Satyajit Das Warns Financial Engineering "Has Masked The Global Economy's Precarious Health"

Tyler Durden's picture

Submitted by Satyajit Das via,

Easy money masks global economy’s precarious health

Too much of economic growth and the accompanying bull market in stocks is the result of financial engineering. Increasingly, companies seek to improve earnings or increase their share price by means that are not necessarily directly linked to their actual business.

Companies have increased the use of lower-cost debt financing, taking advantage of the tax deductibility of interest. In private equity transactions, the level of debt is especially high. Complex securities have been used to arbitrage ratings and tax rules to lower the cost of capital.

Mergers and acquisitions as well as various types of corporate restructurings (such as spin-offs and carve-outs) have been used to create “value.” Given the indifferent results of many such transactions, the major benefits appear to have accrued financially to corporate insiders, bankers, and consultants.

Share buybacks and capital returns, sometimes funded by debt, have been used to support share prices. In January 2008, prior to the global financial crisis, U.S. companies were using almost 40% of their cashflow to repurchase their own shares. Ominously, that position is similar today.

Tax arbitrage, especially by international companies operating in multiple jurisdictions, has increased post tax earnings. The use by many companies of special vehicles in low tax jurisdictions, like Ireland, evidences this trend.

Some companies have used trading to increase earnings. Oil companies can make money from trading or speculating in oil, for example. Accordingly, they can make money irrespective of whether the oil business is good or bad or the price of crude is high or low, profiting from uncertainty and volatility. It is not even necessary to produce, refine, or consume oil to benefit from its price fluctuations.

Even Berkshire Hathaway headed by traditional investor and legendary stock-picker Warren Buffett, enjoys significant gains through financial engineering, including the use of leverage and derivative contracts. Berkshire uses the insurance premiums received as “free float” to finance investments. In the last decade, the company has sold long-dated options on international stock indices, credit default swaps on U.S. corporate credits, and insurance against municipal bonds. The premiums received boost its investment capital.

In both of these cases, the leverage derives from the receipt of cash up-front against a promise to make a contingent payment sometime in the future. The advantage is attenuated by the fact that the risk is back-ended and Berkshire does not have to post collateral to secure the risk. Payment is required only when the contracts are unwound or expire.

Nothing has really changed since the 2008-09 crisis. Low interest rates encourage borrowing. Artificially low capital costs have allowed unsustainable businesses to continue, generating sub-standard returns. Companies seek glib solutions to the complex problem of earning adequate returns by re-engineering their finances, rather than improve their operations.

Governments also are increasingly borrowing and adopting private-sector financial engineering techniques to deal with economic problems. Governments have increased their debt levels, in some cases resorting to forcing purchases of bonds by central banks, domestic banks, and captive institutions such as state pension funds.

Conventional and innovative monetary policies have supported aggregate demand and helped maintain economic activity to prevent prevented even deeper recessions. Policies that have sent both real and nominal interest rates to ultra-low levels have resulted in re-distribution of income and wealth.

According to a 2013 report from the McKinsey Global Institute, between 2007 and 2012, governments in the U.S., Europe and the U.K. collectively benefited by $1.6 trillion, primarily through reduced debt-service costs and increased profits remitted from central banks. Most of this wealth transfer came from households, pension plans, insurers, and foreign investors, mainly through lower interest earnings on savings.

It is time that businesses and governments focus on helping the real economy to solve large problems including debt, lack of growth, industrial stagnation, slowing innovation and productivity, aging demographics, income inequality, resource scarcity, and environmental threats.

Financial engineering masks the true performance and health of companies and nations. But the damage goes much deeper, deluding decision-makers into thinking that things are better than they are, and that solutions to problems can be deferred.

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clade7's picture

Anybody wanna say "Ya Think?"  Just try to offload all your Beanie Babies and Polish Pottery at a garage sale!  "Precarious" my ass!  Its downright Ludicrouis!

blindfaith's picture



WOW...I just saw both at a weekend fleemarket and yard sale.  They were still there when I left both places.



JRobby's picture

WOW! Now that's a surprise! Isn't it?

Fizzy Head's picture

Ironic an article like this comes out on a record dow day, a RECORD DOW DAY! almost 21k already, on what fundamentals?


Im so sick of the top 1% at this point, i hope for their sake they have a hiding spot the rest of us dont know about.......


go back and look at the picture again, its pouring money but on who?

ArthurDaley-OldieTimeTrader's picture

Peter Thiel bought residency in New Zealand and Mark Zuckerberg bought 700 acres in Kauai  They know its coming

Erek's picture



Both are a great deal when paid for in toiletp.. err fiat!

clade7's picture

The major shame of took an Indian to tell us this?  Some Rajit mutherfucking Singh?  Where the hell has my portfolio manager been all these years?  Getting over run and slaughtered here!  I feel like Custer!  Or the liquor store in White Clay Nebraska!  All these fucking Indians all over the place?  I dont know what to believe!  And some Sabu comes along and says, 'Hey, pay attention, you are about to get killed',... WTH?

JRobby's picture

Ok for math tutoring. Don't let him operate a train.

Hal n back's picture

Das years ago wrote a complex 3 volume set of books on deriviative-it was too complex to understand.

and that is why we have derivative problems-trillions written, few understood.

He must have been asked to write this article. And his books are becomeing less complex so people can read and understand.

He did write "Traders, Guns and Money"-where he outlined how the banks fucked companies left and right with derivatives the companies could not cancel without a major payment.Part of the  issue was the guys from bank selling this shit were the companies trusted advisors the bankers.

Just like used car salesmen.


Just who can be trusted.  Not many.






JRobby's picture

Definitive guide to derivatives:

Chapter 1 (the only chapter)

Paragraph 1: Know Your Counter Parties and their overall exposure.

Paragraph 2: Paragraph 1 is impossible to determine so you are fucked unless you have inside information.

"They" sold interest rate swaps and collars like there was no tomorrow with the knowledge that Greenspan would never raise rates, AND the market expected him to. "They" loaded up on the shit because they knew that the payday was guaranteed. Now Greenspan is saying he believes in gold backing. Can this crap get any thicker or smell any worse?


innertrader's picture

"Just who can be trusted."



French Bloke's picture

Hey Clade, I guess that makes him a Financial "Guru" then. He knows a lot more than you and I ever will. And he happens to be correct.

LawsofPhysics's picture

Yes, yes, yes, everyone is acutely aware how the ongoing "let the majority eat cake" monetary, social, political, and economic experiment/fraud will end.  Moral hazard is a real motherfucker like that.

hedge accordingly.

A. Boaty's picture

"...Berkshire does not have to post collateral to secure the risk...." Haven't we seen this movie before?

LawsofPhysics's picture


Since money/DEBT creation requires no real work and NO REAL COLLATERAL, WHY CAN'T WE ALL CREATE AS MUCH MONEY AS WE WANT!?!?!?!

This is the fundamental problem.  Fuck'em.

The bankers and financiers are nothing but useless fucks stuck between the printer/computer and the producer/consumer in the real economy!!!!!

Be optimistic as all economies do tend to evolve...

...eventually we will execute all the useless fucks.

blindfaith's picture



No...this just can't be true ! 


It must be more fake news.

NoDebt's picture

"and that solutions to problems can be deferred."

That implies a belief that politicians ever wanted to solve problems in the first place.  They don't.  

Muad'Grumps's picture

You know these major corporations are going to be floating more shares to pay back this debt down the road...too bad it will be at much lower prices. Buy high, sell low. Brilliant!


This is how the Dow gold ratio could go below one.

cowdiddly's picture

What buying a Dow 20000k hat 4 trading days ago before you have to buy a Dow 21000 hat is bad?

What's your problem buddy? Ya Skeered? HA

skbull44's picture

And add to this conundrum of fraud the mainstream media and academic shills who continue to tell the public that everything is just fine, thank you.

JRobby's picture

I say a one time pay per view event where "mainstream media and academic shills" are hunted down and exterminated in entertaining (like James Bond) ways would pull some real ratings.

syzygysus's picture

Dow 33,333


then it goes to 666.


that's what they do with their magick numbers.

wisehiney's picture

Highly deflationary.

Brynjo's picture

I thought this article was going to warn that earnings and asset prices were "optically distorted" by the magnification (and higher risk) associated with leverage. I thought it would have highlighted that low interest rates, and huge "engineered" balance sheets at Central Banks enable weak unsustainable businesses to thrive only temporarily. Or that rising inflation, and then rates, would result in low-cost leveraged markets to implode. He does touch on some of these topics.

But he seems to miss the reality that to the extent companies enjoy "real savings" at the corporate level through tax avoidance (or lower average cost of capital), those savings accrue to their investors.

Yes, Das touches on reality that leverage may not help their "home" country's Treasury or thereby broader society, but logically that is not part of an argument for suggesting the company's earnings aren't real or that its stock is mis-priced. (Unless he makes the case that those and other "tax breaks" will shrink rather than increase going forward...)

Fake Trump's picture

Bull (shit) markets. With all the uncertainties around the world you don't need to be a rocket scientist to know the outcome eventually. It is a not question of IF but WHEN. THERE ARE SO MANY BLACK SWANS around and it only takes ONE to land squarely on Trump's ass.

Hal n back's picture

The auditing profession is in trouble. Congress on one side told them to ignore mark to market, and allow NON GAAP, and buybacks.

ON the other side they have clients like FB which push non gaap to the limit, then threaten the audit firm if hte audit frim does not play ball with everything

Finally I think few read financials and annual reports  now a days.

Grandad Grumps's picture

What was your first clue, Sherlock?

Joe Cool's picture

It's funny how so many have been saying this for years....Now it's like Mainstream...

Oracle of Kypseli's picture

I just bet my last $500 on a long expiration put on the advise of Maharishi mahes suami sachitanada rama crishna nanga Whose nick name is actually "Joe" 

The miracle maker will get me back 300k lost in the last several years at the advise of a Washington DC great brockerage house

The Harlequin's picture

In simple terms, when the productive economy is in complete disarray, and investment becomes bloated with an endless cycle of non-productive transactions fueled by hidden inflation, the value of anything becomes completely ephemeral. The reason your second-hand beanie dolls won't sell is because most of the cost of production has gone into the pockets of people who produce precisely nothing! And we all know who those people are!

innertrader's picture

S&P 500 -  I haven't been right the S&P 500 since covering shorts at 720.  Since then I have tried to sell it 3 times, lost money twice, broke even once and I've been bearish ever since 1440, so what the hell do I know?  I know I had no clue that we'd create $10 TRILLION in U.S. debt during the last 8 years.  I also know that the BIG BOYS WERE TOLD!!!  To put it simply, I know that since I went back to trading Live Cattle about 2 years ago that I"ve been MUCH HAPPIER and I'm going to stay there!  After all, the FED can't type a number in a computer and create a single head of Cattle out of thin air!!!


So, while I watch the S&P etc. etc., I ONLY trade Cattle.  Besides, the Futures Cattle Market is only open from 8:30 to 1:05 and at my age, I like the hours much better!!!




spekulatn's picture

Here is a very, very, very long article that paints a big picture of the whole damn shit show,