The Wrongologist

Geopolitics, Power and Political Economy

Sunday Cartoon Blogging – October 20, 2019

(Blogging will be light until Tuesday 10/29 as Wrongo and Ms. Right will be in London. Yesterday’s Brexit votes seem to leave things up in the air, so it should be interesting.)

Vanity Fair has an article on possible manipulation of the stock markets with advance information about big news coming from the White House. Several publications have noticed that a killing was made several times on positions taken just before news breaks, but VF lays out just how much. The vehicle was “S&P e-minis”, electronically traded futures contracts linked to the Standard & Poor’s 500 stock index: (emphasis by Wrongo)

“In the last 10 minutes of trading on Friday, August 23, as the markets were roiling in the face of more bad trade news, someone bought 386,000 September e-minis. Three days later, Trump lied about getting a call from China to restart the trade talks, and the S&P 500 index shot up nearly 80 points. The potential profit on the trade was more than $1.5 billion.”

There were several more.

  • On September 10th in the last 10 minutes of trading, someone bought 82,000 S&P e-minis when the index was trading at 2969. On September 11 in Beijing, the Chinese government announced that it would lift tariffs on a range of American-made products. That same day, Trump said he would postpone tariffs on some Chinese goods. The S&P index moved up 47 points. If you were the lucky one who bought the 82,000 e-mini contracts, well, then you were sitting on a one-day profit of roughly $190 million.
  • In the last 10 minutes of trading on Friday, September 13, someone got lucky. That’s when someone sold short 120,000 S&P e-minis when the index was trading around 3010. The time was 3:50 p.m. in New York, but it was nearly midnight in Tehran. A few hours later, drones attacked a large swath of Saudi Arabia’s oil infrastructure, choking off production in the country and sending oil prices soaring. By the time the market opened for pre-trading on Sunday night, the S&P index had fallen 30 points, giving that lucky ducky a quick $180 million profit.
  • But these wins were peanuts. A trader, or group of traders bought 420,000 September e-minis in the last 30 minutes of trading on June 28. That was about 40% of the day’s trading volume in September e-minis. At the time, Trump was in Osaka, Japan, 14 hours ahead of Chicago, meeting with China’s President Xi Jinping. On Saturday in Osaka, after the market had closed in Chicago, Trump emerged from his meeting with Xi and announced that the trade talks were “back on track.” On Thursday, June 27, the S&P 500 index stood at about 2915; a week later, it was just below 3000, a gain of 84 points. Whoever bought the 420,000 e-minis on June 28 had made a profit of nearly $1.8 billion.

You get the picture. Traders have been watching these wagers intently since the start of the Trump presidency. The precision and timing of the trades, and the vast amount of money being made, make the traders wonder if all this is on the level. Or, is it some form of insider trading?

So far, the SEC and the Commodity Futures Trading Commission (CFTC) seem disinterested in pursuing what might be behind these trades. On to cartoons.

America hosts the G-7. Naturally, Trump picks his own hotel:

The Mikes try to clean up Trump’s Turkey mess:

The arguments against Brexit are stronger:

RIP Elijah Cummings:


Saturday Soother – February 10, 2018

The Daily Escape:

Lighting the Olympic torch – photo by Chang W. Lee

Did anybody see the bus that ran over Wrongo’s 401k?? It was a tough week on the retirement savings front for anyone who uses the capital markets to bolster their net worth. Retail investors are trapped – they can’t sell their holdings quickly, and there doesn’t seem to be a safe haven for their cash if they manage to get out of the markets only slightly bruised. Fear seems to be guiding Mr. Market.

Also, Washington finally passed a bi-partisan budget deal, but only after a brief shutdown. Sadly, it adds more than $1 Trillion to the national debt. It’s hard to square the Republicans’ deficit hawk ideology with their sudden willingness to spend whatever it takes to give the military whatever it wants.

During the recession, (Obamatime) the Republicans argued that responsible people tighten their belts when times are bad, just like people do with their household expenses. Now, we really shouldn’t use that argument for governments who can create their own currency. Despite that, if you really think the government should be run like a household, wouldn’t a responsible family increase their savings and pay down their debts when times are good? That would give them a “rainy day” fund that they could dip into when times were bad. Or, they could then go back into debt to get through the rough patch.

But today’s Republicans are saying: “Times are great! Let’s max out the credit card”. This will soon be followed by: “Oh shit, now I have to starve the kid so I can make the payments on my student loans”.

They won’t even follow their own dumb rules.

That was the week that was. A stomach-churning, no sleeping, hot steaming pile of anxiety. You need a real break.

To help you forget about your financial losses and your government’s foolishness, settle into a comfortable chair with a Vente cup of Volcanica Coffee’s Blue Mountain Peaberry coffee from the Clydesdale estate in Jamaica (only $89.88/lb.). You can’t afford it after what happened on Wall Street, but like Congress, you have a credit card. So go for it!

The Clydesdale coffee region is near the center of Jamaica’s Blue Mountain coffee area. The Clydesdale Estate was founded in the 1700’s.

Now, listen to a throwback to the 2012 Olympics in London. Here is the London Symphony Orchestra conducted by Sir Simon Rattle with a performance of “Chariots of Fire”. The performance includes physical comedy by Mr. Bean (the British comedian Rowan Atkinson):

This isn’t high art, but it is fun, and tangentially relevant to the Olympics.

Those who read the Wrongologist in email can view the video here.


Wrongo’s 2018 Predictions

The Daily Escape:

Snowy Landscape with Arles in the background – Vincent Van Gogh, 1888

A tradition at the Mansion of Wrong is to attend the annual New Year’s Day Concert at the First Congregational Church of Washington CT, built in 1801. The concert is always by the New Baroque Soloists. This year, the church was packed, and among the guests were Tia Leoni and Tim Daly, the leads in the CBS series “Madam Secretary”.  For the sixth year in a row, it was another inspiring performance by the New Baroque Soloists.

Now it is time for a few Wrong predictions about 2018, most of which will probably will be wrong:

  1. The US economy as measured by GDP will grow at greater than 2% for 2018.
    1. The US stock market as measured by the S&P 500 index will end 2018 with little or no growth over year-end 2017.
    2. The Trump tax cuts will increase the deficit, and despite Paul Ryan’s best (or worst) efforts to push the country into austerity, that can will be kicked down the road for a few more years.
  2. The Democrats will not take control of either the House or the Senate in the 2018 mid-term elections. The still-growing economy, and the pittance that increases paychecks from the Trump tax cut will help incumbents enough to forestall a wave election.
    1. The Democrats will remain without real leadership or vision in 2018.
  3. Cyber and other forms of meddling by people who wish our democracy harm will continue in the 2018 elections, to broader effect than in 2016.
    1. Facebook and Google will be held to account for their failure to tamp down disinformation.
  4. Trump will continue to flounder as the leader of the Free World, while his “frenemies” in the GOP will continue to try to thwart him on domestic economic legislation.
    1. There will be some form of bi-partisan accommodation on DACA.
    2. Trump’s public-private infrastructure deal will not pass the Senate.
    3. The House will pass legislation that messes with Medicaid, but the Senate will not.
    4. Trump will have the opportunity to appoint another Supreme Court Justice.
  5. Trump will have a serious medical issue in 2018, but will not leave office, or be temporarily replaced by Pence.
  6. Mueller: By March, MAGA will mean “Mueller Ain’t Going Away”. The storm will crest, a Russiagate conspiracy will be exposed, and crud will fly everywhere. This could lead to the Democrats taking control of one or both Houses.
    1. A few additional Trumpets will go to jail, or be tied up in court. Trump will not be impeached by the 2018 Republicans. 2019 might bring a different calculus.
  7. Tillerson and possibly other cabinet members will resign to “spend more time with family”.
  8. #metoo will continue to dog politicians, Hollywood and the media.
  9. Middle East:
    1. Syria – by this time next year, the war will be essentially over. Assad will still be in power, and the US will be out of the picture. The Syrian Kurds will switch sides, and collaborate with the Assad regime.
    2. Iran – the current protest movement will fizzle out. Neo-cons in Trump’s administration will try to bring us close to war with Iran, but cooler heads at the Pentagon will prevail.
    3. Famine and death in Yemen will continue to be ignored by everyone in the US.
  10. Russia: Russia, China, and Iran will have a “come together” moment, possibly resulting in an agreement for mutual economic cooperation.
    1. Russia will continue to face ongoing battles with the US, but Putin will persist.
    2. Ukraine: The US delivery of anti-tank missiles to the Ukrainian army will not cause them to begin military operations in the east.
  11. Europe: The right-wing authoritarian movements in the Eurozone and England will become a larger factor in their domestic politics. Brexit will occur, and no one in the UK will be happy about the outcome.
  12. Will there be a war or “incident” with North Korea? Despite the scary politics, the Seoul Winter Olympics will keep the situation from escalating through June. The second half of 2018 could lead to some kind of incident between the US and NorKo, but will not be a nuclear incident.

A “black swan” event (an event that comes as a surprise, has a major effect), could change everything for the President, the country and the world. Let’s hope that none occur in 2018.


How Wrong Were Wrongo’s 2017 Predictions?

Wrongo is not a futurist, or a stock-picker with mad skills. On January 2 2017 he made a series of predictions about the year to come. Let’s see how wrong he was:

  1. There will be more global political and social turmoil:
    1.  The EU could collapse: That didn’t happen, as Macron soundly defeated LePen. OTOH, Merkel barely survived her election and May lost badly in a wrongly-played attempt to gain a super majority in the UK. Wrongo gets a “D” in this prediction.
    2. China’s economy is wobbling: and it still is, but a command economy can create its own reality. Wrongo gets a “C”.
  2. The US will continue to lose influence globally despite “Mr. Unpredictable” becoming our Orange Overlord: Wrongo gets an “A”. From Western Europe to the Middle East and Asia, there is not a single example of where Trump has put America in a position of greater influence in the past year. Except for Israel: they plan to name a train station after him.  Think about it, what great man only gets a train station?
  3. Trump arrives in the Oval Office as an overconfident leader, the man with no plan but with a short attention span, and within six months he will have his first major policy failure: Was his first policy failure the immigration ban? The North Korea diplomatic fiasco? The multiple attempts to repeal Obamacare? Walking out of the Trade Agreement, giving China a free hand in Asia? Give Wrongo an “A”, except that Wrongo added:

This will make him more subdued, more conservative and less populist thereafter.

Trump was less subdued, less populist, and clearly more conservative as he played to his base. Give Wrongo a “B”.

4. The triumvirate of Russia/Turkey/Iran will elbow the US firmly out of the Fertile Crescent, and secure friendly regimes in Damascus and Baghdad. An easy “A”. Wrongo went on to say:

This will push American influence in the Middle East back to just the Gulf States, a weakened Saudi Arabia, and an increasingly isolated Israel.

A home run for Wrongo, but not for America.

  1. Domestically, drug abuse, suicide, and general self-destructive behavior will continue to climb and become impossible to ignore: Sadly, another “A”. Trump’s declaration of the opioid crisis as a “Health Emergency” was a public relations exercise with no plan about how to truly deal with the crisis. Wrongo also said:

The growing antibiotic resistance to main stream drugs will impact health in the US.

This is very true here, as well as globally. There is no political push to force drug companies to deal concretely with this issue.

6. The Trump stock market rally has already turned into the Santa Selloff:  Give Wrongo an “F” on this prediction. While the Dow closed 2016 at 19,719, we are looking to close 2017 above 24,000, up nearly 18% in the past year.

Meta Prediction: Some people who voted for Trump have incompatible outcomes in mind, so it’s a virtual guarantee that a sizable minority are going to feel cheated when they fail to get what they were promised: This was hard to get wrong, so give Wrongo a gentleman’s “C”. Wrongo went on to say:

OTOH, when Trump fails, most of his base will blame anyone but the Donald. The question is, when disillusionment sets in, will the reaction be a turning away, or a doubling down on the anger? Wrongo thinks anger will win out.

An easy “A”.

Here is the part of the prediction that was 100% spot on:

The coming Trump administration will seem like a fractious family outing: Just under half of the family (the “landslide” segment) wanted to take a ride, but now, the whole family has to go. Those who wanted to stay home will sulk in the back seat while Daddy tells them to shut up and stop bitching.

Meanwhile, once we are out of the driveway, it dawns on everyone that Daddy hasn’t decided yet where to go. Everyone pipes up with suggestions, but Daddy again tells everyone to shut up, because it’s his decision alone…Daddy won’t reveal the destination, but insists everyone will love it once they get there, even those who wanted to stay home, those who wanted to go to the beach, and those who wanted to head over the cliff like Thelma and Louise.

2018 predictions will come in the New Year.


Get Used to Donald Trump

(Wrongo will be on the road until 2/27. This is the last post until we resume with Sunday Cartoons on 2/28)

Now that Donald Trump has swept Nevada, it’s time to acknowledge that he is the likely GOP nominee, and Republicans are lining up to accept him into the fold. In fact, the GOP House Majority Leader, Kevin McCarthy said this week that he could work with the Donald, while a few Congress people have now endorsed him.

Mr. Trump is running as a fixer of America’s problems based upon his business success. But is success in business indicative of presidential performance?

Maybe not, although in 2012, Mitt Romney said the Constitution should be amended to say a president must have business experience:

I’d like to have a provision in the Constitution that in addition to the age of the president and the citizenship of the president and the birth place of the president being set by the Constitution, I’d like it also to say that the president has to spend at least three years working in business before he could become president of the United States.

A 2009 survey of historians by C-Span showed that 6 of our 10 best presidents lacked sufficient business experience to be president by Romney’s yardstick. That includes Ronald Reagan, the actor, corporate spokesman and politician, and John F. Kennedy, the naval officer, writer and politician. There is one failed businessman on the list of great presidents, the haberdasher Harry S. Truman.

And Teddy Roosevelt, Eisenhower and FDR would not have been president, since none had real business experience.

By contrast, two 20th century businessmen-presidents, George W. Bush, who got rich owning the Texas Rangers, and Herbert Hoover, who found his fortune in mining, were ranked among the worst presidents ever by the same C-Span historians. And both had Harvard MBA’s.

Trump’s business experience and its success are more relevant if you are thinking about voting for him, than say, one of the other candidates, because it is his ONLY qualification. He has no political experience, he has no clear policies, and the vague ideas that he does throw out suggest that he has not taken the time to learn much about the big issues of the day.

His message is basically: “Don’t worry about the details, you can trust me because I’m super successful and I have a huge company.”

Let’s look at how successful Trump has been in business. According to The Economist, a review of Mr. Trump’s career suggests three conclusions. First, his fortune is about $4 billion. Second, about 93% of his wealth is located in America, and 80% is in real estate. Third, Mr. Trump’s performance has been mediocre compared with growth in the value of the stock market and in the growth of New York property values. More from The Economist: (brackets by the Wrongologist)

Of his wealth, only an estimated 7% is outside America and 66% is…in New York [City]. Only about 22% of his worth is derived from assets that he actively created after 2004, when he became a reality TV star. Some 64% is from conventional property and a further 17% from resorts and golf clubs. His biggest recent deal [was] in real estate: buying the Doral hotel in 2012 out of bankruptcy.

The Economist provided this handy chart about Donald Trump’s financial performance against a few market metrics. The best long-term starting point is 1985, when Trump first appeared in the wealth rankings without his father. The most generous starting point is 1996, when Trump had just clawed his way back from the financial abyss. The final starting point is a decade ago:

Trump Trackrecord

  • Judged by his long-term record, he has done poorly. And over the past decade Donald Trump has lagged both the S&P and Manhattan commercial real estate benchmarks.
  • Judged from the low point in 1996, he has outperformed the S&P 500 index of big firms and the New York property market. That’s a win.
  • His ranking among American billionaires has fallen from a high of 26 to 121. By the standards of the country’s real estate giants, his property empire is just 14% of the size of America’s biggest real estate firm.

Trump will be 70 in June. Much of his wealth was made well over a decade ago from a few buildings in Manhattan, including Trump Tower. The Economist thinks that Trump’s success happened a long time ago, that he has limited experience with complex organizations, little foreign experience, and limited policy experience. He has spent most of his life managing what is essentially a family business, one that he inherited from his father.

Republican primary voters say: “so what?”

If you are going to vote for The Donald, and he does get elected, go visit Trump Tower in NYC, and celebrate with one of the $18 “You’re Fired” Bloody Marys.


Monday Wake Up Call – November 30, 2015

Today’s wake up is for the American worker. While you were sleeping, corporate executives were piecing together an economy and associated tax regulations that allowed them to become America’s oligarchs.

The Center for Effective Government just came out with a study of CEO retirement funds. You already know the conclusion, but you didn’t know the facts:

• The 100 largest CEO retirement funds are worth a combined $4.9 billion. That’s equal to the entire retirement account savings of 47 million American families
• Nearly half of all working age Americans have no access to a retirement plan. The median balance in a 401(k) plan at the end of 2013 was $18,433, enough to generate a monthly retirement check of $104.

In addition, 73% of Fortune 500 firms have also set up special tax-deferred compensation accounts for their executives. These are similar to the 401(k) plans that some Americans have through their employers. But average workers face limits on how much pre-tax income they can invest each year in similar plans, while the plans the F500 provides to their top executives do not. They are free to shelter unlimited amounts of compensation in their retirement funds where their money can grow tax-free, until retirement.

But for the average employee? The GAO says that 29% of workers approaching retirement (aged 50-65) do not have pension or retirement savings in a 401(k) or IRA. While according to a study by the Schwartz Center at the New School, 55% of those aged 50-64 will be forced to rely solely on Social Security (which averages $1,233 a month).

The current rules mean that if CEO’s slash worker retirement benefits, they can boost corporate profits and thereby, stock prices. And since much of executive compensation is tied to the company’s stock price, these rules (and company practice) create a powerful incentive for CEO’s to choose their pocketbooks over those of their employees.

We are talking about market power. The CEO’s and their firms have little to fear from Mr. Market. In turn the rising wealth at the top buys growing political influence, through campaign contributions, lobbying, and the rewards of the revolving door between government jobs and those in the private sector. Political influence in turn is used to write the rules of the game—the tax laws we are speaking of here, antitrust laws, deregulation, union-busting—all in a way that reinforces income concentration.

The result is a feedback loop between political power and market power that created, and now maintains, a vicious circle of oligarchy.

Well, time to wake up from a snooze that allowed our politicians and the largest corporations and their CEOs to turn our country and economy into their private sandbox.

To help with today’s wake-up, here is Rage Against the Machine, the gone but not forgotten band, with Zach de la Rocha on vocals and the superb Tom Morello on guitar. They are performing “No Shelter”, written in 1998:

Sample Lyrics:
Empty ya pockets son, they got you thinkin’ that
What ya need is what they selling
Make you think that buying is rebelling
From the theaters to malls on every shore
Tha thin line between entertainment and war

Chained to the dream they got ya searchin’ for
Tha thin line between entertainment and war

There be no shelter here
Tha front line is everywhere
There be no shelter here
Tha front line is everywhere

American eyes, American eyes
View the world from American eyes
Bury the past, rob us blind
And leave nothing behind

Just stare
Just stare
Relive the nightmare

Those who read the Wrongologist in email can view the video here.


Monday Wake Up Call – September 21, 2015

Are you familiar with the “Bad Bank” strategy? It is a new bank set up to buy the bad loans of a bank that has a significant amount of nonperforming assets. Those assets are purchased at market prices. If the assets remained on the original bank’s books, they would be forced to take big write-downs. So, the “good bank” sells the assets to the bad bank, and clears their balance sheet.

And the “bad bank” goes off to fail, be recapitalized, or liquidated. The shareholders and bondholders of the “bad bank” stand to lose money from this solution but its depositors will be bailed out by the government.

Occidental Petroleum (OXY) made a similar deal last November by spinning off California Resources, (CRC) and since then, most investors that bought into the deal got burned.

CRC held OXY’s oil-and-gas exploration assets in California. CRC is CA’s largest natural gas producer and its largest oil-and-gas acreage holder with operations in Los Angeles, San Joaquin, Ventura, and Sacramento. OXY was the big player in the Monterey Shale formation, which had been hyped as the largest reserves of oil in the US. But, in 2014, the US Energy Information Administration (EIA) downgraded the amount of OXY’s known reserves in CA. From Wolf Richter: (emphasis and brackets by the Wrongologist)

The LA Times spilled the beans last week [May 2014] that the EIA is set to severely downgrade the Monterey Shale in California in an upcoming report. Once thought to hold 13.7 billion barrels of technically recoverable oil, the EIA now believes only about 600 million barrels are accessible. Slashing technically recoverable estimates by 96% could be enough to kill off the shale revolution in California.

Six months later, OXY exited CA shale by spinning off 80.5% of CRC to OXY’s shareholders. CRC’s shares began trading on the NYSE on December 1, 2014. As part of the spinoff, CRC paid OXY a special dividend of $6 billion. To fund the dividend, CRC issued bonds totaling $5 billion and leveraged loans for the remainder. This debt now costs CRC about $330 million a year in interest.

Back in 2014, hedge funds were clamoring for energy spinoffs. They’d buy a big stake in the parent company and push the board to do a spinoff that entailed loading the spinoff up with debt to fund a fat special dividend back to the parent.

“Unlocking value,” is the Wall Street term for this kind of financial engineering. Wall Street then made sure that there were enough unwitting or yield-desperate buyers for the bonds. The hedge funds made their money, and moved on.

Then CRC reported its second quarter earnings, which showed a net loss of $68 million on revenues that had plunged 45% to $609 million. And on September 15, Moody’s slashed CRC’s corporate rating from Ba2 to B1, and the bonds from Ba2 to B2. All of it with “negative outlook”. Moody’s described CRC’s relatively high costs of production and interest costs totaling $31.71 per barrel of oil equivalent. It pointed to low oil prices that it didn’t expect “to improve materially in 2016.”

So in 2014, no investor realized that CRC’s reserves had been cut by 96%? Or, that their break-even cost per barrel was $31+?

This Cali deal is Straight Outta Enron.

Now the question is can CRC survive without having to resort to a debt restructuring, bankruptcy, and a total shareholder wipe-out?

These kinds of deals are best pulled off in a credit bubble. Low interest rates force some investors to chase yield, and the unwitting buyers that have these fruits of Wall Street’s labor in their portfolios are the ones who feel the pain. Wall Street will tell you that the dividend and spinoff were disclosed in advance, so it’s not “fraud” by the company. It’s just “stupidity” by yield-hungry investors.

Why do you care? These securities could easily be in your 401k, or in an ETF that you own directly, assuming that you are among the 48% of Americans that have investment accounts.

So it is time for We the People to wake up to Wall Street’s financial engineering and what masquerades as legalized robbery. To help with the wake up, here is John Lennon’s “Power to the People”:

You will note the nearly completed Twin Towers at the end of the video. For those who read the Wrongologist in email, you can view the video here.


Sunday Cartoon Blogging – July 12, 2015

In recent years, many on the right talk as if they have inside knowledge of what the Creator wants us to think and do. As reported here last week, we have been arguing about the role of religion in our politics since the founding of the Republic. In 1789, George Washington declared a day of “public thanksgiving and prayer.” 12 years later, Thomas Jefferson abruptly canceled the ritual. The First Amendment, explained Jefferson, erected a “wall of separation between church and state.”

But Jefferson’s contractor failed to make that wall strong enough.

So, Wrongo is adding a book to his summer reading list. It is “One Nation Under God: How Corporate America Invented Christian America” by Kevin Kruse. The book tries to explain the religiosity in our politics. Kruse investigates how the idea of America as a Christian nation was promoted in the 1930s and ’40s when industrialists and business lobbies, chafing against the government regulations of the New Deal, recruited and funded conservative clergy to preach faith, freedom and free enterprise. He says this conflation of Christianity and capitalism moved to center stage under Eisenhower’s watch in the ’50s, when the words “Under God” in the Pledge of Allegiance and the phrase “In God we trust” was inserted on the back of the dollar bill.

This week saw the USA Women’s soccer team take Manhattan, the NYSE go dark, Greece on the verge of going dark, the Confederate flag comes down in Charleston and Trump jumps into the lead in Republican opinion polls.

Women’s soccer is America’s new role model:

COW Soccer II

Stock Exchange glitch wasn’t explained clearly, so speculation ensued:

COW Glitch

South Carolina makes something old new again:

Clay Bennett, Chattanooga Times Free Press

Clay Bennett, Chattanooga Times Free Press

Socratic Method not enough to fix Greek quagmire:

COW Socrates

Trump divides Republicans:

COW Trump II

And forces a new strategy:

COW Trump

While W keeps rolling along:

COW W Speech


End Government Subsidies of Private Equity

We have written about taxpayer-funded corporate subsidies this week. Let’s talk about the Private Equity (PE) industry, where profit margins are pretty high. By PE we mean investing in assets that include equity securities and debt of operating companies that are not at the time of the investment, publicly traded. PE is a re-branding of leveraged buyouts (LBOs) which were the way Wall Streeters built wealth in the 1980s.

In the past 35 years, we have seen a finance-led revolution that has generated fantastic wealth for PE managers. PE has in large part, helped create the growing chasm between America’s most wealthy and everyone else. This is shown in the disproportionate numbers of private equity and hedge fund principals in the top .1% of American wealth. That wealth doesn’t only come from just making a killing when the target company goes public or is acquired, it also comes from favorable tax treatments for the PE company principals and investors.

Although the PE industry is often held up as an exemplar of free-market capitalism, it is surprisingly dependent on government subsidies for its profits. In a typical deal, a PE firm buys a company, using some of its own money and some borrowed money. It then tries to improve the performance of the acquired company, with an eye toward cashing out by selling it, or taking it public.

The key to this strategy is debt: the PE firms borrow to invest since, just as with your mortgage, the less money you put down, the bigger the potential return on investment. But debt also increases the risk that companies will go bust, so early on, the amount of debt PE firms employed was conservative.

That has changed in the last 10 years. After using debt to buy them, many PE funds now have their portfolio companies borrow even more. They then use that money to pay themselves “special dividends.” This allows them to recoup their initial investment while keeping the same ownership stake.

Before 2000, big special dividends were not common. But between 2003 and 2007, PE funds took more than $70 billion out of their companies. These dividends created no economic value—they just redistributed money from the company to the private-equity investors.

As an example, in 2004, Wasserstein & Company bought the mail-order fruit retailer Harry & David. The following year, Wasserstein and other investors took out more than $100 million in dividends, paid for with borrowed money. In 2011, Harry and David defaulted on its debt and dumped its pension obligations on the US government. And when an investment goes bankrupt, there are more fees, and maybe more tax write-offs for the PE partners.

Taxpayers are left on the hook. Interest payments on that debt are tax-deductible, and when pensions are dumped, a federal agency, the Pension Benefit Guaranty Corporation (PBGC) picks up the company’s pension liability. That means taxpayers are on the hook for those unfunded pensions.

And the money that PE dealmakers earn is taxed at a much lower rate than normal income, thanks to the US tax code’s carried interest loophole, which permits that income to be taxed at capital gains rates.

Most do not know that the single largest source of investment capital in PE funds is government pension funds. According to Preqin, a database company that tracks investment in PE, approximately 30% of capital in US PE funds is contributed by government pension funds. Government pension funds are usually called “public” pension funds, administered by government employees and governed by officials who are directly elected by the public or appointed by elected officials.

A key point about the power and reach of PE. They have more than $3.5 trillion under management. Assuming normal leverage (30% equity) that gives them $11.7 trillion in buying power. That’s about 40% of the value of publicly-traded firms in the US. Think about the political clout they have by investing government pension money. Not only do PE firms own a huge portion of America’s productive businesses, unlike the diffuse ownership of public companies, they control them outright.

So, PE is a government-sponsored enterprise, both via tax subsidy and via funding. We taxpayers are helping them to fabulous paydays, thanks to our Congress Critters.

If PE firms are as good at remaking companies as they claim, they shouldn’t need tax loopholes to make their money. If we capped the deductibility of corporate debt, and closed the carried-interest loophole, it would not prevent PE firms from buying companies or improving corporate performance.

But it would add to our tax revenues, and that might keep a bridge or two from falling into a river during rush hour somewhere in America.

The American Dream: You have to be asleep to believe it.” -George Carlin


Monday Wake Up Call – April 6, 2015

Today’s Wake up is for the Republican Chicken Hawks who think that Iran is the Greatest Threat To America™. They are denouncing the possible nuclear Iranian deal because Bibi says, or because they think it takes the military option off the table, or they think that Iran got too good a deal, or all of the above.

Here, from the Atlantic, are some specific details from Harvard’s Belfer Center for Science and International Affairs. The table below summarizes the new framework accord and analyzes differences between where Iran stood before negotiations, and where it will be, if, or when, the accord becomes reality:

Iran Before after Accord

By eliminating 12,000 centrifuges and five bombs’ worth of low-enriched uranium, the accord extends the breakout timeline for Iran to produce enough highly enriched uranium for a bomb to one year. By requiring the reconfiguration of Iran’s planned plutonium-producing reactor at Arak, the accord essentially closes the door to a plutonium-based Iran bomb. And by agreeing to establish a new mechanism that will allow unprecedented access for the International Atomic Energy Agency (IAEA) to suspicious nuclear sites anywhere in Iran, the accord makes it much more difficult for Iran to cheat.

It’s time to ask critics of the proposed deal, particularly those running for president in 2016, exactly where they stand, and what they would do if an agreement is reached.

Wouldn’t you think after Iraq, the American people would want to debate this, and emphatically say that war with Iran is such a stupid idea that no one advocating it should get within a mile of the White House, the State Department, or the Pentagon? Everyone, (Republican chicken hawks included) should want to negotiate peace as our default position.

But, it has been a whole twelve years since we started a war, and given the history of the last few decades, we’re past due. So who’s the big, brave Republican running on an Iran war platform? Everybody.

Wake up Chicken Hawks. Here to help rouse you from your neo-con wet dream, a song by The Lone Bellow, a Brooklyn NY-based group with three-part harmonies and great melodies. This is “Then Came the Morning” from their 2nd Album of the same name. Here they are on WFUV, Fordham University radio:

Sample Lyrics:
Take my words, breathe them out like smoke
Burn every single letter that I wrote
Let the pages turn to ash, I don’t want them back
Everything you always said to me

Monday’s Hot Links:

Tesla made an April fool’s announcement and investors were pissed:

PALO ALTO, Calif., April 1, 2015 – Tesla today announced a whole new product line called the Model W. As many in the media predicted, it’s a watch. That’s what the “W” stands for.

In the following minute, the stock jumped $1.50. Nearly 400,000 shares traded in that time, and it was the heaviest one minute of trading volume in the stock since the first minute after the IPO on Feb 12. Sadly, there is no watch. People bought the stock because they were introducing a thing called the Model W. They didn’t read beyond the headline, and thought whatever it was, would be big. Invest wisely, grasshopper.

The next two links contrast a big business solution to a big problem, with an open-source solution to a big problem. The big business solution is elegant, expensive and patented. The entrepreneurial solution is elegant, cheap and free:

The latest technology for removing salt from seawater, is developed by Lockheed Martin, and will be a game-changer. Desalination technology is all over the world, but it is inefficient, using lots of energy to force salt water through a filtration system. That makes it expensive. Lockheed has developed a special filter that doesn’t need as much energy to push water through the filter. Its made out of Graphene. If this scales up, where do we put the excess salt? Or, if you really are thinking, If Lockheed can strain salt ions out of water, then why not gold ions? Invest at your own risk.

Ever hear of Liter of Light? They are a charity that makes a skylight-type light using a used liter plastic bottle, filled with water and a little bleach that is placed through tin roofs in the 3rd world. They then added an LED light and a 1 watt solar collector, for light at night. All of this started in the Philippines. Liter of Lights now has chapters in 53 countries, and has installed 350,000 daytime lights and around 15,000 night lights. Watch a video here. Please, you won’t regret it.

According to UNESCO, more than 1.5 billion people around the world currently have no access to electric light, and around 1.3 billion of them must spend up to half their income to light their homes at night. The fact that the technology is not patented, or owned by a large, multinational corporation, like Lockheed, who owns the Graphene filter, makes this a sweet place to send some of your excess money, Wrongsters. Do not expect a financial return.