The Tax Bill: aspects that no one (at all) will discuss.

 

Banksy’s Elephant: By Bit Boy – FlickrThe Elephant in the RoomCC BY 2.0Link

The Tax Bill: aspects that no one (at all) will discuss.

Courtesy of David Brin

[David Brin is an astrophysicist, technology consultant, and best-selling author who speaks, writes, and advises on a range of topics including national defense, creativity, and space exploration. He’s also a popular and influential futurist (one of four “World’s Best Futurists”). To find David’s books and latest thoughts on various matters, visit his website and blog. And, in case you missed our interview with David, go here.]

It seems that the GOP, which has owned every branch of government and lever of power, since January, will at last have an “accomplishment” –  a Tax Bill they admit will add a trillion dollars to the national debt, while offering last-minute gushers for real estate developers, banks, hedge funds, the oil industry, lobbyists and aristocratic heirs…

… all of it without spending a red cent on infrastructure, which would have generated high money velocity and growth, while fixing actual bridges, actual roads we use.

(Funny how that list describes almost every power broker or politician-owner correlated with this Congress and this White House:  Real Estate developers, Banks, hedge fund skulks, the oil industry, lobbyists and aristocratic heirs… ah, swamp drainage.)

To distract from this raid on our children, the oligarchy offers up more magical incantations of Supply Side “economics,” proclaiming thatthis time the oligarchs will spend their windfall on R&D and productive capacity and jobs… unlike every single other time, when they spent it all on passive asset bubbles, exactly as Adam Smith predicted, back in 1776.

Smith warned that aristocrats — like the ones our U.S. Founders rebelled-against — tend not to spend infusions of cash on risky capital formation, or research, or factories. Generally 90% of them will plow it into ‘rent-seeking’ assets like stocks or land, where they can passively collect dividends or gains.  (Note that every tax break in this bill favored passive income, not wages you actually earn through work.)

As in King George’s time, top cronies adjust the laws to favor rent-grabbing assets over innovation, production or work. Smith would be outraged today… but not surprised.

Of course there is an end game to asset bubbles, and that end-game is the elephant in the room! One that, so far, no clever pundit has raised, amid all the yelling over this tax bill… an important aspect of the legislation that matters far more than the petty attacks on higher education and science, or the open war waged upon Blue States. I’ll get to this invisible pachyderm, in a moment.

But pause first to congratulate the victors! The same folks who howled that Democrats passed the ACA (‘Obamacare’) in “just a year,” holding open, public hearings for just 6 months in just five committees… those same complainers have now passed the biggest tax bill in history with ZERO days of hearings, with scribbled margin notes enacted into law, forging this trillion dollar raid for billionaires in top secret and passing it in the dead of night, amid a festival of lies.

What you fellahs do is evil. It is treason. But you do it very well.

The real reason for the tax cut – an oligarch exit strategy

Critics of the Tax Bill point out that benefits to aristocrats are locked in, while much smaller cuts for working people fade quickly and turn into tax hikes, over a few years. That’s a travesty, of course.  But also a distraction, because we’re left with an impression that the biggest change – slashing corporate tax rates – has little to do with the top-rich families of the country.

We’re assured corporations will then invest it all in R&D, in new products, in factories and jobs. But…

1) Again, across 40 years, this Supply Side incantation never came true. Ever. Once. The eras of highest U.S. growth, rising wages and middle class health all took place under high tax rates established by the Greatest Generation, in the 1940s, 50s and 60s. Except for the JFK rate cuts, every other cut was followed by reduced growth rates.

(See: Comparing the GOP tax plan to what it was like prior to the great depression.)

2) For the 2nd half of the Obama Administration, corporations have been mostly very profitable. They already had tons of cash on-hand, in the USA, to invest in production, jobs or R&D, but those investments declined. Their bulging cash larders were spent instead ondividends and stock buybacks that helped their CEOs to meet performance criteria for their vampiric option plans.

3) Any “competitive disadvantage” from other nations’ lower corporate rates might have been dealt with by negotiating a world treaty balancing such rates. It’s happened before! Sure, negotiations might not work, this time. But there’s no mention of even trying, only a race to the bottom.

4) Those who used to lie – claiming they care about deficits and debt – are suddenly shouting “squirrel!” and pointing offstage.

5) If this Tax bill had anything to do with investment in new products etc., it would have targeted to incentivize R&D, new factories and jobs. Instead, this was left as only a vague, armwaved promise. There is a reason.

They need an exit from the bubble they created

Look across the era since Adam Smith wrote The Wealth of Nations. Every generation of Americans since then has witnessed attempted political and economic putsches by would-be aristocrats gaming the rules so they can get richer without working or producing. Instead, as Smith described, they heap wealth into passive (rent or dividend or capital gains or parasitic-commission bleeding) assets. They do this because it’s far easier than putting “skin” into actually producing goods and services.

They also do this because sweetheart legislation makes it a great deal! But the smart ones know there is a price.

That price is an ASSET BUBBLE.  We’ve seen many in our lifetimes: commodities, housing, real estate, banking and now a hyper-inflated stock market, with price to-earnings ratios that seem straight from the Twilight Zone. Those who piled their earlier tax largesse into asset bubbles know the great times always end. 

And hence, being clever, they always plan an exit strategy, for when the bubble bursts.

The dream strategy concocted during our previous two bubbles used to be “privatize social security!”  Get every middle class bumpkin to funnel his or her SSI account into stocks during a market peak! Fill equity markets with Greater Fools to sop up bloated assets, so the current (rich) owners can cash-out at top prices.

That scam was stopped, thank God, just before the last collapse.  Whereupon Republicans suddenly lost interest in privatizing Social Security.  Go figure!

So what’s the plan now?

Send hundreds of billions of tax-bennies to already profitable corporations! Without any requirements or incentives to actually spend any of it on R&D or factories or jobs, members of the inbred, incestuously conniving “CEO caste” of 5000 golf buddies will know what to do, with a nod and wink.

Accelerate their already absurdly massive stock buy-backs!  (There are reasons why this was illegal, during the Greatest Generation.) Break the U.S. budget subsidizing companies to squander their futures, giving money to current stockholders… buying up stock that the moguls know will soon plummet in value.

We stopped their earlier scam, but this time — by skulking in secret and at night — they will get their way.

How can you benefit from this insight?  The wise will wait till the first buy-back crest brings equities to their final peak, then sell. Get out before the middle gets crushed again.

Oh, it may work. Only they are counting on us never noticing. And that could be a mistake.

Coda

“There are two ideas of government,” William Jennings Bryan declared in his 1896 “Cross of Gold” speech. “There are those who believe that if you will only legislate to make the well-to-do prosperous their prosperity will leak through on those below. The Democratic idea, however, has been that if you legislate to make the masses prosperous their prosperity will find its way up through every class which rests upon them.”

That was more than three decades before the collapse of the economy in 1929. The crash followed a decade of Republican control of the federal government during which trickle-down policies, including massive tax cuts for the rich, produced the greatest concentration of income in the accounts of the richest 0.01 percent at any time between World War I and 2007. Those disparities were brought to their minimum under FDR and Eisenhower, with tax rates and policies that were ratified over and over by the Greatest Generation.

We need to study them, and how they achieved all that they did in a spirit of moderation and enterprise. Especially, how they veered away from dogmatism and craziness, just when it seemed overwhelming.

One major danger of the right’s current madness is that the left might over-react, returning to its own past insanities. The Evonomics site is where calm, rational, brilliant scholars & others reveal how cheaters have betrayed not just the poor and middle class, but also enterprise, innovation, genuine market economics, common sense, national self-interest and even Adam Smith! The articles and studies get better and better, making the clear case that market enterprise works, but only when cheating is stymied. (I’ve published a few there.)

If your cousin is one of that vanishing breed – a residually sane Republican – take her to Evonomics and tell her: “Only you can save enterprise capitalism from its age-old foe. Not socialism so much, but feudalism.”

Which brings me to my question. You’d have to be deaf and blind not to see the signs of a growing movement of American conservatives who are fed-up… not just with Bannon and Putin and their Trump, but with Rupert Murdoch and the insanity promulgated by Clear Channel Radio. Signs are all there – especially among the Mormons – that vigorous conversations are afoot about holding a convention of Sane American Conservatives.

Here’s a parallel event, showing how it happened, in the past. If the dems could do it, why not you guys?

Hence my question. Surely some of you have been approached by now? By people desperate to save American conservatism, before it is too late?

Addenda:

* In addition to stock buybacks, there are mergers and acquisitions. At one level, this helps to make up for the plummet in industrial R&D — purchasing small, innovative startups does have its logic, reducing short-term risk, passing it over to entrepreneurs. That’s fine. But the other half is what three generations of our ancestors fought, tooth and nail, the trend toward monopoly, duopoly or oligarchy in an industry. Anti-Trust laws were there for hard-won reasons that the Baby Boomers may be too stupid to grok.

*  Apparently the tax bill actually makes corporate tax deductions more or less irrelevant. But don’t get excited.  The omission will be fixed in conference committee. What matters is: “The biggest consequence could be the research credit, often used by manufacturers, technology firms and pharmaceutical companies.”  This is just another part of the War on Science. But more-so, since it directly goes to the jugular of American strength. Putin could not have asked for more.

[”What are you looking at?” picture credit: CC BY-SA 2.0, Link]

An Interview with David Brin

Our guest David Brin is an astrophysicist, technology consultant, and best-selling author who speaks, writes, and advises on a range of topics including national defense, creativity, and space exploration. He is also a well-known and influential futurist (one of four “World’s Best Futurists,” according to The Urban Developer), and it is his ideas on the future, specifically the future of civilization, that I hope to learn about here.   

Ilene: David, you base many of your predictions of the future on a theory of historical conflict between two models of civilization -– the diamond and the pyramid. Can we start with a brief explanation of these?

David: In somewhere like 99% of human cultures, the stable attractor state was feudalism or some variant, a pyramidal society with owner lords controlling ignorant masses. This structure was a huge success for the topmost males, who got harems, reinforcing the system… but it was lousy at governance because it inherently suppresses criticism and ferment and creativity from below. Whenever human males get a lot of power, we feel within us a temptation to consolidate that power and re-create that pyramid.

The Enlightenment diamond-shaped society, with a huge, prosperous, socially-mobile, empowered middle class, is by far the most productive and creative system the world has ever seen. In 200 years, we accomplished more than all other societies combined, and not just in physical endeavors. Also in attacking age-old assumptions about race, gender and environmental blindness. Adam Smith showed us how to use competition open and fair to create fecund arenas markets, democracy, science, etc. that in turn spawn cornucopia.

But the diamond is unstable. The very same wealth that we use to attract creative people to take risks and foster new goods, services, etc. starts to build a new caste of owner-oligarchs, whom Adam Smith knew to be the inherent enemies of the very system that engendered them! Marx was also aware of this basic “contradiction of capitalism.” Capitalism’s winners are tempted to become cheaters, using wealth to suppress new competition. And cheating kills capitalism, perverting it and giving it a bad name.

Ilene: Lately, it seems like there are a lot of winners who are also cheaters… are we going backwards?

David: Amid 6,000 years of feudal despotisms, a few brief moments of illumination happened when citizens rose up to rule themselves. Periclean Athenian democracy was spectacularly agile and creative, but only lasted about one human lifespan, before it was crushed by neighboring oligarchies. The Florentine Republic was shorter lived. But we’ve managed about 250 years of an amazing experiment.

So don’t be myopic. Other generations of Americans faced crises and attempts by would-be feudal lords to smash our diamond back into the old pattern. Generally, these phases of the American Civil War (we’re in phase eight) have ended surprisingly well, as we extend freedom and rights and dignity to ever more kinds of people. But at the time, each crisis seemed impossible to overcome.

We need confidence. Alas, that is why many voices in power and media try to spread gloom.

Ilene: You said above that we are in Civil War, phase eight? What were the previous seven phases of American Civil War?

David: I describe them elsewhere (e.g. Phases of the American Civil War). Simplistically speaking, there have been two Americas. One is dynamically forward-looking, obsessed with trying new things and taking on new challenges. It respects pragmatism, negotiation and science, admires the self-made man or woman, and tends to keep widening the circle of those who can play. The other side of our character is romantic drawn by mythologies and nostalgia for the past – its rituals and symbols and hierarchies. One might call this our “confederate” side, but indeed, those traits were official doctrine in most of those older societies wherein our ancestors dwelled. Moreover, you can see romantic leanings all across the spectrum, in the incantations of Karl Marx and the conjurings of J.R.R. Tolkien and George Lucas. The Nazis were an extremely romantic movement, as were the Stalinists.

What of those phases of our recurring civil war? Well… Phase one took place in the South, during the Revolution, when the British found their strongest support among Loyalist/Tory militias in Georgia and the Carolinas.  It was Scots-Irish hill settlers, fighting for Daniel Morgan, who tipped the balance in that struggle, toward what would become the American Experiment.

Phase two featured a period when southern politicians grew ever stronger in control of the U.S. federal government.  True, Andrew Jackson clamped down on John C. Calhoun’s secessionism, in the 1830s, and kept the nation together. But Jackson’s overall sentiments were what we might call “confederate.” Indeed, southern control over levers of power only grew until, by 1860, five of nine Supreme Court justices were slave-owners.

There’s no time or space here, to go into great detail, so I’ll leave the others as an assignment!

Ilene: Thank you, I’ll check that out. I’m curious, if, as you’ve suggested, our imaginations cause us to be delusional, how do we still manage to advance?

David: Human beings are inherently misled into subjective fantasies, but there’s a saving grace. We all have different delusions. Other people don’t necessarily share yours, and hence they will help you penetrate yours through the miracle of criticism! Others will tell you about your delusions.  (And boy, will you be eager to return the favor!)

The greatest discovery of our recent, enlightenment revolution was reciprocal accountability, a method that allows adversarial competition to work its magic in flat-open-fair arenas, the greatest of which are markets, democracy, science, justice courts, sports. All five are regulated to limit cheating and monolithic domination. In all five, the core principle is that empowered participants keep an eye on each other.

Competition by itself always leads to cheating by the powerful, who try to establish pyramids of power, like feudalism. Yet, competition is the great creative force! So how do we save it from its own contradictions? By cooperation! By cooperating with each other, via politics, to make rules and prevent cheating, so that competition can thrive!

This is clear in the fifth arena — sports. Without tight rules and regulations and referees, any sporting league would collapse. As it happens, something similar is why our other four arenas democracy, science, courts, and markets work better now than they ever did, in any previous society. But cheaters will innovate, and all of our creative-competitive arenas are currently under attack by rogues, seeking to re-establish pyramids of inherited power.

Ilene: Do the arenas for competition that you describe have different ideal amounts of rules and rituals?

David: Markets need creativity and can afford a high error rate, so their ritualized combat is loose. Science can regulate itself largely because practitioners are watching each other, fiercely. Courtrooms need very little creativity but a very low error rate, hence they are meticulous, slow, patterned and structured. Of course, this starts to break down when the judges become political shills.

Ilene: Do you think there is still a long way to go to reach satisfactory balances in the marketplace and other arenas?

David: Markets are the filthiest competitive arena, but produce the wealth that keeps the others going. The left denounces “competition” and the right denounces “regulation” when it is only regulated competition that has ever prevented inevitable human cheating and allowed our creativity to flower.

All the five competitive arenas feature ritualized combat – in the marketplace, elections, science conferences, the courtroom, and playing field – where “truth” is determined in terms of best products, policies, theories, cases and teams. But there is no similar way for us to adjudicate between ten million rumors, stories, lies and fake news items that spread each hour on the web. I predicted this would be a problem 25 years ago, in my novel EARTH. Alas, no one heeds science fiction authors!

Ilene: Perhaps we should! How did you know?

David: I don’t know why some things seem obvious. In the twenty years since I published The Transparent Society, almost every single page has come true, in one form or another.

Ilene: This quote of yours made me wonder whether insatiability might be like a design flaw, hardwired into us. Do you think it is?

The question of satiability is crucial here. Among the elites in any society, there are those who measure their status and contentment by their relative wealth — the degree by which they appear to be elevated over the majority. Others measure their sense of success in terms of personal goals — items they want to own and things they want to do or achieve. To these latter individuals, it is immaterial whether millions of others get to own and do the same things. In fact, the more the merrier!

Distinguishing between these two motivations for seeking wealth can be profoundly significant, not only psychologically but also philanthropically. Many political and social disagreements among members of the monied elite arise from tension between these two views of wealth — whether it is a means to achieve status above others, or a means to achieve specific and tangible goals. What seems to determine the balance is satiability, having to do with an individual’s ability to draw genuine satisfaction and a sense of completion from the achievement of his or her previously stated goals.

David: Well, well. Whoever wrote that sure had a strong point of view! I hope he got plenty of critical scrutiny to penetrate or interrogate delusions! It would also be nice if he got to test that theory. By getting rich.

Ilene: Sign me up too! You’ve been saying that we are in the midst of a culture war.  Now, if anything, this culture war has been getting more intense. Science is under attack; even basic human rights principles are under attack. Sometimes it feels like we’re losing.

David: It’s a mistake to get distracted by matters like symbolism, or “left vs right,” or even racism, as appalling and deadly evil as it is. The main issue today – underlying all others is the destruction of our ability to use facts, to refute rumors and to demolish lies. To provide a basis for grownup negotiation.

And it’s not just in science!  Can you name for me one profession of high knowledge and skill that’s not under attack by extremists on the far left or today’s entire right? Teachers, medical doctors, journalists, civil servants, law professionals, economists, skilled labor, professors… oh, yes and now the intelligence community and military officer corps, which are being denounced as a malignant “deep state.”

We could get past the surface problems of culture war – and yes, finally crush racism and sexism and environmental neglect if facts were still weapons that moderates could use against fanatics. Or that sane adults could use for negotiation. The destruction of fact has been the top priority of those re-igniting civil war.

Ilene: And they have been pretty successful! A substantial portion of our population distrusts scientists and rejects science. Climate change denial is a good example. In spite of tremendous evidence, many people believe climate change is a hoax. They believe thousands of scientists are part of a conspiracy which sells climate change for its own purposes. Why has this “War on Science” been so effective?

David: Science had to be attacked first. Most Americans do not buy into the “War on Science,” but a large enough minority has that they now will believe any cult incantation can substitute for facts or evidence.

Think about how this fits the model of an oligarchic coup. The New Lords will never be able to take complete control so long as fact-people like journalists, teachers, economists, doctors, the FBI… and yes, scientists… can stand in their way saying, “the facts don’t agree with you.”

Ilene: And in the arena of democracy, an anti-science minority now has enormous political power…?

David: The core objective of the enemies of the Republic has been achieved the total destruction of politics as a problem-solving methodology for the American Republic. The very word has been trashed. And the “Hastert Rule” promises damnation for any member of one party who dares to offer to negotiate with the other.

Ilene: What are your predictions for the US and the world in 50 years?

David: About a century ago, John M. Keynes prophesied that rising industrial production would pour forth so much wealth with such automated efficiency that the forty hour week (just then coming into fashion) would be reduced to thirty hours, then twenty, as jobs were shared and the working class got more leisure time. As it happened, there was a vast world out there that still needed to industrialize, and the West’s appetite for ever-more goods kept factories and mines etc. humming hard for all of those decades. And the two were related, for the developing world was uplifted primarily out of the spending of Americans and others, on trillions of dollars’ worth of crap we never needed.

But there’s a light on the horizon. A century forestalled, the era foreseen by Keynes appears about to dawn, with automation seeming about to render most kinds of human industrial employment wholly or partially obsolete. Indeed, many white-collar jobs and even creative tasks seem prone to takeover by AI systems. Local production of goods and food may end the long chains of container ships carrying cargoes across oceans, an ecological godsend, but sending the world economy into convulsions.

If the Keynes era dawns, then we’ll be faced with many decisions:

  • Who will own the means of production and the cornucopia that pours forth. If it is a classic, feudal pyramid, then exploitation and unfairness are guaranteed, followed by revolution. But it needn’t be that way.
  • Will paychecks be replaced by UBI or Universal Basic Income? Or else by giving every citizen a “share” in these urban factories and farms, so they can live off dividends?
  • Either way, how will folks spend their time?  We are already in an under-appreciated era of hobbies, pastimes, avocations and amateur sagacities. There are more blacksmiths and sword makers in the U.S. today that in the Wild West or European middle ages.  In my novel Foundation’s Triumph… and separately in EARTH… I posited an Age of Amateurs, and it is already here.  But… will that suffice for all people?
  • If all of this happens under the guidance of Artificial Intelligence, will they help us to design better ways for a better era?  And will we agree with those super-minds about what is “better”?

Ilene: When do you think AI will surpass us and what will “they” do with us?

David: For this, let me refer you to my big talk on AI, before a packed house at IBM’s World of Watson congress in Las Vegas, October 2016. A punchy tour of big perspectives on Intelligence, as well as both artificial and human augmentation. (Innovation Talks: David Brin.)

Ilene: Do you think there is more to a human being than what can be replicated by AI? Something non-reproducible, maybe non-material?

David: Brain science suggests we may be harder to emulate than the AI optimists and “singularity” zealots claim. First we thought we’d need the same number of computer binary “flops” as there are neurons in a brain – in the hundred billions range. Then folks said we’ll need to emulate the number of inter-cellular synapses, in the hundreds of trillions. Now we know that each synapse flash is accompanied by “calculations’ taking place inside the neurons and surrounding tissues… perhaps a hundred quadrillion murky, nonlinear bits of info processing. Oh, we are marvels, all right.

Still, I wager within just a few years computer emulations will seem intelligent enough to cause us real uproar.

Ilene: If attacks by cheaters which destabilize human society are a consequence of human insatiability, perhaps we could create AI that is less insatiable?

David: Watch that video of my IBM talk. I describe six approaches to making AI. One of them – “machine learning” – is really taking off.  One of them – secret Wall Street trading programs — could end our species. But one of them, portrayed in EXISTENCE and some of my short stories, could offer us a soft landing into a world of AI beings who are decent folks. If we raise them as our children. As humans.

****

To learn more about David, please visit him at his website and blog

Originally posted at Phil’s Stock World.

Pictures courtesy of Pixabay.

“The question is, why isn’t EVERYONE kneeling at this point?”

Meaningless Monday Market Movement – Happy Columbus Day

By Phil of Phil’s Stock World 

In fourteen hundred and ninety two, Columbus sailed the ocean blue – and got totally lost, missed India by 6,000 miles but called the Native American Islanders Indians anyway, slaughtered them and stole their gold and, lacking any real wealth to go back to Spain with, instituted a slave trade that lasted 250 years and ruined the lives of tens millions of people.

I got called into the Principal’s office when my daughter gave a report like that in 7th grade – just 5 year ago.  Suddenly, it’s in vogue to question our “heritage” and the legends of the founders and that’s a good thing.  You want Russians to question Marx and Lennin and you want the Chinese to question Mao so why shouldn’t our children question Columbus and Jefferson?  Either you want to raise critical thinkers or you don’t.

There aren’t many critical thinkers playing the markets these days. Over the weekend, Trump and North Korea continued their Twitter War after Trump’s “calm before the storm” comments on Friday and Saturday afternoon, the President of the United States tweeted “Presidents and their administrations have been talking to North Korea for 25 years, agreements made and massive amounts of money paid…hasn’t worked, agreements violated before the ink was dry, makings fools of U.S. negotiators. Sorry, but only one thing will work!” to which Kim Jong Un said that proved it was necessary to protect themselves against the “nuclear threats of the U.S. imperialists.” Kim Jong-un also said that North Korea’s nuclear weapons are a “powerful deterrent firmly safeguarding the peace and security in the Korean peninsula and Northeast Asia.”

Image result for trump world war 3

Senator Bob Corker, the Republican chairman of the Senate Foreign Relations Committee, charged in an interview on Sunday that President Trump was treating his office like “a reality show,” with reckless threats toward other countries that could set the nation “on the path to World War III.”  Other key quotes from that interview were:

  • “I know for a fact that every single day at the White House, it’s a situation of trying to contain him.”
  • He acts “like he’s doing ‘The Apprentice’ or something.”
  • On how fellow GOP senators feel: “Look, except for a few people, the vast majority of our caucus understands what we’re dealing with here… of course they understand the volatility that we’re dealing with and the tremendous amount of work that it takes by people around him to keep him in the middle of the road.”
  • On Trump undermining Tillerson: “A lot of people think that there is some kind of ‘good cop, bad cop’ act underway, but that’s just not true.”
  • On Trump’s tweets harming U.S. foreign policy: “I know he has hurt, in several instances, he’s hurt us as it relates to negotiations that were underway by tweeting things out.”

Corker remains influential, and his breaking from Trump so publicly could lead others to speak out. Perhaps more significantly, the retiring Senator still holds a vote until Jan. 2019 in a Senate the Republicans control by a two-vote margin.  He’s highly skeptical of Trump’s tax plan, and may be tough to get onside on other key issues.

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Those key issues include tax reform and the Obamacare repeal (yes, they are still trying to do that) and those are the underpinnings for the market rally.  The justification for these record-high market multiples is that we’re not taking into account all the extra money companies will be making when they don’t have to pay taxes anymore but they don’t pay taxes now – so how much less can they possibly pay?

Taxes are already down 2/3 for Corporations in the past 40 years and now Trump’s plan it to knock off another 1/3 of what’s left but 2% is only 10% of where we started and, it begs the question – if cutting Corporate Tax Rates fixes everything – why didn’t the first 66% of the cuts have any effect (other than leading to 2 of the worst market crashes in history and an economy that’s $20Tn in debt)?

Image result for taxes paid by corporations

Including “Entitlement” taxes (that’s right, they talk about cutting entitlement spending but ignore that fact that they already took that money from you – so you ARE ENTITLED to get it back!), Individual Taxes have jumped from 51.8% of all collections in the 50s to 80% in 2015 (up 42%) while Corporate Taxes (including Excise Taxes) have dropped from 45.5% to 13.8% (down 70%).  The new tax plan doesn’t have to completely screw the Middle Class – the old tax plan already did that!

Excise taxes were a type of tax that Corporations couldn’t avoid paying because they were based on sales – not phony P&L statements so, of course, those have been slashed from 13.4% to 3% (down 77.6%) and there, in a nutshell, is why the US is $20Tn in debt – it’s nothing but $20Tn of tax avoidance by Corporations that’s gotten worse and worse every year for decades and the proposal on the table now is to CUT THEIR TAXES FURTHER and also give massive tax cuts to the owners of those Corporations. This is MADNESS!

67% of the people now disapprove of the direction our country is heading but the GOP is doubling down for the 32%. Only 67% of Republicans still support the President, down from 80% in March and that does not bode well for next year’s elections with 13 months to go.  Instead of getting a handle on what’s actually wrong with this country, our Vice President, Mike Pence, flew to Indianapolis over the weekend in order to engage in some performance art – walking out on the Colts game “because the 49ers kneeled during the National Anthem“.  That’s the story – here’s the facts:

Pence knew this was going to happen. The press was told to remain in the parking lot, and not even to bother coming in — as Pence would be leaving early.

Pence had just been in Las Vegas, and his next stop was Los Angeles, a short plane flight west — but he instead flew all the back to Indianapolis for this photo op, taking his entourage and his security detail with him.  The streets doubtless had to be blocked off for his motorcade.  Special security precautions were taken for the Vice President of the United States.  All along, he planned to engage in a tawdry, pre-planned sham performance — with all the expense that entails — just to get people embroiled in a cynical culture war.

If they want to pull something like this as a sort of campaign stunt, let them pay for it with campaign money. Don’t bill the taxpayers for this. This is why people hate government.

This country has real problems brewing and yes, Puerto Rico still has no electricity or fresh water for 3M people stuck on an island and THIS is what our leaders are up to?  The question is, why isn’t EVERYONE kneeling at this point?   

As promised, we sent out Alerts to press our hedges on Friday, taking our President’s word that a storm is coming as a good reason to be cautious into earnings, which kick into gear on Thursday, with CitiGroup (C) and JP Morgan (JPM) reporting, followed on Friday by BankAmerica (BAC), Wells Fargo (WFC), PNC (PNC) and First Horizon (FHN) and then, next week – we’re officially back in earnings season.

Today is a holiday and the volume will be very low but we have 9 Fed speakers jammed into the next 4 days and the Fed Minutes will be released on Wednesday, along with a 10-year note auction at 1pm.  Other than that, just some loose data with Retail Sales punctuating the week on Friday along with Consumer Sentiment:

Not much else to do but let today play out and, hopefully, see what is real tomorrow.

No Redemption

By Ilene

(Originally published at Phil’s Stock World. Check back for a follow-up interview in Nov. 2017.)

Interview with Sam Antar

Crazy EddieSam Antar, former CFO of the criminal enterprise “Crazy Eddie,” will tell you all about his crimes while insisting he will burn in Hell. He now teaches accountants, lawyers, and FBI agents about white-collar fraud and how to catch white-collar criminals. I met Sam in Portland, at his seminar for healthcare fraud investigators.

Sam opened his lecture by asking the audience, “Can anyone guess why I’m here?” A man in the audience suggested “because you got caught.” (That was the first correct answer in twelve years.) Sam, who was energetic and seemed to be enjoying himself, spoke of Crazy Eddie, fraud, and the investigators charged with bringing criminals to justice. Below, I’ve posted a summary of Sam’s presentation followed by our interview and some background information.

1. Presentation

About fraud

All fraud is basically the same.  All fraud is personal in nature. It’s done on a one to one basis.  Your humanity, ethics, and sense of fairness are weaknesses that we – white collar criminals – seek to exploit.  We have no morality. The more likable and friendly we are, the easier it is for us to commit our crimes. We build walls of false integrity. You never know who the real person is behind a criminal’s carefully choreographed wall of false integrity. Bernie Madoff had a wall of false integrity around him and the lawyers investigating him at the SEC were enamored by his status. That’s why they didn’t properly follow through on whistleblower Harry Markopolos’s tips about Madoff’s criminal activities.

Punishment does very little to prevent crime. It’s not a great deterrent. Criminals don’t stop because they see other people getting caught. While Bernie Madoff committed his crimes for almost two decades, he saw many other criminal get caught. Did that stop him?

When I cooperated with the government it was only to save my own skin. I only cooperated with the US Attorney’s Office, the FBI, the SEC, and lawyer representing victims of my crimes because I did not want to bend down to pick up a bar of soap and worry about who was going to be my boyfriend.

Fraud Triangle/Diamond

Criminologists have identified three common elements to all white collar crime: incentive, opportunity, and rationalization. It’s known as the fraud triangle. In recent years, capability was added as a common element of white collar crime and the fraud triangle was renamed the fraud diamond.

Incentive – People think white collar crime is primarily motivated by personal profit, and many times it is. However, personal profit is not always the primary reason why white collar criminals commit their crimes. Such crimes, in many cases, are motivated by power and loyalty within the criminal group. Money is important, don’t get me wrong, we’re not communists, but it isn’t everything.

In the family business type of organized fraud, the members of the criminal group share family, religious, ethnic, racial and cultural ties, such as in the Mafia and other organized crime groups. The criminal participants are not just bound together by money, but by their sociology. I was in a group like this. We felt intense family loyalty. This loyalty and quest for status within our tight-knit group was part of my incentive to act criminally.

Opportunity – The textbook answer is that the opportunity to commit white collar crimes is due to lack of internal controls, lack of checks and balances, and lack of effective oversight. What is missing from the standard textbook answer is YOU. Whatever makes you moral and ethical makes white collar criminals effective. Your morality and ethics limits your behavior, while giving the white collar criminal more flexibility and freedom to commit their crimes. The paradox we face is that the more humane our society is, the easier it is for criminals to commit crime.

For example, we don’t profile people in the U.S. No one wants to be accused of being a racist, bigot, or anti-Semite and the criminals know it and exploit society’s political correctness. We’d have to give up too many civil liberties and give the government far more powers to effectively fight white collar crime and the criminals know that too and exploit laws protecting civil liberties.

Capability – Intelligence without morality. For instance, I went to college to become a more effective crook. 95% of white collar criminals have no criminal records. The higher the monetary value of the crime, the less likely it is that the criminal will have a previous record.

Rationalization – Most people think that we have to rationalize our crimes. Not true. We know what we’re doing and simply do not care about our victims.

Question from the audience: “Why didn’t you care?”

I simply didn’t. Rationalization is for sissy criminals. You have to take the moral compass out of the equation to really understand criminal behavior.  Morality doesn’t exist in the criminal world, except it helps us when the other person has morality. We could be sociopaths, we knew what we were doing and didn’t care about hurting anyone. We didn’t have any ethical or moral concerns.

Criminals know that people live on hope and it’s our job to exploit your hopes and dreams.

Question from the audience: “Did you plan this out?”

Of course we planned it out. Criminals control every aspect of the crime scene. We had all ends covered.

Right from the start, Eddie was skimming money, hiring family members and paying them off the books. We only stopped skimming to commit an even bigger crime – securities fraud.

We brought Crazy Eddie public to defraud the public. The entire empire was built on deceit.  Criminals are no different from you in how we plan our moves, except anything goes for us. The Crazy Eddie IPO was at $8 and the stock went up to $80, split adjusted.

In the five years before going public Crazy Eddie’s reported income quadrupled due to our gradual reduction of skimming which increased our reported earnings. So the growth rate looked great for Crazy Eddie’s initial public offering to investors.

Once we went public, it didn’t pay to skim money off the top. Instead we inflated our earnings by such methods as double counting inventory. Inflating earnings increased the market capitalization of Crazy Eddie and allowed our family, which owned most of the company’s stock, to sell shares at inflated prices.

Crazy Eddie wasn’t a discounter like we advertised. We were essentially a bait and switch operation. When we could not switch customers to higher profit margin products, we subsidized discounts by not paying sales taxes. We bought used and damaged merchandise and sold it as brand new. Eddie went to war against the big companies, he brought down fair trade. That made him a hero of the NYC metropolitan area consumer. However, Eddie Antar was no hero. His so-called discounting was a ruse, a wall of false integrity he built around his criminal empire.

Inventory fraud

Why didn’t the auditors count the boxes of inventory we lied about?  Think about it.  They come in wearing expensive suits. They feel too proud to be climbing on stacks of boxes counting inventory.  We knew they wouldn’t. We exploited their self-esteem. To quote Al Pacino playing Satan in the “Devil’s Advocate” movie, ‘Vanity is my favorite sin.’

We hardly ever obstructed our auditors, we just distracted them, like a magician in a magic show. To get the auditors to do what you want, it’s always better to give them things, like consulting work on the side, to corrode their skepticism.

Investigations

To investigate a criminal enterprise, an investigator has to form alliances with some criminals to catch the bigger criminals – bigger fish. The most effective investigators seem to like the criminals on some level, they have a fascination with crime. If the investigator is repulsed by the criminals, he can’t communicate well with them and get the lower level criminal to help him catch the bigger fish.

A good investigator cannot be judgmental towards cooperating criminal witnesses. It’s a war of wits between the investigator and the cooperating criminal, but there’s also a bonding process that goes on.  I’m on good terms with all the investigators that went after me.

 

(Later, after the seminar.)

2. Interview

Ilene: Sam, what motivated you, and your family, to engage in the long list of crimes at Crazy Eddie?

Sam: We enjoyed being criminals, and enjoyed the money. We didn’t even need the money, just wanted more.

It started when the company, Crazy Eddie, was a private company in 1969. As a private company, there’s no need to boost income – you want to keep reported income low because you have to pay taxes on it.  So we skimmed money off the top.  If someone paid cash for an item, which was more common back then than it is now, we wouldn’t report it to the IRS.  By not declaring the income, we could avoid the sales tax and the income tax — we’d be way ahead.

As a public company, however, we had to do the opposite.  We wanted earnings so it would appear as though the company was growing quickly.  We wanted fictitious earnings.

Ilene: How do you create fictitious earnings?

Sam: Double counting inventory, overstating inventory, understating accounts payable, money laundering, and other methods.

Ilene: Did your auditors miss your accounting inaccuracies?

Sam: Public accountants that are sent out to audit public companies are typically young kids who do most of the leg work.  In those days, they were mostly guys in their twenties, say 22 years old to 26 years old, perhaps even 30 years old. But basically younger guys.

I was a pimp and matchmaker for these guys, and would set them up with young girls to distract them and keep them busy.  You know, these guys think with their penises, not their heads.

You never tell an auditor they can’t have something. You just agree and don’t follow through.  It wasn’t hard to distract them from their audits by pairing them with girls — these guys are like Pavlov’s dogs – throw women in front of these guys and they are very distractible.

Ilene: Did the girls know what you were up to?

Sam: Some did, some didn’t.

As criminals, we use charm and deceit to get what we want. White collar crime is all about confidence. White collar criminals are con men, they need to gain the confidence of their victim. They do this by smiling and flattering the victims. Here’s a politically incorrect example. How many guys have told you how great you are in order to get favors from you?

Sam Antar and Crazy EddieIlene: I don’t know the number but you mean like romancing the victim?

Sam: Yes. Criminals use the same technique you see when a guy’s trying to pick up a girl. That’s how white collar criminals gain confidence – they’ll use flattery and tell many lies.

There are three “basic tactics” that white collar criminals use. First, we exploit your humanity and good intentions; those are your weaknesses. Second, we build a wall of false integrity around ourselves because we need you to trust us. And, third, we measure our effectiveness by your comfort level.

(Having spoken with Sam several times on the phone, I thought he seemed genuinely remorseful and was feeling comfortable with him, so when he added that by the time he was finished with me, I’d be a paranoid schizophrenic and never trust anyone, I thought he was just trying to shock me.)

I started working from Crazy Eddie when I was 14 years old. I was essentially trained, from day one, to be an effective criminal within the family business.

Ilene: Do you think your criminal nature is genetic or environmental, or a combination?

Sam: I don’t know about the genetics, but there’s certainly environmental factors involved. Members of my family are Sephardic Jews; we were a very cohesive group. My grandparents came to the United States in the early 1920s. They had been highly discriminated against in the past, in Syria, where my family is from.

We had to be insular to cope with the discrimination, and that helped build the culture of cohesion within our family. The same unity helped the community, the culture, survive living in Arab lands.

Likewise, organized crime groups commonly share the same social, ethnic and religious groupings. The members are bound together by religion and stature within the criminal group.

Ilene: Like the Mafia?

Sam:  Yes.

Ilene: But you didn’t kill people.

Sam: No, I didn’t kill people but I was just as brutal and caused just as much harm as if I did.

This was the life that I was brought up to be in, within an otherwise law-abiding community. However, in every tight-knit community there exists a criminal subculture that benefits from the cohesiveness of that community. The same cohesiveness that helped the community survive also helped the small criminal subculture within that community to be more effective and survive, too.

Social cohesion is like higher education, there are good sides of it, but education can be used for bad things, too. College helped me supplement my criminal ways so that I could become a better white collar criminal, with my acquired accounting skills.

Ilene: So your crimes grew progressively worse?

Sam:  Yes. Most mom and pop retailers skim money off the top – we were a family of merchants, and skimming was normal at the time. My cousin Eddie started the company, and in this new business, not declaring income to the IRS, was normal.

Criminals are no different from regular people in that criminal behavior starts small. To understand criminal behavior, you have to take the morality out of the equation.  Most people don’t prepare for failure. Like people don’t plan to go bankrupt, criminals also don’t prepare to get caught.

Skimming profits and cheating the IRS was a first step. Next was insurance fraud. So, for example, if someone stole a truck full of merchandise, we could report more merchandise stolen than was actually stolen to the insurance company. Who is going to believe the thief if he gets caught? Or if there was a flood that damaged some inventory, we could throw all the non-salable goods onto the damage list to increase our insurance proceeds.

Crazy Eddie functioned as a private company from 1969 to 1984. In 1980, we started preparing to go public. Our goal of minimizing profits switched to that of increasing profits and legitimatizing the company, “going legit.” In effect, we committed securities fraud through the process of going legit by gradually reducing our skimming and increasing our reported profits.

Now, we wanted to show growth in earnings. Gradually and fraudulently, we reduced the amount of skimming to zero to inflate our growth rate. When we went public in 1984, our growth rate appeared much greater than it really was. By misrepresenting our growth in profits, we were committing securities fraud in addition to our other sins. We were portraying ourselves as a legitimate public company, until finally it all became unsustainable.

Ilene: What sort of frauds did you add to your list?

Sam: Money laundering to increase revenues and profits (the “Panama Pump”). Inflating inventories through fraudulent asset valuations. Timing differences to increase profits (accounts payable cut-off fraud). Concealing liabilities and expenses to increase profits (debit memo fraud). Improperly changing financial statement disclosures to cover up these crimes.

In effect, we were selling a bill of goods to investors. We didn’t care and didn’t feel badly about it.

Ilene: Do you feel badly about it now?

Sam: Well, I don’t give closure.

Ilene: Are you a sociopath?

Sam: No, but I think Eddie Antar may have been a sociopath.

Ilene: Are you still a criminal?

Sam: Let me give you an example, I’m like a drug addict in recovery.  An addict, even in recovery, is always an addict. Likewise, a convicted felon, like me, always has the same criminal mind, even if I’m not committing a crime.

The most effective drug counselors are addicts in recovery, who are helping other addicts to get off their addictions. I’m no different from a substance abuser. I have the same fascination with crime as I did before. It’s more fun and less risky to talk about crime than do it. But if I were to tell you I wasn’t a criminal today, should you believe me?

(The answer to that question is no, but I didn’t say anything.)

 

3. Background Information 

Timeline of Crazy Eddie’s evolution in crime:

(1) 1969-1979: Skimming and under reporting of income (tax fraud) prior to planning to go public

(2) 1980-1984: Gradual reduction of skimming to increase profit growth in preparation for initial public offering, known as committing securities fraud by “going legit.”

(3) 1984-1987: As a public company, Crazy Eddie overstated income to help insiders sell stock at inflated prices until the enterprise came crashing down.

 

Reunion: Crazy Eddie Antar and His CFO/CPA Cousin Sam Antar Meet for first time in 30 Years

 

 

In “Straight Talk about Brutality of White Collar Crime from a Convicted Felon” Sam explains, “If you want to truly understand the brutal nature of white collar crime in all of its gory detail, please listen to my videotaped interview below that is featured on the Con Artist Hall of Infamy website.” 

 

Sam Antar Interview, Part 1: The Rules of Criminality

 

Sam Antar Interview, Part 2: Humanity, or the lack thereof

 

Videos courtesy of Becca MacLaren and the Con Artist Hall of Infamy. The Con Artist Hall of Infamy was founded by Warren Hellman and Arthur Rock, “two billionaires with a fascination of white collar crime and a passion dedicated towards educating the public about the cold-blooded brutality of criminality.” 

This interview was originally published at Phil’s Stock World in May, 2010.

Non-Farm Friday – The Calm Before the Storm

From Phil’s Stock World…

Non-Farm Friday – The Calm Before the Storm

By Phil

Image result for trump calm before the storm cartoonYou guys know what this represents? Maybe it’s the calm before the storm.” 

That’s the word from our President last night as he prepared for a dinner meeting with his military commanders.  The press asked him WTF he was talking about – as the President has many enemies he’d like to attack from Kim Jong Un to NBC News – who knows which way the drones are going to fly and Trump, ever the consummate game-show host, left us with a cliffhanger saying “You’ll find out.”

Certainly Trump needs a distraction after such a terrible week for his Presidency and he’s been working overtime to keep the haters spinning in circles, rolling back environmental regulations, arguing for gerrymandering in the courts, taking away birth control, taking away abortion (the GOP needs more poor babies to vote for them), demanding Congress violate the first amendment while defending the second in the wake of tragedy…  Hell, I bet you don’t even know the US refused to join the rest of the civilized World in condemning the DEATH PENALTY for LGBT people in other countries.

That’s right, the US actually voted AGAINST a UN resolution that condemned the death penalty as a punishment for being gay.  This is not fake news, this really happened – in America – in 2017.  The fact is that we live in a world where even today gay people are being arrested, tortured and killed because of their sexual orientation. And the United States didn’t just let an opportunity to condemn those atrocities pass by – it did much worse. It took a stand against that condemnation.

This latest vote came as a stark reminder that under the current administration, the United States hasn’t just given up its commitment to advancing human rights. It has, instead, changed sides in that struggle.  The resolution urged countries that have still not abolished the Death Penalty (most countries have) to make sure it is not imposed as punishment for “apostasy, blasphemy, adultery and consensual same-sex relations.”  That’s right, blasphemy too – like speaking out against the Trumpster!  Maybe that’s why you haven’t heard about this from your regular news outlets…

The fact that the United States, the birthplace of the modern human rights movement, has opposed a measure supported by every single Western and Eastern European country in the body, and every Latin American country (only Cuba abstained), and instead sided with Saudi Arabia, Egypt, China and other countries with troubling human rights records, makes it a very dark day for human rights.

Joe Biden made a speech condemning Trump saying the US is “heading down a very dark path” and urged Washington’s foreign policy establishment to take a stand:

I really feel incredibly strongly that the women and men sitting before me, who have been the intellectual backbone of the foreign policy establishment in this country for decades, have to start to speak out.  President Obama and I have been very quiet and respectful, giving the administration time, but some of these roots are being sunk too deeply. I believe it’s time to challenge some of the dangerous assumptions that are attempting to replace that liberal world order.”

Acknowledging that many Americans feel left behind by globalization, he said: “The appeal to populism and nationalism is a siren song, a way for charlatans to aggrandize their power, raise themselves up, break down those mechanisms that were designed, whether in our constitution or internationally, to limit the abuse of power, and destabilize the world.  It’s not alarmist. We’re walking down a very dark path that isolates the United States on the world stage and, as a consequence, endangers – not strengthens – endangers American interests and the American people.”

Image result for trump un cartoonTo stand in the well of the general assembly, and wave the flag of narrow nationalism, while warning of a future vulnerable to ‘decay, dominion and defeat’ marks a dangerous revision of political small-mindedness that led the world to consume itself in two world wars in the last century, and it abandons America’s hard-won position as the indispensable nation, as a leader that inspires more than fear.  Trading insults. Deploying taunting nicknames. Promising to ‘totally destroy’ a country of 25 million people. Such erratic action only worsens the crisis and rejects the possibility of diplomacy.”

Sorry if this has “nothing to do with the markets” but it has to do with life on Earth and, if you are first hearing about these things from me – you need to wonder what has happened to the once-free press in America that a massive reversal of position on Gay Rights goes unreported and former VP, Joe Biden’s criticism of Trump goes uncovered or that the President of the United States hinting of a coming war passes with barely a mention – and the markets march up and up – as if nothing is wrong in the World.  We’re in for a rude awakening – we just don’t know when…

8:30 Update:  Complete and utter disaster on the Jobs Report!  Non-Farm Payrolls were DOWN 33,000 jobs (with +100,000 expected by leading economorons) and that’s off from August’s +169,000 and the first negative number in many years – go Trump!  You can’t blame this on the Hurricanes:  As it turns out, the number of people hired by insurance companies as claims adjusters more than made up for the number of jobs that were displaced by the storm.

Also, from the bureau of fake statistics, July has now been revised down from 189,000, which boosted the Dow 1,000 points that month, to 139,000 the lowest number of jobs added since July (though now trounced by September).  Will the market now take back those 1,000 Dow points (5%) and then what about this month’s terrible report?  Is bad news still good news or is the Fed already locked into a December hike, no matter how crappy the data?

There’s nothing good about this jobs report for the markets.  Less jobs is less consumers to spend and wages continue to pressure upwards, 0.5% this month on a 6% annualized pace – there’s a margin-killer.  There are 159,830,000 working Americans who are making an average of $26.55/hr.  That’s $22.23 for the bottom 99%, “non-supervisory” positions and in order to increase the average by $4.32 by including the Top 1%, we can see that the Top 1% has to average $450/hr – about 20x more than the Bottom 99% make.  Yep, that’s about right.

So if you hear reports about 6% wage growth and your paycheck isn’t moving – now you know where the money is going!

Image result for french revolution guillotineYou can’t grow an economy by only giving money to the richest 1% of the people.  This has been proven over and over again for thousands of years.  This is the leading cause of revolutions, for God’s sake!  At a certain point, it occurs to 99 people that if they kill that one guy and divided his $450 by 99 ($4.55 each), they’d ALL be 20% richer.  THAT’S Democracy!

It’s not only bad for the continuation of a peaceful nation but it’s simply bad for the economy when you pool wealth in the hands of so few people.  Businesses that cater to the masses are very vulnerable as the masses run out of disposable income and the GOP’s joke of a tax cut (see previous rants) is only going to make things worse, not better.  At some point (and we think it’s this earnings period, which covers the -33,000 jobs and the -50,000 revision) this will start to show up in the earnings of a lot of companies that are trading at record highs because people don’t think about the repercussions of these policies – they simply believe tax cuts are good and buy every stock in sight.

That’s how bubbles form.  We may soon see how they pop!

Have a great weekend,

– Phil

Hurricanes and Fires: Updated Interview on Climate Change with Jan Dash

Why we need to act on climate change now

Interview with Jan Dash PhD, by Ilene Carrie, Editor at Phil’s Stock World

Updated in the wake of Hurricanes Harvey and Irma on September 13 , 2017.

Jan Dash PhD is a physicist, an expert at quantitative finance and risk management, and a consultant at Bloomberg LP. In his thought-provoking book, Quantitative Finance and Risk Management, A Physicist’s Approach, he devotes a chapter to climate change and its long-term systemic risk. Jan’s Climate Portal provides extensive background and references. In this interview, Jan discusses climate change and how inaction is threatening our future. (Scroll down for pdf file.) 

Ilene: Hi Jan. Thank you for taking the time to share your ideas on global warming. . . I’m looking at a graph, along with the current atmospheric CO 2 level that you and Yan Zhang modeled for the Bloomberg Carbon Clock, which shows just how sharply CO 2 levels have increased mostly in only the last 50 years relative to the last 12 thousand years. And I can see that CO 2 levels are currently about 400 ppm – and that at 450 ppm, the text says we will reach a “ danger zone.” What happens when CO 2 levels reach 450 ppm? Why is that level considered the “danger zone?”

Screenshot of Bloomberg’s Carbon Clock

Jan: If we can limit CO 2 to 450 ppm, it is likely that we can limit the average global temperature increase to around 2 degrees Centigrade or 3.6 degrees Fahrenheit above pre-industrial levels. This is the goal of the Paris Agreement, designed to leave a livable planet to our descendants.

Ilene: Do you think we will be successful?

Jan: With present policies, it does not look like we will achieve that goal. Action must be increased urgently to avoid increasingly severe climate impacts on our grandchildren and their descendants. Solving the climate problem is prerequisite to any long-term solution to the many serious issues facing humanity today. Climate change is actually the outstanding moral, ethical, and survival issue of our time.

We are in a “ danger zone” now. Today’s CO 2 level of around 400 ppm is going up rapidly and is already above CO 2 levels since the beginning of civilization. The average global temperature is moving out of the stable balanced range that made civilization possible. The present increase in CO 2 is outside of natural variation and this extra CO 2 can be shown by rigorous physics analysis to be due to human activity, mostly burning fossil fuels. Future climate impacts mostly depend on what we do or don’t do to limit CO 2 from burning fossil fuels.

We are now starting to see the effects of climate change (in statistical terms, the signal of climate change impacts is now apparent). Some of the impacts have already been very bad and out of statistics for natural variability. The effects so far, however, are only a small echo of the increasingly severe impacts our grandchildren will experience if we do not act substantially to mitigate climate change now.

Heron by Gellinger/Pixabay

Ilene: If we fail to get CO 2 under control, what will the earth be like in the second half of the century?

Jan: We have always had disasters. Climate change makes them worse. Long-term climate impacts in the absence of action will include increasingly severe food and water shortages worldwide, climate-induced migrations due to rising sea levels that will make many coastal cities and regions unlivable, increasingly negative health impacts, increasing extreme weather, increasing political and military instabilities with potentially increased terrorism, increasingly damaged valuable ecosystems, more extinctions of species, and a whole host of other bad impacts. The US military has been writing for years about climate change negatively impacting US national security.

How increases in CO 2 raise the average global temperature, what likely risks will follow, and what we can do to lessen those risks are all presented in comprehensive reports. The Intergovernmental Panel on Climate Change (IPCC) volumes run several thousand pages. I get reports every week from reputable universities and laboratories worldwide detailing the increasing dangers of climate impacts.

The real question is what legacy are we choosing to leave our grandchildren – will they have a decent way of life or will they have to deal with massive climate problems? We actually do not have a choice about finding climate solutions if we want to leave a livable world to our descendants. We should think in a risk-management framework.

Excessive rainfall led to the river Danube (Europe’s second longest river) flooding and causing extensive damage in Ulm, Germany, June 2013. Hans/Pixabay

Ilene: How do you apply the mathematics of risk management to climate change?

Jan: Climate Change Risk Management is the sensible paradigm that is increasingly being employed to act on climate change. We deal with all sorts of risk. Climate change is a risk. We can deal with the risk of climate change. We have the technology now. Climate risk management is not and does not have to be mathematically precise. We never have complete certainty for anything, and we do not need certainty to act. The analogy I like is that if you are sitting in a car stalled on the railroad tracks, you don’t need to know the exact velocity of the train that is approaching in order to act. The biggest uncertainty is what the human race will or will not choose to do to limit CO 2. Climate risk management tools include figuring out corporate climate risk approximately using scenarios, for example the scenarios described by the Task Force on Climate Related Financial Disclosures. Other risk tools include the Social Cost of Carbon and the nascent Climate Change Value at Risk. In my book, I also describe how a formal approach to Climate Change Risk Management can be useful.

The basic math of risk management is to measure risk at a high confidence level among possible scenarios; this means a precautionary approach. I do want to point out a parallel with former V.P. Cheney’s “One-Percent Doctrine”: If there’s a 1% chance that climate change can be devastating to humanity, we have to treat it as a certainty in terms of our response.

Ilene: In your book, you discuss “the negatively ethically-based discount rate for valuation of future climate impacts.” Could you explain a little about that?

Jan: There are two ways to look at climate action today regarding discounting, generally used to quantify today’s perspective. The first way uses the profit rate a firm requires. If that profit rate is used as the discount rate to discount future impacts on our descendants, there is hardly any present value to us for the suffering of our descendants, and this discourages climate action. I think this view is unethical. The second (and I believe better) way to look at climate action today is simply the reduction of suffering for our descendants, by climate action, independent of any present value and discounting. Actually, if we do not act sufficiently, ethically we should put something aside for our descendants to cope with climate change. This would translate into an ethically-based negative discount rate.

We can mitigate the destructive forces of climate change. We really can, and without too much cost, especially taking into account the costs of climate damage due to inaction. The solutions to climate risk will present opportunities, including more jobs, which will offset mitigation costs. We need leaders that will step up to provide incentives and long-range climate action plans.

Ilene: Speaking of leaders, Donald Trump’s decision to withdraw from the Paris Climate Agreement last month seems like an enormous setback to the worldwide effort to ultimately cap atmospheric CO 2 levels. Will Trump’s exit from the Paris Agreement move the day of reckoning substantially closer? 

Jan: The analogy I like is that all countries are in a badly leaking boat. All countries need to help bail out the water to survive. If a country becomes a bad agent and decides not to help, either the others have to work harder or we all sink. The Paris Agreement was the first to achieve international unanimity with the bottom-up approach of each country “doing what it can” to mitigate climate change with the “Nationally Determined Contributions.” To achieve the goals of the Paris Agreement, the world consumption of fossil fuel needs to level off in the next few years and drop to zero by mid-century.

Climate change will hit some countries harder than others – especially poor countries that are most vulnerable to climate change and that did the least to cause the climate problem, a huge moral and ethical issue. Vulnerable peoples are affected the worst by climate change because they have the fewest resources to cope with climate impacts. But in the end, if we do not act robustly, all countries will eventually be badly hit — there will no place to hide.

Trump’s decision to pull the US out of Paris is not the last word, but it adds substantially to the risk of going well past the 450 ppm level and missing the goal of transitioning to renewable energies by mid-century, which is necessary to leaving a livable planet to our descendants.

Ilene: Do you believe that states, cities, and corporations will make up for the lack of participation by the federal government?

Jan: The world’s governments luckily seem to have pulled together since the announcement, with additional motivation to act on climate change, including China and India. Many US local and state governments are being proactive, including mid-western states that have increasing wind energy (because wind is increasingly lower in price and economical). Many corporations are also stepping up significantly. I don’t know if it will be enough. The US federal government is also worsening the climate problem in other ways, including federal opposition to the renewable energy development needed to replace burning fossil fuels. This opposition is economically shortsighted, since renewable energies have the promise to open a new distributed energy economy with significant opportunities.

Transition to renewable distributed energies can have huge positive economic significance similar to the change from centralized computing (mainframes) to distributed computing (iPhones, Internet) that led to a new, more productive economic paradigm. In transitioning, we need to be mindful of those people who are tied to the fossil fuel sector, as well as others vulnerable to climate change, who will require assistance to survive.

Flood damage by the river Donau (Danube) in Ulm, Germany, in 2013. Hans/Pixabay

Ilene: I’ve read that as CO 2 accumulates, future warming gets “locked in.” You appear to confirm that claim. 

Jan: You are right about the persistence of CO 2. A substantial fraction of CO 2 emitted stays in the atmosphere on time scales of 100 years. The higher the cumulative CO 2 level gets, the worse the impacts will likely be.

Ilene: Positive feedback mechanisms worsen any increase in temperature, as increased CO 2 provokes other effects that lead to further warming. Are there significant negative feedback mechanisms as well? 

Jan:  Positive feedbacks are bad because they increase global warming, and substantial positive feedbacks are known to exist. Negative feedbacks would be good. Unfortunately for us, no convincing evidence exists for negative feedbacks substantial enough to stop global warming. The relevant metrics including all feedbacks are the Equilibrium Climate Sensitivity and Transient Climate Response. The probabilities of various values of these metrics from many sources are documented in the IPCC 2013 AR5 Science report – see Ch. 12, Box 12.2, page 1110. The bottom line is that we should not be hypnotized by the remote chance that negative feedbacks will save us by producing low values for these metrics. Prudent risk management principles tell us that we should base our action using at least the average values for these metrics, even higher than average. Regardless, climate impacts will worsen sooner or later without substantial action. The message is unchanged. We are already in the “danger zone;” we need to act to mitigate climate change now.

Ilene: Do you have a solution to climate change in mind?

Jan: We will need a portfolio of actions. Instead of thinking about a single 100% solution that does not exist, think of twenty 5% solutions which do exist and which provide practical ways of solving the climate problem. This portfolio of risk-motivated solutions will need action from individuals, corporations, investors, NGOs, including faith groups, and governments at all levels to be successful. There are many things we can do. For a start, people can call their representatives to urge climate action. A good idea is to put an honest price on carbon in the US, as suggested by the conservative Climate Leadership Council and by the Citizens Climate Lobby.

Ilene: Many people believe that there’s no such thing as climate change; others believe that, while climate change may exist, it’s due to natural processes over which we have no control. According to a recent Pew Research Center study, slightly less than half of US adults believe that climate change is mostly due to human activity.

Source: Pew Research Center

What do you think the primary reasons are for such widespread skepticism despite an enormous body of scientific evidence? 

Jan: In 2002, a Republican strategist Frank Luntz wrote a very influential memo that recommended deliberately attacking climate science by emphasizing “doubt” as a way to avoid acting on climate change. The same strategy had formerly been used by the tobacco industry that attacked the science demonstrating the dangers of tobacco to protect cigarettes. We now have a whole industry of disinformation on climate change and a destructive politicization of climate science. Careful climate research papers from universities and laboratories worldwide are opposed by scientifically invalid disinformation from right-wing think tanks. This disinformation – distorting the very nature of science – contains factual errors, flimsy erroneous arguments, and cherry-picked data used with false generalizations, among other fallacies. The Trump administration is mostly saturated with climate disinformation and ignorance, obstructing climate action. Trump appointees now unfortunately running the EPA and other agencies spout climate disinformation, ignoring or suppressing valid climate science.

People need to wake up and realize that the influential, right-wing, “ tiny minority of contrarians,” who deny climate science and refuse to accept the facts of climate destruction are obstructing action and damaging the United States.

I believe that as the impacts of climate change become more evident, people will stop trusting the (mostly right-wing) media and politicians that loudly push climate disinformation, in spite of tribal loyalties and confirmation bias.

The good news is that most people do want action on climate change. Prudent risk management on climate would say that action is warranted. People who believe climate change is not a problem might ask themselves “what will I tell my grandchildren if I’m wrong?”

Arctic Ice Free-Photos/Pixabay

Ilene: How are the impacts of global warming most likely to destabilize the worldwide financial system? Given that there are multiple, serious consequences of climate change, what are the most worrisome pathways to an economic crisis?

Jan: In the language of physics, financial and economic systems worldwide are in unstable equilibrium. Economic and financial systems can be thrown into crisis by any sufficiently strong perturbations. The 2008 crisis is the latest example. I believe that climate change unfortunately has the potential to generate deep economic and financial crises, and I am not alone in this assessment. Pathways to an economic crisis include physical climate impacts and transition impacts from fossil fuels to renewables. The physical effects will negatively affect supply chains and business generally. If transition risk is not handled reasonably, severe economic problems could result. For systemic worldwide climate impacts, recovery from crisis could be very long, if it happened at all. Estimates in economic models of future GDP levels generally do not include effects of climate-induced crises and therefore do not reflect the full extent of climate-induced destruction.

Ilene: Are there any investing themes we should be aware of?

Jan: Dominant future investment themes are pretty clear – notably renewable energies (wind, solar, batteries, etc.), which are rapidly becoming economically more and more competitive. Electric cars, better electric grids, and energy efficiency are others. Technologies currently in research (fourth-generation nuclear energy, fusion energy, as well as carbon sequestration), are promising long-term investment opportunities. Divestment from fossil fuels will avoid financial losses in the transition from fossil fuels to renewable energies. As mentioned before, transition should be largely completed by 2050 if we are to leave a livable world to our descendants, with large amounts of carbon remaining in the ground as useless “stranded assets.”

Ilene: What about just adapting to climate change? Is adaptation viable on a long-term basis without mitigating climate change?

Jan: Adaptation to some extent will be necessary along with any amount of mitigation, with increased adaptation needed for less mitigation. The impacts that I mentioned will get worse and worse if we do not mitigate climate change substantially. Some people will adapt, though in a damaged world. The poor and vulnerable will be forced to adapt the most to survive, if they can. Many people will die early. If we have business as usual, BAU (with at most a token amount of climate mitigation), the planet in 2100 will be very different from what it is now. It will be a hostile place. I wouldn’t want to be there. Eventually the planet under BAU basically will become unlivable. It’s that simple. Again, right now we are moving out of the balanced temperature range that has made civilization possible. We need a simple message. The message is “act now.” Anything else is too risky.

Hurricane Harveys and Irma

The frontage road surrounding the Houston Chronicle on three sides, submerged in water due to Hurricane Harvey, August 28, 2017. Al Lewis, Houston Chronicle

Ilene: Do you believe the severity of recent hurricanes (Harvey in Houston and Irma in Florida) is a symptom of climate change and a preview of what to expect in the future?

Jan: Yes. The quick answer is that hurricanes now occur in a background of climate change and global warming, tending to make them more intense than they would be otherwise. Unfortunately, future extreme weather events will be made increasingly more extreme by man-made global warming simply because they will have more energy to wreak havoc. Warmer water gives hurricanes more energy when they form, and warmer air can hold more moisture, producing more rain. Sea level rise increases storm-surge flooding. There is evidence that the jet stream is being modified by climate change, potentially increasing the time that hurricanes may stall over a given region.

All these effects were present with Harvey, which increased the hurricane’s destructiveness. In particular, Harvey did stall, producing record rain and flooding, with horrible consequences. We saw similar effects with Hurricane Sandy in 2012. Unfortunately, It’s a fact: climate change made Hurricane Harvey more deadly.

For Hurricane Irma, the monster wider than the state of Florida, the basic message is the same. Climate change enhances the intensity of hurricanes, making more people suffer and causing more material damage.

Ilene: How have Hurricanes Harvey and Irma disrupted supply chains and how will these disruptions affect the economy? 

Jan: Corporate supply chains can be complex and can be broken. A component in a supply chain that goes missing can affect downstream production with negative economic consequences. With Harvey, a substantial fraction of the US chemical industry was thrown off-line. Irma affected the entire state of Florida, including the tourist and agricultural sectors. Recovery from extreme events is very costly, and climate change-enhanced extreme events will increase our costs.

Ilene: Is it a coincidence that hurricanes this summer are occurring in bunches (e.g. Harvey, Irma, Jose, and Katia), or is there a reason?

Jan: There may be periods without strong hurricanes and periods with strong hurricanes. The causes of hurricanes are complicated. However, once a hurricane starts, it can be made worse by climate change.

In general, we are starting to see regular dangerous occurrences of what would have been “100-year events” without climate change. In risk management, this is called “tail risk.”

Ilene: By “tail risk” do you mean that what was once considered unlikely is becoming increasingly more likely? 

Jan: Yes. Climate change is increasing the tail risk and, moreover, moving the new average risk up toward the old tail risk, with increasingly bad consequences.

Ilene: While hurricanes are crippling the south, the west is in flames. Western forest wildfires have been increasing since the 1980s and the cost of suppressing them have surged. How unusual is this and how do higher temperatures contribute to the fires?

Jan: Greater temperatures and changes in precipitation due to global warming mean more dry vegetation to burn, which can increase the intensity of fires once they start. California (where I grew up) no longer has a fire season, and fire size has increased. Fire season is now all year long.

Ilene: One stock market “guru” proclaimed a few months ago that because Warren Buffett suggested insurance prices were not factoring in climate change, there was no climate change. I’m not sure if the guru was wrong about Buffett and/or insurance companies, but if so, is that about to change? What are your thoughts on the insurance situation?

Jan: The National Association of Insurance Commissioners (NAIC) recognizes climate change – see the NAIC’s Climate Change and Risk Disclosure and Emerging Risks: Climate Extremes in the U.S. Reinsurance companies are starting to factor in climate change. Munich Re estimates that climate change has already increased the probability of major U.K. flood loss events up to 2-fold.

Property and casualty insurance companies tend to be reactive, simply raising prices and cancelling policies after an extreme event. Ceres, a sustainability nonprofit organization composed of large investors, reports that “while more U.S. insurers are improving their disclosure and management of climate risks, most are still giving it minimal attention, both in terms of risks and opportunities.”

The recent hurricanes may impact parts of the insurance industry and increase the risk of climate change to people who no longer can get affordable insurance.

One salient message is that the insurance industry – along with other industries – is starting to wake up to climate risk. Maybe the guru will also wake up.

Ilene: Are you hopeful?

Jan: Yes. I am optimistic; I have no other choice. I do not want to have a conversation with my grandsons when they get older and ask me “Grampa, what did you do for climate?” and I say, “Well I got depressed and stopped.” I am not going to have that conversation. I will continue to do my best to make sure the world is livable for them and for their grandchildren. I am hopeful that we (humanity) will make the necessary adjustments before it’s too late.

We need to act with more urgency now. The costs of inaction are too great.

Thanks for reading this. You can help.

Jan Dash managed quant/risk groups at Bloomberg LP, Moore Capital Management, Citigroup/Salomon Smith Barney, Fuji Capital Markets, Eurobrokers, and Merrill Lynch. His prior finance and physics academic positions included Adjunct Professor with the Courant Institute (NYU), Visiting Research Scholar at Fordham University (Graduate School of Business Administration), Directeur de Recherche at the Centre de Physique Théorique (CNRS, Marseille, France), and Member of Technical Staff at Bell Labs. He has published over 60 scientific papers, and holds a BS from Caltech in engineering and a PhD in physics from UC Berkeley. The 2nd edition of his book, Quantitative Finance and Risk Management, A Physicist’s Approach, devotes a chapter to climate change and its long-term systemic risk. Jan is also the primary author of the handy list of quick responses to climate contrarian fallacies and the Managing Editor of The Climate Portal.

Ilene Carrie is editor and content manager at Phil’s Stock World, a popular website for learning about investing and option trading strategies.

The opinions expressed in this interview are those of the author and do not necessarily reflect those of any institution mentioned. 

KEEP CALM AND WATCH MORE TELEVISION

Thaddeus Howze is a science fiction and fantasy writer, technology consultant, polymath, autistic, creator of worlds, iconoclast, humanist and occasional bastard (nobody’s perfect). Read more about Thaddeus here. 

KEEP CALM AND WATCH MORE TELEVISION

Courtesy of Thaddeus Howze

New phrases to describe your television watching habits.

#bingewatching #cringewatching #hingewatching #singewatching #fringewatching

ASYNCHRONOUS, DELIVERED ACROSS THE AIRWAVES

In the beginning, there was television and it was all there was. Shows were filmed, recorded and broadcast over the airwaves at a designated time.

You watched it when it aired. Or worse, you didn’t. If you missed it, you might have to wait for what seem like forever, to see it again. You were the laughing stock of your friend-group and you loathed their secret knowledge of a thing you had not experienced.

And then there was syndication. And it was good. When a show ended, if you hadn’t managed to ever be around when your particular missed show took place, you could, with the help of your handy-dandy TV Guide (okay kiddies, look it up), plot out your path to the show you missed and become one with your television again.

Syndication gave you back your life. Then came technology which would change your relationship to television forever. You could record television with your video recorder. The much maligned Betamax and the visually inferior VHS recording device became a part of the life of every person who could afford one.

Only the blinking of the 12:00 upon its LED dashboard revealed our hidden contempt for its complexity.

And there was freedom from the clock, freedom from the control of live television, freedom to tell Nielson to get bent. We were free at last! Hallelujah!

We could record two hours of anything we wanted, assuming we could ever get the technology to work for us. If you couldn’t program your clock, however, you were likely to have to stand there and tell your device to record manually.

It was not ideal, but it was still a form of freedom.

The technology advanced letting you record up to six hours of video on a single video cassette.

BLOCKBUSTER LIVES (1985)

This was the era of Blockbuster and it was good. Except for the video rental late fees. Those were always bad. Be kind, rewind was the renter’s motto.

And lo, cable was born and we were offered a new way of looking at television. It was television but it wasn’t. It was without commercials. It was non-stop. It didn’t end in the morning at two AM with screens of snowy static or dead-space tones which told you the programming day had ended.

Cable never ended. It just replayed the same thing it had yesterday. HBO, Home Box Office replayed the same things so often, it was often said, HBO meant Hey, Beastmaster’s On. Beastmaster was the first movie licensed to HBO and became the series which headlined their network for half a decade.

Cable evolved and soon offered more programming than television ever could. The hunger for more TV than a person could watch had arrived. New stations formed, new services were founded and soon there were five hundred channels and nothing was left to the imagination.

Cable killed Blockbuster, as surely as it crept up behind it and brained it at a table discussing treachery and villainy. Cable could be recorded but there was less need. After all, it would be back again, sometimes in the same day.

BLOCKBUSTER DIED. (2010, sold to Dish Networks)

But the VCR was still good. Sports enthusiasts who hated commercials were in heaven. Anyone who hated commercials considered this technology a blessing. I know. I was one of them.

Cable became the norm. Television continued to exist. Networks struggled to become edgier. Cable became edgier effortlessly. Networks did their best to keep up.

Viewers thrilled to the changes in television and cable in the nineties. So many choices, so little time left to watch television. Americans adjusted. We just watched more television. Sometimes up to eleven hours a day.

How was one supposed to keep up with all this amazing television? With a Digital Video Recorder. Think VCR with the capacity to hold twenty to forty hours of television.

Tivo dethroned the VCR overnight. VHS tapes became kindling to start fires and DVRs became the norm. Leading to the final evolution of television, a transformation so astounding, so revolutionary, it sparked its own meme.

STREAMING FROM THE CLOUD (1995, Netflix)

Streaming was born. So much for VCR, so much for DVR, now we could hold your television for you in the cloud. Entire video libraries at your fingertips. Forever. At least that’s what we thought. As long as you could connect to the Internet, you could be watching television. Nothing bad could happen from this evolution right?

Except for that pesky up-tick in traffic accidents, but this was considered a price worth paying.

Surely no further evolution could happen to make TV more convenient, right? Wrong. Netflix released an entire series of a television show in a single day.

Mind blown.

BINGE-WATCHING WAS OFFICIALLY BORN (April 10, 2015)

This created a new condition so revolutionary, the phrase “binge-watching or bingeing” was born.

Lo the heavens split open and poured out upon the ground a single complete season of never seen before goodness which cause television viewers to exclaim to the heavens, more, dear gods of television, more. And their prayers were answered.

The ultimate expression of television had been reached. The capacity to, in a single day absorb not just a single hour, or a a bounty of two hours of television, which was the norm for a show in the time of Networks, or a miniseries, which was four hours of television spread out over a week, now you could seen the entirety of a television show with eight to twelve hours at one time.

An orgasmic explosion of goodness which left viewers stunned, their minds opened, their bladders bursting, their eyes bleary, their bellies exploding, and their hunger for media expanded beyond any reasonable expectation.

Welcome to the era of binge-watching. In addition to anything which had ever existed up till now, you had the option to have streaming services cater directly to you and release their content in a single burst of creativity.

Literally, this is the best any television service could possibly offer. An entire season in a single night.

DIGITAL, ON DEMAND VIDEO

The apotheosis of digital media. Digital, on-demand video. Within reason you can watch whatever your heart and your wallet desires and can afford to hunt for, across seven streaming services, three cable networks and a growing number of individual network services provided directly from distributing agencies such as CBS and now, Disney.

With the advent of a season being delivered in its entirety, a new trend in television watching took root. Binge-watching became the way viewers now absorbed television. Instead of watching television shows one week at a time ala network TV, you could now enjoy shows the way a junkie enjoys their heroin, in one long drawn-out, mind-numbing series of episodes.

Until your soul cries out for release.

Binge-watching or bingeing is not just for the new and exciting. With services like Hulu and Netflix, viewers could catch up on entire seasons of things which had come and gone, into the annals of history. (Some of those things should have stayed forgotten) but for some viewers, now conditioned to absorbing media and hungry for anything have started combing through their virtual back lots for more.

But bingeing would lead to other forms of television absorption based on the ability to binge one’s television.

HINGE-WATCHING

For some television being made today, there are shows which supported each other and connections are made between the shows. Easter eggs which show connectedness. Characters, story elements, ideas, even actors, might cross the digital divide making shows feel more real, more related, more connected than television has ever been before.

Marvel’s Cinematic Universe is a series of loosely-connected movies and television shows which have overlapping elements. DC Entertainment’s CW shows have also started overlapping and cross-pollinating and where our next term draws its origin.

Enter hinge-watching.

If you’re hinge-watching, you are trying to watch everything associated with a particular series and for some series to be understood, you MUST consume the media in the proper order, hence hinge-watching. The MCU has spawned an industry of answers over which episodes are relevant, necessary and in what order are the proper story elements released. Fans now battle to prove they are the definitive source of what order to watch things in and why.

If you are a hinge-watcher, you know your series of choice has elements which hinges upon the viewing of the previous materials. You don’t have to watch them, but for maximum continuity and integrity, the hinge-watcher leaves nothing to chance.

For example: To enjoy the recent Defenders series by Netflix, the show hinges upon the adventures of Matt Murdock, also known as Daredevil. Without watching Daredevil, the show simply loses much of its initiative and steam.

Daredevil’s adventures inform much of what takes place in Defenders and the show would make literally no sense without him.

CRINGE-WATCHING

Which leads to our next form of viewing: shows you might have to view to understand a series but hate the effort so much, you might be said to be “cringe-watching” said series.

The same way Daredevil is the hinge in the Defenders series, the character, Iron Fist, is the cringe in the series. Iron Fist is the opposite of Daredevil; poorly-written, lazily-acted, badly-choreographed, a show which literally should have no reason for its existence, except as a tent pole for the Defender series.

Iron Fist may be required for the Defenders stories, but you will assuredly NOT enjoy the series nearly as much as any of the other heroes in the series (Luke Cage, Jessica Jones) making it the worst of the lot.

SINGE-WATCHING

Singe-watching is a more positive connotation for binge-professionals. Singe-watching is not just watching a series, you are live-tweeting it, you are posting online about it, you are sharing it with your friends, you are annoying your loved ones, you will shout it to the Universe at large; extolling the virtues of the series, sharing elements of the writing, promoting the beauty of the cinematography, the amazing dialogue, or any of a number of other features you can see and want others to appreciate with you.

Because to the singe-watcher, much sought after by companies, nothing matters unless you can get others to experience the heat the same way you do. Shows like the Flash, Arrow, Westworld or Game of Thrones have their own singe-watchers who promote the show and have followings because of their insight, their understanding and sharing of views with other kindred spirits online.

Singe-watching is real and it is making its own brand of celebrity writers out there.

FRINGE-WATCHING

Last, but not least, is the exotic art of fringe-watching. In a world where media is everywhere and entire libraries of everything imaginable is ready for consumption, there are still some things which won’t be watched, by anyone. Half the time, with the growth of media libraries, it is hard to tell when something has changed. Keeping up is almost impossible.

Enter the fringe-watcher. They have already consumed all of the good stuff online. They have already supped at the three out of five star menu of movies. The fringe-watcher dares to enter the land of the two star or even one star movies.

They will not be denied. If the potential for quirky, but good, can be found, the fringe-watcher knows them all. They are the brave, the bold, the fringe-watching. They know every episode of One Piece by heart, all one thousand of them.

No show is too obscure and the fringe-watcher finds them fascinating. They may write new series bibles, analyses, fan fiction or anything else which tickles their fancy. Shows like Mongrel (BBC funny-vulgar animals), Rick and Morty featuring mad-scientist hijinks, and Duckman, adventures in dysfunctional family fun. To the fringe-watcher, his badge is found in the extremity of the shows he enjoys.

So keep calm, binge, hinge, fringe, singe or cringe. You do you. Just keep watching television, for god’s sake, actors, writers, directors, animators, and distribution houses are counting on you. You can’t stop now. You can’t stop ever. Michael Bay needs at least three explosions a day to live.

What is going to happen on television next? Beamed directly into our brains, I bet… Assuming we have any brains left.

Image may contain: one or more people

*****

Thaddeus Howze is a prolific writer of speculative fiction, scientific, technical and cultural commentary from his office in Hayward, California. He writes as a columnist for the Good Men Project, a social men’s magazine and Krypton Radio, a sci-fi enthusiast media station and website. He is also a freelance journalist for Polygon.com and Panel & Frame magazine. 

Thaddeus is the co-founder of Futura Science Fiction Magazine and one of the founding members of the Afrosurreal Writers Workshop in Oakland. Thaddeus’ work has appeared in numerous anthologies and he published two books, ‘Hayward’s Reach’ (2011), a collection of short stories and ‘Broken Glass’ (2013). More here. 

Why we need to act on climate change now (updated 9-3-17)

Interview with Jan Dash PhD, by Ilene Carrie, Editor at Phil’s Stock World.

Updated on September 3, 2017 in the wake of Hurricane Harvey

Jan Dash PhD is a physicist, an expert at quantitative finance and risk management, and a consultant at Bloomberg LP. In his thought-provoking book, Quantitative Finance and Risk Management, A Physicist’s Approach, he devotes a chapter to climate change and its long-term systemic risk. Jan’s Climate Portal provides background. In this interview, Jan discusses climate change and the way inaction is threatening our future.

Ilene: Hi Jan. Thank you for taking the time to share your ideas on global warming. . . I’m looking at a graph, along with the current atmospheric CO2 level that you and Yan Zhang modeled for the Bloomberg Carbon Clock, which shows just how sharply CO2 levels have increased mostly in only the last 50 years relative to the last 12 thousand years. And I can see that CO2 levels are currently about 400 ppm – and that at 450 ppm, the text says we will reach a “ danger zone.” What happens when CO2 levels reach 450 ppm? Why is that level considered the “danger zone?”

Screenshot of Bloomberg’s Carbon Clock

 

Jan: If we can limit CO2 to 450 ppm, it is likely that we can limit the average global temperature increase to around 2 degrees Centigrade or 3.6 degrees Fahrenheit above pre-industrial levels. This is the goal of the Paris Agreement, designed to leave a livable planet to our descendants.

Ilene: Do you think we will be successful?

Jan: With present policies, it does not look like we will achieve that goal. Action must be increased urgently to avoid increasingly severe climate impacts on our grandchildren and their descendants. Solving the climate problem is prerequisite to any long-term solution to the many serious issues facing humanity today. Climate change is actually the outstanding moral, ethical, and survival issue of our time.

We are in a “ danger zone” now. Today’s CO2 level of around 400 ppm is going up rapidly and is already above CO2 levels since the beginning of civilization. The average global temperature is moving out of the stable balanced range that made civilization possible. The present increase in CO2 is outside of natural variation and this extra CO2 can be shown by rigorous physics analysis to be due to human activity, mostly burning fossil fuels. Future climate impacts mostly depend on what we do or don’t do to limit CO2 from burning fossil fuels.

We are now starting to see the effects of climate change (in statistical terms, the signal of climate change impacts is now apparent). Some of the impacts have already been very bad and out of statistics for natural variability. The effects so far, however, are only a small echo of the increasingly severe impacts our grandchildren will experience if we do not act substantially to mitigate climate change now.

 

Heron by Gellinger/Pixabay

 

Ilene: If we fail to get CO2 under control, what will the earth be like in the second half of the century?

Jan: We have always had disasters. Climate change makes them worse. Long-term climate impacts in the absence of action will include increasingly severe food and water shortages worldwide, climate-induced migrations due to rising sea levels that will make many coastal cities and regions unlivable, increasingly negative health impacts, increasing extreme weather, increasing political and military instabilities with potentially increased terrorism, increasingly damaged valuable ecosystems, more extinctions of species, and a whole host of other bad impacts. The US military has been writing for years about climate change negatively impacting US national security.

How increases in CO2 raise the average global temperature, what likely risks will follow, and what we can do to lessen those risks are all presented in comprehensive reports. The Intergovernmental Panel on Climate Change (IPCC) volumes run several thousand pages. I get reports every week from reputable universities and laboratories worldwide detailing the increasing dangers of climate impacts.

The real question is what legacy are we choosing to leave our grandchildren – will they have a decent way of life or will they have to deal with massive climate problems? We actually do not have a choice about finding climate solutions if we want to leave a livable world to our descendants. We should think in a risk-management framework.

 

This image was taken in Ulm, Germany, when the river Danube (Europe’s second longest river) caused flood damage following excessive rainfall in June 2013. Hans/Pixabay

 

Ilene: How do you apply the mathematics of risk management to climate change?

Jan: Climate Change Risk Management is the sensible paradigm that is increasingly being employed to act on climate change. We deal with all sorts of risk. Climate change is a risk. We can deal with the risk of climate change. We have the technology now. Climate risk management is not and does not have to be mathematically precise. We never have complete certainty for anything, and we do not need certainty to act. The analogy I like is that if you are sitting in a car stalled on the railroad tracks, you don’t need to know the exact velocity of the train that is approaching in order to act. The biggest uncertainty is what the human race will or will not choose to do to limit CO2. Climate risk management tools include figuring out corporate climate risk approximately using scenarios, for example the scenarios described by the Task Force on Climate Related Financial Disclosures. Other risk tools include the Social Cost of Carbon and the nascent Climate Change Value at Risk. In my book, I also describe how a formal approach to Climate Change Risk Management can be useful.

The basic math of risk management is to measure risk at a high confidence level among possible scenarios; this means a precautionary approach. I do want to point out a parallel with former V.P. Cheney’s “One-Percent Doctrine”: If there’s a 1% chance that climate change can be devastating to humanity, we have to treat it as a certainty in terms of our response.

Ilene: In your book, you discuss “the negatively ethically-based discount rate for valuation of future climate impacts.” Could you explain a little about that?

Jan: There are two ways to look at climate action today regarding discounting, generally used to quantify today’s perspective. The first way uses the profit rate a firm requires. If that profit rate is used as the discount rate to discount future impacts on our descendants, there is hardly any present value to us for the suffering of our descendants, and this discourages climate action. I think this view is unethical. The second (and I believe better) way to look at climate action today is simply the reduction of suffering for our descendants, by climate action, independent of any present value and discounting. Actually, if we do not act sufficiently, ethically we should put something aside for our descendants to cope with climate change. This would translate into an ethically-based negative discount rate.

We can solve the “ climate problem,” to mitigate climate change. We really can, and without too much cost, especially taking into account the costs of climate damage due to inaction. The solutions to climate risk will present opportunities, including more jobs, which will act as a counter to mitigation costs. We need leaders that will step up to provide incentives and long-range climate action plans.

Ilene: Speaking of leaders, Donald Trump’s decision to withdraw from the Paris Climate Agreement last month seems like an enormous setback to the worldwide effort to ultimately cap atmospheric CO2 levels. Will Trump’s exit from the Paris Agreement move the day of reckoning substantially closer? 

Jan: The analogy I like is that all countries are in a badly leaking boat. All countries need to help bail out the water to survive. If a country becomes a bad agent and decides not to help, either the others have to work harder or we all sink. The Paris Agreement was the first to achieve international unanimity with the bottom-up approach of each country “doing what it can” to mitigate climate change with the “Nationally Determined Contributions.” To achieve the goals of the Paris Agreement, the world consumption of fossil fuel needs to level off in the next few years and drop to zero by mid-century.

Climate change will hit some countries harder than others – especially poor countries that are most vulnerable to climate change and that did the least to cause the climate problem, a huge moral and ethical issue. Vulnerable peoples are affected the worst by climate change because they have the fewest resources to cope with climate impacts. But in the end, if we do not act robustly, all countries will eventually be badly hit — there will no place to hide.

Trump’s decision to pull the US out of Paris is not the last word, but it adds substantially to the risk of going well past the 450 ppm level and missing the goal of transitioning to renewable energies by mid-century, which is necessary to leaving a livable planet to our descendants.

Ilene: Do you believe that states, cities, and corporations will make up for the lack of participation by the federal government?

Jan: The world’s governments luckily seem to have pulled together since the announcement, with additional motivation to act on climate change, including China and India. Many US local and state governments are being proactive, including mid-western states that have increasing wind energy (because wind is increasingly lower in price and economical). Many corporations are also stepping up significantly. I don’t know if it will be enough. The US federal government is also worsening the climate problem in other ways, including federal opposition to the renewable energy development needed to replace burning fossil fuels. This opposition is economically shortsighted, since renewable energies have the promise to open a new distributed energy economy with significant opportunities.

Transition to renewable distributed energies can have huge positive economic significance similar to the change from centralized computing (mainframes) to distributed computing (iPhones, Internet) that led to a new, more productive economic paradigm. In transitioning, we need to be mindful of those people who are tied to the fossil fuel sector, as well as others vulnerable to climate change, who will require assistance to survive.

 

Flood damage by the river Donau (Danube) in Ulm, Germany, in 2013. Hans/Pixabay

 

Ilene: I’ve read that as CO2 accumulates, future warming gets “locked in.” You appear to confirm that claim. 

Jan: You are right about the persistence of CO2. A substantial fraction of CO2 emitted stays in the atmosphere on time scales of 100 years. The higher the cumulative CO2 level gets, the worse the impacts will likely be.

Ilene: Positive feedback mechanisms worsen any increase in temperature, as increased CO2 provokes other effects that lead to further warming. Are there significant negative feedback mechanisms as well? 

Jan:  Positive feedbacks are bad because they increase global warming, and substantial positive feedbacks are known to exist. Negative feedbacks would be good. Unfortunately for us, no convincing evidence exists for negative feedbacks substantial enough to stop global warming. The relevant metrics including all feedbacks are the Equilibrium Climate Sensitivity and Transient Climate Response. The probabilities of various values of these metrics from many sources are documented in the IPCC 2013 AR5 Science report – see Ch. 12, Box 12.2, page 1110. The bottom line is that we should not be hypnotized by the remote chance that negative feedbacks will save us by producing low values for these metrics. Prudent risk management principles tell us that we should base our action using at least the average values for these metrics, even higher than average. Regardless, climate impacts will worsen sooner or later without substantial action. The message is unchanged. We need to act to mitigate climate change now.

Ilene: Do you have a solution to climate change in mind?

Jan: We will need a portfolio of actions. Instead of thinking about a single 100% solution that does not exist, think of twenty 5% solutions which do exist and which provide practical ways of solving the climate problem. This portfolio of risk-motivated solutions will need action from individuals, corporations, investors, NGOs, including faith groups, and governments at all levels to be successful. There are many things we can do. For a start, people can call their representatives to urge climate action. A good idea is to put an honest price on carbon in the US, as suggested by the conservative Climate Leadership Council and by the Citizens Climate Lobby. I repeat, we (humanity) are already in the “danger zone”; we can solve the climate problem, but we must ramp up our efforts now.

Ilene: Many people believe that there’s no such thing as climate change; others believe that, while climate change may exist, it’s due to natural processes over which we have no control. According to a recent Pew Research Center study, slightly less than half of US adults believe that climate change is mostly due to human activity.

 

Source: Pew Research Center

 

What do you think the primary reasons are for such widespread skepticism despite an enormous body of scientific evidence? 

Jan: In 2002, a Republican strategist Frank Luntz wrote a very influential memo that recommended deliberately attacking climate science by emphasizing “doubt” as a way to avoid acting on climate change. The same strategy had formerly been used by the tobacco industry that attacked the science demonstrating the dangers of tobacco to protect cigarettes. We now have a whole industry of disinformation on climate change and a destructive politicization of climate science. Careful climate research papers from universities and laboratories worldwide are opposed by scientifically invalid disinformation from right-wing think tanks. This disinformation – distorting the very nature of science – contains factual errors, flimsy erroneous arguments, and cherry-picked data used with false generalizations, among other fallacies. The Trump administration is mostly saturated with climate disinformation and ignorance, obstructing climate action. Trump appointees now unfortunately running the EPA and other agencies spout climate disinformation, ignoring or suppressing valid climate science.

I believe that as the impacts of climate change become more evident, people will stop trusting the media and politicians that loudly push climate disinformation, in spite of tribal loyalties and confirmation bias.

The good news is that most people do want action on climate change. Prudent risk management on climate would say that action is warranted. People who believe climate change is not a problem might ask themselves “what will I tell my grandchildren if I’m wrong?”

 

Arctic Ice Free-Photos/Pixabay

 

Ilene: How are the impacts of global warming most likely to destabilize the worldwide financial system? Given that there are multiple, serious consequences of climate change, what are the most worrisome pathways to an economic crisis?

Jan: I believe that financial and economic systems worldwide are, to use the language of physics, in unstable equilibrium. Economic and financial systems can be thrown into crisis by any sufficiently strong perturbations. The 2008 crisis is the latest example. I believe that climate change unfortunately has the potential to generate deep economic and financial crises, and I am not alone in that belief. Pathways to an economic crisis if we do not act sufficiently will include physical climate impacts and transition impacts from fossil fuels to renewables. The physical effects will negatively affect supply chains and business generally. If transition risk is not handled reasonably, severe economic problems can result. For large systemic worldwide climate impacts, recovery from crisis could be very long, if it happened at all. Estimates in economic models of future GDP levels generally do not include the climate-induced crisis effect I am talking about.

Ilene: Are there any investing themes we should be aware of?

Jan: Dominant future investment themes are pretty clear – notably renewable energies (wind, solar, batteries, etc.), which are rapidly becoming economically more and more competitive. Electric cars, better electric grids, and energy efficiency are others. Technologies currently in research (fourth-generation nuclear energy, fusion energy, as well as carbon sequestration), are promising long-term investment opportunities. Divestment from fossil fuels will avoid financial losses in the transition from fossil fuels to renewable energies. As mentioned before, transition should be largely completed by 2050 if we are to leave a livable world to our descendants, with large amounts of carbon remaining in the ground as useless “stranded assets.”

Ilene: What about just adapting to climate change? Is adaptation viable on a long-term basis without mitigating climate change?

Jan: Adaptation to some extent will be necessary along with any amount of mitigation, with increased adaptation needed for less mitigation. The impacts that I mentioned will get worse and worse if we do not mitigate climate change substantially. Some people will adapt, though in a damaged world. The poor and vulnerable will be forced to adapt the most to survive, if they can. Many people will die early. If we have business as usual, BAU (with at most a token amount of climate mitigation), the planet in 2100 will be very different from what it is now. It will be a hostile place. I wouldn’t want to be there. Eventually the planet under BAU basically will become unlivable. It’s that simple. Again, right now we are moving out of the balanced temperature range that has made civilization possible. We need a simple message. The message is “act now.” Anything else is too risky.

Hurricane Harvey

The frontage road surrounding the Houston Chronicle on three sides, submerged in water due to Hurricane Harvey, August 28, 2017. Al Lewis, Houston Chronicle

 

Ilene: Do you believe the hurricane in Houston, particularly its severity, is a symptom of climate change and a preview of what to expect in the future?

Jan: Yes. The quick answer is that hurricanes now occur in a background of climate change and global warming, tending to make them more intense than they would be otherwise. Unfortunately, future extreme weather events will be made increasingly more extreme by man-made global warming simply because they will have more energy to wreak havoc. Warmer water gives hurricanes more energy when they form, and warmer air can hold more moisture, producing more rain. Sea level rise increases storm-surge flooding. There is evidence that the jet stream is being modified by climate change, potentially increasing the time that hurricanes may stall over a given region.

All these effects were present with Harvey, which increased the hurricane’s destructiveness. In particular, Harvey did stall, producing record rain and flooding, with horrible consequences. We saw similar effects with Hurricane Sandy in 2012. (For a discussion of interrelated factors that together intensify a storm’s capacity for destruction, read It’s a fact: climate change made Hurricane Harvey more deadly.)

We are starting to see regular dangerous occurrences of what would have been “100-year events” without climate change. In risk management, this is called “tail risk.”

Ilene: By “tail risk” do you mean that what was once considered unlikely is becoming increasingly more likely? 

Jan: Yes. Climate change is increasing the tail risk and, moreover, moving the new average risk up toward the old tail risk, with increasingly bad consequences.

Ilene: One stock market “guru” proclaimed a few months ago that because Warren Buffett suggested insurance prices were not factoring in climate change, there was no climate change. I’m not sure if the guru was wrong about Buffett and/or insurance companies, but if so, is that about to change?

Jan: The National Association of Insurance Commissioners (NAIC) recognizes climate change – see the NAIC’s Climate Change and Risk Disclosure and Emerging Risks: Climate Extremes in the U.S. Reinsurance companies are starting to factor in climate change. Munich Re estimates that climate change has already increased the probability of major U.K. flood loss events by 1.4 to 2 times.

Property and Casualty Insurance companies tend to be reactive, simply raising prices and cancelling policies after an extreme event. Ceres, a sustainability nonprofit organization composed of large investors, reports that “while more U.S. insurers are improving their disclosure and management of climate risks, most are still giving it minimal attention, both in terms of risks and opportunities.”

The real message is that the insurance industry – along with other industries – is starting to wake up to climate risk. Maybe the guru will also wake up.

Ilene: Are you hopeful?

Jan: Yes. I am optimistic; I have no other choice. I do not want to have a conversation with my grandsons when they get older and ask me “Grampa, what did you do for climate?” and I say, “Well I got depressed and stopped.” I am not going to have that conversation. I will continue to do my best to make sure the world is livable for them and for their grandchildren. I am hopeful that we (humanity) will make the necessary adjustments before it’s too late.

We need to act with more urgency now. The costs of inaction are too great.

Thanks for reading this. You can help.

 

Jan Dash managed quant/risk groups at Bloomberg LP, Moore Capital Management, Citigroup/Salomon Smith Barney, Fuji Capital Markets, Eurobrokers, and Merrill Lynch. His prior finance and physics academic positions included Adjunct Professor with the Courant Institute (NYU), Visiting Research Scholar at Fordham University (Graduate School of Business Administration), Directeur de Recherche at the Centre de Physique Théorique (CNRS, Marseille, France), and Member of Technical Staff at Bell Labs. He has published over 60 scientific papers, and holds a BS from Caltech in engineering and a PhD in physics from UC Berkeley. The 2nd edition of his book, Quantitative Finance and Risk Management, A Physicist’s Approach, devotes a chapter to climate change and its long-term systemic risk. Jan is also the primary author of the handy list of quick responses to climate contrarian fallacies and the Managing Editor of The Climate Portal.

Ilene Carrie is editor and content manager at Phil’s Stock World, a popular website for learning about investing and option trading strategies.

The opinions expressed in this interview are those of the author and do not necessarily reflect those of any institution mentioned. 

Why we need to act on climate change now

We have updated Why we need to act on climate change now.

Read the updated version, which includes discussion of Hurricane Harvey, here.

 

Trump Error, Day 7 – Waiting on the Fed

Courtesy of Phil of Phil’s Stock World

Well, now what?

The World was shocked at the US’s sweeping Muslim ban with another round of anti-Trump protests at home and abroad and the Global Markets are tumbling and the Volatility Index (VIX) is rising as even Green-Card Holders were banned from returning to the US on a sudden executive order that stranded thousands of legal immigrants overseas this weekend.

I’d love to not talk about politics but politics is driving the markets at the moment so responsible analysts NEED to discuss politics or they are doing you a tremendous disservices.  I’m not going to get into the back and forth of the thing – that’s all over the papers but we also declared a trade war with Mexico and China is now saying:

“‘A war within the president’s term’, ‘war breaking out tonight’ are not just slogans, but the reality.” 

The commentary was first reported by South China Morning Post on Friday, and comes amid concerns about a trade war between the world’s two largest economies. “The Chinese government is quite concerned about the potential for direct confrontation with the Trump administration,” said Ian Bremmer of the Eurasia Group. “Chinese officials are preparing for the worst, and they expect to retaliate decisively in response to any U.S. policies they perceive as against their interests.”

So happy Monday to you on Day 7 of the Trump Error.  Over in Europe, Germany is now worried about too much inflation and is calling for the ECB to start tightening monetary policy but poor Italy is still having bank troubles (and Europe is down 1% this morning with Italy down 2%) and Greece and Puerto Rico are both heading into debt crises (again).

Peurto Rico got an extension but the IMF just said Greece’s debt, at 275% of their GDP is “explosive and highly unsustainable”.  Explosive and unsustainable is what they say about collapsing stars – not economies inside the solar system!  And if the IMF says this about Greece, then why are Japan and China still getting a pass – both of whom have over 250% debt to GDP (assuming you can even believe China’s GDP number).

Perhaps Lord Trump is doing China a favor by starting a war to distract their population – giving the Communist Party someone to blame for their coming economic crisis.  I don’t think he’s gotten around to pissing off Japan yet, maybe because they are still taking bids for casino rights over there – just like the 4 muslim countries Trump does business with were not included in his immigration ban (Azerbaijan, Egypt, Turkey and Saudi Arabia).

In fact, Trump was on the phone with Kind Salman of Saudi Arabia this weekend and reportedly spoke to him for an hour, maybe finding out why 11 of the 19 9/11 hijackers came from Saudi Arabia… maybe.  Actually the call seemed to be about how we can help fighting Saudi Arabia’s enemies,

“The Saudis welcomed Tillerson’s appointment,” Teneo’s Holdings’ Hawes said. “Tillerson is someone who has tremendous diplomatic experience in the region,” he said. “He is a known quantity. Right now, I think this is going as well as Saudi policymakers could have hoped.”

Anyway, back to China!  China is essentially closed this week for the Lunar New Year and that’s a good thing as they’ve been approaching a liquidity crisis all month and a week break will, hopefully, give the PBOC a chance to print up a bunch of money. As you can see from the chart, capital has been fleeing China since 2014 with estimates of $3-5 TRILLION leaving the country and bubbling into foreign stocks, bonds and especially real estate.

More and more of that capital is flowing through China’s unregulated “Shadow Banking” system, which now dwarfs the banks that are under state control.  That means that, in a crisis, there is no way for the Government to control what happens – scary! With borrowing costs rebounding in 2017, firms will likely run into trouble again as the real-estate cycle winds down – this time with even more debt in play.

In some respects, China is much worse off than Japan with 170% of their GDP in Non-Financial Corporate Debt alone but, of course, those corporations are mostly owned or controlled by the Government so running the presses is a short-term solution to that problem too.

My big concern with China (and the World) is that they are one of the largest drivers of the Global Real Estate Recovery and rising rates my depress home prices and then panicky Chinese property investors may decide to dump their holdings and suddenly we’re back in a crisis as home prices begin to drop rapidly, setting off more panic.

Needless to say, we’re a bit skeptical of the Real Estate sector in 2017, even though we do see a US-based housing recovery, with rates holding back some of the enthusiasm.  Nothing matters this week ahead of Wednesday’s 2pm Fed Statement and we don’t expect them to do anything so anything else would be a surprise:

Notice no Fed speak to move the markets and just Evans (dove) after the meeting on Friday morning, presumably to salvage the week with some encouraging words.  We’re still waiting for some encouragement from the earnings reports.  So far, there hasn’t really been much to justify the 10% “Trump Rally” and nothing Trump has done so far has justified buying stocks for 25 times earnings or higher.  We’ll see if this week’s reports can tip the scales (doubt it):

We’re still short (see last week’s posts) and this morning, in our Live Member Chat Room, we added shorts back on the Oil Futures (/CL) at $53.25 to go with our Dow (/YM) Futures shorts from our Live Trading Webinar last Wednesday.  We’ve already hit $52.75 for $500 per contract gains on the oil shorts – isn’t it a good thing you saved $3 today by not subscribing!

Be careful out there!

 

Smart Shoppers Like Sales: Ross and Costco

By Paul Price of Arrow Loop Research

In recent years retail’s sweet spot has been “off-price” merchandise. That means high-quality, yet deeply discounted goods. People want nice things but are insisting on bargain prices.

Ross Stores (ROST) and Costco (COST) are businesses that have prospered along with that trend. Both companies appear on track to post all-time record earnings in their current fiscal years. Shares of each have risen significantly since the end of The Great Recession.

These firms make money because educated consumers know what things are worth and appreciate getting them at marked-down levels.

Should you be buying, or holding these stocks now, with the expectation of further gains?

Those who buy stocks in the way consumers buy other items won’t be purchasing Ross or Costco at today’s quotes. Neither appears to offer much upside over the coming year. Both ROST and COST are pricey versus their historical valuation metrics.

The 2008-09 recession left ROST available to investors at a single-digit forward multiple. ROST sold at P/Es ranging from 10.5x to 14.0x during each of the next four calendar years (green-starred below). Its asking price escalated in recent years as momentum chasers continued to jump on board.

From 2010 through 2016 ROST sported an average multiple of 16.9x. Its typical yield was about 1.05%.

Prior to 2017, there were three previous periods of clear overvaluation (red-starred). Pullbacks started at P/Es ranging from 20.0x to 22.6x. Ross Store’s Jan. 13, 2017, multiple of 21.4x its FY 2017 projection (ends Feb. 3, 2018) falls right in the midst of that “toppy” zone.

ROST’s long-term holders saw eventual gains. Failure to sell at overpriced valuations forced them to sit through drawdowns of 25.1% (from $35.40 to $26.50), 24.6% ($41.00 to $30.90) and 23.3% ($56.70 to $43.50) over the following 6 – 9 months.

A regression towards a more typical P/E could send ROST back to the $53 – $60 range, even if the coming year plays out well. Unforeseen adversity could make things even worse.

Independent research house Morningstar sees it similarly. They carry ROST with a 2-star, out of 5, sell rating. Their fair value estimate sits at $59, about 12% below last week’s quote.

Costco is a terrific operator which prices product aggressively. COST makes virtually all its net profits from recurring membership fees. High customer loyalty allows management to raise those fees about 10% about once every two years.

The company’s good characteristics are well known and appreciated, though. Costco was so beloved by investors that, late in 2015, its share valuation ventured to north of 32x (red-starred below). That valuation represents a 38% premium to Costco’s 10-year average P/E of 23.2x.

Paying too much achieved the expected result. While profits trended higher over the ensuing thirteen months, COST shares traded last week around $7.70 per share lower.

Costco’s best entry points, during 2009, 2010, 2012 and 2015, came at below average multiples. Current yields at those moments (green-starred) were all higher than average as well.

As of Jan. 13, 2017, COST still fetched a pricey 27.5x its FY 2017 (ends Sep. 2, 2017) estimate of $5.89. Consensus views for FY 2018 now center on a rise to $6.54 per share. Applying a normalized P/E to Costco’s forward estimate would only support an 18-month target price of about $152.

Could COST really see multi-year growth without parallel share price movement? A peek at the chart shows that’s exactly what happened from the top in 2008 through the first half of 2011.

Once again, quantitatively-based Morningstar seconded my conclusion. They rate Costco with just 2-stars while calling fair value as $149, around 8% below the current quote.

Why be the chump who pays top dollar to get stocks which are fated to go on sale later?

There will likely be much better future opportunities to get into Costco shares. It appears appropriate for value-conscious holders of both ROST and COST to be taking profits.

Both are great examples of good companies, trading at bad prices.

Take a free trial to Arrow Loop Research’s Actionable Trade Ideas. Click here to get started.

Monday Mayhem – Riots in Walker’s Republican Dreamland

Courtesy of Phil of Phil’s Stock World

Forget the details of why this started.

What you should be concerned about is how easily a protest march in Wisconsin turned into a riot – to the point where Gov Scott Walker called out the National Guard in Milwaukee.  Six businesses were set on fire during Saturday evening’s unrest, and three of them were destroyed.  About 100 protesters had gathered for a demonstration Saturday evening when violence broke out.  Chief Flynn said the city’s gunshot detection system was activated 48 times during the unrest, adding that some activations recorded several rounds being fired.

Koch-backed Walker has turned Wisconsin into a nightmarish state that is now ranked 49th in the US and is one of 5 states in the country with a contracting economy with a $2Bn budget shortfall in 2015.  Walker has cut $1Bn from education, smashed unions, ended paid leave for sick days and maternity leave requirements and, of course, put in “right to work” laws that have stagnated wages for the past 6 years.

Image result for wisconsin riotsIn short, Walker has implemented the GOPs 2016 platform and his state is in revolt. He even signed a bill that striped public employees of their collective bargaining rights, barred the traditional collection of union dues and forced workers to pay more for their health care and retirement benefits – things the national GOP want but don’t dare put in writing – and this is the result!

The problem is, this is the end of all “cut taxes and cut social programs to pay for it” budget plans – it’s only a question of when it is actually time to pay the piper and deploying the National Guard costs a whole lot more than buying a few kids a decent school lunch but then the money doesn’t go to a contributing military contractor… politics sure are tricky!

Meanwhile, in the rest of the World, we’re ignoring Japan’s horrific 0.2% GDP Report this morning, which would have been negative if not for $276Bn in stimulus spending.  Business investment fell 5.9% and exports fell as well so the only people who actually believe in Abenomics are the Abe Government, apparently.

Household spending in Japan is flat as we approach the 4-year mark on Japan’s experimental monetary policy but please – don’t let that stop us from trying the same thing, right?

Shanghai, meanwhile, jumped 2.4% this morning on news that the mainland Shenzhen and Hong Kong Indexes will soon be linked – allowing 1.3Bn mainlanders to now lose all their money in Hong Kong as well – how exciting!

This morning, we got our own horrific economic news as the Empire State Manufacturing Index collapsed to -4.21, which is 260% below the +2.50 expected by leading Economorons. There’s no point in getting into details though, as the markets have already decided to ignore it and open higher anyway because cities in flames, riots that require the National Guard and worsening business conditions can’t possibly compete with more free money in Asia, can they?

We also have CPI and Industrial Production tomorrow, the Atlanta Fed Wednesday and the Philly Fed on Thursday along wih Leading Economic Indicators and plenty of good earnings reports including HD, DKS, TGT, SPLS, CSCO, AMAT and WMT:

We’re still “Cashy and Cautious” and watching the rally mainly from the sidelines.  While this rally is too scary to short outright, we’re also being very careful with our bullish selections but it’s already Aug 15th and still now ka-boom, so maybe we’re wrong and the markets will go up and up forever and ever.

Maybe.

 

The Cartoon History Of Elizabeth Holmes & Her Pet Unicorn

If you don’t want to wait for the movie (starting Jennifer Lawrence), here’s the unfinished story.  

Courtesy of ZeroHedge. View original post here.

From Bay Area School Drop-out to Billion Dollar Baby to Biggest Loser… the rise and fall of Elizabeth Holmes and her hobby-horse Theranos is as much media-hyped fantasy as it is smoke and mirrors. In order to help explain the rollercoaster car-crash, KQED put together this comic book. Enjoy…

Source: KQED

Into the Future: Interview with Rick Neaton

Introduction

Rick Neaton has been investing and writing about technology for over twenty years. In 2008, Rick founded Rivershore Investment Research (RIR), a subscription-based technology newsletter, to share his work with others interested in technology and investing. RIR covers key technology trends, publicly traded technology companies, and numerous investing themes.

In RIR, Rick focuses on important trends in technology and on how these trends will generate winners and losers. By focusing on technology, product cycles, market cycles, and valuations, Rick identifies timely investment opportunities and helps readers avoid costly mistakes. Further, he touches on major political and economic events as they shape the world’s investing environment, helping readers navigate the natural and not-so-natural ups and downs in the financial markets.

Interview

Ilene: What is your outlook for the US economy and the global economy over the next 1 to 3 years?

Rick: I think the US economy will continue to grow at a below average annual real rate. That is around 2%.

The world economy will not act in unison. India appears to be capable of producing 7-8% annualized real GDP growth.

China’s problems appear more political than economic in that it is transitioning from being an industrial-based economy to being a services-based economy. People who have made lots of money in China’s old economy are fearful of political repercussions to their capital. They have responded by moving more and more of their assets offshore. That is creating tension between the central government plans and the needs of these individuals.

Thus the pressure in China appears to be more centered on the value of assets held there than on the actual growth in the economy. Remember that 6.5% growth in China’s economy is still far more in dollar terms than prior years in which the growth rate was 7%, 8% or 9% in terms of China’s GDP. Because of the problems in China, you don’t want to own Chinese assets like stocks and bonds.  But you would want to own the offshore assets that Chinese buyers find attractive. These political issues in China explain the sudden surge in the Chinese corporate interest in acquiring western companies for cash.

Europe continues to muddle along hamstrung by political issues there.  At some point, it will become attractive again for investors.

Ilene: What do you see directly ahead for US equities?

Rick: Currently, U.S. stock markets are still consolidating after a very significant correction that occurred from mid-2015 to early in 2016. The actual performance of most companies is actually better than most investors think.  And certain themes like cloud computing and all the build-outs needed to achieve efficiencies in cloud computing will lead the markets from now until 2020.

Ilene: What is the most significant change occurring in technology and how will it change the way we live?

Rick: There are two main changes. First, cloud computing is moving storage and application processing away from each individual user of a device and to the data center. The hyper-speed connections and networks that everyone thought came too soon about 20 years ago are now just beginning to enable this scale.

Second, real time sensors are beginning to be deployed to various devices and they are changing the nature and the needs for computing. We see the first iterations of these sensor deployments in the form of fitness trackers and driver assist devices in automobiles.  But there are many more uses to come over the next 5-20 years. In turn, sensor deployments are driving the need for more programmable logic in devices and the need for more efficient power utilization in many devices that will need to be on 24 hours every day.

Intel (INTC) has been one of first major old tech companies to recognize these trends and implement significant changes to its business structure.  Well-recognized company names that do not respond timely to these changes will not survive.

Our lives will be changed significantly by 2030.  Our health care and the data needed to maintain our health will be sensed on a device that we now recognize as a fitness band.  It will be transmitted to our portable computing device that will be similar to a smartphone. That device will crunch the initial sensing data and send it in real time to a series of server racks in large data centers that will analyze this data and notify our physicians in real time about the findings.  It would even summon an emergency transport vehicle if necessary.

Driving a car may not be totally autonomous by 2030, but it will be much less dependent upon the human driving the vehicle and much more dependent upon the sensors in that vehicle.  Most everything will operate like the old Star Trek computer; i.e., most everything will be voice activated and responsive to voice commands. Keyboards will be as ancient in 2030 as a manual typewriter seems today.  First examples of this new interface are the Amazon Echo and the voice command features in your smartphone like Siri in an Apple product.

Finally, virtual reality and augmented reality will replace the current monitor on your computer.  Google Cardboard and Facebook’s Oculus are first generation examples of this new world; i.e, the Atari Pongs of the VR world.

Ilene: Thank you, Rick. I’m looking forward to further exploring technology trends and the tech companies involved in Part 2 of our interview.
For free samples of recent RIR newsletters, please visit Rick at RIR here.

Pictures via Pixabay. 

Our Investing Philosophy In Action

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Paul Price (previous writer for the Market Shadows newsletter) and Market Shadows are now partnering with Lowenthal Capital Partners at Seeking Alpha. The new partnership is called Arrow Loop Research. If you miss reading Paul Price’s articles on stocks and the market, take a free trial to ALR’s newsletter at Seeking Alpha, click here.

Summary

  • Value-oriented investing philosophy.
  • Methodology for buying quality stocks when they are trading at attractive levels.
  • Guidelines for building a portfolio.

A. Investing Philosophy

Our investing philosophy is captured well by these famous quotes:

“Basically, price fluctuations have only one significant meaning for the true investor. They provide him with an opportunity to buy wisely when prices fall sharply and to sell wisely when they advance a great deal.” ~ Benjamin Graham, The Intelligent Investor

“The common intellectual theme of the investors from Graham-and-Doddsville is this: they search for discrepancies between the value of a business and the price of small pieces of that business in that market.” ~ Warren Buffett, speaking at Columbia Business School in 1984

B. Methods

1. Price Assessment

We love to take advantage of price vs. value divergences when we find them.

Stocks go “on sale” for various reasons such as earnings misses, company-specific setbacks, and/or general market weakness. Sometimes there is no clear explanation. Whatever the cause, price weakness often leads to very favorable risk/reward profiles – i.e., a good time to buy.

Buy/sell decisions can’t be made until we establish “fair value” – our target price – for the stock in question. To arrive at that, we use a combination of fundamental analysis along with the stock’s historical valuation metrics. Applying normalized metrics to forward estimates, we determine a reasonable 12-month target price range.

Experience shows that “reversion to the mean” occurs predictably over almost all six- to 18-month time periods.

Identifying inaccurately priced shares is key to success. However, keep in mind, not all stocks trading near their lows are being mispriced.

Read the full article at Seeking Alpha.

Arrow Loop picture credit: By Urban (Own work) [GFDL or CC-BY-SA-3.0], via Wikimedia Commons. Castle of Caen, arrow slit (or loop) [meurtrière].

“I Used To Be A Big Deal… And Then A Billion Dollars Walked Out The Door” – Hugh Hendry’s Sad Story

Hugh Hendry’s presentation to Skagen is worth watching. Hendry is co-founder and hedge fund manager of Eclectica Asset Management. Zero Hedge provides some excerpts and their comments below the video.

Courtesy of Zero Hedge. View original post here.

Full presentation to Skagen:

In a somewhat more manic-than-usual introduction to his 2016 macro outlook, Eclectica’s Hugh Hendry – the first of the big bears to throw in the towel and kiss the ring of central planners – admits that things did not turn out quite as he expected, noting “I used to be a big deal”, that “I had $1.5 billion in AUM” and that “life is cruel.”

While the entirety of his presentation is certainly worth watching, what specifically caught our attention were the occasional, and rather troubling, streams of consciousness during which we get a glimpse into Hendry’s current frame of mind and, frankly, we are a little concerned, because while we have no doubt in Hendry’s investing genius (even if he did decide to infamously flipflop in 2013 and many of his LPs decided not to stick with him), the content of what he says is just a little troubling.

Some excerpts:

This morning I ended up in an accident in emergency and I just to dispel any rumors that it involved having superglue on my hands or anything else embarrassing. But I’m back, I’m better, albeit my ear is a little bit ringing. And life is cruel, people keep getting younger. The Joseph Stiglitz interview was broadcast on British TV 6 years ago in 2010.

As I say to my children, I used to be a big deal ago 6 years ago. I was at a party recently with some younger girls who represent some fund of funds in New York, I said “I am in global macro, I run Eclectica”… nothing. They had never heard of me. So if I may continue with the introduction, I feel actually now that I have to.

My shrink says I’ve got to get over it, that I keep wishing to express my identity. My identity lies in a post-dated envelope which is going to come through my door in ten years time, and on that number is my compound growth rate. I am that silly person who somehow defines myself by performances… I have survived, I am like when you spill red wine on the carpet and you scrub it, and that stain just won’t come out, it’s difficult to get rid of me. I’ve been running a global macro fund for 14 years, now one of the longest running London global macro teams, and we have compounded at 8%. I wish it was 18%, I would still be on the beach if it was 18%. But with 8% comes a degree of accomplishment I believe, because that 8% has been accomplished with a set of return that just have not correlated with anything. I am eclectic.

* * *

For two years I didn’t take any risk. I had $1.5 billion in AUM. For me that’s a big number and I had clients who thought I was negative correlated to the stock market and they were fearful, Investors are fearful: it’s one of the most bullish things about stocks today apart from their profound underperformance to fixed income markets.

On his intellectual metamorphosis from bear to bull:

I had a Damascene conversion. I was one of those angry, curmudgeonly Austrian economists. I made over 30% in 2008, I won. My AUM halved. But then you had this QE and all those people who didn’t see it, who took the reckless bets, they all came back. We had a chance to kill the vampires and we missed the chance. Purge the system of its rottenness; we failed to do it. That’s how I lived; one should never be angry, it’s such a negative force and I got over that. I survived for 14 years because I was good at making mistakes.

And then this:

Back to my rant about central banks: they were right, I was wrong. The notion that QE has distorted the integrity of market prices is kinda right, but is kinda right in a benevolent manner because without the courageous intellectual decision by the American Federal Reserve to introduce QE shortly followed by the Bank of England, I think without a doubt we would have had another Great Depression. So QE has influenced the integrity of market pricing because it took away the very real risk of a depression. In that sense, equities are worth more.

So without the “courageous intellectual decision” by the Fed to take away “tail risk” and thus eliminate one of the fundamental tenets of capitalism, namely “risk,” equities are worth more? Well, sure. The only question is what happens when the market finally sees through this massive, global experiment in central-planning, one which by definition means that every asset is overvalued. Indicatively we saw glimpses of that before the Shanghai Accord unleashed an unprecedented central bank re-stimulus attempt.

But the saddest part is Hendry’s James Joyceian lament of how he lost virtually all of his AUM – it happened when he infamously flipflopped from bearish to bullish in 2013, a shift we profiled in “Hugh Hendry Throws In The Bearish Towel: His Full Must-Read Letter.”

A funny thing happened at the end of 2013 I wrote a letter to my new clients and I began with the preface “what if I was to tell you that I’d become bullish on equities; is that something you’d be interested in.”

The resounding message no. A billion dollars walked out the door. “What, really, you’re bullish?” This is cabaret maybe I should be in show business. Bullishness, optimstic, bearishness, there are adjectives that are very demeaning to the endeavor of global markets.

In 2013 I was flat and I had one client who said “Gee, if only you had been down 15% I could give you more money, but this being flat, I feel uncomfortable.”

At this point Hendry proceeds to lay out his returns, proudly noting that in 2014 he made 10%, in 2015 he made 6% (mostly on the back of China), and “this year we are flat” (according to the latest HSBC report as of March 31, as of March 31, Eclectica is down to -5.9%).

He goes on: “I am not very good in the company of others; with the greatest of respect to bank credit analysts I’ve never had a call from a buddy at Goldman Sachs, JPMorgan, Morgan Stanley, so I am the author of my own mistakes, but I want to tell you I am very, very good at making mistakes.”

We honestly hope this is not the latest one.

His sad story aside, we urge readers to watch the entire presentation below to see how an honest, in their own mind, transformation from crushed bear to just as crushed bull takes place, as well as Hugh’s quasi-contrarian view on what will happen to China next as well as to the Renminbi (he completely disagrees with the Kyle Bass view that a major devaluation is inevitable) which he says “is the key to the markets today,” something he also touches upon in “Hugh Hendry: “If China Devalues By 20% The World Is Over, Everything Hits A Wall.”

Terrorism Doesn’t Matter to the Markets?

Courtesy of Phil of Phil’s Stock World

I think it’s amazing.

They caught the Brussels bomber (the one that didn’t blow himself up) and there was an extra bomb, so he could have killed more people – yet the markets in Europe are UP this morning.  Sure it’s nice they caught the guy, and they say it’s the same guy who masterminded Paris, but the fact that he’s 24 years-old and that ISIS has 30,000 other core members SHOULD bother people – at least a little.

When the markets are back near their all-time highs, I tend to look for things that can go wrong and it’s kind of strange to think that terror attacks on major cities is not one of those things. Our near-total detachment from reality reminds me of a scene in the movie “Brazil”, where rich people are having lunch and the restaurant is bombed and they simply go on eating amidst the horror, only mildly inconvenienced. Is that the world we’re aiming for? Seriously?

Nevertheless, as you can see, the VIX, the “fear index” has continued its March march lower, down almost 50% from its February peak. The only thing the markets actually fear is that the Central Banks will stop the endless flow of FREE MONEY that is flying off the presses, and 13 Central Bank actions in the past 30 days say that’s not going to happen any time soon (see Monday’s post for the chart).

Speaking of Brazil (EWZ), corrupt President Dilma Rousseff said she will never resign and that she considers the impeachment procedure to be a coup as that country spirals completely out of control with barely 4 months to go before the August 5th start of the Olympics or, as Rousseff likes to think of it – payday!  You have to sympathize with her as all these years of bribes and kickbacks will all be for nothing if she can’t be there in August to collect her take.

You might think that, like terrorism, Brazil doesn’t matter but that country is possibly on the way to bankruptcy and it is the World’s 7th largest economy ($2.25Tn) so I think it’s going to matter a lot once people begin focusing on it as we ramp up for the Olympics.  Just this morning, Petrobas (PBR) announced a $10.2Bn loss for Q4 and will lay off another 15% of their staff to bring the 2016 total firings to 45% – 12,000 jobs.  They’ve also drastically cut spending by 25% ($32Bn), causing a ripple effect throughout Brazil’s economy.  Another massive company, Vale (VALE) is teetering on the edge of disaster with $8.7Bn in Q4 losses.

In the same way our Top 1% strives to emulate the diners in Brazil, the movie, they also want to emulate their peers in Brazil, the country, where the collapsing infrastructure causes 2-hour commutes for the working poor (who used to be middle class before all their money was funneled up to the top) while the Top 1% fly over the traffic in helicopters.  There are more registered helicopters in Sao Paulo than any other city in the world; 593 to be exact, surpassing New York and Tokyo in just the last five years.

Perhaps the most over-the-top example of the trend is that of Rio de Janeiro state Gov. Sergio Cabral. A recent magazine expose showed that his commute to work is only about 6 miles. Yet every morning he gets up, takes a chauffeured car to his helipad about halfway to work, and then takes the rest of the trip, about three minutes, by chopper. The cost to the taxpayer of that daily flight, according to the magazine, is $1.7 million a year. Cabral also used his helicopter to ferry his nanny, his dog and his family on shopping trips and vacations to his country home.

Again folks – this is the 7th largest economy in the World – it’s the “B” in BRIC and rampant “free market Capitalism” has turned it into a nightmare for 99% of the population.  On Dec 16th, Fitch became the second of the three big credit-rating agencies to downgrade Brazil’s debt to junk status.  Days later Joaquim Levy, the Finance Minister appointed by President Rousseff to stabilise the public finances, quit in despair after less than a year in the job.

Brazil’s economy is predicted to shrink by 3.5% in 2016, more than it did in 2015 (-3%).  For her part, PBR kickbacks are minor compared to charges that Rousseff conspired to hide the size of the deficit and Government debt – now 80% of GDP after being run up on failed stimulus attempts (sound familiar?).  Nonetheless, as you can see from the chart, Brazil has popped over 50% off the January lows on all the FREE MONEY enthusiasm generated by our beloved Central Banksters who are smart enough to be far less obvious in their corruption.

Notice the 1-week, 25% pop in the country’s index – yeah, that makes sense…

Meanwhile, we’re STILL shorting at those same lines we laid out Monday and this morning they are working yet again but, so far, it’s been nickels and dimes against quick reversals.  I still think a major sell-off is a lot more likely than a major rally but so far, so wrong.

Don’t forget, we have a Live Trading Webinar at 1pm (EST) this afternoon – last week we made our Members $390 trading the Russell Futures (/TF) – this morning our shorting lines for our Members were:

  • Dow (/YM) Futures short at 17,500
  • S&P (/ES) Futures short at 2,042.50
  • Nasdaq (/NQ) Futures short at 4,435
  • Russell (/TF) Futures short at 1,091
  • Nikkei (/NKD) Futures short at 17,000

The Nikkei is not a great short as the Dollar will rise when our markets fall and, if oil fails to hold $40, it will likely take the Dow with it – so we’ll keep an eye on that.  Our trading rules are very simple, we look for 3 of our 5 indexes to be below and then we short the laggards (the last ones to cross under) on the theory that they’ll catch up a bit.  If ANY of the indexes pop back over their line (including the ones we short), then we GET OUT!  That limits our downside but lets our upside run.

It’s also a good idea to learn how to take a profit – something we emphasize in our Live Webinars! (For replays, visit our YouTube channel here.)

See you later,

– Phil

Try Phil’s Stock World Daily Report, free, by signing up here.

 

Janet Fakes It and Buys Just One Day

By Phil Davis of Phil’s Stock World

One day more.

Like those about to die miserably in Les Miserables, our fearless Fed leader sang the same old song with a few new lines (well, that’s The Who, actually) and, as Lincoln predicted – you can fool some of the people all of the time. And what a rally we had yesterday, as the Dow popped 200 points on “news” that the Fed would not raise rates more than twice this year.  We took quick advantage of it in our Live Trading Webinar (replay available here) and went long on the Russell Futures (/TF) and made a very quick (15 mins) $390 per contract but, since the whole thing was BS, we took the money and ran!

How much BS?  Janet’s fake, Fake, FAKE!!! enthusiasm for our economy was nicely summed up by Dave Fry, who said:

“There’s a lot of spin (um, lying?)going on with the Fed’s announcement Wednesday. It’s consistent with past comments and runs as follows:

  • Consumer Confidence has improved—no it hasn’t.
  • Economic Growth is growing at “moderate” pace—not really unless you consider 1% moderate.
  • The strong dollar has restricted economic growth—this has been the mantra for past two years, Retail Sales, Industrial Production and so forth remain weak.
  • Oil prices are rebounding has prices increased—that’s possibly true but the category is still weak.
  • Employment is expanding as is participation—most new jobs part-time or in the low paying services sectors, this is BS.
  • Overseas Economic weakness has little effect on our projections—seriously?
  • Financial market (stock markets) are doing well fanning the flames to heat up investor confidence—markets are still rallying based on corporate buybacks.  One thing to keep in mind is that this creates a lot of debt.

And, so the psychological manipulation goes.”

That “psychological manipulation” was enough to buy us that one more day before reality hit this morning as Japan’s February Trade Data was yet another disaster. You can blame a slump in exports to US (down 3.2%) as the source of new woes in addition to a continuing 15.6% decrease in export volume to China.

“The tailwind from the weak yen has gone. We can’t help but hold a pessimistic view on the outlook for exports,” said Atsushi Takeda, an economist at Itochu Corp. in Tokyo, said before the figures were released. “Domestic demand won’t be dependable at all, and the same goes for exports. I can’t deny the possibility of another economic contraction this quarter.”

“The lack of a boost from exports raises a risk of Japan’s contraction this quarter,” said Nobuyasu Atago, the chief economist at Okasan Securities Co. and a former Bank of Japan official. “It’s becoming clearer that the weakness of the global economy is taking a toll on Japan’s economy.” (Bloomberg)

Interestingly enough, going long on the Nikkei Futures (/NKD) was our last trade idea of the day in our Live Member Chat Room, where I said (3:51): “/NKD is the best way to go long overnight above 16,900.  Either Asia likes the Fed and rallies or the Dollar comes back and the Nikkei likes that – two ways to win!”  As you can see on the chart, by 9pm we were back to 17,200 but those who were greedy were punished at the Nikkei pulled a full reversal overnight (we don’t hold Futures positions overnight, in general, so no worries).

Though the Nikkei is back down, the very lousy data has us hesitating to go long again unless the Dollar (95 on /DX Futures) heads back up and /NKD crosses 16,700 – then we can play it long again with tight stops IF the US Index Futures are improving (Dow over 17,200, S&P over 2,120, Nasdaq over 4,375 & Russell over 1,070).  It hasn’t been a whole day yet and tomorrow is options expiration day so anything is possible.

On the whole, our tracking portfolios are all parked in neutral except our Butterfly Portfolio, where our spreads got downright aggressive in last month’s adjustments and that will be changed today as we get ready for a flat to down period between now and April expiration. We’ll want to get more aggressive with our hedges into the weekend uncertainty to protect our still cooking long positions.

CAUTION is the watchword for today and tomorrow.  While the Fed did not disappoint and tank the markets yesterday, it might be even worse that they drastically lowered the rate outlook and it barely got a reaction from the markets.  If we fully reverse the Fed move into the weekend – next week can be very scary indeed!

Tell me when the dollar rally ends, I’ll tell you when EM starts working again

Courtesy of Joshua Brown

A really simple chart that illustrates an incredibly powerful trend.

Emerging markets have been atrocious investments for almost 7 full years now. To me, it’s almost entirely a dollar phenomenon. The theory is that strength in emerging market stocks is predicated on one thing: demand for commodities. When China, Korea, Taiwan and India are buying a lot of what Brazil, Russia and South Africa are selling – commodities – then EM works. When they’re buying less commodities, EM doesn’t work.

And, to a large extent, the dollar’s strength or weakness determines the price and maybe even the demand for commodities. I know that could be considered controversial, but I think the missing piece of the puzzle is asset inflows and outflows around the world and the ability to sell and pay back dollar-denominated debt.

Pretty clear what’s been going on here in my chart below, although obviously after the fact. You’re looking at the EEM index of emerging market stocks priced in the S&P 500, as a ratio chart.

(click to embiggen!)

eem

Emerging markets have underperformed by 50% over the last seven years – which is incredible. In the bottom pane, you see the US dollar chart, bottoming out precisely where the EEM:SPY ratio peaks circa 2011. It’s been all downhill for emerging stocks and all uphill for the dollar ever since.

When will this powerful trend reverse?

As you can see, there’ve been several tradeable rallies in EM stocks relative to US stocks over the years – many believe we’re in the midst of one now thanks to bouncing oil and metal prices. But it’s important to note that every one of these rallies has failed precisely at the downtrend line illustrated above in blue. There’s no reason to believe the next one won’t fail as well.

Guilty until proven innocent. There are very few prolific counter-trend traders in old age homes.

Price Matters

Paul Price (at RealMoneyPro.com) has been buying MCK and PRGO recently. He sends us a few charts illustrating his strategy, which is simply this: Buy solid companies when they are trading at valuations lower than their own historical averages, when the price is depressed due to market conditions, rather than serious company specific problems. These stocks also present excellent put writing opportunities.

McKesson (MCK) ~ Paul argues that MCK ($153.99) is undervalued by about 50%. He’s been buying the stock and selling long-term puts with a strike price of $140 – $150. He writes,

McKesson’s typical P/E has come in around 15.5x. Its present day forward multiple is just 11.1x. Of the three best buying opportunities since 2007 (green-starred below) only 2008’s absolute bottom presented a more favorable valuation.

McKesson hasn’t changed hands as low as $122 since September of 2013, a year when EPS came in at $8.35 versus an estimated $12.70 in FY 2015. The dividend has increased by 40% since the last time you could get into MCK that cheaply.

Perrigo (PRGO) ~ PRGO ($124.85) dropped recently after taking some charges associated with fighting off a hostile takeover bid by Mylan. Paul thinks the company is undervalued due to its strong balance sheet and earnings growth. He’s buying stock and selling long-term puts. The stock is cheaper now than when Paul first published this article on Feb. 18.

Peak prices of $157.50 to $215.73 were hit during each of the past three years. S&P Research and Morningstar both assign a 4-star, buy rating on PRGO. S&P sees fair value as more than $188 while targeting $200 over the next 12-months. Morningstar tags present day value at $165.

Complete and Utter Scam: Oil Prices

Phil’s article below was from yesterday morning, before today’s big spike in oil prices (2-12-16). He follows up on Oil Fears Spook Investors (Again), from Monday.

Why is oil currently up almost 12%? US crude surges as much as 12% on output-cut hopes.” 

Screen Shot 2016-02-12 at 9.14.20 AM

(Screenshot: Yahoo’s chart)

Markets Collapse as Sweden goes Negative & Oil Spills Over

From Thursday’s article by Phil at Phil’s Stock World

Really, Sweden?  

Well, it’s just an excuse to sell off on a 30-year auction day (happens almost every one) because it panics people into T-Bills at ridiculously low rates and makes it look like the Fed is doing its job and people really do want to lend the Government money for 30 years at 2.5% rather than do something productive with the money.  Why?  Because if people don’t want to by 30-year Treasury Notes at 2.5% then one would have to question our Government’s $19,000,000,000,000 debt load which, at 2.5%, costs $475Bn in interest payments alone to sustain and if we were to assume rates climb to 5%, then another $475Bn per year would have to be figured into the budget (without asking the Top 1% or Corporations to contribute, of course!).

On the other hand, with Sweden now CHARGING 0.5% to put money in the Riksbank, 2.5% on US debt looks like a pretty good deal, doesn’t it?  I already sent out an Alert this morning (tweeted too, with the hashtag #CurrencyWars) on what happened and how we’re playing the Futures, so I won’t rehash all that here.

Oil, meanwhile, is down another 4% this morning ($26.25) and that’s on me as I told Canada that oil was not going to make a comeback on Money Talk last night – and it was not a happy conversation.  We would like to play the $25 line for a bounce on /CL but we’re EXTREMELY concerned about the MASSIVE overhang of FAKE!!! contracts (see Monday’s post and here is a good place to say “I told you so!”) with 324,000 open orders still remaining in the March contracts (but they did cancel 191,000 fake orders in 3 days, so catching up).

In fact, since I get a lot of mail from people who can’t believe the NYMEX is a complete and utter scam used only to defraud the American people by creating a false demand for oil and driving up prices, let’s compare the “open order ‘demand'” (had to double quote demand as it’s such BS) from Monday morning to yesterday’s close.  Here’s Monday’s NYMEX contract strip:

Here’s yesterday’s closing strip (Wednesday 2-10-16):

Updated numbers from Thursday 2-11-16:

Screen Shot 2016-02-12 at 9.58.17 AM

Phil: “Oil Contracts – Looks like they ditched a healthy 66,000 yesterday. At that pace they’ll get it done no problem but they’ll need a new OPEC rumor every day and, eventually, it won’t work well enough to get buyers to step in. Still, there’s record shorts on the NYMEX (and energy stocks) so pretty easy to squeeze them, my bias is still to bet long off support lines (0.50s).”  

Where did the fake orders for 191,000,000 barrels (1,000 per contract) go?  We know they can’t possibly be delivered since Cushing, OK can only handle 40M barrels a month (less than 10% of the fake order capacity) so what happened?  Well, if you noted the next 4 months from Monday – they totaled 665,000 contracts and now, amazingly, they total 875,000 contract – that’s a gain of 210,000 contracts!

In other words, there is no actual change to the fake, Fake, FAKE!!! orders at the NYMEX, they just roll them along to the next months so they can pretend there is demand there as well.  Since all those trading and rolling losses are worked into the price of oil – only the consumer suffers the losses while the traders and the Banksters that work with them make Billions in fees for their barrel-rolling trick.

And I will tell you now that, as usual, 90% of the remaining 324M barrels worth of contracts to buy oil at $27 will be CANCELLED and not delivered to the US in March – in hopes of screwing you with higher prices later.

And this is the problem Canada, and the rest of the World, have now.  There has been a scam, pretty much since the deadly Commodity Futures Modernization Act Revisions, which were literally signed into law the day after Bush won his Presidency in the Supreme Court (hidden inside an 11,000 page appropriations bill that HAD to be signed to avoid a Government shut-down a week before Christmas).  This bill and it’s repercussions are now wreaking havoc with the Global Economy for the 2nd time.

The first time, aside from Enron (Bush’s biggest single donor) et al (made possible by the deregulation in the Act, which was sponsored by Enron) ripping off consumers all over the country, the unregulated trading caused oil to jump from $20 per barrel under Clinton to $140 a barrel under Bush, which ultimately broke the consumers’ backs and led to our 2008 market collapse.

Now it’s time for round two as the misallocation of capital towards energy projects, based on the assumption that $100 oil was a REAL price based on market demand (it’s not, it’s completely unaffordable) has caused MASSIVE over-production of oil all around the World and the companies and countries that borrowed money to finance that production growth AND the banks that lent them the money are now in BIG TROUBLE with oil back at it’s NORMAL price of $26.50 per barrel.

As I said on BNN last night, countries like Canada, where 20% of their GDP comes from the energy sector, are going to have a very painful time adjusting to normal oil prices but the sooner they come to grips with that reality, the better.

The worst thing they can do is attempt to prop up a failing industry that is drastically in need of a consolidation wave as they are currently over-producing, according to the IEA, 1.75Mb of oil per day.  That’s about 2% of global production that needs to go off-line before we’re even close to sopping up the GLUT of oil that has flooded Global storage facilities to near capacity.

The worst part is (for OPEC and the North American Energy Cartel – you know who you are!) is that the sanctions lifted on Iran are now going to put another 1.5Mb/d of production on-line by the end of this year (already over 500,000/day) which is accelerating the problem. OPEC has, so far, not made any moves to cut back – part of their problem is they now only control 30% of the World’s oil because their previous policy of holding back production to jack up oil prices has backfired as the high prices led 60M daily barrels of competing oil to come to market and their share of the global market has fallen 50% since they held us hostage in the 70s.

And now we head towards the end game and it’s the Chinese curse of living in “interesting times” indeed for oil producers. As I told Money Talk last night – don’t rush to find “bargains” in the energy sector – a lot of these guys are never coming back!

This article follows Oil Fears Spook Investors (Again).

Click on this link to try Phil’s Stock World FREE! (click on text at the top). 

Oil Fears Spook Investors (Again)

Oil Fears Spook Investors (Again)

oil-696579_640From Phil Davis’s Monday article at Phil’s Stock World

We should all fear Oilmageddon!” 

That’s the word from CitiBank, which is SUPPOSED to be the voice of reason in these markets. When Banksters tell us to get out of something – it’s usually time to get in.

Nattering Naybob had a very good summary of the weeks events, reminding us of my Wednesday warning that we were simply in a “dead cat bounce” and likely to fall even further this morning. I wrote,

Some are connecting the dots so the 1859 to 1940 SP500 rally, could be the dead cat bounce we alluded to as the overall trend reasserts itself. I said ES could test 1930 and to wake me up when it got there, where it was rejected in a big way. I have a funny feeling this Super Bowl, Monday, and week could all be ugly.

And ugly it is this morning but I’ll be on Money Talk on BNN Wednesday night, explaining to Canada why the collapse of oil does NOT mean the Global Economy is collapsing and I’ll write it down here so you can get ahead of the game and, as Buffett advises: “Be greedy while others are fearful.”

The big problem is that most “analysts” don’t know anything more than they knew in college – especially the ones who wrote books and who, even if they know better, almost never contradict what they have published – no matter how much evidence to the contrary has piled up against them.  Those who aren’t slaves to the status quo are often paid by the-powers-that-be to steer the sheeple in and out of positions as needs dictate, and even the honest media loves a conflict – and they’ll present both sides of an argument as valid – even when one side is clearly idiotic.

So, getting back to oil – most people think oil pricing is a function of supply and demand. Long-term it is. But short-term it’s a function of sentiment and manipulation. We take full advantage of that at PSW and I could give you a dozen examples from our 10 years in circulation but suffice it to say it’s not that hard to spot those patterns. One great pattern we observe is the fake, Fake, FAKE!!! trading of oil contracts over at the NYMEX.

As you can see from the 5-month strip at the NYMEX, there are 515,000 open contracts for March delivery and that’s very high, which puts downward pressure on the price because the contracts close on Feb. 22 (10 trading days, we’re closed next Monday) and, not only are the storage facilities at Cushing, OK (the point of delivery) full to the brim with unwanted oil, but Cushing can only handle about 40M actual barrels of oil per month so there is NO WAY ON EARTH that 515,000 contracts, representing 515 MILLION barrels of oil, can possibly be delivered.

Of course the traders know this and they pull this scam off every month in order to create a false sense of demand for oil and, every month, they whittle their fake orders down to 15-25M actual barrels worth of contacts (15-25,000) and the rests are fake, Fake, FAKE!!! – ALL of the time.

Yes, trading on the NYMEX is a complete and utter fraud BUT knowing it’s a fraud helps us make money so, other than my occasional rants like this one – we could care less – certainly the regulators don’t care…  This month, over 3M contracts will change hands at the NYMEX, representing 600M barrels of oil – all so just 20M can actually be delivered to the US consumers. The rest of the nonsense (99%) is just a game to move the prices around with the US consumers picking up the tab for all the fees that monthly churning generates.

There are 515,000 contracts worth of open orders for March delivery and, since only 25M barrels are likely to be delivered, they have 10 days to cancel or roll 490M barrels worth of crude orders to longer months.  Since most of those contracts are trading at a loss, and since hope springs eternal, and since humans and their corporate masters have a huge aversion to taking losses – we can expect those contracts to be rolled to longer months – only perpetuating the problem.

In addition, we know that “THEY” have trouble rolling more than 40,000 contracts in a single day – usually that causes downward price pressure and they have 10 days to roll 490,000 contracts – so oil will remain under pressure until 2/22, when we should get a nice pop into the end of that week. Meanwhile, rumors are accelerating regarding a possible OPEC production cutback and that’s keeping oil off the $25 line – for now. As I said – we’re playing for a bounce off $30 (with tight stops below) because we expect more rumors to lift oil into Wednesday’s inventory report.

There are over 1 BILLION barrels worth of FAKE!!! orders for oil deliver at the NYMEX in the front 4 months – soon to be the front 3 months in 10 trading days.  The US currently imports just 5.7M barrels per day or 171M barrels per month (but not all to Cushing, of course) so the deliveries FALSELY scheduled for Cushing alone, in March, represent a 3-month supply for the entire US!

There’s problem number one – energy trading is a complete and utter scam (as if Enron didn’t make that plainly obvious 15 years ago) and don’t get me started about the ICE (see: Goldman’s Global Oil Scam Passes the 50 Madoff Mark).  Oil is not racing back to $50 because $50 is not the mid-point on oil – it’s a top and oil should NEVER have been anywhere close to $100 per barrel and that bubble has long since burst.

Again we have to think about the rigid and limited mind-set of the average analyst who thinks that low oil prices mean a bad economy because, clearly, demand must be off.  That was a very solid assumption since the birth of the internal combustion engine but now that we have electric cars and solar and wind power – it’s no longer such a direct correlation.  While we do have an oversupply of oil, to be sure – it’s wrong to blame it on a slow economy.

One solid example of this is auto demand.  You are probably aware of the fact that auto sales hit records in 2015, with 50M cares delivered globally.  While this somewhat represents a bump in demand, it’s mainly about replacement cars. What kind of cars are we replacing?  The average age of the US fleet is 11.5 years and we can safely assume that most cars being replaced fall on the longer end of the scale.  Well, the average car in 2005 got just 22 miles per gallon and we’re replacing them with cars that get 35 miles per gallon (new car fleet average) thanks to Obama’s CAFE standard rules.  And it’s not just the US – the whole world is getting more efficient:

A car being driven 15,000 miles a year (average) that used to use 750 gallons at 20 miles per gallon is replaced by a car driven the same 15,000 miles a year that now gets 35 miles per gallon and used 428 gallons.  That’s 42% LESS fuel than the previous car!  An oil barrel is 42 gallons and it’s not all refined to gasoline but let’s just say that each new car sold requires 10 less barrels per year than it’s predecessor.  At 50M cars a year that’s 500M less barrels per year required for our auto fleet – a 1.5Mb/day demand cut that becomes 3Mb/day in year 2 and 4.5Mb/day in year 3 and THAT is where our demand is going and it’s NOT coming back!

In fact, we also are getting more efficient trucks and more efficient planes and more efficient machines in our factories and a lot of equipment is using wave, wind and solar energy for power and not using any oil at all to run.  So our economy could be off to the races and oil consumption would still be going downhill and, ironically, the better our economy does the faster the old gas-guzzling machines get replaced and the faster the demand for oil declines but that’s a GOOD THING, not a reason to panic.

Yes, there will be disruptions as we move into a post-oil economy – especially for economies that depend on oil.  Saudi Arabia alone has enough oil in the ground to supply the World for 40 years and, sadly, it’s not likely they’ll even use half of it before oil is a fuel of the past and THAT is why no one wants to cut production – despite this persistent glut that is without end – because they know they are playing a game of musical chairs with oil barrels and they are all going to be stuck with a worthless fuel of the past with a rapidly declining inventory value.

This is also bad news for companies like Exxon (XOM), Chevron (CVX) which are, unfortunately, Dow Components.  It’s bad news for the energy sector and the banks that lent them money so there WILL be disruption – but it’s the good and healthy kind as our society moves on from using oil and it’s NOT a sign of a slowing global economy – that’s why we flipped long this morning!

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Pros and Cons of Obama’s $10 Barrel Oil Tax

Assuming you own some stocks, it’s probably a good idea to distract yourself and avoid headlines this weekend. For instance, 22 Signs That The Global Economic Turmoil We Have Seen So Far In 2016 Is Just The BeginningThe rout could continue next week. Here’s why, and Citi: World economy trapped in ‘death spiral’. Although this one’s interesting.

Pros & Cons Of Obama’s $10/Barrel Oil Tax

Courtesy of ZeroHedge

With President Obama unveiling his $10/Barrel tax plan to fund government-subsidized public transportation (versus having a choice over the method of transportation), we thought a glimpse at the pros and cons of the choices might be useful.

Reporting by The Onion.

Weighing factors such as convenience, time commitment, and environmental impact, deciding whether to commute via your own fossil-fuel-powered car or government-provided unicorn-fueled public transportation can be difficult.

Here is a side-by-side comparison of the two options…

Source: The Onion

This happens all the time

Here’s a very good article by Joshua Brown, who sends you to another article by Michael Batnick, the Irrelevant Investor. Today, Michael writes It Was The Best of Days, It Was The Worst of Days, which I also recommend reading.

This happens all the time

Courtesy of Joshua Brown, The Reformed Broker

What’s taking people’s breath away about this year’s stock market sell-off is probably some combination of three things: A) we’re unaccustomed to it, we’ve been spoiled for years, and B) it’s global in nature (and some would say global in origin), and C) the speed of the selling is incredible, by any historical standard – it feels like a whoosh straight down.

But as disorienting as this all feels, the truth is that double-digit drawdowns from prior highs in the S&P 500 are not an anomaly – they are the norm, statistically speaking. In fact, this happens during 2 out of every 3 years.

My colleague Michael Batnick has run the numbers…

  • The average intra-year decline is 16.4%. This current decline might feels worse due to the speed at which it’s happening, and because it’s occurring right out of the gate.
  • Double digit declines are to be expected, 64% of all years experienced them.
  • It’s not unusual for those double digit declines to be of little importance. 57% of the years with 10% drawdowns finished positive.
  • Stated differently, 36% of all years saw a double digit decline and still finished positive.
  • Drawdowns of 20% or more have happened 23 times, or 26% of all years. On five of those 23 occasions, stocks still ended up positive on the year.

He’s also got a great pair of charts showing the decline in each year along with that year’s closing gain or loss. This is a very powerful thing to be aware of given the cacophony of fear-mongering you’re coming into contact with right now.

Head over and check it out:

What’s Going On? (The Irrelevant Investor)