Month: October 2018

Authored by Charles Hugh Smith via OfTwoMinds blog,

In the present era of decadence, Universal Basic Income (UBI) is the modern equivalent of Bread and Circuses.

The dynamics of decadence are easy to understand: as affluence becomes the norm that is widely assumed to be permanent, shared purpose and sacrifice for the common good is replaced by self-absorbed decadence and an ethos of maximizing personal gain.

In his seminal essay The Fate of Empires, Sir John Glubb listed these core dynamics of imperial decline:

(a) A growing love of money as an end in itself.

(b) A lengthy period of wealth and ease, which makes people complacent. They lose their edge; they forget the traits (confidence, energy, hard work) that built their civilization.

(c) Selfishness and self-absorption.

(d) Loss of any sense of duty to the common good.

Glubb included the following in his list of the characteristics of decadence:

— An increase in frivolity, hedonism, materialism and the worship of unproductive celebrity.

— A loss of social cohesion.

— The willingness of an increasing number to live at the expense of a bloated bureaucratic state.

Glubb’s list may at first glance be largely psychological–self-aggrandizement and a focus on hedonistic pursuits–but the dynamics of decadence have economic, political and social ramifications.

First and foremost, the aristocratic financial and political elites secured their position at the expense of social mobility by erecting barriers that protect them from competition and accountability. In effect, they eliminated the risk posed by change by rigging the system to their benefit.

To fund their extravagant lifestyles, they took more of the earnings of those below them, widening the inequality between the aristocracy and commoners to extremes. Historian Peter Turchin reports that where the patricians of the Roman Republic had 10 or 20 times the wealth of an average Roman citizen, by the late Empire the elites possessed up to 200,000 times the wealth of the average commoner.

The heavier burdens on the productive class and the decay of social mobility divested commoners of a financial stake in the system, and the concentration of political power in an oligarchy disenfranchised them of political influence.

When social mobility and shared purpose are lost, there is little motivation to contribute to a system that benefits the few at the expense of the many. People respond by reducing their productive participation and becoming dependents of the state, a phase captured by the phrase Bread and Circuses in the late Roman era, when a significant percentage of the Rome’s populace received free bread and access to costly entertainments in exchange for their political compliance.

Disenfranchised commoners with few prospects for advancement form a volatile political class; a small event can trigger a non-linear explosion that threatens the stability of a status quo that benefits the few at the expense of the many. To counter this threat, the elites bought the compliance and complicity of the masses with Bread and Circuses. As Glubb noted, the willingness to live off the state is a reflection of general decadence; if there is no other hedonistic pursuit within financial reach, then Bread and Circuses will do.

As the eventual collapse of decadent empires attests, Bread and Circuses are no substitute for social mobility, low barriers to accumulating capital and a political stake in the system. In the present era of decadence, Universal Basic Income (UBI) is the modern equivalent of Bread and Circuses. But buying off the disenfranchised doesn’t transform an unstable system into a stable system; it merely masks the instability for a time.

The core belief of decadent eras is that the status quo is so powerful and permanent that it can withstand the predations of the few and the Bread and Circuses lavished on the many.

This is of course a false confidence. Every status quo is a social construct that is inherently non-linear. The decline of productive sectors, the divestiture of commoners from ownership of productive assets and the political disenfranchisement of commoners hollow out the economy and the society.

These dynamics of decadence weaken the social and economic order, creating conditions that favor a loss of faith in the status quo and the failure of key institutions.

*  *  *

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Bahrain’s slumping economy and mushrooming public debt have been given a fresh lifeline as Saudi Arabia and other Gulf Cooperation Council (GCC) allies have agreed to inject billions in order to stabilize the tiny island gulf nation and prevent a looming financial crisis.

In a move designed to keep Bahrain’s currency from collapsing and to avoid a potential credit crunch, Saudi Arabia, Kuwait, and the United Arab Emirates have pledged to give Bahrain $10 billion — enough to meet its funding requirements as it attempts to eliminate its budget deficit by 2022.

Bahrain had faced the likelihood of defaulting on a $750 million Islamic bond repayment due on Nov. 22. and the IMF last spring warned its public debt represents 89 percent of its gross domestic product, while reserves are low.

Bahrain was severely impacted by a slump in global oil prices in 2014 and has experienced sporadic political unrest going back to the so-called “Arab Spring” protests of 2011.

Beyond wanting to stave off financial collapse and any associated contagion or dwindling confidence in the region from spreading, its GCC partners have a pressing geopolitical interest in protecting the ruling Khalifa monarchy as well. 

The last time Bahrain needed an urgent “bail out” from its Saudi older brother – a New York Times headline from 2011: Saudi Troops Enter Bahrain to Help Put Down Unrest

The tanks poured across the King Fahd Causeway bridge, which connects Saudi Arabia and Bahrain

When widespread protests among Bahrain’s Shia-dominant population first broke out against the longtime Sunni rule of King Hamad bin Isa Al Khalifa and his family — a dynasty which has held power since 1783 — the Saudis immediately sent tanks and over 1000 troops across the King Fahd causeway to suppress the Shia rebellion, with the UAE sending a further 500 of its own police and security personnel. 

Thus Bahrain’s Sunni “big brothers” in the region fear that any deep financial turmoil could quickly lead to internal political unrest among the majority Shia population. 

Bahrain – Public debt (% of GDP) projected through 2020, via the IMF/Actualitix

The details of what’s essentially an Arab bailout deal are summarized by Reuters as follows:

A package of reforms announced by the Bahrain government on Thursday are aimed at delivering 800 million Bahraini dinars ($2.12 billion) in annual savings and eliminate its budget deficit by 2022. Manama had projected a $3.5 billion budget deficit in 2018.

…The program includes reforms aimed at reducing public expenditure and inefficient spending while also simplifying government processes and increasing non-oil revenue.

A source quoted by Reuters said the $10 billion support package is to be delivered through a long-term, interest-fee loan with financing to be provided gradually on terms acceptable to both parties. The loan is said to be enough to keep Bahrain’s economy afloat and able to avoid defaulting on loans until it balances the budget. 

The timing is politically interesting as the bailout comes ahead of potentially contentious November parliamentary elections on November 24th, the last two of which sparked anti-government demonstrations. 

Notably, the Navy’s 5th Fleet is based out of Bahrain, so the US-Saudi alliance clearly prioritizes the stability of the island-nation’s Sunni ruling family and the economy it oversees. 

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Authored by Daniel Payne via The College Fix,

Site features dozens of unsubstantiated allegations; take them ‘with a grain of salt,’ moderators say…

A website allegedly run by University of Washington students allows individuals to publicly accuse people of sexual assault with no evidence.

The website, titled “Make them scared UW,” was first registered in November of last year but reportedly launched in late September of this year by University of Washington students, the Daily UW campus newspaper reports.

It appears that the list of accused rapists and sexual assault perpetrators has grown substantially on the site in recent weeks in the wake of the rape claims made against U.S. Supreme Court justice nominee Brett Kavanaugh.

Meanwhile, one student named on “Make them scared UW” told The College Fix that the allegation is false, that the University of Washington has dismissed the allegations against him as completely uncorroborated and cleared him of any wrongdoing.

Thus far, every person named on the list is male, and their names include the school they attend. Many listed on the site appear to be University of Washington students, but as apparent word of this site has spread, students from many other colleges are now listed, too.

The site does not employ any mechanisms to verify the truth of any accusations it publishes, and the website’s moderators attempt to protect themselves from liability or criticism by stating atop the list of the accused: “Please remember, just because a name is on this list does not mean the individual is guilty. All it means is that we have received an accusation against them.”

The moderators of the website did not respond to The College Fix‘s repeated requests for comment. The Fix sought to learn if the site’s moderators had any concerns about accusations being directed at innocent people, and whether or not the website has received any legal challenges for publishing unverified allegations.

According to the FAQ page of the website, “Make them scared UW” is a “communal rape list.”

It is “intended to be an online hub for anyone who wants to expose the names of their attackers and harassers, and to fill a gap left by inadequate treatment of these cases by formal institutions.”

“One of our site’s moderators will review your submission, verify your contact information, and after receiving your confirmation, publish the information you provided us (minus any personally identifying info) on the list page on our site,” the FAQ page tells individuals who wish to submit an accusation.

“We do not have the ability to determine whether any accused party is guilty or innocent of the accused acts, so take all names listed with a grain of salt,” the site’s front page states.

Via Facebook message, The College Fix managed to contact one student on the list, a young man who was identified as attending the University of Washington. The student denied having sexually assaulted his accuser.

“I was investigated by my school’s office and found that there was insufficient evidence of what she was accusing me of,” he told The Fix. He said the allegation stems from a night in which he and his accuser “both got pretty drunk,” after which he performed oral sex on her. After he attempted to initiate intercourse, his accuser said no, at which point he “backed off,” he said.

“This girl gave the investigator at my school literally everything, our facebook messages, our snapchat messages (she saved all of them), text messages, and even my reddit account and I was deemed to be so not a threat to her that the investigator didn’t even care if I was in the same class as her,” the student said. He said that he wasn’t even aware he was on the “Make Them Scared” list until The Fix contacted him.

Campus spokesman Victor Balta told The Fix that the school has not decided how to proceed on the issue.

“The contents of the website are very concerning, and the UW is committed to our work toward preventing sexual violence and sexual harassment, maintaining support and protections for anyone who experiences such violence, properly investigating and addressing allegations, and upholding due process,” Balta said via email.

Asked if the school was aware if the website is run by students at the University of Washington, Balta said: “We don’t know for certain.”

Asked if false allegations on the site made or posted by students or affiliates of the university would be treated as “harassment” under school policy, Balta said: “If the university received a complaint that an individual was being harassed or bullied by a student, we would investigate it in the same manner as we would any other case.” Balta reiterated that the university is uncertain if the site is run by students.

In an interview with the student newspaper The Daily UW, University of Washington School of Law associate professor Zahr Said said that the website moderators could face “considerable risks of a defamation lawsuit by anyone whose name they mention in connection with a criminal behavior or sexual assault that gives rise to civil liability.”

But the site’s moderators told The Daily: “We hope that anyone whose name was inaccurately posted on our site will let us know so we can remedy the situation. We’ve verified each claim to the best of our ability, and have not published any claims which we believed to be false.”

“The site’s domain name was registered Nov. 29, 2017, with additional security so as not to reveal the identity of the individual who registered it,” The Daily reported.

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Yet another shopping mall project looks to have fallen victim to “the Amazon effect”, serving as evidence that brick and mortar retail, in the conventional sense, is doomed.

The latest victim is the New Horizon Mall in Calgary. The construction of the “multicultural mega-mall” is nearly complete, but tepid interest forced its developer to push back its planned grand opening to next year. The mall was initially set to open in October of this year.  Only 9 of the 517 spaces in the mall have opened for business since May, when owners were first allowed to take possession according to a new report by Global News.

“It’s surreal. It’s not normal – we’re in the Matrix,” one shopper told Global News. 

The developer, Eli Swirsky, president of The Torgan Group of Toronto, told Global News:

“I love the mall. I think the mall will be fine,” he said in an interview. “I wish it was faster, of course, but every time I go there I’m awed by its size and potential and I think we’ll get there.

Swirsky told Global News that he expects 20 stores will be open by the end of September, but he still wouldn’t commit to a final grand opening date. Instead, he said that it will likely happen when 80 to 100 stores have opened. That is seen to push back the grand opening well into spring of next year.

The optimistic outlook stands in the face of eerie reality of the project, which shows “For Lease” signs and empty glass spaces traditionally reserves for stores.

Those who have already taken up shop in the mall, including Rami Tawil of Silk Road Importers, think that pushing the grand opening off until there are more tenants is a good idea: “I think now it’s better if we push it a couple of months because we need more stores here to open. We need the people coming to see more stores.”

The mall style is based on a similar mall that the developer opened in the Toronto area – about 20 years ago. The mall is different from traditional malls in the sense that it doesn’t exclusively lease to tenants. Rather, investors can purchase retail space and then have the option of leasing it to others or operating it themselves. The developer also holds large chunks of space in hopes of enticing anchor tenants. None of these have been announced yet.

The few tenants of the mall are at varying stages of readiness. Some are still trying to figure out what type of product or service may be best to offer at the location. Others are trying to re-sell or lease their spaces, according to the mall’s general manager, Jason Babiuk.

The mall was a $200 million project that broke ground in June 2016. Some believe that the difficulty in filling the mall has to do with its condominium-like ownership model, which could attract the wrong type of investors to such a project.

Retail analyst Maureen Atkinson, a senior partner at J.C. Williams Group stated: “The challenge with the condo model is that the people who run the stores are typically not the people who own them. So they would have sold these to investors … who see it as an investment and they may have trouble finding somebody who wants to run a business.”

Earlier this week we learned that mall rents in the United States were plunging as vacancies were shooting toward record highs.  According to a WSJ report, the average rent for malls in the third-quarter fell 0.3% to $43.25 a square foot. This is down from $43.36 in the second quarter and is the first time this number has fallen sequentially since 2011, according to research firm Reis.

At the same time, vacancy rates are on the ascent, rising to 9.1% in the third quarter from 8.6% in the second quarter. 

Our take? Instead of trying to re-invent an industry that is already on its deathbed by opening a “multi-cultural” mall, maybe Canada should have, at very least, taken a page out of the United States’ once successful mall playbook: bankrupt retail brands and greasy Asian food court samples. 

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Authored by Patrick Buchanan via Buchanan.org,

Four days after he described Christine Blasey Ford, the accuser of Judge Brett Kavanaugh, as a “very credible witness,” President Donald Trump could no longer contain his feelings or constrain his instincts.

With the fate of his Supreme Court nominee in the balance, Trump let his “Make America Great Again” rally attendees in Mississippi know what he really thought of Ford’s testimony.

“‘Thirty-six years ago this happened. I had one beer.’ ‘Right?’ ‘I had one beer.’ ‘Well, you think it was (one beer)?’ ‘Nope, it was one beer.’ ‘Oh, good. How did you get home?’”

‘I don’t remember.’ ‘How did you get there?’ ‘I don’t remember.’ ‘Where is the place?’ ‘I don’t remember.’ ‘How many years ago was it?’ ‘I don’t know. I don’t know. I don’t know. I don’t know.’”

By now the Mississippi MAGA crowd was cheering and laughing.

Trump went on:

“‘What neighborhood was it in?’ ‘I don’t know.’ ‘Where’s the house?’ ‘I don’t know.’ ‘Upstairs, downstairs, where was it?’ ‘I don’t know. But I had one beer. That’s the only thing I remember.’”

Since that day three years ago when he came down the escalator at Trump Tower to talk of “rapists” crossing the U.S. border from Mexico, few Trump remarks have ignited greater outrage.

Commentators have declared themselves horrified and sickened that a president would so mock the testimony of a victim of sexual assault.

The Republican senators who will likely cast the decisive votes on Kavanaugh’s confirmation — Jeff Flake, Susan Collins, Lisa Murkowski — they all decried Trump’s mimicry.

Yet, in tossing out the “Catechism of Political Correctness” and treating the character assassination of Kavanaugh as what it was, a rotten conspiracy to destroy and defeat his nominee, Trump’s instincts were correct, even if they were politically incorrect.

This was not a “job interview” for Kavanaugh.

In a job interview, half the members of the hiring committee are not so instantly hostile to an applicant that they will conspire to criminalize and crush him to the point of wounding his family and ruining his reputation.

When Sen. Lindsey Graham charged the Democratic minority with such collusion, he was dead on. This was a neo-Bolshevik show trial where the defendant was presumed guilty and due process meant digging up dirt from his school days to smear and break him.

Our cultural elites have declared Trump a poltroon for daring to mock Ford’s story of what happened 36 years ago. Yet, these same elites reacted with delight at Matt Damon’s “SNL” depiction of Kavanaugh’s angry and agonized appearance, just 48 hours before.

Is it not hypocritical to laugh uproariously at a comedic depiction of Kavanaugh’s anguish, while demanding quiet respect for the highly suspect and uncorroborated story of Ford?

Ford was handled by the judiciary committee with the delicacy of a Faberge egg, said Kellyanne Conway, while Kavanaugh was subjected to a hostile interrogation by Senate Democrats.

In our widening and deepening cultural-civil war, the Kavanaugh nomination will be seen as a landmark battle. And Trump’s instincts, to treat his Democratic assailants as ideological enemies, with whom he is in mortal struggle, will be seen as correct.

Consider. In the last half-century, which Supreme Court nominees were the most maligned and savaged?

Were they not Nixon nominee Clement Haynsworth, chief judge of the 4th Circuit Court of Appeals, Reagan nominee Robert Bork, Bush 1 nominee Clarence Thomas, and Trump nominee Brett Kavanaugh, the last three all judges on the nation’s second-highest court, the District of Columbia Circuit Court of Appeals?

Is it a coincidence that all four were Republican appointees, all four were judicial conservatives, and all four were gutted on the grounds of philosophy or character?

Is it a coincidence that Nixon in Watergate, Reagan in the Iran-Contra affair, and now Trump in Russiagate, were all targets of partisan campaigns to impeach and remove them from office?

Consider what happened to decent Gerald Ford who came into the oval office in 1974, preaching “the politics of compromise and consensus.”

To bring the country together after Watergate, Ford pardoned President Nixon. For that act of magnanimity, he was torn to pieces by a Beltway elite that had been denied its anticipated pleasure of seeing Nixon prosecuted, convicted and sentenced to prison.

Trump is president because he gets it. He understands what this Beltway elite are all about — the discrediting of his victory as a product of criminal collusion with Russia and his resignation or removal in disgrace. And the “base” that comes to these rallies to cheer him on, they get it, too.

Since Reagan’s time, there are few conservatives who have not been called one or more of the names in Hillary Clinton’s litany of devils, her “basket of deplorables” — racist, sexist, homophobic, xenophobic, Islamophobic, bigoted, irredeemable.

The battle over Kavanaugh’s nomination, and the disparagement of the Republicans who have stood strongest by the judge, seems to have awakened even the most congenial to the new political reality.

We are all deplorables now.

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It could go down as the largest heist that a single lowly bank teller ever thwarted in history. Not only did the window teller’s own bank’s system and higher ups at HSBC Holdings PLC fail to detect a fraudulent transfer of a half-billion dollars, but it initially appeared perfectly legitimate as even “the central bank’s Swift message code indicated—inaccurately—that the money was for intrabank business with HSBC” according to an electrifying Wall Street Journal investigation of the scheme that reads like a Hollywood thriller. 

In September of 2017 an accountant walked into a suburban London branch of HSBC and requested a $2 million transfer from his account to Japan. When the teller pulled up the account and saw a balance of $500 million, she thought something seemed off, and told the man she wasn’t able to make the transfer. 

Upon notifying her superiors, HSBC soon learned that three weeks prior officials at the central bank of Angola had transferred $500 million of the African nation’s reserves to a small London accounting company run out of a tiny office wedged between a cafe and barber shop in a rough London neighborhood. 

This would mark the beginning of authorities in the UK, Europe, and Angola unraveling a complex scheme that spanned continents, involved a strange cast of characters, and uncovered a lengthy paper trail of forged bank documents and embroiled Angola’s former president in scandal. The Wall Street Journal aptly described it as involving an “Ocean’s Eleven”-style cast of characters in a stunning and engaging deep dive report this week over just how it all went down. 

The WSJ report summarizes the result of the investigation as follows:

Authorities in Angola now allege the $500 million transfer was illegal, part ofa convoluted plot to defraud the southern African country in the final weeks of President José Eduardo dos Santos’s 38-year rule. If Angolan prosecutors are right, the HSBC teller had helped thwart one of the biggest attempted bank heists ever.

The plot involved a group individuals surrounding former President José Eduardo dos Santos, who at the very end of his 38 years as ruler of Angola may have had a role in defrauding the country’s national reserves. President dos Santos’ son, formerly governor of the central bank, has been confirmed as part of the conspiracy which sought to siphon massive fees and cash from the national bank under the guise of setting up a $35 billion investment fund. 

Though the HSBC handed over the bulk of the half-billion dollars back to Angola, four men alleged to be part of the conspiracy are being sued for a remaining €25 million the central bank paid to set up the multibillion-dollar fund, including a Brazilian based in Tokyo and a Dutch agricultural engineer, as well as the London-based accountant that attempted to access the swindled funds. 

The WSJ report likens the bizarre plot to a “get-rich-quick scheme” where investor’s are offered too good to be true massive level of returns:

Angola’s lawyers say the country may have fallen victim to a decades-old type of get-rich-quick scheme, typically used to defraud individuals or companies, not sovereign states. Investors are told they can make huge returns through a private market in “bank guarantees.” There is no such market, and the U.S. Treasury Department and Securities and Exchange Commission have warned that such offers are always fraudulent.

The scheme began when “a letter marked ‘confidential’ arrived at Angola’s finance ministry for then-President dos Santos, 76 years old, who was preparing to step down after elections that August. Angola was reeling from double-digit inflation, and its currency had plunged since the 2014 oil bust.”

Angolan officials received the letter as authentic and failed to properly vet the source: “The letter, bearing a BNP Paribas SA logo and the signature of the French bank’s chairman, made a compelling proposal. BNP Paribas and other European banks would help Angola create a $35 billion fund, refinance debt and get hard currencies for imports.”

Except that the letter, logo, and signature were all completely fake, as after an investigation exposed the origins of the scheme BNP Paribas stated they were all forged. But it appears that once Angolan officials agreed to hear a face-to-face pitch, they were lured further into the proposed investment fund to “help diversify Angola’s economy” which would be managed by a a “qualified trust company” in London.

According to the report:

In a seaside hotel, Mr. Onderwater, the Dutch engineer, and Mr. Pontes presented slides for a new fund to help diversify Angola’s economy, to be managed by , according to excerpts from the presentation in U.K. court documents. A slide listed banks said to be supporting the project, including the European Central Bank.

Half a billion dollars of Angola’s reserves would then be transferred to a shell company set up by the London accounting office pictured below.

Two of the schemers, now in the midst of civil trial in UK courts, began immediately collecting huge sums in agreed upon fees to “manage” the fund, according to the WSJ:

Nevertheless, in July of last year, the central-bank governor, Valter Filipe da Silva, signed an agreement with Mr. Pontes to set up the fund.

That same month, the central bank started transferring €24.85 million ($28.9 million) from its Commerzbank AG account in Frankfurt to an account of Mr. Pontes at Banco Comercial Português SA in Lisbon, for fees due under the agreement, U.K. court documents show.

Mr. Onderwater received €5 million of that money, using some to buy property in Lisbon and rural Devon, England, investigators for the Angolan finance ministry found.

And further fees were transferred to Japan to be collected by the Brazilian participant in the plan: 

Another €2.4 million went to a Tokyo company called Bar Trading, headed by another alleged participant in the plan, 51-year-old Brazilian Samuel Barbosa da Cunha. His role was to act as “trustee” of Angola’s $500 million seed money for the new fund, in charge of obtaining the “bank guarantees” and financial instruments that were supposed to transform the country’s money into $35 billion, according to Mr. Pontes’s testimony and other U.K. court filings.

Aside from the colorful cast of characters and how many countries the elaborate fraud scheme spanned, the other most interesting element to the story is how the initial massive $500 million transfer was overlooked in the first place. 

The WSJ report describes: 

The central bank’s Swift message code indicated—inaccurately—that the money was for intrabank business with HSBC rather than headed to an HSBC customer, according to bank documents reviewed by the Journal. HSBC noticed the discrepancy later, when it started probing the transfer.

Once the $500 million was in Perfectbit’s account, the accountant made Mr. Barbosa and an associate owners of the company. The accountant, Bhishamdayal Dindyal, kept signing power on the HSBC account.

In the weeks that followed the fund transfer from Angola’s central bank the accountant and his partners in the scheme visited various HSBC branches to attempt to access the cash, which proved unsuccessful according to court records. 

And that’s when: “After the alert teller in the suburban London branch filed a report about the enormous balance, HSBC suspended the account for review.” 

Thus a mere old fashioned face-to-face bank teller exchange at the window of a random suburban HSBC branch ultimately exposed an international conspiracy to defraud an African nation out of half-a-billion dollars. 

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Authored by Lance Roberts via RealInvestmentAdvice.com,

Earlier this week, Eddy Elfenbein has an interesting post discussing the “Bull Market In Dividends.” 

“For the third quarter, dividends from the S&P 500 grew by 10.96%. That’s the strongest growth rate in more than three years. It’s the 34th quarter in a row of dividend growth.

Over the last eight years, dividends are up 234%, which is pretty close to what the S&P 500 price index has done.

Considering how simple it is, the S&P 500 has tracked a 2% dividend yield fairly closely for the last several years.”

It is an interesting point particularly when you consider that there are a lot of dividends which have been “financed”through “cheap debt.” There is also the issue of record debt issuance by companies with marginal balance sheets at best or are walking “zombies” at worst.

As John Coumarionos noted earlier this week.

“Low interest rates have allowed companies that would have otherwise gone out of business to stay alive, and this has caused a tepid recovery. Chancellor notes the cumulative default rate on junk bonds during the entire recession was 17%, or “around half the level of the two previous downturns.” And while central bankers might view this as a victory, he views it as the cause of economic weakness.

The lessons for investors are to remain vigilant about stock valuations and higher yielding bonds. At some point, the zombies will not be able to sustain themselves any longer.”

This is an interesting point when you begin to think about the long-term history of dividends and what they represent with respect to long-term market cycles.

Let’s start with the notion that “dividends always increase.”

First, the statement is incorrect because during market reversion “cash dividends” DO NOT increase – but the YIELD does because of the collapse in prices. 

But, more to the point, that notion is only true, until it isn’t.

During the 2008 financial crisis, more than 140 companies decreased or eliminated their dividends to shareholders. Yes, many of those companies were major banks, however, leading up to the financial crisis there were many individuals holding large allocations to banks for the income stream their dividends generated. In hindsight, that was not such a good idea.

But it wasn’t just 2008. It also occurred dot.com bust in 2000. In both periods, while investors lost roughly 50% of their capital, dividends were also cut on average of 12%.

Of course, it wasn’t EVERY company cutting dividends by 12%. Some didn’t. Many did, and some even eliminated their dividends entirely to protect creditors. The last point is the most important. For any company shareholders are a secondary concern. However, access to the debt market is a far more important consideration when it comes to financial decision making, who gets paid, and who doesn’t.

Since 2009, due to the Federal Reserve’s suppression of interest rates, investors have piled into dividend yielding equities, regardless of fundamentals, due to the belief “there is no alternative.” The resulting “dividend chase” has pushed the valuations of dividend yielding companies to excessive levels disregarding underlying fundamental weakness. 

As with the “Nifty Fifty” heading into the 1970’s, the resulting outcome for investors was less than favorable. These periods are not isolated events. There is a high correlation between declines in asset prices and the actual dividends being paid out throughout history. The chart below shows the history of inflation-adjusted dividends and the S&P 500 going back to 1900. (Data courtesy of Dr. Robert Shiller.)

The first thing to note is the extreme deviation of real annual dividends above their long-term linear growth trend. As you will notice is that such extensions have ALWAYS mean reverted throughout history. (In other words, the best time to BUY dividend yielding companies is when the dividend has deviated well below the long-term growth trend.)

Here is another way to look at the same data. The chart below shows the percentage deviation above and below the 5-year average annual cash dividend. There are two things you should take note of.

1. When deviations have exceeded a 20% deviation it has denoted very overvalued markets.

2. Reversions below the 5-year average have been coincident with secular bear markets. 

Notice that the current deviation from the 5-year average has already started to decline which is coincident with the Federal Reserve rate hike campaign. Given that much of the dividend issuance was done through cheap debt over the last decade, it is not surprising that with rising rates, the rate of dividend issuances has begun to slow.

Dividends may well already be telling us of a more troubling trend for investors is coming. 

While I completely agree that investors should own companies that pay dividends (as it is a significant portion of long-term total returns), it is also crucial to understand that companies can, and will, cut dividends during periods of financial stress. During the next major market reversion, we will see much of the same happen again.

It is during these times when prices collapse, and dividends are slashed, the “I bought it for the dividend plan” doesn’t work out.

EVERY investor has a point, when prices fall far enough, that regardless of the dividend being paid, they WILL capitulate and sell the position. This point generally comes when dividends have been cut and capital destruction has been maximized.

Just something to think about as you catch up on your weekend reading list.

Economy & Fed

• Fed Admits Its Road Map Is A Fuzzy Blur by Caroline Baum via MarketWatch

• Conservatives Hate Debt – Add $2.4 Trillion by Committee For A Responsible Federal Budget

• Political Divide In America Is Worst Ever by Tyler Durden via ZeroHedge

• The “Almost” Too Good To Be True Economy by Heather Long via Washington Post

• New Fiscal Year Gets Off  To An Ominous Start by Hunt Lawrence via American Spectator

• 11-Takeaways From NYT’s Trump Investigation by Buettner, Craig & Barstow via NYT

• A $1 Trillion Dollar Blunder by Stephen Moore via The Washington Times

• The Enduring Scam Of Corporate Tax Breaks by Bryce Covert via NYT

• Workers Receive Only A Fraction Of Corp Tax Cuts by Tyler Durden via ZeroHedge

• The Important Economic Event Of The Decade by Neil Irwin via NYT

• Absurd Theory On Why Wages Aren’t Rising Faster by Jordan Weissmann via Slate

• The China Tariff Mess by Martin Feldstein via Project Syndicate

Markets

• Shiller: A 1929 Redux? by Tyler Durden via Zerohedge

• Get Ready For An 8-13% Correction by Mark Hulbert via MarketWatch

• We Are Only A Few Ticks From “DotCon” Stupidity by Shawn Langlois via MarketWatch

• Do Spectacular Earnings Justing High Stock Prices by Robert J Shiller via Project Syndicate

• Post Mid-Term Rally Not A Definite by William Watts via MarketWatch

• This Only Happens Near Market Peaks by Dana Lyons via The Lyons Share

• Is Gold Poised To Pop? by Simon Constable via Forbes

• Why You Can’t Decide On Lunch Or Funds To Buy by Jacob Passy via MarketWatch

• Rare Divergence Could Spell Trouble For Stocks by Ryan Vlastelica via MarketWatch

• This Chart Shows Why Another VIX Surge Is Coming by Jesse Colombo via Forbes

• 4-Reasons China Is At Risk Of A Slowdown by Ed Yardeni via Yardeni.com

Most Read On RIA

• Irrational Exuberance by Lance Roberts

• Sailing Vs. Rowing: Active Vs. Passive by Michael Lebowitz

• How To Invest For A Hard Landing by Vitaliy Katsenelson

• Debts & Deficits – A Slow Motion Train Wreck by Lance Roberts

• Bubbles & Zombies by John Coumarianos

• Do You Believe In Magic by David Robertson

• The Risk Of An ETF Driven Liquidity Crash by Lance Roberts

Research / Interesting Reads

• BIS Issues Urgent “Zombie Alert” by Nomi Prins via The Daily Reckoning

• Powell Hints He May Crash The Markets by Tyler Durden via ZeroHedge

• Powell Has Cost Investors $1.5 Trillion In 2018 by Mark Decambre via MarketWatch

• US Debt Soars $1.27 Trillion In 2018 by Wolf Richter via Wolf Street

• Markets Are Cyclical, But Where Are We In The Cycle? by John Stepek via MoneyWeek

• Larry McDonald: It’s Going To Get Really Ugly by Christoph Gisiger via Finanz Und Wirtschaft

• Marks: 5-Tips To Make You A Better Investor by Howard Marks via MarketWatch

• 10-Years After Lehman: Bubbles & Zombies by Edward Chancellor via ThinkMarkets

• 100-Years Of Ineptitude by Helmut Anheier via Project Syndicate

• Elon Musk’s Deal With SEC Doesn’t Fix Biggest Problem by Charles Gasparino via NY Post

• Bad Financial Moon Rising by William White via Project Syndicate

“Any fool can buy a stock. It takes a smart investor to know when to sell.” – Anonymous

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