Financial Sector Induced Systemic Instability of Economy
While I believe in usefulness of capital markets, it is clear that they are double edge sword and
that banks "in a long run" tend to behave like
sociopathic individuals.
Mr. Capone may have something to say about danger of banks :-).That means that growth of
financial sector represents a direct threat to the stability of the society. Positive feedback loops
creates one financial crisis after another with the increasing magnitude leading up to a collapse of
financial system like happened in 1927 and 2008.
"Minsky's financial instability hypothesis depends critically on what amounts to a sociological
insight. People change their minds about taking risks. They don't make a one-time rational
judgment about debt use and stock market exposure and stick to it. Instead, they change their
minds over time. And history is quite clear about how they change their minds. The
longer the good times endure, the more people begin to see wisdom in risky strategies."
The Cost of Capitalism: Understanding Market Mayhem and Stabilizing our
Economic Future, by Robert Barbera
The flaw with Capitalism is that it creates its own positive feedback loop, snowballing to
the point where the accumulation of wealth and power hurts people — eventually even those at the
top of the food chain. ”
Banks are a clear case of market failure and their employees at the senior level have
basically become the biggest bank robbers of all time. As for basing pay on current revenues
and not profits over extended periods of time, then that is a clear case of market failure --
The banksters have been able to sell the “talent” myth to justify their outsized pay
because they are the only ones able to deliver the type of GDP growth the U.S. economy needs in
the short term, even if that kills the U.S. economy in the long term. You’ll be gone, I’ll be
gone.
Unfortunately, many countries go broke pursuing war, if not financially, then morally (are
the two different? – this post suggests otherwise).
I occurs to me that the U.S. is also in
that flock; interventions justified by grand cause built on fallacy, the alpha and omega of failure.
Is the financial apparatchik (or Nomenklatura, a term I like which, as many from the Soviet era,
succinctly describes aspects of our situation today) fated also to the trash heap, despite the
best efforts of the Man of the hour, Ben Bernanke?
Financialization is a Damocles sword hanging over the neoliberal society
While I believe in usefulness of capital markets, it is clear that they are double edge sword and
that banks "in a long run" tend to behave like
sociopathic individuals.
Mr. Capone may have something to say about danger of banks :-).That means that growth of financial
sector represents a direct threat to the stability of the society (Keynesianism
and the Great Recession )
Without adult supervision, as it were, a financial sector that was already inherently unstable
went wild. When the subprime assets were found to be toxic since they were based on mortgages on
which borrowers had defaulted, highly indebted or leveraged banks that had bought these now
valueless securities had little equity to repay their creditors or depositors who now came after
them. This quickly led to their bankruptcy, as in the case of Lehman Brothers, or to their being
bailed out by government, as was the case with most of the biggest banks. The finance sector
froze up, resulting in a recession—a big one—in the real economy.
Neoliberal revolution, or, as Simon Johnson called it after "quite coup" (Atlantic),
brought political power to the financial oligarchy deposed after the New Deal. Deregulation
naturally followed, with especially big role played by corrupt Clinton administration. Positive feedback loops creates one financial crisis after another with the
increasing magnitude. "Saving and loans" crisis followed by dot-com crisis of 2000, which in
turn followed by the collapse of financial system in 2008, which looks somewhat similar to what
happened in 1927. No prominent financial honcho, who was instrumental in creating "subprime
crisis" was jailed. Most remained filthy rich.
Unless the society puts severe limits on their actions like was done during New Deal,
financial firms successfully
subvert the regulation mechanisms and take the society hostage. But periodic purges with relocation
of the most active promoters of "freedom for banks" (aka free market fundamentalism) under the smoke
screen of "free market" promotion does not solve the problem of positive feedback loops that banks create
by mere existence. That's difficult to do while neoliberal ideology and related neoclassical economy
dominates the society thinking (via brainwashing), with universities playing especially negative
role -- most of economics departments are captured by neoliberals who censor any heretics. So year
after year brainwashing students enter the society without understanding real dangers that
neoliberalism brought for them. Including lack of meaningful employment opportunities.
Of course, most of high level officers of leading finance institutions which caused the crisis of
2008-2009 as a psychological type are as close to gangsters as one can get. But there is
something in their actions that does not depend on individual traits (although many of them
definitely can be classified as psychopaths), and is more related to their social position.
This situation is somewhat similar to Bolsheviks coup d'état of 1917 which resulted in capturing
Russia by this ideological sect. And in this sense quite coupe of 1980 is also irreversible in
the same sense as Bolsheviks revolution was irreversible: the "occupation" of the country by a
fanatical sect lasts until the population rejects the ideology with its (now apparent) utopian
claims.
Bolshevism which lasted
75 years, spend in such zombie state the last two decades (if we assume 1991 as the year of death of
Bolshevism, its ideology was dead much earlier -- the grave flaws in it were visible from late 60th,
if not after the WWII). But only when their ideology was destroyed both by inability to raise the standard of living
of the population and by the growing neoliberal ideology as an alternative (and a new, more powerful then Marxism high-demand
cult) Bolsheviks started to lose the grip on their power in the country. As a result Bolsheviks lost the power
only in 1991, or more correctly switched camps and privatized the country. If not inaptness of their
last General Secretary, they probably could last more. In any case after the ideology collapsed, the
USSR disintegrated (or more correctly turn by national elites, each of which wanted their peace of
the pie).
The sad truth is that the mere growth of financial sector creates additional positive feedback loops
and increases structural instability within both the financial sector itself and the society at large.
Dynamic systems with strong positive feedback loops not compensated by negative feedback loops are unstable.
As a result banks and other financial institution periodically generate a deep, devastating crisis.
This is the meaning of famous Hyman Minsky phrase "stability is destabilizing".
In other words, financial apparatchiks (or Financial Nomenklatura, a term from the Soviet era, which
succinctly describes aspects of our situation today) drive the country off the cliff because they do
not have any countervailing forces, by the strength of their political influence and unsaturable
greed. Although the following
analogy in weaker then analogy with dynamic systems with positive feedback loops, outsized financial
sector can be viewed in biological terms as cancer.
Cancer,
known medically as a malignantneoplasm, is a broad group of
diseases involving unregulated
cell growth. In cancer,
cells divide and grow
uncontrollably, forming malignant tumors, and invading nearby parts of the body. The cancer may also
spread to more distant parts
of the body through the lymphatic system
or bloodstream. Not all tumors
are cancerous; benign tumors
do not invade neighboring tissues and do not spread throughout the body. There are over 200 different
known cancers that affect humans.[1]
Like certain types of cancer they depend of weakening "tumor suppressor genes" (via "Quiet
coup" mechanism of acquiring dominant political power) which allow then to engage in uncontrolled growth, destroying
healthy cells (and first of all local manufacturing).
The other suspicion is the unchecked financialization always goes too far and the last N
percent of financial activity absorbs much more resources (especially intellectual resources) and
creates more potential instability than its additional efficiency-benefits (often zero or negative) can justify. It is hard
to imagine that a Hedge Fund Operator of the Year does anything that is even remotely socially useful to justify his
enormous (and lightly taxed) compensation. It is pure wealth redistribution up based on political domination
of financial oligarchy. Significant vulnerabilities within the shadow banking system and
derivatives are plain vanilla socially destructive. Yet they persist due to inevitable political power
grab by financial oligarchy (Quiet coup).
Again, I would like to stress that this problem of the oversized financial sector which produces
one devastating crisis after another
is closely related to the problem of a positive feedback loops. And the society in which banks are given
free hand inevitably degrades into "socialism for banks" or "casino
capitalism" -- a type of
neoliberalism with huge
inequality and huge criminality of top banking officers.
Whether we can do without private banks is unclear, but there is sound evidence that unlike growth
of manufacturing, private financial sector growth is dangerous for the society health and perverts society
goals. Like cult groups the financial world does a terrific job of "shunning" the principled individuals
and suppressing dissent (by capturing and cultivating neoliberal stooges in all major university
departments and press),
so self-destructing tendencies after they arise can't be stopped within the framework of
neoliberalism. In a way financial
firm is like sociopath inevitable produces its trail of victims (and sociopaths might be useful in battles exactly due
to the qualities such as ability to remain cool in dangerous situation, that make them dangerous in the normal course of events).
This tendency of society with unregulated or lightly regulated financial sector toward self-destruction
was first formulated as "Minsky instability hypothesis" --
and outstanding intellectual achievement of American economic Hyman Minsky (September 23, 1919 –
October 24, 1996). Who BTW was pretty much underappreciated (if not suppressed) during his lifetime because his views
were different from orthodox (and false) neoclassic economic theory which dominates US universities,
Like flat Earth theory was enforce by Catholic church before, it is fiercely enforced by an army of well paid neoliberal economics, those
Jesuits of modern era. Who prosecute heretics who question flat Earth theory even more efficiently then
their medieval counterparts; the only difference is that they do not burn the literally, only
figuratively ;-)
Former Washington University in St. Louis economics professor Hyman P. Minsky had predicted the
Great Recession decades before it happened. Hyman Minsky was a real student of the Great
Depression, while Bernanke who widely is viewed as a scholar who studied the Great Depression, in
reality was a charlatan, who just tried to explain the Great Depression from the positions of
neo-classical economy. That's a big difference.
Minsky instability hypothesis ("stability is destabilizing" under capitalism) that emerged from
his analysis of the Great Depression was based on intellectual heritage of three great thinkers in
economics (my presentation is partially based on an outstanding lecture by Steve Keen Lecture 6 on Minsky, Financial
Instability, the Great Depression & the Global Financial Crisis). We can talk about
three source of influence, there authors writing of which touched the same subject from similar
positions and were the base of Hyman Minsky great advance in understanding of mechanics of
development of financial crisis under capitalism and the critical role of financial system in it
(neoclassical economics ignores the existence of financial system in its analysis):
Minsky didn't follow the conventional version of Marxism . And it was dangerous for him to
do so due to McCarthysm. Even mentioning of Marx might lead to strakism fromthe academy those years.
McCarthy and his followers in academy did not understand the difference between Marx great analysis
of capitalism and his utopian vision of the future. Impliedly this witch hunt helped to establish
hegemony of neoclassical economy in economic departments in the USA.
While Minsky did not cited Marx in his writings and did use Marx's Labor Theory of Value his
thinking was definitely influenced by Marx’s critique of finance. We now know that he read and
admired the Capital. And that not accidental due to the fact that his parents were Mensheviks -- a
suppressed after Bolshevik revolution more moderate wing of Russian Social Democratic Party that
rejected the idea of launching the socialist revolution in Russia -- in their opinion Russia
needed first to became a capitalist country and get rid of remnants of feudalism. They escaped from
Soviet Russia when Mensheviks started to be prosecuted by Bolsheviks.
And probably the main influence on Minsky was not Marx's discussion of finance in Volume I of Capital
with a "commodity" model of money, but critical remarks scattered in Volumes II & III
(which were not edited by Marx by compiled posthumously by Engels), where he was really critical of
big banks as well as Marx's earlier works (Grundrisse,
Theories of Surplus Value) where Marx was scathing about finance:
"A high rate of interest can also indicate, as it did in 1857, that the country is undermined
by the roving cavaliers of credit who can afford to pay a high interest because they pay it out
of other people's pocket* (whereby, however, they help to determine the rate of interest
for all) and meanwhile they live in grand style on anticipated profits.
The second source on which Minsky based his insights was Irving Fisher. Irving Fisher’s
reputation destroyed by wrong predictions on stock market prices. In aftermath, developed theory to
explain the crash and published it in his book "The Debt Deflation Theory of Great
Depressions". His main points are:
Neoclassical theory assumed equilibrium but any real world equilibrium will be short-lived
since
"New disturbances are, humanly speaking, sure to occur, so that, in actual fact, any
variable is almost always above or below the ideal equilibrium."
Theoretically... there must be—over-or under-production, over- or under-consumption,..., and
over or under everything else.
It is as absurd to assume that, for any long period of time, the variables in the economic
organization, or any part of them, will "stay put," in perfect equilibrium, as to assume that the
Atlantic Ocean can ever be without a wave." (1933:339)
According to Fisher two key disequilibrium forces that push economic into the next economic
crisis are debt and subsequent deflation
The "two dominant factors" which cause depressions are "over-indebtedness to start with and
deflation following soon after"
"Thus over-investment and over-speculation are often important; but they would have far less
serious results were they not conducted with borrowed money.
That is, over-indebtedness may lend importance to over-investment or to over-speculation. The
same is true as to over-confidence.
I fancy that over-confidence seldom does any great harm except when, as, and if, it beguiles
its victims into debt." (Fisher 1933: 341; emphasis added!)
A chain reaction when overconfidence leads to over-indebtedness: Debt liquidation leads to
distress selling
Joseph Schumpeter was Joseph Schumpeter has more positive view of capitalism than the other two. He authored the theory
of creative destruction as a path by which capitalism achieves higher and higher productivity.
He capitalism as necessarily unstable, but for him this was a positive feature --
instability of capitalism the source of its creativity. His view of capitalism was highly dynamic
and somewhat resembles the view of Marx (who also thought that capitalism destroys all previous
order and create a new one):
Entrepreneurs profit by disrupting "equilibrium" of system
Finance plays essential role here by enabling entrepreneurs
To Schumpeter, entrepreneurs are people with good ideas but no money
To turn ideas into disruptive products or processes they resort to borrowing from banks
Boom caused by investment phase of entrepreneurs. New entrepreneurs undermine old or rival
products. Successful entrepreneurs repay debt, reducing money supply
In this sense the success (boom) carry the seeds of the subsequet bust because with the
success of "pioneers" draw other into thi same market and banks are more willing to finance them
seeing the success of pioneers. But when too many similar products are financed and hit the
market they create the glut and entrepreneurs who ere late to the party are unable to pay the
debts and go bankrupt desire the fact that might have superiors products (but not superior
enough). Slump caused when excessive products hit the market and there are not enough buyers.
Debt deflation follows.
Unlike Marx, who thought that the periodic crisis of overproduction is the source of
instability (as well as gradual absolute impoverishment of workers), Minsky assumed that the
key source of that instability of capitalist system is connected with the cycles of business
borrowing and fractional bank lending, when "good times" lead to excessive borrowing leading to high
leverage and overproduction and thus to eventual debt crisis (The
Alternative To Neoliberalism ):
Minsky on capitalism:
He followed Marx stating that "capitalism is inherently flawed, being prone to booms, crises
and depressions.
This instability is due to characteristics the financial system must possess and will
inevitably acquire, if it is to be consistent with full-blown capitalism.
Such a financial system will be capable of both generating signals that induce an accelerating
desire to invest and of financing that accelerating investment." (Minsky 1969b: 224)
“The natural starting place for analyzing the relation between debt and income is to take
an economy with a cyclical past that is now doing well.
The inherited debt reflects the history of the economy, which includes a period in the not
too distant past in which the economy did not do well.
Acceptable liability structures are based upon some margin of safety so that expected cash
flows, even in periods when the economy is not doing well, will cover contractual debt payments.
As the period over which the economy does well lengthens, two things become evident in board
rooms. Existing debts are easily validated and units that were heavily in debt prospered; it paid
to lever." (65)
It becomes apparent that the margins of safety built into debt structures were too great.
ans should be reduced...
As a result, over a period in which the economy does well, views about acceptable debt
structure change. In the dealmaking that goes on between banks, investment bankers, and businessmen,
the acceptable amount of debt to use in financing various types of activity and positions increases.
This increase in the weight of debt financing raises the market pnce of capital assets and
increases investment. As this continues the economy is transformed into a boom economy... ” (65)
This transforms a period of tranquil growth into a period of speculative excess
“Stable growth is inconsistent with the manner in which investment is determined in an economy
in which debt-financed ownership of capital assets exists, and the extent to which such debt financing
can be carried is market determined.
It follows that the fundamental instability of a capitalist economy is upward.
The tendency to transform doing well into a speculative investment boom is the basic instability
in a capitalist economy." (65)
The idea of Minsky moment is related to the fact that the fractional reserve banking periodically
causes credit collapse when the leveraged credit expansion goes into reverse. And mainstream economists
do not want to talk about the fact that increasing confidence breeds increased leverage. So financial
stability breeds instability and subsequent financial crisis. All actions to guarantee a market rise,
ultimately guarantee it's destruction because greed will always take advantage of a "sure thing" and
push it beyond reasonable boundaries. In other words, marker players are no rational and assume
that it would be foolish not to maximize leverage in a market which is going up. So the fractional
reserve banking mechanisms ultimately and ironically lead to over lending and guarantee the subsequent
crisis and the market's destruction. Stability breed instability.
That means that fractional reserve banking based economic system with private players (aka capitalism)
is inherently unstable. And first of all because fractional reserve banking is debt based. In
order to have growth it must create debt. Eventually the pyramid of debt crushes and crisis hit. When
the credit expansion fuels asset price bubbles, the dangers for the financial sector and the real economy
are substantial because this way the credit boom bubble is inflated which eventually burst. The damage
done to the economy by the bursting of credit boom bubbles is significant and long lasting.
Blissex said...
«When credit growth fuels asset price bubbles, the dangers for the financial sector and
the real economy are much more substantial.»
So M Minsky 50 years ago and M Pettis 15 years ago (in his "The volatility machine") had it
right? Who could have imagined! :-)
«In the past decades, central banks typically have taken a hands-off approach to asset
price bubbles and credit booms.»
If only! They have been feeding credit-based asset price bubbles by at the same time weakening
regulations to push up allowed capital-leverage ratios, and boosting the quantity of credit as
high as possible, but specifically most for leveraged speculation on assets, by allowing vast-overvaluations
on those assets.
Central banks have worked hard in most Anglo-American countries to redistribute income and
wealth from "inflationary" worker incomes to "non-inflationary" rentier incomes via hyper-subsidizing
with endless cheap credit the excesses of financial speculation in driving up asset prices.
John Kay in his January 5 2010 FT column very aptly explained the systemic instability of financial
sector hypothesis:
The credit crunch of 2007-08 was the third phase of a larger and longer financial crisis. The
first phase was the emerging market defaults of the 1990s. The second was the new economy boom and
bust at the turn of the century. The third was the collapse of markets for structured debt products,
which had grown so rapidly in the five years up to 2007.
The manifestation of the problem in each phase was different – first emerging markets, then
stock markets, then debt. But the mechanics were essentially the same. Financial institutions
identified a genuine economic change – the assimilation of some poor countries into the global economy,
the opportunities offered to business by new information technology, and the development of opportunities
to manage risk and maturity mismatch more effectively through markets. Competition to sell
products led to wild exaggeration of the pace and scope of these trends. The resulting herd enthusiasm
led to mispricing – particularly in asset markets, which yielded large, and largely illusory, profits,
of which a substantial fraction was paid to employees.
Eventually, at the end of each phase, reality impinged. The activities that once seemed so profitable
– funding the financial systems of emerging economies, promoting start-up internet businesses, trading
in structured debt products – turned out, in fact, to have been a source of losses. Lenders had to
make write-offs, most of the new economy stocks proved valueless and many structured products became
unmarketable. Governments, and particularly the US government, reacted on each occasion by
pumping money into the financial system in the hope of staving off wider collapse, with some degree
of success. At the end of each phase, regulators and financial institutions declared that
lessons had been learnt. While measures were implemented which, if they had been introduced five
years earlier, might have prevented the most recent crisis from taking the particular form it did,
these responses addressed the particular problem that had just occurred, rather than the underlying
generic problems of skewed incentives and dysfunctional institutional structures.
The public support of markets provided on each occasion the fuel needed to stoke the next crisis.
Each boom and bust is larger than the last. Since the alleviating action is also larger, the pattern
is one of cycles of increasing amplitude.
I do not know what the epicenter of the next crisis will be, except that it is unlikely to involve
structured debt products. I do know that unless human nature changes or there is fundamental change
in the structure of the financial services industry – equally improbable – there will be another
manifestation once again based on naive extrapolation and collective magical thinking. The recent
crisis taxed to the full – the word tax is used deliberately – the resources of world governments
and their citizens. Even if there is will to respond to the next crisis, the capacity to do so may
not be there.
The citizens of that most placid of countries, Iceland, now backed by their president, have found
a characteristically polite and restrained way of disputing an obligation to stump up large sums
of cash to pay for the arrogance and greed of other people. They are right. We should listen to them
before the same message is conveyed in much more violent form, in another place and at another time.
But it seems unlikely that we will.
We made a mistake in the closing decades of the 20th century. We removed restrictions that
had imposed functional separation on financial institutions. This led to businesses riddled
with conflicts of interest and culture, controlled by warring groups of their own senior employees.
The scale of resources such businesses commanded enabled them to wield influence to create a – for
them – virtuous circle of growing economic and political power. That mistake will not be easily remedied,
and that is why I view the new decade with great apprehension. In the name of free markets, we created
a monster that threatens to destroy the very free markets we extol.
While Hyman Minsky was the first clearly formulate the financial instability hypothesis, Keynes
also understood this dynamic pretty well. He postulated that a world with a large financial
sector and an excessive emphasis on the production of investment products creates instability both in
terms of output and prices. In other words it automatically tends to generate credit and asset bubbles.
The key driver is the fact that financial professionals generally risk other people’s money and due
to this fact have asymmetrical incentives:
They get big rewards when bets go right
They don’t have to pay when bets go wrong.
This asymmetry is not a new observation of this systemic problem. Andrew Jackson noted it in much
more polemic way long ago:
“Gentlemen, I have had men watching you for a long time and I am convinced that you have used
the funds of the bank to speculate in the breadstuffs of the country.When you won,
you divided the profits amongst you, and when you lost, you charged it to the bank. You tell
me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families.
That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand
families, and that would be my sin! You are a den of vipers and thieves. I intend to rout you out,
and by the grace of the Eternal God, will rout you out.”
This asymmetrical incentives ensure that the financial system is structurally biased toward
taking on more risk than what should be taken. In other words it naturally tend to slide to
the casino model, the with omnipresent reckless gambling as the primary and the most profitable mode
of operation while an opportunities last. The only way to counter this is to throw sand into the
wheels of financial mechanism: enforce strict regulations, limit money supplies and periodically
jail too enthusiastic bankers. The latter is as important or even more important as the other two because
bankers tend to abuse "limited liability" status like no other sector.
Asset inflation over the past 10 years and the subsequent catastrophe incurred is a way classic behavior
of dynamic system with strong positive feedback loop. Such behavior does not depends of personalities
of bankers or policymakers, but is an immanent property of this class of dynamic systems. And the main
driving force here was deregulation. So its important that new regulation has safety feature which make
removal of it more complicated and requiring bigger majority like is the case with constitutional issues.
Another fact was the fact that due to perverted incentives, accounting in the banks
was fraudulent from the very beginning and it was fraudulent on purpose. Essentially accounting
in banks automatically become as bad as law enforcement permits. This is a classic case of control fraud
and from prevention standpoint is make sense to establish huge penalties for auditors, which might hurt
healthy institutions but help to ensure that the most fraudulent institution lose these bank charter
before affecting the whole system. With the anti-regulatory zeal of Bush II administration the
level of auditing became too superficial, almost non-existent. I remember perverted dances with
Sarbanes–Oxley when it
was clear from the very beginning that the real goal is not to strengthen accounting but to earn fees
and to create as much profitable red tape as possible, in perfect Soviet bureaucracy style.
Deregulation also increases systemic risk by influencing the real goals of financial
organizations. At some point of deregulation process the goal of higher remuneration for the top brass
becomes self-sustainable trend and replaces all other goals of the financial organization. This
is the essence of Martin Taylor’s, the former chief executive of Barclays, article
FT.com
- Innumerate bankers were ripe for a reckoning in the Financial Times (Dec 15, 2009), which is worth
reading in its entirety:
City people have always been paid well relative to others, but megabonuses are quite new.
From my own experience, in the mid-1990s no more than four or five employees of Barclays’ then
investment bank were paid more than £1m, and no one got near £2m. Around the turn of the
millennium across the market things began to take off, and accelerated rapidly – after a pause in
2001-03 – so that exceptionally high remuneration, not just individually, but in total, was paid
out between 2004 and 2007.
Observers of financial services saw unbelievable prosperity and apparently immense value
added. Yet two years later the whole industry was bankrupt. A simple reason underlies this:
any industry that pays out in cash colossal accounting profits that are largely imaginary will go
bust quickly. Not only has the industry – and by extension societies that depend on it – been
spending money that is no longer there, it has been giving away money that it only imagined it had
in the first place. Worse, it seems to want to do it all again.
What were the sources of this imaginary wealth?
First, spreads on credit that took no account of default probabilities (bankers have been
doing this for centuries, but not on this scale).
Second, unrealised mark-to-market profits on the trading book, especially in illiquid instruments.
Third, profits conjured up by taking the net present value of streams of income stretching
into the future, on derivative issuance for example.
In the last two of these the bank was not receiving any income, merely “booking revenues”.
How could they pay this non-existent wealth out in cash to their employees? Because they had
no measure of cash flow to tell them they were idiots, and because everyone else was doing it.
Paying out 50 per cent of revenues to staff had become the rule, even when the “revenues”
did not actually consist of money.
In the next phase instability is amplified by the way governments and central banks respond to crises
caused by credit bubble: the state has powerful means to end a recession, but the policies it uses give
rise to the next phase of instability, the next bubble…. When money is virtually free – or, at least,
at 0.5 per cent – traders feel stupid if they don’t leverage up to the hilt. Thus previous bubble and
crash become a dress rehearsal for the next.
Resulting self-sustaining "boom-bust" cycle is very close how electronic systems with positive feedback
loop behave and cannot be explained by neo-classical macroeconomic models. Like with electronic
devices the financial institution in this mode are unable to provide the services that are needed.
As Minsky noted long ago (sited from Stephen Mihm
Why capitalism fails Boston Globe):
Modern finance, he argued, was far from the stabilizing force that mainstream economics portrayed:
rather, it was a system that created the illusion of stability while simultaneously creating the
conditions for an inevitable and dramatic collapse.
...our whole financial system contains
the seeds of its own destruction. “Instability,” he wrote, “is an inherent and inescapable flaw of
capitalism.”
Minsky’s vision might have been dark, but he was not a fatalist; he believed it was possible to
craft policies that could blunt the collateral damage caused by financial crises. But with a growing
number of economists eager to declare the recession over, and the crisis itself apparently behind
us, these policies may prove as discomforting as the theories that prompted them in the first place.
Indeed, as economists re-embrace Minsky’s prophetic insights, it is far from clear that they’re ready
to reckon with the full implications of what he saw.
And he understood the roots of the current credit bubble much better that neoclassical economists like
Bernanke:
As people forget that failure is a possibility, a “euphoric economy” eventually develops, fueled
by the rise of far riskier borrowers - what [Minsky] called speculative borrowers,
those whose income would cover interest payments but not the principal; and those he called
“Ponzi borrowers,” those whose income could cover neither, and could only pay their bills
by borrowing still further.
As these latter categories grew, the overall economy would shift from a conservative but profitable
environment to a much more freewheeling system dominated by players whose survival depended not on
sound business plans, but on borrowed money and freely available credit.
Minsky’s financial instability hypothesis suggests that when optimism is high and ample
funds are available for investment, investors tend to migrate from the safe hedge end of the Minsky
spectrum to the risky speculative and Ponzi end. Indeed, in the current crisis, investors tried to raise
returns by increasing leverage and switching to financing via short-term—sometimes overnight— borrowing
(Too
late to learn?):
In the church of Friedman, inflation was the ol' devil tempting the good folk; the 1980s seemed
to prove that, let loose, it would cause untold havoc on the populace. But, as Barbera notes:
The last five major global cyclical events were the early 1990s recession - largely occasioned
by the US Savings & Loan crisis, the collapse of Japan Inc after the stock market crash of 1990,
the Asian crisis of the mid-1990s, the fabulous technology boom/bust cycle at the turn of the
millennium, and the unprecedented rise and then collapse for US residential real estate in 2007-2008.
All five episodes delivered recessions, either global or regional. In no case was there a significant
prior acceleration of wages and general prices. In each case, an investment boom and an associated
asset market ran to improbable heights and then collapsed. From 1945 to 1985, there was no recession
caused by the instability of investment prompted by financial speculation - and since 1985 there
has been no recession that has not been caused by these factors.
Thus, meet the devil in Minsky's paradise - "an investment boom and an associated asset market [that]
ran to improbable heights and then collapsed".
According the Barbera, "Minsky's financial instability hypothesis depends critically on what amounts
to a sociological insight. People change their minds about taking risks. They don't make a one-time
rational judgment about debt use and stock market exposure and stick to it. Instead, they change
their minds over time. And history is quite clear about how they change their minds. The longer the
good times endure, the more people begin to see wisdom in risky strategies."
Current economy state can be called following Paul McCulley a "stable disequilibrium" very similar
to a state a sand pile. All this pile of stocks, debt instruments, derivatives, credit
default swaps and God know corresponds to a pile of sand that is on the verse of losing stability.
Each financial player works hard to maximize their own personal outcome but the "invisible hand" effect
in adding sand to the pile that is increasing systemic instability. According to Minsky, the longer
such situation continues the more likely and violent an "avalanche".
The late Hunt Taylor wrote, in 2006:
"Let us start with what we know. First, these markets look nothing like anything I've ever encountered
before. Their stunning complexity, the staggering number of tradable instruments and their interconnectedness,
the light-speed at which information moves, the degree to which the movement of one instrument triggers
nonlinear reactions along chains of related derivatives, and the requisite level of mathematics necessary
to price them speak to the reality that we are now sailing in uncharted waters.
"... I've had 30-plus years of learning experiences in markets, all of which tell me that
technology and telecommunications will not do away with human greed and ignorance. I think
we will drive the car faster and faster until something bad happens. And I think it will come, like
a comet, from that part of the night sky where we least expect it."
Banking was once a dangerous profession. In Britain, for instance, bankers faced
“unlimited liability”--that is, if you ran a bank, and the bank couldn’t repay depositors or other
creditors, those people had the right to confiscate all your personal assets and income until you
repaid. It wasn’t until the second half of the nineteenth century that Britain established
limited liability for bank owners. From that point on, British bankers no longer assumed
much financial risk themselves.
In the United States, there was great experimentation with banking during the 1800s, but those
involved in the enterprise typically made a substantial commitment of their own capital. For
example, there was a well-established tradition of “double liability,” in which stockholders were
responsible for twice the original value of their shares in a bank. This encouraged stockholders
to carefully monitor bank executives and employees. And, in turn, it placed a lot of pressure on
those who managed banks. If they fared poorly, they typically faced personal and professional ruin.
The idea that a bank executive would retain wealth and social status in the event of a self-induced
calamity would have struck everyone--including bank executives themselves--as ludicrous.
Enter, in the early part of the twentieth century, the Federal Reserve. The Fed was founded in
1913, but discussion about whether to create a central bank had swirled for years. “No one can carefully
study the experience of the other great commercial nations,” argued Republican Senator Nelson Aldrich
in an influential 1909 speech, “without being convinced that disastrous results of recurring financial
crises have been successfully prevented by a proper organization of capital and by the adoption of
wise methods of banking and of currency”--in other words, a central bank. In November 1910, Aldrich
and a small group of top financiers met on an isolated island off the coast of Georgia. There, they
hammered out a draft plan to create a strong central bank that would be owned by banks themselves.
What these bankers essentially wanted was a bailout mechanism for the aftermath of speculative
crashes -- something more durable than J.P. Morgan, who saved the day in the Panic of 1907
but couldn’t be counted on to live forever. While they sought informal government backing and substantial
government financial support for their new venture, the bankers also wanted it to remain free of
government interference, oversight, or control.
Another destabilizing fact is so called myth of invisible hand which is closely related to the myth
about market self-regulation. The misunderstood argument of Adam Smith [1776], the founder of modern
economics, that free markets led to efficient outcomes, “as if by an invisible hand” has played a central
role in these debates: it suggested that we could, by and large, rely on markets without government
intervention. About "invisible hand" deification, see
The Invisible Hand, Trumped by Darwin - NYTimes.com.
The moment in the financial system when the quantity of debt turns into quality and produces yet
another financial crisis is called Minsky moment. In other words the “Minsky moment” is the time
when an unsustainable financial boom turns into uncontrollable collapse of financial markets (aka
financial crash). The existence of Minsky moments is one of the most important counterargument against
financial market self-regulation. It also expose free market fundamentalists such as "former
Maestro" Greenspan as charlatans. Greenspan actually implicitly admitted that he is and that it was
he, who was the "machinist" who helped to bring the USA economic train off the rails in 2008
via deregulation and dismantling the New Deal installed safeguards.
Here how it is explained by Stephen Mihm in
Boston Globe in 2009
in the after math of 2008 financial crisis:
“Minsky” was shorthand for Hyman Minsky, an American macroeconomist who died over a decade
ago. He predicted almost exactly the kind of meltdown that recently hammered the global
economy. He believed in capitalism, but also believed it had almost a genetic weakness.
Modern finance, he argued, was far from the stabilizing force that mainstream economics
portrayed: rather, it was a system that created the illusion of stability while simultaneously
creating the conditions for an inevitable and dramatic collapse.
In other words, the one person who foresaw the crisis also believed that our whole financial system
contains the seeds of its own destruction. “Instability,” he wrote, “is an inherent and inescapable
flaw of capitalism.”
Minsky believed it was possible to craft policies that could blunt the collateral damage caused
by financial crises. As economists re-embrace Minsky’s prophetic insights, it is far from clear that
they’re ready to reckon with the full implications of what he saw.
Minsky theory was not well received due to powerful orthodoxy, born in the years after World War
II, known as the neoclassical synthesis. The older belief in a self-regulating, self-stabilizing
free market had selectively absorbed a few insights from John Maynard Keynes, the great economist
of the 1930s who wrote extensively of the ways that capitalism might fail to maintain full employment.
Most economists still believed that free-market capitalism was a fundamentally stable basis for an
economy, though thanks to Keynes, some now acknowledged that government might under certain circumstances
play a role in keeping the economy - and employment - on an even keel.
Economists like Paul Samuelson became the public face of the new establishment; he and others
at a handful of top universities became deeply influential in Washington. In theory, Minsky could
have been an academic star in this new establishment: Like Samuelson, he earned his doctorate in
economics at Harvard University, where he studied with legendary Austrian economist Joseph Schumpeter,
as well as future Nobel laureate Wassily Leontief.
But Minsky was cut from different cloth than many of the other big names. The descendent of immigrants
from Minsk, in modern-day Belarus, Minsky was a red-diaper baby, the son of Menshevik socialists.
While most economists spent the 1950s and 1960s toiling over mathematical models, Minsky pursued
research on poverty, hardly the hottest subfield of economics. With long, wild, white hair, Minsky
was closer to the counterculture than to mainstream economics. He was, recalls the economist L. Randall
Wray, a former student, a “character.”
So while his colleagues from graduate school went on to win Nobel prizes and rise to the top of
academia, Minsky languished. He drifted from Brown to Berkeley and eventually to Washington University.
Indeed, many economists weren’t even aware of his work. One assessment of Minsky published in 1997
simply noted that his “work has not had a major influence in the macroeconomic discussions of the
last thirty years.”
Yet he was busy. In addition to poverty, Minsky began to delve into the field of finance, which
despite its seeming importance had no place in the theories formulated by Samuelson and others. He
also began to ask a simple, if disturbing question: “Can ‘it’ happen again?” - where “it” was, like
Harry Potter’s nemesis Voldemort, the thing that could not be named: the Great Depression.
In his writings, Minsky looked to his intellectual hero, Keynes, arguably the greatest economist
of the 20th century. But where most economists drew a single, simplistic lesson from Keynes - that
government could step in and micromanage the economy, smooth out the business cycle, and keep things
on an even keel - Minsky had no interest in what he and a handful of other dissident economists came
to call “bastard Keynesianism.”
Instead, Minsky drew his own, far darker, lessons from Keynes’s landmark writings, which dealt
not only with the problem of unemployment, but with money and banking. Although Keynes had never
stated this explicitly, Minsky argued that Keynes’s collective work amounted to a powerful argument
that capitalism was by its very nature unstable and prone to collapse. Far from trending toward some
magical state of equilibrium, capitalism would inevitably do the opposite. It would lurch over a
cliff.
This insight bore the stamp of his advisor Joseph Schumpeter, the noted Austrian economist now
famous for documenting capitalism’s ceaseless process of “creative destruction.” But Minsky spent
more time thinking about destruction than creation. In doing so, he formulated an intriguing theory:
not only was capitalism prone to collapse, he argued, it was precisely its periods of economic stability
that would set the stage for monumental crises.
Minsky called his idea the “Financial Instability Hypothesis.” In the wake of a depression, he
noted, financial institutions are extraordinarily conservative, as are businesses. With the borrowers
and the lenders who fuel the economy all steering clear of high-risk deals, things go smoothly: loans
are almost always paid on time, businesses generally succeed, and everyone does well. That success,
however, inevitably encourages borrowers and lenders to take on more risk in the reasonable hope
of making more money. As Minsky observed, “Success breeds a disregard of the possibility of failure.”
As people forget that failure is a possibility, a “euphoric economy” eventually develops, fueled
by the rise of far riskier borrowers - what he called speculative borrowers, those whose income would
cover interest payments but not the principal; and those he called “Ponzi borrowers,” those whose
income could cover neither, and could only pay their bills by borrowing still further. As these latter
categories grew, the overall economy would shift from a conservative but profitable environment to
a much more freewheeling system dominated by players whose survival depended not on sound business
plans, but on borrowed money and freely available credit.
Once that kind of economy had developed, any panic could wreck the market. The failure of a single
firm, for example, or the revelation of a staggering fraud could trigger fear and a sudden, economy-wide
attempt to shed debt. This watershed moment - what was later dubbed the “Minsky moment” - would create
an environment deeply inhospitable to all borrowers. The speculators and Ponzi borrowers would collapse
first, as they lost access to the credit they needed to survive. Even the more stable players might
find themselves unable to pay their debt without selling off assets; their forced sales would send
asset prices spiraling downward, and inevitably, the entire rickety financial edifice would start
to collapse. Businesses would falter, and the crisis would spill over to the “real” economy that
depended on the now-collapsing financial system.
From the 1960s onward, Minsky elaborated on this hypothesis. At the time he believed that this
shift was already underway: postwar stability, financial innovation, and the receding memory of the
Great Depression were gradually setting the stage for a crisis of epic proportions. Most of what
he had to say fell on deaf ears. The 1960s were an era of solid growth, and although the economic
stagnation of the 1970s was a blow to mainstream neo-Keynesian economics, it did not send policymakers
scurrying to Minsky. Instead, a new free market fundamentalism took root: government was the problem,
not the solution.
Moreover, the new dogma coincided with a remarkable era of stability. The period from the late
1980s onward has been dubbed the “Great Moderation,” a time of shallow recessions and great resilience
among most major industrial economies. Things had never been more stable. The likelihood that “it”
could happen again now seemed laughable.
Yet throughout this period, the financial system - not the economy, but finance as an industry
- was growing by leaps and bounds. Minsky spent the last years of his life, in the early 1990s, warning
of the dangers of securitization and other forms of financial innovation, but few economists listened.
Nor did they pay attention to consumers’ and companies’ growing dependence on debt, and the growing
use of leverage within the financial system.
By the end of the 20th century, the financial system that Minsky had warned about had materialized,
complete with speculative borrowers, Ponzi borrowers, and precious few of the conservative borrowers
who were the bedrock of a truly stable economy. Over decades, we really had forgotten the meaning
of risk. When storied financial firms started to fall, sending shockwaves through the “real” economy,
his predictions started to look a lot like a road map.
“This wasn’t a Minsky moment,” explains Randall Wray. “It was a Minsky half-century.”
Minsky is now all the rage. A year ago, an influential Financial Times columnist confided to readers
that rereading Minsky’s 1986 “masterpiece” - “Stabilizing an Unstable Economy” - “helped clear my
mind on this crisis.” Others joined the chorus. Earlier this year, two economic heavyweights - Paul
Krugman and Brad DeLong - both tipped their hats to him in public forums. Indeed, the Nobel Prize-winning
Krugman titled one of the Robbins lectures at the London School of Economics “The Night They Re-read
Minsky.”
Today most economists, it’s safe to say, are probably reading Minsky for the first time, trying
to fit his unconventional insights into the theoretical scaffolding of their profession. If Minsky
were alive today, he would no doubt applaud this belated acknowledgment, even if it has come at a
terrible cost. As he once wryly observed, “There is nothing wrong with macroeconomics that another
depression [won’t] cure.”
But does Minsky’s work offer us any practical help? If capitalism is inherently self-destructive
and unstable - never mind that it produces inequality and unemployment, as Keynes had observed -
now what?
After spending his life warning of the perils of the complacency that comes with stability - and
having it fall on deaf ears - Minsky was understandably pessimistic about the ability to short-circuit
the tragic cycle of boom and bust. But he did believe that much could be done to ameliorate the damage.
To prevent the Minsky moment from becoming a national calamity, part of his solution (which was
shared with other economists) was to have the Federal Reserve - what he liked to call the “Big Bank”
- step into the breach and act as a lender of last resort to firms under siege. By throwing lines
of liquidity to foundering firms, the Federal Reserve could break the cycle and stabilize the financial
system. It failed to do so during the Great Depression, when it stood by and let a banking crisis
spiral out of control. This time, under the leadership of Ben Bernanke - like Minsky, a scholar of
the Depression - it took a very different approach, becoming a lender of last resort to everything
from hedge funds to investment banks to money market funds.
Minsky’s other solution, however, was considerably more radical and less palatable politically.
The preferred mainstream tactic for pulling the economy out of a crisis was - and is - based on the
Keynesian notion of “priming the pump” by sending money that will employ lots of high-skilled, unionized
labor - by building a new high-speed train line, for example.
Minsky, however, argued for a “bubble-up” approach, sending money to the poor and unskilled
first. The government - or what he liked to call “Big Government” - should become the “employer of
last resort,” he said, offering a job to anyone who wanted one at a set minimum wage. It
would be paid to workers who would supply child care, clean streets, and provide services that would
give taxpayers a visible return on their dollars. In being available to everyone, it would be even
more ambitious than the New Deal, sharply reducing the welfare rolls by guaranteeing a job for anyone
who was able to work. Such a program would not only help the poor and unskilled, he believed, but
would put a floor beneath everyone else’s wages too, preventing salaries of more skilled workers
from falling too precipitously, and sending benefits up the socioeconomic ladder.
While economists may be acknowledging some of Minsky’s points on financial instability, it’s safe
to say that even liberal policymakers are still a long way from thinking about such an expanded role
for the American government. If nothing else, an expensive full-employment program would veer far
too close to socialism for the comfort of politicians. For his part, Wray thinks that the critics
are apt to misunderstand Minsky. “He saw these ideas as perfectly consistent with capitalism,” says
Wray. “They would make capitalism better.”
But not perfect. Indeed, if there’s anything to be drawn from Minsky’s collected work, it’s that
perfection, like stability and equilibrium, are mirages. Minsky did not share his profession’s quaint
belief that everything could be reduced to a tidy model, or a pat theory. His was a kind of existential
economics: capitalism, like life itself, is difficult, even tragic. “There is no simple answer to
the problems of our capitalism,” wrote Minsky. “There is no solution that can be transformed into
a catchy phrase and carried on banners.”
It’s a sentiment that may limit the extent to which Minsky becomes part of any new orthodoxy.
But that’s probably how he would have preferred it, believes liberal economist James Galbraith. “I
think he would resist being domesticated,” says Galbraith. “He spent his career in professional isolation.”
The positive feedback loop in inherent the environment dominated by large transnationals
which funnel their excess cash into the financial system to speculate on asset appreciation.
As analysis in "The
Endless Crisis" suggests ( updating the classic 1960s analysis of the U.S. economy given by Paul
Sweezy and Paul Baran in "Monopoly Capital.") that the global economy is controlled by large
oligopolistic firms. Which boost their profits by lowering their costs and suppressing wages(on global
scale), using computerization, automation and relocating production to cheap-labor countries such
as China. Wage suppression in turn created permanent weak global demand. Which in turn dry
ups investment opportunities in expansion of existing manufacturing facilities. That forces transnationals
to funnel their excess cash into the financial system to speculate on asset appreciation. As
a result we have "permanent recession" punctuated by boom and bust cycles in financial markets.
Nature of leverage is such that it always represent a positive feedback loop. And leverage
is the essence of
Fractional reserve
banking operations. In the absence of negative control loops in a form of regulation,
purges, exiles, etc, financial system eventually loses stability which demonstrate itself in financial
crisis. Deep financial crisis often are followed by stagnation and can turn into social crisis.
The economy finds itself in a "stagnation-financialization trap" in which the only way to stimulate
growth is through the financialization process which leads to the next bubble and the next financial
crisis. Policy makers in Western countries are ready and willing to lead the world off this
cliff: "Restoring the conditions for finance-led expansion has now become the immediate object of
economic policy in the face of a persistently stagnation-prone real economy."(Foster and McChesney,
p 47). The authors add, "Not only have financial crises become endemic, they have also been growing
in scale and global impact." (Foster and McChesney, 43)
It is very difficult to gain a greater understanding of the broad social forces at play that
are shaping the financial sector, but self-destructing tendencies of the latter can be established
beyond reasonable doubt. And the problem here is not with people, although, again, I would
like to stress that a lot of financial actors are as close to psychopaths/sociopaths as one
can get. But people are better then institutions as Prince Kropotkin once remarked. The problem
is with reshaping of institutions via weakening of regulations (up to the total absence of thereof).
Regulations represent genome that guides growth and proliferation of organizational entities much
like cells in human organism. Bad genome creates cancer cells that kills the host. This
analogy with financial sector converting into cancer under a weak regulatory regime is less superficial
that one might think from the first sight. Some see the cycle in which financial sector undermines
economy the following way:
Boost Phase of Credit Expansion. Banks became dominant political force and start to
dictate the government policy.
Deregulation. Banks create for the themselves the "most favorable entity" regime including
access to government funds and taxation. Here revolving door greatly helps (see
Corruption of Regulators)
Overextended Credit Expansion and Over Capacity (dot-com bubble)
Growing Malinvestment ( there are no alternatives and one burst bubble is simply replaced
by the next. For example, dot-com bubble with the housing bubble in the case of the USA)
Impaired Debt and Policy Decisions, such as bailout of TBTF at taxpayer expense and
great cost for the economy. Please note that at this point banks have total political control,
so they essentially bail themselves out at the expense of the society.
Stalled Consumption due to shrinking of middle class and high structural unemployment.
The growing bills are passed on plebs. Cheap Money are Offered as the only Panacea Available.
Shrinking Loans and another round of Bank Speculation, this time in natural resources.
Search for Yield from Shrinking Pool of Productive Assets. Increasingly speculative
investments with high risk
Stagnation - Over-indebted economy, massive overcapacity with limited growth.
The growth of nationalism and protectionism (ref. 1920's -> 1930's). Military Keynesianism.
Oligarchy don't hesitate to sacrifice millions of plebeians in the subsequent wars that always
follow
In financial markets, socially-responsible, rational behavior isn’t optimal. That makes
reckless, self and society endangering behavior not a deviation, but a norm. That makes finance a
close relative to organized crime. In this respect Jefferson famous quote "I believe that banking
institutions are more dangerous to our liberties than standing armies" is really prophetic.
Instability is an immanent feature of dynamic systems with positive feedback loops. Financial
sector introduces a dangerous positive feedback loop into economy precipitating bubbles and subsequent
crisis. Despite artful packaging, the banking industry game is very simple, namely, they
take outsized, leveraged risks and when they work out, pay themselves handsome rewards, and when
they don’t, dump them on the taxpayer. That's why asJohn Kenneth Galbraith aptly noted "Finance
is the Achilles' heel of capitalism." While there are multiple levels and multiple meaning
on each level of this statement, instability of dynamic systems with positive feedback
loops is a fundamental property of such systems and it cannot be changed by any superficial
measures not related to the strength of feedback loop.The "inherently procyclical"
nature of the financial systemimplies thatthat perceptions of value and risk develop in parallel. Bankers always suffer from a blindness
to future dangers that are intrinsic to the system because that stand in a way of getting outsized
profits. The better the economy is doing, the higher the ratings issued by the rating agencies,
the laxer the guidelines for approving credit, the easier it becomes to borrow money and the greater
the willingness to assume risk.
Wall Street execs have been whining for two years that to reduce pay incentives and bonuses
would cost the firms their best talent. The government’s response should be YES! That’s precisely
the idea. Finance was once a means to an end: the growth of the real economy. Banking once served
industry and services. Now finance has become the end, and the real economy is subservient
to financial services (it’s no surprise that after the crisis, over-the-counter derivatives
trading quickly climbed back up to more than $600 trillion). “At some point in our recent past,
finance lost contact with its raison d’être,” European Central Bank chief Jean Claude Trichet
said earlier this year. “Finance developed a life of its own…Finance became self-referential.”
Computers brought innovations into financial markets, but at the same time greatly strengthened
and enhanced positive feedback loops inherent in financial sector. In other words
they make financial players much more dangerous for society then before. Our present system
could not exist without Web-based brokers, indexes, CDO’s, tranches, MERS, high speed trading. Computers
also have allowed dramatic increase of complexity, which often is used to hide the most dangerous
and the most reckless behavior of financial players. Computers are become an integral part of the
feedback and add gain (amplification) to the loop. The gain from computers is not bad by itself but
the trend to remove all controls or attenuations while adding this gain is bound to cause instability.
HFT seems to me one of the more obvious and stupid examples.
Complexity and luck of transparency are central to financial services firm rent seeking.
Those opportunities dramatically increases with computerization of finance and invention of complex
financial instruments. It is interesting that other industries can be allowed to teeter and
fall - steel, railroads, automobiles - but banks are considered sacrosanct. If they are, then
they should be public utilities, but good luck with this idea in captured Congress.
Megabanks automatically become an instrument for acquiring and keeping political influence
for its management ("silent coup"). Financial sector became viewed by the elite as a
solution to stagnation of industrial production and the way to fend of international competitors
playing of the US role of suppliers of global currency. As a result financial sector became a formidable
political force. Like senator Durbin put it:
And the banks -- hard to believe in a time when we're facing a banking crisis that many of
the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own the
place.
That compensates their inefficiency in internal market. Investment banks understand pretty well
that the best investment with highest return is an investment in political capital.
Saving oversized banks, however, may ruin a country’s public finances (Gros
and Micossi 2008). Take the example of Ireland; this country provided extensive financial
support to its large banks and subsequently had to seek financial assistance from the EU and the
IMF in 2010. The public finance risks posed by systemically large banks suggest that such banks
should be reduced in size.
Further evidence against big banks can be found from studies on banking technologies. Berger
and Mester (1997) estimate the returns to scale in US banking using data from the 1990s, to find
that a bank’s optimal size, consistent with lowest average costs, would be for a bank with around
$25 billion in assets. Amel et al. (2004) similarly report that commercial banks in North
America with assets in excess of $50 billion have higher operating costs than smaller banks. These
findings together suggest that today’s large banks, with assets in some instances exceeding $
1 trillion, are well beyond the technologically optimal scale.
Flawed incentives. The relationship between the rating agencies and big banks is a perfect
case study of flawed incentives and positive feedback loop within financial sector. Agencies
were unduly influenced (aka "were puppets of") by the institutions whose products they were grading.
Financial markets never play a purely passive role; they seek a political role and always
try to actively affect so-called fundamentals they are supposed to reflect. Their lobbying
efforts and regulatory capture are part of positive feedback loop that increases risks and
instability of the financial system. They tend to convert economy into what is using analogy
with military industrial complex can be called the crony capitalist financial-regulatory complex.That means that the necessary contraction of hypertrophied financial sector requires difficult
political changes which captured political establishment is unable to pursue on their own, so changes
often come packaged with violence. As Soros stated:
"These two functions that financial markets perform work in opposite directions. In
the passive or cognitive function, the fundamentals are supposed to determine market prices. In
the active or manipulative function market, prices find ways of influencing the fundamentals.
When both functions operate at the same time, they interfere with each other. The supposedly independent
variable of one function is the dependent variable of the other, so that neither function has
a truly independent variable. As a result, neither market prices nor the underlying reality is
fully determined. Both suffer from an element of uncertainty that cannot be quantified.
I call the interaction between the two functions reflexivity. Frank Knight recognized
and explicated this element of unquantifiable uncertainty in a book published in 1921,
but the Efficient Market Hypothesis and Rational Expectation Theory have deliberately ignored
it. That is what made them so misleading."
The Fiat-based currencies has additional built-in instability risks in comparison with gold
based currencies. This is not to say that gold based currencies are better. But the
ability of the US to run record current-account deficits over the past several decades is one such
effect, the effect impossible in gold standard currency environment and the US political elite (Republican
and Democrats alike) became increasingly comfortable with overconsumption. (The
World’s Financial System Has Become Unstable):
Leading Bush administration officials used to talk of the US current-account deficit being
a “gift” to the outside world. But, honestly, the US has been overconsuming – living far beyond
its means – for the past decade. The idea that tax cuts would lead to productivity gains and would
pay for themselves (and fix the budget) has proved entirely illusory. ...
[T]he net flow of capital is from emerging markets to the US – this is what it means to have
current-account surpluses in emerging markets and a deficit in the US. But the gross flow of capital
is from emerging market to emerging market, through big banks now implicitly backed by the state
in both the US and Europe. From the perspective of international investors, banks that are “too
big to fail” are the perfect places to park their reserves – as long as the sovereign in question
remains solvent. But what will these banks do with the funds?
When a similar issued emerged in the 1970’s – the so-called “recycling of oil surpluses” –
banks in Western financial centers extended loans to Latin America, communist Poland, and communist
Romania. That was not a good idea, as it led to a massive (for the time) debt crisis in 1982.
We are now heading for something similar, but on a larger scale. The banks and other financial
players have every incentive to load up on risk as we head into the cycle; they get the upside
(Wall Street compensation this year is set to break records again) and the downside goes to taxpayers.
Financial deregulation logically leads to over-trading and under-investment creating bubbles
and converting the economy into casino capitalism. The recent the ‘flash crash’ as a clear example
of the bubble and subsequent fragility such over-trading can create. Excessive trading in securities
increases instability of the economic system and creates perverted incentives for many economic actors.
The effect is similar to how drugs and alcohol chemically alter the personality, increasing the value
of instant gratification. As Hyman Minsky noted:
“In a world of businessmen and financial intermediaries who aggressively seek profit, innovators
will always outpace regulators; the authorities cannot prevent changes in the structure of portfolios
from occurring. What they can do is keep the asset-equity ratio of banks within bounds by setting
equity-absorption ratios for various types of assets. If the authorities constrain banks and are
aware of the activities of fringe banks and other financial institutions, they are in a better
position to attenuate the disruptive expansionary tendencies of our economy.”
-- Hyman Minsky, 1986
Growth of inequality connected with emergence of hypertrophied financial sector is another
positive feedback loop. Outsized pay in financial sector attracts talent and this talent
is used for destructive (or at least non-constructive) purposes. This is the situation similar to
the poor countries problem with mafia. What is so destabilizing isn’t just the high guaranteed pay
if you can break in (even though that is a huge part of it) but the allure of obscene sums of money
if you can make it to the top.
The share of US national income going to the top 1 per cent of the income distribution has risen
from 15 to 25 per cent over the past decade, mostly because of the growth in size and profitability
of the financial sector. This payments to the top percentile is a tax paid by the population (similar
to what population paid to royalty and church in middle ages) as a whole for the questionable
benefits of living in the casino capitalism economy. While the key to growth of inequality was financial
sector it also complemented by several additional trends:
Dramatic increase of renumeration of top management in all types of companies : by
increasing number of sociopath in higher echelons of financial institutions and second by destroying
morale of the firm which makes reckless moves more probable.
Due to regulatory capture. Concentrated wealth makes it easier to buy deregulation
to free itself up even more. At the same time concentrated wealth of financial sector finds fewer
productive investment outlets and naturally migrates into destructive speculation, including creating
huge speculative global capital flows. A positive feedback loop in which increase of income inequality
increase "financization" of the economy looks like:
Increase of income inequality ->
Inadequate effective demand in non-financial economy ->
Inadequate investment opportunities in non-financial economy ->
Investments flowing into parasitic financial “creativity”...
Regulatory capture, especially complete capture of the Fed (with NY Fed widely considered
to be a branch of Goldman Sachs) and SEC nullifies enforcement and creates another positive
feedback loop. "Revolving doors" provide an excellent opportunity to buy influence without overt
corruption. One recent example is Peter Orzag accepting position in Citi (Why
Citigroup) And that means that while on the job ambitious people might try to avoid to aggravate
banks. But without strong regulatory oversight banks very quickly convert themselves into wonder
machines that provides astronomic returns to brass and selected employees, high returns to
creditors, while at the end of each cycle causing huge losses to taxpayers. Banks must keep up
with their competitors, and if one does some wonder trick with somebody else money, they all must
do it to stay in business. That is why regulation is so vital in this highly competitive sector.
One cannot be virtuous as a commercial entity with obligations to shareholders and customers under
brothel rules. That why Greenspan
as an apostle of deregulation was so destructive for the US economy. This is another positive feedback
loop that feeds on itself. In search of profits which became more scares as financization takes life
out of real economy, financial firms are prone to subvert safeguards and endanger the very society
in which they operate ("financial terrorism effect". Wealth permits financial sector
to remove "sand in the wheels": vital for stability negative feedback loops in form of regulation
and, what is actually more important, strict law enforcement of existing regulations. Here
is a quote from Yves Smith post
Should the Fed Be Independent-
But there has been another thread mixed in with this: resentment at the Fed salvaging the banking
industry, with contingent and real costs, in the form of higher inflation, per
Alford’s and Leijonhufvud’s analysis. Now that many of those actions may indeed have been
the best among a set of bad choices (although I suspect economic historians will conclude the
Fed cut rates too far too fast). However, the big issue is that they involved consequences of
such magnitude that they should not have been left to the Fed. I was amazed, and was not alone,
when Congress did not dress down the Fed in its hearings on the Bear rescue for the central bank’s
unauthorized encroachment into fiscal action (ie., if any of the $29 billion in liabilities assumed
by the Fed in that rescue comes a cropper, the cost comes from the public purse). So the frustration
isn’t merely about outcomes, it’s about process, about the sense of disenfranchisement. And that
will only get worse as this crisis grinds along.
The proliferation of speculative side bets in the form of naked credit default swaps and other
derivatives can have significant negative effects on economic fundamentals such as the terms of financing,
the patterns of project selection, and the incidence of corporate and sovereign default. The
existence of zero-sum side bets on default has major economic repercussions. It has strangulating
effect starving real economy of funds as investors who are optimistic about particular company or
state instead of funding it sell protection. This diverts their capital away from potential borrowers
and channels it into collateral to support speculative positions. Naked CDSs are insurance policies
bought against some other persons property. Such as, I buy a policy against your house. Insurance
companies do not write such policies because I might decide to burn your house down. But even if
we assume that there will be no intentional damage to other’s property, we still are encouraging
diverting of funds. See
Guest Post Economic consequences of speculative side bets – The case of naked CDS « naked capitalism.
They also can create artificial demand. Conservative analyses indicates that in the peak years of
2006 and early 2007, Magnetar’s program drove the demand
for roughly 35% of subprime bonds. That fact refutes the claim that all derivatives, futures,
options and swaps are zero sum game: one person loss is another person gain.
By its nature investment banking is constantly tempted to move into grey zone and then slide
into criminal behavior. There is a profound similarity between investment bankers
and hedge funds "Masters of the Universe" and hackers. Investment bankers play a similar role in
financial system as hackers play in computer networks: they are engaged in systemic effort to undermine
existing laws and security controls. But there one important difference: investment bankers are often
obscenely rich and can buy themselves freedom after being caught. That's why criminal law should
consider financial sector crimes similar to the organized crime. "Algorithmic Terrorism”
( HFT) is one example (Nanex
- Market Crop Circle Of The Day). Nobody went to jail (yet). When you see the kind of losses
we have seen on AAA rated securities for example it is almost certainly there was there was some
kind of fraud involved. In fact growth of investment banking tend to be accompanied by large scale
fraud so this would not be unusual.
Tremendous political power that finance sector acquired due to outsized profits is channeled
toward lobbing that is socially and economically disruptive. Externalities produced by
unregulated banking sector are dangerous for society, but at the same time political power of the
financial sector created a lock in which prevents any meaningful correction. Classic Greek Tragedy
necessary follows. Regulators – and their superiors in the legislative and executive branches
– were captured both intellectually and via implicit form of corruption known as revolving doors.
"To a surprising degree, economic misfortune has correlated with low top marginal tax rates. The
top marginal tax rate at the time of the 1929 crash was 24%. After his election, Roosevelt promptly
raised it to 63% and then to 94%, and one could easily make the case that it was this rise, rather
than financial regulation, that played the primary — though certainly not the only — role in curbing
abuses by attacking greed at its source, without, by the way, damaging the economy. Roosevelt essentially
taxed away big money."
Disincentivizing greed - Page 3 - Los Angeles Times
For financial sector stability is destabilizing. Minsky financial instability hypothesis
can be simplified to the general statement that in any economy with large financial sectorstability is destabilizing as financial firms try to exploit the stable regime to extract
additional profit by increasing leverage and making excessively risky bets which serves as a tax
on real economy, strangulating it and creating the necessity for even more risky bets and higher
leverage. In the latter case large firms also implicitly transfer their risks to larger society (via
subsequent bailouts).
The cost of financial intermediation is ultimately a tax on commerce.Outsized,
predatory financial services sector poses real danger to viable businesses, to business expansion,
and to general economic productivity. Large part of activity of financial sector, especially
connected with securitized products, futures, options and derivatives is parasitic: "Banks tend to
make profits – or more accurately, extract rents – out of all proportion to any contribution they
make to the wider economy." Excessive rents weaken the real economy similar to cases
when parasite weakens the host (The
Banking Oligarchy Must Be Restrained For a Recovery to Be Sustained ). In addition to the
overhang of unindicted and undeclared fraud which is widespread due to regulatory capture, distorting
the clearing of the markets, an oversized financial sector essentially make the sum of government
tax and Wall street tax a real drag on the economy. The percentage of financial sector profits to
corporate profits recently peaked at 41%. This suggests that the scope of parasitic financial activity
is a real killer for the economy.
Weakly regulated banks tend to become classic cases of market failure and their employees
at the senior level have basically become the biggest bank robbers of all time. This tremendous
transfer of wealth is inherent in growth of financial sector. The best way to rob bank is to own
one.
Academia serves as the Fifth column of the financial sector. The financial system can
brainwash society via control of corrupt academia in classic Lysenkoism scenario. Here is relevant
quote from The Quiet
Coup
Wall Street’s seductive power extended even (or especially) to finance and economics
professors, historically confined to the cramped offices of universities and the pursuit of Nobel
Prizes. As mathematical finance became more and more essential to practical finance, professors
increasingly took positions as consultants or partners at financial institutions. Myron Scholes
and Robert Merton, Nobel laureates both, were perhaps the most famous; they took board seats at
the hedge fund Long-Term Capital Management in 1994, before the fund famously flamed out at the
end of the decade. But many others beat similar paths. This migration gave the stamp of academic
legitimacy (and the intimidating aura of intellectual rigor) to the burgeoning world of high finance.
Reaganomics (and later Rubonomics) confused ends with means... As Stiglitz noted,
. ... a financial sector is a means to a more productive economy, not an end in itself. (Financial
Times:
Towards
a better measure of well-being). Attempt to convert the USA into new Switzerland on the
strength of dollar as a reserve currency was doomed from the beginning due to the country size constrains.
Highly leveraged economies are prone to deep and prolong crisis. "The lesson of history,
then, is that even as institutions and policy makers improve there will always be a temptation to
stretch the limits. ... If there is one common theme to the vast range of crises ... it is that excessive
debt accumulation, whether it be by the government, banks, corporations, or consumers, often poses
greater systemic risks than it seems during a boom. ... Highly indebted governments, banks, or corporations
can seem to be merrily rolling along for an extended period, when bang -- confidence collapses, lenders
disappear and a crisis hits. ... Highly leveraged economies ... seldom survive forever ... history
does point to warnings signs that policy makers can look to access risk -- if only they do not become
too drunk with their credit bubble-fueled success and say, as their predecessors have for centuries,
'This time is different' Carmen Reinhart and Kenneth Rogoff (cited from
MarketWatch)
The first thing to understand is that attempt to weaken positive feedback looks via regulation, approach
that can be called “regulation as a Swiss knife” does not work without law enforcement and criminal
liability for bankers, as there is an obvious problem of corruption of regulators. In this sense the
mechanism of purges might be the only one that realistically can work.
In other words it’s unclear who and how can prevents the capture of regulators as financial sector
by definition has means to undermine any such efforts. One way this influence work is via lobbing for
appointment of pro-financial sector people in key positions. If such "finance-sector-selected" Fed chairman
does not like part of Fed mandate related to regulation it can simply ignore it as long as he is sure
that he will be reappointed. That happened with Greenspan. After such process started it became
irreversible and only after a significant, dramatic shock to the system any meaningful changes can be
instituted and as soon as the lessons are forgotten work on undermining them resumes.
In essence, the Fed is a political organization and Fed Chairman is as close to a real vice-president
of the USA as one can get. As such Fed Chairman serves the elite which rules that country, whether
you call them financial oligarchy or some other name. Actually Fed Chairman is the most powerful unelected
official in the USA. If you compare this position to the role of the Chairman of the Politburo
in the USSR you’ll might find some interesting similarities.
In other words it is impossible to prevent appointment of another Greenspan by another Reagan without
changes in political power balance. And the transition to banana republic that follows such appointment
is irreversible even if the next administration water boards former Fed Chairman to help him to write
his memoirs. That means that you need to far-reaching reform of political system to be able to
regulate financial industry and you need to understand that the measures adopted need vigilant protection
as soon as the current crisis is a distant history.
Several other source of financial instability were pointed out by others:
The logic of markets gets extended to “fictitious commodities” – land, labor, and money.Polanyi (1944) famously zeroed in on the way that the logic of markets gets extended to
“fictitious commodities” – land, labor, and money – and the way that society reacts defensively
to that illegitimate extension. Today, arguably, it is the logic of finance that has been so extended,
turning everything it touches into an asset with a speculative price.
Excessive accumulations of financial wealth – “other people’s money” – tend to undermine democratic
political forms.Brandeis (1914) thought that excessive accumulations of financial
wealth – “other people’s money” – tend to undermine democratic political forms (among other
problems). Today, arguably TBTF financial institution threaten democracy.
There are some outstanding lectures and presentation on YouTube on this topic. Among them:
Listen to this article 6 minutes 00:00 / 06:06 1x Earnings, valuation and rampant speculation have all played a role in the extraordinary bull market that began a year ago this week. The latest combination of the three has a troubling reliance on the speculative element. A broad framework for thinking about stocks can be derived from the late economist Hyman Minsky's three stages of debt. In the first stage, borrowers take on only what they can afford to repay in full from their earnings by the time the debt matures; a standard mortgage works like this. Earnings, valuation and rampant speculation have all played a role in the extraordinary bull market that began a year ago this week. The latest combination of the three has a troubling reliance on the speculative element. A broad framework for thinking about stocks can be derived from the late economist Hyman Minsky's three stages of debt. In the first stage, borrowers take on only what they can afford to repay in full from their earnings by the time the debt matures; a standard mortgage works like this. A broad framework for thinking about stocks can be derived from the late economist Hyman Minsky's three stages of debt. In the first stage, borrowers take on only what they can afford to repay in full from their earnings by the time the debt matures; a standard mortgage works like this. A broad framework for thinking about stocks can be derived from the late economist Hyman Minsky's three stages of debt. In the first stage, borrowers take on only what they can afford to repay in full from their earnings by the time the debt matures; a standard mortgage works like this. U.S. 10-year Treasury yield Source: Tullett Prebon As of March 24 % Pre-pandemic peak of S&P 500 2020 '21 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 S&P 500 forward price/earnings ratio Source: Refinitiv Note: Weekly data S&P 500 peak 2020 '21 12 14 16 18 20 22 24 The parallel in the stock market is stocks going up when earnings -- or rather the expectation of earnings, since the market looks ahead -- go up. There is a risk of course, just as there is with debt: The earnings might not appear, and the stock goes back down. But earnings offer the least risky form of gains, and one that we should welcome as obviously justified. From the low in the summer, 2020 earnings forecasts jumped more than 10%, and expectations for this year rose more than 8%. Stocks responded. In Minsky's second stage, borrowers plan only to repay the interest, and refinance when the main debt is due to be repaid; much company debt works like this. It is taken out with a plan to roll it over indefinitely. Interest rates matter a lot: If they go down when the company needs to refinance, it will pay less. The equity parallel is to gains in valuation due to lower long-term rates. As with corporate debt, this is entirely justified and sustainable so long as rates stay low, because future earnings are now more appealing. The danger is that rates rise, in which case the stock might be hit no matter how earnings pan out. A big chunk of the gains in stocks in the past year came from the sharply lower rates in the first response to the pandemic when the Federal Reserve flooded the system with money. Price-to-forward-earnings multiples soared. From the S&P 500's low on March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings 12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the 10-year Treasury, already down sharply from mid-February's high, fell further as stocks rebounded. In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the The parallel in the stock market is stocks going up when earnings -- or rather the expectation of earnings, since the market looks ahead -- go up. There is a risk of course, just as there is with debt: The earnings might not appear, and the stock goes back down. But earnings offer the least risky form of gains, and one that we should welcome as obviously justified. From the low in the summer, 2020 earnings forecasts jumped more than 10%, and expectations for this year rose more than 8%. Stocks responded. In Minsky's second stage, borrowers plan only to repay the interest, and refinance when the main debt is due to be repaid; much company debt works like this. It is taken out with a plan to roll it over indefinitely. Interest rates matter a lot: If they go down when the company needs to refinance, it will pay less. The equity parallel is to gains in valuation due to lower long-term rates. As with corporate debt, this is entirely justified and sustainable so long as rates stay low, because future earnings are now more appealing. The danger is that rates rise, in which case the stock might be hit no matter how earnings pan out. A big chunk of the gains in stocks in the past year came from the sharply lower rates in the first response to the pandemic when the Federal Reserve flooded the system with money. Price-to-forward-earnings multiples soared. From the S&P 500's low on March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings 12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the 10-year Treasury, already down sharply from mid-February's high, fell further as stocks rebounded. In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the In Minsky's second stage, borrowers plan only to repay the interest, and refinance when the main debt is due to be repaid; much company debt works like this. It is taken out with a plan to roll it over indefinitely. Interest rates matter a lot: If they go down when the company needs to refinance, it will pay less. The equity parallel is to gains in valuation due to lower long-term rates. As with corporate debt, this is entirely justified and sustainable so long as rates stay low, because future earnings are now more appealing. The danger is that rates rise, in which case the stock might be hit no matter how earnings pan out. A big chunk of the gains in stocks in the past year came from the sharply lower rates in the first response to the pandemic when the Federal Reserve flooded the system with money. Price-to-forward-earnings multiples soared. From the S&P 500's low on March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings 12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the 10-year Treasury, already down sharply from mid-February's high, fell further as stocks rebounded. In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the In Minsky's second stage, borrowers plan only to repay the interest, and refinance when the main debt is due to be repaid; much company debt works like this. It is taken out with a plan to roll it over indefinitely. Interest rates matter a lot: If they go down when the company needs to refinance, it will pay less. The equity parallel is to gains in valuation due to lower long-term rates. As with corporate debt, this is entirely justified and sustainable so long as rates stay low, because future earnings are now more appealing. The danger is that rates rise, in which case the stock might be hit no matter how earnings pan out. A big chunk of the gains in stocks in the past year came from the sharply lower rates in the first response to the pandemic when the Federal Reserve flooded the system with money. Price-to-forward-earnings multiples soared. From the S&P 500's low on March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings 12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the 10-year Treasury, already down sharply from mid-February's high, fell further as stocks rebounded. In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the The equity parallel is to gains in valuation due to lower long-term rates. As with corporate debt, this is entirely justified and sustainable so long as rates stay low, because future earnings are now more appealing. The danger is that rates rise, in which case the stock might be hit no matter how earnings pan out. A big chunk of the gains in stocks in the past year came from the sharply lower rates in the first response to the pandemic when the Federal Reserve flooded the system with money. Price-to-forward-earnings multiples soared. From the S&P 500's low on March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings 12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the 10-year Treasury, already down sharply from mid-February's high, fell further as stocks rebounded. In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the The equity parallel is to gains in valuation due to lower long-term rates. As with corporate debt, this is entirely justified and sustainable so long as rates stay low, because future earnings are now more appealing. The danger is that rates rise, in which case the stock might be hit no matter how earnings pan out. A big chunk of the gains in stocks in the past year came from the sharply lower rates in the first response to the pandemic when the Federal Reserve flooded the system with money. Price-to-forward-earnings multiples soared. From the S&P 500's low on March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings 12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the 10-year Treasury, already down sharply from mid-February's high, fell further as stocks rebounded. In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the A big chunk of the gains in stocks in the past year came from the sharply lower rates in the first response to the pandemic when the Federal Reserve flooded the system with money. Price-to-forward-earnings multiples soared. From the S&P 500's low on March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings 12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the 10-year Treasury, already down sharply from mid-February's high, fell further as stocks rebounded. In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the A big chunk of the gains in stocks in the past year came from the sharply lower rates in the first response to the pandemic when the Federal Reserve flooded the system with money. Price-to-forward-earnings multiples soared. From the S&P 500's low on March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings 12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the 10-year Treasury, already down sharply from mid-February's high, fell further as stocks rebounded. In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the The parallel in the stock market is the The parallel in the stock market is the hunt for the greater fool . Sure, GameStop < shares bear no relation to the reality < of the company, but I can make money from buying an overpriced stock if I can find someone willing to pay even more because they "like the stock." Wild bets became obvious this year, as newcomers armed with stimulus, or "stimmy," checks Wild bets became obvious this year, as newcomers armed with stimulus, or "stimmy," checks Wild bets became obvious this year, as newcomers armed with stimulus, or "stimmy," checks drove up the price of many tiny stocks, penny shares and those popular on Reddit discussion boards. Speculative bets such as the solar and ARK ETFs rallied up until mid-February, long after growth stocks peaked in August Price performance Source: FactSet *Russell 1000 indexes As of March 25, 7:02 p.m. ET % Invesco Solar Value* ARK Innovation Growth* Sept. 2020 '21 -25 0 25 50 75 100 125 The concern for investors: How much of the market's gain is thanks to this pure speculation, and how much to the justifiable gains of the improving economy and low rates? If too much comes from speculation, the danger is that we run out of greater fools and prices quickly drop back. The concern for investors: How much of the market's gain is thanks to this pure speculation, and how much to the justifiable gains of the improving economy and low rates? If too much comes from speculation, the danger is that we run out of greater fools and prices quickly drop back. me title= A look at how stocks moved through the pandemic suggests earnings and bond yields are still much more important than the gambling element for the market as a whole, but is still troubling. From the S&P peak in mid-February to the end of June, the story was of cratering earnings partly offset by higher valuations. The S&P was down 8%. Earnings forecasts for 12 months ahead fell 20%, while with 10-year yields down almost a full percentage point, valuations were up from a precrisis high of 19 times forecast earnings (itself the highest since the aftermath of the dot-com bubble) to 21 times. Growth stocks -- based on the Russell 1000 index of larger companies -- were slightly up, because they benefit most from falling bond yields, having more of their earnings far in the future. Cheap value stocks, which benefit less, were down 18%. A look at how stocks moved through the pandemic suggests earnings and bond yields are still much more important than the gambling element for the market as a whole, but is still troubling. From the S&P peak in mid-February to the end of June, the story was of cratering earnings partly offset by higher valuations. The S&P was down 8%. Earnings forecasts for 12 months ahead fell 20%, while with 10-year yields down almost a full percentage point, valuations were up from a precrisis high of 19 times forecast earnings (itself the highest since the aftermath of the dot-com bubble) to 21 times. Growth stocks -- based on the Russell 1000 index of larger companies -- were slightly up, because they benefit most from falling bond yields, having more of their earnings far in the future. Cheap value stocks, which benefit less, were down 18%. A look at how stocks moved through the pandemic suggests earnings and bond yields are still much more important than the gambling element for the market as a whole, but is still troubling. From the S&P peak in mid-February to the end of June, the story was of cratering earnings partly offset by higher valuations. The S&P was down 8%. Earnings forecasts for 12 months ahead fell 20%, while with 10-year yields down almost a full percentage point, valuations were up from a precrisis high of 19 times forecast earnings (itself the highest since the aftermath of the dot-com bubble) to 21 times. Growth stocks -- based on the Russell 1000 index of larger companies -- were slightly up, because they benefit most from falling bond yields, having more of their earnings far in the future. Cheap value stocks, which benefit less, were down 18%. From the S&P peak in mid-February to the end of June, the story was of cratering earnings partly offset by higher valuations. The S&P was down 8%. Earnings forecasts for 12 months ahead fell 20%, while with 10-year yields down almost a full percentage point, valuations were up from a precrisis high of 19 times forecast earnings (itself the highest since the aftermath of the dot-com bubble) to 21 times. Growth stocks -- based on the Russell 1000 index of larger companies -- were slightly up, because they benefit most from falling bond yields, having more of their earnings far in the future. Cheap value stocks, which benefit less, were down 18%. From the S&P peak in mid-February to the end of June, the story was of cratering earnings partly offset by higher valuations. The S&P was down 8%. Earnings forecasts for 12 months ahead fell 20%, while with 10-year yields down almost a full percentage point, valuations were up from a precrisis high of 19 times forecast earnings (itself the highest since the aftermath of the dot-com bubble) to 21 times. Growth stocks -- based on the Russell 1000 index of larger companies -- were slightly up, because they benefit most from falling bond yields, having more of their earnings far in the future. Cheap value stocks, which benefit less, were down 18%. Growth stocks -- based on the Russell 1000 index of larger companies -- were slightly up, because they benefit most from falling bond yields, having more of their earnings far in the future. Cheap value stocks, which benefit less, were down 18%. Growth stocks -- based on the Russell 1000 index of larger companies -- were slightly up, because they benefit most from falling bond yields, having more of their earnings far in the future. Cheap value stocks, which benefit less, were down 18%. NEWSLETTER SIGN-UP ( Mar 26, 2021 , www.wsj.com )
[In casino capitalism] financial institutions make a living screwing over their customers
so their biggest concern is how to avoid losing lawsuits when they get sued
Neoliberal oligarchy fight against income redistribution by pushing perverted social justice
smoke screen and in effect can turn the USA in South Africa. Money quote from comments: "If I
read NASDAQ's proposal for Board representation in the Onion, I would have thought that even
these jokesters have exceeded the creativity threshold of ridiculousness I thought was possible."
and "What about the Mentally Ill? Do they get a seat? How about the Homeless?"
Three words about famele CEO and board room members: Elizabeth Holmes, Theranos. BTW what is
unclear in NASDAQ bold critical race theory support is: Can we exchange one black member for two
female members? Or not.
Also why stop at the boardrooms. Why not require the same in professional sport teams?
Nasdaq has, in its own words, embraced "the social justice movement." The
actual job of a stock exchange, however, is to ensure that trading is orderly and its listed
companies follow standard governance rules. But doing that doesn't earn the applause of the
political left. Progressive approval apparently means a lot to Nasdaq, which has officially
proposed to its regulator -- the Securities and Exchange Commission, newly chaired by Gary
Gensler -- to increase boardroom diversity through a "regulatory approach."
This proposal would require that Nasdaq-listed companies not only disclose the diversity
characteristics of their existing boards, but also retain "at least one director who
self-identifies as female," and "at least one director who self-identifies as Black or African
American, Hispanic or Latinx, Asian, Native American or Alaska Native, two or more races or
ethnicities, or as LGBTQ+."
Noncompliant firms must publicly "explain" -- in writing -- why they don't meet Nasdaq's
quotas. Nasdaq has, in its own words, embraced "the social justice movement."
The actual job of a stock exchange, however, is to ensure that trading is orderly and its
listed companies follow standard governance rules. But doing that doesn't earn the applause of
the political left. Progressive approval apparently means a lot to Nasdaq, which has officially
proposed to its regulator -- the Securities and Exchange Commission, newly chaired by Gary
Gensler -- to increase boardroom diversity through a "regulatory approach."
The Fed, in sync with the fiction writers at the Bureau of Labor Statistics (BLS), reports
consumer inflation as honestly as Al Capone reported taxable income.
Vardaman 3 hours ago
"A basket of things no one actually buys, with prices we just pull out of our
asses..."
Glock 1 hour ago
Yep, the BLS uses the CPI-W to literally avoid raising SS payments. The real rate of
inflation for seniors is close to 10% as the things they spend most of their money on like
medical care, medicine, food and utilities have gone through the roof
While the government claims they are entitled to 1.5% or less COLA's out of which comes a
bigger deduction every year for Medicare. Scam artists.
Keith Speights: Some findings were recently published in Nature magazine that
indicate that the Pfizer-BioNTech and the Moderna vaccines may provide protection for
years.
Many investors are and were hoping for annual recurring revenue from these companies'
vaccines. Brian, how troublesome is this latest data for the prospects for Pfizer, BioNTech,
and Moderna?
Brian Orelli: There's a bit of an extrapolation going on here. The researchers looked at
memory B cells, which tend to provide more long-term protection than, let's say, antibodies.
They looked at those in the lymph nodes and found the cells were there as long as 15 weeks.
Typically, they'd mostly be gone by four to six weeks. So that's the basis of this claim
that it could offer protection for years. If true, that will be a big blow obviously to vaccine
makers, at least for Moderna and BioNTech.
Pfizer would be fine because it's so diversified. It's really hard to make an argument for
the valuations of Moderna and BioNTech right now if these vaccines are one and done over a
couple of years. They really need to have ongoing sales until they can get growth from other
drugs in their pipelines.
Speights: Brian, when I first saw the story, I went to check out to see how the stocks were
performing, and Moderna is up, BioNTech was barely changed, Pfizer barely changed. It seems to
me that investors really aren't making much of this news. Do you think that's the right take at
this point?
Orelli: I think it's still too early to be able to conclude that it's definitely going to
work for years. The other issue is that we're looking at, will those B cells actually protect
against the variants?
If they don't protect against the variants, then it doesn't really matter if you have B
cells in your lymph nodes. If they're not going to protect against the variants then we're
going to have to get a booster shot anyway.
Speights: Right. Obviously, if these vaccines provide immunity for multiple years, these
companies aren't going to make nearly as much money as they expect and a lot of investors
expect. So this is a big story to watch, but like you said, really, really early right now and
too soon to maybe go drawing any conclusions at this point.
Note to Goldman: you're a bank. Stick to banky-stuff. Leave the fear **** and lies to
the professionals in the .gov and MSM.
p3scobar 7 hours ago
Goldman is the government... sooo.....
espirit 9 hours ago
If Goldman can give medical advice, so can I.
A Lunatic 9 hours ago remove link
Turning off the TV will neutralize the Delta Variant.
rag_house 9 hours ago
Just like 'Climate Change' you know it's contrived when the bankers start doing
'science.'
liberty2day 9 hours ago
when did they not?
rag_house 8 hours ago
Bankers aren't scientists. They simply dream up fake things they want to convince people
of and bribe people to try to make it seem real.
Enraged 9 hours ago remove link
Goldman Sachs Charged in Foreign Bribery Case and Agrees to Pay Over $2.9 Billion
The Goldman Sachs Group Inc. and Goldman Sachs (Malaysia) have admitted to conspiring to
violate the Foreign Corrupt Practices Act (FCPA) in connection with a scheme to pay over $1
billion in bribes to Malaysian and Abu Dhabi officials to obtain lucrative business for
Goldman Sachs, including its role in underwriting approximately $6.5 billion in three bond
deals for 1Malaysia Development Bhd. (1MDB), for which the bank earned hundreds of millions
in fees.
bond prices have nothing to do with recovery [sic]
stock prices have nothing to do with growth, except growth of the money supply
Kreditanstalt 3 hours ago
"...the price of a beer or a McDonalds in 10-years time will be exactly the same as it
is today. (Which it won't.)"
But the type who buy US government bonds don't care about the price of burgers. They
only plan to flip the thing back to the next Greater Fool...or THE FED
"... For now, loose monetary and fiscal policies will continue to fuel asset and credit bubbles, propelling a slow-motion train wreck. The warning signs are already apparent in today's high price-to-earnings ratios SPX , low equity risk premiums, inflated housing and tech assets COMP , and the irrational exuberance surrounding special purpose acquisition companies (SPACs), the crypto sector BTCUSD, , high-yield corporate debt , collateralized loan obligations, private equity, meme stocks AMC, and runaway retail day trading. ..."
"... But meanwhile, the same loose policies that are feeding asset bubbles will continue to drive consumer price inflation, creating the conditions for stagflation whenever the next negative supply shocks arrive. Such shocks could follow from renewed protectionism; demographic aging in advanced and emerging economies; immigration restrictions in advanced economies; the reshoring of manufacturing to high-cost regions; or the balkanization of global supply chains. ..."
"... More broadly, the Sino-American decoupling threatens to fragment the global economy at a time when climate change and the COVID-19 pandemic are pushing national governments toward deeper self-reliance. ..."
"... Making matters worse, central banks have effectively lost their independence, because they have been given little choice but to monetize massive fiscal deficits to forestall a debt crisis. With both public and private debts having soared, they are in a debt trap. Central banks will be damned if they do and damned if they don't, and many governments will be semi-insolvent and thus unable to bail out banks, corporations, and households. The doom loop of sovereigns and banks in the eurozone after the global financial crisis will be repeated world-wide ..."
"... When former Fed Chair Paul Volcker hiked rates to tackle inflation in 1980-82, the result was a severe double-dip recession in the United States and a debt crisis and lost decade for Latin America. But now that global debt ratios are almost three times higher than in the early 1970s, any anti-inflationary policy would lead to a depression, rather than a severe recession. The question is not if but when. ..."
Roubini warns: After 'the Minsky Moment' crashes overheated speculative markets, 'the
Volcker Moment' will will arrive to crash the debt-burdened global economy
( Project Syndicate ) -- In
April, I
warned that today's extremely loose monetary and fiscal policies, when combined with a
number of negative supply shocks, could result in 1970s-style stagflation (high inflation
alongside a recession). In fact, the risk today is even bigger than it was then.
After all, debt ratios in advanced economies and most emerging markets were much lower in
the 1970s, which is why stagflation has not been associated with debt crises historically. If
anything, unexpected inflation in the 1970s wiped out the real value of nominal debts at fixed
rates, thus reducing many advanced economies' public-debt burdens.
The warning signs are already apparent in today's high price-to-earnings ratios, low
equity risk premiums, inflated housing and tech assets, and the irrational exuberance
surrounding special purpose acquisition companies (SPACs), the crypto sector, high-yield
corporate debt, collateralized loan obligations, private equity, meme stocks, and runaway
retail day trading.
Conversely, during the 2007-08 financial crisis, high debt ratios (private and public)
caused a severe debt crisis -- as housing bubbles burst -- but the ensuing recession led to low
inflation, if not outright deflation. Owing to the credit crunch, there was a macro shock to
aggregate demand, whereas the risks today are on the supply side.
Worst of both
worlds
We are thus left with the worst of both the stagflationary 1970s and the 2007-10 period.
Debt ratios are much higher than in the 1970s, and a mix of loose economic policies and
negative supply shocks threatens to fuel inflation rather than deflation, setting the stage for
the mother of stagflationary debt crises over the next few years.
For now, loose monetary and fiscal policies will continue to fuel asset and credit
bubbles, propelling a slow-motion train wreck. The warning signs are already apparent in
today's high price-to-earnings ratios SPX , low equity risk
premiums, inflated housing and tech assets COMP , and the
irrational exuberance surrounding special purpose acquisition companies (SPACs), the crypto
sector BTCUSD, ,
high-yield corporate debt , collateralized loan obligations, private equity, meme stocks
AMC, and runaway
retail day trading.
But meanwhile, the same loose policies that are feeding asset bubbles will continue to
drive consumer price inflation, creating the conditions for stagflation whenever the next
negative supply shocks arrive. Such shocks could follow from renewed protectionism; demographic
aging in advanced and emerging economies; immigration restrictions in advanced economies; the
reshoring of manufacturing to high-cost regions; or the balkanization of global supply
chains.
Recipe for macroeconomic disruption
More broadly, the Sino-American decoupling threatens to fragment the global economy at a
time when climate change and the COVID-19 pandemic are pushing national governments toward
deeper self-reliance. Add to this the impact on production of increasingly frequent
cyberattacks on critical infrastructure and the social and political backlash against
inequality, and the recipe for macroeconomic disruption is complete.
Making matters worse, central banks have effectively lost their independence, because
they have been given little choice but to monetize massive fiscal deficits to forestall a debt
crisis. With both public and private debts having soared, they are in a debt trap. Central
banks will be damned if they do and damned if they don't, and many governments will be
semi-insolvent and thus unable to bail out banks, corporations, and households. The doom loop
of sovereigns and banks in the eurozone after the global financial crisis will be repeated
world-wide
As inflation rises over the next few years, central banks will face a dilemma. If they start
phasing out unconventional policies and raising policy rates to fight inflation, they will risk
triggering a massive debt crisis and severe recession; but if they maintain a loose monetary
policy, they will risk double-digit inflation -- and deep stagflation when the next negative
supply shocks emerge.
But even in the second scenario, policy makers would not be able to prevent a debt crisis.
While nominal government fixed-rate debt in advanced economies can be partly wiped out by
unexpected inflation (as happened in the 1970s), emerging-market debts denominated in foreign
currency would not be. Many of these governments would need to default and restructure their
debts.
At the same time, private debts in advanced economies would become unsustainable (as they
did after the global financial crisis), and their spreads relative to safer government bonds
would spike, triggering a chain reaction of defaults. Highly leveraged corporations and their
reckless shadow-bank creditors would be the first to fall, soon followed by indebted households
and the banks that financed them.
The Volcker Moment
To be sure, real long-term borrowing costs may initially fall if inflation rises
unexpectedly and central banks are still behind the curve. But, over time, these costs will be
pushed up by three factors. First, higher public and private debts will widen sovereign and
private interest-rate spreads. Second, rising inflation and deepening uncertainty will drive up
inflation risk premiums. And, third, a rising misery index -- the sum of the inflation and
unemployment rate -- eventually will demand a "Volcker Moment."
When former Fed Chair Paul Volcker hiked rates to
tackle inflation in 1980-82, the result was a severe double-dip recession in the United States
and a debt crisis and lost decade for Latin America. But now that global debt ratios are almost
three times higher than in the early 1970s, any anti-inflationary policy would lead to a
depression, rather than a severe recession. The question is not if but when.
Under these conditions, central banks will be damned if they do and damned if they don't,
and many governments will be semi-insolvent and thus unable to bail out banks, corporations,
and households. The doom loop of sovereigns and banks in the eurozone after the global
financial crisis will be repeated world-wide, sucking in households, corporations, and shadow
banks as well.
As matters stand, this slow-motion train wreck looks unavoidable. The Fed's recent pivot
from an ultra-dovish to a mostly dovish stance changes nothing. The Fed has been in a debt trap
at least since December 2018, when a stock- and credit-market crash forced it to reverse its
policy tightening a full year before COVID-19 struck. With inflation rising and stagflationary
shocks looming, it is now even more ensnared.
So, too, are the European Central Bank, the Bank of Japan, and the Bank of England. The
stagflation of the 1970s will soon meet the debt crises of the post-2008 period. The question
is not if but when.
Nouriel Roubini is CEO of Roubini Macro Associates and chief economist at Atlas Capital
Team.
Traders are addicted to trading, much like murderers fixate on murdering. The traders
noticed a slight change in the Fed's tone and sold anything tied to inflation. They whacked
gold good. Then they went after the other commodities. When they were done there, they went
after value stocks, before finishing the week by blasting a bunch of cyclical names.
25 play_arrow
ted41776 5 hours ago
the only kind of ism that has exist is sociopathism
they always end up at the top of any power pyramid and make the rules that apply to all
others but not them
same as it always was and same as it always will be
NoDebt 4 hours ago
Traders are addicted to trading, much like murderers fixate on murdering
A line I wish I had come up with.
lambda PREMIUM 4 hours ago
This was already modeled and formalized: The Gambler Fallacy.
Let us preface our inflation note with one of our favorite quotes:
"World War II was transitory"
– GMM
Inflation has eroded my purchasing power in my transitory life. Bring back the $.35 Big Mac,
which was only about 20% of the minimum wage. Now? About 40-50%... Enough to spark a
revolution?
There are also Bagdad Bobs from IEA " "World oil supply is expected to grow at a faster rate
in 2022, with the US driving gains of 1.6 million bpd from producers outside the OPEC alliance.
"
"... Just in time for Pride Month, a new exchange traded fund aims to connect with LGBTQ investors. ..."
"... LGBTQ Loyalty Holdings partners with Harris Poll to annually survey 150,000 self-identifying LGBTQ constituents across the U.S. for their views about a company's brand awareness, brand image, brand loyalty and how the firm supports the community. As noted in its prospectus , 25% of the index's weighting is derived from that survey data. ..."
Just in time for Pride Month, a new exchange traded fund aims to connect with LGBTQ investors. Two previous efforts failed to
attract enough assets.
The fund, LGBTQ + ESG100 ETF LGBT,
, launched in late May, is a passively managed, large-cap index fund that holds the top 100 U.S. companies that most align with
the LGBTQ community.
In 2019, two LGBTQ-focused ETFs were delisted: ALPS Workplace Equality Portfolio ETF and InsightShares LGBT Employment Equality
ETFs. Like this new fund, both were mostly U.S. large-cap, passive index ETFs comprising companies that received high or perfect
marks for workplace equality in the Human Rights Campaign Corporate Equality
Index , a benchmark for corporate LGBTQ policies.
The first ETF stuck around for five years, but the second barely made it two years, even though it was launched with much fanfare
by UBS. Neither gained many assets.
Bobby Blair, CEO and founder of LGBTQ Loyalty Holdings, which launched the fund with issuer ProcureAM, says community input on
holdings makes this fund different.
LGBTQ Loyalty Holdings partners with Harris Poll to annually survey 150,000 self-identifying LGBTQ constituents across the U.S.
for their views about a company's brand awareness, brand image, brand loyalty and how the firm supports the community. As noted in
its prospectus
, 25% of the index's weighting is derived from that survey data.
... the LGBTQ + ESG100 has an annual expense ratio of 0.75%.
Just in time for Pride Month, a new exchange traded fund aims to connect with LGBTQ investors. Two previous efforts failed to
attract enough assets.
The fund, LGBTQ + ESG100 ETF LGBT,
+0.91%
, launched in late May, is a passively managed, large-cap index fund that holds the top 100 U.S. companies that most align with
the LGBTQ community.
In 2019, two LGBTQ-focused ETFs were delisted: ALPS Workplace Equality Portfolio ETF and InsightShares LGBT Employment Equality
ETFs. Like this new fund, both were mostly U.S. large-cap, passive index ETFs comprising companies that received high or perfect
marks for workplace equality in the Human Rights Campaign Corporate Equality
Index , a benchmark for corporate LGBTQ policies.
The first ETF stuck around for five years, but the second barely made it two years, even though it was launched with much fanfare
by UBS. Neither gained many assets.
Bobby Blair, CEO and founder of LGBTQ Loyalty Holdings, which launched the fund with issuer ProcureAM, says community input on
holdings makes this fund different.
LGBTQ Loyalty Holdings partners with Harris Poll to annually survey 150,000 self-identifying LGBTQ constituents across the U.S.
for their views about a company's brand awareness, brand image, brand loyalty and how the firm supports the community. As noted in
its prospectus
, 25% of the index's weighting is derived from that survey data.
... the LGBTQ + ESG100 has an annual expense ratio of 0.75%.
I accept the reality except that FED said this inflation is "transitory."
The Fed description is accurate... it's just whether the transition is to
lower inflation or to runaway inflation.
Jim McCreary
The biggest single factor that will drive long-term inflation is the absence of downward
price pressure from new Chinese market entrants. Cutthroat pricing from China is the ONLY
reason the West has been able to get away with Money-Printing Gone Wild for the past 20 years
without triggering runaway inflation.
There are no new Chinese entrants because the Chinese are now all in in the world economy.
The existing Chinese competitors are seeing their costs go UP, not down, because they have
fully employed the Chinese population, and have to pay up in order to get and keep
workers.
So, without any more downward price pressure from China, this latest round of
Money-Printing Gone Wild is showing up as price inflation, and will continue to do so.
Batten down the hatches! Stagflation and then runaway inflation are coming!
Doyle Lonnegan to Johnny "Hooker" Kelly in the movie The Sting: "Your boss is quite the
card player Mr. Kelly. How does he do it?"
Kelly to Lonnegan: "He cheats."
philipat 2 days ago
It's appropriate that the entirely useless ex-PM Cameron got taken by this guy and tried
to use his influence to access free money for him from The Treasury as an "advisor"..He
didn't get any.
The Fed never had control, just s bunch of shysters running a long term hybrid ponzi
scheme.
Lordflin 54 minutes ago (Edited)
The Fed is losing control...
I suppose that is true... as the function has been to drain the people's wealth into the
coffers of the few...
The Real Satoshi 29 minutes ago remove link
Sad that Greg Hunter got kicked off youtube.
gregga777 12 minutes ago (Edited)
He is in great company, though. Anyone who offends the Marxist narratives (Politically
Correct, Multicultural, Affirmative Action, Diversity, Feminist, LGBTQQ, etc.) gets kicked
off YouTube.
pmc 36 minutes ago (Edited) remove link
...As Kissinger said "The illegal we do immediately; the unconstitutional takes a little
longer."
"... The CPI is calculated by analyzing the price of a "basket of goods." The makeup of that basket has a big impact on the final CPI number. According to WolfStreet , 10.9% of the CPI is based on durable goods (computers, automobiles, appliances, etc.). Nondurable goods (primarily food and energy) make up 26.6% of CPI. Services account for the remaining 62.5% of the basket. This includes rent, healthcare, cellphone service etc.) ..."
"... The things the government includes and excludes from the basket can make a profound difference in that final CPI number. Back in 1998, the government significantly revised the CPI metrics. Even the Bureau of Labor Statistics (BLS) admitted the changes were "sweeping." ..."
"... In 1998, the BLS followed the recommendations of the Boskin Commission. It was appointed by the Senate in 1995. Initially called the "Advisory Commission to Study the Consumer Price Index," its job was to study possible bias in the computation of the CPI. Unsurprisingly, it determined that the index overstated inflation " by about 1.1% per year in 1996 and about 1.3% prior to 1996. The 1998 changes to CPI were meant to address this "issue." ..."
"... As Peter pointed out, there is a lot of geometric weighting, substitution and hedonics built into the calculation. The government can basically create an index that outputs whatever it wants. ..."
"... Peter said there is a bit of irony in government officials and central bankers constantly complaining about "not enough inflation." ..."
"... They're the ones that are cooking the books to pretend that inflation is lower than it really is. Because what they're really trying to do is get the go-ahead to produce more inflation, which is printing money." ..."
"... And there are other things that hide inflation. For instance, shrinking packaging so there is less product sold at the same price, or substituting lower quality ingredients, or requiring consumers to assemble items themselves. ..."
"... They find different ways to lower the quality and not increase the price, and I'm sure that the government is not picking up on any of that. If the quality improves, yeah, yeah, they calculate that. But they probably ignore all the circumstances where the quality is diminished." ..."
"... The bottom line is we can't trust CPI to tell us the truth about inflation. ..."
And we're seeing rising prices all over the place, from the grocery store to the gas station. Even
the government numbers flash
warning signs . But as Peter Schiff explains in this clip from an interview with Jay Martin, it's probably even worse than we
realize because the government cooks the numbers when it calculates CPI.
The monthly rises in CPI
through the first quarter show an upward trend. The CPI in January was up 0.3%. It was up 0.4% in February. And now it's up 0.6%
in March. That totals a 1.013% increase in Q1 alone. The question is does this really reflect the truth about inflation? Peter doesn't
think it does.
The government always makes changes to their methods of measuring things, whether it's GDP, or inflation, or unemployment.
And they always tweak the numbers to produce a better result as a report card. "
Imagine if students in a school had the ability to change the metrics by which they were graded or the methodology the teacher
used to calculate their grades.
Would it surprise anybody that all of a sudden they started getting more As and Bs and fewer Cs and Ds? The government always
wants to make the good stuff better, like economic growth, and the bad stuff better, like unemployment or inflation. So, they
want to find ways to make those numbers little and the good numbers big."
The CPI is calculated by analyzing
the price of a "basket of goods." The makeup of that basket has a big impact on the final CPI number. According to WolfStreet , 10.9%
of the CPI is based on durable goods (computers, automobiles, appliances, etc.). Nondurable goods (primarily food and energy) make
up 26.6% of CPI. Services account for the remaining 62.5% of the basket. This includes rent, healthcare, cellphone service etc.)
The things the government includes and excludes from the basket can make a profound difference in that final CPI number. Back in 1998, the government significantly revised the CPI metrics. Even
the Bureau of Labor Statistics
(BLS) admitted the changes were "sweeping."
According to the BLS, periodic changes to the CPI calculation are necessary because "consumers change their preferences or new
products and services emerge. During these occasions, the Bureau reexamines the CPI item structure, which is the classification scheme
of the CPI market basket. The item structure is a central feature of the CPI program and many CPI processes depend on it."
In 1998, the BLS followed the recommendations of the Boskin Commission. It was appointed by the Senate in 1995. Initially called
the "Advisory Commission to Study the Consumer Price Index," its job was to study possible bias in the computation of the CPI. Unsurprisingly,
it determined that the index overstated inflation " by about 1.1% per year in 1996 and about 1.3% prior to 1996. The 1998 changes
to CPI were meant to address this "issue."
As Peter pointed out, there is a lot of geometric weighting, substitution and hedonics built into the calculation. The government
can basically create an index that outputs whatever it wants.
I think this period of "˜Oh wow! We have low inflation!' It's not a coincidence that it followed this major revision into how
we calculate it."
Peter said there is a bit of irony in government officials and central bankers constantly complaining about "not enough inflation."
They're the ones that are cooking the books to pretend that inflation is lower than it really is. Because what they're really
trying to do is get the go-ahead to produce more inflation, which is printing money."
Peter said the CPI will never reveal the true extent of rising prices.
And there are other things that hide inflation. For instance, shrinking packaging so there is less product sold at the same price,
or substituting lower quality ingredients, or requiring consumers to assemble items themselves.
They find different ways to lower the quality and not increase the price, and I'm sure that the government is not picking up
on any of that. If the quality improves, yeah, yeah, they calculate that. But they probably ignore all the circumstances where
the quality is diminished."
The bottom line is we can't trust CPI to tell us the truth about inflation.
Not only is this not true, the evidence shows that bubbles are called in advance. In 1999,
the Wall Street Journal had 286 articles on bubbles. Here are a few of the titles,
"When the Bubble Bursts..."
"The Bubble Won't Burst"
"Bursting Mr. Geenspan's Bubble"
"Fed `Bubble' Policy: Watch, Don't Pop'"
"Fed Governor Meyer Counters Suggestions Of a Market Bubble"
Dogecoin is now valued at more than Ford.
Economics?
Lunacy is more like it.
This is just more proof that the dollars are becoming more worthless.
Whistling past the graveyard.
...retail investors have been net buyers of stocks for 10 straight weeks, hedge funds have
been sellers, client data from BofA Global Research showed, with the four-week average of net
sales of equities by hedge funds hitting their highest levels since the firm began tracking the
data in 2008.
Archegos is a Greek word denoting leadership. The place where the eponymous family office
led UBS, and a growing roll call of investment banks, was into a morass.
"... In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. ..."
"... The parallel in the stock market is the hunt for the greater fool . Sure, GameStop shares bear no relation to the reality of the company, but I can make money from buying an overpriced stock if I can find someone willing to pay even more because they 'like the stock.' ..."
"... The concern for investors: How much of the market's gain is thanks to this pure speculation, and how much to the justifiable gains of the improving economy and low rates? If too much comes from speculation, the danger is that we run out of greater fools and prices quickly drop back. ..."
In Minsky's second stage, borrowers plan only to repay the interest, and
refinance when the main debt is due to be repaid; much company debt works like this. It is
taken out with a plan to roll it over indefinitely. Interest rates matter a lot: If they go
down when the company needs to refinance, it will pay less.
The equity parallel is to gains in valuation due to lower long-term rates. As with corporate
debt, this is entirely justified and sustainable so long as rates stay low, because future
earnings are now more appealing. The danger is that rates rise, in which case the stock might
be hit no matter how earnings pan out.
A big chunk of the gains in stocks in the past year came from the sharply lower rates in the
first response to the pandemic when the Federal Reserve flooded the system with money.
Price-to-forward-earnings multiples soared. From the S&P 500's low on
March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings
12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the
10-year Treasury, already down sharply from mid-February's high, fell
further as stocks rebounded.
In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the
hope of capital gains big enough to make up the gap. Land speculators are a prime
example.
The parallel in the stock market is the
hunt for the greater fool . Sure, GameStop shares
bear no relation to the reality of the company, but I can make money from buying an overpriced stock if I can find someone
willing to pay even more because they 'like the stock.'
Wild bets became obvious this year, as newcomers armed with stimulus, or 'stimmy,' checks
drove up the price of many tiny stocks, penny shares and those popular on Reddit discussion
boards.
The concern for investors: How much of the market's gain is thanks to
this pure speculation, and how much to the justifiable gains of the improving economy and low
rates? If too much comes from speculation, the danger is that we run out of greater fools
and prices quickly drop back.
SUBSCRIBER 2 hours ago Borrowing money to gamble on the stock market is not
a very smart thing to do in my opinion. Like thumb_up 7 Reply reply Share link Report flag
R
The current financial world has been reduced to a one-legged bar-stool in a bar where
drinks are on the house. There is no scenario where this does not end well no matter how
euphoric we are in the moment.
Even those with half a brain can twig that JP Morgan are a bunch of crooks. Simply Google
"JP Morgan fines".
Those who are market savvy should Google "JP Morgan fines".
Surely in literally everly market segment the CEO, Jamie Dimond, would be banged up in
prison?!!!!!!!!!!!!!!!!!!
nsurf9 21 hours ago (Edited)
You think this guy understands that, even with more than 50% of the, country in plandemic
lock-down, shutter/closed and/or bankrupt for a solid year, the "markets" have literally
doubled.
This just means that JPM like the other whores have taken their short positions and will
now do everything in their power to ensure that they cash out.
Corporations, especially those headquartered in Georgia, have come out against the
legislation signed by Governor Kemp. Republicans describe the bill as one that addresses
election integrity while Democrats call it a voter suppression law – "Jim Crow 2.0".
Coca-Cola and Delta were among
the first to make a point to virtue-signal after the governor signed the bill, only to be
exposed as taking part in the process and giving input into the legislation. Both were fine
with the law until the governor signed it and grievance activists did their thing. Coke soon
discovered that not all of its consumers think that companies should be making policy –
that 's the job of lawmakers- and now it is trying to clean up the mess it made for itself.
Churches have increasingly played a part in American politics and this is an escalation of
that trend. Evangelical churches have shown support for conservative and Republican candidates
while black churches get out the vote for Democrats. This threat of bringing a large-scale
boycott over state legislation is a hostile action against the corporation. It's political
theatre. Groups like Black Voters Matter, the New Georgia Project Action Fund (Stacey Abrams),
and the Georgia NAACP are pressuring companies to publicly voice their opposition and the
religious leaders are doing the bidding of these politically active groups.
When SB 241 and HB 531 were working through the legislative process, the groups put pressure
on Republican lawmakers and the governor to abandon the voting reform legislation. They also
demanded that donations to any lawmakers supporting the legislation be stopped. The Georgia
Chamber of Commerce tried to remain bipartisan while still voicing support for voting rights
but then caved and expressed "concern and opposition" to some provisions . At the time,
several large Georgia companies were targeted by activists, including Aflac, Coca-Cola,
Delta Airlines, Home Depot, Southern Company and UPS.
The Georgia Chamber of Commerce previously reiterated the importance of voting rights
without voicing opposition against any specific legislation. In a new statement to CNBC, the
Georgia Chamber said it has "expressed concern and opposition to provisions found in both HB
531 and SB 241 that restrict or diminish voter access" and "continues to engage in a
bipartisan manner with leaders of the General Assembly on bills that would impact voting
rights in our state."
Office Depot came out at the time and supported the Chamber's statement. The Election
Integrity Act of 2021, originally known as Georgia Senate Bill 202, is a Georgia law
overhauling elections in the state that was signed into effect by the governor and we know what
happened. Office Depot has not delivered for the activists as they demand so now the company
faces boycott drama. The
religious leaders are taking up where the activist groups left off.
African Methodist Episcopal Bishop Reginald Jackson said the company has remained "silent
and indifferent" to his efforts to rally opposition to the new state law pushed by
Republicans, as well as to similar efforts elsewhere.
" We just don't think we ought to let their indifference stand ," Jackson said.
The leader of all his denomination's churches in Georgia, Jackson had a meeting last week
with other Georgia-based executives to urge them to oppose the voting law, but said he's had
no contact with Home Depot, despite repeated efforts to reach the company.
Faith leaders at first were hesitant to jump into the boycott game. Now the political
atmosphere has changed and they are being vocal. Jackson focused on pressuring Coca-Cola first.
After that company went along to get along, before it realized its error, Jackson moved his
focus onto other companies.
"We believe that corporations have a corporate responsibility to their customers, who are
Black, white and brown, on the issue of voting ," Jackson said. "It doesn't make any sense at
all to keep giving dollars and buying products from people that do not support you."
He said faith leaders may call for boycotts of other companies in the future.
So, here we are with Home Depot in the spotlight. There are
four specific demands leveled at Home Depot in order to avoid further action from the
activists.
Rev. Lee May, the lead pastor of Transforming Faith Church, said the coalition is "fluid
in this boycott" but has four specifics requests of Home Depot: To speak out publicly and
specifically against SB 202; to speak out against any other restrictive voting provisions
under consideration in other states; to support federal legislation that expands voter access
and "also restricts the ability to suppress the vote;" and to support any efforts, including
investing in litigation, to stop SB 202 and other bills like it.
" Home Depot, we're calling on you. I'm speaking to you right now. We're ready to have a
conversation with you. You haven't been ready up to now, but our arms are wide open. We are
people of faith. People of grace, and we're ready to have this conversation, but we're very
clear those four things that we want to see accomplished ," May said.
The Rev. Timothy McDonald III, senior pastor of the First Iconium Baptist Church, warned
this was just the beginning.
"It's up to you whether or not, Home Depot, this boycott escalates to phase two, phase
three, phase four," McDonald said. "We're not on your property -- today. We're not blocking
your driveways -- today. We're not inside your store protesting -- today. This is just phase
one."
That sounds a lot like incitement, doesn't it? Governor Kemp is speaking out, he has had
enough. He held
a press conference to deliver his comments.
"First, the left came for baseball, and now they are coming for Georgia jobs," Kemp said,
referring to MLB's decision to move this year's All-Star Game from Atlanta over the new laws.
"This boycott of Home Depot – one of Georgia's largest employers – puts partisan
politics ahead of people's paychecks."
"The Georgians hardest hit by this destructive decision are the hourly workers just trying
to make ends meet during a global pandemic. I stand with Home Depot, and I stand with nearly
30,000 Georgians who work at the 90 Home Depot stores and 15 distribution centers across the
Peach State. I will not apologize for supporting both Georgia jobs and election integrity,"
he added.
"This insanity needs to stop. The people that are pushing this, that are profiting off of
it, like Stacey Abrams and others, are now trying to have it both ways," Kemp said. "There is
a political agenda here, and it all leads back to Washington, D.C."
The governor is right. The activists are in it to federalize elections, not to look out for
Georgians, who will lose jobs over these partisan actions. The law signed by Kemp increases
voting rights, it doesn't limit them .
The Financial Instability Hypothesis (FIH) has both empirical and theoretical aspects that
challenge the classic precepts of Smith and Walras, who implied that the economy can be best
understood by assuming that it is constantly an equilibrium-seeking and sustaining system. The
theoretical argument of the FIH emerges from the characterization of the economy as a
capitalist economy with extensive capital assets and a sophisticated financial system.
In spite of the complexity of financial relations, the key determinant of system behavior
remains the level of profits: the FIH incorporates a view in which aggregate demand determines
profits. Hence, aggregate profits equal aggregate investment plus the government deficit. The
FIH, therefore, considers the impact of debt on system behavior and also includes the manner in
which debt is validated.
Minsky identifies hedge, speculative, and Ponzi finance as distinct income-debt relations
for economic units. He asserts that if hedge financing dominates, then the economy may well be
an equilibrium-seeking and containing system: conversely, the greater the weight of speculative
and Ponzi finance, the greater the likelihood that the economy is a "deviation-amplifying"
system. Thus, the FIH suggests that over periods of prolonged prosperity, capitalist economies
tend to move from a financial structure dominated by hedge finance (stable) to a structure that
increasingly emphasizes speculative and Ponzi finance (unstable). The FIH is a model of a
capitalist economy that does not rely on exogenous shocks to generate business cycles of
varying severity: business cycles of history are compounded out of (i) the internal dynamics of
capitalist economies, and (ii) the system of interventions and regulations that are designed to
keep the economy operating within reasonable bounds.
"... much like the dot-com period, there is a broad subset of stocks (mostly in technology) that have become completely untethered, particularly since the summer of 2020, from business fundamentals like earnings and even sales -- driven higher only by euphoric market participants extrapolating from a past extraordinary trajectory of prices. ..."
"... A lot of today's US stock market has become what I call a "pure price-chasing bubble." Examination of the history of comparable pure price-chasing bubbles shows there has been a set of key causal factors that contributed to these rare (I have found nine in total) market events; the presence of most of these factors has usually been necessary for markets to reach the requisite escape velocity. ..."
"... To fuel the bubble further, there was a rapid expansion of bank money beginning three years before the market peak -- but the expansion of credit was even greater, owing to an explosion of margin credit (with implied annuaized interest rates sometimes reaching 100 percent) through an informal system utilizing postdated checks ..."
"... The US market certainly exhibits an exceptional record of price appreciation, with the S&P 500 having risen by almost 500 percent over more than a decade. In contrast to most other bubbles, however, it is notable that US economic growth over this period has been relatively anemic. ..."
"... Due to a sustained high rate of corporate equity purchases financed with debt, this overarching expansion of credit has also made its way into the last decade's bull market and steepened its price trajectory. ..."
"... The role of message boards and chat rooms -- with their millions of participants, all in instant real-time contact -- has created crowd dynamics in speculative stock market favorites at a pace without parallel in other pure price-chasing bubbles. ..."
"... a peak will be reached, a decline will follow, and the psychological dynamics in play on the way up will go into reverse and will accelerate the fall. ..."
"... Moreover, in the context of a grossly underestimated mass of corporate debt, history tells us the consequences of the bursting of the US stock market bubble should be another financial crisis and another recession ..."
According to Frank Veneroso, a broad subset of today's US stock market has become what he
calls a "pure price-chasing bubble." Examination of the history of comparable pure
price-chasing bubbles shows there has been a set of key causal factors that contributed to
these rare market events.
The most extreme such case was an over-the-counter market in Kuwait called the "Souk
al-Manakh." This exemplar of a pure price-chasing phenomenon may shed light -- albeit
unflattering -- on the current US equity market, Veneroso contends.
My simple solution is to turn the vacant malls into giant marijuana growing operations,and
huge meth labs,and use the revenue from the meth and weed sales to balance the Federal
budget..As an additional plus,you put the Mexican drug cartels out of business,which can't be
a bad thing,either
FurnitureFireSale 26 minutes ago
The smile on the side of the Prime trucks looks like a big wang (Bezos's?) saying "F-U,
take THIS!" to all the small businesses. Once you see it, you cannot unsee it.
Puppyteethofdeath 14 minutes ago
Turn them into homeless shelters.
744,000 Americans filed for 1st time unemployment last week.
Every week the numbers are the same.
no cents at all 5 minutes ago
Yet mall property owners and their ilk have equity prices in the stratosphere. Same with
cruise lines. A mystery. (Although doesn't take scooby doo to understand why)
That makes Jamie brilliant. play_arrow 5 play_arrow 1
zorrosgato 10 hours ago
"flush with savings"
HA!
Yen Cross 10 hours ago
Jack, ****, Dimon? Which one was it Z/H Google moderator?
I donate at Christmas.
Basil 20 minutes ago
whats gone wrong is the cancer of progressiveism. wokeism, social justice nonsense.
Gadbous 29 minutes ago
Don't you want to just slap these people?
MuleRider 18 minutes ago
You misspelled decapitate.
GrandTheftOtto 2 hours ago
"It was a year in which each of usfaced difficult personal challenges"
boundless hypocrisy...
Mr. Rude Dog 2 hours ago remove link
" Americans know that something has gone terribly wrong, and they blame this country's
leadership: the elite, the powerful, the decision makers - in government, in business and in
civic society," he wrote.
"This is completely appropriate, for who else should take the blame?"
Lets see if he projects the problem back on the citizens...Let's see what happens.
"But populism is not policy, and we cannot let it drive another round of poor planning
and bad leadership that will simply make our country's situation worse."
I knew the so called elites could not take the blame... You know populism always makes bad
decisions with the economy, our monetary system, our infrastructure and just managing our tax
money in general...Yes I knew Jamie could not take the blame..LOL.!!!!
QE4MeASAP 2 hours ago
So Dimon is giving the state of the union instead of Biden?
Budnacho 2 hours ago
Jamie Dimon....Friend of the Little Guy....
Tomsawyer2112 PREMIUM 11 hours ago
He doesn't believe a word of what he just said. But he knows that if he wants his bank to
continue to be an extension of the government and curry favor then he needs to tow the line.
I am sure he also has his eye on a future role as Fed Lead or US Treasurer but might be tough
since he's not a diversity candidate.
oknow 2 hours ago
Someone turn off his mike, dont need your sorry *** confession
Just confiscate his wealth and make him do 9 to 5 jobs for the rest of his life.
ChromeRobot 9 hours ago remove link
This guy is a rarity in the banking industry. He's a billionaire. Running a bank I was
often told in my early years in finance was foolproof. Everybody needs money and they have
it. Hard to fk up. Somehow this "titan" has gamed it to do really well doing something
incredibly easy. Positioning yourself to be a SIFI helps too! Too big to fail has it's
perks.
a drink before the war 10 hours ago
What Jamie is really saying without saying it is " I get paid in stock options however
since the pandemic JPM and other banks haven't been allowed to do stock buy back but come
June we get back to the NORMAL and with the FED printing money and giving it to us we going
to talk this stock WAY up no matter what because I got almost two years of stock options I
gotta get paid for!"
lay_arrow 2
archipusz 10 hours ago
If you want to get to the top, you must speak the party line narrative.
The truth is something different altogether.
Eddie Haskell 10 hours ago
If you want to be a state-approved oligarch you've gotta suck the right dickie. Good
job.
Detective Miller 38 minutes ago
"Jaimie Tells Bagholders To 'Buy Buy Buy!!!'"
Onthebeach6 38 minutes ago
The US is addicted to helicoptor money.
The world looks fine to an addict until the supply is cut off.
sbin 41 minutes ago
Off shore industry
Steal pension funds
Laundering drug money
Regulatory capture.
Jimmy going to lock himself in jail and forfeit his assets?
34k of jerkoff.
Nuk Soo Kow 2 hours ago
How magnanimous of Jamie to blame elitists and civic "leaders" for the structural problems
in America. It was the banksters that pushed NAFTA and helped China engineer it's currency
against the dollar, which led to massive outflows of productive capital. It was the banksters
via the use of financial legerdemain who engineered the collapse in 2008 (not to mention
every other banking panic and collapse prior to). It's high time to throw out this den of
vipers once and for all.
Nature_Boy_Wooooo 2 hours ago
He lost me at.....
We need more cheap immigrant labor...... housing is unaffordable for many.
No **** moron!......you suppressed our wages and increased demand for housing.
PT 10 hours ago remove link
I always consult the fox when I want to know about the state of the hen house.
QuiteShocking 10 hours ago
Economic boom?? Is really just trying to get back to where we were previously before the
pandemic hit with things opening back up etc... More people have been working from home so
different spending patterns are developing.. but could change... Supply chain chaos makes it
seem like shortages and inflation etc... It may only last through 2023?? but with Dems in
charge this is not a given with their anti business slant??
same2u 11 hours ago
UBI for the rich= stock market...
Hope Copy 3 hours ago (Edited)
Jamie knows that the core of Crypto is at the CIA and that the pseudo Republic has far to
much Fascist politics at the core .. There has been a competitive failure at most all levels
of the government in recent times with a 'winner take all' at the cost of keeping competitive
practices alive (not to mention kickbacks).. Of course China is laughing even though they
have a history of cutting corners (and outright fraud) in every economic sector.
Mario Landavoz 20 minutes ago
Banker. That's all ya need to know.
Just a Little Froth in the Market 40 minutes ago
But the CEO was very candid about China...
"China's leaders believe America is in decline... The Chinese see an America that is
losing ground in technology, infrastructure and education – a nation torn and
crippled . . . and a country unable to coordinate government policies (fiscal, monetary,
industrial, regulatory) in any coherent way to accomplish national goals
This is correct.
Joe A 55 minutes ago
He is just mocking and taking a piss at everybody. That America is such a mess is because
of people like him with his scorched earth robber baron rogue capitalism. But there is a way
to redeem yourselves. Just make all your assets available to the American people. And oh,
blow your own brain out.
Abi Normal 3 hours ago remove link
What else is he supposed to say? As long as things don't go bad for Jamie it's cool.
OrazioGentile 3 hours ago
The Banksters, after years of mismanagement, borderline fraud, and endless bailouts now
see that investments in unicorn startups, selling mindless BS to each other, and the quick
buck lead to a burned out husk called America?!? Now?!? Let all of them live in the great
paradise called the Cayman Islands that they helped build and see how far they get selling
"capital instruments" to each other. The last 20 years have taught most Americans that hard
work is meaningless to get ahead IMHO.
If we are to believe authorities the USA. added 916K jobs in March, and the official
unemployment rate is at 6% (note the word official; the current official U6 unemployment rate as
of March 2021 is 10.70%; so the real number is probably much higher than 10%)
Fudging data became as prominent as it was in the USSR. The neoliberal empire can't afford objective stats.
Notable quotes:
"... monthly data is collected over a brief timeframe - just a few days - and that the calculations are seasonally adjusted. ..."
"... Yes, at least half the sheep population think they are real. It's insane how dumb people are today. ..."
I spent the last 2 weeks digging into the numbers - especially timing of the surveys and
data collection. I get the fact that weekly claims don't reflect new hires. I also realize
that monthly data is collected over a brief timeframe - just a few days - and that the
calculations are seasonally adjusted.
But let's be reasonable - how is it possible to have 700K - 800K initial jobless claims
every week and create nearly a million new jobs? Does anyone really believe any of these numbers?
Globalistsaretrash
Yes, at least half the sheep population think they are real. It's insane how dumb people
are today.
...history shows that one messy unwind can easily spread. The U.S. Office of Financial
Research finds that the ten largest hedge funds were leveraged
far more heavily than the next 40 largest funds, as of June. And many family offices may
not be counted in these statistics at all, which mostly rely on disclosure forms they are able
to avoid.
There are some obvious responses for regulators, such as mandating disclosure of the
total return swaps that allowed Archegos to build big positions out of the public eye. But
there are no easy answers to the wider challenge of overseeing leverage within the broadest
financial complex when debt is almost free.
The system has held up under the latest strain, but this isn't a victory. Archegos means one
who leads the way. Regulators must do what they can to ensure as few as possible follow.
Swiss rival Credit Suisse expects a hit in the billions of dollars from Archegos, people
with knowledge of the matter have said, while Nomura Holdings Inc. has signaled it may lose as
much as $2 billion. Analysts at JPMorgan Chase & Co. estimate the Archegos blowup may cause
as much as $10 billion of combined losses for banks.
David Herro, chief investment officer of Harris Associates -- one of Credit Suisse's biggest
shareholders -- said on Bloomberg Television on Wednesday that the Archegos incident was a
"wake-up call" for Credit Suisse and should lead to sweeping changes to its culture and
oversight practices.
Shares of Credit Suisse tumbled 21% this week on concern over the size of its potential
Archegos hit. Deutsche Bank is down 2.9%.
Casino capitalism is the fertile ground for the most sleazy types of speculators. The stock
market has become a giant slot machine financed by 401K lemmings. The marks here are 401K
investors.
Excessive leverage is a immanent feature of the pre-collapse stage of Minsky cycle. So those
who argue that we are close to another crash get some additional confirmation due to this event.
The Masters of the Universe rediscovered the hidden areas of huge risk, and like in 2008 are
afraid but can't and do not want to anything.
TBTF such as Goldman and Morgan aid the most sleazy types as they bring outsized profits for
them. So this a catch 22 as Goldman and other TBFT controls SEC not the other way around.
It would be prudent to view banksters as a special type of mafia and treat accordingly and
prohibit for them serving in government. But this is impossible under neoliberal as financial
oligarchy has all political power.
The question is: Is there another fund that's larger, that's more leveraged with the same
characteristics that could prove to be a more systemic event? That's the major concern right
now." Wall Street's hottest trades such as pure-tech plays and high-flying tech/media like the
ones bet on by Hwang -- could be unwound. The Hwang blowup wakes up investors to the realization
that many parts of the market are overvalued and it's time to sell -- and quickly as yields are
going up. For the the FAANGS, the Tesla's out there -- the fundamentals don't support the stock.
So it would be logical to a large correction.
Notable quotes:
"... The idea that one firm can quietly amass outsized positions through the use of derivatives could set off another wave of criticism directed against loosely regulated firms that have the power to destabilize markets. ..."
Much of the leverage used by Hwang's Archegos Capital Management was provided by banks
including Nomura Holdings Inc. and Credit Suisse Group AG through swaps and so-called
contracts-for-difference, according to people with direct knowledge of the deals. It means
Archegos may never actually have owned most of the underlying securities -- if any at all.
While investors who own a stake of more than 5% in a U.S.-listed company usually have to
disclose their holdings and subsequent transactions, that's not the case with positions built
through the type of derivatives apparently used by Archegos. The products, which are transacted
off exchanges, allow managers like Hwang to amass exposure to publicly-traded companies without
having to declare it.
The swift unwinding of Archegos has reverberated across the globe, after banks such as
Goldman Sachs Group Inc. and Morgan Stanley forced Hwang's firm to sell billions of dollars in
investments accumulated through highly leveraged bets. The selloff roiled stocks from Baidu
Inc. to ViacomCBS Inc., and prompted Nomura and Credit Suisse to disclose that they face
potentially significant losses on their exposure.
One reason for the widening fallout is the borrowed funds that investors use to magnify
their bets: a margin call occurs when the market goes against a large, leveraged position,
forcing the hedge fund to deposit more cash or securities with its broker to cover any losses.
Archegos was probably required to deposit only a small percentage of the total value of
trades.
The chain of events set off by this massive unwinding is yet another reminder of the role
that hedge funds play in the global capital markets. A hedge fund short squeeze during a
Reddit-fueled frenzy for Gamestop Corp. and other shares earlier this year spurred a $6 billion
loss for Gabe Plotkin's Melvin Capital and sparked scrutiny from U.S. regulators and
politicians.
The idea that one firm can quietly amass outsized positions through the use of
derivatives could set off another wave of criticism directed against loosely regulated firms
that have the power to destabilize markets.
Bob 2 days ago This is another major reminder that the stock market is not as rational as we
want to believe. A small group of very large, leveraged funds can have far more impact on the
market than dozens or hundreds of well thought out and researched programs. Sigh. Take your
lumps and move on. Hasso 2 days ago 2008 - Hwang's Tiger Asia suffered losses from the
Volkswagen short, 2012 - Hwang's Tiger Asia paid $44M to settle insider trading charges, banned
2014- Hong Kong fined him $5.3M & banned him for four years. 2021 - And here we are
again.
Tyrone 2 days ago Gee, Credit Suisse involved in sleezy investments. Again. I'm shocked, just
shocked!
Manohar 2 days ago Banks haven't learnt anything yet...you know why? Because its other people's
money and the no one gets prosecuted when they are caught with hand in the cookie jar.
killer klown 2 days ago it's a sign that the market and it's regulators have learned
nothing.........to even pretend that a penny difference in assumed earnings versus actual
earnings using the GAAP accounting (which itself says it's not exact but generally accepted
accounting principles)moves a stock is in itself a joke, this situation of a BIG BLACK BOX
calls for the complete dismantle of the derivatives market which was created to lay off risk.
Bill Hawng should be FLAT Broke his possesions seized, The board of Credit Suisse and Nomura et
all should be unemployed as of 8:31 this morning. But they won't and it's only going to happen
again and again.
Amvet 2 days ago Market manipulators have a free rein in the USA. Are politicians also
involved? Reply 16 3 George 2 days ago Just amazing how some of the world's most sleazy
characters have access to cosmic sums of money and remain under the radar and legal(???). Then
nothing seems to happen except that loads of other folk get burned while they move on to the
next bright idea. Reply 13 1 Rick 2 days ago So clearly limiting those who can purchase these
to exclude amateur players has not been successful. Recklessness is not limited to amateurs.
Mr. H. 2 days ago In 2008 high finance was playing very high risk games with clients money at
the undefined edge between legal and illegal. A bunch of firms went away along with many
billions of dollars because a bunch of players were playing CYA. They came up with the term
"too big to fail" when they were picking winners and losers. "too big to fail" is is fetid
bovine excrement. The SEC, that is the administrative government, was not doing its job! There
were many questions about government employee competence to do those jobs. The government
should have let the market place pick the winners and losers, then the government should have
prosecuted everyone who failed to perform their fiduciary duty and set a major precedent about
high risk play with other people's money; keep it legal or go to jail and lose your shirt. That
is what should happen this time too! Noone 2 days ago Almost like something that is so
dangerous and risky to both the market AND the "investor" that retail traders ARE BANNED from
doing it should.. idk.. BE ILLEGAL FOR EVERYONE? Useless SEC. Do your job right.
Philip 2 days ago Ironic that Hedge Funds are the most unhedged game going.... Dan 1 day ago
The managers of these HFs lack morality, they steal from other companies because they believe
in their twisted little minds if they set up a system whereby they can trade in dark pools with
illegal naked shorting, counterfeit shares and stock manipulation under the radar -- it makes
the crime okay. All of this criminality is been done with the aid of supplementary leverage
ratio (SLR) If they can manage to bankrupt the company they short with Government SLR they end
up paying no tax and pocket the money GME/AMC and more for example.. Bingo the most audacious
robbery attempt in the history of the state. Oh boys did they fail, wow what a spectacular
failure. Now they have to deleverage destabilizing the entire market. Do these HF managers rank
their values differently to the moral code we all live by? Obviously they do! There's no doubt
they'll get lots of time to think about their behaviour when they're in the slammer. Each case
will have to be evaluated on its own merit at some stage of course. On the face of it, all
indications points to a tradeoff that benefits themselves at the disadvantaging of other. Sad
for them! I rest my case!
Jodes 1 day ago The spikes in shares like ROKU, BIDU, SHOP and many more have huge parabolic
spikes at the top accounting for the disfunctional market as we were seeing it at the top. They
had huge buy orders to artificially spike the prices keep them up and then experts come in
after and raise price targets and put a BUY rating on the stock. Then get retail to buy in and
then drop them like a rock. Greedy and dispicibale. All probably done for a huge bonus. While
retail suffers for their greed.
Vince 2 days ago More than 100 Trillion (with a T) are moving around the world in Derivatives
each and every day., some say closer to 200 Trillion! You figure it our when THAT bubble
bursts! Reply 2 1 SniffMopWho 2 days ago Interesting how these guys make millions and billions,
just by pressing keys on a keyboard.
... 2 days ago More sleaze trying to bring down the market by making risky bets with swaps and
derivatives, yet the regulators are caught asleep again. Just more proof of incompetence by
Biden and his hired idiots at the SEC.
TL;DR- Citadel and friends have shorted the treasury bond market to oblivion using the
repo market. Citadel owns a company called Palafox Trading and uses them to EXCLUSIVELY short
& trade treasury securities. Palafox manages one fund for Citadel - the Citadel Global
Fixed Income Master Fund LTD. Total assets over $123 BILLION and 80% are owned by offshore
investors in the Cayman Islands. Their reverse repo agreements are ENTIRELY rehypothecated
and they CANNOT pay off their own repo agreements until someone pays them, first. The ENTIRE
global financial economy is modeled after a fractional reserve system that is beginning to
experience THE MOTHER OF ALL MARGIN CALLS.
THIS is why the DTC and FICC are requiring an increase in SLR deposits. The madness has
officially come full circle.
tnorth 4 hours ago
another month of completely rigged 'markets'
mtl4 4 hours ago remove link
Music is still playing, make sure you have a chair when it stops
this_circus_is_no_fun 1 hour ago remove link
Consider these two points:
Treasuries are claimed to be backed by the "full faith and credit of the United
States".
In Q1, Treasuries suffer their biggest loss in 40 years.
y_arrow
Kreditanstalt 1 hour ago (Edited)
I've always wondered why seemingly contradictory and uncorrelated assets and asset classes
alternately "soar" and "plunge" on different days, usually in random conjunction with
others...
It seems so counterintuitively...MECHANICAL...or theory-driven, rather than rational
"investing".
A little known hedge fund that blew up last week has sent shockwaves through the world of investment banking.
Shares in Credit Suisse (
CSGN.SW
)
and Nomura (
8604.T
)
sunk over 10% on Monday after both warned they faced potentially billions in losses linked to hedge fund Archegos Capital.
Banks that worked with Archegos and lent it money to buy shares were scrambling to offload Archegos' investments after a handful
of risky bets made by the hedge fund went bad. The rush to exit these positions hit public shares prices, leaving banks with huge
losses.
Hedge funds typically borrow money from banks to invest, a process known as margin trading. This allows funds to leverage up the
cash they hold and increase their positions -- potentially earning far greater returns if their bets come good. However, it also
means hedge funds can theoretically lose more money than they hold in client funds.
If trades made on margin turn sour, banks will ask a client to put up more money as collateral to limit potential losses. This
process is known as a margin call.
Archegos faced margin calls on its positions last week but failed to provide extra cash. As a result, banks began selling off
stocks held on the hedge fund's behalf -- a fire sale known in the City as liquidating positions. The business press reported on
Friday that Goldman Sachs (
GS
)
and Morgan Stanley (
MS
)
were selling huge chunks of shares in businesses including ViacomCBS (
VIAC
),
Discovery (
DISCA
)
and Chinese stocks Baidu (
BIDU
)
and Tencent Music (
TME
).
The block sales are estimated to be worth around $20bn (£14.5bn),
according
to the Financial Times
.
Shares in Credit Suisse sunk after it warned of 'significant losses' linked to the blow up at Archegos Capital. Photo:
Fabrice Coffrini/AFP via Getty Images
A little known hedge fund that blew up last week has sent shockwaves through the world of investment banking.
Shares in Credit Suisse (
CSGN.SW
)
and Nomura (
8604.T
)
sunk over 10% on Monday after both warned they faced potentially billions in losses linked to hedge fund Archegos Capital.
Banks that worked with Archegos and lent it money to buy shares were scrambling to offload Archegos' investments after a
handful of risky bets made by the hedge fund went bad. The rush to exit these positions hit public shares prices, leaving
banks with huge losses.
Hedge funds typically borrow money from banks to invest, a process known as margin trading. This allows funds to leverage up
the cash they hold and increase their positions -- potentially earning far greater returns if their bets come good. However, it
also means hedge funds can theoretically lose more money than they hold in client funds.
If trades made on margin turn sour, banks will ask a client to put up more money as collateral to limit potential losses. This
process is known as a margin call.
Archegos faced margin calls on its positions last week but failed to provide extra cash. As a result, banks began selling off
stocks held on the hedge fund's behalf -- a fire sale known in the City as liquidating positions. The business press reported
on Friday that Goldman Sachs (
GS
)
and Morgan Stanley (
MS
)
were selling huge chunks of shares in businesses including ViacomCBS (
VIAC
),
Discovery (
DISCA
)
and Chinese stocks Baidu (
BIDU
)
and Tencent Music (
TME
).
The block sales are estimated to be worth around $20bn (£14.5bn),
according
to the Financial Times
.
"Things started going wrong for Archegos when shares of companies such as Viacom started to slide mid-last week," said Michael
Brown, a senior market analyst at Caxton Business. "It was at that point that margins were called, and couldn't be provided,
hence the block sales seen Friday."
A fire sale can have a negative impact on stock prices and shares in both ViacomCBS and Discovery sunk 27% on Friday. Banks
therefore risked making less back from the sales than they lent to clients to fund the investments.
Credit Suisse on Monday warned it was facing "highly significant" losses linked to Archegos that could be "material to our
first quarter results".
The Swiss lender didn't name Archegos but said: "A significant US-based hedge fund defaulted on margin calls made last week by
Credit Suisse and certain other banks."
Credit Suisse said it was "in the process" of selling shares held by Archegos. The bank said it was "premature" to estimate
how much it would likely lose from the crisis.
"We intend to provide an update on this matter in due course," Credit Suisse said.
Shares sunk 13.4% in Zurich.
"One would assume that, judging by the size of positions sold, the 'game is up' for Archegos," Brown said.
He said it was "unlikely" that Archegos would pose a systemic risk to the financial system. Neil Wilson, chief market analyst at
Markets.com, said the hedge fund "appears to have been too concentrated in a number of risky stocks."
A hedge fund blow up is relatively unusual and Archegos' undoing has raised concerns that other funds could find themselves in
similar positions.
"Block equity-trades stemming from margin-calls on Archegos will have sent the market's spidey senses a tingle," said Bill Blain,
a senior strategist at Shard Capital. "Who is next?"
Alex Harvey, a portfolio manager at Momentum, said: "We tend to find out after the event that other funds get caught up as
sometimes hedge funds may be crowded into similar trades."
"When we look at this and think about the GameStop saga and the decline in Tesla as two examples -- what we're seeing are more and
more pockets of very unusual trading activity in some stocks," he said. "You worry that this sort of frothy trading activity in
turn creates pockets of distress among investors and banks that leads to larger unwinds and losses for financials."
"... How convinced should anyone be when dismissing the message of metrics like these? To be sure, both the market and economy are in uncharted waters. It's possible -- perhaps likely -- that old standards don't apply when something as random as a virus is behind the stress. At the same time, many a portfolio has been squandered through complacency. Market veterans always warn of fortunes lost by investors who became seduced by talk of new rules and paradigms. ..."
"... At 35, the CAPE is at its highest since the early 2000s. ..."
"... Another indicator raising eyebrows is called Tobin's Q. The ratio -- which was developed in 1969 by Nobel Prize-winning economist James Tobin -- compares market value to the adjusted net worth of companies. It's showing a reading just shy of a peak reached in 2000. T ..."
"... the signal sent by the "Buffett Indicator," a ratio of the total market capitalization of U.S. stocks divided by gross domestic product. ..."
"... Still, it's hard to ignore the risks to underlying assumptions. While rock-bottom rates underpin many of the arguments, this year has shown that the Fed still is willing to let longer-term interest rates run higher. And betting on huge upside earnings surprises is risky too -- it's rare to see a 16% beat historically. Before last year, earnings had exceeded estimates by an average 3% a quarter since 2015. ..."
"... "This happens in every bubble," said Bill Callahan, an investment strategist at Schroders. "It's: 'Don't think about the traditional value metrics, we have a new one.' It's: 'Imagine if everyone did XYZ, how big this company could be.'" ..."
"... To Scott Knapp, chief market strategist of CUNA Mutual Group, abandoning standard valuation measures because the environment has changed places investors in "pretty sketchy territory." Talk of watershed moments rendering traditional metric irrelevant as a signal, he says. "That's usually an indication we're trying to justify something," he said. ..."
Shiller P/E. Tobin's Q. Buffett Indicator. Ignore them all?
It's 'usually an indication we're trying to justify something'
Everywhere you look, there's a valuation lens that makes stocks look frothy. Also everywhere you look is someone
saying don't worry about it.
The so-called
Buffett
Indicator
. Tobin's Q. The S&P 500's forward P/E. These and others show the market at stretched levels, sometimes
extremely so. Yet many market-watchers argue they can be ignored, because this time really is different. The
rationale? Everything from Federal Reserve largesse to vaccines promising a quick recovery.
How convinced should anyone be when dismissing the message of metrics like these? To be sure, both the market and
economy are in uncharted waters. It's possible -- perhaps likely -- that old standards don't apply when something as
random as a virus is behind the stress. At the same time, many a portfolio has been squandered through complacency.
Market veterans always warn of fortunes lost by investors who became seduced by talk of new rules and paradigms.
"Every time markets hit new highs, every time markets get frothy, there are always some talking heads that argue:
'It's different,'" said Don Calcagni, chief investment officer of Mercer
Advisors
.
"We just know from centuries of market history that that can't happen in perpetuity. It's just the delusion of
crowds, people get excited. We want to believe."
Source: Robert Shiller's website
Robert Shiller is no apologist. The Yale University professor is famous in investing circles for unpopular valuation
warnings that came true during the dot-com and housing bubbles. One tool on which he based the calls is his
cyclically adjusted price-earnings ratio that includes the last 10 years of earnings.
While it's flashing warnings again, not even Shiller is sure he buys it. At 35, the CAPE is at its highest since the
early 2000s. If that period of exuberance is excluded, it clocks in at its highest-ever reading. Yet in a recent
post
,
Shiller wrote that "with interest rates low and likely to stay there, equities will continue to look attractive,
particularly when compared to bonds."
Another indicator raising eyebrows is called Tobin's Q. The ratio -- which was
developed
in
1969 by Nobel Prize-winning economist James Tobin -- compares market value to the adjusted net worth of companies.
It's showing a reading just shy of a peak reached in 2000. To Ned Davis, it's a valuation chart worth being wary
about. Still, while the indicator is roughly 40% above its long-term trend, "there may be an upward bias on the ratio
from technological change in the economy," wrote the Wall Street veteran who founded his namesake firm.
Persuasive arguments also exist for discounting the signal sent by the "Buffett Indicator," a ratio of the total
market capitalization of U.S. stocks divided by gross domestic product. While it recently reached its highest-ever
reading above its long-term trend, the methodology fails to take into consideration that companies are more
profitable than they've ever been, according to Jeff Schulze, investment strategist at ClearBridge Investments.
"It's looked extended really for the past decade, yet you've had one of the best bull markets in U.S. history," he
said. "That's going to continue to be a metric that does not adequately capture the market's potential."
At Goldman Sachs Group Inc., strategists argue that however high P/Es are, the absence of significant leverage
outside the private sector or a late-cycle economic boom points to low risk of an imminent bubble burst. While people
are shoveling money into stocks at rates that have signaled exuberance in the past, risk appetite is rebounding after
a prolonged period of aversion, according to the strategists, who also cite low interest rates.
"Today is a very different situation -- I don't think we've got a broad bubble," Peter Oppenheimer, chief global
equity strategist at the firm, said in a recent interview on Bloomberg Television. "Given the level of real rates,
where they are, it's still likely to be broadly supportive for equities versus bonds."
Another rationale employed to dismiss certain valuation metrics is the earnings cycle. Corporate America is just
emerging from a recession, with profits forecast to stage a strong comeback. The strong outlook for profits is why
many investors are giving similarly stretched valuations the benefit of the doubt. Trading at 32 times reported
earnings, the S&P 500 looks quite expensive, but with income forecast to jump 24% to $173 a share this year, the
multiple drops to about 23.
The valuation case becomes more favorable should business leaders continue to blow past expectations. For instance,
if this year's earnings come in at 16% above analyst estimates, as they did for the previous quarter, that'd imply a
price-earnings ratio of less than 20. While that exceeds the five-year average of 18, Ed Yardeni is not troubled by
what he calls "the New Abnormal."
"Valuation multiples are likely to remain elevated around current elevated levels because fiscal and monetary
policies continue to flood the financial markets with so much free money," said the founder of Yardeni Research Inc.
He predicts the S&P 500 will finish the year at 4,300, about an 8% gain from current levels.
Still, it's hard to ignore the risks to underlying assumptions. While rock-bottom rates underpin many of the arguments, this year
has shown that the Fed still is willing to let longer-term interest rates run higher. And betting on huge upside earnings
surprises is risky too -- it's rare to see a 16% beat historically. Before last year, earnings had exceeded estimates by an
average 3% a quarter since 2015.
"This happens in every bubble," said Bill Callahan, an investment strategist at Schroders. "It's: 'Don't think about the
traditional value metrics, we have a new one.' It's: 'Imagine if everyone did XYZ, how big this company could be.'"
Returns of 2%
Valuations are never useful market-timing tools because expensive stocks can get more expensive, as was the case during the
Internet bubble. Yet viewed through a long-term lens, valuations do matter. That is, the more over-valued the market is, the
lower the future returns. According to a study by Bank of America strategists led by Savita Subramanian, things like
price-earnings ratios could explain 80% of the S&P 500's returns during the subsequent 10 years. The current valuation framework
implies an increase of just 2% a year over the next decade, their model shows.
To Scott Knapp, chief market strategist of CUNA Mutual Group, abandoning standard valuation measures because the environment has
changed places investors in "pretty sketchy territory." Talk of watershed moments rendering traditional metric irrelevant as a
signal, he says.
"That's usually an indication we're trying to justify something," he said.
"In a community where the primary concern is making money, one of the necessary rules is to
live and let live. To speak out against madness may be to ruin those who have succumbed to it.
So the wise in Wall Street are nearly always silent. The foolish thus have the field to
themselves."
John Kenneth Galbraith, The Great Crash of 1929
"Foolishness is a more dangerous enemy of the good than malice. One may protest against
evil; it can be exposed and, if need be, prevented by use of force. Evil always carries within
itself the germ of its own subversion in that it leaves behind in human beings at least a sense
of unease.
In conversation with them, one virtually feels that one is dealing not at all with a person,
but with slogans, catchwords and the like that have taken possession of them. They are under a
spell, blinded, misused, and abused in their very being."
Dietrich Bonhoeffer, Prisoner for God: Letters and Papers from Prison
"The ideal subject of totalitarian rule is not the convinced Nazi or the dedicated
communist, but people for whom the distinction between fact and fiction, true and false, no
longer exists."
Hannah Arendt, The Origins of Totalitarianism
"When we trade the effort of doubt and debate for the ease of blind faith, we become
gullible and exposed, passive and irresponsible observers of our own lives. Worse still, we
leave ourselves wide open to those who profit by influencing our behavior, our thinking, and
our choices. At that moment, our agency in our own lives is in jeopardy."
Margaret Heffernan
Today was a general wash and rinse in the markets.
Wax on, wax off.
If you look at the charts you will see the deep plunges in the early trading hours in stocks
and the metals, especially silver.
Simply put, it is called running the stops.
This is not 'the government' doing this.
These are the monstrous financial entities that we have allowed lax regulation and years of
propagandizing to create, in the biggest Banks and hedge funds.
Most will run back to the familiar sources of their ideological addiction, the so-called
'news sites' that thrive on the internet and alternative radio funded by the oligarchs.
If you are one of those who cannot wait to run back to your familiar ideological watering
hole to relieve the tension of thought, you might just be one of the willfully blind and
lost.
Truth is more palatable to the sick at heart when it has been twisted out of shape.
The good news perhaps is that a cleaning out like this often proceeds a resumption of a move
higher.
First they kick off the riff raff. Oh, certainly that does not include you, but those
others, right?
Or not. It is not easy to think like a criminal when you are not privy to the same jealously
guarded information and perverse perspective on life.
On the lighter side I have experienced no side effects from the first dose of the
Coronavirus vaccine which I had the other day.
Let's see if the second shot has the same results.
The whole experience reminded me of 'Sabin Oral Sunday' back in 1960. I don't recall any
anti-vaxxer or ideologically driven whack-a-doodlism back then, but I was too young to
care. And polio shots were no fun. But it beat doing time in an iron lung.
How many people are really out of work? The answer is surprisingly difficult to ascertain.
For reasons that are likely ideological at least in part, official unemployment figures greatly
under-report the true number of people lacking necessary full-time work.
That the "reserve army of labor" is quite large goes a long way toward explaining the
persistence of stagnant wages in an era of increasing productivity.
How large? Across North America, Europe and Australia, the real unemployment rate is
approximately double the "official" unemployment rate.
The "official" unemployment rate in the United States, for example, was 5.5 percent for
February 2015. That is the figure that is widely reported. But the U.S. Bureau of Labor
Statistics keeps track of various other unemployment rates, the most pertinent being its "U-6"
figure. The U-6 unemployment rate includes all who are counted as unemployed in the "official"
rate, plus discouraged workers, the total of those employed part time but not able to secure
full-time work and all persons marginally attached to the labor force (those who wish to work
but have given up). The actual U.S. unemployment rate for February 2015, therefore, is 11 percent .
Canada makes it much more difficult to know its
real unemployment rate. The official Canadian
unemployment rate for February was 6.8 percent, a slight increase from January that
Statistics Canada attributes to "more people search[ing] for work." The official measurement in
Canada, as in the U.S., European Union and Australia, mirrors the official standard for
measuring employment defined by the International Labour Organization -- those not working at
all and who are "actively looking for work." (The ILO is an agency of the United Nations.)
Statistics Canada's closest measure toward counting full unemployment is its R8 statistic,
but the R8 counts people in part-time work, including those wanting full-time work, as
"full-time equivalents," thus underestimating the number of under-employed by hundreds of
thousands,
according to an analysis by The Globe and Mail . There are further hundreds of
thousands not counted because they do not meet the criteria for "looking for work." Thus
The Globe and Mail analysis estimates Canada's real unemployment rate for 2012 was
14.2 percent rather than the official 7.2 percent. Thus Canada's true current unemployment rate
today is likely about 14 percent.
Everywhere you look, more are out of work
The gap is nearly as large in Europe as in North America. The official European Union
unemployment rate was 9.8
percent in January 2015 . The European Union's Eurostat service requires some digging to
find out the actual unemployment rate, requiring adding up different parameters. Under-employed
workers and discouraged workers comprise four percent of the E.U. workforce each, and if we add
the one percent of those seeking work but not immediately available, that pushes the
actual unemployment rate to about 19 percent.
The same pattern holds for Australia. The Australia Bureau of Statistics revealed that its
measure of "extended labour force under-utilisation" -- this includes "discouraged" jobseekers,
the "underemployed" and those who want to start work within a month, but cannot begin
immediately -- was
13.1 percent in August 2012 (the latest for which I can find), in contrast to the
"official," and far more widely reported, unemployment rate of five percent at the time.
Concomitant with these sobering statistics is the length of time people are out of work. In
the European Union, for example, the long-term unemployment rate -- defined as the number of
people out of work for at least 12 months --
doubled from 2008 to 2013 . The number of U.S. workers unemployed for six months or longer
more than tripled from
2007 to 2013.
Thanks to the specter of chronic high unemployment, and capitalists' ability to transfer
jobs overseas as "free trade" rules become more draconian, it comes as little surprise that the
share of gross domestic income going to wages has declined steadily. In the U.S., the share has
declined from 51.5 percent in 1970 to about 42 percent. But even that decline likely
understates the amount of compensation going to working people because almost all gains in
recent decades has gone to the top one percent.
The increased ability of capital to move at will around the world has done much to
exacerbate these trends. The desire of capitalists to depress wages to buoy profitability is a
driving force behind their push for governments to adopt "free trade" deals that accelerate the
movement of production to low-wage, regulation-free countries. On a global basis, those with
steady employment are actually a minority of the world's workers.
Using International Labour Organization figures as a starting point, professors John Bellamy
Foster and Robert McChesney calculate that the "global reserve army of labor" -- workers who
are underemployed, unemployed or "vulnerably employed" (including informal workers) -- totals
2.4 billion. In contrast, the world's wage workers total 1.4 billion -- far less! Writing in
their book The Endless
Crisis: How Monopoly-Finance Capital Produces Stagnation and Upheaval from the USA to
China , they write:
"It is the existence of a reserve army that in its maximum extent is more than 70 percent
larger than the active labor army that serves to restrain wages globally, and particularly in
poorer countries. Indeed, most of this reserve army is located in the underdeveloped
countries of the world, though its growth can be seen today in the rich countries as well."
[page 145]
The earliest countries that adopted capitalism could "export" their "excess" population
though mass emigration. From 1820 to 1915, Professors Foster and McChesney write, more than 50
million people left Europe for the "new world." But there are no longer such places for
developing countries to send the people for whom capitalism at home can not supply employment.
Not even a seven percent growth rate for 50 years across the entire global South could absorb
more than a third of the peasantry leaving the countryside for cities, they write. Such a
sustained growth rate is extremely unlikely.
As with the growing environmental crisis, these mounting economic problems are functions of
the need for ceaseless growth. Once again, infinite growth is not possible on a finite planet,
especially one that is approaching its limits. Worse, to keep the system functioning at all,
the planned
obsolescence of consumer products necessary to continually stimulate household spending
accelerates the exploitation of natural resources at unsustainable rates and all this
unnecessary consumption produces pollution increasingly stressing the environment.
Humanity is currently consuming the equivalent of one and a
half earths , according to the non-profit group Global Footprint Network. A separate report
by WWF–World Wide Fund For Nature in collaboration with the Zoological Society of London
and Global Footprint Network, calculates that the Middle East/Central Asia, Asia-Pacific, North
America and European Union regions are each consuming about double their
regional biocapacity.
We have only one Earth. And that one Earth is in the grips of a system that takes at a pace
that, unless reversed, will leave it a wrecked hulk while throwing ever more people into
poverty and immiseration. That this can go on indefinitely is the biggest fantasy.
The EUP is cutting its own throat trying to bully China. I see the move was made as soon
as Blinken arrived and began spreading lies about both Russia and China. I know China and
Russia would like these rogue nations to uphold their honor by obeying the UN Charter, but it
seems too many have caught the Outlaw US Empire's disease and now want to return to their
Colonial ways. If the EUP ends up trashing the Comprehensive Agreement on Investment (CAI)
with China, many individual European nations are going to be very angry. China won't mind if
that's what the EUP does as is explained here :
"After China announced sanctions on 10 individuals and four entities from the EU as a
countermove to EU's unilateral sanctions against China, some people from the EU reacted
strongly, claiming China's countermeasures were "unacceptable." The European Parliament
canceled a meeting on Tuesday to discuss the Comprehensive Agreement on Investment (CAI) with
China. Some members of the European Parliament warned that the lifting of Chinese sanctions
should be a condition to promote talks on CAI. Voices that support to block the agreement in
an attempt to punish China have been hyped by some anti-China forces.
"Yet those forces should be told that the CAI between China and the EU is mutually
beneficial, rather than a gift from the EU to China. If the European Parliament wants to
obstruct the deal, taking it as a bargaining chip in interactions with China, it should first
reach a consensus among European countries. If they all agree, let's just take it as
negotiations between China and the EU never took place last year. But don't blackmail China
with the case. China despises such ugly deeds."
China's saying essentially that it will forego the benefits of trade if it isn't properly
respected and doesn't care if the EU's dire economic condition worsens because it can't stand
up for itself in the face of the world's #1 Bully, which is exactly the same line Russia has
taken.
It is not just Jens Quisling, half (or more) of the European political elite are USA
proxies.
Take for example the European green parties.
I am pretty sure that the Dutch green party is at its core a NATO/military intelligence
operation. It was created as a merger of three parties, all of whom had a distinct pacifist
and socialist signature. The new party, GroenLinks ("GreenLeft") has forgotten all of that
and has limited itself to churning out Big Climate slogans. The party leader is an obviously
hollow puppet in the image of Justin Trudeau. His opinions are handed to him by advisors in
the shade.
A few years ago, an MP for GroenLinks, Mariko Peters was enthousiastically
promoting more military missions in Afghanistan. She was also a board member of the
"Atlantische Commissie", the local Dutch chapter of the Atlantic Treaty Organisation
(the USA chapter is the more well-known Atlantic Council). If you study her antics and
associations more closely, it is pretty obvious that there is nothing green or left about
this lady and that she is an obvious atlanticist diplomat/spy type.
Currently, there are no political parties in the Netherlands that are critical of NATO.
This used to be very
different not even a very long time ago.
What the article does not mention is the association, reputedly for a six-figure salary)
of former Grüne luminary Joschka Fisher to the Nabucco pipeline project (competing with
ns2). Fischer is also a member of the council on foreign relations and a founding member even
of the European chapter ECFR.
Absurd NFT PRices Expose a Global Financial House of Cards
BY SKWEALTHACADEMY
FRIDAY, MAR 26, 2021 - 5:59
The
insanity of absurd NFT prices reveals the fraud of the global currency system. The pricing for assets worldwide has gone
insane at a time when the vast majority of the world's population became poorer, not wealthier, over the past 12 months due
to the global economic lockdowns. As an example, there was an article in the Philadelphia Inquirer the other day of
a
cassette tape of hip hop icon Nas's Illmatic album selling for $13,999
. Not a CD, but a cassette tape. A rectangular
piece of cardboard, known as an NBA trading card, for star
Luka
Doncic's rookie trading card, recently auctioned for $4.6M.
Luka Doncic is not a star that played in 1925, and for this
reason, his rookie card is worth so much. Luka Doncic entered the NBA in the 2018-19 season, less than three years ago.
Nostalgic or collector items are simply selling for insane price because, in my opinion, wealthy people have captured so
much of the world's wealth through a global currency system designed and engineered to produce this end result, that they
have no better use for their money than to pay $14,000 for a music item that the vast majority of people do not even have
the necessary hardware to actually play and to pay more than $4.5M for a piece of cardboard. Anyone that truly understands
the difference between a sound and an unsound monetary system realizes that the likelihood, under a sound monetary system,
of people paying exorbitant prices for the types of assets and NFTs described above would be a fraction of the probability
at which they are occurring today.
Banksy, a
UK-based street artist infamous for mocking the very wealthy people that pay millions for his artwork, even titling a piece
"Morons" which depicted an art auction with a framed picture of the words "I can't believe you morons actually buy this
shit". Instead of being offended by the artist's mockery, someone paid nearly 44,000 pounds for it and it recently sold
for nearly 10 times the original purchase price when the piece was destroyed and the act of destruction was turned into an
NFT. By the way Banksy also sold a very simple drawing of a girl with a red balloon that was mounted inside a frame in
which he had hidden a shredder. After it sold for $1.4M, Banksy remotely activated the hidden shredder and shredded his
artwork into thin strips as perhaps "revenge" against the idiocy of narcissistic, wealthy art collectors that can't find
any better use of their money than purchasing stencil created art for which no rational person would ever pay $1.4M. To
demonstrate the idiocy of the art world, Sotheby's immediately coined the shredding of the art piece as "the first work in
history ever created during a live auction", which art collectors worldwide seemed to accept, and thereby increased the
value of the destroyed piece of art to perhaps as high as double the original auction price at the current time and
avoiding a more rational valuation for the art piece to near zero.
I once read
a book called the $12M Stuffed Shark, in which the author revealed that US hedge fund manager Steve Cohen paid $12M to an
artist to kill a shark and put it in a vat of plexiglass sealed formaldehyde that he could display in the foyer of his
house and basically concluded, after a careful introspection into the art world, that pieces of art like pyramids built
from tiny Godiva chocolates and stainless-steel colored balloon animals
($58M
or more)
would be priced at whatever price dealers could convince the dumbest rich person it was worth. Certainly this
conclusion seemed to be supported when someone purchased an
"art
installation" of a banana taped to the wall with duct tape at a Miami Beach art gallery for $120,000 at the end of 2019
.
When people conclude that the best use for $5M or $58M is to buy a piece of cardboard or a steel balloon animal during a
period in which Rome is burning (i.e. exploding homelessness numbers in Los Angeles nearing 70,000 as evidenced
here
and
here
),
either this is a sign of the fraud of the monetary system, the decline of civilization, or both. If you have ever lived in
Los Angeles, as I have, and watch the video referenced in the second link, you will find it astonishing that massive
homeless encampments have sprung up throughout Los Angeles in areas that prior to recent years, had no homelessness.
(depending on the social media platform you may be watching this on, the soaring prices for which art that I consider to be
the lowest form of art that many do not even consider as art is selling for such absurd prices, including NFTs that I will
soon discuss, is certainly reflective of the rapid decline of civilization.
This rapid
decline of civilization is also reflected in the fact that giant titans of the tech world and social media platforms
continue to promote and push the most morally reprehensible content to the top positions of success on their platforms.
When popular YouTube Logan Paul visited the "suicide forest" in Japan and found a dead body hanging from the tree, he
filmed it and mocked the dead person and YouTube quickly promoted his video as one of their top trending videos on their
entire platform for 24 hours, until Logan Paul, not YouTube executives, deleted the video due to the outrage it provoked.
Another popular YouTuber, David Dobrik, has had many of his reprehensible videos monetize bullying and belittling of
others, often promoted on YouTube among the top trending videos. Recently Dobrik came under fire for allegedly monetizing a
video of an actual rape on his channel, and he was roundly mocked when his initial apology consisted of trying to blame the
rape victim, who was allegedly underage and too drunk to consent to sex. In his "apology", Dobrik stated he always gains
consent for his videos, but sometimes people he victimizes consent at first but then change their minds later, and that is
why it appears in many of his videos that he is monetizing morally reprehensible behavior. In any event, YouTube executives
allegedly allowed such morally and cowardly behavior to be monetized to massive sums of income for such YouTubers and seem
to be more focused on demonetizing anyone that challenges a narrative, true or false, forwarded by the oligarchs.
And as
ludicrous as are the prices paid for some of the assets I've mentioned above, the level of insanity paid for NFTs, in my
opinion, are at an even exponentially higher level. For those of you that may not know what are NFTs, Non-Fungible Tokens
are unique blockchain-based digital assets that represent an increasing number of commodities, from art and real estate to
collectibles like sports trading cards. One platform, Original Protocol, recently auctioned off the world's first NFT music
album by American DJ 3LAU. Collectively, the artist's fanbase
paid
out more than $11 million
for 33 NFTs contained on 3LAU's album Ultraviolet. In this case, since musicians are
routinely ripped off by giant record labels and often have such suffocating, unfair contracts that make it near impossible
to earn any significant income from album releases, the digitization of music in the form of NFTs that allow musicians to
control their income is a wonderful aspect of the new digital economy of NFTs.
The
Non-Fungibility of NFTs and Most Cryptocurrencies Disqualify Them for Use in Financial Derivative Currency Swaps
NFTs sell
digital representations of items, including some that used to be represented in the physical world, like trading cards and
pieces of art. As is the case in the fine art world, an NFT's price is the highest price you can convince someone to pay
for it, a pool of clients that often overlaps with the over indulgent, narcissistic people that comprise the bidders for
modern art pieces that sell for millions of dollars. Perhaps the most amazing quality of NFTs is that they actually have a
more meaningful value than any cryptocurrency not backed by any type of hard asset. For example, bitcoin is a digital
asset, but one would be hard pressed to describe its intrinsic value. One cannot say its fungibility is its price because
its price is denominated in fiat currencies with intrinsic values of near zero. Furthermore, for those that constantly and
very wrongly argue that non hard-asset backed cryptocurrencies are sound money, if bankers truly believed that bitcoin even
remotely qualified as sound money, they would have zero problem offering currency swap derivative contracts between any
fiat currency and bitcoin.
Yet, there
is not a single corporation in the entire world that has a currency swap that hedges their corporate cash treasury holdings
with bitcoin. You can never have any type of financial contract without unlimited risk if it is denominated in bitcoin in
which both parties realistically have no idea of the price range of that currency for the maturity of that contract. No
rational party will lock themselves into a contract in which a currency presents unlimited risk to them. The simple
understanding of why there are no derivative currency swaps or hedging contracts denominated in bitcoin should easily
explain to any rational person the very reason why BTC is not considered as sound money by a single banker in the entire
world. On the contrary, even as volatile in price as gold and silver may be, gold and silver mining companies routinely
hedge their inventory risk and their revenue risk of yet-to-be-mined gold and silver ounces by establishing open positions
of gold and silver futures contracts years into the future.
You can't
argue that BTC's intrinsic value is the block of the blockchain that records the transaction, because whether that block is
used to record an NFT, BTC, or ownership of real estate, a photo or song, the price represented by that block could
possibly vary from just a few dollars to several million dollars. So the blockchain has no intrinsic value either. However,
with NFTs, its value, is more uniquely determinable than the block upon which a bitcoin transaction is stored that records
the price of bitcoin, because that value is simply the highest price willing to be paid by all available bidders at any
given time. If there are no available bidders willing to bid on a particular NFT for weeks or perhaps months on end, then
one can assume the price of that NFT, even if the last paid price was $100,000, is likely zero. But even if there is one
available bidder for that NFT at a price of $1,000,000 then the market price of that NFT is $1M. Though one may state that
the bidding mechanism is much more controlled in BTC markets and that BTC could never be priced at zero or $1M per BTC in
such a cavalier manner that mimics the pricing of NFTs, the similarities between the pricing mechanisms based upon lack of
fungibility should not be ignored when considering the inherent risk imbedded in the price of BTC in its near $60,000 per
coin current price. You will either understand this risk and behave accordingly, or ignore this risk and likely expose
yourself to strong downside risk in the future at some point that should be expected but will remain unexpected to those
that cannot, or will not, accept this existing risk.
The five
biggest whales that own BTC in order from top to bottom,
are
believed to be as follows:
(1) The collective of institutions/people called Satoshi Nakamoto; (2) The FBI; (3) The
Winklevoss Twins; (4) Micree Zhan; and (5) Jihan Wu. Other notable owners among the top 10 BTC whales are Huobi, Tim Draper
and the North Korean State. In 2017, Bloomberg reported that only 1,000 people owned 40% of all BTC in the entire world.
Given that in the past two years, it has been reported that the top whales had been cornering the BTC market and increasing
their market share, it would not be surprising if they had increased their market share to 50% or perhaps even higher by
2021. In any event, this translates into 0.00012658% of the world's population likely controlling majority ownership of
BTC. I don't know of any world in which such a statistic does not translate into enormous risk.
Unanswered
Questions
But
fungibility is what reveals why cryptocurrencies like BTC and NFTs cannot ever qualify as sound money. For those that don't
understand why sound money needs to be a fungible asset, take gold for example. Fungibility essentially means that money
should never vary in its qualitative properties but only its quantitative properties. All gold has electroconductivity
properties no matter its form. Electroconductivity is an intrinsic quality of gold. Because all purified four nine gold has
the same density, the same volume will always be measured by the exact same weight in grams, again another fungible quality
of gold. However, depending on how paper gold futures markets are being manipulated and the date, that same gram of gold
will vary wildly in fiat currency price. Fiat currency price, thus can never be the quantitative property used to value
gold. Weight is the constant that should be used for gold's value when it is to be used as sound money, because this
quantitative property is always unwavering, always constant no matter if one is using gold as money in Moscow, Capetown,
Montevideo, Santiago, Montreal, Phoenix, Miami, Mogadishu, Kiev, Paris, Heidelberg, Reykjavik, Chiangmai, or Seoul.
What
quantitative property of bitcoin that is consistent and always the same across all uses? This is a question without an
answer. For this same reason, NFTs could never serve as sound money either. No matter the latest fiat currency price paid
for a Banksy "Morons" drawing set on fire, how can one determine the exchange rate for this NFT and an NFT representing a
Mark Cuban tweet. Should the Banksy NFT be priced 10 million times higher than a Mark Cuban tweet NFT? Is an NBA TopShot
NFT worth 1/1000 the price of a Banksy burning piece of art NFT? And even though NFTs have more uniqueness than say, a
satoshi of BTC, because price assigned to that uniqueness is entirely subjective, the uniqueness leaves it no more fit to
use as sound money than a cryptocurrency that has no backing of a hard asset. Miami-based art collector Pablo Rodriguez-Fraile
proved the absurd pricing mechanism for NFT when he recently sold an NFT that he acquired for $66,666 in October,
a
10-second computer-generated video clip of a slogan-covered giant Donald Trump created by digital artist Beeple
, for
mor than 100 times his original cost at $6.6M.
The last
point of irony in the BTC is the solution to the unsound global fiat currency system narrative is that many HODLers of BTC
are well aware of the oligarch's use of their power consolidation strategy of (1) Create a crisis; (2) Present the solution
to the artificially created crisis; and (3) Implement the solution to consolidate power, yet will never give any type of
consideration to the possibility of how perfectly the creation of BTC, in response to the 2008 global financial crisis,
fits this exact historical narrative that oligarchs have repeatedly implemented, instead choosing to believe that BTC is
the special unique exception to this oft-deployed strategy.
This
despite, three US employees of the Central Bank, Galina Hale, Marianna Kudlyak, and Patrick Shultz, and one US university
professor, Arvind Krishnamurthy, admitting that the premise I presented to my social media followers in December of 2017,
when BTC hit $20,000, that the introduction of the US bitcoin futures market was going to be used to slash the BTC price
drastically, essentially writing the premise for the referenced US Central Banker paper five months before it was written.
In that paper, titled "How Futures Changed Bitcoin Prices", the four authors basically echoed my premise, and stated,
"We suggest
that the rapid rise of the price of bitcoin and its decline following issuance of futures on the CME is consistent with
pricing dynamics suggested elsewhere in financial theory and with previously observed trading behavior. Namely, optimists
bid up the price before financial instruments are available to short the market (Fostel and Geanakoplos 2012). Once
derivatives markets become sufficiently deep, short-selling pressure from pessimists leads to a sharp decline in value.
While we understand some of the factors that play a role in determining the long-run price of bitcoin, our understanding of
the transactional benefits of bitcoin is too imprecise to quantify this long-run price. But as speculative dynamics
disappear from the bitcoin market, the transactional benefits are likely to be the factor that will drive valuation."
While they
did not name the players in the BTC futures markets that drove BTC prices downward from $20,000 to $3,000 in 2018, the
implication is that Central Bankers were involved in this downward spiral. And if Central Bankers were involved in this
downward spiral, the downward price spiral would of course, been far easier to execute, if Central Bankers were also among
the members of the collective that constitutes the largest BTC whale, Satoshi Nakamoto. Even though these dots, though
purely speculative, are clearly possible, most every BTC HODLer that is confident in the achievement of end-year $300,000
BTC prices or higher, will never consider this possibility, even for a nanosecond, despite heavy suggestions of three US
Central Bank employees that Central Bankers were involved in the 2018 BTC price crash. But if one did, as is the rational
and logical thing to do, then one would have far greater difficulties distinguishing the mechanisms that set the price for
NFTs and BTC. And as the introduction of the first BTC ETFs seem to be on the near horizon now, one would be smart to heed
the lessons learned after trading of BTC futures was introduced at the end of 2017. Subscribe to my
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Listen to this article 6 minutes 00:00 / 06:06 1x Earnings, valuation and rampant speculation have all played a role in the extraordinary bull market that began a year ago this week. The latest combination of the three has a troubling reliance on the speculative element. A broad framework for thinking about stocks can be derived from the late economist Hyman Minsky's three stages of debt. In the first stage, borrowers take on only what they can afford to repay in full from their earnings by the time the debt matures; a standard mortgage works like this. Earnings, valuation and rampant speculation have all played a role in the extraordinary bull market that began a year ago this week. The latest combination of the three has a troubling reliance on the speculative element. A broad framework for thinking about stocks can be derived from the late economist Hyman Minsky's three stages of debt. In the first stage, borrowers take on only what they can afford to repay in full from their earnings by the time the debt matures; a standard mortgage works like this. A broad framework for thinking about stocks can be derived from the late economist Hyman Minsky's three stages of debt. In the first stage, borrowers take on only what they can afford to repay in full from their earnings by the time the debt matures; a standard mortgage works like this. A broad framework for thinking about stocks can be derived from the late economist Hyman Minsky's three stages of debt. In the first stage, borrowers take on only what they can afford to repay in full from their earnings by the time the debt matures; a standard mortgage works like this. U.S. 10-year Treasury yield Source: Tullett Prebon As of March 24 % Pre-pandemic peak of S&P 500 2020 '21 0.25 0.50 0.75 1.00 1.25 1.50 1.75 2.00 S&P 500 forward price/earnings ratio Source: Refinitiv Note: Weekly data S&P 500 peak 2020 '21 12 14 16 18 20 22 24 The parallel in the stock market is stocks going up when earnings -- or rather the expectation of earnings, since the market looks ahead -- go up. There is a risk of course, just as there is with debt: The earnings might not appear, and the stock goes back down. But earnings offer the least risky form of gains, and one that we should welcome as obviously justified. From the low in the summer, 2020 earnings forecasts jumped more than 10%, and expectations for this year rose more than 8%. Stocks responded. In Minsky's second stage, borrowers plan only to repay the interest, and refinance when the main debt is due to be repaid; much company debt works like this. It is taken out with a plan to roll it over indefinitely. Interest rates matter a lot: If they go down when the company needs to refinance, it will pay less. The equity parallel is to gains in valuation due to lower long-term rates. As with corporate debt, this is entirely justified and sustainable so long as rates stay low, because future earnings are now more appealing. The danger is that rates rise, in which case the stock might be hit no matter how earnings pan out. A big chunk of the gains in stocks in the past year came from the sharply lower rates in the first response to the pandemic when the Federal Reserve flooded the system with money. Price-to-forward-earnings multiples soared. From the S&P 500's low on March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings 12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the 10-year Treasury, already down sharply from mid-February's high, fell further as stocks rebounded. In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the The parallel in the stock market is stocks going up when earnings -- or rather the expectation of earnings, since the market looks ahead -- go up. There is a risk of course, just as there is with debt: The earnings might not appear, and the stock goes back down. But earnings offer the least risky form of gains, and one that we should welcome as obviously justified. From the low in the summer, 2020 earnings forecasts jumped more than 10%, and expectations for this year rose more than 8%. Stocks responded. In Minsky's second stage, borrowers plan only to repay the interest, and refinance when the main debt is due to be repaid; much company debt works like this. It is taken out with a plan to roll it over indefinitely. Interest rates matter a lot: If they go down when the company needs to refinance, it will pay less. The equity parallel is to gains in valuation due to lower long-term rates. As with corporate debt, this is entirely justified and sustainable so long as rates stay low, because future earnings are now more appealing. The danger is that rates rise, in which case the stock might be hit no matter how earnings pan out. A big chunk of the gains in stocks in the past year came from the sharply lower rates in the first response to the pandemic when the Federal Reserve flooded the system with money. Price-to-forward-earnings multiples soared. From the S&P 500's low on March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings 12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the 10-year Treasury, already down sharply from mid-February's high, fell further as stocks rebounded. In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the In Minsky's second stage, borrowers plan only to repay the interest, and refinance when the main debt is due to be repaid; much company debt works like this. It is taken out with a plan to roll it over indefinitely. Interest rates matter a lot: If they go down when the company needs to refinance, it will pay less. The equity parallel is to gains in valuation due to lower long-term rates. As with corporate debt, this is entirely justified and sustainable so long as rates stay low, because future earnings are now more appealing. The danger is that rates rise, in which case the stock might be hit no matter how earnings pan out. A big chunk of the gains in stocks in the past year came from the sharply lower rates in the first response to the pandemic when the Federal Reserve flooded the system with money. Price-to-forward-earnings multiples soared. From the S&P 500's low on March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings 12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the 10-year Treasury, already down sharply from mid-February's high, fell further as stocks rebounded. In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the In Minsky's second stage, borrowers plan only to repay the interest, and refinance when the main debt is due to be repaid; much company debt works like this. It is taken out with a plan to roll it over indefinitely. Interest rates matter a lot: If they go down when the company needs to refinance, it will pay less. The equity parallel is to gains in valuation due to lower long-term rates. As with corporate debt, this is entirely justified and sustainable so long as rates stay low, because future earnings are now more appealing. The danger is that rates rise, in which case the stock might be hit no matter how earnings pan out. A big chunk of the gains in stocks in the past year came from the sharply lower rates in the first response to the pandemic when the Federal Reserve flooded the system with money. Price-to-forward-earnings multiples soared. From the S&P 500's low on March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings 12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the 10-year Treasury, already down sharply from mid-February's high, fell further as stocks rebounded. In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the The equity parallel is to gains in valuation due to lower long-term rates. As with corporate debt, this is entirely justified and sustainable so long as rates stay low, because future earnings are now more appealing. The danger is that rates rise, in which case the stock might be hit no matter how earnings pan out. A big chunk of the gains in stocks in the past year came from the sharply lower rates in the first response to the pandemic when the Federal Reserve flooded the system with money. Price-to-forward-earnings multiples soared. From the S&P 500's low on March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings 12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the 10-year Treasury, already down sharply from mid-February's high, fell further as stocks rebounded. In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the The equity parallel is to gains in valuation due to lower long-term rates. As with corporate debt, this is entirely justified and sustainable so long as rates stay low, because future earnings are now more appealing. The danger is that rates rise, in which case the stock might be hit no matter how earnings pan out. A big chunk of the gains in stocks in the past year came from the sharply lower rates in the first response to the pandemic when the Federal Reserve flooded the system with money. Price-to-forward-earnings multiples soared. From the S&P 500's low on March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings 12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the 10-year Treasury, already down sharply from mid-February's high, fell further as stocks rebounded. In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the A big chunk of the gains in stocks in the past year came from the sharply lower rates in the first response to the pandemic when the Federal Reserve flooded the system with money. Price-to-forward-earnings multiples soared. From the S&P 500's low on March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings 12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the 10-year Treasury, already down sharply from mid-February's high, fell further as stocks rebounded. In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the A big chunk of the gains in stocks in the past year came from the sharply lower rates in the first response to the pandemic when the Federal Reserve flooded the system with money. Price-to-forward-earnings multiples soared. From the S&P 500's low on March 23 to the end of June, the market went from 14 to more than 21 times estimated earnings 12 months ahead, even as those estimated earnings fell amid lockdown gloom. The yield on the 10-year Treasury, already down sharply from mid-February's high, fell further as stocks rebounded. In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the In Minsky's third phase, borrowers take loans where they can't afford to pay either the interest or principal from income, in the hope of capital gains big enough to make up the gap. Land speculators are a prime example. The parallel in the stock market is the The parallel in the stock market is the The parallel in the stock market is the hunt for the greater fool . Sure, GameStop < shares bear no relation to the reality < of the company, but I can make money from buying an overpriced stock if I can find someone willing to pay even more because they "like the stock." Wild bets became obvious this year, as newcomers armed with stimulus, or "stimmy," checks Wild bets became obvious this year, as newcomers armed with stimulus, or "stimmy," checks Wild bets became obvious this year, as newcomers armed with stimulus, or "stimmy," checks drove up the price of many tiny stocks, penny shares and those popular on Reddit discussion boards. Speculative bets such as the solar and ARK ETFs rallied up until mid-February, long after growth stocks peaked in August Price performance Source: FactSet *Russell 1000 indexes As of March 25, 7:02 p.m. ET % Invesco Solar Value* ARK Innovation Growth* Sept. 2020 '21 -25 0 25 50 75 100 125 The concern for investors: How much of the market's gain is thanks to this pure speculation, and how much to the justifiable gains of the improving economy and low rates? If too much comes from speculation, the danger is that we run out of greater fools and prices quickly drop back. The concern for investors: How much of the market's gain is thanks to this pure speculation, and how much to the justifiable gains of the improving economy and low rates? If too much comes from speculation, the danger is that we run out of greater fools and prices quickly drop back. me title= A look at how stocks moved through the pandemic suggests earnings and bond yields are still much more important than the gambling element for the market as a whole, but is still troubling. From the S&P peak in mid-February to the end of June, the story was of cratering earnings partly offset by higher valuations. The S&P was down 8%. Earnings forecasts for 12 months ahead fell 20%, while with 10-year yields down almost a full percentage point, valuations were up from a precrisis high of 19 times forecast earnings (itself the highest since the aftermath of the dot-com bubble) to 21 times. Growth stocks -- based on the Russell 1000 index of larger companies -- were slightly up, because they benefit most from falling bond yields, having more of their earnings far in the future. Cheap value stocks, which benefit less, were down 18%. A look at how stocks moved through the pandemic suggests earnings and bond yields are still much more important than the gambling element for the market as a whole, but is still troubling. From the S&P peak in mid-February to the end of June, the story was of cratering earnings partly offset by higher valuations. The S&P was down 8%. Earnings forecasts for 12 months ahead fell 20%, while with 10-year yields down almost a full percentage point, valuations were up from a precrisis high of 19 times forecast earnings (itself the highest since the aftermath of the dot-com bubble) to 21 times. Growth stocks -- based on the Russell 1000 index of larger companies -- were slightly up, because they benefit most from falling bond yields, having more of their earnings far in the future. Cheap value stocks, which benefit less, were down 18%. A look at how stocks moved through the pandemic suggests earnings and bond yields are still much more important than the gambling element for the market as a whole, but is still troubling. From the S&P peak in mid-February to the end of June, the story was of cratering earnings partly offset by higher valuations. The S&P was down 8%. Earnings forecasts for 12 months ahead fell 20%, while with 10-year yields down almost a full percentage point, valuations were up from a precrisis high of 19 times forecast earnings (itself the highest since the aftermath of the dot-com bubble) to 21 times. Growth stocks -- based on the Russell 1000 index of larger companies -- were slightly up, because they benefit most from falling bond yields, having more of their earnings far in the future. Cheap value stocks, which benefit less, were down 18%. From the S&P peak in mid-February to the end of June, the story was of cratering earnings partly offset by higher valuations. The S&P was down 8%. Earnings forecasts for 12 months ahead fell 20%, while with 10-year yields down almost a full percentage point, valuations were up from a precrisis high of 19 times forecast earnings (itself the highest since the aftermath of the dot-com bubble) to 21 times. Growth stocks -- based on the Russell 1000 index of larger companies -- were slightly up, because they benefit most from falling bond yields, having more of their earnings far in the future. Cheap value stocks, which benefit less, were down 18%. From the S&P peak in mid-February to the end of June, the story was of cratering earnings partly offset by higher valuations. The S&P was down 8%. Earnings forecasts for 12 months ahead fell 20%, while with 10-year yields down almost a full percentage point, valuations were up from a precrisis high of 19 times forecast earnings (itself the highest since the aftermath of the dot-com bubble) to 21 times. Growth stocks -- based on the Russell 1000 index of larger companies -- were slightly up, because they benefit most from falling bond yields, having more of their earnings far in the future. Cheap value stocks, which benefit less, were down 18%. Growth stocks -- based on the Russell 1000 index of larger companies -- were slightly up, because they benefit most from falling bond yields, having more of their earnings far in the future. Cheap value stocks, which benefit less, were down 18%. Growth stocks -- based on the Russell 1000 index of larger companies -- were slightly up, because they benefit most from falling bond yields, having more of their earnings far in the future. Cheap value stocks, which benefit less, were down 18%. NEWSLETTER SIGN-UP
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Since June the story has reversed. Earnings forecasts have soared, and this year's earnings predictions are now
back up to match where 2020 earnings were expected to be before the recession. The bond yield has leapt almost
a full percentage point, and is higher than it was last February.
Yet, since June, the market's overall valuation is slightly up, and growth stocks are up 23%. Sure, cheap value
stocks responded as expected, rising almost a third and beating growth stocks. But if a lower bond yield
justified the rise in valuations, a higher bond yield ought to mean lower valuations, and probably outright
lower prices for growth stocks.
This is concerning but, directionally at least, is explained by the oddity of August, when bond yields rose
alongside valuation multiples and
the
biggest technology stocks leapt in price
. Measure it from the end of August, instead of the end of June,
and valuations have dropped a bit as bond yields have risen.
But the fall isn't enough to provide much comfort, and worse is that the highly speculative stocks popular with
many individual traders bucked the trend. Notable themes including electric cars, hydrogen, SPACs and wind and
solar power went into ludicrous mode until the middle of February this year, when the rise in bond yields
accelerated and the speculative stocks fell back some.
Share prices propelled more by earnings expectations than bond yields is healthy, while speculation is -- by its
nature -- fickle, and so a poor basis for holding on to a stock for long. My hope is that the contribution of pure
gambling to the overall level of the market is relatively small. But it is hard to explain why stocks should be
so much higher than before the pandemic panic when the earnings outlook is worse and bond yields are back to
where they were.
P Paul Avila SUBSCRIBER 8 hours ago U.S. stocks edged higher Wednesday as investors
awaited more testimony from Federal Reserve Chairman Jerome Powell.
Good grief. Is there any way his subordinates could prevent that? Perhaps lock him in a
supply closet until the market closes? Every time he opens his pie hole, I lose money.
W Will Bee SUBSCRIBER 8 hours ago Actually I suspect we are waiting for all the FED and
Treasury "people" to stop jawboning us so Markets can assimilate their irrelevance
Mar.24 -- Senator Elizabeth Warren (D-MA) asks Treasury Secretary Janet Yellen if she would
direct the Financial Stability Oversight Council (FSOC) to consider designating BlackRock as a
firm whose failure could threaten the financial system.
(Reuters) - Treasury Secretary Janet Yellen said on Wednesday it is important to "look
carefully" at systemic risks posed by asset managers, including BlackRock Inc, but said
designating them as systematically important financial institutions may not be the right
approach.
Yellen's remarks came in response to questions from Senator Elizabeth Warren, a longtime
Wall Street critic, who demanded to know why BlackRock and other large asset managers had not
been added to the list of designated institutions.
"I believe it is important to look very carefully at the risks posed by the asset management
industry, including BlackRock and other firms," Yellen, who as Treasury secretary, chairs the
Financial Stability Oversight Council (FSOC), which is charged with making such
designations.
"FSOC began to do that, I believe, in 2016 and 2017, but the risks it focused on were ones
having to do with open-end mutual funds that can experience massive withdrawals and be forced
to sell off assets that could create fire sales. That is actually a risk we saw materialize
last spring in March," she said.
In 2014, BlackRock and other asset managers won a battle in their fight against tighter
regulation when a panel of top financial regulators agreed to revamp their review of
asset-management firms to focus on potentially risky products and activities rather than
individual firms.
"I think that with respect to asset management, rather than focus on designation of
companies, I think it is important to focus on an activity like that and consider what the
appropriate restrictions are," Yellen said.
"The past two administrations in the US, and numerous global regulators, have studied our
industry for a decade and concluded that asset managers should be regulated differently from
banks, with the primary focus being on the industry's products and services," BlackRock said in
a statement.
The collapse of Greensill involved a predicable cast of unwise enablers, but it should
serve as a warning to the growing number of Alternative Asset buyers on the dangers of complex deals which promise much but
deliver less. Due diligence is critical in the highly illiquid alternatives sector.
You really can't make it up when it comes to the collapse of supply chain charlatan Greensill. I suspect it will make a great
film It should also send a judder down our spines, reminding us things are seldom what they seem in complex structured finance:
I'm wondering how many fund managers are quietly nervous about what's really in their alternative asset/direct lending
investment buckets this morning?
If I was a holder of complex European securitisation/receivables deals that promise much, but actually provide very little
information on the performance of underlying assets, then I might suddenly find an anxious desire to check just how they are
REALLY doing.
At least former UK premier David Cameron will be happy. A majority comprising Tory MPs on the UK's Treasury Select Committee
blocked
an inquiry
into Greensill yesterday on the basis it may be politically influenced. The fact
Call-Me-Dave
was
texting chancellor Rishi Sunak pleading for GFC to be a special case for Covid Bailout loans says it all about the dangers of
lobbying. The SNP will be equally delighted at the lack of scrutiny of dodgy dealings up in the Highlands.
The Greensill collapse is unlikely to be the last time financial chicanery is exposed as
sham. And that is why holders of European Alternatives and Asset backed transactions should be nervous. The lessons of the
Greensill deals are multiple:
Don't assume the deals you are sold are what you are told they are,
There is no substitute for deep due diligence.
Companies that look impossible to finance do not suddenly become AAA credits after a sprinkling of magic secured funding dust.
Anything promising of low-risk/high-returns from complex structuring and technical innovation is suspect.
Let's review the unfolding Greensill mess:
There over 1000 holders of the $10 bln plus of defaulted Greensill investment structures packaged and issued by Credit Suisse –
which marketed them as ultra-safe secured investments. Under the law, what the holders recover on these deals will rather depend
on how much the administrator and the courts can jemmy out of Sanjay Gupta's
dead-firm walking
;
steel and commodities business GFC Alliance. (I have no hesitation in saying GFC will go to the wall – there can't be a single
sane financial firm on the planet willing to finance them as the story of its' Greensill relationship emerges and its connected
in-house banking arrangements become clearer – although, apparently, a state rescue is under consideration to save jobs.)
Investors will be lucky to see much more than the 30% recovery already in the pot from non-Gupta related investments in the
Greensill funds – but Credit Suisse may decide to make its investors good. The reputational damage of seeing their private and
investment banking clients clobbered for their stupidity, which would negate their private banking brand, may mean it's worth
taking the hit. No wonder CS staff are very grumpy about their bonuses.
Successful financial scams require willing participants. All the usual fools are there in
the mix.
Yet again the German regulator missed what was going on in Greensill's German bank and its exposures to Gupta. The team at Credit
Suisse who agreed to warehouse Greensill originated "future receivables" and sell them as pristine secured assets have a limited
shelf life. The insurance broker who managed to convince an insurance fund the underlyings were AAA quality looks vulnerable. Or
what about the sales teams in Morgan Stanley who actually marketed the deals. Yet again Softbank is in the frame after it
invested in excess of $1.5 bln at a $4-7 bln valuation, hailing Greensill as a leading Finech, when the actual truth is that its
high-tech driven lending algos were nothing more than basic Excel spread sheets.
Greensill's financial magic was little more than sheer chutzpah – being able to persuade investors that the dull old low margin
conservative business of factoring – short-term secured lending against invoices and accounts receivable, was something
incredibly clever, undervalued and able to generate huge returns based on unique proprietary tech.
Greensill deals went further. Rather than just factoring Gupta's bills to suppliers and its invoices, the firm conjured up
"future receivables" – pledging the company's expected future earnings for lending now. That's not necessarily a bad thing – its
basic credit – but it only works if these earnings were completely predictable like obligated mortgage payments. What Greensill
was doing was lending on future earnings on very volatile commodities. Remember – oil prices went negative in 2020.
In return for funding challenging names we know Greensill took divots out these clients. It made over £36 mm financing Gupta's
deals in Scotland, and an amazing $108mm in fees from the $850mm Bluestone coal deals in the US – for which it is now being taken
to court. All these fees gave Lex Greensill the wherewithal for his private Air Greensill fleet – but didn't make the financings
any safer.
Any smart investors would probably have asked questions – but what's not to like about a deal that's secured on receivables,
offers a high coupon, is wrapped with an insurance package from reputable insurer and involves major investment firms like Credit
Suisse banking them, and Morgan Stanley marketing them?
One question is how did Greensill get away with it so long?
It was clear as early as 2017 there were major issues with some of the supply chain financing deals Greensill was putting
together. The following year a major Swiss investment group, GAM, blew up when deals a leading fund manager had bet the shop on
were questioned internally. A review by external investigators discovered a lack of information and documentation on a whole
series of Greensill deals. They questioned how due diligence was done on the deals. The fund manager was suspended and later
dismissed – triggering a redemption run on the fund. The whistle-blower was also shown the door on the back of massive client
exits.
GAM invested in the funds because it's very hard to turn down the promise of a low risk / high return deal that promised so much
more than the tiny yields available in conventional credit markets.
Despite the events at GAM, Credit Suisse went on to package $10 bln plus of Greensill deals. It was all done with an insurance
wrap from a single name put them in its safe bucket. I know other insurance firms refused the deals. The trigger for the collapse
of the Greensill scam was the withdrawl of that critical insurance – causing Credit Suisse to stop. Greensill has known for a
year Tokyo Marine (which sacked the underwriter involved) would not renew and had been unable to find alternative cover.
Perhaps Credit Suisse bought the story and Softbank link that Greensill was a remarkable new Fintech with the Midas touch of
changing dull, conservative factoring into a money machine? All that glitters is not gold.
One of the major developing themes in markets has been a shift from financial assets – which are seriously mispriced due to
monetary distortion and financial asset inflation – into real assets, the so-called alternatives market. Alternative because they
are not stocks or bonds, but cash flows and real assets. The collapse of Greensill will heighten awareness of due diligence risks
in these non-standard, off-market, asset backed alternatives. Alternative asset holders will be looking at holdings for what else
might be wobbly.
For instance, I might urge them not to be hypnotised by the assumptions underlying a well-known fund investing in music
royalties, the basis of which is also being questioned by analysts. (I certainly won't mention the fund by name as the manager is
a well-known litigant.) I have no reason to believe or disbelieve what analysts, the FT and a US investment bank have said about
it overpaying for assets or questioning the valuation hikes it puts on future revenues when it acquires catalogues. Personally I
like music assets, know their value, and, given certain circumstances the fund in question might come good. Equally.. it might
not.
To understand how these deals works its critical to understand exactly what's occurring within the structures – how real are the
assets, how the cash flows, how its accounted, and where it goes. That's why having top notch accountants and lawyers is such an
important requirement for any deal. However, if they are working in the interests of the issuers and bankers – then investors are
the likely patsies. There is a real difference between the way US and European Asset Backed deals are structured – basically US
deals are transparent. European deals tend to be opaque.
Alternative deals based on real assets and tangible cash flows are often, but not always, decorrelated from distorted financial
assets, allowing low risk deals to yield better long- term returns. They tick can the box in terms of risk vs return and provide
significant diversification away from conventional markets. The major negative is there is little pretence they will be liquid
assets. If you want to sell – even in good markets it will not be easy.
The only way you should participate in Alternative type deals is by knowing exactly what's going on. And – yes, my day job is
Head of Alternative Assets. Happy to discuss in depth any time.
Your editorial "The
Semiconductor Shortage" (March 13) is right that government action is not needed to correct
the short-term supply-demand imbalance causing the global chip shortage, but wrong that the
U.S. can "prod" its way to stronger domestic semiconductor production and more secure chip
supply chains in the long term. Global competitors haven't passed the U.S. as a location for
chip manufacturing by prodding. They've done it by funding ambitious government incentives to
lure semiconductor production to their shores.
As a result, only 12% of global manufacturing is now done in the U.S., down from 37% in
1990.
Disposable people are indispensable. Who else would fight the wars? Who would preach? Who
would short derivatives? Who would go to court and argue both sides? Who would legislate? Who
would sell red hots at the old ball game?
For too long disposable people have been misrepresented as destitute, homeless, unemployed,
or at best precariously employed. True, the destitute, the homeless, the unemployed and the
precarious are indeed treated as disposable but most disposable people pursue respectable
professions, wear fashionable clothes, reside in nice houses, and keep up with the Jones.
Disposable people are defined by what they do not produce. They do not grow food. They do
not build shelters. They do not make clothes. They also do not make the tractors used to grow
food, the tools to build shelters or the equipment to make clothes.
Although disposable people do not produce necessities what they do is not unnecessary. It is
simply that the services they provide are not spontaneously demanded as soon as one acquires a
bit of additional income. One is unlikely, however, to engage the services or purchase the
goods produced by disposable people unless one is in possession of disposable income.
Disposable income is the basis of disposable people. Conversely, disposable people are the
foundation of disposable income.
Tesla down 31%? Not a problem I will use the dividends to offset my losses. Oh wait!
BigJJ 13 minutes ago
I've never understood how Tesla could possibly make money given all the infrastructure
they had to install just to sell shoddily thrown together rusty cars that are useless when
the grid crashes.
Sound of the Suburbs 41 minutes ago (Edited)
...What was the ponzi scheme of inflated asset prices that collapsed in 2008?
El Hosel 1 hour ago (Edited)
Clearly "It's different this time", now that everybody knows "stocks only go up"...
"... Many of these new companies made outrageous, and often fraudulent, claims about their business ventures for the purpose of raising capital and boosting share prices. ..."
"... However, in the midst of the "mania," things like valuation, revenue, or even viable business models didn't matter. It was the "Fear Of Missing Out," which sucked investors into the fray without regard for the underlying risk. ..."
"... Sir Issac Newton, the brilliant mathematician, was an early investor in South Sea Corporation. Newton quickly made a lot of money and recognized the early stages of a speculative mania. Knowing that it would eventually end badly, he liquidated his stake at a large profit. ..."
"... However, after he exited, South Sea stock experienced one of the most legendary rises in history. As the bubble kept inflating, Newton allowed his emotions to overtake his previous logic and he jumped back into the shares. Unfortunately, it was near the peak. ..."
"... The story of Newton's losses in the South Sea Bubble has become one of the most famous in popular finance literature. While surveying his losses, Newton allegedly said that he could "calculate the motions of the heavenly bodies, but not the madness of people." ..."
"... Yes, this time is different. "Like all bubbles, it ends when the money runs out." – Andy Kessler ..."
I have previously discussed the importance of understanding how "physics" plays a crucial role in the stock market. As Sir Issac
Newton once discovered, "what goes up, must come down."
Andy Kessler, via the Wall Street
Journa l, recently discussed a similar point with respect to the momentum in stock prices. To wit:
"Does this sound familiar: Smart guy owns stock in March at $200, sells it in June at around $600, but then buys it back in
July and August for between $900 and $1,000. By September it's back at $200. Ouch. Tesla this year? Yahoo in 2000? Nope. That
was Sir Isaac Newton getting pulled into the great momentum trade of the South Sea Co., which cratered 300 years ago this month.
He lost the equivalent of more than $3 million today. Newton, whose second law of motion is about the momentum of a body equaling
the force acting on it, didn't know that works for stocks too."
To understand what happened to the South Sea Corporation, you need a bit of history.
The South Sea History
In 1720, in return for a loan of £7 million to finance the war against France, the House of Lords passed the South Sea Bill, which
allowed the South Sea Company a monopoly in trade with South America.
England was already a financial disaster and was struggling to finance its war with France. As debts mounted, England needed a
solution to stay afloat. The scheme was that in exchange for exclusive trading rights, the South Sea Company would underwrite the
English National Debt. At that time, the debt stood at £30 million and carried a 5% interest coupon from the Government. The South
Sea company converted the Government debt into its own shares.
They would collect the interest from the Government and then pass it on to their shareholders.
Interesting Absurdities
At the time, England was in the midst of rampant market speculation. As soon as the South Sea Company concluded its deal with
Parliament, the shares surged to more than 10 times their value. As South Sea Company shares bubbled up to incredible new heights,
numerous other joint-stock companies IPO'd to take advantage of the booming investor demand for speculative investments.
Many of these new companies made outrageous, and often fraudulent, claims about their business ventures for the purpose of
raising capital and boosting share prices. Here are some examples of these companies' business proposals (History House, 1997):
Supplying the town of Deal with fresh water.
Trading in hair.
Assuring of seamen's wages.
Importing pitch and tar, and other naval stores, from North Britain and America.
Insuring of horses.
Improving the art of making soap.
Improving gardens.
The insuring and increasing children's fortunes.
A wheel for perpetual motion.
Importing walnut-trees from Virginia.
The making of rape-oil.
Paying pensions to widows and others, at a small discount.
Making iron with pit coal.
Transmutation of quicksilver into a malleable fine metal.
For carrying on an undertaking of great advantage; but nobody to know what it is.
A Speculative Mania
However, in the midst of the "mania," things like valuation, revenue, or even viable business models didn't matter. It was
the "Fear Of Missing Out," which sucked investors into the fray without regard for the underlying risk.
Though South Sea Company shares were skyrocketing, the company's profitability was mediocre at best, despite abundant promises
of future growth by company directors.
The eventual selloff in Company shares was exacerbated by a previous plan of lending investors money to buy its shares. This "margin
loan," meant that many shareholders had to sell their shares to cover the plan's first installment of payments.
As South Sea Company and other "bubble " company share prices imploded, speculators who had purchased shares on credit went bankrupt.
The popping of the South Sea Bubble then resulted in a contagion that spread across Europe.
Newton's Folly
Sir Issac Newton, the brilliant mathematician, was an early investor in South Sea Corporation. Newton quickly made a lot of
money and recognized the early stages of a speculative mania. Knowing that it would eventually end badly, he liquidated his stake
at a large profit.
However, after he exited, South Sea stock experienced one of the most legendary rises in history. As the bubble kept inflating,
Newton allowed his emotions to overtake his previous logic and he jumped back into the shares. Unfortunately, it was near the peak.
It is noteworthy that once Newton decided to go back into South Sea stock, he moved essentially all his financial assets into
it. In general, Newton was intimately familiar with commodities and finance. As Master of the Mint, his post required him to make
many decisions that depended on market prices and conditions. The story of Newton's losses in the South Sea Bubble has become
one of the most famous in popular finance literature. While surveying his losses, Newton allegedly said that he could "calculate
the motions of the heavenly bodies, but not the madness of people."
Throughout financial history, markets have evolved from one speculative "bubble," to bust, to the next with each one being believed
"it was different this time." The slides below are from a presentation I made to a large mutual fund company. What we some common
denominators between all previous bubbles and now.
The table below shows a listing of assets classes that have experienced bubbles throughout history, with the ones related to the
current environment highlighted in yellow. It is not hard to see the similarities between today and the previous market bubbles in
history. Investors are currently chasing "new technology" stocks from Zoom to Tesla, piling into speculative call options, and piling
into leverage. What could possibly go wrong?
Oh, by the way, the slides above are from a 2008 presentation just one month before the Lehman crisis. The point here is that
speculative cycles are always the same.
The Speculative Cycle
Charles Kindleberger suggested that speculative manias typically commence with a "displacement" which excites speculative interest.
The displacement may come from either an entirely new object of investment (IPO) or from increased profitability of established investments.
The speculation is then reinforced by a "positive feedback" loop from rising prices. which ultimately induces "inexperienced investors"
to enter the market. As the positive feedback loop continues, and the "euphoria" increases, retail investors then begin to "leverage"
their risk in the market as "rationality" weakens.
The full cycle is shown below.
During the course of the mania, speculation becomes more diffused and spreads to different asset classes. New companies are floated
to take advantage of the euphoria, and investors leverage their gains using derivatives, stock loans, and leveraged instruments.
As the mania leads to complacency, fraud and manipulation enter the market place. Eventually, the market crashes and speculators
are wiped out. The Government and Regulators react by passing new laws and legislations to ensure the previous events never happen
again.
The Latest Mania
Let's go back to Andy for a moment:
"When bull markets get going, investors come out of the woodwork to pile in. These momentum investors -- I call them momos
-- figure if a stock is going up, it will keep going up. But usually, there is some source of hot air inflating stocks: either
a structural anomaly that fools investors into thinking ever-rising stock prices are real or a source of capital that buys, buys,
buys -- proverbial 'dumb money.' Think of it as a giant fireplace bellows, an accordion-like contraption that pumps in fresh oxygen
to keep flames growing." – Andy Kessler
We have seen these manias repeated throughout history.
In 1929 you could buy stocks with as little as a 5% down payment
The 1960s and '70s had the Nifty Fifty bubble.
In 1987 it was a rising dollar, portfolio insurance, and major investments by the Japanese into U.S. real estate.
In 2000, it was the new paradigm of the internet and the influx of new online trading firms like E*Trade creating liquidity
issues in Nasdaq stocks. Additionally, record numbers of companies were being brought public by Wall Street to fill investor demand.
In 2008, subprime mortgages, low interest rates, and lax lending policies, combined with a litany of derivative products inflated
massive bubbles in debt instruments.
In 2020?
What about today? Look back at the chart of the South Sea Company above. Now, the one below. See any similarities. Yes, that's
Tesla. However, you can't solely blame the Federal Reserve as noted by Andy:
"Most simply blame the Federal Reserve -- especially today, with its zero-interest-rate policy -- for pumping the hot air that
gets the momos going. Fair enough, but that's only part of the story. Long market runs have always allured investors who figure
they're smart to jump in, even if it's late.
Everyone forgets the adage, 'Don't mistake brains for a bull market.'"
As stated, while no two financial manias are ever alike, the end results are always the same. Are there any similarities in today's
market? You decide.
"From SPACs, or special purpose acquisition companies, which are modern-day blind pools that often don't end well. Today's
momos also chase stock splits, which mean nothing for a company's actual value. Same for a new listing in indexes like the S&P
500. Isaac Newton could explain the math." – Andy Kessler
You get the idea. But one of the tell-tale indications is the speculative chase of "zombie" companies which are only still alive
primarily due to the Federal Reserve's interventions.
Fixing The Cause Of The Crash
Historically, all market crashes have been the result of things unrelated to valuation levels. Issues such as liquidity, government
actions, monetary policy mistakes, recessions, or inflationary spikes are the culprits that trigger the "reversion in sentiment."
Importantly, the "bubbles" and "busts" are never the same. I previously quoted Bob Bronson on this point:
"It can be most reasonably assumed that markets are efficient enough that every bubble is significantly different than the
previous one. A new bubble will always be different from the previous one(s). Such is since investors will only bid prices to
extreme overvaluation levels if they are sure it is not repeating what led to the previous bubbles. Comparing the current extreme
overvaluation to the dotcom is intellectually silly.
I would argue that when comparisons to previous bubbles become most popular, it's a reliable timing marker of the top in a
current bubble. As an analogy, no matter how thoroughly a fatal car crash is studied, there will still be other fatal car crashes.
Such is true even if we avoid all previous accident-causing mistakes."
Comparing the current market to any previous period in the market is rather pointless. The current market is not like 1995, 1999,
or 2007? Valuations, economics, drivers, etc. are all different from cycle to the next.
Most importantly, however, the financial markets always adapt to the cause of the previous "fatal crash." Unfortunately, that
adaptation won't prevent the next one.
Yes, this time is different. "Like all bubbles, it ends when the money runs out." – Andy Kessler
"... In the Risk Alert below, the itemization of various forms of abuses, such as the many ways private equity firms parcel out interests in the businesses they buy among various funds and insiders to their, as opposed to investors' benefit, alone should give pause. And the lengthy discussion of these conflicts does suggest the SEC has learned something over the years. Experts who dealt with the agency in its early years of examining private equity firms found the examiners allergic to considering, much the less pursuing, complex abuses. ..."
"... Undermining legislative intent of new supervisory authority the SEC never embraced its new responsibilities to ride herd on private equity and hedge funds. ..."
"... The agency is operating in such a cozy manner with private equity firms that as one investor described it: It's like FBI sitting down with the Mafia to tell them each year, "Don't cross these lines because that's what we are focusing on." ..."
"... Advisers charged private fund clients for expenses that were not permitted by the relevant fund operating agreements, such as adviser-related expenses like salaries of adviser personnel, compliance, regulatory filings, and office expenses, thereby causing investors to overpay expenses ..."
"... Current SEC chairman Jay Clayton came from Sullivan & Cromwell, bringing with him Steven Peikin as co-head of enforcement. And the Clayton SEC looks to have accomplished the impressive task of being even weaker on enforcement than Mary Jo White. ..."
"... On the same side though, fraud is a criminal offence, and it's SEC's duty to prosecute. And I believe that a lot of what PE engage in would happily fall under fraud, if SEC really wanted. ..."
"... Crimogenic: Producing or tending to produce crime or criminality. An additional factor is that, in the main, the criminals do not take their money and leave the gaming tables but pour it back in and the crime metastasizes. AKA, Kleptocracy. ..."
"... You might add that the threat of consequences for these crimes makes the criminals extremely motivated to elect officials who will not prosecute them (e.g. Obama). They're not running for office, they're avoiding incarceration. ..."
"... Andrew Levitt, for instance, complained bitterly that Joe Lieberman would regularly threaten to cut the SEC's budget for allegedly being too aggressive about enforcement. Lieberman was the Senator from Hedgistan. ..."
"... More banana republic level grift. What happens when investors figure out they can't believe anything they are told? ..."
"... Can we come up with a better descriptor for "private equity"? I suggest "billionaire looters". ..."
"... Where is the SEC when Bain Capital (Romney) wipes out Toys-R-Us and Dianne Feinstein's husband Richard Blum wipes out Payless Shoes. They gain control of the companies, pile on massive debt and take the proceeds of the loan, and they know the company cannot service the loan and a BK is around the corner. ..."
"... Thousands lose their jobs. And this is legal? And we also lost Glass-Steagal and legalized stock buy-backs. The Elite are screwing the people. It's Socialism for the Rich, the Politicians and Govt Employees and Feudalism for the rest of us. ..."
We've embedded an SEC Risk Alert on private equity abuses at the end of this post. 1 What is remarkable about this
document is that it contains a far longer and more detailed list of private abuses than the SEC flagged in its initial round of examinations
of private equity firms in 2014 and 2015. Those examinations occurred in parallel with groundbreaking exposes by Gretchen Morgenson
at the New York Times and Mark Maremont in the Wall Street Journal.
At least some of the SEC enforcement actions in that era look
to have been triggered by the press effectively getting ahead of the SEC. And the SEC even admitted the misconduct was more common
at the most prominent firms.
Yet despite front-page articles on private equity abuses, the SEC engaged in wet noodle lashings. Its pattern was to file only
one major enforcement action over a particular abuse. Even then, the SEC went to some lengths to spread the filings out among the
biggest firms. That meant it was pointedly engaging in selective enforcement, punishing only "poster child" examples and letting
other firms who'd engaged in precisely the same abuses get off scot free.
The very fact of this Risk Alert is an admission of failure by the SEC. It indicates that the misconduct it highlighted five years
ago continues and if anything is even more pervasive than in the 2014-2015 era. It also confirms that its oft-stated premise then,
that the abuses it found then had somehow been made by firms with integrity that would of course clean up their acts, and that now-better-informed
investors would also be more vigilant and would crack down on misconduct, was laughably false.
In particular, the second section of the Risk Alert, on Fees and Expenses (starting on page 4) describes how fund managers are
charging inflated or unwarranted fees and expenses. In any other line of work, this would be called theft. Yet all the SEC is willing
to do is publish a Risk Alert, rather than impose fines as well as require disgorgements?
The SEC's Abject Failure
In the Risk Alert below, the itemization of various forms of abuses, such as the many ways private equity firms parcel out interests
in the businesses they buy among various funds and insiders to their, as opposed to investors' benefit, alone should give pause.
And the lengthy discussion of these conflicts does suggest the SEC has learned something over the years. Experts who dealt with the
agency in its early years of examining private equity firms found the examiners allergic to considering, much the less pursuing,
complex abuses.
Undermining legislative intent of new supervisory authority the SEC never embraced its new responsibilities to ride herd on
private equity and hedge funds.
The SEC has long maintained a division between the retail investors and so-called "accredited investors" who by virtue of having
higher net worths and investment portfolios, are treated by the agency as able to afford to lose more money. The justification is
that richer means more sophisticated. But as anyone who is a manager for a top sports professional or entertainer, that is often
not the case. And as we've seen, that goes double for public pension funds.
Starting with the era of Clinton appointee Arthur Levitt, the agency has taken the view that it is in the business of defending
presumed-to-be-hapless retail investors and has left "accredited investor" and most of all, institutional investors, on their own.
This was a policy decision by the agency when deregulation was venerated; there was no statutory basis for this change in priorities.
Congress tasked the SEC with supervising the fund management activities of private equity funds with over $150 million in assets
under management. All of their investors are accredited investors. In other words, Congress mandated the SEC to make sure these firms
complied with relevant laws as well as making adequate disclosures of what they were going to do with the money entrusted to them.
Saying one thing in the investor contracts and doing another is a vastly worse breach than misrepresentations in marketing materials,
yet the SEC acted as if slap-on-the-wrist-level enforcement was adequate.
We made fun when thirteen prominent public pension fund trustees wrote the SEC asking for them to force greater transparency of
private equity fees and costs. The agency's position effectively was "You are grownups. No one is holding a gun to your head to make
these investments. If you don't like the terms, walk away." They might have done better if they could have positioned their demand
as consistent with the new Dodd Frank oversight requirements.
Actively covering up for bad conduct . In 2014, the SEC started working at giving malfeasance a free pass. Specifically, the SEC
told private equity firms that they could continue their abuses if they 'fessed up in their annual disclosure filings, the so-called
Form ADV. The term of art is "enhanced disclosure". Since when are contracts like confession, that if you admit to a breach, all
is forgiven? Only in the topsy-turvy world of SEC enforcement.
The agency is operating in such a cozy manner with private equity firms that as one investor described it: It's like FBI sitting down with the Mafia to tell them each year, "Don't cross these lines because that's what we are focusing
on."
Specifically, as we indicated, the SEC was giving advanced warning of the issues it would focus on in its upcoming exams, in order
to give investment managers the time to get their stories together and purge files. And rather than view its periodic exams as being
designed to make sure private equity firms comply with the law and their representations, the agency views them as "cooperative"
exercises! Misconduct is assumed to be the result of misunderstanding and error, and not design.
It's pretty hard to see conduct like this, from the SEC's Risk Alert, as being an accident:
Advisers charged private fund clients for expenses that were not permitted by the relevant fund operating agreements, such
as adviser-related expenses like salaries of adviser personnel, compliance, regulatory filings, and office expenses, thereby causing
investors to overpay expenses
The staff observed private fund advisers that did not value client assets in accordance with their valuation processes or in
accordance with disclosures to clients (such as that the assets would be valued in accordance with GAAP). In some cases, the staff
observed that this failure to value a private fund's holdings in accordance with the disclosed valuation process led to overcharging
management fees and carried interest because such fees were based on inappropriately overvalued holdings .
Advisers failed to apply or calculate management fee offsets in accordance with disclosures and therefore caused investors
to overpay management fees.
We're highlighting this skimming simply because it is easier for laypeople to understand than some of the other types of cheating
the SEC described. Even so, industry insiders and investors complained that the description of the misconduct in this Risk Alert
was too general to give them enough of a roadmap to look for it at particular funds.
Ignoring how investors continue to be fleeced . The SEC's list includes every abuse it sanctioned or mentioned in the 2014 to
2015 period, including undisclosed termination of monitoring fees, failure to disclose that investors were paying for "senior advisers/operating
partners," fraudulent charges, overcharging for services provided by affiliated companies, plus lots of types of bad-faith conduct
on fund restructurings and allocations of fees and expenses on transactions allocated across funds.
The SEC assumed institutional investors would insist on better conduct once they were informed that they'd been had. In reality,
not only did private equity investors fail to demand better, they accepted new fund agreements that described the sort of objectionable
behavior they'd been engaging in. Remember, the big requirement in SEC land is disclosure. So if a fund manager says he might do
Bad Things and then proceeds accordingly, the investor can't complain about not having been warned.
Moreover, the SEC's very long list of bad acts says the industry is continuing to misbehave even after it has defined deviancy
down via more permissive limited partnership agreements!
Why This Risk Alert Now?
Keep in mind what a Risk Alert is and isn't. The best way to conceptualize it is as a press release from the SEC's Office of Compliance
Inspections and Examinations. It does not have any legal or regulatory force. Risk Alerts are not even considered to be SEC official
views. They are strictly the product of OCIE staff.
On the first page of this Risk Alert, the OCIE blandly states that:
This Risk Alert is intended to assist private fund advisers in reviewing and enhancing their compliance programs, and also
to provide investors with information concerning private fund adviser deficiencies.
Cutely, footnotes point out that not everyone examined got a deficiency letter (!!!), that the SEC has taken enforcement actions
on "many" of the abuses described in the Risk Alert, yet "OCIE continues to observe some of these practices during examinations."
Several of our contacts who met in person with the SEC to discuss private equity grifting back in 2014-2015 pressed the agency
to issue a Risk Alert as a way of underscoring the seriousness of the issues it was unearthing. The staffers demurred then.
In fairness, the SEC may have regarded a Risk Alert as having the potential to undermine its not-completed enforcement actions.
But why not publish one afterwards, particularly since the intent then had clearly been to single out prominent examples of particular
types of misconduct, rather than tackle it systematically? 2
So why is the OCIE stepping out a bit now? The most likely reason is as an effort to compensate for the lack of enforcement actions.
Recall that all the OCIE can do is refer a case to the Enforcement Division; it's their call as to whether or not to take it up.
The SEC looks to have institutionalized the practice of borrowing lawyers from prominent firms. Mary Jo White of Debevoise brought
Andrew Ceresney with her from Debeviose to be her head of enforcement. Both returned to Debevoise.
Current SEC chairman Jay Clayton came from Sullivan & Cromwell, bringing with him Steven Peikin as co-head of enforcement. And
the Clayton SEC looks to have accomplished the impressive task of being even weaker on enforcement than Mary Jo White. Clayton made
clear his focus was on "mom and pop" investors, meaning he chose to overlook much more consequential abuses by private equity firms
and hedgies. The New York Times determined that the average amount of SEC fines against corporate perps fell markedly in 2018 compared
to the final 20 months of the Obama Administration. The SEC since then levied $1 billion fine against the Woodbridge Group of Companies
and its one-time owner for running a Ponzi scheme that fleeced over 8,400, so that would bring the average penalty up a bit. But
it still confirms that Clayton is concerned about small fry, and not deeper but just as pickable pockets.
David Sirota argues that the OCIE
was out to embarrass Clayton and sabotage what Sirota depicted as an SEC initiative to let retail investors invest in private equity.
Sirota appears to have missed that that horse has left the barn and is in the next county, and the SEC had squat to do with it.
The overwhelming majority of retail funds is not in discretionary accounts but in retirement accounts, overwhelmingly 401(k)s.
And it is the Department of Labor, which regulates ERISA plans, and not the SEC, that decides what those go and no go zones are.
The DoL has already green-lighted allowing large swathes of 401(k) funds to include private equity holdings.
From a post earlier this month :
Until now, regulations have kept private equity out of the retail market by prohibiting managers from accepting capital from
individuals who lack significant net worth.
Moreover, even though Sirota pointed out that Clayton had spoken out in favor of allowing retail investors more access to private
equity investments, the proposed regulation on the definition of accredited investors in fact not only does not lower income or net
worth requirements (save for allowing spouses to combine their holdings) it in fact solicited comments on the idea of raising the
limits.
From a K&L Gates write up :
Previously, the Concept Release requested comment on whether the SEC should revise the current individual income ($200,000)
and net worth ($1,000,000) thresholds. In the Proposing Release, the SEC further considered these thresholds, noting that the
figures have not been adjusted since 1982. The SEC concluded that it does not believe modifications to the thresholds are necessary
at this time, but it has requested comments on whether the final should instead make a one-time increase to the thresholds in
the account for inflation, or whether the final rule should reflect a figure that is indexed to inflation on a going-forward basis.
It is not clear how many people would be picked up by the proposed change, which was being fleshed out, that of letting some presumed
sophisticated but not rich individuals, like junior hedge fund professionals and holders of securities licenses, be treated as accredited
investors. In other words, despite Clayton's talk about wanting ordinary investors to have more access to private equity funds, the
agency's proposed rule change falls short of that.
Moreover, if the OCIE staff had wanted to undermine even the limited liberalization of the definition of accredited investor so
as to stymie more private equity investment, the time to do so would have been immediately before or while the comments period was
open. It ended March 16 .
So again, why now? One possibility is that the timing is purely a coincidence. For instance, the SEC staffers might have been
waiting until Covid-19 news overload died down a bit so their work might get a hearing (and Covid-19 remote work complications may
also have delayed its release).
The second possibility is that OCIE is indeed very frustrated with the enforcement chief Peikin's inaction on private equity.
The fact that Peikin's boss and protector Clayton has made himself a lame duck meant a salvo against Peikin was now a much lower
risk. If any readers have better insight into the internal workings of the SEC these days, please pipe up.
______
1 Formally, as you can see, this Risk Alert addresses both private equity and hedge fund misconduct, but on reading
the details, the citing of both types of funds reflects the degree to which hedge funds have been engaging in the buying and selling
of stakes in private companies. For instance, Chatham Asset Management, which has become notorious through its ownership of American
Media, which in turn owns the National Enquirer, calls itself a hedge fund. Moreover, when the SEC started examining both private
equity and hedge funds under new authority granted by Dodd Frank, it described the sort of misconduct described in this Risk Alert
as coming out of exams of private equity firms, and its limited round of enforcement actions then were against brand name private
equity firms like KKR, Blackstone, Apollo, and TPG. Thus for convenience as well as historical reasons, we refer only to private
equity firms as perps.
2 Media stories at the time, including some of our posts, provided substantial evidence that particular abuses, such
as undisclosed termination of monitoring fees and failure to disclose that "senior advisers" presented as general partner "team members"
were in fact consultants being separately billed to fund investments, were common practices. Yet the SEC chose to lodge only marquee
enforcement actions against one prominent firm for each abuse, as if token enforcement would serve as an adequate deterrent. The
message was the reverse, that the overwhelming majority of the abuses were able to keep their ill-gotten gains and not even face
public embarrassment.
TBH, in the view of Calpers ignoring its advisors, I do have a little understanding of the SEC's point "you're grown ups" (the
worse problem is that the advisors who leach themselves to the various accredited investors are often not worth the money.
On the same side though, fraud is a criminal offence, and it's SEC's duty to prosecute. And I believe that a lot of what PE
engage in would happily fall under fraud, if SEC really wanted.
Yes, the SEC conveniently claims a conflicted authority – 1. to regulate compliance but without an "enforcement authority",
and 2. report egregious behavior to their "enforcement authority". So the SEC is less than a permissive nanny. Sort of like "access"
to enforcement authority. Sounds like health care to me.
No, this is false. The SEC has an examination division and an enforcement division. The SEC can and does take enforcement actions
that result in fines and disgorgements, see the $1 billion fine mentioned in the post. So the exam division can recommend enforcement
to the enforcement division. That does not mean it will get done. Some enforcement actions originate from within the enforcement
division, like insider trading cases, and the SEC long has had a tendency to prioritize insider trading cases.
The SEC cannot prosecute. It has to refer cases that it thinks are criminal to the DoJ and try to get them to saddle up.
Crimogenic: Producing or tending to produce crime or criminality. An additional factor is that, in the main, the criminals
do not take their money and leave the gaming tables but pour it back in and the crime metastasizes.
AKA, Kleptocracy.
Thus in 2008 and thereafter the criminal damage required 2-3 trillion, now 7-10 trillion.
Any economic expert who does not recognize crime as the number one problem in the criminogenic US economy I disregard. Why
read all that analysis when, at the end of the run, it all just boils down to bailing out the criminals and trying to reset the
criminogenic system?
You might add that the threat of consequences for these crimes makes the criminals extremely motivated to elect officials who
will not prosecute them (e.g. Obama). They're not running for office, they're avoiding incarceration.
The SEC has been captured for years now. It was not that long ago that SEC Examination chief Andrew Bowden made a grovelling
speech to these players and even asked them to give his son a job which was so wrong-
But there is no point in reforming the SEC as it was the politicians, at the beck and call of these players, that de-fanged
the SEC – and it was a bipartisan effort! So it becomes a chicken-or-the-egg problem in the matter of reform. Who do you reform
first?
Can't leave this comment without mentioning something about a private equity company. One of the two major internal airlines
in Oz went broke due to the virus and a private equity buyer has been found to buy it. A union rep said that they will be good
for jobs and that they are a good company. Their name? Bain Capital!
We broke the story about Andrew Bowden! Give credit where credit is due!!!! Even though Taibbi points to us in his first line,
linking to Rolling Stone says to those who don't bother clicking through that it was their story.
Of course I remember that story. I was going to mention it but thought to let people see it in virtually the opening line of
that story where he gives you credit. More of a jolt of recognition seeing it rather than being told about it first.
Of the three branches of government which ones are not captured by big business? If two out of three were to captured then
does it matter what the third does?
Is the executive working for the common good or for the interests of big business?
Is the legislature working for the common good or for the interests of big business?
Is the judiciary working for the common good or for the interests of big business?
In my opinion too much power has been centralised, too much of the productivity gains of the past 40 years have been monetised
and therefore made possible to hoard and centralise. SEC should (in my opinion) try to enforce more but without more support then I do not believe (it is my opinion, nothing more
and nothing less) that they can accomplish much.
The SEC is a mysterious agency which (?) must fall under the jurisdiction of the Treasury because it is a monetary regulatory
agency in the business of regulating securities and exchanges. But it has no authority to do much of anything. The Treasury itself
falls under the executive administration but as we have recently seen, Mnuchin himself managed to get a nice skim for his banking
pals from the money Congress legislated.
That's because Congress doesn't know how to effectuate a damn thing – they legislate
stuff that morphs before our very eyes and goes to the grifters without a hitch. So why don't we demand that consumer protection
be made into hard law with no wiggle room; that since investing is complex in this world of embedded funds and glossy prospectuses,
we the consumer should not have to wade through all the nonsense to make decisions – that everything be on the table. And if PE
can't manage to do that and still steal its billions then PE should be declared to be flat-out illegal.
Please stop spreading disinformation. This is the second time on this post. The SEC has nada to do with the Treasury. It is an independent regulatory agency. It however is the only financial regulator that does not keep what it kills (its own fees and fines) but is instead subject
to Congressional appropriations.
Andrew Levitt, for instance, complained bitterly that Joe Lieberman would regularly threaten
to cut the SEC's budget for allegedly being too aggressive about enforcement. Lieberman was the Senator from Hedgistan.
It should be noted that out here in the countryside of northern Michigan that embezzlement (a winter sport here while the men
are out ice fishing), theft and fraud are still considered punishable felonies. Perhaps that is simply a quaint holdover from
a bygone time. Dudley set the tone for the C of C with his Green Book on bank deregulation. One of the subsequent heads of C of
C was reported as seeing his position as "being the spiritual resource for banks". If bank regulation is treated in a farcical
fashion why should be the SEC be any different?
I was shocked to just now learn that ERISA/the Dept of Labor is in regulatory control of allowing pension funds to buy PE fund
of funds and "balanced PE funds". What VERBIAGE. Are "PE Fund of Balanced Funds" an actual category? And what distinguishes them
from good old straightforward Index Funds? And also too – what is happening before our very glazed-over eyes is that PE is high
grading not just the stock market but the US Treasury itself. Ordinary investors should be buying US Treasuries directly and retirement
funds should too. It will be a big bite but if it knocks PE out of business it would be worth it. PE is in the business of cooking
its books, ravaging struggling corporations, and boldly privatizing the goddamned Treasury. WTF?
What about the wanton destruction of the purchased companies? If this solely about the harm done to the poor investors?
If so, that is seriously wrong.
If, you know, the neoliberal "because markets" is the ruling paradigm then of course there is no harm done. The questions then
become: is "because markets" a sensible paradigm? What is it a sensible paradigm of? Is "because markets" even sensible for the
long term?
an aside: farewell, Olympus camera. A sad day. Farewell, OM-1 and OM-2. Film photography is really not replicated by digital
photography but the larger market has gone to digital. Speed and cost vs quality. Because markets. Now the vulture swoop.
Where is the SEC when Bain Capital (Romney) wipes out Toys-R-Us and Dianne Feinstein's husband Richard Blum wipes out Payless
Shoes. They gain control of the companies, pile on massive debt and take the proceeds of the loan, and they know the company cannot
service the loan and a BK is around the corner.
Thousands lose their jobs. And this is legal? And we also lost Glass-Steagal and
legalized stock buy-backs. The Elite are screwing the people. It's Socialism for the Rich, the Politicians and Govt Employees and
Feudalism for the rest of us.
"... Kane, who coined the term "zombie bank" and who famously raised early alarms about American savings and loans, analyzed European banks and how regulators, including the U.S. Federal Reserve, backstop them. ..."
"... We are only interested observers of the arm wrestling between the various EU countries over the costs of bank rescues, state expenditures, and such. But we do think there is a clear lesson from the long history of how governments have dealt with bank failures . [If] the European Union needs to step in to save banks, there is no reason why they have to do it for free best practice in banking rescues is to save banks, but not bankers. That is, prevent the system from melting down with all the many years of broad economic losses that would bring, but force out those responsible and make sure the public gets paid back for rescuing the financial system. ..."
"... In 2019, another question, alas, is also piercing. In country after country, Social Democratic center-left parties have shrunk, in many instances almost to nothingness. In Germany the SPD gives every sign of following the French Socialist Party into oblivion. Would a government coalition in which the SPD holds the Finance Ministry even consider anything but guaranteeing the public a huge piece of any upside if they rescue two failing institutions? ..."
Running in the background, though, was a new, darker theme: That the post-2008 reforms had gone too far in restricting policymakers'
discretion in crises. The trio most responsible for making the post-Lehman bailout revolution -- Ben Bernanke, Timothy Geithner,
and Henry Paulson --
expressed their
misgivings in a joint op-ed :
But in its post-crisis reforms, Congress also took away some of the most powerful tools used by the FDIC, the Fed and the Treasury
the FDIC can no longer issue blanket guarantees of bank debt as it did in the crisis, the Fed's emergency lending powers have
been constrained, and the Treasury would not be able to repeat its guarantee of the money market funds.
These powers were critical in stopping the 2008 panic The paradox of any financial crisis is that the policies necessary to
stop it are always politically unpopular. But if that unpopularity delays or prevents a strong response, the costs to the economy
become greater.
We need to make sure that future generations of financial firefighters have the emergency powers they need to prevent the next
fire from becoming a conflagration.
Sotto voce fears of this sort go back to the earliest reform discussions. But the question surfaced dramatically in Timothy Geithner's
2016 Per Jacobsson Lecture, " Are We Safer? The Case for Strengthening
the Bagehot Arsenal ." More recently, the Group of Thirty
has advanced similar suggestions -- not too surprisingly, since Geithner was co-project manager of the report, along with Guillermo
Ortiz, the former Governor of the Mexican Central Bank, who introduced the former Treasury Secretary at the Per Jacobson lecture.
Aside from the financial collapse itself, probably nothing has so shaken public confidence in democratic institutions as the wave
of bailouts in the aftermath of the collapse. The redistribution of wealth and opportunity that the bailouts wrought surely helped
fuel the populist surges that have swept over Europe and the United States in the last decade. The spectacle of policymakers rubber
stamping literally unlimited sums for financial institutions while preaching the importance of austerity for everyone else has been
unbearable to millions of people.
Especially in money-driven political systems, affording policymakers unlimited discretion also plainly courts serious risks. Put
simply, too big to fail banks enjoy a uniquely splendid situation of "heads I win, tails you lose" when they take risks. Scholars
whose research INET has supported, notably
Edward Kane , have shown how the certainty of government bailouts advantages large financial institutions, directly affecting
prices of their bonds and stocks.
For these reasons INET convened a panel at a G20 preparatory meeting in Berlin on "
Moral Hazard Issues in Extended Financial Safety Nets ."
The Power Point presentations of the three panelists are presented in the order in which they gave them, since the latter ones sometimes
comment on Edward Kane
's analysis of the European banks. Kane, who coined the term "zombie bank" and who famously raised early alarms about American
savings and loans, analyzed European banks and how regulators, including the U.S. Federal Reserve, backstop them.
Peter Bofinger
, Professor of International and Monetary Economics at the University of Würzburg and an outgoing member of the German Economic Council,
followed with a discussion of how the system has changed since 2008.
Helene Schuberth
, Head of the Foreign Research Division of the Austrian National Bank, analyzed changes in the global financial governance system
since the collapse.
The panel took place as public discussion of a proposed merger between two giant German banks, the Deutsche Bank and Commerzbank,
reached fever pitch. The panelists explored issues directly relevant to such fusions, without necessarily agreeing among themselves
or with anyone at INET.
But the point Robert Johnson, INET's President, and I
made some years back , amid an earlier wave of talk about using public money to bail out European banks, remains on target:
We are only interested observers of the arm wrestling between the various EU countries over the costs of bank rescues,
state expenditures, and such. But we do think there is a clear lesson from the long history of how governments have dealt with
bank failures . [If] the European Union needs to step in to save banks, there is no reason why they have to do it for free best
practice in banking rescues is to save banks, but not bankers. That is, prevent the system from melting down with all the many
years of broad economic losses that would bring, but force out those responsible and make sure the public gets paid back for rescuing
the financial system.
The simplest way to do that is to have the state take equity in the banks it rescues and write down the equity of bank shareholders
in proportion. This can be done in several ways -- direct equity as a condition for bailout, requiring warrants that can be exercised
later, etc. The key points are for the state to take over the banks, get the bad loans rapidly out of those and into a "bad bank,"
and hold the junk for a decent interval so the rest of the market does not crater. When the banks come back to profitability,
you can cash in the warrants and sell the stock if you don't like state ownership. That way the public gets its money back .at
times states have even made a profit.
In 2019, another question, alas, is also piercing. In country after country, Social Democratic center-left parties have shrunk,
in many instances almost to nothingness. In Germany the SPD gives every sign of following the French Socialist Party into oblivion.
Would a government coalition in which the SPD holds the Finance Ministry even consider anything but guaranteeing the public a huge
piece of any upside if they rescue two failing institutions?
There needs to be an asset tax on/break up of the megas. End the hyper-agglomeration of deposits at the tail end. Not holding
my breath though. (see NY state congressional delegation)
To be generous, tax starts at $300 billion. Even then it affects only a dozen or so US banks. But would be enough to clamp
down on the hyper-scale of the largest US/world banks. The world would be better off with lot more mid-sized regional players.
Anyone who mentions Timmy Geithner without spitting did not pay attention during the Obama reign of terror. He and Obama crowed
about the Making Home Affordable Act, implying that it would save all homeowners in mortgage trouble, but conveniently neglected
to mention that less than 100 banks had signed up. The thousands of non-signatories simply continued to foreclose.
Not to mention Eric Holder's intentional non-prosecution of banksters. For these and many other reasons, especially his "Islamic
State is only the JV team" crack, Obama was one of our worst presidents.
Fergusons graph on DBK's default probabilities coincides with the ECB's ending its asset purchase programme and entering the
"reinvestment phase of the asset purchase programme". https://www.ecb.europa.eu/mopo/implement/omt/html/index.en.html
The worst of the euro zombie banks appear to be getting tense and nervous. https://www.youtube.com/watch?v=dKpzCCuHDVY
Maybe that is why Jerome Powell did his volte-face last month on gradually raising interest rates. Note that the Fed also reduced
its automatic asset roll-off. I'm curious if the other euro-zombies in the "peers" return on equity chart are are experiencing
volatility also.
Apparently the worst fate you can suffer as long as you don't go Madoff is Fuld. According to Wikipedia his company manages
a hundred million which must be humiliating. It's not as humiliating as locking the guy up in prison would be by a very long stretch.
Greenspan famously lamented that there isn't anything the regulators can really do except make empty threats. This is dishonest.
The regulations are not carved in stone like the ten commandments. In China they execute incorrigible financiers all the time.
Greenspan was never willing to counter any problem that might irritate powerful financial constituencies. For example, during
the internet stock bubble of the late 1990's, Greenspan decried the "irrational exuberance" of the stock market. The Greenspan
Fed could have raised the margin requirement for stocks to buttress this view, but did not. As I remembered reading, Greenspan
was in poor financial shape when he got his Fed job.
His subsequent performance at the Fed apparently left him a wealthy man. Real regulation by Greenspan may have adversely affected
his wealth. It may explain why Alan Greenspan would much rather let a financial bubble grow until it pops and then "fix it".
Everybody forgets (or at least does not mention) that Greenspan was a member of the Class of '43, the (mostly Canadian) earliest
members of the Objectivist Cult with guru Ayn Rand. Expecting him to act rationally is foolish. It may happen accidentally (we
do not know why he chose to let the economy expand unhindered in 1999), but you cannot count on it. In a world with information
asymmetry expecting markets to be concerned about reputation is ridiculous. To expect them to police themselves for long term
benefit is even more ridiculous.
I think Finance is currently about 13% of the S&P 500, down from the peak of about 18% or so in 2007. I think we will have
a healthy economy and improved political climate when Finance is about 8-10% of the S&P 500 which is about where I think finance
plays a healthy, but not overwhelming rentier role in the economy.
"... She soldiered through her painful stomach ailments and secretly tape-recorded 46 hours of conversations between New York Fed officials and Goldman Sachs. After being fired for refusing to soften her examination opinion on Goldman Sachs, Segarra released the tapes to ProPublica and the radio program This American Life and the story went viral from there... ..."
"... In a nutshell, the whoring works like this. There are huge financial incentives to go along, get along, and keep your mouth shut about fraud. The financial incentives encompass both the salary, pension and benefits at the New York Fed as well as the high-paying job waiting for you at a Wall Street bank or Wall Street law firm if you show you are a team player . ..."
"But the impotence one feels today -- an impotence we should never consider permanent -- does not excuse one from remaining true
to oneself, nor does it excuse capitulation to the enemy, what ever mask he may wear. Not the one facing us across the frontier or
the battle lines, which is not so much our enemy as our brothers' enemy, but the one that calls itself our protector and makes us
its slaves. The worst betrayal will always be to subordinate ourselves to this Apparatus, and to trample underfoot, in its
service, all human values in ourselves and in others."
Simone Weil
"And in some ways, it creates this false illusion that there are people out there looking out for the interest of taxpayers, the
checks and balances that are built into the system are operational, when in fact they're not. And what you're going to see and what
we are seeing is it'll be a breakdown of those governmental institutions. And you'll see governments that continue to have policies
that feed the interests of -- and I don't want to get clichéd, but the one percent or the .1 percent -- to the detriment of everyone
else...
If TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the
same winding mountain road, but this time in a faster car... I think it's inevitable. I mean, I don't think how you can look at all
the incentives that were in place going up to 2008 and see that in many ways they've only gotten worse and come to any other conclusion."
Neil Barofsky
"Written by Carmen Segarra, the petite lawyer turned bank examiner turned whistleblower turned one-woman swat team, the 340-page
tome takes the reader along on her gut-wrenching workdays for an entire seven months inside one of the most powerful and corrupted
watchdogs of the powerful and corrupted players on Wall Street – the Federal Reserve Bank of New York.
The days were literally gut-wrenching. Segarra reports that after months of being alternately gas-lighted and bullied at
the New York Fed to whip her into the ranks of the corrupted, she had to go to a gastroenterologist and learned her stomach lining
was gone.
She soldiered through her painful stomach ailments and secretly tape-recorded 46 hours of conversations between New York Fed officials
and Goldman Sachs. After being fired for refusing to soften her examination opinion on Goldman Sachs,
Segarra released the tapes to ProPublica and
the radio program This American Life and the story went viral from there...
In a nutshell, the whoring works like this. There are huge financial incentives to go along, get along, and keep your mouth shut
about fraud. The financial incentives encompass both the salary, pension and benefits at the New York Fed as well as the high-paying
job waiting for you at a Wall Street bank or Wall Street law firm if you show you are a team player .
If the Democratic leadership of the House Financial Services Committee is smart, it will reopen the Senate's aborted inquiry into
the New York Fed's labyrinthine conflicts of interest in supervising Wall Street and make removing that supervisory role a core component
of the Democrat's 2020 platform. Senator Bernie Sanders' platform can certainly be expected to continue the accurate battle cry that
'the business model of Wall Street is fraud.'"
Michael Mackenzie and James Fontanella-Khan in New York Fri, March 5, 2021, 7:00 PM
The veteran value investor John Rogers predicted the US is headed for a repeat of the
"roaring twenties" a century ago that will finally encourage investors to dump tech stocks in
favour of companies more sensitive to the economy. The founder of Ariel Investments told the
Financial Times in an interview that value investing "dinosaurs" like him stood to win as
higher economic growth and rising interest rates took the air out of some of the hottest stocks
of recent years. The US central bank is "overly optimistic that they can keep inflation under
control", he said, and higher bond market interest rates would reduce the value of future
earnings for highly popular growth stocks such as tech companies and for the kinds of
speculative companies coming to market in initial public offerings or via deals with Spacs.
"Why does the US use the winter storm as the excuse every time?" Shu Bin, director of the
State Grid Beijing Economics Research Institute, told the Global Times on Thursday, noting
that the power grid system is very vulnerable and requires constant maintenance and
upgrade.
A report from the US Department of Energy (DOE) in 2015 said that 70 percent of power
transformers in the country were 25 years or older, 60 percent of circuit breakers were 30
years or older, and 70 percent of transmission lines are 25 years or older. And the age of
these components "degrades their ability to withstand physical stresses and can result in
higher failure rates," the report noted.
[...]
"The US has no nationwide power grid network allocation plan like China. When it
encounters extreme weather, a state won't help another state like some Chinese provinces
and regions do with flexible allocation plans," Lin Boqiang, director of the China Center
for Energy Economics Research at Xiamen University, told the Global Times on Thursday.
[...]
"China uses 50Hz across the country, like the country has the same heartbeat," he said,
adding that China has never experienced such a scale of blackouts as the US.
[...]
China has mastered the top technologies such as "UHV transmission" and "flexible DC
transmission" and started the strategic "west-east electricity transmission" and
"north-south electricity transmission" projects, which in turn offer an opportunity for the
development of the country's western region.
Not as apocalyptic as it may seem. I wrote a comment on the situation in the earlier
thread
here .
Temps are starting to move up and tomorrow (Thursday) should begin the thaw. Friday is
sunny and 47 deg F for a high, then sunny weekend and following. So we're over the worst of
it. The lowest it ever got was around 0 deg F.
The infrastructure failed - the people paid to manage this failed - everybody is angry, 10
people died so far last I heard.
Rolling blackouts, some people very much suffering, townships opening warming shelters -
probably not millions of pipes bursting. Not totally iced in, just nowhere to go. People
stayed home. Businesses stayed closed. Not totally without food, people stocked up staples in
2020.
Not that dire. Absolutely fucking disgusting, and a hardship that touched everyone - some
people got really screwed and I don't know why the treatment was uneven like that - not
demographics, something with the grid. Dire, yes, and life-threatening to some or perhaps
many (numbers not clear to me yet), but not so dire as your picture suggests. Nothing like
Katrina, except the same ineptness.
But heads will roll. The governor has mandated an investigation into the regulator, ERCOT.
What follows next is of great interest. Facts will appear. I'll post anything useful.
I heard a rumor it was getting better. Could be less blackouts. Will post now in case
power goes off ;)
This Texas debacle may light a heated debate in the USA for the next weeks, for two
reasons:
1) Texas is the big alt-right/Trumpist Festung for the foreseeable future. Their
nation-building process involve catapulting Texas as the anti-California ,
the conservative version of the Shining City on the Hill, around which the USA will be
rebuilt;
2) What is happening in Texas right now goes directly to the heart of neoliberalism, which
is the political doctrine that vertebrates the alt-right. That's why conservative ideologues
such as Tucker Carlson et al are desperately scrambling on TV and social media to blame the
outage on the so-called Green New Deal.
What is happening right now in Texas, therefore, may be another episode on the battle for
the soul of the American Empire.
Last week, a large number of small-time investors drove up the price of GameStop's (GME)
stock a
historic 1,784 percent . But this was no mere spike in some obscure stock. The stock's
price spiked in part as a result of efforts by "an army of smaller investors who have been
rallying on Reddit and elsewhere online to support GameStop's stock and beat back the
professionals." These professionals were hedge fund managers who had shorted GameStop's stock.
In other words, hedge funders were betting billions that GameStop's stock would go down. But
the price went up instead, meaning hedge funds like Melvin Capital (and Citron Research) took
"a significant loss," possibly totaling
$70 billion.
There surely were plenty of insiders on both sides of this deal. Given the complexity of
various schemes employed by seasoned investors, it seems it is very unlikely that this is just
a simple matter of little Davids taking on Wall Street Goliaths.
But it also looks like that's not all that was going on. Had this only been just another
scheme by some Wall Street insiders against some other Wall Street insiders the story would
probably have ended there.
But that's not what happened. Rather, it appears that, for many of the smaller investors who
were involved, much of this "short squeeze" was conducted for the purposes of throwing a monkey
wrench in the plans of Wall Street hedge funds which exist within the rarified world of
billionaires and their friends.
Pro–Wall Street Fearmongering
The reactions to the event from media pundits and other commentators were telling in that
there was clearly fear and outrage over the fact that business as usual on Wall Street wasn't
being enforced. Predictably, much of the reaction to the Reddit rebellion was to label it a
"fiasco," " insanity
," and something sure to leave a "
trail of destruction ." The important thing was to use words designed to make it all look
like the threat to hedge funds represents some sort of grave threat to the overall economy. Jim
Lebenthal at CNBC, for example,
declared the "short-squeeze fiasco is a threat to the proper functioning of financial
markets."
The fearmongering went beyond even the usual places we hear about financial news. On The
View , for example, Meghan McCain delivered the sort of status quo
–defending bromides we've come to expect from her. She insisted the GameStop affair could
spiral into an economy-killing disaster because
If the stock ends up plunging because of this, because of GameStop and Wall Street loses
billions, at a certain point, it will impact stocks like Apple and Disney and stocks that a
lot of average Americans do invest in, and if that happens, average Americans will end up
losing even more money.
Her comment doesn't rally make any sense, and she doesn't seem to have even a rudimentary
understanding of what happened. But her comment delivered the important point: namely, that
anything that causes volatility in the market could be a disaster for every American household.
Translation: and we should all be very, very afraid if something isn't done to keep these
Reddit people --
whom she compared to the Capitol "insurrectionists" -- under control.
Of course, in a functioning and relatively unhampered market, unusual, unexpected things
happen all the time. Entrepreneurial actors do things the incumbent firms and "experts" hadn't
counted on. This leads to "instability" and big swings in prices. This is actual capitalism,
and it doesn't mean the marketplace isn't functioning properly. In fact, it probably means the
marketplace is dynamic and responsive to consumers and other market participants.
But that's not something Wall Street insiders or their pals in Washington like in the modern
era. Although Wall Streeters love to portray themselves as capitalist captains of industry, the
fact is they have very little interest in real, competitive capitalism.
Rather, we live in the era of "too big to fail" (TBTF), when market freedom means nothing
and preserving the portfolios of powerful Wall Street institutions is what really
matters.
Decades of "Too Big to Fail"
It's based on the idea that Wall Street is just too important to the whole economy, and
Washington must intervene to make sure rich guys on Wall Street stay rich. David Stockman
explains this philosophy:
[It is] the notion that the "threat of systemic risk" and a cascading contagion of losses
form the failure of any big Wall Street institution would be so calamitous that it warranted
an exemption from free market discipline.
This goes back at least to the 1994 Mexican bailout -- which was really a bailout of
investors, not of Mexico -- which solidified the process of normalizing huge transfers of
wealth from taxpayers and dollar holders to the Wall Street elite. By then, the "Greenspan put"
was already in place, with the central bank forever poised to embrace more easy money in
pursuit of propping up stock prices. Then came the bailouts of 2008 and the covd-19 avalanche
of easy money -- all of which lopsidedly benefited Wall Street over the rest of the
economy.
This "exemption from free market discipline" is what Wall Street is all about these days.
The financial sector has become accustomed to enjoying bailouts, easy money, and the resulting
financialization which puts ever greater amounts of the US economy into the hands of Wall
Street money managers. The sector is now built on corporate welfare, not "free markets." No
matter what happens, Wall Street expects the deck to be stacked in its favor.
This is why "volatility" has become a bad word, and "stability" is now the name of the game.
It's why Lebenthal thinks anything out of the ordinary is a threat to the "proper functioning
of financial markets." If some free market innovation and inventiveness actually takes place in
some small corner of the marketplace, well, then we're all expected to get very upset.
That's the way Wall Street likes it. ay_arrow 1
Kayman 8 hours ago
The marketing slogan "Too Big Too Fail" conveniently presumed Wall Street was more
important than the Real Economy. A fatal presumption.
Wall Street is a Parasite, backstopped by the Fed, who, in turn, are backstopped by the
Nation. A crumbling nation, where the Fed strangles lending/savings intermediation, and saves
the blood suckers by bleeding the dying core of America.
wmbz 8 hours ago
"The sector is now built on corporate welfare, not "free markets."
This is NOT a new thing. Corporate welfare has been in play for a long, long time. I am
amazed how long it has taken otherwise "smart" people to grasp this fact.
The only difference is, it is out in the glaring sunlight for all to see. TPTB are damn
proud of it!
junction 7 hours ago (Edited)
Except for the involvement of WallStreetBets in temporarily blocking the hedge fund bear
raid on GameStop using "naked" shorts, it is still business as usual on Wall Street. No one
at the SEC does anything but collect a salary, issue press releases and go to lunch as the
Mafia crime families. . . oops, hedge funds run "bust out" operations on businesses. The
lapdog financial press cheered on the hedge funds as they demolished American businesses. The
same gutter journalists who are not yet linking micro-manager Bezos giving up total control
of Amazon right after his cloud service illegally de-platformed Parler for violation of
bogus. made-up community standards. But then, bigger things are afoot. Bolshevik president
Biden just approved deploying B-1 bomber to Norway for the first time. Nuclear bomb carrying
B-1 bombers. Anything to distract people from how rotten things are.
Cognitive rationalist 7 hours ago
Banking financial sector: private profits for me, public losses for thee
gladitsover 8 hours ago remove link
"..the table is tilted folks. The game is rigged.."
George Carlin
Lokiban 8 hours ago
I think it was all about showing to those unawares how corrupt and rigged Wall street
truly is and they have gotten the message out bigtime.
The only question to be asked is who became the proverbial bagholder when average people saw
their 'Bitcoin-Tulipmania' chance to get out with amazing profits and with that breaking the
promise to continue pumping gme till it hits $1500.
One has always to be carefull if these kind of actions are true populism going against the
controllers or is it controllers playing their hideous games again for a reason, like the
great reset.
Greed has never been a good advisor in these times, easy sheoplemoney. It works all the
time..
COMMENT: Message: Re Reddit "WallStreetBets"
Hi Marty,
Thanks for this blog post but I think they are not trying to make money out of short
squeezing GME really, they are trying to make a point. If you follow some of the posts you
see many stories about how badly people and their families were hurt in 2008 when not a
single banker went to prison. Stories of Fathers losing jobs and houses and descending into
alcoholism in front of their children who now are part of WallStreetBets, others who had to
live off of beans and rice or what Mama could grow in the garden and went hungry etc.
So they are not buying GME to see it rise, though that is fine, they are spending money
"they can afford to lose" to punish the hedge funds that have along with bankers hurt the
little guy repeatedly. These same people IMO have bought off our politicians, removed
regulations like Glass Steagal etc all to reap profits to the top while crushing everyone
else.
Listen in June 2008 I got laid off from Palm, in July I broke my arm ( badly ), in August
some tenants left so I tried to put that property up for sale but in September Lehman fell
and the real estate agent told me the market was OFF that I could not sell and needed to rent
it with no one renting for 5 more months. At the same time in September I had a 100K home
equity line I took out just for emergencies and since I was having one I wanted to use it
– but then Wells Fargo pulled the whole thing.
So there I was Marty, sitting on the couch with a cast from fingers to shoulder watching
the world meltdown on a tiny TV set while on lots of pain killers
I was forced to use my small 401K, and ended up using the whole thing through 9 months of
disability, two surgeries and a job search that did not yield a job until the fall of
2011.
So IMO these arrogant SOB cheating hedge fund guys should pound sand on GME for once because
the casino is rigged, heads they win, tails they win, and the taxpayers lose their jobs,
homes, and pay for their bailouts.
I say give it to 'em.
Off my soapbox
REPLY: I fully understand that. I have fought against these people my whole life. I was
more interested in learning HOW the economy functioned where they were only interested in
guaranteed trades. I guess I was the Leonardo da Vinci of finance. Instead of digging up
bodies to figure out how the anatomy functioned, I searched history and developed a computer
model to try to ascertain what made the world economy tick.
A professor from Princeton where Einstein taught said to me that I reminded him of
Einstein. I was surprised, for I did not see myself as comparable to Einstein in any way. He
then explained that what he meant was my curiosity which moved me to try to figure out what
made it all function. I came to understand what he meant. If you are not CURIOUS and seek out
knowledge, then you will NEVER discover anything new! I was not dealing with the physics of
the world, but the finance. People are attracted by this blog and Socrates for that same
reason. They have that spark of curiosity and seek to also understand what makes it all tick!
We need to teach students to be curious. That is the key to all progress we desperately need
to survive this never-ending battle of authoritarianism v independence and freedom.
I have stated many times that I had discovered the 8.6-year frequency in my research I
conducted at Princeton, University in the Firestone Library. Those were fond memories for it
was an amazing resource back then as was the Royal British Newspaper Library, which I
gathered my FOREX database by sifting through the largest newspaper collection in the
world.
This was the difference between me and the "club" where I tried to understand the movement
of the ages that caused the rise and fall of civilization and therein the economy/markets,
and the "club" which seeks to manipulate everything by sheer force armed with bribes. They
own the Southern District of New York courts, the Second Circuit, and the Department of
Justice along with the SEC and CFTC. Goldman Sachs has even stacked the SEC and CFTC with
their former people. Nobody was prosecuted despite the fact that they were involved in the
looting of capital in Malaysia and Greece. And people have the audacity to claim there was
absolutely no election fraud? There is nothing we can trust that goes on in government
anymore and it will only get far worse as we head into 2032.
I am well aware of the sentiment behind this Reddit trend. My concern is simple. Don't put
it past the "club" to be in there making this seem like a sure bet and then set everyone up
for the big crash. Be careful here going into Feb/March 2021.
Last week, a large number of small-time investors drove up the price of GameStop's (GME)
stock a
historic 1,784 percent . But this was no mere spike in some obscure stock. The stock's
price spiked in part as a result of efforts by "an army of smaller investors who have been
rallying on Reddit and elsewhere online to support GameStop's stock and beat back the
professionals." These professionals were hedge fund managers who had shorted GameStop's stock.
In other words, hedge funders were betting billions that GameStop's stock would go down. But
the price went up instead, meaning hedge funds like Melvin Capital (and Citron Research) took
"a significant loss," possibly totaling
$70 billion.
There surely were plenty of insiders on both sides of this deal. Given the complexity of
various schemes employed by seasoned investors, it seems it is very unlikely that this is just
a simple matter of little Davids taking on Wall Street Goliaths.
But it also looks like that's not all that was going on. Had this only been just another
scheme by some Wall Street insiders against some other Wall Street insiders the story would
probably have ended there.
But that's not what happened. Rather, it appears that, for many of the smaller investors who
were involved, much of this "short squeeze" was conducted for the purposes of throwing a monkey
wrench in the plans of Wall Street hedge funds which exist within the rarified world of
billionaires and their friends.
Pro–Wall Street Fearmongering
The reactions to the event from media pundits and other commentators were telling in that
there was clearly fear and outrage over the fact that business as usual on Wall Street wasn't
being enforced. Predictably, much of the reaction to the Reddit rebellion was to label it a
"fiasco," " insanity
," and something sure to leave a "
trail of destruction ." The important thing was to use words designed to make it all look
like the threat to hedge funds represents some sort of grave threat to the overall economy. Jim
Lebenthal at CNBC, for example,
declared the "short-squeeze fiasco is a threat to the proper functioning of financial
markets."
The fearmongering went beyond even the usual places we hear about financial news. On The
View , for example, Meghan McCain delivered the sort of status quo
–defending bromides we've come to expect from her. She insisted the GameStop affair could
spiral into an economy-killing disaster because
If the stock ends up plunging because of this, because of GameStop and Wall Street loses
billions, at a certain point, it will impact stocks like Apple and Disney and stocks that a
lot of average Americans do invest in, and if that happens, average Americans will end up
losing even more money.
Her comment doesn't rally make any sense, and she doesn't seem to have even a rudimentary
understanding of what happened. But her comment delivered the important point: namely, that
anything that causes volatility in the market could be a disaster for every American household.
Translation: and we should all be very, very afraid if something isn't done to keep these
Reddit people --
whom she compared to the Capitol "insurrectionists" -- under control.
Of course, in a functioning and relatively unhampered market, unusual, unexpected things
happen all the time. Entrepreneurial actors do things the incumbent firms and "experts" hadn't
counted on. This leads to "instability" and big swings in prices. This is actual capitalism,
and it doesn't mean the marketplace isn't functioning properly. In fact, it probably means the
marketplace is dynamic and responsive to consumers and other market participants.
But that's not something Wall Street insiders or their pals in Washington like in the modern
era. Although Wall Streeters love to portray themselves as capitalist captains of industry, the
fact is they have very little interest in real, competitive capitalism.
Rather, we live in the era of "too big to fail" (TBTF), when market freedom means nothing
and preserving the portfolios of powerful Wall Street institutions is what really
matters.
Decades of "Too Big to Fail"
It's based on the idea that Wall Street is just too important to the whole economy, and
Washington must intervene to make sure rich guys on Wall Street stay rich. David Stockman
explains this philosophy:
[It is] the notion that the "threat of systemic risk" and a cascading contagion of losses
form the failure of any big Wall Street institution would be so calamitous that it warranted
an exemption from free market discipline.
This goes back at least to the 1994 Mexican bailout -- which was really a bailout of
investors, not of Mexico -- which solidified the process of normalizing huge transfers of
wealth from taxpayers and dollar holders to the Wall Street elite. By then, the "Greenspan put"
was already in place, with the central bank forever poised to embrace more easy money in
pursuit of propping up stock prices. Then came the bailouts of 2008 and the covd-19 avalanche
of easy money -- all of which lopsidedly benefited Wall Street over the rest of the
economy.
This "exemption from free market discipline" is what Wall Street is all about these days.
The financial sector has become accustomed to enjoying bailouts, easy money, and the resulting
financialization which puts ever greater amounts of the US economy into the hands of Wall
Street money managers. The sector is now built on corporate welfare, not "free markets." No
matter what happens, Wall Street expects the deck to be stacked in its favor.
This is why "volatility" has become a bad word, and "stability" is now the name of the game.
It's why Lebenthal thinks anything out of the ordinary is a threat to the "proper functioning
of financial markets." If some free market innovation and inventiveness actually takes place in
some small corner of the marketplace, well, then we're all expected to get very upset.
That's the way Wall Street likes it. ay_arrow 1
Kayman 8 hours ago
The marketing slogan "Too Big Too Fail" conveniently presumed Wall Street was more
important than the Real Economy. A fatal presumption.
Wall Street is a Parasite, backstopped by the Fed, who, in turn, are backstopped by the
Nation. A crumbling nation, where the Fed strangles lending/savings intermediation, and saves
the blood suckers by bleeding the dying core of America.
wmbz 8 hours ago
"The sector is now built on corporate welfare, not "free markets."
This is NOT a new thing. Corporate welfare has been in play for a long, long time. I am
amazed how long it has taken otherwise "smart" people to grasp this fact.
The only difference is, it is out in the glaring sunlight for all to see. TPTB are damn
proud of it!
junction 7 hours ago (Edited)
Except for the involvement of WallStreetBets in temporarily blocking the hedge fund bear
raid on GameStop using "naked" shorts, it is still business as usual on Wall Street. No one
at the SEC does anything but collect a salary, issue press releases and go to lunch as the
Mafia crime families. . . oops, hedge funds run "bust out" operations on businesses. The
lapdog financial press cheered on the hedge funds as they demolished American businesses. The
same gutter journalists who are not yet linking micro-manager Bezos giving up total control
of Amazon right after his cloud service illegally de-platformed Parler for violation of
bogus. made-up community standards. But then, bigger things are afoot. Bolshevik president
Biden just approved deploying B-1 bomber to Norway for the first time. Nuclear bomb carrying
B-1 bombers. Anything to distract people from how rotten things are.
Cognitive rationalist 7 hours ago
Banking financial sector: private profits for me, public losses for thee
gladitsover 8 hours ago remove link
"..the table is tilted folks. The game is rigged.."
George Carlin
Lokiban 8 hours ago
I think it was all about showing to those unawares how corrupt and rigged Wall street
truly is and they have gotten the message out bigtime.
The only question to be asked is who became the proverbial bagholder when average people saw
their 'Bitcoin-Tulipmania' chance to get out with amazing profits and with that breaking the
promise to continue pumping gme till it hits $1500.
One has always to be carefull if these kind of actions are true populism going against the
controllers or is it controllers playing their hideous games again for a reason, like the
great reset.
Greed has never been a good advisor in these times, easy sheoplemoney. It works all the
time..
There is a massive threat to our capital markets, the free market in general, and fair
dealings overall. And no, it's not China. It's a homegrown threat that everyone has been afraid
to talk about.
Until now.
That fear has now turned into rage.
Hordes of new retail investors are banding together to take on Wall Street. They are not
willing to sit back and watch naked short sellers, funded by big banks, manipulate stocks, harm
companies, and fleece shareholders.
The battle that launched this week over GameStop between retail investors and Wall
Street-backed naked short sellers is the beginning of a war that could change everything.
It's a global problem, but it poses the greatest threat to Canadian capital markets, where
naked short selling -- the process of selling shares you don't own, thereby creating
counterfeit or 'phantom' shares -- survives and remains under the regulatory radar because
Broker-Dealers do not have to report failing trades until they exceed 10 days.
This is an egregious act against capital markets, and it's caused billions of dollars in
damage.
Make no mistake about the enormity of this threat: Both foreign and domestic schemers have
attacked Canada in an effort to bring down the stock prices of its publicly listed
companies.
In Canada alone, hundreds of billions of dollars have been vaporized from pension funds and
regular, everyday Canadians because of this, according to Texas-based lawyer James W.
Christian. Christian and his firm Christian Smith & Jewell LLP are heavy hitters in
litigation related to stock manipulation and have prosecuted over 20 cases involving naked
short selling and spoofing in the last 20 years.
"Hundreds of billions have been stolen from everyday Canadians and Americans and pension
funds alike, and this has jeopardized the integrity of Canada's capital markets and the
integral process of capital creation for entrepreneurs and job creation for the economy,"
Christian told Oilprice.com.
The Dangerous Naked Short-Selling MO
In order to [legally] sell a stock short, traders must first locate and secure a borrow
against the shares they intend to sell. A broker who enters such a trade must have assurance
that his client will make settlement.
While "long" sales mean the seller owns the stock, short sales can be either
"covered" or "naked" . A covered short means that the short seller has
already "borrowed" or has located or arranged to borrow the shares when the short sale is made.
Whereas, a naked short means the short seller is selling shares it doesn't own
and has made no arrangements to buy. The seller cannot cover or "settle" in this instance,
which means they are selling "ghost" or "phantom" shares that simply do not exist without their
action.
When you have the ability to sell an unlimited number of non-existent phantom shares in a
publicly-traded company, you then have the power to destroy and manipulate the share price at
your own will.
And big banks and financial institutions are turning a blind eye to some of the accounts
that routinely participate in these illegal transactions because of the large fees they collect
from them. These institutions are actively facilitating the destruction of shareholder value in
return for short term windfalls in the form of trading fees. They are a major part of the
problem and are complicit in aiding these accounts to create counterfeit shares.
The funds behind this are hyper sophisticated and know all the rules and tricks needed to
exploit the regulators to buy themselves time to cover their short positions. According to
multiple accounts from traders, lawyers, and businesses who have become victims of the worst of
the worst in this game, short-sellers sometimes manage to stay naked for months on end, in
clear violation of even the most relaxed securities laws.
The short-sellers and funds who participate in this manipulation almost always finance
undisclosed "short reports" which they research & prepare in advance, before paying
well-known short-selling groups to publish and market their reports (often without any form of
disclosure) to broad audiences in order to further push the stock down artificially. There's no
doubt that these reports are intended to create maximum fear amongst retail investors and to
push them to sell their shares as quickly as possible.
That is market manipulation. Plain and simple.
Their MO is to short weak, vulnerable companies by putting out negative reports that drive
down their share price as much as possible. This ensures that the shorted company in question
no longer has the ability to obtain financing, putting them at the mercy of the same funds that
were just shorting them. After cratering the shorted company's share price, the funds then
start offering these companies financing usually through convertibles with a warrant attachment
as a hedge (or potential future cover) against their short; and the companies take the offers
because they have no choice left. Rinse and Repeat.
In addition to the foregoing madness, brokers are often complicit in these sorts of crimes
through their booking of client shares as "long" when they are in fact "short". This is where
the practice moves from a regulatory gray area to conduct worthy of prison time.
Naked short selling was officially labeled illegal in the U.S. and Europe after the
2008/2009 financial crisis.
Making it illegal didn't stop it from happening, however, because some of the more creative
traders have discovered convenient gaps between paper and electronic trading systems, and they
have taken advantage of those gaps to short stocks.
Still, it gets even more sinister.
According to Christian, "global working groups" coordinate their attacks on specifically
targeted companies in a "Mafia-like" strategy.
Journalists are paid off, along with social media influencers and third-party research
houses that are funded by what amounts to a conspiracy. Together, they collaborate to spread
lies and negative narratives to destroy a stock.
At its most illegal, there is an insider-trading element that should enrage regulators. The
MO is to infiltrate a company through disgruntled insiders or lawyers close to the company.
These sources are used to obtain insider information that is then leaked to damage the
company.
Often, these illegal transactions involve paying off "informants", journalists, influencers,
and "researchers" are difficult to trace because they are made from offshore accounts that are
shut down once the deed is done.
Likewise, the "shorts" disguised as longs can be difficult to trace when the perpetrators
have direct market access to trading systems. These trades are usually undetected until the
trades fail or miss settlement. At that point, the account will move the position to another
broker-dealer and start the process all over again.
The collusion widens when brokers and financial institutions become complicit in
purposefully mislabeling "shorts" as "longs", sweeping the illegal transactions under the rug
and off of regulatory radar.
"Spoofing" and "layering" have also become pervasive techniques to avoid regulator
attention. Spoofing, as the name suggests, involves short sellers creating fake selling
pressure on their targeted stocks to drive prices lower. They accomplish this by submitting
fake offerings in "layers" at different prices to create a mirage.
Finally, these bad actors manage to skirt the settlement system, which is supposed to
"clear" on what is called a T+2 basis . That
means that any failed trades must be bought or dealt with within 3 days. In other words, if you
buy on Monday (your "T" or transaction day), it has to be settled by Wednesday.
Unfortunately, Canadian regulators have a hard time keeping up with this system, and failed
trades are often left outstanding for much longer periods than T+2. These failing trades are
constantly being traded to reset the settlement clock and move the failing trade to the back of
the line. The failures of a centralized system
According to Christian, it can be T+12 days before a failed trade is even brought to the
attention of the IIROC (the Investment Industry Regulatory Organization of Canada)
Prime Brokers and Banks are Complicit
This is one of Wall Street's biggest profit center and fines levied against them are merely
a minor cost of doing business.
Some banks are getting rich off of these naked short sellers. The profits off this kind of
lending are tantalizing, indeed. Brokers are lending stocks they don't own for massive profit
and sizable bonuses.
This layer of what many have now called a "criminal organization" is the toughest for
regulators to deal with, regardless of the illegal nature of these activities.
Prime brokers lend cash account shares that are absolutely not allowed to be lent. They lend
them to short-sellers in order to facilitate them in settling their naked shorts.
It's not that the regulators are in the dark on this. They are, in fact, handing out fines,
left and right -- both for illegal lending and for mismarking "shorts" and "longs" to evade
regulatory scrutiny. The problem is that these fines pale in comparison to the profits earned
through these activities.
And banks in Canada in particular are basically writing the rules themselves, recently
making it easier (and legal) to lend out cash account shares.
Nor do law firms have clean hands. They help short sellers bankrupt targeted companies
through court proceedings, a process that eventually leads to the disappearance of evidence of
naked shorts on the bank books.
"How much has been stolen through this fraudulent system globally is anyone's guess," says
Christian, "but the number begins with a 'T' (trillions)."
The list of fines for enabling and engaging in manipulative activity that destroys
companies' stock prices may seem to carry big numbers from the retail investor's perspective,
but they are not even close to being significant enough to deter such actions:
- The SEC charged Citigroup's principal U.S. broker-deal subsidiary in 2011 with misleading
investors about a $1 billion collateralized debt obligation (CDO) tied to the U.S. housing
market. Citigroup had bet against investors as the housing market showed signs of distress. The
CDO defaulted only months later, causing severe losses for investors and a profit of $160
million (just in fees and trading profits). Citigroup paid $285 million to settle these SEC
charges.
- In 2016, Goldman, Sachs & Co. agreed to pay $15 million to settle SEC charges that
its securities lending practices violated federal regulations. To wit: The SEC found that
Goldman Sachs was mismarking logs and allowed customers to engage in short selling without
determining whether the securities could reasonably be borrowed at settlement.
- In 2013, a Charles Schwab subsidiary was found liable by the SEC for a naked short-selling
scheme and fined
$8.2 million .
- The SEC charged two Merrill Lynch entities in 2015 with using "inaccurate data in the
course of executing short sale orders", fining them $11 million.
- And most recently, Canadian Cormark Securities Inc and two others came under the SEC's
radar. On December 21, SEC instituted cease-and-desist orders against
Cormark. It also settled charges against Cormark and two other Canada-based broker deals for
"providing incorrect order-making information that caused an executing broker's repeated
violations of Regulation SHO". According to the SEC, Cormark and ITG Canada caused more than
200 sale orders from a single hedge fund, to the tune of more than $660 million between August
2016 and October 2017, to be mismarked as "long" when they were, in fact, "short" -- a clear
violation of Regulation SHO. Cormark agreed to pay a penalty of $800,000 , while ITG Canada -- one of
the other broker-dealers charged -- agreed to pay a penalty of $200,000. Charging and fining
Cormark is only the tip of the iceberg. The real question is on whose behalf was Cormark making
the naked short sells?
- In August 2020, Bank of Nova Scotia (Scotiabank) was fined
$127 million over civil and criminal allegations in connection with its role in a massive
price-manipulation scheme.
According to one Toronto-based Canadian trader who spoke to Oilprice.com on condition of
anonymity, "traders are the gatekeeper for the capital markets and they're not doing a very
good job because it's lucrative to turn a blind eye." This game is set to end in the near
future, and it is only a matter of time.
"These traders are breaking a variety of regulations, and they are taking this risk on
because of the size of the account," he said. "They have a responsibility to turn these
trades down. Whoever is doing this is breaking regulations [for the short seller] and they know
he is not going to be able to make a settlement. As a gatekeeper, it is their regulatory
responsibility to turn these trades away. Instead, they are breaking the law willfully and with
full knowledge of what they are doing."
"If you control the settlement system, you can do whatever you want," the source
said. "The compliance officers have no teeth because the banks are making big money. They
over-lend the stocks; they lend from cash account shares to cover some of these fails for
instance, if there are 20 million shares they sold 'long', they can cover by borrowing from
cash account shares."
The Naked Truth
In what he calls our "ominous financial reality", Tom C.W. Lin, attorney at law, details how
"millions of dollars can vanish in seconds, rogue actors can halt trading of billion-dollar
companies, and trillion-dollar financial markets can be distorted with a simple click or a few
lines of code".
Every investor and every institution is at risk, writes Lin.
The naked truth is this: Investors stand no chance in the face of naked short sellers. It's
a game rigged in the favor of a sophisticated short cartel and Wall Street giants.
Now, with online trading making it easier to democratize trading, there are calls for
regulators to make moves against these bad actors to ensure that North America's capital
markets remain protected, and retail investors are treated fairly.
The recent GameStop saga is retail fighting back against the shorting powers, and it's a
wonderful thing to see - but is it a futile punch or the start of something bigger? The
positive take away from the events the past week is that the term "short selling" has been
introduced to the public and will surely gather more scrutiny.
Washington is gearing up to get involved. That means that we can expect the full power of
Washington, not just the regulators, to be thrown behind protecting the retail investors from
insidious short sellers and the bankers and prime brokers who are profiting beyond belief from
these manipulative schemes.
The pressure is mounting in Canada, too, where laxer rules have been a huge boon for
manipulators. The US short cartel has preyed upon the Canadian markets for decades as they know
the regulators rarely take action. It is truly the wild west.
Just over a year ago,
McMillan published a lengthy report on the issue from the Canadian perspective, concluding
that there are significant weaknesses in the regulatory regime.
While covered short-selling itself has undeniable benefits in providing liquidity and
facilitating price discovery, and while the Canadian regulators' hands-off approach has
attracted many people to its capital markets, there are significant weaknesses that threaten to
bring the whole house of cards down.
McMillan also noted that "the number of short campaigns in Canada is utterly
disproportionate to the size of our capital markets when compared to the United States, the
European Union, and Australia".
Taking Wall Street's side in this battle, Bloomberg notes that Wall Street
has survived "numerous other attacks" over the centuries, "but the GameStop uprising could mark
the end of an era for the public short", suggesting that these actors are "long-vilified folks
who try to root out corporate wrongdoing".
Bloomberg even attempts to victimize Andrew Left's Citron Research, which -- amid all the
chaos -- has just announced that it has exited the short-selling game after two decades.
Nothing could be further from the truth. Short sellers, particularly the naked variety, are
not helping police the markets and route out bad companies, as Bloomberg suggests. Naked short
sellers are not motivated by moral and ethical reasons, but by profit alone. They attack good,
but weak and vulnerable companies. They are not the saviors of capital markets, but the
destroyers. Andrew Left may be a "casualty", but he is not a victim. Nor likely are the hedge
funds with whom he has been working.
In a petition initiated by Change.org, the petitioners urge the SEC and FINRA to
investigate Left and Citron Research, noting: "While information Citron Research publishes are
carefully selected and distributed in ways that do not break the law at first sight, the SEC
and FINRA have overlooked the fact that Left and Citron gains are a result of distributing
catalysts in an anticipation of substantial price changes due to public response in either
panic, encouragement, or simply a catalyst action wave ride. Their job as a company is to
create the most amount of panic shortly after taking a trading position so they and their
clients can make the most amount of financial gains at the expense of regular investors."
On January 25 th , the
Capital Markets Modernization Taskforce published its final report for Ontario's Minister
of Finance, noting that while naked short selling has been illegal in the United States since
2008, it remains a legal loophole in Canada. The task force is recommending that the Ministry
ban this practice that allows for the short-selling of tradable assets without first borrowing
the security.
The National Coalition Against Naked Short Selling - Failing to Deliver Securities (NCANS),
which takes pains to emphasize that is not in any way against short-selling, notes: "Naked
short-selling transfers the risk exposure and the hedging expense of the derivatives market
makers onto the backs of equity investors, without any corresponding benefit to them. This is
fundamentally unfair, and must stop."
Across North America, the issue is about to reach a fever pitch over GameStop. For once,
regular retail investors have a voice to use against Wall Street. And for once, Washington
appears to be listening. The House and Senate both have hearings
scheduled over the GameStop saga.
Paradoxically, the same company that basically started the retail investor coup -- zero-fee
trading app Robinhood -- is now under fire for pulling the rug out from under the same
democratic movement.
After retail investors joined forces against Wall Street short-sellers to push GameStop
stock from $20 to a high of over $480 in less than a week, Robinhood made the very unpopular
move of instituting
a ban on buying for retail investors. Under the rules, Wall Street could still buy and
sell, but retail investors could only sell. This new band of investors -- which includes pretty
much all of Robinhood's clientele -- are up in arms, with customers now suing. They won't go
away, and they have Washington's ear and Twitter and Reddit's social media power. This is
shaping up to be an uprising.
What happens with GameStop next could end up dictating a new form of capital markets
democracy that levels the playing field and punishes the Mafia-like elements of Wall Street
that have been fleecing investors and destroying companies for years.
Retail investors want to clean up capital markets, and they just might be powerful enough to
do it now. That's a serious wake-up call for both naked short sellers and the investing
public.
"... Today's cultural dominance in much of the South and chunks of the Midwest by boobtoob preachers, Dominationists and the highly heretical oxymoronical "Christian" Zioni$ts can be seen as the afterbirth of cultural Calvinism. Calvinism is Talmudic in its essence and squats at the nexus of what they like to call "Judeo-Christian Civilization". ..."
The author Jafee is confused on Bentham, because Bentham was confused himself, or was a Jewish agent of mammon.
The highlighted terms accord with Benthamian Utilitarianism -- the greatest human happiness of the greatest human number.[1]
Much (but surely not all) pertinent history suggests that Bentham's thinking influenced the construction of the Preamble
The English philosopher Jeremey Bentham (1748-1832) was a defender of usury, which is the opposite of happiness for the greatest
human number.
In 1787 Jeremey Bentham wrote "In Defence of Usury." Bentham was the son of a rich lawyer, and a lawyer himself, not an economist,
which is why he was confused. Bentham created the present mis-definition of usury which prevails to today, so he was very damaging.
"The taking of grater interest than the law allows, or the taking of greater interest than is usual."
Bentham ignored hundreds of years of the Catholic Scholastics work on usury, and also ignored Aristotle. Actually Bentham attacked
Aristotle in order to spread his B.S. Bentham's father was Jewish, and Bentham also ignored the fairly strong Old Testament admonitions
against usury.
Bentham spread the same erroneous B.S. that Calvin did, and both men did enormous damage, and whether by design or confusion
are NOT for the common good. Their connections to our (((friends))) is suspicious.
A Persian Daric is a gold coin. Bentham said this: Though all money in nature is barren, though a Daric would not beget another
Daric yet for a Daric which a man borrowed he might get a ram and couple of ewes and the ewes would probably not be barren (pages
98 to 101 of his screed)
Aristotle and the Catholic Schoolmen clearly showed that it was the Ewes that were fertile, not the coins.
Bentham or Calvin could not read with comprehension and twisted words into new meanings. This twisted language persists in
the brains of modern humans as confusion.
As if every Daric is going to buy an Ewe in order to reproduce.
By 1850 John Whipple wrote "The Importance of Usury Laws – An answer to Jeremey Bentham."
"The purpose of money is to facilitate exchange. It was never intended as an article of trade, as an article possessing an
inherent value in itself, and further than as representative or test of the value of all other articles."
It undoubtedly admits of private ownership, but of an ownership that is not absolute, like the product of individual industry,
but qualified and limited by the special use for which it was designed.
And
The power of money over every other article, arises out of the artificial character given to it by the STATE , AND NOT
OUT OF THE QUALITIES OF THE MATERIAL WHICH IT IS COMPOSED.
Bentham also argued that anti-usury laws were due to prejudice against Jews. Whipple was not frightened by the Jew trick of
anti-semitism claims. Whipple said this in reply, "The real truth is this feeling which he calls prejudice is the result of the
moral instinct of mankind."
Whipple wasn't afraid of calling out the Jew.
In other words, Bentham did not have the moral instinct of mankind, but instead was a usurer, hiding behind his utilitarianism
doctrine.
My view is that the preamble general welfare clause is direct lineage that comes through Benjamin Franklin and his experiences
in the Philadelphia Colony. Franklin was definitely NOT a usurer, and was not confused on money.
The Preamble of the constitution reflects a Liebnizian metaphysic reflected in the notion of the pursuit of happiness, were
are not talking utilitarianism, but a recognition that man is made in the image of the creator, Imago Dei where happiness
reflects an acknowledgement that we are actually creative beings where happiness is a reflection of such creativity, above mere
acquisition of 'property' as the Confederacy devolved the phrase to "Life, Liberty and Property"
@Mefobills eply distorted by Calvinistic Puritanism and its "Chosen People" mythos.
Much of the religious fervor which dominated the American frontier in the latter decades of the 18th Century and early 19th–they
called it "The Great Awakening" -- was infused with the patriarchal form of religiosity as ignited by Calvinistic tropes and memes.
Today's cultural dominance in much of the South and chunks of the Midwest by boobtoob preachers, Dominationists and the
highly heretical oxymoronical "Christian" Zioni$ts can be seen as the afterbirth of cultural Calvinism. Calvinism is Talmudic
in its essence and squats at the nexus of what they like to call "Judeo-Christian Civilization".
My preference is to employ the more objectively truthful description: the "JudieChristie MagickMindfuck.
@Leonard R. Jaffee Anti-semitism card. Bentham even attacked Aristotle for corrupting Christianity.
In Bentham's book, Bentham associates some of the positive attributes of thrift with money lending. Money lending becomes on
the same plane as thrift in his worldview. An here is the coup-de-gras: Compound interest was forbidden in Bentham's day, and
Bentham urged its legalization.
A compound curve for interest is outside of nature, as the claims on nature grow exponentially. Nature does not grow exponentially.
Nature and labor cannot pay the claims, and society polarizes. Jesus started his mission on the Jubilee year, as Jubilees are
coded in the Bible to prevent polarization.
If Bentham wasn't a Jew, he certainly had the Jewish spirit. Bentham was not for the common good.
"... "I am also reading the the next focus of the little people investors is the highly manipulated precious metals markets.....I love the smell of burning Wall Street in the morning." ..."
"... Back in the Oughts when the fraudulent mortgages were grossly inflating Real Estate Investment Trusts (REITs), there were many instances of naked short selling to keep honest REITs down, activities I learned firsthand. We formed a shareholders organization that lobbied the SEC to enforce its laws but to no avail--the regulators were well captured and did zip. ..."
"... There's short selling, and then there's naked short selling. Why do the markets require naked short selling? If those hedge funds already owned the stocks that they are selling short, they would not be in such trouble now. ..."
Early this week a few amateur stock trading nerds decided to promote a stock that was heavily shortened by certain hedge funds.
The idea was to raise the stock price of Game Stop Corp., a vendor for computer games, by having lots of small stock traders to
buy into it. The hedge fund that shortened the stock, and thereby bet on a dropping stock price, would then make huge losses while
the many small buyers would potentially profit.
Instead of greed, this latest bout of speculation, and especially the extraordinary excitement at GameStop, has a different
emotional driver: anger. The people investing today are driven by righteous anger, about generational injustice, about what
they see as the corruption and unfairness of the way banks were bailed out in 2008 without having to pay legal penalties later,
and about lacerating poverty and inequality. This makes it unlike any of the speculative rallies and crashes that have preceded
it.
The movement was successful. The stock price of Game Stop Corp. rose from some $10 to over $400 within just a few days. The
short seller
had
to take cover under a larger firm:
Hedge fund Melvin Capital closed out its short position in GameStop on Tuesday after taking huge losses as a target of the
army of retail investors. Citadel and Point72 have infused close to $3 billion into Gabe Plotkin's hedge fund to shore up its
finances.
I'm shocked! Absolutely shocked to see that the game of finance is rigged!!!!/snark
There have not been market fundamentals since the beginning of financialization in 1971 when money became fiat instead of gold
backed. I find it interesting that it has taken 50 years for the cancer of financialization to fully compromise the host. It will
be interesting to see where this goes from here.
I think the speed of decline of empire is speeding up as noted by the increase in international investment in China.
I am also reading the the next focus of the little people investors is the highly manipulated precious metals markets.....I
love the smell of burning Wall Street in the morning.
"I am also reading the the next focus of the little people investors is the highly manipulated precious metals markets.....I
love the smell of burning Wall Street in the morning."
Is Max Keiser going after the silver market again? I bet he was posting on r/Wallstreetbets to stir things up!
Back in the Oughts when the fraudulent mortgages were grossly inflating Real Estate Investment Trusts (REITs), there were many
instances of naked short selling to keep honest REITs down, activities I learned firsthand. We formed a shareholders organization
that lobbied the SEC to enforce its laws but to no avail--the regulators were well captured and did zip.
We even ran full pages ads in the NY Times and WaPost to add visibility to our justifiable outrage, which was well proven when
the bubble burst.
But Obama didn't do his job and enforce the law, and the entire mess is far worse now. This episode epitomizes the amazing
amounts of corruption masquerading as well regulated markets and an equitable financial system.
I support Hudson's debt forgiveness for the main reason it will bankrupt the debt holders--the Financial Parasites--who are
also the beneficiaries of the corrupt system; and with their destruction, will allow for the rise of the Public Financial Utility
that will restore law and order to that realm of the economy. Yes, this must be seen as yet another episode of the longstanding
Class War, one of the most brazen ever.
There's short selling, and then there's naked short selling. Why do the markets require naked short selling? If those hedge
funds already owned the stocks that they are selling short, they would not be in such trouble now.
Citadel and Point72 have infused close to $3 billion into Gabe Plotkin's hedge fund to shore up its finances.
-b
How Robinhood was rigged:
Robinhood sells its orderflow to Citadel for execution. Citadel then chiselled the retail investor for pennies per trade by frontrunning (think high freq trading) before execution
of retail order, inflating the price and cheating the customer.
Citadel bailed out Citron, essentially inheriting the short position. Citadel then threatened Robinhood with refusing payment for orderflow
The wonderful world you talk about was not experienced by the peoples of Guatemala, Iran,
Chile, Honduras, Nicaragua, Mexico, Argentinia, Haiti, Vietnam, Laos, Cambodia, Iran, Iraq,
Libya, Syria and many of the homeless and destitute in the US, UK, Japan etc. The wonderful
world you describe is an illusion.
There is a line from the 1960s Science Fiction series called the Invaders from another
galaxy who wish take over the world. At the beginning of each episode the narrator says " they
wish to take over the world and make it their world".
The Transnational Financiers have been working towards that goal for centuries!!!!
Like the petrodollars, WTO better known as globalization, was formed in 1995 after the
fall of Eastern blocks ,to dominate and control the world trade in US fiat currency specially
when China with her cheap skilled labor was to become major world manufacturers of goods.
Basically like oil America agreed not to impose tariff on goods they consumed if you trade
and exported on their fiat currency which costed US nothing to produce. Obviously unlike oil
trade this globalization of trade in US dollar could not work, since unlike oil trade America
couldn't politically dominated and control the good manufacturing countries, like it could,
with small oil producing countries. The period of free trade in goods and energy is coming to
an end, therefore US needs to lower her standards of living, or to go to major wars with
other resources hungry powers to continue colonizing the third world resources and labor.
Either way the end result will be the sam as for, not so Great Britain, ottomans, Spanish,
Persian empires, the only obvious difference shorter empire.
"The middleman and the host society come in conflict because elements in each group have incompatible goals. To say this is
to deny the viewpoint common in the sociological literature that host hostility is self-generated (from psychological problems
or cultural traditions)."
Edna Bonacich, "A Theory of Middleman Minorities," 1973.
[1]
An interesting accompaniment to Nathan Cofnas's 2018 attempted debunking of Kevin MacDonald's work on Jews was the subtle resurfacing
of Steven Pinker's claim that a more plausible theory of the Jewish historical experience can be found in "Thomas Sowell's convincing
analysis of 'middleman minorities' such as the Jews, presented in his magisterial study of migration, race, conquest, and culture."
Pinker first involved himself in criticism of MacDonald's work in a
letter to Slate , in January 2000, where he made the
above comment. A mere teenager in January 2000, it was only in the wake of the Cofnas affair that I first discovered and read Pinker's
initial response to MacDonald's theory. It goes without saying that I disagreed with almost everything Pinker had to say, but I was
especially vexed by his invocation of the "middleman minority" theory, something I've been familiar with for over a decade and always
found strongly lacking. Pinker himself, of course, has relatively little expertise in the area, his only comment on the theme coming
from a quasi-memoir on Jewish intelligence written for
New Republic . Additionally, his gushing use
of persuasive language ("convincing," "magisterial") to describe Thomas Sowell's extremely derivative and now rather dated Migrations
and Cultures: A World View (1996) struck me as a wholly contrived inflation of what isn't really a rival theory at all,
and certainly not a Sowell innovation. In fact, the history of "middleman minority" theory, and especially its application to the
Jews, has a patchy, chequered, and ambiguous history that is worth exploring in its own right. The following essay is intended to
provide such a history, as well as to broadly assess the merits and inadequacies of exploring Jewish history through this lens, and
also the ways it complements, and falls short of, Kevin MacDonald's theory.
History of the Theory
The comparing of Jews with other sojourning or diaspora trading peoples is far from new, and has even been a staple of anti-Jewish
writing since at least the Enlightenment. Voltaire, for example, wrote in his Oeuvres Complètes (Geneva, 1756) and Dictionnaire
Philosophique (Basle, 1764) that "The Guebers [Parsis in the modern terminology], the Banyans [Indian merchants] and the Jews,
are the only nations which exist dispersed, having no alliance with any people, are perpetuated among foreign nations, and continue
apart from the rest of the world." [2]
In the course of his essay, however, Voltaire concluded that, some surface similarities aside, "It is certain that the Jewish nation
is the most singular that the world has ever seen." Bruno Bauer (1809 -- 1882), the German Protestant theologian, philosopher and
historian, also used the example of the Parsis and Overseas Indians, writing in The Jewish Problem (1843),
The base [of the tenacity of the Jewish national spirit] is lack of ability to develop with history, it is the reason of the
quite unhistorical character of that nation, and this again is due to its oriental nature. Such stationary nations exist in the
Orient, because there human liberty and the possibility of progress are still limited. In the Orient and in India, we still find
Parsees [sic] living in dispersion and worshipping the holy fire of Ormuz.
[3]
After Voltaire, commentary on the relationship between the economic activity of the Jews and other aspects of their behavior and
history, a key theme in modern middleman minority theory, were common points of discussion and debate. Jakob Friedrich Fries (1773
-- 1843), an avowedly anti-Semitic German philosopher, argued in his essay On the Danger to the Well-Being and Character of the
Germans Presented by the Jews (1816), that Jews adopted their historical middleman role willingly, out of a hunger for profit
and an innate sense of separateness, rather than being forced into it by broader economic structures and contexts (which again are
a major focus of modern middleman minority theory). For Fries,
Both in Germany and abroad the Jews had free states where they enjoyed every right, and even countries where they reigned --
but their sordidness, their mania for deceitful, second-hand dealing always remained the same. They shy away from industrious
occupations not because they are hindered from pursuing them but simply because they do not want to.
Following Bauer and Fries -- and before modern scholarship on the subject, the most prominent invocation of ideas similar to modern
middleman minority theory can be observed in the work of Karl Marx. In fact, Marx's essay On the Jewish Problem is an explicit
reply to Bauer, with Marx accusing Bauer of "a one-sided conception of the Jewish problem."
[4] Marx decried Bauer's focus on religious
matters, perceiving the roots of the Jewish problem to reside instead in resource competition and raw economics. In many of his arguments
and assessments of the economic and sociological position of the Jews, Marx anticipated Edna Bonacich (1940 -- ), the Jewish Marxist
anti-Zionist sociologist who essentially invented middleman minority theory in its modern form (and whose work will be discussed
below), in arguing for a structural-contextual explanation of the middleman role of the Jews. In this view, the historical development
of Capital essentially invites and entices certain sojourning or diaspora groups, including the Jews, to adopt lucrative but exploitative
and antagonistic roles within society. In the words of Marx, "we recognize therefore in Judaism a generally present anti-social element
which has been raised to its present peak by historical development , in which the Jews eagerly assisted ." [emphasis
added] These antagonistic roles then generate host hostility, which reinforces ethnocentrism and negative characteristics in the
minority, accelerating and deepening conflict.
Marx's emphasis on economic opportunity and the capitalist superstructure influenced later writers such as the German economist
Wilhelm Roscher (1817 -- 1894), Werner Sombart (1863 -- 1941), Max Weber (1864 -- 1920), and Georg Simmel (1858 -- 1918), all of
whom attempted in some form to trace the relationship of ethnicity to occupational choice (a major concern of modern middleman minority
theory), with particular attention paid to the Jews. In keeping with his flamboyant Marxism, Sombart was closest to Marx's ideas
on the Jews, arguing in The Jews and Modern Capitalism (1911) that Capital had drawn Jews into their influential, exploitative,
and lucrative roles in such a comprehensive manner that Jews had become a kind of ur-middleman minority, and thus were both the prime
movers of modern capitalism and the very embodiment of exploitative capital itself. Later, in Der moderne Kapitalismus (1913),
Sombart claimed that the middleman nature of the Jews had become endemic in society, creating generations of mere "traders," a bourgeois
"Jewish species" whose entire intellectual and emotional world is "directed to the money value of conditions and dealings, who therefore
calculates everything in terms of money." This "spirit of Moloch" compelled the entrepreneur to "make money relentlessly until at
last he conceives this as the real goal of all activity and all existence."
[5] For Sombart, the origins of the
worst of modern capitalism can be found in the early middleman role of the Jews, their medieval semi-nomadic quest for usury-derived
profit and Victorian hawking of shoddy goods being a precursor to modern advertising and the mass production of superfluous and quickly
obsolete consumer products.
Max Weber's interpretation of the Jewish middleman role was slightly softer, with Weber advancing the notion of "pariah capitalism."
Pariah capitalists, who include the Jews as well as the Parsis, the Overseas Indians, and the Overseas Chinese, are groups whose
characteristics and situational contexts make them prone to willingly adopt socially negative positions in order to obtain wealth
and influence. For Weber, capitalism itself was not intrinsically bad. The Puritans, with their industry and hard work, were held
up in Weber's The Protestant Ethic and the Spirit of Capitalism (1904/5) as exemplars of positive, "rational" capitalism.
Jews, and other pariah capitalists, however, invariably advanced a negative "irrational" capitalism typified by consumer credit,
speculation, and colonialism. According to Weber, middleman minorities or "pariah capitalist groups" perverted the essentially good
nature of capitalism because of their practice of "dual ethics," or moral double-standards, which was itself a product of their sojourning
nature and situational context. Weber also perceived Judaism itself as reinforcing the Jewish preference for pariah capitalism.
[6]
Softer still were the ideas of Wilhelm Roscher, one of the founders of the historical school of political economy. Roscher was
part of the historical economist or European Institutionalist movement (which also influenced Weber) that argued for a study of economics
based on empirical work that laid special methodological emphasis on context, rather than logical philosophy. Roscher's emphasis
on context and the historical development of capitalism are exemplified in his 1875 essay "The Status of the Jews in the Middle Ages
Considered from the Standpoint of Commercial Policy."[7] In this essay, Roscher presented capitalism as neither inherently good or
bad, and he made the argument that Jews, who like other middleman minorities were economic modernizers, were positive influences
and crucial to the development of a burgeoning economic trading system. Gideon Reuveni offers the following summary:
According to Roscher, the modernizing role of the Jews explains the change in attitudes within the social majority: from tolerance
and acceptance to exclusion and persecution. In other words, once, in the eyes of the majority the role of the Jews becomes superfluous,
resentments towards the Jews become more prevalent. This cycle in relations towards Jews, Roscher observed, was not specific to
the relationship between Jews and non-Jews but was rather a general development among many peoples who allow their economies to
be administered by a foreign and more highly cultivated people, but later, upon having reached the necessary level of development
themselves, often after intense struggles, try to emancipate themselves from this tutelage. According to Roscher, "one may defiantly
speak in this connection of a historical law here."
[8]
Similar to Roscher's ideas were the theories of the Jewish Marxist anti-Zionist Abram Leon (1918 -- 1944). Leon, a Polish Jew
said to have been executed at Auschwitz at the age of 26, published
The Jewish Question: A Marxist Interpretation around 1942, in
which he proposed that Jews were a "people-class." For Leon, "Judaism mirrors the interests of a pre-capitalist mercantile class."
He explains,
Judaism was an indispensable factor in precapitalist society. It was a fundamental organism within it. That is what explains the
two-thousand-year existence of Judaism in the Diaspora. The Jew was as characteristic a personage in feudal society as the lord and
the serf. It was no accident that a foreign element played the role of "capital" in feudal society. Feudal society as such
could not create a capitalist element; as soon as it was able to do so, precisely then it ceased being feudal. Nor was it accidental
that the Jew remained a foreigner in the midst of feudal society. The "capital" of precapitalist society existed outside of its economic
system. From the moment that capital begins to emerge from the womb of this social system and takes the place of the borrowed organ,
the Jew is eliminated and feudal society ceases to be feudal. It is modern capitalism that has posed the Jewish problem. Not because
the Jews today number close to twenty million people (the proportion of Jews to non-Jews has declined greatly since the Roman era)
but because capitalism destroyed the secular basis for the existence of Judaism. Capitalism destroyed feudal society; and with it
the function of the Jewish people-class. History doomed this people-class to disappearance; and thus the Jewish problem arose. The
Jewish problem is the problem of adapting Judaism to modern society.
Georg Simmel, an ethnically Jewish sociologist, philosopher, and critic, moved in much the same theoretical direction as Roscher
and Leon, as evidenced in his famous and still influential essay "Der Fremde" ("The Stranger") (1908). Simmel argued that certain
groups like Jews and other diaspora peoples may be members of host nations in a spatial sense but not in a social sense. They may
be in the nation, but not of it. These groups are both near and far, familiar and foreign. This contextual scenario
influences the behavior of "stranger" groups by permitting them freedom from convention and allowing them access to an alleged greater
objectivity. For Simmel, "the Stranger," the classic example of which in his estimation is the Jew, is "the person who comes today
and stays tomorrow. He is, so to speak, the potential wanderer: although he has not moved on, he has not quite overcome the freedom
of coming and going." [9] This freedom,
argues Simmel, makes "the Stranger" ideally suited to fulfil the role of middleman minority.
[10] As with Roscher's theory, which
is markedly contradicted in several key areas of the historical record, there are a number of obvious logical and evidential problems
with Simmel's theory, and these will be discussed later.
Between Simmel's 1908 essay and the 1970s, middleman minority theories continued to be advanced. With the exception of Philip
Curtin and his Cross-cultural Trade in World History (1984), these efforts were developed primarily by Jewish scholars, and
overwhelmingly within the context of trying to explicitly or implicitly explore, explain, or offer apologetics for the Jewish experience.
For example, Abner Cohen (1921 -- 2001), was an anthropologist at the University of London, who advanced, in his influential work
Urban Ethnicity (1974) and numerous other publications, the idea that there are "trading diasporas."
[11] Of particular interest are Cohen's
ideas about "visibility strategies" pursued by such groups:
The use of symbols to maintain group boundaries can thus be seen as a cultural strategy. In fact, many groups in traditional
and modern societies find that their interests are guarded better through invisible organisations such as cousinhoods, membership
in a common set of social clubs, religious ties, and informal networks, than through a highly visible, formally recognised institution.
At times, ethnic groups may need to heighten their visibility as strangers to maintain their interests while in other instances
they may wish to lower their profile and appear to be an integral part of the society.
[12]
This bears a striking similarity to the sixth chapter of Kevin MacDonald's Separation and Its Discontents , which is concerned
with visibility strategies, especially among crypto-Jews, and concludes with the argument that "this attempt to maintain separatism
while nevertheless making the barriers less visible is the crux of the problem of post-Enlightenment Judaism."
[13] In fact, beginning in the 1970s,
middleman minority theory began to develop several ideas that dovetail very well with the concept of Judaism as a group evolutionary
strategy. Nowhere is this more apparent than in the work of Edna Bonacich.
Although the modern refinement of middleman minority theory is often traced to Hubert Blalock's 1967 Toward a Theory of Minority-Group
Relations , the greater scholarly interest has been shown in Edna Bonacich's 1973 American Sociological Review article
"A Theory of Middleman Minorities." [14]
Bonacich sought to refine and systematize Blalock's theory within an anti-capitalist framework, essentially making the argument that
all group conflict in such scenarios is the result of a rational competition for resources in which group characteristics and interests
play a crucial role. A Jewish Marxist and anti-Zionist, Bonacich's interpretations borrow heavily from Marx, Sombart, Weber, Roscher,
and Leon, to the extent that Bonacich essentially concurs that capitalism created opportunities for exploitative middleman communities
and the Jews and other middleman minorities, who possess certain predisposing characteristics including dual loyalty and a level
of unscrupulousness, willingly and enthusiastically engaged in these roles.
Bonacich is well-known for her work on East Asian middleman minorities in the United States, especially her 1980 monograph
The Economic Basis of Ethnic Solidarity: Small Business in the Japanese American Community , but her earliest work on middleman
minorities clearly demonstrates a concern with the Jewish experience.
[15] In her discussion of middleman
minorities in the 1973 article, Bonacich describes Jews as "perhaps the epitome of the form." Some of the key features of the 1973
article include the arguments that Jews and other middleman minorities are essentially economic "teams," and that these teams rely
upon very high levels of ethnocentrism and related social and economic strategies, which in turn enable them to succeed in individualistic
societies. Bonacich writes,
The modern industrial capitalist treats his workers impartially as economic instruments; he is as willing to exploit his own
son as he is a stranger. This universalism, the isolation of each competitor, is absent in middleman economic activity, where
primordial ties of family, region, sect, and ethnicity unite people against the surrounding, often individualistic economy
. [emphasis added] [16]
Bonacich makes some very interesting, and controversial, remarks on the nature of conflict between middleman minorities and their
hosts, with special reference to Jews. For Bonacich, accusations that Jews have simply been scapegoats for the woes of Europeans
are based on nothing more than a "surface impression."
[17] While noting that middleman minorities "are noteworthy for the acute hostility they have faced," it remains that,
host members have reason for feeling hostile toward middleman groups. Even the extremity of the host reaction can be
understood as "conflict" behavior. The reason is that the economic and organisational power of middleman groups makes them
extremely difficult to dislodge. The difficulty of breaking entrenched middleman monopolies, the difficulty of controlling
the growth and extension of their economic power, pushes host countries to ever more extreme reactions. One finds increasingly
harsh measures, piled on one another, until, when all else fails, "final solutions" are enacted.
[18] [emphasis added]
Bonacich has also argued that Jews and other middleman minorities do engage in economic and social "dual loyalty," and that middleman
minorities do in fact "drain" resources away from host populations and can become very powerful as a result. This then frequently
causes host elites and masses to unite against the sojourning element, a conflict that can escalate rapidly if the sojourning element
refuses to give up its monopolies. Bonacich explicitly rejects any idea that "host hostility is self-generated (from psychological
problems or cultural traditions)," arguing instead that "the middleman and the host society come in conflict because elements in
each group have incompatible goals." With her apparent justification of host violence against middleman minorities, including Jews,
as well as her objective view of certain Jewish characteristics, Bonacich's theory has been heavily criticized in some quarters,
despite its ongoing influence in contemporary sociology. Robert Cherry, for example, has lamented that Bonacich's ideas on middleman
minorities "reinforce persistent, negative Jewish stereotypes."
[19]
Discussion
Before moving to an assessment of the merits and inadequacies of middleman minority theory in explaining Jewish history, it's
worth reflecting on the history of the theory in light of Steven Pinker's claim that it represents a rival, or "more convincing,"
analysis of the Jewish historical trajectory. The first problem, of course, is that, despite Pinker's lavish praise, Thomas Sowell
is not remotely regarded within scholarship as a leading or original thinker in the area of middleman minority theory. Not only does
discussion of middleman minorities form a relatively small element of Sowell's Migrations And Cultures , but what does appear
is highly derivative of the work of Edna Bonacich, Walter Zenner, and others.
A further problem is Pinker's assumption that there exists a single, unified theory on middleman minorities that will help explain
the Jewish historical experience, and that somehow this will also be sufficient to counter the theory of Kevin MacDonald, or at least
offer a more convincing framework that would allow MacDonald's ideas to be dispensed with. As should already be clear from this brief,
and incomplete, bibliographical overview, within middleman minority theory there is a plethora of often competing interpretations,
as well as a general problem of definitions. Walter Zenner, a key proponent of middleman minority theory, concedes that "we tend
to make our definitions and models fit the prototypical group. For decades, the Jews were the archetype."
[20] In other words, for a considerable
time, middleman minority theory was built around trying to explain the experience of Jews, with other groups haphazardly mapped onto
the theory in way that tried to give the impression of similarity, even where these similarities were thin to non-existent. Bonacich
has made roughly the same argument, asserting that middleman minority theory should be regarded as incomplete because it can only
point to an "ideal type," and
In reality there are problems of fit between any actual ethnic group and this picture, problems in establishing which or how
many of the traits a population need have before it can be classified as a middleman minority.
[21]
Bonacich, very reasonably in my opinion, proposes that middleman minority theory, of which she herself is a pioneer, is something
of a misnomer and should be regarded as little more than "a useful sensitiser to a host of interrelated variables."
[22] One is therefore pressed by Pinker's claim to ask not only which of the many strands of middleman minority theories Steven
Pinker is praising, but also just how "convincing" and "magisterial" he can find it given the field's leading contemporary thinkers
regard their work in such ambiguous terms.
Finally, it is not at all clear how any of the aspects of middleman minority theory obviate the need for a deeper theoretical
framework in which to understand the behaviors and contexts under study. Middleman minority theory, as remarked above, is an incomplete
tool, and has little to offer in terms of deeper explanatory value for such relevant key concepts under discussion as resource competition,
ecological strategies, visibility strategies, psychological attitudes toward the majority, and social identity theory. One of the
strong points of Kevin MacDonald's work, which is truly cross-disciplinary and unusually well-equipped in terms of the relevant historical
literature, is that is does offer such an analysis, and can be argued to fill a lot of the logical and evidential gaps of middleman
minority theory. This is not to say that the two frameworks are in opposition, but that the concept of a group evolutionary strategy
can be usefully and seamlessly integrated into middleman minority theory, especially in relation to Jews.
It's been continually remarked by many scholars in the field that Jews should be regarded as either an "ideal type," "the epitome
of the form," a singular example, or otherwise unique case -- even within the context of broad comparative approaches with other
trading diaspora peoples. The qualities that have made Jews so unique -- cultural, historical, religious, and even biological --
are rarely remarked or elaborated upon in sociological studies of middleman minorities, which are often lacking in depth in terms
of their historical analysis. As will be discussed below, Zenner, in particular, has highlighted ways in which Jews do not fit the
standard middleman minority pattern, especially in terms of their extravagant and influential involvement in the culture and politics
of the host nation (see also MacDonald's Diaspora
Peoples on the Overseas Chinese, xlii ff). Unfortunately, middleman minority literature has little to say in terms of further
explanatory theory on how or why Jews came to both define and exceed the middleman typology. Here, middleman minority theory not
only isn't a rival for MacDonald's work, it positively cries out for it.
"American Jews do not fit the sojourner pattern, since their political involvement goes far beyond the support of Jewish causes.
Much Jewish political activity, whether right, center, or left, can be related to a perception of how to make America and the
world safe for Jews. American Jewish support for domestic liberalism and internationalism can be interpreted in this way."
Walter Zenner, "American Jewry in the light of Middleman Minority Theories," 1980.
[23]
Merits of Middleman Minority Theory
The most obvious merit of middleman minority theory is that, like Kevin MacDonald's theory of a group evolutionary strategy, it
places an unusual and welcome emphasis on rational resource competition as the basis for social conflict involving certain minorities.
By offering a socio-economic explanation for hostility toward Jews, middleman minority theory represents a unique space within academia
where the otherwise ubiquitous "pure prejudice" idea that host hostility is self-generated (from psychological problems or cultural
traditions) is summarily and comprehensively dismissed. Although this has not come without criticism, as seen in Robert Cherry's
denunciation of Edna Bonacich's work as reinforcing bigotry
[24] , this emphasis has been able
to continue largely untroubled thanks to its advancement under a hardline traditional Marxist interpretive veneer.
Middleman minority theory, especially the variant advanced by Bonacich, also insists that host populations do have interests,
and that these interests are genuinely and seriously threatened by middleman minorities who drain away resources. These minorities
then use their accumulated resources to build up power and influence, sometimes even to the extent of gaining considerable economic,
social, and political monopolies over the hosts. Since these monopolies can be very difficult to dislodge, and since monopolies may
satisfy some interests of host populations or segments of host populations, middleman minority theory insists that it is rational
and somewhat inevitable that increasingly harsh and even violent measures will be taken against the offending minority. As a result,
middleman minority theory offers a far more plausible and objective understanding of group conflict than many of the ideas that dominate
the academic discussion of group conflict, especially conflict involving Jews. In addition, the outright rejection of "scapegoat"
theories as "superficial," and the lack of appeals to concepts of victimhood in such a framework, can only be described in the context
of the current academic climate as utterly refreshing.
A second major merit of middleman minority theory is the emphasis that some strands place on the characteristics of the
minorities themselves. Middleman minority theory contains within it three basic theoretical approaches. Context-based theories like
that of Roscher, and revived to some degree by Nathan Cofnas (who is particularly concerned with the urban environment-context),
argue that middleman minorities are essentially creatures of the societies in which they are found, and are for the most part created
by opportunities, status gaps, and vacuums over which they have no control and which have nothing to do with their inherent characteristics
(a slight advantage in intelligence being the only characteristic that Cofnas feels comfortable in applying). Situational theories,
like that advanced by Simmel are similar, but place more emphasis on the culturally-located role of the trader, the Stranger, and
the "sojourner as trader," as the determinant factor in the creation of middleman minorities. Culture-based, or characteristic-based,
middleman minority theories, however, tend to be more numerous, and more convincing. These theories, like that advanced by Weber
and given tacit assent by Bonacich and Zenner, place strong emphasis on the broad range of traditions, ideologies, behaviors, and
aptitudes of middleman minority groups.
The most frequently highlighted of such traits within middleman minority theory is ethnocentrism, which again dovetails with the
primary emphasis of Kevin MacDonald's theory. Ethnocentrism is acknowledged as a central factor in the maintenance of self-segregation
among middleman minority groups, and is often supported by ideological beliefs such as the caste system, or what Zenner describes
as "the Chosen People complex." [25]
Ethnocentrism in middleman minorities is presented as crucial to understanding host hostility not only because of the way it facilitates
the draining of resources from the host population, but also because of highly antagonistic correlates such as dual loyalty and a
willingness to engage in lucrative but morally destructive (for the host) trading. Walter Zenner speaks of a "double standard of
morality" that is
Expressed in dealings with outsiders, such as lending to them with interest, unscrupulous selling practices, and providing
outsiders with illicit means of gratifying their appetites, while at the same time, denying the same means to in-group members.
[26]
An excellent example of this process in action is the fact
Israel
is the largest producer and host of international online gambling sites , while making it illegal for its own citizens to use
such sites. Of course, we are talking here about a nation state rather than a minority population, but this contradiction, and the
nature of Israel within the international community, will be discussed in a critique of the narrowness of middleman minority theory
later.
A further merit of middleman minority theory is the heavy emphasis the cultural-characteristic interpretation places on group
strategies. Middleman minorities, again with Jews being held up by both Zenner and Bonacich as an exemplar or especially acute case,
are said to engage in constantly adaptive activity in order to manage their visibility, ensure their safety, advance their interests,
accumulate power and wealth, and entrench themselves ever deeper within the host. Bonacich has indicated that Jews are especially
keen to remain entrenched in the West, and the United States in particular, because it is financially and politically lucrative,
and only a catastrophic weakening of their monopolies would bring an end to existing strategies.
[27] Zenner goes as far as to claim
that "much of the content of American Jewish life can be seen as visibility strategies. Strategy here includes both unconscious mechanisms
of coping with situations and consciously formulated plans."
[28] Zenner speaks of a "dynamic process"
whereby Jews minimise visibility to avoid hostility, maximise visibility when pursuing certain interests, and generally work unceasingly
to make their image more favorable in the minds of the host. Again, all of this corresponds very well with one of the central themes
of the Culture of Critique -- the idea that Jewish involvement in certain intellectual movements could be seen in the context
of a pursuit of Jewish interests either consciously or in ways that involved unconscious motivations and self-deception. It also
maps very closely to MacDonald's framework on Jewish crypsis and other attempts to mitigate anti-Semitism, advanced in the sixth
chapter of Separation and Its Discontents .
Problems in Middleman Minority Theory
Given the prevalence of Jews in the development and promotion of the modern incarnation of middleman minority theory, including
Georg Simmel, Edna Bonacich, Abner Cohen, Abram Leon, Walter Zenner, Werner Cahnman,
[29] Donald Horowitz,
[30] Gideon Reuveni,
[31] Ivan Light, Steven J. Gold,
[32] and Robert Silverman,
[33] a reasonable concern might be
that middleman minority theory is itself an intellectual "visibility strategy." Just as it has been posited that Jews tend to support
mass migration because it will result in Jews becoming "one among many" ethnic minorities, and thus in their logic less conspicuous
and therefore safer, middleman minority theory can act to reduce Jewish visibility by offering the idea that Jews are just one among
many diaspora trading groups and their history and behavior is therefore not unique or worthy of special attention. It remains the
case that even in those interpretations which highlight negative Jewish behavior and portray host responses as rational (e.g. the
work of Bonacich and Zenner), the proposed framework still insists on some level of commonality, no matter how tenuous, with the
experiences of other minority groups, and it ultimately places the blame for conflict on a much broader context, often the impersonal
historical development of capitalism.
In other words, while the framework can deny that Jews are "victims" of host nations, these theories also deny that host nations
are truly the victims of Jewish exploitation. Both are simply argued to be the victims of capitalism, and any sense of individual
or group agency is rhetorically dissolved. Again, this acts to lower Jewish visibility and culpability and remains attractive for
that reason. There are certainly good reasons along this line of thought for proposing that Steven Pinker's promotion of the theory
over Kevin MacDonald's ideas has less to do with a serious engagement with the content of the work of Bonacich et al. and significantly
more to do with deflecting the entire conversation into an area of discussion in which Pinker feels Jews are less visible.
A major problem with middleman minority theory is that it has a very uncomfortable and unsatisfactory way of handling the obviously
unique aspects of the Jewish experience, especially in relation to the unprecedented involvement of Jews in post-Enlightenment Western
culture and politics, something for which there is absolutely no parallel among other diaspora trading groups anywhere. As has been
discussed, middleman minority theory was essentially first created, consciously or unconsciously, by scholars anxious to find a way
to explain the Jewish experience. Attempts to connect this experience, amounting to some two millennia of history, with the much
more modern and straightforward experiences of, for example, the Chinese in the Philippines or the Japanese in America, have been
doomed to the grossest of generalizations and the clumsiest of associations. This has resulted in a steady stream of admissions within
the field that the best way to interpret middleman minority theory is simply that it proposes an "ideal type" (essentially the Jews)
with unfortunate "problems of fit between any actual ethnic group and this picture [the Jewish experience]."
[34] Zenner has conceded that the
concept has been very "difficult to define so as to cover all groups so designated."
[35] All of which calls into question
whether this concept possesses any real efficacy as an analytical or predictive tool in a comparative sense at all.
An interesting point of difference between the Jewish experience and that of other diaspora trading peoples is that the latter
are acknowledged as possessing a genuine sense of sojourn. In other words, their first generations tend to be truly temporary, semi-nomadic
groups who aim to make money before eventually returning to a homeland. A subtly different experience is observed in the Jews, as
noted by Jack Kugelmass in his 1981 PhD thesis Native Aliens: The Jews of Poland as a Middleman Minority . For Kugelmass,
"the so-called "middleman" character of the Jew is seen as an aspect of the Jewish sense of sojourn, which unlike most sojourns
is ideological rather than sociological in nature ." [emphasis added] Another way of phrasing this would be to say that the Jewish
sense of sojourn is cultural-biological rather than contextual, and since the concept of sojourning has been a major feature of Jewish
life since at least the writing of the Exodus, this difference between other groups is really so stark as to require a distinct analysis
-- something offered to an unparalleled degree in Kevin MacDonald's A People That Shall Dwell Alone . In this analysis, it
would appear that, unlike a relatively small number of other peoples who have merely adopted some tactics in order to pursue a specific
diaspora trade role, Jews have, from time immemorial, given themselves over entirely to these strategies as an entire way of life
-- the "middleman minority" as a raison d'être .
This absolutely crucial distinction is linked to the remarkable fact of contemporary political life that the state of Israel exists
largely according to the same strategies employed by Jews when in a diaspora condition. As stated above, an excellent example of
the dual morality process in action is the fact Israel is the largest producer and host of international online gambling sites
, while making it illegal for its own citizens to use such sites. The creation of the state of Israel has also exacerbated, rather
than ameliorated, issues of dual loyalty in Jewish minority populations, even if these issues are more or less kept out of the public
eye through diplomatic soothing around Israeli spying and the maintenance of certain taboos in the mass media. Israel itself would
appear to be a kind of middleman minority archetype within the international community, cultivating close and lucrative ties with
the elite (the United States), while engaging in more or less unchallenged exploitative and oppressive activities against lower social
orders (Palestinians, and other
vulnerable or indebted population groups in South America).
Like the "ideal type" of middleman minority, Israel heavily drains the resources even of its allies (U.S. military and diplomatic
aid) and pursues its strategies in a ceaseless quest for security, while maintaining moral double standards and being rather shameless
in engaging in what Zenner has described as the classic overrepresentation of middleman minorities in "morally shady" activities.
[36] Even in recent years, Israel has become notorious in the
international organ trade ,
moneylending , and allegations of humanitarian atrocities. Israeli newspapers have also described their country as a "
monopoly nation " due to the intense tendency towards economic monopoly in the country's business life -- a key feature of middleman
minority life that Jews appear to continue to embody to an extent unparalleled in any other ethnic group. Further evidence for the
apparently deep-seated, rather than contextual, nature of "middleman" traits in Jews might be found in studies indicative of a biological
underpinning to Jewish ethnocentrism, such as that described by Kevin MacDonald in the Preface to the Culture of Critique
:
Developmental psychologists have found unusually intense fear reactions among Israeli infants in response to strangers, while
the opposite pattern is found for infants from North Germany. The Israeli infants were much more likely to become "inconsolably
upset" in reaction to strangers, whereas the North German infants had relatively minor reactions to strangers. The Israeli babies
therefore tended to have an unusual degree of stranger anxiety, while the North German babies were the opposite -- findings that
fit with the hypothesis that Europeans and Jews are on opposite ends of scales of xenophobia and ethnocentrism.
As well as dealing poorly with obviously unique aspects of the Jewish experience, a significant portion of middleman minority
theory is devoted to context-based narratives that are often in stark contrast to, or completely disproven by, the historical record.
With the exception of the work of Kevin MacDonald, which demonstrates a very extensive engagement with works of history, a general
weakness in all of the late twentieth-century sociological studies discussed above is the fact that, despite their incredibly ambitious
claims about the historical trajectory of capitalism or middleman minority populations, there is a quite serious neglect of any of
the relevant historiography. This leads, in the case of the modern adherents of Simmel, Roscher, and Leon, to the constant repetition
of error-laden tropes such as the idea that Jews turned to commerce because they were prohibited from owning land (rather than arriving
as profit-seeking financiers), that Jews were most often invited into nations by elites seeking a financial stimulus, or that Jews
were banished from countries once their position as loan merchant was superfluous. In fact, these three tropes, all of which remove
Jewish agency and characteristics from consideration, are essentially the pillars of context-based middleman minority theory pertaining
to Jews, and are absolutely crucial to Roscher's ideas in particular.
The historical record is now acknowledged as more or less complete in relation to the issue of the Jewish ownership of land. It
has been conclusively established, for example, that the general trend across Europe was that Jews were in fact able to possess and
own land during the centuries immediately following their initial spread and expansion in Europe (c.1000 -- 1300). Restrictions on
land ownership were later enacted as penalties for exploitation or as part of a system of elite land transfer -- e.g., the desire
of the English kings to obtain the land of indebted lesser knights, and doing so by financially compensating Jewish moneylenders
for forfeited lands they could no longer legally hold.
One of the correlates of the land ownership trope is the astonishingly naive assumption that land ownership would preclude involvement
in financial speculation. Again, the historical record contradicts this. Mark Meyerson's Princeton-published A Jewish Renaissance
in Fifteenth-Century Spain (2010), for example, offers an expansive analysis of Jewish landowners in Spain who "did not necessarily
cultivate the land themselves" and combined wine production operations worked by non-Jewish peasants with "lending operations and
tax farming." [37] Pointing to the
prevalence of early Jewish land ownership in Poland, France, and Germany, in which Jews enjoyed a "privileged status available to
few Christians," Norman Roth has described the trope that Jews were forced out of agriculture by restrictive laws and the violence
of the Crusades as "patently absurd."
[38]
The theory that Jews, and by tenuous implication other middleman minorities, were most often invited into nations by elites
seeking a financial stimulus or to fill a "status gap," is also contradicted by the historical record. The early entry and expansion
of Jews in Europe is relatively well-documented, the dominant trend being that Jews either presented themselves before elites in
order to solicit business, or that they acted as financiers for conquest and then followed in the wake of the conquerors (e.g., the
well-documented role of Jewish financiers in Norman Conquest of England and Strongbow's conquest of Ireland).
[39] Ireland's Annals of Innisfallen
(1079 A.D.) record: "Five Jews came from over sea with gifts to Tairdelbach [King of Munster], and they were sent back again over
sea." Unless Tairdelbach (Turlough O'Brien, 1009 -- 86) had undergone a dramatic change of mind, it's likely that the arrival of
the Jews hadn't been preceded by an invitation. In fact, unsolicited approaches for request to settle and establish financial activities
are in evidence from the time of O'Brien to the 1655 "Humble Address" of Manasse ben Israel to the English government.
A very common form of government documentation found in the study of Early Modern Jewish communities are the charters outlining
their terms of settlement, and these are very revealing. Rather than act as economic catalysts, Jews are more frequently observed
following the trail of already economically improving areas, hoping to profit from their advancement. As Felicitas Schmeider has
pointed out, in terms of the German context, "permission to settle Jews in a newly privileged town is one thing kings were frequently,
if not regularly, asked for, especially in the thirteenth and fourteenth centuries."
[40]
The theory that Jews were banished from countries once their position as loan merchant or general role as a middleman minority
was superfluous is also forcefully contradicted by the historical record. Just as medieval Jews perceived that they were the innocent
victims of evil Gentiles, so Jewish historiography has overwhelmingly portrayed the expulsions as the result of "rumors, prejudices,
and insinuating and irrational accusations."
[41] Context-based middleman minorities
theories absorbed these tropes and reinvented them in narratives that blamed the expulsions on the fact that Capital had simply exhausted
the usefulness of the Jews. Such understandings of the expulsions have only very recently come to be revised, most saliently in the
work of Harvard historian Rowan W. Dorin, whose 2015 doctoral thesis and subsequent publications have for the first time helped to
fully contextualize the mass expulsions of Jews in Europe during the medieval period, 1200 -- 1450.
[42]
Dorin points out that Jews were never specifically targeted for expulsion qua Jews, but as usurers, and notes that the
vast majority of expulsions in the period targeted "Christians hailing from northern Italy." Jews were expelled, like these Christian
usurers, for their actions, choices, and behaviors. What the period witnessed was not a wave of irrational anti-Jewish actions, or
for that matter an impersonal reflex of glutted Capital, but rather a widespread ecclesiastical reaction against the spread
of moneylending among Christians that eventually absorbed Jews into its considerations for common sense reasons. A number of laws
and statutes, for example Usuranum voraginem , were designed in order to provide a schedule of punishments for foreign/travelling
Christian moneylenders. These laws contained provisions for excommunication and a prohibition on renting property in certain locales.
The latter effectively prohibited such moneylenders from taking up residence in those locations, and compelled their expulsion in
cases where they were already domiciled. It was only after these laws were in effect that some theologians and clerics began to question
why they weren't also applied to Jews who, in the words of historian Gavin Langmuir, were then "disproportionately engaged in moneylending
in northern Europe by the late 12th century."
[43] The Church had historically objected
to the expulsion of Jews in the belief that their scattered presence fulfilled theological and eschatological functions. It was only
via the broader, largely common sense, application of newly developed anti-usury laws that such obstructions to confrontations with
Jews became theologically and ecclesiastically permissible, if not entirely desirable. And once this Rubicon had been crossed, it
paved the way for a rapid series of expulsions of Jewish usury colonies from European towns and cities, a process that accelerated
rapidly between the thirteenth and fifteenth centuries.
The lack of engagement with developments in historiography is worsened to a large extent by the absence of a truly cross-disciplinary
approach in most, if not all, existing middleman minority analyses. This is particularly glaring in the works of Bonacich and Zenner
which, while making multiple and apparently crucial references to conscious and unconscious group "strategies," fail to engage in
any kind of historiographical or psychological scholarly contextualization. How exactly such strategies as "visibility strategies"
can operate at group level are left completely unexplained and without any substantial evidence beyond common sense observations
of Jewish behavior. The lack of a cross-disciplinary approach in such instances doesn't necessarily mean that these ideas are wrong,
or that "visibility strategies" don't exist, but it does mean that explanations and evidence are still required. To date, the only
convincing attempt to fill in such gaps, and offer a truly cross-disciplinary approach (incorporating history, sociology, and psychology)
to the idea of group strategies, is found in the work of Kevin MacDonald.
Conclusion
As stated at the outset of this essay, it isn't at all clear how any of the aspects of middleman minority theory obviate the need
for a deeper theoretical framework in which to understand the behaviors and contexts under study. Middleman minority theory, as remarked
above, is an incomplete tool, and has little to offer in terms of deeper explanatory value for such relevant key concepts under discussion
as resource competition, ecological strategies, visibility strategies, and social identity theory. Middleman minority theory, or
at least some strands of it, is useful and valuable in the study of Jews to the extent that it places an unusual emphasis on group
conflict as arising from resource competition, the characteristics of Jews (including Jewish ethnocentrism), and the existence of
group strategies. There are, however, multiple, serious inadequacies in middleman minority theory, including the possibility that
it is in part itself a "visibility strategy," that is has a general problem of definitions, that it fails to adequately deal with
unique qualities of the Jews and their experiences, that it generally fails to engage with the historical record, and that it has
no real explanatory or predictive frameworks for many of the ideas it discusses, including group strategies. I am forced to concur
with Edna Bonacich that, in regards to the study of Jews, middleman minority theory should be conceived, at best, as "a useful sensitiser
to a host of interrelated variables."
[44]
Notes
[1] Bonacich, Edna. "A Theory
of Middleman Minorities." American Sociological Review 38, no. 5 (1973): 583 -- 94, (589).
[2] Francois-Marie Arouet de
Voltaire, Oeuvres Complètes (Geneva, 1756), Vol. 7. Ch.1. See also Dictionnaire Philosophique (Basle, 1764), Vol. 14
.
[3] B. Bauer, The Jewish Problem
( Die Judenfrage , 1843) ed Ellis Rivkin and trans. Helen Lederer (Cincinnati: Hebrew Union College -- Jewish Institute of
Religion, 1958).
[4] K. Marx, On the Jewish
Problem ( Zur Judenfrage , 1844) ed Ellis Rivkin and trans. Helen Lederer (Cincinnati: Hebrew Union College -- Jewish
Institute of Religion, 1958).
[5] W. Sombart, Der moderne
Kapitalismus , Munich and Leipzig 1913. This work was published in an English translation by E. Epstein under the title, The
Quintessence of Capitalism , London, 1915.
[6] W. P. Zenner, Minorities
in the Middle: A Cross-Cultural Analysis (Albany: State University of New York, 1991), 5.
[7] W. Roscher, "Die Stellung der Juden im Mittelalter, betrachtet vom Standpunkt der allgemeine Handelspolitik," Zeitschrift
für die gesamte Staatswissenschaft Bd. 31 (1875) S. 503 -- 526.
[8] G. Reuveni, "Prolegomena
to an "Economic Turn" in Jewish History," in G. Reuveni (ed) The Economy in Jewish History: New Perspectives on the Interrelationship
Between Ethnicity and Economic Life (Berghahn, 2011), 3.
[9] As the son of Catholic and
Lutheran converts from Judaism, Simmel's relationship to his Jewishness is fascinating in itself. See A. Morris-Reich, The Quest
for Jewish Assimilation in Modern Social Science , (New York: Routledge, 2008), chapter 4. For the influence of Simmel's stranger
minority theory see Werner Cahnman, "Pariahs, Strangers, and Court Jews -- A Conceptual Classification," Sociological Analysis, 35
(1974); C. R. Hallpike, "Some problems in Cross-Cultural Comparison," in The Translation of Culture , T. Beidelman (ed), (London:
Tavistock, 1971); Hilda Kuper, "Strangers in Plural Societies: Asians in South Africa and Uganda," in Pluralism in Africa
, Leo Kuper and M. G. Smith (eds) (Berkeley: University of California Press, 1971); Jack H. Porter, "The Urban Middleman: A Comparative
Analysis," Comparative Social Research , 4 (1981); R. A. Reminick, "The Evil Eye Belief among the Amhara of Ethiopia," Ethnology,
13 (1974), W. Shack and E. Skinner, Strangers in African Societies (Berkelely: University of California Press, 1979); Paul
Siu, "The Sojourner," American Journal of Sociology , 58, (1952).
[10] J. Stone, Racial Conflict
in Contemporary Society , (Cambridge: Harvard University Press, 1985), 96.
[11] This coinage is frequently
attributed to Philip Curtin, who employs the term in his Cross-cultural Trade in World History (1984), but the term was in
use by Cohen, within a strict thematic sense, as early as the latter's 1974 chapter "Cultural Strategies in the Organisation of Trading
Diasporas," in C. Meillassoux (ed) The Development of Indigenous Trade and Markets in West Africa (London, 1971).
[12] Quoted in W. P. Zenner,
Minorities in the Middle: A Cross-Cultural Analysis (Albany: State University of New York, 1991), 8.
[13] K. MacDonald, Separation
and Its Discontents: Toward an Evolutionary Theory of Anti-Semitism , 187.
[14] E. Bonacich, "A Theory
of Middleman Minorities." American Sociological Review 38, no. 5 (1973): 583 -- 94.
[15] E. Bonacich, The Economic
Basis of Ethnic Solidarity: Small Business in the Japanese American Community (Berekely: University of California Press, 1980).
[19] R. Cherry, "American Jewry
and Bonacich's Middleman Minority Theory," Review of Radical Political Economics , 22 (2 -- 3), 158 -- 173, 161.
[20] W. P. Zenner, Minorities
in the Middle: A Cross-Cultural Analysis (Albany: State University of New York, 1991), 10. See also W. Zenner, "American Jewry
in the light of middleman minority theories," Contemporary Jewry , 5:1 (1980), 11 -- 30, 18. Zenner argues that "As a synthetic
concept, the phrase "middleman minority" is difficult to define so as to cover all groups so designated."
[21] E. Bonacich, The Economic
Basis of Ethnic Solidarity: Small Business in the Japanese American Community (Berekely: University of California Press, 1980),
22. See also E. Bonacich, "A Theory of Middleman Minorities." American Sociological Review 38, no. 5 (1973): 583 -- 94, 585.
[27] E. Bonacich, "A Theory
of Middleman Minorities." American Sociological Review 38, no. 5 (1973): 583-94, 592.
[28] W. Zenner, "American Jewry
in the light of middleman minority theories," Contemporary Jewry , 5:1 (1980), 11-30, 23.
[29] W. Cahnman, "Pariahs, Strangers
and Court Jews," Sociological Analysis 35, 3 (1974): 155-66.
[30] D. Horowitz, Ethnic
Groups in Conflict (Berkeley: University of California Press, 1985).
[31] G. Reuveni (ed) The
Economy in Jewish History: New Perspectives on the Interrelationship Between Ethnicity and Economic Life (Berghahn, 2011).
[32] I. Light & S. J. Gold,
Ethnic Economies (Bingley: Emerald, 2000).
[33] R. Silverman, Doing
Business in Minority Markets (New York: Garland, 2000).
[34] E. Bonacich, The Economic
Basis of Ethnic Solidarity: Small Business in the Japanese American Community (Berekely: University of California Press, 1980),
22.
[35] W. Zenner, "American Jewry
in the light of middleman minority theories," Contemporary Jewry , 5:1 (1980), 11-30, 13.
[37] M. D. Meyerson, A Jewish
Renaissance in Fifteenth-Century Spain (Princeton: Princeton University Press, 2010), 111.
[38] N. Roth, Medieval Jewish
Civilization: An Encyclopedia (New York: Routledge, 2003),
[39] J. Hillaby, "Jewish Colonisation
in the Twelfth Century," in P. Skinner (ed), The Jews in Medieval Britain: Historical, Literary, and Archaeological Perspectives
(Woodbridge: Boydell Press, 2003), 36.
[40] F. Schmeider, "Various
Ethnic and Religious Groups in Medieval German Towns? Some Evidence and Reflections," in, Segregation, Integration, Assimilation:
Religious and Ethnic Groups in the Medieval Towns of Central and Eastern Europe (Burlington: Ashgate, 2009), 15.
[41] Joseph Pérez, History
of a Tragedy: The Expulsion of the Jews from Spain (Chicago: University of Illinois Press, 2007), 60.
[42] R. W. Dorin, Banishing
Usury: The Expulsion of Foreign Moneylenders in Medieval Europe, 1200 -- 1450 (Harvard PhD dissertation, 2015); R. W. Dorin, "Once
the Jews have been Expelled," Intent and Interpretation in Late Medieval Canon Law," Law and History Review , Vol. 34, No.
2 (2016), 335-362.
[43] G. Langmuir, History,
Religion, and Antisemitism (Los Angeles: University of California Press, 1990), 304.
Sowell’s A Conflict of Visions has nothing to say about race, but it and its successors pretty much nail what is wrong
with today’s progressives. And it’s the same as what was wrong with yesterday’s progressives.
If we survive 2020, this volume will be what he’s remembered for.
The Zionist thinkers understood the unnatural and dangerous situation of the Jews in the Diaspora, and seized the first opportunity
to re-reform the Jewish people as a normal nation in its homeland. In only one generation, all the Jewish communities in the Eastern
lands liquidated their affairs and joined movement. The same with the powerful Russian and Ukrainian communities, they moved (mostly)
to Israel. Last year, about 30,000 American Jews gave up their precious citizenship and moved to Israel. I foresee in two generations
a more or less Jew-less America. What I am saying is that the Jews do not like their middleman foreigner status. In Marx etc.
time there were no alternatives. Now there is Israel. Some 55% of the Jews have already moved there.
Israel is the largest producer and host of international online gambling sites, while making it illegal for its own citizens
to use such sites
It should be noted that Monaco does the same thing with its gambling casinos. It has long been unlawful for Monaco’s own Monégasque
citizens to enter into those casinos to gamble.
Also, the ultra-high level of Jewish involvement in pornography sales is another relevant area here.
One of those Jewish pornography-meisters was Jimmy ‘Jimbo’ Wales, afterwards recruited to head the CIA-Mossad Wikipedia, where
paedophilic persons have been able to persistently post fake biographies of themselves and smears against their victims. Jimmy
Wales has attended birthday parties of Israeli Presidents, and received a $1 million ‘prize’ from Tel Aviv University.
The most obvious merit of middleman minority theory is that, like Kevin MacDonald’s theory of a group evolutionary strategy,
it places an unusual and welcome emphasis on rational resource competition as the basis for social conflict involving certain
minorities. By offering a socio-economic explanation for hostility toward Jews, middleman minority theory represents a unique
space within academia where the otherwise ubiquitous “pure prejudice” idea that host hostility is self-generated (from psychological
problems or cultural traditions) is summarily and comprehensively dismissed.
The Jews like to cast themselves as “just another struggling minority trying to make it among the oppressive majority.” This
ignores the international Zionist (Jewish supremacist) agenda, and the pathological Jewish drive for totalitarian control.
Where does that drive originate? Jesus of Nazareth, apparently Hebrew, preached the opposite, and called organized Jewish hypocrisy,
greed, corruption and double standards “the Synagogue of Satan.” Of course, the corrupt Jewish Moneychangers (the Jewish establishment
of his era) in bed with the Roman Empire didn’t like that one bit, and so instigated his murder. When the cosmopolitan Hebrew
mob, prompted by the corrupt Jewish establishment, chose the criminal Barabbas over Jesus, the Jews made their choice for ideological
evil and corruption.
That is a choice they affirm time and again, day after day, year after year, century after century.
Whether one wants to read this decision as a cosmic moral judgement on the Jews, or simply as a rational economic decision
by the Jews (choosing systematic corruption and shady insider back room deals over honest work) makes no difference. They chose
the path they chose, and they affirm that decision every day through their corrupt, criminal and murderous international Zionist
works.
One doesn’t have to be a Christian to wear the Jon Carpenter sunglasses from The Live which allow one to see that the Judeo-Imperial
“ruling class are [social] aliens concealing their appearance and manipulating people to spend money, breed, and accept the status
quo with subliminal messages in mass media,” but it helps.
One doesn’t have to be a Christian to know that Jewish infiltrated Empires working in concert with a corrupt establishment
are bad news, but again, it helps.
In Britain Jews are clearly influential but the Norman ruling class has had it’s grip on the UK ever since they landed here
in 1066, indeed William the Conqueror was mentioned in the article above, he certainly had his uses for Jews, there is little
information available though as to just how many Jews arrived and what lead King William 1 to bring them over with his troops.
As of present much of inner London is owned by aristocratic families who can trace their descent to King Williams troops
Also a considerable proportion of high status people in Britain were educated at just a few private schools including a great
deal of our present government
In Britain it is often a case of who you know, not what you know that determines whether you will reach the top of society
or not, compared to other European countries like Germany and Finland in Britain there is a tendency for the higher classes to
promote people on the basis of whether they have a background in common with them rather than merit, just like the Jews.
When I was going to university there, the corner stores were all Chinese. As were the Laundromats. I suspect the children all
became doctors and lawyers and graduated from the need to continue operating them.
As per usual, Andrew Joyce demonstrates that he is an objective social scientific historian by flooding his article with a
preponderance of documentable verifiable factual data.
However, to my mind there is one ‘word’ in this 8,000+ word tour de force; one very important word that all lovers of Western
history and culture dedicated to the perpetuation of that history and culture should focus on … one word: ‘NATION’!
At the very top of his essay Joyce quotes Voltaire:
“Voltaire concluded that, some surface similarities aside ,
‘It is certain that the Jewish nation is the most singular that the world has ever seen.
’ ”
Similarly he quotes Bruno Bauer:
“The base [of the tenacity of the Jewish national spirit ] … the character of that [Jewish] nation.
..”
Some say Jews are a ‘ race’ , some say they are an ‘ethnicity’, some say they are a ‘religion’. The case
can be and is made for all these, in Voltarie’s words, “surface similarities” . However, none capture the essence of what
constitutes the basis for Jewish POWER.
Jews are a worldwide profoundly unified ideological NATION. And that ideological unity is the basis of their national power.
This unity was succinctly captured in an interview with a Mossad agent when he said:
“I can knock on the door of any Jew in the world and I will be invited in.”
Ideological unified nations are powerful nations, and are conquers. The Jews are one of the most ideologically unified nations
in the world. The power derived from that unity has allowed them to conquer the most economically and militarily powerful country
in the world – America.
Further, by conquering America, the wealthiest and most powerful country in Western Civilization, the Jews have de facto conquered
the whole of the West.
Ideological unified nations are strong.
Ideological dis-unified nations are weak.
So call ‘Color Revolutions’ are manifestations of dis-unified nations who in turn are weak and conquerable by strong unified nations.
We have seen numerous weak nation color revolutions in Africa, Middle East and Europe. Now we are experiencing an American
color revolution.
The American ‘color revolution’ is the Jewish nation delivering the ‘coup de grace’ to America and the West.
Andrew Joyce, your articles are so God-damned good!
Jewish behavior reminds me of narcissism: sense of entitlement, self-centered, feeling of superiority, manipulative and deceitful
behavior, desire for power and control, will suck a host dry, and once they’ve gotten what they want, will easily discard the
host. Highly competitive, status-oriented.
Don’t dare call them out on anything because that causes them to feel shame, and that’s like driving a stake through them.
They work behind the scenes, secretly. They must always be seen in a good light. They will smear and destroy you (your reputation,
your job, your life) if you expose them. They will retaliate in ways you would never be able to because they don’t have a conscience,
and this is why they win and are so hard to fight. Very vindictive. No qualms about lying or twisting the truth.
They are never content, always working to change things in their favor, to get the upper hand. Most people just want to live
their lives, so they acquiesce, but this is a mistake because one day you turn around to realize they now own the farm! If they
don’t get their way, they just regroup and come at you from another angle. They keep wearing you down, chipping away at you until
you give in. It is really something to behold because you just can’t believe their gall.
Their rabbis keep them in line by using fear (fear of the other), and fear is the greatest motivator/persuader. Keeps them
solidly as one. They’re constantly reminded of the Holocaust, the ovens that are lurking around every corner, as well as the injustices
they have suffered (through no fault of their own – ha!). Keeps them neurotic and they don’t stray.
@Oliver Elkington rville, Fitzroy,
Marshall, and Spencer. The Guardian , Independent and Telegraph wrote articles in 2011 and 2013 alleging such persons
still ‘run’ Britain. Lefties use this ploy to attack the Conservative Party whose members tend to be wealthy like champagne socialists.
Back to the point raised by neutral , none of the above mentioned newspapers would run similar stories on Jewry. That
is the litmus test of who really rules.
Despite being a tiny minority Jews have shaped modern Britain. This has been documented here by Joyce, Langdon and others.
Sure the middle man theory explains everything, but needs some footnotes:
-These middle men are specifically encouraged to cheat us, it’s written in their holy books
-they regard us as animals in human form, with either no souls or much lesser souls
-they regard us as having been created ONLY to serve them.
The modern industrial capitalist treats his workers impartially as economic instruments; he is as willing to exploit
his own son as he is a stranger. This universalism, the isolation of each competitor, is absent in middleman economic activity,
where primordial ties of family, region, sect, and ethnicity unite people against the surrounding, often individualistic economy.
The modern finance capitalist …..
Industrial capitalism after it was invented in the American Colonies, was characterized by injection of state capital (not
Jewish finance capital) into industry, to then improve the labor value of the population. American labor was in short supply relative
to the large land mass available.
Industrial Capitalist will treat his workers as valuable contributors, because their labor value is constantly being improved
upon by improved public health, and improved infrastructure such as roads and phone systems. Industrial Capitalist economic method
is to raise up the existing people, and not import low wage “coolie labor.”
The highest form of industrial capitalism was probably Germany, which adopted the American System through Frederick List.
Workers in industrial capitalist Germany had access to best facilities of that era, their work hours were made sensible (no
longer exploitative). Autobahns were built, and industry was built up using state capital (not finance capital) to high levels
of productivity.
Finance Capitalism is Jewish usury method. Finance Capitalism is middleman theory taken to extremes.
The middleman is a hidden string puller whose god is Moloch. The middleman is the third entity in man’s relations, usurping
the role of the King.
It is the King who is to have the role of settling disputes, dispensing with just law, and overseeing high civilization. It
is impossible to have high civilization with Jews operating as middlemen.
Finance capitalism’s big bang event is traced to Amsterdam’s Jews invading Britain.
1) Debt Spreading Private Banking .. the Bank of England in 1694. This event stripped the sovereign King of his money power
and transferred it to hidden bank stock owners.
2) Stock Market Capital. Absentee ownership of Companies. Hidden String Pullers control corporations, rather than the employees
of said companies. The first manifestation was both the Dutch and English India Companies.
3) Allowing Company stock to be on-sold into markets. The logic of prices and money (Moloch) is now tied to private banking
ledger credit entry. BOE creates the private bank credit that is used in “free markets.”
4) Corporation charters are now perpetual, and corporations are held up as being more than a god created human. Being perpetual
is more than being a human, where said human has a finite life span.
Jews are anti-logos, so everything they touch turns to shit. There is a religious and spiritual element to Jews, who are against
the natural order.
Virtually all of the “American System” politicians were assassinated. Countries that attempted to adopt “industrial capitalism”
of the American system were invaded and destroyed in world wars. The world wars were engineered in back room deals, using hidden
string pulling tactics.
America was turned in 1912, and is now under Jewish finance capitalism control. The founding fathers of America would be appalled
if they were alive today.
Hindus are like Jews–they love money and believe themselves to be a special people (as exemplified by your PM Modi and his
RSS buddies). Because of the caste system, Hindus barely tolerate lower caste Hindus.
This comment is aimed at Andrew Joyce, the writer of the article. Good job Andrew.
In addition to finance big bang event I discuss above, there was also the attack on Christianity. So the big bang event was
multi-dimensional, and informs today’s reality.
Here is your quote on Sombart:
For Sombart, the origins of the worst of modern capitalism can be found in the early middleman role of the Jews, their medieval
semi-nomadic quest for usury-derived profit and Victorian hawking of shoddy goods being a precursor to modern advertising and
the mass production of superfluous and quickly obsolete consumer products.
Here is another quote from Sombart, which I think is critical:
Werner Sombart in his book “The Jews and Modern Capitalism” came to an important conclusion.”That which is called Puritanism
is in reality Judaism.”
Our Jewish friends in Amsterdam created puritan Judeo-Christianity, which is a perversion of Jesus’ teachings. Jesus started
his mission on the Jubilee year, aiming precisely at the Pharisee class. Jesus also whipped the money changers, his only act of
violence.
Weber also has some problems in his non treatment of usury:
Max Weber’s book, “The Protestant Ethic and the Spirit of Capitalism,” created a split definition. Jewish capitalism on
one side, and Puritan (Calvanist) on the other. Jewish capitalism was speculative pariah capitalism, while Puritan was bourgeois
organization of labor. Weber excluded the problem of usury, thus obscuring what is necessary to see. The Puritan was excluded
from blame.
Let that sink for a moment. I think you understimate – as did I – just how radical this site and it’s owner are, as well as
the majority of the commenters, and just what they are tiptoeing around, and have been for some time. I also think within another
few years, their position will become explicit.
Incidentally, I argely agree that in a few decades most Jews will be flourishing in Israel, but I do think the US will always
have a large and prosperous Jewish community as well, forever. It isn’t going anywhere.
@Tom Verso th the surface of
JSI’s success that they rarely, if ever, see beheath that surface to what is obviously the real cancer of the human race. That’s
why what we’re witnessing today is nothing less than
The Pyrrhic Victory of Jewish Supremacy Inc.
For evidence look at the following:
City – New York
State – California
Country – The USA
Continent – Europe
Civilization – The West
They have conquered the above the way a tumor conquers a human organism.
He can’t – yet – express what he is really trying to say clearly and simply, he has to bury it in a thicket of dense verbiage
which is tedious to cut through.
In a few years, I think Unz will have developed to the point where writers like Joyce can make their point crystal clear in
simple language.
@AaronB e that they have developed
may eventually topple under its own weight, thereby liberating them from their tragic quest to find and hold external phantoms
responsible for their own traumas.
Clarity for Joyce would likely be something like “my father was mean, controlling and made me feel bad, he was always
trying to bring me low to make him feel big, I now need to heal to come to terms with it.”
Sorry Joyce that you feel bad. That’s real. Stop doing yourself the disservice of pretending your hurt is actually your concern
for the world or whatever. That is stupid.
Judaism is an ethnic/religious supremacist ideology that sees the rest as nothing more than cattle to be exploited, so according
to Jewish dogmas if you don’t declare the Jews to be your masters, you are technically anti-Semitic.
The 238-page document, written by the majority staff of the House Transportation
Committee, calls into question whether the plane maker or the Federal Aviation Administration
has fully incorporated essential safety lessons, despite a global grounding of the MAX fleet
since March 2019.
After an 18-month investigation, the report, released Wednesday, concludes that Boeing's
travails stemmed partly from a reluctance to admit mistakes and "point to a company culture
that is in serious need of a safety reset."
The report provides more specifics, in sometimes-blistering language, backing up
preliminary
findings the panel's Democrats released six months ago , which laid out a pattern of
mistakes and missed opportunities to correct them.
In one section, the Democrats' report faults Boeing for what it calls "inconceivable and
inexcusable" actions to withhold crucial information from airlines about one cockpit-warning
system, related to but not part of MCAS, that didn't operate as required on 80% of MAX jets.
Other portions highlight instances when Boeing officials, acting in their capacity as
designated FAA representatives, part of a widely used system of delegating oversight
authority to company employees,
failed to alert agency managers about various safety matters .
Boeing concealed from regulators internal test data showing that if a pilot took longer
than 10 seconds to recognise that the system had kicked in erroneously, the consequences
would be "catastrophic" .
The report also detailed how an alert, which would have warned pilots of a potential
problem with one of their anti-stall sensors, was not working on the vast majority of the Max
fleet . It found that the company deliberately concealed this fact from both pilots and
regulators as it continued to roll out the new aircraft around the world.
In Bed With the Regulators
Boeing's defense is the FAA signed off on the reviews. Lovely. Boeing coerced or bribed the FAA to sign off on the reviews now tries to hide behind
the FAA.
There is only one way to stop executive criminals like those at Boeing. Charge them with manslaughter, convict them, send them to prison for life, then take all of
their stock and options and hand the money out for restitution.
adr , 1 hour ago
Remember, Boeing spent enough on stock buybacks in the past ten years to fund the
development of at least seven new airframes.
Instead of developing a new and better plane, they strapped engines that didn't belong on
the 737 and called it safe.
SDShack , 21 minutes ago
What is really sad is they already had a perfectly functional and safe 737Max. It was the
757. Look at the specs between the 2 planes. Almost same size, capacity, range, etc. Only
difference was the 757 requires longer runways, but I would think they could have adjusted
the design to improve that and make it very similar to the 737Max without starting from
scratch. Instead Boeing bean counters killed the 757 and gave the world this flying coffin.
Now the world bean counters will kill Boeing.
Tristan Ludlow , 1 hour ago
Boeing is a critical defense contractor. They will not be held accountable and they will
be rewarded with additional bailouts and contract awards.
MFL5591 , 1 hour ago
Can you imagine a congress of Criminals Like Schiff, Pelosi and Schumer prosecuting
someone else for fraud? What a joke. Next up will be Bill Clinton testifying against a person
on trial for Pedophilia!
RagaMuffin , 1 hour ago
Mish is half right. The FAA should join Boeing in jail. If they are not held responsible
for their role, why have an FAA?
Manthong , 1 hour ago
"There is only one way to stop executive criminals like those at Boeing.
Charge them with manslaughter, convict them, send them to prison for life, then take all
of their stock and options and hand the money out for restitution."
Correction:
There is only one way to stop regulator criminals like those in government.
Charge them with manslaughter, convict them, send them to prison for life, then take all
of their pensions and ill gotten wealth a nd hand the money out for restitution.
Elliott Eldrich , 43 minutes ago
"There is only one way to stop executive criminals like those at Boeing.
Charge them with manslaughter, convict them, send them to prison for life, then take all
of their stock and options and hand the money out for restitution."
Ha ha ha HA HA HA HA HA! Silly rabbit, jail is for poors...
Birdbob , 1 hour ago
Accountability of Elite Perps ended under Oblaba's reign of "Wall Street and Technocracy
Architects" .White collar criminals were granted immunity from prosecution. This was put into
play by Attorney Genital Eric Holder. This was the beginning of having an orificial Attorney
Genital that facilitated the District of Criminals organized crime empire ending the 3 letter
agencies' interference. https://www.blogger.com/blog/post/edit/8310187817727287761/1843903631072834621
Dash8 , 1 hour ago
You don't seem to understand the basic principle of aircraft design...it must not require
an extraordinary response for a KNOWN problem.
Think of it this way; Ford builds a car that works great most of the time, but
occasionally a wheel will fall off at highway speeds...no problem, right? ....you just guide
the car to the shoulder on the 3 remaining wheels and all good.
Now, put your wife and kids in that car, after a day at work and the kids screaming in the
back.
Still feel good about your opinion?
canaanav , 1 hour ago
I wrote software on the 787. You are right. This was not a known problem and the Trim
Runaway procedure was already established. The issue was that the MAX needed a larger
horizontal stab and MCAS would have never been needed. The FAA doesnt have the knowledge to
regulate things like this. Boeing lost talent too, and gets bailouts and tax breaks to the
extent that they dont care.
Dash8 , 1 hour ago
But it was a known problem, Boeing admits this.
Argon1 , 41 minutes ago
LGBT & Ethnicity was a more important hiring criteria than Engineering talant.
gutta percha , 1 hour ago
Why is it so difficult to design and maintain reliable Angle Of Attack sensors? The
engineers put in layers and layers of complicated tech to sense and react to AOA sensor
failures. Why not make the sensors _themselves_ more reliable? They aren't nearly as complex
as all the layers of tech BS on top of them.
Dash8 , 1 hour ago
It's not, but it costs $$....and there you have it.
Argon1 , 37 minutes ago
Its the Shuttle Rocketdyne problem, the upper management phones down to the safety
committee and complains about the cost of the delay, take off your engineer hat and put on
your management hat. All of a sudden your project launches on schedule and the board claps
and cheers at their ability to defy physics and save $ millions by just shouting at someone
for about 60 seconds..
canaanav , 1 hour ago
Each AOA sensor is already redundant internally. They have multiple channels. I believe
they were hit with a maintenance stand and jammed. That said, AOA has never been a control
system component. It just runs the low-speed cue on the EFIS and the stick shaker. It's an
advisory-level system. Boeing tied it to Flight Controls thru MCAS. The FAA likely dictated
to Boeing how they wanted the System Safety Analysis (SSA) to look, Boeing wrote it that way,
the FAA bought off on it.
Winston Churchill , 43 minutes ago
More fundamental is why an aerodynamically stable aircraft wasn't designed in the first
place,love of money.
HardlyZero , 13 minutes ago
Yes. In reality the changed CG (Center of Gravity) due to the larger fan engine really did
setup as a "new" design, so the MAX should have been treated as "new" and completely
evaluated and completely tested as a completly new design. As a new design it would probably
double the development and test cost and schedule...so be it.
DisorderlyConduct , 1 hour ago
"Lovely. Boeing coerced or bribed the FAA to sign off on the reviews now tries to hide
behind the FAA."
No - what a shoddy analysis.
The FAA conceded many of their oversight responsibilities to Boeing - who was basically
given the green light to self-monitor. The FAA is the one that is in the wrong here.
Well, how the **** else was that supposed to end up? This is like the IRS letting people
self-audit...
Astroboy , 1 hour ago
Just as the Boeing saga is unfolding, we should expect by the end of the year other
similar situations, related to drug companies, pandemia and the rest.
8. The internet was invented by the US government, not Silicon Valley
Many people think that the US is ahead in the frontier technology sectors as a result of
private sector entrepreneurship. It's not. The US federal government created all these
sectors.
The Pentagon financed the development of the computer in the early days and the Internet
came out of a Pentagon research project. The semiconductor - the foundation of the
information economy - was initially developed with the funding of the US Navy. The US
aircraft industry would not have become what it is today had the US Air Force not massively
subsidized it indirectly by paying huge prices for its military aircraft, the profit of which
was channeled into developing civilian aircraft.
People believe that corporate executives are immune from prosecution and protected by the
fact that they are within the corporation. This is false security. If true purposeful and
intended criminal activities are conducted by any corporate executive, the courts can do what
is called "Piercing The Corporate Veil" . It is looking beyond the corporation as a virtual
person and looking at the actual individuals making and conducting the criminal
activities.
Just as a poetic discussion of the weather is not meteorology, so an issuance of moral
pronouncements or political creeds about the economy is not economics. Economics is a study of
cause-and-effect relationships in an economy.
-- Thomas Sowell
The first lesson of economics is scarcity: There is never enough of anything to satisfy all
those who want it. The first lesson of politics is to disregard the first lesson of
economics.
-- Thomas Sowell
Economics is the painful elaboration of the obvious.
The curious task of economics is to demonstrate to men how little they really know about
what they imagine they can design.
-- Friedrich von Hayek
I can't imagine economists admitting how little they actually know. If they admitted to
themselves, it would hurt their ego. If they admitted to others, it would hurt their job
prospects.
-- Joseph Mattes, Vienna (The Economist, letters December 04, 2010)
The use of mathematics has brought rigor to economics. Unfortunately, it has also
brought mortis .
-- Attributed to Robert Heilbroner
A study of economics usually reveals that the best time to buy anything is last year.
-- Marty Allen
Economic statistics are like a bikini, what they reveal is important, what they conceal is
vital
-- Attributed to Professor Sir Frank Holmes, Victoria University, Wellington, New Zealand,
1967.
Doing econometrics is like trying to learn the laws of electricity by playing the radio.
-- Guy Orcutt
Economists
The First Law of Economists: For every economist, there exists an equal and opposite
economist.
The Second Law of Economists: They're both wrong.
-- David Wildasin
"Murphys law of economic policy": Economists have the least influence on policy where they
know the most and are most agreed; they have the most influence on policy where they know the
least and disagree most vehemently.
-- Alan S. Blinder
An economist is someone who, when he finds something that works in practice, tries to make
it work in theory.
The purpose of studying economics is not to acquire a set of ready-made answers to economic
questions, but to learn how to avoid being deceived by economists.
-- Joan Violet Robinson
An economist is an expert who will know tomorrow why the things he predicted yesterday
didn't happen today.
-- Laurence J. Peter
Having a[n in] house economist became for many business people something like havinga
resident astrologer for the royal court: I don't quite understand what this fellow is saying
but there must be something to it.
-- Linden. (Jan. 11, 1993). Dreary Days in the Dismal Science. Forbes. Pp. 68-70.
Economics is the only field in which two people can get a Nobel Prize for saying exactly the
opposite thing.
Economists do it with models.
-- Heard at the LSE
Bentley's second Law of Economics: The only thing more dangerous than an economist is an
amateur economist!
Berta's Fundamental Law of Economic Rents.. "The only thing more dangerous than an amateur
economist is a professional economist."
Definition: Policy Analyst is someone unethical enough to be a lawyer, impractical enough to
be a theologian, and pedantic enough to be an economist.
Q: Why did God create economists ?
A: In order to make weather forecasters look good.
Q: Why has astrology been invented?
A: So that economy could be an accurate science.
Economists have forecasted 9 out of the last 5 recessions.
An econometrician and an astrologer are arguing about their subjects. The astrologer says,
"Astrology is more scientific. My predictions come out right half the time. Yours can't even
reach that proportion". The econometrician replies, "That's because of external shocks. Stars
don't have those".
When an economist says the evidence is "mixed," he or she means that theory says one thing
and data says the opposite.
-- Attributed to Richard Thaler, now at the Univ of Chicago
The last severe depression and banking crisis could not have been achieved by normal civil
servants and politicians, it required economists involvement.
Taxes
State run lotteries: think of them as tax breaks for the intelligent.
-- Evan Leibovitch
Inflation
Inflation is the one form of taxation that can be imposed without legislation.
-- Milton Friedman
Having a little inflation is like being a little pregnant–inflation feeds on itself
and quickly passes the "little" mark.
-- Dian Cohen
Trade and Trade Barriers
Tariffs, quotas and other import restrictions protect the business of the rich at the
expense of high cost of living for the poor. Their intent is to deprive you of the right to
choose, and to force you to buy the high-priced inferior products of politically favored
companies.
-- Alan Burris, A Liberty Primer
Perhaps the removal of trade restrictions throughout the world would do more for the cause
of universal peace than can any political union of peoples separated by trade barriers.
-- Frank Chodorov
When goods don't cross borders, soldiers will.
-- Fredric Bastiat, early French economist
The primary reason for a tariff is that it enables the exploitation of the domestic consumer
by a process indistinguishable from sheer robbery.
-- Albert Jay Nock
Regulation
Regulation - which is based on force and fear - undermines the moral base of business
dealings. It becomes cheaper to bribe a building inspector than to meet his standards of
construction. A fly-by-night securities operator can quickly meet all the S.E.C. requirements,
gain the inference of respectability, and proceed to fleece the public. In an unregulated
economy, the operator would have had to spend a number of years in reputable dealings before he
could earn a position of trust sufficient to induce a number of investors to place funds with
him. Protection of the consumer by regulation is thus illusory.
-- Alan Greenspan
You fucking academic eggheads! You don't know shit. You can't deregulate this industry.
You're going to wreck it. You don't know a goddamn thing!
-- Robert Crandall, boss of American Airlines, to an unnamed Senate lawyer in 1971
Government
The direct use of physical force is so poor a solution to the problem of limited resources
that it is commonly employed only by small children and great nations.
-- David Friedman
Government Spending
See, when the Government spends money, it creates jobs; whereas when the money is left in
the hands of Taxpayers, God only knows what they do with it. Bake it into pies, probably.
Anything to avoid creating jobs.
-- Dave Barry
I don't think you can spend yourself rich.
-- George Humphrey
Capitalism and Free Markets
A major source of objection to a free economy is precisely that it gives people what they
want instead of what a particular group thinks they ought to want. Underlying most arguments
against the free market is a lack of belief in freedom itself.
-- Milton Friedman
The most important single central fact about a free market is that no exchange takes place
unless both parties benefit.
-- Milton Friedman
The only thing worse than being exploited by capitalism is not being exploited by
capitalism.
-- Joan Violet Robinson
Manufacturing and commercial monopolies owe their origin not to a tendency imminent in a
capitalist economy but to governmental interventionist policy directed against free trade and
laissez faire.
-- Ludwig Mises, "Socialism"
If an exchange between two parties is voluntary, it will not take place unless both believe
they will benefit from it. Most economic fallacies derive from the neglect of this simple
insight, from the tendency to assume that there is a fixed pie, that one party can only gain at
the expense of another.
-- Milton Friedman
States with central-planning regimes [ ] do tend to consume much less energy (and much less
of everything else) [ ] than do Americans. There is a word for that: poverty.
-- The Politically Incorrect Guide to Socialism
Central Banks
Any system which gives so much power and so much discretion to a few men, [so] that mistakes
– excusable or not – can have such far reaching effects, is a bad system. It is a
bad system to believers in freedom just because it gives a few men such power without any
effective check by the body politic – this is the key political argument against an
independent central bank To paraphrase Clemenceau: money is much too serious a matter to be
left to the Central Bankers.
-- Milton Friedman
A central banker walks into a pizzeria to order a pizza.
When the pizza is done, he goes up to the counter get it. There a clerk asks him: "Should I
cut it into six pieces or eight pieces?"
The central banker replies: "I'm feeling rather hungry right now. You'd better cut it into
eight pieces."
Intellectual Property
For one thing, there are many "inventions" that are not patentable. The "inventor" of the
supermarket, for example, conferred great benefits on his fellowmen for which he could not
charge them. Insofar as the same kind of ability is required for the one kind of invention as
for the other, the existence of patents tends to divert activity to patentable inventions.
-- Milton Friedman
Slavery
From the experience of all ages and nations, I believe, that the work done by freemen comes
cheaper in the end than the work performed by slaves.
The work done by slaves, though it appears to cost only their maintenance, is in the end the
dearest of any. A person who can acquire no property can have no other interest but to eat as
much and to labour as little as possible.
Whatever work he does, beyond what is sufficient to purchase his own maintenance, can be
squeezed out of him by violence only, and not by any interest of his own.
-- Adam Smith
Prohibition
It is because it's prohibited. See, if you look at the drug war from a purely economic point
of view, the role of the government is to protect the drug cartel. That's literally true.
-- Milton Friedman
In the Long Run
John Maynard Keynes: "In the long run we are all dead."
Joan Robinson: "Yes, but not all at the same time."
Minimum Wage and Unemployment
The real minimum wage is zero: unemployment.
-- Thomas Sowell
All of the progress that the US has made over the last couple of centuries has come from
unemployment. It has come from figuring out how to produce more goods with fewer workers,
thereby releasing labor to be more productive in other areas. It has never come about through
permanent unemployment, but temporary unemployment, in the process of shifting people from one
area to another.
-- Milton Friedman
Misc
Talk is cheap. Supply exceeds Demand.
It is difficult to get a man to understand something when his salary depends on his not
understanding it.
-- Upton Sinclair
When you start paying people to be poor, you wind up with an awful lot of poor people.
-- Milton Friedman
of course the country could never listen to this guy .it just makes too much damn sense.
-- ryanx0 about Milton Friedman [http://www.youtube.com/watch?v=Se_TJzB9-z0]
Every individual necessarily labors to render the annual revenue of society as great as he
can. He generally neither intends to promote the public interest, nor knows how much he is
promoting it. He intends only his own gain, and he is, in this, as in many other cases, led by
an invisible hand to promote an end which was not part of his intention.
-- Adam Smith, Wealth of Nations
SOCIALISM: You have two cows. State takes one and give it to someone else.
COMMUNISM: You have two cows. State takes both of them and gives you milk.
FASCISM: You have two cows. State takes both of them and sell you milk.
NAZISM: You have two cows. State takes both of them and shoot you.
BUREAUCRACY: You have two cows. State takes both of them, kill one and spill the milk in
system of sewage.
CAPITALISM: You have two cows. You sell one and buy a bull.
Back during the Solidarity days, I heard that the following joke was being told in
Poland:
A man goes into the Bank of Gdansk to make a deposit. Since he has never kept money in a bank before, he is a little nervous.
"What happens if the Bank of Gdansk should fail?" he asks.
"Well, in that case your money would be insured by the Bank of Warsaw."
"But, what if the Bank of Warsaw fails?"
"Well, there'd be no problem, because the Bank of Warsaw is insured by the National Bank of Poland."
"And if the National Bank of Poland fails?"
"Then your money would be insured by the Bank of Moscow."
"And what if the Bank of Moscow fails?"
"Then your money would be insured by the Great Bank of the Soviet Union."
"And if that bank fails?"
"Well, in that case, you'd lose all your money. But, wouldn't it be worth it?"
All models are wrong but some are useful.
-- George Box
I'd rather be vaguely right than precisely wrong.
-- J.M.Keynes; Found in Forbes magazine 01/25/1999 issue. In the Numbers Game column by
Bernard Cohen
Far better an approximate answer to the right question, which is often vague, than an exact
answer to the wrong question, which can always be made precise.
-- J. Tukey
There is an entirely leisure class located at both ends of the economic spectrum
Wall Street is very story driven. They wasted a decade throwing money at tight oil and
lost billions. It's hard to see how this tight oil story gets resuscitated. The '10s saw free
debt, low regulatory regime, no effective alternatives to oil, skilled work force, entrenched
globalized oil markets, no pandemics, etc, and they STILL lost hundreds of billions. Wall
Street wants to lose their money in new ways. At least they get some novelty out of it.
Hey there! It's me, the stock market. I know it's weird to write you like this, but I felt
like I needed to drop a quick thank-you note for everything you've done for me this year. I
mean, your big ol' balance sheet is almost $3 trillion larger since early March! You're backing
up the truck and loading it with Treasuries and corporate bonds and bond ETFs, all to keep the
competition to stocks from fixed-income yields as limited as Jim Cramer's understanding of me.
It's been a dream come true, honestly. I mean, fess up: Have you been reading my diary?!
... ... ...
So please do me a solid and keep this thank-you note in mind when you host your virtual
Jackson Hole summit. No cowboy stuff, OK? If I hear anybody mutter something about "irrational
exuberance," I swear I'm gonna blow my top and hurt a few of these Robinhood types, you got
that? The Lord giveth, and the Lord taketh away. It's what I do -- and I'm good at it! But
right now, this is still a lot of fun for me...
"... Since the collapse of the Soviet Union, the world has not seen these levels of concentration of ownership. The Soviet Union did not die because of apparent ideological reasons but due to economic bankruptcy caused by its uncompetitive monopolistic economy. Our verdict is that the US is heading in the same direction. ..."
"... In a future instalment of this report, we will show that the oligarchization of America – the placing it under the rule of the One Percent (or perhaps more accurately the 0.1%, if not 0.01%) - has been a deliberate ideologically driven long-term project to establish absolute economic power over the US and its political system and further extend that to involve an absolute global hegemony (the latter project thankfully thwarted by China and Russia). ..."
"... In present-day United States a few major investors – equity funds or private capital - are as a rule cross-owned by each other, forming investor oligopolies, which in turn own the business oligopolies. ..."
"... A study has shown that among a sample of the 1,500 largest US firms (S&P 1500), the probability of one major shareholder holding significant shares in two competing firms had jumped to 90% in 2014, while having been just 16% in 1999. (*2). ..."
"... Institutional investors like BlackRock, Vanguard, State Street, Fidelity, and JP Morgan, now own 80% of all stock in S&P 500 listed companies. The Big Three investors - BlackRock, Vanguard and State Street – alone constitute the largest shareholder in 88% of S&P 500 firms, which roughly correspond to America's 500 largest corporations. (*3). Both BlackRock and Vanguard are among the top five shareholders of almost 70% of America's largest 2,000 publicly traded corporations. (*4). ..."
A close-knit oligarchy controls all major corporations. Monopolization of ownership in US
economy fast approaching Soviet levels
Starting with Ronald Reagan's presidency, the US government willingly decided to ignore the
anti-trust laws so that corporations would have free rein to set up monopolies. With each
successive president the monopolistic concentration of business and shareholding in America has
grown precipitously eventually to reach the monstrous levels of the present day.
Today's level of monopolistic concentration is of such unprecedented levels that we may
without hesitation designate the US economy as a giant oligopoly. From economic power follows
political power, therefore the economic oligopoly translates into a political oligarchy. (It
seems, though, that the transformation has rather gone the other way around, a ferocious set of
oligarchs have consolidated their economic and political power beginning from the turn of the
twentieth century). The conclusion that
the US is an oligarchy finds support in a 2014 by a Princeton University study.
Since the collapse of the Soviet Union, the world has not seen these levels of concentration
of ownership. The Soviet Union did not die because of apparent ideological reasons but due to
economic bankruptcy caused by its uncompetitive monopolistic economy. Our verdict is that the
US is heading in the same direction.
In a later report, we will demonstrate how all sectors of the US economy have fallen prey to
monopolization and how the corporate oligopoly has been set up across the country. This post
essentially serves as an appendix to that future report by providing the shocking details of
the concentration of corporate ownership.
Apart from illustrating the monopolization at the level of shareholding of the major
investors and corporations, we will in a follow-up post take a somewhat closer look at one
particularly fatal aspect of this phenomenon, namely the
consolidation of media (posted simultaneously with the present one) in the hands of
absurdly few oligarch corporations. In there, we will discuss the monopolies of the tech giants
and their ownership concentration together with the traditional media because they rightfully
belong to the same category directly restricting speech and the distribution of opinions in
society.
In a future instalment of this report, we will show that the oligarchization of America
– the placing it under the rule of the One Percent (or perhaps more accurately the 0.1%,
if not 0.01%) - has been a deliberate ideologically driven long-term project to establish
absolute economic power over the US and its political system and further extend that to involve
an absolute global hegemony (the latter project thankfully thwarted by China and Russia). To
achieve these goals, it has been crucial for the oligarchs to control and direct the narrative
on economy and war, on all public discourse on social affairs. By seizing the media, the
oligarchs have created a monstrous propaganda machine, which controls the opinions of the
majority of the US population.
We use the words 'monopoly,' 'monopolies,' and 'monopolization' in a broad sense and subsume
under these concepts all kinds of market dominance be it by one company or two or a small
number of companies, that is, oligopolies. At the end of the analysis, it is not of great
importance how many corporations share in the market dominance, rather what counts is the death
of competition and the position enabling market abuse, either through absolute dominance,
collusion, or by a de facto extinction of normal market competition. Therefore we use the term
'monopolization' to describe the process of reaching a critical level of non-competition on a
market. Correspondingly, we may denote 'monopoly companies' two corporations of a duopoly or
several of an oligopoly.
Horizontal shareholding – the cementation of the
oligarchy
One especially perfidious aspect of this concentration of ownership is that the same few
institutional investors have acquired undisputable control of the leading corporations in
practically all the most important sectors of industry. The situation when one or several
investors own controlling or significant shares of the top corporations in a given industry
(business sector) is referred to as horizontal shareholding . (*1). In present-day United
States a few major investors – equity funds or private capital - are as a rule
cross-owned by each other, forming investor oligopolies, which in turn own the business
oligopolies.
A study has shown that among a sample of the 1,500 largest US firms (S&P 1500), the
probability of one major shareholder holding significant shares in two competing firms had
jumped to 90% in 2014, while having been just 16% in 1999. (*2).
Institutional investors like BlackRock, Vanguard, State Street, Fidelity, and JP Morgan, now
own 80% of all stock in S&P 500 listed companies. The Big Three investors - BlackRock,
Vanguard and State Street – alone constitute the largest shareholder in 88% of S&P
500 firms, which roughly correspond to America's 500 largest corporations. (*3). Both BlackRock
and Vanguard are among the top five shareholders of almost 70% of America's largest 2,000
publicly traded corporations. (*4).
Blackrock had as of 2016 $6.2 trillion worth of assets under management, Vanguard $5.1
trillion, whereas State Street has dropped to a distant third with only $1 trillion in assets.
This compares with a total market capitalization of US stocks according to Russell
3000 of $30 trillion at end of 2017 (From 2016 to 2017, the Big Three has of course also
put on assets).Blackrock and Vanguard would then alone own more than one-third of all US
publicly listed shares.
From an expanded sample that includes the 3,000 largest publicly listed corporations
(Russell 3000 index), institutions owned (2016) about
78% of the equity .
The speed of concentration the US economy in the hands of institutions has been incredible.
Still back in 1950s, their share of the equity was 10%, by 1980 it was 30% after which the
concentration has rapidly grown to the present day approximately 80%. (*5). Another study puts
the present (2016) stock market capitalization held by institutional investors at 70%. (*6).
(The slight difference can possibly be explained by variations in the samples of companies
included).
As a result of taking into account the common ownership at investor level, it emerges that
the US economy is yet much more monopolized than it was previously thought when the focus had
been on the operational business corporation alone detached from their owners. (*7).
The
Oligarch owners assert their control
Apologists for monopolies have argued that the institutional investors who manage passive
capital are passive in their own conduct as shareholders as well. (*8). Even if that would be
true it would come with vastly detrimental consequences for the economy as that would mean that
in effect there would be no shareholder control at all and the corporate executives would
manage the companies exclusively with their own short-term benefits in mind, inevitably leading
to corruption and the loss of the common benefits businesses on a normally functioning
competitive market would bring.
In fact, there seems to have been a period in the US economy – before the rapid
monopolization of the last decade -when such passive investors had relinquished control to the
executives. (*9). But with the emergence of the Big Three investors and the astonishing
concentration of ownership that does not seem to hold water any longer. (*10). In fact, there
need not be any speculation about the matter as the monopolist owners are quite candid about
their ways. For example, BlackRock's CEO Larry Fink sends out
an annual guiding letter to his subject, practically to all the largest firms of the US and
increasingly also Europe and the rest of the West. In his pastoral, the CEO shares his view of
the global conditions affecting business prospects and calls for companies to adjust their
strategies accordingly.
The investor will eventually review the management's strategic plans for compliance with the
guidelines. Effectively, the BlackRock CEO has in this way assumed the role of a giant central
planner, rather like the Gosplan, the central planning agency of the Soviet command
economy.
The 2019 letter (referenced above) contains this striking passage, which should quell all
doubts about the extent to which BlackRock exercises its powers:
"As we seek to build long-term value for our clients through engagement, our aim is not to
micromanage a company's operations. Instead, our primary focus is to ensure board
accountability for creating long-term value. However, a long-term approach should not be
confused with an infinitely patient one. When BlackRock does not see progress despite ongoing
engagement, or companies are insufficiently responsive to our efforts to protect our clients'
long-term economic interests, we do not hesitate to exercise our right to vote against
incumbent directors or misaligned executive compensation."
Considering the striking facts rendered above, we should bear in mind that the establishment
of this virtually absolute oligarch ownership over all the largest corporations of the United
States is a relatively new phenomenon. We should therefore expect that the centralized control
and centralized planning will rapidly grow in extent as the power is asserted and methods are
refined.
Most of the capital of those institutional investors consists of so-called passive capital,
that is, such cases of investments where the investor has no intention of trying to achieve any
kind of control of the companies it invests in, the only motivation being to achieve as high as
possible a yield. In the overwhelming majority of the cases the funds flow into the major
institutional investors, which invest the money at their will in any corporations. The original
investors do not retain any control of the institutional investors, and do not expect it
either. Technically the institutional investors like BlackRock and Vanguard act as fiduciary
asset managers. But here's the rub, while the people who commit their assets to the funds may
be considered as passive investors, the institutional investors who employ those funds are most
certainly not.
Cross-ownership of oligarch corporations
To make matters yet worse, it must be kept in mind that the oligopolistic investors in turn
are frequently cross-owned by each other. (*11). In fact, there is no transparent way of
discovering who in fact controls the major institutional investors.
One of the major institutional investors, Vanguard is ghost owned insofar as it does not
have any owners at all in the traditional sense of the concept. The company claims that it is
owned by the multiple funds that it has itself set up and which it manages. This is how the
company puts it on
their home page : "At Vanguard, there are no outside owners, and therefore, no conflicting
loyalties. The company is owned by its funds, which in turn are owned by their shareholders --
including you, if you're a Vanguard fund investor." At the end of the analysis, it would then
seem that Vanguard is owned by Vanguard itself, certainly nobody should swallow the charade
that those funds stuffed with passive investor money would exercise any ownership control over
the superstructure Vanguard. We therefore assume that there is some group of people (other than
the company directors) that have retained the actual control of Vanguard behind the scenes
(perhaps through one or a few of the funds). In fact, we believe that all three (BlackRock,
State Street and Vanguard) are tightly controlled by a group of US oligarchs (or more widely
transatlantic oligarchs), who prefer not to brandish their power. It is beyond the scope of
this study and our means to investigate this hypothesis, but whatever, it is bad enough that as
a proven fact these three investor corporations wield this control over most of the American
economy. We also know that the three act in concert wherever they hold shares.
(*12).
Now, let's see who are the formal owners of these institutional investors
In considering these ownership charts, please, bear in mind that we have not consistently
examined to what degree the real control of one or another company has been arranged through a
scheme of issuing different classes of shares, where a special class of shares give vastly more
voting rights than the ordinary shares. One source asserts
that 355 of the companies in the Russell index consisting of the 3000 largest corporations
employ such a dual voting-class structure, or 11.8% of all major corporations.
We have mostly relied on www.stockzoa.com for the shareholder data. However, this and
other sources tend to list only the so-called institutional investors while omitting corporate
insiders and other individuals. (We have no idea why such strange practice is employed
The American Revolution was a catastrophe for its economy, which had to endure decades of
reconstruction. In order to neutralize the threat of the British Empire, it stroke multiple
trade deals with it.
The USA is home to the father of protectionism: Alexander Hamilton. He stated that a
national industry in its infancy should be protected from its more mature competition. The
USA followed his advice and protected its nascent industry from the British threat.
When the British Empire begun to degenerate, the Americans used the cheap British capital
in excess in the financial markets to build up their infrastructure, specially their
railways. Australia did the same.
The Founding Fathers did what they had to do in order to protect their country and make it
flourish. When the ideology of the time stated they shouldn't, they invented a new ideology
that stated they should. And the could: when the British and French tried to destroy the USA
through a sea embargo, they responded in kind (Embargo Act of 1807) and prevailed; they did
not cave in to the then imperial powers.
So, I don't understand why so many Americans are offended with China. The capitalist world
tried to keep China poor and as a raw material exporter, sweatshop conglomeration. China
didn't accept this, and decided to fight back. The result is here for all of us to see.
"Today the Department of State is updating the public guidance for CAATSA authorities
to include Nord Stream 2 and the second line of TurkStream 2. This action puts investments or
other activities that are related to these Russian energy export pipelines at risk of US
sanctions. It's a clear warning to companies aiding and abetting Russia's malign influence
projects and will not be tolerated. Get out now or risk the consequences".
Pompeo speaking at a press conference today.
CAATSA -- Countering America's Adversaries Through Sanctions Act
So Russia and Turkey are "adversaries" of the USA?
In what way?
Do these states wish to wage war against the USA?
Is it adversarial to United States interest to compete economically with the hegemon?
Who cares? Really, is Pompeo still scary? If he has a functioning brain, he should realize
that all these blatant efforts to reserve markets for America by sanctioning all its
competitors out of the picture is having the opposite effect, and frightening customers away
from becoming dependent on American products which might be withheld on a whim when America
wants political concessions. 'Will not be tolerated' – what a pompous ass. Sanction
away. The consequence is well-known to be seizure of assets held in the United States or an
inability to do business in the United States. That will frighten some into submission
– like the UK, which was threatened with the cessation of intelligence-sharing with the
USA (sure you can spare it?) if it did not drop Huawei from its 5G networks. But others will
take prudent steps to limit their exposure to such threats, in the certain knowledge that if
they work, they will encourage the USA to use the technique again.
The good news is that the unstoppable juggernaut of globalization has fallen to it's
knees. Countries and societies around the world will have to look at ways they came become
independent and self sufficient,at least to some degree. It's like "War of the Worlds"
really, the best effort of humanity to contain the plague fails, but a random natural
occurrence saves humanity from the brink of destruction. Hopefully some real scientists will
be allowed to mitigate the medical disaster, but one thing is for sure, the grand plan of
turning everyone into a nomad competing for pennies on the international market, for the sole
benefit of the richest among the rich, is dead. Some really hard times are coming for the
international nomads/ parasites, and hopefully humanity will move to some more beneficial
culture, and have a real chance to survive as a species, in the long term.
"... I agree that globalism is/will be heading into the dumpers, but I see no chance that US-based manufacturing is going to make any significant come-back. ..."
"... What market will there be for US-manufactured goods? US "consumers" are heavily in debt and facing continued downward pressures on income. ..."
"... There will certainly be, especially given the eye-opener of COVID-19, a big push to have medical (which includes associated tech) production capacities reinvigorated in the US. ..."
"... More "disposable" income goes toward medical expenditures. Less money goes toward creating export items; wealth creation only occurs through a positive increase in balance of trade. And on the opposite end of the spectrum, death, the US will likely continue, for the mid-term, to export weaponry; but, don't expect enough growth here to mean much (margins will drop as competition increases, so figure downward pressure on net export $$). ..."
"... the planet cannot comply with our economic model's dependency on perpetual growth: there can NOT be perpetual growth on a finite planet. US manufacturing requires, as it always has, export markets; requires ever-increasing exports: this is really true for all others. Higher standards of living in the US (and add in increasing medical costs which factor into cost of goods sold) means that the price of US-manufactured goods will be less affordable to peoples outside of the US. ..."
"... I'll also note that the notion of there being a cycle, a parabolic curve, in civilizations is well noted/documented in Sir John Glubb's The Fate of Empires and Search for Survival (you can find electronic bootlegged copies on the Internet)- HIGHLY recommended reading! ..."
"... All of this is pretty much reflected in Wall Street companies ramp-ups in stock-buy-backs. That's money that's NOT put in R&D or expansion. I'm pretty sure that the brains in all of this KNOW what the situation is: growth is never coming back. ..."
"... Make no mistake, what we're facing is NOT another recession or depression, it's not part of what we think as a downturn in the "business cycle," as though we'll "pull out of it," it's basically an end to the super-cycle ..."
"... We are at the peak (slightly past peak, but not far enough to realize it yet) and there is no returning. Per-capita income and energy consumption have peaked. There's not enough resources and not enough new demand (younger people, people that have wealth) to keep the perpetual growth machine going. ..."
I agree that globalism is/will be heading into the dumpers, but I see no chance that US-based manufacturing is going to
make any significant come-back.
The world's economy is in contraction. Although capital, what actual capital exists, will have to try and do something "productive,"
it is confronted by this fact, that everything is facing contraction. During times of contraction it's a game of acquisition rather
than expanding capacity: the sum total is STILL contraction; and the contraction WILL be a reduction in excess, excess manufacturing
and labor.
What market will there be for US-manufactured goods? US "consumers" are heavily in debt and facing continued downward pressures
on income. China is self-sufficient (enough) other than energy (which can be acquired outside of US markets). Most every other
country is in a position of declining wealth (per capita income levels peaked and in decline). And manufacturing continues to
increase its automation (less workers means less consumers).
There will certainly be, especially given the eye-opener of COVID-19, a big push to have medical (which includes associated
tech) production capacities reinvigorated in the US. One has to look at this in The Big Picture of what it means, and that's that
the US population is aging (and in poor health).
More "disposable" income goes toward medical expenditures. Less money goes toward
creating export items; wealth creation only occurs through a positive increase in balance of trade. And on the opposite end of
the spectrum, death, the US will likely continue, for the mid-term, to export weaponry; but, don't expect enough growth here to
mean much (margins will drop as competition increases, so figure downward pressure on net export $$).
Lastly, and it's the reason why global trade is being knocked down, is that the planet cannot comply with our economic model's
dependency on perpetual growth: there can NOT be perpetual growth on a finite planet. US manufacturing requires, as it always
has, export markets; requires ever-increasing exports: this is really true for all others. Higher standards of living in the US
(and add in increasing medical costs which factor into cost of goods sold) means that the price of US-manufactured goods will
be less affordable to peoples outside of the US.
And here too is the fact that other countries' populations are also aging. Years
ago I dove into the demographics angle/assessment to find out that ALL countries ramp and age and that you can see countries'
energy consumption rise and their their net trade balance swing negative- there's a direct correlation: go to the CIA's Factbook
and look at demographics and energy and the graphs tell the story.
I'll also note that the notion of there being a cycle, a parabolic
curve, in civilizations is well noted/documented in Sir John Glubb's The Fate of Empires and Search for Survival (you can find
electronic bootlegged copies on the Internet)- HIGHLY recommended reading!
All of this is pretty much reflected in Wall Street companies ramp-ups in stock-buy-backs. That's money that's NOT put in R&D
or expansion. I'm pretty sure that the brains in all of this KNOW what the situation is: growth is never coming back.
MANY years ago I stated that we will one day face "economies of scale in reverse." We NEVER considered that growth couldn't
continue forever. There was never a though about what would happen with the reverse "of economies of scale."
Make no mistake,
what we're facing is NOT another recession or depression, it's not part of what we think as a downturn in the "business cycle,"
as though we'll "pull out of it," it's basically an end to the super-cycle.
We will never be able to replicate the state of things
as they are. We are at the peak (slightly past peak, but not far enough to realize it yet) and there is no returning. Per-capita
income and energy consumption have peaked. There's not enough resources and not enough new demand (younger people, people that
have wealth) to keep the perpetual growth machine going.
@Rev. Spooner bout the Bill of Rights or the Constitution or community. Those are a joke
to people whose money is made transnational.
The lumpens who have never traveled out of their state have no concept of geographic
dimensions. They have never even left home. They think everyone is as patriotic as them and
will fight and die for their country and their community.
I assure none of the elite care a whit. Penthouses look the same from Manhattan to
Tokyo.
Ask the Boers in South Africa or Polish in Detroit who did not "sniff the wind" in
time.
The guy who has a gun loaded in his pocket as an insurance policy has a plan and it does
not end well for the person who hit him.
The elites have two or three passports, own businesses overseas, own houses.
Trump just changed the rules to let Wall Street's most predatory industry get its hands on hundreds of billions of dollars of
ordinary workers' retirement savings. Now his friends in private equity are celebrating.
If politics is the art of the sleight of hand, then Donald Trump is one of the deftest magicians of all time -- a master of creating
mesmerizing spectacles, while his minions quietly rob everything in sight. This David Copperfield routine has become so mundane we
are practically numb to it, but the trick Trump just pulled off for his billionaire pals was something particularly special -- it
could end up being one of the single biggest financial heists in history.
The Trump administration's new directive came just a few months after private equity billionaire Stephen Schwarzman -- who had
been pushing for the change -- poured $3 million
into a super PAC backing Trump's reelection bid.
While long-standing worker-protection regulations have prevented 401(k) plans from investing in high-risk private equity firms,
the letter now permits corporations to funnel that money to those firms, which charge notoriously giant fees.
Trump's administration argued that workers should feel fortunate and thankful that the administration will now let employers turn
their savings over to private equity barons.
"This information letter will help Americans saving for retirement gain access to alternative investments that often provide strong
returns," labor secretary Eugene Scalia said
in a statement announcing the new policy. "The letter helps level the playing field for ordinary investors and is another step
by the department to ensure that ordinary people investing for retirement have the opportunities they need for a secure retirement."
In practice, private equity firms will now be allowed to access -- and skim fees off of -- the
$9 trillion in 100
million workers' 401(k) plans and IRAs.
"If just 5 percent of the money in these retirement funds were available to private equity, it would be a windfall of $435 billion
-- real money even to private equity millionaires and billionaires,"
wrote Eileen Appelbaum of the Center for Economic and Policy Research (CEPR).
The Labor Department letter is the result of all that private equity influence -- and at a particularly opportune time. The
industry -- including
Partners Group -- has recently been fretting about a decline in fees during the COVID-19 pandemic. The letter offers the potential
for a bailout for the industry, paid for by millions of workers' retirement savings.
That said, this is not some temporary relief during a fleeting crisis -- this is the culmination of a long-term campaign by Schwarzman.
Six days after Trump was inaugurated, the Blackstone chief said that he had been dreaming of a president who would change the law
to let his firm make bank off workers' 401(k) savings.
"In life you have to have a dream," Schwarzman told analysts in
January 2017 , days after Trump's inauguration. "One of the dreams is our desire and the market's need to have more access at
retail to alternative asset products . . . A lot of people are not allowed to put those into retirement vehicles and other types.
And one of the interesting issues when you have a new government is whether they want to continue that type of prohibition or not.
Because what it's doing is denying people sort of a better retirement, and if there's a change in that area that becomes a huge opportunity
for the firm."
Like Shelley Levene's smarmy real-estate sales pitch in
Glengarry Glen Ross , Schwarzman's argument is that private equity offers ordinary Americans terrific untapped investment upside.
In his telling, workers have been unfairly deprived of these opportunities under the old laws -- and not surprisingly, both the Trump
Labor Department and some of the business press have credulously echoed that line.
"Everyday investors may soon be able to get a piece of private equity action," effused the lede of the New York Times
' report on the Labor Department letter, as if this is a sweet get-rich-quick opportunity for the average working man.
But only days after the change, a landmark
study was released, telling the real story of private equity.
The report by University of Oxford professor Ludovic Phalippou shows that in the last fifteen years, private equity firms generally
have not provided better returns to investors than low-fee stock index funds. In the process, a handful of private equity firms and
their executives have raked in roughly $230 billion in fees from investors like public pension funds and university endowments.
"This wealth transfer might be one of the largest in the history of modern finance: from a few hundred million pension scheme
members to a few thousand people working in private equity," Phalippou concludes.
Politicians have enabled this redistribution.
In Washington, federal lawmakers have
preserved a tax loophole
that allows private equity moguls to classify their winnings as capital gains rather than income, thereby paying far lower tax rates
than ordinary workers.
Meanwhile, in states and cities, local officials have continued to
direct more and more of government workers' pension savings to politically connected private equity firms. Those officials have
been hoping that private equity investments would produce outsize returns that might forestall tax hikes necessary to raise revenue
and fund the pension benefits promised to public-sector workers. But overall, those returns were not significantly better than the
stock market, and they came with giant fees.
In its letter, the Trump administration actually acknowledged some of these pitfalls of private equity investments, noting that
they involve "more complex, and typically, higher fees." But that wasn't enough to stop the Labor Department from shoving millions
of unwitting workers and retirees into private equity's maw just a few years after
Blackstone
and other major private equity firms were sanctioned
by regulators for fleecing investors.
The Quest for Dumb Money
The private equity industry is hardly short on cash -- the industry was sitting on roughly
$1.5 trillion of undeployed capital at the end of 2019. The reason the Labor Department letter is so important to the industry
is because 401(k)s and IRAs represent a particular kind of capital that private equity firms love -- so-called
"dumb money."
Unlike a share of publicly traded stock whose price is the same for all investors, a private equity investment's fees can vary
widely from investor to investor. Private equity firms are therefore always eager to find investors willing to accept the highest
possible fees. "Dumb money" refers to such investors -- entities like pension funds, 401(k) plans, and university endowments that
are pools of other people's money directed by officials with no personal skin in the investment decisions.
Wall Street sees these funds as "dumb" -- and particularly lucrative -- because the officials negotiating on retirees' or universities'
behalf may not drive as hard a bargain on fees and terms as, say, an individual billionaire or an insurance company trying to protect
its cash reserves.
This wiggle room with dumb money can be enormously lucrative for private equity firms: a recent
study by Stanford and Harvard researchers
found that had public pensions all received the same private equity fee rates, they "would have earned nearly $45 billion more on
their investments."
In other words: that is $45 billion of earnings that could have gone to retirees, but instead went to private equity firms and
other wealthy investors because pension fund managers didn't secure better fees and terms.
That part about "other unobserved investors" is key -- private equity firms explicitly say in their
SEC filings that they can and will offer different investors different fees and terms on the exact same investments. It is a
situation that has caused
some retirees to wonder whether their dumb money is being used to pad the profits of smarter, politically connected investors
who negotiate better terms in the same private equity investments.
Now that Trump's Labor Department has opened the floodgates, a lot more money could end up flowing into these opaque deals, enriching
private equity executives and their friends -- while leaving workers'
meager retirement savings even further depleted.
End Mark
David Sirota is editor-at-large at Jacobin . He edits the Too Much Information newsletter and previously served as a senior
adviser and speechwriter on Bernie Sanders's 2020 presidential campaign. You can subscribe to David Sirota's newsletter "Too Much
Information" here . Andrew Perez contributed research to this
story.
Private equity is essential a mafia style business: they aid to blled thier victim dry.
Notable quotes:
"... By the end of 2018, available cash was so tight that Prospect got a $41 million infusion from Leonard Green and members of its management, according to Moody's. The ratings firm downgraded Prospect deeper into junk last year at B3, citing "shareholder-friendly policies" and the higher leverage resulting from the $457 million dividend. ..."
"... Meanwhile, care quality ratings for seven of the 10 Prospect hospitals evaluated by the Centers for Medicare and Medicaid Services, or CMS, have declined since 2016, according to HMP Metrics, a health-care facility analytics service. CMS ranks facilities from 1 to 5 stars, with 5 being the best. ..."
"... Most Prospect hospitals sit at the bottom rungs of quality assessments, according to the agency's hospital comparison database. Nine have a two-star rating or below, placing them in the lowest 30% of rated hospitals, according to CMS data. Just one Prospect-owned hospital -- Roger Williams Medical Center in Rhode Island -- earned a three-star rating. ..."
"... "Private equity owners, seeking high returns, may be even more willing to cut costs in crucial ways than even other for-profit health care companies," she said in an interview. ..."
"... How much of this is virtue signalling by Mitt Romney and others of the elite? Is he willing to disgorge himself of the the hundreds of millions he took from Americans through his company Bain? ..."
These far right social conservatives lost yesterday and they don't even realize it. Mitt
Romney marched with BLM. Mitt is no radical on social issues (he certainly is on. Taxes on
the rich) you won't convince a single one of these hard right wing people that systemic
racism is real, even when you give examples like the North Carolina Republican Party
disenfranchising blacks "with surgical precision" or the direct evidence of the commenter
Dukeboy who states he is a retired police officer and is obviously a white supremacists. But
you don't need to convince them of anything. This is the same group who would have been
against the civil rights protests in the '60's. They aren't needed to create a massive
change.
The hubris to think that your feelings of guilt would be meaningful to black people is off
the charts.
"My local school has been underfunded for generations due to the property tax funding system
and redlining but Karen feels bad about it so all is right with the world!"-Said no black
person ever.
How much of this is virtue signalling by Mitt Romney and others of the elite? Is he
willing to disgorge himself of the the hundreds of millions he took from Americans through
his company Bain?
How much? 100% of it. Romney is a vicious corporate raider who has destroyed countless
jobs and by extension, lives. How many suicides have followed in the wake of Bain's corporate
takeovers? When Romney lived in Belmont, MA, he and his wife petitioned the town to not allow
ambulances to go down their street with sirens on. Seriously.
"... Moreover, people do distinguish between needs and wants. Americans need to eat, but they mostly don't need to eat out. They don't need to travel. Restaurant owners and airlines therefore have two problems: they can't cover costs while their capacity is limited for public-health reasons, and demand would be down even if the coronavirus disappeared. This explains why many businesses are not reopening even though they legally can. Others are reopening, but fear they cannot hold out for long. And the many millions of workers in America's vast services sector are realizing that their jobs are simply not essential. ..."
"... America's economic plight is structural. It is not simply the consequence of Trump's incompetence or House Speaker Nancy Pelosi's poor political strategy. It reflects systemic changes over 50 years that have created an economy based on global demand for advanced goods, consumer demand for frills, and ever-growing household and business debts. This economy was in many ways prosperous, and it provided jobs and incomes to many millions. Yet it was a house of cards, and COVID-19 has blown it down. ..."
In the 1960s, the US had a balanced economy that produced goods for both businesses and
households, at all levels of technology, with a fairly small (and tightly regulated) financial
sector. It produced largely for itself, importing mainly commodities.
Today, the US produces for the world, mainly advanced investment goods and services, in
sectors such as aerospace, information technology, arms, oilfield services, and finance. And it
imports far more consumer goods, such as clothing, electronics, cars, and car parts, than it
did a half-century ago.
And whereas cars, televisions, and household appliances drove US consumer demand in the
1960s, a much larger share of domestic spending today goes (or went) to restaurants, bars,
hotels, resorts, gyms, salons, coffee shops, and tattoo parlors, as well as college tuition and
doctor's visits. Tens of millions of Americans work in these sectors.
Finally, American household spending in the 1960s was powered by rising wages and growing
home equity. But wages have been largely stagnant since at least 2000, and spending increases
since 2010 were powered by rising personal and corporate debts. House values are now stagnant
at best, and will likely fall in the months ahead.
Mainstream economics pays little attention to such structural questions. Instead, it assumes
that business investment responds mostly to the consumer, whose spending is dictated equally by
income and desire. The distinction between "essential" and "superfluous" does not exist. Debt
burdens are largely ignored.
But demand for many US-made capital goods now depends on global conditions. Orders for new
aircraft will not recover while half of all existing planes are grounded. At current prices,
the global oil industry is not drilling new wells. Even at home, though existing construction
projects may be completed, plans for new office towers or retail outlets won't be launched
soon. And as people commute less, cars will last longer, so demand for them (and gasoline) will
suffer.
Faced with radical uncertainty, US consumers will save more and spend less. Even if the
government replaces their lost incomes for a time, people know that stimulus is short term.
What they do not know is when the next job offer – or layoff – will come along.
Moreover, people do distinguish between needs and wants. Americans need to eat, but they
mostly don't need to eat out. They don't need to travel. Restaurant owners and airlines
therefore have two problems: they can't cover costs while their capacity is limited for
public-health reasons, and demand would be down even if the coronavirus disappeared. This
explains why many businesses are not reopening even though they legally can. Others are
reopening, but fear they cannot hold out for long. And the many millions of workers in
America's vast services sector are realizing that their jobs are simply not essential.
Meanwhile, US household debts – rent, mortgage, and utility arrears, as well as
interest on education and car loans – have continued to mount. True, stimulus checks have
helped: defaults have so far been modest, and many landlords have been accommodating. But as
people face long periods with lower incomes, they will continue to hoard funds to ensure that
they can repay their fixed debts. As if all this were not enough, falling sales- and income-tax
revenues are prompting US state and local governments to cut spending, compounding the loss of
jobs and incomes.
America's economic plight is structural. It is not simply the consequence of Trump's
incompetence or House Speaker Nancy Pelosi's poor political strategy. It reflects systemic
changes over 50 years that have created an economy based on global demand for advanced goods,
consumer demand for frills, and ever-growing household and business debts. This economy was in
many ways prosperous, and it provided jobs and incomes to many millions. Yet it was a house of
cards, and COVID-19 has blown it down.
"Reopen America" is therefore an economic and political fantasy. Incumbent politicians crave
a cheery growth rebound, and the depth of the collapse makes possible some attractive
short-term numbers. But taking them seriously will merely set the stage for a new round of
disillusion. As nationwide protests against systemic racism and police brutality show,
disillusion is America's one big growth sector right now.
"... Russiagate became a convenient replacement explanation absolving an incompetent political establishment for its complicity in what happened in 2016, and not just the failure to see it coming. ..."
"... Because of the immediate arrival of the collusion theory, neither Wolf Blitzer nor any politician ever had to look into the camera and say, "I guess people hated us so much they were even willing to vote for Donald Trump ..."
" Russiagate became a convenient replacement explanation absolving an incompetent political establishment for its complicity
in what happened in 2016, and not just the failure to see it coming.
Because of the immediate arrival of the collusion theory, neither Wolf Blitzer nor any politician ever had to look into
the camera and say, "I guess people hated us so much they were even willing to vote for Donald Trump ."
As a peedupon all I can see is that the elite seem to be fighting amongst themselves or (IMO) providing cover for ongoing elite
power/control efforts. It might not be about private/public finance in a bigger picture but I can't see anything else that makes
sense
"... "I understand that people are angry, but they shouldn't just endanger businesses without even a thought to enriching themselves through leveraged buyouts and across-the-board terminations..." ..."
"I understand that people are angry, but they shouldn't just endanger businesses without
even a thought to enriching themselves through leveraged buyouts and across-the-board
terminations..."
"Look, we all have the right to protest, but that doesn't mean you can just rush in and
destroy any business without gathering a group of clandestine investors to purchase it at a
severely reduced price and slowly bleed it to death," said Facebook commenter Amy Mulrain,
echoing the sentiments of detractors nationwide who blasted the demonstrators for not hiring
a consultant group to take stock of a struggling company's assets before plundering.
" I understand that people are angry, but they shouldn't just endanger businesses without
even a thought to enriching themselves through leveraged buyouts and across-the-board
terminations.
It's disgusting to put workers at risk by looting. You do it by chipping away at their
health benefits and eventually laying them off. There's a right way and wrong way to do this.
"
At press time, critics recommended that protestors hold law enforcement accountable by
simply purchasing the Minneapolis police department from taxpayers.
So not only ambulance service was destroyed by private equity, they now added other specialties. I wonder is those criminals who
insert unnecessary stents in patients are connected to private equity.
Images removed
Notable quotes:
"... "You can't serve two masters. You can't serve patients and investors" ..."
"... Morganroth's defense of pandemic Botox might seem odd, but it made perfect sense within the logic of the U.S. health-care system, which has seen Wall Street investors invade its every corner, engineering medical practices and hospitals to maximize profits as if they were little different from grocery stores. At the center of this story are private equity firms, which saw the explosive growth of health-care spending and have been buying up physician staffing companies, surgery centers, and everything else in sight. ..."
"... But some doctors say that the private equity playbook, which involves buying companies, drastically cutting costs, and then selling for a profit -- the goal is generally to make an annualized return of 20% to 30% within three to five years -- creates problems that are unique to health care. "I know private equity does this in other industries, but in medicine you're dealing with people's health and their lives," says Michael Rains, a doctor who worked at U.S. Dermatology Partners , a big private equity-backed chain. "You can't serve two masters. You can't serve patients and investors." ..."
"... Yet over the past decade, lawyers devised a structure that allows investors to buy a medical practice without technically owning it: the MSO, or management service organization. Today, when an investment firm buys a doctor's office, what it's actually buying are the office's "nonclinical" assets. In theory, physicians control all medical decisions and agree to pay a management fee to a newly created company, which handles administrative tasks such as billing and marketing. ..."
"... Businessweek ..."
"... When individual doctors sell, they generally receive $2 million to $7 million each, with 30% to 40% of that paid in equity in the group. After the acquisition, doctors get a lower salary and are asked to help recruit other doctors to sell their practices or to join as employees. ..."
"... Patients, for the most part, are in the dark. Unlike when your mortgage changes hands, you usually aren't notified when a big investment firm buys your doctor. Sometimes the sign on the door bearing the physician's name stays put, and subtle changes in operations or unfamiliar fees may be the only clues that anything has happened. ..."
"... At Advanced Dermatology & Cosmetic Surgery , the largest private equity-backed group in the field, with more than 150 locations across the U.S., that sense of discomfort came shortly after Audax Group bought a controlling stake in what was then a much smaller chain in 2011. The new management team introduced a scorecard that rewarded offices with cash if they met daily and monthly financial goals, according to a lawsuit filed in 2013 against the company by one of its dermatologists. The doctor alleged that the bonus program encouraged staff to do as many procedures as possible, rather than strictly addressing patients' medical needs. ..."
"... Most dermatologists use outside labs and pathologists, but private equity-owned groups buy up existing labs and hire their own pathologists. Then doctors are encouraged to refer patients within the group and send biopsy slides to the company-owned labs, keeping the entire chain of revenue in-house. ..."
"... Now comes the cost-cutting. This is supposed to be the hallmark of private equity, and, done right, it can work to the benefit of doctors and patients. But there are pitfalls unique to medicine, where aggressive cuts can lead to problems, some of them merely inconvenient and some potentially dangerous. ..."
"... A doctor at Advanced Dermatology says that waiting for corporate approvals means his office is routinely left without enough gauze, antiseptic solution, and toilet paper. Even before the great toilet paper shortage of 2020, he would travel with a few rolls in the trunk of his car, to spare patients when an office inevitably ran out. The company declined to comment. ..."
"... One paradox of the Covid-19 pandemic has been that even as the virus has focused the entire country on health care, it's been a financial disaster for the industry. And so, while emergency room doctors and nurses care for the sick -- comforting those who would otherwise die alone, and in some cases dying themselves -- private equity-backed staffing companies and hospitals have been cutting pay for ER doctors. These hospitals, like the big medical practices, make a large portion of their money from elective procedures and have been forced into wrenching compromises. ..."
"... For investors with capital, on the other hand, the economic fallout from the virus is a huge opportunity. Stay-at-home orders have left small practices more financially strained than they've ever been. That will likely accelerate sales to private equity firms, according to Marc Cabrera, an investment banker focused on health-care deals at Oppenheimer & Co. Independent doctors or groups that previously rebuffed offers from deep-pocketed backers "will reconsider their options," he says. ..."
"... Many doctors may ultimately come to regret cashing out, but it's hard to get out once you're in. As part of an acquisition, the private equity groups typically require doctors to sign yearslong contracts, with noncompete clauses that prevent them from working in the surrounding area. ..."
Not long after Gavin Newsom, the governor of California, ordered the state's 40 million residents to stay home to stop the spread
of the new coronavirus, Dr. Greg Morganroth called his team of doctors and said their dermatology group was staying open.
Morganroth is chief executive officer of the California Skin Institute
, which he founded in 2007 as a single office in Mountain View. He's since expanded to more than 40 locations using a financing
strategy that's become exceedingly common in American health care: private equity. In this case, he took out a loan from
Goldman Sachs Group Inc. that could eventually convert to an
equity stake. CSI is now the largest dermatology chain in California.
But the Covid-19 pandemic
put Morganroth in a precarious position. Most medical procedures were characterized as
nonessential by government officials and practitioners. Doctors were closing offices, and patients were staying away to limit
their potential exposure to the virus.
CSI took a different approach. Morganroth explained his thinking on April 2 in a Zoom call with more than 170 dermatologists from
around the country organized by the Cosmetic Surgery Forum, an industry conference. Contrary to what they might have heard, Morganroth
told them, they should consider staying open during the pandemic. "Many of us are over-interpreting guidelines," he said.
For a moment there was an awkward silence. Doctors had thought they were signing up for advice on how to apply for
government money that would help them meet payroll while they were shut down; they hadn't expected to be told not to shut down
at all. Morganroth continued: "We are going to be in a two-year war, and we need to make strategic plans for our businesses that
enable us to survive and to rebound."
Back at CSI, the company's front-office staff was working the phones, calling patients in some of the worst-hit areas and reminding
them to show up for their appointments, even for cosmetic procedures such as Botox injections to treat wrinkles. During the videoconference,
Morganroth argued that offering Botox in a pandemic wasn't so different from a grocery store allowing customers to buy candy alongside
staples.
"If I had a food supply company and had to stay open, and I had meat, bread, and milk, would I stop making lime and strawberry
licorice?" Morganroth asked. "I would make everything and go forward."
From a public-health point of view, some of the doctors believed, this was questionable. Common reasons for visiting a dermatologist's
office -- skin screenings, mole removals, acne consultations -- aren't particularly time sensitive. Serious matters, such as suspected
cancers and dangerous rashes, can be handled, at least initially, with
telemedicine consultations . Then doctors can weigh the risks for their patients and determine who needs to come in. In a statement,
CSI says that it followed local and state laws for staying open, while providing "necessary care" for patients, and that it had not
required doctors to come to work.
"You can't serve two masters. You can't serve patients and investors"
Morganroth's defense of pandemic Botox might seem odd, but it made perfect sense within the logic of the U.S. health-care system,
which has seen Wall Street investors invade its every corner, engineering medical practices and hospitals to maximize profits as
if they were little different from grocery stores. At the center of this story are private equity firms, which saw the explosive
growth of health-care spending and have been buying up physician staffing companies, surgery centers, and everything else in sight.
Over the past five years, the firms have invested more than $10 billion in medical practices, with a special focus on dermatology,
which is seen as a hot industry because of the aging population. Baby boomers suffer from high rates of two potentially lucrative
conditions: skin cancer and vanity. Some estimates suggest that private equity already owns more than 10% of the U.S dermatology
market. And firms have started to expand into other specialties, including women's health, urology, and gastroenterology.
There's nothing inherently wrong with any of this. But some doctors say that the private equity playbook, which involves
buying companies, drastically cutting costs, and then selling for a profit -- the goal is generally to make an annualized return
of 20% to 30% within three to five years -- creates problems that are unique to health care. "I know private equity does this in
other industries, but in medicine you're dealing with people's health and their lives," says Michael Rains, a doctor who worked
at
U.S. Dermatology Partners , a big private equity-backed
chain. "You can't serve two masters. You can't serve patients and investors."
Investment firms, and the practices they fund, say these concerns are overblown. They point out that they're giving doctors a
financial shelter from the rapidly changing medical environment, a particularly attractive prospect now, and that money from private
equity firms has expanded care to more patients. But they've also made it next to impossible to track the industry's impact or reach.
Firms rarely announce their investments and routinely subject doctors to nondisclosure agreements that make it difficult for them
to speak publicly. Bloomberg Businessweek spoke to dozens of doctors at 10 large private equity-backed dermatology groups.
Those interviews, along with information obtained from other employees, investors, lawyers, court filings, and company records, reveal
how the firms operate, and why they sometimes fail patients.
The process is never exactly the same, but there are familiar patterns, which tend to play out in five steps.
Step 1: Marriage
The strange thing about private equity money in medicine is that for-profit investors have long been prevented from buying doctor's
offices. Corporate ownership goes against a doctrine set by the American Medical
Association , the main trade group for doctors in the U.S., and is prohibited by law in many states, including Texas and New
Jersey. For most of the past 100 years, if you wanted to make money on a medical practice, you needed to have a medical license.
Yet over the past decade, lawyers devised a structure that allows investors to buy a medical practice without technically owning
it: the MSO, or management service organization. Today, when an investment firm buys a doctor's office, what it's actually buying
are the office's "nonclinical" assets. In theory, physicians control all medical decisions and agree to pay a management fee to a
newly created company, which handles administrative tasks such as billing and marketing.
In practice, though, investors expect some influence over medical decision-making, which, after all, is connected to profits.
"When we partner with you, it's a marriage," said Matt Jameson, a managing director at BlueMountain Capital, a $17 billion firm that
recently invested in a women's health company, while speaking at a conference in New York in September. "We have to believe it. You
have to believe it. It's not going to be something where clinical is completely not touched." (When contacted by Businessweek
, Jameson asked to clarify his comments. "Doctors and other qualified healthcare professionals at the providers we've invested
in make medical decisions," he said in a statement.)
The typical buyout starts with the acquisition of a big, popular practice, often with multiple doctors and several locations,
for as much as $100 million. (Investors typically pay between 9 and 12 times annual profit.) This practice functions as an anchor,
like a name-brand department store at a shopping mall, attracting patients and doctors to the new group as it expands. Then comes
the roll-up: The private equity firm purchases smaller offices and solo practices, giving the group a regional presence.
As part of the new structure, investors deal with paperwork and save money by buying medical supplies in bulk. Crucially they
also negotiate higher insurance reimbursement rates. One dermatologist who sold her practice to the California Skin Institute says
she was surprised to find out the bigger group's payouts from insurers were $25 to $125 more per visit.
When individual doctors sell, they generally receive $2 million to $7 million each, with 30% to 40% of that paid in equity in
the group. After the acquisition, doctors get a lower salary and are asked to help recruit other doctors to sell their practices
or to join as employees.
At first, doctors are generally thrilled by all of this. They have financial security and can focus on treating patients without
the stress of running a business. Patients, for the most part, are in the dark. Unlike when your mortgage changes hands, you usually
aren't notified when a big investment firm buys your doctor. Sometimes the sign on the door bearing the physician's name stays put,
and subtle changes in operations or unfamiliar fees may be the only clues that anything has happened.
Step 2: Growth
The promise of more patients is a big draw for doctors. By sharing marketing costs and adding locations, the new companies can
advertise more and attract customers. Private equity-owned practices have been diligent users of social media, announcing newly added
doctors and posting coupons on Twitter and Instagram. But these practices can be aggressive in ways that make some doctors uncomfortable.
At Advanced Dermatology & Cosmetic Surgery , the largest
private equity-backed group in the field, with more than 150 locations across the U.S., that sense of discomfort came shortly after
Audax Group bought a controlling stake in what was then a
much smaller chain in 2011. The new management team introduced a scorecard that rewarded offices with cash if they met daily and
monthly financial goals, according to a lawsuit filed in 2013 against the company by one of its dermatologists. The doctor alleged
that the bonus program encouraged staff to do as many procedures as possible, rather than strictly addressing patients' medical needs.
In some of the company's Florida offices, the doctor alleged, medical assistants responded to the bonus structure by ticking extra
boxes on exam reports, stating that doctors checked many more areas of the body than they actually had. That led to higher patient
bills, defrauding the government under its Medicare program, according to the lawsuit. The federal government declined to join the
case, and it was dismissed about a year after it was filed. Advanced and Audax declined to comment.
One-Stop Skin Care
By buying up labs and adding specialists, private equity-owned dermatology groups get paid at every step of a patient's treatment.
Data: Estimated Medicare reimbursement rates for the Miami area, Sensus Healthcare sales presentation
Private equity-backed practices also try to increase revenue by adding more-lucrative procedures, according to doctors interviewed
by Businessweek . In dermatology, this means more cosmetics, laser treatments, radiation, and especially Mohs surgeries
-- a specialized skin cancer procedure that removes growths from delicate areas like the face and neck one layer at a time, to limit
scarring. The surgery involves expensive equipment and specialized doctors, so some large medical groups keep costs down by assembling
traveling Mohs teams, who fly in from other states. Others create mobile labs in vans that set up in clinics' parking lots.
Most dermatologists use outside labs and pathologists, but private equity-owned groups buy up existing labs and hire their own
pathologists. Then doctors are encouraged to refer patients within the group and send biopsy slides to the company-owned labs, keeping
the entire chain of revenue in-house. This takes advantage of a regulatory quirk that has made dermatology, and a handful of other
specialties, attractive to private equity. Under the 1989 Stark Law, doctors aren't allowed to make patient referrals for their own
financial gain. An exception was made for some fields because it's more convenient for patients, explains Dr. Sailesh Konda, a Mohs
surgeon and professor at the University of Florida. "But that can be abused."
Step 3: Synergy
Now comes the cost-cutting. This is supposed to be the hallmark of private equity, and, done right, it can work to the benefit
of doctors and patients. But there are pitfalls unique to medicine, where aggressive cuts can lead to problems, some of them merely
inconvenient and some potentially dangerous.
A doctor at Advanced Dermatology says that waiting for corporate approvals means his office is routinely left without enough gauze,
antiseptic solution, and toilet paper. Even before the great
toilet paper shortage of 2020, he would travel with a few rolls in the trunk of his car, to spare patients when an office inevitably
ran out. The company declined to comment.
At the country's second-biggest skin-care group, U.S. Dermatology
Partners , a former doctor says a regional manager switched to a cheaper brand of needles and sutures without consulting the
medical staff. The quality was so poor, she says, they would often break off in her patients' bodies. Mortified, she'd have to dig
them out and start over. She complained to managers but couldn't get better supplies, she says. Paul Singh, U.S. Dermatology's CEO,
says the company uses a "reputable, global vendor for medical supplies." "While our group may have standardized purchasing processes,
individual providers have the autonomy to procure specific supplies that they need for a particular patient situation or patient
population," he says in a statement.
Doctors who join a private equity-backed group generally sign contracts that state they'll never have to compromise their medical
judgment, but some say that management began to intervene there, too. Dermatologists at most of the companies say they were pushed
to see as many as twice the number of patients a day, which made them feel rushed and unable to provide the same quality of care.
Others were forced to discuss their cases with managers or medical directors, who asked the doctors to explain why they weren't sending
more patients for surgery. Multiple practices also encouraged doctors to send home Mohs surgery patients with open wounds and have
them come back the next day for stitches -- or to have a different doctor do the closure the same day -- because that would allow
the practice to collect more from insurers.
That's if doctors are performing the procedures at all. At Advanced Dermatology, several doctors say they were asked to claim
that physician assistants, or PAs, were under their supervision when they weren't seeing patients in the same building, or even the
same town. Because PAs are paid less than dermatologists, this allowed the company to keep costs low while growing the business.
In a statement, Eric Hunt, Advanced's general counsel and chief compliance officer says that having PAs on staff enables the company
to "provide access to quality dermatological care to more patients."
Step 4. Rolling Up the Roll-Up
Advanced Dermatology was sold in 2016 by Audax to Harvest
Partners LP , following a pattern that's typical in the industry. At some point, after costs have been cut and profits maximized,
most private equity-owned medical groups will be sold, often to another private equity firm, which will then try to somehow make
the company even more profitable.
Having reduced most of the obvious costs, Advanced Dermatology began skimping on more important supplies, including Hylenex, according
to doctors and other employees. The drug is an expensive reversal agent used when cosmetic fillers, which are supposed to make skin
look plumper, go wrong. Not having enough is dangerous: Patients who get an injection that inadvertently blocks a blood vessel can
be left with dead sections of skin or even go blind if they don't get enough Hylenex in a matter of hours. The company says that
it stocks Hylenex in every office that performs cosmetic procedures, and that it "has no records of any provider being denied an
order for this medication."
Advanced Dermatology also started giving even more authority to PAs, according to doctors and staff. Without enough oversight
some were missing deadly skin cancers, they say. Others were doing too many biopsies and cutting out much larger areas of skin than
necessary, leaving patients with big scars. Doctors who complained about the bad behavior say they saw PAs moved to other locations
rather than fired or given more supervision. Hunt, the company's lawyer, says that all PAs get six months of training and are supervised
by experienced doctors.
The staff coined a new medical diagnosis, "pre- pre- pre-cancer"
Advanced Dermatology also put more pressure on doctors to send biopsies to in-house labs. The move made sense financially, but
some of the doctors didn't trust the lab. One of its two pathologists in Delray Beach, Fla., Steven Glanz, had a history of misdiagnosing
benign tumors, which led patients to undergo surgeries that were later found to be unnecessary, according to doctors who worked with
him. Dermatologists who warned that Glanz was a danger to patients say that their complaints to Dr. Matt Leavitt, the group's founder
and CEO, were ignored. More procedures, doctors knew, brought in more money.
Glanz, who had been with the practice since its early days, was known to read slides under a microscope with a pistol on his desk.
After he was arrested with a handgun, a folding knife, and a vial of methamphetamine crystals, he was fired and Florida's state medical
board fined him $10,000, requiring him to complete a five-hour course on ethics before he could resume practicing. But his former
colleagues were unsettled; they knew Glanz's signature was on years of reports that determined treatment for patients. Some slides
were reevaluated, and pathologists noticed mistakes. Managers told some doctors and their staff that patients, even those who'd been
misdiagnosed and had unnecessary procedures, were not to be told. Glanz pleaded guilty to stalking and a firearms violation and was
sentenced to probation. When a reporter called his office and identified herself, the receptionist hung up. Further attempts to reach
Glanz were unsuccessful. Advanced's Hunt says that he was "formally released from employment three years ago," but did not comment
further.
Of course, some doctors pushed ethical boundaries long before private equity came into the picture. But critics of the industry,
including doctors and investors, say management teams put in place by private equity firms tend to look the other way as long as
a medical practice is profitable. Of the dermatologists with the highest biopsy rates in the country (between 4 and 11 per patient,
per year), almost 25% were affiliated with private equity-backed groups, according to Dr. Joseph Francis, a Mohs surgeon and data
researcher at the University of Florida.
Medical providers may have also been blurring ethical lines at U.S. Dermatology Partners, which was until recently on its second
private equity owner, Abry Partners LLC . At four of the
company's offices in Texas, a doctor and his PAs were doing more biopsies than necessary, according to employees. These employees
say the staff routinely called patients with benign lichenoid keratosis, small brownish blotches that usually go away on their own,
and told them the growths should be removed. Under instruction from the doctor, the staff coined a new medical diagnosis, "pre- pre-
pre-cancer," and then talked patients into coming in for removal, employees say. Singh, the U.S. Dermatology CEO, says that the company
trusts doctors to make the right decisions and that it monitors them through routine audits.
Step 5: Sell-Off
In some cases the cost-cutting either becomes impossible or leads to compromises in care too obvious to ignore. In 2016 a
DermOne LLC office in Irving, Texas, had been using a faulty
autoclave machine to sterilize surgical equipment -- the state and county health departments identified 137 patients that needed
to get tested for blood-borne diseases such as HIV and hepatitis. By 2018, DermOne's backer, Westwind Investors, wanted out.
Westwind had been one of the earliest firms to build a big dermatology business -- with practices in five states -- but others
had grown larger. After the debacle in Irving, the Nevada-based firm sold DermOne's medical records and patient lists, as well as
some of its offices, to other groups. It dissolved the remaining offices, leaving some patients abruptly without care. Westwind did
not respond to repeated requests for comment. Two other private equity-backed groups, TruDerm and Select Dermatology LLC, have also
gone out of business in the past two years.
The surviving chains have been saddled with large piles of debt they're now struggling to repay. In January, U.S. Dermatology
Partners defaulted on a $377 million loan, meaning the private equity backer, Abry Partners, had to hand over the keys to its lenders,
Golub Capital ,
Carlyle Group , and
Ares Management , which will now oversee a chain with almost
100 locations, receiving 1 million visits from patients a year. Abry did not respond to requests for comment .
For the medical groups that make it, the game plan is to eventually sell to the largest players, such as
KKR ,
Blackstone Group , and
Apollo Global Management . Pioneering investors, including Audax,
are now buying practices in other fields -- a concerning development to critics who note that the areas that are currently attracting
investment, such as urology, generally involve more invasive procedures. Should doctors performing vasectomies be thinking about
the dollar-rate returns for KKR -- or any private investor?
"It's ultimately going to backfire," says Dr. Jane Grant-Kels, a veteran dermatologist and professor at the University of Connecticut
School of Medicine. "There's a limit to how much money you can make when you're sticking knives into human skin for profit."
One paradox of the Covid-19 pandemic has been that even as the virus has focused the entire country on health care, it's been
a financial disaster for the industry. And so, while emergency room doctors and nurses care for the sick -- comforting those who
would otherwise die alone, and in some cases
dying themselves
-- private equity-backed staffing companies and hospitals have been
cutting pay for ER doctors. These hospitals, like the big medical practices, make a large portion of their money from elective
procedures and have been forced into wrenching compromises.
For investors with capital, on the other hand, the economic fallout from the virus is a huge opportunity. Stay-at-home orders
have left small practices more financially strained than they've ever been. That will likely accelerate sales to private equity firms,
according to Marc Cabrera, an investment banker focused on health-care deals at Oppenheimer & Co. Independent doctors or groups that
previously rebuffed offers from deep-pocketed backers "will reconsider their options," he says.
Many doctors may ultimately come to regret cashing out, but it's hard to get out once you're in. As part of an acquisition, the
private equity groups typically require doctors to sign yearslong contracts, with noncompete clauses that prevent them from working
in the surrounding area.
As governors throughout the nation ease restrictions on businesses, Advanced Dermatology is opening its most profitable offices
first. The company received an undisclosed sum under the Cares Act, as part of the government relief package intended for health-care
workers. Hunt, Advanced's chief compliance officer, told employees in an email earlier this month that the money would be used for
protective gear, such as masks, and to replace "millions of dollars" in lost revenue.
The group had closed most of its offices since the stay-at-home orders were issued in March, cutting pay for doctors and furloughing
staff. With cities and states beginning to consider reopening, doctors and PAs say they've been told they should be prepared for
a full schedule. Hunt says the company is following the appropriate safety measures, but employees fear it will be nearly impossible
to keep patients apart in waiting rooms. Opening in a reduced capacity, they understand, is not an option.
Trump's economic war on China comes in the shadow of an even deadlier military escalation.
And it may not stop after November, no matter who wins the election.
Economists like to
think of the wreckage caused by stock market downturns, widespread bankruptcies, and corporate
downsizing as "creative destruction." As it destroys the old and the dysfunctional, the
capitalist system continually spurs innovation, much as a forest fire prepares the ground for
new growth.
Or so the representatives of the dismal science argue.
Donald Trump, who is neither economist nor scientist, has his own version of creative
destruction. He is determined to destroy the Affordable Care Act and replace it with his own
health insurance alternative. He has torn up the Iran nuclear deal in favor of negotiating
something brand new with Tehran. He has withdrawn from the Paris climate accord and argues that the United
States is reducing carbon emissions in its own superior manner.
The problem, of course, is that Trump is very good at destruction but, despite his previous
job as a real estate mogul, exceedingly bad at construction. Indeed, there's abundant evidence
that he never intended to replace what he is destroying with anything at all. Trump has never
offered any viable alternative to Obamacare or any new negotiating framework with Iran. And
prior to the recent economic downturn, U.S. carbon emissions were increasing after several
years of decline.
Perhaps the most dangerous example of Trump's uncreative destruction is his approach to
China.
Previously, Trump said that he simply wanted to level the playing field by placing trade
with China on a fairer and more reciprocal basis, strengthening the regime of intellectual
property rights, and stopping Beijing from manipulating its currency.
He was willing to go to great lengths to accomplish this goal. The tariffs that Trump
imposed on Chinese products precipitated a trade war that jeopardized the livelihoods of
millions of American farmers and workers. The initial trade deal that the United States and
China signed in January, even though many of the U.S. tariffs remain in place, was supposed to
be the grand alternative to the old and dysfunctional trade relationship.
But here again, Trump is not telling the truth. He and his team have a very different set of
objectives. As with so many other elements of his domestic and foreign policy, Trump wants to
tear apart the current system -- in this case, the network of economic ties between the United
States and China -- and replace it with absolutely nothing at all.
Oh sure, Trump believes that U.S. manufacturers can step up to take the place of Chinese
suppliers. More recently, as the administration "turbocharges" its efforts to isolate China in
response to its purported pandemic mistakes , it has
talked of creating
an Economic Prosperity Network of trusted allies like South Korea, Australia, India, and
Vietnam. But this is all whistling in the dark, because the administration doesn't really
understand the consequences -- for the world economy, for the U.S. economy -- of tearing apart
the global supply chain in this way.
Just how poorly Trump understands all this is reflected in
his statement last week that "we could cut off the whole relationship" with China and "save
$500 billion." This from the president who erroneously believes that China
is paying the United States "billions and billions of dollars of tariffs a month." What else do
you expect from a man who received a BS in economics from Wharton?
Unlike many of the administration's other policies, however, its hardline approach to China
has some bipartisan support. Engagement with China has virtually
disappeared as a policy option in the Democratic Party. Joe Biden, the Democrats'
presumptive presidential candidate, has attempted to present himself as the tougher alternative
when it comes to China, a misguided
effort to fend off charges of his bedding down with Beijing.
Finger to the wind, Biden is crafting policies in response not just to Trump but to public
opinion. In 2017, 44 percent of Americans had a favorable view of China, compared to 47 percent
who held an unfavorable opinion of the country, according to Pew. In
this year's survey , only 26 percent looked at China positively versus 66 percent who
viewed it negatively. The latter category includes 62 percent of Democrats.
Writing for the Atlantic Council, Michael Greenwald
sums up the new conventional wisdom of the centrists:
The United States can no longer remain content with the notion of a Chinese economic
threat arising in the distant future. The advent of COVID-19 has made it more apparent than
any other time including the US-China trade war that now is the moment for the United States,
European Union, and other like-minded countries to diversify supply chains away from
China.
That's what makes Trump's uncreative destruction vis a vis China so dangerous. It may not
stop after November, no matter who wins the election.
The Great Disentanglement
China's economic shutdown at the onset of the coronavirus pandemic disrupted many global supply
chains, prompting a number of countries and corporations to accelerate their strategy of
reducing their dependency on China for components.
Rising labor costs in China, concerns over human rights abuses there, but especially the
trade war between Washington and Beijing had contributed to the
U.S. fashion industry and tech firms
like Apple rethinking their own supply chains. Japan, heavily dependent on Chinese trade,
is
using $2 billion in economic stimulus funds to subsidize the move of Japanese firms out of
China.
The Trump administration is thus swimming with the current in its effort to isolate China.
It has imposed sanctions because of China's violations of Uyghur human rights. It has levied
penalties against China for its cooperation with Iranian firms. And it has threatened to add
another set of tariffs on top of the existing ones for China's handling of the coronavirus.
Its latest initiative has been to tighten the screws on the Chinese technology firm, Huawei.
Last week, the administration announced sanctions against any firms using U.S.-made equipment
that supply the Chinese tech giant. The chief victim of these new restrictions will be the
Taiwanese firm TSMC, which supplies 90 percent of Huawei's smartphone chips.
In other words, the Trump administration is committed not only to severing U.S. economic
connections with China. It wants to put as much pressure on other countries as well to
disentangle themselves from Chinese manufacturing. Taiwan, of course, has no particular love
for Mainland China. It battles Beijing on a daily basis to get international recognition --
from other countries and from global organizations like the World Health Organization.
But the Taiwanese economy is also heavily dependent on its cross-strait neighbor. As Eleanor
Albert points
out :
China is Taiwan's largest trading partner, accounting for nearly 30 percent of
the island's total trade, and trade between the two reached $150.5 billion in 2018 (up from
$35 billion in 1999). China and Taiwan have also agreed to allow banks, insurers, and other
financial service providers to work in both markets.
And it probably won't be Huawei but Taiwan that suffers from the U.S. move. As Michael
Reilly notes
, "Huawei's size in the global market means its Taiwanese suppliers cannot easily find an
alternative customer of comparable standing to replace it." China, meanwhile, will either find
another source of chips outside the U.S. sphere, or it will do what the United States has been
threatening to do: bring production of critical components back closer to home.
Another key player in the containment of China is India. Trump's friendship with Indian
Prime Minister Narendra Modi, a right-wing Hindu nationalist, is more than simply an
ideological affection. Trump sealed
a $3 billion in military sales deal with India in February, with a trade deal still on the
horizon.
Modi, in turn, is hoping to be the biggest beneficiary of the falling out between Washington
and Beijing. "The government in April reached out to more than 1,000 companies in the U.S. and
through overseas missions to offer incentives for manufacturers seeking to move out of China,"
reports Bloomberg . "India is prioritizing medical equipment suppliers, food processing
units, textiles, leather, and auto part makers among more than 550 products covered in the
discussions."
Vietnam is another regional competitor that the United States is supporting in its
containment strategy. With only a couple hundred reported coronavirus cases and zero deaths,
Vietnam is
poised to emerge from the current crisis virtually unscathed. With low labor costs and an
authoritarian government that can enforce deals, it is already a favored alternative for
corporations looking for alternatives to China. But wildcat strikes have been happening in
greater numbers in the country, and the Vietnamese government recently
approved the country's first independent trade union.
Yet with a more technologically sophisticated infrastructure, China will continue to look
more attractive to investors than India or Vietnam.
Don't Count Out China
If your image of the Chinese economy is stuck in the 1980s -- cheap toys and mass-produced
baubles -- then you probably think that severing economic ties with the country is no big deal.
America can produce its own plastic junk, right?
But China is no longer hurrying to catch up to the West. In some ways, the West is already
in China's rearview mirror.
Huawei is well-known for the part it's playing in the rollout of 5G networks worldwide.
China is not only ahead of the curve in upgrading to 5G domestically, it is busy manufacturing
all the new tech that will run on these high-speed networks, like virtual reality and
augmented reality and AI-driven devices.
Perhaps more to the point, China is not simply part of the global supply chain. It is using
these new technologies to revolutionize the global supply chain.
For instance, it's using 3-D modeling to shorten product development. It has long integrated
drones into its distribution networks. "Chinese supply chain companies are incorporating
groundbreaking technologies like cloud-based systems, data analytics, and artificial
intelligence (AI) and using them to redesign supply chain operations," writes Adina-Laura
Achim.
And don't discount the role of a well-financed, centralized, authoritarian government. The
Trump administration is, frankly, at a huge disadvantage when it tries to pressure companies to
relocate their operations. Writes
Manisha Mirchandani:
The global technology and consumer electronics sectors are especially reliant on
China's infrastructure and specialized labor pool, neither of which will be easy to
replicate. The Chinese government is already mobilizing resources to convince producers of
China's unique merits as a manufacturing location. Zhengzhou, within Henan Province, has
appointed officials to support Apple's partner Foxconn in mitigating the disruptions caused
by the coronavirus, while the Ministry of Finance is increasing credit support to the
manufacturing sector. Further, the Chinese government is likely to channel stimulus efforts
to develop the country's high-tech manufacturing infrastructure, moving away from its
low-value manufacturing base and accelerating its vision for a technology-driven services
economy.
The Trump administration is playing the short game, trying to use tariffs and anti-Chinese
sentiment to hobble a rising power. China, on the other hand, is playing the long game,
translating its trade surpluses into structural advantages in a fast-evolving global
economy.
Will the Conflict Turn Hot?
Despite the economic ravages of the pandemic, the Pentagon continues to demand the lion's
share of the U.S. budget. It wants another $705 billion for 2021, after increasing its budget
by 20 percent between 2016 and 2020.
This appalling waste of government resources has already caused long-term damage to the
economic competitiveness of the United States. But it's all the money the Pentagon is spending
on "deterring China" that might prove more devastating in the short term.
The U.S. Navy announced
this month that it was sending its entire forward-deployed sub fleet on "contingency
response operations" as a warning to China. Last month, the U.S. Navy Expeditionary Strike
Group
sailed into the South China Sea to support Malaysia's oil exploration in an area that China
claims. Aside from the reality that oil exploration makes no economic sense at a time of record
low oil prices, the United States should be helping the countries bordering the South China Sea
come to a fair resolution of their disputes, not throwing more armaments at the problem.
There's also heightened risk of confrontation in the Taiwan Strait, the East China Sea, and
even in outer space . A huge portion of the Pentagon's budget goes toward preparing for war
with China -- and, frankly, provoking war as well.
What does this all have to do with the Great Disentanglement?
The close economic ties between the United States and China have always represented a
significant constraint on military confrontation. Surely the two countries would not risk
grievous economic harm by coming to blows. Economic cooperation also provides multiple channels
for resolving conflicts and communicating discontent. The United States and Soviet Union never
had that kind of buffer.
If the Great Disentanglement goes forward, however, then the two countries have less to lose
economically in a military confrontation. Trading partners, of course, sometimes go to war with
one another. But as the data
demonstrates , more trade generally
translates into less war.
There are lots and lots of problems in the U.S.-China economic relationship. But they pale
in comparison to World War III. Share this:
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So, yes, the West still has a realistic chance of destroying China and inaugurating a new
cycle of capitalist prosperity.
What happens with the "decoupling"/"Pivot to Asia" is that, in the West, there's
a scatological theory [go to 10th paragraph] - of Keynesian origin - that socialism can
only play "catch up" with capitalism, but never surpass it when a "toyotist phase" of
technological innovation comes (this is obviously based on the USSR's case). This theory
states that, if there's innovation in socialism, it is residual and by accident, and that
only in capitalism is significant technological advancement possible. From this, they posit
that, if China is blocked out of Western IP, it will soon "go back to its place" - which is
probably to Brazil or India level.
If China will be able to get out of the "Toyotist Trap" that destroyed the USSR, only time
will tell. Regardless, decoupling is clearly not working, and China is not showing any signs
so far of slowing down. Hence Trump is now embracing a more direct approach.
As for the USA, I've put my big picture opinion about it some days ago, so I won't repeat
myself. Here, it suffices to say that, yes, I believe the USA can continue to survive as an
empire - even if, worst case scenario, in a "byzantine" form. To its favor, it has: 1) the
third largest world population 2) huge territory, with excellent proportion of high-quality
arable land (35%), that basically guarantees food security indefinitely (for comparison, the
USSR only had 10% of arable land, and of worse quality) 3) two coasts, to the two main Oceans
(Pacific and Atlantic), plus a direct exit to the Arctic (Alaska and, de facto, Greenland and
Canada) 4) excellent, very defensive territory, protected by both oceans (sea-to-sea),
bordered only by two very feeble neighbors (Mexico and Canada) that can be easily absorbed if
the situation asks to 4) still the financial superpower 5) still a robust "real" economy -
specially if compared to the micro-nations of Western Europe and East-Asia 6) a big fucking
Navy, which gives it thalassocratic power.
I don't see the USA losing its territorial integrity anytime soon. There are separatist
movements in places like Texas and, more recently, the Western Coast. Most of them exist only
for fiscal reasons and are not taken seriously by anyone else. The Star-and-Stripes is still
a very strong ideal to the average American, and nobody takes the idea of territory loss for
real. If that happens, though, it would change my equation on the survival of the American
Empire completely.
As for Hong Kong. I watched a video by the chief of the PLA last year (unfortunately, I
watched it on Twitter and don't have the link with me anymore). He was very clear: Hong Kong
does not present an existential threat to China. The greatest existential threat to China
are, by far, Xinjiang and Tibet, followed by Taiwan and the South China Sea. Hong Kong is a
distant fourth place.
One problem with your scenario is that the US navy may be over-extended in parts of the
world where all the enemy has to do is to cut off supply lines to battleship groups and then
those ships would be completely helpless. US warships in the Persian Gulf with the Strait of
Hormuz sealed off by Iran come to mind.
Incidents involving US naval ship collisions with slow-moving oil tankers in SE Asian
waters and some other parts of of the the world, resulting in the loss of sailors, hardly
instill the notion that the US is a mighty thalassocratic force.
It's my understanding also that Russia, China and maybe some other countries have invested
hugely in long-range missiles capable of hitting US coastal cities and areas where the bulk
of the US population lives.
And if long-range missiles don't put paid to the notion that projecting power through
sending naval warships all over the planet works, maybe the fact that many of these ships are
sitting ducks for COVID-19 infection clusters might, where the US public is concerned.
I agree the new anti-ship missile technology may have changed the rules of naval
warfare.
However, it's important to highlight that, contrary to the US Army, the USN has a stellar
record. It fought wonderfully against the Japanese Empire in 1941-1945, and successfully
converted both the Pacific and the Atlantic into "American lakes" for the next 75 years. All
the Americans have nowadays it owes its Navy.
But you may be right. Maybe the USN is also susceptible to degeneration.
Of the existing 30 or so high-tech productive chains, China only enjoys superiority at 2
or 3 (see 6:48). It is still greatly dependent on the West to development and still is a
developing country.
Based on what I've read, China is on a fast track to develop technology on their own. In
addition, technology development is world-wide these days. What China can not develop itself
- quickly enough, time is the only real problem - it can buy with its economic power.
"if China is blocked out of Western IP, it will soon "go back to its place" - which is
probably to Brazil or India level."
Ah, but that's where hackers come in. China can *not* be blocked out of Western IP. First,
as I said, China can *buy* it. Unless there is a general prohibition across the entire
Western world, and by extension sanctions against any other nation from selling to China -
which is an unenforceable policy, as Iran has shown - China can buy what it doesn't have and
then reverse-engineer it. Russia will sell it if no one else will.
Second, China can continue to simply acquire technology through industrial espionage.
Every country and every industry engages in this sort of thing. Ever watch the movie
"Duplicity"? That shit actually happens. I read about industrial espionage years ago and it's
only gotten fancier since the old days of paper files. I would be happy to breach any US or
EU industrial sector and sell what I find to the Chinese, the Malaysians or anyone else
interested. It's called "leveling the playing field" and that is advantageous for everyone.
If the US industrial sector employees can't keep up, that's their problem. No one is
guaranteed a job for life - and shouldn't be.
"1) the third largest world population"
Which is mostly engaged in unproductive activities like finance, law, etc. I've read that
if you visit the main US universities teaching science and technology, who are the students?
Chinese. Indians. Not Americans. Americans only want to "make money" in law and finance, not
"make things."
"2) huge territory, with excellent proportion of high-quality arable land (35%), that
basically guarantees food security indefinitely"
In military terms, given current military technology, territory doesn't matter. China has
enough nuclear missiles to destroy the 50 Major Metropolitan Areas in this country. Losing
100-200 millions citizens kinda puts a damper on US productivity. Losing the same number in
China merely means more for the rest.
"3) two coasts, to the two main Oceans (Pacific and Atlantic)"
Which submarines can make irrelevant. Good for economic matters - *if* your economy can
continue competing. China has one coast - but its Belt and Road Initiative gives it economic
clout on the back-end and the front-end. I don't see the US successfully countering that
Initiative.
"4) excellent, very defensive territory, protected by both oceans (sea-to-sea)"
Which only means the US can't be "invaded". That's WWI and WWII thinking the US is mired
in. Today, you destroy an opponent's military and, if necessary, his civilian population, or
at least its ability to "project" force against you. You don't "invade" unless it's some weak
Third World country. And if the US can't "project" its power via its navy or air force,
having a lot of territory doesn't mean much. This is where Russia is right now. Very
defensible but limited in force projection (but getting better fast.) The problem for the US
is China and Russia are developing military technology that can prevent US force projection
around *their* borders.
"bordered only by two very feeble neighbors (Mexico and Canada) that can be easily
absorbed if the situation asks"
LOL I can just see the US "absorbing" Mexico. Canada, maybe - they're allies anyway.
Mexico, not so much. You want a "quagmire", send the US troops to take on the Mexican drug
gangs. They aren't Pancho Villa.
"4) still the financial superpower"
Uhm, what part of "Depression" did you miss? And even if that doesn't happen now,
continued financial success is unlikely. Like pandemics, shit happens in economics and
monetary policy.
"a big fucking Navy, which gives it thalassocratic power."
That can be sunk in a heartbeat and is virtually a colossal money pit with limited
strategic value given current military technology which both China and Russia are as advanced
as the US is, if not more so. Plus China is developing its own navy quickly. I read somewhere
a description of one Chinese naval shipyard. There were several advanced destroyers being
developed. Then the article noted that China has several more large shipyards. That Chinese
long coast comes in handy for that sort of thing.
China Now Has More Warships Than the U.S.
But sometimes quantity doesn't trump quality. [My note: But sometimes it does.] https://tinyurl.com/y7numhef
That's just the first article I found, from a crappy source. There are better analyses, of
course.
"I don't see the USA losing its territorial integrity anytime soon. There are separatist
movements in places like Texas and, more recently, the Western Coast. Most of them exist only
for fiscal reasons and are not taken seriously by anyone else."
I'd agree with that. I hear this "California secession" crap periodically and never
believe it. However, for state politicians, the notion of being "President" of your own
country versus a "Governor" probably is tempting to these morons. State populations are
frequently idiots as well, as the current lockdown response is demonstrating. All in all,
though, if there are perceived external military threats, that is likely to make the states
prefer to remain under US central control.
"Britain had to agree to the pact because it had lost the capability to defend the
colony.".."
That was the excuse. I believe HK was offered to China in return for Deng to open up and
turn China capitalist. Deng was not the one who
demanded HK return. Britain initiated the discussions. Deng gladly accepted although he
insisted on maintaining their authoritarian form of undemocratic government and left HK's
fate ambiguous so Britain could get support from their people and the HK elite. The party
elites were happy to be able to join the Western Elites in accumulating an unequal share of
the wealth. The Soviet elites led by the US Globalist puppet Gorbachev chose the same path
although they chose Fake Democracy and rule of the oligarchs as in the US rather than party
control of China
HK is protected against US tarrifs imposed on China goods. China exports a good chunk of
goods through HK. If Trump were really serious he would remove HK's protected status.
The timing doesn't add up. China opened up in 1972 (the famous Nixon-Mao handshake), while
the UK's agreement to give HK back was from 1984 - well into the Thatcher Era.
The most likely reason for the UK to decide to obey the lease deal was of military nature:
the valuable land necessary to defend HK was the flatland adjacent to the city proper, where
potable water comes from. It already part of the Mainland, thus rendering the defense of HK
virtually impossible without an outright invasion of the Mainland itself.
Margaret Thatcher probably didn't want to obey the treaty (99-year lease), as a good
neoliberal she was, but her military advisors probably warned her of the practical
difficulties, and, since it was a 99-year lease anyway, she must've agreed to simply allow
the treaty to be followed.
It is important to highlight that, in 1984, there were a lot of reasons the capitalist
world should be optimist about China becoming capitalist. After all, it really got off the
Soviet sphere after 1972, and Deng's reforms were - from the point of view of a vulgar
(bourgeois) economist - indeed a clear path to a capitalist restoration. It didn't cross
Thatcher's mind that China could stand its ground and remain socialist - at least not in
1984. If you read the sources of the time, you will easily see the Western elites treated
China's return to capitalism as a given.
It is still greatly dependent on the West to development and still is a developing
country.
So, yes, the West still has a realistic chance of destroying China and inaugurating a new
cycle of capitalist prosperity.
What happens with the "decoupling"/"Pivot to Asia" is that, in the West, there's
a scatological theory [go to 10th paragraph] - of Keynesian origin - that socialism can
only play "catch up" with capitalism, but never surpass it when a "toyotist phase" of
technological innovation comes (this is obviously based on the USSR's case). This theory
states that, if there's innovation in socialism, it is residual and by accident, and that
only in capitalism is significant technological advancement possible. From this, they posit
that, if China is blocked out of Western IP, it will soon "go back to its place" - which is
probably to Brazil or India level.
If China will be able to get out of the "Toyotist Trap" that destroyed the USSR, only time
will tell. Regardless, decoupling is clearly not working, and China is not showing any signs
so far of slowing down. Hence Trump is now embracing a more direct approach.
As for the USA, I've put my big picture opinion about it some days ago, so I won't repeat
myself. Here, it suffices to say that, yes, I believe the USA can continue to survive as an
empire - even if, worst case scenario, in a "byzantine" form. To its favor, it has: 1) the
third largest world population 2) huge territory, with excellent proportion of high-quality
arable land (35%), that basically guarantees food security indefinitely (for comparison, the
USSR only had 10% of arable land, and of worse quality) 3) two coasts, to the two main Oceans
(Pacific and Atlantic), plus a direct exit to the Arctic (Alaska and, de facto, Greenland and
Canada) 4) excellent, very defensive territory, protected by both oceans (sea-to-sea),
bordered only by two very feeble neighbors (Mexico and Canada) that can be easily absorbed if
the situation asks to 4) still the financial superpower 5) still a robust "real" economy -
specially if compared to the micro-nations of Western Europe and East-Asia 6) a big fucking
Navy, which gives it thalassocratic power.
I don't see the USA losing its territorial integrity anytime soon. There are separatist
movements in places like Texas and, more recently, the Western Coast. Most of them exist only
for fiscal reasons and are not taken seriously by anyone else. The Star-and-Stripes is still
a very strong ideal to the average American, and nobody takes the idea of territory loss for
real. If that happens, though, it would change my equation on the survival of the American
Empire completely.
As for Hong Kong. I watched a video by the chief of the PLA last year (unfortunately, I
watched it on Twitter and don't have the link with me anymore). He was very clear: Hong Kong
does not present an existential threat to China. The greatest existential threat to China
are, by far, Xinjiang and Tibet, followed by Taiwan and the South China Sea. Hong Kong is a
distant fourth place.
"They Saw This Day Coming" - Huawei Forges Alliances With Rival Chipmakers As
Washington's Crackdown Intensifies by Tyler Durden Fri, 05/22/2020 - 18:05 The US
Commerce Department's latest move to block companies from selling products to Huawei that were
created with American technology, equipment or software has undoubtedly hurt the Chinese
telecoms giant. But it won't be nearly enough to take it down.
Since Washington launched its campaign against Huawei two years ago (when the trade tensions
between the US and China started to heat up, as President Trump started slapping more tariffs
on foreign goods) the company has been strengthening ties with contract chipmakers in Taiwan
and elsewhere, while ramping up its own microchip-technology arm, known as HiSilicon
Technologies.
On Friday,
Nikkei reported that Huawei had initiated conversations with other mobile chipmakers to try
and figure out where it might source certain essential components for its handsets (remember,
Huawei is the second-largest cellphone maker by sales volume) and other products.
Of course, the crackdown cuts both ways, as several American companies relied heavily on
Huawei's business (they can still apply for licenses to continue selling to Huawei...so long as
Commerce approves).
As
we reported earlier this week , it's not just American chipmakers that are distancing
themselves from Huawei: some Taiwan-based chipmakers are also dropping the telecoms giant for
fear of being targeted by Treasury sanctions, including TSMC, the world's largest contract
chipmaker.
Now, Huawei is reportedly in talks with MediaTek, the world's second-largest contract chip
producer.
Huawei Technologies is seeking help from rival mobile-chip makers to withstand a U.S.
clampdown aimed at crippling the Chinese company, sources familiar with the matter told the
Nikkei Asian Review.
Huawei is in talks with MediaTek, the world's second-largest mobile chip developer after
Qualcomm of the U.S., and UNISOC, China's second-largest mobile chip designer after Huawei's
HiSilicon Technologies unit, to buy more chips as alternatives to keep its consumer
electronics business afloat, the sources said.
To work with a contract chipmaker, Huawei would still need to design its own chips. Over the
past two years, Huawei has expanded its team of engineers working on chip design to more than
10,000, Nikkei said.
To be sure, MediaTek already makes low- and medium-end chips for Huawei, evidence that the
company, which was founded by a veteran of China's PLA, and purportedly maintains strong links
to the Chinese military, has been bracing for the other shoe to drop. MediaTek, meanwhile, is
still trying to figure out if it can meet Huawei's latest bid.
"Huawei has foreseen this day coming. It started to allocate more mid- to low-end mobile
chip projects to MediaTek last year amid its de-Americanization efforts," one of the sources
said. "Huawei has also become one of the key clients for the Taiwanese mobile chip
developer's mid-end 5G mobile chip for this year."
MediaTek is evaluating whether it has sufficient human resources to fully support Huawei's
aggressive bid, as the Chinese company is asking for volume 300% above its usual procurement in
the past few years, another source familiar with the talks said.
The situation has also created an opportunity for small Chinese chipmakers (working, we
imagine, mostly with technology stolen from American and Taiwanese companies) to expand.
Huawei also seeks to deepen its collaboration with UNISOC, a Beijing-backed mobile chip
developer that relies mostly on smaller device makers as customers and mainly supports
entry-level products and devices for emerging markets. Previously, Huawei used only very few
UNISOC chips for its low-end smartphone and tablet offerings, sources said.
"The new procurement deals would be a great boost to help UNISOC further upgrade its chip
design capability," said a chip industry executive. "In the past, UNISOC was struggling quite
a bit, because it could not really secure big contracts with global leading smartphone makers
as these top smartphone makers could find better offerings elsewhere. This time could be an
opportunity that it could really seek to match the international standard."
UNISOC last year accelerated its 5G chip development to catch up with Qualcomm and
MediaTek, Nikkei has reported. More recently, the company received 4.5 billion yuan ($630
million) from China's national integrated circuit fund, the so-called Big Fund.
UNISOC is preparing to list on the Shanghai STAR tech board, the Chinese version of
Nasdaq, later this year. Qualcomm has needed a license from the U.S. Department of Commerce
to supply Huawei since mid-May of 2019.
Huawei has already expanded production of in-house mobile processors for its smartphone
business to 75%, up from 69% in 2018 and 45% in 2016, according to to data from GF Securities
cited by Nikkei. Huawei shipped 240 million smartphones in 2019. And with China now throwing
caution to the wind and cracking down on Hong Kong, we wouldn't be surprised to see more Huawei
drama in the headlines next week, with serious market repercussions for the US semiconductor
industry.
That will be an interesting chess party. The USA moved way to many plants to Chine to get out
of this conflict without major losses
Notable quotes:
"... Secretary of State Mike Pompeo slammed China as “hostile to free nations,” portraying Beijing as fundamentally opposed to the United States, on Wednesday. ..."
"... But the Secretary of State pointed to deeper issues in the relationship, claiming that “the nature of the regime is not new.” “For several decades, we thought the regime would become more like us through trade, scientific exchanges, diplomatic outreach, letting them in the [World Trade Organization] as a developing nation,” he said. “That didn’t happen.” ..."
'The regime is ideologically and politically hostile to free nations.'
Secretary of State Mike Pompeo slammed China as “hostile to free nations,”
portraying Beijing as fundamentally opposed to the United States, on Wednesday.
Tensions between the United States and China have reached a fever pitch during the
coronavirus pandemic. Pompeo’s speech at a Wednesday morning press conference laid out a
vision of a global clash between two fundamentally different societies.
“China’s been ruled by a brutal, authoritarian regime, a communist regime since
1949,” he said. “We greatly underestimated the degree to which Beijing is
ideologically and politically hostile to free nations. The whole world is waking up to that
fact.”
He added that a focus on the coronavirus pandemic “risks missing the bigger picture of
the challenge that’s presented by the Chinese Communist Party.”
The pandemic has accelerated U.S.-China tensions.
Last week, a Chinese Communist Party news threatened sanctions against U.S. lawmakers for
attempting to sue the Chinese government for the pandemic, and U.S. law enforcement accused
Chinese hackers of cyberattacks against U.S. researchers.
But the Secretary of State pointed to deeper issues in the
Canada makes it much more difficult to know its real unemployment rate. The official Canadian unemployment rate for February was 6.8 percent, a slight increase from January that Statistics Canada attributes to "more people search[ing] for work." The official measurement in Canada, as in the U.S., European Union and Australia, mirrors the official standard for measuring employment defined by the International Labour Organization -- those not working at all and who are "actively looking for work." (The ILO is an agency of the United Nations.)
Cleaning
Up Trump's Global Mess
Trump's
Mexico Tariffs Are About White Nationalism, Not Trade
Trump's
Trade War Is About Trump, Not China
Why
Spend $54 Billion More on the Pentagon? To Start a War, Obviously.
Making
China Great Again