Month: April 2014

In the second part of the series on the troubling repetition of financial crises, The FT’s John Authers warns that while the 2008 financial crisis appears (judging my ‘markets’) to have been resolved; this has only sown the seeds of a further crisis. Bob Swarup, author of ‘Money Mania’, explains to John Authers how more needs to be done than such short-term fixes. Europe, for instance, Swarup notes is replaying the “tragedy of small decisions” that it went through in the 1920s as nations become ever more dependent and inter-connected and policy-makers around the world are faced with the uncomfortable reality of a highly complex world increasingly beyond the control of the fiscal and monetary policy manipulations.

From Europe’s historical “success” to the ugly future and rising tide of euro-skepticism and from the Fed solving the problems of the past by creating even bigger problems in the future… for as QE has progressed it has distorted the markets are removed any forceful need for the required reforms that will do more than stabilize the patient…  We need to fight complexity on the regulatory side as TBTF will eventually fail – and that will be catastrophic… furthermore – we need to re-evaluate what we mean by GDP – “all” growth is not good…

 

We risk repeating the same short-term-focused mistakes of Augustus… with the same consequences

 

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Submitted by James H. Kunstler of Kunstler.com,

The debate over Thomas Piketty’s new book Capital in the Twenty-First Century is as dumb as every other issue-set in the public arena these days — a product of failed mental models, historical blindness, hubris, and wishful thinking. Piketty’s central idea is that wealth will continue to accumulate and concentrate among individual rich families at ever-greater rates and therefore that nation-states should take a number of steps to prevent that from happening or at least attempt to correct it.

The first mistake of Piketty fans such as New York Times op-ed ass Paul Krugman is the assumption that the dynamic labeled “capitalism” is an ism, a belief system that you can subscribe to or drop out of, depending on your political correctitude. That’s just not true. So-called capitalism is more like gravity, a set of laws that apply to and describe the behavior of surplus wealth, in particular wealth generated by industrial societies, which is to say unprecedented massive wealth. The human race never saw anything quite like it before. It became both a moral embarrassment and a political inconvenience. So among the intellectual grandiosities of modern times is the idea that this massive wealth can be politically managed to produce an ideal equitable society — with no side effects.

Hence, the bold but hapless 20^th century experiment with statist communism, which pretended to abolish wealth but succeeded mainly in converting wealth into industrial waste and pollution, while directing the remainder to a lawless gangster government elite that ruled an expendable mass peasantry with maximum cruelty and injustice.

In the other industrial nations, loosely called “the west,” the pretense to abolish wealth altogether never completely took, but a great deal of wealth was “socialized” for the purpose of delivering public goods. That seemed to work fairly well in post-war Europe and a bit less-well in the USA after the anomalous Eisenhower decade when industrial labor enjoyed a power moment of wage arbitrage. Now that system is unraveling, and for the reason that Piketty & Company largely miss: industrial economies are winding down with the decline of cheap fossil fuels.

Piketty and his fans assume that the industrial orgy will continue one way or another, in other words that some mysterious “they” will “come up with innovative new technologies” to obviate the need for fossil fuels and that the volume of wealth generated will more or less continue to increase. This notion is childish, idiotic, and wrong. Energy and technology are not substitutable with each other. If you run out of the former, you can’t replace it with the latter (and by “run out” I mean get it at a return of energy investment that makes sense). The techno-narcissist Jeremy Rifkins and Ray Kurzweils among us propound magical something-for-nothing workarounds for our predicament, but they are just blowing smoke up the collective fundament of a credulous ruling plutocracy. In fact, we’re faced with an unprecedented contraction of wealth, and a shocking loss of ability to produce new wealth. That‘s the real “game-changer,” not the delusions about shale oil and the robotic “industrial renaissance” and all the related fantasies circulating among a leadership that checked its brains at the Microsoft window.

Of course, even in a general contraction wealth will still exist, and Piketty is certainly right that it will tend to remain concentrated (where it isn’t washed away in the deluge of broken promises to pay this and that obligation). But he is quite incorrect that the general conditions we enjoy at this moment in history will continue a whole lot longer — for instance the organization of giant nation-states and their ability to control populations. I suppose it’s counter-intuitive in this moment of the “Deep State” with all its Orwellian overtones of electronic surveillance and omnipotence, but I’d take the less popular view that the Deep State will choke to death on the diminishing returns of technology and that nation-states in general will first degenerate into impotence and then break up into smaller units. What’s more, I’d propose that the whole world is apt to be going medieval, so to speak, as we contend with our energy predicament and its effects on wealth generation, banking, and all the other operations of modern capital. That is, they’ll become a lot less modern.

As all this occurs, some families and individuals will hang onto wealth, and that wealth is apt to increase, though not at the scales and volumes afforded by industrial activities. Political theorizing a la Marx or Thomas Piketty is not liable to deprive them of it, but other forces will. The most plausible framework for understanding that is the circulation of elites. This refers to the tendency in history for one ruling elite to be overturned and replaced by another group, often by violence, and then become the new ruling elite. It always happens one way or another, and even the case of the Bolsheviks in Russia during the industrial 20^th century can be seen this way.

In any case, just because human affairs follow certain patterns these days, don’t assume that all these patterns will persist. I doubt that the Warren Buffets and Jamie Dimons of the world will see their wealth confiscated via some new policy of the Internal Revenue Service — e.g. the proposed “tax on wealth.” Rather, its more likely that they’ll be strung up on lampposts or dragged over three miles of pavement behind their own limousines. After all, the second leading delusion in our culture these days, after the wish for a something-for-nothing magic energy rescue remedy, is the idea that we can politically organize our way out of the epochal predicament of civilization that we face. Piketty just feeds that secondary delusion.

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A lack of volatility in the markets is dangerous, according to Saxo Bank's Chief Economist Steen Jakobsen, who says we need to know why the danger will be with us for some time. In this brief clip he warns, "…the world seems to think there is a stable permanent equilibrium which doesn't make sense if you think about it, unemployment is still rising, debt to GDPs are still rising, the Crimea situation is increasing in tension, not decreasing, The US still has a lot of stuff to do on social security and welfare spending…for two or three years down the road, with no activity, the world will fall into not only deflation, but also a recession." Jakobsen predicts that, year on year, world growth will actually be "a big fat zero" and therefore the markets are drifting into dangerous territory. 

 

As Jakobsen notes,

My longest used chart for fixed income – confirmation is coming soon…..30-year to 2.50 percent

Remember this trend has continued despite 100 percent of macro strategist thinking US rates will be higher in six months time – despite extreme low volatility & complacency – despite the so-called: Great rotation.

Of course it reflects deflation, lack of growth and extremely poor policy responses, which this morning was indirectly admitted by Fed chief Janet Yellen:

Yellen concerned Fed model offers distorted prediction on prices

Yes, the policy makers talk, but the market clearly disagree, especially the bond market.

Imagine if Russia/Ukraine “really” is at true geopolitical risk, if lowflation is not transitory, if growth does not come back again this year, if central banks have no alternative at zero bound, if European Central Bank chief Draghi is bluffing (as he often does)….., if China devalues…. ?

No, it will never happen. We have great diplomatic efforts being expended on Russia, central banks understanding the true economy and politicians who are committed and fully in line with the real economy, plus an extremely strong bank sector – The King is dead, long live the King….

Greed is good – Leeman BrothaZ

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Submitted by Jeff Thomas via Doug Casey's International Man blog,

We have often suggested that, if we wish to know what is coming politically, socially, and economically in jurisdictions such as the EU and US, we might have a look at countries like Argentina and Venezuela, as they are in a similar state of near-collapse (for the very same reasons as the EU and US) but are a bit further along in the historical pattern.

Such a bellwether was seen in Argentina recently. Although the event in question is a very minor one, it is an illustration of the social tipping point—the manner in which a government loses control over its people.

Briefly, the events were as follows: Two men on a motorbike cruised a posh neighbourhood in Buenos Aires, seeking opportunities for purse-snatching. The pillion rider dismounted and snatched a purse from a woman. Bystanders saw the act, ran down the thief before he could re-mount the motorbike, and knocked him to the ground. Other onlookers (very possibly fed up with street crime caused by economic hardships) joined in. In a fury, they beat the thief senseless.

A policewoman managed to calm the group and handcuff the thief. Twenty minutes later, police assistance and an ambulance arrived.

Furious neighbours complained bitterly that the police had protected the thief but are generally doing little to protect law-abiding citizens.

Similar occurrences are on the increase in Argentina, and they have reached the point that the public have begun lynching thieves, as they increasingly believe that the police no longer serve to protect the people.

The pattern that is playing out can be described as a six-part process, and in Argentina, part five has been reached. Essentially, the process is this:

1. People Seek Ever-Increasing Government Largesse

This occurs over a period of decades. It begins with politicians seeking to either gain or retain office, advising the public that they should have a "right" to receive largesse from their government. Over time, the public, liking the idea of receiving something that they have not earned, warm to it and come to believe in its validity. Increasingly, the government takes money from the pockets of one group of citizens and "redistributes" it to others to whom it has made the promises.

2. Government Runs Out of Money

As elections occur every four or five years in most countries, the frequency of elections means a regular ramping-up in the level of promises to the electorate. Over time, the source group (those whose earnings are being appropriated) becomes tapped–out. (As British PM Maggie Thatcher said, "The trouble with socialism is that you eventually run out of other people's money."

At this point, the government can no longer deliver on its promises of largesse. But, the recipients have come to believe that they truly are entitled to the largesse, that it is their money and either the government or the greedy rich are withholding their money.

3. Citizens Become Increasingly Desperate

The citizens, who have become less productive and more dependant as a result of the largesse, now find themselves unable to afford even basic needs. Some begin to do desperate things in order to survive. Crime increases. Whilst police may address such crimes after the fact, they cannot anticipate them.

4. Vigilantism Arises

As crime increases unabated, citizens, in their frustration, come to blame not only the criminals, but also the police. At some point, acts of violence against criminals begin to occur, as citizens begin to take matters into their own hands. This trend expands, sometimes to the point that vigilante groups form.

5. Government Attempts to Maintain Order at All Costs

Governments at this point tend not to remain cool and crack down more on criminals. Instead, they tend to make the mistake of lashing out at those who defend themselves against the criminals. (In the example above, President Cristina Fernández de Kirchner made a statement to the public that, "Some people want us to return to barbarism; some people want us to react violently." She urged officials and the public to be "rational and civilized," and affirmed "education and social inclusion are the ultimate ways of solving these problems.")

6. Government Becomes the Enemy

Once such a pronouncement is made by a political leader, the social tipping point has been reached. The public, having first been angered by the criminals, turn their anger toward the police and, finally, toward their political leader. When the public realise that the formerly seemingly benevolent leader holds their welfare in no more regard than she holds the criminals who prey on them, she becomes a pariah.

So, why on earth, do political leaders, throughout history, make the same mistake over and over? Why do they reveal the truth—that they actually have no concern for their minions?

At first, when the crimes begin, the leader is personally unaffected and has little concern. As crime increases, it is not the crime that the leader finds objectionable, but the grumblings of the people. It does not occur to the leader that to say, essentially, "Too bad for ya—suck it up," is the absolute worst approach to take.

What then, drives leaders to almost invariably take the wrong public stance in such instances? To answer this, we need only to look at leadership myopically, as does the leader. Leaders tend to care little, if at all, for the welfare of the electorate, who only exist to ensure reinstatement every few years. Otherwise, they are of no consequence. They are tolerated and pandered to, but they must never dare to supplant the authority of the leader. When the public develop the moral spine that is required to make themselves judge and jury, they are assuming an authority that belongs to the leader alone, and they are, therefore, a greater threat to the government than the criminals.

The leader's sole true concern is that the government hold the exclusive right of control. Above all, she dictates the maintenance of order.

And the leader has good cause for this concern in such an instance. Once such vigilantism becomes "necessary" in the eyes of the public, they have unconsciously taken back the authority of who is in charge. When this happens, this jig is up, as the population twigs onto the concept that they not only need to take charge of their lives, but they can. Of such realizations are revolutions made.

The beating of a thief is, in itself, a minor event, but these events often become social tipping points. (Witness the self-immolation of a street vendor in Tunisia in 2011.)

If there is a lesson to be learned from events such as this one in Argentina, it is that the EU and US are not far behind in their socio-economic/political deterioration. Perhaps the reason that the dominant powers in the world today are ramping up their internal defence systems so dramatically is that they see the writing on the wall.

The reader is then left with two questions: 1) Will his country soon be facing dramatic inner turmoil that may be a threat to his well-being? And, 2) Would he be better served if he were to prepare an alternate location in which to be, if the fur begins to fly?

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Moments ago, Herbalife reported results which at first blush were far stronger than expected: revenues of $1.26 billion above the expected $1.23 billion, with (non-GAAP) EPS of $1.50 compared to expectations of $1.30, and well above the $1.27 last quarter. What, won’t get much emphasis is that of this $1.50, a whopping $0.66, or $66.6 million, is an addback related to “remeasurement loss relating to Venezuela” – considering the country is a devaluing basket case, to assume that any FX related losses in the banana republic are “one-time” is the height of folly. However, as everyone knows, for a company like Herbalife actual earnings hardly matter. What matters is how much shareholder friendly magic will the Icahn-controlled management team pull out of its hat. And it pulled out a lot.

Perhaps the most notable announcement was that the company would terminate its $30 million/quarter dividend in order to “accelerate cash returns to shareholders” in the form of share buybacks. Surely great news for William Ackman who no longer will have to pay the dividends courtesy of his stock short, this is what HLF said:

The company now expects to repurchase a total of $581 million of its outstanding common stock during the second quarter of 2014 as part of its previously announced $1.5 billion share repurchase program. The $581 million is comprised of the approximately $315 million expected to be purchased in April as part of a 10b5-1 trading plan ($255 million already completed as of Friday, April 25); plus the $50 million included in previous guidance and $216 million that otherwise was expected to be returned to shareholders in the form of quarterly cash dividends over the next eight quarters.

 

Mr. Johnson stated, “Our strong sustained financial performance and the current market valuation of our shares make repurchasing stock the most attractive method of returning capital to shareholders and reflects our continued commitment to creating long-term value for our shareholders.”

And just as notable in addition to the acceleration of the stock buyback (why does the company suddenly feel the urge to hand over its cash to shareholders – would several investigations into whether it is a Ponzi have anything to do with it), is the amount of debt Herbalife issued in order to find its $695 million Q1 buyback (and $581 million expected in Q2). But instead of telling, we’ll show.

The chart below summarizes the three key cash sources and uses of funds for Herbalife: cash from operations, stock buybacks and debt issuance proceeds. See if you can spot the pattern:

 

And just to clarify the pattern above, here is a chart of Herbalife’s total debt. It probably needs no highlighting, but toal debt doubled in the first quarter to $1.85 billion, with well over half of the debt issuance proceeds going to fund the stock bought back in the quarter.

 

What to make of this, and why the sudden scramble to make Herbalife into the biggest cash piggybank available?

Simple: the FTC, DOJ and FBI are investigating Herbalife whether it is a Ponzi scheme, that much is clear. However, neither iCahn, nor the management team, nor shareholders are looking forward to being around when the conclusion of said inquiries is revealed. And, as a result, by the time the various probes are over, Herbalife will be a massively levered debt-to-equity passthrough vehicle, which uses a tiny fraction of cash from operations, together with gargantuan leverage, to syphon off as much cash from the company to (activist) shareholders as humanly possible.

In fact, if Uncle Carl succeeds, by the time the FBI is done investigating, Herbalife will have so much debt it will be weeks if not days away from a bankruptcy filing. In the meantime Icahn will reap all the benfits of the operational entity, and leave the discarded, debt-bloaded carcass to John Q Public, without having to worry at all what happens to the company once the debt spree is finished and what happens to the company in bankruptcy court.

Activism 101, QED.

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