Month: December 2014

Who could have seen that coming!!??? Apparently Draghi could not calrify exactly what he meant in 90 minutes, 3 hours ago!!!!

• *ECB SAID TO PREPARE BROAD-BASED QE PACKAGE FOR JANUARY MEETING

So, despite telling us earlier than not January and not ready, we get this spurious headline just as EURUSD crossed 1.2450… Fun-durr-mentals indeed.

 

 

Is the market really going to fall for this again?!!

 

Charts: Bloomberg

via Zero Hedge http://ift.tt/1vQRd2X Tyler Durden

Submitted by Mike Krieger via Liberty Blitzkrieg blog,

I hadn’t written a single piece on the U.S.-Ukraine-Russia quagmire for the entirety of 2014, until Monday when I published: Tensions Between the U.S. and Russia Are Worse Than You Realize – Remarks by Foreign Minister Sergey Lavrov. Now I can hardly think of anything else.

The reason the geopolitical hot zone has so captured my attention is because I think we are much closer to a serious escalation than most people want to admit. I hope I’m wrong, but when I take a step back and look at what is being said and done under the surface, an incredibly dangerous tinderbox is now firmly in place and ready to be lit. We know from history that relatively minor catalysts can lead to unimaginable horrors. I fear the stage is set for some real nastiness, and hope cooler heads can prevail on both sides.

Claims that the new government in Ukraine is nothing more than a Western puppet Parliament have been swirling around consistently since February. Nevertheless, I think it’s very significant that the takeover is now overt, undeniable and completely out in the open. Nothing proves this fact more clearly than the recent and sudden granting of citizenship to three foreigners so that they can take top posts in the government.

At the top of the list is American, Natalie Jaresko, who runs private equity fund Horizon Capital. She will now be Ukraine’s Finance Minister, and I highly doubt she will be forced to pay the IRS Expatriation Tax (one set of laws for the rich and powerful, another set of laws for the peasants). For Economy Minister, a Lithuanian investment banker, Aivaras Abromavicius, will take the reigns. Health Minister will be Alexander Kvitashvili of Georgia.

 

The Wall Street Journal reports:

Ukraine’s parliament appointed a new, pro-Western government that includes a U.S.-born finance minister to take on the job of staving off financial collapse, overhauling the shrinking economy and ending the armed conflict in the country’s east.

 

The new cabinet includes Finance Minister Natalie Jaresko, the chief executive of a private-equity fund and a former U.S. diplomat, as well as two other nonnatives: Economy Minister Aivaras Abromavicius, a former investment banker from Lithuania; and Health Minister Alexander Kvitashvili, who held a similar post in Georgia.

 

Ukraine is dependent on the International Monetary Fund for financing, and officials and analysts say it will need more than the current $17-billion program from the lender.

 

Two senior EU officials said Tuesday that the IMF has in recent days shared a rough estimate of $15 billion in financing needs for Ukraine through the first quarter of 2016, although that could be revised as fund officials negotiate with the new government.

 

Shortly before the voting in Kiev, President Poroshenko signed a decree granting Ukrainian citizenship to the three foreign-born candidates. He said the dire economic situation meant Ukraine had to look for people outside the country with experience of dealing with “systemic crises.”

 

Valeriy Voshchevskiy, deputy prime minister for infrastructure and ecology, said he wanted to privatize state holdings such as the railway and road-building monopolies.

This is where American financial oligarchs will get paid. It’s all about looting at the end of the day, as always.

Some analysts praised the inclusion of outsiders in the government as a way to tap foreign experience, insulate against corruption and help push through unpopular economic overhauls. But opposition lawmakers slammed the decision.

 

“We don’t understand why from 300 coalition members and 40 million people [in the country], 10 minister candidates couldn’t be found who’d be Ukrainian citizens or at least ethnic Ukrainians,” said Yuriy Boiko, head of the Opposition Bloc and a former energy minister.

 

In a sign of early discontent, some lawmakers from the ruling coalition questioned the creation of a new Information Ministry, dubbed the “Ministry of Truth” by some journalists amid concerns that it could create another expensive layer of bureaucrats.

 

The newly appointed minister said earlier that it will be needed to counter Russian propaganda.

I don’t know much, but I know that people don’t like being ruled by foreigners. Ever.

Bearing that in mind, a bill known as H.Res.758 was recently introduced in the U.S. Congress. Here’s the full title: H.Res.758 – Strongly condemning the actions of the Russian Federation, under President Vladimir Putin, which has carried out a policy of aggression against neighboring countries aimed at political and economic domination.

Here’s how a summary of the bill starts off (click on the image for the full summary):

 

This isn’t well intentioned diplomacy, these are demands. The last bullet point is particularly laughable. The U.S. government admonishes Russia for interfering in Ukraine’s internal affairs (a nation directly on its border), when Ukraine just granted an American private equity manager citizenship so that she can be Finance Minister. The hypocrisy will not be lost on Putin, or anyone else for that matter.

The danger of this bill was highlighted by former U.S. Rep. Dennis Kucinich. Here are some excerpts via TruthDig:

U.S.-Russia relations have deteriorated severely in the past decade and they are about to get worse, if the House passes H. Res. 758.

 

NATO encirclement, the U.S.-backed coup in Ukraine, an attempt to use an agreement with the European Union to bring NATO into Ukraine at the Russian border, a U.S. nuclear first-strike policy, are all policies which attempt to substitute force for diplomacy.

 

The Western press begins its narrative on the Crimea situation with the annexation, but completely ignores the provocations by the West and other causal factors which resulted in the annexation. This distortion of reality is artificially creating an hysteria about Russian aggressiveness, another distortion which could pose an exceptionally dangerous situation for the world, if acted upon by other nations. The U.S. Congress is responding to the distortions, not to the reality.

 

Tensions between Russia and the U.S. are being fueled every day by players who would benefit financially from a resumption of the Cold War which, from 1948 to 1991 cost U.S. taxpayers $20 TRILLION dollars (in 2014 dollars), an amount exceeding our $18 trillion National Debt.

Based on all I have read and observed, I’d have to say I generally agree with the conclusions of Mr. Kucinich.

Finally, I want to end the post with some very important words from Eurasia Group President Ian Bremmer. They were published in the article, Crumbling Oil Makes Putin More Dangerous:

Russian President Vladimir Putin is being pushed “further into a corner” by falling oil prices, leaving him little option but to continue his aggression toward Ukraine and confrontation with the West, Eurasia Group President Ian Bremmer told CNBC on Tuesday. Putin has “gone all-in on an anti-U.S., must-keep-Ukraine nationalist engagement,” Bremmer said on “Squawk Box .” He said it’s “completely inconceivable” for Putin to back down. “This is what is behind all his approval ratings. It’s behind who he now is as a leader,” Bremmer said, adding that capitulation would “erode a lot of his power.” Russia’s currency and economy are crumbling along with oil prices, the country’s main export and revenue source. On Monday, the ruble suffered its worst one-day decline since 1998, and it looks like Russia’s economy will tip into recession next year. As the ruble tumbles, what will Putin do next? “I think that lower oil prices simply squeeze him harder, pushes him further into a corner. He feels he has to fight as a consequence.

This echoes sentiments I expressed in my piece Monday. I wrote:

Lavrov also describes the negative impact that this behavior has had on the Russian psyche generally. He expresses dismay that the U.S. status quo sees the world as unipolar, and attempts to tackle every problem from the perspective that might is right. In no uncertain terms, Lavrov makes it clear that Russia will not stand for this. I don’t think the Russians are bluffing, so this is a very dangerous situation.

The U.S. establishment is used to bullying around anyone it wants and getting its way. This will not happen with Putin. It appears that the U.S. is attempting to put so much pressure on Putin that he does something reckless and loses all support on the world stage. I can’t stress enough how important, and dangerous, the current situation is, as Putin is"

*  *  *

It appears not all the government members approve as this fight just broke out… The fight occurred after the majority of people's deputies supported the draft resolution on the appointment of the number of members of parliamentary committees. After the vote, the People's Deputy Vladimir Parasyuk began requiring word in explanation of vote, but the chairman of the Verkhovna Rada of Ukraine Volodymyr Groisman refused it.

 

 

 

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In his latest letter (link), GMO’s James Montier destroys the concept of shareholder value maximization or SVM, which, as defined by Friedman in 1970 is roughly as follows: “There is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits…” As an aside, Montier is anything but a fan of Milton: ‘It is quite staggering just how many bad ideas in economics appear to stem from Milton Friedman. Not only is he culpable in the development of SVM, but also for the promotion of that most facile theory of inflation known as the quantity theory of money. Most egregiously of all, he is the father of the doctrine of the “instrumentalist” view of economics, which includes the belief that a model should not be judged by its assumptions but by its predictions.”

And while the full letter covers many topics, not the least of which is corporate obsession with buybacks, which as we warned back in 2012 would soon be the only game in town thanks precisely to the same failed Federal Reserve policies that were meant to boost the economy but merely ended up benefiting the 1% and is therefore directly leading to the record wealth disparity and middle-class destruction which everyone – even the Fed – has finally noticed, there is one point that bears emphasis: the plunge in S&P500 corporate lifespans to record lows.

From Montier:

From the collected evidence on the psychology of incentives, it appears that when incentives get too high people tend to obsess about them directly, rather than on the task in hand that leads to the payout. Effectively, high incentives divert attention away from where it should be.

 

One of the other features that stands out as having changed significantly between the era of managerialism and the era of SVM is the lifespan of a company and the tenure of the CEO. Both have shortened significantly.

 

 

In the 1970s, the average lifespan of a company in the S&P 500 was 27 years (already down massively from the 75 years seen in the 1920s!). In the latter half of the last decade, the lifespan of a corporate in the S&P 500 had declined still further to a paltry 15 years.

 

In parallel to this trend, the average tenure of a CEO has fallen sharply as well. In the 1970s, the average CEO held his position for almost 12 years. More recently this has almost halved to an average tenure of just six years. It is little wonder that CEOs may be incentivized to extract maximum rent in the minimum time possible given the shrinkage of their time horizons (not independent of the shrinkage in time horizons for investors perhaps).

How can one explain this unprecedented collapse in corporate viability? Simple: in Montier’s words, upper-management is merely focused on maximizing its own compensation, virtually at any cost, up to an including encumbering the corporation with record amounts of debt and using the proceeds to boost equity value, which in turn leads to a direct surge in executive compensation. To wit:

From the mid 1980s onwards, equity issuance has been net negative as firms have bought back an enormous amount of their own equity (and geared themselves by issuing debt – a massive debt for equity swap). One of the most common raison d’êtres for stock markets that gets offered up is that they are providing vital capital to the corporate sector – the evidence suggests that this is nothing more than a fairy tale. Far from providing capital to the corporate sector, shareholders have been extracting it from corporates.

 

This is also one of the main reasons provided by Montier why SVM has gone so horribly wrong.

… what went wrong? I think one of the most obvious candidates concerns the pay of CEOs. When one casts even a cursory glance over Exhibit 4 (CEO median pay) the increasing dominance of stock-related pay becomes obvious. During the era of managerialsim, the vast majority (i.e., over 90%) of the total compensation for CEOs came through salary and bonus. In the last two decades one can see the increasing dominance of stock-related pay. In the last decade some two-thirds of total CEO compensation has come through stock and options.

 

This has certainly aligned managers and shareholders à la Jensen and Murphy, but doesn’t seem to have generated the kind of impact that one might have expected. At least two reasons for this stand out. Firstly, as is now well known, options aren’t the same thing as stock. They give executives all of the upside and none of the downside of equity ownership. Effectively they create a heads I win, tails you lose situation.

 

In addition, incentives don’t always work in the way that one might expect (yet more evidence of the law of unintended consequences). Economists tend to have complete faith in the concept of incentives, driven by their obsession with a very specific definition of rationality. However, the evidence on the way incentives work may surprise you (and recently raises questions for many economists).

And here is the CEO “incentivization to extract maximum rent in the minimum time possible” in one chart:

Is there any wonder why the most powerful entities in the US – corporations – and rather their chief executives, have been so enthralled and supportive of central bank money printing? After all, how much of the exponential rise in executive pay, most of it tied to stocks and options, would have been possible had central banks not backstopped not only the financial system, but the equity tranche in the S&P 500? It also shows why in a day of low yields, corporations have been so happy to issue every more loans and use the proceeds to directly serve as the primary bidder of stocks to ever higher valuations; valuations which as Montier explains are far above where intrinsic values suggest buybacks make corporate sense.

… if one were feeling charitable, one might choose to suggest that there just weren’t many new investment opportunities, and thus this return of capital was a perfectly reasonable thing to do. If this were the case, one might hope that the buybacks were done at prices that were below intrinsic value (since this would have genuinely improved the lot of shareholders). However, as Exhibit 14 shows, this hasn’t been the case. When market valuations were high (prior to the financial crisis) a record number of buybacks were conducted. Conversely, at the market lows, firms were hardly doing any buybacks at all. As Warren Buffett said in his letter to shareholders back in 1999, “Buying dollar bills for $1.10 is not a good business for those who stick around.”

 

The obsession with returning cash to shareholders under the rubric of SVM has led to a squeeze on investment (and hence lower growth), and a potentially dangerous leveraging of the corporate sector.

Again, all topics we have covered in the past.

Montier’s conclusion: SVM, buybacks, and all other derivatives of the unprecedented capital misallocation resulting from 6 years of global QE is directly to blame for record wealth inequality – again, something we have said is the case for a little over 5 years!

To see how this is related to the rising inequality that we have seen it is only necessary to understand who benefits from a rising stock market (i.e., who gets the “benefits” of SVM and its buyback frenzy). The identity of this group is revealed in Exhibit 15. The top 1% own nearly 40% of the stock market, and the top 10% own 80% of the stock market. These are the beneficiaries of SVM.

 

 

Another reflection of the role of SVM in creating inequality can be seen by examining the ratio of CEO-to-worker compensation. Before you look at the evidence, ask yourself what you think that ratio is today and what you think is “fair.” A recent study by Kiatpongsan and Norton (2014) asked these exact questions. The average American thought the ratio was around 30x, and that “fair” would be around 7x.

 

The actual ratio is shown in Exhibit 16. It turns out the average American was off by an order to magnitude! If we measure CEO compensation including salary, bonus, restricted stock grants, options exercised, and long-term incentive payouts then the ratio has increased from 20x in 1965 to a peak of 383x in 2000, and today sits somewhere just short of 300x!

 

* * *

 

The role of SVM in declining labour share should be obvious, because it is the flip-side of the profit share of GDP. If firms are trying to maximize profits, they will be squeezing labour at every turn (ultimately creating a fallacy of composition where they are undermining demand for their own products by destroying income).

 

Montier’s conclusion:

[W]e need to think about the broader impact of policies like SVM on the economy overall. Shareholders are but one very narrow group of our broader economic landscape. Yet by allowing companies to focus on them alone, we have potentially unleashed a number of ills upon ourselves. A broader perspective is called for. Customers, employees, and taxpayers should all be considered. Raising any one group to the exclusion of others is likely a path to disaster. Anyone for stakeholder capitalism?

Sadly no. Because nobody seems to mind: after all there are such epic distractions on TV as Ferguson, Bill Cosby and, of course, Dancing with the Stars. So for now at least, the Ponzi that enriches only very, very few continues, and remember: there has never been a revolution on an uptick. However, if Bill Gross is correct, those days may be finally coming to an end.

What happens then will be the biggest, and likely most lethal, “mean-reversion” in history.

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