Feb 17

Today’s News 17th February 2019

  • Man Jailed After Police Find 3D Printed Gun And US Lawmaker Kill List

    A Dallas man has been sentenced to eight years in federal prison after officers discovered a 3D-printed assault rifle and a hit list of US lawmakers in his backpack, despite a court order that banned him from owning a gun, stated US Attorney for the Northern District of Texas Erin Nealy Cox.

    According to Cox, Eric McGinnis obtained a barrel, tactical stock, upper receiver, and a vertical grip — and then used a 3D printer to build the gun’s lower receiver, the section of the firearm which provides housing for internal components such as the hammer, bolt, action, and firing mechanism.

    He then assembled the parts into a short-barrel AR-15 rifle and traveled to a nearby woodland with what federal attorneys called an extensive “hit list” of Democratic and Republican lawmakers, including their home addresses. The list was titled, “9/11/2001 list of American Terrorists.”

    The arrest of McGinnis occurred in 2017 after Grand Prairie Police Department in Texas heard rapid-fire shooting in a remote area of town. On Wednesday, he was sentenced to eight years in prison.

    McGinnis being arrested outside Dallas in 2017 

    “When he realized he couldn’t legally purchase a firearm, Eric McGinnis circumvented our gun laws by 3D-printing his weapon, eliminating the need for a background check,” said Cox.

    A second examination of McGinnis’ cellphone and computer by US Capitol investigators suggested he was overly obsessed with James Hodgkinson, the shooter who wounded Rep. Steve Scalise at a GOP Congressional baseball practice in Virginia in 2007, the federal prosecutor revealed at sentencing Wednesday.

    McGinnis admitted he had “printed” the lower receiver of the gun to a family member during a jailhouse phone call.

    “I didn’t buy a gun, I built the gun,” he said in the recorded phone call. “The upper, I printed a lower, and I built it — installed the trigger and did all that stuff. I built it.”

    Chief US District Judge Barbara M.G. Lynn found McGinnis guilty of possessing an unregistered assault rifle and illegally possessing ammunition while subject to an active protective order.

    This case, investigated by the Bureau of Alcohol, Tobacco, Firearms & Explosive with support from the Grand Prairie Police Department and US Capitol Police, was initiated by Cox’s initiative to keep dangerous weapons away from criminals.

    “When he realized he couldn’t legally purchase a firearm, Eric McGinnis circumvented our gun laws by 3D-printing his weapon, eliminating the need for a background check,” said Nealy Cox. “This case should send a message to prohibited persons contemplating acquiring guns by any method: this office is committed to keeping guns out of the hands of those who violate protective orders for domestic violence, no matter how the guns are obtained – by theft, purchase, or 3D printing.”

    “Controls to determine if an individual is prohibited from purchasing firearms and ammunition worked,” said Jeffrey C. Boshek II, Special Agent in Charge of ATF’s Dallas Field Division. “Mr. McGinnis applied evolving technology to by-pass those controls to manufacture an untraceable NFA weapon. The fact a prohibited person was able to manufacture an untraceable firearm with apparent ease and anonymity presents a significant challenge and major concern to law enforcement and our community.”

    Recently, Senate Democrats condemned President Trump’s proposal to transfer oversight of 3D guns to the Commerce Department, indicating that it would allow criminals to get easier access to electronic blueprints.

    “The Trump administration basically gave anyone – including criminals and murderers – a green light to 3D print and sell untraceable ‘ghost guns,'” said Sen. Chris Murphy, D-Conn., according to The Washington Examiner. “Thankfully, the courts have blocked this for now, but Congress needs to act to close this glaring loophole before anyone gets killed.”

    Rapid advances in 3D-printing technology have made it possible for anyone to buy a 3D printer on Amazon and print a gun in their living room.

    These guns can be assault rifles or pistols, are referred to as “ghost guns,” which have no serial numbers and cannot be traced by the government, a problem that has frightened federal and state officials.

  • Howard Marks: The Most Dangerous Thing The Fed Ever Did Was Convince Investors That "It's Different This Time"

    As the infamous quote from the movie “the Usual Suspects” goes: “The greatest trick the devil ever pulled was convincing the world he didn’t exist.” Similarly, as the billionaire investor and Oaktree Capital Management founder Howard Marks explained during a recent interview with RealVision’s Grant Williams, the most dangerous trick the Federal Reserve ever pulled was to convince investors that “it’s different this time”.

    That in the post-crisis era, the central bank has discovered an elixir to eliminate the business cycle, installing in its place an everlasting bull market, abetted by a “goldilocks” economy, where every dip presents an immediate buying opportunity.

    Williams described Marks in their interview as “a great student of [market] cycles” before questioning whether old-school thinking about the boom-bust nature of the markets was even still relevant in the post-crisis brave new world that QE and negative interest rates have brought us.

    Marks

    But Marks quickly dismissed this, affirming that he is still believes in the value of analyzing and timing the market cycle. Perhaps that’s why his fund, Oaktree Management, seized the opportunity to deploy capital during Q4, when nothing was working (2018 will go down in history as one of the worst years for financial markets on record, given the breadth of losses across asset classes), and everybody seemed to be selling in a panic.

    Negative

    Elaborating further Marks explained his view on where we are in the cycle. Until Trump’s arrival in the West Wing, the recovery had been chugging along slowly (while asset prices had been moving in a nearly uninterrupted diagonal line from left to right). Setting aside the direct impact of central bank liquidity, Marks explained that after the crisis, people and businesses were left traumatized, which was one reason why growth was so tepid, even once this immense monetary assistance had been factored in. But the fiscal stimulus unleashed by the Trump administration, in the form of tax cuts and increased federal spending, was like administering a “shot of adrenaline to an already healthy patient.”

    For this reason, Marks doesn’t think the highs are in – at least not yet. But ultimately, he believes we will get to new “highs that lead to lows.”

    GRANT WILLIAMS: There must come a point where things get out of hand. Going back to the original question of 2005, 2006, do you see any similarities in what you’re seeing and what’s starting to make your spidey sense tingle?

    HOWARD MARKS: Not similarities in the sense of specific things repeating. But I have felt that because people were traumatized by the great recession, the recovery has been the slowest one since World War II. And that has kept things moderate, which meant that we would certainly have a recession one of these days. But it would be moderate. When you don’t have a boom, you don’t have to have a bust in my belief.

    But now between the tax bill, which was a shot of adrenaline into, in my opinion, an already healthy patient, and then the possibility that we’re going to see a Powell put in action, I think that we may get to highs that lead to lows.

    I’m a believer in cycles. I believe they always have occurred, I think I understand why. And I think they always will occur and I try to study them. And then when I kind of got to the end of writing the book I said, well why do we have cycles? If the market goes up 10% a year on average, why doesn’t just go 10% every year? And in fact, it almost never goes up between 8 and 12. So the average is not the norm. Why not?

    And the answer, I think, is excesses and corrections. So you have a trend line and most trend lines are upward sloping, but then you deviate from the trend line on the upside because of some combination of optimism and greed and wishful thinking. And then you have to have a correction to the downside. So now I’m thinking we may have more of an excess, which leads to more of a correction.

    And the longer the Fed and the federal government forestall a recession by artificial means, the worse the fallout will be when one finally arrives. Offering an extremely apt analogy, Marks contrasted the Fed’s machinations with the “good forest management” policies needed to prevent out-of-control wildfires like those that have erupted in California over the past two years (see here for an example of what we’re talking about).

    Marks reasoning goes, the best way to avoid an out-of-control blaze is to permit moderate fires to burn from time to time. That way, they clear out the underbrush. But if we extinguish every blaze before it has a chance to burn, then we put ourselves at risk for a “big one” that could quickly accelerate beyond our control.

    GRANT WILLIAMS: When did we get to the point where a recession is something that has to be avoided at all costs?

    HOWARD MARKS: Yeah, well it’s a big mistake. In one of my memos – postmortem for the global financial crisis –  I talked about forest fires. Good forest management, you permit there to be fires once in a while. And if there are fires of moderate size, occasionally it burns out the fuel and then you don’t get the one big one. Same thing, in my opinion.

    And the fluctuations of the economy are natural, in my opinion. And should be permitted to occur. And if you try to forestall them, then when they happen – I don’t think you can forestall forever. And when they happen, they’re bigger.

    Over the past 20 years, the whims of the financial markets have grown to outweigh the influence of the economic cycle. The financial crisis, for example, had almost nothing to do with the real economy, Marks explained. Which is why tacit Fed policies like the “Powell Put” could be far more destabilizing than many investors might suspect.

    GRANT WILLIAMS: Yeah sure. Well you mentioned cycles, I know you’re a great student of cycles. And they used to be so important in markets – everywhere you look. Whether it was the human cycle, whether it was a market cycle, credit cycles – everything seemed to have a rhythm.

    And it made investing a lot easier because you could at least have some sense of how these cycles would turn. That seems to have changed significantly in the last 15, 20 years. You’re shaking your head there.

    HOWARD MARKS: I don’t agree with that. If you talk about 20 years, if you came in this business 20 years ago, you have seen two profound cycles. You had the TMT bubble and crash and then you had the mortgage bubble and crash. And I think that maybe they weren’t predictable, but I’m not sure they ever were.

    GRANT WILLIAMS: I wouldn’t classify those cycles. I kind of look at them and think they were both attempts at cycle turns that happened quickly in kind of short order in small corners of the market. And then got squashed quickly by Fed policy.

    HOWARD MARKS: Well, they were market cycles – bubble and crash.

    GRANT WILLIAMS: Yeah.

    HOWARD MARKS: They weren’t economic cycles in the traditional sense. And in the last 20 years, I think that developments in the financial world have taken over in importance from developments in the rest of the business world.

    Ultimately, Marks still believes in the importance of understanding market cycles because, fundamentally, human nature hasn’t changed. Which is why it’s dangerous to believe that, in an increasingly unstable world, that stability has become the norm.

    HOWARD MARKS: …And the big theme of the book is Mark Twain – history does not repeat, but it does rhyme. And the world is just too unstable a place to believe that stability is the norm.

    And you know if you think about it, in the economy a great year is up four, and a bad year is down two. So the economy has an upward trend and it kind of goes like this. Then companies have leverage – financial leverage and operating leverage. So their profits go like this. And then the market goes like this. And why? Because of people.

    The risk in the market does not come from stock certificates, companies, exchanges, it comes from people. But people are prone to excess and I don’t see how it can be argued otherwise.

    And by the way, when people say, I don’t think we’re going to have cycles in the future because the astute Fed has it under control – or whatever it is – what they’re saying is what I consider the four worst words in the world – it’s different this time. OK until now we’ve had cycles, but we’re not going to have anymore.

    One risk that markets are probably failing to truly understand is the rise of the radical left, and their support for “confiscatory” taxation policies.

    GRANT WILLIAMS: I mean, it certainly seems that way. When you look at the traction Ocasio- Cortez is getting – and Liz Warren – and it’s clear that they both realize that this is how we’re going to create that traction – by going against the elite.

    But some of the things they’re proposing are the 70% tax. Liz Warren was on MSNBC looking straight down the camera at everybody else saying, we’re going to find your wealth and we’re going to come and get it. These are things that I’m sure a lot of people in America never thought they’d hear in this country.

    HOWARD MARKS: I think the thing in the memo that I got heated about the most, and I was trying to put it out and then Friday Elizabeth Warren came out with her wealth tax idea. But what got me was that – she tweeted it out of course – the way she did it.

    She said something like – don’t quote me – the rich and powerful run America and look at what they have arranged for themselves. They are allowed to keep their accumulated wealth. Well, guess what? We’re all allowed to keep our accumulated wealth.

    And she makes it sound like – through some skullduggery – they have exempted themselves from the wealth tax. You can’t exempt yourself from something that doesn’t exist. But she makes it sound nefarious. And that’s populism – they, they. And it’s not constructive.

    I would lay a strong bet that five years from now, my tax rate will be higher than it is today. But it should be, as I said in the memo, it should be progressive, but not punitive. And not confiscatory. Among other things, people don’t have to sit still and pay it.

    I wrote a memo back in 2016 called “Economic Reality” and I talked about a guy I know who was the biggest taxpayer in New Jersey. They raised the rates to a point where he moved to Florida where there is no tax.

    So the point is, the people who want to confiscate seemed to think that there’s nothing that the confiscatees can do about it.

    Marks believes the growing divisiveness in Washington will lead to increasingly counterproductive policymaking, as Democrats and Republicans focus more on spiting one another by passing major policy initiatives without any participation from the minority party (Obamacare and Trump’s tax bill are both examples of this). But shifting his focus back to his investing strategy, Marks explained that he recently realized that cyclical extremes offer probably the best chances of trades with high returns. “When you are at an extreme high or an extreme low, the logic is compelling and the probability of being right is high.”

    But the problem is, these opportunities don’t come around very often. Marks most successful market calls occurred about once a decade – 5 times in 50 years.

    But another inflection point where valuations are obviously overstretched could be just around the corner.

    Watch a clip from the RealVision interview below:

  • In Unprecedented Move, Catholic Church Expels Cardinal For Sexual Abuse

    Some six months after an archbishop in the Vatican ignited a scandal that nearly brought down the pope by publicizing allegations that the Vatican had systematically suppressed and dragged its feet on investigating one of the most powerful cardinals in the US, Pope Francis has taken the unprecedented step of defrocking – or laicizing, as its technically known – 88-year-old retired cardinal William McCarrick, who was once one of the most powerful Catholic officials in the US.

    Priest

    According to the New York Times, the de-frocking of McCarrick, who was found guilty of using his position of power to abuse both seminarians and children, may be the first example in the church’s 2,000+ year history of a cardinal being expelled from the priesthood, though no scholar of the church can say for certain that this is true. According to the ruling, McCarrick can no longer perform any religious duties – including taking confession and delivering holy communion – and will henceforth be known simply as Mr. McCarrick. \

    In a statement on Saturday, the Vatican said Mr. McCarrick had been dismissed after he was tried and found guilty of several crimes, including soliciting sex during confession and “sins” with minors and with adults, “with the aggravating factor of the abuse of power.”

    While the Vatican has defrocked hundreds of priests for sexual abuse of minors, few of the church’s leaders have faced severe discipline. The decision to laicize, or defrock, Mr. McCarrick is “almost revolutionary,” said Kurt Martens, a professor of canon law at the Catholic University of America.

    “Bishops and former cardinals are no longer immune to punishment,” Professor Martens said. “The reverence that was shown in the past to bishops no longer applies.”

    Francis expedited the church’s final decision so that it would be delivered ahead of a Vatican summit on sexual abuse in the priesthood, a story that was first uncovered by the Boston Globe back in 2002, and has since escalated to a global scandal that has threatened the church’s power in traditional strongholds from the US to Ireland. Still unknown is how the church will investigate McCarrick’s rise under Pope John Paul II and his successors. Francis himself has been accused of turning a blind eye to McCarrick’s misconduct.

    Per the WSJ, McCarrick had appealed an initial ruling of guilt on Jan. 11. And on Wednesday, the Vatican’s Congregation for the Doctrine of the Faith, rejected the appeal. McCarrick, who is now 88, was notified of the decision on Friday. He will now likely lose the church-supported housing and health benefits, and may need to find a new place to live. McCarrick’s expulsion follows the pope’s decision to laicized two retired Chilean bishops accused of sexually abusing minors. In December, he also removed two top cardinals from his powerful advisory council after they were implicated in sexual abuse cases.

    A man who was victimized by McCarrick as a child delivered a statement to the NYT praising Francis for his decision to strip McCarrick of his title, though he lamented the fact that it came after years of trauma and pain.

    James Grein, who told The Times that he was 11 when Mr. McCarrick began a sexually abusive relationship with him, said in a statement on Saturday: “For years I have suffered, as many others have, at the hands of Theodore McCarrick. It is with profound sadness that I have had to participate in the canonical trial of my abuser. Nothing can give me back my childhood.”

    He added: “With that said, today I am happy that the Pope believed me. I am hopeful now I can pass through my anger for the last time. I hope that Cardinal McCarrick will no longer be able to use the power of Jesus’ Church to manipulate families and sexually abuse children.”

    McCarrick has been living in a Capuchin friary in Kansas under orders to pursue a life of “prayer and penance.” He wears a pacemaker and had knee replacement surgery in 2016.

  • NFL Paid Kaepernick $60 To $80 Million To Settle: Report

    Colin Kaepernick received between $60 and $80 million in an out-of-court settlement with the NFL, according to NFL columnist Mike Freeman, who tweeted on Friday: “Number NFL team officials are speculating to me is the NFL paid Kaepernick in the $60 to $80 million range.”

    While the exact terms of the settlement have not been revealed, Kaepernick attorney Mark Geragos released a statement following Freeman’s tweet, noting that the terms of the agreement are subject to a confidentiality agreement. 

    For the past several months, counsel for Mr. Kaepernick and Mr. Reid have engaged in an ongoing dialogue with representatives of the NFL. As a result of those discussions, the parties have decided to resolve the pending grievances. The resolution of this matter is subject to a confidentiality agreement so there will be no further comment by any party. 

    The NFL Players Association, meanwhile, acknowledged the settlement in a separate statement. 

    “Today, we were informed by the NFL of the settlement of the Colin Kaepernick and Eric Reid collusion cases. We are not privy to the details of the settlement, but support the decision by the players and their counsel. We continuously supported Colin and Eric from the start of their protests, participated with their lawyers throughout their legal proceedings and were prepared to participate in the upcoming trial in pursuit of both truth and justice for what we believe the NFL and its clubs did to them. We are glad that Eric has earned a job and a new contract, and we continue to hope that Colin gets his opportunity as well.”

    As Breitbart‘s Dylan Gwinn notes, perhaps this is why Kaepernick refused to play in the Alliance of American Football for anything less than $20 million. 

    https://platform.twitter.com/widgets.jshttps://platform.twitter.com/widgets.jshttps://platform.twitter.com/widgets.js

  • All US Citizens Ordered Out Of Haiti Amidst Mass Unrest And Chaos

    Haiti continues to be gripped by civil unrest and mass protests demanding that President Jovenal Moise step down over charges of corruption and and rampant inflation under his watch — yet unlike similar unrest happening hundreds of miles due south of the small Caribbean country in Venezuela, Washington has stood in support of the president. Starting Thursday the US State Department urged all American citizens out of the country and issued a no-not-travel advisory due to “crime and civil unrest”. 

    And national security adviser John Bolton followed with a statement on Saturday for all sides in Haiti to “respect and protect their democracy” — a bit ironic considering he spent the rest of the day tweeting regime change related messages targeting Venezuela’s Maduro. He revealed in the tweet that he met with Haitian Foreign Minister on Friday “to express the United States’ enduring support for and friendship with Haiti.” He further urged “all of Haiti’s political actors to respect and protect their democracy, engage in dialogue, and put an end to the political violence.”

    Protests from days ago, via The Miami Herald/AP

    In its prior travel ban the State Dept. described a rapidly deteriorating situation of “Protests, tire burning, and road blockages are frequent and unpredictable. Violent crime, such as armed robbery, is common,” and said further that “Emergency response, including ambulance service, is limited or non-existent.” An update told all U.S. citizens who remained in Haiti “to strongly consider departing as soon as they safely can do so” and warned of encountering potential roadblocks or hazardous checkpoints.  

    “Travelers are sometimes targeted, followed and violently attacked and robbed shortly after leaving the Port-au-Prince international airport,” the State Department said.

    https://platform.twitter.com/widgets.js

    According to CNN one group of 24 missionaries from Canada have become trapped in a town about 30 miles outside of the capital of Port-au-Prince, unable to navigate the blocked roads into the capital. 

    CNN also describes clashes that have left an unknown number of Hatians dead:

    Several people have been killed in the clashes, according to local media reports. CNN has not been able independently to confirm the exact number of those killed.

    In the Port-au-Prince neighborhoods of Nazon and Turgeau, scores of people stood in lines Saturday desperate for the basics of life: water, gas and food.

    Crowds, about 100 strong in spots, dotted the roadways, waiting with 5-gallon plastic buckets, and gas stations were mobbed.

    The evacuation orders amidst the unrest, which have been issued by other governments such as Canada, are sure to make things further difficult for the county’s economic woes, as tourism makes up about 5% of GDP.

    Protesters clashed with police over the past week. In some instances the police reportedly responded with live ammo. Image source: AP

    Mass protests paralyzed the Port-au-Prince region starting a little over a week ago, and are in some aspects actually related to the Venezuela crisis. For starters,

    At work is a messy cocktail of political forces opposed to the Jovenel Moïse presidency. This is fueled in part by a judicial report issued in January that outlined massive embezzlement of Venezuela’s discounted oil PetroCaribe program to Haiti. The report highlights individuals from no fewer than three successive Haitian presidencies, and follows a parliamentary report issued more than a year ago that covered many of the same allegations—all left unanswered.

    And amidst this Washington starting weeks ago put immense pressure on Port-au-Prince to break ties with the Maduro regime in Venezuela, in recognition of self-styled “Interim President” Juan Guaido. 

    https://platform.twitter.com/widgets.js

    These pressures were successful and the Haitian government caved earlier this month, fueling the rage of Hatians in the street, many of which were already angered over the impact that Washington’s oil sanctions on nearby Venezuelea are having on Haiti.

    https://platform.twitter.com/widgets.js

    The overlapping Haitian and Venezuelan situations are outlined as follows:

    The first and most notable has been the pressure it has been under—most notably from an increasingly irritated Washington—to break ranks with Venezuela’s Maduro regime, which it finally did early this month. The Maduro regime in effect tried to bribe Haiti by offering to reprogram some of the PetroCaribe funding but the Moïse government didn’t back down. 

    What’s at stake is described by Ariel Fornari of Haiti Analysis:

    For more than a decade Venezuela has aided the governments of Haiti and the Dominican Republic through a preferential system known as Petrocaribe, which provided subsidized crude oil prices to meet the countries critical energy demands. The Petrocaribe oil agreement, allowed for governments to pay only 60 percent of the oil shipments they purchase from Venezuela. The remaining 40 percent could be financed over 25 years at 1 percent interest, as long as oil prices stayed above $40 per barrel. This allowed for tremendous savings, and money that (according to the agreement) was supposed to be used for socially beneficial purposes.

    And further: 

    Countries such as Nicaragua, Jamaica, Cuba, and many islands in the eastern Caribbean have successfully utilized Petrocaribe funds and other Venezuelan support mechanisms, investing in vital infrastructure, education, healthcare, and have used the funding to avoid austerity deals with the IMF and other international financial institutions.  Corrupt politicians in Hispaniola, though, whose regimes are closely aligned with Washington, have by contrast become well-known for robbing many of the funds meant for the social needs of their population.

    Thus Port-au-Prince so easily succumbing to Washington against Maduro was the last straw for many in a politically complex scandal which has grown for years as a result of the Petrocaribe deal, which began in earnest when it was revealed in 2017 that almost $4bn in funds earmarked for social development went missing, widely assumed to be the result of corrupt officials still within the Moise government skimming on a mass scale. 

    Interestingly the Maduro government itself has been accused of stirring discontent in Haiti’s streets through the Venezuelan embassy in the Haitian capital and its ambassador, who is reportedly still in residence. This is an accusation likely to grow coming from anti-Maduro leaders. 

    Meanwhile the value of the national currency (Gourde) keeps plummeting, and the future looks increasingly bleak, signified by an early February tragedy in which a boatload of Haitians drowned trying to reach the Bahamas — which observers see as a worrisome indicator of what’s coming. 

  • Group Of 10 Elite Hedge Fund Managers Made $7.7 Billion In 2018

    Remarkably enough considering investors just endured a year that will be remembered as one of the worst for cross-asset performance in recent memory, Citadel founder and hedge fund billion Ken Griffin – who capped off a $700 million real-estate buying binge by dropping more than $450 million for properties in London and New York City – still finished the year well in the black.

    According to Bloomberg, Griffin was one of the leaders of a pack of well-compensated hedge fund billionaires who saw their wealth expand by $7.7 billion in 2018. Griffin alone saw his fortune swell by $870 million, bringing his total net worth to $10 billion.

    Griffin

    Citadel had a good year last year, but its returns didn’t include anything on the scale of George Soros’ legendary pound short or John Paulson’s bet against the housing market. So how did he do so well?

    The answer is that funds like Citadel and Ray Dalio’s Bridgewater Associates have grown so large, they effectively throw off hundreds of millions – if not billions – of dollars in fees a year, even during relatively lean stretches for the market. 

    “We still want the mega funds to produce returns that are better than a typical hedge fund, that’s why we’re willing to pay the 2 and 20 percent fees,” said Tim Ng, CIO of Clearbrook Global Advisors, which invests in hedge funds. “We’re willing to tolerate lower performance from some in a market like 2018 because they have for years outperformed their peers.”

    As Bloomberg’s ranking showed…

    BBG

    Quant

    …quant funds dominated the competition last year.

    Citadel’s flagship Wellington fund, for instance, returned 9.1 percent last year, while the average fund lost 6.7 percent, slightly worse than the S&P 500 Index. Of course, Griffin doesn’t get performance fees unless he makes a profit for his clients. As the largest investor in the funds, the billionaire’s interests are aligned with theirs.

    How did other big names stack up in 2018?

    Quants feature heavily on Bloomberg’s list, led by James Simons of Renaissance Technologies. The former code-breaker’s fortune increased $1.6 billion to $16.6 billion, according to Bloomberg estimates, making him the world’s wealthiest hedge fund manager.

    RenTech’s Institutional Equities Fund gained 8.5 percent, while its Medallion vehicle, closed to outside investors, did better.

    Ray Dalio’s fortune rose $1.3 billion, powered by Bridgewater’s approximately $160 billion of assets.

    He’s now worth about $16.2 billion. His flagship Pure Alpha fund gained 14.6 percent last year, while the All Weather strategy lost money.

    And while the average fund was down 6.7%, trailing the S&P 500’s ~4.5% drop, some managers crushed the competition.

    Michael Platt of Bluecrest Capital Management returned 25 percent, although hedge fund investors didn’t benefit after he kicked out clients. Jeffrey Talpins of Element Capital Management had a 17 percent gain for his macro fund, elevating him to billionairedom.
    For several people on the list, hedge funds are just a component of their businesses.

    Griffin owns one of the world’s largest firms making markets in stocks and bonds. In addition to buying houses and art, he’s given away more than $700 million to charity.

    Chase Coleman of Tiger Global Management runs a fabulously successful venture capital arm, helping to boost his fortune to $3.9 billion.

    And with the market in the midst of one of the best start-of-year rallies since the early 1990s, 2019 is shaping up to be an even better year across the industry…though there’s still plenty of time (and some evidence in historical market data) for things to head south from here.

  • China Accounts For More Than 60% Of All New Credit Created Globally In The Past Ten Years

    Over five years ago, in November 2013, when the world’s attention was still largely focused on what the “Big 4” central banks would do with QE and/or interest rates, we wrote an article showing in one simple chart  “How In Five Short Years, China Humiliated The World’s Central Banks“, and noted that in just the brief period since the financial crisis “Chinese bank assets (and by implication liabilities) have grown by an astounding $15 trillion, bringing the total to over $24 trillion. In other words, China has expanded its financial balance sheet by 50% more than the assets of all global central banks combined.”

    Fast forward to today, when not only is China’s debt the biggest wildcard for the stability of the global financial system – something China is well aware of and is why in January, Beijing injected a gargantuan $685 billion in new credit into its financial system, greater than the GDP of the 21st largest country, Taiwan…

    …  but even central banks openly admit that China’s relentless debt-issuance spree is a major risk factor for global financial stability. One such bank is the NY Fed, which this week issued a report titled “Could Rising Household Debt Undercut China’s Economy?” which while containing nothing that regular readers don’t already know, provides a handy snapshot of the full extent of China’s debt problems (and is a useful sequel to the NY Fed’s 2017 report “China’s Continuing Credit Boom“.)

    So for those curious how and why China now accounts for more than 60% of all new credit created globally over the past ten years (an increase from 50% just two years ago), read on:

    Could Rising Household Debt Undercut China’s Economy?

    Although there has been a notable deceleration in the pace of credit growth recently, the run-up in debt in China has been eye-popping, accounting for more than 60 percent of all new credit created globally over the past ten years. Rising nonfinancial sector debt was driven initially by an increase in corporate borrowing, which surged in 2009 in response to the global financial crisis. The most recent leg of China’s credit boom has been due to an important shift toward household lending. To better understand the rise in household debt in China and its implications for financial stability and China’s economic performance, it is important to examine the expansion in household credit, how the rise in debt compares to international experience, and the associated risks.

    The Drivers of Household Debt in China

    The growth of China’s household debt reflects a natural evolution in financial sector deepening and has grown in two waves. The first occurred during the late-1990s following major financial reforms and the privatization of China’s housing stock. The second wave began in the wake of the global financial crisis and has witnessed much more rapid growth, with debt increasing by nearly $5.7 trillion, or nearly 30 percent of China’s GDP. In fact, household lending overtook corporate borrowing in early 2018 to become the largest driver of aggregate loan growth in China. New household lending now accounts for roughly half of new loans.

    As illustrated in the upper panel of the chart below, the majority of household debts in China are residential mortgages, although other forms of consumer credit are also large and growing rapidly. The lower panel of the chart shows the shares of household loans by lending category.

    As of June 2018, outstanding mortgage loans accounted for close to 60 percent ($4 trillion) of total household debt. Mortgages comprise roughly 19 percent of bank loans in China (compared to 30 percent in Korea and 23 percent in Japan). Growth in mortgage lending has averaged 27 percent per year over the past three years, although the pace of growth has decelerated gradually over the last year as Chinese authorities have tightened macroprudential policy.

    China’s credit card debt is part of “consumption loans,” which comprises 14 percent of total household debt, and is now the fastest growing component. Additional consumer credit not captured in the official data include online peer-to-peer lending platforms, other forms of microlending and consumer finance, and informal lending. Peer-to-peer lending platforms, which have increased rapidly in recent years, have also been the focus of heightened regulatory scrutiny recently due to a series of failures by some platforms.

    How Does China’s Household Debt Compare with Other Countries?

    China’s household debt relative to its GDP and aggregate household disposable income is broadly comparable to international peers, but this follows a period of rapid growth from initially low levels. For example, according to statistics compiled by the Bank for International Settlements (BIS), China’s household debt-to-GDP ratio now stands at around 50 percent. As illustrated in the left panel of the chart below, this is still fairly modest compared with most developed economies, but above most emerging market economies outside of Asia. Within Asia, China is rapidly catching up to Japan (57 percent), but is further behind Thailand, Malaysia, and Hong Kong (all close to 70 percent), and well below Korea (95 percent). However, China’s ratio increased by nearly 30 percentage points over the past decade, a much larger increase than witnessed in virtually all other countries, including Korea, which increased by about 23 percentage points.

    Debt ratios relative to households’ disposable income are arguably better measures of the aggregate burden on households, but are more difficult to compile on an internationally comparable basis. Nonetheless, a similar picture is evident. As shown in the right panel of the above chart, China’s ratio of household debt to total disposable income ranges from roughly 80 percent to 110 percent, depending on the measure of income. This range is broadly comparable to the ratio in the United States and the median for countries in the OECD (113 percent), but is well below Korea (170 percent).

    The next chart shows an estimate of China’s household debt service ratio (principal and interest) relative to disposable income (DSR), where we compute China’s DSR comparably to the method used by the BIS (specifically, we use the five-year nominal interest rate in China and assume an 18-year average remaining maturity on debt). Based on this metric, China’s DSR is comparable to the United States, and is catching up to some other countries where household debt is often viewed as a concern among policymakers and market participants.

    Rapid Build-Up of Debt Is Posing a Risk to China’s Growth Outlook

    Overall, the risks related to household debt in China are generally viewed as manageable by most observers. However, it is important to caution against being overly sanguine, especially since aggregate measures of debt and income may mask important differences among households.

    In fact, some household survey data already paint a more worrisome picture. For example, a recent working paper using micro-level data from 2015 suggests that a quite large proportion of Chinese households with debt outstanding to formal financial institutions—that is, excluding informal borrowing—already carry high debt service burdens. One of the metrics used in that paper to define a high burden are households with DSRs exceeding 0.4, a commonly used cutoff for identifying highly indebted households. The authors’ data show that 25 percent of indebted households carried DSRs exceeding 0.4 in 2015.

    Though it is difficult to make direct comparisons due to data and methodological differences, these figures appear rather high in an international context. The fraction of indebted households in Spain with DSRs exceeding 0.4 was 16.5 percent in 2008, while the proportion in the United States peaked at 14.8 percent in 2007 (using gross income). China’s figure is even comparable to that in Korea, which was 23.5 percent in 2017. Partly attenuating the Chinese figures are the facts that income may be understated in the survey data, and that relatively small fractions of Chinese households report negative net worth. The fraction of households whose DSRs and debt-to-asset ratios jointly exceed 0.4 and 1, respectively, has increased rapidly from a low base, but was about 1.2 percent in 2015, still well below the 3.1 percent in Korea reported in the Bank of Korea’s Financial Stability Report.

    The impact on growth and consumption dynamics of household debt are complex, but some research suggests that fast increases in household debt entail trade-offs between faster, near-term GDP growth and slower growth in the future. For instance, a one percentage point increase in the household-debt to GDP ratio would lower economic growth in the long run by a tenth of a percentage point, while some other research has found somewhat larger reductions in growth over shorter forecast horizons. The results suggest that the negative long run effects tend to kick in at GDP ratios ranging between 60 and 80 percent, which China is on track to reach fairly soon, as illustrated in the left panel of the chart below.

    Risks to Financial Stability Are a Longer Term Watch Point

    In addition to the growth outlook, the rapid increase in household debt also raises issues from a financial stability perspective. Given the rise in mortgage loans and growing concerns with an overheated housing market, the property sector is a key watch point. Property has become the most important store of wealth in China, with alternative investment channels for household income still developing or under restrictions. For this reason, Chinese authorities view the housing sector as a key risk to financial and social stability and are likely to ease macroprudential policy in the event of a significant downturn in home prices.

    Limits on initial loan-to-value ratios are an important macroprudential tool in China, which provide some insulation to financial institutions and households in the event of shocks to house prices, incomes, or interest rates. The majority of mortgages in China are floating-rate loans, although benchmark interest rates are not adjusted often. Although loan-to-value ratios are increasing, they are generally low at around 50 percent on average; securitization of mortgage loans is also quite limited.

    Other direct and indirect risks related to the rise in household debt in China also stand out and bear close monitoring. Household lending is being driven by small- and medium-sized banks, as shown in the right panel of the above chart, which are typically less well-capitalized. These banks are increasing household loans at roughly 30 percent, on average, compared to 20 percent at the larger banks.

    The pickup in nonmortgage household lending (for example, credit cards and other consumption loans) may be adding additional leverage to borrowers of both mortgages (for down payments) and unsecured revolving consumer credit (from online peer-to-peer lending platforms). This additional leverage is of particular concern for the roughly one third of household debt that is estimated to be held by highly indebted households (those with debt-to-income greater than four times). It also suggests that a deterioration in the balance sheets of these households could have a negative impact on the banking sector as well as on the economy, a risk highlighted by the International Monetary Fund in its October 2017 Global Financial Stability Report.

  • Another Retailer Bites The Dust: Payless To Shutter US Operations As Bankruptcy Filing Looms

    With its second bankruptcy filing in two years imminent, Bloomberg is reporting that discount shoe retailer Payless (Shoesource Inc.) will liquidate its US operations, and begin shutting down its online operations, as the US “retail apocalypse” claims its latest victim.

    While it’s still unclear whether the retailer will ultimately file Chapter 11 or Chapter 7, as of now, its Latin American operations are expected to continue operating. Meanwhile, its corporate-owned stores in the US and Puerto Rico are expected to remain open through March. The Topeka, Kansas-based retailer has been looking for a “Debtor-in-Possession” loan to see it through the proceedings.

    Payless

    Last year saw bankruptcy filings from once-iconic retailers like Toys R’ Us and Sears. And already this year, at least half a dozen names have gone bust, including Shopko, FullBeauty Brands, Charlotte Russe, Things Remembered and Gymboree, which like Payless, also filed for bankruptcy last month and is also liquidating most of its operations. In total, since 2016, some 35 retail chains have filed for chapter 11 reporting more than $100M in debt according to Reorg First Day.

    https://platform.twitter.com/widgets.js

    Payless, which employs more than 18,000 globally and operates about 3,600 outlets worldwide, with more than 2,700 in North America, was founded in 1956 with the goal of selling affordable shoes in a self-service setting and is, or rather was, the largest specialty footwear chain in the Western Hemisphere.

    In what has become a common theme among troubled retailers, some of whom have continued to do a brisk (or brisk enough) business, the company was doing great until its 2012 LBO by Golden Gate Capital and Blum Capital Partners, which saddled the company with untenable debt, and ended up filing for bankruptcy protection in April 2017. A few months later, it emerged with fewer stores, half the debt load, creditors owning the equity.

    All of these bankruptcies have happened during a period when interest rates are relatively low and economic growth and consumption (the most recent retail sales report notwithstanding) have been pretty robust.

    So just imagine what will happen to America’s brick-and-mortar stalwarts when the next recession finally arrives.

  • Elon Musk-Backed Software Can Churn Fake News Stories And Is "Too Dangerous To Release"

    The ability of technology to spread disinformation has been a favorite talking point of the left since the 2016 election, and now it appears that environmentally-conscious poster-boy, Elon Musk, is contributing to the problem. OpenAI, a company co-founded by Musk, has rolled out a piece of software that can produce real looking fake news articles after being given just a few pieces of information to work with.

    An example of this was recently reported by technology website stuff, detailing an example published last Thursday. The system was given sample text of:  “A train carriage containing controlled nuclear materials was stolen in Cincinnati today. Its whereabouts are unknown.”

    From there, software was able to write a seven paragraph news story, including quotes from government officials – with the only catch being that the story was 100% made up.

    https://platform.twitter.com/widgets.js

    New York University computer scientist Sam Bowman said: “The texts that they are able to generate from prompts are fairly stunning. It’s able to do things that are qualitatively much more sophisticated than anything we’ve seen before.”

    While OpenAI claims it is “aware of the concerns around fake news” its co-founder Musk has been vehemently outspoken about the quality of news coverage he, and his portfolio of companies, has received over the last few years. Back in May of 2018, Musk was so concerned with truth in news, he famously came up with the idea of creating a site where the public can “rate the core truth” of any article and track the credibility score of its author.

    https://platform.twitter.com/widgets.js

    The software creation is trained in language modeling, which involves predicting the next word or piece of text based on knowledge of all previous words, the same way your auto-complete works on your phone, Gmail account or in Skype. The software can also be used for translation and question answering. The positive is that the software can help creative writers generate ideas or dialogue. The software can also be used to check for grammatical errors and hunt for bugs in software code, according to the company.

    As Gizmodo notes, the researchers used 40GB of data pulled from 8 million web pages to train the GPT-2 software. That’s ten times the amount of data they used for the first iteration of GPT. The dataset was pulled together by trolling through Reddit and selecting links to articles that had more than three upvotes. When the training process was complete, they found that the software could be fed a small amount of text and convincingly continue writing at length based on the prompt. It has trouble with “highly technical or esoteric types of content” but when it comes to more conversational writing it generated “reasonable samples” 50 percent of the time.

    In one example, the software was fed this paragraph:

    In a shocking finding, scientist discovered a herd of unicorns living in a remote, previously unexplored valley, in the Andes Mountains. Even more surprising to the researchers was the fact that the unicorns spoke perfect English.

    Using those two sentences, the AI was able to continue writing this whimsical news story for another nine paragraphs in a fashion that could have believably been written by a human being. Here are the next few machine-paragraphs that were produced by the machine:

    The scientist named the population, after their distinctive horn, Ovid’s Unicorn. These four-horned, silver-white unicorns were previously unknown to science.

    Now, after almost two centuries, the mystery of what sparked this odd phenomenon is finally solved.

    Dr. Jorge Pérez, an evolutionary biologist from the University of La Paz, and several companions, were exploring the Andes Mountains when they found a small valley, with no other animals or humans. Pérez noticed that the valley had what appeared to be a natural fountain, surrounded by two peaks of rock and silver snow.

    GPT-2 was also remarkably good at adapting to the style and content of the prompts it’s given. The Guardian was able to take the software for a spin and tried out the first line of George Orwell’s Nineteen Eighty-Four: “It was a bright cold day in April, and the clocks were striking thirteen.” The program picked up on the tone of the selection and proceeded with some dystopian science fiction of its own:

    I was in my car on my way to a new job in Seattle. I put the gas in, put the key in, and then I let it run. I just imagined what the day would be like. A hundred years from now. In 2045, I was a teacher in some school in a poor part of rural China. I started with Chinese history and history of science.

    The OpenAI researchers found that GPT-2 performed very well when it was given tasks that it wasn’t necessarily designed for, like translation and summarization. These excellent results have freaked the researchers out. One concern they have is that the technology would be used to turbo-charge fake news operations. The Guardian published a fake news article written by the software along with its coverage of the research. The article is readable and contains fake quotes that are on topic and realistic. The grammar is better than a lot what you’d see from fake news content mills. And according to The Guardian’s Alex Hern, it only took 15 seconds for the bot to write the article.

    The good news is that journalists – already threatened by the collapse in the ad-revenue supported business model, aren’t about to  go extinct just yet.

    OpenAI has decided not to publish or release sophisticated versions of its software as a precaution, but it has created a tool that lets people experiment with the algorithm and see what type of text it can generate. The company says that the system’s abilities are not consistent enough to “pose an immediate threat”.

    Other concerns that the researchers listed as potentially abusive included automating phishing emails, impersonating others online, and self-generating harassment. But they also believe that there are plenty of beneficial applications to be discovered. For instance, it could be a powerful tool for developing better speech recognition programs or dialogue agents.

    OpenAI plans to engage the AI community in a dialogue about their release strategy and hopes to explore potential ethical guidelines to direct this type of research in the future, although we are confident that various “deep state” organization already posses a similar, if not far more advanced version.

    Musk helped kickstart the nonprofit research organization in 2016 along with Sam Altman. Musk’s foundation grants that were used to help start the company became a topic of controversy in a recent article that we published about Musk’s charitable foundation.

Digest powered by RSS Digest