Category: zerohedge

Ask any “brick and mortar” retailer in the past decade what new development has had the greatest (and most adverse) impact on their business, and 11 out of 10 times the answer will be “Amazon” and eCommerce in general. Or ask legacy enterprise solutions companies, which used to rake in tens of billions of dollars every year with customer, client-facing IT and tech solutions, why their stock price has been tumbling in recent years (coughibmcough), and you will hear one word: the “cloud.”

Indeed, we live in a time of tremendous overhaul in legacy business relationships, and while much of this has been driven by the low cost of capital made possible by ten years of ultra low interest rates, much if not all of this deflationary technological innovation is here to stay, with a few (FAANG) winners and many losers, those unable to adapt fast enough to the changing times.

While investors in US equities have had to contend with several major cross-currents over the past year, including the gradual phase out of central bank intervention in capital markets i.e., “Quantitative Tightening”, the favorable impact of the “three arrows of Trumponomics” such as tax cuts, fiscal expansion and deregulation offset by growing fears about protectionism and GDP and EPS-crushing trade wars,  even as bank deregulation provides solace to bank investors, a key focus for investors, policy makers and businesses themselves across the globe has been the growing dominance of Internet-based companies as a result of a series of disruptive innovations sweeping across the U.S. economy, presenting investors with another major source of confusion: how to value, and trade, legacy businesses when confronted with disruptors. Alternatively, what is the upside for the disruptors.

As Barclays writes in a recent report, the disruptors (Internet and cloud-based companies, mainly the FAANGs: Facebook, Apple, Amazon, Netflix, And Google) are breaking down moats of the disrupted (legacy consumer businesses and IT hardware & software companies), by dominating the user experience and creating strong moats for themselves in the process. This, according to Barclays, is “leading to a shift in value from consumer discretionary and consumer staples to info tech.”

The various trends and conflicts between legacy industries and new businesses are broken down by Barclays into the following three key types of disruptions:

• Internet is disrupting consumer focused businesses (retailers, cable TV⁄media, consumer staples, consumer PC industry): FAANG stocks are disrupting legacy consumer industries by either modularizing supply or distribution moats of the incumbents and creating strong moats for themselves by owning the user experience.
• Cloud computing disrupting IT hardware and software companies: Amazon⁄Microsoft are the disruptors due to the flexibility and low cost of cloud’s pay-for-use model
• Shale⁄fracking disrupting oil & gas industry and power companies: shale oil & gas revolution and well productivity disrupting oil & gas supply-demand balance

And while Barclays provides a detailed analysis of all three “disruption” modalities, we will focus on the first two – the role of the internet and “the cloud” in disrupting consumer-facing businesses and IT Hardware/Software– as that is the one transition that is of greatest impact to most US consumers.

The Internet as a Disruptor

According to Barclays, historically the competitive advantage of legacy consumer focused businesses depended on either: 1) creating a monopoly⁄oligopoly in supply (creating a “scarce resource” in the process), or 2) controlling distribution by integrating with suppliers. Here, the fundamental disruption of the internet has been to turn this dynamic on its head by dominating the user experience. Barclays explains further:

First, while the mega-tech internet companies have high upfront capital costs, their user base is so large that the capital costs per user are insignificant, specially relative to revenue generated per user. This means that the marginal costs of serving another customer is effectively zero, thus neutralizing the advantage of exclusive supplier relationships that were leveraged by legacy distributors. Secondly, the internet has led to the creation of infinitely scalable networks that commoditize⁄modularize supply of “scarce resources” (thus disrupting the legacy suppliers of those resources), making it viable for the disrupting internet company to position itself as the key beneficiary of the industry‘s disruption by integrating forward with end users⁄consumers at scale.

As a result of the disruption, the user experience has become the most important factor determining success in the current environment: the disruptors win by providing the best experience, which earns them the most consumers⁄users, which attracts the most suppliers, which enhances the user experience in a virtuous cycle. This is also why so many legacy businesses find themselves unable to compete with runaway disruptors, whose modest advantage quickly becomes an insurmountable lead due to the economics of scale made possible by the internet.

This has resulted in a shift of value from the disrupted to the disruptors who modularize⁄commoditize suppliers, integrate the modularized suppliers on their platform, and distribute to consumers⁄users with which they have an exclusive relationship at scale.

This further means that the internet enforces strong winner-take-all effects: since the value of a disruptor to end users is continually increasing it is exceedingly difficult for competitors to take away users or win new ones. This, according to Barclays, makes it difficult to make antitrust arguments based on consumer welfare (the standard for U.S. jurisprudence), but ripe for EU antitrust regulation (which considers monopolistic behavior illegal if it restricts competition).

The Cloud as a Disruptor

Back in the “old days”, on-premise IT Hardware and Software companies built high barriers to entry by creating integrated suites of hardware⁄middleware and application software involving multi-year relationships with enterprises, complete with licensing & support contracts and cash-rich streams of maintenance and service costs. High switching costs and entrenchment through customization of on-premise hardware and software based on enterprise-specific needs resulted in outsized profits for the incumbents. Fast forward to today, when Amazon⁄Microsoft commoditized data center infrastructure, effectively transforming computing resources into storage, computing, database, and application software components running on centralized servers which could be used on an ad-hoc basis not only by their internal teams but also enterprise customers. Here’s Barclays:

The cloud is becoming a disruptive force for IT hardware, software, and the services industry as the cloud’s greater efficiency, flexibility, and lower cost is reshaping IT spending patterns and vendor incumbency. Cloud displacement risk is high for companies participating in storage and servers, followed by managed services and application⁄middleware software as competitive pressures mount from elongating replacement cycle and greater price discounting.

Even for large enterprises and governments, where decades of IT infrastructure and applications make the move from on-premise to the cloud difficult, the cloud’s pay-for-use model is changing how these enterprises evaluate and deploy on-premise IT workloads, and increasing the use of modular and customized IT solutions, which stands to hurt the cash-rich services and software maintenance streams of the disrupted legacy IT hardware and software businesses.

Summarizing these various trends while also highlighting how the “disrupteds” are fighting back, Barclays lays out the following chart below which illustrates:

1. The key disrupted industries that have been disrupted by the internet-based companies,
2. What were the moats of these legacy businesses,
3. How the disruptors commoditized those moats,
4. How the disrupted legacy businesses are adapting, and
5. Whether the value will continue to shift from the disrupted to the disruptors.

 

To be sure, assessing the net impact of these innovations on each sector is difficult as in some cases the disruptors and the disrupted belong to the same sector – for example, Amazon and retailers are both in consumer discretionary while Microsoft and IT hardware and software companies are both in info tech. With that caveat in mind, the Barclays summary of the net impact of the affected disrupted sectors is laid out below.

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Authored by Caitlin Johnstone via CaitlinJohnstone.com,

At a graduation ceremony for the US Naval War College (barf), US Secretary of Defense James Mattis asserted that Russian President Vladimir Putin “aims to diminish the appeal of the western democratic model and attempts to undermine America’s moral authority,” and that “his actions are designed not to challenge our arms at this point but to undercut and compromise our belief in our ideals.”

This would be the same James Mattis who’s been overseeing the war crimes committed by America’s armed forces during their illegal occupation of Syria. This would be the same United States of America that was born of the genocide of indigenous tribes and the labor of African slaves, which slaughtered millions in Korea, Vietnam, Cambodia, Iraq, Libya and Syria for no legitimate reason, which is partnered with Ukrainian Nazis, jihadist factions in Syria and Iranian terror cultists, which supports 73 percent of the world’s dictators, which interferes constantly in the electoral processesof other countries as a matter of policy, which stages coups around the world, which has encircled the globe with military bases, whose FBI still targets black civil rights activists for persecution to this very day, which routinely enters into undeclared wars of aggression against noncompliant governments to advance plutocratic interests, which remains the only country ever to use nuclear weapons on human beings after doing so completely needlessly in Japan, and which is functionally a corporatist oligarchy with no meaningful “democratic model” in place at all.

A casual glance at facts and history makes it instantly clear that the United States has no “moral authority” of any kind whatsoever, and is arguably the hub of the most pernicious and dangerous force ever assembled in human history. But the establishment Russia narrative really is that cartoonishly ridiculous: you really do have to believe that the US government is 100 percent pure good and the Russian government is 100 percent pure evil to prevent the whole narrative from falling to pieces. If you accept the idea that the exchange is anything close to 50/50, with Russia giving back more or less what it’s getting and simply protecting its own interests from the interests of geopolitical rivals, it no longer makes any sense to view Putin as a leader who poses a unique threat to the world. If you accept the idea that the west is actually being far more aggressive and antagonistic toward Russia than Russia is being toward the west, it gets even more laughable.

In order to believe that the US has anything resembling “moral authority” you have to shove your head so far into the sand you get lava burns, but that really is what is needed to keep western anti-Russia hysteria going. None of the things the Russian government has been accused of doing (let alone the very legitimate questions about whether or not they even did all of them) merit anything but an indifferent shrug when compared with the unforgivable evils that America’s unelected power establishment has been inflicting upon the world, so they need to weave a narrative about “moral authority” in order to give those accusations meaning and relevance. And, since the notion of America having moral authority is contradicted by all facts in evidence, that narrative is necessarily woven of threads of fantasy and denial.

Establishment anti-Russia hysteria is all narrative, no substance. It’s sustained by the talking heads of plutocrat-owned western media making the same unanimous assertions over and over again in authoritative, confident-sounding tones of voice without presenting any evidence or engaging with the reality of what Russia or its rivals are actually doing. The only reason American liberals believe that Putin is a dangerous boogieman who has taken over their government, but don’t believe for example that America is ruled by a baby-eating pedophile cabal, is because the Jake Tappers and Rachel Maddows have told them to believe one conspiracy theory and not the other. They could have employed the exact same strategy with any other wholly unsubstantiated conspiracy narrative and had just as much success.

In reality, Russia is nothing other than a rival power structure that the US-centralized empire wants to either collapse or absorb, but they can’t just come right out and tell the public that they’re dangerously escalating tensions with a nuclear superpower because westerners live in an invisible empire ruled by insatiably greedy plutocrats, so they make up nonsense about Putin being some kind of omnipotent supervillain who has infiltrated the highest levels of US government and is trying to take over the world.

I think it’s time we give Vladimir Putin his due. He is clearly the greatest intelligence agent —ever . He has engineered the unraveling of the western alliance, fidelity to democracy in the United States and the severing of the UK from the EU. It’s a remarkable achievement

— Steve Schmidt (@SteveSchmidtSES) June 10, 2018

Of equal interest to the Defense Secretary’s “moral authority” gibberish is his claim that Putin’s actions “are designed not to challenge our arms at this point but to undercut and compromise our belief in our ideals.”

I mean, like… what? So Russia isn’t challenging America militarily and isn’t taking any actions to attempt to, but it’s trying to, what, hurt America’s feelings? All this new cold war hysteria and nuclear brinkmanship has basically been America acting like a bitchy high school drama queen because Russia is saying mean things about it behind its back? How does a guy named “Mad Dog” get to be such a thin-skinned little snowflake?

I’m just playing. Actually, when Mattis says that the Russian government is trying to “undercut and compromise our belief in our ideals,” he is saying that Moscow is interrupting the lies that Americans are being told about their government by the plutocrat-owned media. As we’ve been discussing a lotrecently, control of the narrative is absolutely essential for rulers to maintain their rule. When you hear establishment policy makers babbling about “Russian propaganda” and Putin’s attempts to “undercut and compromise our belief in our ideals,” all that they are saying is that the plutocrats who rule America need to be able to control the way Americans think and vote, and that the Russian government is making it a bit harder for them to do that.

More and more, the threads of the establishment narrative are ceasing to be unconsciously absorbed and are being increasingly consciously examined instead. This development has ultimately nothing to do with Russia and everything to do with our species moving out of its old relationship with mental narrative as it approaches evolve-or-die time in our challenging new world. I am greatly encouraged by what I am seeing.

*  *  *

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In the first week of February, in the trading session just before the February 5 VIXtermination, the market tumbled as a result of a January average hourly earnings number that surged (even though as we explained at the time, the market had wildly misinterpreted the print), prompting speculation that the Fed was dangerously behind the curve and would need to accelerate its tightening, potentially hiking rates more than just 4 times in 2018, leading to an accelerating liquidation of risk assets which eventually culminated in the record VIX spike.

Since then, inflation fears moderated following several downward revisions (as expected) and more tame hourly earnings prints, with market concerns instead shifting to trader wars, the return of populism to Europe, the tech bubble, and the sustainability of record margins and net income.

But according to a recent analysis by Deutsche Bank’s Aleksandar Kocic, traders are ignoring the risk of an imminent, “phase shift” spike in wages at their own risk. Specifically, Kocic looks at the current locus of the Philips curve – which many economists have left for dead due to its seeming failure to explain how the plunge in unemployment to record low levels has failed to boost wages – and notes that as the economy approaches the full employment, “wages tend to become more responsive.” This, to the Deutsche Bank analyst, “is the inflection point that the Fed is monitoring.“

Looking at the Phillips curve over the past 4 economic cycles, Kocic compares it to the Cheshire cat’s smile from Alice in Wonderland, which is present even when the actual cat body is no longer there: “In each cycle, it falls apart, but after every annihilation, it re-composes itself and continues to play an important role.”

Specifically, what Kocic highlights, is the sudden phase transitions between the end of one cycle and the start of another, in which one observes a “near vertical” spike in inflation to the smallest favorable change in underlying conditions. In the DB chart below, each cycle has a different color which implicitly marks their beginning and end.

In the current context, the most important message of this graph is the finale of each recovery. In the past, this stage always exhibited a dramatic (practically straight line) rise in wages in response to infinitesimal improvements in economic activity. These periods are highlighted with (almost) vertical lines in the chart.

Of course, as economists have long lamented, what has prompted many to speculate that the Phillips curve is broken or even dead, is the failure of the economy to respond with a sharp increase in wages to the already near record low unemployment rate, which is over 0.5% below what the Fed currently believes is the NAIRU (non-accelerating inflation rate of unemployment), or the unemployment rate which does not cause inflation to rise or decrease.

The NAIRU level corresponding to the 1990 is 6%, and 5% in 2000 and 2006. Currently, NAIRU is around 4.5%. This is the territory where the Fed is likely to become concerned. Allowing the economy to overheat would jeopardize Fed’s ability to control inflation if it rises too fast.

Another way of visualizing the potential risk facing both the Fed and traders is whosn in the next chart, which looks at the Phillips curve within the latest economic cycle, starting with the early stagflationary months of 2007, then progressing into several years of recession, before ultimately emerging into the recovery and, finally, “growth and inflation” phase. According to Kocic, “we are currently in the final stages of the recovery. If we enter the goldilocks region (upper left corner) too fast, the Fed could be caught behind the curve and might be forced to hike aggressively which could have a negative impact on growth while leaving only inflation behind”…  a recipe for progressing straight into another recession.

As the Deutsche strategist warns, and as the events of early February so vividly demonstrated, “this is the most dangerous development which the Fed would want to avoid.”

Underscoring why it is only a matter of time before the Phillips curve, which he believes is not dead, but merely waiting to erupt in “a near vertical spike” reveals some fireworks, Kocic notes that “in addition to the distance from the NAIRU and the inflation target, the actual non-linearity of the curve is the key development to watch, in particular the change in response of inflation to the decline in unemployment” and adds:

The economy is currently operating below NAIRU and just slightly below the target and has shown a sustained support for higher slope which has been persistent since the end of 2016. This has caught the market’s attention.

But it’s not just the Phillips curve that has caught the attention of Kocic. As regular readers will recall, back in the summer of 2013 we first speculated that Okun’s law is either broken, or there is a giant, and inexplicable output gap forming in the US economy, in which GDP was trending far below where the unemployment rate suggested it should be.

Now, five years later, that output gap is finally closing, and according to Kocic if past is prologue, it may do so in an “explosive” manner. This is how he frames it:

The figure below shows the Okun’s law which captures the interplay between the social and economic response to the crisis in terms of distance of unemployment rate from NAIRU (social) and output gap (economic). Historically, output gap closes roughly when unemployment reaches NAIRU (the long term intercept / beta is close to zero). Post-2007, there has been a structural break in this relationship: The economy was slower to recover – it required a more aggressive improvement of labor market in order for the growth to reach its potential. This is shown in the figure through lower intercept: unemployment has to decline about 0.8% below NAIRU for the gap to close.

So, according to Kocic, if the unemployment rate is already low enough to potentially trigger a “near vertical” spike in wages (Phillips), it is also low enough to launch a sharp reversal in the output gap (Okun) leading to a Fed that is behind the curve on the parameters, or as the DB analyst says, with “current unemployment rate already 0.5% below NAIRU it is only a quarter of a percent away from closing the output gap. This justifies possible Fed’s concerns.”

Then again, if Kocic’s historical analog for the current situation is correct, “nightmares” may be a better word than “concerns.” The reason for that is that the appropriate historical period to compare the current regime to is the 1960s, when the output gap “exploded”:

While we think that history might not be the best guide for the future at the moment, the lessons of the 1960s are difficult to be completely ignored. The figure below shows the unfolded Okun’s law. 1960s are a screaming example of the effect of “exploding” output gap as a consequence of injection of fiscal stimulus when the economy was already operating at full employment, a situation that bears keen similarity to the present.

If the DB analysis is accurate, the implications would be profound for the market, which would find itself not only observing a sudden spike higher in wages, but also an economy where the actual GDP is suddenly soaring far above the potential, resulting in a 1960s output gap rerun and a Fed that has never been so far behind the curve.

The outcome of both would be even more aggressive rate hikes by the Fed, which – if the scenario plays out as Kocic envisioned – would be forced to raise rates well more than the 7 or so hikes the latest dots currently envision for 2018 and 2019, resulting in another bout of exploding volatility as the market finds itself not only chasing the dots, but in a rerun of “February” where to catch up to inflation, first the Fed, and then the market would be forced to aggressively tighten financial conditions.

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During the longest bull market in modern history, the S&P 500 surged a whopping 418% over the 9.5 years between November 1990 and March 2000.

This was during the famous economic expansion that took place during the Clinton era, in which job growth was robust, oil prices fell, stocks soared, and making money was as easy as throwing it in the stock market.

But, as Visual Capitalist’s Jeff Desjardins notes, in mere months, this famed bull market may lose its title as the “longest” in the modern era.

That’s because, according to data and analysis from LDL Research, the current bull market will take over the claim to fame in late August 2018.

Courtesy of: Visual Capitalist

RANKING THE BULLS

In today’s chart, we show every bull market since WWII, including the top six which are covered in more detail:

*Still in progress.

By looking at duration, total rate of return, and annualized rate of return, it really gives a sense of how these bull markets compare.

The current run, which will soon become the longest, didn’t have the same level of intensity as other high-ranking bull markets. Critics would say that it was artificially propped up by ultra-low rates, QE, and other government actions that will make the market ultimately less robust heading forward.

Regardless, the current run ranks in fourth place among the markets above in terms of annualized return.

WHAT ENDED EACH BULL?

The market psychology behind bull and bear markets can be fascinating.

Below we look at the events credited with “ending” each bull market – though of course, it is actually the actions of investors (buying or selling) that ultimately dictates market direction.

1. The Great Expansion
The bull run lasted 9.5 years, ultimately capitulating when the Dotcom Bubble burst. From the span of June 1999 and May 2000, the Fed raised interest rates six times to try and get a “soft landing”. Market uncertainty was worsened by the 9/11 attacks that occurred the year after.

2. The Post-Crisis Bull Run
Still ongoing…

3. The Post-War Boom
This boom occurred after WWII, and it ended in 1956. Some of the sources we looked at credited the launch of Sputnik, Eisenhower’s heart attack, and the Hungarian Revolution as possible sources of market fear.

4. That ’70s Growth
The Iranian Revolution, the 1979 Energy Crisis, and the return of double-digit inflation were the factors blamed for the end of this bull.

5. Reagan Era
This bull market had the highest annualized return at 26.7%, but the party came to an end on Black Monday in 1987 – one of the most infamous market crashes ever. Some of the causes cited for the crash: program trading, overvaluation, illiquidity and market psychology.

6. The Hot Aughts
Stocks did decently well during the era of cheap credit and rising housing prices. However, the Financial Crisis put an end to this growth, and would cut the DJIA from 14,000 points to below 6,600 points.

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Via Investing In Chinese Stocks blog,

Back during the 2015 stock market bubble, many investors and companies pledged their shares for loans. Standards were low at the time. In addition to taking insanely overvalued shares as collateral, banks also loaned money against shares that the owner didn’t have the right to sell. Here’s a post I wrote nearly 3 years ago, back in July 2015, detailing what I thought was the craziest example: Is This Peak Insanity? Blanket Company With P/E of 6000 Pledges 30% of Shares As Collateral

A blanket company had a P/E of 5800 at the peak. Shares have plunged, but the P/E is still above 3000. Shares fell more than 60% from their peak. This week, they were limit down on Monday, halted for three days, and limit up on Friday.

Just in case you think the P/E ratio may be distorting things, the price-to-sales ratio is above 70. Debt-to-assets is 23 times. Price-to-book 159 times.

By itself, this is crazy enough to show how the bull market was an indiscriminate liquidity driven momentum trader market. But this is not the end of the story.

Reuters: China’s companies at risk of stock-backed loan recalls

Chinese companies that borrowed money using shares as collateral may have to put up more assets or repay their debts, carrying the ripples from the stock market plunge into the wider economy.

A near 30 percent collapse in share prices has started to endanger some businesses using such financing, and the country’s banking regulator said on Thursday it would let financial institutions renegotiate lending terms in these circumstances.

Bank and other loans backed by listed shares officially increased around 260 percent in May to 58.4 billion yuan ($9.4 billion) from a year earlier, representing about 4.8 percent of total social financing for the period.

“There is no doubt all the companies are facing a financing dilemma,” said Zhang Jihong, board secretary at Hubei Landing Holding Co Ltd, a textile company that suspended its shares from trading on Tuesday – roughly half of all shares on mainland bourses are now suspended – after its stock fell 61 percent.

Hubei Landing has 29.9 percent of its shares pledged as collateral for a loan from a trust company.

The stock trading under the symbol of Hubei Landing is now called Gosun Holding after acquiring Gosun Technology in August 2015. Shares are at a new post-2015 low.

More importantly, the “financing dilemma” is back for many companies. Already, more than 10 companies have run into trouble this month. That may be far from the worst of it as 98 percent of A-shares companies have pledged shares. Some major shareholders have pledged 100 percent of their holdings, while other companies have more than 70 percent of outstanding shares pledged. 
 

In fact, judging from recent years, this landmine of equity pledges was buried in the bull market in 2015. At that time, the stocks in the entire market soared. Many shareholders who did not have the necessary conditions for reducing shareholdings used the stock pledge to finance and increase leverage. This became a direct incentive for the rapid development of the A share stock pledge business at that time.

From the perspective of the pledged ratio, among the 3,453 A-share companies that have pledged their stocks at present, there are 1,250 listed companies with more than 20% of the pledged shares, accounting for 36.2%, and 129 listed companies with more than 50% of the pledged shares. Among them, 51 listed companies pledged more than 60%, and 10 companies pledged more than 70%. Among them, the proportion of pledged stocks of Tibetan Song is 78%, ranking first.

The top ten companies by pledged shares as a total of outstanding:

Earlier this week Zhongnan Red Cultural Group saw its shares halted. 

Nasdaq: China Stocks-Factors to watch on Wednesday

Zhongnan Red Cultural’s share trade to halt as shares pledged by controlling shareholder triggered margin call

Nanfeng Ventilator (300004) is in the midst of a stock pledge crisis and it’s largest shareholder, and chairman, is missing.

East Money: 股权质押危机之一：南风股份股权质押爆仓 实控人失联留下官司一堆

On June 12, Nanfeng Co., Ltd. (referred to as “Nanfeng Shares”, 300004.SZ) issued the “Announcement on the Progress of the Missing Chairman-related Issues.” He said that on May 3, he was informed of the company’s actual controller and chairman. Yang Zishan lost contact and has not yet obtained contact with him. Loss of association, restructuring failed, the company’s multiple accounts were frozen, and the chairman’s pledged stock was taken. Namfung’s shares have yet to come out of the shadows of the dark May.

… According to the announcement, as of the announcement date, it was initially understood that Yang Zishan’s personal borrowings excluding stock pledges amounted to approximately 360 million yuan (without involving the company), and there may be a debt amount of approximately 380 million yuan in the name of the fraudulent company as a borrower or guarantor (not yet Verified) and other personal debts not involving the company (exact amount is unknown).

The company stated that the verification company confirmed that the relevant borrowings or guarantees were not corporate actions and none of the company’s board of directors or the shareholders’ meeting decided or approved the company. The company was unaware of this, and the related loan money did not enter the company. The company did not grant any related matters. The accreditation clearly stated that it would not assume related responsibilities and had reported the case to the public security agency.

…At present, Yang Zishan holds 12.37% of the company’s shares, accumulative pledged shares accounted for 99.12% of its total shareholding, accounting for 12.26% of the company’s total share capital. If Yang Zishan’s shares are closed or judicially auctioned, there will be no change in the actual control of the company. A person in charge of the company told the China Times reporter that the actual controller of Nanfeng shares was lost, which may be related to the debt crisis. Problems in funding led to an increase in the gap.

The article puts some value on pledged shares:

As of June 12, 129 listed companies had pledged more than 50% of the total share capital. According to statistical data, the stock pledges of the controlling shareholders of 404 listed companies have hit a closing line with a market value of RMB 328.9 billion. There are 86 listed companies with a market value of more than 1 billion yuan pledged by controlling shareholders, and 9 companies with more than 5 billion yuan. Industry insiders told the China Times reporter that the stocks held by the major shareholders and actual controllers of listed companies all have limited time for sale, and they cannot realize real-time liquidity. The equity pledge model has become a fast financing channel. In the field of listed companies, it is not surprising that major shareholders or actual controllers complete cash financing through equity pledge. The problem is that the risk is relatively large. The amount of financing with certain discounted proportions is financed through the market value of the pledged equity. If the stock price fluctuates, there may be a series of risks such as the inability to repay the principal due to pledge of equity.

Shares are experiencing “flash crashes” as a result of this “land mine” risk.

East Money: 6月以来逾10家A股公司股权质押“炸雷” 你的股票有强平风险没？

[More than 10 A-share companies with pledged shares have “hit mines” since June. Have you had a strong risk in your stock? Since the beginning of this year, the share prices of some listed companies of A shares have seen multiple rounds of “flash crashes.” If it is said that the “first flash crash” in the previous quarter is closely related to the “deleveraging” of institutional trust products, then in the “second quarter of the flash crash” that is coming, a high proportion of equity pledges will increasingly become a new “Gate of Life” for stocks. (Securities Times)

No stocks and no deposits: 98% of A-share companies pledged

　　Judging from the characteristics of the recent market, whether it is the stock price drop triggering the risk of equity pledge closing (such as the South China Culture), it still triggers a real closeout behavior (such as Huayi Jiaxin), the stock price “flash collapse second quarter” and equity The relationship between pledges is particularly close.

Here’s the charts of Zhongnan Red and Spearhead Integrated Marketing (Huayi). The former has halted trading.

Pledging shares is a way to obtain cheap financing, what could go wrong?

The equity pledge has the advantages of low cost, high efficiency, flexible business, and wide source of funds, which has become an important reason for the high enthusiasm for equity pledges in recent years. At the same time, investment bankers also told reporters that the prevalence of equity pledges, in addition to the relevant shareholders of the assets of the bank’s assets, but also with the background of bank tightening, some projects can not achieve loans, loans have reached limits and other closely related. This makes the relevant shareholders more willing to finance through equity pledges.

In fact, judging from recent years, this landmine of equity pledges was buried in the bull market in 2015. At that time, the stocks in the entire market soared. Many shareholders who did not have the necessary conditions for reduction used the stock pledge to finance and increase leverage. This became a direct incentive for the rapid development of the A share stock pledge business at that time.

Under the huge scale of equity pledges, if the company’s value grows steadily and the secondary market performs smoothly, it will be calm. However, with the increase of external interference factors and the resulting price below the A-share market valuation center, equity pledges have become a major explosion. Since June of this year, more than 10 A-share companies have already announced the existence of pledges. The risk of equity liquidation involves the market value of nearly 10 billion yuan.

Naturally, there’s possible fraud involved. One investment banker lays out a 3-step process that started with manipulating share prices higher:

“Three steps”

“Equity pledges have been an important way of capital operation.” The aforementioned investment bankers explained that, for example, some of the fixed-income participants replaced the previous bridge loans used for the increase in the number of shares, and some of the companies The method of equity pledge achieves the change of major shareholders, in order to bypass the threshold of “can’t backdoor”.

However, under the equity pledge and the expected collapse of share prices, a “three-step” model is emerging in the market.

“From a certain point of view, the major shareholder of the equity pledge is a group of smart capital players. Sometimes, they first blow the market value to achieve the maximum financing, but then the stock price will often appear due to the return value of the stock price It fell, and the institutions of the pledges became anxious at this time.”

Here’s one example: 361 shareholders of one company pledged all their shares, equivalent to nearly 50 percent of outstanding shares:

Statistically, many stockholders’ stock pledges are conducted at relatively high stock prices. This is not only related to the overall downward trend of the market itself, but also related to the choice of shareholders for the pledge of specific time nodes.

Three hundred and sixty-one controlling shareholders, Tianjin Qixin Zhicheng Technology, pledged 3.297 billion shares in one breath in March, which accounted for 100% of their shares, and also accounted for 48.74% of the company’s total share capital. At the time of its pledge, it was precisely when the stock price of three hundred sixty-six had the strongest performance. The company recently issued an announcement that the pledge was not a new issue, but a pledge of 460 shares in the equity of the controlling shareholder at the time of the privatization of US stocks.

Tianjin Qixin is a private company that has a stake in Qihoo. It says the shares are related to the delisting of Qihoo from the U.S. market.

Step two in this process is halting shares after they collapsed in price:

Secondly, after the equity pledge, under the influence of the big market, the stock price of the relevant company has become the norm. Most of the major shareholders have adopted a suspension to protect the interests. However, this approach is a double-edged sword, although it can suppress the stock price decline in the short term, it will also Bring the loss of stock liquidity. And in the context of stricter regulation of suspension, it cannot be used frequently.

According to the aforementioned investment bank sources, in fact, after the major shareholders pledged their money, some of them are not afraid of falling stock prices. They are most afraid of the stock price falling but they are their pledges. “From this point of view, it is equivalent to the major shareholders transferring the risk to the pledgee. Therefore, the institutional equity pledge business including some brokerage companies has begun to shrink.”

In accordance with the conventional practice, since the pledges reach the warning line, it is generally required to make up the position within 2 days, and to add additional pledged stocks or direct cash compensation. If it breaks below the open line, it will notify the emergency plan the next day: either, the priority shareholder redeems, the redemption amount = principal + unpaid interest; or, if there is no money to redeem, it will be equal.

According to the preliminary review of the announcement, in the past month, the equity pledges of more than 20 listed companies have been liquidated, and the number has quadrupled compared with April.

Finally, after stock prices fell due to equity pledges, if major shareholders cannot protect stock prices through repurchase or other means, there is no way to cover short positions and there is no way to repay loans. When financial institutions sell off, they will have an impact on the secondary market. As a result, stocks with a high ratio of pledges have seen their shares collapse.

Here’s a list of companies whose controlling shareholders have pledged 100 percent of their shares:

Some companies are avoiding collapse by pledging more collateral. Others, such as Nanfeng discussed above, have shifted risk to the lender thanks to the court freezing the assets. 

Take Ruikang as an example, the company received a letter from the company’s controlling shareholder, Hangzhou Ruikang Sports Culture Co., Ltd. on June 12th. Due to the continuous decline in the stock price of the company in recent days, some of the shares of Ruikang Sports Pledge have already exceeded the liquidation line. . As a result, Ruikang Sports and its controlling shareholder Shenzhen Shenliyuan Investment Group Co., Ltd. began to actively negotiate with the pledgee to sign a supplementary agreement and added 20 sets of commercial houses and 5 sets of residential buildings totaling 5770.07m2 as collateral.

Taking Southwind as an example, the shares of Yangzishan, one of the company’s actual controllers, had already touched the liquidation line as early as the end of May. However, since all of its shares have been frozen by the judiciary, the shares pledged by Yang Zishan will not be forced. Warehouse transfer. This also means that the relevant risks have been accumulated here at the pledgee.

Final advice for investors:

The pledge rate of equity is below 30%, which is generally safer. Conversely, more than 70% of them belong to high-risk varieties, because once the warning line is touched, they may face the dilemma of no assets available for compensation. At the same time, for cases where the proportion of equity pledged exceeds 50%, it should always pay close attention to the changes in the stock prices of related companies and the latest equity pledge information.

So much for default risk from China’s deleveraging effort being contained.

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Perhaps it’s because of his long-held view that bond yields will remain anchored – and might even enter (or reenter) negative territory in the near future – as the global economy slumps into another uncomfortable slowdown – but the financial press has been paying quite a bit of attention to Societe General global strategist Albert Edward. Barron’s back in April published a must-read interview with Edwards, in which he touched on his infamous “Ice Age” thesis, as well as the looming global recession. And this week, the Financial Times is back with its own piece on Edwards that’s pegged to the fact that Edwards’ former nemesis, Malaysian Prime Minister Mahathir Mohamad, has returned to power.

Albert Edwards

Edwards – who was then employed as a strategist at Kleinwort Benson Securities – made a name for himself back in the 1990s when he was writing (correctly, as it turned out) about some of the issues that led to the 1997 Asian financial crisis. The strategist, who moved to French bank Societe Generale just over 10 years ago, has over the last two decades earned a reputation as perhaps the best-known permabear on Wall Street.

The year was 1995 and, for market strategist Albert Edwards, a nasty piece of feedback had just arrived from the Far East. A one-page fax to Mr Edwards from a client of his then employer, Kleinwort Benson Securities, tore into a piece of his analysis which had suggested that economies round the Pacific Rim might be over-heating.

The client was having none of it: “Your understanding of this part of the world ranks on a par with Noddy and Big Ears’s comprehension of sub-atomic physics,” the client wrote.

And so was born in the strategist’s mind the idea of “Noddynomics” – an insult that Mr Edwards was soon to hurl in the direction of the then Malaysian prime minister, Mahathir Mohamad, in one of his regular strategy notes. Kleinwort Benson was not very popular in the region for some time.

Edwards readily admits that investors who followed his predictions to the letter would’ve lost money doing so (particularly since the dawn of QE), Edwards is refusing to give up on his long-term bearish view. Back in February, Edwards joined the ranks of US bond bears, with the caveat that his view was an explicitly short-term thesis (“I repeat my forecast that US 10y yields will fall below zero”).

Despite his on-paper record, Edwards has proved himself to be one of the Street’s more enduring strategists for his commitment to his contrarian ideas.

Mr Edwards’ durability has been evident in another form: in June each year winners are announced for the annual Extel Survey of analyst research. And every year, for the past 15 on the trot, this particular strategist has come top of the Global Strategy category. It is an extraordinary record, not least because, by his own words, Mr Edwards’ predictions have proved somewhat wrong for some time now.

Mr Edwards himself puts this down, at least partly, to the fact that he is ready to make fun of himself. “The Weekly note is short. It’s entertaining. And you’ve got to remember there’s so much bullish stuff out there,” he says. “Across the market people feel comfortable when everyone’s being bullish. So there’s room for a maverick. There’s room for the long view.”

And while the recovery wasn’t kind to devoted believers in Edwards’ “Ice Age” thesis (since the start of the year, equities have largely remained near their all-time highs, even during periods of intense market turbulence), at least one of his predictions has been proven correct:

In the years since, following the dotcom crash and then the financial crisis a decade ago, one side of the thesis has proved correct, with sovereign yields moving into negative territory across developed markets. But the secular derating of equities predicted by Mr Edwards has manifestly failed to happen.

But as stocks failed to rally during the Q1 earnings season and the correlation between climbing yields and a rising dollar reemerged, strategists at Morgan Stanley and elsewhere have reaffirmed their own long-term bullish views on volatility.

So while Morgan Stanley’s quants view near-term volatility pricing as roughly fair from a dynamic hedging perspective, “if buying options to benefit from price movement they are a little rich – hence the view to overwrite or play the upside via call spreads.”

Longer-term, however, the bank remains bullish on volatility given the nearing turn of the cycle – but for directional users of options it is better to wait until there is a catalyst for a crack in earnings, which will drive a true break of the range.

As Edwards explains, QE might work in the short term, but ultimately, it fails to solve the underlying problem. Credit bubbles like the one that triggered the financial crisis remain intact until the Fed and its fellow central banks – fearing that the economies they supervise would be left vulnerable should another collapse occur – decide to hike interest rates until they unleash another catastrophic “credit event”.

In a summary of one of Edwards’ more recent strategy notes, we reminded readers how Fed tightening cycles have preceded nearly every financial crash of the twentieth century.

But as Edwards and ideological compatriots see things, that’s hardly the Fed’s only shortcoming. The rapid expansion in home valuations and wealth inequality has created a generation of people who feel economically left behind setting up lawmakers to capitalize on the growing antipathy toward central bankers when the next crash hits.

“QE might look good for a few years, but it makes the problem worse. With a normal cycle, with interest rates going up quickly, these companies would have gone out of business quicker.”

So when the next credit bubble bursts, when the next crisis arrives, politicians will be looking for someone to blame.

“Last time they were able to blame it on the bankers, people like Fred Goodwin. But the commercial banks won’t he holding all the toxic waste next time. Instead, the politicians will be looking to the central bankers. They will lose the confidence.”

According to a BIS report released late last year, roughly 10% of companies in emerging and developed economies have only survived because central banks have suppressed real interest rates. These “zombie” firms will be the first to be culled by the next recession because, quite simply, they are unable to survive without the flow of cheap financing that has kept them afloat over the past decade.

This trend, combined with the disturbing jump in small-business credit-card charge-off rates…

…Has prompted Edwards to declare that the second-longest US economic expansion in history is nearing a spectacular end. To put a spin on a popular defense of central bank intervention, while this isn’t the first time Edwards has made such a declaration, This Time It’s Different.

Earlier this month, Edwards shared a message with the Federal Reserve that he learned during a recent vacation – a two-week long commune with nature in Lake Tahoe and Yosemite.

It was significant that we didn’t see any bears at either venue despite doing a 7.30am, 13 mile valley floor hike! I’m sure the absence of fellow bears was a significant countertrend sign. I learned something else on my trip worth sharing. We took the Yosemite Tram tour of the valley floor and the ranger gave a very interesting talk about fire.  Until 1970 Yosemite Parks was extinguishing regular small-scale fires to prevent property damage. The resultant rise in dense small tree growth meant that although fires were less frequent, they quickly got out of control. Since 1970 they have allowed more fires to burn, resulting in less damage.

So, when the next recession finally arrives, will central banks be able to salvage their already damaged credibility? Or will this next crash lead to a fundamental shift in the view that central banks can and should be independent?

“The Fed could well lose its independence. So, too, could the Bank of England. And in my view they should.”

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Authored by Jay Syrmopoulos via ActivistPost.com,

United States Army Secretary Mark Esper recently revealed that the military has a strategic vision of utilizing autonomous and semi-autonomous unmanned vehicles on the battlefield by 2028.

“I think robotics has the potential of fundamentally changing the character of warfare. And I think whoever gets there first will have a unique advantage on the modern battlefield,” Esper said during a Brookings Institution event.

“My ambition is by 2028, to begin fielding autonomous and certainly semi-autonomous vehicles that can fight on the battlefield,” he added. “Fight, sustain us, provide those things we need and we’ll continue to evolve from there.”

In a preview of the U.S. Army’s strategic vision, released on June 6, Esper said the integration of these forces would become a critical strategic component, quoting from the document:

The Army of 2028 will be able to deploy, fight, and win decisively against any adversary, anytime, and anywhere … through the employment of modern manned and unmanned ground combat systems aircraft, sustainment systems and weapons.

When Esper was reportedly asked about concerns regarding autonomous robots being a threat to humanity, he replied in jest, “Well, we’re not doing a T-3000 yet,” referencing the Terminator movie series about self-aware AI threatening the existence of humanity.

Of course, while he jokes about the threat of autonomous killer robots, polymath inventor Elon Musk clearly takes the potential of such a threat much more seriously, as evidenced by his comments at the South by Southwest (SXSW) conference and festival on March 11, in which he said that “AI is far more dangerous than nukes.”

“I’m very close to the cutting edge in AI and it scares the hell out of me,” Musk told the SXSW crowd. “Narrow AI is not a species-level risk. It will result in dislocation… lost jobs… better weaponry and that sort of thing. It is not a fundamental, species-level risk, but digital super-intelligence is.”

“I think the danger of AI is much bigger than the danger of nuclear warheads by a lot. Nobody would suggest we allow the world to just build nuclear warheads if they want, that would be insane. And mark my words: AI is far more dangerous than nukes,” Musk added.

As The Free Thought Project reported last month, the Pentagon reportedly plans to spend more than $1 billion over the next few years developing advanced robots for military applications that are expected to complement soldiers on the battlefield, and potentially even replace some of them.

While the development of this tech by the Army sounds like a movement toward better weaponry, and not a digital super-intelligence, as discussed by Musk—the creation of fully autonomous unmanned weapons systems clearly has implications given the potential future development of some type of “digital super-intelligence.”

Esper attempted to allay fears by noting that the Army’s unmanned vehicle program would be akin to the Air Force’s use of Predator drones, and clarified that the idea would be to protect soldiers by removing them from direct combat. In turn, he said, this would enhance tactical ability and mobility, thus paving the way for cheaper tanks due to not having a crew inside in need of protection.

However, due to the complexity of the modern battlefield, a human element would remain part of the process.

“In my vision, at least, there will be a soldier in the loop. There needs to be. The battlefield is too complex as is,” Esper said.

The nuance in Esper’s statement seemingly leaves lots of ambiguity when he says, “In my vision, at least…” which by default likely implies other competing visions that almost certainly include the use of autonomous systems that don’t have a “solider in the loop.”

During his SXSW commentary, Musk noted that rapid advancements in artificial intelligence are far outpacing regulation of the burgeoning technology, thus creating a dangerous paradigm. He explained that while he is usually against governmental regulation and oversight, the potentially catastrophic implications for humanity create a need for regulation.

“I’m not normally an advocate of regulation and oversight,” Musk said. “There needs to be a public body that has insight and oversight to confirm that everyone is developing AI safely.”

While some experts in the field have attempted to dismiss the threat posed to humanity by the development of AI, Musk said these “experts” are victims of their own delusions of intellectual superiority over machines, calling their thought process “fundamentally flawed.”

“The biggest issue I have with AI experts… is that they think they’re smarter than they are. This tends to plague smart people,” Musk said. “They’re defining themselves by their intelligence… and they don’t like the idea that a machine could be smarter than them, so they discount the idea. And that’s fundamentally flawed.”

The billionaire inventor pointed to Google’s AlphaGo, an AI-powered software that can play the ancient Chinese board game Go as evidence of exponential learning capacity of machines. Although it was reputedly the world’s most demanding strategy game, in early 2017, the AlphaGo AI clinched a decisive victory over the top Go player in the world.

While current semi-autonomous systems keep humans marginally in the loop, the advent of fully autonomous systems that operate without any human input creates serious ethical implications in terms of the morality of using killer robots to slaughter human combatants on the battlefield.

Although Esper’s stated preference for keeping soldiers in the loop is noble, the larger U.S. war machine will undoubtedly find some type of efficiency in eliminating the human component altogether to make killing on the battlefield even more “efficient.”

We are clearly on an extremely slippery slope when it comes to killer robots and A.I.  Intellectual giants like Elon Musk and Stephen Hawking have continually attempted to sound the civilizational alarm regarding the extreme dangers inherent to AI.

As an article in the Guardian on Monday pointed out, killer robots are only a threat if we are stupid enough to create them. Now, the only question is: Will anyone heed all these warnings?

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A New York psychologist who claims to have “met Trump personally” in the early 90’s at a fashion event, Suzanne Lachmann, says that Donald Trump interrupted her while she was trying to introduce herself – asking her why he would want to talk to her with all the hot models around, and that he “wouldn’t let you suck my dick.”  

Lachmann told The Post she spotted the famous developer standing alone at a Missoni fashion event — filled with models — on the heels of his 1992 divorce from first-wife Ivana.

She approached The Donald to introduce herself as “a neighbor,” and tell him she enjoyed his recent interview on the Howard Stern show.

“He interrupted me and said, ‘Why would I want to talk to you? Look at all the beautiful women in here. I wouldn’t let you s–k my d–k.’”

Stunned, she said, she walked away without a response. –NY Post

Earlier in the month, Lachmann – a New York Fire Department consultant whose Twitter account is littered with anti-Trump tweets and retweets, wrote “As a mental health expert – clinical psychologist – based in #nyc consultant for #FDNY who helps determine who must be taken off line due to mental duress, have met trump personally and had direct interaction w him I say w certainty that he is #UnfitForOffice #UnfitToBePresident”

As a mental health expert – clinical psychologist – based in #nyc consultant for #FDNY who helps determine who must be taken off line due to mental duress, have met trump personally and had direct interaction w him I say w certainty that he is #UnfitForOffice #UnfitToBePresident

— Suzanne Lachmann (@DrSuzanneL) June 6, 2018

In February, Lachmann ranted over Twitter about Trump supporters, saying they are “psychiatrically unstable, mentally impaired, cognitively limited, utterly misanthropic, white supremacists to the extreme,” who “can’t distinguish what an abusive sick nut job he is.”

They don’t have an answer. They’rpsychiatrically unstable, mentally impaired, cognitively limited, utterly misanthropic, white supremacists to the extreme, and/or so severely traumatized by events in their own lives that they cannot distinguish what an abusive, sick nutjob he is

— Suzanne Lachmann (@DrSuzanneL) February 12, 2018

Lachmann, 50, described the encounter in the March 2017 edition of Psychology Today:

I was volunteering that evening and later approached him in order to introduce myself, and he said, “Why would I want to talk to you? I wouldn’t even let you suck my d*ck. Look at all the beautiful women here. Don’t waste my time.” –Psychology Today

The Post suggested that Lachmann’s comments over Twitter may have violated the FDNY’s social media policy which states: “Employees who identify themselves as FDNY employees, or hold positions with the FDNY that are known to the general public … should make a clear disclaimer that the statements and views expressed … do not reflect the views of the FDNY.” 

Lachmann, however, insisted the policy doesn’t apply to her because “I’m a consultant, not an employee.” 

FDNY spokesman Frank Gribbon, however, said “It’s inappropriate to cite her work with FDNY in social posts that express political views.“

Sad! 

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Authored by Peter Schmidt via SchiffGold.com,

When currency was backed by gold, a central bank’s main function was to maintain the value of the issued currency in terms of gold.  For example, if a central bank created too much money against the gold reserves in the banking system, an increasing number of people would begin to exchange their currency for gold.  To combat this, a central bank would be forced to raise interest rates and decrease the money supply.  The higher interest rates would incentivize people to exchange gold for larger savings on deposit that earn interest.  Banking reserves – gold – would return to the banking system and the economy would return to balance.  The prime reason for insisting on defining currency in terms of a precious metal was to provide a self-correcting braking mechanism to the creation of money.  As expressed by the great Wilhelm Röpke:

If in the production of goods the most important pedal is the accelerator, in the production of money it is the brake.  To insure that this brake works automatically and independently of the whims of government and the pressure of parties and groups seeking “easy money” has been one of the main functions of the gold standard.  That the liberal should prefer the automatic brake of gold to the whims of government in its role of trustee of a managed currency is understandable.”

The US dollar was backed by gold as recently as 1971.  Any central bank in the world could present the Federal Reserve $35 and receive 1-ounce of gold in exchange.  However, on August 15, 1971 – blaming it on the “gnomes of Zurich” – President Nixon “temporarily” broke the dollar’s last link with gold.  Nixon closed the “gold window” and reneged on the promise to exchange an ounce of gold for $35.  Since then, the system of credit in the US has been under the Fed’s complete control.

Unsurprisingly, without the natural braking action provided by gold, the value of the dollar has collapsed and the ensuing 45 years are the most crisis-ridden period in American economic history.

The case against today’s Fed can be made in a number of ways.  A method – which enjoys the advantage of hoisting Ben Bernanke on his own mathematical petard – is to use economic statistics from two eras – 1967 and 2015.  One of the reasons Ben Bernanke is such a big fan of baseball is his fondness of statistics.  In baseball, like few other sports, players from one era can be compared to players from other eras because the game has changed so little.  Because of his fondness for baseball statistics and their constancy over time, Bernanke should be sympathetic to the data presented here – even if it exposes the enormous damage he and the Fed have visited on hundreds of millions of hard-working Americans.

The chart below speaks volumes about the disastrous impact of Fed policies since 1971.  The chart also reveals how the credit inflation the Fed has created, actually masks the disastrous impact of the Fed’s policies.  Specifically, the Fed-induced inflation makes it difficult for the average worker to realize that even though their salaries have soared in dollar terms, these salaries now purchase much less than they used to.

The chart lists prices for several common items as well as average incomes and home prices for the years 1967 and 2015.   In addition to defining prices and incomes in dollars, prices and incomes are also defined in their equivalent amounts measured in ounces of gold.  The equivalent “ounces of gold” are simply determined by taking the price in dollars and dividing it by the prevailing price of gold for the time period under review.

As a result of the collapsing value of the dollar – it is worth less than 3% of its 1971 equivalent in gold terms – it is not completely straightforward to compare economic performance in 1967 with the performance today.  When prices and incomes are measured in dollars they appear to be soaring – annual incomes have risen from $7,181 per year to $52,000.  However, when these same incomes are measured in ounces of gold, they appear to be collapsing – falling from 648.6-ounces per year to just 269.5.

What is really going on?

Because money – whether it manifests itself as paper currency issued by a central bank or a constitutionally prescribed amount of precious metal – is merely a store of wealth and a means of exchange, the Fed’s incompetence is best demonstrated by comparing what the average person can purchase with his salary today versus 1967.  The last column in the chart measures how much more unaffordable everyday items have become to the average worker, and does so without using dollars or gold.  Instead, this column computes the cost of an item on the basis of the median worker’s income for both 2015 and 1967.  A ratio of these two costs is then taken with the 2015 cost in the numerator.

For example, let’s examine home prices.  In 2015, a house cost the average worker 5.7-times their average annual income (296,400/52,000).  In contrast, in 1967 the median house cost the average worker just 3.06-times their average annual income (22,700/7,181).  Measured against the average worker’s income, today’s house costs 1.8-times more than the 1967 equivalent house (5.7/3.06)!  With the exception of a gallon of milk, every item in the chart has become more expensive to the average worker since 1967.

In conclusion and as shown here, when prices of goods are measured in terms of incomes, we can clearly see that today’s incomes purchase much less than they used to.  The clearly demonstrated fact that the average worker – the backbone of any economy – has been falling behind for decades on end shows the problems with the US economy are deep, systemic and long-running.  As evidenced here, these problems clearly have their origin in the Fed’s monetary mismanagement and the failure of the dollar to maintain even a fraction of its value over time.

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Michael Milken is not giving up on having his securities fraud convictions overturned, and now it looks as though he may have the help to make it happen. In what has been a decades long endeavor for Milken, he is finally gaining traction to cosmetically repair his record by having his convictions from the 1980’s overturned, Bloomberg reported today.

(Photo Source: Bloomberg)

Milken is perhaps best known for being the “junk-bond king” of the 1980s, and his firm, Drexel Burnham Lambert, pioneered the use of junk bonds for leveraged buyouts and single-handedly helped fuel a merger and acquisition boom. As Bloomberg wrote:

From his X-shaped desk in Beverly Hills, California, Milken had helped popularize high-yield debt in the 1980s at Drexel Burnham Lambert, fueling the leveraged buyout boom. He was implicated in illegal transactions by Ivan Boesky, a stock arbitrager and longtime Milken client.

Subsequent to that, Milken was also convicted of securities fraud associated with dealings with a Drexel client, and he had to serve two years in prison and pay a $600 million fine.

After paying his debt to society, he founded the Milken Institute and has since funded hundreds of millions of dollars, if not billions, for cancer research. He also hosts one of the most popular financial conferences that takes place on the west coast annually every year – drawing some of the biggest names in the industry and in the media.

Milken has been trying for decades to have his securities fraud convictions overturned. It is a move that is purely for cosmetics and won’t make any tangible difference on the billionaire’s day-to-day life, other than him being able to claim a victory for clearing his name and possibly give Wall Street regulators and federal prosecutors yet another reason to groan.

And now it looks as though Milken finally has the traction to possibly make it happen with the Trump administration. His list of supporters, including Anthony Scaramucci and Steve Mnuchin, also includes the man who went after him in the 80s as Attorney General, Rudy Giuliani:

Some of President Donald Trump’s closest confidants have urged him to pardon Michael Milken, the 1980s “junk bond king” who has unsuccessfully sought for decades to reverse his securities fraud conviction, according to people familiar with the matter.

The idea of a Milken pardon is being supported by Anthony Scaramucci, the financier who briefly directed White House communications; Treasury Secretary Steven Mnuchin; and Trump son-in-law and senior adviser Jared Kushner, the people said. Another advocate is Rudy Giuliani, the onetime federal prosecutor whose criminal investigation landed Milken in jail but who later bonded with him.

Milken’s attempts to secure a presidential pardon have spanned Republican and Democratic administrations, with him or his supporters putting his name forward as a worthy clemency candidate in no small part due to his philanthropic works. Milken, who is worth $3.4 billion according to data compiled by Bloomberg, has mounted high-profile efforts since his conviction to combat prostate cancer and improve childhood education. However, until now presidents have declined requests to embrace a man who came to be viewed as a symbol of greed on Wall Street.

Bloomberg noted in its article that a pardon wouldn’t reverse Milken’s “lifetime ban on securities dealing, which would require a separate appeal to the Securities and Exchange Commission.” The SEC could, from there, still resist granting his appeal, regardless of the presidential pardon. Bloomberg also wrote that it would potentially be overturning the most high profile insider trading case ever, if it happens:

Ripping up Milken’s conviction — the result of arguably the highest-profile inside trading case ever — would be a blow to federal prosecutors, particularly those overseeing Wall Street. It would also be a rebuke to the judge who oversaw the matter three decades ago and excoriated Milken at his sentencing.

Whether or not the pardon happens remains to be seen, but surely Milken’s philanthropy over the last couple of decades and his high standing with presidential administration officials may see to it that his name is exonerated sometime soon after all.

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