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6.3 trillion reasons Blackrock isn’t worried

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Student activist, David Hogg, has added to his seemingly never ending list of firms to boycott. Yet again, the impetuousness of youth made him misunderstand the very nature of the business he is attacking. Yes, some Blackrock funds hold gun makers for the sake of index tracking. Some ESG related funds don’t. Clients of Blackrock and other funds get to choose what products they wish to invest in.

Paraphrasing what Blackrock’s Larry Fink said to CNBC on the matter, “we are just custodians of our client’s money. They decide what they wish to invest into and they can select from products that don’t hold gun manufacturers.

Fink said the feedback from clients was a 95/5 ratio in favour of what Blackrock is doing with respect to investment offerings. As a $6.3 trillion AUM asset manager one wonders how much impact this boycott will have. If history is a guide then Blackrock and other funds will no doubt see a boost to assets under management thanks to Hogg’s boycott.

Or perhaps Fink should offer him an internship to learn about ESG.

Remington’s (de)faulty trigger

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As many are aware, Remington filed for Chapter 11 bankruptcy protection earlier this year. It would seem odd given that gun sales had trended sharply higher since Obama took office. However Trump’s victory led to lowered risk of tighter gun controls meaning many dealers were stuffed with excess inventory leading up to the election which hit sales for Remington. Added to that, Remington’s high debt load caused it to seek remedial action through the courts to sort the mess. The $620m in debt will be forgiven in place of a $145m injection and shares in the new company. However tied up in the mess are victims filing a class action lawsuit against Remington’s Model 700 which had a design fault that led to unintentional discharge injuring and in some cases killing the owners. Despite the reorganization plan there are calls for the plaintiffs to get 100 percent of their $163 million in claims against Remington.

The Jester’s Court hands down a verdict on the cheats

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It is a good job that Cricket Australia (CA) doesn’t conduct murder forensics. It would be fascinating to know how the investigations over ball tampering were conducted. The case would appear open and shut. Only three people knew according to CA. Job done. Inside 3 days. All facts have been collected and harsher punishments will be dealt later on. Does this seem like a thorough investigation for the biggest scandal in Australian cricket? Not for a minute.

Was each team member, coaching staff and support crew separately asked and interrogated several times, not only  in front of a panel, but each individual investigator in order to make sure the stories corroborated with post the briefings over several days and weeks? Were follow up meetings conducted in consecutive days to make sure the stories didn’t change? Was evidence of team WhatsApp chats voluntarily offered to exonerate players? By the sounds of it, this looks like a severe containment exercise within a private club. Seemingly no independent investigation and an expedited trial to limit damage.

The tweet from Cricket Australia telling us that the CEO reports Steve Smith is distraught speaks volumes. Apart from being the least valuable information possible, it almost wants fans to feel sympathy for his remorse. It is a joke. A man earning millions a year bet his career on allowing his team to cheat. Whether Warner pressured him and he was too weak to stop him is no excuse. Anyone with half a brain would know better. Still it shows the true light of the investigation – Steve is upset…don’t go too hard on him because he is a nice guy, no really….

The recent reports that staff within the CA can’t stand ring leader David Warner for his “bullsh1t” paint a picture of ridiculously poor ethics throughout the organisation’s senior  management. If Warner has gone rogue, then it is worth investigating every claim he makes no matter how far fetched to get to the truth. Sadly it seems that the investigation wanted to sandpaper a scripted outcome to ensure the reverse swing on the trial whizzes straight by the fans so things can get back to normal ASAP. The jig is up. Cricket Australia will likely find sponsorship from the local butchers going forward because it will be hard for mainstream corporates to back such a sham. The future of cricket is far bleaker than we think.

Domestic Violence & Child Abuse – a global issue

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Domestic violence and child abuse – inextricably linked to the breakdown of families. Two distasteful topics to be sure and the stats seem to be getting much worse. In 2015 authorities in the US recorded 3.4mn child abuse investigations from 3.1mn in 2011. For 2015, a nationally estimated 1,670 children died of abuse and neglect, mostly at the hands of their mothers. Alcohol, drug and other substance abuse has been a contributing factor. DV hotlines in America receive approximately 20,800 calls a day according to the National Coalition Against Domestic Violence. In 2016, 57,335 URLs contained child sexual abuse imagery and 2,416 domain names worldwide were linked to this content. This is a 21% increase from 1,991 in 2015. Until recently, most child sexual abuse images were found in the US(57%), but Europe now hosts 60% of all material. 21,000 of these sites are run out of The Netherlands. Internet Watch Foundation (IWF) notes a 258% increase in new website domains being bought specifically to show the abuse of children.

Even in peace loving Japan, domestic violence (DV) has seen a very sharp upturn according to the National Police Agency this week. DV reached almost 70,000 recorded cases in 2016. Between 2010 and 2016, victims of DV have doubled and over 4x since 2005.  The Ministry for Health, Labor & Welfare (MHLW) has 208 child consultation centres which fielded over 88,000 cases in 2014, a 20.5%YoY increase or 22x the level of 20 years ago. Child pornography cases continue to rise in Japan too from 1,342 in 2010 to over 1,800 in 2014 . While a law was passed in July 2014 banning possession of child pornography, sentences only carry a maximum 1 year jail sentence or ¥1mn fine. Sexually explicit manga, anime and computer graphics which display child pornography are exempt because lawmakers view these as outside the scope of real children.

In Australia some 264,000 DV incidents were recorded in 2015.  In 2016–17, about 72,000 women, 34,000 children and 9,000 men seeking homelessness services reported that family and domestic violence caused or contributed to their homelessness according to the Australian Institute of Health and Welfare.

The number of children receiving child protection services in Australia has risen by about 20% over the past 4 years—from 135,000 in 2012/13 to 162,000 in 2015/16. Nationally, emotional abuse was the most common primary type of abuse or neglect substantiated for children (45%), followed by neglect (25%), physical (18%) and sexual abuse (12%). Overall, just over half (51%) of children who were the subject of substantiations were girls (23,000 compared with 22,200 boys). Girls were almost twice as likely to have a substantiation recorded for sexual abuse than boys (16% compared with 8.5%). Boys had slightly higher rates of physical abuse, emotional abuse and neglect than girls (19% compared with 18%, 46% compared with 43%, and 26% compared with 23%, respectively.

According to the American Society of  Positive Care of Children (ASPCC), 14% of all men in prison and 36% of women in prison were abused as children, about twice the frequency seen among the general population.

The Department of Health & Human Services notes that child abuse reports in America involved 7.2 million children. More than one-half (54.1%) of perpetrators were women, 45% of perpetrators were men, and 0.9% were of unknown sex. The majority of victims consisted of three ethnicities—White (43.2%), Hispanic (23.6%), and African-American (21.4%).

According to the American Academy of Pediatrics, children born with fetal alcohol syndrome may develop learning and behavior problems including hyperactivity, poor concentration, and memory problems. The National Institute on Drug Abuse of the National Institutes of Health conducted a study on neonatal abstinence syndrome and determined babies suffering from opiate withdrawal were more likely to have low birth-weight and respiratory complications. 11,000 babies are born to crack dependent mothers each year and cost the state $750mn p.a. to treat. Victims reported with the alcohol abuse child risk factor during their first year, 87.9% of the victims were reported during their first month of life.

These trends are worrying. As an increasing number of countries make it easier to divorce by offering extra support to single parents, responsibility and accountability are being cast aside. The government essentially endorses families to split and get the single parent to marry the state. 40% of White and 70% of black households in America are now single parent. In Japan one quarter of families are now single parent. As we wrote last week, children that grow up in single parent households are far more likely to suffer emotional problems and issues with self-esteem.

Since 2007, the rate of suicide deaths among children between the ages of 10 and 14 in the US has doubled according to the Center for Disease Control Prevention(CDC). Most children under 13 who kill themselves are boys: 76% of those who died in 1999-2015 were male. Since 2014, suicide has become one of the leading causes of death in children aged 10-19 in Japan. 60% of the children and 46% of the young adolescents in the US who died from suicide had problems with friends or family members. School problems and recent crises were noted as common triggers.

Per our previous post, the police department that encouraged school kids to walk up to and communicate with outcast kids as opposed to walking out on school would have far more positive long term impacts. Yet authorities seem more keen on policing political correctness. Running school programs that reinforce ideals of celebrating identity politics that openly discourage traditional families.  Reading through the many years of warnings both school authorities and law enforcement/intelligence authorities had prior to the Parkland, Florida shooter, Nikolas Cruz, committing his schoolyard rampage the egg-shell culture of not tackling his issues head on led to a potentially avoidable tragedy. Yet in today’s culture shaming innocents, scapegoating unrelated organisations, vilifying corporations and pushing expedience after the fact take priority to taking responsibility and looking at ways of preventing the root cause rather than the method.

After reading through these depressing statistics, it is not too hard to envisage things going from bad to worse from here. It isn’t just an American issue but a global trend that only gets harder to treat the longer it festers.

Stopping school massacres in the playground

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While kids around America plan to walkout of school to protest for tighter gun control, one sensible police department is putting up this sign. Looking back over school massacres it should not have escaped anyone that the perpetrators are generally the ones that feel betrayed, left out, ignored, bullied or the subject of mockery on social media. In every school such things take place. We’ve all seen the bully and the weakling at play. The “Nigel no friends” taunts.

CM has pointed out the growing rate of single parent households (generally the father) is 40% in the white community and 70% in the black community. Psychological studies have shown boys seem to be more impacted by the lack of a father in the house than do girls. In many cases the perpetrators of these school massacres have had unstable family backgrounds. So these are the kids that are likely dealing with inner feelings of despair and struggling to understand how their place in the world works. Throw bullying on top of this and the feelings of revenge fester, sadly in ways that sometimes end up in Parkland tragedies.

Therefore as much as these kids feel aggrieved and angered enough to march and beat up on politicians, the NRA, it’s members and sponsors perhaps this meme of #walkupnotout is the real lesson that will go far further than banning guns outright to prevent such disasters in the future. These kids who are willing to make a plan over months and years to get their subjective justice won’t stop just because they can’t lay their hands on a firearm. Cars, knives, bomb making or any other means will still be available to them.

So to David Hogg and his fellow student activists don’t forget that to prevent further such atrocities perhaps the most powerful weapon to disarm is actually yourselves taking a step to befriend the outcasts you know exist.

For Life

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If Xi Jinping’s 3.5 hour speech wasn’t enough to torture the bladders and eyelids of attendees at the last plenary session several months ago, it seems the 10-yr presidential term limit is about to be thrown out meaning Xi can rule for as long as he likes. While many criticize the current US administration for its authoritarian behaviour it is not a lick on this. His grip on regional geopolitics from here on will challenge the resolve of its neighbours, most likely thrusting them into the bosom of the US. Watch US arms deals in Asia take off.

Also note India announced last week it is now building a major military base in the Seychelles to combat China’s influence in territorial waters. China has already got Sri Lanka on board with the Port of Hambantota which allows PLA Navy ships to dock. China is also funding Pakistan to help build the backdoor to India’s north via the Karakoram Highway.

Interesting times ahead.

A reminder on the extra market downside risk created by ETFs

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As a reminder in markets selling off in recent days, please find a report which touches on the extra volatility created by ETFs on the downside that amplifies market sell offs.

An excerpt of the report is as follows;

CEO Larry Fink of Blackrock, the world’s largest ETF creator, has made it clear that leveraged ETFs (at present 1.2% of total ETF AUM) have the potential to “blow up the whole industry one day.” The argument is that the underlying assets that provide the leverage (which tend to have less liquidity) could cause losses very quickly in volatile markets. To put this in perspective we looked at the Direxion Daily Fin Bull 3x (FAS) 3x leverage of the Russell 1000 Financial Services Index…The point Mr Fink is driving at is…the average daily return is closer to 10x (in both directions) than the 3x it is seeking to offer. This is post any market meltdown. On a daily basis the minimum and maximum has ended up being -1756x to 1483x of the index return, albeit those extremes driven by the law of small numbers of the return of the underlying index. Which suggests that in a nasty downturn the ETF performance of the leveraged plays could be well outside the expectations of the holders.