Category: zerohedge

Via InternationalMan.com,

International Man: Earlier this year, it became apparent a socialist would win Argentina’s presidential election.

The Argentine peso lost 30% of its value in a single day. The same day, in US dollar terms, the value of the Argentine stock market was cut in half.

Doug, you spend a lot of time in Argentina and the Southern Cone. What’s your take on the situation? Is Argentina headed for another currency collapse?

Doug Casey: Cristina Fernández de Kirchner was elected vice president and Alberto Fernández was elected president in the October 27 election. They basically destroyed the incumbent Mauricio Macri.

It’s a real pity because Macri is a decent human being whose heart was is in the right place politically and economically. But he was too timid. He did too little too late. Typical of “conservatives” everywhere, he didn’t make a moral argument to the populace. He made no effort to pull the corrupt fascist welfare state out by its roots, explaining why it’s destructive and why the state is the cause, not the cure, of the country’s problems. Instead, he just made some marginal improvements around the edges, and made things more comfortable for the Peronists now that they’re back in office.

And—since he’s associated with the free market—he actually discredited the free market.

In any event, Argentina is going back into the toilet. Who knows what kind of new stupidities, in addition to the usual old stupidities, the two Fernándezes are going to impose upon the country?

On the bright side—but only for tourists—Argentina is one of the cheapest countries in the world right now. That’s because the currency has collapsed. Good news for tourists and foreign speculators but a disaster for Argentines, most of whom have all their savings and earn their salaries in the increasingly worthless peso.

If you’re a long-term believer in Argentina or if you want to enjoy a great lifestyle, now’s the time to go shopping there. Real estate is at bargain levels again. There’s really no bid for a lot of properties. In Buenos Aires an apartment costs 5–10% of its equivalent in New York or London.

Things are definitely in crisis in Argentina. But the fact is that just about every other country in the world is heading in the wrong direction—at a faster or slower rate—certainly including the United States, Canada, and countries in western Europe. The socialists, the fascists, and the jingoists are in the ascendant all over the world.

There are many reasons for this. One is that Marxist-oriented professors have been indoctrinating the younger generation in high school and college for decades. The left has totally taken over educational systems everywhere. The average person has been inculcated with perverse and destructive ideas about economics, politics, philosophy, and ethics from roughly age 6 to age 22. It’s hard to get these things out of their heads once they’ve learned them in their youth.

Also, remember that, especially since the end of the 19th century, “democracy”—really just a polite form of mob rule—has been the world’s ruling ideology. It’s resulted in the politicization of all areas of society. When every parliament or legislature in the world meets, they believe it’s not just their right but their duty to pass new laws. And that’s idiotically applauded as a good thing by the hoi polloi. Those laws tell you what you must do and what you must not do and designate penalties if you don’t obey. And all that legislation, which accrues like barnacles on a ship’s hull, has to be paid for with taxes.

Fortunately, science and technology are still advancing at the rate of Moore’s Law. Unfortunately, the world is degenerating politically at about the same rate. Argentina is not an aberration from that point of view. It’s just a generation or so “ahead” of the United States in sliding down the slippery slope.

That said, it’s more important than ever that you have a crib in a second country, no matter where you live—because anything can happen anywhere. If you can afford it and are able to do so, you should have a backup plan someplace else in the world.

International Man: As you said, Argentina isn’t the only country headed down a path toward economic hardship. Governments around the world are printing dollars, pounds, euros, pesos, and what have you by the trillions, and the trend seems to be accelerating. How do you see this playing out in the next few years?

Doug Casey: We’re going into what I’ve styled the Greater Depression. We entered the leading edge of a gigantic financial and economic hurricane in 2007 and went through it in 2008 and 2009, and now we’re in the eye of the storm.

It’s a very big hurricane, and the storm has a very big “eye,” but we’re now approaching the trailing edge. When we go into the storm’s trailing edge, it’s going to be much longer lasting, much different, and much worse than what we experienced in 2008—if anybody remembers how scary that was.

It’s going to be accompanied by social, cultural, and probably military upsets as well. Now’s the time to prepare. It’s going to be one for the record books, and not just in the United States. It’s going to happen all over the world, because all the world’s central banks and governments think the same way. They’re all bankrupt and trying to solve the problems they’ve created by printing up more currency and passing more laws. It’s bad news.

International Man: Americans are growing increasingly sympathetic to socialist ideas and politicians that promise “free stuff.” How does this trend translate into a situation like what’s happening in Argentina?

Doug Casey: The world’s governments—prominently including the US’s—are creating massive new amounts of fiat money as we speak. So far, most of this money has gone into the financial markets, creating gigantic bubbles in stocks, bonds, and real estate. A lot of people are relying on these artificially high values. They’re going to get hurt.

Over the coming decade, governments and their central banks are going to destroy their national currencies. The average guy—if he’s able to save at all—saves in dollars, euros, or yen, etc. He’s going to be wiped out.

The rich will continue to get richer, because they stand next to the fire hose of money being created. The middle and lower classes resent the politically favoured classes getting more. The middle and bottom levels of society could see real social upset, with catastrophic political ramifications.

It’s one of the reasons the odds favor Trump losing in 2020. I say that as someone who bet that he’d win in 2016. If the economy gets ugly, you’re going to get one of these absolutely crazy socialists or welfare statists that we see lined up on the Democratic debate stage. The best case is that somebody like Bloomberg—basically kind of a mellower Trump—steps in for the Democrats.

On the off chance that Trump wins in 2020, then the storm is going to definitely break during his next administration. That guarantees that the crazy Democrats—which is to say the socialists, radical welfarites, and cultural Marxists—are going to win in the next election. The conflict in basic belief systems between the Red and Blue counties is so acrid and radical—it’s the kind atmosphere you see before a civil war.

Who knows what either the Red or Blue people will do? They’re capable of absolutely anything. None of it good. I don’t see a way out.

But let’s go back to Argentina for a minute. As I said, the US is only about a generation behind the Argentines, and the Argentine electorate has been totally corrupted. The place is a blueprint for where the United States is going.

The US’s size, accumulated capital, and the productivity of its people have insulated it from a lot of the stupid things its government and the Fed have done. But if the US destroys its currency—and it’s well on the way to doing so—it will be much worse than when the Argentines destroy their currency.

Argentines have hundreds of billions of dollars stored abroad in foreign banks. When the Argentine peso collapses, that money can be brought into Argentina to pick up the bargains and bring capital into the country to get things going again.

If the US dollar is destroyed, however, it will be completely different.

First, the dollar is the major asset of most banks all around the world. It’s actually the world’s currency. If the dollar goes, it’s going to destroy their balance sheets.

Second, people all over the world who have foreign bank accounts generally save in dollars. They’re going to be devastated.

Third, Americans don’t have a lot of money abroad to bring back into the country to get things going again. In fact, the US government has made it quite hard for the average American to diversify internationally.

Fourth, the major US export for decades hasn’t been wheat or Boeings. It’s been dollars. The foreign trade deficit of $600 billion per year has given Americans an artificially high standard of living for many years. Nice foreigners give us real goods in exchange for fiat dollars. When confidence in the dollar collapses, Americans will feel it.

So, it’s going to be extremely serious when the chickens come home to roost this time. It’s a consequence of what the Federal Reserve is doing to the dollar. They’re inflating it—but they call that “Quantitative Easing.”

The Chinese symbol for the word crisis is a combination of the symbols for danger and opportunity. I’ve been pointing out the danger part, but I also want to point out the opportunity part of the equation.

The good news is that precious metals should go on a really wild run up in price. If you own a lot of gold and silver, you should not only be insulated from many of these financial and economic problems, but you should gain in relative terms.

The cheapest part of the market right now is gold and silver mining stocks. There’s going to be a panic into these stocks; they’re the only part of the stock market that offers real upside.

It’s a good-news/bad-news type of thing. The good news being that if you position yourself now, you should be able to profit from what’s going to happen. The bad news is that in a real depression everybody loses; the winners are merely the ones who lose the least.

The important thing to remember is that most of the real wealth in the world will still exist no matter how bad the Greater Depression is, and your share of it can grow if you allocate capital properly now.

International Man: The 2020 presidential election is just around the corner. Whether Donald Trump gets reelected or a Democratic candidate wins, how do you think it will affect the overall economic situation in the US?

An avalanche of money printing to finance deficit spending seems certain no matter who wins.

Doug Casey: As I said before, if Trump is reelected because the economy holds together until November 2020—which I doubt—it’s definitely going to collapse on his next term in office.

Trump is incorrectly associated with the free market and capitalism. Trump is basically a statist who thinks the government really ought to control the economy—but in the way he thinks best. Once again capitalism—what’s left of it—will be blamed in the next crisis, and in the following election the socialists will grab the economy in a stranglehold and choke it to death.

In a way, it doesn’t matter if the socialists win this time or the next time. The trend is in motion, and a real crisis seems inevitable.

I think the United States is going to be hard to recognize in five years. That’s not even counting the fact that the US government might have a serious war with the Iranians, the Chinese, or the Russians. None of this is necessary, but it’s probable.

International Man: What can people do to protect themselves and prevent the crisis from wiping them out?

Doug Casey: Buy physical gold and silver. Speculate in mining stocks. Be aware that commodities in general— and especially agricultural commodities like corn, soybeans, cattle, hogs, coffee, orange juice—are all very, very cheap.

It’s likely that we’re going to see an explosion in some or all of these things over the next few years. Last but not least, start getting into some—or all—of the second- and third-generation cryptocurrencies. My colleague Marco Wutzer, who knows about ten times more than anyone else in the field, makes an excellent case that some of them have 1,000-to-one potential from current levels.

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Marco just released a new exclusive video on what he thinks is the most compelling crypto play right now. Click here to watch it now.

Seeing as most young Americans are saddled with student-loan debt, underemployment and other economic blights, few have any money left for important large purchases like a home. At this point, it’s beginning to look like millennials will be remembered as the first rentier generation in the country’s history.

To wit, according to data from the National Association of Realtors, the median age of first-time home buyers has increased to 33 in 2019, the highest median age since they started collecting the data back in 1981. Meanwhile, the median age for all buyers hit a fresh record high of 47, climbing for the third straight year, and well above the median age of 31 in 1981.

Source: Bloomberg

Though the median age for first timers only increased by one year, BBG reports that it reflects a variety of factors impacting those who are searching for a home.

For one, since the housing-market collapse ten years ago, construction of affordable housing has never recovered. Low housing stock, coupled with low interest rates, has stoked higher prices, especially in more affordable markets from the coasts to the middle of the country. This made circumstances ideal for older Americans with more assets to borrow against and cash on hand. But younger Americans who don’t have enough saved for a down payment lost out.

“Housing affordability is so difficult today, especially when coupled with rising rents and student loan debt, that they’re finding different ways to enter home ownership,” said Jessica Lautz, vice president of demographics and behavioral insights at the Realtors group in Washington.

That’s not all: the percentage of first-time buyers who are married has declined as more single people buy homes to share with girlfriends, boyfriends or roommates. As the average ages of home buyers increases, average incomes have also risen. The median income of purchasers rose to $93,200 in 2018 as the disappearance of affordable housing pushes low-income buyers out of the market.

Factoring in the expansion of economic inequality, young buyers who do manage to buy their own homes typically receive a small gift from their relatives to help cover the down payment first.

Authored by John Mauldin via MauldinEconomics.com,

When the US and ultimately the rest of the Western world began to engage China, resulting in China finally being allowed into the World Trade Organization in the early 2000s, no one really expected the outcomes we see today.

There is no simple disengagement path, given the scope of economic and legal entanglements. This isn’t a “trade” we can simply walk away from.

But it is also one that, if allowed to continue in its current form, could lead to a loss of personal freedom for Western civilization. It really is that much of an existential question.

Doing nothing isn’t an especially good option because, like it or not, the world is becoming something quite different than we expected just a few years ago—not just technologically, but geopolitically and socially.

China and the West

Let’s begin with how we got here.

My generation came of age during the Cold War. China was a huge, impoverished odd duck in those years. In the late 1970s, China began slowly opening to the West. Change unfolded gradually but by the 1990s, serious people wanted to bring China into the modern world, and China wanted to join it.

Understand that China’s total GDP in 1980 was under $90 billion in current dollars. Today, it is over $12 trillion. The world has never seen such enormous economic growth in such a short time.

Meanwhile, the Soviet Union collapsed and the internet was born. The US, as sole superpower, saw opportunities everywhere. American businesses shifted production to lower-cost countries. Thus came the incredible extension of globalization.

We in the Western world thought (somewhat arrogantly, in hindsight) everyone else wanted to be like us. It made sense. Our ideas, freedom, and technology had won both World War II and the Cold War that followed it. Obviously, our ways were best.

But that wasn’t obvious to people elsewhere, most notably China. Leaders in Beijing may have admired our accomplishments, but not enough to abandon Communism.

They merely adapted and rebranded it. We perceived a bigger change than there actually was. Today’s Chinese communists are nowhere near Mao’s kind of communism. Xi calls it “Socialism with a Chinese character.” It appears to be a dynamic capitalistic market, but is also a totalitarian, top-down structure with rigid rules and social restrictions.

So here we are, our economy now hardwired with an autocratic regime that has no interest in becoming like us.

China’s Hundred-Year Marathon

In The Hundred-Year Marathon, Michael Pillsbury marshals a lot of evidence showing the Chinese government has a detailed strategy to overtake the US as the world’s dominant power.

They want to do this by 2049, the centennial of China’s Communist revolution.

The strategy has been well documented in Chinese literature, published and sanctioned by organizations of the People’s Liberation Army, for well over 50 years.

And just as we have hawks and moderates on China within the US, there are hawks and moderates within China about how to engage the West. Unfortunately, the hawks are ascendant, embodied most clearly in Xi Jinping.

Xi’s vision of the Chinese Communist Party controlling the state and eventually influencing and even controlling the rest of the world is clear. These are not merely words for the consumption of the masses. They are instructions to party members.

Grand dreams of world domination are part and parcel of communist ideologies, going all the way back to Karl Marx. For the Chinese, this blends with the country’s own long history.

It isn’t always clear to Western minds whether they actually believe the rhetoric or simply use it to keep the peasantry in line. Pillsbury says Xi Jinping really sees this as China’s destiny, and himself as the leader who will deliver it.

To that end, according to Pillsbury, the Chinese manipulated Western politicians and business leaders into thinking China was evolving toward democracy and capitalism. In fact, the intent was to acquire our capital, technology, and other resources for use in China’s own modernization.

It worked, too.

Over the last 20–30 years, we have equipped the Chinese with almost everything they need to match us, technologically and otherwise. Hundreds of billions of Western dollars have been spent developing China and its state-owned businesses.

Sometimes this happened voluntarily, as companies gave away trade secrets in the (often futile) hope it would let them access China’s huge market. Other times it was outright theft. In either case, this was no accident but part of a long-term plan.

Pillsbury (who, by the way, advises the White House including the president himself) thinks the clash is intensifying because President Trump’s China skepticism is disrupting the Chinese plan. They see his talk of restoring America’s greatness as an affront to their own dreams.

In any case, we have reached a crossroads. What do we do about China now?

Targeted Response

In crafting a response, the first step is to define the problem correctly and specifically. We hear a lot about China cheating on trade deals and taking jobs from Americans. That’s not entirely wrong, but it’s also not the main challenge.

I believe in free trade. I think David Ricardo was right about comparative advantage: Every nation is better off if all specialize in whatever they do best.

However, free trade doesn’t mean nations need to arm their potential adversaries. Nowadays, military superiority is less about factories and shipyards than high-tech weapons and cyberwarfare. Much of our “peaceful” technology is easily weaponized.

This means our response has to be narrowly targeted at specific companies and products. Broad-based tariffs are the opposite of what we should be doing. Ditto for capital controls.

They are blunt instruments that may feel good to swing, but they hurt the wrong people and may not accomplish what we want.

We should not be using the blunt tool of tariffs to fight a trade deficit that is actually necessary.  The Chinese are not paying our tariffs; US consumers are.

Importing t-shirts and sneakers from China doesn’t threaten our national security. Let that kind of trade continue unmolested and work instead on protecting our advantages in quantum computing, artificial intelligence, autonomous drones, and so on.

The Trump administration appears to (finally) be getting this. They are clearly seeking ways to pull back the various tariffs and ramping up other efforts.

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I predict an unprecedented crisis that will lead to the biggest wipeout of wealth in history. And most investors are completely unaware of the pressure building right now. Learn more here.

Back in August 2018, long before WeWork’s historic implosion, we discussed how WeWork’s EBITDA is “whatever you want it to be” thanks to the company’s bizarre pro forma addbacks, which transformed a $933MM net loss and a $193 million adjusted EBITDA loss, into a “positive” $233 million “community-adusted” EBITDA for 2017, and a net loss of about $1.9 billion using standard accounting, to a $467 million “profit” in 2018.

This is what we said:

Here, for the first time we saw not just one adjustment to adjusted EBITDA, but an adjustment to the adjustment to the adjustment, and it was called “Community Adjusted EBITDA”, which by the miracles of non-GAAP “accounting”, pushed the company’s EBITDA from negative $193 million to positive $233 million.

We made this observation in the context of Moody’s inexplicably scrapping its B3 credit rating on WeWork. Commenting on this, we said:

It wasn’t clear why Moody’s – the rating agency with the lowest opinion of the office space leasing company – withdrew its rating, but it could be an indication that finally rating agencies are getting tired of the bizarre – and in this case, ridiculous – adjustments that companies increasingly come up with to lipstick their pig, and present their company in a far better light than reality.

Fast forward to today, when the topic of WeWork’s community-adjusted EBITDA has once again come up after the WSJ reported that in the weeks before its now failed attempt to go public, the SEC had “ordered WeWork to remove the measure, before the company offered to substantially change it.”

Specifically, according to a WSJ report on the “wrangling” that was taking place between WeWork and the SEC over whether or not to include the grotesque EBITDA adjustment, which the company had since renamed to the less jarring “contribution margin”, as the IPO loomed, “the SEC zeroed in on how WeWork framed its heavy losses, particularly through a bespoke profitability metric called “contribution margin,” a version of which had formerly been known as “community-adjusted Ebitda.” The agency had first ordered WeWork to remove the measure, before the company offered to substantially change it.”

Demonstrating just how seriously corporations takes the SEC, however, the day before WeWork had hoped to start the roadshow to peddle its IPO to investors, the metric was still mentioned in its revised prospectus more than 100 times (WeWork supposedly planned to amend the filing before starting the roadshow — but instead shelved the IPO, as investors questioned the company’s worth and its corporate governance.)

There are two key points here: the first, of course, is that WeWork was hoping to mislead investors (all of whom were sophisticated enough to know the garbage that “community-adjusted” anything is) by keeping this massive pro forma adjustment; the second is that WeWork appears to be openly defying the SEC’s instructions on cleaning up its prospectus – something it obviously couldn’t do if it hoped to deflect attention from the company’s massive losses.

“It’s highly unusual to have issues that are so important still being disputed while they are out there marketing the stock to investors,” said Minor Myers, a law professor at the University of Connecticut who reviewed the correspondence at the Journal’s request. As WeWork was battling the SEC over its metrics, its advisers were “figuring what they can sell using these numbers,” Mr. Myers added.

The WSJ also reports that WeWork’s resistance to removing the metric was directed by Mr. Neumann himself, who had “previously boasted about the metric to reporters and investors, to show how the company’s core business was profitable.”

Of course, the core business wasn’t profitable as demonstrating previously just how dismal WeWork’s real bottom line was:

Furthermore, if WeWork was “profitable” along any metric, it would not have scrapped its IPO and demanded a SoftBank bailout.

It wasn’t just the community-adjusted EBITDA that was a concern for the SEC: among other issues the SEC targeted was what the WeWork prospectus called “illustrative annual economics.” The agency questioned how the company had arrived at some rosy numbers. “Please explain to readers and tell us how your assumed workstation utilization rate of 100% is realistic,” its letter said. In reply, WeWork agreed to drop the illustrative economics section from the prospectus.

The bottom line, as the WSJ summarizes, “WeWork’s liberal use of customized metrics that don’t comply with generally accepted accounting principles, or GAAP, was central to its wrangling with the SEC, according to people close to the process. The draft prospectus WeWork filed in December cited at least six non-GAAP metrics; by the time it issued the prospectus in August, the tally had fallen.”

Yet even after the back and forth with the SEC, and the IPO debacle, WeWork refused to change its way: on Friday, after markets closed, WeWork published a slide deck from Oct. 11—long after the company’s self-annointed messiah, Adam Neumann resigned, that showed financial results including a “location contribution margin” that appeared to be a renamed version of the metric at the center of its dispute with the SEC.

In short, once you start lying to the investing public in how you misrepresent your business, it is virtually impossible to stop, unless you are SoftBank of course in which case you just assume everyone is an idiot as Masa Son’s financial juggernaut did with these two slides.

However, it is not our intention here to focus on WeWork’s fake financials – we did that last August. Instead, it’s to point out that there is never just one cockroach. In fact, when it comes to non-GAAP adjustments, and “fake numbers”, one can say that everyone is a cockroach: as the WSJ points out, nearly all big companies now use at least one non-GAAP financial metric. Last year, 97% of S&P 500 companies used non-GAAP metrics, up from 59% in 1996, according Audit Analytics.

Which begs the question: in the aftermath of the WeWork fiasco, which relied exclusively on non-GAAP, “community” adjustments to make its financials appear respectable even though fundamentally they were a disaster, is every financial report – and with 97% out of all companies using non-GAAP metrics one can be excused to use the term “ever” – nothing but fake financial news, and when the veil is finally lifted, as was the case with We Work, what will happen to all those trillions in market capitalization built upon “one-time”, “non-recurring” addbacks and pro forma, adjusted, recasted and otherwise fake foundations?

Authored by Onar Am via LibertyNation.com,

According to a new poll conducted by the Victims of Communism Memorial Foundation, 70% of millennials would likely vote for a socialist candidate. Furthermore, 19% of them see The Communist Manifesto as a surer guarantee of freedom and equality than the Declaration of Independence, and 15% think that the world would be a better place if the Soviet Union still existed.

The Conundrum

To many, this may come as a shock. Socialism has failed wherever it has been tried and communism has cost the lives of more people than any other ideology in a comparable amount of time. Historical circumstances produced a near-perfect scientific test of the system in the 20th century. In every case, communism failed – ending in a bloodbath, regardless of race, ethnicity, culture, and development stage.

Simultaneously, near-capitalist societies were tested with those same ethnicities and cultures: East- versus West-Germany, North- versus South-Korea, and Hong Kong versus mainland China. The outcome was as conclusive and decisive as any social experiment could ever get: While capitalism lifted people out of poverty and created largely stable and prosperous societies, communism produced murderous and oppressive hellholes from which people desperately tried to flee.

Given the massive evidence of the positive effects of capitalism and the disastrous results of socialism, a resurgence of communism should have been impossible. How could it happen?

The Long March Through The Institutions

The answer is straightforward: Teachers and professors are bombarding students with communist propaganda. They teach that the U.S. was founded on slavery while conveniently overlooking the fact that western civilization is the only one in the world to have successfully abolished slavery.

They teach that Hitler was the vilest person ever to have existed but conveniently forget to mention that Stalin, Mao, Pol Pot, Ceausescu, Mugabe, Barre, and Castro together killed far more than 100 million people and enslaved many more across four continents. Students learn about the Holocaust, but not the Holodomor.

The professors are not doing this out of ignorance. After World War II, when it became clear that Marxism could never compete with capitalism as an economic system, the radical left formulated a strategy of achieving their utopia by taking over the educational institutions and indoctrinating children with their worldview.

That would have sounded like a conspiracy theory if it hadn’t been for the fact that leftists have been open about this goal for a long time. In the 1960s, German communist Rudi Dutschke formulated the slogan the “long march through the institutions.” He described it as a way of creating the necessary conditions for a communist revolution by infiltrating said institutions. One of the prominent figures of the so-called Frankfurt School in America, Herbert Marcuse, agreed with this strategy in 1971: “[I] regard your notion of the ‘long march through the institutions’ as the only effective way … ”

In his recent book The Madness of Crowds, author Douglas Murray documents that leftists in the 1980s saw the working class voting for Ronald Reagan as traitors to the socialist cause and therefore needed to turn their back on ordinary people and instead make minorities the focus of their campaign to destroy capitalism.

The near-unthinkable surge of socialist and communist sympathies among millennials in the freest, most prosperous nation in the world is the result of that 70-year-long march through the institutions.

A Feature, Not A Bug

But why? Why would a group of radical leftists want to destroy the system that has uplifted so many people out of poverty in favor of a system that has murdered millions? In a conversation with Eric Weinstein, Peter Thiel presents a chilling possibility. Mass murder is a feature of communism, not a bug:

“My Stanford professor René Gerard had the observation that communism among Western intellectuals became unfashionable in 1953, the year Stalin died, and the reason was that they were not communists despite the millions of people being killed; they were communists because of it.”

For naïve students, communism and socialism are just idealistic fantasies – but how many of their professors harbor far more sinister motivations?

As the bubble in subprime auto continues to grow bigger – even at the same time the auto industry is mired in recession – terms on new loans for new buyers continue to get more burdensome for already broke consumers. 

In fact, many people are piling on debt to their auto loans that far exceeds the car’s value, according to the Wall Street Journal. Like homeowners during the financial crisis, this leaves many people with negative equity or “underwater”.

33% of people who traded in cars to buy new ones in the first nine months of 2019 had negative equity. This compares to 28% five years ago and 19% 10 years ago. The borrowers owed about $5,000, on average, after trading in their cars before taking on new loans. Five years ago that figure stood at an average of about $4,000.

And the rise in car prices isn’t helping, either. Easy lending standards are helping perpetuate the cycle, with lenders now issuing loans that can last 7 years or longer, as we have documented here on Zero Hedge. 

Borrowers remain responsible for paying their remaining debt even after they get rid of the vehicle that’s tied to it. When buying a new car, they just roll this debt into a new loan. Dealerships, who now make more money on financing than on selling the car, encourage this type of refinancing. 

Consumer lawyers say that customers are often forced to trade in their vehicles, either due to changing needs or vehicle problems. 

David Goldsmith, a lawyer who defends consumers in auto cases said: “These aren’t Rolls-Royces. They’re Ford Escapes.”

Borrowers that have negative equity at the time of buying a new vehicle are often saddled with longer loan terms, higher interest rates and higher monthly payments. The higher rates and longer amortization schedule means that a smaller share of their payments go to paying off their principal. The result is obvious: many consumers wind up deeper and deeper in the hole everytime they trade in a new vehicle. 

Underwater loans are most prevalent with subprime borrowers, mainly due to consumers with lower credit scores lacking the means to pay off the remaining balances on their loans before taking out the next one. In the even of a default, lenders generally take possession of the vehicles and try to resell them. That money is then applied to the unpaid balance, but often isn’t enough to cover the total balance. 

Most of these loans are originated at dealerships now, which then assign the loans to a number of lenders, banks and credit unions. Many loans are also bundled into bonds and sold to Wall Street.

The added debt from these loans can make it difficult for borrowers to stay current. 5.2% of outstanding securitized subprime auto loan balances were at least 60 days past due on a rolling 12 month average period ending June 2019. This is up from 4.8% the year before and 4.9% two years prior. 

Nicole-Malia Tennent and Shyanne Fernandez, both in their early 20s, are a perfect example. They sought to trade in the car they shared for something less expensive last year. They instead ended up splurging on a new vehicle and rolling over their $12,500 unpaid loan balance from their last car into a loan for a new 2018 GMC Sierra. 

The new loan balance stood at $66,000 as a result of the old loan being rolled over. They split the payment of $900 per month now, which they have 84 months to pay off. Their old loan was about $500 per month.

“Sunday Start”, authored by Morgan Stanley equity strategist, Jessica Alsford

In three weeks, the world’s leaders will begin to gather in Madrid for the 25th United Nations Climate Change Conference. The intensity of the global climate strikes this year suggests that the proceedings will be scrutinized as never before. But the decisions made, or not made, will also have repercussions for global markets.

We’re transitioning towards a lower carbon economy, albeit at a slower pace than needed to stay within a two degrees Celsius climate scenario (2DS). For companies that can build offshore wind installations, develop electric vehicles and manufacture renewable diesels, we see potential for material earnings growth. In Decarbonisation: The Race to Net Zero, we estimated that more than US$50 trillion of capital will need to be deployed into renewables, EVs, hydrogen, biofuels and carbon capture and storage over the next 30 years, putting US$3-10 trillion of EBIT up for grabs.

Decarbonising electricity is the largest opportunity to reduce carbon emissions, with the power sector responsible for a quarter of global emissions. Strong renewables growth should be achievable given the significant improvements we’ve seen in solar and wind economics. But costs continue to constrain many other clean technologies, including battery storage, green hydrogen, CCS and biofuels.

If governments are serious about halting climate change, some form of stimulus will be needed.

Subsidies have already been key in industries like renewables. In the US, federal subsidies have helped to drive the transition to renewable energy, which rose from 14% of total power generation capacity in 2000 to 24% in 2018.

One alternative is to make high-carbon incumbents prohibitively expensive. European regulation on CO2 emissions, together with city bans on diesel, has catalyzed investment by global OEMs into electric vehicles. While the transition will be costly for the autos industry, it’s hard to see another path towards achieving aggressive targets.

Taxes should be another means of incentivizing investment in low-carbon technologies, but they remain ineffective. Even in Europe, where the carbon price has increased three-fold since the end of 2017, it remains far below the US$75 per tonne estimated by the IMF as necessary by 2030 to achieve a 2DS.

Even if the price of carbon rises to that level, a global tax is needed, through either a multilateral agreement or a carbon border adjustment. Domestic carbon taxes are unlikely to succeed in a world where many industries can move to regions with less punitive environmental regimes.

Until now, the willingness of governments to take steps to halt climate change has been open to question, given the potential implications for inflation, government debt and employment. But we see several reasons why change may come over the next 12 months. Significantly, awareness and concern about climate change among the general population are growing, driven by more frequent extreme weather, media coverage and actions by protest groups.

Regarding political appetite for change, we see notable shifts in tone across the world. The EC’s incoming president, Ursula von der Leyen, has announced the intention to create a climate plan. This includes legislation to achieve carbon neutrality by 2050, the introduction of a green border tax and the creation of a fund to advance a “just transition”. In the US, the current administration has formally notified the UN that it intends to withdraw from the Paris Agreement the day after the 2020 presidential election. However, the majority of Democratic candidates have made climate change a key item in their policy agendas.

Climate and carbon could also become drivers of QE. Christine Lagarde has made it abundantly clear that climate change will be a priority during her tenure as ECB president, suggesting that the central bank might use monetary policy to support a climate-friendly stance.

As with many market drivers, it’s hard to pinpoint the moment when a risk will become a reality. But to us, the direction of travel for the carbon price is clear. Challenges still lie ahead, but if the next 12 months don’t bring a material response from the world’s leaders, we see an increasing likelihood that carbon will impact asset prices through other channels. Between 2016-18, climate-related disasters such as wildfires and hurricanes have caused over US$650 billion worth of economic damage worldwide (or 28bp of global GDP).

Whichever trajectory we end up following, it seems clear that climate will be a key driver of asset prices in the months and years ahead.

* * *

More fallout at Twitter after it was revealed last week that that two Twitter employees spied on users on behalf of Saudi Arabia — and after the arrest of one as another fled the country: CEO Jack Dorsey had actually met privately with crown prince Mohammed bin Salman six months after the company uncovered the Saudi intelligence infiltration, a new report has revealed. 

Middle East Eye uncovered the critical timeline related to the meeting via the Justice Department’s criminal complaint filed in California, which raises a host of pressing questions, given the scandal was known internally to Twitter executives by December 2015, yet Dorsey sat down with MbS in June 2016. Middle East Eye reported Saturday:

Lawyers for one of the Saudi dissidents targeted in the operation say Dorsey and Mohammed bin Salman’s meeting raises questions about what the CEO of Twitter, a company which has seen massive Saudi investment in recent years, knew and when he knew it.

The Washington Post reported that two employees working for the company in 2015 accessed the private information of more than 6,000 Twitter accounts. Their Saudi intelligence “handler” had actually been a close associate to MbS at the time. And yet even after this bombshell scandal was unearthed internally Jack appeared chummy and business as usual with MbS in New York. 

Crucially, at least one of the accounts accessed by the spies could be related to the murder of journalist Jamal Khashoggi, given it belongs Saudi dissident Omar Abdulaziz, well-known to have been a close friend and confidant of Khashoggi. 

Thus it’s further important to remember that this major Saudi spy infiltration of Twitter occurred significantly prior to the October 2, 2018 murder of Khashoggi by a Saudi hit team at the Istanbul consulate. What did Jack know and when of the personal Twitter information collected on Saudi dissidents accessed from within the company? Did he broach the issue with MbS during their 2016 meeting? 

The two former Twitter employees, identified as Ahmad Abouammo and Ali Alzabarah – the former arrested in Seattle and the latter believed to have fled US soil – along with their alleged Saudi intelligence ‘handler’ Ahmed Almutairi, who was identified as serving as the intermediary between Saudi Arabia and the Twitter staff, were central to the broader MbS campaign to muzzle critics and activists overseas. 

According to the criminal complaint, Twitter did take some limited action a week after uncovering the spy plot to warn several dozen users that they “may have been targeted by state-sponsored actors”. 

The attorney for the friend of Khashoggi who was targetted, Omar Abdulaziz, told Middle East Eye the following:

“The thing that strikes me is when you look through the government’s complaint, this guy hacked 5,500 records in June. That’s not a small number. It raises the question about what Twitter did and did not want to know,” said Mark Kleiman, an attorney who represents Omar Abdulaziz, a Saudi dissident living in Canada.

Kleiman told Middle East Eye that he and Ben Gharagozli, a second lawyer representing Abdulaziz, understood that “somebody from one of the three-letter agencies in the US” tipped Twitter off about Azabarah, before company put him on administrative leave in early December 2015.

Abdulaziz and his attorney are furious, given it was literally life and death on the line, as was proven with Khashoggi’s heinous murder by Saudi state assassins, which possibly was even planned with information gleaned from Twitter or other messaging platforms. 

Kleiman underscored that “It’s hard to imagine that [Dorsey] wouldn’t have heard about it six months later.”

* * *

HRH Deputy Crown Prince Mohammed bin Salman meets with Twitter cofounder & CEO Jack Dorsey in NYC @jack pic.twitter.com/Nd8szEr2ZN

— بدر العساكر Bader Al Asaker (@Badermasaker) June 25, 2016

Middle East Eye notes in its report that it sent Twitter a list of the following questions, though it initially received no response:

• When and how Twitter became aware of Alzabarah’s activities
• Whether Twitter believed its accounts had been targeted by a state-sponsored actor in December 2015
• Whether Twitter was aware in December 2015 that Alzabarah had been feeding user data to Bader al-Asaker, who had close ties to the Saudi ruling family
• Whether Dorsey had been made aware of Alzabarah’s activities and the fact that he had been involved in state-sponsored activity and, if so, whether he knew about these actions when he met with Mohammed bin Salman in June 2016
• Whether Dorsey raised any concerns over the incident with Mohammed bin Salman or Asaker during the June 2016 meeting

Submitted by Eric Peters, CIO of One River Asset Management

“Hmmm,” said the former central banker, leaning back in a chair. I’d asked how his thinking on the meaning of money had changed over these last three decades. We both started this journey in 1989, and our paths somehow led us to this long table in Tokyo. In that time, much changed. Back then, Japan’s gov’t debt-to-GDP was roughly 50%, 10yr JGB yields were 5%, the dollar was worth 127 Yen. But now, debt/GDP is roughly 250%, the central bank has printed enough money to buy half of it, 10yr yields are -0.07%, the Yen has strengthened to 109.

“You are correct, as a young man I would have never imagined this would be our destination,” he said, after some consideration. “And I am trying to think about how my views changed over so many years, because I cannot recall a moment when I realized everything was not as I had previously understood,” he said. “Perhaps, over such a long span of time our thinking gradually evolves, and we’re not aware that it has.” I nodded, quietly considering my long wander. “But here we are, and while I do not understand it perfectly, it makes some sense.”

Fishy

We were discussing equity markets over sushi. America’s has had an extraordinary run. In the 30yrs from Japan’s 1989 Nikkei high, the S&P 500 gained 925%, and from the 2009 GFC crisis lows the S&P 500 gained 464%. The Nasdaq gained 1,948% since 1989 (+655% from 2009 low). They say the reason for this recent extraordinary march is the Fed’s QE and a policy of low rates that has combined to push America’s CEOs to buy back stock, while forcing global investors to pay any price for growth in an ageing economy, where growth is scarce.

“I suppose that explanation for America’s bull run makes sense in isolation,” said the CIO in Tokyo. But Japanese rates are -0.10%. The BOJ printed enough money to make an Italian central banker blush and continues buying stocks directly on the open market. Japan is the ultimate ageing economy, with slow growth, world-class technologists, researchers, and plenty of entrepreneurs.  “Investors have come to accept that overall explanation without reservation. Yet, if it is true, how can it also be true that the Nikkei remains 40% below its 1989 high?”
 
Hump Day

The Japanese work culture is notorious for its long hours. Microsoft Japan conducted an experiment in August with 2,300 workers. It paid them to not work on Fridays. It encouraged online chats in place of meetings or emails. It insisted meetings include five people or fewer and last no longer than 30mins. Microsoft saw a 40% increase in sales/worker, a 59% decline in paper usage, and a 23% drop in electricity consumption. Asked what day employees would like off if the firm moves to a 4-day workweek, 50% answered Wednesday.

Minnows

The dynamism in Japan’s economy is not to be found in the conglomerates,” said the CIO, focused on small cap stocks. “To find the interesting companies, you must look at the small and mid-sized firms that supply the large players – they’re the ones where you find the creativity, the risk takers, innovators.” Japan spends 3.5% of GDP on Research & Development, the US spends 2.8% and China 2.0%. Only South Korea spends a larger percentage of its GDP on R&D (4.3%). “The very big firms here have grown to resemble state owned enterprises.”

Anecote

“We move slowly here,” said the executive, chain smoking Seven Stars. “We have refined the art of flawless production,” he explained. “But there was a time when it was not so.” Two Asahi Extra Dry’s arrived, the thick foam head in each glass identical, poured deliberately, in perfect proportion, beautiful beer. “We once copied the chemical compounds designed in America,” he admitted. “As we amassed knowledge, we developed our own, and accumulated manufacturing know-how, capital.” In the distance, Japan’s factories spewed smoke, but at a pace that made the past appear more frantic than the present. “We produced chemicals and materials for the world to incorporate into nearly every product, and in pursuit of perfection, we introduced quality controls. Then controls on controls. And controls on controls on controls, ensuring that our final output was flawless.” The executive smiled, drawing deeply, his wrinkled face aglow. “But this pursuit of perfection slowed our ability to develop new compounds. And now the Chinese outpace us. They copy our formulas as we once copied yours. They produce at a pace that ensures higher impurities, but greater throughput, wider margins. And without having to bear the costs of R&D investment, they slash prices savagely.” The executive lit another Seven Star, turned his head slowly, exhaled. “The Chinese test their compounds with scant regard to safety. Then iterate again and again. Racing to produce compounds that may not be great but are perhaps good enough. They scale production overnight. They do what they must to capture market share,” he said, growing quiet, contemplative. I matched his silence, waiting for him to fill the void. Across the world’s third largest economy, the mighty conglomerates lumbered onward, industrial inertia. “And while we know this, and see this all unfolding, we appear unwilling to respond, unable to change course, accelerate.”

 

McKinsey & Company is known for advising many of the world’s biggest corporations on a wide range of issues. 

But it’s the company’s advisory services to bankrupt companies that has led it to be the target of a federal criminal investigation, according to the New York Times. 

Prosecutors in New York are trying to determine whether or not McKinsey used its influence over bankrupt companies to steer assets to itself, or its clients, during Chapter 11 proceedings. 

McKinsey’s North American chairman, Gary Pinkus, said: “The firm received an inquiry from the United States Attorney’s Office in Manhattan last year, and addressed it. Since then, we have received no additional requests from the U.S.A.O.”

Over the last 2 weeks, investigators have interviewed people about McKinsey’s actions in the bankruptcies of companies like Alpha Natural Resources and SunEdison. The judges overseeing these cases have already suggested that questions over McKinsey’s conduct would best be resolved by the Justice Department.

In the Alpha Natural Resources bankruptcy, McKinsey did not disclose that it owned some of the company’s debt, an arrangement that ultimately gave McKinsey a stake in the restructured company, called Contura. Bankruptcy advisers are prohibited from holding direct or indirect stakes in the insolvent company.

…

In the SunEdison bankruptcy, Mr. Alix accused McKinsey of manipulating invoices for prior work to improperly receive payment and avoid disclosing that it was a creditor — a status that could have disqualified McKinsey from working as the energy company’s bankruptcy adviser. After Mr. Alix raised those issues, McKinsey called the allegations reckless and defamatory.

An investigation by the Office of the United States Trustee, a division of the Justice Department that polices the conduct of companies in the bankruptcy system, is also taking place. The office has told judges in other bankruptcy cases that it was examining the conduct of McKinsey and McKinsey admits it has answered questions from the regulator. 

Neither investigation may lead to legal action – but a criminal case could be damaging to McKinsey’s reputation. 

Bruce A. Markell, a professor of bankruptcy law at the Pritzker School of Law at Northwestern University said: “Would it kill McKinsey? No, because McKinsey has far more lines of business than bankruptcy.” Instead, Markell says that an investigation could hinder the firm’s bankruptcy division, one that is currently working with clients like PG&E. 

“I think McKinsey’s still standing at the end of this. It may not be as tall. It may be a bit bowed, but I think they’re still on the playing field,” he assessed. 

The criminal investigation adds to the mounting criticism that McKinsey has prioritized its own profits over clients, ethics and the law, the article notes:

McKinsey refunded millions of dollars in fees after South African authorities accused it of helping associates of the country’s former president, Jacob Zuma, loot public coffers. The firm’s name surfaced in a case federal prosecutors brought against a Ukrainian oligarch because it gave a presentation that cited the need to bribe officials in India. And court records recently revealed its role in helping opioid makers sell more drugs, although the firm was not a defendant in that case.

But it has been the company’s bankruptcy division that has arguably invited the most criticism. These types of advisers have significant influence over the handling of bankrupt companies’ assets and help determine which creditors get priority on defaulted debt. 

Jay Alix, the founder of a competing firm, has been the most vocal with his criticism. Alix has said that McKinsey does not properly disclose its connections to other parties involved in bankruptcy cases, which breaks rules about fair dealing. Judges have voiced concerns about the issues he has raises, but some have also dismissed his complaints for lacking standing. 

McKinsey – obviously – denies wrongdoing. Pinkus said: “Over the past few years, Jay Alix has waged a relentless campaign based on false allegations to drive McKinsey out of the bankruptcy advisory space in order to advantage his firm AlixPartners. Courts have dismissed Mr. Alix’s claims in four separate bankruptcy cases, including those of Alpha Natural Resources and SunEdison, as well as a complaint Mr. Alix brought last year under the Racketeer Influenced and Corrupt Organizations Act.”

Pinkus says the inquiry that McKinsey received from federal prosecutors in 2018 came shortly after Alix’s complaint was filed. The complaint was later dismissed in August 2018 when Alix failed to show that he had been directly harmed. 

“We continue to respond, as we always have, to questions from the U.S. Trustee, which indicated in court this week that it ‘has been engaged in discussions with both Mar-Bow and McKinsey RTS,’” a spokesman for McKinsey concluded.