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IMF Cuts US GDP From 2.0% To 1.7% As US Retail Sales Forecast Slashed From 4.1% To 3.6%: Winter Blamed

This is what happens when a priced to perfection global economy (and well beyond perfection based on the S&P 500) runs into the utterly and completely unpredictable and unforseeable "harsh winter weather."

First, the IMF just cut (again) its forecast for US GDP, this time from 2.0% to the consensus-estimate 1.7%. The IMF cited the 1Q contraction, which from a +3% original estimate ended up being that, just with a minus sign. It also says second-half growth to accelerate... because it must!

  • Some other brilliant points from the IMF:
  • IMF staff: U.S. to reach full employment “only by end-2017”
  • “The economy is expected to reach full employment only by end-2017 and inflationary pressures are expected to remain muted”
  • “If true, policy rates could afford to stay at zero for longer than the mid-2015 date currently foreseen by markets”
  • Says job market “reasonably healthy,” wages should rise slowly

Or not at all.

And while IMF just slashed its 2014 forecast, it kept its growth forecast steady at 3%. Tomorrow the IMF releases its entire World Economic Outlook quarterly pamphlet which has been the source of so much amusement around these parts. We can't wait to update it for tomorrow's latest and greatest growth slashing.

And just so the IMF doesn't appear alone as the only idiot who, for the 5th year in a row, issued an optimistic forecast about US growth which is crashing before its eyes, here is the National Retail Federation which also just cut its 2014 retail sales growth outlook from 4.1% to 3.6%.

The National Retail Federation today lowered its retail sales forecast for 2014 because of slow growth recorded during the first half of the year, but said sales are expected to grow significantly faster over the next five months. NRF forecasted in January that retail sales would grow 4.1 percent in 2014 over 2013, but today’s revision lowers the forecast to 3.6 percent.


NRF calculated that sales grew 2.9 percent during the first half of the year and are expected to grow at least 3.9 percent during the second half. The numbers include general retail sales and non-store sales, and exclude automobiles, gasoline stations, and restaurants.


“No retailer was immune to the doldrums witnessed during the first quarter, and as a result, the year’s growth trajectory was impacted,” said NRF President and CEO Matthew Shay. “That said, there is plenty of evidence that the second half of the year will be better for the industry as consumers begin to feel more optimistic about their spending decisions.


“And though we maintain realistic expectations of retail sales growth in 2014, we are optimistic that the chances for a stronger economy still exist,” continued Shay.


“The severe weather and other factors we experienced earlier this year have taken their toll on retail, but most of those problems are behind us,” said NRF Chief Economist Jack Kleinhenz. “A second look at our forecast shifted our expectations slightly, but it’s important to note that the outlook is positive. Sales are growing and we expect them to continue at a moderate pace.”


In this month’s Monthly Economic Review, Kleinhenz noted, “…one of the worst winters in recent memory kept shoppers home during the first quarter, and weak numbers for real estate, inventories and exports continued to hamper the economy through the second quarter. However, employment has grown at its strongest pace since 2005, business and consumer confidence have edged higher, manufacturing activity has expanded and inflation pressures remain tame, improving expectations for the second and third quarters.”

And while we enjoy the "it's the weather's fault" joke as much as the next one, can we please move on: said joke hasn't been funny in about 5 months now.

Putin Recalls State Duma From Vacation, "Planning Something" On Ukraine Situation

In a somewhat disconcerting move, Russian President Vladimir Putin has recalled The State Duma from a planned vacation to participate in an unscheduled meeting because of the situation in eastern Ukraine. As Ukrinform reports, sources confirm "Something is being planned, because many deputies come, probably for a quorum." Rumors are spreading that Putin is set to issue Kiev an ultimatum over recognizing separatists or face military intervention.


As Ukrinform reports,

State Duma deputies, who are currently on a planned vacation, urgently come to Moscow to participate in an unscheduled meeting because of the situation in eastern Ukraine, a source in the State Duma told Ukrinform on Wednesday.


"Maybe something will happen tomorrow. Now this issue is being solved. Something is being planned, because many deputies come, probably for a quorum. Many deputies arrive... and today they already have to be in Moscow," he said.


According to the source, it is still unknown which document is to be considered by Russian deputies.


According to the source, it is clear only that Russia's top-ranking officials "planned something" on the situation in the east of Ukraine if they plan to hold an unscheduled meeting of the State Duma.

It appears Putin is preparing to issue an ultimatum to Kiev (as reports via Google Translate)

Russian attempt to legalize the terrorists as a political entity


Security Council in Moscow lasted until now and almost ended at 21.00 on Kiev.


This said a source close to the Russian State Duma.


According to the information tomorrow, July 23, probably held a joint meeting of both houses of the Russian parliament - the Federation Council on which President Vladimir Putin "may declare any serious initiative."


According to the source , tonight Ukrainian leadership will probably be an ultimatum, demanding a ceasefire and start negotiations in the Ukraine-Russia-"DNR" / "LC".


Thus, Russia will try to legitimize the terrorists as a political entity.


If Ukraine does not agree Putin, according to the interlocutor, may decide on entering the Russian troops in Ukraine under the guise of "peacekeepers."


As reported, after the meeting of the EU Council has learned that the European Union could recognize so-called "DNR" and "LC" terrorist organizations.

*  *  *

Given that Poroshenko has demanded the separatists be labeled "terrorists" under international law, we suspect this is one demand they cannot fulfil... and of course, Ukraine is claiming that the 2 fighter jets shoit down this morning were shot down by and from Russia... sure, with the whole world watching, Putin would do that?

Why a Single Bail-In For a Country Few Can Find On a Globe Matters to EVERYONE


The Cyprus bank bail-in committed of early 2013 may seem like small deal to most US investors.


After all, most Americans probably couldn’t even find Cyprus on a globe. And with the mainstream media spreading the narrative that the Cyprus bail-in was a one-time event that was meant to support the bank while punishing tax dodging crooks, 99% of folks won’t think twice about the situation.


However, the reality of what happened in Cyprus is a far different matter. And the reason that this reality has not been featured as headline news is because doing so would reveal the following:


1)   European politicians are both corrupt and incompetent.

2)   Those meant to assess the risk of any financial institutions don’t know what they’re talking about.

3)   The average citizen will be screwed while politically connected insiders will be given the means to circumvent the law.


Let’s assess these issues one by one.


First off, the Cyprus bank “bail-in” was not some sudden event. The country first asked for a bail-out in JUNE 2012. Here’s the timeline.


·      June 25, 2012: Cyprus formally requests a bailout from the EU.

·      November 24, 2012: Cyprus announces it has reached an agreement with the EU the bailout process once Cyprus banks are examined by EU officials (ballpark estimate of capital needed is €17.5 billion).


During the period of late June 2012 until November 2012, Cyprus’s problems were allegedly being assessed and nothing more. Throughout this period, NO ONE in a position of significant political or financial power suggested to Cypriots or anyone else who had money in the Cyprus banks that their money would be STOLEN.


Instead, numerous bureaucrats came out to assure the public that this situation was under control and that the risks to the Cyprus banks would be carefully assessed.


Then, in the span of a single week, a bank holiday was declared, bank accounts were frozen, and deposits were stolen.


Here’s the specific sequence of events:


·      March 16 2013: Cyprus announces the terms of its bail-in: a 6.75% confiscation of accounts under €100,000 and 9.9% for accounts larger than €100,000… a bank holiday is announced.

·      March 17 2013: emergency session of Parliament to vote on bailout/bail-in is postponed.

·      March 18 2013: Bank holiday extended until March 21 2013.

·      March 19 2013: Cyprus parliament rejects bail-in bill.

·      March 20 2013: Bank holiday extended until March 26 2013.

·      March 24 2013: Cash limits of €100 in withdrawals begin for largest banks in Cyprus.

·      March 25 2013: Bail-in deal agreed upon. Those depositors with over €100,000 either lose 40% of their money (Bank of Cyprus) or lose 60% (Laiki).


The most critical item to note about this timeline is that while the general public was assured that all was well, politically connected insiders were warned to get their money OUT OF THE BANKS


One hundred and thirty-two companies reportedly had inside knowledge of Cyprus’ impending levy tax as they withdrew deposits worth US$916 million in the run-up to the bailout deal.


The companies withdrew their savings in the two week period (between March 1 to March 15) leading up to the rescue deal that enforced heavy losses on wealthy depositors in Cypriot banks, according to Greek newspaper Proto Thema.


Shortly after this the EU ministers and the IMF hammered out a 10-billion-euro (US$13 billion) bailout agreement with Cyprus, which included a one-time tax on deposits held in Cypriot banks.


In the meantime all banks in Cyprus temporarily froze the amounts required to pay the tax on their clients’ deposits and stopped all transactions while the government negotiated the details of the agreement.


The companies on the list withdrew their deposits in euro, USD, GBP and Russian rubles and later transferred to banks outside of Cyprus. The total amount withdrawn comes to US$916 million.


So, nearly $1 billion worth of insider money escaped the Cyprus confiscation scheme. NONE of it was retiree savings. Ordinary individuals got screwed while politically connected insiders were able to get out scot-free.


Now what’s truly amazing is that the Cyprus bank that collapsed was actually AWARDED BEST BANK for Private Banking by EUROMONEY Magazine. What was hailed as the BEST bank for private banking ended up being totally insolvent with 47% of deposits above €100,000 being converted into bank equity.


Bank of Cyprus has been named as the Best Bank for Private Banking in Cyprus, by the internationally acclaimed magazine EUROMONEY


Bank of Cyprus Private Banking ranked first among Cypriot, Greek and other international financial institutions operating in Cyprus in the Private Banking sector. This accolade classifies the Bank among the leading financial institutions offering Private Banking services and is yet another important international distinction for the Bank of Cyprus Group…


This recognition by EUROMONEY is ever more important in today’s macroeconomic environment as it reaffirms the Bank’s ability to safely and successfully respond to its clients’ financial needs and emphasizes its clients’ loyalty and trust.


Now, the political and financial elite in Cyprus and the EU will argue that bank deposits were not STOLEN because they were converted into equity in the bank at a rate of €1 per share. But being forced to change cold hard cash for equity in an insolvent bank is hardly cause for excitement.


Indeed, the market, now well aware that the Bank of Cyprus is insolvent, has been dumping shares. So those depositors whose deposits were converted into equity are watching their savings evaporate as shares dive.


Moreover, it’s not as though they were given the means to get their other deposits out of the bank:


Last year, thousands of customers with money in Bank of Cyprus, including many British and Russians, became unwilling shareholders in the lender when their deposits were turned into equity as part of a controversial €10bn emergency rescue.


Depositors saw 47.5 per cent of their money above a €100,000 threshold turned into equity.


More than a third of their cash was then locked into six, nine and 12-month accounts. Shares in Bank of Cyprus have been suspended on the Athens and Nicosia stock exchanges since early 2013 and only one of the fixed term cash accounts has released all of the money due to customers.


Éxito’s Ben Rosenberger and Michele Del Bo, who have previously arranged the sale of Lehman Brothers and Icelandic bank distressed debt, said that sellers had so far been mostly international clients who wanted to extract their money from the island by selling their deposits and shares to distressed debt funds.


Now the bank wants to raise capital, which would dilute the equity holdings for former depositors. What were savings are now not only subject to the whims of the market, but can be actively diluted by capital raises.


Again, we refer to the list we began this article with:


1)   European politicians are both corrupt and incompetent.

2)   Those meant to assess the risk of any financial institutions don’t know what they’re talking about.

3)   The average citizen will be screwed while politically connected insiders will be given the means to circumvent the law.


Cyprus matters because while countries may differ in specific cultural components, the monetary system in place is by and large the same around the world. And what happened in Cyprus should be seen as a template for what can happen elsewhere.


This concludes this article. If you’re looking for the means of protecting your portfolio from the coming collapse, you can pick up a FREE investment report titled Protect Your Portfolio at


This report outlines a number of strategies you can implement to prepare yourself and your loved ones from the coming market carnage.


Best Regards


Phoenix Capital Research






A Revolving Door Farce: CFTC Commissioner Bails To Head Regulator's Biggest Opponent

There is no better way to describe what the recently departed CFTC commissioner Scott O'Malia just did when he bailed from the commodity watchdog to become the new head of the International Swaps and Derivatives Association, aka ISDA, the biggest banking group that has constantly opposed every intervention and attempt to regulate the swaps market by the CFTC since the Lehman crisis, than an epic farce.

For those who are unaware ISDA is a global OTC derivative lobby group, counting the world's largest investment banks among its members, and has frequently fought regulatory efforts to reform the market after the financial crisis. ISDA itself was exposed as a complete joke during the European crisis when due to the overhang of avoiding Europe's insolvent reality, it made CDS protection obsolete as protection from sovereign restructurings and credit events, in the process crushing one of the key ways to hedge for credit event risk. 

Meet Scott O'Malia

A member of the U.S. Commodity Futures Trading Commission will become the new head of a bank lobby group that is fighting the derivatives regulator in court over a crucial new rule curtailing Wall Street.


The International Swaps and Derivatives Association said on Wednesday that Scott O'Malia, a Republican who often voted against new CFTC policy in the wake of the financial crisis, will become the trade group's next chief executive.


O'Malia will start his new job as of Aug. 18, ISDA said. The news came only days after O'Malia said he planned to leave the CFTC as of Aug. 8.


ISDA is one of three banking groups that sued the CFTC in December, hoping to beat back tough trading guidelines for U.S. companies doing business overseas, which they fear could hurt markets and cut profits.


The two sides are set to face each other in a first hearing in a federal court in Washington next week.

Even an otherwise impartial Reuters appears outraged by this blatant and painfully clear example of government capture of "public servants" by those who have dangle carrots of money in exchange for lobby (and future employment promise) favors, and thus set the rules, courtesy of people like O'Malia.

The speed of O'Malia's move, and ISDA's high profile, made the appointment striking even by Washington standards, where a 'revolving door' between regulators and those they oversee makes moves from one side to the other common.


"This is why Americans are so disgusted with so many high government officials and believe that Washington is in cahoots with Wall Street," said Dennis Kelleher, who heads Better Markets, a group urging tighter regulation of big banks.


O'Malia spent more than four years as a member of the CFTC, and was an outspoken critic of the rule-making process mandated by the 2010 Dodd-Frank financial reform law, which he said had been rushed, confused and lacked transparency. At the CFTC, he chaired the Technology Advisory Committee, which drives the agency's efforts to better cope with the vast amount of data it has to handle.

But wait, wasn't it that other former CFTC commissioner, Bart Chilton, who since has also departed for the far better paying confines of the private sector, who claimed every chance he got that it was the CFTC's "woefully small budget" that prevented it from analyzing the data it got? Apparently it turns out that the only reason for the CFTC's abysmal enforcement record is because the group in charge of processing said data was controlled by a coopted individual whose only prerogative was to cozy up to his future employer, ISDA, and not make any waves whatsoever.

Two-Thirds Of Chinese Consumers No Longer Trust Western Fast-Food As "Meat Scandal" Spreads Across Asia

As if the Chinese meat scandal was not a big enough concern for Western fast-food firms, The WSJ reports that the crisis is spreading across Asia as Yum Brands and McDonalds sever links with US-owned Shanghai Husi Food Company, which is accused of selling expired beef and chicken, pulling supplies of chicken from restaurants in Japan. Perhaps even more worrisome for American fast-food companies who have expanded aggressively and over-hyped the growth opportunities in China, a second Sina survey started yesterday, featuring 25,000 respondents, found 77% believed the restaurant brands affected had been aware of Husi’s faulty practices, while 69% said they would no longer dine at the restaurants run by the Western companies.

As WSJ reports,

More companies are cutting ties to a U.S.-owned Chinese food supplier over worries that they may have served expired meat to their customers, as they moved to shore up their reputations in a market known for food-safety problems.


The issue, which on Monday prompted KFC owner Yum Brands and McDonald's China arm to drop the China-based food supplier, on Tuesday spread to Japan. McDonald's on Tuesday said its outlets there cut ties with Shanghai Husi Food Co., an arm of OSI Group Inc. of Aurora, Ill. Shanghai Husi has been accused in Chinese media reports of selling meat products beyond their shelf life.


McDonald's said it pulled chicken nuggets supplied by the company, affecting 10% of its Japanese stores, a move that will create a short-term nugget shortage until new orders arrive from a supplier in Thailand.


"In this case we do feel that we were a bit deceived relative to one of these plants," said McDonald's CEO Don Thompson, speaking on the company's earnings conference call on Tuesday.


McDonald's, which has more than 2,000 outlets in China, is working with Chinese authorities to investigate, a company spokeswoman said. "It appears from the initial news report that these alleged mis-practices have been hidden from McDonald's," she said.


OSI representatives in China didn't respond to requests for comment on Tuesday. On Monday the company said it believed the Chinese media reports depicted an isolated incident, but said it takes full responsibility and would act accordingly.


In China, Starbucks, Burger King, and the 7-Eleven convenience store chain and others on Tuesday also said they cut ties with Shanghai Husi.


Other food companies that have sourced their meat from Husi include the Swedish furniture retailer, Ikea, and the Chinese fast-food chain, Dicos.

But it appears the damage is done...

A Sina survey started yesterday, featuring 25,000 respondents, found 77% believed the restaurant brands affected had been aware of Husi’s faulty practices, while 69% said they would no longer dine at the restaurants run by the Western companies.




A crisis in confidence in China’s food industry emerged after melamine was found in domestically produced baby formula in 2008. That scandal left 300,000 babies sick and resulted in six premature deaths.


Other stories including fake eggs, diseased pork, recycled oil, mislabelled meat have only led to further calls for industry reform.


With new food scandals arising every few months on the mainland, Western fast-food brands are generally seen as being more trustworthy than local restaurants.


However, this trust may have been badly affected by this new scandal surrounding Husi.

*  *  *
On the bright side, all these firms will have an alternate scapegoat for weak earnings other than the weather...

"The West's Public Enemy Number One"

Newsweek's "triumphal" return to print with its expose on the wrong Satoshi Nakamoto (of "Bitcoin founder" fame) was less than, well, triumphal. So what is the eyeball starved media outlet seeking a second life to do? A screaming "grab me" epiphany of jingoist groupthink, in which we read that last week's events in Russia was "Putin's Lockerbie moment", should certainly help (and indeed it's very kind of Newsweek to have conducted all the forensic analysis and tests which confirm its magazine-selling allegations).


Which is ironic, considering just three months ago we got...


Perhaps the West needs bigger buttons then?

This Is What A 8900% 1-Day Profit Looks Like

When the lottery tickets are scattered around like this (and mal-investment concerns at record-low levels), is it any wonder the world and his mum is buying Biotech stock options, what could go wrong?

Having traded at $60 yesterday, Puma Biotech (PBYI) is trading at $235 after a successful Phase 3 study into breast cancer made it an attractive takeover target. It appears someone had been buying small odd lots of $100 calls in the last few days (dramatically out of the money) betting on just this.


And they just made 8900% on the trade...

"Is College Worth It?" - Here Is The Fed's Answer In One Chart

The topic of whether college is worth it (costs vs benefits) has been discussed at length (here, here, and here most recently) but no lesser entity than the San Francisco Fed's PhDs have crunched the numbers and found that in the new normal, median starting wages of recent college graduates have not kept pace with median earnings for all workers. Furthermore, they are not optimistic - "because college grads face wages and hiring conditions that are especially responsive to business cycle conditions, this low earnings growth, together with shifts in the distribution of graduates’ labor market status, suggests continued weakness in the overall economy."


As SF Fed notes,

Median starting wages of recent college graduates have not kept pace with median earnings for all workers over the past six years. This type of gap in wage growth also appeared after the 2001 recession and closed only late in the subsequent labor market recovery. However the wage gap in the current recovery is substantially larger and has lasted longer than in the past. The larger gap represents slow growth in starting salaries for graduates, rather than a shift in types of jobs, and reflects continued weakness in the demand for labor overall.


Welcome to the part-time economy graduates...

Also shown are overall earnings and earnings for recent graduates working part-time. With few exceptions, wage growth has been limited in all occupational groups for recent graduates. Note that professional and related occupations and management, business, and finance, which are the two most popular categories for recent graduates, have seen particularly low wage growth.




Thus, while comparing occupational distributions across years indicates some stability, there is a clear pattern of low earnings growth for most categories. In fact, for almost all occupations and skill groups for which we have enough data to compare recent graduates to all others, we find that recent graduates experienced lower wage growth than other workers.

As SF Fed concludes...

The past several annual cohorts of graduates have experienced low earnings growth across almost all occupations compared with the overall population. While this post-recession pattern was also present after the 2001 recession, earnings growth following the most recent recession has been held down longer than in the past, which reflects the depth and severity of the recession.


Because college grads face wages and hiring conditions that are especially responsive to business cycle conditions, this low earnings growth, together with shifts in the distribution of graduates’ labor market status, suggests continued weakness in the overall economy.

*  *  *

So is college worth it?

The Stealing Of America By The Cops, The Courts, The Corporations And Congress

Submitted by John Whitehead via The Rutherford Institute,

“What the government is good at is collecting taxes, taking away your freedoms and killing people. It’s not good at much else.” —Author Tom Clancy

Call it what you will—taxes, penalties, fees, fines, regulations, tariffs, tickets, permits, surcharges, tolls, asset forfeitures, foreclosures, etc.—but the only word that truly describes the constant bilking of the American taxpayer by the government and its corporate partners is theft.

We’re operating in a topsy-turvy Sherwood Forest where instead of Robin Hood and his merry band of thieves stealing from the rich to feed the poor, you’ve got the government and its merry band of corporate thieves stealing from the poor to fatten the wallets of the rich. In this way, the poor get poorer and the rich get richer. All the while, the American Dream of peace, prosperity, and liberty has turned into a nightmare of endless wars, debilitating debt, and outright tyranny.

What Americans don’t seem to comprehend is that if the government can arbitrarily take away your property, without your having much say about it, you have no true rights. You’re nothing more than a serf or a slave.

In this way, the police state with all of its trappings—from surveillance cameras, militarized police, SWAT team raids, truancy and zero tolerance policies, asset forfeiture laws, privatized prisons and red light cameras to Sting Ray guns, fusion centers, drones, black boxes, hollow-point bullets, detention centers, speed traps and abundance of laws criminalizing otherwise legitimate conduct—is little more than a front for a high-dollar covert operation aimed at laundering as much money as possible through government agencies and into the bank accounts of corporations.

The rationalizations for the American police state are many. There’s the so-called threat of terrorism, the ongoing Drug War, the influx of illegal immigrants, the threat of civil unrest in the face of economic collapse, etc. However, these rationalizations are merely excuses for the growth of a government behemoth, one which works hand in hand with corporations to profit from a society kept under lockdown and in fear at all times.

Indeed, as I point out in my book A Government of Wolves: The Emerging American Police State, the real motivating factor behind erecting a police state is not to protect the people, but to further enrich the powerful. Consider the following costly line items, all part of the government’s so-called quest to keep us safe and fight terrorism while entrenching the police state, enriching the elite, and further shredding our constitutional rights:

$4.2 billion for militarized police. Almost 13,000 agencies in all 50 states and four U.S. territories participate in a military “recycling” program which allows the Defense Department to transfer surplus military hardware to local and state police. In 2012 alone, $546 million worth of military equipment was distributed to law enforcement agencies throughout the country.


$34 billion for police departments to add to their arsenals of weapons and equipment. Since President Obama took office, police departments across the country “have received tens of thousands of machine guns; nearly 200,000 ammunition magazines; thousands of pieces of camouflage and night-vision equipment; and hundreds of silencers, armored cars and aircraft.” While police departments like to frame the acquisition of military surplus as a money-saving method, in a twisted sort of double jeopardy, the taxpayer ends up footing a bigger bill. First, taxpayers are forced to pay millions of dollars for equipment which the Defense Department purchases from megacorporations only to abandon after a few years. Then taxpayers find themselves footing the bill to maintain the costly equipment once it has been acquired by the local police.


$6 billion in assets seized by the federal government in one year alone. Relying on the topsy-turvy legal theory that one’s property can not only be guilty of a crime but is also guilty until proven innocent, government agencies have eagerly cashed in on the civil asset forfeiture revenue scheme, which allows police to seize private property they “suspect” may be connected to criminal activity. Then whether or not any crime is actually proven to have taken place, the cops keeps the citizen’s property. Eighty percent of these asset forfeiture cases result in no charge against the property owner. Some states are actually considering expanding the use of asset forfeiture laws to include petty misdemeanors. This would mean that property could be seized in cases of minor crimes such as harassment, possession of small amounts of marijuana, and trespassing in a public park after dark.


$11,000 per hour for a SWAT team raid on a government dissident. The raid was carried out against Terry Porter, a Maryland resident who runs a welding business, is married with three kids, is outspoken about his views of the government, and has been labeled a prepper because he has an underground bunker and food supplies in case things turn apocalyptic. The raiding team included “150 Maryland State Police, FBI, State Fire Marshal’s bomb squad and County SWAT teams, complete with two police helicopters, two Bearcat ‘special response’ vehicles, mobile command posts, snipers, police dogs, bomb disposal truck, bomb sniffing robots and a huge excavator. They even brought in food trucks.”


$3.8 billion requested by the Obama administration to send more immigration judges to the southern border, build additional detention camps and add border patrol agents. Border Patrol agents are already allowed to search people’s homes, intimately probe their bodies, and rifle through their belongings, all without a warrant. As one journalist put it, “The surveillance apparatus is in your face. The high-powered cameras are pointed at you; the drones are above you; you’re stopped regularly at checkpoints and interrogated.” For example, an American citizen entering the U.S. from Mexico was subjected to a full-body cavity search in which she was subjected to a variety of invasive procedures, including an observed bowel movement and a CT scan, all because a drug dog jumped on her when she was going through border security. Physicians found no drugs hidden in her body.


$61 billion for the Department of Homeland Security, one of the most notoriously bloated government agencies ever created. The third largest federal agency behind the Departments of Veterans Affairs and Defense, the DHS—with its 240,000 full-time workers and sub-agencies—has been aptly dubbed a “runaway train.”


$80 billion spent on incarceration by the states and the federal government in 2010. While providing security, housing, food, medical care, etc., for six million Americans is a hardship for cash-strapped states, it’s a gold mine to profit-hungry corporations such as Corrections Corp of America and GEO Group, the leaders in the partnership corrections industry. Thus, with an eye toward increasing its bottom line, CCA has floated a proposal to prison officials in 48 states offering to buy and manage public prisons at a substantial cost savings to the states. In exchange, the prisons would have to contain at least 1,000 beds and states would have to maintain a 90% occupancy rate for at least 20 years. This has led to the phenomenon of overcriminalization of everyday activities, in which mundane activities such as growing vegetables in your yard or collecting rainwater on your property are criminalized, resulting in jail sentences for individuals who might otherwise have never seen the inside of a jail cell.


$6.4 billion a year for the Bureau of Prisons and $30,000 a year to house an inmate. There are over 3,000 people in America serving life sentences for non-violent crimes. These include theft of a jacket, siphoning gasoline from a truck, stealing tools, and attempting to cash a stolen check. Most of the non-violent offenses which triggered life sentences were drug crimes involving trace amounts of heroin and cocaine. One person imprisoned for life was merely a go-between for an undercover officer buying ten dollars’ worth of marijuana. California has more money devoted to its prison system than its system of education. State spending on incarceration is the fastest growing budget item besides Medicaid.


93 cents an hour for forced, prison labor in service to for-profit corporations such as Starbucks, Microsoft, Walmart, and Victoria’s Secret. What this forced labor scheme has created, indirectly or not, is a financial incentive for both the corporations and government agencies to keep the prisons full to capacity. A good portion of the 2 million prisoners in public facilities are forced to work for corporations, making products on the cheap, undermining free laborers, and increasing the bottom line for many of America’s most popular brands. “Prison labor reportedly produces 100 percent of military helmets, shirts, pants, tents, bags, canteens, and a variety of other equipment. Prison labor makes circuit boards for IBM, Texas Instruments, and Dell. Many McDonald's uniforms are sewn by inmates. Other corporations—Microsoft, Victoria's Secret, Boeing, Motorola, Compaq, Revlon, and Kmart—also benefit from prison labor.”


$2.6 million pocketed by Pennsylvania judges who were paid to jail youths and send them to private prison facilities. The judges, paid off by the Mid Atlantic Youth Service Corporation, which specializes in private prisons for juvenile offenders, had more than 5,000 kids come through their courtrooms and sent many of them to prison for petty crimes such as stealing DVDs from Wal-Mart and trespassing in vacant buildings.


$1.4 billion per year reportedly lost to truancy by California school districts, which receive government funding based on student attendance. The so-called “solution” to student absences from school has proven to be a financial windfall for cash-strapped schools, enabling them to rake in millions, fine parents up to $500 for each unexcused absence, with the potential for jail time, and has given rise to a whole new track in the criminal justice system devoted to creating new revenue streams for communities. For example, Eileen DiNino, a woman serving a two-day jail sentence for her children’s truancy violations, died while in custody. She is one of hundreds of people jailed in Pennsylvania over their inability to pay fines related to truancy, which include a variety of arbitrary fees meant to rack up money for the courts. For example, “[DiNino’s] bill included a laundry list of routine fees: $8 for a “judicial computer project”; $60 for Berks constables; $40 for “summary costs” for several court offices; and $10 for postage.” So even if one is charged with a $20 fine, they may end up finding themselves on the hook for $150 in court fees.


$84.9 million collected in one year by the District of Columbia as a result of tickets issued by speeding and traffic light cameras stationed around the city. Multiply that income hundreds of times over to account for the growing number of localities latching onto these revenue-generating, photo-enforced camera schemes, and you’ll understand why community governments and police agencies are lining up in droves to install them, despite reports of wide scale corruption by the companies operating the cameras. Although nine states have banned the cameras, they’re in 24 states already and rising.


$1.4 billion for fusion centers. These fusion centers, which represent the combined surveillance and intelligence efforts of federal, state and local law enforcement, have proven to be exercises in incompetence, often producing irrelevant, useless or inappropriate intelligence, while spending millions of dollars on “flat-screen televisions, sport utility vehicles, hidden cameras and other gadgets.”

In sum, the American police state is a multi-billion dollar boondoggle, meant to keep the property and the resources of the American people flowing into corrupt government agencies and their corporate partners. For those with any accounting ability, it’s clear that the total sum of the expenses being charged to the American taxpayer’s account by the government add up to only one thing: the loss of our freedoms. It’s time to seriously consider a plan to begin de-funding this beast and keeping our resources where they belong: in our communities, working for us.

Cows Versus Bulls

In yet another example of central planners not comprehending the unintended consequences of their actions, Glenn Stevens - head of the Reserve Bank of Australia - commented last night on the curious lack of animal spirits holding back the global economic recovery. As Bloomberg's Richard Breslow notes though, of course, his argument is disingenuous at best since it is the actions (and consequences) of central banks crowding out other market participants and creating a culture of investors who moo (herd-like along with their yield-chasing, buyback purchasing, capex cutting peers) rather than roar... Central banks have turned investors from bulls to cows...


Glenn Stevens speech last night wasn’t the important monetary policy marker that it had been flagged to be, yet it was still telling in a "thou doth protest too much" fashion, Bloomberg’s Richard Breslow writes.

Stevens commented on what he thinks is a curious lack of animal spirits holding back global economic recovery. He focused on the limits to monetary policy and why the world needs entrepreneurial spirit to take hold.

Of course, Breslow blasts, his argument is disingenuous at best, especially when saying there are limits to monetary policy when rates are at/near zero.

Central Banks remain cautious of the fragile global economy; the monetary policy transmission mechanism isn’t working; and the multiplier is near zero while at the same time there is neither capacity nor will for fiscal action.

The absence of animal spirits isn’t surprising - it is a direct result of activist central bankers and sovereign wealth funds crowding out other market participants and creating a culture of investors who moo rather than roar

He also mentioned how eerily calm markets are in face of all the geo-political uncertainty, but it’s really just the same side of the coin, markets are relying on activist central banks who are in control:

Trouble/Turmoil... Ease... QE... Rinse and Repeat

*  *  *

And ever it shall be.. .and ever more cow-like investors will become (zombie cows perhaps).

Poroshenko Demands Ukraine Separatists Be Declared "Terrorists" Under International Law

As the tit-for-tat public relations blitz continues to play out, Ukrainian President Petro Poroshenko has demanded that the self-proclaimed Donetsk People's Republic (DPR) and Luhansk People's Republic (LPR) be recognized as terrorist organizations, "so that any cooperation or support the terrorists receive is recognized as such under international law." Now that the US has 'proved' that the separatists shot down MH17, we suspect the calls will grow louder... even as Poroshenko says he opposes martial law.


As Interfax reports,

Ukraine will demand at an EU Foreign Affairs Council meeting on Tuesday that the self-proclaimed Donetsk People's Republic (DPR) and Luhansk People's Republic (LPR) be recognized as terrorist organizations, Ukrainian President Petro Poroshenko said.


"We [Ukraine] and the Netherlands will make every effort, in particular during the meeting tomorrow of the EU Foreign Affairs Council where Ukrainian Foreign Minister Pavlo Klimkin will speak, so that the so-called Luhansk and Donetsk People's Republics be declared terrorist organizations and so that any cooperation or support the terrorists receive is recognized as such under international law," Poroshenko said on Monday while visiting the Dutch embassy in Kyiv.


Ukraine is preparing international lawsuits against the self-proclaimed DPR and LPR, to label them as terrorist organizations, Poroshenko said earlier on July 19 during a meeting with Dutch Foreign Minister Frans Timmermans.



Introduction of martial law would make military operations more difficult, Ukrainian President Petro Poroshenko says in statement.

Martial law would also impact possible IMF support

*  *  *

We're all terrorists now...

After Bubble Pops, Saudi Arabia Opens Stock Market To Foreign "Greater Fool" Investors

Shortly after we highlighted the utter ridiculousness of the bubble frenzy in Dubai stocks (30x IPO oversubscription for a firm that did not exist), the Dubai General Financial Markets Index tumbled 30% popping an epic 250% rally since The Fed started QE3. It seems Saudi Arabia is getting nervous at its neighbor's fall and so The Kingdom has decided it needs more great fools to keep its dream alive... and as The WSJ reports today, Saudi Arabia plans to open its $530 billion stock market to foreigners for the first time early next year, a move that will allow the Middle East's biggest economy to attract more international investment and reduce its dependence on oil revenue. Did we just find another China inflation outlet?



As WSJ reports,

The kingdom in 2008 began allowing foreign investors indirect access to the market through swaps, but it has hesitated to open the market fully.


The kingdom is among the last of the big markets to limit international access, but it was expected to open the doors to foreign cash while it rolls out plans to spend hundreds of billions of dollars to build infrastructure and provide employment across the country.


Analysts and investors welcomed the plans, noting that it will cut through red tape and help them avoid fiddly instruments that aim to mimic local stocks.

It's nothing but great news (for EM asset managers)...

"As the largest equity market in the Middle East and North Africa, this will certainly put the region back on international investors' radar and is likely to be transformative for regional equities," said Bassel Khatoun, the head of MENA equities at Franklin Templeton Investments.

Wondering who will be buying? Only the very biggest names (cough Sovereign funds and central banks cough)

"According to draft documentation, QFIIs [Qualified Foreign Institutional Investors] would need minimum assets under management of $5 billion and to have been engaged in securities activities for over five years," said Fahd Iqbal, the head of Middle East research at Credit Suisse. "This is in line with the regulatory authority's preference for long-term investors over short-term speculators."

*  *  *
Greater Fool hot money flows here we come...

Whi(t)ney Tilson Does It Again

After an incredible day in Herbalife - its best performance ever - following Bill Ackman's "death blow," none other than Whitney Tilson (who oddly has not been seen on CNBC for many months) has penned a letter to his investors explaining "why I am more confident of my Herbalife short position." As a gentle reminder, Mr. Tilson entered his Herbalife short in December 2012 in the low $20s (shortly after Ackman's initial pitch) and recently made it one of his firm's largest short positions. It appears there are now two ways by which Herbalife shares implode - Ackman buys a 'minority stake' and 'fixes it' or Whitney Tilson gets on TV and shifts to a long position...

Whitney Tilson – Why I’m More Confident of My Herbalife Short Position Today

The Herbalife bears won the day yesterday and the bulls won the day (and then some) today. Yawn. This is why I run a diversified short book.


Over the past year and a half since his initial presentation, Bill Ackman and his team at Pershing Square uncovered a lot of great new information about the company and how it operates that neither I nor anyone else (nor even Ackman himself) knew, but much of this didn’t come through clearly in his presentation today (which you can watch here) for various reasons – just read any of the harsh media coverage. But I don’t care about the messaging – that can be fixed. I care about the substance.


To be short this stock (as I am), you have to believe two things:

  1. That the majority (not all) of this company’s operations are based on a pyramid scheme, false and deceptive marketing, etc.; and
  2. That regulators will act to shut the company down or at least seriously rein it in.

On these two measures, I have more confidence in this investment now than I did before his presentation. To put rough numbers on it, before today I thought there was a 90% chance #1 was true and a 70% #2 would happen, so that’s a 63% chance of this investment working out. Now I think the odds are 95% and 80%, meaning I think my odds have improved to 76% — so I’m perfectly happy to have a 25% larger short position (which the market took care of today – I didn’t have to do a thing!).


The main reason for my increased confidence is that I think Ackman showed convincingly that nutrition clubs (which he estimates account for as much as 50% of Herbalife’s U.S. business and nearly all of its incremental profits) are fundamentally not about genuine consumption of Herbalife products by people pursuing healthy lifestyles and weight loss (as the company would have you believe) but almost entirely by: a) Those pursuing the business opportunity (i.e., building a downline rather than real sales as, for example, Amway, Tupperware and Pampered Chef); and b) Their friends and family who are trying to support them.


And, critically, the business opportunity is being sold in a false and deceptive way in which mostly vulnerable, unsophisticated people are promised that if they just work hard and invest their time and money they are likely to become President’s Club members and earn $500,000 annually forever. There is, of course, no disclosure whatsoever about how much time and money the average person invests, the real financial characteristics of the average nutrition club (almost all lose money), and the likelihood of anyone ever earning $1 in revenue, much less breaking even, much less earning enough money to make it worth one’s time, and much less becoming a President’s Club member (approaching 1 in 100,000).


In short, Ackman present voluminous evidence that Herbalife is aggressively selling millions of people a promise of the American Dream but is instead giving them the American Nightmare – bleeding them dry and discarding them. This is the very definition of fraud.


The best analogy I can think of is a slimeball going around targeting people dying of a terrible illness and promising them that he has the cure – all they have to do is pay him $3,000, do what he says (or take the “medicine” or “treatment” he gives them), and they’ll be cured. In fact, scams like this are all too common – see this 60 Minutes expose, for example, of stem cell fraud. However, these frauds are mostly located overseas because, of course, they’re illegal here!


To be clear, this is not like Amway, in which a relative of mine, years ago, peddled Amway products to her friends and family (which we reluctantly bought to support her). She wasn’t pursuing the business opportunity, but rather, like the vast majority of Amway reps, was just selling products and making a commission. That’s the difference between legitimate multi-level marketers and pyramid schemes: are most of the people in it to sell products or for the business opportunity? The key thing Ackman showed today is that these nutrition clubs, which the company, analysts, and bulls point to as evidence of legitimate end demand, are really just fronts for people pursuing the business opportunity and few of the people coming to them are what any sensible person would view as real customers.


Nor is it like buying a lottery ticket (where people knowingly waste their money in pursuit of a big payday) because everyone who buys a lottery ticket knows what their odds are (close to zero). Could you imagine the outcry if the lottery ran ads of lottery winners saying, “Just pick numbers like I did and you’re certain to strike it rich! (And if you don’t, you’re a loser.)”


A final point: I think Ackman today rebutted the primary bull argument (which was the only lingering doubt I had): that if Herbalife were a pyramid scheme, there would be a ton of excess inventory in the system and one would see large volumes being sold at distressed prices on eBay and elsewhere. But now we know why: the majority of the product is actually being consumed – but not by real consumers, but rather millions of people (and their unfortunate friends and family) caught up in a vast scam that’s like a cult, with vast promises, huge rallies, etc.

*  *  *
It seems the 'market' disagrees... for now.

h/t ValueWalk

Despite Warmest May/June On Record, Misses Blamed On "Unseasonably Cool" Weather

"Weather," it appears is the new 'dog-ate-my-homework' no matter how much facts get in the way.


Compare NOAA's "Facts" about the actual temperatures...

The world’s heat record was broken for a second consecutive month. With the exception of Antarctica, new temperature highs were recorded on every continent.



The National Oceanic and Atmospheric Administration (NOAA) released June’s results Monday, revealing an average global temperature of 61.2 degrees for the period. The result is 1.30 degrees higher than the 20th century average of 59.9 degrees, making this June the warmest in more than 130 years.


The same trend was seen in May, which experienced a 1.33 degree increase from the the average 58.6 degrees.

To Business leaders excuses...

ICSC’s Michael Niemira says unseasonably cool weather hurt consumer interest in summer merchandise despite clearance prices; may shift demand to back-to-school shopping.


[Harley Davidson] believes second-quarter U.S. retail sales were adversely affected by prolonged poor weather across parts of the U.S..

*  *   *

Or could missed sales expectations be a result of stagnant incomes and rising inflation?

Krugman’s Latest Debt Denial: Why His Two Magic Numbers Don’t Cut It

Submitted by David Stockman via Contra Corner blog,

Professor Krugman is at it again—–conjuring fairy tales about a benign long-term fiscal outlook. Notwithstanding that the public debt has surged from 40% to 75% of GDP during the six short years since 2008, he claims there is no reason to fret and that there is no debt spiral anywhere in the future. In part that’s because the Keynesian priesthood has declared that interest rates have down-shifted on a permanent basis. CBO has therefore dutifully incorporated this assumption into its long-term projections:

This (interest rate) markdown has the effect of making the budget outlook — which was already a lot less dire than conventional wisdom has it — look even less dire. But there’s a further point worth emphasizing: the CBO has just declared an end to the debt spiral.

Even accepting CBO’s “rosy scenario” outlook (see below), it’s not evident that it has declared an end to the debt spiral. In fact, it projects publicly-held treasury debt to soar from $12 trillion today to about $52 trillion by 2039. Most people would judge that a spiral. Indeed, as shown in the CBO graph below based on “current policy”, the public debt ratio is heading sharply upwards to more than 100% of GDP.

So how does professor Krugman turn this dismal chart into an “all clear” reassurance–when it actually shows public debt heading to above WWII levels at a time when the baby boom is at peak retirement? Well, it seems that Krugman unearthed two numbers in a 182 page report that purportedly render harmless the $52 trillion of bonds, notes and bills that CBO projects will need to find a home at the historically low interest rates it forecasts for the next 25 years.

So we turn to Table A-1 on page 104 of the CBO report, and we learn that for the next 25 years CBO projects an average interest rate on federal debt of 4.1 percent and an average growth rate of nominal GDP of 4.3 percent. And this means no debt spiral at all.

A GDP growth rate higher than the average carry cost of the public debt sounds all good, but here’s the thing. Given outcomes during the 21st century to date, there is simply no plausible reason to believe that nominal GDP can grow at a 4.3% CAGR for the next 25 years. In fact, since the pre-crisis peak in early 2008, nominal GDP has grown at only a 2.5% CAGR, and even during the last two years when “escape velocity” was expected any day, the compound growth rate has been only 3.0%. Indeed, during the entire 14 years of this century—encompassing nearly two complete business cycles—-nominal GDP has expanded at just 3.8% per annum.

Needless to say, when you are crystal balling a quarter century ahead, CAGRs make a big difference, and that’s profoundly true of the Federal budget. Specifically, revenue is highly sensitive to nominal GDP growth because it is always money income, not real GDP, that is on the radar screen of the tax-man.

Thus, owing to the miracle of compounding under the CBOs 4.3% CAGR, nominal GDP is projected to amount to about $49 trillion by 2039. By contrast, if money incomes grow at a 3.3% CAGR, or at the upper end of the last seven year’s experience, nominal GDP a quarter century forward would be only $38 trillion. And at CBO’s 19.4% of GDP tax take on the $11 trillion difference—-that’s nearly a $2.0 trillion annual revenue shortfall by the terminal year.

At the same time, the spending side will be driven by the soaring social insurance tab for retiring baby boomers during the decades ahead, regardless of nominal GDP. Accordingly, CBO forecasts that outlays for Social Security and Medicare will rise from 8% to 11% of GDP during the next quarter century, and that this will cause primary Federal spending (i.e. ex-interest expense) to grow at a 4.8% CAGR.

But that’s where professor Krugman fairly tale of two magic numbers hits the shoals. Based on the above demographic/social insurance dynamics, CBO projects that non-interest Federal spending will rise from $3.3 trillion this year to about $10.3 trillion by 2039. Yet were nominal GDP growth to track the lower 3.3% CAGR suggested above, there would be little off-setting reduction in the primary spending path.

That is especially the case because CBO’s forecast continues to embody a modern version of “rosy scenario”—that is, it assumes that real output will grow at a 2.3% CAGR for the next 25 years. Yet that ignores the numerous and compounding headwinds lurking down the road. These include baby boom demographics and the massive overhang of $60 trillion of public and private debt domestically; and global troubles everywhere—from the bankrupting old age colony in Japan, to the tottering house of cards known as “red capitalism” in China, to the crushing burden of the socialist welfare state in Europe. Given these adversities, there is no reason to assume that US real growth will sharply accelerate from the tepid trends of the recent past.

To wit, real GDP has averaged only 1.0% annually since the pre-crisis peak in early 2008, 1.5% during the last 8 quarters, and just 1.8% during the last fourteen years—including the false prosperity of the Greenspan housing and credit bubble after 2001. So why will GDP growth accelerate by nearly one-third for a quarter century running—when even under CBO’s own forecast, labor force demographics will turn sharply negative in the years ahead?

Whereas 1.0-1.5% of annual real output growth during the second half of the 20th century was accounted for by labor force expansion, CBO projects this foundational component will drop to just a 0.5% annual rate during the next several decades. This demographically baked in reality, in turn, requires CBO to project that labor productivity will rise by 1.8% annually in order to meet its 2.3% output growth bogey.

But that just can’t happen. During the next 25 years the US economy will be shedding its most productive labor—which is to say, the now aging baby boom work force. At the same time, the US economy will also be laboring under a severe, cumulative deficit in domestic investment in productive plant and equipment—the sine quo non of future labor productivity growth. Since the turn of the century, in fact, real CapEx growth have averaged only 0.8% annually, or hardly one-third of its prior historical rate; and the true measure of future productivity growth— net investment in real plant and equipment after capital consumption allowances—has actually declined by 20% since 1999-2000.

Real Business Investment – Click to enlarge

In a word, the shortfall from CBO’s 4.3% nominal growth scenario is likely to come almost entirely out of the “real” component of GDP rather than its 2.0% GDP deflator assumption. This means that nominal Federal spending would likely remain consistent with CBO’s projections as outlined above (i.e. COLA adjustments would be about the same), and could possibly rise considerably higher due to a larger caseload of safety net beneficiaries.

The baleful bottom line is this. Under the CBO’s rosy scenario, the primary Federal deficit by 2039 is just under $1 trillion annually or a modest 1.8% of GDP, meaning that the primary deficit is not fueling an uncontrolled debt spiral. By contrast, under the 3.3% nominal GDP scenario with realistic assumptions about labor productivity and real growth, the primary deficit would soar to nearly $3 trillion annually, and reach 7.5% of GDP.

It goes without saying that a primary deficit that massive would fuel a hellacious debt spiral—the very opposite of the benign outlook espied by professor Krugman. Rather than the 106% of GDP already built into the CBO forecast, the public debt over the next 25 years would literally spiral off the charts.  We would end up exactly in the fiscal briar patch that professor Krugman so insouciantly mocks:

… because people will fear that we’re about to turn into Greece, Greece I tell you.

So talk about unjustified complacency with respect to the public debt spiral! The best outcome we can imagine per CBO’s rosy scenario case is a clearly dangerous level of public debt relative to GDP. But the probable path under sober economics is orders of magnitude worse.  Indeed, with primary debt accumulating at a nearly double digit rate against GDP, the CBO’s average 4.1% interest expense assumption would give way to higher rates, meaning that neither of professor Krugman’s two magic numbers cut it. Under a regime of even modest monetary normalization over the next quarter century, current fiscal policy will lead to interest rates that are far higher, not lower, than the growth rate of nominal income.

So its time to put Greece right back into the front and center of the US fiscal picture, I tell you!

No Thanks, Call Me When You're Dead

By: Chris Tell at:

It's no secret that Mark and I work with a lot of start-ups. In this capacity we align closely with various accelerators, incubators, venture capitalists, bankers and the attendant flotsam and jetsam in the early stage capital markets.

All of the above mentioned folks are typically focusing on working to finance, build and bring value to young companies. Not often talked about is what happens when things go wrong.

What can possibly go wrong?

Oh, lots can go wrong, trust me. The stats are hard to ignore: 75% of all start-ups will never make it out alive. Founders of these companies will work extremely hard, probably put all their net worth into their companies, sleep infrequently, mortgage the house, forgo time with family and friends, possibly get divorced... and yet they will still fail.

I sympathize with this plight. As an investor closely guarding my capital, I cannot and will not however put money into a "sympathy" play. Many years ago I made that mistake. Not again. That can only ever end one way, and it is rarely good for either party. I can't tell you how many times I've had founders say to me:

Oh but Chris, I've put all my money into this, I've worked my ass off and therefore my valuation/salary makes sense

Unfortunately that's normally just not the case. As an entrepreneur you're signing up for the "potential" to make a little or a lot of money but don't expect it be easy, unless you're in social media with good PR skills in which case you should probably take the money and run.

Right now we have one particular company whose metrics are quite simply kicking ass. The founder and management are taking zero pay and have done so almost from the beginning. We believe they're on the cusp of something big. This is not because we want it to be so, but because the business is gaining a lot of traction. They have an awesome platform and yet with all of this they have struggled to raise capital. All the while we've watched absolute garbage companies raise funding at nosebleed valuations. Hey, who said markets or investors always act rationally? One of their failings has been not having someone on the board that can market, tell the story and raise capital on their behalf.

Then we have another company in our portfolio run by a young, very smart, driven gent who lived on his grandmother's couch in order to self finance and bootstrap his dream. The company has recently secured half a dozen high-profile clients, and their revenues and business have exploded. 

The fact of the matter is that as an entrepreneur, do you want to accept early-stage high-risk capital? If so, fine, but it shouldn't be cheap. The higher the risk the greater the return required. Whether it's a convertible note on a company with no tangible assets or straight up equity as a founder, you're going to have to give up more than an already profitable company would. Don't be pissed off. It only makes sense.

It is pretty rare for Mark and I to meet with founders who are NOT confident in their ability to conquer the world. We've had some who even when countered with solid factual data which invalidates their business models, remain steadfast. Call it confidence, call it cockiness or call it arrogance, it doesn't really matter, entrepreneurs tend to have this trait. Quite frankly it is probably required to succeed, though from an investors perspective this all to often needs to be countered with experience, and a healthy dose of "sanity check". Yet another reason we focus so intently on management.

Unless you're a start-up building an app that will clean your fingernails or perform some other life-changing function, in which case now is the right time to go get you some silly Silicon Valley money, you're likely going to have to deal with investors like ourselves. That means your small company which you're placing a $5 million pre-money valuation on is probably, being realistic, more likely to get funded via a convertible note with follow on financing being done at substantially less than that especially if you've failed to gain traction. And sometimes as is the case with the company I mentioned earlier on, it's best to let them die.

Which leads me to...

Bottom feeders or value hunters?

There exist turnaround specialists or activist investors focused on corporate restructuring of larger yet unprofitable businesses. Sometimes unenthusiastically called "chop shops", activist investors have made fortunes in taking unprofitable companies and selling off various parts whereby the value of the "parts" equal more than the whole.

Operating in a similar environment are turnaround specialists who focus on getting rid of wasteful practices, incompetent management teams and caustic investors that are destroying shareholder value.

Moving even further down the chain we get to those companies in liquidation. These are the companies which have done what so many start-ups do... fail. They've died of natural causes, or maybe they've been taken out back and proverbially "shot" by their VC or investor group. One can only hope that it was quick because it never is painless.

It was around this time last year Mark and I were pitched on a deal. It was an existing, relatively small business. The company was up for sale. The story was it was a consolidation and being divested from the core assets of the largest shareholder and owner. Digging deeper we believed otherwise and instead sat on the sidelines while a good friend and colleague kept a watchful eye on the proceedings.

About a month ago, together with our friend, we bought the company from the liquidators for less than 1/20 the original offering price. It actually made sense to buy it dead rather than alive, as we were really just after a few key assets.

The risk reward ratio has now dropped substantially. In some (not all) instances it's actually far easier to paint on a fresh canvas than it is to take an existing, flawed painting and try redo it so that it's perfect.

One of the most profitable strategies one can employ is buying during, or after a collapse. This is true of large stock markets, sectors and it's equally true of individual public and private companies. It takes patience and a fair bit of guts, but the potential rewards if you get it right can be life-changing.

- Chris


I've got two quotes for you today. Both are from the recently departed Felix Dennis. I didn't know much about Felix Dennis and was recently put onto some of his work by my friend Chris Mayer who writes the excellent Mayer's Special Situations . I think they're particularly apt for any investor to consider.

"I think having a great idea is vastly overrated. I know it sounds kind of crazy and counterintuitive. I don't think it matters what the idea is, almost. You need great execution." - Felix Dennis

"Good ideas are like Nike sports shoes. They may facilitate success for an athlete who possesses them, but on their own they are nothing but an overpriced pair of sneakers. Sports shoes don't win races. Athletes do." - Felix Dennis

Actually Apple's Net Cash Hasn't Grown In Two Years

Perhaps the one chart that is most praised following every Apple's quarterly earnings report is the one showing the company's gargantuan cash trove, and sure enough, this quarter was no exception for good reason: AAPL's total cash and equivalents, including its short and long-term investments just rose to a record $164.5 billion, as shown below.

There is one problem with this chart: it includes the contribution of AAPL's debt, because while pundits are quick to praise AAPL's cash, they forget that starting in Q3 2013 AAPL also started loading up on debt, first $17 billion, and as of this quarter, the debt has now grown to $29 billion.

Why? For the simple reason that the bulk of AAPL's cash hoard has been held offshore since 2009, and only $18.4 billion, or the least since September 2010, was on the domestic books as of the March 31 quarter (the June 30 update won't be available until the 10-Q is filed).


Clearly, AAPL doesn't want to pay cash taxes on its repatriated cash, so for the past year it has been issuing debt instead to fund dividends and buybacks. Which also means that one has to net out the debt when looking at the firm's net cash level.

It is this - Apple's cash net of its debt - which is shown on the chart below. Contrary to the chart at the top, it shows that Apple's cash has actually not increased at all in the past 7 quarters, and at June 30 was $135 billion, below the $137 billion AAPL had in December 2012 when it launched its aggressive "shareholder friendly" strategy in the form of massive dividends and stock buybacks.

The good news is that for now, courtesy of its massive cash cushion, any incremental debt is merely a blip, but what was $0 less than two years ago has promptly grown to $29 billion, a far faster pace of growth than AAPL's own organice cash creation. At this rate, in a year or two, even S&P may start asking if AAPL's AA+ rated debt is truly worth the same rating as the US itself.

1 In 25 New Yorkers Is A Millionaire

New York "has the second largest millionaire and largest billionaire population of any global city," according to analysis by Spear's magazine, but as LA Times reports, walk down the streets of The Big Apple and 1 in every 25 New Yorkers you bump into is a millionaire. But if you really want to rub shoulders with the rich... almost 1 in 3 Monaco residents are millionaires) and likely billionaires too...


As LA Times reports,

The Big Apple ranks fourth in a listing of the top 20 global cities based on the portion of their populations whose net worth, excluding primary residence, tops $1 million.


Altogether, 4.63% of New Yorkers, or 389,100 people, are millionaires, according to the analysis by Spear's magazine and consulting firm WealthInsight.


“New York has long been the bastion of wealth not only in America, but the world," said Oliver Williams, an analyst at WealthInsight. "It has the second largest millionaire and largest billionaire population of any global city."


Monaco, Zurich and Geneva claimed the first three spots. Nearly 3 in 10 people in Monaco are millionaires.

Via Spears,


1. Monaco (29.21%)

2. Zurich (27.34%)

3. Geneva (17.92%)

4. New York (4.63%)

5. Frankfurt (3.88%)

6. London (3.39%)

7. Oslo (2.90%)

8. Singapore (2.80%)

9. Amsterdam (2.63%)

10. Florence (2.59%)

11. Hong Kong (2.58%)

12. Rome (2.54%)

13. Dublin (2.40%)

14. Doha (2.31%)

15. Toronto (2.29%)

16. Venice (2.25%)

17. Brussels (2.11%)

18. Houston (2.09%)

19. San Francisco (2.07%)

20. Paris (2.04%)

"Authenticity Is As Rare As A Unicorn In Today's Politically-Motivated Markets"

Submitted by Ben Hunt via Salient Partners' Epsilon Theory blog,


[Jeremiah and Bear Claw hunt elk]


Wind’s right, but he’ll just run soon as we step out of these trees.

Bear Claw:

Trick to it. Walk out on this side of your horse.


What if he sees our feet?

Bear Claw:

Elk don’t know how many feet a horse has!

“Jeremiah Johnson” (1972)

Gaston Phoebus, “Livre de Chasse” (1387)

In war, truth is the first casualty.
Aeschylus (525 – 456 BC)

I honestly believe that people of my generation despise authenticity, mostly because they're all so envious of it.
Chuck Klosterman, “Killing Yourself to Live: 85% of a True Story” (2005)

I began my time as Chairman with the goal of increasing the transparency of the Federal Reserve, and of monetary policy in particular. In response to a financial crisis and a deep recession, the Fed’s monetary policy communications have proved far more important and have evolved in different ways than I would have envisioned eight years ago.
Ben Bernanke, “Communication and Monetary Policy” (Nov. 19, 2013)

The stalking horse is a hunting technique that goes back thousands of years, where a hunter finds it much easier to get a drop on wild game by hiding behind an animal or a representation of an animal that the prey finds more familiar in its natural environment than a human. My favorite description of how the stalking horse technique works comes from the 1972 Robert Redford movie, “Jeremiah Johnson”, where the old trapper Bear Claw patiently explains to newbie trapper Jeremiah that they can walk behind their horses to get a good shot because “elk don’t know how many feet a horse has”. Of course Bear Claw is right, and he and Jeremiah eat well that night.

Today’s markets are chock-full of stalking horses, not for something as trivial as setting up a hostile takeover (which is how the phrase has traditionally been used in investment circles), but for setting up politically-driven macro-economic goals. Whether it’s the use of words to create a representation of a stalking horse or a direct investment in a security to turn it into a stalking horse, governments today are more manipulative (and I mean that in the technical sense of the word) than at any time since the 1930’s. Very little is as it seems in modern markets.

And yes, we’re the elk.

Here’s a great example of what I mean. This past Wednesday the WSJ published an article titled “China Plays a Big Role as US Treasury Yields Fall”, pointing out that the Chinese government bought US Treasuries at the fastest pace in the first five months of 2014 than at any point since this data started being collected more than 30 years ago. China added $107 billion to its Treasury holdings over these five months, almost 10% of its total Treasury holdings of $1.27 trillion, which is itself about 10% of the total $12 trillion US Treasury market. As the article points out, these massive purchases go a long way towards explaining “the mysterious US bond rally of 2014”, where, for example, yields on the 10-year note fell from 3% at the end of 2013 to about 2.5% over this five month period, despite widespread expectations at the start of the year by both market savants and investor public opinion that rates were on a one-way path up, up, and away.

The reason I characterize China’s purchases as a stalking horse rests on both the meaning of the purchases for the Chinese government and the perception of the purchases by market participants.

China is not buying US Treasuries for the same reasons that, say, PIMCO buys US Treasuries. China is not an economic buyer of US Treasuries, making an asset allocation decision based on some evaluation of fundamental global growth prospects. No, China is a strategic buyer of US Treasuries, purchasing US dollar-denominated assets in order to weaken its own currency and spur domestic growth by boosting exports. I’ve written about this sea change in Chinese monetary policy a lot (here, here, and here), and what we are seeing in China’s acceleration of US Treasury purchases is part and parcel of this existential political calculus and its challenge to the Western “rules” of global economics.

What’s really interesting to me – and this gets to the market perception question – is that this “explanation” of the 2014 US bond rally is just now being promulgated by one of the major media arbiters of taste. I mean, China’s Treasury purchases are no secret. The data is published monthly with about a 6-week delay. In April (data released more than a month ago) China bought more Treasuries than the US Fed, but there was hardly a peep about it in any major financial media outlet. What’s interesting about the perception by market participants of China’s accelerated Treasury purchases is that there was essentially NO perception of these purchases as an explanation of falling rates. It’s as if China were invisible or something, which, of course, is EXACTLY how China wished to be perceived in these actions. The market’s inability to recognize that China was buying massive amounts of US Treasuries to weaken the yuan is exactly like the elk herd’s inability to recognize that Jeremiah Johnson was standing on the other side of his horse to get a cleaner shot. The market has access to all the data, just like the elk can see how many feet are under Jeremiah’s horse. We see six feet under the horse, but we can’t comprehend the meaning of six feet under a horse. This is the secret of the stalking horse.

To be clear, I’m NOT saying that there is some grand conspiracy between financial media and China to keep their actions and motives hush-hush. Even if, to use a purely hypothetical thought experiment, Rupert Murdoch were perfectly willing to carry Beijing’s water to the ends of the Earth, the simple truth is that the Chinese regime doesn’t need to resort to these Citizen Kane tactics to carry out a stalking horse operation.

Also to be clear, I’m NOT saying that China’s Treasury purchases are the only reason for falling rates or that there are no fundamental economic reasons for continued strength in global bond markets. On the contrary, I’m firmly in the camp that global growth is structurally challenged, miserable as far as the eye can see, and that Western monetary policy is part of the problem, not the solution.

What I’m saying is that in the Golden Age of the Central Banker it is impossible to distinguish fundamental economic reasons for asset class price movements from politically-driven strategic reasons. Are European sovereign bonds so strong over the past few months because growth remains pathetically weak or because Draghi is promising his own version of QE? Answer: yes.

What I’m saying is that:

  1. Just as the elk is hard-wired to trust a horse standing in a field no matter how many legs it has, so are we wired to watch stocks go up and down and think about fundamental economic explanations for market outcomes no matter how many signals exist that non-economic game-players are really calling the shots.
  2. Government actors, from the Fed to the ECB to the White House to the Chinese Politburo, understand how we are wired and strategically use that understanding to further political goals such as market stability (US) and trade regime change (China). They stand behind their horses – stocks and bonds and fundamental economic explanations – in order to hunt down their true quarry without spooking anyone.

Once you start thinking about what’s happening in markets and the world as an inextricable weave of fundamental events and political efforts to shape our interpretation of those events to achieve a political end, you start to see stalking horses everywhere. A Fed QE program ostensibly to reduce unemployment and help Main Street? Stalking horse. A regulatory Big Data program ostensibly to identify brokers who churn accounts? Stalking horse. A Chinese banking program ostensibly to liberalize currency exchange rates? Stalking horse.

And it’s not just actual programs or actual market behaviors like the Chinese purchase of US Treasuries. When words are used for strategic effect rather than a genuine transmission of information you create a virtual stalking horse. This, of course, describes every use of words by every politician and every central banker. This is what Bernanke and Yellen and Draghi and Abe and Obama and Merkel mean when they refer to communication policy. Communication policy is the strategic use of words to shape perceptions and expectations. It’s a focus on how something is said as opposed to what is described. It’s a focus on form rather than content, on truthiness rather than truth. It’s why authenticity is as rare as a unicorn in the public world today.

Look, I understand why politicians and bankers have completely abandoned authenticity, an uncommon quality even in the best of times. The Great Recession was a near-death experience for the global economy, and slamming a syringe of adrenaline into the patient’s heart – which was basically what QE 1 did – doesn’t happen without long-term side-effects. To switch the metaphor around a bit, this was a war to preserve the System, and as Aeschylus said 2,500 years ago, the first casualty of war is truth. I really don't think Bernanke or Draghi came into office thinking that their public statements would become the most powerful weapon in their arsenal, or that they could train markets to respond so positively to words presented strategically for effect, but there you have it. This is what worked. This is how the war was won.

So … I understand why politicians and bankers have adopted a stalking horse technique to shape market expectations and behaviors, but that doesn’t mean I have to like it. And while I am happy to condone the use of emergency powers to win a war and save the world, I am not at all comfortable with their continued use once the crisis is over. Unfortunately, I believe that is exactly what has happened, that “strategic communication policy” has mutated from an emergency measure designed to prevent an economic collapse into a standard bureaucratic process designed to maintain financial stability. Is this banal assumption and routinization of power a natural bureaucratic response to a crisis, something we also saw in the aftermath of the Great Depression? Yes, but I’ve got examples going the other way, too. Lincoln suspended habeas corpus in 1861, and good for him. But in early 1866 – less than a year after Lee’s surrender at Appomattox – the US government stood down and restored Constitutional protections. I am really hard-pressed to understand how the exigencies of recovery from the Great Recession, now more than 5 years on, are somehow more deserving of ongoing emergency policies than the immediate aftermath of the freakin’ Civil War.

Wait a second, Ben. Are you seriously equating the government’s use of “strategic communications” to a suspension of Constitutional protections?  Doesn’t that seem a tad over the top? Yes I am, and no I don’t think so. The bedrock assumption of limited, representative government is that we, the people have an inalienable right to make an informed decision about who will make policy decisions on our behalf. Of course this is an imperfect process, and of course the information we use to make these decisions will be mediated and skewed by all sorts of competing interests. But it makes a big difference if the government itself is fully committed to mediating and skewing this information. And it makes all the difference in the world if relatively apolitical institutions like the Fed and various regulatory authorities – institutions which have been granted a vast array of powers over the years precisely because they have been viewed as relatively apolitical – now embrace the highly political act of mediating and skewing information in service to their own particular visions of stability and status quo preservation. This is the danger of strategic communication policy. This is the price we pay for a loss of authenticity within our most important institutions.

Whew! Okay, I’ll climb down from the soap box for now. What is the practical investment adaptation to all this, where historical market patterns based on economic principles can and will be turned on their heads by government “hunters” determined to capture their non-economic goals? I believe that now, more than ever, a portfolio based on what I call profound agnosticism is in order. It’s not easy to admit that your crystal ball is broken, that you have no idea what will happen next or when it will happen, but that’s the required mind-set, I think. Importantly, however, this mind-set does not require hiding under a rock or going to cash or playing defense all the time. Is the Golden Age of the Central Banker a time for investment survivors rather than investment heroes? Absolutely. But as I’ll discuss in Epsilon Theory notes over the next few weeks, a wily elk can still do pretty well for himself if he recognizes the hunters’ games and sticks to the ground he knows. If you’re not already a subscriber, I hope you join the herd.

In closing, I thought I’d share one more illustration from the 14th century “Book of the Hunt”. Here we see a method of trapping wolves that involves a long circular corridor with a one-way door forming a concentric circle around a holding pen where the bait (a live sheep and a blood trail source) is placed. It’s important to use the concentric lay-out for three reasons. First, the circular outer wall is hard for the wolf to escape if he gets wise to the trap, and the circular inner wall keeps the live bait … alive. Second, wolves expect to hunt and track their prey. By establishing a longer trail that must be navigated successfully the wolf becomes more committed to the trap the farther he goes. Third and most importantly, the design prevents the wolves from seeing each other until they get to the end of the blood trail, at which point it’s too late to escape what they now know is a trap.

Gaston Phoebus, “Livre de Chasse” (1387)

In many respects this medieval wolf trap is an even more effective metaphor for modern markets and the Narrative constructions of politicians and bankers than the stalking horse. So for all you investors and allocators who see yourselves as solitary wolves rather than as an elk or some other herd animal, just remember that these hunters have a plan for you, too. You can learn a lot from an old book …