Month: April 2016

Submitted by Mark St. Cyr

Why Silicon Valley’s “It’s Different This Time” Is Now A Broken Record

Like a broken record whenever a profit measure was asked of “Silicon Valley” (i.e., everything social or tech) as to when something would either be profitable or, begin returning investor cash with either net profits or dividends. The response was always the same “It’s different this time.” Meaning: there aren’t any now, but just you wait! Some are still waiting, and waiting, and waiting, and….

The only reason this retort was tolerated for as long as it had been is for that other “it’s different this time” meme that took hold in unison when it came to everything one thought they understood about investing, free markets and capitalism itself: quantitative easing e.g., QE.

As long as the Fed enabled “free money” to chase momentum plays – the gravy train to cash-out-riches was running on rails. Yet, here too investors, savers, and more would ask “When does normalization type policies begin that benefit the prudent balance sheet or fiscally responsible?” And here the retort was much same, “Not now, but just you wait!” And again they too are still waiting, and waiting, and waiting, and…

Of course the answer to the question of why we’re waiting is, you guessed it – “it’s different this time.” Four words that replaced a teenager’s one word answer to everything: “Because!” But that’s what a Ph.D is for I guess – making the simple more complex. But I digress.

However, today there are visible cracks showing in the armor of that once fool-proof defense. Everywhere you look (but you have to open your eyes too see) the once celebrated IPO cash-out where dreams and fortunes are made regardless if the business model works, stable, or is even viable, has been all but erased 4 months into 2016. And how much longer it goes on is anyone’s guess.

As we stand today, as of this writing, there have been zero IPO’s of any “unicorns.” Zero, as in zip, zero, nada. Why? Is it – different this time?

It seems too me the deciding difference is more of the same old, same old. i.e., Without QE’s enabling “hot money” for momentum chasing – net profits matter. Not “net-eyeballs” for fairy-tale story telling. And net profits today are as rare as the vaunted unicorn itself: mythical. Unless it’s Non-GAAP, then as they say “You’re crushing it!”

Today, investors of all stripes seem to be no longer buying into myths. At least not without “free money” (e.g., QE) that is.

“Eyeballs for ads” (aka – user growth etc., etc.) has been the celebrated metric used and touted for everything social et al from its inception. Not sales, not profits, nor a whole lot of other business centric measurements as to the health and viability of an enterprise. No, like a broken record only user growth metrics (i.e., eyeballs) mattered. Yet, there’s currently a very, very, very (did I say very?) big problem with this whole “eyeballs” or “user growth” defense. The issue is: The fairy tale metric has morphed into a real-life counter factual that can no longer be hidden. And this nightmare is growing day, by day, by day, and by day. Let’s list a few shall we?

Regardless of how a next in rotation fund manager, economist, think tank alumni, or Ivy League’d Ph.D professor et al wants to justify these “markets.” Anyone with a modicum of business acumen understands there’s no fundamental business reason or metric that logically explains why we should be at these heights. None. It’s a fairy-tale story based on a mirage as its factual base. All smoke and mirrors supported via a cohort of complacent onlookers, along with, just as many fervent believers hoping, and praying that this “Never-land” can exist forever. Do I need to remind you that even the Bank of Japan’s governor Mr. Kuroda actually uses the term “Peter Pan” to describe his monetary thesis? Welcome to monetary policy 21st century style. Remember – it’s different this time.

Yet, how is it, here we are within spitting distance of the all time, never before seen in human history highs and: there hasn’t been a one? Not any unicorns cashing out? None in all of 2016 thus far? How is it different this time? Why is it different this time? How can all this good in the markets be so bad not only for the “eyeballs for ad dollars” based social everything genre, but all IPO candidates in general?

Oh right, I forgot. Not to sound like a broken record but “it’s different this time.” I would suggest this time, is a looking a lot like last time. Can you say A – O – L? Many can – they just won’t.

Another point is; when it comes to that cashing-out IPO stock option dream and picking up a San Francisco McMansion on the cheap at $5 million or so. Those dreams are beginning to take on more of a realization that a shipping container reality might be here to stay far longer than first anticipated. Or, if you’re lucky, you might find a nice place in some box, or under some stairwell or crawl space to rent while you wait for that “just you wait!” IPO announcement we’re told is coming any day now.

Only issue? Hopefully that box, or room in a McMansion isn’t rented from someone who is also waiting. Or, you may find they’ll need to use that space eventually for themselves as they list their bedroom on AirBnB™ to help foot the bill. But not too worry. For they’ll state, “It’s just any day now!” when they’ll cash out their shares with ____________ (fill in the blanks) unicorn’s IPO. If it ever does – at a value that pays. After all: there’s always next quarter, right? Just like earnings. But again I digress, sorry.

How about some past unicorn cash outs? How are they doing? Twitter™? Linkedin™? Square™? If you hold shares in these companies you should be crushing it when it comes to your portfolio. After all, these companies have seen their shares hurt “unfairly” as many a Silicon Valley aficionado or next in rotation fund manager will attest. So, with a historic rise that dwarfed all previous measures prior in the “markets,” with the best recovery ever (yes, ever) in a quarter in the stock markets history. The share prices of these companies should be on fire, no?

No. In actuality if you still own shares I would surmise the description would be more in kind with underwater, or drowning in a sea of red, yes? Well remember, it’s different this time, right?

But these are new business models we’re told. It is us or you that “just doesn’t get it” when it comes to all these new businesses emanating from tech. Disruption is the key! Profits come later, making net profits much later (if ever!) It’s all about “eyeballs for ads.” Once they get that user growth model back on track just you wait!

Well we’re still waiting, but more importantly, Wall Street has been waiting and has clearly shown it’s losing its patience. And for many, not only are they no longer willing to wait. But more importantly: They’re either pulling out, or turning a blind eye to “eyeballs” entirely. Now it’s, “Where’s my money or, I’m showing you the door.” And it’s gaining ground daily.

There’s no better example today than Yahoo™. Here’s a company only a mere 3+ years ago was heralded with its hiring of Marissa Mayer as CEO, its stake in Alibaba™, along with its “eyeballs for ads” count was, and still is, one of the highest on the web. Today? Now that  QE is no longer, the only thing worth keeping (as to sell) seems to be its stake in Alibaba. Although at a far lower value than they were from its own IPO heights.

How valuable is all that “eyeballs for ads” goodwill? As the ole saying goes: “How much you got?” For it seems via the rumor mill it isn’t going to take all that much to acquire it. Talk about a diminishing value. As for being a board member? That now has a life expectancy of “how long before you can move out?” And as for its once high flyer, party throwing CEO? Maybe LinkedIn will be her next ticket to fame. No, not as an executive – but as a job board participant. Oh and by the way, LinkedIn shares are still on sale – and nobody seems to care. Except those with double-digit percentage losses. But alas, once again, I digress.

It seems she’s just the latest in an ever-growing list of “social everything” brilliance – as long as there’s QE to supply the brain power. And the debacle at Yahoo is just the latest of the oldest names. For I believe: It’s coming to the “new” in much the same fashion and will snowball even quicker. And yes, even with the markets at these levels. Why? Easy…

The fairy-tale can no longer withstand reality. Net profits, and return of money and/or investment matters. Period. Unless…

You’re one of the fortunate that is somehow already located within an index fund that is targeted and/or held by either a central bank or sovereign wealth fund. If not? “There’s no soup for you!” (i.e., money to wait.) That time has now since passed for “it’s different this time.” And not the way the “Valley” has argued these last 6+ years. (And I believe that too is about to find itself in a whole ‘nother “it’s different this time” reality check in the very near future.)

The time of “eyeballs for ads” has peaked in my opinion. That story as I’ve argued over the years would unravel quicker than a sweater thread, and all it would take was when the meme of “it’s different this time” began being debunked by measurements the “Valley” itself couldn’t just talk over or spin away.

As a matter of fact I’m of the opinion that today: the more words used to protect the fairy-tale meme will actually work against it. I’ll finish with the latest example for anyone who wants to truly understand just how encompassing the “it’s different this time” narrative really has become and – to what extent.

There is probably no other industry that has been disrupted, broken, changed, and far more other ways than I can type – than music. And there has been no other business model in the “eyeballs/ears for ads” internet genre than streaming music services. Billions of listeners, billions of this, billions of that. Valuation touted of $BILLIONS, and more. “It’s the way of now!” “Streaming is it!” “Invest now or miss the boat!” “This is where the money of the decade is to be made!” And on, and on, and on. However, there’s a problem.

Remember how I implied “would unravel quicker than a sweater thread?” And all it would take was when the meme of “it’s different this time” began being debunked in ways so glaringly obvious without saying a word? Well, here is the latest fulfillment of that argument.

Streaming music; for all that it’s been touted to be; both the be all, and, end all of music. Along with why its business model would be the darling of investors everywhere. I ask you not only to contemplate this yourself, but also, think about how this one fact is going to play into the minds of not only current investors, but rather, those desperately needing new investors today for all that “cashing out” to take place tomorrow. Ready?

Vinyl sales, yes, as in those plastic looking arcane relics of yesteryear that adorn many a bar room wall or lie boxed is some grandparents basement hasn’t just made some resurgence that you didn’t read on you latest social media “eyeballs for ad revenue” of choice. No, this resurgence isn’t making such a comeback as to replace digital. However, what is has done is antiquated that meme of “it’s different this time” when it comes to those “eyeballs for ads” supported models. Ready? (If you’re an investor in one form or another of the “eyes for ads” model you might want to take a seat. Don’t say I didn’t warn you.)

According to the Recording Industry Association of America (RIAA) vinyl sales generated more revenue in 2015 than ALL the ads/advertising on YouTube™, Spotify™, and Soundcloud™ – Combined!

But what about all those eyeballs/and ears you ask? Sorry, but the pun just writes itself:

It’s differen..It’s differn…It’s differen…It’s differen…It’s differen…It’s differen…

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In the aftermath of Bloomberg’s surprising Friday report, according to which Saudi Arabia flipflopped on its previous promise that it would freeze its oil output while allowing Iran to grow supply until it hit its pre-embargo peak, instead saying that it would only join the freeze curbe Iran – and all other OPEC member nations – also joined, crude tanked.

Today, what little hope there may have been that Iran will suddenly change its mind and join the production freeze evaporated on Sunday when Iran’s oil minister rejected a Saudi demand to stop throttling up its petroleum production. As the WSJ adds, this threatens what has become a farcical deal to “limit crude output and raise prices” when the major oil producers meet in Doha on April 17.

The follows Zanganeh’s admission that Iran’s oil and condensates exports surpassed 2mm b/d, a trend Iran will certainly not want to imperil.

Iranian Oil Minister Bijan Zanganeh

As the WSJ notes, Zanganeh’s remarks were his first comments since a report emerged last week that Saudi Arabia, the world’s largest crude exporter, would limit its production only if Iran followed suit.

The dueling positions by the Middle East’s two biggest rivals for power and economic might have set off a scramble among other oil-producing nations to salvage a deal to freeze their output and stop growth in the world’s petroleum supplies. Global oil production outpaces demand by almost two million barrels on any given day, sending prices to their lowest levels in over a decade.

Ironically, in advance of the Doha meeting which many thought had a chance of reaching some agreement, other OPEC members had pushed their oil production to the limit, flooding the market with even more excess supply. Most will find it virtually impossible to throttle production back.

As a reminder, Saudi Arabia and other members of the 13-nation Organization of the Petroleum Exporting Countries are set to meet with nonmembers like Russia on April 17 in Doha to hash out a production freeze.

The Bloomberg report on Friday. citing an interview with the kingdom’s Deputy Crown Prince Mohammed bin Salman, shocked Saudi Arabia’s Arab allies in the Persian Gulf.

 

Before the prince’s comments, Saudi Arabia had been signaling it would hold production steady, instead of increasing, even if Iran ramped up its output. Iran just received relief from Western sanctions that had crippled its oil industry and is increasing output to achieve presanctions levels.

As for Iran, it is merely sticking to what it has said before it would do: Zanganeh told Iran’s semiofficial Mehr News Agency that he still intended to bring Iran’s oil production to its presanctions level of four million barrels a day an increase of one million barrels a day compared with late 2015.

As noted above, Iran’s oil and gas condensate exports rose by 250,000 barrels a day in March to surpass two million barrels per day, the ministry’s Shana news service quoted Mr. Zanganeh as saying.

Even though Mr. Zanganeh told Mehr he would certainly attend the Doha meeting if “he had time,” his refusal to heed to Saudi demands that Iran freeze its output calls the success of the upcoming meeting into question.

With the Iran breaking ranks, Kuwait and Qatar are scrambling to reach Riyadh to salvage the prospective agreement, according to the WSJ. Kuwait’s acting oil minister Anas al-Saleh said cooperation between OPEC and nonmembers would “certainly help stabilize oil prices.”

“We believe that a common agreement on a positive stand will serve market stability,” the minister said.

Of course, Kuwait has already made it clear that without Iran there is no deal: as we reported on March 8, Kuwait’s oil minister said on Tuesday that his country’s participation in an output freeze would require all major oil producers. “I’ll go full power if there’s no agreement. Every barrel I produce I’ll sell,” Anas al-Saleh told reporters in Kuwait City last month.

He may now have no choice.

Oil prices have risen since Saudi Arabia and Russia met in Doha in February and first broached the idea of a freeze. Prices have climbed over $40 a barrel in recent weeks, after hitting lows of $27 a barrel in January. But prices fell on Friday after the Saudi prince’s comments were published. It remains to be seen if oil will revert back to its February lows now that any hope for a coordinated supply cut is no longer on the table.

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After last night’s oddly drafted letter by the Greek PM Tsipras (which contained a combination of typed text and scribbles) to IMF head Lagarde in the wake of the Wikileaks revelation which was interpreted by many, the Greek government included that the IMF would seek a “credit event” to facilitate its debt-reduction negotiations with Angela Merkel, it was only a matter of time before the IMF had to officially respond to the Greek premier and population. She did so moments ago.

The highlights:

• … any speculation that IMF staff would consider using a credit event as a negotiating tactic is simply nonsense
• … if it were necessary to lower the fiscal targets to have a realistic chance of them being fully met, there would be an attendant need for more debt relief.
• … this weekend’s incident has made me concerned as to whether we can indeed achieve progress in a climate of extreme sensitivity to statements of either side
• … I have decided to allow our team to return to Athens to continue the discussions.
• … it is critical that your authorities ensure an environment that respects the privacy of their internal discussions and take all necessary steps to guarantee their personal safety.
• … the IMF conducts its negotiations in good faith, not by way of threats, and we do not communicate through leaks
• … I also look forward to any personal conversation with you on how to take the discussions forward.

Full letter:

Dear Prime Minister,

 

Thank you for your letter of April 2, in which you ask about the IMF’s position regarding the program negotiations with Greece.

 

My view of the ongoing negotiations is that we are still a good distance away from having a coherent program that I can present to our Executive Board. I have on many occasions stressed that we can only support a program that is credible and based on realistic assumptions, and that delivers on its objective of setting Greece on a path of robust growth while gradually restoring debt sustainability.

 

Otherwise it would fail to re-establish confidence, with the implication, among others, that Greece would soon again be forced to adopt yet more measures. Of course, any speculation that IMF staff would consider using a credit event as a negotiating tactic is simply nonsense.

 

As you and I have discussed several times, including recently on the telephone, I have been consistent in pointing out that, if it were necessary to lower the fiscal targets to have a realistic chance of them being fully met, there would be an attendant need for more debt relief. In the interest of the Greek people, we need to bring these negotiations to a speedy conclusion.

 

I agree with you that successful negotiations are built on mutual trust, and this weekend’s incident has made me concerned as to whether we can indeed achieve progress in a climate of extreme sensitivity to statements of either side. On reflection, however, I have decided to allow our team to return to Athens to continue the discussions.

 

The team consists of experienced staff who have my full confidence and personal backing. For them to be able to do their work, as you have invited us, it is critical that your authorities ensure an environment that respects the privacy of their internal discussions and take all necessary steps to guarantee their personal safety.

 

Finally, the IMF conducts its negotiations in good faith, not by way of threats, and we do not communicate through leaks. To further enhance the transparency of our dialogue, I have therefore decided to release the text of this letter on our website at www.imf.org. I also look forward to any personal conversation with you on how to take the discussions forward.

 

Sincerely yours,

 

Christine Lagarde

And so once again conditions between Greece and the IMF (the only Troika agency that advocates more Greek debt cuts) are right back to their traditional sub-frigid place.  As to whether Greece can guarantee the personal safety of the IMF’s team, we shall find out imminently: the critical negotiations are set to begin in the next few days.

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One of the more prominent names featured in the Panama Papers disclosure is that of Iceland’s Prime Minister Sigmundur David Gunnlaugsson. The reason is that according to the leaked files, Prime Minister Sigmundur David Gunnlaugsson and his wife secretly owned a company called Wintris set up in 2007 on the Caribbean island of Tortola in the British Virgin Islands, to hold investments with his wealthy partner, later wife, Anna Sigurlaug Pálsdóttir.

As Guardian reports, the couple were living in the UK at the time and had been advised to set up a company in the tax haven in order to hold and invest substantial proceeds from the sale of Pálsdóttir’s share in her family’s business back in Iceland.

Gunnlaugsson owned a 50% stake in Wintris for more than two years, then transferred it to Pálsdóttir, who held the other 50%, for one dollar. The prime minister’s office now says his shareholding was an error and “it had always been clear to both of them that the prime minister’s wife owned the assets”. Once drawn to the couple’s attention in late 2009, the error was corrected.

Towards the end of Gunnlaugsson’s time as a Wintris shareholder, having returned to Iceland, he was elected to parliament as leader of the Progressive party.

Gunnlaugsson, who became prime minister four years later, never disclosed his Wintris shares on Iceland’s parliamentary register of MPs’ financial interests.

As the Guardian also reported earlier, in the video clip below, PM Gunnlaugsson walks out of an interview with Swedish television company SVT. Gunnlaugsson is asked about Wintris, which he says has been fully declared to the Icelandic tax authority. Gunnlaugsson says he is not prepared to answer such questions and decides to discontinue the interview, saying: ‘What are you trying to make up here? This is totally inappropriate.’

 

The prime minister and his wife then rushed out separate public statements in Icelandic condemning reporters’ intrusions into their private business matters.

Both stressed their financial interests had always been properly disclosed to the Icelandic tax authorities. The Guardian has seen no evidence to suggest tax avoidance, evasion or any dishonest financial gain on the part of Gunnlaugsson, Pálsdóttir or Wintris.

But it may be too late.

As the Guardian adds, the prime minister is this week expected to face calls in parliament for a snap election after the Panama Papers revealed he is among several leading politicians around the world with links to secretive companies in offshore tax havens.

The financial affairs of Sigmundur Davíð Gunnlaugsson and his wife have come under scrutiny because of details revealed in documents from a Panamanian law firm that helps clients protect their wealth in secretive offshore tax regimes. The files from Mossack Fonseca form the biggest ever data leak to journalists Opposition leaders have this weekend been discussing a motion calling for a general election – in effect a confidence vote in the prime minister.

 

On Monday, Gunnlaugsson is expected to face allegations from opponents that he has hidden a major financial conflict of interest from voters ever since he was elected an MP seven years ago.

As Iceland’s Visir reports, quoting a facebook post by Iceland’s former PM Johanna Sigurdardottir, she is calling upon Gunnlaugssonto resign to “prevent a social uprising”, and calling on him to “give a straightforward account of all the facts of the matter”. Google translated:

Prime Minister Johanna Sigurdardottir said debt his people to leave immediately and prevent an uprising in society.

 

Johanna Sigurdardottir, a former prime minister, says that the Prime Minister must immediately resign and the government all to leave. The Facebook post her she says that it is not just the credibility of the nation to the international community that is at stake – but will people never feel what leaders have been proven to be. It has formed a real breaches of confidentiality between the Government and the people of the country. Riots and anger in the community will not be weaker this collapse. Furthermore, says Johanna society will not have the Prime Minister that it needs to be ashamed, Prime Minister of the obvious has become the deception and dishonesty, the Prime Minister described was mistrust on the currency and the Icelandic economy by hiding their money in tax shelter, the Prime Minister does not seem to understand what morality is and wants to get yourself set up its own protocol, which is currently placed in the group with the perverse power brokers in the world. Prime Minister owes his people to leave immediately and prevent an uprising in society.

The former finance minister Steingrímur Sigfússon told the Guardian: “We can’t permit this. Iceland would simply look like a banana republic. No one is saying he used his position as prime minister to help this offshore company, but the fact is you shouldn’t leave yourself open to a conflict of interest. And nor should you keep it secret.”

Essentially, Gunnlaugsson political career is over, and the only question is whether Goldman has already picked a banker to replace him.

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What do Lloyd Blankfein, Jamie Dimon, James Gorman, John Thain, Jimmy Cayne, and any of the revolving door of AIG CEO’s have in common? Three things come to mind rather quickly: 1) All were financial executives during the 2008 global financial crisis. 2) All of their firms received massive public bailouts. 3) None of them went to jail for their firm’s involvement in said crisis. As a matter of fact, most are still plugged in somewhere on Wall Street, presumably helping to facilitate the next great financial crisis.

While everyday Americans were (and still are) quite disgusted with the fact that absolutely nobody was actually held accountable for the creation of the financial crisis, it’s safe to say that most have given up hope that anyone will be convicted. As a matter of fact, US Attorney General Eric Holder once said that banks are so large that it would be difficult to prosecute anyone. 

 That’s nice.

Enter Iceland, a small country of roughly 330,000 residents, where as Bloomberg reports, bank executives are actively being prosecuted and sent to jail for their negligent actions.

Unlike the jellyfish in the US, Iceland appointed Olafur Hauksson as special prosecutor to investigate bankers and their roles in the financial crisis. The result? 26 convictions of bankers and financiers since 2010. In upholding the convictions, Iceland’s Supreme Court said that actions were “thoroughly planned”, and “committed with concentrated intent” – refreshingly different than Holder’s let’s just let them get away with it because it’s hard to figure out verbiage.

This is Olafur Haukson: a person who is the diametrical opposite of Holder; a person who dares to prosecute bankers.

Olafur Haukson, special prosecutor to investigate the banking cases

As Bloomberg writes, in contrast to the Icelandic saga, no bank CEOs in the U.S. or the U.K. have been convicted for their roles in the subprime mortgage crackup and related disasters. Bringing white-collar criminal cases may be easier in Iceland because courts don’t use juries. Rather, they employ neutral experts to help judges understand the intricacies of finance. In Britain’s highest-profile case stemming from the crash, the country’s Serious Fraud Office investigated London-based real estate magnates Vincent and Robert Tchenguiz in connection with their business dealings with Kaupthing. The brothers were never charged, and in 2014 the SFO even had to pay them £4.5 million ($6.4 million) in damages to settle their claims of malicious prosecution.

Hauksson, a bear of man with a fighter’s jaw, is pressing ahead with a half-dozen more cases related to the crash. The former top lawman in Akranes, a port town up the coast from Reykjavik, Hauksson was one of only two applicants for the job of special prosecutor—and the only lawyer. “It was important for the country to look carefully at what happened in the months that led up to the banking collapse,” he says. Few expected him to succeed in untangling the web of self-dealing that stretched from Reykjavik to Luxembourg to London. “He was used to issuing parking fines and breaking up drunken brawls,” says Sigrun Davidsdottir, a journalist who writes about the bank cases on her website, Icelog. “It’s earth-shattering what he’s accomplished.”

What he has accomplished is to do the unthinkable: send criminal bankers in prison.

Working with the Financial Supervisory Authority, his office found that the country’s top three banks routinely made huge loans to their biggest stockholders. Worse, the banks secured the debts with their own equity, which spelled doom when share prices nosedived in September 2008. That month, Kaupthing Chairman Einarsson and CEO Sigurdsson surprised investors by announcing that Sheikh Mohammed bin Hamad bin Khalifa al Thani, a member of Qatar’s royal family, had acquired a 5.1 percent stake in the bank. The two bankers, with the help of Gudmundsson in Luxembourg and stockholder Olafsson, had directed Kaupthing to lend the sheik $280 million to buy the stake through a daisy chain of shell companies in the British Virgin Islands and Cyprus, according to court records. Arion Bank was formed from the domestic assets of Kaupthing after it failed in October 2008.

The result: Iceland’s economy is vibrant and growing: “It’s a rebound other European nations would envy. Iceland’s gross domestic product is set to expand almost 4 percent this year, according to forecasts compiled by Bloomberg. The unemployment rate of 2.8 percent is about one-third the average of the European Union. As the state prepares to lift capital controls later this year, the banking sector continues to strengthen: State-owned Islandsbanki, the nation’s No. 2 lender with $8.4 billion in assets, boasts a common equity Tier 1 ratio of 28.3 percent. That’s more than twice the 12.7 percent average recorded by Europe’s 25 largest banks as of Dec. 31, according to Bloomberg data. “Before the crisis, the banks grew too fast and too much,” says Unnur Gunnarsdottir, director general of the Financial Supervisory Authority, which oversees the lenders. “That will not happen again.”

* * *

Despite Haukson’s success in ensuring criminal bankers pay for their actions, Hauksson isn’t letting up. He still has half a dozen more cases relating to the 2008 crash. Those on the receiving end of his convictions get to visit the beautiful Kviabryggja Prison, an old farmhouse turned prison, located in a remote area bordered by the North Atlantic.

Kviabryggja Prison in western Iceland doesn’t need walls, razor wire, or guard towers to keep the convicts inside. Alone on a wind-swept cape, the old farmhouse is bound by the frigid North Atlantic on one side and fields of snow-covered lava rock on another. To the east looms Snaefellsjokull, a dormant volcano blanketed by a glacier. There’s only one road back to civilization.

 

This is where the world’s only bank chiefs imprisoned in connection with the 2008 financial crisis are serving their sentences, Bloomberg Markets magazine reports in its forthcoming issue. Kviabryggja is home to Sigurdur Einarsson, Kaupthing Bank’s onetime chairman, and Hreidar Mar Sigurdsson, the bank’s former chief executive officer, who were convicted of market manipulation and fraud shortly before the collapse of what was then Iceland’s No. 1 lender. They spend their days doing laundry, working out in the jailhouse gym, and browsing the Internet. They and two associates incarcerated here—Magnus Gudmundsson, the ex-CEO of Kaupthing’s Luxembourg unit, and Olafur Olafsson, the No. 2 stockholder in the bank at the time of its demise—can even take walks outside, like Kviabryggja’s 19 other inmates, all of whom were convicted of nonviolent crimes.

 

* * *

 

At Kviabryggja Prison, the tumult in the capital seems worlds away. It’s dead quiet around the single-story barracks, and in the distance rise massifs that form Iceland’s western fjords. The Kaupthing convicts are marking time in different ways. A couple of them are tutoring fellow inmates. The subjects: math and economics.

This is where Iceland’s criminal bankers can be found now:

 

Meanwhile, in the US…

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Submitted by The Burning Platform

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From Nicholas Colas at Convergex

Our basket of unorthodox economic indicators shows an American economy in a state of flux.  On the plus side, used vehicle prices remain stable and pickup truck sales still show positive comps to last year.  Light vehicle dealer inventories at 68 days supply are normal for this time of year, as long as car and truck demand hold up through the spring selling season.  Google still autofills “I want to buy” with “a house” first and now “a timeshare” is second, showing continued strong consumer interest in both primary and discretionary housing.  On the downside, food stamp program participation is still running +45 million individuals and +22 million households, down only modestly from the +48 million participants at the peak in 2013. Our proprietary “Bacon Cheeseburger Index” shows deflationary pressure on par with 2009 and 1998, pulling consumer inflationary expectations lower.  And firearm background checks by the FBI both ramped to new highs in 2015 (+23 million) and show +40% year over year comps in the first two months of 2016.

There is a t-shirt popular in certain parts of the U.S. that bears the following message: “Alcohol, Tobacco, Firearms… Who’ s bringing the chips?”  Yes, ladies sizes are also available.  And if casual clothing isn’t your thing, the same sentiment is available on caps, mugs, patches, greeting cards and bumper stickers.  Just Google the term and you’ll see a wide variety of options.

If that sentiment abhors or confounds you, I can understand.  America is a large country, both in terms of geographic and ideological span.  What gets taken for granted in Manhattan draws a quizzical eye in Moline or Monsey, and vice versa.

Just as it pays to travel through America to understand it completely, we also believe it pays to look beyond the customary economic data to really get under the hood of the domestic economy.  We’ve been doing this piece quarterly, highlighting these “Off the Grid” economic indicators, for 5 years now and they never fail to both illuminate and entertain.  We’ve included our customary chart deck in the attached document, but the rest of this report will be a highlight reel of this quarter’s findings.

Take one simple example: inflation. 

• Academic discussions center on either growth in the money supply or the change in the general price levels of goods and services. Core PCE (the Fed’s preferred measure) is currently +1.7%, but we all heard Fed Chair Yellen’s skepticism on this data during her speech this week.
• The Fed Chair is right to be cautious, for it is inflationary expectations that really matter. If the population believes prices will decline in the future, or at least become relatively less dear, they will delay consumption today.  Look for “Japan” in the economic dictionary to understand the consequences.  To understand where consumer inflation expectations are going, you would do well to consider a basket of commonly and frequently purchased goods.  That, after all, is what anchors inflation expectations for many consumers.
• Enter our very own “Bacon Cheeseburger Index”, an evenly split mini-basket of items that just happen to make up summertime’s most desirable lunch or dinner treat. Thanks to price declines in all three cholesterol-laden commodities, a bacon cheeseburger now costs 5.1% less than a year ago.
• A look back at this index to 1990 finds that it is actually a decent indicator of deflation risk. Prior periods when the BCI turned resoundingly negative (3 percent or more) since 1990 include: 2009 (Financial Crisis), 1998 (EM/Long Term Capital), and 1992 (lead up to Iraq Invasion).  In each case, the Fed was cutting interest rates, not raising them.

So should the Fed actually use the Bacon Cheeseburger Index?  Of course not…  But does it help explain in one compact (if anecdotal) form why the Federal Reserve is happy to hold off on rate increases?  I think it does.

We have a host of other indicators we track, and in the remainder of this note I will summarize them.

Auto-related indicators.  Used car prices are a highly underappreciated economic bellweather.  Everyone looks at new car sales, but with every new vehicle that rolls off the lot, a less shiny one stays behind.  The value of that trade-in can stop a potential buyer from signing a new car loan or upgrading models.  Other indicators worth a mention: full sized pickup truck sales (a proxy for small business growth) and overall new vehicle inventories.

• Used car prices according to Manheim auto auctions – one of the biggest in the business – have remained stable since mid-2010. If there is a worrisome sign, it is that they recently dropped 1.4%. That bears watching, especially with 3 year old off-lease vehicles from the 2013 sales year coming back to dealers.
• Full sized pickup truck sales are still rising, up 8% year over year.
• Dealer inventories of new cars and trucks is currently 68 days, down from 73 days last year at this time and 80 days in February. Anything over 60 is considered “High”, but a good spring selling season should clear inventory.

Supplemental Nutrition Assistance Program (also called Food Stamps) Participation data tells a story about how deep the economic “Recovery” has run through the strata of American society.

• Prior to the Financial Crisis (2006 Fiscal Year data), there were 26.5 million Americans in the SNAP program.
• That number rose to a peak of 47.6 million in 2013 and has only declined to 45.8 million as of the end of the last government Fiscal Year in September.
• The most recent data available has total participation at 45.1 million and 22.3 million households. This amounts to 14% of all Americans and 20% of all American households.

We track a range of goods and services to assess where Americans are investing and spending:

• Background checks by the FBI for firearm purchases hit a new record at 23.1 million last year. At an average transaction price of $600 (an educated guess based on many visits to gun stores over the years) that is $14 billion in firearms sales.  Moreover, data from January and February 2016 shows background check volumes running +40% over last year.  Now, not every check results in a sale, but we assume most do and some no doubt actually represent multiple purchases.  Also worth noting: Google Trend data (the number of searches for a specific term) for ‘Buy a Gun’ are at multiyear lows.  To me, that means that repeat buyers are responsible for the recent growth since they have no need to search for a Federal Firearms Dealer.
• Precious metal coin purchases from the U.S. Mint show consumers are more interested in gold over silver bullion purchases. On a rolling 6 month basis, the Mint is selling $87 million of gold coins/month now versus $62 million/month a year ago.  As for silver bullion coins, the current average selling rate is $63 million/month versus $69 million last year at this time.  Worth noting: both figures far exceed the amount of incremental capital invested in U.S. equity mutual funds, which is negative $23 billion YTD according to the Investment Company Institute.  As with the firearms data, Google searches for ‘Gold coins” is at multiyear lows and likely indicates bullion buyers are repeat purchasers.
• Gallup Daily Tracking surveys for dollars spent out of pocket show an average daily outlay of $84, up from last year’s $82 at this time but down from the $87/day level of two years ago.
• Miles driven continue to climb, according to the U.S. Department of Transportation. For January 2016, the growth here was 2.0% over last year and on a rolling 6 month average basis the comps are still running closer to 3% – numbers we haven’t seen since the middle of the last decade. Cheap gas is, of course, the primary explanation but also forces the question: where is everyone going and why aren’t they spending more when they get there?

 

 

To measure common items searched on Google for either purchase or sale, we look at what the search engine “Autocompletes” when you type “I want to buy” and “I want to sell”.  Autocomplete is a proprietary Google algorithm that attempts to predict the rest of your query based on what others have completed to the same starting words.

Yes, hilarity ensues sometimes with Autocomplete (see here: http://ift.tt/177tNfs), but we’ve tracked what Google has recommended to finish “Buy” and “Sell” searches since 2011. Here’s the latest:

• “A house” has been the #1 autocomplete for “I want to buy” since Q1 2015, and remains on top this quarter.
• Moving up to #2 for “Buy” is “a timeshare”. We’ll take it as a positive for both the primary and secondary residence real estate markets that these feature at the top.
• Rounding out the top 4 are “a car” and “stock”.
• For “I want to sell”, the top three answers are “Car”, “House” and “Kidney”. And yes, the last one is still illegal in the U.S.

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

For the first time in history, more people are obese than underweight, according to a new study. In 1975, more than twice as many people were underweight than obese…

 

Behind the global spike is greater access to cheap food as incomes have risen. "It’s been very easy, as countries get out of poverty, to eat a lot, and to eat a lot of unhealthy calories,” said the study’s senior author, adding that "the price of fresh fruits, vegetables, and whole grains are often “noticeably more than highly processed carbohydrates." The rich world can blunt the health impacts of unhealthy weight with drugs, but health systems in the developing world may not be equipped to do the same.

The past 40 years have seen an unprecedented increase in the number of obese adults worldwide, climbing to about 640 million from 105 million in 1975. If the current trend continues, about one-fifth of adults will be obese by 2025.

 

The rate has more than doubled for women and tripled for men, according to a new analysis published in the Lancet. Under the present trajectory, the chance of meeting a goal set by the World Health Organization to halt the increase over the next decade is, according to the study, “virtually zero.”

 

 

 

A person who has a body-mass index higher than 30, or weighs at least 203 pounds and is 5-foot-9-inches tall, is considered obese.

 

The world population’s average weight has increased by about 3.3 pounds (1.5 kilograms) per decade since 1975, the researchers estimate. Excess weight raises the risk of diabetes, heart disease, and other chronic conditions.

 

“The issue really comes down to people either not having enough to eat or not having enough healthy food to eat,” he said. “It becomes a manifestation of the same problem.”

Governments need to prepare for the jump in medical costs that accompany unhealthy weight and focus on prevention now to avoid higher costs in the future, said Bill Dietz, director of the Sumner M. Redstone Global Center for Prevention and Wellness at George Washington University. “They should be as nervous as a cat on a hot tin roof about the tsunami of diabetes that’s coming their way,” Dietz said. “The cost of this rise in the prevalence of obesity is going to be staggering.”

The main takeaway? Excess weight has become a far bigger global health problem than weighing too little. While low body weight is still a substantial health risk for parts of Africa and South Asia, being too heavy is a much more common hazard around the globe.

via Zero Hedge http://ift.tt/1UNKs11 Tyler Durden

An unprecedented leak of more than 11 million documents, called the “Panama Project“, has revealed the hidden financial dealings of some of the world’s wealthiest people, as well as 12 current and former world leaders and 128 more politicians and public officials around the world.

More than 200,000 companies, foundations and trusts are contained in the leak of information which came from a little-known but powerful law firm based in Panama called Mossack Fonseca, whose files include the offshore holdings of drug dealers, Mafia members, corrupt politicians and tax evaders – and wrongdoing galore.

The law firm is one of the world’s top creators of shell companies, which can be legally used to hide the ownership of assets. The data includes emails, contracts, bank records, property deeds, passport copies and other sensitive information dating from 1977 to as recently as December 2015.  

It allows a never-before-seen view inside the offshore world — providing a day-to-day, decade-by-decade look at how dark money flows through the global financial system, breeding crime and stripping national treasuries of tax revenues.

Mossack Fonseca’s fingers are in Africa’s diamond trade, the international art market and other businesses that thrive on secrecy. The firm has serviced enough Middle East royalty to fill a palace. It’s helped two kings, Mohammed VI of Morocco and King Salman of Saudi Arabia, take to the sea on luxury yachts.

In Iceland, the leaked files show how Prime Minister Sigmundur David Gunnlaugsson and his wife secretly owned an offshore firm that held millions of dollars in Icelandic bank bonds during that country’s financial crisis.

The files include a convicted money launderer who claimed he’d arranged a $50,000 illegal campaign contribution used to pay the Watergate burglars, 29 billionaires featured in Forbes Magazine’s list of the world’s 500 richest people and movie star Jackie Chan, who has at least six companies managed through the law firm. The files contain new details about major scandals ranging from England’s most infamous gold heist to the bribery allegations convulsing FIFA, the body that rules international soccer.

In the “Operation Car Wash” case in Brazil, prosecutors allege that Mossack Fonseca employees destroyed and hid documents to mask the law firm’s involvement in money laundering. A police document says that, in one instance, an employee of the firm’s Brazil branch sent an email instructing co-workers to hide records involving a client who may have been the target of a police investigation: “Do not leave anything. I will save them in my car or at my house.”

In Nevada, the leaked files show, Mossack Fonseca employees worked in late 2014 to obscure the links between the law firm’s Las Vegas branch and its headquarters in Panama in anticipation of a U.S. court order requiring it to turn over information on 123 companies incorporated by the law firm. Argentine prosecutors had linked those Nevada-based companies to a corruption scandal involving an associate of former presidents Néstor Kirchner and Cristina Fernández de Kirchner.

Today, Mossack Fonseca is considered one of the world’s five biggest wholesalers of offshore secrecy. It has more than more than 500 employees and collaborators in more than 40 offices around the world, including three in Switzerland and eight in China, and in 2013 had billings of more than $42 million.

* * *

The leak also provides details of the hidden financial dealings of 128 more politicians and public officials around the world.

The cache of 11.5 million records shows how a global industry of law firms and big banks sells financial secrecy to politicians, fraudsters and drug traffickers as well as billionaires, celebrities and sports stars. These are among the findings of a yearlong investigation by the International Consortium of Investigative Journalists, German newspaper Süddeutsche Zeitung and more than 100 other news organizations.

The files expose offshore companies controlled by the prime ministers of Iceland and Pakistan, the king of Saudi Arabia and the children of the president of Azerbaijan.

They also include at least 33 people and companies blacklisted by the U.S. government because of evidence that they’d been involved in wrongdoing, such as doing business with Mexican drug lords, terrorist organizations like Hezbollah or rogue nations like North Korea and Iran.

“These findings show how deeply ingrained harmful practices and criminality are in the offshore world,” said Gabriel Zucman, an economist at the University of California, Berkeley and author of “The Hidden Wealth of Nations: The Scourge of Tax Havens.” Zucman, who was briefed on the media partners’ investigation, said the release of the leaked documents should prompt governments to seek “concrete sanctions” against jurisdictions and institutions that peddle offshore secrecy.

The documents make it clear that major banks are big drivers behind the creation of hard-to-trace companies in the British Virgin Islands, Panama and other offshore havens. The files list nearly 15,600 paper companies that banks set up for clients who want keep their finances under wraps, including thousands created by international giants UBS and HSBC.

An ICIJ analysis of the leaked files found that more than 500 banks, their subsidiaries and branches have worked with Mossack Fonseca since the 1970s to help clients manage offshore companies. UBS set up more than 1,100 offshore companies through Mossack Fonseca. HSBC and its affiliates created more than 2,300.

* * *

In the largest media collaboration ever undertaken, journalists working in more than 25 languages dug into Mossack Fonseca’s inner workings and traced the secret dealings of the law firm’s customers around the world. They shared information and hunted down leads generated by the leaked files using corporate filings, property records, financial disclosures, court documents and interviews with money laundering experts and law-enforcement officials.

Reporters at Süddeutsche Zeitung obtained millions of records from a confidential source and shared them with ICIJ and other media partners. The news outlets involved in the collaboration did not pay for the documents.

Before Süddeutsche Zeitung obtained the leak, German tax authorities bought a smaller set of Mossack Fonseca documents from a whistleblower, a move that triggered the raids in Germany in early 2015. This smaller set of files has since been offered to tax authorities in the United Kingdom, the United States and other countries, according to sources with knowledge of the matter.

The larger set of files obtained by the news organizations offers more than a snapshot of one law firm’s business methods or a catalog of its more unsavory customers. It allows a far-reaching view into an industry that has worked to keep its practices hidden — and offers clues as to why efforts to reform the system have faltered.

* * *

The year-long investigation was coordinated by the International Consortium of Investigative Journalists (ICIJ), who worked with hundreds of journalists from the world’s top media organisations including the ABC’s Four Corners program.

What the documents reveal is the inner workings of a global industry of law firms and big banks who sell financial secrecy to those who can afford it.

The ICIJ findings include evidence that:

• Offshore companies linked to the family of China’s top leader, Xi
  Jinping, as well as Ukrainian President Petro Poroshenko, who has
  positioned himself as a reformer in a country shaken by corruption
  scandals
• 29 billionaires featured in Forbes Magazine’s list of the world’s 500 richest people
• Icelandic Prime Minister Sigmundur David Gunnlaugsson and his wife secretly owned an offshore firm that held millions of dollars in Icelandic bank bonds during the country’s financial crisis
• Associates of Russian President Vladimir Putin secretly shuffled as much as $2 billion through banks and shadow companies
• New details of offshore dealings by the late father of British Prime
  Minister David Cameron, a leader in the push for tax-haven reform
• Offshore companies controlled by the Prime Minister of Pakistan, the King of Saudi Arabia and the children of the President of Azerbaijan
• 33 people and companies blacklisted by the US Government because of evidence that they have done business with Mexican drug lords, terrorist organisations like Hezbollah or rogue nations like North Korea
• Customers including Ponzi schemers, drug kingpins, tax evaders and at least one jailed sex offender
• Movie star Jackie Chan, who had at least six companies managed through the law firm

The leaked data allows a never-before-seen view inside the offshore world — providing a day-to-day, decade-by-decade look at how dark money flows through the global financial system, breeding crime and stripping national treasuries of tax revenues.

Most of the services the offshore industry provides are legal if used by the law-abiding. But the documents show the extraordinary lengths individuals will go to in order to hide the true owners of companies.

Mossack Fonseca offers extra services to provide “front people” known as nominees to act as shareholders, directors or even the owners of your company. This can make it extremely difficult for authorities trying to investigate money laundering or follow the money through complex networks of offshore accounts.

Firm worked with more than 14,000 ‘middlemen’ on clients’ behalf

An ICIJ analysis of the leaked files found that more than 500 banks, their subsidiaries and branches had worked with Mossack Fonseca since the early 1970s to help clients manage offshore companies.

In all, the files indicate Mossack Fonseca worked with more than 14,000 banks, law firms, company incorporators and other middlemen to set up companies, foundations and trusts for customers.

The documents reveal that these offshore players often failed to follow legal requirements to ensure their clients were not involved in criminal enterprises, tax dodging or political corruption.

Mossack Fonseca says the middlemen are its true clients, not the eventual customers who use offshore companies. The firm says these middlemen provide additional layers of oversight for reviewing new customers. As for its own procedures, Mossack Fonseca says they often exceed “the existing rules and standards to which we and others are bound”.

Mossack Fonseca offers backdating of documents

The leaked files also show the firm regularly offered to backdate documents to help its clients gain advantage in their financial affairs. It was so common that an email exchange from 2007 showed firm employees talking about establishing a price structure — clients would pay $8.75 for each month farther back in time that a corporate document would be backdated.

In a written response to questions from ICIJ and its media partners, the firm said it “does not foster or promote illegal acts”.

“Your allegations that we provide shareholders with structures supposedly designed to hide the identity of the real owners are completely unsupported and false,” the firm said.

The firm added that the backdating of documents “is a well-founded and accepted practice” that is “common in our industry and its aim is not to cover up or hide unlawful acts”.

The firm said it could not answer questions about specific customers because of its obligation to maintain client confidentiality.

* * *

There is much more in the full set of releases covered in the ICIJ’s website, however we wonder what if any action will be taken against any of these criminals who also happen to be some of the world’s wealthiest people and most powerful politicians: after all, it is they who make the rules.

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

US equity markets rebounded by the greatest amount ever in Q1 to end the quarter with a "keep the dream alive" positive return. This 'central-bank'-sponsored bounce occurred as S&P 500 earnings expectations plunged 9.6% – the biggest quarterly collapse since Q1 2009. As FactSet details,

During the first quarter, analysts lowered earnings estimates for companies in the S&P 500 for the quarter. The Q1 bottom-up EPS estimate (which is an aggregation of the estimates for all the companies in the index) dropped by 9.6% (to $26.32 from $29.13) during this period. How significant is a 9.6% decline in the bottom-up EPS estimate during a quarter? How does this decrease compare to recent quarters?

 

During the past year (4 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 4.4%. During the past five years (20 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 4.0%. During the past ten years, (40 quarters), the average decline in the bottom-up EPS estimate during a quarter has been 5.3%. Thus, the decline in the bottom-up EPS estimate recorded during the first quarter was larger than the 1-year, 5-year, and 10-year averages.

 

In fact, this was the largest percentage decline in the bottom-up EPS estimate during a quarter since Q1 2009 (-26.9%).

 

At the sector level, nine of the ten sectors recorded a percentage decline in the bottom-up EPS estimate for the first quarter that was larger than the 5-year average for that sector. Six of the ten sectors recorded a percentage decline in the bottom-up EPS estimate for the first quarter that was larger than the 10-year average for that sector.

 

As the bottom-up EPS estimate for the index declined during the quarter, the value of the S&P 500 increased during this same time frame. From December 31 through March 31, the value of the index increased by 0.8% (to 2059.74 from 2043.94). This quarter marked the 10th time in the past 12 quarters in which the bottom-up EPS estimate decreased during the quarter while the value of the index increased during the quarter.

What doe this idiocy look like?

 

And all it took was the coordinated easing from most of the world's largest central banks…

 

It's not the first time Central Banks have lifted stocks away from reality…

 

Simply put, nothing else matters.

via Zero Hedge http://ift.tt/25EM4xd Tyler Durden