Tuesday, August 23, 2016

Answering James Grant's Question

Just remember insane or stupid or both is still tradable.  James Grant calls Switzerland loading up on S60 billion in USA equities a head-scratcher.  Well, not really.

Yes, they own a lot of everything. Let us consider how they get the money for that: They create Swiss francs from the thin alpine air where the Swiss money grows. Then they buy Euros and translate them into Dollars. So far nobody’s raised a sweat. All this is done with a tab of a computer key. And then the SNB calls its friendly broker – I guess UBS – and buys the ears off of the US stock exchange. All of it with money that didn’t exist. That too, is something a little bit new....
It is a truism that central banks do this. They’ve done this of course for generations. But there is something especially vivid about the Swiss National Bank’s purchases of billions of Dollars of American equity. These are actual profit making, substantial corporations in the S&P 500. So the SNB is piling up big positions in them with money that really comes from nothing. That’s a little bit of an existential head scratcher, isn’t?

Wouldn't you buy $60 billion for nothing?  And there here is the kicker, hedge it by shorting that $60 billion.  Out of nothing, you now have claim on $60 billion of USA industry.    What about margin call risk?  Shorting is dangerous when you borrow 60 billion with only a 10% margin.  No risk at all if you own the stock and short sell it to yourself, that is borrow it from yourself with 100% margin or no risk, or both, sell it off to suckers, and then await whatever happens.  Either way you win.  Worst case is the credit you used, or the value you "won" is repudiated, and you lose nothing, cuz you started the gig with nothing.

If I had a sovereign money gig, I'd do it.

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Where Are We?

History gives about 200 to 400 years for an era.  Where are we?  That's the problem, we have no idea.  Sure, there are plenty of systems for spotting it, and they may be right, but then they have nothing to do with any given individual.  Yes, the Lushan rebellion marked the downward spiral for the T'ang dynsasty, but your Da Ming court official family may have been sent to Sichuan before the palace was sacked.  Who knows?

These count for something:
The Defense Department’s Inspector General, in a June report, said the Army made $2.8 trillion in wrongful adjustments to accounting entries in one quarter alone in 2015, and $6.5 trillion for the year. Yet the Army lacked receipts and invoices to support those numbers or simply made them up.
What is the significance?  Who knows?  First it is just credit.  They put it on the tab.  It means someone else (Boeing?  Blackwater? Apple? ISIS...  any of the USA contractors?) is owed that much by we taxpayers.

Second, following the first, were goods and services rendered?   Did some quartermaster buy 2000 iPhones to upgrade combat effectiveness, or to unload into Vietnam, and then make the invoice disappear into the computer system?  Or did he cut out the middleman and just redirect the funds (no iPhones delivered or actually ordered) into to his Philippines bank account, which everyone knows will not report "gambling win accounts" to Uncle Sam.

Why do we have black hole computer systems?   If the IG cannot control the computers, nor the army, then they cannot control who sees what.  I am sure our adversaries enjoy reading our budgets too, and realizing we have no idea what we've got.

This has got to be some sort of deep state move.  A $6.5 trillion unaccounted for (this does not mean missing, just nonsensical accounting) is something everyone at the top knows (I've heard about this before), but to release now in an election season says 1. You'll get more of this with Hillary, 2. Trump would demand an accounting.    Commander in Chief Trump could simply confine all concerned to quarters until their accounts were properly rectified.

And both candidates want more defense money.  Well, I know where the can start...  with $6.5 trillion unaccounted for.  When they have accounted for every dime of that, then they can start cutting, not increasing.

In fact, another way is to simply announce a 10% cut in military budget each year for the next three years.  Guess what?  Each division would account real quick for what they have fearing they might lose a toy or two.

And then this...
(CNN)In the most direct public warning to Moscow and Damascus to date, the new US commander of American troops in Iraq and Syria is vowing to defend US special operations forces in northern Syria if regime warplanes and artillery again attack in areas where troops are located.
Commander of American forcers in Syria?  Since when are we fighting in Syria?  Who declared war? When we learned in 1970 that Nixon had move some military assets into Cambodia, the nation erupted, riots everywhere, students killed by the military on campus...  and to day.... pffffft!  Who cares.  They knew what they were doing going to "all-volunteer" poverty draft.

Where are we now?  Who knows.

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Monday, August 22, 2016

Best Economic Essay in Ten Years

What have I been saying?  After delineating good and bad credit, finally someone in academia is saying it!
Only then can we understand how the bubble economy’s pseudo-prosperity was fueled by credit flows — debt pyramiding — to inflate asset markets in the process of transferring ownership rights to whomever was willing to take on the largest debt.
Again and again I have pointed out the winners only had to be willing to take on the most debt.  I thought I was the only person pointing this out.  Comes now a couple of professors who explains well why if you have paycheck, property or pension, for the next forty years, you're toast.
That is what makes the seemingly empirical accounting format used in most economic analysis an expression of creditor-oriented pro-rentier ideology. Households do not receive incomes from the houses they live in. The value of the “services” their homes provide does not increase simply because house prices rise, as the national accounts fiction has it. The financial sector does not produce goods or even “real” wealth. And to the extent that it produces services, much of this serves to redirect revenues to rentiers, not to generate wages and profits.
Some will argue, all those tellers and loan officers and Vice Presidents and janitors and rent-a-cops are certainly being paid wages generated and stockholders and Presidents get profits.  No.  They are just minion-rentiers who are tossed some redirected revenues for making actual the redirection in toto.

Here is an important point, upon which I will intrude...
Economic theory today is in some ways a step backward by expunging the nineteenth-century view — and indeed that of medieval economics and even of classical antiquity — with regard to how banking and high finance intrude into economic life to impose austerity and polarize the distribution of wealth and income.
How is this distribution of wealth effected?  Titles.  Ex nihilo credit is available to borrowers from hegemon-chartered entities.  People who are wholly engaged in loaning credit, something from nothing, are able to attach at least a partial lien, if not a clear title, to at least a portion if the means of production and real wealth such as homes.  A slice here, a chunk there, it can add up.  Their slice is purely inflation, but since all loan-involved investments are marginal, and the lender's title is superior, when the economic actor is overwhelmed in his measure, all spoils go to the lender.  It is a neat trick.  Wait a minute.  It is just the pigeon drop scam!
What you don't know at this point is that your new acquaintances are running a scam, and you're the target. The first stranger earned your confidence, so that when the second stranger presented a moneymaking opportunity, you had someone you trusted telling you that it was a good idea. The first tip-off to the pigeon drop, then, is when you find yourself with a new friend, followed soon after by a chance for the two of you to cash in with the help of a third person.
Your new acquaintance is a real estate broker who instills the confidence, and the second stranger is the banker, who can make a money maker happen, a home (or a job ((a degree)) or a car...  you name it.)  It's the same set up over and over, but it is legal.  There is nothing in the bag of value, except what money or title obligations you put in.  Later, you realize you got nothing, they got the titles.  Titles to your future income stream. Except no one hides this, because it is enforced by law.

For example, in one instance, as homes are sold and debt is assigned, who has the title to the goods?  Well, you, as long as you can make payments and pay taxes. But one gross distortion is since the 1980s in USA you cannot get a mortgage without very special circumstances (maybe farmland).  Now you get a deed of trust, which allows banks to fast track foreclose, so they can get the home resold faster.

James Tobin already in 1984 worried that “we are throwing more and more of our resources, including the cream of our youth, into financial activities remote from the production of goods and services” (Tobin 1984, 14)
Yes, a specialty retailer who had a storied life was closing down and lamented we lost two, maybe three generations of entrepreneurs.  They went instead for the skim.  After noting a business loan is paid for out of the proceeds from the new means of production created, home loans must be paid out of the current income of the borrower.  The house itself provides no income.
Mortgages are also special in that real estate assets have grown into the largest asset market in all western economies, and the one with the most widespread participation. Following classical analysis, if every real estate asset bought on credit skims off the income of the owner-borrower, then the rise in home ownership since the 1970s has sharply increased rent extraction and turned it into a flow of interest to mortgage lenders. 
Everything changed in the 1970s.  When Nixon took us off the gold standard (lite).
Bank credit to the nonbank “asset” sector (mainly for real estate, but also LBOs and takeover loans to buy companies, margin loans for stock and bond arbitrage, and derivative bets) does not enter the “real sector” to finance tangible capital formation or wages. Its principal immediate effect is to inflate prices for property and other assets. Recent econometric analysis confirms that mortgage credit causes house price to increase (Favara and Imbs 2014) — and not just vice versa, as in the demand-driven textbook credit market theories.
Any real estate agent in the 1990s could have told you that if you could afford a $200,000 house at 9% interest, you can afford a $300,000 house a 6% interest.  Academics figured this out only in 2014? So, when the interest rates dropped from 9% to 6% did people trade up to more or better homes?  No way.  A $200,000 house at 9% interest becomes a $300,000 house at 6% interest.  Imagine how overpriced the homes people are getting now at 4%.  That $200,000 house is now priced at $600,000.  If and when the economy crashes, wages, income, etc goes back to at least lower, one way or another.  But the nominal debt stays at $600,000.  Because of your marginal exposure, Warren Buffett picks it up for pennies of ex nihilo credit on the dollar for Berkshire Hathaway, and you must at best bankrupt your "loss."
How does this asset-price inflation affect the economy of production and wages and profits? In due course this process involves increasing the debt-to-GDP ratio by raising household debt, mortgage debt, corporate and state, local and government debt levels. This debt requires the real sector to pay debt service — a fact that prompted Benjamin Friedman (2009, 34) to write that “an important question — which no one seems interested in addressing — is what fraction of the economy’s total returns … is absorbed up front by the financial industry.”
Yes.  Good question.  And the follow-up question would be, to whom does it go?  The answer will be, the 1%.
To ignore this rising fraction is to ignore debt and its consequence: debt deflation of the “real” economy. Of course, the reason why debt leveraging continued so long was precisely because credit to the FIRE sector inflated asset prices faster than debt service rose — as long as interest rates were falling. The tidal wave of post-1980 central bank and commercial bank liquidity drove interest rates down, increasing capitalization ratios for rental income corporate cash flow.
He is hitting on something here... credit inflation, debt deflation.  Two sides of the same coin? I'll have to turn that over in my mind.  And this is good stuff:
A debt-leveraged rise in asset prices has a liability counterpart on the balance sheet of households and firms. Homes, commercial properties, stocks, and bonds are loaded down with debt as they are traded many times by investors or speculators taking out larger and larger loans at easier and easier terms: lower down-payments, zero-amortization (interest-only) loans and outright “liars’ loans” with brokers and their bankers filing false income declarations and crooked property valuations, to be packaged and sold to pension funds, German Landesbanks, and other institutional investors. Each new debt-leveraged sale may bid up prices for these assets.
But the credit can be repaid (with interest) only by withdrawing payment from the “real” sector (out of profits and wages), or by selling financialized assets, or borrowing yet more credit (“Ponzi lending”). The rising indebtedness approaching the 2008 crest was carried not so much by diverting current income away from buying goods and services or by selling financial assets, but by loading down the economy’s balance sheet and national income with yet more debt (that is, by borrowing the interest falling due, for example, by home equity loans). What kept the “Great Moderation” income growth and inflation levels so “moderate” was an exponential flood of credit (i.e., debt) to carry the accumulation and compounding of interest. It was like having to finance a chain letter on an economy-wide scale, with banks creating the credit to keep the scheme going.
And this...  well, it also constrains the creation of means of production the would generate a surplus from what it produces.  What cannot go on will end at some point.
This is the institutional reality behind the negative correlation coefficient of credit and income growth, reported in the previous section. In fact, to assess credit for its income growth potential is to miss its true function in the rentier economic system. The FIRE sector’s real estate, financial system, monopolies, and other rent-extracting “tollbooth” privileges are not valued in terms of their contribution to production or living standards, but by how much they can extract from the economy. By classical definition, these rentier payments are not technologically necessary for production, distribution, and consumption. They are not investments in the economy’s productive capacity, but extraction from the surplus it produces.
Now this needs a bit of explication.
Financial markets can grow sustainably — that is, without rising fragility — only when loans to the real sector are self-amortizing. For instance, the thirty-year home mortgages typical after World War II were paid over the working life of homebuyers. The interest charges often added up to more than the property’s seller received, but the loans financed about two million new homes built each year in the United States in the early post-war decades, creating enough economic growth to pay down the loans.
Things were very different then. Home loans were for mortgages, not deeds of trust, financed largely by Savings and Loans and Credit Unions in which the interest rate, about the same today, 4.75%. in 1955, barely covered the costs of administration of the loan.  The loan was against money,  the cash in the pay envelope deposited on the first Friday of the month into the S&L or CU, backed by gold and silver.  And the loan terms were usually 20 years, because that is all it took to comfortably pay off a note.  There was no Freddie Mac to create inflation by vacuuming up as much paper as anyone could generate.  That would not come until... wait for it... the 1970s.  But there were assumable loans, meaning instead of flipping homes and inflating values, I might get a job offer in another town and just pass my mortgage onto someone else who continued the payments.  The S&L just wanted its money back, could care less from whom.  So yes real estate markets can grow sustainably, but nothing we have today resembles when last we had a sustainable market.

And this too:
Many U.S. students could not attain a college degree without student loans.
 Not true, false dilemma. The fact is EZCredit is merely more attractive, buy-now pay-later, than a pay-as-you-go degree, granted that ex nihilo credit woefully overpriced an ever degraded degree.
In addition to showing that the financial industry accounted for 7.9 percent of U.S. GDP in 2007 (up from 2.8 percent in 1950), they calculated that much of this took the form of fees and markups — the quintessential transfer payments. 
OK, useful figure, let's call it the 5 point growth.  That 5 point growth generated, as this essay demonstrates, a false economy, unreal GDP proportion reported as GDP. So then we must ask, what per cent of 5 point growth is of the distortion of reported GDP, generated by financial engineering?  And better yet, net of false economy FIRE financial engineering portion, to what does the "7.9% of GDP" truly amount?
This raises a vital question for today’s economies. Can debt-financed rising asset prices make economies richer on a sustainable basis? If the aim of raising asset prices is to increase the capitalization rate of rents and profits by lowering interest rates, can pension funds, insurance companies, and retirees save enough for their retirement out of current earnings, or can they live by capital gains alone?
As for today's economies, the question is moot.  Retirees are being "sicked-in" to hospices, shaken down for all of their assets, and dispatched at necessary rates to help maintain balance.  So the question is not vital for today, today's retirees are being queue'd up for extinction in this Darwinist polity.  The question is vital to whomever makes it through the progressing disintegration.
Financial and other investors focus on total returns, defined as income plus “capital” gains. But although the original U.S. income tax code treated capital gains as income, these asset-price gains do not appear in the NIPA. The logic of their exclusion seems to be that what is not seen has less of a chance of being taxed. That is why financial assets are called “invisibles,” in contrast to land as the most visible “hard” asset.
Yes, as I have been saying here, when we switched from vendor-financing for industry and commerce to bank finance starting in the 1970s, that which was near impossible to tax for the impracticality of it, such diffuse records, now became easy to tax with ex nihilo credit ascendency since the records could be found in one place: banks.

That this was a conscious agenda item is revealed in the fact when the FED was first set up back in 1913, the FED engaged in an intensive campaign for business to switch from vendor financing to Trade Acceptances ostensibly to improve commercial efficiency.  "Let the banks process your receivables for you."  It did not work, USA business did not fall for that ruse.  But with ex nihilo credit after 1971, it worked like a dream. No a ten cent retail purchase can be tracked and taxed.

Here again, as perspicacious as this essay is, it is prolegomenous.  It will be interesting to know what the prescriptions are, just how to save the Hegemon's system from its greediest outliers?  Sure, whoever borrowed the most won for a while, but not any more.  They are dropping like flies.  Now let's discover what the sustainable limits are in the pigreon drop scam.
It is an economy where resources flow to the FIRE sector rather than to moderate-return fixed capital formation. 
Yes, to what I have referred here elsewhere on the blog as "exceptional wealth."  the 1% did not earn their exceptional wealth, in a free market.  They stole it fair an square, legitimately.

Should it be redistributed?  No way!  Simply delegitimize charging interest, that is deregulate finance at least as far as making interest a non-enforceable contract item, just as gambling debts are non-enforceable in USA, and watch the "wealth" first deflate as it is marked to market, and then redistribute perfectly as the accumulators lose the wherewithal to ever corrupt more and more players: economists, politicians, professors, Wall Street actors, industry, religion, law, ad nauseum.  Delegitimize and redistribution happens automatically and fairly.  Will capital fly?  Sure, when it is that light, ligher than air, mere notional, it sure will.  But where?  "I have $10 billion tallied in ex nihilo credit obligations due me, will you give me refuge in Switzerland?"  "Convert it to gold first, then show up in our airport.  Good luck."  Good luck indeed getting away from the Hegemon with that.
Such economies polarize increasingly between property owners and industry/labor, creating financial tensions as imbalances build up. It ends in tears as debts overwhelm productive structures and household budgets. Asset prices fall, and land and houses are forfeited.
A good portion of it forfeited to the state, hence its recurrence.  The Hegemon could care less if this is unwound rationally, fairly peacefully, or if there is a world war.  Note when the Soviet empire crashed, existentially ended, all of the previous players remained at the top. The gentle unwinding process of eliminating the legitimization of interest (for without it ex nihilo credit will disappear too) would be acceptable to the hegemon, just as the surprise insurgency of a Donald Trump is acceptable (and the moment he is not acceptable, he'll get a serious headache, like a Kennedy).

The summary is excellent, I recommend highly clicking on the link up top and reading the whole thing.

Somehow, I haven't figured it out yet, and apparently no one else has either, if ex nihilo credit and negative interest rates are correlated, and the significance thereof.  There may be a clue in ex nihilo credit inflation/price deflation. I dunno. Whoever figures this out will be so far ahead of everyone else.

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Sunday, August 21, 2016

We Owe It to Ourselves

Following on yesterday's post, what do we owe to ourselves?  Well.  We owe...

Graph One Gross Federal Debt 1939 - 2012

but wait, there's more.
Of the two types of federal debt, only debt held by the public is reported as a liability
so to the $11 trillion in public debt noted above, add this $5 trillion, plus some other things left out, and we get to a total of about $18 trillion, we owe ourselves...

How do we manage this debt?
Whenever a government account needs to spend more than it takes in from the public, the Treasury must provide cash to redeem debt held by the government account. The government must obtain this cash by increasing taxes, cutting spending, borrowing more from the public, retiring less debt (if the budget is in surplus), or some combination thereof.
Now, hmmmm, what is the trend in debt, and how much we have, no nonsense?

Graph Two Federal Govt Debt Net, Discontinued

Whoa... it goes as far as 2004.  So does this mean after 2004, where you see it plateau, ther is good news that Uncle Sam, in our name, is repenting of profligacy?  Or, did things get far worse?  (Think Middle East wars.)  O dear.  Note the heading.  "Discontinued."  I guess we don't wanna know.
Now that is just we we owe ourselves, government division...  and of course elections are rigged, we would never agree to that ourselves.  OK, let look at what we owe ourselves, non-government debt, and only banking related debt.

Graph Three bank Credit of All Commercial Banks 1971 - 2016

Ok, you say that is the profligate down the street, not you.  Fat chance it is not you, when he cannot pay, you do when banks get bailed out because he cannot pay what he borrowed from the banks.  Again, the banks are not out anything, just what your neighbor borrowed now you owe the banks.  And because he could borrow ex nihilo credit, he called forth goods and services you never would: hot tubs, snow mobiles, Club Med Vacations, Corn Dogs with every fill-up... not only that, he called forth the means of production to provide what you never would call forth with money.  Too bad for you.

Note all the graphs start up when Nixon went off Gold Standard Lite in 1971. And then what happened when we allowed banks to lend credit, as Uncle Sam just added wars, bailouts, scams to our tab.

There is no raational limit to what can be financed with ex nihilo credit.  What cannot go on will eventually stop. And therefore, when it stops it will be for an irrational reason, meaning nobody knows when.  The only thing we can be sure is all policies will benefit the Hegemon, and and and when it crashes disastrously, the Hegemon will benefit.  "Rule over us, fight our battles for us!"

The fight will be beyond "what do we get?" the fight will be how little of this will be allocated to each class.  The more debt allocated to you, the less you get in life.

We owe it to ourselves.

Pay up.  Or, start your own business and be high, sparse fruit.  Lifestyle over accumulation.

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Saturday, August 20, 2016

Bank of England and Ex Nihilo Credit Regime

I hope this is clear:

Once upon a time, people would build a mill financed by a collection of homeowners whose homes were at risk if the credit (backed by the homes) could not be repaid by the revenue from the mill's operation.   There was some reward in building a mill and getting an agreed percentage of the income from the mill for having financed the mill, not to mention the fact that a mill also helps build up a community.  Think of the probity and due diligence in such an arrangement, with direct skin in the game.

An individual may do this as well, if his resources commanded enough credit to back such a project.  Again, this is a business arrangement.  It was either a joint venture, or a sole entrepreneur.  Everyone had skin in the game, no loans involved.  Especially no loans at interest.

Such business arrangements are creative and unitive.  They create something good, the unite the community.

Today a bank, as you see in the essay to which I link here, lends absolutely nothing.    Please note, as usual, they say "money" when they mean "credit."  Funny thing is, bankers are quite careful with these terms when they discuss business among themselves, but switch to confuse-ish when they communicate outside of the banks.

As mega-economist JK Galbraith said:
‘The study of money, above all other fields in economics, is the one in which complexity is used to disguise truth or to evade truth, not to reveal it.’ Money, p. 5  J. K. Galbraith
Indeed, and nothing is more fundamental to the deception than calling credit money.

In spite of backed by nothing, as the cited essay notes, that credit does call forth goods and services.  He who provides the goods and services wants to be paid, and is paid, in credit (not money!)  Credit against whom?  For the credit was created ex-nihilo.  "We owe it to ourselves" comes the answer.  That answer is actually quite true, but disguises the implications.  In essence, ex nihilo credit is the apotheosis of capitalism: privatize the profits, socialize the losses. The Hegemon's minions get the profits, we get the liability, the losses.  We owe it to ourselves.

Yes, a mill is built, as are bridges to no where and wars for profit and defense against blowback, and Tuskegee experiments, are all financed as well backed by absolutely nothing.  Yes, there are also homes financed this way, backed by absolutely nothing.  But what homes?  To whom?  Where?  Although economics prides itself on being a value-neutral science, it is the branch of study that produced the term "moral hazard."

We, ourselves, make good on the ex nihilo credit extended with inflation, a degradation of  current goods and services although the prices remain constant, we pay for it by less in terms of wages, as the fruit of our labors is diverted to paying down what "we owe ourselves."  When that credit is maxed out, we borrow, from say the Chinese.  And when that is maxed out, we pile the debt on to future generations.  Now note, for all of that, there is no money.  It is all credit, ex nihilo credit.

But here is the problem.  With bank credit created ex nihilo, by charter from the Hegemon, the range of goods and services that may be called forth is not the same that would be called forth in a money-based economy.  There is no probity with ex-nihilo credit, only politics.

It is an undisputed fact that Nixon went off the gold standard (lite) because the Vietnam war was bankrupting USA.  The first thing we bought on ex nihilo credit was 4 more years of defeat.  Then we got around to other things no sane people would finance: Fukushima nuclear power plant in 1976, and the other USA power plants, and so much more.  But but but, Fukushima is in Japan!  Yes!  And EximBank lends ex nihilo credit to Toshiba so Toshiba can buy from GE that in which no sane person would invest: crazy dangerous unstable massive nuclear power plants in an earthquake and tsunami zone.  Am I editorializing?  How come GE requires 100% indemnification on every plant it builds?  Because they are safe?  No.  Upon whose account is this liability placed?  We owe it to ourselves!

What could go wrong?  Nothing.  Because by the time something does go wrong, all the players are retired.  Mistakes were made, let's move forward.  As with all ex nihilo credit projects funded, the profits are privatized, the losses are socialized. Political agenda advanced.  And it gets better: with no government backing, Toshiba has come up with a free market micro-nuclear power plant that meets the needs of small communities.  Its safety and affordabilty has caused quite a stir, but, given regulatory capture, the regulators make sure we won't see safe nuclear power soon.

And since ex nihilo credit is a provision of the Hegemon, it is lent within bounds set by the Hegemon.  It is not price signals and the market deciding what assets are allocated to what needs, it is an auction by the Hegemon to rent-seekers who have what projects they will pursue at what interest rates. The winners are those whose projects at that price intrigue or delight the Hegemon.   Hmmmm...  a billion to advance frankenfoods?  Sold!  War?  You bet.  Bailout the banks? Existential imperative.  Domed stadium?  Of course!

Banking has become a completely distorted program of granular work in this regard.  We no longer have banking in USA. The lowest, closest form of banking to the market, the credit union, is no longer a credit union.  It's just small.

Now, should any of these not pay off, well, the bank does not want "nothing" (that which it put at risk, nothing), nor does it want your house.  What it gets is for as long as it takes, backed by law,  is a repayment out of your income stream what it anticipated in giving you a loan of nothing for something for which you come to learn you cannot pay.  Now you are trapped, enslaved if you took the student loan bait.  And it cost the Hegemon absolutely nothing, because we owe it to ourselves.

See the difference?  Usually, if a loan goes bad,  the lender loses something.  With capitalism, if a loan goes bad, the lender loses absolutely nothing.  You lose the house, but you are obliged to still pay for it, or go bankrupt.  if you go bankrupt, it doesn't cost the bank anything.  they already have a reserve for bad debt built into their system, and the write off of your debt simply restores the bank's ability to  lend again, given the reserve requirements of fractional reserve banking. Student loans are special cases, those who seek education become slaves if they cannot pay back the loan.

Now, if you understand this, can you see it is not the money lent they want back, since no money was lent anyway, nor does getting paid back nothing for nothing mean anything.  Nor do the banks want the house.  What they want is your income stream, a percentage thereof, for nothing.  And that is precisely what they get as long as you are solvent.  And if you become insolvent, they don't care.

So can you see yet how it is interest, and not merely the FED, or lending nothing for something that is the problem.  It is interest paid, usury, defined as any amount for any time at any rate, that is the problem.

As Galbraith said, the point is to disguise.  And with the vast majority of economic activity based on ex nihilo credit, the vast ocean of commentary is oriented to the extant regime. But this evil regime is no secret, it was easy enough for me to figure out.  For most of history people pointed out this baleful tendency. That Bank of England explanation above is quite honest, but it is rendered impotent by calling ex nihilo credit "money."And once you know, you can estimate with probity what will work or not work, to your benefit.

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Friday, August 19, 2016

Apparel Shake-Out

The modern dinosaur is rational, so it can manage its demise.
Trade show company Messe Frankfurt, organizer of Texworld USA, will launch a new high-end, off-price trade show in New York next year.
Boulevard PrĂȘt-A-Sale will bow March 21-23 at the Javits Center in New York. The debut show will focus on menswear, but for the second edition in October, men’s and women’s apparel, accessories and footwear will be added.
Messe Frankfurt has teamed up with fashion industry veterans Arnold and Bruce Zimberg to launch the new show.
“The retail industry is in a state of tremendous change, with shoppers looking for value more than ever before, and retailers looking to provide them with the best products available,” said Arnold Zimberg, in a Messe Frankfurt statement.
High-end, off-price is a contradiction in terms.  It means some high-end wholesale players are dying out, so they will milk their brand at retail discounters.  Note the article does not name any names, but an entire show means a whole lotta dinosaurs see their ice-age coming.

This again is great news for start-ups.    Whatever brands opt in for this show will become anathema at the true high end boutiques and dept stores, meaning a vacuum you can fill.

Get going!

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Thursday, August 18, 2016

Trump's Foreign Policy Speech

Unh!  I wish he would not use the term radical Islam.  Radical comes form the word radix, root... people mean extremist when they say radical.  I esteem myself a radical Christian, and unless I am discussing religion with radical Jews and radical Moslems, I am bored.  Extremist Christians bore me, as do mainstream Christians, Jews and Moslems.  Extremists, Christian, Jew and Moslem, put a halo on violent rent-seeking, they could care less about the religion for which they will kill. And mainstream religious folk are simply embarrassed by the faith claims of their tradition.  They chafe at the requirements of the original, the radical, and explain it away.

And then, in a foreign policy speech opportunity, he centers on Islamic extremists?  Of all of the problems we have?  Well, it is a kind of pandering, social conditioning has made Islamic extremists the witches of today, the commie infiltrators, the child molesters, the bete du jour.  So give them what they want, a speech on Islamic extremism.

It is an OK medium in which to compare and contrast.  Both Hillary and Trump have a record of their ideas on contemporary events.  Trump looks good in his perspicacity, no doubting that.  But who knows what decisions he might have made, and how they might have turned out.  Certainly his actions would have been different, but we cannot know if they would have been better.  Many a slip twixt the cup and the lip.

But as to his speech, here is a .pdf of the text.

After a litany of horrors perpetrated by Moslem criminals, Trump says:
We cannot let this evil continue. 
Nor can we let the hateful ideology of Radical Islam – its oppression of women, gays, children, and nonbelievers – be allowed to reside or spread within our own countries.
Nice pivot!  Front running Hillary... his agenda is the same as Hillary's... fighting immigrant crime is about gay rights!  Did anyone covering this speech notice that? Perhaps he is sincere, but this will put Hillary in a bind, how much of the hundreds of millions in the "Clinton Foundation" is behead-the-gays Saudi money?  At any rate the first eight pages of a 20 page speech states he will end extremism in oppression of gays, kids, women in our own country.  Wait, wasn't this a foreign policy speech?

This is complete nonsense:
Iran, the world’s largest state sponsor of terrorism, is now flush with $150 billion in cash released by the United States – plus another $400 million in ransom. 55 Worst of all, the Nuclear deal puts Iran, the number one state sponsor of Radical Islamic Terrorism, on a path to nuclear weapons. 56 57
All I can imagine is he knows this is a slanderous characterization of Iran.  And after detailing, in effect, how Hillary is the world's largest state sponsor of terrorism, he decries the USA finally giving back the money we stole nearly 40 years ago.  I think his picking on Iran is tactical.  He has to know that Iran could be our best friend in the Middle East, far better than Israel.  The Iranians are Aryan, not Semitic, and can match Israel for talent and achievement.  Shia Iran has no dog in the Sunni Arab/Jewish fight. Yes, of course they have their hands in plenty of places, but they are also adult supervision, contrary to the smear campaigns.  Iran is strategically located, and protected by both Russia and China.  China's Belt and Road initiative depends on Iran, and Iran welcomes the initiative, but would love to have USA counterbalance to Chinese "friendship."  The Donald's strategy?  By pandering to the socially conditioned "source of all evil in the world" when the Donald makes a sensible peace deal with them, he win-wins: he gets a deal that makes sense anyway from sane actors, and he is the hero who was able to overcome great evil.

A specific example illuminates Trumps thinking:
One more point on this: I have long said that we should have kept the oil in Iraq – another area where my judgement has been proven correct. According to CNN, ISIS made as much $500 million in oil sales in 2014 alone, fueling and funding its reign of terror. 88 If we had controlled the oil, we could have prevented the rise of ISIS in Iraq – both by cutting off a major source of funding, 89 and through the presence of U.S. forces necessary to safeguard the oil and other vital infrastructure. 90 91 I was saying this constantly and to whoever would listen: keep the oil, keep the oil, keep the oil, I said – don’t let someone else get it.
Um... so Cheney was right?  What we wrecked we could have rebuilt in our own image with their own resources?  Again, he agrees we ought never have invaded in the first place, and certainly as the Pope said in so many words "the rape resulted in a child, now you must take care of the child."  What to do? I dunno if keeping the money is the right response after a robbery.  I'd like to see better ideas.

If I become President, the era of nation-building will be ended. Our new approach, which must be shared by both parties in America, by our allies overseas, and by our friends in the Middle East, must be to halt the spread of Radical Islam.
Yay.  I could not agree more. End nation building, aka, pre-emptive invasions.  But how you put the "must" in "share" I dunno.  Sound like more of the same.  The paragraph starts with "If" but the entire idea is under a laconic "if."  What happens when our partners don't do "what they must?"
As President, I will call for an international conference focused on this goal. We will work side-by-side with our friends in the Middle East, including our greatest ally, Israel. We will partner with King Abdullah of Jordan, and President Sisi of Egypt, and all others who recognize this ideology of death that must be extinguished.
OK, based on his stated rationale, gays will be heartened by his meeting.
I also believe that we could find common ground with Russia in the fight against ISIS. They too have much at stake in the outcome in Syria, and have had their own battles with Islamic terrorism.
Yes!  As I have said here dozens of times, we need only work out a careful unilateral withdrawal and the Russians and the Chinese will strive in the Middle East with no skin off our backs.  Those two countries have the problems in their back yard.  We trespass in their back yards to start trouble.  Terrorists are over here because we were over there first.  Get out!

O good!  He mentions free markets:
Just as we won the Cold War, in part, by exposing the evils of communism and the virtues of free markets, so too must we take on the ideology of Radical Islam.
More on free markets?  Or anything economic? Nope, that is it.  He goes straight back to...
While my opponent accepted millions of dollars in Foundation donations from countries where being gay is an offense punishable by
12prison or death, 92 93 my Administration will speak out against the oppression of women, gays and people of different faith. 94 95
So somehow free markets... terrorism...  gay rights.... it is all the same I guess.  He goes on for another 8 pages, till the end, connecting gay rights and fighting terrorism.  I wonder a this.

And then this:
We will also keep open Guantanamo Bay, and place a renewed emphasis on human intelligence. Drone strikes will remain part of our strategy, but we will also seek to capture high-value targets to gain needed information to dismantle their organizations. Foreign combatants will be tried in military commissions.
Unh!  Why?  Let those innocent wrong-place wrong-time cab drivers and mentally deficients just rot to death?  Yes, even if innocent, if released they will kill Americans.  Sure, wouldn't you?  But Bush and Cheney knew that when they set it up.  Tell Dick Cheney to expect visitors and parole them to his house. Dump his problem on his doorstep. I am sure he'd have a 100 Blackwater mercenaries waiting, but it would be his problem to solve. How about we give Guantanamo Bay back to Cuba if they will keep the inmates in Cuba?  i dunno, I don't have these problems because I don't make those crazy decisions that get us into those problems.

If you want to see Moslem crime in USA end, then unilaterally withdraw all troops from the Middle East, and unilaterally declare free trade with all countries, like Hong Kong does.  We have no duties on imports from your countries, nor regulations on your products (USA importers by legal fiction become the manufacturers under USA health and safety laws.)  Such a liberal free trade policy will help everyone, including, women, kids and gays.  (Is it not a bit insulting listing gays with women and kids? I dunno.  I've worked with too many homosexuals to consider them somehow helpless, nor would they.)

To be fair, this was a speech on how to deal with ISIS.  I've never paid any attention, so far, to anything Trump has said (or Hillary for that matter) because neither can do much if anything about the economic problems we have.  Circumstances are directing us.  Problems could be fixed, but the politics will forbid it, and as large as Trump is, he can't do it with his ideas.

And that is what we have.  A specific case, problem, and his response: make the world safe for gays, women, kids.  How is that different than any other politician?  How come Trump is so feared, loathed? I wonder a it, but them I don't watch TV or log on to LifeDrain to be told by The Alphabet what my thoughts will be today.  Fear of Trump is pure social conditioning, street theatre.  He has said nothing anyone can fear.  I am not surprised.

I tend toward anyone anti-war.  Trump has stated he is such, but this one time I've read him, meh.  So at this point, Green Jill Stein or Trump?  Same difference.  Antiwar, I am all for it.  The rest we can't do anything about, except start our own business.

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Wednesday, August 17, 2016

1600 Skeechers Stores

SKX, Skeechers, has has miserable performance the last 5 years. Check them out on Yahoo finance, and place with the 1 yr 2 yr 5yr 10 yr graphs,  How come?  1600 stores.

And now they are doubling down on their model.  Read their press release:
“The new shopping district at One World Trade Center is the place to be – gorgeous, massive and spectacular, it’s one of the biggest retail openings in the United States this decade,” said Michael Greenberg, president of SKECHERS. “The center’s new stores read like a who’s who list of iconic global brands – and we’re thrilled to take part in this huge retail phenomenon. Consumer interest is already tremendous, the foot traffic will be massive, and we can’t wait to welcome the swarms of locals and tourists who will be walking this center every day.”
Their is no possible way to recoup those costs selling shoes in that space.  Of course, they will charge off the loss to "promotion."

There is one reason Skeechers is in trouble.  Retailers can feed back unbiased market reaction to your product.  Your owned-stores cannot and will not do so.

The management is having fun while it lasts.

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Tuesday, August 16, 2016

How To Play Retail Downturn

Now these must always be read in terms of big business, since that is what the government and media and academia care about.  But the news about them is useful to us.
Nearly 60 percent of the decrease in prices for final demand services is attributable to
margins for apparel, jewelry, footwear, and accessories retailing, which fell 6.0 percent. The indexes
for machinery and equipment wholesaling; health, beauty, and optical goods retailing; food retailing;
loan services (partial); and automotive fuels and lubricants retailing also declined.
So at WalMart, Kohls, Footlocker, Macy's, etc... the prices you pay are falling. 6% is a huge drop.  That's tar pits for the dinosaurs grew on mal-credit.  And dinosaurs cannot adjust to an organically growing market:

From the rise of the casual camper to the boutique fitness boom, it can feel like there have never been more people in the market for sports apparel. As of 2015, sporting goods stores in the US were bringing in as much as $48 billion in annual revenue, according to IBISWorld, up from $39.8 billion in 2012. Sports participation is up, too. According to Euromonitor, participation in high school sports has increased from 25 percent to 35 percent over the last 35 years, with nearly double the number of female students playing sports as compared to the 1980s.
"My needs evolved, but in many ways, Sports Authority hasn't."
But there's a stark gap between an increasing customer base and many sports retailers — a gap that only continues to widen, no matter how many times companies see new ownership or rethink their businesses. As Hermina puts it, "My needs evolved, but in many ways, Sports Authority hasn't."

It's not as though Sports Authority has no idea of the trends in the marketplace, they buy the $50,000 Euromonitor reports that tell them so.  It's just that Sports Authority has a hired and trained personnel, infrastructure, logistics and relationships that cannot be repurposed to meet the changes in a world where borrowing malcredit and get-big-or-get-out is over.  Any more than Jeb Bush could repurpose himself in a Republican party base that wants a Donald Trump.
There are an incredible number of national and regional multi-brand sports retailers in America: Dick's Sporting Goods, Cabela's, Champs Sports, Bass Pro Shops, REI, Academy Sports, Modell's, and Big 5 Sporting Goods Corporation, to name a few — and these are just the ones that still exist today.

The least savvy, like Sports Authority, was no authority on what sportsfolk buy.  Gone. Now Big 5 will see a temporary bump-up in sales as people who thought "Sports Authority" as the solution, a dwindling group to be sure, googles the nearest Big 5 and buys the soccer shoes or Nike Spandex.  That is a mixed list.  Within that list is REI, a co-op.  It will thrive regardless of the economy.

As with all crowded markets, the sporting goods industry eventually hit a saturation point, and competition forced many stores to either close or be bought by bigger companies. The '70s and '80s saw many mergers and acquisitions in the space, and they just kept coming. Eastern Mountain Sports, for example, was founded by rock climbers Alan McDonough and Roger Furst in 1967. It was first sold to The Franklin Mint in 1979, which was subsequently bought by Warner Communications, and then sold to private firm American Retail Group. With financial backing from investors J.H. Whitney & Co., EMS chief executive Will Manzer bought control of the company in 2004, and then sold it to Vestis Retail Group in 2012, after Vestis had already acquired Sports Chalet and Bob's Stores. (Vestis was formed by Versa Capital Management, a firm best known for turning around sinking brands.)

There was no saturation.  The amount of local sporting goods stores was pitch-perfect to the market.  What happened is what you see above, roll-up artists borrowing malcredit to buy up all of the players.  by the late 1980s, after the S&L bailout, it was clear "who who borrowed the most wins."  So start up a pure play:

In the case of Sports Authority, it was founded in Florida in 1987, and was briefly owned by KMart in the the early '90s before it merged in 2003 with Gart Sports, a Denver, Colorado business that was founded in 1928. Gart had been through several mergers of its own, including with Hagan's Sports and Stevens Brown in 1987, as well as with Chicago-based Sportmart in 1997 and Houston-based Oshman's in 2001. In 2006, Sports Authority also bought Copeland's Sports, a California business in bankruptcy — the same year it was eventually bought by private equity investment firm Leonard Green & Partners.
Well, these false economy monsters are now dying, since the false economy os going down.  This brings up a thought, is there a LIFO rule here, last in first out?  Someone should do a review of the dinosaur bankruptcies and see if there is a pattern.

Now here are a couple of quotes, surprisingly juxtaposed:
"The lines between wholesale and retail faded from black and white to gray to nonexistent," Greg Baldwin, vice president of merchandising at sporting goods chain Schuylkill Valley Sports, told the Philadelphia Inquirer. "I now compete with 90 percent of my suppliers via e-commerce, physical stores, or a combination of the two. The importance of the retailer as a pipeline to the consumer has been greatly diminished."
And then
Today's consumers are looking for specificity, both in terms of function and also aesthetic. The everything-to-everybody nature of huge multi-brand retailers no longer appeals; department stores across America are struggling with this new reality as well.
People looking for specificity in function and aesthetic default-buy mass produced Nike for lack of a better product (as I default buy Apple, the least bad.)  That he has to compete with Nike stores and Nike online is no surprise.  The real question is the goods represented by the 10% of his suppliers with whom he does not compete online or otherwise, what is his volume, profit margin and turnover.  I can pretty much guarantee this is his best performing segment.

That 10%, obviously small specialty suppliers, figured out how to reach Schuylkill Valley Sports, as well as enough other small retailers to thrive.  In every industry we have countless examples of this, and at the same time we have so many more people who could be producing goods and services for the domestic market, except for the sales networks that atrophied under the malcredit regime.

But they are coming back, representing a means for the design creative to connect with the retail creative, an organic market.

If Jobs had to open Apple stores because as late as 2002 there were no computer stores that felt like Saks 5th Avenue, and Nike had to open stores for the same reason, then that was a failure of the retailers.

Elsewhere here I have advised startups to sublease space in retailers to get started.  Here is another example:
Dick's has taken this to heart by developing stronger partnerships with big brands and rolling out shop-in-shops like a trend-focused "Nike Field House" and a dedicated "Under Armour All-American" section in its stores. As a result, the selection at Dick's has became more enticing, and also more expensive.
Yes, if you sell what people want, they will pay more for it.  if it is not quite right, they need a discount to buy.  In any event, make your agreement very short term, month to month, because as the article notes, Dick's chances of succeeding are slim.

The problem to solve is to rebuild the link between the design creative and the retail creative.  We lsot two generations of entrepreneurs to F I R E.   Many o these natural salesfolk went into false economy Finance, Investment and Real Estate sales.  Sure, they carved out a portion of the malcredit for themselves, but their investments are now tallied in credit in the very bubbles in which they were instrumental in inflating: stocks, real estate, etc.  When that goes pffffft, it will be good to have them back.

When more small biz retail-creativ are offering more of that 10% unique, there will be more design-creative folk drawn into the remunerating work.

The article predictably assumes the false premise that online sales are a threat to brick and mortar.  We've eliminated that false premise on this blog, so people can proceed from factual bases.  Although this comment is tainted, it is otherwise sound:
"Retailers in general have a huge advantage over Amazon in that they have physical stores and they are able to actually raise an emotional response," says Sam Cinquegrani, the founder and CEO of digital marketing firm ObjectWave. "These stores need to understand the opportunity and leverage that because they have way more to offer. Once they think in those terms, competing with Amazon becomes a different type of exercise."
The taint "digital marketing firm" is a false economy exercise if ever there was one.  But the point is spot-on.  Amazon is simply a massive, unprofitable, mail order catalog and online self-serve check-out system.   If retailers simply do what they have always done, 20% new, 80% mainstream, they do fine.  Malcredit disrupted that by shifting the "new" from design to price.  Now the dinosaurs are stuck with a infrastructure that offers little of interest at any price.  There is no way they can cash in on what is coming back: personal relationships, that which atrophied as malcredit grew.

For a startup, a few points:

1. Stay away form the biggies, don't you supply them.  Sure, give Dick's 6% of the gross for a month long trunk show in their stores, so you can make money testing your new ideas.  This is no different than those people with folding tables in Costco for three days selling some local products.

2. There is a vacuum being created by a death like Sports Authority, but Big 5 gets most of the temporary benefit.  A tiny sliver of permanent benefit go to specialty retailers.  The tiny sliver is huge when given the base size of the specialty retailer.

3. The dead inventory in the pipeline, plus the excess in peoples storage lockers, is all inventory that must be disposed.  Two things, prices will fall and used needs to be moved with new, causing more downward pressure.  (Walmart is testing upscale used stores!)  Specialty retailers need to keep a section for used, like Powell's books.

4. Compete on design.  Give the specialty, small retailers a supply of what they need.  Trade on the smallest quantities rational, not the largest order possible.  The trick is frequency and iteration, not volume.

In any event, get your business going.

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Monday, August 15, 2016

I Hope He Is a Cherry Importer

I deal specifically with these crazy marketing orders in my import export class.  They are an outrage, even evil, but they are tradable.
“These cherries are beautiful,” Santucci wrote on his Facebook page. “But, we have to dump 14 percent of our tart cherry crop on the ground to rot. Why? So we can allow the import of 200 million pounds of cherries from overseas! It just doesn’t seem right.”
How are such rules, promulgated by the profoundly corrupt people who populate our federal government, tradable?

A tart cherry grower has a domestic market.  He has customers.  He should be an importer of tart cherries as well as a grower.  It is foolish to say "this is stupid, evil" and then pout.  Better to say "this is stupid, evil...  and I'll make money off it."

If you can't make illegitimate money with your congressmen's venality, get rich, and then support your congressman's enemy then you do not belong in business.

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