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Private Capital Allocation Matching Only the Great Depression for Inefficiency

November 12, 2016

Private Capital Allocation Matching Only the Great Depression for Inefficiency

The Summary:
  1. Economic policy objectives (monetary and fiscal) are meant to incentivize domestic private business investment, which drives incomes and the money multiplier effect, i.e. the engine of the economy.
  2. Economic policy objectives have failed because CEO’s, the private capital allocators, simply cannot accommodate business investment when the demand function is as weak as we currently find it, no matter how available and how cheap the capital.
  3. The demand function is weak because we misunderstood and ignored the side effects of trade policies and their reliance on new world economies that naturally have a lower money multiplier effect than old world economies.
  4. A materially damaged demand function leads to a misallocation of resources; for the past 15 years capital has been and continues at an accelerating rate to be allocated to cash distribution (the most economically inefficient use of capital) rather than investment, further deteriorating the demand function (economic death spiral).
  5. The only question that matters now then is;  How do we get private sector capital allocators to allocate capital more efficiently?  I’ll give you a hint, it requires indications of sustainable demand improvement and neither monetary nor fiscal policy have the capacity to generate sustainable demand improvement when the demand function is damaged to the point that CEO’s refuse to invest productively.  This then requires a new economic policy framework, one that CAN generate sustainable demand improvement, which will allow capital allocators to invest productively.

We can understand the problem without villainizing any particular stakeholders by focusing on where we are today and delivering a viable solution.  Mistakes were made and judging whether they were honest or malicious in nature is irrelevant to finding the solution.  Our focus here is a solution.

The Proof:

What is the objective of Monetary and Fiscal policy expansion?

…click on the above link to read the rest of the article…

88% Probability We Just Entered Recession & The Broken Monetary Mechanism That Got Us Here

September 17, 2016

88% Probability We Just Entered Recession & The Broken Monetary Mechanism That Got Us Here

My last piece “The Matrix Exposed” generated a bit of a stir.  And as per usual the PhD’s had some fairly colourful things to say to me regarding the notion that more money and more credit may actually stall an economy.  But look I’m not trying to be offensive to anyone.  I’m simply making a case that when consumer credit becomes the basis of growth, well you have a real problem.  And that is a pretty reasonable argument even without the hoards of data backing it up.

But so allow me an attempt to mend some bridges.  Let’s start by looking at the various existing frameworks that drive economic policy.  We have Monetary policy (the banks), Fiscal policy (Congress), Microeconomic policy (Corporations).  So let’s look at each.

Let’s begin with Fiscal policy.  The very first issue that should jump out to everyone is that Congress has been utterly ineffective for almost 2 decades now.  That is because the partisanship has become so intense that there simply seems no room for compromise in an effort to get any reasonable piece of legislation done.  What we are left with is a slew of outdated fiscal policies.  Perhaps most detrimental is a corporate tax rate nearly twice that of many other developed nations.

The problem with relatively (to other nations) high corporate tax rates is it means that any domestic investment, everything else equal, has a significantly longer breakeven point.  Said another way, the return on domestic investment is much lower than the return on foreign capital investment (ceteris paribus).  This is a very intuitive concept, easily digestible by all.  The implication is that the relative level of corporate tax rates here in the US incentivize corporations to invest elsewhere.

…click on the above link to read the rest of the article…

Bill Gross’ May Investment Letter: The Scariest Thing I’ve Read In Years

May 16, 2016

Bill Gross’ May Investment Letter: The Scariest Thing I’ve Read In Years

A friend recently sent me Bill Gross’ May investment letter and I haven’t been able to stop thinking about for days.  Now one cannot deny that Bill is a highly intelligent man which is clear when reading his letters.  He thinks differently than most and that comes out between the lines.  But this latest letter has me more on edge than I normally find myself and for two reasons.  First is that I cannot decipher if Bill is actually championing what he is discussing or simply suggesting it is a stark reality that we must accept.  Second is that it reveals that even the likes of Bill Gross does not understand free market capitalism.

The gist of the letter was discussing the fact that technology is accelerating the replacement of human capital with software and machines.  It is a fact.  Bill rightly suggests that if this continues on course (which he believes it will) we will find ourselves in a jobless society.  He describes a future where jobs are no longer part of societal life.  Bill includes an excerpt from Andy Stern’s Raising the Floor,

“a policymaker – a future President or Prime Minister – must recognize that existing government policies have “built a whole social infrastructure based on the concept of a job, and that concept does not work anymore.” In other words, if income goes to technological robots whatever the form, instead of human beings, our culture will change and if so policies must adapt to those changes.”

To this proposition Bill then proposes a solution,

“What should the policy response be?  Retraining and education sound practical and are at the head of every politician’s promised ticket for the yellow brick road, but to be honest folks, I doubt that much of it will be worth the expense. 

…click on the above link to read the rest of the article…

April Cheers Could Bring May Tears, Have a Look…

April 21, 2016

April Cheers Could Bring May Tears, Have a Look…

When people stop trusting a market they stop using that market.  Trust is at near 20 year lows.  The conundrum is that as volumes decline it becomes ever easier for price insensitive participants to manipulate the market only furthering the distrust.  This first three charts depict the deterioration of volumes and capital outflows in the face of a ‘7 year bull’.  A hard to explain phenomenon.

Screen Shot 2016-04-21 at 12.52.14 PM

Raw Price to Monthly Volume:

Screen Shot 2016-04-21 at 11.33.29 AM

And the capital outflows….

Screen Shot 2016-04-21 at 11.58.31 AM

Now I heard Rick Santelli yesterday discuss whether the market can continue its run to new all time highs.  And with the obvious caveat of completely accepting that the fundamentals no longer have any correlation or relevance whatsoever to the market then yes, Santelli believes the market can reach all new highs.  On what, one may reasonably ask?  Well “kinetic energy”, he says, otherwise known as ‘Animal Spirits’ on Wall Street.

But it’s not so much kinetic energy that is levitating this market devoid of any supportive fundamentals, it is the fact that volumes are thin enough and technology has progressed enough that it has become entirely viable for existing policy champions (NY Fed/Citadel algos) to halt even drastic downward momentum runs and then for corporate treasury departments to grind the markets higher through record buybacks.  What we have left is a market of price insensitive participants i.e. corporate treasury departments and the Fed’s cronies (who incidentally make a fortune enacting the manipulation on behalf of the Fed).

Now I know that the last few remaining true believers, because I’ve talked to several, will suggest this explanation is just fancy talk.  But I ask you to look at the above charts and explain to me how else a market runs higher for 7 years in the face of the capital and volume exodus that has taken place?

…click on the above link to read the rest of the article…

A Blended Fundamental and Technical Perspective on Where We Go From Here

February 27, 2016

A Blended Fundamental and Technical Perspective on Where We Go From Here

So I’m currently teaching applied financial modelling at Marquette University in the beautiful blue collar town of Milwaukee, WI; home of the Harley, the (Miller) High-Life and SummerFest.  It’s a great town and a great school.  A few years ago the business college brought in a pretty savvy guy called David Krause who then started a program called AIM, where the top finance students actually manage more than $2M.  Because of the program’s success US News & World Report ranked Marquette’s finance program 21st in the nation this year.  Not bad for a small Jesuit school in the midwest.

Now I mention this because after 15 years in banking, teaching financial modeling has forced me to reacquaint myself with some of the basic tenets of markets and valuation.  Such things tend to get lost in the midst of “getting the deal done” and chasing paper profits.  This reacquaintance process has been quite illuminating for me and I thought perhaps for others too.

A reminder of what the market actually represents is a good place to start.  The stock market is simply an asset with some intrinsic value based on an expectation of future free cash flows to equity holders.  Those cash flows are generated from revenues less costs of the underlying companies that make up the market.  Let’s use the Wilshire 5000 Full Price Cap Index as the proxy market for this discussion as it is the broadest measure of total market cap for US corporations.  It’s level actually represents market capital in billions.

Screen Shot 2016-02-25 at 8.29.51 PM

So the market has put a valuation on those expected future cash flows to equity holders (as of today) at around $19.7T (a 55% increase from Jan of 2012) down from around $22.5T (a 77% increase from Jan of 2012) at the market peak last summer.

…click on the above link to read the rest of the article…

The Fed’s Fatal Flaw: A Predictable End

June 18, 2015

The Fed’s Fatal Flaw: A Predictable End

So last week a very savvy investor asked me my view (h/t Simon Popple) on – When and what will break the chains on gold by those seemingly omnipotent forces that so assuredly keep its price in check? In essence, the belief is (and I expect for most honest and impartial analysts this is true) that because there is potentially significant downside risk to a global monetary system built upon a currency to which gold represents the proverbial kryptonite (we’ll discuss why), there are checks in place within the system, to ensure that kryptonite doesn’t become too potent. The architects of the existing system would have been foolish not to implement checks on gold.

And due to traditional physical gold transactions being cumbersome in a world of click, point and trade, checks on gold come surprisingly simple (paper market). However, there now exists a broadening network of architects (think China’s Silk Road Fund, gold ATM’s in Dubai and electronic exchanges like Allocated Bullion Exchange) creating a modernized electronic infrastructure where physical gold transacts as efficiently as all other financial markets but while maintaining the inherent intrinsic and enduring value. Modern logistics for a monetary system with 5000 years of staying power will make it incredibly difficult to rebuild checks on gold subsequent to the death of the Fed.

Below I will provide the Hypothesis, Groundwork, Empirical Evidence and Conclusion that will speak to the title of this essay.   With that, grab a coffee and enjoy!

 

Hypothesis

The monetary system enacted in 1913 (and all fiat monetary systems), issuing currency backed by interest bearing indenture, was fatally flawed due to a requirement for its very survival to create an ever-increasing stock of money, without also providing the means for perfect investment, resulting in a system where debt ultimately consumes all profits and labour over time.

…click on the above link to read the rest of the article…

 

Olduvai IV: Courage
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Olduvai II: Exodus
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