Saturday, July 9, 2016

Is Another 9/11 Necessary To Re-Direct American Anger?

ORIGINAL LINK

Via The Daily Bell,

America’s Anger Is Out of Control, Jeffrey Kluger ... After the September 11 attacks, TIME’s Lance Morrow wrote a powerful essay titled, “The Case for Rage and Retribution,” in which he argued:

 

“For once let’s have no fatuous rhetoric about ‘healing.’ A day cannot live in infamy without the nourishment of rage. Let’s have rage. What’s needed is a unified, unifying, Pearl Harbor sort of purple American fury—a ruthless indignation that doesn’t leak away in a week or two…”

 

– TIME

As we can see from the above statement, Jeff Kluger has in mind another convulsive episode like Pearl Harbor or 9/11 that will unify the “anger” that Americans feel.

Kluger seems to imply that this anger is stemming from current elections. His concern is that it is spilling over into other areas of life.

If every offensive, unjust or insulting incident turns into a jolt of high-fructose fury mainlined straight to the brain’s amygdala, what’s left when there’s a truly right and righteous reason to rise up in anger? And those important moments do occur. 

Kluger seems to be saying that anger has become fashionable and applying anger liberally trivializes it.

Also, if Americans are angry about many things, that makes for a dysfunctional society rather than a unified one.

Kluger obviously wants a unified America. In order for rage to be unifying it needs to be a “purple American fury.”

This is actually a somewhat cynical assessment of how to manipulate anger in our view.

Why do we need another Pearl Harbor or 9/11 just so Americans can feel unified?

Why should “Americans” feel unified anyway? And, really, what is an “American?”

Because the “anger in America” meme is ubiquitous in the mainstream media at the moment, there are many other commentaries on it.

Here’s one from CNN by Michael Smerconish:

Are the voters really mad as hell? … voters, many of them in the GOP, have outsized weight in politics … The anger that threatens Washington based on partisanship is metastasizing. Now is the time to take back control of our political debate.

 

Remember, when Howard Beale asked Americans to shout outside that they were “mad as hell”, many followed. It’s time for the rest of us to close our windows.

CNN is asking us to “close our windows” and not listen to people who are “angry” about the state of America’s politics and economy.

TIME is hopeful that this anger can be channeled into some horrible, outsized event that will unify the current emotional anarchy.

Both of these editorials seem frightened by anger. But the description trivializes what is going on.

People aren’t just “angry.” Many are extraordinarily upset about certain events taking place in the USA. It’s not simply an inchoate emotion.

Millions upon millions are angry over the reduction in freedoms and the rise of the fedgov political class.

They are worried and anxious about police shootings, gun confiscation and a general trend toward increased authoritarianism all around them.

They don’t recognize America anymore. It feels like a fascist or socialist country.

Like Kluger’s article, Smerconish’s CNN piece suggests ways that the electorate’s anger can be reduced.

His solution to American anger is to change voting laws so that “silent ones” have more impact and are more noticeable.

That would make the anger less visible. Eventually, people would calm down.

We don’t believe in either of these solutions.

It is not a good idea to root for another major national tragedy in order to resolve American anger. And  changing voter laws to empower people who are not angry surely does not address the causes of the anger.

Conclusion: What will make people less angry in this case is more freedom. But freedom is rarely given and mostly manipulated. If you want to be free, you will have to do it yourself. Get out of debt. Store gold and silver. Find alternative living arrangements in case of an emergency. Don’t leave it up to mainstream punditry to determine how to deal with what you feel. Inevitably, their solutions will not lessen problems but increase them.



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"America Is Broken" - The Week Anger Boiled Over

ORIGINAL LINK

Despite the fact a somewhat deluded President Barack Obama contends that racial relations have improved during his presidency - calling this week's black, former military Dallas shooter a "demented individual who's not representative of Americans," an atmosphere of crisis is enveloping the U.S. after a traumatic week; and as TheHill.com's Niall Stanage explains so 'fair-and-balanced'ly, it has left politicians, academic experts and private citizens searching for an explanation for the anger roiling the nation. 

The killing of five police officers in Dallas in a Thursday evening ambush followed hard on the heels of two instances where black men were killed in deeply contentious circumstances by law enforcement: Alton Sterling in Baton Rouge, La., and Philando Castile in Falcon Heights, Minn.

As the nation was reeling from those events, there were also reports that a shooter in Tennessee who had killed one person earlier Thursday appeared to have been motivated by anger against police officers. There was panic at another rally in Portland, Ore., Thursday evening when an onlooker apparently antagonistic to protestors marching against police violence drew a weapon.

The series of events has created a sense that the social fabric is torn — one point upon which people in a deeply polarized country agree.

America is broken,” movie director Spike Lee tweeted on Friday...

Madness,Madness And Mo' Madness. America Is Broken. @ Forty Acres & A Mule https://t.co/J0LlG8xohP

— Spike Lee (@SpikeLee) July 8, 2016

America is driving toward the abyss and it’s time we hit the brakes” was the headline on a story on the conservative National Review website.

The atmosphere is so febrile that even some public figures who have themselves been accused of divisiveness in the past are emphasizing the need to seek common ground. 

“We have got to make real change because otherwise these extremists exploit the anxiety of the people,” civil rights campaigner Rev. Al Sharpton told The Hill. “Most people want to see a balanced system where the police are respected and can do their job, and at the same time citizens are protected. After that, extremists have the floor.” 

Others compared the current climate to 1968, a tumultuous year that saw the assassinations of Martin Luther King and Sen. Robert F. Kennedy, then a candidate for president, as well as riots in major cities and continuing friction over the Vietnam War.

“We had the riots, we had cities burning, the rise of the Black Panther Party, turbulence in the country,” said broadcaster and writer Earl Ofari Hutchinson. “But driving everything — the thing that stuck out — was the polarization, the division. We fast forward almost 50 years later and we are seeing a return of that sort of mentality.”

The comparison with 1968 is a fraught one, however, with some experts suggesting that the nation’s current troubles fail to rise to that level, significant though they are.

“It is not 1968. Many things have changed,” said Julian Zelizer, a Princeton professor of history and public affairs, on Friday. “Even the violence we saw last night pales by comparison with the rioting that took place throughout the 1960s.”

Whatever the merits of particular historic parallels, however, there is little doubt that the nation is in uncommonly volatile shape. While vexing questions of race and the criminal justice system are a big part of that, it also involves other issues, from economic insecurity to disenchantment with the political system. 

Political polarization has also been exacerbated by the explosive growth in social media and the increased fragmentation of traditional media.  

Cable news and talk radio give people the option to receive their information from sources that comport with their ideological leanings — and often speak with a shrill voice. On Friday, conservative radio host Rush Limbaugh said Black Lives Matter was “becoming a terrorist group committing hate crimes.”

The tendency to find reinforcement of one’s own views in social media is also well documented. 

A 2014 study by the Pew Research Center found a significant rise in political polarization over the previous two decades.  

The proportion of Democrats who said they held a “very unfavorable” view of the Republican Party, and vice versa, had more than doubled between 1994 and 2014. A full 50 percent of people who held “consistently conservative” views — and 35 percent of people who held “consistently liberal” views — said it was important for them to live in a place “where most people share my political views.”

“There is less overlap on the basic issues and basic values than there was two decades ago,” Alec Tyson, a senior researcher at Pew, said.

On top of that, the effects of wage stagnation, income inequality and economic insecurity seem to be playing a part in creating the current combustible atmosphere.

20160301_obama_0.jpg

“When people wake up in the morning trying to figure out how they are going to pay the bills, how they are going to put food on the table for their family, it leads to an anxiety that then leads to bad judgment and bad choices,” said Sharpton.

The strained political atmosphere is hardly calming the waters either. To liberals, the success of Donald Trump in winning the Republican nomination has been rooted in an antagonistic attitude toward minorities, women and other groups. To conservatives, the comments of Democrats such as President Obama and Hillary Clinton about controversial cases involving police have undercut public confidence in law enforcement with unpredictable consequences. 

Ron Hosko, the president of the Law Enforcement Legal Defense Fund, asserted that while it was “perfectly appropriate” to have mature discussions about criminal justice reform, the president and others had taken things several steps too far. 

Hosko argued that the “reflexive response” from Obama was to assume any interaction in which a black person died at the hands of police was rooted in racism. 

“That is wholly inappropriate. He has shown ridiculously poor judgment. He is the divider-in-chief when he does that and he has done it repeatedly,” Hosko said. 

Virtually no one on either side of the divide believes that a coming-together is imminent — especially when violence perpetrated by or against police might erupt again at any time, and the political world is moving full-speed ahead with a presidential campaign that is likely to be heated and bitter. 

“The sides are pulling apart, they are certainly not pulling together,” said Hosko.

Hutchinson said: “I am deeply troubled because I do not see a way to bridge the gap that is there.”

Source: The Hill



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FBI Pros Question Decision Not to Charge Hillary Clinton

ORIGINAL LINK

If some in the general public were outraged, so were some in the FBI.

This week, FBI Director James Comey testified that Hillary Clinton and her aides had compromised classified information in an extremely careless fashion, exposed it to hostile adversaries, violated public records law, destroyed public documents (some permanently, so that they cannot be forensically recovered) and that Clinton made repeated false statements in public about her actions. But, he concluded, no charges should be filed. Clinton apparently told the FBI she didn’t understand classified markings and all the technology at issue, and that she didn’t know she was doing anything wrong. And the FBI takes her at her word.

Comey is well-respected by politicians in both political parties and by many within his own ranks. But there is new dissent after his Clinton decision, which some FBI insiders found baffling and contrary to normal practices.

“Many people at the FBI are outraged, but cannot speak out,” one insider told me.

Here are some of the observations by FBI professionals who wish to remain anonymous because their opinions could affect their job prospects:

  • Why wasn’t Clinton’s interview recorded? On May 22, 2014 the Justice Department announced a substantial change in policy “creating a presumption that FBI…agents will electronically record,” expressing a preference for video recordings over audio. “It appears to me they made a deal not to record,” says one observer, which flies in the face of the idea that Clinton was treated like anybody else.

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  • Typically it’s the U.S. Attorney’s office, not FBI agents, deciding whether charges will be filed. “Director Comey seems to have taken on responsibilities far beyond the FBI’s purview–he assumed the duties of the Agent, US Attorney and Grand Jury.”
  • “It appears no Grand Jury was empaneled for this investigation,” says an insider. “This is absurd, Grand Juries are used in nearly all criminal investigations” and that’s where the decision is made as to whether the standard for charges has been met. (Attkisson Note: I have no information on whether or not a Grand Jury was empaneled)
  • A two-day turnaround between the interview with the target and a decision not to prosecute is “unheard of.” “Even in the most straightforward of cases, the time span between a target interview and prosecution opinion takes weeks, not days. If a good interview were conducted [with Clinton] on Saturday, there would have been leads or other new pieces of information to verify or investigate prior to any conclusion to the case.”
  • During his Congressional testimony, Comey indicated he didn’t look into Clinton’s false statements. He said he needed an additional “referral” or formal request for the FBI to investigate whether she committed perjury under oath to Congress. “This makes no sense,” said a career agent. “It is normal practice that if you came upon evidence of a crime different than the one you were originally investigating, it was fair game.”
  • The Director commented that it wouldn’t be fair to charge Clinton for her reckless behavior because no one else had ever been charged by the standard before. “I am not aware of any investigation where a government official went to such extreme measures to comb through the government records,” said a career FBI professional.

Read FBI Director Comey’s statement on Hillary Clinton case



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Friday, July 8, 2016

When Narratives Go Bad

ORIGINAL LINK

By Ben Hunt Of Epsilon Theory

When Narratives Go Bad (pdf link)

 

How many things served us yesterday as articles of faith, which today are fables for us?

– Michel de Montaigne, The Complete Essays (1580)

* * *

That same night, I wrote my first short story. It took me thirty minutes. It was a dark little tale about a man who found a magic cup and learned that if he wept into the cup, his tears turned into pearls. But even though he had always been poor, he was a happy man and rarely shed a tear. So he found ways to make himself sad so that his tears could make him rich. As the pearls piled up, so did his greed grow. The story ended with the man sitting on a mountain of pearls, knife in hand, weeping helplessly into the cup with his beloved wife’s slain body in his arms.

– Khaled Hosseini, The Kite Runner (2003)

A fable for our times, the ultimate disposition of extraordinary monetary policy. Bad news is good news until bad news is all we know. Global growth is the wife.

* * *

The idea of negative interest rates strikes many people as odd. Economists are less put off by it. … The anxiety about negative interest rates seen recently in the media and in markets seems to me to be overdone. Logically, when short-term rates have been cut to zero, modestly negative rates seem a natural continuation; there is no clear discontinuity in the economic and financial effects of, say, a 0.1 percent interest rate and a -0.1 percent rate.

– Former Fed Chair Ben Bernanke, "What Tools Does the Fed Have Left?”, March 18, 2016

Bernanke is right – economists are not put off by the idea of negative rates. And that’s exactly the problem. There’s a huge discontinuity between a 0.1 percent interest rate and a -0.1 percent interest rate, but economists don’t see it because it’s a BEHAVIORAL discontinuity. Positive rates permit investing behaviors based on fundamentals and compounding. Negative rates require investing behaviors based on hope for a greater fool.

* * *

My Sunday school teachers had turned Bible narrative into children's fables. They talked about Noah and the ark because the story had animals in it. They failed to mention that this was when God massacred all of humanity. 

– Donald Miller, Blue Like Jazz: Nonreligious Thoughts on Christian Spirituality (2003). The condescension of modern status quo Narrative construction is staggering. It’s a mistake to do this with kids, and it’s a bigger mistake to do this with voters and investors

* * *

A major European power, a longtime defender of liberal democracy, pluralism and free markets, falls under the sway of a few cynical politicians who see a chance to exploit public fears of immigration to advance their careers. They create a stark binary choice on an incredibly complex issue, of which few people understand the full scope — stay in or quit the E.U.

– New York Times columnist Tom Friedman, doing his part to create a status quo protecting Narrative post-Brexit, where government “unforgivably” abdicated its responsibility by “allowing” foolish citizens who can’t possibly know their own self-interest to vote on something that’s “incredibly complex” and can only be understood by wise men … like Tom Friedman.

* * *

He spotted the entourage and security personnel that signaled another important person’s plane. With the temperature over 103 degrees, Mr. Clinton, rather than chatting on the scorching cement, climbed aboard to say hello to Attorney General Loretta E. Lynch.

– New York Times “reporter” Amy Chozick, in a yeoman effort to maintain the status quo protecting Narrative. Nothing to see here folks, move along, just a sociable man trying to get out of the heat.

* * *

Stooges:  Simple Simon met a pieman,
               Going to the fair;
               Says Simple Simon to the pieman,
               Let me taste your ware.
               Said the pieman to Simple Simon,
               Show me first your penny.
               Said Simple Simon to the pieman:

Moe: Scram! Ya don't get any! [throws pie in face]

You can learn a lot about political Narrative creation by looking at dominant forms of satire and comedy. Satire today is as arch and elitist as the status quo institutions it defends, in sharp contrast to the populist, slapstick comedy of the Marx Brothers or the Three Stooges. I’ll bet there’s a 99% correlation between UK Leave voters and people who think Benny Hill is funny, and the same between UK Remain voters and people who think John Oliver is funny. For the Tom Friedmans of the world, the solution is simple: “educate” people that John Oliver is hilarious, but you’re a racist dope if you laugh at Benny Hill. Yeah, that’ll work.

* * *

I wrote my way out of hell.
I wrote my way to revolution.
I was louder than the crack in the bell.
I wrote Eliza love letters until she fell.
I wrote about The Constitution and defended it well.
And in the face of ignorance and resistance,
I wrote financial systems into existence.
And when my prayers to God were met with indifference,
I picked up a pen, I wrote my own deliverance.
– Lin-Manuel Miranda, Hamilton (2015)

Why does Hamilton work? Because it’s not arch and it’s not elitist. Because it takes one of the most powerful and long-lived Narratives in modern history — the Founding Fathers — and tells the story without irony, without condescension, and without the (literal) whitewashing of other storytellers.
The Old Stories still work when you play them straight. Thank you, Lin-Manuel.

* * *

Choronzon: I am a dire wolf, prey-stalking, lethal prowler.
Morpheus: I am a hunter, horse-mounted, wolf-stabbing.
Choronzon: I am a horsefly, horse-stinging, hunter-throwing.
Morpheus: I am a spider, fly-consuming, eight legged.
Choronzon: I am a snake, spider-devouring, poison-toothed.
Morpheus: I am an ox, snake-crushing, heavy-footed.
Choronzon: I am an anthrax, butcher bacterium, warm-life destroying.
Morpheus: I am a world, space-floating, life-nurturing.
Choronzon: I am a nova, all-exploding... planet-cremating.
Morpheus: I am the Universe -- all things encompassing, all life embracing.
Choronzon: I am Anti-Life, the Beast of Judgment. I am the dark at the end of everything. The end of universes, gods, worlds ... of everything. Sss. And what will you be then, Dreamlord?
Morpheus: I am hope.

? Neil Gaiman, The Sandman, Vol. 1: Preludes and Nocturnes (1991)

There was a tale he had read once, long ago, as a small boy: the story of a traveler who had slipped down a cliff, with man-eating tigers above him and a lethal fall below him, who managed to stop his fall halfway down the side of the cliff, holding on for dear life. There was a clump of strawberries beside him, and certain death above him and below. What should he do? went the question.

And the reply was, Eat the strawberries.

The story had never made sense to him as a boy. It did now.

– Neil Gaiman, American Gods (2001)

The fin of any siècle is almost always a rough ride, even if we end up dreaming a better dream. In investing as in life there’s never enough time, and we are beset on all sides. Eat the strawberries

* * *

 

Here’s my most basic view on everything that’s happening in the world right now, politically, economically, socially … all of it: the Fix is still in, but it’s getting harder and harder to maintain.

The Fix is the status quo, and it goes by different labels of identity depending on what you’re talking about. “European Union” is one of those labels. “Central Banking” is one. “Clinton” is another. They aren’t real things at all, but are statements of shared identity that channel our behavior in highly predictable patterns that are, in turn, highly useful to The Powers That Be, and are maintained by expressions of Common Knowledge such as “everyone knows that everyone knows that Brexit was a grievous mistake” or “everyone knows that everyone knows that low interest rates spur the economy.” Those expressions of Common Knowledge are also called Narratives, and the Narratives are dying.

And yes, I know that this all sounds suspiciously philosophical and divorced from our investing reality, but bear with me for a moment, because the punchline here is going to be that I think what I’m describing is the ONLY thing that matters for our investing reality. Our reality is not determined by the antics of the flesh-and-blood Hillary Clinton or Donald Trump, but by the status quo ideas and institutions represented by and threatened by the human-shaped cartoons we call “Hillary Clinton” and “Donald Trump”. To figure out what’s next for markets, we have to figure out why “Clinton” – shorthand for globalism (it’s not called The Clinton Global Initiative for nothing) and a sort of technocratic, condescending, principle-less, democracy-suspicious manner of governing – is failing. We have to figure out why Bill Clinton’s stroll across the Phoenix tarmac to chat up the Attorney General was a) reported at all, and b) greeted by derision and despair within his own party. If you don’t like my use of the label “Clinton” or if you think I’m being too political, replace it with “Brussels” or “Beijing”. It’s all the same thing, just three different shades of gray.

And I really couldn’t care less, professionally at least, what actually transpired between Bill Clinton and Loretta Lynch, or what Hillary Clinton actually believed about her email security classifications. What I care deeply about, however, is how the Narrative around these events is being shaped and reshaped, because that Narrative will determine the path and outcome of every election and every market on Earth. And what I can tell you is that I am shocked by the diminishing half-life of status quo protecting Narratives, by the inability of Big Institutions and Big Money and Big Media and Big War and Big Academia to lock down an effective story that protects the State, even when their competition is primarily comprised of clowns (dangerous clowns, but clowns all the same) like Donald Trump and Nigel Farage. There’s a … tiredness … to the status quo Narratives, a Marie Antoinette-ish world weariness that sighs and pouts about those darn peasants all the way to the guillotine.

We’ve seen this before. History is littered with failed Narratives, once-powerful arrays of Common Knowledge that somehow lose their ability to compel human behavior and eventually become mere myth. That’s where Narratives go to die. They become fables, stories that we chuckle at, stories that we shake our heads at and ask “did people really believe in all that?” Michel de Montaigne – who invented the essay as a literary form and was the first blogger, albeit more than 400 years before Al Gore invented the Internet – wrote about the devolution of faith to fable back in the 16th century. It’s a phenomenon as old as humanity itself. Manifest Destiny … Cultural Revolution … these were Narratives every bit as powerful in their day as European Union or Clinton in ours. Now they’re historical curiosities, something you come across on a Wikipedia bender.

The rarity isn’t the Narrative that dies and fades into myth, but the Narrative that survives by re-inventing itself, by finding its words and stories repurposed and retold for a modern ear. For example, the Narrative of the American Founding Fathers is as potent today as it was 100 years ago, maybe more so, and that was before Hamilton gave it a new telling and a new power chord.

Why are the status quo protecting Narratives faltering so badly? I think it’s because status quo political and economic institutions – particularly Central Banks – have failed to protect incomes and have pushed income and wealth inequality past a political breaking point. They made a big bet: we’re going to bail-out/paper-over the banks to prevent massive losses in the financial sector, we’re going to inflate the stock market so that the household sector feels wealthier, and we’re going to make vast sums of money available for the corporate and government sectors to borrow really cheaply. And as the McKinsey chart here shows, by Q2 2014 they had largely succeeded on all counts, certainly in getting the corporate and government sectors to borrow trillions in new debt.

salient-epsilon-theory-ben-hunt-when-narratives-go-bad-july-7-2016-global-stock

 

The result, or so the thinking went, of all this pump-priming or bridge-building or whatever metaphor you please would be for all four basic sectors of the global economy – households, corporations, governments, and financial institutions – to consume more and invest more and fail never, which would in turn create a virtuous, self-sustaining cycle of risk taking, real growth, and real wealth creation.

salient-epsilon-theory-ben-hunt-when-narratives-go-bad-july-7-2016-john-oliver

It was a reasonable bet to make. But the bet failed. Why? There’s a book or two to write on this, but I’ll sum it up this way: you can no more force corporations to invest for growth if they don’t believe it’s safe than you can force people to watch John Oliver if they don’t think he’s funny. Sure, they’ll tell you that they think he’s funny, because everyone knows that everyone knows that John Oliver is funny, and they need to go along with the Common Knowledge to be successful social animals. But in their heart of hearts, they don’t think John Oliver is funny. Now to be clear, I’m picking on John Oliver to make a point. Personally, I think he’s funny. Some of the time. Well … kind of funny. I guess. Okay, I don’t really think he’s very funny. Sorry. And the truth is that if you paid me to watch HBO, just as Central Banks are basically paying corporations to borrow money, I’m going to watch 20 Game of Thrones re-runs before I watch a single episode of Last Week Tonight with John Oliver, just as corporations are going to buy back stock and hoard cash 20 times more than invest in new jobs or new equipment.

So what does this have to do with incomes? Two things.

First, little of the increased corporate or government borrowing trickled down into jobs or wage income growth. We’ve all seen the charts. Real wage growth is nonexistent in the Western world. Second, to make it feasible for corporations and governments to borrow these trillions of dollars in the first place, every bit of Central Bank balance sheet expansion (buying bonds) and balance sheet “twist” (buying longer duration bonds) and expansion of allowable securities for purchase (buying more kinds of bonds) and imposition of negative rates (charging you interest if you don’t buy longish-term bonds) was designed to – you guessed it – buy more bonds and thus drive up bond prices and drive down interest rates, particularly longish-term bond prices and longish-term interest rates. That’s great if you’re an investor looking for a percentage return on your bond portfolio. That’s terrible, however, if you’re an investor looking for an income from your bond portfolio. Over the past seven years, Central Banks have rewarded the return-seeking bond buyer many times over, and they’ve done nothing but punish the income-seeking bond buyer.

Put these two income squelchers together – zero wage income growth because corporations aren’t investing for growth and less-than-zero investment income growth because Central Banks have crushed rates – and you have a vast swath of the voting public in every developed nation on Earth that (rightfully!) feels aggrieved and left behind by the gleaming economic recovery that the status quo Narrative Missionaries tout at every turn. Notably, the failure of wage income growth skews younger and Democrat/left. The failure of investment income growth skews older and Republican/right. The status quo Narratives could survive (and have many times) an assault from one wing of the electorate or the other. But from both simultaneously? It’s going to be a close call.

But here’s the even larger problem lurking in the not-so distant future, and it’s found in the behavioral WHY of return-seeking bond buyers versus income-seeking bond buyers. These are two entirely different investor populations from a behavioral perspective, with different languages and different investment genotypes. When I hear an investor or financial advisor ask, “Why in the world would I buy a Swiss bond with a -0.5% interest rate?” I know that I’m talking to an income-seeking bond buyer. The return-seeking bond buyer, on the other hand, says “Hey, if you’re right about the world, those Swiss bonds currently yielding -0.5% are going to -1.0%, which means that the price is going up. Where can I buy one of those?”

The only rational owner of a negative rate bond is a pure return seeker; there are zero income seekers holding negative rate bonds. Why is this a problem? Because income seekers will continue to own bonds even if the price goes down (for a while, anyway; at the very least, they are sticky owners). Return seekers, on the other hand, are not sticky owners at all. They will only own a bond if they think that the price is going up – meaning in this case that yields will continue to become even more negative, i.e., that there’s a greater fool (probably in the form of a Central Bank) willing to pay higher and higher prices for these income-destroying bonds – and they will sell in a heartbeat if they think this dynamic is changing.

There is, to cop a phrase from the People’s Bank of China, a massive “one-way bet” on negative rate sovereign debt today. The momentum trade has crystallized to perfection in negative rate bonds, which has grown to become a $10+ trillion (yes, that’s trillion with a T) asset class. I think it’s the most crowded trade in the world from a behavioral or investment DNA perspective, and the moment you get even a whiff of the ECB or BOJ backing down from or reaching its limit of greater foolishness, you are going to get a rush to the exit on ALL sovereign bonds that will shake global capital markets to their core. It’ll be good times till then, as it always is, and I am seeing zero signs of Central Bankers backing down from their greater foolishness. But we have once again set up the global financial system as an inverted pyramid, with a $10 trillion asset class poised on a single, solitary piece of Common Knowledge —– what everyone knows that everyone knows. In 2008, the $10 trillion asset class of residential mortgage backed securities (RMBS) was entirely based on the Common Knowledge that it was impossible to have a nationwide decline in U.S. home prices. When that Narrative failed, the entire inverted pyramid came crashing down. In 2016, the $10 trillion asset class of negative rate sovereign bonds is entirely based on the Common Knowledge that there is no limit to the greater foolishness of Central Banks. If this Narrative fails, the entire inverted pyramid will come crashing down again. Hence my punchline: monitoring this and related status quo protecting Narratives (like the concerted effort to paint Brexit as a one-off blunder, just like Bear Stearns was painted in 2008) is the only thing that really matters for our investment reality.

What to do? Convexity, convexity, convexity. Our portfolios should minimize the maximum risk the world actually presents, not maximize the reward our crystal ball models predict. Timing, timing, timing. We need to pay attention to what matters, and right now that’s all policy and all Narrative all the time. In a negative rate world, you’ve got to think in terms of catalysts, not “stocks for the long haul”. And one more thing. To paraphrase Groucho Marx in Duck Soup, if a four-year-old can’t understand what you’re doing in your portfolio, don’t do it. For me, that means real assets and real yield, fractional ownership in real companies with real cash flows from real economic activity with real people. You know, what a stock market used to mean before it became a Central Bank casino. For more on all these points, I’d point you directly to the recent Epsilon Theory notes “Hobson’s Choice and “Cat’s Cradle.

I know that this all comes across as very negative about the world and our investing future, and that’s because it is. To use a poker analogy, we were dealt some bad cards, the Central Banks waaay overplayed the hand, and now we’ve got to figure out how to extricate ourselves without losing our entire stake. But is this a hopeless situation? No. The most important lesson I ever learned from my mentors in this business is this: always live to fight another day. We can do that. It won’t be fun and it won’t be pretty and we’ll have some scars to show for it, but we can do that. The useful lesson from the Biblical Flood Narrative isn’t a pleasant fable about Noah saving the cute and cuddly animals. The useful lesson is that hubris must be confronted, hope is always present, and that preparation and honest actions will see us through any storm. Yes, we can do that.

 



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26 Million Americans Are Now "Too Poor To Shop" Study Finds

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A new study finds that roughly 26 million Americans remain "too poor to shop". The study, performed by America's Research Group, found that about 26 million Americans work on average two or three jobs at a time which, when added together, nets just shy of $30,000 in annual income. All while supporting anywhere from two to four children.

The chairman of ARG, Mr. Britt Beemer, said in an interview with the NY Post that he first started looking into data when he was tracking a different indicator. Beemer first started tracking a group and surveying roughly 15,000 people to determine who had not finished Christmas shopping in 2014. During that year, the number was 21 percent but recently ran as high as 29%. From there Beemer decided to analyze the data further and learned American's are seeing increasing numbers of fellow citizens who are simply just too poor to shop.

Beemer told the Post: "The poorest Americans have stopped shopping, except for necessities" and "It's scary when you start to see things that you've never seen before"..."People are so pessimistic about their future"

Just this past April we wrote: "most Americans' savings continue to decline, and millions of US households not only don't have any money left over to save away, but are forced to resort to credit to fund day to day expenses."

Recall from January the piece from the Atlantic that review that weak state of American's finances. The Atlantic learned that nearly 50% of Americans were not in a position to find $400 to pay of a doctor visit without reaching out to friends So not only are 26 million Americans too poor to shop, there are also 2/3 of Americans who have no savings.

"Various surveys that I have talked about in the past have found that more than 60 percent of all Americans are living to paycheck to paycheck, but I didn’t realize that things were quite this bad for about half the country. If you can’t even come up with $400 for an unexpected emergency room visit, then you are just surviving from month to month by the skin of your teeth. Unfortunately, about half of us are currently in that situation."

As The NY Post details, retailers have blamed the weather, slow job growth and millennials for their poor results this past year, but a new study claims that more than 20 percent of Americans are simply too poor to shop.

These 26 million Americans are juggling two to three jobs, earning just around $27,000 a year and supporting two to four children — and exist largely under the radar, according to America’s Research Group, which has been tracking consumer shopping trends since 1979. “The poorest Americans have stopped shopping, except for necessities,” said Britt Beemer, chairman of ARG.

 

Beemer has been tracking this subgroup for two years, ever since his weekly surveys of 15,000 consumers picked up that 21 percent of consumers did not finish their Christmas shopping in 2014 due to being too busy working.

 

That number grew to 29 percent last year, and Beemer dug in to learn more about them, calling them on holidays. He estimates that this group has swelled from 6 million households four years ago, because their incomes have not kept pace with expenses like medical costs.

 

Nearly half of all Americans have not seen an increase in salary over the last five to seven years, and another 28 percent have seen their take-home pay reduced by higher medical insurance deductions or switching to part-time jobs, ARG found. “It’s scary when you start to see things that you’ve never seen before,” said Beemer.

 

“People are so pessimistic about their future.” Most of those living on the edge — 68 percent are women between the ages of 28 and 38 — work in retail or in call centers, according to Beemer.

 

Another sign that a chunk of the population has pulled back its spending is that discounters like Walmart and the Dollar Store have been “holding their own,” said Richard Church, managing director of Discern Securities.

The story of the increasing difficulty facing Americans in maintaining their standard of living continues... even after almost 10 years of Federal Reserve market-based intervention.



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The Bearish David Rosenberg Reemerges: "What If I Told You Employment Actually Declined 119,000 In June"

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After several years of trying to put a positive spin on economic data in an attempt to validate the success of Fed policies, which in light of recent events have clearly failed with bond yields today touching new all time lows and market-derived inflation expectations about as low as they have ever been while even CNBC now admits that the only policy target of the Yellen Fed is to keep stocks as high as possible (there it is clearly succeeding for now), it was somewhat surprising to see Rosie "the bull" vaporize, and be replaced by the bearish side of David Rosenberg in such vigorous fashion today after years of hibernation.

The metamorphosis took place in what was a rather scathing take on today's jobs report, about which he said that "it makes little or no sense that the business sector would be so cautious over committing capital to the real economy and at the same time embark on a sustained hiring spree."

We agree. Here are the highlights:

What if I told you that employment actually declined 119,000 in June and has been faltering now for three months in a row?  Yes, that is indeed the case.

 

Of course, the focus, as always is on the non-farm payroll report but keep in mind that while this is the data series that moves markets, it does not necessarily have the final word on how the labor market is truly faring.

 

Okay, so let’s get the pablum out of the way first. Nonfarm payrolls surprised yet again but this time to the upside — surging 287,000 in the best showing since last October and again making a mockery of the consensus economics community which penned in a 180,000 bounce.... when taking May and June together, they average out to be less than 150,000 versus the twelve-month average of 200,000 so even as the June data pulled a major upside surprise, the overall view that the pace of job creation is moderating remains fully intact.

 

It’s not as if the Household sector ratified the seemingly encouraging news contained in the payroll data as this survey showed a tepid 67,000 job gain last month and rather ominously, in fact, has completely stagnated since February.

 

Historians will tell you that at turning points in the economy, it is the Household survey that tends to get the story right.

 

* * *

 

The simple fact of the matter is that May and June were massive statistical anomalies. The broad trends tell the tale. Go back to June 2014 and the six-month trend in payrolls is running at a 2.2% annual rate and the three-month trend at 2.4%. A year ago, as of June 2015, the six-month pace was 1.9% and the three-month at 2.2%. Fast forward to today, and the six-month annualized rate is 1.4% and the three-month has slowed all the way down to a 1.2%. This is otherwise known as looking at the big picture.

But wait, Rosenberg said jobs actually declined? Here is his math:

When the Household survey is put on the same comparable footing as the payroll series (the payroll and population-concept adjusted number), employment fell 119,000 in June — again calling into question the veracity of the actual payroll report — and is down 517,000 through this span. The six-month trend has dipped below the zero-line and this has happened but two other times during this seven-year expansion.

employment%20rosenberg_0.jpg

See, it isn't that difficult to have a critical eye on government data and refuse to drink the BLS Kool-Aid now.  His conclusion:

The Fed may well be breathing a sigh of relief, but we are not out of the woods yet. My advice is to simply ignore those pundits who may conclude that a rate hike is back on the table any time soon.

Actually, the market is already doing that for you David: with stocks at all time highs and bond yields at all time lows, the algos are quite confident that the Fed will not hike for a long, long time. As for the underlying economy, alas that has not matter for nearly a decade, something have said constantly and something which even Rosenberg once again admits.

Source: Gluskin Sheff



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NSA Whistleblower: Clinton Emails Damaged U.S. National Security Much More than Manning, Assange Or Any Other Whistleblower

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Clinton Revealed “Intelligence Methods” and Sources FBI director Comey said today that Hillary Clinton running emails containing government information on an unsecured, private server was not as bad as former CIA director Petraeus sharing classified documents with his lover. But…

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Comey: Clinton Allowed People Without Security Clearances To Have Access To Classified Material On Her Server

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During testimony before Congress on Thursday, FBI Director James Comey stated that people without the proper security clearance did have access to classified material on presumptive Democratic presidential nominee former Secretary of State Hillary Clinton’s server.

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Comey said, “I don’t think any of the correspondents on the classified emails were uncleared people. These were all people with clearances, working, doing State Department business, on the unclass system.”

He added, “[T]here’s no doubt that uncleared people had access to the server, because even after Pagliano, there were others who maintained the server who were private sector folks.” He then pegged the number of people without clearances who had access to the server as “probably more than two, less than ten.”

He was then asked, “Did Secretary Clinton’s attorneys have the security clearances needed?” He responded, “They did not.”

After Representative Jason Chaffetz (R-UT), who was questioning Comey said, “Hillary Clinton gave direction to her attorneys, without a security clearance, to go through documents that were classified.” Comey responded, “I think that’s what happened, in fact. Whether that was the direction is a question I can’t answer sitting here.”

Chaffetz later asked, “[I]s there a reasonable expectation that Hillary Clinton would send and receive, if not hourly, if not daily, classified information? That’s reasonable to think that the secretary of state would get classified information at every moment. She’s not the head of fish and wildlife. So, the idea that she would turn over her emails, her system, her server, to what it sounds like, up to ten people without security clearances, and there’s no consequence. So, why not do it again?”

Comey answered, “That’s a question I don’t think you should put to me. You’re asking — I’m talking about my criminal investigation.”

Chaffetz then asked, “But, how can that — there’s no intent there? Does she not understand that these people don’t have security clearances?” Comey answered, “Surely she understands at least some of them don’t have security clearances.”

Chaffetz then asked, “So, she understands they don’t have security clearances, and it’s reasonable to think she’s going to be getting classified information. Is that not intent to provide a non-cleared person access to classified information?”

Comey answered that it wasn’t reasonable to assume that “someone who is maintaining your server is reading your emails. In fact, I don’t think that’s the case here. There’s a separate thing, which is, when she’s engaging counsel to comply with the State Department’s request, are her lawyers then exposed to information that may be on there that’s classified.”

After Chaffetz asked whether Clinton’s lawyers saw classified information, Comey stated he didn’t know.

Chaffetz responded, “It has to be yes, director. you came across 110, and they said they went through all of them.” Comey countered, “Well, they didn’t read them all. They just looked at headers.”

After an exchange on whether Clinton’s attorneys read classified emails, Chaffetz asked, “Did Hillary Clinton give non-cleared people access to classified information?” Comey answered, “Yes.”

Chaffetz then asked Comey, “What do you think her intent was?” Comey answered that he believed her intent “was to get good legal representation, then to make a — make the production to the State Department. … I don’t see the evidence there to make a case that she was acting with criminal intent in her engagement with lawyers.”

Follow Ian Hanchett on Twitter @IanHanchett



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Thursday, July 7, 2016

The Damning Truth: What the FBI didn’t say about Hillary Clinton’s email

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By Peter Van Buren Federal Bureau of Investigation Director James Comey’s recommendation that no charges be brought against Hillary Clinton for her use of an unclassified email server while secretary of state is significant, but what he did not address is equally important. What was not said about intent Comey stated some 110 emails were classified when…

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Busted

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by Ryan Gabrielson and Topher Sanders

ProPublica

Busted

Tens of thousands of people every year are sent to jail based on the results of a $2 roadside drug test. Widespread evidence shows that these tests routinely produce false positives. Why are police departments and prosecutors still using them?

by Ryan Gabrielson and Topher Sanders, ProPublica

Graphics by Fathom  |  Photography by Todd Heisler, The New York Times

July 7, 2016This story was co-published with The New York Times Magazine.

Amy Albritton can’t remember if her boyfriend signaled when he changed lanes late that August afternoon in 2010. But suddenly the lights on the Houston Police patrol car were flashing behind them, and Anthony Wilson was navigating Albritton’s white Chrysler Concorde to a stop in a strip-mall parking lot. It was an especially unwelcome hassle. Wilson was in Houston to see about an oil-rig job; Albritton, volunteering her car, had come along for what she imagined would be a vacation of sorts. She managed an apartment complex back in Monroe, La., and the younger of her two sons — Landon, 16, who had been disabled from birth by cerebral palsy — was with his father for the week. After five hours of driving through the monotony of flat woodland, the couple had checked into a motel, carted their luggage to the room and returned to the car, too hungry to rest but too drained to seek out anything more than fast food. Now two officers stepped out of their patrol car and approached.

Albritton, 43, had dressed up for the trip — black blouse, turquoise necklace, small silver hoop earrings glinting through her shoulder-length blond hair. Wilson, 28, was more casually dressed, in a white T-shirt and jeans, and wore a strained expression that worried Albritton. One officer asked him for his license and registration. Wilson said he didn’t have a license. The car’s registration showed that it belonged to Albritton.

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Algorithms Series
Chemical Field Tests

The officer asked Wilson to step out of the car. Wilson complied. The officer leaned in over the driver’s seat, looked around, then called to his partner; in the report Officer Duc Nguyen later filed, he wrote that he saw a needle in the car’s ceiling lining. Albritton didn’t know what he was talking about. Before she could protest, Officer David Helms had come around to her window and was asking for consent to search the car. If Albritton refused, Helms said, he would call for a drug-sniffing dog. Albritton agreed to the full search and waited nervously outside the car.

Helms spotted a white crumb on the floor. In the report, Nguyen wrote that the officers believed the crumb was crack cocaine. They handcuffed Wilson and Albritton and stood them in front of the patrol car, its lights still flashing. They were on display for rush-hour traffic, criminal suspects sweating through their clothes in the 93-degree heat.

As Nguyen and Helms continued the search, tensions grew. Albritton, shouting over the sound of traffic, tried to explain that they had the wrong idea — at least about her. She had been dating Wilson for only a month; she implored him to admit that if there were drugs, they were his alone. Wilson just shook his head, Albritton now recalls. Fear surging, she shouted that there weren’t any drugs in her car even as she insisted that she didn’t know that Wilson had brought drugs. The search turned up only one other item of interest — a box of BC Powder, an over-the-counter pain reliever. Albritton never saw the needle. The crumb from the floor was all that mattered now.

At the police academy four years earlier, Helms was taught that to make a drug arrest on the street, an officer needed to conduct an elementary chemical test, right then and there. It’s what cops routinely do across the country every day while making thousands upon thousands of drug arrests. Helms popped the trunk of his patrol car, pulled out a small plastic pouch that contained a vial of pink liquid and returned to Albritton. He opened the lid on the vial and dropped a tiny piece of the crumb into the liquid. If the liquid remained pink, that would rule out the presence of cocaine. If it turned blue, then Albritton, as the owner of the car, could become a felony defendant.

Helms waved the vial in front of her face and said, “You’re busted.”

Albritton, then a 41-year-old mother of two boys, was strip searched at the Harris County Jail in 2010. “Oh, yes, with the bend over, cough,” she recalled.

Albritton was booked into the Harris County jail at 3:37 a.m., nine hours after she was arrested. Wilson had been detained for driving without a license but would soon be released. Albritton was charged with felony drug possession and faced a much longer ordeal. Already, she was terrified as she thought about her family. Albritton was raised in a speck of a town called Marion at the northern edge of Louisiana. Her father still drove lumber trucks there; her mother had worked as a pharmacy technician until she died of colon cancer. Albritton was 15 then. She went through two unexpected pregnancies, the first at age 16, and two ill-fated marriages. But she had also pieced together a steady livelihood managing apartment complexes, and when her younger son was born disabled, she worked relentlessly to care for him. Now their future was almost certainly shattered.

The officers allowed her to make a collect call on the coinless cellblock pay phone. She had a strained relationship with her father and with her son’s father as well; instead she dialed Doug Franklin, an old friend who once dated her sister. No one answered. Near dawn the next morning, guards walked Albritton through a tunnel to the Harris County criminal-justice tower’s basement, where they deposited her in a closet-size holding room with another woman, who told Albritton that she had murdered someone. Albritton prayed someone would explain what would happen next, tell her son she was alive and help her sort out the mess. She had barely slept and still hadn’t eaten anything. She heard her name called and stepped forward to the reinforced window. A tall man with thinning hair and wire-rim glasses approached and introduced himself as Dan Richardson, her court-appointed defense attorney.

Of Dan Richardson, her court-appointed attorney, Albritton said: “You could tell he was very rushed, busy.”

Richardson told Albritton that she was going to be charged with possession of a controlled substance, crack cocaine, at an arraignment that morning. Albritton recalls him explaining that this was a felony, and the maximum penalty was two years in state prison. She doesn’t remember him asking her what actually happened, or if she believed she was innocent. Instead, she recalls, he said that the prosecutor had already offered a deal for much less than two years. If she pleaded guilty, she would receive a 45-day sentence in the county jail, and most likely serve only half that.

Albritton told Richardson that the police were mistaken; she was innocent. But Richardson, she says, was unswayed. The police had found crack in her car. The test proved it. She could spend a few weeks in jail or two years in prison. In despair, Albritton agreed to the deal.

Albritton was escorted to a dark wood-paneled courtroom. A guilty plea requires the defendant to make a series of statements that serve as a confession and to waive multiple constitutional rights. The judge, Vanessa Velasquez, walked her through the recitation, Albritton recalls, but never asked why she couldn’t stop crying long enough to speak in sentences. She had managed to say the one word that mattered: “guilty.”


Police officers arrest more than 1.2 million people a year in the United States on charges of illegal drug possession. Field tests like the one Officer Helms used in front of Amy Albritton help them move quickly from suspicion to conviction. But the kits — which cost about $2 each and have changed little since 1973 — are far from reliable.

The field tests seem simple, but a lot can go wrong. Some tests, including the one the Houston police officers used to analyze the crumb on the floor of Albritton’s car, use a single tube of a chemical called cobalt thiocyanate, which turns blue when it is exposed to cocaine. But cobalt thiocyanate also turns blue when it is exposed to more than 80 other compounds, including methadone, certain acne medications and several common household cleaners. Other tests use three tubes, which the officer can break in a specific order to rule out everything but the drug in question — but if the officer breaks the tubes in the wrong order, that, too, can invalidate the results. The environment can also present problems. Cold weather slows the color development; heat speeds it up, or sometimes prevents a color reaction from taking place at all. Poor lighting on the street — flashing police lights, sun glare, street lamps — often prevents officers from making the fine distinctions that could make the difference between an arrest and a release.

There are no established error rates for the field tests, in part because their accuracy varies so widely depending on who is using them and how. In Las Vegas, authorities re-examined a sampling of cocaine field tests conducted between 2010 and 2013 and found that 33 percent of them were false positives. Data from the Florida Department of Law Enforcement lab system show that 21 percent of evidence that the police listed as methamphetamine after identifying it was not methamphetamine, and half of those false positives were not any kind of illegal drug at all. In one notable Florida episode, Hillsborough County sheriff’s deputies produced 15 false positives for methamphetamine in the first seven months of 2014. When we examined the department’s records, they showed that officers, faced with somewhat ambiguous directions on the pouches, had simply misunderstood which colors indicated a positive result.

Over half of those proven innocent pleaded guilty within a week
ProPublica examined some 300 cases of those arrested and wrongly convicted in Houston. Those defendants often pleaded guilty at their first court hearing, having been incarcerated since their arrest.

No central agency regulates the manufacture or sale of the tests, and no comprehensive records are kept about their use. In the late 1960s, crime labs outfitted investigators with mobile chemistry sets, including small plastic test tubes and bottles of chemical reagents that reacted with certain drugs by changing colors, more or less on the same principle as a home pregnancy test. But the reagents contained strong acids that leaked and burned the investigators. In 1973, the same year that Richard Nixon formally established the Drug Enforcement Administration, declaring “an all-out global war on the drug menace,” a pair of California inventors patented a “disposable comparison detector kit.” It was far simpler, just a glass vial or vials inside a plastic pouch. Open the pouch, add the compound to be tested, seal the pouch, break open the vials and watch the colors change. The field tests, convenient and imbued with an aura of scientific infallibility, were ordered by police departments across the country. In a 1974 study, however, the National Bureau of Standards warned that the kits “should not be used as sole evidence for the identification of a narcotic or drug of abuse.” Police officers were not chemists, and chemists themselves had long ago stopped relying on color tests, preferring more reliable mass spectrographs. By 1978, the Department of Justice had determined that field tests “should not be used for evidential purposes,” and the field tests in use today remain inadmissible at trial in nearly every jurisdiction; instead, prosecutors must present a secondary lab test using more reliable methods.

But this has proved to be a meaningless prohibition. Most drug cases in the United States are decided well before they reach trial, by the far more informal process of plea bargaining. In 2011, RTI International, a nonprofit research group based in North Carolina, found that prosecutors in nine of 10 jurisdictions it surveyed nationwide accepted guilty pleas based solely on the results of field tests, and in our own reporting, we confirmed that prosecutors or judges accept plea deals on that same basis in Atlanta, Boston, Dallas, Jacksonville, Las Vegas, Los Angeles, Newark, Philadelphia, Phoenix, Salt Lake City, San Diego, Seattle and Tampa.

This puts field tests at the center of any discussion about the justice of plea bargains in general. The federal government does not keep a comprehensive database of prosecutions in county and state criminal courts, but the National Archive of Criminal Justice Data at the University of Michigan maintains an extensive sampling of court records from the 40 largest jurisdictions. Based on this data, we found that more than 10 percent of all county and state felony convictions are for drug charges, and at least 90 percent of those convictions come by way of plea deals. In Tennessee, guilty pleas produce 94 percent of all convictions. In Kansas, they make up more than 97 percent. In Harris County, Tex., where the judiciary makes detailed criminal caseload information public, 99.5 percent of drug-possession convictions are the result of a guilty plea. A majority of those are felony convictions, which restrict employment, housing and — in many states — the right to vote.

Demand for the field tests is strong enough to sustain the business of at least nine different companies that sell tests to identify cocaine, heroin, marijuana, methamphetamine, LSD, MDMA and more than two dozen other drugs. The Justice Department issued guidelines in 2000 calling for test-kit packaging to carry warning labels, including “a statement that users of the kit should receive appropriate training in its use and should be taught that the reagents can give false-positive as well as false-negative results,” but when we checked, three of the largest manufacturers — Lynn Peavey Company, the Safariland Group and Sirchie — had not printed such a warning on their tests. (Lynn Peavey Company did not respond to our request for comment. A spokesman for the Safariland Group said the company provides law-enforcement agencies with extensive training materials that are separate from the tests and their packaging. We asked John Roby, Sirchie’s chief executive, about the missing warnings and requested an interview in May. He responded in writing a month later saying that the boxes carrying Sirchie’s cocaine tests had been updated and now display a warning that reactions may occur with both “legal and illegal substances.” After our inquiry, Sirchie added another warning to its packaging, listing at the bottom of its printed instructions: “ALL TEST RESULTS MUST BE CONFIRMED BY AN APPROVED ANALYTICAL LABORATORY!”)

Even trained lab scientists struggle with confirmation bias — the tendency to take any new evidence as confirmation of expectations — and police officers can see the tests as affirming their decisions to stop and search a person. Labs rarely notify officers when a false positive is found, so they have little experience to prompt skepticism. As far as they know, the system works. By our estimate, though, every year at least 100,000 people nationwide plead guilty to drug-possession charges that rely on field-test results as evidence. At that volume, even the most modest of error rates could produce thousands of wrongful convictions.


The crime lab in Houston was not obligated to test the samples of alleged drugs used in gaining guilty pleas. And yet it did, with life-changing results.

After he arrested Amy Albritton, Officer Helms sent what remained of the crumb he found on the floor of her car to the Houston Police Department crime laboratory. He listed it as “.02 grms crack cocaine” and noted on the submission form that he was also sending a “syringe w/ unknown substance .01 gr” — presumably the needle Officer Nguyen reported pulling from the ceiling lining and that Albritton had not seen and still could not explain. (Helms’s submission form, which was separate from the arrest report, said it came not from the ceiling but from the “suspect visor.”) The last item Helms turned in was a ziploc bag of the “unknown wht powder” that had been removed from the BC Powder package.

“HOLD + ANALYZE FOR COURT,” Helms wrote by hand. And then, with no court case pending, the evidence sat on hold, one of several thousand samples in the laboratory’s backlog of untested pills, plants, powders and assorted crumbs and pebbles.

Albritton served 21 days of her 45-day sentence. When she was released, she took a taxi to the motel where she had planned to stay with Wilson, whom she never saw again after the arrest. (Helms and Nguyen would not comment for this article; Wilson did not respond to requests.) The manager had kept her clothes, so she took a room again and waited for her friend Doug Franklin to fly in from Louisiana. The plan was that he would lend her the money to get her impounded car and keep her company on the drive home. When they retrieved the car, it had been sitting in the summer heat for more than three weeks. Albritton was overwhelmed by the smell of rotting hamburgers.

Albritton hands her son, Landon Jinks, medications to take one morning at their apartment in April. Since her conviction, she’s only been able to get work as a bartender and waitress, making it far harder to care for her son, who was disabled at birth by cerebral palsy.

When Albritton pleaded guilty, she asked Franklin to explain the situation to her bosses at the rental-property firm, but Franklin decided it was safer to say nothing. She was going to be fired in any case, he reasoned, and alerting an employer about the drug felony would only hurt her future prospects. Albritton had managed the Frances Place Apartments, a well-maintained brick complex, for two years, and a free apartment was part of her compensation. But as far as the company knew, Albritton had abandoned her job and her home. She was fired, and her furniture and other belongings were put out on the side of the road. “So I lost all that,” she says.

Albritton’s older son, Adam, then 24, had been living on his own for years and learned of his mother’s arrest only after she had begun her sentence. While Albritton was incarcerated, her younger son, Landon, remained with his father, who had threatened in the past to seek custody but never followed through. Albritton’s father, Tommy Franklin (no relation to Doug), was openly skeptical about her claim of innocence. “If the law said you had crack, you had crack,” she recalls him telling her.

Albritton gave up trying to convince people otherwise. She focused instead on Landon. Using a wheelchair, he needed regular sessions of physical and occupational therapy, and Albritton’s career managing the rental complex had been an ideal fit, providing a free home that kept her close to her son while she was at work, and allowing her the flexibility to ferry him to his appointments. But now, because of her new felony criminal record, which showed up immediately in background checks, she couldn’t even land an interview at another apartment complex. With a felony conviction, she couldn’t be approved as a renter either. Doug Franklin allowed Albritton and Landon to move in with him temporarily, and Albritton took a minimum-wage job at a convenience store.

Through all of this, the crumb of evidence remained in storage in the Houston crime lab. It was a closed case, and the prosecutor, as was standard practice, had filed a motion to destroy the evidence. Only some final paperwork — a request from the lab and a judge’s signature — was needed. But this was an extremely low priority in a complex bureaucracy.

By 2010, the lab had been discredited by a decade of botched science and scandal. Thousands of untested rape kits were shelved from unsolved assaults. Errors in fingerprint matches were discovered in more than 200 cases. The lab had lost key blood samples; employees had tampered with or falsified other evidence. And it was continuing to struggle with a significant backlog of drug-test evidence — one that stemmed from what amounted to an epic experiment in field testing.

When Hurricane Katrina struck the Gulf Coast in August 2005, more than 250,000 mostly black refugees streamed into Houston, and local authorities openly anticipated a crime surge in which the refugees were portrayed as would-be perpetrators. Charles McClelland, who retired in February as Houston’s police chief and was then an assistant chief, says the department decided that pursuing drug-possession charges would also help suppress the number of predicted robberies and burglaries. “Anecdotally, it makes sense: Where does a person who has a substance-abuse problem get the money to buy drugs?” McClelland argues. “One could easily make the connection that they’re committing crimes.” The city distributed thousands more of the color field tests than usual to patrol officers, and drug evidence swamped the controlled-substances section of the lab. Even as the Katrina refugees gradually left Houston, the emphasis on low-level drug enforcement remained. By 2007, annual submissions to the lab had climbed to 22,000, even as budget cuts had reduced the staff, leaving the scientists with far more samples than they could competently analyze.

“Police officers aren’t chemists. We shouldn't be doing field tests on the hood of patrol cars.” —Charles McClelland, former Houston police chief

In 1972, the Department of Justice published a training guide for forensic chemists in the nation’s crime labs, emphasizing that they were “the last line of defense against a false accusation,” but 40 years later, that line had largely vanished. A federal survey in 2013 found that about 62 percent of crime labs do not test drug evidence when the defendant pleads guilty. But the Houston crime lab, for all its problems, would not be among them.

James Miller, the lab’s controlled-substances manager, had long practiced a kind of evidentiary triage. Evidence tied to pending drug manufacturing, sale or possession cases — 50 a year on average — would receive immediate attention, because only laboratory analysis would be admissible in court. But evidence from cases in which the defendants pleaded guilty before going to trial — the overwhelming majority of the remaining thousands of submitted drugs samples — would also be tested. The city had no legal requirement to confirm that the substances were the illegal drugs the police claimed they were. But in Miller’s lab, everything would be checked, even if it took years. “All along, we’ve said we’re about the science,” he says — not securing convictions. So the evidence sat, waiting.

The forensic scientists in Miller’s lab keep untested samples in Manila envelopes locked in cabinets below their work benches. Some sat there for as long as four years, lab records show. Albritton’s evidence stayed locked up for six months. On Feb. 23, 2011 — five months after Albritton completed her sentence and returned home as a felon — one of Houston’s forensic scientists, Ahtavea Barker, pulled the envelope up to her bench. It contained the crumb, the powder and the still-unexplained syringe. First she weighed everything. The syringe had too little residue on it even to test. It was just a syringe. The remainder of the “white chunk substance” that Officer Helms had tested positive with his field kit as crack cocaine totaled 0.0134 grams, Barker wrote on the examination sheet, about the same as a tiny pinch of salt. Barker turned to gas chromatography-mass spectrometry analysis, or GC-MS, the gold standard in chemical identification, to figure out what was in Albritton’s car that evening. She began with the powder. First the gas chromatograph vaporized a speck of the powder inside a tube. Then the gas was heated, causing its core chemical compounds to separate. When the individual compounds reached the end of the tube, the mass spectrometer blasted them with electrons, causing them to fragment. The resulting display, called a fragmentation pattern, is essentially a chemical fingerprint. The powder was a combination of aspirin and caffeine — the ingredients in BC Powder, the over-the-counter painkiller, as Albritton had insisted.

Then Barker ran the same tests on the supposed crack cocaine. The crumb’s fragmentation pattern did not match that of cocaine, or any other compound in the lab’s extensive database. It was not a drug. It did not contain anything mixed with drugs. It was a crumb — food debris, perhaps. Barker wrote “N.A.M.” on the spectrum printout, “no acceptable match,” and then added another set of letters: “N.C.S.” No controlled substance identified. Albritton was innocent.


Inger Chandler heads the Harris County District Attorney's conviction integrity unit and has worked to remedy hundreds of wrongful drug convictions.

Inger Chandler oversees the small conviction-integrity unit of the Harris County district attorney’s office, where she has been a prosecutor for 12 years. Conviction-integrity units are a fairly new concept in law enforcement: Prosecutors re-examine convictions in light of new evidence, often in the form of previously unavailable DNA tests. Conviction-integrity units originally focused on murder and rape cases, but they also increasingly investigate drug convictions.

In early 2014, Chandler took a call while sitting at her desk, encircled by stacks of case files and pictures of her toddler twins. Eric Dexheimer, a reporter at The Austin American-Statesman, told her he had noticed a series of unusual exonerations coming out of the Texas Court of Criminal Appeals. He’d tracked 21 drug convictions across Texas that had been reversed because labs had found that the drugs in question weren’t really drugs. The laboratory results came after defendants had already pleaded guilty. Did Harris County have any other bad drug convictions beyond what the courts had overturned? Chandler didn’t know, but she said she would try to find out.

Chandler called Miller, the controlled-substances manager at the lab, and asked him if there was something wrong with any of their drug convictions. Miller was not surprised to hear from Chandler. He explained that the lab had indeed found problems with their drug convictions; when his forensic scientists found discrepancies in the evidence — officially labeled “variants” — they sent the details by email to the district attorney’s office, and they had been doing so for years. Chandler hadn’t known any of this. She found the email inbox for lab notices, and it did indeed contain hundreds of messages that were sent from the lab. One after another, the lab notices said, “No Controlled Substance.” In cases involving drug possession, that meant the defendants were not guilty. (Drug manufacturing and selling charges can hold even if the underlying substance is not illegal.)

It was unclear if anyone had ever followed up on the notices. When Chandler entered several of the court case numbers into the district attorney’s records-search system, however, she found that a majority of the convictions remained in place. She started a list. Over the course of the following year, she found that the district attorney’s office had failed to correct 416 “variants” between January 2004 and June 2015, all of them in cases that ended in guilty pleas. Some variants were legally ambiguous — the field test was positive, but for the wrong drug; the drug weights were incorrect; or there was too little of the evidence to analyze — but in 251 cases, the results were simple: “No Controlled Substance.”

Under the 1963 Supreme Court opinion in Brady v. Maryland, prosecutors must provide defendants with exculpatory evidence, even after a conviction. Chandler could have met that mandate simply by alerting the convicting court and the defense attorneys to the lab reports — “Every other Brady situation, as long as I give notice, I’m done,” she says — but in these cases, Chandler says, she knew very few of the wrongful drug convictions would be reversed if she let the system handle each of them individually. The exoneration effort needed to be centralized, so that someone would become responsible for finding the defendants themselves. Chandler took the list to Devon Anderson, Harris County’s district attorney.

Anderson, a former district-court judge, had been the top prosecutor for only seven months. Her husband, Mike Anderson, who took office as district attorney in January 2013, died of cancer eight months into his term, and Gov. Rick Perry appointed her to replace him. Now, as Chandler described the problem, Anderson felt sickened. The litany of wrongful convictions was not just enormous — it was still growing. Her office, she says, was to blame for “a breakdown at every point in the system.” She hired a former prosecutor to research the cases and find the defendants. “It may sound corny, but it’s true: Our duty under Texas law is to seek justice,” she says. “A lot of people think it’s convictions, but it’s justice.”

In April 2014, The American-Statesman published Dexheimer’s story, which focused on 21 wrongful drug convictions across Texas caused by lab delays. But prosecutors in Harris County were still uncovering the scale of their own problem.

Based in part on the information gathered by Marie Munier, the former prosecutor Anderson hired to examine the drug convictions, we determined that 301 of the 416 variants began as arrests by the Houston Police Department, with the rest coming from surrounding municipalities, and that 212 of those 301 arrests were based on evidence that lab analysis determined was not a controlled substance, or N.C.S.

The use of field tests is seen as a way of lightening the load for overwhelmed crime labs.

In our own examination of those 212 cases — thousands of pages of arrest reports, court filings and laboratory-testing records, along with interviews of prosecutors, police executives, officers, defense attorneys and innocent defendants who pleaded guilty — we saw a clear story about both who is being arrested and what is happening to them. The racial disparity is stark. Blacks made up 59 percent of those wrongfully convicted in a city where they are 24 percent of the population, reflecting a similar racial disparity in drug enforcement nationally. Patrol units, not trained narcotics detectives, appeared to be the most prolific field-test users.

The kits, or the officers interpreting them, got it wrong most often when dealing with small amounts of suspected drugs. Sixty-three percent of the N.C.S. cases involved less than a gram of evidence. The smallest possession cases are the ones in which a field test can be of greatest consequence; if officers find larger quantities of white powder in dozens of baggies or packaged in bricks, they have sufficient probable cause to make an arrest regardless of what a color test shows. (Though in those cases, too, they are generally required to test the drugs.) It’s widely assumed in legal circles that these wrongfully convicted people are in fact drug users who intended to possess drugs. Barry Scheck, a founder of the Innocence Project, a nonprofit group that seeks to overturn wrongful convictions, says some who work toward exoneration have complained to him that those exonerated of drug charges often are just accidentally not guilty, and shouldn’t be added to the National Registry of Exonerations. The assumption is not entirely without basis — 162 of the 212 N.C.S. defendants had criminal histories involving illegal drugs. However, 50 had no criminal history involving drugs at all.

All of the 212 N.C.S. defendants struck plea bargains, and nearly all of them, 93 percent, received a jail or prison sentence. Defendants with no previous convictions have a legal right in Texas to probation on drug-possession charges, even if they’re convicted at trial. But remarkably, 78 percent of defendants entitled to probation agreed to deals that included incarceration. Perhaps most striking: A majority of those defendants, 58 percent, pleaded guilty at the first opportunity, during their arraignment; the median time between arrest and plea was four days. In contrast, the median for defendants in which the field test indicated the wrong drug or that the weight was inaccurate — that is, the defendants who actually did possess drugs — was 22 days. Not only do the innocent tend to plead guilty in these cases, but they often do so more quickly.


On July 29, 2014, Munier sent a letter to Amy Albritton. It was a form letter, one of hundreds Munier was sending to exonerated defendants, opening with the salutation “Dear Sir or Madam,” but the contents were highly personal. It stated that the Harris County district attorney’s office had learned that the drug evidence in Albritton’s case was not a controlled substance: “Accordingly, you were prosecuted for a criminal drug offense and convicted in error.” Munier mailed the letter to the address on Albritton’s driver’s license, but Albritton did not receive it. She had long since moved on.

She had struggled to rebuild her life as a felon. The hours at the convenience store were erratic, so she started waiting tables and tending bar as she tried to find work in property management again. In 2013, she heard about a small set of rentals in Baton Rouge that needed someone to run them day to day. The pay was low compared with what she had made at Frances Place, and there was no free apartment. But the owner agreed to interview Albritton, even with her drug felony, and quickly hired her. She had almost nothing to pack besides her clothes and Landon’s before relocating to the state capital. The reason this property owner was willing to hire a drug felon became apparent soon enough. The apartments were in disrepair, with broken heaters and plumbing, and the owner forced his property manager to deal with angry tenants. She had gone to work for a slumlord.

Albritton quit and took a bartending position at the restaurant attached to a Holiday Inn near Louisiana State University. Tips included, she was earning about $15,000 a year, but she liked her co-workers and impressed her bosses. One of them tried to promote her to shift supervisor, Albritton recalls, but the promotion was denied when a criminal-background check by the hotel chain’s corporate office flagged the Houston conviction. She could pour drinks and do nothing more. She remembers how desperate she had been to leave her jail cell, naïvely believing that the punishment for pleading guilty would end with her sentence. “No,” she says. “You’re not ever free and clear of it. It follows you everywhere you go.”

In the two years since the efforts to overturn wrongful convictions began at the Harris County district attorney’s office, Inger Chandler and her colleagues at the integrity unit have struck 119 N.C.S. convictions from the record. At least 172 remain. They haven’t been able to locate all of the wrongly convicted, at times even after hiring private investigators, and some defendants they have reached have declined to interact with the courts, even to clear their record. Last year, as we examined records in Harris County, we came upon Albritton’s file and decided to search for her ourselves to find out what had happened to one representative figure out of hundreds. Her case fit the larger pattern of convictions for no controlled substance: It moved rapidly, with Albritton pleading guilty within 48 hours of her arrest, and it involved an exceedingly small amount of supposed drugs. We searched for Albritton in public databases, finding likely relatives but no phone numbers or a current address. We called her sister, who said that Albritton was in Baton Rouge and provided a cellphone number. It was disconnected. But knowing where Albritton lived now, we found a Facebook profile she had been updating regularly with details of her life, including her work. Interestingly, we also found that Albritton had pleaded guilty to a 2008 misdemeanor, a D.U.I. conviction in Louisiana, despite breathalyzer results showing her blood-alcohol level at 0.0. When we asked her about this, she said that she had caused a collision by pulling onto the wrong side of a two-lane highway, and because she was guilty of that, she did not protest the other charges; she’s still unable to explain why she confessed to a crime there was no evidence she committed.

In August, we called and left a brief message for Albritton at the Sporting News Grill. She returned the call a couple of hours later, her voice small, wondering what this was about. When we described the details from the lab report and the letter from the district attorney that she never received, Albritton gasped. She didn’t make a sound for several seconds before shouting into the phone: “I knew it! I told them!”

If Albritton’s case is one of hundreds in Houston, there is every reason to suspect that it is just one among thousands of wrongful drug convictions that were based on field tests across the United States. The Harris County district attorney’s office is responsible for half of all exonerations by conviction-integrity units nationwide in the past three years — not because law enforcement is different there but because the Houston lab committed to testing evidence after defendants had already pleaded guilty, a position that is increasingly unpopular in forensic science.

Crime labs have been moving away from drug cases to focus on DNA and evidence from violent crimes. In some instances, the shift has been extreme. The Las Vegas Metropolitan Police Department’s forensic laboratory analyzes the evidence in, on average, just 73 drug cases a year, internal records show. Nearly all of its 8,000 annual possession arrests rest exclusively on field-test results.

The United States Department of Justice was once among the leading voices of caution regarding field tests, and encouraged all drug evidence go to lab chemists. But in 2008, the Justice Department funded a program developed by the National Forensic Science Technology Center, a nonprofit that provides crime-lab training, to reduce drug-evidence backlogs. Titled Field Investigation Drug Officer, the program consisted of a series of seminars that taught local police officers how to administer color field tests on a large scale. In its curriculum, the technology center states that field tests help authorities by “removing the need for extensive laboratory analysis,” because “the field test may factor into obtaining an immediate plea agreement.” The Justice Department declined repeated interview requests.

Field tests provide quick answers. But if those answers and confessions cannot be trusted, Charles McClelland, the former Houston police chief, says, officers should not be using them. During an interview in March, McClelland said that if he had known of the false positives Houston’s officers were generating, he would have ordered a halt to all field testing departmentwide. Police officers are not chemists, McClelland said. “Officers shouldn’t collect and test their own evidence, period. I don’t care whether that’s cocaine, blood, hair.”

Judges, too, have the power, and a responsibility, some argue, to slow down the gears of the system. Patricia Lykos, the Harris County district attorney from 2009 to 2013, says that when she served as a criminal-court judge in the 1980s and 1990s, she would ask the defendants questions about their lives and the crimes they were accused of committing. If she wasn’t satisfied that the defendant was guilty of the charge, Lykos says, she wouldn’t accept the plea. At times the situation is even easier to decipher, says David LaBahn, president of the Association of Prosecuting Attorneys. The defendant can be heard arguing his or her innocence to the appointed attorney. In such drug-possession cases, when the prosecutor doesn’t have a lab report, “if I’m that judicial officer, this case is continued” — adjourned — “until everybody can do their job,” LaBahn says.

But that means the defendant, depending on his or her custody status, could go back to jail until the case proceeds, presenting a significant dilemma. Last year, Devon Anderson, the current Harris County district attorney, prohibited plea deals in drug-possession cases before the lab has issued a report. The labs issue reports in about two weeks, but defendants typically wait three before they can see a judge — enough time to lose a job, lose an apartment, lose everything. And yet since Anderson implemented the rule, case dismissals have soared 31 percent, primarily because the lab has proved defendants not guilty. People plead guilty when they’re innocent because they see no alternative. People who have just been arrested usually don’t know their options, or even that they have an option. “There’s a fail-safe in there, and it’s called the defense lawyer,” says Rick Werstein, the attorney now representing Albritton as she seeks to finalize her exoneration. Defense lawyers can demand a lab analysis, and they exist to help defendants navigate the consequences of the jail time while they wait, even as they explain the even higher costs of a felony conviction. They are fully authorized to pursue alternative deals.

System Failures

The Houston cases shed light on a disturbing possibility: that wrongful convictions are most often not isolated acts of misconduct by the authorities but systemic breakdowns — among judges and prosecutors, defense lawyers and crime labs. Explore the graphic.

In fact, Richardson, Albritton’s original court-appointed lawyer, says the prosecutor offered her a deferred adjudication, in which she may have been able to wait for the results of a lab test outside the walls of a jail cell. Richardson, who first said he had no memory of their conversations, says he told her about the offer but she refused it. Albritton says she has never heard of anything called deferred adjudication. Neither could explain what actually happened. Perhaps they simply accepted that the field test, with its promise of scientific inevitability, would eventually convict her. “The entire country works on these field-test kits, right?” Richardson asks.

In the past three years, people arrested based on false-positive field tests have filed civil lawsuits in Sullivan County, Tenn.; Lehigh County, Pa.; Atlanta, Ga.; and San Diego, Calif. Three of the four cases also named the manufacturers Safariland Group or Sirchie as defendants. Three of the cases have already been settled. In one of them, the Sullivan County case, Safariland secured a gag order on the plaintiff, explicitly to prevent media coverage, before entering settlement negotiations. The plaintiffs in each of the suits were people who were arrested, refused to plead guilty and were detained for a month or longer. So far, we have been unable find anyone who pleaded guilty based on field-test results and later filed suit, though Werstein said he and Albritton are considering their additional legal options.

The Texas Criminal Court of Appeals overturned Albritton’s conviction in late June, but before her record can be cleared, that reversal must be finalized by the trial court in Houston. Felony records are digitally disseminated far and wide, and can haunt the wrongly convicted for years after they are exonerated. Until the court makes its final move, Amy Albritton — for the purposes of employment, for the purposes of housing, for the purposes of her own peace of mind — remains a felon, one among unknown tens of thousands of Americans whose lives have been torn apart by a very flawed test.

“The trial court also concluded that, because Applicant was not aware of the laboratory results, her plea in this case was unknowing and involuntary. Applicant is entitled to relief.” —Excerpt from the appellate opinion vacating Albritton’s felony conviction.

This story is not subject to our Creative Commons license.

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Ryan Gabrielson covers the U.S. justice system for ProPublica. His work has received numerous national honors, including a Pulitzer Prize, two George Polk Awards, an Alfred I. duPont-Columbia Silver Baton, the Al Nakkula Award for Police Reporting, and a Sigma Delta Chi Award.

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Topher Sanders covers racial inequality for ProPublica. His education coverage was recognized in 2012 by the Education Writers Association. His reporting on juvenile plea deals and the time Jacksonville juveniles spend in pre-trial detention facilities was a finalist for an Investigative Reporters and Editors award in 2015.

Design, additional photography, and production by David Sleight, Rob Weychert, and Hannah Birch.


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