Tag: news

Authored by Daniel Payne and John Solomon via Just the News (emphasis ours)

Now that Wirecard’s nearly 15-year-long accounting fraud – the biggest corporate accounting scandal in post-war German history – has been uncovered, the negligence exercised by the company’s auditors, auditors who lent the black-box digital payments firm the patina of authenticity that it needed to get listed on the DAX and dupe German regulators into investigating its enemies, must not go undisclosed.

Just like Bernie Madoff, or Enron, no accounting fraud of this magnitude can continue for as long as this one did without third-parties looking the other way, or even deliberately conspiring to conceal the fraud. And the lack of transparency combined with diffusion of responsibility inside major accounting firms like Ernst & Young, which signed off on Wirecard’s books for a decade, can sometimes create the perfect environment for something like this to continuously slip through the cracks. 

In a re-run of the Enron scandal, which led to the demise of accounting giant Arthur Andersen (the firm collapsed under regulatory and financial pressure in the aftermath of the Enron blowup, and its accounting business was later purchased by Accenture), the FT just reported that Ernst & Young could have uncovered Wirecard’s fraud years ago if it had only bothered to audit a Singapore-based bank account where the company claimed its fraudulent revenues – some $2.1 billion of revenue, to be precise – were allegedly parked.

Here’s more from the FT:

People with first-hand knowledge told the Financial Times that the auditor between 2016 and 2018 did not check directly with Singapore’s OCBC Bank to confirm that the lender held large amounts of cash on behalf of Wirecard. Instead, EY relied on documents and screenshots provided by a third-party trustee and Wirecard itself.  “The big question for me is what on earth did EY do when they signed off the accounts?” said a senior banker at a lender with credit exposure to Wirecard.  A senior auditor at another firm said that obtaining independent confirmation of bank balances was “equivalent to day-one training at audit school”.  OCBC declined to comment. A person briefed on the details told the Financial Times that Wirecard has no banking relationship with OCBC and that the fintech’s former Singapore-based trustee does not have an escrow account with the bank. The lender did not receive any query from EY in relation to Wirecard between 2016 and 2018, the person added.

To be sure, in terms of sheer scale, the collapse of Enron was much bigger than Wirecard’s slide into insolvency (even though two-thirds of the company’s revenue in recent years has been proven to be completely made up). The firm, which has maintained that it couldn’t have possibly known about the fraud, is reviewing the work of its German auditors via an “out of country” team.

But that doesn’t mean EY should escape serious consequences. Many are already wondering: will Wirecard’s collapse transform EY into “Arthur Andersen 2.0?”

Twenty years ago, I watched the #Enron scandal spell the end for the world’s leading accounting firm #ArthurAnderson. I never thought I would see a similar failure again. I was wrong. #Wirecard

— Christopher Storck (@KommStrategie) June 26, 2020

Could #Wirecard collapse make EY the next Arthur Anderson?

— Marc Moore (@MarcMoo86882966) June 26, 2020

Whatever regulators decide, it’s clear that the Big Four accounting firm is about to sustain some reputational damage. The firm had issued unqualified audits of Wirecard for a decade despite growing questions about suspect accounting practices from journalists and short-sellers and repeated delays of another audit that was supposed to validate Wirecard’s claims, but never quite did.  Wirecard reportedly told its auditors that the money moved late last year from OCBC in Singapore to banks in the Philippines, where supposedly there was now €1.9bn ($2.1 billion) deposited. But a special audit by KPMG could not obtain original documents from the banks and the banks in the Philippines confirmed that documents provided by Wirecard to KPMG were of “a spurious nature” – meaning they were outright forgeries. Fortunately, perhaps, for EY: It’s not the only institution that failed to adequately monitor Wirecard: Germany’s BaFin also bears tremendous responsibility, and is already facing an EU investigation into whether it violated any rules.

As Apple shutters dozens of its physical store locations across America on the heels of a second wave of COVID cases (though not deaths), Microsoft has escalated by shuttering its physical stores… for good, as part of a strategic shift in its retail operations.

Full Press Release:

Microsoft today announced a strategic change in its retail operations, including closing Microsoft Store physical locations. The company’s retail team members will continue to serve customers from Microsoft corporate facilities and remotely providing sales, training, and support. Microsoft will continue to invest in its digital storefronts on Microsoft.com, and stores in Xbox and Windows, reaching more than 1.2 billion people every month in 190 markets. The company will also reimagine spaces that serve all customers, including operating Microsoft Experience Centers in London, NYC, Sydney, and Redmond campus locations. The closing of Microsoft Store physical locations will result in a pre-tax charge of approximately $450M, or $0.05 per share, to be recorded in the current quarter ending June 30, 2020. The charge includes primarily asset write-offs and impairments.

“Our sales have grown online as our product portfolio has evolved to largely digital offerings, and our talented team has proven success serving customers beyond any physical location,” said Microsoft Corporate Vice President David Porter.

“We are grateful to our Microsoft Store customers and we look forward to continuing to serve them online and with our retail sales team at Microsoft corporate locations.”

Since the Microsoft Store locations closed in late March due to the COVID-19 pandemic, the retail team has helped small businesses and education customers digitally transform; virtually trained hundreds of thousands of enterprise and education customers on remote work and learning software; and helped customers with support calls. The team supported communities by hosting more than 14,000 online workshops and summer camps and more than 3,000 virtual graduations.

“We deliberately built teams with unique backgrounds and skills that could serve customers from anywhere. The evolution of our workforce ensured we could continue to serve customers of all sizes when they needed us most, working remotely these last months,” said Porter. “Speaking over 120 languages, their diversity reflects the many communities we serve. Our commitment to growing and developing careers from this talent pool is stronger than ever.”

The retail team members will serve consumers, small-business, education, and enterprise customers, while building a pipeline of talent with transferable skills.

“The Microsoft Store team has long been celebrated at Microsoft and embodies our culture,” said Microsoft Chief People Officer Kathleen Hogan. “The team has a proven track record of attracting, motivating, and developing diverse talent. This infusion of talent is invaluable for Microsoft and creates opportunities for thousands of people.”                                                                

With significant growth through its digital storefronts, including Microsoft.com, and stores on Xbox and Windows, the company will continue to invest in digital innovation across software and hardware. New services include 1:1 video chat support, online tutorial videos, and virtual workshops with more digital solutions to come.

“It is a new day for how Microsoft Store team members will serve all customers,” said Porter. “We are energized about the opportunity to innovate in how we engage with all customers, maximize our talent for greatest impact, and most importantly help our valued customers achieve more.”

So presumably those employees who were “furloughed” for COVID will not be getting their jobs back?

Submitted by Michael Every of Rabobank

*I* Can, You Can’t(illon)

The US bill imposing mandatory sanctions on Chinese individuals and entities who “materially contribute to the contravention of China’s obligations” to Hong Kong’s autonomy –and banks that do “significant transactions” with them– which we learned yesterday was being delayed, has instead just been passed unanimously by the Senate. The House of Representatives is working on its own version; that gets reconciled with this bill; the final bill gets passed to President Trump, who either signs it or vetoes it – in which case it has a veto-proof majority anyway. This is the constitutional dynamic that has been described several times in the last 12 months for China-focused bills with serious consequences for not just international relations, but international business and finance. So far the results have not hit markets: but this bill cuts out the middleman and takes us straight to the biting sanctions.

Of course, that does not matter to markets at the moment. Neither does Texas and Florida pausing on re-opening as virus cases surge. Neither does the Fed telling US banks it expects them to see USD700bn in bad loans ahead, and ordering them to cap dividends and suspend buybacks until the end of Q3. (Yes, this is the Fed, not the PBOC, who have already ordered similar measures.) Stocks are up, Bloomberg tells me, because more stimulus is expected now that US re-opening is stalling. Bad news is good news – and good news is of course good news.

This dynamic is well known to regular readers. Less well-known is Richard Cantillon (1680–1734), the Irish-French economist. That’s no accident, as economists are not taught any economic history. Moreover, Cantillon’s ideas are so piercingly relevant that it’s more comfortable not to teach them. He was a mercantilist, and he bequeathed us the “Cantillon Effect”, which like all the best theories is very simple: when money gets printed, those closest to it within the institutional structure get to skim the cream, and those farthest away get none. You can dress this up in economic jargon like differential inflation rates as money supply expands, but the basic message is “It’s good to be the King”, in those days, or today, “*I* Can, You Can’t(illon)”

Is it any wonder we have soaring asset prices at a time of mass unemployment? No! Because money is cascading out of our institutional structure, some are at the front of the queue, others at the back. (And some are outside in the rain.) Our present “solutions” are our problems.

That the BOE Governor just stated the UK government nearly went broke in March when his job is to ensure that can never happen is pure Cantillon. So are the excerpts from two recent articles below, both of which are sadly true:

1. The New York Times: “The Jobs We Need”

If income had kept pace with overall economic growth since 1970, Americans in the bottom 90% of the income distribution would be making an extra $12,000 per year, on average. In effect, every American worker in the bottom 90% of the income distribution is sending an annual check for $12,000 to a richer person in the top 10%.

1. The Onion: “Study Finds Gap Widening Between Rich Pets And Poor Americans”

“Since the 1970s, economic growth has slowed for all but a tiny fraction of Americans and their pets, such that not only are the vast majority of luxury goods much more available to these purebred dogs, cats, and chinchillas than the average person, rich pets enjoy lavish lifestyles that many US citizens could only dream of.” The report concluded by suggesting that the most viable path to prosperity for low-income Americans was becoming a wealthy family’s pet. [NB That conclusion is not too far away from former Fed Chair Yellen’s thesis that if only poor people had more assets they would be less poor.]

Of course, one can accept the Cantillon effect exists but that it has no negative impact on the economy. For example, if institutional money gets channelled into infrastructure and industrial mercantilism, it’s pro-growth – as we see today in China. However, it’s still a paradigm with a half-life unless market forces also dictate where the funds flow, or unless China can keep finding new foreign markets to absorb its perpetual over-supply. Which brings us back to the US Hong Kong Accountability Bill: try selling more goods when not only are tariffs rising, but your banks are under US sanction.

The other problem we face is when the Cantillon effect lifts some boats by so much more than others. That’s Piketty and Marx territory: is it any wonder we are hearing allegations of “Marxists!” being levelled today?

Things are absolutely worse when Cantillon devolves from doing something productive, and not (re)distributing the gains, to one where it does nothing. I am thinking of the recent run of UK government projects that suck up funds but produce no high speed railways or COVID-19 contact-tracing apps. Is this just bureaucratic incompetence,…or is it actually the Cantillon effect? Somebody is still getting all that money. As one UK radio talk-show host joked yesterday, why can’t the government pay him millions NOT to produce a contact tracing app, as it would be far cheaper? Perhaps his joke is missing the real (politik) point – not just in the UK but in a swathe of countries, including the US.

Meanwhile the other key real politik –the US pushing China into a corner globally and saying “*I* can, you can’t”– continues to play out. There is that latest Hong Kong bill, and the Wall Street Journal reports the US is considering getting the federal government involved in 5G, perhaps even ‘persuading’ key US firms to buy key European rivals, to ensure that there is a “not China” rival to embattled Huawei. This is unlikely to see Beijing respond well.

Similarly, Berlin is not going to respond well if the US also pushes Germany into a corner too by trying to kill off the Nord Stream 2 pipeline via sanctions, which Bloomberg states is now expected and for which EU retaliatory measures are being prepared – like removing German troops that protect US territory?

The institutional structure is *really* going to have to step up the liquidity support to keep markets smiling, if so. Indeed, those kind of twin shocks would require so much ‘institutional structural support’ that a whole lot more people might ask: “Why Can’t-illon we get some of that good stuff too?”

Following the somewhat surprising surge (stimulus checks) in personal incomes in April (after March’s collapse), May’s income data was expected to fade as spending rebounded strongly (on the pent-up-demand after re-opening).

On a month-over-month basis, personal income did drop, but less than expected (-4.2% MoM vs -6/0% exp) but spending rose less than expected (+8.2% MoM vs +9.3% exp) – this was still the biggest surge in spending on record (since 1958).

Source: Bloomberg

Year-over-year, income growth slowed (as stimulus checks slowed) but spending’s slump rebounded only modestly (remaining down a shocking 9.3% YoY)…

Source: Bloomberg

Note that personal income (ex-transfer receipts – i.e. stimulus checks) rebounded very modestly…

Source: Bloomberg

…as government handouts plunged by $1.1 trillion to $5.3 trillion…

In fact, on the income side of the equation, May saw the biggest drop in government wages on record…

All this chaotic noise has sparked massive volatility in the implied savings rate, which plunged back towards old normal (from 32.2% to 23.2%) but still remains extremely high…

Source: Bloomberg

Finally, we note that The Fed’s favorite inflation indicator  – Core PCE Deflator – slowed even firther to +1.0% YoY (slightly hotter than the +0.9% YoY expected)…

Source: Bloomberg

Providing Powell and his pals cover to keep on pumping.

Authored by Jesse Felder via TheFelderReport.com,

Everyone is talking about the massive disparity between stock prices and fundamentals right now. To paraphrase Jeremy Grantham, we now find ourselves in the top 1% of stock market valuations and the bottom 1% of economic outcomes (based on the annualized rate of decline in second quarter GDP). A popular way to demonstrate this gap is seen in the chart below which plots total equity values along with total corporate profits.

At first glance, it appears this is the biggest disconnect between prices and profits in at least 30 years. However, if we turn this into a price-to-earnings ratio, it becomes clear that the stock market bubble of 20 years ago actually takes the cake.

But what a simple price-to-earnings ratio doesn’t account for is the fact that Dotcom bubble appears so severe in the chart above largely because profit margins were relatively depressed at the time. Furthermore, profit margins in recent years became extremely inflated. This serves to make stock prices over the past few years look less expensive than they otherwise would.

So if we normalize profit margins (hat tip, John Hussman), we can see that stock prices today are more expensive than they were 20 years ago at the peak of the Dotcom mania. It turns out that the current disconnect between stock prices and sustainable profits is, in fact, greater than anything we have seen in modern history.

The last time we saw prices and earnings disconnect in such an extreme way famously led to a “lost decade” for the stock market from 2000 to 2010. Is it unreasonable to think the current extreme in valuations could lead to another “lost decade,” especially if profit margins are only beginning to revert to their historical mean?