Sunday, July 28, 2013

On the L(Edge)


This week we found out the use of covert information for individual advantage is officially a bad behavior…officially. Well, that’s so long as you’re not part of the Administration's Citizen Espionage Cabal in which case the misuse of secret-court-sanctioned covert collections is in the best paternalistic interest of the citizens who are incapable of knowing what is right or wrong and need a benevolent spy to insure that they are not seditious or subversive. And we’ve learned this because we have been treated to a steady drumbeat of the allegations of misdeeds perpetrated by Steven Cohen’s SAC Capital Advisors. For those of you who are trying to keep track of which criminal activity is criminal and which is “stimulus” to “support the economic recovery” you need one simple rule to keep it straight. If it’s authorized by the Administration, it’s good, legal and beneficial for the promotion of all of our collective interests. If it’s taking advantage of those stimuli monies by private traders not in the official Letter of Marque Privateering club, it’s criminal. Wasn’t it so much easier when you could see the Jolly Roger and say, “Oh, that’s a pirate!” before your wealth was stolen?

The indictment clearly highlights, among the alleged wrong-doing, “solicitation and use of illegal inside information”, (clearly you need a secret court to adjudicate as legal what is unconstitutional) on “a scale without known precedent in the hedge fund industry.” By accessing Inside Information, SAC Defendants provided “high conviction” trading ideas giving management and investors an “edge” over other investors.  In doing this, they made “millions of dollars of illegal profits and avoided losses at the expense of members of the investing public.” 

This activity was happening, according to the indictment at the same time Goldman Sachs was independently advising the Government of Mongolia to assume 12% debt on the development of one of the world’s largest copper reserves to “purchase” illiquid equity in their own national resource despite the fact that they were also advising people to buy into Ivanhoe and Rio Tinto – the beneficiaries of the structure developed to bankrupt the country.  This was happening at the same time that the World Bank and the IFC were advising governments around the world to enter into indentures that would destabilize governments for the sake of accessing natural gas reserves and minerals.  This was happening at the same time that rating agencies were defrauding investors using inflated credit quality ratings.  This was happening at the same time that the LIBOR price-fixing behavior was happening with nary a glance.  This was happening while the criminal enforcement division of the Internal Revenue Service was privately acknowledging billions of dollars of corporate taxpayer abuse of the In Process Research & Experimentation Tax Credit – one of the largest tax frauds by government estimates – while the Treasury turned a blind eye towards evidence provided by whistleblowers.  Unprecedented?  Seriously.  Steven Cohen’s indictment is a rounding error for the abuses listed above.  And the U.S. Department of Justice action on ANY of these other matters is…, well, umm…, oh, that’s right – these other ones are in our National Interest!

I don’t know Steven Cohen and I don’t know the individuals named in the indictment.  I am intimately aware of the industry.  What Steven did was wrong but the hedge funds that purchased real estate right next to equity and bond trading switches so that they can trade in and out of positions at the speed of light (literally) are perfectly legal.  High frequency, low latency trades; proprietary trades trading against high net worth wealth management account clients’ asset allocation; and, misrepresentation of pension solvency (and the insurers thereof) – these multi-billion dollar defrauding activities are beyond the scope of investigators.  No criminal indictments.  Just political donations.

It may be the case that SAC ran afoul of the law and for that I am certain that law enforcement (including criminal convictions) is appropriate.  But I’m getting quite tired of the selective enforcement of laws in which the language contained in indictments actually specifically indicts the un-prosecuted behavior of sanctioned actors.  This is the part that really is an offense.  And worst of all, the public is led to believe that the judiciary is actually doing its job while the real crimes go undetected.  We The People, the ones who pay taxes for the authorization of the Department of Justice, are being defrauded by “Justice” and nobody’s the wiser for it. 

“The accumulation of gold in the treasury of private individuals is ruin of the timocracy; they invent illegal modes of expenditure; for what do they or their wives care about the law?

Yes, indeed.  And then one, seeing another grow rich, seeks to rival him, and thus the great mass of the citizens become lovers of money.

Likely enough.  And so they grow richer and richer, and the more they think of making a fortune the less they think of virtue; for when riches and virtue are placed together in the scales of the balance, the one always rises as the other falls.  True.  

And in proportion as riches and rich men are honoured in the State, virtue and the virtuous are dishonoured. “  

Plato had it right.  And we need to be as wise today as he was when he dictated The Republic.  Sitting in the Shenandoah Mountains with my aunts and uncles at yesterday’s family reunion I was reminded that intelligent, thoughtful citizens are living in entire oblivion to the nature and structure of the perpetuation of financial high crimes.  That needs to change and you, the reader, need to make sure that you share information that can illumine what is being done in secret in our names.  Until we shine light on the real corruption, we’ll be hanging over the edge without knowing our own precarious state.

Sunday, July 21, 2013

Fabricated in Detroit


On December 11, 2010 I wrote a blog post on Article 1, Section 10 of the U.S. Constitution entitled “Debtor in Possession… well at least Possessed.”  In the wake of that posting, many professional investors and advisors (those who have a vested interest in picking the pockets of pensioners) suggested that my conclusions were overstated and the risk to bonds was not as great as I stated.  The Honorable Rosemarie Aquilina, Judge for the Ingham County Circuit Court in Michigan sided with my precedent-setting blog post.  Sorry Chrysler and Eminem – “Imported from Detroit” doesn’t get you free from the long arm of the law.  And for those of you have been sleeping, when a Circuit Court judge finds it necessary to add, in her own handwriting on the court order, “A copy of this Order shall be delivered to President Obama.  It is so Ordered.”, my warnings on the fixed income pension crisis are not black swans anymore – they’re a whole flock of buzzards getting ready for the carcasses. 

Michigan Attorney General Bill Schuette immediately announced that he’s appealing Judge Aquilina’s ruling at the Michigan Court of Appeals.  Governor Rick Snyder’s trying to limit the collateral damage from Detroit’s filing and Kevyn Orr, Detroit’s emergency manager is left looking like President Nixon at a Chinese table tennis match.  At issue is the constitutional provision in Michigan barring a Chapter 9 bankruptcy that prohibits actions which “threatens to diminish or impair accrued pension benefits.” 

Now, I’m not saying I told you so but I did thus inform you years ago!  We’ve got a real problem on our hands and the Detroit filing – a reality that President Obama desperately tried to cover with a thin veneer in his acquisition of the Presidency – is neither isolated nor the most consequential.  What makes this one somewhat ironic is that conservative pundits and many Republicans thought that unions put Obama into 1600 Pennsylvania Ave.  Detroit will give us another interesting view of the President turning his back on that very population at the whim of his true benefactors: “The Powers That Be”.  Detroit wasn’t spared in the auto bailout.  The financial institutions exposed to distressed financing of the auto sector that had a lot to lose were paid off handsomely (and anonymously)! 

So this record-setting $18 billion bankruptcy is fascinating on its face.  In the actual filing Detroit states that:
It has over 100,000 creditors;
It has “More than $1 billion in assets”;
It has “More than $1 billion in liabilities”;
It has over 60,000 parcels of land and more than 7,000 vacant structures which pose “a threat of imminent and identifiable harm to the public health or safety”; and,
Detroit has been in a state, “of 60 years of decline for the City, a period in which reality was often ignored.”

It’s this last line that really jumps off the page.  Call me Cassandra (think Trojan Horse) but the reference to “60 years” is particularly fascinating and vindicating.  What was it in 1953 that put Detroit on the collision course with today?  Ian Fleming introduced us to James Bond in Casino Royale, Watson and Crick unwound the helix, the CIA authorized the use of LSD to test human cognitive potential, Hugh Hefner published a nude photo of Marilyn Monroe in his first issue of Playboy.  A more careful view of history may suggest that this reference hearkens back to the contentious polarization of relationships between management and unions which, under President Harry S. Truman, was punctuated with events like his veto of the Taft-Hartley Labor Management Relations Act of 1947.  In his veto, he played the part of Cassandra to today’s Trojan Horse with his preamble, “I have no patience with stubborn insistence on private advantage to the detriment of the public interest.”

Private advantage insistence over public interest!  Seldom could such a ringing indictment of our current fiscal state be more succinctly stated.  And seldom have fewer paid attention to principles of fostering constructive understanding between management and labor evidenced in Truman’s veto.  Ironically, however, one must consider what’s lurking behind the masquerade in Michigan.  Does the court, the Attorney General or the Governor actually have the pensioners’ interest in mind or are they, once again, mere marionettes on the fiscal strings animated by benefactors who will profiteer from this bankruptcy?  Tragically, when the City Manager seeks to put General Obligation Bonds (munis for those of you who are in the capital markets) on the same level as unsecured creditors and retirees, you realize that “safe assets” are getting far more volatile than sellers would want you to believe.  PowerShares VRDO Tax-Free Weekly Portfolio (PVI) and PowerShares Insured National Municipal Bond Portfolio (PZA) reportedly have significant (over 3.5%) exposure to Michigan’s bond headaches according to S&P.  And while retirees read the headlines wondering what this means for them, bond traders are placing bets against their future liquidity.

I’ve said this too many times but today begs recitation.  Economies built on debt (uncorrelated, perpetual growth-dependent, leverage) must fail.  Whether it’s the U.S. Treasury’s debt currency model that mandates perpetual GDP expansion or Detroit’s 60 year descent into insolvency, the jury is in and capricious debt speculation has once again failed.  It took World War II to mask the first 30 year maturity default; Nixon’s gold default to mask the second; and, planes into the World Trade Center on 9-11 to mask the third sovereign default.  Bottom line, we’ve never proven that debt works in the long run and the actions we take to cover our illiquidity events are dramatic and far-reaching to say the least.  In last week’s post I warned of the looming specter of pension harm that is casting an ever-growing shadow across the G-20 economies.  Detroit is merely the canary in the coal mine and, with any luck, some of you will wake up before the methane knocks you out.

“I got a question for you.  What does this city know about luxury?  What does a town that’s been to hell and back know about the finer things in life?  You see, it’s the hottest fires that make the hardest steel, add hard work and conviction.  When it comes to luxury, it’s as much about where it’s from as who it’s for.  This is the Motor City.  And this is what we do.” – Wieden & Kennedy / Eminem

It’s going to take more lawyers charging millions and more slogans than Wieden & Kennedy (that’s right, the same guys that Just Do Nike) can muster to paper the mess that Detroit’s in now.  But none of that will fix the real problem.  Until we align capital to measurable productivity (including contractions), we’ve got more promises to break.  And We The People must wake up from the trance or there’s more wheels to fall off.

Sunday, July 14, 2013

Until QE3 Do Us Part


 If we are careless, we’ll look at the last two weeks of market volatility and conclude that as goes Ben Bernanke’s bipolar Fed-speak, so goes the economy.  At his Wednesday conversation with economists, Ben told the National Bureau of Economic Research:

 “I think transparency in central banking is kind of like truth-telling in everyday life.  You got to be consistent about it.  You can’t be opportunistic about it.”

He went on to clarify:

“I think if you think about the recent developments and the information that we’ve provided to the public about our thinking — I guess I would ask you to consider the counterfactual, if we hadn’t said anything. The information we provided about, for example, our contingent data-dependent plans for the asset purchase program, we’re actually pretty close to our understanding of what markets expected for that program. But suppose we had said nothing and that time had passed and that market perceptions had drifted away from our own thinking and our own expectations for policy. In addition, during that time, again in the counterfactual where we don’t provide any information, it’s very likely that more highly levered risk-taking positions might build up, reflecting, again, some expectation of an infinite asset purchase program.”

Transparency is kinda like truth-telling.  If you’re not really transparent, are we to expect that the premium on the truth is kinda like your opacity?  The ‘accommodative’ monetary policy that the Fed continues to pursue is disguised under the argument that zero interest rate environments and asset purchase manipulations at $85 billion a month will stimulate employment and build momentum in the economy.  In reality, Ben’s obsession has more to do with cheap money to support wealth dislocation by enhanced leverage than it does with unemployment.  Cheap leverage for private equity buy-outs and M&A do not stimulate employment.  To the contrary, leveraged transactions typically lead to consolidation efficiency and job cuts.

To justify his ‘optimistic’ view on the economy, Ben pointed to housing – another asset bubble in the making courtesy of artificially low interest rates – and debt-financed automobile purchases.  The former is particularly fascinating given the fact that the Fed is buying a lot of mortgage securitizations.  The lower the interest rates, the lower the terminal asset value of the mortgages that they’re buying.  Now if they were a buy-and-hold investor, this would be problematic.  But they’re not.  They’re a buy-while-intervention-is-expedient investor and they’ll be a dump-when-politically-expedient seller.  In other words, the quality of the assets they’re creating through the illusion of low interest and the 30 years that those assets will be ‘underwater’ from a yield perspective doesn’t bother them.  But it should be highly troubling to the public for two reasons.

First, manipulation of the mortgage securitization market is a contributing factor to the 2008 recession.  Cheap money (then it was second mortgages being “cheaper” than consumer credit) doesn’t create stable economic conditions.  If buyers are only buying because credit is cheap, then manufacturers are prone to establish a “normal” condition that’s not resilient in economic shocks.  This problem has manifest several times in the past 15 years.  But that’s the least of what should be worrisome.  Far more problematic is the perfect storm that the Fed’s policy has put in motion for pensioners and retirees over the next 15 years.  Let me explain.

Investments in liquid stocks have seen an apparent growth over the past 5 years.  With prices rising from their 2008 lows and with leverage-fueled dividends, apparent asset value has increased.  This should be seen as good news.  However, lurking beneath the surface of this ‘growth’ has been a leverage Charybdis waiting to yawn its terrible mouth open to unleash a deadly whirlpool into which the populace can fall.  While profits rose on the corporate down-sizing efficiencies and cheap leverage, top-line organic revenue has not followed suit.  Made worse by ‘accommodative’ monetary policies in other G-20 countries (something Ben also addressed obliquely), exporters face highly volatile markets and are not growing new business as quickly as their perceived ‘value’ has inflated.  In other words, we didn’t get more workers more productive over the past 5 years.  Rather we got fewer workers more efficient.  Second, long-term assets (the fixed income kind) have been depressed.  From your CDs that barely cover the postage to report on their meager performance to your 401(k) fixed income accounts with PIMCO and Templeton, what was modeled to generate 2-3% has barely eked out half that value after fees (which haven’t changed enough to compensate for the degradation in performance).  And at the bottom of the yawning chasm – far beyond the watchful gaze of most investors – insurance companies (life, mortgage, and pension) have been holding onto loads of cash that has not kept up with the mandatory returns that they need to fulfill their future obligations. 

This last point is the one that could really take out the next generation.  What made the first hundred years of the Federal Reserve work was its inextricable accommodation to match asset duration between the banking and life insurance and (insured) mortgage sector.  Take away life and property insurance and you don’t have the U.S. real estate market.  Take away these markets and you don’t have long-term investments.  And have insurance companies fail to keep up with their actuarial investment requirements and you don’t have liquid insurers in a decade or so.  Conspicuously missing from the Chairman’s comments were any references to the Pujo Committee and its investigations leading up the authorization of the Fed.  What was supposed to be a mechanism to break the banking monopoly on financial and monetary policy in 1912 actually turned into a mechanism which now is entirely an asset monopolist on both the U.S. Treasury and the mortgage market fronts.  And worst of all, this particular monopolist is actually undermining the future in triplicate.

Preservation of the current interest rate environment has not worked nor will it in the indeterminate future.  In fact, the longer it persists, the bigger the implosion.  This ‘bubble’ won’t pop – instead it is a giant vacuum that will suck future economic interests into a downward spiral.  We’ll have to make up new names – not Recession and Depression but Coriolis and Charybdis.  And, to be clear, the present course has been set for so long that we’ll necessarily have to pay to unwind it.  And that, unlike Ben’s speech, is not conditional, situational truth.  It’s the cold, hard facts.  At the undoing of QE3, equities will fall, insurers will default, and real estate will collapse again.  And we’ll keep sharing this fate until we embrace an economy that fosters productivity-based policies rather than monetary manipulative accommodation.

Sunday, July 7, 2013

The Golden Lure: Factor Ficiaries


Oh the good I could do with millions of dollars!  Never mind how I get them.  If I had them, then I would…

Just a few short centuries before the great time change, Aeschylus (525-456 BCE) gave us one of our more venal terms: “Philanthropy”.

“For he, thy choice flower stealing, the bright glory
Of fire that all arts spring from, hath bestowed it    
On mortal men. And so for fault like this      
He now must pay the Gods due penalty,       
That he may learn to bear the sovereign rule
Of Zeus, and cease from his philanthropy.”
Prometheus Bound (lines 6-11)

Ironic, don’t you think, that the first use of philanthropos tropos in literature is associated with a chained Titan hero being punished by the gods for loving humanity too much?  Prometheus, having given humanity the divine utility of fire thereby unleashing civilization and the arts, was bound in chains and riveted to a rock so that an eagle could feast on his liver each day (the liver would magically regrow through the night for the eagle’s next chomping). 

Following the well-trodden path of metaphysical catechist annexation, Judaism (tzedakah), Islam (Zakat), Christianity (charity), Hindu (dāna) all promoted the importance of using material wealth as a means of evidencing concern for “others”.  The principle of charity as a means of manifesting social justice in the present and prima facie evidence of goodness in the great beyond has been a fixture in cultures for thousands of years.  In the over 1.5 million “charitable organizations” in the U.S. alone over $2 trillion dollars are parked awaiting deployment.  Pope Benedict XVI in his Papal Encyclical Caritas in Veritate, quite carefully articulated the centrality of charity as a means of evidencing and transcending social justice in genuine expressions of love for humanity.  Carefully reading his exposition, you see a recapitulation to the Pope Paul VI Encyclical Populorum Progressio view which states that a globalized society, “makes us neighbors but does not make us brothers.” Benedict and Paul conclude that it’s the gods who are responsible for making us genuinely care.  So there’s a paradox: deities punish a hero for loving humanity too much and the same deities are the only pathway to evidence philanthropy!

I was around a lot of money in the last several weeks.  Loads of it!  And I was struck by two seemingly disparate issues expressed by the people who had it.  First, they were really upset that they don’t know how on earth to invest it to make more of it.  Do you put it in Treasuries, gold, equities, real estate?  What’s going to be the best hedge against Black Swans, irrational exuberance, and other metaphoric specters?  How do I know that I’m not having my pocket picked by my wealth managers who are prop trading against my portfolio?  And second, they didn’t know how to give it away.  NGOs, charities, random acts of… well, randomness? 

One of the most desperate communities needing philanthropy – and I mean a genuine sense of the love of humanity – is philanthropists!

Now the title of the post, “The Golden Lure”, is meant to be what at least a few of you “caught” when you first read it.  We know the reciprocal ethic of, “Do unto others as you would have them do unto you,” referred to by many as the Golden Rule.  But through the prism of materialistic charity (the myopia attending disproportionate monetary wealth) the reciprocity is missing.  In a world of “benefactor” and “beneficiary”, the ‘factors’ are seen for what they have – not who they are – and the ‘ficiaries’ are seen for what they lack – not who they are.  The more mournful the caricature of lack (think children and puppies here), the greater the lure.  Tragically, the currency utilized to satiate the endless cycle of futile charity is held in disproportion most often because the impoverished were unseen prior to predatory endeavors.  Had we engaged resource stewards with suitable honor, we wouldn’t have the IMF and World Bank’s much ballyhooed “resources curse”, for example.  We’d have less billionaires but we’d also have less sex slavery, human trafficking, and permanently dislocated refugees “needing our charity”. 

Philanthropists, like their mythical progenitor, are riveted to the golden rock of their enslavement only to have their livers pecked out by each tale of woe born of monetary resource asymmetry.

So here’s an idea.  Why don’t We the People wake up from this 2,500 year trance?  If we are in possession of excess in one dimension of wealth – money for example – why don’t we examine where we failed to fairly price the contributions of others and seek to remedy that imbalance?  Maybe it’s with our money.  Maybe it’s with our time, communities, technologies, knowledge or any of the other Integral Accounting dimensions.  Rather than relying on the morning eagle’s feeding torment to rob us of our joyful engagement with humanity, why don’t we enlist humanity to chip away at the rock thereby reducing its anchoring qualities?  Then one day, when the eagle comes, we can teach it to fish and it can eat for a lifetime.