Dell Is Reportedly Reconsidering an IPO Following Hedge Fund Pushback

Dell Technologies might be reconsidering a move that would take the company public.

The company’s executives are debating whether to hold an initial public offering (IPO) and go public after deciding against the move earlier this year, Reuters is reporting, citing people who claim to have knowledge of its plans. Some of Dell’s executives reportedly believe that the company’s improving financial picture, coupled with some pushback from hedge fund managers over its “tracking stock” maneuver, create an IPO opportunity.

Dell was considering going public earlier this year but backed off the idea over concerns that Wall Street wouldn’t take kindly to its massive debt, according to Reuters. Instead, Dell decided to pursue a $21.7 billion deal that would see it acquire tracking stock held by hedge funds, including activist investor Carl Icahn. Tracking stock is a specific type of share that centers on a single company unit rather than the entire business. Dell’s tracking stock is specific to its 81% stake in VMWare (vmw).

Hedge fund managers, including Icahn, have bristled at Dell’s buyback, ostensibly believing there’s more value to be gleaned from the company.

If Dell goes public, those shareholders would be forced to sell all of their tracking stock, according to Reuters. And Dell is reportedly looking to work with investment banks to determine how an IPO might ultimately affect both its operation and those shareholders.

For its part, Dell hasn’t commented publicly on an IPO and declined Fortune‘s request for comment on the Reuters report.

3 Ways to Find the Leaders Within Your Company

Great companies are full of leaders, and if you’re lucky, you already work with a few of them on a day-to-day basis. Still, it’s a safe bet that there are many more leaders than you realize, some of whom have transformative ideas that can help your company succeed. These individuals don’t always hold a leadership position or title, so it’s up to you to find them. To do that, you’ll have to know where to look and whom to look for.

Potential leadership candidates extend well beyond management and executive positions. Instead of limiting your search to individuals in certain roles, look for people who share certain key qualities.

One of the most obvious indicators of potential is a willingness to work. True leaders are committed to doing their best work, pushing themselves to achieve, and setting themselves and their teams up to do the same in the future.

And whether or not they recognize their own potential, leaders are constantly striving to improve. Human beings have a natural tendency to seek praise and shy away from criticism. True leaders don’t do either. Instead, they value honesty, and they know that good communication is the key to improvement–whether that communication is positive or negative feedback.

People who hope to succeed in work (and in life) must have a willingness to communicate, accept feedback, and work hard in pursuit of their goals. Knowing this, your job is to implement processes for identifying the potential leaders who share those qualities.

Look to the following three strategies to help shine a light on the untapped leaders in your company so you can set them and your company up for future success:

1. Create a mentorship program.

A mentorship program can deliver tons of value to your team members and your company as a whole. First, you have those employees who step up and show a willingness to serve as mentors. These individuals are excellent leadership candidates, and the fact that they’re demonstrating a desire and ability to coach others in building a particular skill means they value that feedback and communication process, too.

In addition, a mentorship program can help you identify potential leaders among the mentees. Pinpointing these individuals early on will help you cultivate in them the attributes that are paramount to their success. It also allows you to keep an eye on them and make sure they’re happy at your company. People quit jobs all the time and go on to take their undiscovered talents elsewhere; finding these employees early can help you reduce that potential turnover.

2. Host an internal pitching event.

Imagine an event where hopeful founders are pitching to venture capitalists; now, apply that principle to your own company. Get everyone together for as much time as you can spare, whether it’s a weekend retreat or half a Friday. An internal pitch event will demonstrate your focus on big-picture efforts and collaboration, as well as give your team members the chance to share their visions for the company.

Your employees have ideas for improving processes, adding value, and growing the business, and some of those ideas may have been on their minds for a while. Giving them an opportunity to share them can help you spot good ideas and potential leaders who are always thinking about the future of your company and its customers.

3. Invite team members to contribute content.

Content is essential for sharing ideas and connecting with an audience, which are things leaders do every day. Invite your employees to do the same by contributing their own expertise to your company’s thought leadership strategy.

Don’t think that your potential content creators need to be perfect writers, either. Have your marketing department interview these internal contributors to extract their knowledge. Then, take the most compelling ideas and stories and turn them into full-fledged pieces of content that appeal to your audience while accomplishing your company goals.

Not only does this give your marketing team great content, but it also gives your potential future leaders experience turning their ideas into actionable, helpful content that provides value to an audience.

Remember, leaders aren’t just found in the C-suite. They’re everywhere, and their titles don’t always indicate either their current contribution or their future at your company. It’s up to you to tap into your company’s human resources in the most effective way possible, and you can start by implementing these strategies to identify underutilized leadership skills. Leadership isn’t about title–it’s about action and commitment. Ultimately, finding hidden leaders will help your company reach its own potential.

Why You May Love an Amazon Alexa Microwave

Amazon is all-in on Alexa, and this week, it revealed a new set of voice-enabled products ranging from a a wall clock to a doodad that goes in your car. The star and symbol for this bold new wave of Alexa devices? The AmazonBasics Microwave.

At a glance, it looks identical to every other 700W microwave, but it has some new tricks. By touching the Alexa button on it, you can ping a nearby Echo speaker, which will let you tell the microwave what you want to cook. In demos, Amazon showed how you could ask to cook “one potato,” commanding the microwave to heat a potato like only a microwave can.

OK, OK, so asking Alexa to cook a potato doesn’t sound all that profound. Many Twitter users poked fun at the idea, and some publications have suggested it’s “unnecessary” or wondered if “we really need” a smart microwave.

Of course, the answer is no. But if Amazon gets it right, a voice-controlled microwave could bring this dated device into the 21st century.

Fixing the Microwave

Regular old microwaves still work as well as they did in the 1970s, when they first became a thing people put in their kitchens. That’s the problem. It’s an appliance that’s hardly changed in half a century.

Most households own a microwave oven, but sales peaked in the mid-2000s and haven’t grown since. In 2014, Quartz dug into what it saw as the slow death of the microwave oven, pinning the lack of growth on a lot of possible culprits, from healthy eating to toaster ovens. But a lack of innovation has also contributed.

Microwave oven interfaces are deceptively complex, full of annoying button combinations. If you have a modern microwave, it probably came with 10 power levels and a bunch of pre-programmed modes to defrost, heat from frozen, melt or soften items, and cook a variety of foods. These handy presets can make the cheese on a slice of pizza melt rather than go rubbery, or heat two cups of frozen vegetables just right.

Most microwaves already know how long to cook something based on food type and portion. Unfortunately, they’re really difficult to remember how to use. Sometimes there’s a chart behind the door; other times, you have to keep the user manual handy to fully operate your microwave.

Here’s an example: To heat frozen vegetables in my microwave, you have to press the “cook” button, wait, then press 5, wait, then press 2. There are more than 80 button combinations that you have to memorize to use it precisely. A lot of microwaves are like this. It’s no wonder that most frozen meals just say “heat on high for three minutes.”

Every microwave has different presets with different button combinations that do different things. It’s more difficult than memorizing attack combos in Street Fighter II. No one should have to remember all that.

If Amazon gets its new microwave right, it could really improve the experience. Instead of using those horrible button combos, we could begin to tell our microwave the gist of what we want it to do—”defrost two cups of frozen peas”—and let it do the heavy lifting. The company says that at launch, the microwave should be able to defrost several types of foods, like vegetables or chicken, by varying the microwave’s power level, as well as adjust the cook time. It could mean a lot fewer undercooked potatoes and far less exploding tomato sauce in our future.

Standard microwaves can’t learn new tricks, but Alexa can. Amazon could continually refine the software with new foods, meaning a voice-connected microwave may actually get better over time. It’ll be no time before Google introduces one of its own.

Better Nuking Ahead

Of course, Amazon’s microwave may not live up to its potential. We weren’t all that impressed with GE’s Smart Countertop Microwave, which also comes with Alexa compatibility. In that device, Alexa doesn’t actually vary the power level or do all that much.

And talking to the microwave isn’t always convenient. It takes less time to press the “add 30 seconds” button than to press the Alexa button, then ask Alexa to add 30 seconds. You can command Alexa to stop the microwave, but why would you do that when you could just push a button yourself? You have to open the door to get your food, after all.

Then there are the privacy pitfalls. Do we really want Amazon to keep a detailed log of all our microwave use? Overzealous data logging is a problem with almost every new connected device—and a microwave might not benefit us enough to make the privacy tradeoff worth it.

Amazon hopes the extremely low price will ward off those concerns. At $60, the AmazonBasics Microwave is nearly half the price of some competitors. That alone will convince some people to try it.

Microwaves are imperfect tech, and voice control alone can’t make your frozen dinner taste better. But there’s a good chance you’re not making use of the helpful presets already built into yours. If Alexa succeeds, and I can forget how long it takes to cook a potato or the mind-numbing button combination I need to defrost veggies in the microwave, count me in.

First North Carolina Got a Hurricane. Then a Pig Poop Flood. Now It’s a Coal Ash Crisis

After the storm comes the flood. Hurricane Florence poured 8 trillion gallons of rain onto North Carolina, and now the landscape between the Cape Fear River and the barrier islands of the Carolinas is a waterworld. Because ecological disasters happen in irony loops, that means long-recognized hazards have now become add-on catastrophes. First the floodwaters found thousands of literal cesspools containing the waste of 6 million hogs, and on Friday the waters reached a pool of toxic coal ash.

The water has breached the cooling lake at the LV Sutton natural gas plant on the Cape Fear River, forcing it to shut down. Also onsite are two coal ash basins, at least one of which—containing 400,000 cubic yards of the stuff, according to the owner of the facility, Duke Energy—may already be leaking coal ash into the River.

Coal ash is the irony part. Coal-fired power plants had to be located near the mountains that harbored the coal, and near the waterways that the power plants needed for coolant and water to boil to spin the turbines. “One of the consequences of burning coal is you get ash, and then you have to have something to do with it,” says Stan Meiburg, director of graduate studies in sustainability at Wake Forest University and a former EPA deputy administrator, both in DC and the Southeast. “The earliest practices were to put the ash right near the power plant.”

Coal use has been tailing off in the US, but as recently as 2011 the country was generating 130 million tons of coal combustion residue, or CCR, every year. More irony: Better air quality management technology captured more fly ash before it could leap out of smokestacks, raising the amount of CCR. Dry, the ash flies all over the place and can be a toxic inhalant. But get it wet, like mud, and it stays still and is easier to transport to landfills.

After the carbon in coal gets oxidized, what’s left is a list of metals that you hope are not present in jewelry: lead, mercury, selenium, arsenic, cadmium, chromium and a bunch of other bad actors. For decades people suspected that the gunk in the pools might leach into groundwater, or that a storm could breach the walls of a pool and the ash slurry would get into a river or lake. There were indications that they might cause problems—the fish and amphibians in the lakes and streams near coal ash ponds had reproductive problems, organ damage, higher metabolic rates indicating some kind of physiological stress. Metals accrued in the animals that ate them. In one particularly disturbing outcome, researchers found tadpoles with scoliosis and mouth deformations—they were missing not just teeth but whole rows of teeth.

Hilariously, none of the more than 1,000 coal ash ponds in the US were regulated in any way at all. And then in 2008, one of them broke open and poured a billion gallons of slurry all over eastern Tennessee. Meiburg says he recalls estimates that it would have cost the pond’s owner, the Tennessee Valley Authority, $50 million to remediate; it cost over $1 billion to dig the ash-mud out of the river bottoms.

In 2014 it happened again. Two stormwater drain pipes beneath a Duke Energy coal ash pond in North Carolina collapsed, spilling 39,000 tons of ash and 27 million gallons of slurry into the Dan River. North Carolina passed regulatory laws. The EPA got some regulations together. By 2015, there was at least a schedule for utilities to get their coal ash put into safer landfills. “What the public interest community called for was closure of the unlined, dangerous ponds. The 2015 rule from the Obama administration didn’t go that far,” says Lisa Evans, senior counsel for the environmental group Earthjustice. “It improved the situation immensely, but it didn’t get the job done.”

Irony again: One of the first things the EPA did under President Trump was re-weaken those coal ash regulations.

And irony yet again: The coal ash at the Sutton plant? “The basins are slated to be closed by the middle of next year,” says Paige Sheehan, a spokesperson for Duke Energy. “Some of the material was taken by train to a lined structural fill. The remainder is being moved to a new lined landfill on site.” But Duke knows the situation is dicey. Another coal-burning byproduct the company stores at Sutton, cenospheres—microscopic, hollow spheres made of silica and alumina sometimes recycled into concrete or other composite materials— “are flowing into the Cape Fear River,” she says. “We cannot rule out that coal ash might also be leaving the basin.”

LV Sutton isn’t the only plant that’s a potential problem. Another site, the closed Grainger Generating Station near the Waccamaw River in South Carolina, has 200,000 tons of coal ash within reach of rising floodwaters. Sheehan says Duke’s also watching pools at another plant called HF Lee, in Goldsboro. “This is like a natural experiment going on down there right now, because the possibility of more pool systems like this failing and releasing their waste, combined with all the other waste from pig farm operations?” says Christopher Rowe, a biologist at the University of Maryland Center for Environmental Science. It’s hard to wrap your head around.”

How complex? The immediate risk depends on the volume that actually gets released, and the next couple of days at the high water mark will determine that. Living things in the waters downstream can absorb that wide spectrum of heavy metals suspended as solids, to varying effects. But then those solids sink to the bottom.

But it still could be dangerous. “Even if the water in the river becomes very clear, and you can’t find any traces of contaminants,” says Avner Vengosh, a water quality and geochemistry researcher at Duke University. “The coal ash buried at the bottom slowly but surely releases contaminants into the ambient environment.”

The source is “pore water,” water mixed into the coal ash sediments in the top five inches or so of the riverbed. There’s no oxygen down there, so that dirt becomes the electrochemical opposite of oxidizing, what chemists call “reducing.” The heavy metals behave very differently, becoming more bioavailable to any critters at the bottom. “In an oxidizing form, it would tend to be absorbed into the sediment. In a reduced form it tends to be soluble in the water,” Vengosh says.

So you have to clean that mud out—a dangerous process in itself. At least 30 people who worked on cleaning up the 2008 spill are dead and, reports say, 200 more are sick; a lawsuit is ongoing.

And time is a factor, because climate change means hurricanes will, like Florence, be more intense and drop more rainfall, some of them right onto the Carolinas. There’s the final irony: A major contributor to the greenhouse gases that cause climate change were, of course, all those coal-fired power plants.


More Great WIRED Stories

Farfetch tops price range in IPO in boon to luxury market

PARIS (Reuters) – Farfetch (FTCH.N) priced its shares above its targeted range on Friday in a New York flotation that values the online luxury retailer at over $5.8 billion and underscores how big a bet web sales have become for high-end brands.

FILE PHOTO – Branding for online fashion house Farfetch is seen at the company headquarters in London, Britain January 31, 2018. REUTERS/Toby Melville

E-commerce is emerging as one of the biggest growth drivers for luxury labels initially fearful of diluting their image by selling online.

London-based Farfetch – a 10-year-old site that connects shoppers to hundreds of boutiques and fashion labels but carries no inventory – is one of a clutch of rapidly-expanding multi-brand platforms that got an early foothold in the market.

Its shares are set to start trading on the New York stock exchange on Friday, after the company set the offer price in its initial public offering at $20 per share – surpassing the range of $17 to $19 that had already been increased.

It will raise $885 million in the listing, with the company issuing 33.6 million new shares and existing shareholders, including early backers such as Advent Venture Partners and Vitrurian Partners, selling 10.6 million.

The IPO values Farfetch, founded by Portuguese entrepreneur Jose Neves, at $5.8 billion according to the share count available in its latest filings. When including employee share options this would rise to $6.3 billion, the company said.

Existing Farfetch investors include JD.com (JD.O), China’s second largest e-commerce firm, which bought extra shares along the listing in a private placement.

The flotation comes at a time of growing competition among independent online fashion retailers and luxury groups rolling out their e-commerce operations, including cash-rich luxury heavyweights like Louis Vuitton owner LVMH (LVMH.PA), which is experimenting with its own multi-brand site.

Richemont (CFR.S), the Swiss conglomerate that owns jeweler Cartier, this year took control of now delisted Farfetch rival Yoox Net-A-Porter, in a deal that valued that platform at 5.3 billion euros ($6.2 billion).

Farfetch – which has never turned a profit, but posted a 59 percent jump in revenues last year to $386 million – drew investment from prominent industry players in its IPO, like the Pinault family that controls Kering (PRTP.PA), the French group behind brands such as Italy’s Gucci.

To stand out from the crowd, the platform is investing heavily in technology, including for digital store services it is trialing with France’s Chanel, one of Farfetch’s big name tie-ups.

Online sales are set to make up a quarter of the luxury industry’s revenues by 2025 from just under 10 percent now, according to consultancy Bain, thanks in part to demand from young shoppers in tech-savvy markets like China.

($1 = 0.8493 euros)

Reporting by Sarah White; Editing by Keith Weir

3D Gun Printing Entrepreneur Cody Wilson Is on the Run From Police Over Child Sexual Assault Charge

A gun-rights advocate known for his quest to help Americans manufacture firearms at home using 3-D printers may be on the run in Taiwan, after police in Texas charged him for paying to have sex with a 16-year-old girl.

The Austin Police Department is working with national and international authorities to locate Cody Wilson, 30, and “bring him to justice” after he became aware of the investigation and missed a flight home from Taipei, Commander Troy Officer said at a press conference on Wednesday.

Wilson’s nonprofit firm, Defense Distributed, recently clashed with Democratic-led states over his plan to publish gun blueprints online. The Austin-based company provides templates of various firearms on its website, which users can download and produce at home on 3-D printers.

Wilson, who has described himself as a “crypto-anarchist,” was charged by Austin police with sexually assaulting the unidentified girl by paying $500 to have sex with her at a hotel. Police say Wilson met her on the website “SugarDaddyMeet.com,” after bragging to her about his newfound notoriety.

A judge in Travis County, Texas, issued a warrant for Wilson’s arrest.

Surveillance video from Aug. 15 shows the pair at a coffee shop and later at a hotel. The victim told authorities about the incident. Police said it wasn’t clear if Wilson knew the girl’s age, but that authorities who interviewed her believe she looks younger than 16, not older.

Police said a friend of the victim called Wilson and tipped him off that authorities were investigating. It’s not clear how the friend knew Wilson.

A call to Wilson’s mobile phone wasn’t answered and the voice mail box was full. His criminal defense lawyer couldn’t immediately be identified. Josh Blackman, Wilson’s lawyer in the civil suit that was filed by the states, said he only represents the Texan in civil matters.

After the charges became public on Wednesday, organizers of a Second Amendment conference set for the coming weekend said Wilson wouldn’t be speaking at the event. He had been scheduled on Sept. 22 to discuss the impact of 3-D printing on the future of gun control at the 33rd annual gun rights policy conference in Chicago.

The charge Wilson faces is a second-degree felony in Texas. If found guilty, he could find himself barred from owning a firearm due to state and federal regulations.

Gun-control activists have argued that Defense Distributed’s templates could put guns in the hands of criminals. Gun-rights activists argued that untraceable guns are already prohibited under federal law, making the templates simply a technological advancement in the firearms space.

In August, a Seattle judge blocked Defense Distributed from posting the 3-D printing gun templates to its website. In an effort to circumvent the decision, Wilson instead started selling the files instead of giving them away for free.

He has also used the Defense Distributed website to raise over $340,000 for his 3-D printed gun rights cause.

Why the EU’s New Amazon Antitrust Investigation Could Get the Retailer Into a Heap of Trouble

Amazon has attracted the scrutiny of the European Union’s antitrust regulators yet again, this time over the way it runs its core e-commerce business.

If the EU’s preliminary investigations morph into a full-blown probe, Amazon (amzn) could be in a world of trouble. Here’s what you need to know.

What’s the problem?

Amazon provides a platform through which it sells products itself, while also inviting third-party merchants to sell their products.

EU Competition Commissioner Margrethe Vestager, whose picture must surely be pinned onto dartboards across Silicon Valley by this point, said Wednesday that her department has launched an initial investigation into whether Amazon is using the data it holds on third-party merchant activity to unfairly give advantage to its own e-commerce business.

This is a very early-stage investigation; it isn’t even a formal probe yet. At this point, Vestager’s team has merely sent out questionnaires to merchants that use Amazon’s platform, in order to gauge their experiences.

“The question here is about the data,” she said. “Do you then also use this data to do your own calculations, as to what is the new big thing, what is it that people want, what kind of offers do they like to receive, what makes them buy things?”

Has Amazon had run-ins with Vestager before?

This is certainly not Amazon’s first rodeo with the Danish liberal.

Last year, she forced the company to change its e-book contracts with publishers so that the publishers would no longer have to give it terms that are as good as those they offer rival e-book platforms.

Then, later in 2017, Vestager ordered Luxembourg to recover $294 million in back-taxes from Amazon, after her department found the country had effectively given the firm illegal state aid in the form of a sweetheart tax deal. To be clear, that was a decision against Luxembourg—but Amazon was the loser.

So Amazon’s in trouble?

Could be. There are a couple things worth noting about Vestager.

The first is that she is a fastidious layer of groundwork. As demonstrated in her achingly slow-moving antitrust cases against Google (googl), which have resulted in separate fines of $2.7 billion (over comparison shopping) and $5 billion (over Android,) Vestager takes her time. This is always a risky trade-off in the antitrust world—yes, it makes it more likely that the resulting fine survives an appeal, but it allows guilty companies to continue distorting the market while their cases drag on.

The second thing is that, appropriately for a regulator who regularly takes on Big Tech, Vestager is innovative in the way she approaches her work. This has been demonstrated in the way she folds tax avoidance into her competition remit (hi, Apple) and it’s about to be demonstrated again in the new Amazon investigation.

Vestager has been tutting for a while about how market-dominating giants use their troves of “big data” to shut out competition, and now it looks like she’s pursuing that line of inquiry. It’s not just Amazon that should be sweating at the thought of this.

One more thing to note is that Vestager may not stay on as the EU’s competition enforcer for much longer. The Juncker Commission will draw to a close in just over a year’s time, and the next Commission president may want someone else to fill that seat—although Vestager has expressed a willingness to stay on in order to secure her legacy.

Fun fact, though: Vestager herself is widely expected to be the Liberal candidate for the Commission presidency.

Amazon has antitrust worries elsewhere too, right?

Yup, particularly back home in the U.S., where President Donald Trump has a vendetta against Amazon CEO Jeff Bezos, who is also the owner of the Trump-critical Washington Post.

Trump isn’t the only one to be highlighting Amazon’s potentially abusive market practices in the U.S. The legal scholar Lina Khan has gained a lot of attention for her analysis of the problem, which boils down to predatory pricing and Amazon’s vertical integration of business lines. But the president has waded into the matter with the seemingly clear motive of riling Bezos—a tactic that could well derail the debate.

So if Vestager’s new probe does turn formal, and the Commission does end up deciding against Amazon and hitting it with a fine and a demand that it change the way it does business—and if Trump is still president by that probably distant point—the EU can at least take solace that it’s unlikely to see Trump lambast it for taking advantage of the U.S., as he did after Google’s most recent fine.

Clues Pile Up For Expecting Another Rate Hike Next Week

The Federal Reserve remains on track for another round of tightening monetary policy at next week’s FOMC meeting, based on a several indicators. If the central bank announces another rate hike, it’ll mark the eighth increase since the Fed began squeezing policy post recession in December 2015.

Market sentiment is clearly anticipating the Fed will roll out another rate hike at its policy announcement on September 26. Fed funds futures this morning are pricing in a 94% probability that the target rate will rise 25 basis points to a range of 2.0-2.25%, based on CME data.

The central bank has certainly laid the monetary groundwork for hikes by extending and deepening the contraction in inflation-adjusted base money (aka M0), also known as high-powered money that’s controlled by the Fed. The 1-year trend in real M0 fell for the sixth straight month in August, sliding 10.7% versus the year-earlier level – the biggest decline in nearly two years.

The policy-sensitive 2-year Treasury yield is also pointing to an increasing likelihood that another rate hike is near. This widely followed maturity, which is considered an indicator of expectations for near-term monetary policy bias, held steady for a second trading day at 2.78% on Monday (September 17), a post-recession high, based on daily data via Treasury.gov.

Fed officials have been recently talking up the case for more policy tightening. Eric Rosengren, the president of the Federal Reserve Bank of Boston, for example, recently advised that higher rates are necessary to avoid threatening US financial stability with excessively low borrowing costs, which can trigger unwarranted risk-taking. Speaking to the Financial Times, he said, “we do need to be concerned about financial excesses,” explaining that the historical record for unmanaged “boom-bust cycles” isn’t encouraging. As such, he recommended that the Fed “lean against the wind a little” via rate hikes.

By some accounts, the benchmark 10-year Treasury yield (2.99% on Monday) deserves to be modestly higher. “I think what we have to recognize is if we strictly looked at the fundamentals of the market, we should be between 3 and 3.25 percent,” Jim Caron, fixed-income portfolio manager at Morgan Stanley Investment Management, told CNBC on Friday.

Economic data of late offers support for more tightening. Headline retail spending advanced 6.6% over the 12 months through last month – close to an eight-year high. Consider, too, that the trend in private-sector employment continued to hold at a healthy 1.9% year-over-year increase in August. Meantime, several nowcasts for GDP growth in the third quarter see another strong gain in the cards – the Atlanta Fed’s GDPNow estimate as of September 14, for instance, projects a sizzling 4.4% gain.

One of the potential reasons to delay a rate hike is softer inflation data of late. Core consumer inflation eased to a 2.2% annual rate in August, the lowest since April. Implied inflation via Treasury spreads appeared to anticipate to weaker inflation. Note, however, that Treasury-based inflation expectations have stabilized in recent days, implying that pricing pressure will now hold steady or accelerate going forward.

The fact that wage growth picked up last month, despite the slightly softer gain in consumer prices generally, is a distinction that the Fed is surely monitoring. Average hourly earnings increased 2.9% for the year through August, the biggest gain in nine years.

What might derail plans for the next rate hike? Surprisingly weak economic data are always on the short list of potential spoilers. But expectations for most numbers on tap for release between now and the Fed’s announcement next week (Wednesday, September 26) look encouraging. If there’s a case for standing pat, it’s not obvious in the data published to date.

“I still think that certainly three to four total increases for this year are reasonable and the data have been strong,” Federal Reserve Bank of Chicago President Charles said on Friday. “I will not be surprised if it’s four increases this year. I do still believe that a gradual increase in interest rates is appropriate.”

Here Comes China's (Literal) Plunge Protection Team

I’ve long contended that when it comes to the trade war, Chinese authorities aren’t as concerned about the domestic stock market as the U.S. administration would have the American public believe.

On multiple occasions over the past several months, President Trump has referenced the disparity between the performance of U.S. stocks (SPY) and Chinese equities as evidence that America is prevailing in the ongoing trade dispute. For instance, at a rally in Ohio early last month, Trump said this:

Sadly, because I don’t like this, the Chinese market is down 27% in the last three or four months.

Since then, he’s repeated that (or some derivation thereof) on Twitter. Last Thursday, for example, he said this:

We are under no pressure to make a deal with China, they are under pressure to make a deal with us. Our markets are surging, theirs are collapsing.

That is probably not the correct way to think about things and indeed, it’s not consistent with the way the administration itself has generally defined “winning” and “losing” on trade.

Economists will tell you that nobody “wins” in a trade war and they’ll also tell you that thinking about deficits and surpluses in terms of “winning” and “losing” is to misunderstand deficits and surpluses. But let’s give the President the benefit of the doubt and assume there’s some validity to the notion that “winning” and “losing” can be defined in terms of trade balances. If that’s the case, the U.S. isn’t “winning”. In fact, China logged the largest surplus on record with the U.S. in August:

(Bloomberg)

On top of that, the rapid depreciation of the Chinese yuan (CYB) that started in late June after the PBoC decided not to raise rates in open market operations following the Fed hike (on the way to enacting a RRR cut ten days later), served to shield the economy from the effects of the tariffs. Specifically, the depreciation from late June through early August completely offset the effects of the first round of 301 investigation-related tariffs (duties on $50 billion in goods implemented in two steps on July 6 and August 23) and what was, at the time, still a theoretical second round of IP theft-related tariffs on $200 billion in Chinese exports to the U.S. (those tariffs are now a reality).

Beijing effectively let the Fed do all of the work when it came to cushioning the tariff blow. As upbeat U.S. economic data continued to force Jerome Powell to stick with a hawkish lean, the PBoC implemented a series of stealth easing measures, thereby countenancing a widening policy divergence between the U.S. and China, which in turn pressured the yuan weaker and cushioned the economy. Here’s my annotated yuan chart again, which shows the depreciation, along with the four steps China took in August to put the brakes on the yuan’s slide once they felt it had gone too far, too fast.

(Bloomberg)

Notably, China managed to let the yuan depreciate without stoking capital flight, or at least based on FX reserves, which remained steady over the course of the depreciation.

(Bloomberg)

What you should get from the above is that Beijing’s first priority was to shield the economy by getting out ahead of the tariff impact with currency depreciation. The stock market could wait.

The reason the stock market could wait is primarily down to two factors (or at least that’s how I see it).

First, Xi doesn’t have the same political calculus as Trump. Here’s how BofAML’s Ethan Harris put it last month:

After consolidating power at the 13th National Congress, Xi does not need to worry about midterms or his own re-election. Hence he likely does not worry about the stock market as much as a US president.

Second, Beijing can theoretically stabilize the stock market any time it wants, because in China, there is a literal “plunge protection team” (no conspiracy theories needed).

China established the so-called “National Team” in 2015 when a dramatic unwind in a half-dozen backdoor margin lending channels burst the country’s equity bubble, sending onshore stocks careening some 40% lower from early June 2015 through late September. Here’s Deutsche Bank with a brief history for the uninitiated:

The National Team operates through 21 known entities: China Securities Finance Corp., Central Huijin Investment and Central Huijin Asset Management (wholly-owned by Central Huijin Investment), five mutual funds set by the CSF with Rmb200bn total initial investment, ten managed accounts entrusted with asset management companies and three wholly-owned subsidiaries of the SAFE.

Relying on funding from equity injections, interbank borrowing and central bank support, the National Team mobilized some Rmb1.5tr to purchase stocks and ETFs in a bid to stabilize the A-share market after a rapid and deep correction in 2015.

Again, this is a real thing. It’s not some old wives’ tale and it’s not an urban legend. As of this summer, the National Team held more than 1,100 stocks worth more than CNY1.2 trillion. As Deutsche Bank goes on to write in the note cited above, that’s good for 5.5% of the A-share market’s free float:

(Deutsche Bank)

After the collapse in the summer of 2015, the Shanghai Composite wouldn’t ultimately bottom until early the following year and over the course of the last two months, traders have observed state buying when the index has bumped up against those 2016 lows. For instance, on August 20, local media reports suggested major Chinese insurance companies spent billions of yuan buying up shares in the onshore market. In the three sessions prior to August 20, an unnamed large Chinese insurer was said to have bought billions in A-shares whenever the SCHOMP fell below 2,700.

(Heisenberg)

On Monday, the index broke decisively through those lows, and considering everyone knew an announcement from the Trump administration on the next round of tariffs was imminent, it wasn’t difficult to predict that on Tuesday, should A-shares sputter again, the afternoon session would likely see a rally in the onshore market, tipping state buying. Sure enough, that appears to have played out. Here’s a Tuesday chart of the SHCOMP:

(Heisenberg)

Needless to say, it’s unlikely that retail and other discretionary investors just decided, out of the blue, to start buying equities in the afternoon on a day when the U.S. made things official with regard to the next round of tariffs. In other words, what you see there was probably the vaunted National Team.

Well, according to Deutsche Bank, Beijing is likely to step up efforts to support the domestic stock market from here. The bank says that so far in 2018, the National Team has held its fire due to a perceived lack of contagion risk and a desire to see how the trade war developed before deploying resources.

On the former point, Deutsche notes that this year’s losses in Chinese stocks have been far less alarming on multiple fronts (compared to 2015) including fewer stocks trading limit-down. Perhaps more importantly, margin financing is optically lower than the egregious leverage employed three years ago (note above how I cited the unwind in backdoor margin lending channels as a cause of the crash in 2015).

So why now? That is, what’s the rationale for deploying state resources and rolling out the literal plunge protection this month as opposed to say, waiting until 2019 when the tariff rate on the additional $200 billion in Chinese exports announced on Monday will more than double to 25%, perhaps weighing on sentiment further?

For Deutsche Bank, there are four reasons to think this is an opportune time for state-backed vehicles to step in. First (and as mentioned above), the SHCOMP is bumping up against the 2016 lows, which are seen as key psychological levels. Second, valuations are compelling. Third, the first two rounds of 301 investigation-related tariffs are in the books, and there are convincing signs that the deceleration in the domestic economy may be enduring. Fourth, interbank rates are low, which means state vehicles can obtain cheap funding for equity purchases. Here are two charts which illustrate points two and four:

(Deutsche Bank)

The full note contains a ton more color, but the question readers here are undoubtedly asking at this point is whether this is tradable for average investors.

The answer is “probably” – but indirectly. Access to the A-share market, while expanding, is limited and it’s unlikely that U.S. retail investors are going to be interested in playing in that sphere. But for regular folks, here’s the key line from Deutsche’s note:

If the A-share market stabilizes and recovers on support from the National Team, we are likely to see a boost to sentiment and a positive spillover effect on the similarly fragile offshore H-share market.

The read-through there is that this is potentially tradable through H-shares via the iShares China Large-Cap ETF (FXI) and the iShares MSCI China ETF (MCHI). I don’t want to get too specific there and as usual, I leave it to readers to evaluate whether a given idea is appropriate for their circumstances, market acumen and risk tolerance. But what I can point you to is the following set of charts from Deutsche which show you what the National Team holds:

(Deutsche Bank)

If you compare those holdings to the H-share holdings in MCHI and FXI you’ll see some overlap, but do note that this comes with all manner of caveats, including (but by no means limited to) the possibility that going forward, the National Team may decide to buy things they don’t already own a lot of.

More broadly though, it’s probably a reasonably safe assumption that efforts on Beijing’s part to stabilize the onshore market would generally be positive for Hong Kong shares on the whole.

Panning out even further (and coming full circle), there are reasons to believe that having exhausted the capacity of the yuan to shoulder the burden in terms of shielding the economy from the trade war, and with domestic shares mired in a bear market and breaching the 2016 lows, Beijing is prepared to move in and arrest the slide in domestic equities, perhaps as part of a broader effort to ensure that sentiment in China doesn’t sour amid what’s now likely to morph into a protracted war of attrition on the trade front.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

The Ingredients Of An 'Event'

This past week marked the 10th anniversary of the collapse of Lehman Brothers. Of course, there were many articles recounting the collapse and laying blame for the “Great Financial Crisis” at their feet. But as is always the case, an “event” is always the blame for major reversions rather than the actions which created the environment necessary for the crash to occur. In the case of the “financial crisis,” Lehman was the “event” which accelerated a market correction that was already well underway.

I have noted the topping process and the point where we exited the markets. Importantly, while the market was giving ample signals that something was going wrong, the mainstream analysis continued to promote the narrative of a “Goldilocks Economy.” It wasn’t until December of 2008, when the economic data was negatively revised, that the recession was revealed.

Of course, the focus was the “Lehman Moment,” and the excuse was simply: “No one could have seen it coming.”

But many did. In December 2007, we wrote:

“We are likely in, or about to be in, the worst recession since the ‘Great Depression.'”

A year later, we knew the truth.

Throughout history, there have been numerous “financial events” which have devastated investors. The major ones are marked indelibly in our financial history: “The Crash Of 1929,” “The Crash Of 1974,” “Black Monday (1987),” “The Dot.Com Crash,” and the “The Financial Crisis.”

Each of these previous events was believed to be the last. Each time, the “culprit” was addressed and the markets were assured the problem would not occur again. For example, following the crash in 1929, the Securities and Exchange Commission and the 1940 Securities Act were established to prevent the next crash by separating banks and brokerage firms and protecting against another Charles Ponzi. (In 1999, legislation was passed to allow banks and brokerages to reunite. 8 years later, we had a financial crisis and Bernie Madoff. Coincidence?)

In hindsight, the government has always acted to prevent what was believed to the “cause” of the previous crash. Most recently, Sarbanes-Oxley and Dodd-Frank legislations were passed following the market crashes of 2000 and 2008.

But legislation isn’t the cure for what causes markets to crash. Legislation only addresses the visible byproduct of the underlying ingredients. For example, Sarbanes-Oxley addressed the faulty accounting and reporting by companies like Enron, WorldCom and Global Crossing. Dodd-Frank legislation primarily addressed the “bad behavior” by banks (which has now been mostly repealed).

While faulty accounting and “bad behavior” certainly contributed to the end result, those issues were not the cause of the crash.

Recently, John Mauldin addressed this issue:

“In this simplified setting of the sandpile, the power law also points to something else: the surprising conclusion that even the greatest of events have no special or exceptional causes. After all, every avalanche large or small starts out the same way, when a single grain falls and makes the pile just slightly too steep at one point. What makes one avalanche much larger than another has nothing to do with its original cause, and nothing to do with some special situation in the pile just before it starts. Rather, it has to do with the perpetually unstable organization of the critical state, which makes it always possible for the next grain to trigger an avalanche of any size.

While the idea is correct, this assumes that at some point the markets collapse under their own weight when something gives.

I think it is actually a little different. In my view, ingredients like nitrogen, glycerol, sand, and shell are mostly innocuous things and pose little real danger by themselves. However, when they are combined together and a process is applied to bind them, you make dynamite. But even dynamite, while dangerous, does not immediately explode as long as it is handled properly. It is only when dynamite comes into contact with the appropriate catalyst that it becomes a problem.

“Mean-reverting events,” bear markets and financial crises are all the result of a combined set of ingredients to which a catalyst was applied. Looking back through history, we find similar ingredients each and every time.

The Ingredients

Leverage

Throughout the entire monetary ecosystem, there is a consensus that “debt doesn’t matter” as long as interest rates remain low. Of course, the ultra-low interest rate policy administered by the Federal Reserve is responsible for the “yield chase” and has fostered a massive surge in debt in the U.S. since the “financial crisis.”

Importantly, debt and leverage, by itself, is not a danger. Actually, leverage is supportive of higher asset prices as long as rates remain low and the demand for, rates of return on, other assets remains high.

Valuations

Likewise, high valuations are also “inert” as long as everything asset prices are rising. In fact, rising valuations supports the “bullish” thesis, as higher valuations represent a rising optimism about future growth. In other words, investors are willing to “pay up” today for expected further growth.

While valuations are a horrible “timing indicator” for managing a portfolio in the short term, valuations are the “great predictor” of future investment returns over the long term.

Psychology

Of course, one of the critical drivers of the financial markets in the “short term” is investor psychology. As asset prices rise, investors become increasingly confident and are willing to commit increasing levels of capital to risk assets. The chart below shows the level of assets dedicated to cash, bear market funds and bull market funds. Currently, the level of “bullish optimism” as represented by investor allocations is at the highest level on record.

Again, as long as nothing adversely changes, “bullish sentiment begets bullish sentiment,” which is supportive of higher asset prices.

Ownership

Of course, the key ingredient is ownership. High valuations, bullish sentiment and leverage are completely meaningless if there is no ownership of the underlying equities. The two charts below show both household and corporate levels of equity ownership relative to previous points in history.

Once again, we find rising levels of ownership are a good thing as long as prices are rising. As prices rise, individuals continue to increase ownership in appreciating assets, which, in turn, increases the price of the assets being purchased.

Momentum

Another key ingredient to rising asset prices is momentum. As prices rice, demand for rising assets also rises, which creates further demand on a limited supply of assets, increasing prices of those assets at a faster pace. Rising momentum is supportive of higher asset prices in the short term.

The chart below shows the real price of the S&P 500 index versus its long-term Bollinger bands, valuations, relative strength and its deviation above the 3-year moving average. The red vertical lines show where the peaks in these measures were historically located.

The Formulation

Like dynamite, the individual ingredients are relatively harmless. However, when the ingredients are combined, they become potentially dangerous.

Leverage + Valuations + Psychology + Ownership + Momentum = “Mean-Reverting Event”

Importantly, in the short term, this particular formula does indeed remain supportive for higher asset prices. Of course, the more prices rise, the more optimistic the investing becomes, as it becomes common to believe “this time is different.”

While the combination of ingredients is indeed dangerous, they remain “inert” until exposed to the right catalyst.

These same ingredients were present during every crash throughout history. All they needed was the right catalyst. The catalyst, or rather the “match that lit the fuse,” was the same each time.

The Catalyst

In the U.S., the Federal Reserve has been the catalyst behind every preceding financial event since they became “active,” monetarily policy-wise. As shown in the chart below, when the Fed has embarked upon a rate hiking campaign, bad “stuff” has historically followed.

With the Fed expected to hike rates two more times in 2018, and even further in 2019, it is likely the Fed has already “lit the fuse” on the next financially related event.

Yes, the correction will begin as it has in the past, slowly, quietly, and many investors will presume it is simply another “buy the dip” opportunity.

Then suddenly, without reason, the increase in interest rates will trigger a credit-related event. The sell-off will gain traction, sentiment will reverse, and as prices decline, the selling will accelerate.

Then, a secondary explosion occurs as margin calls are triggered. Once this occurs, a forced liquidation cycle begins. As assets are sold, prices decline as buyers simply disappear. As prices drop further, more margin calls are triggered, requiring further liquidation. The liquidation cycle continues until margin is exhausted.

But the risk to investors is not just a market decline of 40-50%. While such a decline, in and of itself, would devastate the already underfunded 80% of the population that is currently woefully underprepared for retirement, it would also unleash a host of related collapses throughout the economy as a rush to liquidate holdings accelerates.

The real crisis comes when there is a “run on pensions.” With a large number of pensioners already eligible for their pension, the next decline in the markets will likely spur the “fear” that benefits will be lost entirely. The combined run on the system, which is grossly underfunded, at a time when asset prices are dropping, will cause a debacle of mass proportions. It will require a massive government bailout to resolve it.

But it doesn’t end there. Consumers are once again heavily leveraged with sub-prime auto loans, mortgages and student debt. When the recession hits, the reduction in employment will further damage what remains of personal savings and consumption ability. The downturn will increase the strain on an already burdened government welfare system, as an insufficient number of individuals paying into the scheme is being absorbed by a swelling pool of aging Baby Boomers now forced to draw on it. Yes, more government funding will be required to solve that problem as well.

As debts and deficits swell in coming years, the negative impact to economic growth will continue. At some point, there will be a realization of the real crisis. It isn’t a crash in the financial markets that is the real problem, but the ongoing structural shift in the economy that is depressing the living standards of the average American family. There has indeed been a redistribution of wealth in America since the turn of the century. Unfortunately, it has been in the wrong direction, as the U.S. has created its own class of royalty and serfdom.

All the ingredients for the next market crash are currently present. All that is current missing is the “catalyst” which ignites it all.

There are many who currently believe “bear markets” and “crashes” are a relic of the past. Central banks globally now have the financial markets under their control, and they will never allow another crash to occur. Maybe that is indeed the case. However, it is worth remembering that such beliefs were always present when, to quote Irving Fisher, “stocks are at a permanently high plateau.”