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Authored by Vitaliy Katsenelson via RealInvestmentAdvice.com,

The Roman philosopher Seneca wasn’t talking about the stock market when he wrote that “Time discovers truth,”but he could have been. In the long run a stock price will reflect a company’s (true) intrinsic value. In the short run the pricing is basically random. Here are two real-life examples.

Let’s say you had the smarts to buy Microsoft in November 1992. It would have been a brilliant decision in the long run — the software giant’s stock has gone up many-fold since. But nine months later, in August 1993, that call did not look so brilliant: Microsoft shares had declined 25% in less than a year. In fact, it would have taken you 18 months, until May 1994, for this purchase to break even. Eighteen months of dumbness?

In the early 1990s, the PC industry was still in its infancy. Microsoft’s DOS and Windows operating systems were de facto standards. Outside of Apple Macs and a tiny fraction of computers, every computer came preinstalled with DOS and Windows. Microsoft had a pristine balance sheet and a brilliant co-founder and CEO in Bill Gates who would turn mountains upside-down to make sure the company succeeded. The above sentence is infested with hindsight — after all, that was almost 30 years ago. But Microsoft clearly had an incredible moat, which became wider with every new PC sold and every new software program written to run on Windows.

Here is another example: GoPro is a maker of video cameras used by surfers, skiers, and other extreme sports enthusiasts. If you had bought the stock soon after it went public, in 2014, you would have paid $40 a share for a $5.5 billion–market-cap company earning about $100 million a year — a price-earnings ratio of about 55. Your impatience would, however, have been rewarded: The stock more than doubled in just a few short months, hitting $90.

Would it have been a good decision to buy GoPro? The company makes a great product — I own one. But GoPro has no protective “moat” around its business. None. Most components that go into its cameras are commodities. There are no barriers to entry into the specialized video camera segment. Most important, there are no switching costs for consumers. Investors who bought GoPro after its IPO paid a huge premium for the promise of much higher earnings from a company that might or might not be around five years later.

What is even more interesting is that some of those buyers were then selling to even bigger fools who bought at double the price a few months later. GoPro was a momentum stock that was riding a wave about to break. Fast-forward a few years and GoPro sales have been on decline; nowadays its stock trades below $6.

These two examples bring us to the nontrivial topics of complex systems and nonlinearity. My favorite thinker, Nassim Taleb, wrote the following in his book “Antifragile: Things That Gain from Disorder”:

“Complex systems are full of interdependencies – hard to detect – and nonlinear responses. Nonlinear means that when you double the dose of, say, a medication, or when you double the number of employees in a factory, you don’t get twice the initial effect, but rather a lot more or a lot less.”

The stock market is a complex system where in the short term there are few if any interdependencies between decisions and outcomes. In the short run, stock prices are driven by thousands of random variables. Stock market participants have different risk tolerances and emotional aptitudes, and diverse time horizons ranging from milliseconds (for high-speed traders) to years (for long-term investors).

In other words, predicting where a stock price will be in a day, a month or even a year is not much different from prognosticating whether the ball on a roulette wheel will land on red or black. In the longer run, good decisions should pay off because fundamentals will shine through — as was the case with buying Microsoft in 1992 and not buying GoPro in 2014. But in the short run there is no correlation between good decisions and results.

Whenever you look at your portfolio, think of Microsoft and GoPro. The performance of your stocks in the short run tells you absolutely nothing about what you own or about the quality of your decisions. You may own a portfolio of Microsofts, and its value is going down because at this juncture the market doesn’t care about Microsofts. Or maybe you stuffed your retirement fund with overpriced fads that may not be around a year from now. But in the longer run, remember what Seneca knew:

“Time discovers truth.”

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The Bay Area has always been a bastion of progressive values. But since the election of President Trump, the dominant ideological orientation in a region that’s notoriously prone to groupthink has shifted from questioning conservative values to deliberate anti-Americanism.

Examples of this trend abound: From the assault of a man carrying an American flag (in an ironic twist, the victim of the vicious beating happened to be a Bernie Sanders supporter) to the internal backlash at Google over the company’s work with the federal government, including the Department of Defense.

One bizarre incident reported Tuesday by the Stamford Review stands out not just because it happened at Stanford, an elite American University, but also because it was seemingly unprovoked. The paper published a column retelling how a campus administrator had recommended that a fraternity called Sigma Chi (a fraternity that was disbanded following a probationary period last year) remove an American flag flying outside the house. The administrator – identified only as “Mr. Z” – suggested that flying the star-spangled banner could be interpreted as aggressive or jingoistic by some members of the community, and that, if Sigma Chi wanted to ingratiate itself with its neighbors (and presumably the administration) it should consider un-hoisting the flag to help “improve its image” in the community.

This context of a friendly relationship with Mr. Z made the following incident all the more surprising. One night during Autumn 2017, Lozano recounted, Mr. Z was invited to eat dinner at Sigma Chi. While discussing improving the fraternity’s image with the university, Mr. Z offhandedly suggested that Sigma Chi remove the potentially discomforting symbol outside: the American flag flown in front of the house. Mr. Z urged Sigma Chi to consider the image being presented to the rest of campus by flying the flag out front. He furthered that if Sigma Chi wished to break away from stereotypes that plagued the house and to change its perception on campus, its members should contemplate un-hoisting the American flag.

While this remark was just one in a larger discussion on rebranding the house, it stands out. Mr. Z’s recommendation insinuated not only that the flag made others uncomfortable but that its being flown tainted Sigma Chi’s reputation and, presumably, worsened its chance of survival. Lozano understood Mr. Z to imply that the American flag, as a symbol, could be intimidating, aggressive or alienating. Mr. Z’s tone further signaled to Lozano that he found the mere sight of the American flag to be offensive.

The students who spoke with the Review recalled that they were initially confused by Mr. Z’s remark, because they didn’t understand how anybody could interpret hanging an American flag on American soil as an offensive act. The members of the fraternity surveyed the surrounding area and found several buildings – including several owned by the university – where American flags had been hanging. Still reeling from the suggestion, the fraternity decided to double down: Instead of removing the flag, they bought an even larger flag.

The remark was, according to Lozano, out of the blue and incongruent with the candid rapport they had shared with Mr. Z up and until then. Furthermore, they wondered, since when is an American flag flown at an institution in the United States offensive? Lozano later observed that right down the road from Sigma Chi, an American flag is flown outside Stanford’s Post Office. Similarly, he noted, an American flag is flown outside Green Library’s Bing Wing and was once flown outside Memorial Auditorium, which commemorates fallen Stanford soldiers from WWI onward. According to Lozano’s knowledge, Mr. Z raised no objections to the Dominican flag flown by a student from his bedroom window in Sigma Chi or to the Palestinian flag which was hung across the street at Columbae.

In protest of Mr. Z’s suggestion, the house declined to remove the flag, instead choosing to replace it with an even bigger one. Some members, of course, abstained from the discussion about and decision to purchase a bigger flag. The following day, by Lozano’s doing, Sigma Chi upgraded from a three-by-five-foot flag to a four-by-six-foot flag. The former flag was then framed and placed on display inside the house. This decision was, in Lozano’s words, a “silent but visible protest” against the classification of the American flag as a potentially stigmatizing symbol by a member of the Stanford administration.

Though the reasons for its dispersal are unclear, Sigma Chi was banned from the university shortly after the incident.

While it’s unclear whether the flag gestured had anything to do with the ban, at least the students were able to move on with their dignity intact.

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Having taken a day off to watch Bush’s funeral – drifting modestly higher before the early close – reports of the arrest of Huawei’s CFO at the request of US authorities has sparked carnage at the re-open.

As we detailed earlier, mere hours after Chinese officials finally affirmed President Trump’s description of Saturday’s trade ‘truce’ – this after fears that the true nature of the agreement might have been “lost in translation” helped trigger the worst one-day market selloff since October – the DOJ has gone ahead and kicked the hornet’s nest, seriously jeopardizing the prospects for a prolonged trade detente between the world’s two biggest economies.

Dow futures were down over 500 points as they opened…

 

The selling is across all the major US index futures…

For now there is no reaction in Yuan or Treasuries.

For now it appears that the trade truce is back to square one zero, leaving Trump with a choice: releasing Meng or watching the any last hopes of Christmas rally fade into the distance.

via RSS https://ift.tt/2E4T1Bp Tyler Durden

Authored by John Whitehead via The Rutherford Institute,

“This Christmas season finds us a rather bewildered human race. We have neither peace within nor peace without. Everywhere paralyzing fears harrow people by day and haunt them by night. Our world is sick with war; everywhere we turn we see its ominous possibilities. And yet, my friends, the Christmas hope for peace and goodwill toward all men can no longer be dismissed as a kind of pious dream of some utopian. If we don’t have goodwill toward men in this world, we will destroy ourselves by the misuse of our own instruments and our own power.”— Martin Luther King, Jr., “A Christmas Sermon on Peace”

To a nation of snowflakes, Christmas has become yet another trigger word.

The latest Christmas casualties in the campaign to create one large national safe space are none other than the beloved animated classic Rudolph the Red-Nosed Reindeer (denounced for promoting bullying and homophobia) which first aired on television on December 6, 1964, and the Oscar-winning tune “Baby, It’s Cold Outside” (accused of being a date rape anthem) crooned by everyone from Dean Martin to Will Ferrell and Zooey Deschanel in the movie Elf.

Also on the endangered species Christmas list are such songs as “Deck the Halls” (it supposedly promotes “gay” apparel), “Santa Baby” (it has been denounced for “slut shaming”), and “White Christmas” (perceived as being racist).

One publishing company even re-issued their own redacted version of Clement Clarke Moore’s famous poem “Twas the night before Christmas” in order to be more health conscious: the company edited out Moore’s mention of Santa smoking a pipe (“The stump of a pipe he held tight in his teeth, / And the smoke, it encircled his head like a wreath.”)

Oh the horror.

After a year plagued with its fair share of Scrooges and Grinches and endless months of being mired in political gloom and doom, we could all use a little Christmas cheer right now.

Unfortunately, the politically charged Right and Left have been trying to score points off each other for so long, using whatever means available, that even Christmas has been weaponized.

Yet just because the War on Christmas has been adopted as a war cry by Donald Trump doesn’t mean that it’s not real.

Look around you.

When I was a child in the 1950s, the magic of Christmas was promoted in the schools. We sang Christmas carols in the classroom. There were cutouts of the Nativity scene on the bulletin board, along with the smiling, chubby face of Santa and Rudolph. We were all acutely aware that Christmas was magic.

Fast forward to the present day, and there is a phobia surrounding Christmas that has turned it into fodder for the politically correct culture wars.

Indeed, in its “Constitutional Q&A: Twelve Rules of Christmas,” The Rutherford Institute points out that some communities, government agencies and businesses have gone to great lengths to avoid causing offense over Christmas.

Examples abound.

Schools across the country now avoid anything that alludes to the true meaning of Christmas such as angels, the baby Jesus, stables and shepherds.

In many of the nation’s schools, Christmas carols, Christmas trees, wreaths and candy canes have also been banned as part of the effort to avoid any reference to Christmas, Christ or God. One school even outlawed the colors red and green, saying they were Christmas colors and, thus, illegal. 

Students asked to send seasonal cards to military troops have been told to make them “holiday cards” and instructed not to use the words “Merry Christmas” on their cards.

Many schools have redubbed their Christmas concerts as “winter holiday programs” and refer to Christmas as a “winter festival.” Some schools have cancelled holiday celebrations altogether to avoid offending those who do not celebrate the various holidays.

In Minnesota, a charter school banned the display of a poster prepared to promote the school’s yearbook as a holiday gift because the poster included Jack Skellington from Tim Burton’s The Nightmare Before Christmas and other secular Christmas icons, not to mention the word “Christmas.”

In New Jersey, one school district banned traditional Christmas songs such as “Joy to the World” and “Silent Night” from its holiday concerts.  A New Jersey middle school cancelled a field trip to attend a performance of a play based on Charles Dickens’s “A Christmas Carol” because some might have found it “offensive.”

In Texas, a teacher who decorated her door with a scene from “A Charlie Brown Christmas,” including a scrawny tree and Linus, was forced to take it down lest students be offended or feel uncomfortable.

In Connecticut, teachers were instructed to change the wording of the classic poem “Twas the Night Before Christmas” to “Twas the Night Before a Holiday.”

In Virginia, a high school principal debated about whether he could mention Santa or distribute candy canes given that they were symbols of Christmas.

In Massachusetts, a fourth-grade class was asked to list 25 things that reminded them of Christmas. When one young student asked if she could include “Jesus,” her teacher replied that she could get fired if Christmas’ namesake appeared on the list.

Things are not much better outside the schools.

In one West Virginia town, although the manger scene (one of 350 light exhibits in the town’s annual Festival of Lights) included shepherds, camels and a guiding star, the main attractions—Jesus, Mary and Joseph—were nowhere to be found due to concerns about the separation of church and state.

In Chicago, organizers of a German Christkindlmarket were informed that the public Christmas festival was no place for the Christmas story. Officials were concerned that clips of the film “The Nativity Story,” which were to be played at the festival, might cause offense.

In Delaware, a Girl Scout troop was prohibited from carrying signs reading “Merry Christmas” in their town’s annual holiday parade.

While the First Amendment Establishment Clause prohibits the government from forcing religion on people or endorsing one particular religion over another, there is no legitimate legal reason why people should not be able to celebrate the season freely or wish each other a Merry Christmas or even mention the word Christmas.

The Rutherford Institute’s “Twelve Rules of Christmas” guidelines are helpful in dealing with folks who subscribe to the misguided notion that the law requires anything Christmas in nature be banned from public places.

Yet here’s the thing about this so-called War on Christmas that people don’t seem to get: while Christmas may be the “trigger” for purging Christmas from public places, government forums and speech – except when it profits Corporate America – it is part and parcel of the greater trend in recent years to whittle away at free speech and trample the First Amendment underfoot.

Claiming to promote tolerance and diversity while seeking a homogeneous mindset, many workplaces, schools and public places have become intolerant of any but the most politically correct viewpoints.

Anything that might raise the specter of controversy is avoided at all costs.

We are witnessing the emergence of an unstated yet court-sanctioned right, one that makes no appearance in the Constitution and yet seems to trump the First Amendment at every turn: the right to not be offended.

In this way, emboldened by phrases such as “hate crimes,” “bullying,” “extremism” and “microaggressions,” free speech has been confined to carefully constructed “free speech zones,” criminalized when it skates too close to challenging the status quo, shamed when it butts up against politically correct ideals, and muzzled when it appears dangerous.

This is censorship, driven by a politically correct need to pander to those who are easily offended.

Where you see this “safe space” mindset really play out is in the nation’s public schools, which continue to adopt policies—such as zero tolerance policies—that promise to steer young people clear of anything that even hints at danger, controversy or non-politically correct thinking.

Unfortunately, all too often it is common sense and individual liberty that get trampled underfoot: a student gets suspended under the school’s zero tolerance policy against drugs for chewing on a Certs breath mint; a kindergartner is suspended under the school’s zero tolerance policy against violence for playing a make-believe game of cops and robbers using his finger as a gun; and a school trip to see “A Christmas Carol” is cancelled because of the school’s zero tolerance policy against anything that is in any way offensive.

What’s worse, the motto today seems to be “When in doubt, throw it out.”

At the slightest hint of trouble, government officials (and corporations) are inclined to chuck anything that might be objectionable. So whereas Mark Twain’s classic “Huckleberry Finn” used to at least make the list of banned books every year, it now rarely even makes an appearance on school reading lists. It has been scrubbed out of existence.

See how that works?

Zero tolerance policies are ultimately about programming people into compliance with the government’s dictates.

The government doesn’t care about Christmas. It cares about control.

By government, I’m talking about the entrenched government bureaucracy that really calls the shots no matter what political party controls Congress and the White House.

Never forget, the police state wants us to be a nation of snowflakes, snitches and book burners: a legalistic, intolerant, elitist, squealing bystander nation willing to turn on each other and turn each other in for the slightest offense.

All of the petty sniping over Melania Trump’s red-themed Christmas decorations?

That plays perfectly into the Deep State’s efforts to keep the citizenry at odds with each other and incapable of presenting a united front against the threats posed by the government and its cabal of Constitution-destroying agencies and corporate partners.

You want to know why this country is in the state it’s in?

As I make clear in my book Battlefield America: The War on the American People, the answer is the same no matter what the problem might be, whether it’s the economy, government corruption, police brutality, endless wars, censorship, falling literacy rates, etc.: every one of these problems can be sourced back to the fact that “we the people” have stopped thinking for ourselves and relinquished responsibility for our lives and well-being to a government entity that sees us only as useful idiots.

The Greek philosopher Socrates believed in teaching people to think for themselves and in the free exchange of ideas. For his efforts, he was accused of corrupting the youth and was put to death. However, his legacy lived on in the Socratic method of teaching: posing questions that help young and old discover the answers by learning to think for themselves.

Now even the Socratic method is in danger of extinction.

As Rod Serling, creator of the classic sci-fi series Twilight Zone and one of the most insightful commentators on human nature, once observed, “We’re developing a new citizenry. One that will be very selective about cereals and automobiles, but won’t be able to think.”

We face an immense threat in our society from this drive to obliterate our history and traditions in order to erect a saccharine view of reality. In the process, we are creating a schizophrenic world for our children to grow up in, and it is neither healthy nor will it produce the kind of people who will be able to face the challenges of a future ruled by a totalitarian regime.

You can’t sanitize reality. You can’t scrub out of existence every unpleasant thought or idea. You can’t legislate tolerance. You can’t create enough safe spaces to avoid the ugliness that lurks in the hearts of men and women. You can’t fight ignorance with the weapons of a police state.

What you can do, however, is step up your game.

Opt for kindness over curtness, and civility over censorship. Choose peace over politics, and freedom over fascism. Find common ground with those whose politics or opinions or lifestyles may not jive with your own. 

Do your part to make the world a little brighter and a little lighter, and maybe, just maybe, we’ll have a chance of digging our way out of this hole.

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Ever since April, the otherwise drab and colorless Fed Beige Book, was notable for one specific trend: a rising frequency of the word “tariff” with every subsequent report, confirming that in addition to the usual concerns businesses voiced to the regional Fed such as labor and prices, one of the growing worries amid local companies was the impact of trade war on future business. And, as we noted last month, with the Trump-Xi summit fast approaching, the Beige Book confirmed that with no less than 51 mentions of the word “tariff”, most companies were on edge over future trade prospects.

• March Beige Book instances of word “tariff”: 0
• April Beige Book instances of word “tariff”: 36
• May Beige Book instances of word “tariff”: 22
• July Beige Book instances of word “tariff”: 31
• September Beige Book instances of word “tariff”: 41
• October Beige Book instances of word “tariff”: 51

Today, the December Beige Book was released, and in a notable development, we saw the first decline in mentions of “tariffs” since May, with the word used “only” 39 times, a steep drop from October’s 51.

And while superficially this may be taken as a good sign, another, perhaps more ominous trend has emerged.

But first, a quick glimpse at what else today’s Beige Book revealed: a casual glance of the summary page revealed few surprises. Indeed, according to the Federeal Reserve, most regions reported growth at an overall modest to moderate pace, and while the overall near-term growth outlook remained positive, some contacts cited tariffs, rising interest rates, and labor market constraints as reasons for waning optimism. Employment growth slowed, partly because of labor shortages from increasingly tight labor markets. A majority of Districts noted capacity constraints due to difficulty in attracting and retaining workers.

In further good news for workers and wage growth,the Beige Book noted that “wage growth tended to the higher side of modest to moderate”, even as employment gains ebbed “due in part to worker shortages” while most disticts had examples of boosts in nonwage benefits.” Overall, this is a welcome development for American workers, if not so much for markets, which are on edge ahead of Friday’s report on average hourly earnings, which – if this report is any indication – may print above the 3.1% Y/Y consensus and spark more concerns that the Fed will have no choice but to remain hawkish.

In a potentially troubling development for markets – and those keeping tabs on wage inflation – most Districts noted wage growth had increased, and prices rose at a modest pace overall. There were widespread reports of input price pressures, with some Districts noting tariffs had lifted prices. Still, while October cited “modest to moderate” price rises, in December this was downgraded to just “modest.”

Making matters worse, the Fed noted that while price growth was modest, input costs rose faster than final goods prices, which is another way of saying “margin compression”, and yet another confirmation that peak profits may have indeed arrived. Not surprisingly, businesses once again were quick to blame tariffs for margin compression, with the Beige citing spreading reports of “tariff induced cost increases”, and that “tariffs remained a concern for manufacturers”, while “optimism waned in some disticts on tariffs, rates and labor.”

But the most concerning news was the all too clear notice by the Fed that the economy itself may have peaked, with the report explicitly pointing out that Dallas and Philadelphia reported “slower growth.”

Meanwhile, as noted above, while the use of the word “tariff” may have declined for the first time in half a year, another word took its place: as shown in the chart below, the word “slow” and its variants appeared on 43 different occasions, a notable increase from 37 in October and 25 in September, which is the range it had been for most of 2018.

This rather clear hint from the Fed, or at least the various regional Fed constituent firms, that growth is moderating is not surprising, given that the economy is growing above trend and a slower expansion is embedded in the Fed’s forecasts. But, as Bloomberg’s Ye Xie notes, the report points to a clear late cycle market in 2019, one marked by lower risk-adjusted returns and much higher volatility (as BofA warned in its year-ahead preview yesterday).

* * *

Finally, there were the usual memorable anecdotes from the various regional Feds, of which the Chicago district was perhaps most remarkable, as “a number of contacts said that they had been “ghosted,” a situation in which a worker stops coming to work without notice and then is impossible to contact.” We observed the rise of this phenomenon back in July in “‘Ghosting’ On The Rise As Workers Blow Off Interviews“

Here are the other anecdotes (source: Bloomberg):

• Boston: Massachusetts restaurants continued to note acute labor shortages and higher labor costs, citing the Commonwealth’s recently implemented Employer Medical Assistance Contribution (EMAC) and scheduled hikes in the minimum wage

• New York: A couple contacts lost existing and prospective skilled workers due to immigration restrictions, including H-1B visas not being renewed.

• Philadelphia: One staffing firm noted that its roster of qualified job candidates is essentially tapped out — it has become very difficult to find qualified applicants to replenish its candidate pool.

• Cleveland: Some concern that seasonal patterns may be unusual this year as firms try to import goods before additional tariffs on Chinese goods take effect on January 1

• Richmond: A cabinet manufacturer reported an uptick in business in recent weeks, as customers rushed orders in anticipation of higher tariffs in the new year.

• Atlanta: Several contacts pointed out that overall compensation costs were expected to increase at a slightly faster pace in 2019

• Chicago: A number of contacts said that they had been “ghosted,” a situation in which a worker stops coming to work without notice and then is impossible to contact.

• St. Louis: Local contacts note that barge activity has increased due to the large number of storage barges for soybeans affected by recent tariffs.

• Minneapolis: A tight labor market for high-tech skills in Minneapolis-St. Paul has led to double-digit wage increases for some information technology and other STEM positions over the past 12 months.

• Kansas City: International geopolitical discussions surrounding waning OPEC production and U.S. sanctions on Saudi Arabia may affect District energy prices and production expectations moving forward.

• Dallas: A manufacturing equipment supplier reported frequently raising wages to prevent its employees from being poached by other firms, and one contact noted high employee turnover despite paying their groundskeepers $20 an hour.

• San Francisco: Drier-than-usual conditions in parts of California lowered yields for select crops, like nuts and tomatoes, but contacts noted that inventories were at an adequate level to meet demand.

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Mere hours after Chinese officials finally affirmed President Trump’s description of Saturday’s trade ‘truce’ – this after fears that the true nature of the agreement might have been “lost in translation” helped trigger the worst one-day market selloff since October – the DOJ has gone ahead and kicked the hornet’s nest, seriously jeopardizing the prospects for a prolonged trade detente between the world’s two biggest economies.

Canada’s Globe and Mail reported Wednesday evening that Canadian authorities have arrested Wanzhou Meng, the CFO of Huawei Technologies and daughter of the telecom giant’s founder, Ren Zhengfei. An ex-officer with the People’s Liberation Army, Ren is one of the country’s most revered business figures. Wanzhou is facing extradition to the US on suspicions that she violated US sanctions against Iran (allegations that nearly resulted in a devastating Treasury “death sentence” earlier this year for Huawei rival ZTE).

“Wanzhou Meng was arrested in Vancouver on December 1. She is sought for extradition by the United States, and a bail hearing has been set for Friday,” Justice department Ian McLeod said in a statement to The Globe and Mail. “As there is a publication ban in effect, we cannot provide any further detail at this time. The ban was sought by Ms. Meng.

Prosecutors in New York have been investigating suspicions that Huawei violated US sanctions against Iran since earlier this year. News of the probe was first reported in April. We seriously doubt the Chinese leaders will interpret Wanzhou’s arrest as a gesture of good faith and trust at a time when negotiations over a possible trade truce were expected to finally begin in earnest after a months-long standoff. After all, how would the US react if Beijing arrested Jeff Bezos’ (hypothetical) daughter?

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Authored by Michael Snyder via The End of The American Dream blog,

Vibrant competition is absolutely essential in order for a capitalist economic system to function effectively.  Unfortunately, in the United States today we are witnessing the death of competition in industry after industry as the biggest corporations increasingly gobble up all of their competitors. 

John D. Rockefeller famously once said that “competition is a sin”, and he was one of America’s very first oligopolists.  According to Google, an oligopoly is “a state of limited competition, in which a market is shared by a small number of producers or sellers”, and that is a perfect description of the current state of affairs in many major industries.  In early America, corporations were greatly limited in scope, and in most instances they were only supposed to exist temporarily.  But today the largest corporations have become so huge that they literally dominate our entire society, and that is not good for any of us.

Just look at what is happening in the airline industry.  When I was growing up, there were literally dozens of airlines, but now four major corporations control everything and they have been making gigantic profits…

AMERICA’S airlines used to be famous for two things: terrible service and worse finances. Today flyers still endure hidden fees, late flights, bruised knees, clapped-out fittings and sub-par food. Yet airlines now make juicy profits. Scheduled passenger airlines reported an after-tax net profit of $15.5bn in 2017, up from $14bn in 2016.

What is true of the airline industry is increasingly true of America’s economy. Profits have risen in most rich countries over the past ten years but the increase has been biggest for American firms. Coupled with an increasing concentration of ownership, this means the fruits of economic growth are being monopolised.

If you don’t like how an airline is treating you, in some cases you can choose to fly with someone else next time.

But as a recent Bloomberg article pointed out, that is becoming increasingly difficult to do…

United, for example, dominates many of the country’s largest airports. In Houston, United has around a 60 percent market share, in Newark 51 percent, in Washington Dulles 43 percent, in San Francisco 38 percent and in Chicago 31 percent. This situation is even more skewed for other airlines. For example, Delta has an 80 percent market share in Atlanta. For many routes, you simply have no choice.

And of course the airline industry is far from alone.  In sector after sector, economic power is becoming concentrated in just a few hands.

For a moment, I would like you to consider these numbers…

• Two corporations control 90 percent of the beer Americans drink.

• Five banks control about half of the nation’s banking assets.

• Many states have health insurance markets where the top two insurers have an 80 percent to 90 percent market share. For example, in Alabama one company, Blue Cross Blue Shield, has an 84 percent market share and in Hawaii it has 65 percent market share.

• When it comes to high-speed Internet access, almost all markets are local monopolies; over 75 percent of households have no choice with only one provider.

• Four players control the entire U.S. beef market and have carved up the country.

• After two mergers this year, three companies will control 70 percent of the world’s pesticide market and 80 percent of the U.S. corn-seed market.

I knew that things were bad, but I didn’t know that they were that bad.

Capitalism works best when competition is maximized.  In socialist systems, the government itself becomes a major player in the game, and that is never a desirable outcome.  Instead, what we want is for the government to serve as a “referee” that enforces rules that encourage free and fair competition.  Jonathan Tepper, the author of “The Myth of Capitalism: Monopolies and the Death of Competition”, made this point very well in an excerpt from his new book…

Capitalism is a game where competitors play by rules on which everyone agrees. The government is the referee, and just as you need a referee and a set of agreed rules for a good basketball game, you need rules to promote competition in the economy.

Left to their own devices, firms will use any available means to crush their rivals. Today, the state, as referee, has not enforced rules that would increase competition, and through regulatory capture has created rules that limit competition.

Our founders were very suspicious of large concentrations of power.  That is why they wanted a very limited federal government, and that is also why they put substantial restrictions on corporate entities.

When power is greatly concentrated, most of the rewards tend to flow to the very top of the pyramid, and that is precisely what we have been witnessing.  The following comes from the New York Times…

Even when economic growth has been decent, as it is now, most of the bounty has flowed to the top. Median weekly earnings have grown a miserly 0.1 percent a year since 1979. The typical American family today has a lower net worththan the typical family did 20 years ago. Life expectancy, shockingly, has fallen this decade.

So what is the solution?

Well, one of the big things that we need to do is to stop crushing small business.

In America today, the rate of small business creation has been hovering near all-time lows and the percentage of Americans that are working for themselves has been hovering near all-time lows.

In order for more competition to exist, we need more competitors to enter the marketplace, but instead we have been crushing “the little guy” with mountains of regulations and deeply oppressive taxes.

And you know what?  Many of the big corporations actually like all of the red tape because they know that they can handle it much easier than their much smaller competitors can.  That gives them a competitive advantage, and it creates a barrier to entry that is difficult to overcome.

When I was in school, I was taught that one of the reasons why the U.S. system was so much better than communist systems was because we had so many more choices.

But today our choices are very limited in industry after industry, and the gigantic corporate entities that dominate everything don’t really care if we like it or not.

We can do so much better than this, but in order to do so we must return to the values and principles that this nation was originally founded upon.

via RSS https://ift.tt/2PnYTYG Tyler Durden

While the S&P is struggling to eek out some modest gains for the year in the last month of the year, for hedge funds 2018 has not only been a scratch, but also one the worst years since the financial crisis, as the following chart – which reveals that most hedge funds haven’t generated any alpha (or beta) in the past four years – shows.

Earlier this week we reported that notable name, Balyasny Asset Management, was hit especially hard when between losses in 2018 and client redemptions, the fund lost over $4 billion in AUM, leading to the termination of 20% of its work force. However, it was not until November, that some of the most marquee names were hammered for the first time in years.

According to Bloomberg, the holy trinity of multi-strategy hedge fund managers who run “silo” based asset management firms, billionaires Ken Griffin, Izzy Englander and Steve Cohen, posted monthly losses in November that ranked among their worst ever as stock hedge funds dumped holdings at a rate not seen since the financial crisis, while other assets such as credit and oil suffered dramatic losses.

Griffin’s Citadel lost about 3% last month, its poorest showing since the first quarter of 2016 when Citadel’s Surveyor Capital suffered jarring losses on its commodities book. Englander’s Millennium Management, which has had a remarkable – some say almost Bernie Madoffesque – track record of virtually never posting a down month, slid 2.8%, its third-worst month on record. Meanwhile, Cohen’s Point72 Asset Management – which this year was reopened for outside investors – lost 5%, wiping out its 2018 gains.

What is notable is that the three multi-strat funds stumbled after posting surprisingly strong numbers in October when stocks suffered even greater losses, and when the multi-manager firms rode out a nearly 7% plunge in the S&P 500 Index with only minimal losses. However, the contagion from equities, which sent both credit and commodities tumbling, finally took its tool. And, according to Bloomberg, the damage suffered by these hedge funds underscores the risk faced by firms that farm out money to dozens of internal managers who all run their stock portfolios in similar ways: When other hedge funds cut and run, the multi-manager giants can get caught up in the havoc, i.e., when one investor tries to flee a burning hedge fund hotel, they all do, and the result ends up being a disaster.

The disappointing numbers are especially remarkable as the three firms market themselves as “market-neutral” and steady money makers as their managers tend to run portfolios with a roughly equal weighting of longs and shorts, or small net exposure in either a bullish or bearish direction, while “neutralizing” style, factor and sector biases.

Alas, as November showed, these mandates tend to crowd the firms – whose PMs have usually “been around the block” and have worked at all the same companies – into the same trades.

Furthermore, because individual PMs are typically forced to sell positions after relatively small losses by their back office risk controller, the firms are forced to employ massive leverage to capture upside. As a result, while Citadel, Point72 and Millennium together hold less than $100 billion in net assets, that number rises to almost half a trillion dollars when leverage is accounted for is included in the firm’s “regulatory capital”.

So when did the great multi-strategy wipeout begin? According to a recent report by Morgan Stanley, the unwind began in the latter half of October when traditional long-short funds, facing losses on the month and year as markets slumped, began selling long holdings and buying to close out shorts, resulting in several days of violent short squeezes (which we documented extensively). Over the next month, Morgan Stanley noted that funds sold out of their U.S. long stock positions at a magnitude not seen since the financial crisis. Their trades eventually hit the multi-managers, who saw their longs drop while their shorts rose in value (i.e. one of those teeth crushing events that Nomura’s Charlie McElligott discussed in the past two weeks).

And thus – as Bloomberg notes – began the cycle of liquidation at the multi-manager firms, as individual PMs or teams hit their risk limits, forcing them out of various positions and beginning a cycle of losses and further sales.

Separately, Morgan Stanley said that while gross and net leverage for equity hedge funds had reached lows for the year last month – around 179 percent gross and 43 percent net – something which Goldman Sachs also observed in its Q3 13F summary report…

… there was still room for them to fall more based on previous market dislocations. That could mean more selling and additional losses if markets fail to stabilize in the coming days, especially because hedge fund managers traditionally deleverage further at the end of the year.

That said, don’t discount the multi-strats yet: while beatdowns like November were rare, the three firms above have rebounded from de-leveraging events relatively quickly in the past. Readers will recall how Citadel, which slumped 8% in early 2016 ended the year up 5%. Millennium dropped 2.7% that February yet finished with a 3.3% gain.

Even after a dismal November, in 2018 Citadel is still up 8.5%, outperforming over 95% of its peers, while Millennium has gained 4.2%. Perhaps indicating that some of his prior “expert network” magic has now vanished, Steve Cohen is flat for the year. Maybe that’s something for the next season of “Billions” to address.

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