Why Management Is Incentivized To Fabricate Earnings: It’s All About non-GAAP Bonuses

When it comes to the stock market, there is no single greater observable divergence right now than that between GAAP and non-GAAP earnings. As the chart below shows, while on a non-GAAP basis earnings have been hurting in recent years, with the LTM EPS of the S&P has declined to 116.4, down from 118.1 as of December 31, 2014, the real surprise is in GAAP EPS, which are back down to 88, a level last seen in 2007 when the market was about 500 points lower.

And, depending on whether one believes in adjusting EPS and giving companies the full credit of addbacks, pro forma numbers, and other various fudges, the P/E of the S&P as of this moment, is either 18x on a non-GAAP basis, or a ludicrous 23.7x if GAAP earnings are used.

The reason for the use of this non-GAAP numbers is very simple: to create an illusion of corporate profitability where one does not exist, something which can be seen most vividly in the earnings, or rather loss numbers of Alcoa, easily the most chronic offender of non-GAAP adjustments, which has made a half a billion dollar loss into half a billion dollar profit.

But, as the WSJ calculates, it is not just shareholders who enjoy the illusion that their investment is doing better than in reality (and thus their stock is worth more than it would be under a GAAP world) – it is corporate executives themselves who are delighted by non-GAAP numbers.

As the WSJ reports, non-GAAP adjusted metrics aren’t just showing up in earnings releases: “pro forma figures have been proliferating in annual proxy statements, too.” And the reason why in addition to shareholders, management is also infatuated with non-GAAP is because “when used with compensation metrics, they can help executives draw bigger pay packets.”

In other words, in the worst possibly form of skewed incentives, CEOs are ever more compensated to fabricate the most inaccurate profit picture they can come up with.

According to research firm Audit Analytics, the term “non-GAAP” appeared in 58% of proxies for companies in the S&P 500 that have released them so far this year. Five years ago, that term showed up in 27% of proxies for current S&P 500 constituents.

 

And this is how a major conflict of interest has emerged:

There is nothing improper about using non-GAAP measures as long as they are disclosed properly. And corporate boards decide on the measures they want to use for compensation purposes. Plus, there is an argument to be made for sometimes excluding items from results for compensation purposes. If, say, a natural disaster hits a company with expensive repairs, perhaps an adjustment is in order.

 

But other items that often get excluded in pro forma results, such as layoff-related charges, do seem like a reflection of management’s performance. And boards have too often shown a willingness to set awfully low bars for executives to clear.

Why conflict of interest? Because management teams are progressively rewarded to come up with untrue, borderline fraudulent numbers. After all, why else is the SEC allegedly “cracking down” on companies to limit the number of non-GAAP adjustments. As the WSJ itself admits, this push to rewarding management based on non-GAAP numbers disadvantages shareholders and wrecks the idea of pay for performance. “In that vein, the dramatic rise in the number of companies using pro forma measures to determine bonuses would indicate the balance between shareholders and executives is being skewed in executives’ favor.”

Some Dow Jones case studies, where as the WSJ notes an examination of the most recent proxy statements from companies in the Dow Jones Industrial Average shows about a dozen of the index’s 30 constituents had annual pro forma earnings well in excess of GAAP ones and used the pro forma ones in annual bonus calculations.

Coca-Cola’s pretax income increased by 3% under GAAP. But after adjusting for the impact of the stronger dollar and “nonrecurring items,” the income growth figure the Dow component used for bonus purposes rose to 5.5%.

 

Absent adjustments, Dow member Home Depot reported operating income of $11.77 billion last year. But the pro forma figure of $12.06 billion it used for compensation figures excluded the impact of the strong dollar and costs associated with its 2014 credit-card data breach.

 

Pfizer earned $1.11 per share last year under GAAP. But the Dow component excluded a number of items from the pro forma results it used for bonus purposes, pushing earnings per share to $2.20—above the $2.05 it had targeted for its annual incentive program.  Without that adjustment, the chief executive’s bonus under the company’s annual incentive program could have been significantly lower. While in most years, the pro forma earnings the pharmaceutical company has used for compensation purposes have exceeded GAAP, in 2013 they were lower.

And if the WSJ thinks the DJIA is bad, please don’t even think of looking at the NASDAQ and/or the Russell 2000, where the only difference between profit and loss is the FASB and SEC’s overly generous treatment of non-GAAP reporting.

The biggest risk here, however, is a simple one, and the WSJ explains it well:

“more worrisome, using pro forma to set bonuses provides executives with an incentive to exclude items not because they should, but to hit performance bogeys. That creates a risk that pro forma results say less about a company’s underlying health than about executives desire to get paid more.”

To be sure, we have been saying precisely this since 2010. We can only hope that now that the WSJ has also caught on, that the SEC will finally do something about it.

There is a problem, however: a full crackdown on non-GAAP would mean that instead of generating 116 in EPS, the S&P500 actually made 25% less in profits. Which also means that if one assumes an 18x multiple, the fair value of the S&P is just under 1,600.

So the question is whether the SEC would ever willingly step into a mine field where the crackdown on fabricated earnings would mean wiping out trillions in fabricated market cap from the S&P500. The answer: of course not. Which is why while the SEC may rage all it wants against non-GAAP adjustments, it will never actually do anything.

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Memorial Day Observed, White House Locked Down, Eric Holder Slightly Praises Snowden: P.M. Links

  • Arlington National CemeteryIt’s Memorial Day, and remembrance events are happening across the country as U.S. troops continue serving in countries like Iraq and Afghanistan.
  • Former Attorney General Eric Holder says Edward Snowden performed a “public service” by triggering debate about domestic surveillance, a public service Holder nevertheless believes should be punished.
  • The White House was put on partial lockdown over a suspicious package.
  • Verizon and striking workers have reached a tentative agreement that may end a work stoppage if approved.
  • Australia is planning to auction off millions of dollars worth of seized bitcoins that were grabbed in a bust of a guy who was selling illegal drugs online.
  • X-Men: Apocalypse won the holiday weekend box office, despite (spoiler!) being awful and making no sense. Alice Through the Looking Glass is the big box office loser. It also appears to be awful and makes no sense, so there you go.

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Ben Carson: President Hillary Would Bring About “Tremendous Carnage And Death”

In a world in which everything has devolved to threats of Mutual Assured Destruction of the “if something does not happen then the world will end” variety observed most notably with the scaremongering campaign over Brexit in which David Cameron recently went as far as suggesting that war could break out should the UK leave the EU (as well as currency collapse, recession, and some of the worst parts of the bible), it only makes sense to take whatever works and run with it.

That’s what former GOP presidential candidate Ben Carson, and the first of Trump’s former foes to endorse him, said on Monday when he told “Fox and Friends” that America is like a “cruise ship” about to tip over “Niagara Falls,” unless Republicans rally around Donald Trump.

In other words if Hillary wins, nothing short of the apocalypse would follow according to the neurosurgeon.

“America, right now, is like a cruise ship that is about to go off of Niagara Falls with tremendous carnage and death,” Carson said: “What you have to do first is recognize the problem, stop the ship, turn it around and then move in the other direction.”

Carson also warned that Gary Johnson, the Libertarian Party candidate, and any potential third-party candidate that gets into the race are stealing the spotlight away from Trump because of “petty little differences.”

Carson’s bashing of the potential Libertarian Party threat continued: “A quarter of a century ago, another Clinton was running for the White House and it was the entrance of a third-party candidate, Ross Perot, that made it possible for him to win,” Carson said. “Now, wouldn’t it be ironic if the same thing happened this time? Wouldn’t we be smart to learn from things that have happened in the past?”

“I’m hoping that whoever that third-party candidate is will stop for a moment and think about what the implications are of allowing Hillary Clinton or someone like her to get in there,” he continued. “They get two to four Supreme Court picks and completely change the nature of this  country and destroy the prospects for their children and their grandchildren to have the same opportunities that they had.”

Considering the Libertarian Party, in its current iteration, feels the odd urge to sabotage itself in the most disastrous manner, such as last night when the candidate for chairman decided to do a striptease on live TV during the party’s Orlando convention and got undressed to his underwear, Carson probably has nothing to fear from a libertarian party third party challenge.

 

Meanwhile, as Carson was predicting doom and gloom should Trump not win, across the Atlantic the most famous physicist alive today, Stephen Hawking, also chimed in on the US presidential race, when he called Trump “a demagogue who seems to appeal to the lowest common denominator,” during an appearance on the United Kingdom’s ITV network. He added that the success of Donald Trump’s presidential campaign is a mystery.

We can understand Hawking’s confusion: after all it was only a month ago when official polls discovered that Hawking was in fact dead wrong when as Reuters reported, among Trump’s supporters were America’s “wealthiest, best-educated voters”:

Trump’s sweep of Pennsylvania, Maryland, Delaware, Connecticut and Rhode Island on Tuesday included wins in some of the richest and best-educated counties in the country – like Fairfield County, Connecticut, and Newport County, Rhode Island – and added to victories in his more traditional strongholds of white working-class neighborhoods.

 

Exit polls from Connecticut, Pennsylvania and Maryland showed Trump winning about half of Republican voters with college degrees, and over half of Republican voters making more than $100,000 a year.

 

“On its face, it is hard to believe he’d be improving with a demographic group that has been so averse to his style, his denigrating language,” said Randall Miller, a professor of American politics at Saint Joseph’s University in Pennsylvania.

It appears that in addition to making a mockery of the mainstream media, Trump also managed to stump even the supposedly smartest person alive on earth.

But while Hawking may be truly a brilliant mind when it comes to cosmology and theoretical physics, his political beliefs seem to be shaped by mainstream media: during the same television appearance, Hawking urged British voters to vote in favor of keeping the U.K. in the European Union. The much-discussed “Brexit” vote is scheduled for June 23 and a vote to leave the EU would cost Great Britain in terms of its economy, national security and scientific research.

“Gone are the days we could stand on our own against the world,” he said. “We need to be part of a larger group of nations, both for our security and our trade.”

At least Hawking refrained from postulating of an alternate reality in which Trump is president and a terminal cosmological event is the consequence.

Threats about the end of the world in which a majority has elected Trump (or vice versa) aside, we are more curious what Trump’s reaction to Hawking’s statement will be, in what will hardly be a fair contest. And speaking of unfair contests, much more than Trump vs Hawking, we are already looking forward to the inevitable slamdown that will follow once Trump unloads on the Keynesian clown himself because as of today, none other than Paul Krugman just decided to join the anti-Trump fray. Please don’t disappoint us Donald.

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“It’s Unbearable” 50-Year-Old German Woman Rages “I Have Lost All My Trust In The State”

Via VladTepesBlog.com,

An original translation by Nash Montana of a PI News report

I am almost 50 years old, I have a University degree, and was – out of love for nature – always a trusted voter for the Green Party. I never felt much interest for politics. In Germany everything seemed to always go its natural regular course. I had trusted our parliamentary democracy, I thought our administration would hardly make mistakes, because it is controlled by the opposition. Never, absolutely never did I think that I would lose all my trust in the State. It’s unbearable that I am afraid of the future. Preferably I’d just like to leave. But I feel too old to leave Europe.

What country would even take me anymore? I am not a shameless African that just seats himself in a refugee boat. I would properly apply to the respective immigration authority. But my chances are close to zero. I am – like most Europeans – damned to impotence as I see this invasion happen.

When, about ten years ago, a friend of mine emigrated to Australia, I felt sorry for her. How could one leave our beautiful Europe? A continent with such wonderful nature and culture. I would’ve never even thought of this. Today I know: She did the right thing.

I am becoming depressed in Europe. Our defenselessness shocks me. The failure to act by our politicians drowns my mind in a fog of powerlessness. I have not read any of Sarrazin’s books, so as not to upset myself even more. Everything I read, in just our daily newspapers, is enough for me already.

The Euro is a complete nightmare. The illegal immigration is a complete nightmare. But the single largest outrage is the political correctness which disables us from criticizing these immense breaches of law.

We, that is us adult and mature citizens, who are in this way disenfranchised. When I went to school, I was taught critical thinking. What good is that to me now?

Meanwhile I hate the Green party. They are asinine and dopey, and they are shameless. Just like the SPD and the CDU. They expect that we get up at 6 AM in the morning and encourage our children to succeed, just so that they will wear themselves out like us in order to be able to keep on financing this daily madness. And soon until we’re 73 years old. [Translator: Germany plans to raise retirement age to 73]. But a State that provides no more stability, can no more expect of its citizens to function at full capacity. With each pot hole I drive through, with each African that I see loitering around, my motivation tanks more.

What does our Politics (Me: Policy?) even still have to offer to us? Legalization of hemp – probably so that we can withstand daily life in this insane country! Other than that there is nothing innovative on the program. I have looked at it all. Because I am looking for a new party that I can vote for.

I want the Deutsche Mark back and that the outer borders of the EU are being protected. I do not want to see any more pictures like these Daily Mail ones.. I don’t want more than that. Is that too much to ask for?

I do not have much power. But there are a few things that are within my might:

1. I will dedicate my time to look over my income tax very in depth, and I will not give away another cent of my money to this robber government.

 

2. I am seriously thinking of leaving my church, because the church is not fulfilling their mission duty. With this action, I can save another 1,000 Euro.

 

3. I will do nothing that stimulates consumption. Only buy the very necessary things. The finance minister will in the future only collect the absolutely unavoidable consumption taxes.

 

4. I will not leave any money on bank accounts, instead I will invest it in foreign currency and gold, and keep it stored in my house.

 

5. I will only vacation in non-EU countries.

 

6. I will in the coming year, two times for six weeks each of my free time, devote to the AfD and hand out flyers. When I read the preamble of the AfD program  I had to cry because it is so beautiful. I will share this program wherever my feet will take me.

Inner Immigration – I can’t say more to it. Maybe add prayer. But lastly, I haven’t even gone to church anymore. The fiddling of my church with the powers that be does not please me. The new pope does not please me. The church does not provide me with spiritual stability anymore. On the contrary, the church scares me with their crusade against Europe.

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“An Unusual Number Of Known Unknowns” – These Are The Key Event Risks In June

One of the recurring concerns voiced by Bank of America’s Michael Hartnett is that with May now in the rearview mirror, we are entering “the event risk month” of June (incidentally, over the weekend, the credit strategist presented several ideas how to trade said event risk, either bullish or bearish). Now it is UBS’ turn to reiterate the warning that June may see a spike in volatility due to “an unusual number of known unknowns.”

According to UBS, in June there will be “an unusual number of known unknowns from several sources. June 2016 is a month in which the number of event risks is particularly high. In our baseline scenarios we do not see market upsets, but the potential is there: Japanese fiscal policy; meetings of the ECB, Fed and BoJ; new ECB policy implementation; a German Constitutional Court ruling; the UK referendum; elections in Spain; and a decision on the FTT are all thrown into the mix.”

Here is the full breakdown, first in table format.

And then the chronological narrative:

1 June: Closing day of the Japanese Diet – new fiscal action?

We expect Japanese Prime Minister Shinzo Abe to announce new fiscal policy on 1 June – the closing day of the current session of the Japanese Diet. We think that the scheduled rise in the consumption tax will be delayed and a supplementary budget of ¥5-10tn could be announced. It is also possible that the Lower House is dissolved and new elections called.

 

2 June-16 June: Central bank meetings

On balance, we do not expect any change in monetary policy to be announced by the ECB, the Federal Reserve or the BoJ in June, but statements and guidance will be watched closely.

First up is the ECB on 2 June. The ECB will present its new staff forecasts at the press conference. We think the key challenge for Mr Draghi will be to not appear too hawkish amid rising oil prices and robust Eurozone Q1 GDP growth, and we believe it too early for the ECB to send strong signals about the duration of QE beyond March of next year. But much will be discussed.

After that, the FOMC will meet on 15 June. We think that it will wait until September before it next raises rates (in part because of upcoming event risk). However, the minutes of the April meeting and recent Fed rhetoric has kept this meeting “live” and expectations higher than they might otherwise have been.

We don’t think that the BoJ will announce a further easing on 16 June, but it will be a close call. We see a 40% chance that it does, and a 60% chance that this takes place by July. If conducted in combination with a fiscal expansion (see above), Japan would in effect be conducting a policy of ‘helicopter money’ and we would expect the polemic to increase in global markets on this subject

 

6-10 June / 24 June: TLTROs, and other ECB policy implementation

While we do not expect new ECB policy to be announced at the June meeting (see above), June is the month in which some already-announced policies are implemented for the first time. The first auction of the new Targeted Long-Term Refinancing Operations (TLTRO II) will take place on 23 June, with the publication of the results on 24 June. Market focus has been on the ability of banks to borrow 4-year money at an interest rate (to be set by ex-post calculations) as low as the current deposit rate of -0.40%.

However, we think that more important will be the first voluntary repayment of TLTRO I to be announced at 11.00am London time / 12.00pm CET on 10 June. (The repayment itself will take place on 29 June, coinciding with the first settlement date of TLTRO I). It is likely that the bank repayment of  LTRO I will be larger than the take-up of TLTRO II – and result in the first significant reduction of the ECB’s balance sheet since QE began in March of last year. In turn, this might appear as an involuntary tightening of monetary policy.

The reason this might happen is that one of the effects of QE has been a largescale creation of deposits in euro area banks. But TLTRO I took place before QE was announced and banks have been unable to repay it until now. Many of them – particularly in core countries – have been burdened with large excess liquidity as a result. In turn, this has meant a drag on Net Interest Margins (NIM) for these banks as risk free rates have been negative while they are (by and large) paying 0% to depositors.

Also in June, we expect the Eurosystem to begin its purchases of corporate bonds in its Corporate Sector Purchase Programme (CSPP). It is likely that this will begin in the days shortly after the ECB’s press conference on 2 June. The corporate bond market will be watching the implementation of purchases on a daily basis. We believe that once the CSPP settles in, the Eurosystem will be buying around €12bn a month in corporate bonds. Last Wednesday Reuters reported that – citing “several bank sources” – these will amount to €5-10bn per month initially.

 

21 June: German Constitutional Court ruling on OMTs

On 21 June, the German Federal Constitutional Court in Karlsruhe will give its final ruling on the acceptability of the ECB’s Outright Monetary Transactions (OMTs) programme in the field of German law. In our view, this represents less of an immediate market risk than a contingent one. In a scenario where the Court ruled against OMTs, uncertainty might increase over the ability of the ECB to respond to another period of extreme volatility in European sovereign markets

Some appear to think that a ruling against OMTs might impede the purchase of peripheral bonds in the ECB’s current QE programme. We believe this to be unlikely. Bundesbank opposition to QE as a monetary policy tool in principle (even if not in timing) seems slight.

It is widely accepted that the announcement of OMTs in the summer of 2012 was the beginning of the end of the sovereign debt crisis in Europe. But in October 2014, the German Constitutional Court found that the policy was “incompatible with primary law”. At the same time, the judges in Karlsruhe passed it on to the European Court of Justice for review, which last year came to the opposite conclusion (though in the context of European law).

 

24 June: Result of the UK referendum on EU membership

The recent rally in sterling and the tightening of peripheral sovereign spreads have been widely attributed in the media to an increase in confidence that the UK referendum will result in a vote to remain. If correct, this would mean that there would be potential for sterling to fall and peripheral spreads to widen once more in a scenario where there is either a vote to leave or if opinion polls showed increased support for that outcome.

Figure 3: Average Italy and Spain 10-year spread to Germany and EURGBP; past 6 months

 

26 June: Elections in Spain

Spain will hold another general election on 26 June, after its 21 December 2015 election resulted in no government being formed. In general, we think that Spanish yield spreads to Germany should tighten over the coming months as the relatively strong growth heals the economy and improves debt dynamics.

However, Spain missed on its deficit targets in 2015 by a wide margin and is likely to miss again this year, according to the European Commission. In part, this can be attributed to the dominance of elections in the public calendar. But there is a risk to sovereign spreads if a government is formed after the elections which might take an anti-austerity stance and widen the public deficit even more.

 

30 June: A decision on the European Financial Transaction Tax

A group of European governments have been proposing a European Financial Transaction Tax (FTT) for several years. In the most recent statement, the proponent governments indicated that “taxation should be based on the principle of the widest possible base and low rates and it should not impact the cost of sovereign borrowing”.

The statement also directs governments to decide on further details – including, importantly, the levels of the tax – by the end of June: “in order to prepare the next step, experts in close coordination with the commission should elaborate adequate tax rates for the different variants. A decision on these open issues should be made until the end of June 2016.”

It should be noted, however, that aside from the 10 countries currently promoting the tax there is opposition among other EU member states, most notably the UK. Under the “Enhanced Cooperation” framework, the countries will pursue the policy only if 9 or more member states support it. In December, Estonia withdrew its support for the project.

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Almost 100 Beheadings So Far In 2016 And Counting… And No, It’s Not ISIS

Submitted by MiddleEastEye via TheAntiMedia.org,

Amnesty International warned on Friday that a surge in executions carried out by Saudi authorities could see more than 100 people put to death in the first six months of 2016.

The London-based watchdog says that the kingdom carried out at least 158 death sentences last year, making it the third most prolific executioner after Iran and Pakistan.

This year, at least 94 people have been executed so far, “higher than at the same point last year,” Amnesty International said.

If executions continue at the same pace, “Saudi Arabia will have put to death more than 100 people in the first six months of this year,” the human rights group warned.

“Executions in Saudi Arabia have been surging dramatically for two years now and this appalling trend shows no sign of slowing,” said Amnesty International’s MENA deputy director James Lynch.

Lynch spoke of “pervasive flaws” in the kingdom’s justice system “which mean that it is entirely routine for people to be sentenced to death after grossly unfair trials.”

Murder and drug trafficking cases account for the majority of Saudi executions, although 47 people were put to death for “terrorism” on a single day in January.

Among those was Shia cleric Nimr al-Nimr whose execution sparked a diplomatic rift between Riyadh and Tehran. Nimr was a driving force of the protests that broke out in 2011 in the kingdom’s east, an oil-rich region where the Shia minority of an estimated two million people complains of marginalisation.

Nimr’s execution sparked protests after the death sentence was handed down based on confessions he says were extracted through torture. The case “provides a glaring example of the arbitrary use of the death penalty after proceedings that blatantly flout international human rights standards,” said Amnesty.

Following Nimir’s execution sources in the kingdom told Middle East Eye that prisoners arrested when they were children and others suffering from mental illness were among dozens of inmates executed in Saudi Arabia in January. One security source who witnessed the executions told MEE: “It was a massacre. There was blood and body parts everywhere.”

Nimr’s execution sparked protests in Iran, where mobs ransacked and set fire to the Saudi embassy, leading to Riyadh severing ties with Tehran and plunging the two regional rivals into a diplomatic crisis.

Nimir’s nephew, Ali al-Nimr, who was arrested with two others while they were still minors, is currently on death row.

Lynch urged Saudi authorities to “quash his conviction and order a re-trial immediately in proceedings that meet international fair trial standards without recourse to the death penalty.”

Saudi Arabia has a strict Islamic legal code under which murder, drug trafficking, armed robbery, rape and apostasy are all punishable by death.

“The Saudi Arabian authorities should end their reliance on this cruel and inhuman form of punishment and establish an official moratorium on executions immediately,” said Lynch.

Most people put to death in Saudi Arabia are beheaded with a sword.

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Brits “Appalled, Disgusted” At Brexit Postal Ballot ‘Fraud’

"I am appalled by it. It should be neutral," exclaimed one angry Brit after seeing that Brexit voters are being sent postal ballots with a guide that strongly suggests they should vote for Britain to remain in the European Union.

The "How to vote by post" forms were sent out last week…

 

And, as The Telegraph reports, this has prompted furious complaints from anti-EU campaigners, as the step-by-step guide includes advice to "read the instructions carefully, then complete your ballot paper" above an image showing a pencil in a hand ticking a box to "remain a member of the European Union."

"When i first saw these instructions I was disgusted… The Electoral Commission should never have allowed this to be sent."

Experts say there is a risk that the forms could be challenged in court because they appear to guide the choice of voters.

Bernard Jenkin – the MP who oversees the conduct of the referendum – noted "any subliminal messaging by authorities purporting to be neutral is absolutely forbidden and it should be reported to the Electotal Commission," and Arron Banks – a backer of the Leave.EU campaign – exclaimed "to send out postal votes with instructions showing people how to vote and favoring the "remain" campaign is the latest outrage... we will be asking our lawyers to contact the electoral commission for an explanation."

Officials defended the design of the instruction leaflet, saying "the placement of a pen graphic is incidental… it could not be construed as indicating how to vote."

But the chief executive of Electoral Administrators warned "clearly this has not followed good practice."

*  *  *

It seems that the establishment is leaving nothing to chance. With 'Project Fear' now complete – as politicians enter the dark period of propaganda prior to the vote – the manipulation will continue until the status quo is maintained… for now, the polls suggest the establishment is going to have do more…

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Trump And Hillary Don’t Know How To Fix The Economy

Submitted by Justin Murray via The Mises Institute,

Recently, Hillary Clinton was taped ridiculing Donald Trump for lacking a detailed plan for the American economy. The message, so it goes, is that Trump is not suited for the presidency because he doesn’t have a plan on how to turn the American economy around.

But is it really more dangerous to elect a president who makes up economic policy on the fly than one who proclaims to have a detailed plan for us?

The answer to this is no, it is not more dangerous to elect someone who makes up economic policy by the seat of his pants — as Donald Trump is prone to do — than it is to elect someone who thinks she can have the future of the economy neatly mapped out. However, this does not imply that seat-of-the-pants method is less dangerous either. The underlying problem is we have two competing people who think they can manage the American economy.

The core of why both philosophies are equally dangerous is best summarized by F.A. Hayek and the pretense of knowledge. Hayek notes in his speech in 1974:

Unlike the position that exists in the physical sciences, in economics and other disciplines that deal with essentially complex phenomena, the aspects of the events to be accounted for about which we can get quantitative data are necessarily limited and may not include the important ones … in the study of such complex phenomena as the market, which depend on the actions of many individuals, all the circumstances which will determine the outcome of a process … will hardly ever be fully known or measurable.

We are incapable of knowing what the future will bring. No president can come up with a detailed or air tight plan or can accumulate a sufficient stable of experts to be able to guide the behavior, wants, and needs of 320 million people.

For example, if we were to have asked George Bush and his economic experts in 2002 to develop a five year plan for cell phones, we would have built up a massive production capacity and R&D structure around miniaturizing phones as that was all the rage. If someone said in 2002 that people in the future would give up physical buttons and want larger screens, they would have been looked upon as mad. People are buying smaller and smaller phones, there’s no way they could touch the screen and get anything done! But come 2007, Apple introduces the iPhone and the older-style button phone has nearly vanished from the marketplace. Had the government decided it needed to plan the economy around smaller phones, we wouldn’t be enjoying a mobility revolution.

This extends well beyond cellular phones and into all walks of our lives. We don’t need central planning on how we consume our energy, what cars we can buy, what we charge people for borrowing money, and so forth.

All behavior is risky. Even if central planners could somehow canvass all of our wants and needs, figured out when exactly we want to satisfy those needs, and determined who gets what in a world of scarcity, the planners would still fail. This is because even we have no idea what we’ll want in the future. If we were to ask someone to write down exactly what they would buy on August 14, 2017 and put it in an envelope then open it up and compare it to what was bought on that day, there is little doubt the results would be wildly different.

The planner is going to do no better. Instead of a single individual failing to predict his own habits in a fun exercise, we’ll be malinvesting untold amounts of money into unwanted industries and imposing counterproductive and dangerous rules on businesses — the effects of which are impossible to predict. Furthermore, central planning shuts down innovation and the entrepreneurial process because it assumes to know today what is wanted tomorrow. Most innovation arises when someone produces a product we had no idea we wanted and couldn’t fathom existing.

Does Hillary Clinton’s plan for the economy make her a more qualified president than Donald Trump, who will likely create plans spontaneously? No, it makes them equally dangerous as both assume they have the ability to do what countless officials over the centuries have never managed to do — predict the future.

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Politicians: It`s not the Jobs Stupid, It`s the Job`s Strategy Stupid (Video)

By EconMatters


We compare Germany and South Korea`s Business Development Strategy versus the United States – and how important top down leadership is in cultivating a strategic vision for a country`s growth prospects.

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Grant Williams Warns Of Looming ‘Wealth Tax’, Says “Own Physical Gold, Not ETFs”

Grant Williams, strategy advisor to Vulpes Investment Management and co-founder of Real Vision Television is always worth the read or listen, and he sat down for an interview during his time at this year's Mauldin Strategic Investment Conference to discuss his views on gold, and why physical cash is being eliminated.

On the subject of gold, Williams is very quick to point out that he doesn't buy gold for the price, he owns it for what it does. He goes on to say that once people realize the value of owning physical gold, ETF's will no longer be what investors want to own.

"I don't buy gold, I own it. I don't buy gold at $1,100 because I think it's going to go to $1,200. I buy it for what it does, not what the price is, the price is the last consideration for me. I think the way the picture has been developing over the last eight years, it's like when you take a polaroid, you take a picture and you sit there and you watch this thing and it slowly comes into focus, and that's what it's been like for me watching gold, we're watching this picture slowly develop."

 

"We're getting to the point where people are going to be able to see the picture, and at that point gold is the answer. It's not just an asset anymore it's the answer to a lot of people's questions. When that happens, I think the most important stage of this completes itself and that is the resolution between the paper price and the physical asset. I think when we get to that point where people want to own gold, ETF's won't suffice anymore. A promise to deliver three months hence is not going to be sufficient anymore, people are going to want to own the asset. At that point you realize that there are multiple hundreds of claims per ounce, and those claims won't be worth anything anymore it's going to be the asset, and that's the end game."

 

"The picture is becoming clearer, and everything the central banks are doing is bringing that day forward a little bit."

When asked the question how to hedge the many risks that investors face today, Williams shifts the conversation to holding cash. As people hoard cash it negates what the central banks are trying to do so they're discouraging holding cash, but he rightly points out that any time someone is telling you 'you really shouldn't do that, we're going to discourage you from doing that' often times that's where people want to (and should) go.

"The thing you're being discouraged most to own is cash. If people hoard cash it negates what the Fed is trying to do; lower interest rates, get people spending, bring the velocity of money up. You can see, the results are all in the opposite direction. You look at the savings rate which bottomed in 2006, we had the sharp spike in '08 which is a perfectly natural thing to do in a crisis, it came back a little bit but the trend is now such that the savings rate has tripled. That is not something that you would expect as a Federal Reserve governor to be the outcome of taking rates to zero, the idea is let's make it unattractive to hold cash."

 

"Any time someone is telling you, 'you really shouldn't do that, we're going to discourage you from doing that', often times that's where people want to go and so I think holding cash, the optionality that you have inherent in owning cash now has certainly not been higher since going in to 2008."

On the push to eliminate physical cash, Williams notes that it's just the logical next step in a plan for the governments to be able to take from those that have money, and give to those who do not. He also accurately points out that the media is helping the government accomplish this task with its constant narrative that only drug dealers and other bad guys use cash.

"Having the ability through digital cash, for a government to reach into your bank account and take 10 percent 20 percent, whatever it may be, is what they need. They can see this coming, at some point they're going to have to take money from the people who have it to fill the hole of the people who have spent it. This was a perfectly logical next step in that process."

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via http://ift.tt/1TRI1Hw Tyler Durden