Capital Formation

Greece’s and the European Union’s economic and political crisis will not be resolved through a new debt deal between the government in Athens and the European authorities. It will be merely one more stop-gag “solution” to a problem whose nature is endemic to the current ideology and politics of State-Power and collectivism. Its real solution requires something deeper and more comprehensive: a revival of the classical liberal ideal of individualism and the economics of free market capitalism. This, unfortunately, is not likely to occur any time soon.

Arguably, labor markets are stronger today than they have been in the past 20 years, but expectations of financial security for many of us are virtually non-existent. As ZH readers are no doubt aware, despite job numbers being “up” 280,000 last May, and average annual wages increasing 2.3 percent, Americans are still having a difficult time finding full-time work that pays a livable wage.

While we are now well aware of the unpatriotic-ness of tax inversions, Goldman Sachs raises the red flag on another corporate action that is about to become highly politicized - share buybacks. The last (and only) pillar of buying left in the US equity markets is set to draw political attention and likely to gain prominence, particularly ahead of the 2016 election.

Ten months after we asked whether "The SEC Is Asking These Hedge Funds Why They All Rushed Into Allergan Last Quarter?" we find that the US market regulator indeed reads this website on a regular basis. As the WSJ reports the SEC has answered our question, and yes: the  SEC is finally asking not only "these" hedge funds why they all rushed into Allergan, but into every other collusive activist take out target.

During “normal times” – an economic growth phase accompanied or generated by rising systemic leverage – central banks have incentive to promote nominal growth and inflation, which make banking systems profitable and their free-spending political overseers happy. In such times, commercial banks have fiduciary responsibilities to shareholders to constantly increase their market values, which they do by expanding their balance sheets.  Now that economies are highly leveraged, extinguishing debt would require banks to reduce the sizes of their loan books, which would shrink their market values. Thus, it seems economic policy makers never have incentive to promote debt extinguishment in the banking system, regardless of economic conditions or prospects.

The Man in the Moon studies the pathology of Earth’s global economy and markets from a distance where there’s no gravitational pull towards empiricism or consensus. His findings: 1) the global economy is over-leveraged, fragile, stagnating, and increasingly centrally managed; 2) capital markets and asset performance have been captured by the perception of the ongoing value of money, and so; 3) unconventional investment analysis is prudent.

Forget Shanghai and its roaring stock market, there's a new centre for speculative excess in China. Nothing says sustainable capital formation like a stock index that trades at a valuation of 67.2 times earnings, is up 166% in the last year and whose components regularly see 500% rallies (and recently epic collapses). Welcome to Shenzhen.

Why are governments rushing to eliminate cash? Simply put, the central banks have lost control of the ability to stimulate anything.

Matching the hindrances of the interventionist state is the manipulations of money and interest rates by central banks everywhere, which distorts markets, misdirects capital and labor use resulting in unsustainable booms and inescapable downturns that bring about wrongly invested capital and misallocated labor. This “wrong twists” to the market takes time to overcome and correct. It is government impediments to open, competitive markets – whether in America or in other parts of the world – that are the causes to behind slow growth and sluggish job creation, not “the rich” and their savings.

Meant to extend and widen trade and related commercial relationships between the participating countries, the Trans-Pacific Partnership (TPP) has also been presented as a way for the U.S. to maintain his economic and political power in East Asia in the face of the rising influence of China in that part of the world. What should be most clear is that the Trans-Pacific Partnership is not a free trade agreement. Parts of it may, no doubt, lower some trade barriers, thus making easier the production, sale and purchase of a wider variety of imports and exports. However, TPP, like all other trade agreements in the post-World War II era is a managed trade agreement.

The goal of equality of opportunity is both absurd and vicious. Achieving it would require that children all be raised in the same environment and have the same genetic inheritance. In contrast, what we should actually strive for is the freedom of opportunity. Freedom of opportunity means the ability to exploit the opportunities afforded by reality, without being stopped by the initiation of physical force, in particular the initiation of physical force by the government or that takes place with the sanction of the government.

Can you arbitrage time?  Can you buy and sell time? We think that you can from the perspective of time horizons. In our view, financial markets are operating on the wrong time horizon – one that is too long (thanks to central banks ZIRP/NIRP and credit creation) - although there are signs that this is beginning to change.

Considering that Chinese equities are the best performing market in USD terms (second only, oddly enough, to Russia) in 2015, one can see why after a disappointing 2012 and 2013, and modest 2014, Hendry has hit 2015 out of the park with a bang, generating a 10.6% return in the first two monthes of the year. So is Hendry still bullish on China's stock market prospects?  Why yes, and then some. But is he is contrarian just for the sake of being contrarian? Does he see something in China that nobody else does? Or is he simply right... or wrong, as the case may be? We will let readers decide.

Herbalife stock is up over 5% after hours after WSJ reports Bill Ackman (among others) made false statement about Herbalife's business models to regulators - in order to spur investigations into the company and lower its stock price. This comes just months after Ackman kinda-sorta-didn't-really insider-trade in the Allergan 'scam' that we detailed here. We suspect Whitney Tilson (and his Lumber Liquidators positions) is getting a little nervous now... and Carl Icahn is quietly laughing to himself.

They will reflate - There won't be growth - There will be blood!