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It’s one of the most important questions this year: Where are bond yields in the United States heading next? For Jeffrey Sherman the answer seems to be obvious: «Up», he signals with his thumb while at lunch at the Los Angeles headquarters of DoubleLine Capital. The Deputy Chief Investment Officer at the renowned fixed income boutique of bond king Jeffrey Gundlach expects more turmoil for financial markets and draws parallels to 1987, the year of the monster crash. At this time, the lively and approachable Californian spots the most attractive opportunities in the commodity sector since commodities tend to perform well in the late stage of the cycle.

Mr. Sherman, tensions in the financial markets are rising. As someone who likes financial history, what are your thoughts when you look at the big picture?
From a short-term perspective, it sure feels like 1987: a little spookiness in the stock market and yields rising. So there are a lot of parallels to 1987. For example, tariffs, a weak dollar and a new Fed Chairman. And remember, there was the crash before the crash. That year, the stock experienced some jitters already in April and about six months later you had the big crash on Black Monday.

That day in October 1987 the Dow Jones suffered its biggest loss in history. At that time people pointed to electronic trading and new financial products like portfolio insurance. Do you spot similar risks today?
People blame quants, people blame algorithms, people blame risk parity. But I’m not convinced. The reason we had this sell off is not algos or risk parity. It’s because of humans. For instance, we all have been told that ETF buyers are buy and hold investors forever. But they’re buy and hold investors until they’re not, until they panic. That’s why these websites for electronic trading like Betterment and all the other Robo-Advisers were down on February 5th. I think even Fidelity had an issue because of the huge volume. So why did all these people try to log in? They weren’t logging in to buy, they were logging in to sell!

What’s next for stocks?
I think you’ll see it again. If bond yields rise you are going to see another scare. It’s the velocity, it’s the speed at which this correction happened: 10% in roughly three to four days, that’s a big move. But what’s interesting is that the bond market was not behaving in a manner which is consistent with the recent past. It didn’t seem like it wanted to rally. Bond yields essentially ended flat that week if not slightly higher. To us, that causes us pause. It means that this correction was an equity market story and bonds weren’t even paying attention to it. Basically, the bond market said: look we continue to trade on fundamentals. We have bigger deficits, we have a growth story, so yields need to be higher.

So what has changed in the bond market?
What has changed is the tax cut. The tax plan really started in the middle of September and that’s when you saw the bond market reacting. That’s when President Trump felt he had to do something and it took him and congress the rest of the year to get it done. At that point, the market had shifted from its disinflationary mindset to a moderate inflation mindset. And that’s the repricing that has been taking place.

Is the tax cut really a game changer for the US economy?
As critical as people were initially of the tax cuts, the cuts are beneficial in 2018 for roughly 98% of the working class. That means that there is more money to be spent or saved. Also, there is something about paycheck growth versus one-time bonuses. In the former case, people tend to spend more, especially people low-income earners because they are the spenders by definition. They don’t make enough money to save. So I think there is the potential to get a little bit of inflation. Because if it is that expansion from the consumer, it will look growthy, but it will also look inflationary. But how long it persists is the multi trillion-dollar question.

What’s more, the tax cuts will bloat the deficit even more. What’s your take on that?
We have an administration and a Congress which want to spend money. For instance, Senator Rand Paul was filibustering for about two hours, ranting about the increase in the deficit and then voted for the tax plan. It’s hypocrisy. So I think they will continue with this deficit binge.

How will this impact the midterms in fall?
People are speculating if the Democrats are going to take over. Socially, they probably could. But they are going to have a hard time economically to take over either the House or the Senate; simply because the tax cuts are going to trickle through and many workers are going to get the benefit of minimum wage. So even the people who aren’t truly getting a tax cut are getting a pay hike. They are going to say: “Look how well we did.” So for the Republicans the timing is beautiful. But I think it reverses in 2020. That’s something we have been talking about for a few years: It’s not the 2016 election that really is the one that’s going to be a pivot. It’s going to be 2020. The reason for that is that the deficits are going to explode, and this administration seems to love debt.

And how do you cope with political risks like the Muller investigation form an investor’s perspective?
The Mueller investigation looks bad. I mean that thing gets worse every week or two. But markets don’t care. They only care if there is an impeachment and then you will get a short-term correction. But it’s very hard to impeach the president. Even if the Democrats get it in one arm of congress they would have to get it through the Senate. So they would have to go to trial in the Senate and the Republicans still have a blocking majority there. And the Republicans showed that they’re loyal to Trump. So it’s practically impossible. But there is always political risk in the world. And typically, the flight to quality trade is what works. That’s why you own high quality bonds like Treasuries, Japanese government bonds and things like that.

So where are US bond yields heading in 2018?
I think we’re going to 3.25 to 3.5% on ten year Treasuries. We broke through most levels on the ten year bond and on the thirty year bond. They have broken their downward channels. Coming in the year it was like: “Hey, we will probably test 3% on the ten year by the first half of the year. Then in January it turned into: “You know, it’s probably the first quarter”. Now it’s maybe March because the bond market does not want to rally. But it’s not just technicals. We’re talking about the Fed’s balance sheet, we’re talking about expanded deficits and we’re talking about less revenue coming in for the government. Don’t forget tax cuts aren’t free.

What does that mean for the new Fed chief Jerome Powell and his plans to tighten monetary policy further?
In March he’s going to hike the Federal Funds Rate. But if you want to hike interest rates three or four times this year plus do the balance sheet unwinding then I think we’re going to have a problem early 2019. I think the financial markets will respond and that’s not good for risk assets. So I’m not convinced that the Fed will take this entire path because I think it becomes painful. This was all set up by Yellen around a year ago. Since then, a lot of fundamentals have changed in the debt market. The plan was set up when yields were lower and before we were set to double the deficit. So it’s really hard to say how the path will look like for the Fed. That’s why we were all listening and watching how Powell behaved when he took the stage this week. It looks like the Fed is going to be more hawkish. But If you want to finance all that debt, you kind of need some dovish people on the board of the Fed. You don’t really want Hawks on there.

Where do you see the biggest risks if something goes wrong?
It’s not that we are extremely bearish on the world. But if rates go up it will put some upward pressure on spreads. And if you respect financial history, what the Fed has always done is hike until something breaks. We definitely had the debt build up. Looking at debt to GDP, people talk a lot about a bond bubble. But it’s not in the treasury market and it’s not in the housing market. It’s in Corporate America.

What’s wrong with Corporate America?
Many companies really lived on due to this low interest rate environment. Zombie companies, those that earn less than they pay in interest, are on the rise again. That’s why you have to watch the corporate market. Right now, it’s not a problem. But let’s say we go to 4% on ten year Treasuries. Does a 6% high yield bond make sense? Probably not. It’s probably 9% or 10% because you have to worry about refinancing. So this is something that hasn’t really happened historically. In fact, the high yield market lived through the entire secular bond bull market. So if we go into this structural bear market, the junk bond market is toast. You are going to have 30% to 40% default rates. That’s extreme thinking. But let’s just take it back down: A 4% on the ten year bond seems completely plausible. So how do you think these risk assets respond? And what does it mean for other markets? People have become complacent with high yield bonds. They assume they don’t default hardly ever. But we know that’s not true. There’s a reason they carry this kind of rating.

Junk bonds tend to act more like stocks in their market behavior than other bonds. What’s your outlook on equities?
One of the most dangerous things is naive extrapolation. Last year, most equity markets advanced more than 20% in dollar terms. So I think some of the risk this year is this naive extrapolation of this recent experience. It’s this recency bias that people think that it just can continue forever. So the risk is that people get complacent and think that equites can always go up.

What is your recommendation when it comes to investing in stocks?
In the US, it’s very difficult to say stocks are cheap. In terms of valuations, when you think about the Cape ratio for instance, you have roughly a 33 ratio on the US market, something closer to 22 to 23 on Europe and about 18 on emerging markets. So what you see is that the European market and emerging markets are a lot cheaper. Also, if you buy into this thesis that we will continue to have this coordinated global growth story, then the emerging markets should be the biggest benefactor. So the ideas is that if you want to deploy new money into equities it’s probably best to kind of shy away from the US because everybody knows the story about the tax reform already. US stocks are priced I won’t’ say to perfection but to a pretty rosy scenario. So if yields push significantly higher it’s really hard on a discounted cash-flow basis to rationalize all of that.

So where do you spot more attractive opportunities for investors right now?
Commodities is our choice investment for investors to get diversification at low prices. It’s an area that tends to do well late in the cycle. It’s a fundamental story.  The consumption side has been increasing and there’s upside to that. If we go from 3.5% global GDP growth to 4% that changes the consumption dynamics significantly. Also, commodities are cheap by historical levels which means it looks like they have room to run. People have kicked them out of their portfolios because of how bad they did for years. It’s an asset class that has underperformed the S&P 500 since the financial crisis every year. But if you get some inflation it’s going to be exhibited in this part of the market. Commodities aren’t perfect on inflation. But they’re pretty good when you have changes in unexpected inflation – and that’s what investors are waking up to.

And which commodities do like most?
I like industrial metals. Copper is kind of iffy at times. However, there’s a strong case for nickel due to demand from electric vehicle production. And if we get growth, zinc still looks interesting because it’s used in galvanizing steel. So I think industrial metals have momentum. I’m optimistic for the precious metals as well. If we do get inflation signs you will see that in the gold and silver price. What’s more, I still think oil goes higher. I think demand will pick up and we will get back to $80. Maybe not this year. Maybe it takes two years. But if the growth story is true the energy market is too cheap still.

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Towering debts, rapidly rising taxes, constant and expensive wars, a debt burden surpassing 200% of GDP. What are the chances that a country with such characteristics would grow rapidly? Almost anyone would probably say ‘none’.

And yet, these are exactly the conditions under which the Industrial Revolution took place in Britain. Britain’s government debt went from 5% of GDP in 1700 to over 200% in 1820, it fought a war in one year out of three … and taxes increased rapidly but not enough to keep pace with the rise in spending …

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Until now, scholars mostly thought of the effect of government borrowing on growth as either neutral or negative…

In a recent paper, we argue that Britain’s borrowing binge was actually good for growth (Ventura and Voth 2015). To understand why massive debt accumulation may have accelerated the Industrial Revolution, we first consider what should have happened in an economy where entrepreneurs suddenly start to exploit a new technology with high returns. Typically, we would expect capital to chase these investment opportunities – anyone with money should have tried to put their savings into new cotton factories, iron foundries and ceramics manufacturers. Where they didn’t have the expertise to invest directly, banks and stock companies should have recycled funds to direct savings to where returns where highest.

This is not what happened. Financial intermediation was woefully inadequate – it failed to send the money where it should have gone …

By issuing bonds on a massive scale, the government effectively pioneered a way – unintentionally – to put money in the pockets of entrepreneurs in the new sectors …

The shift from investing in liming, marling, draining, and enclosure into government debt liberated resources – labour that could no longer be profitably employed in the countryside had to look for employment elsewhere. Because so much of English agricultural labour was provided by wage labourers, the switch to government debt pushed workers off the land. Unsurprisingly, wages failed to keep pace with output; real wages, adjusted for urban disamenities, probably fell over the period 1750-1830. What made life miserable for the workers, as eloquently described by Engels amongst others, was a boon to the capitalists. Their profit rates continued to rise as capital received an ever-larger share of the pie – while the share of national income going to labour and land contracted. Higher profits spelled more investment in new industries, and Britain’s industrial growth accelerated.

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A Chinese government investigation has revealed that more than 80 percent of the data used in clinical trials of new pharmaceutical drugs have been “fabricated“.

The report uncovered fraudulent behaviour at almost every level, and showed that some pharmaceutical companies had hidden or deleted records of potentially adverse side effects, and tampered with data that didn’t meet their desired outcomes.

In light of the findings, 80 percent of current drug applications, which were awaiting approval for mass production, have now been cancelled.

The investigation, led by the Chinese State Food and Drug Administration (SFDA), looked at data from 1,622 clinical trials for new pharmaceutical drugs currently awaiting approval. The applications in question were all for Western medicine, not traditional Chinese medicine.

The SFDA found that the more than 80 percent of the data failed to meet analysis requirements, were incomplete, or totally non-existent.

Not only did the report find that many of the ‘new’ drugs awaiting approval were actually a combination of existing drugs, they also showed that many clinical trial outcomes were written before the trials had actually taken place, and the data had been simply manipulated to match what companies wanted to find.

Worst of all, it wasn’t just a few scientists or pharma companies doing the dirty work. The report found that pretty much everyone involved was guilty of some kind of malpractice of fraud.

Perhaps most worryingly, even third party independent investigators tasked with inspecting clinical trial facilities are mentioned in the report as being “accomplices in data fabrication due to cut-throat competition and economic motivation”.

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We are currently on the mid-semester break. However, we also have 3 major assignments to complete, which, will negate much, if not all of the break.

Currently I am working on 2 out of the 3: Commercial Transactions and International Environmental Law. Both are 5000 word efforts. The issue isn’t getting to 5000 words, the issue is staying within the word count.

Commercial Transactions is already sitting at 3000 words and I’m not even fully 50% through the assignment. That doesn’t even include footnotes. At the moment I feel somewhat burnt out with it, hence the moan.

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Donald Trump just took the lead in a major national poll for the first time in roughly six weeks.

In a Rasmussen poll released Thursday, Trump held a 4-point lead over presumptive Democratic nominee Hillary Clinton. Of the 1,000 likely voters surveyed, the presumptive Republican nominee won over 43% of support compared to Clinton’s 39%.

The margin of error was plus or minus 3 points.

The poll is the first Trump has lead over Clinton since mid-May, when Trump held a 2-point lead in an ABC News/Washington Post poll.

The Rasmussen poll breaks a streak of 22 consecutive polls Clinton has topped Trump in.

After the Rasmussen survey, Clinton’s lead in the RealClearPolitics average of several polls is now 4.9%.

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Coming into the end of semester 1.

Two major assignments due. Exams start in 2 weeks. 2 case conferences, 1 set of submissions, 1 Brief of Evidence and still working full-time.

Nice.

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Donald Trump entered into general-election mode Tuesday night, seeking a pivot to unite the Republican Party against a common foe as it declared him its presumptive nominee.

“We’re going after Hillary Clinton,” Trump said during a victory speech at Trump Tower in New York.

“She will not be a great president. She will not be a good president. She will be a poor” president, he said of the Democratic frontrunner, his likely opponent in the general election.

After winning the Indiana primary and delivering Ted Cruz a knockout punch out of the Republican race, Trump and the party he is now set to lead prepared for the road ahead.

Republican National Committee Chairman Reince Priebus called him the “presumptive nominee” and called for party unity on Tuesday.

“@realDonaldTrump will be presumptive @GOP nominee, we all need to unite and focus on defeating @HillaryClinton,” he tweeted shortly after Cruz announced he was leaving the race.

In a nod to the anti-Trump movement that branded itself as “#NeverTrump,” Priebus added a hashtag: “#NeverClinton.”

For his part, Trump dropped the insults trademark to his campaign, congratulating Cruz on a race well run and calling him a “hell of a competitor.” And he keyed in on Clinton in the victory speech from Trump Tower in New York. He

“We’re going to win big, and it’s going to be America first,” Trump said.

“This country, which is very, very divided in so many different ways is going to become one beautiful and loving country,” he later added.

Trump now needs fewer than 200 delegates to secure the nomination ahead of the July convention after securing all of the 57 delegates up for grabs in Indiana. John Kasich, the Ohio governor, is the lone remaining candidate facing Trump in the Republican race, but he is currently running fourth in the delegate count.

Clinton’s campaign has already taken notice of Trump’s now-imminent grasp on the Republican nomination.

John Podesta, Clinton’s campaign chair, delivered the campaign’s first direct general-election shot at Trump. Podesta said Trump isn’t prepared to keep the country safe and improve conditions for middle America.

“Throughout this campaign, Donald Trump has demonstrated that he’s too divisive and lacks the temperament to lead our nation and the free world,” Podesta wrote in a statement. “With so much at stake, Donald Trump is simply too big of a risk.”

“While Donald Trump seeks to bully and divide Americans, Hillary Clinton will unite us to create an economy that works for everyone,” he later wrote.

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