- The Hidden Persuaders – How The Internet Flips Election & Alters Our Thoughts
Authored by Robert Epstein, originally posted at Aeon.co,
The internet has spawned subtle forms of influence that can flip elections and manipulate everything we say, think and do
Over the past century, more than a few great writers have expressed concern about humanity’s future. In The Iron Heel (1908), the American writer Jack London pictured a world in which a handful of wealthy corporate titans – the ‘oligarchs’ – kept the masses at bay with a brutal combination of rewards and punishments. Much of humanity lived in virtual slavery, while the fortunate ones were bought off with decent wages that allowed them to live comfortably – but without any real control over their lives.
In We (1924), the brilliant Russian writer Yevgeny Zamyatin, anticipating the excesses of the emerging Soviet Union, envisioned a world in which people were kept in check through pervasive monitoring. The walls of their homes were made of clear glass, so everything they did could be observed. They were allowed to lower their shades an hour a day to have sex, but both the rendezvous time and the lover had to be registered first with the state.
In Brave New World (1932), the British author Aldous Huxley pictured a near-perfect society in which unhappiness and aggression had been engineered out of humanity through a combination of genetic engineering and psychological conditioning. And in the much darker novel 1984 (1949), Huxley’s compatriot George Orwell described a society in which thought itself was controlled; in Orwell’s world, children were taught to use a simplified form of English called Newspeak in order to assure that they could never express ideas that were dangerous to society.
These are all fictional tales, to be sure, and in each the leaders who held the power used conspicuous forms of control that at least a few people actively resisted and occasionally overcame. But in the non-fiction bestseller The Hidden Persuaders (1957) – recently released in a 50th-anniversary edition – the American journalist Vance Packard described a ‘strange and rather exotic’ type of influence that was rapidly emerging in the United States and that was, in a way, more threatening than the fictional types of control pictured in the novels. According to Packard, US corporate executives and politicians were beginning to use subtle and, in many cases, completely undetectable methods to change people’s thinking, emotions and behaviour based on insights from psychiatry and the social sciences.
Most of us have heard of at least one of these methods: subliminal stimulation, or what Packard called ‘subthreshold effects’ – the presentation of short messages that tell us what to do but that are flashed so briefly we aren’t aware we have seen them. In 1958, propelled by public concern about a theatre in New Jersey that had supposedly hidden messages in a movie to increase ice cream sales, the National Association of Broadcasters – the association that set standards for US television – amended its code to prohibit the use of subliminal messages in broadcasting. In 1974, the Federal Communications Commission opined that the use of such messages was ‘contrary to the public interest’. Legislation to prohibit subliminal messaging was also introduced in the US Congress but never enacted. Both the UK and Australia have strict laws prohibiting it.
Subliminal stimulation is probably still in wide use in the US – it’s hard to detect, after all, and no one is keeping track of it – but it’s probably not worth worrying about. Research suggests that it has only a small impact, and that it mainly influences people who are already motivated to follow its dictates; subliminal directives to drink affect people only if they’re already thirsty.
Packard had uncovered a much bigger problem, however – namely that powerful corporations were constantly looking for, and in many cases already applying, a wide variety of techniques for controlling people without their knowledge. He described a kind of cabal in which marketers worked closely with social scientists to determine, among other things, how to get people to buy things they didn’t need and how to condition young children to be good consumers – inclinations that were explicitly nurtured and trained in Huxley’s Brave New World. Guided by social science, marketers were quickly learning how to play upon people’s insecurities, frailties, unconscious fears, aggressive feelings and sexual desires to alter their thinking, emotions and behaviour without any awareness that they were being manipulated.
By the early 1950s, Packard said, politicians had got the message and were beginning to merchandise themselves using the same subtle forces being used to sell soap. Packard prefaced his chapter on politics with an unsettling quote from the British economist Kenneth Boulding: ‘A world of unseen dictatorship is conceivable, still using the forms of democratic government.’ Could this really happen, and, if so, how would it work?
The forces that Packard described have become more pervasive over the decades. The soothing music we all hear overhead in supermarkets causes us to walk more slowly and buy more food, whether we need it or not. Most of the vacuous thoughts and intense feelings our teenagers experience from morning till night are carefully orchestrated by highly skilled marketing professionals working in our fashion and entertainment industries. Politicians work with a wide range of consultants who test every aspect of what the politicians do in order to sway voters: clothing, intonations, facial expressions, makeup, hairstyles and speeches are all optimised, just like the packaging of a breakfast cereal.
Fortunately, all of these sources of influence operate competitively. Some of the persuaders want us to buy or believe one thing, others to buy or believe something else. It is the competitive nature of our society that keeps us, on balance, relatively free.
But what would happen if new sources of control began to emerge that had little or no competition? And what if new means of control were developed that were far more powerful – and far more invisible – than any that have existed in the past? And what if new types of control allowed a handful of people to exert enormous influence not just over the citizens of the US but over most of the people on Earth?
It might surprise you to hear this, but these things have already happened.
To understand how the new forms of mind control work, we need to start by looking at the search engine – one in particular: the biggest and best of them all, namely Google. The Google search engine is so good and so popular that the company’s name is now a commonly used verb in languages around the world. To ‘Google’ something is to look it up on the Google search engine, and that, in fact, is how most computer users worldwide get most of their information about just about everything these days. They Google it. Google has become the main gateway to virtually all knowledge, mainly because the search engine is so good at giving us exactly the information we are looking for, almost instantly and almost always in the first position of the list it shows us after we launch our search – the list of ‘search results’.
That ordered list is so good, in fact, that about 50 per cent of our clicks go to the top two items, and more than 90 per cent of our clicks go to the 10 items listed on the first page of results; few people look at other results pages, even though they often number in the thousands, which means they probably contain lots of good information. Google decides which of the billions of web pages it is going to include in our search results, and it also decides how to rank them. How it decides these things is a deep, dark secret – one of the best-kept secrets in the world, like the formula for Coca-Cola.
Because people are far more likely to read and click on higher-ranked items, companies now spend billions of dollars every year trying to trick Google’s search algorithm – the computer program that does the selecting and ranking – into boosting them another notch or two. Moving up a notch can mean the difference between success and failure for a business, and moving into the top slots can be the key to fat profits.
Late in 2012, I began to wonder whether highly ranked search results could be impacting more than consumer choices. Perhaps, I speculated, a top search result could have a small impact on people’s opinions about things. Early in 2013, with my associate Ronald E Robertson of the American Institute for Behavioral Research and Technology in Vista, California, I put this idea to a test by conducting an experiment in which 102 people from the San Diego area were randomly assigned to one of three groups. In one group, people saw search results that favoured one political candidate – that is, results that linked to web pages that made this candidate look better than his or her opponent. In a second group, people saw search rankings that favoured the opposing candidate, and in the third group – the control group – people saw a mix of rankings that favoured neither candidate. The same search results and web pages were used in each group; the only thing that differed for the three groups was the ordering of the search results.
To make our experiment realistic, we used real search results that linked to real web pages. We also used a real election – the 2010 election for the prime minister of Australia. We used a foreign election to make sure that our participants were ‘undecided’. Their lack of familiarity with the candidates assured this. Through advertisements, we also recruited an ethnically diverse group of registered voters over a wide age range in order to match key demographic characteristics of the US voting population.
All participants were first given brief descriptions of the candidates and then asked to rate them in various ways, as well as to indicate which candidate they would vote for; as you might expect, participants initially favoured neither candidate on any of the five measures we used, and the vote was evenly split in all three groups. Then the participants were given up to 15 minutes in which to conduct an online search using ‘Kadoodle’, our mock search engine, which gave them access to five pages of search results that linked to web pages. People could move freely between search results and web pages, just as we do when using Google. When participants completed their search, we asked them to rate the candidates again, and we also asked them again who they would vote for.
We predicted that the opinions and voting preferences of 2 or 3 per cent of the people in the two bias groups – the groups in which people were seeing rankings favouring one candidate – would shift toward that candidate. What we actually found was astonishing. The proportion of people favouring the search engine’s top-ranked candidate increased by 48.4 per cent, and all five of our measures shifted toward that candidate. What’s more, 75 per cent of the people in the bias groups seemed to have been completely unaware that they were viewing biased search rankings. In the control group, opinions did not shift significantly.
This seemed to be a major discovery. The shift we had produced, which we called the Search Engine Manipulation Effect (or SEME, pronounced ‘seem’), appeared to be one of the largest behavioural effects ever discovered. We did not immediately uncork the Champagne bottle, however. For one thing, we had tested only a small number of people, and they were all from the San Diego area.
Over the next year or so, we replicated our findings three more times, and the third time was with a sample of more than 2,000 people from all 50 US states. In that experiment, the shift in voting preferences was 37.1 per cent and even higher in some demographic groups – as high as 80 per cent, in fact.
We also learned in this series of experiments that by reducing the bias just slightly on the first page of search results – specifically, by including one search item that favoured the other candidate in the third or fourth position of the results – we could mask our manipulation so that few or even no people were aware that they were seeing biased rankings. We could still produce dramatic shifts in voting preferences, but we could do so invisibly.
Still no Champagne, though. Our results were strong and consistent, but our experiments all involved a foreign election – that 2010 election in Australia. Could voting preferences be shifted with real voters in the middle of a real campaign? We were skeptical. In real elections, people are bombarded with multiple sources of information, and they also know a lot about the candidates. It seemed unlikely that a single experience on a search engine would have much impact on their voting preferences.
To find out, in early 2014, we went to India just before voting began in the largest democratic election in the world – the Lok Sabha election for prime minister. The three main candidates were Rahul Gandhi, Arvind Kejriwal, and Narendra Modi. Making use of online subject pools and both online and print advertisements, we recruited 2,150 people from 27 of India’s 35 states and territories to participate in our experiment. To take part, they had to be registered voters who had not yet voted and who were still undecided about how they would vote.
Participants were randomly assigned to three search-engine groups, favouring, respectively, Gandhi, Kejriwal or Modi. As one might expect, familiarity levels with the candidates was high – between 7.7 and 8.5 on a scale of 10. We predicted that our manipulation would produce a very small effect, if any, but that’s not what we found. On average, we were able to shift the proportion of people favouring any given candidate by more than 20 per cent overall and more than 60 per cent in some demographic groups. Even more disturbing, 99.5 per cent of our participants showed no awareness that they were viewing biased search rankings – in other words, that they were being manipulated.
SEME’s near-invisibility is curious indeed. It means that when people – including you and me – are looking at biased search rankings, they look just fine. So if right now you Google ‘US presidential candidates’, the search results you see will probably look fairly random, even if they happen to favour one candidate. Even I have trouble detecting bias in search rankings that I know to be biased (because they were prepared by my staff). Yet our randomised, controlled experiments tell us over and over again that when higher-ranked items connect with web pages that favour one candidate, this has a dramatic impact on the opinions of undecided voters, in large part for the simple reason that people tend to click only on higher-ranked items. This is truly scary: like subliminal stimuli, SEME is a force you can’t see; but unlike subliminal stimuli, it has an enormous impact – like Casper the ghost pushing you down a flight of stairs.
We published a detailed report about our first five experiments on SEME in the prestigious Proceedings of the National Academy of Sciences (PNAS) in August 2015. We had indeed found something important, especially given Google’s dominance over search. Google has a near-monopoly on internet searches in the US, with 83 per cent of Americans specifying Google as the search engine they use most often, according to the Pew Research Center. So if Google favours one candidate in an election, its impact on undecided voters could easily decide the election’s outcome.
Keep in mind that we had had only one shot at our participants. What would be the impact of favouring one candidate in searches people are conducting over a period of weeks or months before an election? It would almost certainly be much larger than what we were seeing in our experiments.
Other types of influence during an election campaign are balanced by competing sources of influence – a wide variety of newspapers, radio shows and television networks, for example – but Google, for all intents and purposes, has no competition, and people trust its search results implicitly, assuming that the company’s mysterious search algorithm is entirely objective and unbiased. This high level of trust, combined with the lack of competition, puts Google in a unique position to impact elections. Even more disturbing, the search-ranking business is entirely unregulated, so Google could favour any candidate it likes without violating any laws. Some courts have even ruled that Google’s right to rank-order search results as it pleases is protected as a form of free speech.
Does the company ever favour particular candidates? In the 2012 US presidential election, Google and its top executives donated more than $800,000 to President Barack Obama and just $37,000 to his opponent, Mitt Romney. And in 2015, a team of researchers from the University of Maryland and elsewhere showed that Google’s search results routinely favoured Democratic candidates. Are Google’s search rankings really biased? An internal report issued by the US Federal Trade Commission in 2012 concluded that Google’s search rankings routinely put Google’s financial interests ahead of those of their competitors, and anti-trust actions currently under way against Google in both the European Union and India are based on similar findings.
In most countries, 90 per cent of online search is conducted on Google, which gives the company even more power to flip elections than it has in the US and, with internet penetration increasing rapidly worldwide, this power is growing. In our PNAS article, Robertson and I calculated that Google now has the power to flip upwards of 25 per cent of the national elections in the world with no one knowing this is occurring. In fact, we estimate that, with or without deliberate planning on the part of company executives, Google’s search rankings have been impacting elections for years, with growing impact each year. And because search rankings are ephemeral, they leave no paper trail, which gives the company complete deniability.
Power on this scale and with this level of invisibility is unprecedented in human history. But it turns out that our discovery about SEME was just the tip of a very large iceberg.
Recent reports suggest that the Democratic presidential candidate Hillary Clinton is making heavy use of social media to try to generate support – Twitter, Instagram, Pinterest, Snapchat and Facebook, for starters. At this writing, she has 5.4 million followers on Twitter, and her staff is tweeting several times an hour during waking hours. The Republican frontrunner, Donald Trump, has 5.9 million Twitter followers and is tweeting just as frequently.
Is social media as big a threat to democracy as search rankings appear to be? Not necessarily. When new technologies are used competitively, they present no threat. Even through the platforms are new, they are generally being used the same way as billboards and television commercials have been used for decades: you put a billboard on one side of the street; I put one on the other. I might have the money to erect more billboards than you, but the process is still competitive.
What happens, though, if such technologies are misused by the companies that own them? A study by Robert M Bond, now a political science professor at Ohio State University, and others published in Nature in 2012 described an ethically questionable experiment in which, on election day in 2010, Facebook sent ‘go out and vote’ reminders to more than 60 million of its users. The reminders caused about 340,000 people to vote who otherwise would not have. Writing in the New Republic in 2014, Jonathan Zittrain, professor of international law at Harvard University, pointed out that, given the massive amount of information it has collected about its users, Facebook could easily send such messages only to people who support one particular party or candidate, and that doing so could easily flip a close election – with no one knowing that this has occurred. And because advertisements, like search rankings, are ephemeral, manipulating an election in this way would leave no paper trail.
Are there laws prohibiting Facebook from sending out ads selectively to certain users? Absolutely not; in fact, targeted advertising is how Facebook makes its money. Is Facebook currently manipulating elections in this way? No one knows, but in my view it would be foolish and possibly even improper for Facebook not to do so. Some candidates are better for a company than others, and Facebook’s executives have a fiduciary responsibility to the company’s stockholders to promote the company’s interests.
The Bond study was largely ignored, but another Facebook experiment, published in 2014 in PNAS, prompted protests around the world. In this study, for a period of a week, 689,000 Facebook users were sent news feeds that contained either an excess of positive terms, an excess of negative terms, or neither. Those in the first group subsequently used slightly more positive terms in their communications, while those in the second group used slightly more negative terms in their communications. This was said to show that people’s ‘emotional states’ could be deliberately manipulated on a massive scale by a social media company, an idea that many people found disturbing. People were also upset that a large-scale experiment on emotion had been conducted without the explicit consent of any of the participants.
Facebook’s consumer profiles are undoubtedly massive, but they pale in comparison with those maintained by Google, which is collecting information about people 24/7, using more than 60 different observation platforms – the search engine, of course, but also Google Wallet, Google Maps, Google Adwords, Google Analytics, Chrome, Google Docs, Android, YouTube, and on and on. Gmail users are generally oblivious to the fact that Google stores and analyses every email they write, even the drafts they never send – as well as all the incoming email they receive from both Gmail and non-Gmail users.
According to Google’s privacy policy – to which one assents whenever one uses a Google product, even when one has not been informed that he or she is using a Google product – Google can share the information it collects about you with almost anyone, including government agencies. But never with you. Google’s privacy is sacrosanct; yours is nonexistent.
Could Google and ‘those we work with’ (language from the privacy policy) use the information they are amassing about you for nefarious purposes – to manipulate or coerce, for example? Could inaccurate information in people’s profiles (which people have no way to correct) limit their opportunities or ruin their reputations?
Certainly, if Google set about to fix an election, it could first dip into its massive database of personal information to identify just those voters who are undecided. Then it could, day after day, send customised rankings favouring one candidate to just those people. One advantage of this approach is that it would make Google’s manipulation extremely difficult for investigators to detect.
Extreme forms of monitoring, whether by the KGB in the Soviet Union, the Stasi in East Germany, or Big Brother in 1984, are essential elements of all tyrannies, and technology is making both monitoring and the consolidation of surveillance data easier than ever. By 2020, China will have put in place the most ambitious government monitoring system ever created – a single database called the Social Credit System, in which multiple ratings and records for all of its 1.3 billion citizens are recorded for easy access by officials and bureaucrats. At a glance, they will know whether someone has plagiarised schoolwork, was tardy in paying bills, urinated in public, or blogged inappropriately online.
As Edward Snowden’s revelations made clear, we are rapidly moving toward a world in which both governments and corporations – sometimes working together – are collecting massive amounts of data about every one of us every day, with few or no laws in place that restrict how those data can be used. When you combine the data collection with the desire to control or manipulate, the possibilities are endless, but perhaps the most frightening possibility is the one expressed in Boulding’s assertion that an ‘unseen dictatorship’ was possible ‘using the forms of democratic government’.
Since Robertson and I submitted our initial report on SEME to PNAS early in 2015, we have completed a sophisticated series of experiments that have greatly enhanced our understanding of this phenomenon, and other experiments will be completed in the coming months. We have a much better sense now of why SEME is so powerful and how, to some extent, it can be suppressed.
We have also learned something very disturbing – that search engines are influencing far more than what people buy and whom they vote for. We now have evidence suggesting that on virtually all issues where people are initially undecided, search rankings are impacting almost every decision that people make. They are having an impact on the opinions, beliefs, attitudes and behaviours of internet users worldwide – entirely without people’s knowledge that this is occurring. This is happening with or without deliberate intervention by company officials; even so-called ‘organic’ search processes regularly generate search results that favour one point of view, and that in turn has the potential to tip the opinions of millions of people who are undecided on an issue. In one of our recent experiments, biased search results shifted people’s opinions about the value of fracking by 33.9 per cent.
Perhaps even more disturbing is that the handful of people who do show awareness that they are viewing biased search rankings shift even further in the predicted direction; simply knowing that a list is biased doesn’t necessarily protect you from SEME’s power.
Remember what the search algorithm is doing: in response to your query, it is selecting a handful of webpages from among the billions that are available, and it is ordering those webpages using secret criteria. Seconds later, the decision you make or the opinion you form – about the best toothpaste to use, whether fracking is safe, where you should go on your next vacation, who would make the best president, or whether global warming is real – is determined by that short list you are shown, even though you have no idea how the list was generated.
Meanwhile, behind the scenes, a consolidation of search engines has been quietly taking place, so that more people are using the dominant search engine even when they think they are not. Because Google is the best search engine, and because crawling the rapidly expanding internet has become prohibitively expensive, more and more search engines are drawing their information from the leader rather than generating it themselves. The most recent deal, revealed in a Securities and Exchange Commission filing in October 2015, was between Google and Yahoo! Inc.
Looking ahead to the November 2016 US presidential election, I see clear signs that Google is backing Hillary Clinton. In April 2015, Clinton hired Stephanie Hannon away from Google to be her chief technology officer and, a few months ago, Eric Schmidt, chairman of the holding company that controls Google, set up a semi-secret company – The Groundwork – for the specific purpose of putting Clinton in office. The formation of The Groundwork prompted Julian Assange, founder of Wikileaks, to dub Google Clinton’s ‘secret weapon’ in her quest for the US presidency.
We now estimate that Hannon’s old friends have the power to drive between 2.6 and 10.4 million votes to Clinton on election day with no one knowing that this is occurring and without leaving a paper trail. They can also help her win the nomination, of course, by influencing undecided voters during the primaries. Swing voters have always been the key to winning elections, and there has never been a more powerful, efficient or inexpensive way to sway them than SEME.
We are living in a world in which a handful of high-tech companies, sometimes working hand-in-hand with governments, are not only monitoring much of our activity, but are also invisibly controlling more and more of what we think, feel, do and say. The technology that now surrounds us is not just a harmless toy; it has also made possible undetectable and untraceable manipulations of entire populations – manipulations that have no precedent in human history and that are currently well beyond the scope of existing regulations and laws. The new hidden persuaders are bigger, bolder and badder than anything Vance Packard ever envisioned. If we choose to ignore this, we do so at our peril
- Peak Whine: Life Is Good For "Starving", "Struggling" Complaining (Ex) Yelp Employee
Earlier in the week, (former) Yelp employee Talia Jane Ben-Ora became momentarily famous as the poster-child for all things wrong with the entitlement mindset of young adults in today's America. Her open letter to the CEO whining of her "struggle" and "starvation" had some wondering if this was an Onion parody – it was not.
While Charles Hugh-Smith offered some advice to the 25-year-old, it appears, judging from her social media postings, that she was entirely honest about her plight…
Some examples include:
"So here I am, 25-years old, balancing all sorts of debt and trying to pave a life for myself that doesn’t involve crying in the bathtub every week. Every single one of my coworkers is struggling."
Yep – life's a bitch alright
Because nothing says crying yourself to sleep in a bath-tub like a coffee-infused face-mask…
"I haven’t bought groceries since I started this job. Not because I’m lazy, but because I got this ten pound bag of rice before I moved here and my meals at home (including the one I’m having as I write this) consist, by and large, of that. Because I can’t afford to buy groceries. Bread is a luxury to me, even though you’ve got a whole fridge full of it on the 8th floor."
Is that rice?
hhmm… Home kitchen looks well used…
"Did I tell you about how I got stuck in the east bay because my credit card, which amazingly allows cash withdrawals, kept getting declined and I didn’t have enough money on my BART Clipper card to get to work?"
I guess the car wasn't working?
Of course, most know, this viral 'letter' did not end well for Talia:
"As of 5:43pm PST, I have been officially let go from the company. This was entirely unplanned (but I guess not completely unexpected?) but any help until I find new employment would be extremely appreciated."
Still – we are sure she is very hirable…
Reminding America's entitlement society once again that the true minimum wage is in fact $0.
- You Might Be A Tech Company If…
Via ConvergEx's Nicholas Colas,
It happens at the top of every tech cycle – everyone wants to be a tech company. We’re there now.
But real tech companies do more than employ a lot of programmers. For investors, “Tech” is now shorthand for a range of attributes that go far beyond coding and the cloud. It disrupts and destroys existing businesses and (occasionally) social constructs like government. Tech is clubby – if you’re not inside, you’re outside. Done well, it generates outsized financial returns after first burning through a lot of cash. It engages millennials in the hopes they will be customers for life. And yes, tech makes a handful of people extremely wealthy because employees are also significant owners in the businesses they build. That’s why the world’s sharpest people so often end up in tech.
So before you try to argue for a higher valuation for a public company just because it claims to be “Tech”, consider our seven point checklist – “You might be a tech company if…"
In December 2000 Ford, Chrysler and General Motors almost became technology companies. Between the three concerns, they controlled a market of some $550 billion in auto parts purchases – all the bits and pieces they purchased from their global supply network to assemble into finished cars and trucks. They formed a company for the purpose, with GM and Ford taking stake in a business-to-business online portal called Commerce One to provide the technology. Once their supply chains were online, the rest of the world’s industrial manufacturers would pay handsomely to join the network and save billions of dollars in logistics expenses.
In a classic example of “Right idea, wrong time”, the venture never really hit takeoff speed. The bursting of the dot-com bubble didn’t help, and nor did the economic slowdown of the following year. Commerce One declared bankruptcy in 2004. GM and Chrysler lasted a few years longer, of course, until the Great Recession forced their restructurings.
Fast forward to today, and you see some of the same storyline among established, name brand enterprises that want to be considered “Tech companies”. Unlike the old dot com days, however, the reasons for donning the mantle of “tech” often has more to do with competing for talent than anything else. The rapid growth of everything from Big Data to cloud computing to mobile app development means qualified technology professionals are much in demand. And many would prefer to work for a “Tech company” than say, a commercial bank. Fair enough, I think. Any company that creates a good environment for talented employees and shows they value their work is doing the right thing.
Where things go astray is when investors take up the “Tech company” moniker to argue for different valuation metrics when assessing already existing businesses. It is all too tempting to look at a large industrial company or financial institution and say “They employ more programmers than lots of so-called tech companies. Why shouldn’t they be valued the same way?” This is a slippery slope and, as the auto company example above, can end in tears.
Here’s a quick checklist to see if your “Undervalued” tech-diamond-in-the-rough really merits the “Tech” badge. (With apologies to Jeff Foxworthy.)
You might be a tech company if…
#1 – You disrupt the status quo with a unique vision of the future. This is the essence of a 21st century tech company. Where the existing business model is a yellow cab, you see a smartphone enabled method of providing transportation without owning any cars (Uber, Lyft, etc). Instead of a hotel chain, you envision renting unused rooms and apartments (Airbnb). You don’t care about existing businesses. You destroy them.
#2 – You are either burning cash or generating tons of it. Real tech companies seem to either earn +20% returns on their capital or -20% returns. That’s because their capital is meant to be disruptive, not evolutionary. A “Real” tech company will earn a 5% return for about one month – either on its way to +20%, or just before it runs out of money.
#3 – Your employees have life-changing levels of equity. Payoffs for talent in technology make the lottery look like a money market fund. Whether or not a tech company makes it (and most don’t), key employees generally have enough equity to become very wealthy if things work out.
#4 – Governments don’t know what to do with you. Technology companies disrupt established government protocols almost as often as they upend existing business models. Apple is the poster child of this phenomenon at the moment, with the debate over the unlocking of an iPhone owned by a terrorist. Uber has had its fair share of criticism as well, from local governments around the world. Real tech is so far ahead of societal norms that their innovations often change how we view basic concepts like ownership and privacy.
#5 – Millennials love you. This age cohort – born from the early 1980s to 2000s – is a tough group to crack. They grew up with technology, so they are discerning users – quick to adopt, and equally quick to dismiss. Tech companies that can appeal to this mobile-enabled, multi-tasking customer base have a valuable edge indeed.
#6 – You are “In the club”. It’s no secret that Silicon Valley is a tight knit community of opinion leaders with a unique ability to discern winning business ideas. Members of this group cluster together. They give TED talks. They go to Davos, Allen & Co’s Sun Valley conference, and Bilderberg. And if your company’s CEO doesn’t, they need to.
#7 – Your addressable market grows exponentially because of your technology. In the end, points 1-6 are nice to haves; this one is essential. The reason “Technology” is such a powerful construct is that it destroys pre-existing barriers to competition. The old “Castle-and-moat” approach to business development crumbles in the face of technology. In the end, “Technology” means redefining everything about a given company, industrial sector, industry, and even society itself.
If you can honestly say a company does this, then it really is a “Tech company”.
- Coal Mine Canary Or "Opportunity?" You Decide
Earlier today, we noted that Citi can’t believe how enticing CLO mezz tranches have become.
“Can CLO mezz get any more attractive?” the bank’s structured credit team asked. You’d be forgiven for being a bit incredulous. After all, CLO 2.0 mezz hasn’t exactly been somewhere you want to be. As Morgan Stanley noted last week, “the median total return for US CLO 2.0 (2014-15 vintage) BBs is -9.2%, and for single-Bs is -20.9%.”
Morgan continues: “Investment-grade US CLO tranches performed better but still within negative total return territory, [and] collectively, US CLOs significantly underperformed relative to comparably rated corporate bonds, leveraged loans and senior tranches of CMBS.”
Right. So bad news all the way around.
But you know, you want to look for BTFD opportunities anywhere you can find them and despite the fact that subordinate CLO tranches are about the most ludicrous recommendation imaginable in the current environment, Citi thinks maybe you should have a look because after all, how much wider can US CLO 2.0 spreads possibly get relative to other probably terrible investments? Here’s Citi to explain why there’s value here if your benchmark is HY and/or subordinate CMBS tranches:
CLO BB spread has widened by 275bp to 1000-1500bp range since the start of 2016, already surpassing the 172.5bp widening observed in the full year of 2015. To put this into a broader context, CMBS BBB- also widened by about 260bp to 800bp and HY by 130bp to 876bp. CLO mezz appears cheap to loan and HY, but not so much to CMBS mezz.
Near-term CLO mezz spread movement will largely depend on the market supply and whether the demand from non-traditional or opportunistic buyers will be in place timely to absorb that. Oil price and broader market performance/fund flows are the wild cards. There would be opportunities for the investors to step in and scale up as price downside risk lowers, but the market volatility is likely to persist. Incoming investors should weigh the return with risk management.
Yes, “incoming investors” should “weigh return with risk management,” because if the assets in the collateral pools continue to be downgraded, you’re going to see continued underperformance and make no mistake, there’s no reason whatsoever to expect that the downgrades aren’t going to continue.
Additionally, Citi says BBs are at risk of forced selling by money manangers. Here’s more:
There is about $16.7bn CLO 2.0 BB outstanding [and] based on our primary investor base data and reported fund holdings on IPREO, we estimate roughly $4.3bn is held by hedge funds, $7.1bn by asset managers and $2bn by mutual funds ($1.7bn in open end mutual funds). Assuming two thirds of hedge funds and 20% of asset managers used leverage, our best estimate is perhaps $4.3bn of CLO 2.0 BB bonds were bought with leverage and $1.7bn in open-end mutual funds. Some of these investors might consider selling ahead of more volatility.
So far, TRACE reported $3.4bn non-IG rated bonds traded YTD altogether but doesn’t break into CLO BB, B and equity tranches. If we assume the same rating breakdown as in CLO BWIC traded volume, it means $2.7bn BB, $0.2bn B and $0.5bn equity could have been sold already. If so, it is fair to say more supply can come with leverage unwinding.
Repo desks typically require investors to post daily margin if the portfolio price swing is too big. Given the median CLO 2.0 BB price has dropped about 16 points from $94 in May 2015 to $78 at the end of January 2016, our analysis shows some investors probably have posted 40-60% more capital just to meet margin calls by now, depending on the haircut and price movement (Figure 19). A further price drop in CLO junior debt might, in some cases, require holders to put down more capital than their original investment to meet the margin calls.
So be our guest. Lever up in junior US CLO tranches. It should be fine.
Of course if it turns out poorly you’ll look like the biggest sucker on the planet because you should be able to divine something about the suitability of an investment by observing supply and demand dynamics. Here’s what the picture looks like for US CLOs:
Again: trade accordingly.
- Clash Of The Gods: It's Odin Versus Allah In Norway Where Social Upheaval Looms Large
Last month, we introduced you to “The Soldiers of Odin.”
The “soldiers” are Nordic patriots dedicated to keeping the streets of Finland, Sweden, and Norway safe from the threat posed by marauding gangs of Mid-East migrants hell bent on accosting women.
Well that, or they’re the Nordic equivalent of a biker gang set to capitalize on a groundswell of nationalistic fervor drummed up by the far-right in the wake of Europe’s worsening migrant crisis.
Obviously, the truth is somewhere in-between, but there’s significant comedic value in presenting the extremes.
In any event, the Finnish chapter of the “soldiers” says the group merely seeks to serve as a “preventive soothe” (to quote a Google translation of a statement from National Police Commissioner Seppo Kolehmainen) against the growing threat posed by refugees.
But not everyone sees it that way. “The leaders of the ‘Soldiers of Odin’ are proven to have criminal backgrounds, in cases of racist violence and other violent or drug offenses,” Dan Koivulaakso, local politician and expert on rights movements in Finland says. The movement has spread to Norway, as is evident from the following visual:
“Progress of course doesn’t give unlimited support to the Soldiers of Odin. But the situation is that we have for a long time had a situation in our streets that nobody wants, where crimes are committed and other actions we don’t want occur and the Norwegian police don’t have the resources to do the job. Thus we think that any citizen who wants to contribute to reducing insecurity and reducing crime should be praised for it,” the Progress Party’s Jan Arlid Ellingsen said earlier this week.
Norwegian PM Erna Solberg (who recently said she was willing to effectively contravene the Geneva Convention to keep Norway’s border safe in the event Sweden “collapses”) went out of her way to distance herself from the group. “The Soldiers of Odin have no place in keeping the streets safe. Dangerous values. Ellingsen’s remarks do not represent the government,” a Twitter post reads.
Odins soldaters har ingen plass i arbeidet for trygge gater. Farlig verdisyn. Ellingsen uttalelser representerer ikke Regjeringen.
— Erna Solberg (@erna_solberg) February 23, 2016
Well as it turns out, Solberg isn’t the only one opposed to the Soldiers. Norwegian Islamists aren’t too happy about the group’s proliferation either which is why they’ve formed the “Soldiers of Allah” that will, “in response to the infidels” patrol the streets of Oslo “to prevent evil and encourage the good.”
It wasn’t entirely clear what “encourage the good” meant, but the group did send Norwegian media a picture of the black hoodies they’d be wearing and the shirts feature the ISIS flag.
“Vigilantism does not belong in Norway, whether they do it in the name of Odin or Allah,” Hadia Tajik, the Norwegian Labour Party’s deputy leader said. “I assume that the police, who are the only ones who have the authority to patrol the streets and use force, are following these groups as closely as the circumstances require.“
As for the Soldiers of Odin, they’re quick to distance themselves from Allah’s army but seem prepared to take the upstart group on. “When it comes to ‘Odin’s soldiers’ and ‘Allah soldiers,’ so we have two completely different starting points,” Ronny Alte, a spokesman for “Soldiers of Odin” said. “We want safe streets but they want to use coercion and oppression. That they use a word like ‘infidel’ to describe us really forces a reaction from me. What will they do – force us to convert?”
Yes, ladies and gentlemen, there is now a very real possibility that you will see a street brawl between right-wing hooligans who pledge allegiance to a bearded Norse god and extremists who are prepared to die for the prophet. And this is taking place in Norway.
So please, mainstream media, tell us again about how tinfoil hat fringe blogs exaggerate the threat of societal disintegration.
- US Government 'Asks' Tech Companies To Tweak Algos, Promote Certain Content
Submitted by Mike Krieger via Liberty Blitzkrieg blog,
You probably had no idea, but representatives from Silicon Valley, Hollywood and the U.S. government came together earlier this week to privately discuss how they could jointly fight ISIS propaganda online. Never mind the fact that ISIS is the child of reckless and inhumane preemptive wars of aggression perpetrated by the U.S. government. Such introspection naturally never crosses the mind of government bureaucrats ostensibly attempting to understand the epic disasters they created in the first place.
So who attended the meeting? We don’t know for sure because the plebes aren’t entitled to know such things. Fortunately, we have become privy to some information thanks to Buzzfeed News. Here’s what we learned:
WASHINGTON, D.C. — They flew in from New York, San Francisco, and Los Angeles to hole up in a windowless D.C. conference room for nearly five hours on Wednesday — representatives of the country’s top tech and entertainment companies brainstorming with U.S. counterterrorism officials to tackle one tough question: how to stop the spread of ISIS online.
The standoff between Apple and the FBI did not come up during the meeting, though the issues it involves are at the heart of the very things being discussed. As the role of technology in our lives continues its explosive growth, how will the balance between privacy and security play out in the new Silicon Valley-D.C. relationship?
Among the handful of Arab participants who took part in Wednesday’s event, the questions raised felt even greater.
“They wanted to figure out how to fight ISIS online, how to understand the psychology of those who support ISIS, and they invited almost no one who speaks for those of us in the Arab world, and from Arab communities, who have everything to lose from ISIS’s growing popularity,” said one Arab attendee, who estimated that less than 10% of the attendants were of Middle Eastern descent. “They don’t understand this community. That has been proven time and time again with their tone deaf messages. Why hold an event like this where there are ten white men outnumbering every Arab?”
The lack of voices from the Middle East at the event was raised repeatedly, with one attendee garnering applause when they asked why — in a discussion regarding ISIS’s appeal to young Arab-American Muslims — there was no one speaking to their appeal from within that community.
This is what happens when people fail upward and you have a country run by a cadre of incompetent, corrupt and clueless “elites.”
Other media outlets, who were leaked a list of attendees, revealed that Microsoft, Facebook, Apple, Google, Mediacom, and Edelman were among those attending from Hollywood and Silicon Valley. In a statement, the Department of Justice noted that Assistant Attorney General for National Security John Carlin, U.S. Chief Technology Officer Megan Smith, and Senior Director for Counterterrorism on the National Security Council Staff Jen Easterly all took part in the meeting.
Now here’s the most disturbing revelation.
Over the last year, the government has stepped up its overtures to Silicon Valley, meeting with tech executives in January on the subject of combatting ISIS online. The Department of Defense has opened an office in the San Francisco area, and the State Department has recently appointed its first representative to Silicon Valley. Tech executives who have met with the Pentagon team told BuzzFeed News that some of their requests have been “jarring.” In at least one case, the Pentagon spoke with several companies — who asked not to be named as a condition of discussing the meeting with BuzzFeed News — about tweaking their algorithms to promote certain types of content. Both Google and Facebook have made it clear that they would not make changes to their algorithms to bury results supportive of ISIS.
May as well just call it the Department of Propaganda. Truly unbelievable.
“That’s something that is always brought up in meetings. And it shows how little they understand us,” said the Google representative. “This is a Pandora’s box we won’t open, because if we answer a request by the U.S. government to feature one search result over another, what’s to stop other countries from requesting the same? What’s to stop each country from tailoring the search results of their citizens to their agenda? It’s not a path we are willing to explore.”
Read that again. It’s always brought up at meetings. Perfect example of why Apple needs to be supported in its battle with the FBI. The U.S. government wants nothing short of total control. See:
Video of the Day – John McAfee Proclaims “An Apple Backdoor is the End of America”
As the Apple vs. FBI Debate Rages, Congress Plots to Mandate Encryption Backdoors
Apple Vows to Defend Its Customers as the FBI Launches a War on Privacy and Security
At its core, said many attendees, the issue was the basic distrust the tech and entertainment companies have for the government, which has been amplified by the unprecedented attempt to force Apple to help the FBI break into an encrypted phone and the strong stance taken by tech companies including Google, Microsoft, and Facebook to stand behind Apple.
“It’s like you’ve been asked to partner up and dance with the bully at school who keeps trying to trip you in the hallways,” one attendee told BuzzFeed News after the event. “And even though you want to learn to dance, there isn’t a lot of trust to build on.”
America: This is Your Government.
- Another Central Banker Comes Clean… Buckle Up
In the last month, we’ve had two major confessions from Central Bankers.
We’ve already detailed the first, which came from the Head of the Bank of Japan, Haruhiko Kuroda here.
The second major confession from a Central Banker came from ECB President Mario Draghi. A few days ago, Draghi gave a speech in which he said:
Very low inflation complicates the adjustment process within countries, leading to higher unemployment. It delays the rebalancing process across countries, hindering those that lost competitiveness prior to the crisis from regaining it. And if low inflation is unexpected, it raises real debt burdens making it harder for the economy to grow out of debt.
On the surface this seems like a statement of the obvious: low inflation or deflation makes your debts more difficult to pay off.
However, it is only when you take this a step further and realize that he is in fact talking about the bond bubble in Europe that you realize just why he is terrified.
Remember:
1) Europe’s entire banking system is leveraged at 26 to 1. At these levels even a 4% drop in asset values (read BONDS) renders the banks insolvent.
2) Due to their massive welfare programs, most EU countries have real debt to GDP ratios well north of 300%. Even Germany is above 200%!
3) No major bank or country has used the post-crisis period (2012 to present) or lower yields to deal with their structural debt problems.
Moreover, as Draghi has found, despite three NIRP cuts and €1 trillion in QE, unexpected low inflation continues to be a REAL problem for the EU.
This is why Dragh is so concerned with “unexpected” low inflation… because he EXPECTED inflation to explode higher due to his monetary policies and instead it’s barely flatlining!
Thus, in the last two weeks, we have had TWO major Central Bank heads confess their deepest fears… namely that they do not have the monetary tools to fix their respective financial systems’ problems.
Again, the markets have yet to fully realize this. But this is as close as you can get to a Central Banker ringing a bell at the TOP.
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- The Global Run On Physical Cash Has Begun: Why It Pays To Panic First
Back in August 2012, when negative interest rates were still merely viewed as sheer monetary lunacy instead of pervasive global monetary reality that has pushed over $6 trillion in global bonds into negative yield territory, the NY Fed mused hypothetically about negative rates and wrote “Be Careful What You Wish For” saying that “if rates go negative, the U.S. Treasury Department’s Bureau of Engraving and Printing will likely be called upon to print a lot more currency as individuals and small businesses substitute cash for at least some of their bank balances.“
Well, maybe not… especially if physical currency is gradually phased out in favor of some digital currency “equivalent” as so many “erudite economists” and corporate media have suggested recently, for the simple reason that in a world of negative rates, physical currency – just like physical gold – provides a convenient loophole to the financial repression of keeping one’s savings in digital form in a bank where said savings are taxed at -0.1%, or -1% or -10% or more per year by a central bank and government both hoping to force consumers to spend instead of save.
For now cash is still legal, and NIRP – while a reality for the banks – has yet to be fully passed on to depositors.
The bigger problem is that in all countries that have launched NIRP, instead of forcing spending precisely the opposite has happened: as we showed last October, when Bank of America looked at savings patterns in European nations with NIRP, instead of facilitating spending, what has happened is precisely the opposite: “as the BIS have highlighted, ultra-low rates may perversely be driving a greater propensity for consumers to save as retirement income becomes more uncertain.”
Call it another massive error on behalf of Keynesian central planners who once again fail to appreciate the nuances of the common sense and the liquidity preference of ordinary consumers.
However, just because negative rates have not been passed on to savers yet or just because cash still has not been made illegal, that doesn’t mean it won’t be.
The question at this point is twofold: what happens after the savings of ordinary depositors in the bank officially taxed and/or cash becomes phased out, and more importantly, what happens just before.
In other words, will there be a run on physical cash?
The truth is that if society panics and there is a full blown rush out of existing electronic bank deposits and into physical currency to avoid negative rate taxation, only those who panic first will be safe. Why? Because of the “magic” of fractional reserve banking – there is simply not enough physical currency in circulation to satisfy all savers’ claims.
Here is HSBC’s Steven Major trying to explain the problem:
Based on the evidence so far, households have not rushed to withdraw cash and put it into a safe or, more significantly, pay for someone else to store it for them. This is because retail deposit rates have stayed at or above zero as banks have opted to not pass the lower market rates on.
The assumption that bank deposits can be rapidly converted into cash does not hold up, in our opinion. If everybody wanted to take their cash out of the bank at the same time, the system would soon run out as there are simply not enough notes in circulation. It would take a considerable time to print the currency needed to meet the demand. A central bank could enforce a negative rate for a considerable period of time under these conditions. For example, in the US, even if the production rate is doubled – and assuming the pace of retirement of old notes is unchanged and there is demand for USD3trn of new notes – printing would take 20-years.
To explain this, consider the demand for currency created if savers tried to remove cash from the US banking system. This demand could total anything between USD2.5trn (of excess reserves) and USD4.5trn (the Fed’s total balance sheet). Currently there is USD1.5trn of currency in circulation and the total annual production had a face value USD149bn in 2014, suggesting the 20 years it would take to print the cash.
Currency in circulation is small compared to the potential demand in a negative rate environment. As an example, the Fed’s assets are three times the currency in circulation and the Riksbank’s nearly ten times (see Table 1), but production capacity is limited.
While largely correct, Major is wrong about two critical things.
First, when estimating the potential demand for physical currency in circulation, one has to take into consideration not only the amount of total Fed reserves (or its entire balance sheet) but the entire fractional reserve banking system, and specifically the amount of paperless deposits parked at banks in the form of demand, checking, and savings account, or in other words, all the core components of M2. Not only that, but one must also consider the threat by increasingly more economists that large denomination bills may be outlawed, first in Europe with the €500 bill and then in the US with the $100 bill.
What a ban of Ben ($100 bill) would imply is that the total notional value of US currency in circulation would plunge from $1.35 trillion in the most recent week, to just $271 billion once the total $1.08 trillion value of $100 bills is eliminated. Putting this in context, there are as of this moment, $11.1 trillion in various forms of savings parked at banks as summarized in the chart below.
For the sake of simplicity, this analysis ignores what would happen globally in a comparable scenario in which paper currency in other developed markets is likewise “curbed” in part or in whole. Recall that for NIRP to truly work, paper currency has to be substantially eliminated everywhere it is implemented. We will analyze the impact of a global rush into paper currency in a subsequent post.
Still, what the chart above shows is that if, and when, a run on physical cash begins, there will be roughly $1 dollar in physical to satisfy $10 dollars in savers’ claims, a ratio which drops to 20 cents of “deliverable” cash if the $100 bill is taken out of circulation.
* * *
The second, and far more critical error Major makes, is the assumption that “households have not rushed to withdraw cash and put it into a safe.” As we explained previously, while this may have been true for a long time since 2014 when the first cases of NIRP were unveiled, that is no longer the case. Recall from “Safes Sell Out In Japan, 1,000 Franc Note Demand Soars As NIRP Triggers Cash Hoarding“
Now that the cash ban calls have gotten sufficiently loud to be heard by the generally clueless masses and now that the likes of Jose Canseco are shouting about negative rates, savers are beginning to pull their money out of the banks.
“Look no further than Japan’s hardware stores for a worrying new sign that consumers are hoarding cash–the opposite of what the Bank of Japan had hoped when it recently introduced negative interest rates,” WSJ wrote this morning. “Signs are emerging of higher demand for safes—a place where the interest rate on cash is always zero, no matter what the central bank does.”
“In response to negative interest rates, there are elderly people who’re thinking of keeping their money under a mattress,” one saleswoman at a Shimachu store in eastern Tokyo told The Journal, which also says at least one model costing $700 is sold out and won’t be available again for a month.
“According to the BOJ theory, they should have moved their funds into riskier but higher-earning assets. Instead, they moved into pure cash that earned nothing,” Richard Katz, author of The Oriental Economist newsletter wrote this month.
Meanwhile, in Switzerland, circulation of the 1,000 franc note soared 17% last year in the wake of the SNB’s move to NIRP.
“One consequence of the decision to cut the Swiss central bank’s deposit rate into negative territory in late 2014, and deepen the negative rate to -0.75% early last year, may have been to increase stockpiling,” WSJ reports. “Holding money in cash would protect it from the risk of Swiss banks at some point charging a broad range of customers to deposit money.”
“The connection between the increasing circulation of the big Swiss bill and the central bank policy is obvious,” Karsten Junius, chief economist at Bank J. Safra Sarasin said. Well yes, it is. Just as the connection between soaring safe sales in Japan and Haruhiko Kuroda’s NIRP push is readily apparent.
So once again, we see that when one experiments with policies that fly in the face of logic (like charging people to hold their money), there are very often unintended consqeuences and when you combine sluggish demand with NIRP in a monetary regime that still has physical banknotes, you get a run on cash. And on safes to store it in.
And then this from “Demand For Big Bills Soars As Japan Stuffs Safes With 10,000-Yen Notes“:
“Demand for 10,000-yen bills is steadily rising in Japan, even as the nation’s population falls and the use of credit cards and other forms of electronic payment increases,” Bloomberg writes. “While more cash might sound like a good thing, some economists are concerned that it shows Japanese households are squirreling away money at home instead of investing it or putting it into bank accounts — where it can make its way back into the financial system and be put to productive use.”
One safe maker who spoke to Bloomberg said safe shipments have doubled over the last six months. While part of the demand for safes is likely attributable to the country’s new “My Number” initiative, “the negative-rate policy is likely to intensify the preference of Japanese households to keep cash at home,” Hideo Kumano, an economist at Dai-ichi Life Research Institute said. “Overall, the trend of more cash at home reflects concern about the outlook for economy among households. This isn’t a good thing.”
No it isn’t, and not because of concern about the outlook for the Japanese economy: that had no chance long before Abe and Kuroda came on the scene, mostly as a result of Japan’s demographic spiral of doomed.
“It isn’t a good thing” because it confirms that the global run on physical cash – as much as the bankers of the world would like to keep it under wraps – has begun, and as the chart above shows, in a fractionally-reserved world in which there are $10 in savers’ claims for every $1 in physical currency, it quite literally pays to panic first, as the 9 out of 10 people who panic after the first one, will be stuck with nothing.
* * *
At the end of the day, what it all boils down to, is Exter’s inverted pyramid. As a reminder, this is how Elliott’s Paul Singer summarized the total notional value of all global asset classes:
- Over-the-Counter derivatives, notional amounts: $692 trillion at year-end 2014, per the BIS. For comparison, this figure was $72 trillion in 1998.
- Global real estate: $180 trillion, according to global real-estate services provider Savills.
- Global debt market, both securities and other forms of debt: $161 trillion at year-end 2014, per the Institute for International Finance’s Capital Markets Monitor. According to the Bank of International Settlements (BIS), debt securities make up $95 trillion of this total.
- Global equities: $64 trillion, per the World Federation of Exchanges.
- Global M1 money supply: $24 trillion at year-end 2013, per the World Bank.
- Gold: $6.8 trillion at year-end 2013, according to the Thompson Reuters GFMS Gold Survey.
Because once the banks’ physical cash runs out in a post-NIRP scramble, there is always – at least until it, too, is confiscated once again – gold.
- Hillary Cruises To Victory In South Carolina Amid Strong African American Support
Update: CBS and CNN call it for Clinton. It was over before it started.
* * *
Last weekend, on the heels of a decisive (if expected) victory for Bernie Sanders in the New Hampshire primary, Hillary Clinton reclaimed the momentum in the race for the Democratic nomination by escaping the Nevada caucuses with a narrow victory over the Vermont senator.
On Saturday, we’ll find out if Clinton can preserve the momentum in South Carolina, where she’s expected to win easily by riding a wave of support from the African American community. “In her last campaign, the state shattered Mrs. Clinton’s hopes and frayed the relationship she and Bill Clinton had with black voters, dealing Mr. Obama a 28-percentage-point victory and convincing the country that his appeal extended beyond the largely white, liberal electorate of Iowa,” The New York Times notes.
This time around, she’s playing from a position of strength and is effectively hoping to use her ties to the Obama administration to her advantage. Sanders has made a valiant effort in the state, running radio ads featuring Spike Lee and attending bringing rapper Killer Mike along for campaign stops.
But it likely won’t be enough. Instead of directors and actors, Clinton has campaigned with the mothers of Trayvon Martin and Eric Garner and her support among the state’s African American community is unwavering (questions about her “super predator” comments ca. 1996 notwithstanding).
A Fox News poll out earlier this month showed Clinton leading “The Bern” by a 56-28 margin. As ABC notes, “Clinton will hope to follow in the footsteps of her husband, who won the state en route to his election in 1992, and use South Carolina as her own personal “firewall” against Sanders.” Here’s a rundown of the latest polls from RealClearPolitics:
The state saw record turnout in 2008 when Democratic voters cast 530,000 votes. Generally, a high turnout is a good thing for Sanders, but Clinton’s overwhelming support among African Americans means Sanders has little chance. He won’t be in the state on Saturday evening, but will instead travel to Minnesota for a rally. Earlier today, he was in Texas with planned stops in Austin and Dallas.
Clinton, by contrast, is “right at home” in the Palmetto state. In South Carolina, she’s “the candidate she always wanted to be,” to quote Politico.
“Gone are questions about her authenticity,” Politico continues. “Here, black voters say Clinton’s history as a civil rights stalwart — she first visited the state as a college grad investigating the problem of youths incarcerated in adult jails for the Children’s Defense Fund — trumps any trust issues that dog her elsewhere.”
“You look at South Carolina and we’re at the the bottom in anything you can thing of, educations, poverty. I think Hillary would be good because she’s gonna look out for us,” said Al Tucker, a 67-year-old African American. “I don’t think Bernie has a shot in a national election, and this election is too important,” said Elementary school teacher Alicia Newman. “The next president is probably going to end up appointing the next judge on the Supreme Court. If Hillary is elected, she’ll appoint a moderate or liberal judge to replace (Antonin) Scalia.”
“I was at one point considering Bernie, but she really swayed me on the issues personally affecting me,” said Markos Young, of suburban Columbia. “I would love tuition to be free, but how? Somebody has to pay for it. Where’s that coming from?”
Asked if he’d given up on South Carolina, Sanders responded: “No, no, no, no.”
But he probably should. “I am not familiar with him at all,” a Florence, South Carolina member of the local county council said on Saturday.
Meanwhile, the crowd was so large at a Florence event at which Hillary was speaking that Joyce T. Marshall and 50 other supporters were forced to listen outside on a speaker. “Hillary has done a lot for us, and her husband has done a lot for us,” she said.
Polls close at 7 p.m. EST.
- Snowden Sums Up The Presidential Campaign With Just One Tweet
And so, just like that, with a sweeping victory in South Carolina, Sanders' Socialism crawls back into its cage and crony capitalism is alive and well.
As Edward Snowden so perfectly sums up…
2016: a choice between Donald Trump and Goldman Sachs.
— Edward Snowden (@Snowden) February 28, 2016
And in case you thought this was an exaggeration…
Since 2013 Hillary's grand total is slightly less: $21.7 million for 92 private appearances.
Below we present the full breakdown of every publicly disclosed speech event by Hillary Clinton, together with the associated fee.
And as The Mises Institute's William Andersen so eloquently summarised,
Despite Clinton’s newfound populist rhetoric, her economic agenda reflects her own lifestyle of practicing crony capitalism. Other than her promise to remove “red tape” for small business startups, Clinton’s economic propositions follow the same depressing line that we have seen from Bernie Sanders and Elizabeth Warren: private enterprise extracts wealth from the economy, while the expansion of government power builds wealth and employment opportunities.
If one briefly can summarize Clinton’s policy-making viewpoints, it is this: Hillary Clinton believes that an economy should be a tool of the state and reflect the political interests of Washington. Anything else is called “greed,” or “profits before people.” Private employers and business owners should not seek to be profitable, but rather to be virtuous, with the necessary virtue being decided by Clinton herself.
Hillary Clinton, a beneficiary of the very worst aspects of crony capitalism, has decided after all that she is an economic populist who wants to “share the wealth.” No one is mistaking her for Bernie Sanders or even Huey Long, but, nonetheless, she is a thoroughgoing statist telling voters that the way to improve the economy is to make it more difficult to produce things and force up business costs.
She clearly is not claiming to be a free-enterpriser and stands by her view that state control of economic exchanges will result in more exchanges and improved employment prospects and increased income. What she does not say is that the very economic burdens she promises to lay upon businesses will further erode the prospects of the American middle class she claims to support.
The economics of Hillary Clinton is first and foremost about expanding the power and scope of the US government, and as government gains more control, the more employers and business owners need to be in the good graces of American politicians. To be blunt, Clinton believes that people like herself can continually loot US businesses, with business owners paying their protection money without complain. After all, Hillary knows best; just ask her.
But none of that matters of course.
And so, as Patrick Buchanan recently asked, in a Hillary Clinton vs. Donald Trump race – which, the Beltway keening aside, seems the probable outcome of the primaries – what are the odds the GOP can take the White House, Congress and the Supreme Court?
If Republicans can unite, not bad, not bad at all.
Undeniably, Democrats open with a strong hand.
There is that famed “blue wall,” those 18 states and D.C. with a combined 242 electoral votes, just 28 shy of victory, that have gone Democratic in every presidential election since 1988.
The wall contains all of New England save New Hampshire; the Acela corridor (New York, New Jersey, Pennsylvania, Delaware and Maryland); plus Michigan, Minnesota, Illinois and Wisconsin in the Middle West; and the Pacific coast of California, Oregon, Washington – and Hawaii.
Changing demography, too, favors the Democrats.
Barack Obama carried over 90 percent of the black vote twice and in 2012 carried over 70 percent of the Hispanic and Asian votes. These last two voting blocs are the fastest-growing in the USA.
A third Democratic advantage is simple self-interest.
Half the nation now receives U.S. government benefits – in Social Security, Medicare, Medicaid, food stamps, welfare, student loans, rent subsidies, school lunches and Earned Income Tax Credits, etc.
Folks who rely on government benefits are unlikely to rally to a party that promises to cut government. And as half the nation pays no income tax, these folks are unlikely to be thrilled about tax cuts.
Bernie Sanders, who promises free college tuition and making Wall Street and the 1 percent pay for it, knows his party.
While these realities of national politics would seem to point to inexorable Democratic dominance in coming decades, there are worms in the apple.
First, there is the strangely shrunken and still shrinking Democratic leadership base. As the Daily Caller reports, under Obama, Democrats have lost a net of more than 900 state legislature seats, 12 governors, 69 U.S. House and 13 Senate seats. Such numbers suggest a sick party.
Republican strength on Capitol Hill is again as great as it was in the last years of the Roaring ’20s.
Second, due to Trump, viewership of the Republican debates has been astronomical – 24 million for one, 23 million for another.
The turnout at Trump rallies has been unlike anything seen in presidential primaries; and what’s more, the GOP voter turnout in Iowa, New Hampshire, South Carolina and Nevada set new records for the party.
Yet voter turnout for the Clinton-Sanders race has fallen, in every contest, below what it was in the Clinton-Obama race in 2008.
Bernie’s millennials aside, the energy and excitement has been on the Republican contest, often a sign of party ascendancy.
Not only would Trump at the top of the GOP ticket assure a huge turnout (pro and con), he is the quintessence of the anti-Washington, anti-establishment candidate in a year when Americans appear to want a wholesale housecleaning in the capital.
As a builder and job creator, Trump would surely have greater cross-party appeal to working-class Democrats than any traditional Republican politician. Moreover, when Bernie Sanders goes down to defeat, how much enthusiasm will his supporters, who thrilled to the savaging of Wall Street, bring to the Clinton campaign?
This is the year of the outsider, and Hillary is the prom queen of Goldman Sachs. She represents continuity. Trump represents change.
Moreover, on the top Trump issues of immigration and trade, the elites have always been the furthest out of touch with the country.
In the 1990s, when Bill Clinton fought the NAFTA battle, the nation rebelled against the deal, but the establishment backed it. When Republicans on Capitol Hill voted for most-favored-nation status for China, year in and year out, did Republican grass roots demand this, or was it the U.S. Chamber of Commerce and Business Roundtable?
On immigration, where are the polls that show Middle Americans enthusiastic about increasing the numbers coming? Where is the majority demanding amnesty or open borders?
The elites of Europe are as out of touch as America’s.
Angela Merkel, Time’s Person of the Year in 2015, is at risk of being dumped in 2016 if she does not halt the next wave of Middle Eastern refugees who will be arriving on Europe’s shores when the seas calm in the spring in the Aegean and the Mediterranean.
If we believe the immigration issue Trump has seized upon is explosive here, look to Europe. In the Balkans and Central Europe, even in Austria, the barriers are going up and the border guards appearing.
Mass migration from the Third World to the First World is not only radicalizing America. It could destroy the European Union. Anger over any more migrants entering the country is among the reasons British patriots now want out of the EU.
America is crossing into a new era. Trump seems to have caught the wave, while Clinton seems to belong to yesterday.
A note of caution: This establishment is not going quietly.
- Dear Warren, Nothing Lasts Forever
In his latest letter to investors, Cherry-Coke-sipping Warren Buffett went full fiction-peddle-tard. As the man who perhaps best rode the coat-tails of an ever-increasing wave of American credit expansion exceptionalism (only to come undone in recent times as that game ends), it is no surprise that he explains "for 240 years it’s been a terrible mistake to bet against America, and now is no time to start." We don't mean to rain on his parade too much, but the following charts suggest "nothing lasts forever" and time is ticking.
For a man who runs a massive, highly-levered portfolio of assets exposed to 'Murica, it is hardly surprising Buffett would utter the following:
"For 240 years it’s been a terrible mistake to bet against America, and now is no time to start.
America’s golden goose of commerce and innovation will continue to lay more and larger eggs.
America’s social security promises will be honored and perhaps made more generous.
And, yes, America’s kids will live far better than their parents did."
The trouble is – taking each statement…
History did not end with the Cold War and, as Mark Twain put it, whilst history doesn’t repeat it often rhymes. As Alexander, Rome and Britain fell from their positions of absolute global dominance, so too has the US begun to slip. America’s global economic dominance has been declining since 1998, well before the Global Financial Crisis. A large part of this decline has actually had little to do with the actions of the US but rather with the unraveling of a century’s long economic anomaly. China has begun to return to the position in the global economy it occupied for millenia before the industrial revolution. Just as the dollar emerged to global reserve currency status as its economic might grew, so the chart below suggests the increasing push for de-dollarization across the 'rest of the isolated world' may be a smart bet…
The World Bank's former chief economist wants to replace the US dollar with a single global super-currency, saying it will create a more stable global financial system.
"The dominance of the greenback is the root cause of global financial and economic crises," Justin Yifu Lin told Bruegel, a Brussels-based policy-research think tank. "The solution to this is to replace the national currency with a global currency."
Innovation may be limited by the constant manipulation of government and central banks…
One feature of capitalism that is rarely discussed is the premium placed on cooperation and collaboration. The Darwinian aspect of competition is widely accepted (and rued) as capitalism’s dominant force, but cooperation and collaboration are just as intrinsic to capitalism as competition. Subcontractors must cooperate to assemble a product, suppliers must cooperate to deliver the various components, distributors must cooperate to get the products to retail outlets, employees and managers must cooperate to reach the goals of the organization, and local governments and communities must cooperate with enterprises to maintain the local economy.'
Darwin’s understanding of natural selection is often misapplied. In its basic form, natural selection simply means that the world is constantly changing, and organisms must adapt or they will expire. The same is true of individuals, enterprises, governments, cultures and economies. Darwin wrote:"It is not the strongest of the species that survives, or the most intelligent, but the ones most adaptable to change."
Ideas, techniques and processes which are better and more productive than previous versions will spread quickly; those who refuse to adapt them will be overtaken by those who do. These new ideas, techniques and processes trigger changes in society and the economy that are often difficult to predict.
This creates a dilemma: we want more prosperity and wider opportunities for self-cultivation (personal fulfillment), yet we don’t want our security and culture to be disrupted. But we cannot have it both ways. Those who attempt to preserve their power over the social order while reaping the gains of free markets find their power dissolving before their eyes as unintended consequences of technological and social innovations disrupt their mechanisms of control.
Yet rejecting free markets also fails to preserve the power structure, for a citizenry denied the opportunity to prosper chafes under a Status Quo that enriches Elites and relegates the masses to stagnation and poverty.
The great irony of free-market capitalism is that the only way to establish an enduring security is to embrace innovation and adaptation, the very processes that generate short-term insecurity. Attempting to guarantee security leads to risk being distributed to others, or concentrated within the system itself. When the accumulated risk manifests, the system collapses.
In other words, without the fear of ruin (which is taken away by mandate by The Fed's actions – nothing shall fail), innovation and adaptation is stalled.The 2015 annual report from the Social Security Board of Trustees shows that the program’s disability component is in immediate trouble. Data from the latest report show that the disability fund will be depleted as soon as next year and unable to pay full benefits to beneficiaries.This week’s first chart uses that data to show total income, expenditures, and assets in the Social Security Disability Insurance (DI) trust fund going back to 1980. The chart shows that the trust fund has been operating under deficits since 2009, as shown by the decline in the trust fund (green bars) and ever-growing gap between the payments (red line) and receipts (blue line).
Those deficits have been financed by redeeming nonmarketable government securities that were accumulated over the years when the program was bringing in more revenue than was being paid out. The government spent the surpluses on other government programs and credited the fund with the securities. But because the securities are nonmarketable, the government had to use general federal revenues to “redeem” them once the DI fund started to run deficits in order to cover the difference. With the illusion of the DI trust fund about to disappear, policymakers have no choice but to finally confront the financial imbalance that actually began years ago.
And that means your retirement is going to be 'stolen'…
Given the $42 trillion funding gap in these programs, it’s mathematically impossible for Social Security to continue funding the national debt.
This reality puts the US government in rough spot.
It’s not like government spending is going down anytime soon; it already takes nearly 100% of tax revenue just to pay mandatory entitlements like Social Security, and interest on the debt.
Plus the government itself estimates that the national debt will hit $30 trillion within ten years.
Bottom line, they need more money. Lots of it. And there is perhaps no easier pool of cash to ‘borrow’ than Americans’ retirement savings.
$7.3 trillion in US IRA accounts is too large for them to ignore.
And finally – if the next generation has a better quality of life than the last, then why is this happening…if you’re a millennial, you’d be forgiven for being disillusioned with the American dream.
As we recently noted, compared to young Americans in 1986, you’re three times as likely to think the American dream is dead and buried. As WaPo notes, "young workers today are significantly more pessimistic about the possibility of success in America than their counterparts were in 1986, according to a new Fusion 2016 Issues poll – a shift that appears to reflect lingering damage from the Great Recession and more than a decade of wage stagnation for typical workers.”
It appears that time is drawing near as Charles Hugh-Smith recently noted, the mainstream is finally waking up to the future of the American Dream: downward mobility for all but the top 10% of households.
Downward mobility and social defeat lead to social depression. Here are the conditions that characterize social depression:
1. High expectations of endless rising prosperity have been instilled in generations of citizens as a birthright.
2. Part-time and unemployed people are marginalized, not just financially but socially.
3. Widening income/wealth disparity as those in the top 10% pull away from the shrinking middle class.
4. A systemic decline in social/economic mobility as it becomes increasingly difficult to move from dependence on the state (welfare) or one's parents to financial independence.
5. A widening disconnect between higher education and employment: a college/university degree no longer guarantees a stable, good-paying job.
6. A failure in the Status Quo institutions and mainstream media to recognize social recession as a reality.
7. A systemic failure of imagination within state and private-sector institutions on how to address social recession issues.
8. The abandonment of middle class aspirations by the generations ensnared by the social recession: young people no longer aspire to (or cannot afford) consumerist status symbols such as luxury autos or homeownership.
9. A generational abandonment of marriage, families and independent households as these are no longer affordable to those with part-time or unstable employment, i.e. what I have termed (following Jeremy Rifkin) the end of work.
10. A loss of hope in the young generations as a result of the above conditions.
If you don't think these apply, please check back in at the end of the year. We'll have a firmer grasp of social depression in December 2016… and so will Warren!
- Mind The Business Cycle
Counter-intuitively, the recent increases in core inflation are normal in the sequence of how a recession evolves. The typical business-cycle sequence is that the manufacturing sector weakens first, then employment and consumer spending, and lastly, inflation. In fact, it is often not until the recession is over that inflation begins to come down.
Inflation is the longest lagging indicator.
As recently as 2008, the FOMC’s hawks exploited this phenomena to argue for rate hikes (or actually raise rates in the ECB’s case), all while the economy was crumbling underneath. We covered that period here.
Those desperate for any bullish signs will certainly do the same now, but using current inflation to argue for rate hikes or the avoidance of a downturn is misplaced.
As we have pointed out here and here, manufacturing has clearly turned down in a way (3 independent indicators) that has not failed in calling an upcoming recession. We think that we have entered or will soon enter a full blown US recession.
Don’t be led astray by late-cycle rises in core inflation.
- David Stockman: The Good, Bad & Ugly Of Donald Trump
Submitted by David Stockman via Contra Corner blog,
America will need the Almighty’s unstinting favor if Donald Trump becomes our 45th President. Still, blessed be The Donald for running a demolition derby in the Republican primaries.
There is no hope for the future of capitalist prosperity and a free society at home and world peace abroad unless the Republican Party is destroyed. And, by golly, Trump may well accomplish the deed.
We need to be clear. There is no longer a Republican Party rooted in the main street highways and byways of America. What’s left of it is not really even the xenophobic, nativist, crypto-racist flotsam and jetsam of the populist right that Trump is successfully calling to political arms.
The fact is, the GOP has mutated into the Warfare State party. Nestled comfortably in the Imperial City, it operates a plethora of special interest rackets which underwrite its incumbents’ bi-annual electoral campaigns out in the provinces.
In the interim, GOP politicians idle their time in the capital and on foreign junkets conjuring and embellishing scary stories about terrorist threats and hostile regimes. So doing, they perceive enemies of the American Imperium to be stalking the planet everywhere and even creeping onto these exceptional shores.
In a word, as the party of the Warfare State, the GOP’s main business has become promoting the agenda, campaigns, machinations and glory of the Imperial City. Whenever its pro forma rhetoric about small government and fiscal prudence becomes inconvenient to the needs of the military/industrial/surveillance complex or the fund-raising requirements of its special interest rackets, the GOP’s putative conservative economics platform quickly becomes “inoperative” in the Nixonian vernacular.
There is no better prototype for the new GOP than Senators Lindsay Graham and John McCain. Their agenda consists exclusively of promoting and superintending Washington’s foreign projects, occupations, alliances and maneuvers. Cycling through Tel Aviv on a regular basis, showing up on the battlements of Kiev and lecturing the Chinese about maritime law in international waters, for example, they comically imitate the first century Roman Senators they fancy themselves to actually be.
Yet after decades in Washington they and most of their Senate colleagues have accomplished nothing that resembles the old Republican verities. In fact, during 2000-2006 when Republicans controlled the Congress and the White House, not a single welfare state program or agency was eliminated or even reformed, while vast new expansions of education, Medicare, agriculture, alternative energy subsides and much more were piled on the pre-existing heap of state.
Accordingly, the Federal spending share of GDP grew faster than at any time in history; and the $4 trillion worth of new national debt incurred during the eight Bush years smashed all prior peacetime records.
Even when the likes of Graham and McCain occasionally took time from their foreign adventures, it was not to lead a charge on shrinking the Welfare State or balancing the budget. McCain famously embraced the Wall Street bailouts in the fall of 2008, thereby ending once and for all GOP credibility on the sanctity of free markets and opposition to crony capitalism.
Graham was worse. He embraced the dubious science of global warming, the carbon tax and the vast expansion of the regulatory state that policy implies.
In all, the GOP establishment has become an integral part of the Washington ruling class. It has no passion——only lip service—–for the anti-Washington predicate on which the party was founded.
Once upon a time, by contrast, the GOP actually stood for free markets, fiscal rectitude, hard money and minimalist government. Calvin Coolidge did a pretty good job of it. And even the unfairly besmirched Warren G. Harding got us out of the foreign intervention business—-a path that the great Dwight D. Eisenhower pretty consistently hewed to under the far more challenging conditions of the cold war.
But these were sons of America’s old school interior—–Massachusetts, Ohio and Kansas. As temporary sojourners in Washington, they remained incredulous and chary of grand state missions either at home or abroad.
Harding called it returning to “normalcy”. Coolidge said Washington’s business was to get out of the way. And Ike actually shrank the Warfare state by one-third, ended Truman’s wars and started no new ones, resisted much of the Dulles’ brother’s interventionist agenda, balanced the budget and froze the New Deal as hard in place at he had the votes to achieve.
Today’s Republican crowd bears no resemblance. They live in the capital, fully embrace its projects and pretensions and visit the provinces as sparingly as possible. And that’s why The Donald has them so rattled, even petrified.
To be sure, there is much that is ugly, superficial and stupid about Donald Trump’s campaign platform, if you can call it that, or loose cannon oratory to be more exact. More on that below, but at the heart of his appeal are two propositions which strike terror in the hearts of the Imperial City’s GOP operatives.
To wit, he is loudly self-funding his own campaign and bombastically insisting that America is getting a bad deal everywhere in the world.
The first of these propositions explicitly tells the legions of K-Street lobbies to take a hike, thereby posing a mortal threat to the fund raising rackets which are the GOPs lifeblood. And while the “bad deal” abroad is superficially about NAFTA and our $500 billion trade deficit with China, it is really an attack on the American Imperium
The American people are sick and tired of the Lindsay Graham/John McCain/George Bush/neocon wars of intervention and occupation; and they resent the massive fiscal burdens of our outmoded but still far-flung alliances, forward bases and apparatus of security assistance and economic aid. They especially have no patience for the continued huge cost of our commitments to cold war relics like NATO, the stationing of troops in South Korea and the defense treaty with the incorrigible Japanese, who still blatantly rig their trade rules against American exports.
In short, The Donald is tapping a nationalist/isolationist impulse that runs deep among a weary and economically precarious main street public. He is clever enough to articulate it in the bombast of what sounds like a crude trade protectionism. Yet if Pat Buchanan were to re-write his speech, it would be more erudite and explicit about the folly of the American Imperium, but the message would be the same.
That’s why the War Party is so desperate, and why its last great hope is the bantam weight Senator from Florida. In truth, Marco Rubio is an obnoxious kid who wants to be President so he can play with guns, planes, ships and bombs. He is a pure creature of the Imperial City, even if at his young age he has idled there only since 2010.
Yet down to the last nuance of his insipid neocon worldview and monotonous recitation of the American Exceptionalism catechism, he might as well have been born in Washington of GS-16 parents, not Cuban refugees, raised as a Congressional page, and apprenticed to the Speaker of the US House rather than serving as the same in the backwaters of Tallahassee.
What Marco Rubio is all about is Warfare State republicanism. When he talks about restoring American Greatness it is through the agency of Imperial Washington. He has no kinship with Harding, Coolidge or Eisenhower. None of them were intent on searching the earth for monsters to destroy, as does Rubio in every single speech.
And make no mistake. Every time this naïve smart aleck chastises Obama for weak leadership and alleged failure to get the job forcefully done in Syria, Libya, Iraq, Yemen and countless elsewheres, the ghost of John Quincy Adams should be hollering in his grave. Stalking the globe for monsters to destroy is exactly what this wanna be little Napoléon is all about.
Likewise, none of the Republican greats would have vowed to tear-up the hard-won nuclear and trade deal with Iran on day one in office, as Rubio never stops declaiming. His hard core opposition to that breakthrough for peace and sanity, in fact, is a damning indictment.
The War Party in Washington and Tel Aviv has spent the last 30-years constructing a tissue of lies about the Iranian regime because both need an enemy in order to mobilize their domestic constituencies. The truth is that despite its theocratic rebuke of Imperial Washington after the bloody and thieving reign of the Shah was peacefully ended, the Iranians have never aspired to nuclear weapons, do not conduct a remote fraction of the terrorism inflicted by Washington’s drones, bombs and cruise missiles, and have never threatened the safety and security of the American people.
In denouncing the Iranian accord, Rubio is loudly embracing Washington’s 30-year tissue of lies about Iran and the destructive neocon foreign policy of which it is but one baleful extension.
So the good in The Donald at this juncture is that only he can stop Senator Marco Rubio. Only Trump’s brash bombast can finally displace the toxic neocon ideology that has mutated the GOP into the handmaiden of the Warfare State.
Indeed, Rubio is the very worst bag carrier for the Washington neocon establishment yet. Even George Bush could not be persuaded to bomb Tehran owing the thinness of the evidence and the awful implications of launching an outright genocide against an innocent Persian nation of 80 million.
Yet the strutting know-it-all boy Senator from Florida, who never even learned his way around the Senate but oozes with Napoleonic pretensions and delusions of grandeur, could readily do far worse.
That brings us to the bad of The Donald and what I called the Hairy Deal a few weeks back. Even as The Donald talks up a populist-sounding storm and rebukes Imperial Washington with the insolence it richly deserves, his predicate is fundamentally wrong. He insists that the nation’s ills stem from incompetent politicians making bad deals.
But that’s not right. The problem is bad policies and destructive ideas in the hands of Washington’s career politicians who are extremely competent at orchestrating the machinery of the state against the liberty and prosperity of its citizens.
Thus, in the hierarchy of things screaming out for radical change, the Donald’s favorite whipping boys——-NAFTA, China’s trade practices, illegal aliens and the danger of Muslim refugees——-don’t even rank. Nor do safeguarding the Second Amendment or building a horizontal version of Trump Towers on the Rio Grande.
The fact is, Trump has fashioned his platform by opportunistically scratching the most fearful and bigoted itches roiling the electorate. He has absolutely no semblance of a coherent program——or even an incoherent one for that matter.
Instead, his pitch is comprised of pure bombast and bile. It’s based on the exceedingly dangerous proposition that what Washington needs is a smart deal maker who can make the government agencies and bureaus run better at home and foreign leaders run for cover abroad.
You could call it the Man-on-the-White Horse syndrome, and pity the horse.
But don’t pity the nation. Sadly, the people are getting what they deserve. They have allowed both political parties, the agencies of their democratic right to rule, to betray them with impunity.
And that just as true of the Democrat party as the GOP. There is a dearth of new jobs in America today, for example, because the Democratic Party protects like a junkyard dog the single biggest agency of job destruction in the land.
To wit, the so-called foundation labor law in the form of the social security payroll tax, minimum wage and the NLRB. These relics of the 1930s New Deal remain the litmus tests for the Democrats’ own brand of special interest racketeering——that is, kowtowing to the unions.
But in a global market that can mobilize labor from every rice paddy and remote hamlet on the planet, the protectionism afforded US industrial unions by the NLRB imperils the few manufacturing jobs that remain. At the same time, the minimum wage stops new service sector jobs from being born, while the myth of social insurance—including its second generation off-spring in Obamacare——always and everywhere pushes employers to artificially conserve labor and substitute capital and technology.
Stated differently, the stupidest thing that Washington can do to a $40,000 per year job in an economy where labor is drastically over-priced and uncompetitive with much of the world is to extract upwards of $17,000 worth of payroll taxes and Obamacare employer mandates before workers get a red cent of take home pay.
And, no, the solution is not to abolish social security and dump grandma in the snow. Instead, if the community organizer who stumbled into the White House on the strength of his anti-war rhetoric had not been wedded to the Democrat’s mindless ideology of “social insurance”, he could have abolished the $1.2 trillion per year payroll tax entirely—–the sledge hammer that beats down upon worker living standards day in and day out—— and replaced it with a 10% consumption tax.
Needless to say, in a nation where only 123 million of an adult population of 252 million work full time, we could do with less consumption and more labor hours and production—-so we should tax the former, not the latter. Indeed, a nation which is getting older, fatter and dumber while watching television or trolling the internet eight hours per day, must do less shopping and keeping up with the Kardashians and more work——or it will end up in social and fiscal bankruptcy within a decade or so.
By that token, the giant wedge on labor imposed by social insurance could be further alleviated by the imposition of a stringent means test. Precious few retirees has actually earned through lifetime tax contributions anything close to their combined $450,000 average package of social security and medicare, anyway.
In fact, taxing the wealthy duffers who live on Florida’s golf courses and collect $50,000 per year in medicare and social security benefits should have been a no brainer for the big thinker now incumbent in the White House. But when it comes to feeding the organized labor rackets, thinking has nothing to do with it.
At the end of the day, America is on a slippery slope toward failure because the Warfare State and the Welfare State are suffocating what was once a prosperous capitalism and a resilient free society lightly intruded upon by the machinery of state.
But now both parties have become handmaidens of the state. Domiciled in the Imperial City, they have long ago betrayed their founding principles in favor of incumbency, self-importance and operating the special interest rackets that keep them in office.
Maybe The Donald’s startling but palpable momentum toward the White House will have one saving grace. His relentless campaign against the “politicians” and the Washington money rackets may end up knocking the hypocritical stuffings out of both parties.
There could be worse fates among the present alternatives.
- Caption Contest: Yellen G20 Edition
The most important officials in the financial universe gathered in Shanghai this week for the G-20 summit.
Despite the fact the the group failed to devise and announce a coordinated policy response to address stubbornly low global growth, subdued inflation, and market volatility, everyone was in good spirits.
Well, almost everyone…
- Day Of Reckoning Imminent
Submitted by EconomicPrism.com's MN Gordon (annotated by Acting-Man.com's Pater Tenebrarum),
Fudging Numbers
It all seems so systematic, arranged, and orderly. Sixty seconds make a minute, 60 minutes make an hour, 24 hours make a day, and one day equals one complete rotation of the planet earth. Roughly every 30 days the moon orbits the earth – which is one month. Then every 12 months the earth orbits the sun – which is one year. So far so good…right?
Oldish German calendar.
But here’s where the nice and neat order of it all breaks down. For if you try to measure one of earth’s orbits of the sun in days it’s not so divinely tidy. For it takes 365 days plus an inconvenient 6 hours to fully complete the cycle. Nonetheless, we don’t let these inconvenient 6 hours hamper our perfection.
We’re humans, after all. We innovate, invent, and make the world in our image. So when the numbers don’t jive, we do what must be done. We fudge them. We create an off balance account, we concoct a new theory, we contrive negative interest rate policy…and we invent a leap year.
This coming Monday is the day the books must be reckoned. Peering into our off balance account we find 24 accrued hours that must be tallied up and rectified. Consequently, we must have a day of correction for the disorder of the last four years. We must resynchronize the calendar year with the astronomical year. Moreover, we must reground our measuring system with its baseline – its reference point.
Did you really think we’d let you get away with that calendar-fudging, oh Julius? February 29? Seriously?
Without this resynchronization, what’s a year really measuring? Perhaps, the calendar wouldn’t get too off kilter for a decade or two. But in just 28-years the calendar would be off by an entire week. Not long after that, the calendar would be debased to nothing more than etched lines inside a cave dwellers grotto.
Helicopter Drops
So goes the dollar – or any paper money – when it’s not backed by gold or some other commodity that can’t be created at will. For without a stable base to hold its supply in check, what’s a dollar anyway?
It’s abstract, indefinite, and arbitrary. It can be created out of thin air at the whims of the Federal Reserve. A pocket full of dollars one day and you can buy the things you want and need. On the next day these same dollars can revert to their intrinsic value…fire tinder or toilet paper.
Gold to paper currency conversion once limited the Federal Reserve’s money creation games. But that was before the U.S. severed the dollar’s relationship to gold and commenced the dollar reserve standard. Prior to 1971, a foreign bank could exchange $35 with the U.S. Treasury for an ounce of gold. After that, when foreign banks handed the U.S. Treasury $35, they received $35 in exchange.
Nixon announces that he will “temporarily” default on the convertibility of the dollar into gold. One cannot show this video often enough, because it is such an excellent example of a government official lying as soon as he opens his mouth, with every single sentence he utters. It also betrays a frightening degree of economic ignorance.
The gold default and the debtberg… Nixon has really shown those speculators what’s what! – click to enlarge.
Unlike gold, which has no debt obligation or counterparty risk, dollars can expire worthless when their promissory obligation is defaulted on. Alternatively, they can be inflated to nothing when a desperate Federal Reserve moves to dropping suitcases of money from helicopters over major urban centers.
If this helicopter drop concept is new to you let me assure you that it is no joke. In fact, this is what former Federal Reserve Chairman, Ben S, Bernanke, said the Fed would do in a time of financial crisis. He laid it out very clearly in his November 21, 2002 speech, Deflation: Making Sure “It” Doesn’t Happen Here. Then as Federal Reserve Governor (now former Chairman), Bernanke had the following to say…
“The U.S. Government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. Government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the price in dollars of those goods and services.”
Later in this same speech, Bernanke made reference to a “helicopter drop,” alluding to a central banker hovering in a helicopter – dropping suitcases full of money to individuals.
Prosperity through the printing press – a proven concept since John Law!Day of Reckoning Imminent
Unfortunately, that day is approaching. For without the anchor of a gold standard, financial imbalances and debt creation will continue to grow to commanding heights. Inflation, resulting in an implied default, will likely be more politically expedient than an outright default.
In the meantime, even if the dollar isn’t worthless – yet – its incessant variability is an incessant problem. How does one save, invest, and accumulate wealth when the dollar’s monetary base is continuously inflated?
When a carpenter measures the length of a cabinet as being 3 feet, he’s certain that the length measured as 3 feet will always be 3 feet. No more. No less. To the contrary, when a shopkeeper prices a 24-ounce loaf of bread at $3.93, he’s not certain that the value of one loaf of bread will always be equal to $3.93. In fact, in 1971 – the year the dollar’s last tie with gold was severed – he would’ve valued three 20-ounce loaves of bread equal to $0.89.
Has the usefulness of a loaf of bread, on a per ounce basis, really changed 1006 percent? Has its quality somehow become 1006 percent better? Of course not. Rather, the baseline used to measure the value of a loaf of bread has been twisted and contorted like a politician’s spine. The quantity of dollars in existence has increased. Accordingly, the unit value of the dollar has decreased.
Broad true US money supply TMS-2 – the era of Bernanke and Yellen has seen the amount of money in the economy rise be nearly 125%. Let’s call it “the courage to print” – click to enlarge.
Indeed, prices of individual goods and services will fluctuate to account for natural changes in supply and demand. But when money is anchored to a stable reference point, like during the classical gold standard of the 19th century, overall prices will by and large be stable.
With respect to recording the passage of time, leap year’s necessary, vital, and appropriate, for preserving the calendar year’s conformity with its baseline. So, too, today’s money needs a stable base to derive its meaning and value from.
Without such a reference point, we’ll just continue to spin out of orbit. Money will continue to accrue more zeros at the end of everything it measures. Yet what good’s a $100 dollar bill if it only buys you what a $1 dollar bill did before?
So enjoy Monday’s imminent day of reckoning. The time was there all along…it just needed to be reconciled. Alas, we have a startling suspicion that reckoning the distortions of the dollar reserve standard will not be so amiable. Though it’s necessary, all the same.
Helicopter Ben: He sure earned his nickname. The bill for all the fun is yet to be presented in full, but presented it will be.
- Mind The Non-GAAP: Real S&P Earnings Are The Lowest Since 2010
We have previously documented how, with the fourth quarter earnings season almost completed, Q4 EPS are poised to drop by 3.3% Y/Y, making this the third consecutive quarter of declining year over year earnings, in other words an earnings recession and a half.
And with this quarter’s earnings almost done, attention shifts to Q1 2016 where things are going from great to bad to absolutely abysmal. Here, it appears that Wall Street was just a “tad overoptimistic” on first quarter’s earnings, as consensus has imploded from a +5% expected increase in YoY EPS as of September 25, to a -7.4% plunge according to Factset (and even worse according to Bloomberg).
The companies have validated this implosion in earnings: for Q1 88 companies have issued negative EPS guidance and 22 companies have issued positive EPS guidance. Additionally it’s not just energy: in Q1 the following sectors are expected to post annual EPS declines: Energy (-92.8%), Materials (-19.5%), Industrials (-10.9%), Info Tech (-7.3%), Financials (-4.3%), Consumer Staples (-2.6%), and Utilities (-0.2%). In fact, only three of ten sectors are expected to see their EPS rise: Healthcare, Consumer Discretionary and Telecom Services.
SocGen’s Andrew Lapthorne had some thoughts on this last week saying that “forward earnings expectations are now falling fast, so whilst MSCI World has fallen by around 15% since May last year, 2016 EPS levels are now down 12% over the same period. The poor profit reality is now catching up with weak equity prices.”
What seems to be happening is that the Q4 reporting season is leading to significant cuts to 2016 expectations. Whilst similar effects occurred last year, this is somewhat of a departure from the past when year-ahead forecasts tended to be cut steadily throughout the year. It would appear the perennial bullishness in forward consensus numbers is so out of kilter with economic reality that companies are moving earlier to correct the anomaly to the extent the consensus growth forecast for this year is already fast approaching zero.
Whilst a big part of the downgrade is via the Oil & Gas sector, [there are] big cuts in an ever wider selection of stocks and sectors. Global 2016 EPS forecasts were cut by 3.6% in over the last four weeks or so: we make that the worst monthly cuts to forward estimates since early 2009.
But while near-term forward EPS expectations have been crashing, for now what is keeping full year 2016 EPS up (which have tumbled from +4.3% at the start of the year to just 1.9%) is a hockey stick in Q3 and Q4 EPS expectations that would make the butt of all forecast jokes, the IMF, proud: somehow consensus expects the growth rates for Q3 2016 and Q4 2016 to be +4.7% and +9.4%.
It’s not going to happen.
However, what caught our attention is not the ongoing slaughter in corporate profitability which in any other world would be a sufficient condition to confirm an economic recession; it is what Warren Buffett said earlier about non-GAAP earnings which he blasted in his annual letter:
… it has become common for managers to tell their owners to ignore certain expense items that are all too real. “Stock-based compensation” is the most egregious example. The very name says it all: “compensation.” If compensation isn’t an expense, what is it? And, if real and recurring expenses don’t belong in the calculation of earnings, where in the world do they belong?
Wall Street analysts often play their part in this charade, too, parroting the phony, compensation-ignoring “earnings” figures fed them by managements. Maybe the offending analysts don’t know any better. Or maybe they fear losing “access” to management. Or maybe they are cynical, telling themselves that since everyone else is playing the game, why shouldn’t they go along with it. Whatever their reasoning, these analysts are guilty of propagating misleading numbers that can deceive investors…. When CEOs or investment bankers tout pre-depreciation figures such as EBITDA as a valuation guide, watch their noses lengthen while they speak.
We also decided to not play part in this charade, and took a look at S&P500 earnings on a GAAP and non-GAAP basis. After all, there are those who still say the market is cheap despite what is an earnings bloodbath around the globe.
And indeed, even the unprecedented decline in earnings, non-GAAP 2015 EPS for the S&P500 are poised to print 118, which at an S&P of 1940 implies a P/E multiple of 16.5x. Hardly exorbitant.
And then one looks at the actual, GAAP earnings. What one finds is absolutely shocking.
If using I/B/E/S GAAP earnings, which exclude the barrage of pro-forma write offs, addbacks, “non-recurring items” and countless other “misleading numbers that can deceive investors”, what one gets is a true shocker: instead of 118 in LTM EPS for the S&P 500 (shown in red in the chart below) the true, Warren Buffett-approved number (shown in blue in the chart bellow) is a paltry 91.5! This is also the lowest S&P500 GAAP earnings per share since 2010.
Needless to say, a GAAP P/E above 21 is the highest since the financial crisis.
So what is going on here? The chart below showing the amount of EPS “writeoffs” and pro-forma adjustments should explain it. In 2015, 26.5 of the total non-GAAP in S&P earnings, is the result of accounting gimmicks.
Just so there is no confusion: the GAAP to non-GAAP adjustment has nothing to do with the overall deterioration in corporate revenues and declining profitability. The two are parallel, because while both non-GAAP and GAAP EPS are clearly declining, what Wall Street is doing is using every possible contrivance to make the descent appear far less disastrous.
Meanwhile, the addbacks to the S&P’s EPS are now the highest since the 2008 financial crisis, and in nominal dollar terms, are already an all time high. Consider that the market cap of the S&P is $17.7 trillion – this means that using the non-GAAP P/E of 16.5x one gets S&P 2015 earnings of $1.1 trillion, while real, actual earnings amount to just $830 billion. In other words, a record quarter of a trillion dollars in S&P “earnings” is in the form of pro-forma addbacks and other writeoffs which are only considered earnings in the most ridiculous of Wall Street worlds, one which even Warren Buffett is mocking.
This also means that 22.5% of the S&P “value” is the result of “misleading numbers that can deceive investors” in the words of Warren Buffett.
Incidentally, the last time the difference between GAAP and non-GAAP was this vast, the financial system collapsed and had to be rebooted with trillions in taxpayer bailouts at which point GAAP and non-GAAP were roughly identical.
So what does this all mean?
Simple: if using GAAP earnings, and applying the market’s already generous 16.5x non-GAAP P/E, one gets a fair value of the S&P 500 of 1,500, or 25% lower than the recent prints in the S&P 500.
Finally, keep in mind that all of this also excludes the reality that futures earnings, both GAAP and non-GAAP, in Q3 and Q4 are about to be reduced drastically lower, further reducing the E in P/E, and dragging the overall market lower.
What can possibly short-circuit this positive feedback loop which leads to ever lower earnings, and increasingly lower prices? Two years ago we would have said another major central bank intervention or trillions in new Chinese loans. However, with both of these loopholes largely played out – China’s debt/GDP of 350% means that the entire nation is on the brink of a Minsky Moment collapse at any, well, moment, while recent central bank intervention have only led to even greater market volatility – this time around we don’t know what the true answer is. In fact, it just may be that this time around the market will actually have to crash, like it did in 2008 when the GAAP to non-GAAP spread was just as vast, for the great Wall Street “phony earnings” game to start from scratch.
- This Is Why So Many Political Pundits Seem To Love Hillary Clinton
Submitted by Claire Bernish via TheAntiMedia.org,
So-called political pundits are an ubiquitous sight on mainstream news, particularly during the run-up to a presidential campaign — but their ties to the candidates they analyze remain obfuscated, downplayed, or altogether left out by host networks.
As The Intercept’s Lee Fang reported, “Several consultants who work at firms retained by Hillary Clinton’s campaign and her affiliated Super PACs appear regularly on the major television networks, frequently touting Clinton.”
This cozy bedfellow relationship might not be an issue if the extent of their involvement with the candidates’ campaigns were forthrightly revealed by the networks. Instead, the failure by omission not only muddies the line between impartial analysis and campaign propaganda, it also marks a failure of journalistic integrity.
“Journalism 101 teaches that reporters and TV news hosts must properly identify their sources and analysts,” Ithaca College associate professor of journalism, Jeff Cohen, told Fang. The Intercept’s requests for comment from NBC, CBS, CNN, and ABC News were not answered.
Precision Strategies, co-founded by Stephanie Cutter, has been hired by Hillary Clinton’s campaign, which has paid the firm $120,049 since June 2015 to perform “digital consulting.” Cutter, meanwhile, made appearances on multiple networks without so much as a hint of her current association with Clinton’s campaign. Instead, she is often introduced as a former campaign official for President Obama. Such association with a campaign doesn’t exactly lend itself to unbiased opinion.
“I think that Hillary Clinton has done everything right,” Cutter told NBC’s Meet the Press prior to the first presidential primaries on January 17. “She has run a good campaign. She has outperformed in debates. She’s raised money. She’s got a great ground game.”
It stands to reason the viewing audience had no knowledge of Cutter’s firm’s affiliation with Clinton’s campaign — and her virtual unavoidable bias in such a proclamation. But had they been aware, perhaps viewers would have been better positioned to judge for themselves whether or not that statement rang true.
As Fang noted, Cutter had previously appeared on Meet the Press, also without any indication by hosts of her association with the Clinton campaign — but also proffering similarly pro-Hillary statements. On ABC News’ This Week, Cutter appeared as a Clinton “supporter,” and on CNN, she was called a “Democratic strategist” — but those networks failed to divulge the direct involvement of Precision Strategies with Clinton’s campaign.
Maria Cardona, who contributes to CNN, has long served as a partner with lobbying firm, the Dewey Square Group. Dewey Square partners have not only contributed and fundraised for the Clinton campaign, the firm has been paid for consulting work for Hillary’s Super PACs. Cardona, Fang noted, contributed the individual maximum to the Clinton campaign — and is a DNC superdelegate who “pledged support for Clinton last year, before any of the primary elections.”
Again, Cardona is most often introduced or presents herself on CNN’s various networks as “a neutral Democratic strategist or CNN contributor,” and occasionally as a Clinton “supporter” — but not once, The Intercept found, as a direct campaign contributor or as a Dewey Square paid campaign consultant.
Hari Sevugan and Lynda Tran are directly involved, through 270 Strategies, with Hillary Clinton’s campaign, as well. Tran co-founded 270 Strategies, whose website proudly boasts of its consulting advice to her campaign; and, as Fang explained, the firm was paid $75,200 by one of Hillary’s Super PACs — and $301,621 by a second. Sevugan and Tran make regular appearances on MSNBC and CBS News — without any divulgement about the nature of their affiliation with the Hillary camp, of course — where they often downplay Senator Bernie Sanders legitimate challenges to Clinton’s popularity.
Do you still think the game isn’t rigged?
After Fang’s requests for comment from both CBS and 270 Strategies went unanswered, Tran’s appearance on CBS News on Saturday came with an even more telling introduction than usual:
“Before we start, we should disclose that several employees of 270 Strategies do some work for the Hillary Clinton campaign, however, Lynda, you do not.”
- Markets At Risk As "Tepid, Uninspiring" G20 Proves Investor Hopes Were "Pure Fantasy"
Anyone hoping this week’s G-20 meeting would yield some manner of “Shanghai Accord” to revive sluggish global growth, pull the global economy out of the deflationary doldrums and calm jittery markets that have seen harrowing bouts of volatility in the first two months of the year are disappointed on Saturday.
The joint communique issued by policymakers at the end of the two-day summit is bland and generic, with officials parroting vacuous promises to avoid competitive currency devaluations and maintain monetary policies aimed at supporting economic activity and price stability.
Officials pledged to “consult closely” on FX markets, a reference presumably to China’s “surprise” August 11 deval and the PBoC’s move in December to adopt a trade weighted basket as a reference point for the RMB, a move that telegraphed lots of downside for the currency.
The statement also “acknowledges” the fact that geopolitical risks abound and as Bloomberg noted this morning, “officials added a potential ‘Brexit’ to its long worry list in the communique.”
“That’s a win for Chancellor of the Exchequer George Osborne, who had sought to rally international finance chiefs behind the campaign to keep Britain in the European Union,” Bloomberg goes on to point out.
“Downside risks and vulnerabilities have risen,” due to volatile capital flows and slumping commodities but – and this was a critical passage – “monetary policy alone cannot lead to balanced growth.”
What?! We thought counter-cyclical Keynesian tinkering was the magic elixir. A cure-all that smooths business cycles and creates demand out of thin air. Now you’re telling us it “can’t lead to balanced growth” and implicitly that Paul Krugman is a snake oil salesman? This can’t be.
(Janet is not amused)
“The global recovery continues, but it remains uneven and falls short of our ambition for strong, sustainable and balanced growth,” the statment continues, in a rather dour assessment of the economic landscape. “While recognising these challenges, we nevertheless judge that the magnitude of recent market volatility has not reflected the underlying fundamentals of the global economy,” officials added.
Right. If markets were “reflecting the underlying fundamentals” of this global deflationary trainwreck, things would probably be even more volatile.
Predictably, everyone called on fiscal policy to save the day, in what amounts to a tacit admission that central banks have failed. “Countries will use fiscal policy flexibly to strengthen growth, job creation and confidence, while enhancing resilience and ensuring debt as a share of GDP is on a sustainable path,” the statement reads.
So countries will somehow adopt expansionary fiscal policies without resorting to deficit financing via debt sales. So, magic. Got it.
Long story short, there is no “Shanghai Accord” akin to the 1985 Plaza Accord between the United States, France, West Germany, Japan, and the United Kingdom, which agreed to weaken the USD to shore up America’s trade deficit and boost economic growth. All we have here is a generic statement and empty promises.
“Investor hopes of coordinated policy actions proved to be pure fantasy,” said TCW’s David Loevinger, a former China specialist at the U.S. Treasury. “It’s every country for themselves.”
Yes it is which means the great yuan devaluation will continue unabated as will the competitive easing.
This isn’t a good thing for markets. As Citi’s Steve Englander wrote yesterday, “they won’t save the world but probably convince investors that global policymakers are sufficiently on the same page to add to global confidence.”
Well guess what? They didn’t. We close with the likely read through for markets from Citi’s Brent Donnelly:
The G20 draft communiqué looks like it is out and it seems pretty tepid / uninspiring. So the relevant question now is whether or not this 160-handle rally in SPX (!) is partially attributable to shorts squaring up ahead of the G20 meeting. I would say the rally in the past two days has had extra momentum because of G20 and now shorts should be looking to reestablish—so I think stocks should trade weak from here into Monday.
- Citi Can't Believe How "Attractive" This Trade Is
Three days ago in “Canary, Meet Coal Mine: These Are The Tranches Where The CLO 2.0 Meltdown Begins,” we revealed precisely where the rot is starting to show in the CLO market which, you’re reminded, is starting to unravel amid a string of downgrades in HY energy and a general aversion to junk as the US heads into a default cycle.
Certain buckets have been hit harder than others with the single-Bs plunging nearly 21% and the BBs dropping 9.2%. Broadly speaking, new issue spreads for BBs and Bs have blown out by 225 bps and 350 bps, respectively over the past 12 months and both S&P and Moody’s recently announced their first downgrades of post-crisis US CLO tranches.
In the crosshairs are deals from Silvermine that have double-digit exposure to US O&G.
As we noted on Thursday, there are other factors pressuring the market including the 5% risk retention rule, which requires managers to retain a stake in the first-loss tranche. That could be a game changer for managers without extremely deep pockets and could well weigh further on supply, which is already collapsing.
Of course if you think you’ve got a nose for picking credits there may be an opportunity for you in the equity tranche, Morgan Stanley thinks. “We reiterate our view that the levels of distress in the US market may create ‘option-like’ payoffs in CLO equity in the secondary market, especially in deals by managers who are better ‘credit pickers,’” the bank wrote.
Well now, Citi is out with a fresh look at the space and apparently, they too think there may be some opportunities amid the turmoil. There are some useful observations in Citi’s note about forced Mezz selling amid margin calls in 2.0 BBs and we’ll profile that later this evening, but for now consider the following screengrab from the title of Citi’s new note and the excerpt from a Retuers piece out last month.
From Reuters: “Citigroup retained its market-leading position at the top of the US Collateralized Loan Obligation (CLO) arranger league table in 2015 for volume and deal count.”
In case the implication there isn’t clear enough, allow us to spell it out. First, have a look at CLO 2.0 mezz performance:
Clearly, that’s the absolute last place you want to be right now and yet the biggest CLO arranger on Wall Street is apparently suggesting that these tranches are so enticing, that the bank’s structured credit team is having a hard time coming to terms with the fact that they are about to get “even more attractive.”
Trading accordingly.
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