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“Not only is the equity market at the second most overvalued point in U.S. history, it is also more leveraged against probable long-term corporate cash flows than at any previous point in history.”

— John P. Hussman, Ph.D. “Debt-Financed Buybacks Have Quietly Placed Investors On Margin“, Hussman Funds

“This year feels like the last days of Pompeii: everyone is wondering when the volcano will erupt.”

— Senior banker commenting to the Financial Times

Last Friday’s stock market bloodbath was the worst one-day crash since 2008. The Dow Jones dropped 531 points, while the S&P 500 fell 64, and the tech-heavy Nasdaq slid 171. The Dow lost more than 1,000 points on the week dipping back into the red for the year. At the same time, commodities continued to get hammered with oil prices briefly dropping below the critical $40 per barrel mark. More tellingly, the market’s so called “fear gauge” (VIX) skyrocketed to a 2015 high indicating more volatility to come. The VIX has remained at unusually low levels for a number of years as investors have grown more complacent figuring the Fed will intervene whenever stocks fall too far. But last week’s massacre cast doubts on the Central Bank’s intentions. Will the Fed ride to the rescue again or not? To the vast majority of institutional investors, who now base their buying decisions on Fed policy rather than market fundamentals, that is the crucial question.

Ostensibly, last week’s selloff was triggered by China’s unexpected decision to devalue its currency, the yuan. The announcement confirmed that the world’s second biggest economy is rapidly cooling off increasing the likelihood of a global slowdown. Over the last decade, China has accounted “for a third of the expansion in the global economy,… almost double the contribution of the US and more than triple the impacts of Europe and Japan.” Fears of a slowdown were greatly intensified on Friday when a survey showed that manufacturing in China shrank at the fastest pace since the recession in 2009. That’s all it took to put the global markets into a nosedive. According to the World Socialist Web Site:

“The deceleration of growth in China, reflected in figures on production, exports and imports, business investment and producer prices, is fueling a near-collapse in so-called “emerging market” economies that depend on the Chinese market for exports of raw materials. The past week saw a further plunge in stock prices and currency rates in Russia, Turkey, Brazil, South Africa and other countries. These economies are being hit by a massive outflow of capital, placing in doubt their ability to meet debt obligations.”

(“Panic sell-off on world financial markets”, World Socialist Web Site)

While a correction was not entirely unexpected following a 6-year long bull market, the sudden drop in equities does have analysts rethinking the effectiveness of the Fed’s monetary policies which have had little impact on personal consumption, retail spending, wages, productivity, household income, or economic growth all of which remain weaker than they have been following any recession in the post war era. For all intents and purposes, the plan to inflate asset prices by dropping rates to zero and injecting trillions in liquidity into the financial system has been an abject failure. GDP continues to hover at an abysmal 1.5% while signs of a strong, self sustaining recovery are nowhere to be seen. At the same time, government and corporate debt continue to balloon at a near-record pace draining capital away from productive investments that could lay the groundwork for higher employment and stronger growth.

What’s so odd about last week’s market action is that the bad news on China put shares into a tailspin instead of sending them into the stratosphere which has been the pattern for the last four years. In fact, the reason volatility has stayed so low and investors have grown so complacent is because every announcement of bad economic data has been followed by cheery promises from the Fed to keep the easy-money sluicegates open until the storm passes. That hasn’t been the case this time, in fact, Fed chair Janet Yellen hasn’t even scrapped the idea of jacking up rates some time in September which is almost unthinkable given last week’s market ructions.

Why? What’s changed? Surely, Yellen isn’t going to sit back and let six years of stock market gains be wiped out in a few sessions, is she? Or is there something we’re missing here that is beyond the Fed’s powers to change? Is that it?

crashingmarket

My own feeling is that China is not the real issue. Yes, it is the catalyst for the selloff, but the real problem is in the credit markets where the spreads on high yield bonds continue to widen relative to US Treasuries.

What does that mean?

It means the price of capital is going up, and when the price of capital goes up, it costs more for businesses to borrow. And when it costs more for businesses to borrow, they reduce their borrowing, which decreases the demand for credit. And when the demand for credit decreases in a credit-based system, then there’s a corresponding slowdown in business investment which impacts stock prices and growth. And that is particularly significant now, since the bulk of corporate investment is being diverted into stock buybacks. Check out this excerpt from a post at Wall Street on Parade:

“According to data from Bloomberg, corporations have issued a stunning $9.3 trillion in bonds since the beginning of 2009. The major beneficiary of this debt binge has been the stock market rather than investment in modernizing the plant, equipment or new hires to make the company more competitive for the future. Bond proceeds frequently ended up buying back shares or boosting dividends, thus elevating the stock market on the back of heavier debt levels on corporate balance sheets.

Now, with commodity prices resuming their plunge and currency wars spreading, concerns of financial contagion are back in the markets and spreads on corporate bonds versus safer, more liquid instruments like U.S. Treasury notes, are widening in a fashion similar to the warning signs heading into the 2008 crash. The $2.2 trillion junk bond market (high-yield) as well as the investment grade market have seen spreads widen as outflows from Exchange Traded Funds (ETFs) and bond funds pick up steam.” (“Keep Your Eye on Junk Bonds: They’re Starting to Behave Like ‘08 “, Wall Street on Parade)

As you can see, the nation’s corporations don’t borrow at zero rates from the Fed. They borrow at market rates in the bond market, and those rates are gradually inching up. And while that hasn’t slowed the stock buyback craze so far, the clock is quickly running out. We are fast approaching the point where debt servicing, shrinking revenues, too much leverage, and higher rates will no longer make stock repurchases a sensible option, at which point stocks are going to fall off a cliff. Here’s more from Andrew Ross Sorkin at the New York Times:

“Since 2004, companies have spent nearly $7 trillion purchasing their own stock — often at inflated prices, according to data from Mustafa Erdem Sakinc of the Academic-Industry Research Network. That amounts to about 54 percent of all profits from Standard & Poor’s 500-stock index companies between 2003 and 2012, according to William Lazonick, a professor of economics at the University of Massachusetts Lowell.”

You can see the game that’s being played here. Mom and Pop investors are getting fleeced again. They’ve been lending trillions of dollars to corporate CEOs (via bond purchases) who’ve taken the money, split it up among themselves and their wealthy shareholder buddies, (through buybacks and dividends neither of which add a thing to a company’s productive capacity) and made out like bandits. This, in essence, is how stock buybacks work. Ordinary working people stick their life savings into bonds (because they were told “Stocks are risky, but bonds are safe”.) that offer a slightly better return than ultra-safe, low-yield government debt (US Treasuries) and, in doing so, provide lavish rewards for scheming executives who use it to shower themselves and their cutthroat shareholders with windfall profits that will never be repaid. When analysts talk about “liquidity issues” in the bond market, what they really mean is that they’ve already divvied up the money between themselves and you’ll be lucky if you ever see a dime of it back. Sound familiar?

Of course, it does. The same thing happened before the Crash of ’08. Now we are reaching the end of the credit cycle which could produce the same result. According to one analyst:

“There’s been worrying deterioration in the overall global demand picture with the continuation of EM (Emerging Markets) FX (Currency Markets) onslaught, deterioration in credit metrics with rising leverage in the US as well as outflows in credit funds in conjunction with significant widening in credit spreads…..The goldilocks period of “low rates volatility-stable carry trade environment of the last couple of years is likely coming to an end.”

(“Credit: Magical Thinking“, Macronomics)

In other words, the good times are behind us while hard times are just ahead. And while the end of the credit cycle doesn’t always signal a stock market crash, the massive buildup of leverage in unproductive financial assets like buybacks suggest that equities are in line for a serious whooping. Here’s more from Bloomberg:

“Credit traders have an uncanny knack for sounding alarm bells well before stocks realize there’s a problem. This time may be no different. Investors yanked $1.1 billion from U.S. investment-grade bond funds last week, the biggest withdrawal since 2013, according to data compiled by Wells Fargo & Co…..

“Credit is the warning signal that everyone’s been looking for,” said Jim Bianco, founder of Bianco Research LLC in Chicago. “That is something that’s been a very good leading indicator for the past 15 years.”

Bond buyers are less interested in piling into notes that yield a historically low 3.4 percent at a time when companies are increasingly using the proceeds for acquisitions, share buybacks and dividend payments. Also, the Federal Reserve is moving to raise interest rates for the first time since 2006, possibly as soon as next month, ending an era of unprecedented easy-money policies that have suppressed borrowing costs….

“Unlike the credit market, the equity market well into 2008 was very complacent about the subprime crisis that led to a full blown financial crisis,” the analysts wrote…..

So if you’re very excited about buying stocks right now, just beware of the credit traders out there who are sending some pretty big warning signs.” (“U.S. Credit Traders Send Warning Signal to Rest of World Markets”, Bloomberg)

It’s worth noting that the above article was written on August 14, a week before the stock market blew up. But credit was “flashing red” long before stock traders ever took notice.

But that’s beside the point. Whether the troubles started with China or the credit markets, probably doesn’t matter. What matters is that the system about to be put-to-the-test once again because the appropriate safeguards haven’t been put in place, because bubbles are unwinding, and because the policymakers who were supposed to monitor and regulate the system decided that they were more interested in shifting wealth to their voracious colleagues on Wall Street than building a strong foundation for a healthy economy. That’s why a simple correction could turn into something much worse.

NOTE: As of posting time, Sunday night, the Nikkei Index is down 710, Shanghai down 296, HSI down 1,031. US equity futures are all deep in the red

MIKE WHITNEY lives in Washington state. He is a contributor to Hopeless: Barack Obama and the Politics of Illusion (AK Press). Hopeless is also available in a Kindle edition. He can be reached at [email protected].

(Republished from Counterpunch by permission of author or representative)
 
• Category: Economics • Tags: Wall Street 
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  1. MarkinLA says:

    The stock market was and always will be a sucker’s game of the insider’s (corporate execs and Wall Street) versus the outsiders (everybody else). Can the little guy make money? Sure but he has to know it is basically all a scam and he is the intended mark. This put him ahead of 95% of the people in the market.

    The market goes down because the public has bought in heavily and there are no more suckers to keep it up. Once it goes low enough the suckers throw in the towel and the cycle repeats. To make money you cannot think of yourself as an “investor” – everybody who doesn’t get the deals Warren Buffet gets has to consider himself a trader and willing to dump something at a moments notice.

    The vast majority of stock traded never adds a penny to the company you think you are investing in and has absolutely no effect on that company.

    The only difference between this and a pyramid scam or the mafia’s numbers is that there is some real entity other than mathematical chance attached to it so you can review their financial statements and occasionally find a company that seems to be undervalued. Of course they can be that way because no matter how low their EPS is, they are headed to bankruptcy court like Federal Mogul when their idiot CEO bet the whole company on their ability to overcome their asbestos liability when they thought 1 billion dollars in cash and insurance protection was enough. They were highly profitable until the day they had to hand all their cash to the asbestos fund to limit their liability. Not only did they wipe out their shareholders but their employee stock ownership plan.

    Every day some bubblehead gives you the EXACT reason the market went up or down today or did nothing. If you listen to any of this you deserve to lose all your money. The daily ups and downs are white noise that the insiders use to skim off their cut. The big moves are when the insiders no longer own much stock and need to fleece the public big time. They need an excuse such as the downturn in China to make it all seem so rational so the suckers will come back for more.

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  2. Realist says:

    It’s easy to blame China for everything, hacking, stock market problems and anything else the US doesn’t want to take the blame for.

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  3. Dave Pinsen says: • Website

    I have no idea whether Monday’s market meltdown was a blip or not, but I do know a way investors can have a shot at decent returns while limiting their downside risk. I call it the hedged portfolio method, and recently wrote an article about backtesting it.

    In a nutshell, the idea is to identify stocks and exchange traded products (such as ETFs) that 1) have high potential returns, and 2) are relatively cheap to hedge. Then you buy and hedge a few of them, and hold them for six months or until just before their hedges expire, whichever comes first, and repeat the process. When the method picks winners, you do well, and when it picks losers, you don’t lose too much because you’re hedged.

    This page on my website shows a sample hedged portfolio, and has interactive graphs showing the results of the backtests. If you click on “show positions”, you can see exactly what was in the backtested hedged portfolios every week during the test period from 1/2/2003 to 4/30/2014.

    Read More
    • Replies: @Dave Pinsen
    This article, written on Monday, but published Tuesday before the market opened, includes an example of one of those hedged portfolios, for a small ($30k) portfolio: http://seekingalpha.com/article/3463896-keeping-a-small-nest-egg-from-cracking

    The three underlying stocks in it - DXCM, FB, and NFLX - were all in the green on Tuesday, but even if they all had plummeted, the investor's downside would have been limited, because each one was hedged.
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  4. … last week’s selloff was triggered by China’s unexpected decision to devalue its currency, the juan.

    The ‘juan’? Have the Chinese adopted Spanish now? ;-)

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  5. All that money that’s being taken out of the market — where is it going?

    Is it mere coincidence that the Iran deal is on the table at the same time?

    The Chinese whore has grown flabby and syphilitic.
    Iran is a fresh market, a virgin with big boobs. Wall Street rapists like nothing better.

    Don’t let the Izzies braying fool you: Netanyahu’s interests were at the table and vetted every step, every clause, every word — can you say Wendy Sherman, partner of Madeleine “the price was worth it” Albright? https://www.youtube.com/watch?v=RM0uvgHKZe8

    Anybody know if Sherman’s middle name is Esther?

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  6. rod1963 says:

    What matters is that the system about to be put-to-the-test once again because the appropriate safeguards haven’t been put in place, because bubbles are unwinding, and because the policymakers who were supposed to monitor and regulate the system decided that they were more interested in shifting wealth to their voracious colleagues on Wall Street than building a strong foundation for a healthy economy.

    Spot on.

    In China, you have endemic corruption and a utterly opaque system in regards to what’s really going on. Ghost cities being built like crazy, steel mills being shut down, they are worrying about exports. In the U.S. the stock market resembles a casino with stocks valuations that are insane like Google, Amazon, Twitter, Facebook, etc. Basically a bunch of bullshitters selling bullshit surrounded by pump monkeys. Then on top of that you have every CEO trying to find ways of firing American workers and replace them with slaves from Bombay. And what’s left of our manufacturing and technology sector is being sent overseas.

    Short term we’ll bounce back thanks to intervention, long term we’re screwed.

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  7. Sean says:

    A trader fellow on BBC W S was explaining the crash. Trading has computers that sell automatically to prevent big losses. The override button is the responsibility of the top banana. August is when many bosses go on holiday, and the people left in charge don’t dare override the automated trading systems.

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  8. anon • Disclaimer says:

    Globalization has been spun as the natural industrializing of emerging markets but it’s a lie.

    The majority of globalization has been the banking mafia’s looting and direct transfer of productive capacity from the West to the East for *export* to the West.

    This is the key point. The off-shored productive capacity is still tied to demand in the West.

    (Effectively all that has happened is the supply side of the equation has been shipped overseas while the demand side remained in the West.)

    What are the consequences of this?

    1. The banking mafia have had 30 years where they got to pay 3rd world wages to produce goods sold in the West at Western prices – hence all the billionaire oligarchs.

    2. Some of that transferred productive capacity and the wages that go with it (even if low by western standards) has led to some independent industrial growth in the 3rd world – especially in the smarter regions – but most of it is effectively a semi-detached part of the western economy.

    3. How was western demand maintained when tens of millions of well paid jobs were shipped overseas?

    Debt.

    The banking mafia artificially maintained Western demand throughout thus period using debt.

    So the entire globalist structure hangs from that single thread and that thread has been fraying since 2008.

    So the reason for the China fall is simply that the banking mafia have put the world into a situation of massive stress and that stress will lead to random outbreaks of panic until it all finally goes bang.

    Read More
    • Agree: Seamus Padraig
    • Replies: @Anonymous

    The majority of globalization has been the banking mafia’s looting and direct transfer of productive capacity from the West to the East for *export* to the West.

    This is the key point. The off-shored productive capacity is still tied to demand in the West.
     
    More fundamental to this arrangement than demand is the export of the earnings of the transferred productive capacity in the East into Western capital markets. If the earnings are exported via investment or capital flight, then the assets of the Western elite increase in value and they become wealthier. It is as if they indirectly own the transferred productive capacity. Furthermore, this export of capital makes foreign assets cheaper for Western finance.
    , @Olorin
    Note how widespread is the assumption that capitalism, or any economic model, is 1:1 transferable to anyone, anywhere, at any time.

    Sorta the EU model of things: give Greece and Portugal and Italy the same currency as Germany, and everything will magically become prosperous. Or schooling: just plunk every person with an IQ of 70 in Choate, and watch the transformation unfold.

    Yet in all social systems, including economic ones, population genetics plays a huge role. It's hard to suss this out at present where macroeconomics is concerned. One can only sit on one's little doomstead porch and try to formulate hypotheses.

    One of mine is that capitalism's best predators are in the +1 to +1.5 SD IQ/g range. Not bright enough to see the big-picture consequences, nor empathetic enough to care (different set of alleles), but bright enough to manipulate the system and the masses. The really bright boys, the uber-quants, are so bright (+3 SD or more) they can't talk to the lesser intellects, another example of the commonly observed phenomenon that it's very hard for people to talk across a gulf of more than 1 SD.

    Having hypothesized this, one might also factor in that little incident at the port of Tianjin two weeks ago. It's not a negligible player in all this...and might prove to be a tipping point.

    http://usa.chinadaily.com.cn/epaper/2015-08/14/content_21599983.htm

    There was one yuan devaluation before that...and two after.

    I've already profited from the disaster. I bet a bottle of Laphroaig 18 that the first internet conspiracy theories involving nuclear or energy weapons would emerge within 4 hours. I won with three-plus hours to spare. My bet-partner, who with a nearly +4 SD IQ is much more positive (or perhaps clueless) about the human condition than I, figured it would be at least 24 hours. No biggie--we'll share the bottle.
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  9. Anonymous • Disclaimer says:
    @anon
    Globalization has been spun as the natural industrializing of emerging markets but it's a lie.

    The majority of globalization has been the banking mafia's looting and direct transfer of productive capacity from the West to the East for *export* to the West.

    This is the key point. The off-shored productive capacity is still tied to demand in the West.

    (Effectively all that has happened is the supply side of the equation has been shipped overseas while the demand side remained in the West.)

    What are the consequences of this?

    1. The banking mafia have had 30 years where they got to pay 3rd world wages to produce goods sold in the West at Western prices - hence all the billionaire oligarchs.

    2. Some of that transferred productive capacity and the wages that go with it (even if low by western standards) has led to some independent industrial growth in the 3rd world - especially in the smarter regions - but most of it is effectively a semi-detached part of the western economy.

    3. How was western demand maintained when tens of millions of well paid jobs were shipped overseas?

    Debt.

    The banking mafia artificially maintained Western demand throughout thus period using debt.

    So the entire globalist structure hangs from that single thread and that thread has been fraying since 2008.

    So the reason for the China fall is simply that the banking mafia have put the world into a situation of massive stress and that stress will lead to random outbreaks of panic until it all finally goes bang.

    The majority of globalization has been the banking mafia’s looting and direct transfer of productive capacity from the West to the East for *export* to the West.

    This is the key point. The off-shored productive capacity is still tied to demand in the West.

    More fundamental to this arrangement than demand is the export of the earnings of the transferred productive capacity in the East into Western capital markets. If the earnings are exported via investment or capital flight, then the assets of the Western elite increase in value and they become wealthier. It is as if they indirectly own the transferred productive capacity. Furthermore, this export of capital makes foreign assets cheaper for Western finance.

    Read More
    • Replies: @anon
    Yes, there's a lot to it but I find it's easier to get through to the average person if you only focus on one aspect at a time - in this case that global supply and demand has become dangerously unbalanced and only functions at all through ever increasing western debt.


    @Anonymous

    When you make money by purchasing a stock today at a low price and selling it tomorrow at a higher price, have you added any benefit to society?
     
    None but people buying and *holding* stocks because the firm is well-run etc is a capital allocation signal.

    So the question is why is there currently such a large amount of speculating money and why is speculating currently more profitable than investing?

    When

    capital >>>> labor

    then there will be a) more of it and b) no point in investing because no-one has any money to spend.

    So over the last 30 years or so as the banks bribed the western elites into gradually removing all their restraints we got things like sub-prime, securitization, re-hypothecation, dipping into client's money overnight, profits from off-shoring etc creating vast sums of both real and fake capital while at the same time mass immigration and off shoring led to stagnant wages and demand so no reason to invest.


    So I'd say under *normal* circumstances the stock market provides a useful function but we're not in *normal* circumstances.
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  10. Someone saving so that he or she wouldn’t have to depend entirely or at all on an unfunded state pension and other forms of welfare should start with a modern baseline of 2 to 3 per cent real return on gilt edged bonds established between the foundation of the Bank of England in 1694 and 1914. In the UK 4 per cent was the acceptable rent from tenant farmers and the interest on good first mortgages. 5 per cent was about right for a high quality commercial loan. Then there is 6 or 7 per cent since about 1900 on Anglosphere stockmarkets to be explained (Germany is still to some extent the test case for the potency of alternative ways of financing capitalist growth. Socialist/communist growth proved to be seriously flawed.)
    It should be noted that the difference between 2 per cent and 7 per cent or even 3 per cent and 6 per cent over a 40 year working life is not slight as people in some countries afflicted with high and variable inflation may sometimes have been discouraged from believing. (Open the Excel Functions and test a few scenarios. A simpler approach is to note that a principal sum doubles in 36 years at 2 per cent, 24 years at 3 per cent, 12 years at 6 per cent, 10 years at 7 per cent).

    However…..

    That 6 or 7 per cent is hardwork for the average saver to participate in, especially if he pays fund managers 1 per cent or more annually and a steady cut of tax on dividends and capital gains. No Anglosphere country has added a relevant wealth tax to the best of my knowledge but families can look forward to the slug of inheritance taxes in most countries though, happily, not in mine since the late 70s). The Wall Street, City of London and other supposed insiders are not the biggest reason for the ordinary investor’s difficulty in getting a good slice of the 6 or 7 per cent. Most of what might be blamed on “insiders” could be blamed on factors like overhead costs mentioned above but also the combination of the intrinsic difficulty of beating the market and the youth and ignorance of the swarm of brokers and analysts trying to get people to invest (and sell and reinvest).
    Intrinsically there is increasing wealth to be had because of the increasing rate of invention and innovation over the last 250 years, not forgetting great mineral discoveries, especially gold rushes and oil bonanzas, and demographic factors have been pluses until recently when modern medicine and fertility control threaten to make it a big minus.
    It is arguable whether the Anglosphere model of finance is necessary, or even best for fostering innovation though socialists have a particularly hard task to prove that governments can pick the truly innovative winners (well selected catchups and certain obvious geographical advantages such as docks and oil storage in Singapore don’t qualify). But it does harness the gambling spirit, greed and animal spirits to provide the products of innovation and risk taking for the whole community even if the gamblers and speculators rarely do much to get the extra long term 2 or 3 per cent real return for their investments that long term equity investors might hope for.
    The moral, contrary to quite a lot that has been written, stay about 120 per cent invested across world equity markets (overweighted in one’s home country and currency) for as long as you can, assuming that interest is tax deductible and that you keep an eye on what could happen in a bubble if you are at a stage in life where recovery might be difficult from a market decline which required you to sell. By all means by and sell as a trader if you have the time knowledge and skill – and have considered the tax implications. At least it might make you a better buy and hold investor while you get on with other things.
    I don’t know if Mike Whitney has any claim to be taken seriously on stock market matters. That isn’t clear from this article but he alerted me to one thing to follow up. I had been assuming that the deleveraging and the repair of corporate balance sheets which followed the 2007-2009 meltdown meant that corporations still had healthy balance sheets. Maybe no longer, though presumably banks are no longer vulnerable. In the related topic of buybacks the critics should acknowledge that there can be circumstances in which the best investment of a corporation’s cash would be in its own shares. Also that providing capital gains to shareholders may be tax effective compared with paying dividends. Is it OK to borrow to do that? The article and Comments lack the needed figures. If the corporation can reliably earn the revenue to comfortably cover the 3 or 4 per cent bond interest and is not already overgeared it could be regarded as responsible. A caveat has to be entered however about the the incentives to executives to boost the share price in order to boost their bonuses or options. Non-executive board members should be alert to their duties on that score…
    More and deeper information and analysis from Mr Whitney would be in order.

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  11. Dave Pinsen says: • Website
    @Dave Pinsen
    I have no idea whether Monday's market meltdown was a blip or not, but I do know a way investors can have a shot at decent returns while limiting their downside risk. I call it the hedged portfolio method, and recently wrote an article about backtesting it.

    In a nutshell, the idea is to identify stocks and exchange traded products (such as ETFs) that 1) have high potential returns, and 2) are relatively cheap to hedge. Then you buy and hedge a few of them, and hold them for six months or until just before their hedges expire, whichever comes first, and repeat the process. When the method picks winners, you do well, and when it picks losers, you don't lose too much because you're hedged.

    This page on my website shows a sample hedged portfolio, and has interactive graphs showing the results of the backtests. If you click on "show positions", you can see exactly what was in the backtested hedged portfolios every week during the test period from 1/2/2003 to 4/30/2014.

    This article, written on Monday, but published Tuesday before the market opened, includes an example of one of those hedged portfolios, for a small ($30k) portfolio: http://seekingalpha.com/article/3463896-keeping-a-small-nest-egg-from-cracking

    The three underlying stocks in it – DXCM, FB, and NFLX – were all in the green on Tuesday, but even if they all had plummeted, the investor’s downside would have been limited, because each one was hedged.

    Read More
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  12. Anonymous • Disclaimer says:

    When you make money by purchasing a stock today at a low price and selling it tomorrow at a higher price, have you added any benefit to society? Have you produced any goods? Have you furthered the human race somehow?

    The answer to all of these is of course “no.”

    Now imagine how many millions of people, billions of man-hours, and trillions of dollars are spent to try to come out ahead in this artificial, man-made “game” of financial markets. And it’s all nothing but vapors – nothing tangible is produced. In this way, it’s one of the greatest evils ever foisted upon mankind.

    It may have once had a legitimate purpose, but that’s long since been forgotten and obscured.

    Read More
    • Replies: @ttjy
    And this is what a large part of our retirement is based on.

    Does it seem like media reports tend to speed up the sell-off? Everybody is told to just hold the mutual funds. Then the market keeps going down and the farther it goes down the more the media talks about it causing more and more people to crack and sell their stock which causes it to go down farther.

    I remember a guy at work in 2008 running down the hall yelling It's going down! It's going down!
    , @MarkinLA
    After the IPO none of the money goes into the corporate treasury for R&D or for anything that might result is a more profitable company. It is all just speculation based on numbers and the hope that they are real and actually mean something.

    Well sometimes companies do issue more stock through general sales and not via stock options to their execs, usually when they are dogs and need to cash to avoid bankruptcy and are at best an even bigger risk than when they first went public.
    , @Dave Pinsen
    It's not quite that simple. It's true, that you aren't contributing anything directly to a company when you purchase its shares in the aftermarket (i.e., not during an IPO). But the company's market value, which you do impact through your investing, can have real world effects on the company. A rising share price can make it easier for a company to hire key employees, or to borrow money. A declining share price can have the opposite effect. Companies also sometimes purchase their own shares, and, if you and other investors bid those share prices up, because you believe in the company's prospects, those companies can use their appreciated shares for acquisitions.

    In a similar way, short sellers aren't taking anything directly away from a company by shorting their stock, but that gives them a financial incentive to highlight instances of fraud, illegality, or incompetence at companies whose shares they are betting against.

    The way it's supposed to work -- and maybe does, to some extent -- is that the market uses the wisdom of crowds to help allocate capital and talent. Shares of companies that convince investors they are on the right track rise, and that makes it easier for those companies to raise additional financing via debt or secondary stock offerings, it makes it easier for them to acquire other companies, etc. One wrench in the works, though, is indexing. If everyone invests passively in the index, there's not much wisdom for the market to mine.
    , @Wizard of Oz
    You have of course described what happens and your tests of utility so that the logical answer is a virtual tautology. (Though not quite because, apart from the possibility that it is the making of that profit which is critical to the making of an epoch making outlay - future Nobel Prize winner's college fees made affordable say - there is utility in one person who wants to buy finding someone who wants to sell...).

    Now please show that your views are worth giving some weight by describing the motives and processes which provide risk capital for innovative enterprise from people who want to take the risks and are willing and able to assess or assume them. And the place of liquidity in this. You may of course argue that bureaucratic German or Japanese bankers would do a great job of financing Blue Sky Mines NL or WhizkidNovotech Inc.

    There is after all more to the buying and selling of shares than you dealt with. I write as a mostly buy and hold investor.

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  13. ttjy says:
    @Anonymous
    When you make money by purchasing a stock today at a low price and selling it tomorrow at a higher price, have you added any benefit to society? Have you produced any goods? Have you furthered the human race somehow?

    The answer to all of these is of course "no."

    Now imagine how many millions of people, billions of man-hours, and trillions of dollars are spent to try to come out ahead in this artificial, man-made "game" of financial markets. And it's all nothing but vapors - nothing tangible is produced. In this way, it's one of the greatest evils ever foisted upon mankind.

    It may have once had a legitimate purpose, but that's long since been forgotten and obscured.

    And this is what a large part of our retirement is based on.

    Does it seem like media reports tend to speed up the sell-off? Everybody is told to just hold the mutual funds. Then the market keeps going down and the farther it goes down the more the media talks about it causing more and more people to crack and sell their stock which causes it to go down farther.

    I remember a guy at work in 2008 running down the hall yelling It’s going down! It’s going down!

    Read More
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  14. MarkinLA says:
    @Anonymous
    When you make money by purchasing a stock today at a low price and selling it tomorrow at a higher price, have you added any benefit to society? Have you produced any goods? Have you furthered the human race somehow?

    The answer to all of these is of course "no."

    Now imagine how many millions of people, billions of man-hours, and trillions of dollars are spent to try to come out ahead in this artificial, man-made "game" of financial markets. And it's all nothing but vapors - nothing tangible is produced. In this way, it's one of the greatest evils ever foisted upon mankind.

    It may have once had a legitimate purpose, but that's long since been forgotten and obscured.

    After the IPO none of the money goes into the corporate treasury for R&D or for anything that might result is a more profitable company. It is all just speculation based on numbers and the hope that they are real and actually mean something.

    Well sometimes companies do issue more stock through general sales and not via stock options to their execs, usually when they are dogs and need to cash to avoid bankruptcy and are at best an even bigger risk than when they first went public.

    Read More
    • Replies: @Dave Pinsen
    Secondary offerings, as share offerings post-IPO are called, aren't that uncommon. Tesla just had one , as I noted in a recent article ("Adding downside protection to Tesla"). But most of the commenters on that article are bearish on the company and would agree with your assessment that its secondary offering isn't auspicious.
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  15. joe webb says:

    sounds too bad to be true : corporate bonds are sold to “Mom and Pop ” (?) “… and, in doing so, provide lavish rewards for scheming executives who use it to shower themselves and their cutthroat shareholders with windfall profits that will never be repaid. When analysts talk about “liquidity issues” in the bond market, what they really mean is that they’ve already divvied up the money between themselves and you’ll be lucky if you ever see a dime of it back. Sound familiar?”

    This cannot be true. The bond would blow-up and the corporation/business selling the bond would also fail, and be punished as well by SEC, etc. ( or I am terminally naive )

    Things are a much more complicated here than I think Mr. Whitney sketches for us, and himself I fear.

    In today’s WSJ print edition (which I cannot find now on the digital edition) an article on the Fed’s move in 2009 to get bond prices way down my opening the sluice gates of Fed semi-free money , was intended to prop up if not drive up stock prices, and thus light a fire under a sluggish economy. The article states that this made a certain amount of sense, but ultimately backfired, by encouraging reckless financial wizardry/gimicks. Loans at 2 per cent do not foster a sense of moral hazard as the cliche from a few years back has it. Despite the current stock market sloshing, the article suggests that raising interest rates by the Fed would help sober-up the financial and business folks.

    I admit that I do not understand why a firm buys back its stock, other than to push its stock price higher. A higher stock price attracts more investors who want to get in on a sure thing. It is also another indication of how much surplus capital there is out there.

    This certainly contributes to a bubble in stock price, but for a time at least, looks good. So maybe this is the explanation. Possibly it is a scam, and maybe it is just sensible use of surplus capital that you don’t know what else to do with. ( This is where confiscation of Surplus Capital and returning it to people who have real jobs comes into my argument. Talk about a Stimulus! And
    it involves no new taxes or programs!)

    There is a huge amount of Capital looking for a date. I have argued that there is a very large pool of Surplus Capital (think Surplus Value) sitting on the sidelines with nothing to do but blow bubbles occasionally. It need to meet a Worker who happens to have some money in his pocket.

    A banker friend guesses that in the US alone, there is about 5 trillion US dollars of Surplus Capital.

    Throw in another 10 trillion from Europe and the Far East. Under these conditions, there is way too much Capital chasing very few investment opportunities. A corollary of Surplus Capital is Starved Labor. Wages stink, and purchasing power/consumer spending is thus anemic, thus contributing to stagnation.

    The fundamental is too much Capital, interest rates too low because of it, not enough consumer demand (thru high wages), bubbles in real estate or tulip bulbs cuz there is little prospect of making some money in a productivist enterprise, and consequent multiplication of financial scams, and Capital flight to overseas miasmas like China, the inscrutable, because they lie, cheat and steal and never will operate in the sunshine. Never mind their serfs.

    Finally, in general interest rates will stay low despite the Fed’s attempt to raise them. I just sold all my stock on friday last week as the fire started.. will pay off my mortgage. Making money anywhere will be very difficult, except in real jobs.

    Really folks, the capitalist market is not just a bunch of crooks, whatever the commies tell you.
    The money mangers just try to figure it out, and yes, they cut corners often, and try to survive the rat-race. Are they going to tell you to take your money out? What do you expect? Fairy godmothers? They do not have a fiduciary relationship with you as an investor.

    We need a nationalist economics, and a national economy primarily. All foreign investment should be regarded as dangerous and very carefully considered. Autarky is possible in a big country. Fits right in with Racial homogeneity. Cosmopolitanism is either communism or liberal totalitarianism/ Consumerism

    Joe Webb

    Read More
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  16. joe webb says:

    I think I posted this yesterday….cannot recall, getting on…from a Krugman column.

    -
    Subject: Fw: NYTimes.com: A Moveable Glut ( “But these aren’t just a series of unrelated accidents. Instead, what we’re seeing is what happens when too much money is chasing too few investment opportunities.” )

    The reference to a long piece by ex-Fed Chair, Bernanke, is worth reading and will exercise your brain real good.

    What I learned from it with regard to our current glut of Surplus Capital, is this: not only do we have first world sources of surplus capital, but also second world sources, which send their “beggar-their-workers” profits to the US and Europe to slosh around the Capital effluent pond and thereby worsen our first world situation of capital glut.

    Krugman begins by ticking off a number of seemingly unrelated events, housing bubbles, stock bubbles, etc. but then remarks:

    “But these aren’t just a series of unrelated accidents. Instead, what we’re seeing is what happens when too much money is chasing too few investment opportunities.”

    I have emphasized totally “parked” Capital sitting in banks, some subject to a parking fee of there-quarters of one percent (not an interest rate but a parking lot fee) but that is just the tip of the iceberg. The rest of the iceberg is, to pursue the image, submerged below the surface of apparent reality.

    Apparent economic reality is what we see happening around us…apparently unrelated economic/financial events, but the underlying (sorry) reality is the mass of Capital which is not only just ‘parked’ but operating at a very low level of productivity and dynamism, which is reflected both in profits and in interest rates.

    Of course, profits for corporations have been good over the last few years, but that may be changing fast. Interest rates are at dangerously low levels, usually scaring the be-jesus out of our rulers…Deflation! a threat.

    A growth rate for the entire economy at two percent is better than zero or worse, but not much.

    The financialization of our economies is part of the problem. In stead of Productivism- the emphasis on making things- the emphasis is on profits…short term of course. This sounds like an old left-wing complaint, and it is, but it is as true today as at any other time….much more true. Gone are the days when ‘what’s good for General Motors is Good for the USA.’

    Now General Motors and its clones could not care less about the USA, or for that matter any country in which it operates. What the General Motors of the world, say Apple today, cares about is the Bottom Line, and it will cache overseas profits, screw its blue collar workers, etc. A WSJ writer told me (email) that there are 2.1 trillion corporate dollars (US) sitting abroad, just parked.
    ———-
    An economy is like a biological entity. It does not matter what left-wing or right-wing sentiment calls for in thinking about economics. An economy needs investment and consumption and savings…all in the correct amounts, just like a biological organism needs food, water, exercise, and so on.

    Right now and for some time, the consumption aspect called Consumer Spending…the driver of any economy…has been starved. The other side of the coin is too much saving by Capital. The result is an oversupply of Capital which leads to too low interest rates as well as reckless investment called bubbles. Meanwhile workers’ wages stagnate as well and the whole thing…the economy, goes to hell.

    The Marxist theory of Surplus labor value is not quite it, but Surplus Capital, the most important effect of starving Labor, is real. Interest rates need to go up, and the only way that will happen is for more Consumer Demand to be produced…and that could be accomplished by confiscating a good chunk of Capital and putting it in the hands of workers, or, wage and price and capital controls, in various combinations. A nationalist economics would figure it all out, but what we used to call mad-dog capitalism, especially now that it is Global…has gone from mad-dog to monster.

    Joe Webb

    Read More
    • Replies: @MarkinLA
    I admit that I do not understand why a firm buys back its stock, other than to push its stock price higher.

    Sometimes it is for the right reasons - the company is awash in cash and they pay a high dividend. Buying back the stock reduces their payouts and increases their earnings per share. Today they are mostly to sop up all the executive stock options handed out by the old boys club called the board of directors. This is done to keep the float the same so there is no stock dilution that would piss off the existing shareholders. It is all about transferring the corporations available cash into the executives bank accounts.
    , @annamaria
    "The financialization of our economies is part of the problem."
    Agree. Perhaps the financialization of the economy is actually the root of our problems - and also a sign of the bigger problem of de-democratization of Western societies.
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  17. Dave Pinsen says: • Website
    @MarkinLA
    After the IPO none of the money goes into the corporate treasury for R&D or for anything that might result is a more profitable company. It is all just speculation based on numbers and the hope that they are real and actually mean something.

    Well sometimes companies do issue more stock through general sales and not via stock options to their execs, usually when they are dogs and need to cash to avoid bankruptcy and are at best an even bigger risk than when they first went public.

    Secondary offerings, as share offerings post-IPO are called, aren’t that uncommon. Tesla just had one , as I noted in a recent article (“Adding downside protection to Tesla”). But most of the commenters on that article are bearish on the company and would agree with your assessment that its secondary offering isn’t auspicious.

    Read More
    • Replies: @MarkinLA
    Calculate all the money moving through the markets for every IPO and every secondary offering and compare it to the entire total and what is the percentage of the money that actually goes to the corporations and can be considered an investment versus a speculation? If it is 1/10th of 1 percent I would be shocked.

    I have been though a few secondary offerings, they are never about building new products or buying the rights to new technology. They are always about trying to keep a failing business afloat a bit longer. Tesla is a failing business in conventional terms as is Mankind. They have great products maybe they even are the wave of the future 30 years from now.
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  18. Dave Pinsen says: • Website
    @Anonymous
    When you make money by purchasing a stock today at a low price and selling it tomorrow at a higher price, have you added any benefit to society? Have you produced any goods? Have you furthered the human race somehow?

    The answer to all of these is of course "no."

    Now imagine how many millions of people, billions of man-hours, and trillions of dollars are spent to try to come out ahead in this artificial, man-made "game" of financial markets. And it's all nothing but vapors - nothing tangible is produced. In this way, it's one of the greatest evils ever foisted upon mankind.

    It may have once had a legitimate purpose, but that's long since been forgotten and obscured.

    It’s not quite that simple. It’s true, that you aren’t contributing anything directly to a company when you purchase its shares in the aftermarket (i.e., not during an IPO). But the company’s market value, which you do impact through your investing, can have real world effects on the company. A rising share price can make it easier for a company to hire key employees, or to borrow money. A declining share price can have the opposite effect. Companies also sometimes purchase their own shares, and, if you and other investors bid those share prices up, because you believe in the company’s prospects, those companies can use their appreciated shares for acquisitions.

    In a similar way, short sellers aren’t taking anything directly away from a company by shorting their stock, but that gives them a financial incentive to highlight instances of fraud, illegality, or incompetence at companies whose shares they are betting against.

    The way it’s supposed to work — and maybe does, to some extent — is that the market uses the wisdom of crowds to help allocate capital and talent. Shares of companies that convince investors they are on the right track rise, and that makes it easier for those companies to raise additional financing via debt or secondary stock offerings, it makes it easier for them to acquire other companies, etc. One wrench in the works, though, is indexing. If everyone invests passively in the index, there’s not much wisdom for the market to mine.

    Read More
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  19. @Anonymous
    When you make money by purchasing a stock today at a low price and selling it tomorrow at a higher price, have you added any benefit to society? Have you produced any goods? Have you furthered the human race somehow?

    The answer to all of these is of course "no."

    Now imagine how many millions of people, billions of man-hours, and trillions of dollars are spent to try to come out ahead in this artificial, man-made "game" of financial markets. And it's all nothing but vapors - nothing tangible is produced. In this way, it's one of the greatest evils ever foisted upon mankind.

    It may have once had a legitimate purpose, but that's long since been forgotten and obscured.

    You have of course described what happens and your tests of utility so that the logical answer is a virtual tautology. (Though not quite because, apart from the possibility that it is the making of that profit which is critical to the making of an epoch making outlay – future Nobel Prize winner’s college fees made affordable say – there is utility in one person who wants to buy finding someone who wants to sell…).

    Now please show that your views are worth giving some weight by describing the motives and processes which provide risk capital for innovative enterprise from people who want to take the risks and are willing and able to assess or assume them. And the place of liquidity in this. You may of course argue that bureaucratic German or Japanese bankers would do a great job of financing Blue Sky Mines NL or WhizkidNovotech Inc.

    There is after all more to the buying and selling of shares than you dealt with. I write as a mostly buy and hold investor.

    Read More
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  20. MarkinLA says:
    @joe webb
    I think I posted this yesterday....cannot recall, getting on...from a Krugman column.

    -
    Subject: Fw: NYTimes.com: A Moveable Glut ( "But these aren’t just a series of unrelated accidents. Instead, what we’re seeing is what happens when too much money is chasing too few investment opportunities." )

    The reference to a long piece by ex-Fed Chair, Bernanke, is worth reading and will exercise your brain real good.

    What I learned from it with regard to our current glut of Surplus Capital, is this: not only do we have first world sources of surplus capital, but also second world sources, which send their "beggar-their-workers" profits to the US and Europe to slosh around the Capital effluent pond and thereby worsen our first world situation of capital glut.

    Krugman begins by ticking off a number of seemingly unrelated events, housing bubbles, stock bubbles, etc. but then remarks:

    "But these aren’t just a series of unrelated accidents. Instead, what we’re seeing is what happens when too much money is chasing too few investment opportunities."

    I have emphasized totally "parked" Capital sitting in banks, some subject to a parking fee of there-quarters of one percent (not an interest rate but a parking lot fee) but that is just the tip of the iceberg. The rest of the iceberg is, to pursue the image, submerged below the surface of apparent reality.

    Apparent economic reality is what we see happening around us...apparently unrelated economic/financial events, but the underlying (sorry) reality is the mass of Capital which is not only just 'parked' but operating at a very low level of productivity and dynamism, which is reflected both in profits and in interest rates.

    Of course, profits for corporations have been good over the last few years, but that may be changing fast. Interest rates are at dangerously low levels, usually scaring the be-jesus out of our rulers...Deflation! a threat.

    A growth rate for the entire economy at two percent is better than zero or worse, but not much.

    The financialization of our economies is part of the problem. In stead of Productivism- the emphasis on making things- the emphasis is on profits...short term of course. This sounds like an old left-wing complaint, and it is, but it is as true today as at any other time....much more true. Gone are the days when 'what's good for General Motors is Good for the USA.'

    Now General Motors and its clones could not care less about the USA, or for that matter any country in which it operates. What the General Motors of the world, say Apple today, cares about is the Bottom Line, and it will cache overseas profits, screw its blue collar workers, etc. A WSJ writer told me (email) that there are 2.1 trillion corporate dollars (US) sitting abroad, just parked.
    ----------
    An economy is like a biological entity. It does not matter what left-wing or right-wing sentiment calls for in thinking about economics. An economy needs investment and consumption and savings...all in the correct amounts, just like a biological organism needs food, water, exercise, and so on.

    Right now and for some time, the consumption aspect called Consumer Spending...the driver of any economy...has been starved. The other side of the coin is too much saving by Capital. The result is an oversupply of Capital which leads to too low interest rates as well as reckless investment called bubbles. Meanwhile workers' wages stagnate as well and the whole thing...the economy, goes to hell.

    The Marxist theory of Surplus labor value is not quite it, but Surplus Capital, the most important effect of starving Labor, is real. Interest rates need to go up, and the only way that will happen is for more Consumer Demand to be produced...and that could be accomplished by confiscating a good chunk of Capital and putting it in the hands of workers, or, wage and price and capital controls, in various combinations. A nationalist economics would figure it all out, but what we used to call mad-dog capitalism, especially now that it is Global...has gone from mad-dog to monster.

    Joe Webb

    I admit that I do not understand why a firm buys back its stock, other than to push its stock price higher.

    Sometimes it is for the right reasons – the company is awash in cash and they pay a high dividend. Buying back the stock reduces their payouts and increases their earnings per share. Today they are mostly to sop up all the executive stock options handed out by the old boys club called the board of directors. This is done to keep the float the same so there is no stock dilution that would piss off the existing shareholders. It is all about transferring the corporations available cash into the executives bank accounts.

    Read More
    • Agree: Seamus Padraig, joe webb
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  21. MarkinLA says:
    @Dave Pinsen
    Secondary offerings, as share offerings post-IPO are called, aren't that uncommon. Tesla just had one , as I noted in a recent article ("Adding downside protection to Tesla"). But most of the commenters on that article are bearish on the company and would agree with your assessment that its secondary offering isn't auspicious.

    Calculate all the money moving through the markets for every IPO and every secondary offering and compare it to the entire total and what is the percentage of the money that actually goes to the corporations and can be considered an investment versus a speculation? If it is 1/10th of 1 percent I would be shocked.

    I have been though a few secondary offerings, they are never about building new products or buying the rights to new technology. They are always about trying to keep a failing business afloat a bit longer. Tesla is a failing business in conventional terms as is Mankind. They have great products maybe they even are the wave of the future 30 years from now.

    Read More
    • Replies: @Realist
    "They have great products maybe they even are the wave of the future 30 years from now."

    I disagree that their products are great. It is improbable that the energy density of batteries will ever approach that of internal combustion.
    , @Jmaie
    Not all secondary options are to keep a failing business afloat. It can be an alternative to taking loans or selling bonds when capital is need for expansion / aquisitions / etc.
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  22. annamaria says:
    @joe webb
    I think I posted this yesterday....cannot recall, getting on...from a Krugman column.

    -
    Subject: Fw: NYTimes.com: A Moveable Glut ( "But these aren’t just a series of unrelated accidents. Instead, what we’re seeing is what happens when too much money is chasing too few investment opportunities." )

    The reference to a long piece by ex-Fed Chair, Bernanke, is worth reading and will exercise your brain real good.

    What I learned from it with regard to our current glut of Surplus Capital, is this: not only do we have first world sources of surplus capital, but also second world sources, which send their "beggar-their-workers" profits to the US and Europe to slosh around the Capital effluent pond and thereby worsen our first world situation of capital glut.

    Krugman begins by ticking off a number of seemingly unrelated events, housing bubbles, stock bubbles, etc. but then remarks:

    "But these aren’t just a series of unrelated accidents. Instead, what we’re seeing is what happens when too much money is chasing too few investment opportunities."

    I have emphasized totally "parked" Capital sitting in banks, some subject to a parking fee of there-quarters of one percent (not an interest rate but a parking lot fee) but that is just the tip of the iceberg. The rest of the iceberg is, to pursue the image, submerged below the surface of apparent reality.

    Apparent economic reality is what we see happening around us...apparently unrelated economic/financial events, but the underlying (sorry) reality is the mass of Capital which is not only just 'parked' but operating at a very low level of productivity and dynamism, which is reflected both in profits and in interest rates.

    Of course, profits for corporations have been good over the last few years, but that may be changing fast. Interest rates are at dangerously low levels, usually scaring the be-jesus out of our rulers...Deflation! a threat.

    A growth rate for the entire economy at two percent is better than zero or worse, but not much.

    The financialization of our economies is part of the problem. In stead of Productivism- the emphasis on making things- the emphasis is on profits...short term of course. This sounds like an old left-wing complaint, and it is, but it is as true today as at any other time....much more true. Gone are the days when 'what's good for General Motors is Good for the USA.'

    Now General Motors and its clones could not care less about the USA, or for that matter any country in which it operates. What the General Motors of the world, say Apple today, cares about is the Bottom Line, and it will cache overseas profits, screw its blue collar workers, etc. A WSJ writer told me (email) that there are 2.1 trillion corporate dollars (US) sitting abroad, just parked.
    ----------
    An economy is like a biological entity. It does not matter what left-wing or right-wing sentiment calls for in thinking about economics. An economy needs investment and consumption and savings...all in the correct amounts, just like a biological organism needs food, water, exercise, and so on.

    Right now and for some time, the consumption aspect called Consumer Spending...the driver of any economy...has been starved. The other side of the coin is too much saving by Capital. The result is an oversupply of Capital which leads to too low interest rates as well as reckless investment called bubbles. Meanwhile workers' wages stagnate as well and the whole thing...the economy, goes to hell.

    The Marxist theory of Surplus labor value is not quite it, but Surplus Capital, the most important effect of starving Labor, is real. Interest rates need to go up, and the only way that will happen is for more Consumer Demand to be produced...and that could be accomplished by confiscating a good chunk of Capital and putting it in the hands of workers, or, wage and price and capital controls, in various combinations. A nationalist economics would figure it all out, but what we used to call mad-dog capitalism, especially now that it is Global...has gone from mad-dog to monster.

    Joe Webb

    “The financialization of our economies is part of the problem.”
    Agree. Perhaps the financialization of the economy is actually the root of our problems – and also a sign of the bigger problem of de-democratization of Western societies.

    Read More
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  23. anon • Disclaimer says:
    @Anonymous

    The majority of globalization has been the banking mafia’s looting and direct transfer of productive capacity from the West to the East for *export* to the West.

    This is the key point. The off-shored productive capacity is still tied to demand in the West.
     
    More fundamental to this arrangement than demand is the export of the earnings of the transferred productive capacity in the East into Western capital markets. If the earnings are exported via investment or capital flight, then the assets of the Western elite increase in value and they become wealthier. It is as if they indirectly own the transferred productive capacity. Furthermore, this export of capital makes foreign assets cheaper for Western finance.

    Yes, there’s a lot to it but I find it’s easier to get through to the average person if you only focus on one aspect at a time – in this case that global supply and demand has become dangerously unbalanced and only functions at all through ever increasing western debt.

    When you make money by purchasing a stock today at a low price and selling it tomorrow at a higher price, have you added any benefit to society?

    None but people buying and *holding* stocks because the firm is well-run etc is a capital allocation signal.

    So the question is why is there currently such a large amount of speculating money and why is speculating currently more profitable than investing?

    When

    capital >>>> labor

    then there will be a) more of it and b) no point in investing because no-one has any money to spend.

    So over the last 30 years or so as the banks bribed the western elites into gradually removing all their restraints we got things like sub-prime, securitization, re-hypothecation, dipping into client’s money overnight, profits from off-shoring etc creating vast sums of both real and fake capital while at the same time mass immigration and off shoring led to stagnant wages and demand so no reason to invest.

    So I’d say under *normal* circumstances the stock market provides a useful function but we’re not in *normal* circumstances.

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  24. anon • Disclaimer says:

    So over the last 30 years or so

    Since the collapse of the Soviet Union basically.

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  25. Realist says:
    @MarkinLA
    Calculate all the money moving through the markets for every IPO and every secondary offering and compare it to the entire total and what is the percentage of the money that actually goes to the corporations and can be considered an investment versus a speculation? If it is 1/10th of 1 percent I would be shocked.

    I have been though a few secondary offerings, they are never about building new products or buying the rights to new technology. They are always about trying to keep a failing business afloat a bit longer. Tesla is a failing business in conventional terms as is Mankind. They have great products maybe they even are the wave of the future 30 years from now.

    “They have great products maybe they even are the wave of the future 30 years from now.”

    I disagree that their products are great. It is improbable that the energy density of batteries will ever approach that of internal combustion.

    Read More
    • Replies: @MarkinLA
    I disagree that their products are great. It is improbable that the energy density of batteries will ever approach that of internal combustion.

    That doesn't matter if they can provide a reliable and cheap form of transportation. They can do it in a number of ways:

    Recharge time is reduced to some reasonable value and cost is so low because large power plants are more efficient than small gasoline engines. They are trying to create battery replacement centers where a charged battery replaces your depleted one and off you go. They recharge your battery and give it to someone else. This is not really practical now.

    Bring the price down so low that people can have a basic commuter car for around town and work and have the gas drinker for long trips and vacations. You charge your car at night. Given the ability to tie everything together, your car and phone can keep reminding you to plug it is so you won't be low on current the next day.

    However, the real point is that even great companies and ideas are ahead of their time to the point of being a lousy investment. Does anybody remember those guys who invented the first virtual reality goggles about 25 years ago or the original investors in Iridium the satellite phone company?
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  26. Deduction says:

    I wonder whether they can keep this all afloat for a long time.

    If they keep inflating asset prices through low interest rates and quantative easing is there really anything that will stop them?

    Yes everyone who doesn’t hold these assets gets progressively worse and worse off but only in a way that is too complicated for them to understand.

    People are so passive, I wonder whether the post-2008 routine is actually the new norm.

    Indeed, people are more likely to rebel of the governments stop inflating assets. The short term pain would be much more understandable than any long term benefit.

    Read More
    • Replies: @MarkinLA
    I wonder if the people cheering on low wages for everybody else realize that at some time those people with no disposable income have to buy the assets (homes and stocks) from them. If they have no money to pay for them at an inflated price then what will the price be?
    , @Seamus Padraig

    Indeed, people are more likely to rebel of the governments stop inflating assets. The short term pain would be much more understandable than any long term benefit.
     
    Which, in fact, is one of many reasons why they're going to go on inflating asset bubbles just as long as they can. After the last bubble pops, things get ugly.
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  27. MarkinLA says:
    @Realist
    "They have great products maybe they even are the wave of the future 30 years from now."

    I disagree that their products are great. It is improbable that the energy density of batteries will ever approach that of internal combustion.

    I disagree that their products are great. It is improbable that the energy density of batteries will ever approach that of internal combustion.

    That doesn’t matter if they can provide a reliable and cheap form of transportation. They can do it in a number of ways:

    Recharge time is reduced to some reasonable value and cost is so low because large power plants are more efficient than small gasoline engines. They are trying to create battery replacement centers where a charged battery replaces your depleted one and off you go. They recharge your battery and give it to someone else. This is not really practical now.

    Bring the price down so low that people can have a basic commuter car for around town and work and have the gas drinker for long trips and vacations. You charge your car at night. Given the ability to tie everything together, your car and phone can keep reminding you to plug it is so you won’t be low on current the next day.

    However, the real point is that even great companies and ideas are ahead of their time to the point of being a lousy investment. Does anybody remember those guys who invented the first virtual reality goggles about 25 years ago or the original investors in Iridium the satellite phone company?

    Read More
    • Replies: @Realist
    "That doesn’t matter if they can provide a reliable and cheap form of transportation."

    What makes you think they will? The current Tesla cars have a $7500 government subsidy.

    "They are trying to create battery replacement centers where a charged battery replaces your depleted one and off you go."

    That will be time consuming and very expensive. Do you want someone else's old crap problematic battery in your car?

    "Bring the price down so low that people can have a basic commuter car for around town and work and have the gas drinker for long trips and vacations."

    "people can have a basic commuter car for around town and work...."

    They already have that and have for years. They are low powered, very small unsafe cars known as shitboxes.

    If, if, if. If everything were unicorns and rainbows....what a wonderful world it would be.

    I just don't see it. The fact that Tesla has an infinite P/E ratio is a testament to the stupid investor.
    ReplyAgree/Disagree/Etc. More... This Commenter This Thread Hide Thread Display All Comments
  28. MarkinLA says:
    @Deduction
    I wonder whether they can keep this all afloat for a long time.

    If they keep inflating asset prices through low interest rates and quantative easing is there really anything that will stop them?

    Yes everyone who doesn't hold these assets gets progressively worse and worse off but only in a way that is too complicated for them to understand.

    People are so passive, I wonder whether the post-2008 routine is actually the new norm.

    Indeed, people are more likely to rebel of the governments stop inflating assets. The short term pain would be much more understandable than any long term benefit.

    I wonder if the people cheering on low wages for everybody else realize that at some time those people with no disposable income have to buy the assets (homes and stocks) from them. If they have no money to pay for them at an inflated price then what will the price be?

    Read More
    • Replies: @Deduction

    I wonder if the people cheering on low wages for everybody else realize that at some time those people with no disposable income have to buy the assets (homes and stocks) from them. If they have no money to pay for them at an inflated price then what will the price be?
     
    Only ever higher, if we think about the price in hours of other people's labour.

    I truly don't see an end. At least until the majority are driven into abject working poverty. Unless those in charge also have some genuinely altruistic motives and say enough is enough.

    Even then they would have to be willing to inflict huge short term pain in order to stop this great redistribution to the richest. They would also have to be willing to be demonised for it by the very people they would be trying to help, and of course they could only help if they could hold onto power to see it through.

    Inflating asset/capital/land prices is the same thing as a tax on labour, but labour will never understand so it will go on and on.

    If asset prices go down they can just reinflate them and labour will thank them for protecting high house prices haha.

    Who wouldn't want their biggest life expense to triple in cost?!?!!

    , @Deduction

    I wonder if the people cheering on low wages for everybody else realize that at some time those people with no disposable income have to buy the assets (homes and stocks) from them. If they have no money to pay for them at an inflated price then what will the price be?
     
    Essentially what I mean is:

    Who cares if people pay you not much for your products when you can print yourself the money to pay them for making them? You can even print yourself the money to pay them to be your servants...and if they don't like it or you feel a bit morally uncomfortable, you can just import some who'll be continually submissive and grateful.

    Yes, this all has a limit but unless those in charge have a genuine moral moment the only limit I can see is when ordinary people in the West live as badly as ordinary people do in urban China. And trust me, it is not a good life. Especially shorn of the good optimistic feeling of progress.

    , @Realist
    I understand what you are saying. But a high wage is not justified for everyone.
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  29. Deduction says:
    @MarkinLA
    I wonder if the people cheering on low wages for everybody else realize that at some time those people with no disposable income have to buy the assets (homes and stocks) from them. If they have no money to pay for them at an inflated price then what will the price be?

    I wonder if the people cheering on low wages for everybody else realize that at some time those people with no disposable income have to buy the assets (homes and stocks) from them. If they have no money to pay for them at an inflated price then what will the price be?

    Only ever higher, if we think about the price in hours of other people’s labour.

    I truly don’t see an end. At least until the majority are driven into abject working poverty. Unless those in charge also have some genuinely altruistic motives and say enough is enough.

    Even then they would have to be willing to inflict huge short term pain in order to stop this great redistribution to the richest. They would also have to be willing to be demonised for it by the very people they would be trying to help, and of course they could only help if they could hold onto power to see it through.

    Inflating asset/capital/land prices is the same thing as a tax on labour, but labour will never understand so it will go on and on.

    If asset prices go down they can just reinflate them and labour will thank them for protecting high house prices haha.

    Who wouldn’t want their biggest life expense to triple in cost?!?!!

    Read More
    ReplyAgree/Disagree/Etc. More... This Commenter This Thread Hide Thread Display All Comments
  30. Deduction says:
    @MarkinLA
    I wonder if the people cheering on low wages for everybody else realize that at some time those people with no disposable income have to buy the assets (homes and stocks) from them. If they have no money to pay for them at an inflated price then what will the price be?

    I wonder if the people cheering on low wages for everybody else realize that at some time those people with no disposable income have to buy the assets (homes and stocks) from them. If they have no money to pay for them at an inflated price then what will the price be?

    Essentially what I mean is:

    Who cares if people pay you not much for your products when you can print yourself the money to pay them for making them? You can even print yourself the money to pay them to be your servants…and if they don’t like it or you feel a bit morally uncomfortable, you can just import some who’ll be continually submissive and grateful.

    Yes, this all has a limit but unless those in charge have a genuine moral moment the only limit I can see is when ordinary people in the West live as badly as ordinary people do in urban China. And trust me, it is not a good life. Especially shorn of the good optimistic feeling of progress.

    Read More
    ReplyAgree/Disagree/Etc. More... This Commenter This Thread Hide Thread Display All Comments
  31. @Deduction
    I wonder whether they can keep this all afloat for a long time.

    If they keep inflating asset prices through low interest rates and quantative easing is there really anything that will stop them?

    Yes everyone who doesn't hold these assets gets progressively worse and worse off but only in a way that is too complicated for them to understand.

    People are so passive, I wonder whether the post-2008 routine is actually the new norm.

    Indeed, people are more likely to rebel of the governments stop inflating assets. The short term pain would be much more understandable than any long term benefit.

    Indeed, people are more likely to rebel of the governments stop inflating assets. The short term pain would be much more understandable than any long term benefit.

    Which, in fact, is one of many reasons why they’re going to go on inflating asset bubbles just as long as they can. After the last bubble pops, things get ugly.

    Read More
    ReplyAgree/Disagree/Etc. More... This Commenter This Thread Hide Thread Display All Comments
  32. Realist says:
    @MarkinLA
    I disagree that their products are great. It is improbable that the energy density of batteries will ever approach that of internal combustion.

    That doesn't matter if they can provide a reliable and cheap form of transportation. They can do it in a number of ways:

    Recharge time is reduced to some reasonable value and cost is so low because large power plants are more efficient than small gasoline engines. They are trying to create battery replacement centers where a charged battery replaces your depleted one and off you go. They recharge your battery and give it to someone else. This is not really practical now.

    Bring the price down so low that people can have a basic commuter car for around town and work and have the gas drinker for long trips and vacations. You charge your car at night. Given the ability to tie everything together, your car and phone can keep reminding you to plug it is so you won't be low on current the next day.

    However, the real point is that even great companies and ideas are ahead of their time to the point of being a lousy investment. Does anybody remember those guys who invented the first virtual reality goggles about 25 years ago or the original investors in Iridium the satellite phone company?

    “That doesn’t matter if they can provide a reliable and cheap form of transportation.”

    What makes you think they will? The current Tesla cars have a $7500 government subsidy.

    “They are trying to create battery replacement centers where a charged battery replaces your depleted one and off you go.”

    That will be time consuming and very expensive. Do you want someone else’s old crap problematic battery in your car?

    “Bring the price down so low that people can have a basic commuter car for around town and work and have the gas drinker for long trips and vacations.”

    “people can have a basic commuter car for around town and work….”

    They already have that and have for years. They are low powered, very small unsafe cars known as shitboxes.

    If, if, if. If everything were unicorns and rainbows….what a wonderful world it would be.

    I just don’t see it. The fact that Tesla has an infinite P/E ratio is a testament to the stupid investor.

    Read More
    • Replies: @MarkinLA
    I am not commenting on Tesla's valuation only on the ability of Tesla or somebody like them to provide a product at a profit.

    That will be time consuming and very expensive. Do you want someone else’s old crap problematic battery in your car?

    This is not true. They say they can unbolt the battery which is part of the undercarriage and replace the battery in five minutes. This situation is no different than doing a tank swap at the welding supply place or propane gas center instead of waiting for your tank to be filled. These batteries would be tested and ready to go and you would still have the factory warranty for the battery life based on the miles and time you have owned the car. They could create a form of insurance where for a small fee, you never pay for the replacement of the battery - ever and you have roadside assistance.

    I just don’t see it. The fact that Tesla has an infinite P/E ratio is a testament to the stupid investor.

    If Tesla is stupid what about Chipotle Mexican Grill with a PE above 40? Restaurants are fads that come and go. Telsa at least is developing new technology and has the patents.
    ReplyAgree/Disagree/Etc. More... This Commenter This Thread Hide Thread Display All Comments
  33. Realist says:
    @MarkinLA
    I wonder if the people cheering on low wages for everybody else realize that at some time those people with no disposable income have to buy the assets (homes and stocks) from them. If they have no money to pay for them at an inflated price then what will the price be?

    I understand what you are saying. But a high wage is not justified for everyone.

    Read More
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  34. MarkinLA says:
    @Realist
    "That doesn’t matter if they can provide a reliable and cheap form of transportation."

    What makes you think they will? The current Tesla cars have a $7500 government subsidy.

    "They are trying to create battery replacement centers where a charged battery replaces your depleted one and off you go."

    That will be time consuming and very expensive. Do you want someone else's old crap problematic battery in your car?

    "Bring the price down so low that people can have a basic commuter car for around town and work and have the gas drinker for long trips and vacations."

    "people can have a basic commuter car for around town and work...."

    They already have that and have for years. They are low powered, very small unsafe cars known as shitboxes.

    If, if, if. If everything were unicorns and rainbows....what a wonderful world it would be.

    I just don't see it. The fact that Tesla has an infinite P/E ratio is a testament to the stupid investor.

    I am not commenting on Tesla’s valuation only on the ability of Tesla or somebody like them to provide a product at a profit.

    That will be time consuming and very expensive. Do you want someone else’s old crap problematic battery in your car?

    This is not true. They say they can unbolt the battery which is part of the undercarriage and replace the battery in five minutes. This situation is no different than doing a tank swap at the welding supply place or propane gas center instead of waiting for your tank to be filled. These batteries would be tested and ready to go and you would still have the factory warranty for the battery life based on the miles and time you have owned the car. They could create a form of insurance where for a small fee, you never pay for the replacement of the battery – ever and you have roadside assistance.

    I just don’t see it. The fact that Tesla has an infinite P/E ratio is a testament to the stupid investor.

    If Tesla is stupid what about Chipotle Mexican Grill with a PE above 40? Restaurants are fads that come and go. Telsa at least is developing new technology and has the patents.

    Read More
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  35. Realist says:

    “If Tesla is stupid what about Chipotle Mexican Grill with a PE above 40? Restaurants are fads that come and go. Telsa at least is developing new technology and has the patents.”

    I have no idea what Chipotle has to do with electric cars. Lots of companies have a P/E above 40 Tesla’s is infinite.

    We disagree on this one.

    Read More
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  36. Olorin says:
    @anon
    Globalization has been spun as the natural industrializing of emerging markets but it's a lie.

    The majority of globalization has been the banking mafia's looting and direct transfer of productive capacity from the West to the East for *export* to the West.

    This is the key point. The off-shored productive capacity is still tied to demand in the West.

    (Effectively all that has happened is the supply side of the equation has been shipped overseas while the demand side remained in the West.)

    What are the consequences of this?

    1. The banking mafia have had 30 years where they got to pay 3rd world wages to produce goods sold in the West at Western prices - hence all the billionaire oligarchs.

    2. Some of that transferred productive capacity and the wages that go with it (even if low by western standards) has led to some independent industrial growth in the 3rd world - especially in the smarter regions - but most of it is effectively a semi-detached part of the western economy.

    3. How was western demand maintained when tens of millions of well paid jobs were shipped overseas?

    Debt.

    The banking mafia artificially maintained Western demand throughout thus period using debt.

    So the entire globalist structure hangs from that single thread and that thread has been fraying since 2008.

    So the reason for the China fall is simply that the banking mafia have put the world into a situation of massive stress and that stress will lead to random outbreaks of panic until it all finally goes bang.

    Note how widespread is the assumption that capitalism, or any economic model, is 1:1 transferable to anyone, anywhere, at any time.

    Sorta the EU model of things: give Greece and Portugal and Italy the same currency as Germany, and everything will magically become prosperous. Or schooling: just plunk every person with an IQ of 70 in Choate, and watch the transformation unfold.

    Yet in all social systems, including economic ones, population genetics plays a huge role. It’s hard to suss this out at present where macroeconomics is concerned. One can only sit on one’s little doomstead porch and try to formulate hypotheses.

    One of mine is that capitalism’s best predators are in the +1 to +1.5 SD IQ/g range. Not bright enough to see the big-picture consequences, nor empathetic enough to care (different set of alleles), but bright enough to manipulate the system and the masses. The really bright boys, the uber-quants, are so bright (+3 SD or more) they can’t talk to the lesser intellects, another example of the commonly observed phenomenon that it’s very hard for people to talk across a gulf of more than 1 SD.

    Having hypothesized this, one might also factor in that little incident at the port of Tianjin two weeks ago. It’s not a negligible player in all this…and might prove to be a tipping point.

    http://usa.chinadaily.com.cn/epaper/2015-08/14/content_21599983.htm

    There was one yuan devaluation before that…and two after.

    I’ve already profited from the disaster. I bet a bottle of Laphroaig 18 that the first internet conspiracy theories involving nuclear or energy weapons would emerge within 4 hours. I won with three-plus hours to spare. My bet-partner, who with a nearly +4 SD IQ is much more positive (or perhaps clueless) about the human condition than I, figured it would be at least 24 hours. No biggie–we’ll share the bottle.

    Read More
    • Replies: @MarkinLA
    One of mine is that capitalism’s best predators are in the +1 to +1.5 SD IQ/g range.

    Ruthlessness is far more important on Wall Street than smarts. When Romney was running I remember an Internet conversation with some people who were working for a hedge fund similar to what Bain Capital did for it's money. If the business wasn't likely to be another Staples you tarted it up, loaded it with debt to pay yourself first, and let the chips fall where they may.

    The guy basically said they were looking for old family run businesses that were inefficient because the owner who just died carried a lot of old employees that were now like family to him. The hedge fund as new owners fired them all, worked everybody who was left like dogs to get the numbers up, and used those inflated numbers for an IPO or debt offering.

    Others asked him if he ever thought about those who lost their jobs. His answer was that if he did he couldn't do his job.
    ReplyAgree/Disagree/Etc. More... This Commenter This Thread Hide Thread Display All Comments
  37. MarkinLA says:
    @Olorin
    Note how widespread is the assumption that capitalism, or any economic model, is 1:1 transferable to anyone, anywhere, at any time.

    Sorta the EU model of things: give Greece and Portugal and Italy the same currency as Germany, and everything will magically become prosperous. Or schooling: just plunk every person with an IQ of 70 in Choate, and watch the transformation unfold.

    Yet in all social systems, including economic ones, population genetics plays a huge role. It's hard to suss this out at present where macroeconomics is concerned. One can only sit on one's little doomstead porch and try to formulate hypotheses.

    One of mine is that capitalism's best predators are in the +1 to +1.5 SD IQ/g range. Not bright enough to see the big-picture consequences, nor empathetic enough to care (different set of alleles), but bright enough to manipulate the system and the masses. The really bright boys, the uber-quants, are so bright (+3 SD or more) they can't talk to the lesser intellects, another example of the commonly observed phenomenon that it's very hard for people to talk across a gulf of more than 1 SD.

    Having hypothesized this, one might also factor in that little incident at the port of Tianjin two weeks ago. It's not a negligible player in all this...and might prove to be a tipping point.

    http://usa.chinadaily.com.cn/epaper/2015-08/14/content_21599983.htm

    There was one yuan devaluation before that...and two after.

    I've already profited from the disaster. I bet a bottle of Laphroaig 18 that the first internet conspiracy theories involving nuclear or energy weapons would emerge within 4 hours. I won with three-plus hours to spare. My bet-partner, who with a nearly +4 SD IQ is much more positive (or perhaps clueless) about the human condition than I, figured it would be at least 24 hours. No biggie--we'll share the bottle.

    One of mine is that capitalism’s best predators are in the +1 to +1.5 SD IQ/g range.

    Ruthlessness is far more important on Wall Street than smarts. When Romney was running I remember an Internet conversation with some people who were working for a hedge fund similar to what Bain Capital did for it’s money. If the business wasn’t likely to be another Staples you tarted it up, loaded it with debt to pay yourself first, and let the chips fall where they may.

    The guy basically said they were looking for old family run businesses that were inefficient because the owner who just died carried a lot of old employees that were now like family to him. The hedge fund as new owners fired them all, worked everybody who was left like dogs to get the numbers up, and used those inflated numbers for an IPO or debt offering.

    Others asked him if he ever thought about those who lost their jobs. His answer was that if he did he couldn’t do his job.

    Read More
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  38. Jmaie says:
    @MarkinLA
    Calculate all the money moving through the markets for every IPO and every secondary offering and compare it to the entire total and what is the percentage of the money that actually goes to the corporations and can be considered an investment versus a speculation? If it is 1/10th of 1 percent I would be shocked.

    I have been though a few secondary offerings, they are never about building new products or buying the rights to new technology. They are always about trying to keep a failing business afloat a bit longer. Tesla is a failing business in conventional terms as is Mankind. They have great products maybe they even are the wave of the future 30 years from now.

    Not all secondary options are to keep a failing business afloat. It can be an alternative to taking loans or selling bonds when capital is need for expansion / aquisitions / etc.

    Read More
    • Replies: @MarkinLA
    Yeah, it can in about 1 in 1000 instances. I have never seen it be anything but a company running low on cash and having a hard time borrowing any more money.
    ReplyAgree/Disagree/Etc. More... This Commenter This Thread Hide Thread Display All Comments
  39. MarkinLA says:
    @Jmaie
    Not all secondary options are to keep a failing business afloat. It can be an alternative to taking loans or selling bonds when capital is need for expansion / aquisitions / etc.

    Yeah, it can in about 1 in 1000 instances. I have never seen it be anything but a company running low on cash and having a hard time borrowing any more money.

    Read More
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