the work, etc.

As pressures mount, we focus on short-term needs, because we must do so and also because the shorter term is all we can control. We assure ourselves and others that we can collectively resolve all threats as we’ve done so in the recent past (i.e. recency bias): we’ve got top people working on it, top people.

Since we haven’t changed either inputs or processes, the system careens into collapse.

A 2021 article in Foreign Affairs magazine outlined the sociological factors that guide our collective responses to large-scale threats, crises and challenges: The Threat Reflex: Why Some Societies Respond to Danger Better Than Others (Michele Gelfand)

“The Greek historian Herodotus, in his travels across the world in the fifth century BC, was the first to observe the opposing tendencies of societies toward either order or permissiveness. He singled out the Persian Empire for its openness to foreign ideas and practices: “There is no nation which so readily adopts foreign customs as the Persians. Thus, they have taken the dress of the Medes, considering it superior to their own; and in war they wear the Egyptian breastplate.”

By contrast, he described the Egyptians as having very strong norms, especially about cleanliness, religion, and respect for authority. Two centuries later, the Greek historian Polybius contrasted Roman discipline, order, and rationality with Celtic impetuosity, chaos, and passion on the battlefield. These ancient writers had stumbled on one of the most important ways in which human groups varied—by the strength of their social norms.

It wasn’t until the late 1960s that social science took account of these essential differences. The American anthropologist Pertti Pelto introduced the terms ‘tight’ and ‘loose’ in his work on underlying cultural codes.

A country that closely observes and upholds social norms can be considered to be ‘tight.’ People in those societies don’t tolerate deviance and generally follow the rules. ‘Loose’ countries celebrate individual creativity and freedom. They are lax in maintaining rules and customs but very tolerant of new ideas and ways of being.

Tightness and looseness confer advantages and disadvantages to societies. Tight cultures exemplify order and discipline. Societies with tight cultures tend to consist of individuals who are more attentive to rules, have greater impulse control, and are more concerned about making mistakes. They have higher uniformity–even to the point where their clocks are more synchronized on city streets.

Loose cultures have less order: people have lower impulse control and suffer from greater levels of debt, obesity, alcoholism, and drug abuse. But countries with loose cultures also boast much higher levels of openness: they are more tolerant of people of different races, religions, and sexual orientations; are more entrepreneurial; and have much higher levels of creativity.

But what explains these variations in social norms? Tight cultures and loose ones don’t share any obvious characteristics, such as geography, language, religion, or traditions. GDP isn’t a factor, either: rich and poor countries abound in both categories. Japan, a rich country, and Pakistan, a poor one, have tight cultures; the rich United States has a loose one, as does the far poorer Brazil. Instead, the extent to which societies have been exposed to collective threats in part determines their relative tightness or looseness.

Tight cultures have grappled with more frequent natural disasters, a greater prevalence of disease, greater resource scarcity, higher population density, and territorial invasions. Groups exposed to frequent dangers need stricter rules to coordinate to survive. Groups that have experienced fewer threats can afford to be permissive.

Tightening during times of threat is an important adaptation that helps groups coordinate and survive. Populist authoritarian leaders hijack, amplify, and manipulate threat signals and then promise to return their countries to a tight order.  Understanding tight-loose dynamics can help countries better anticipate and manage these challenges.

The sudden displacement of long-standing regimes can unleash extreme disorder that allows populist autocrats to step into the breach and promise to replace chaos with tightness. History repeatedly shows that chaos pushes people toward a yearning for tightness. This psychology leaves populations in places where norms have collapsed vulnerable to extremists.

What I call ‘tight-loose ambidexterity’: the ability to tighten when there is an objective threat and loosen when that threat recedes.”

As we’ve seen, democracies can respond in a highly authoritarian fashion to threats, “tightening” legal, social, financial and political controls. Though the article doesn’t mention this, I discern a feedback loop in this tightening: as events seem to escape this tightening of centralized control, the leadership instinctively increases the tightening, seeking to impose even greater control of the populace and economy.

This tightening eventually crosses thresholds and generates second-order effects: people sense the restrictions are not helping resolve whatever threats exist, they’re adding a new threat to civil liberties, social mobility / agency and economic freedoms, all of which are the foundational dynamics of an open, adaptable society.

Globally, nation-states appear to be exhibiting elements of all four road maps. Few seem to be exhibiting ‘tight-loose ambidexterity’ or a willingness to impose necessary sacrifices first on those most able to make sacrifices, i.e. their elites.  This does not bode well in terms of changing inputs and processes consequentially enough to change the trajectory toward instability.