Confidence

Debunking Modern Monetary Theory (MMT)

Corp Profit

While the Dow & S&P500 indices grind back higher thanks to the US Fed chickening out on a rate rise in because the economy can’t handle it, many people still overlook the fact that core US profitability has tracked sideways since 2012. 6 years of next to nada. Sure one can boost profits by adding back unrealistic  “inventory adjustments” but the reality is plain and simple. If you search for inventory adjusted earnings they’re still marginally growing but there in lies the point. Real profits aren’t.

Record buybacks fueled by cheap debt is the cause for ‘flattered’ earnings. No growth in E  just falls in S.  EPS growth can look spectacular if you ignore 50% of US corporates have BBB credit ratings or worse.

The latest lexicon is “modern monetary theory” (MMT). The idea that the central banks just manipulate markets in perpetuity. Austerity is no longer needed. Central banks print money and extinguish debts the same way. Seriously why bother with taxation? The question is if it is meant to be a sure winner, why aren’t we all living in 5 bedroom mansions with a Mercedes Benz and a Porsche in the driveway? Why not a helicopter?

Logically if central banks can buy our way out of this debt ridden hellhole, why is growth so anemic? Why is European GDP being cut back? Why is German industrial production at its worst level since 2009? Why does Salvini want to jail the Italian central bankers? Why does the Yellow Vest movement in France carry on for its 15th consecutive week? If MMT works why would the EU care if the UK leaves with No Deal? MMT can solve everything for unelected bureaucrats in theory. Even £39bn can be printed

Last year the US Fed announced it had stopped reporting its balance sheet activity. In 2006 it stopped reporting M3 money supply. Curious timing when inside 2 years the world was flung into the worst recession since 1929. Transparency is now a danger for authorities.

The question boils down to one of basic sanity. All assets are priced relative to others. It’s why an identical house with a view in a nice neighborhood trades at a relatively higher price than one in a outer suburban back lot. The market attributes extra value even if the actual dwelling is a carbon copy. It is why currencies in banana republics trade by appointment and inflation remains astronomical. Investors don’t trust their ability to repay debts unless given extremely favorable terms. Market forces at work.

To put the shoe on the other foot, if all countries adopted MMT why bother buying bonds for retirement? The interest is merely backed by a printing press. Best consume 100% and save zero. The government has moved beyond moral hazard and hopes no one will notice

Take a look at Japan. It has $10 trillion in outstanding debt which is 2x its economy. The Bank of Japan owns 60% of that paper bought through a printing press. The market for JGBs is so manipulated that several Japanese mega banks have handed back their trading licenses because it has become worthless to be on that exchange. The BoJ thinks it can make whatever prices it chooses. The ultimate aim is to convert all of the outstanding debt into a zero coupon perpetual bond with a minor ‘administration’ fee in order to assign some value to it. To the layman, a zero coupon perpetual means you get no interest on the money you lend and the borrower is technically never required to pay the borrowed amount back. Such loans are made by parents to their children, not central banks to politicians (although one could be forgiven to think their behaviour is child like).

Yet the backdrop remains the same. Consumers are tapped out in many countries. Lulled by a low interest rates forever mentality, even minute rises to stem inflation (real is different to reported) hurt. My credit card company constantly sends emails to offer to transfer balances at 9% as opposed to the 20% they can charge if I don’t pay in full.

APRA recently relented on interest only mortgages after demanding it be tightened to prevent a housing bubble getting bigger. Now mortgage holders hope the RBA cuts rates to ease their pain.

Like most new fads, MMT can’t remove the ultimate dilemma that Milton Friedman told us half a century ago. Inflation is always and everywhere a monetary phenomenon. One can’t hope that putting money in the hands of everyone can be sustainable.

The one lesson that we should have learnt from GFC was that living at the expense of the future has rapidly diminishing returns. All we did was double down on that stupidity.

Do we think it normal that Sydney house prices  trade at levels the Japanese property bubble did in the late 1980s? Do we realize that we hold as much mortgage debt than Japanese banks did for a population 5x our size? Do we think that our banks are adequately stress tested? When an economy like ours has avoided recession for a quarter century, it builds complacency.

MMT is nothing more than a figment of the imagination. It preys on the idea that we won’t notice if we can’t see it. Unfortunately behind the scenes, the real economy can’t sustain the distortions. The French make the best modern day example of  a growing number of Main Streeters struggling  to make ends meet.

Central banks monkeying around with MMT smacks of all the same hubris of the past. It is experimental at best and reckless at worst. Markets can be manipulated for as long as confidence can be sustained. Lose the market’s trust and all of a sudden no amount of modern day jargon  can overcome what economists have known for millennia.

If you flood a global economy with cash at 5x the rate the economy can feasibly grow then it will ultimately require bigger and bigger hits to get the same bang before the jig is up. It’s a Ponzi scheme. Bernie Madoff got 120 years jail. Why not the central bankers?

So what is the best asset out there? Gold. It can’t be printed. It requires effort to discover it and dig it out of the ground. Of course the barbouros relic deserves to be consigned to the dustbin of history. If that were so Fort Knox might as well leave the gate open. The more it is hated only makes this contrarian investor want it more.

Before we rush to bash the bankers!

Bankers have worked hard to stay one rung above lawyers. Yet is anyone surprised? Before we embark on a “bash the banker” tirade, at what point do we cast aspersions on the regulators? If you leave a child unattended with a box of matches don’t be surprised if the house burns down.

None of this is new. Before the housing crisis engulfed America, a group of certified home appraisers raised the alarm in 2003 by signing a petition to present to Congress. They claimed many unqualified assessors were in cahoots with mortgage brokers to jack up property appraisals because of the higher fees that were attracted. What was done by the authorities? The square root of jack. So the $750,000 mortgage taken out was actually against a $500,000 property. $250,000 in negative equity before the new home owner moved in. Regulators could have clamped down but didn’t.

Charging dead people fees is of course a bit much and gouging advisory fees without actually offering service is poor form. However at what point does the customer bear some responsibility to accepting the status quo? Getting access to lower cost providers is/was always there but the opportunity costs were such that many just sucked it up. It wasn’t enough to devote time to when the half yearly check up came around.

CM was one of the ones that questioned the big bank superannuation advisor’s usury fees. So poor was the explanation that after minimal effort, a new advisor was found with fees cut in half and investment flexibility rising exponentially. We shouldn’t have been hanging out for a Royal Commission to whump the banks.

Indeed, should any laws have been broken then the perpetrators deserve to have the book thrown at them. If boards willingly accepted that certain divisions were deliberately acting in unethical ways then they deserve to be accountable.

Corporate governance is not helped by hiring a majority of independent directors. The US experience has shown that to be a failure. It is all about corporate culture. If boards have not been setting the highest standards why should we be surprised if the underlings follow suit. We only need look at the debacle that was Cricket Australia or the recent shenanigans at the ABC to see examples of a poorly run board leading to a culture beneath that ends up seeing staff “cheat” or making decisions that flagrantly contravene the charter.

Do we jail bankers for 25 years? Depending on the extent of actually “breaking the law” that maybe a deterrent. WorldCom CEO Bernie Ebbers was sentenced to 25 years based on nine counts of conspiracy, securities fraud and false regulatory filings to the tune of $11bn. Enron’s former CEO Jeffrey Skilling was convicted on 35 counts of fraud, insider trading and other crimes related to Enron and sentenced to 24 years prison and fined $45 million. Madoff 150 years, Stanford 110 years jail. This has not necessarily stopped corporate crime but it should throw a flag in the minds of those considering it. If the consequences are too soft then clearly the risks profile diminishes for the perpetrator.

Look at the advent of whistleblower laws in America. The SEC now encourages whistle-blowing by offering sizable monetary awards (10 to 30% of the monetary sanctions collected). Successful enforcement actions as a result of whistle- blowing has led to awards as high as US$30,000,000. As a result the SEC has seen a 10 fold increase in claims over the last few years. Would boards be more inclined to act ethically if whistleblowers were granted protections?

Plenty of ways to improve what has transpired but what the Royal Commission should make painfully clear is that consumers need to wise up and become more savvy about how they make choices. We can’t forever complain and wait for governments to rescue us when it is them in the first place not acting responsibly to ensure good behaviour.

The free market should be the first to benefit from filling this clear void. Tying up banks in more red tape and onerous regulation isn’t the way forward. All it will do is drive costs for compliance higher which will ultimately hit the consumer. The larger the institution, the easier such regulations will benefit their ability to squeeze the little guy!

Making the punishments for bad behaviour enforceable and putting the onus on boards to act ethically will make all winners.

Naomi Osaka edition Nissan GT-R sells out

While Carlos Ghosn maybe wasting away in a Tokyo detention centre, Nissan is not wasting the talents of Naomi Osaka. At a puffy ecomentalist launch of the new Nissan Leaf EV, one of the board director’s asked the then just crowned US Open winner what car she’d like and without hesitation it was the GT-R. Why? “Because it is fast.” So despite breaking every politically correct rule as goes a green car launch, Nissan got religion and sold out 50 Naomi Osaka edition GT-Rs in a heartbeat. It looks like Naomi run #2 reservations can be made in Feb. Capitalism wins again. Surely the margins on Naomi GT-Rs will outstrip any margins made on Naomi Leafs.

Watch Japanese companies fumble over getting her to star in their commercials. You know what? Best to buy a basket of Naomi Osaka stocks on the TSE. CM wrote a piece on stocks and Japanese idols – there is correlation! Smaller caps tend to benefit more. Valuations largely irrelevant.

As CM wrote it is any wonder a financial institution hasn’t made a Naomi ETF?

Mainstream media or better known as…

The mainstream media (MSM) can’t contain themselves. So deep in the cesspit of their own making that clickbait seems to have replaced responsible journalism for good. CNN’s Jim Acosta may well have the answer as to why a growing number of people view the MSM as the enemy of the people. When several journalists openly call for the doxing of school kids, where are the repercussions? What happened to unbiased, objective reporting?

The recent Lincoln Memorial showdown between a Native American Nathan Phillips and a Covington Catholic High School student, Nick Sandmann, perfectly fit a media narrative – Trump supporting, MAGA hat wearing, white Christian youth actively seeking and attacking a frail old indigenous man. Lost on the media were the earlier chants of the Black Hebrew Israelites calling the kids, “crackers, faggots and pedophiles.” Of course obscenities are a one way street if those attacked tick the wrong identity boxes.

Why doesn’t the media get that everyone is a potential movie producer these days? The truth eventually gets out, sadly after a lot of damage has been done. Does the MSM not get that persistent lying has pushed trust in the media to record lows?

If one watched the entire clip, the ‘activist’ Nathan Phillips went looking for a fight to conflate his agenda. He has been an activist for many years over a multitude of causes. Most activists have little or no tolerance for different views or opinions.

CM, like most of us, don’t know Nathan Phillips (or Nick Sandmann for that matter) from a bar of soap. Does being a First Nation’s person give him a free pass from polite discourse? If someone banged a drum in your face without provocation, would you rank your level of disapproval proportionate to the aggressors identity? Does donning a MAGA hat automatically mean the wearer is a racist or a bigot?

Yet the media perpetuates these falsehoods. The editorial boards of the MSM need a serious class in journalistic ethics. For all of the promises inscribed on the mastheads, few if any live up to their motto. While some came out after to apologize for jumping the gun, time and time again they face no recriminations for their actions.

Is it right that Sandman received death threats? What if some nut job actually tracked him down and took his life? Would the media take responsibility for their fictitious reporting or just plead an honest mistake. You know the MSM has screwed up when even CNN demands retractions.

We are approaching dangerous territory. Identity politics has become so poisonous that there will come a time when the dam will inevitably burst. Even if some think Covington students are out of touch with modern America, does the MSM truly believe they are setting a high watermark for integrity and an higher moral authority to show them the error of their ways?

To turn the argument on its head, had Phillips been white and wearing a MAGA hat banging a drum in front of indigenous school kids, the media would have been spot on in identifying the aggressor. Sadly they played the man and not the ball.

Schick should do a toxic masculinity counter campaign

Gillette’s marketing department must be thrilled to get such decent click thru rates. Sadly they are running circa 10:1 negative on 2.4m views. Great lesson on why lecturing customers is never advisable. Were they eating Tide pods when they came up with the idea?

This virtue signaling stupidity only benefits Edgewell Personal Care (parent of Schick). On what planet did Gillette think this campaign would win fans? If CM was working for Edgewell, the advice to the company would be to do a toxic masculinity spoof counter campaign and watch it go so viral. Watch EPC’s share price ramp tonite.

It’s rare that a #1 player so carelessly throws away its clear advantage. The overwhelming majority of men can’t stand violence toward women.

As is so often the case with virtue signaling the target audience is usually such a tiny minority that one wonders why they bother to spurn the majority to placate them?!

A worm has turned on Apple

Apple guided Q1 revenue around $84bn vs earlier guidance of $89-93bn. Consensus unsurprisingly pegged itself to the middle of the initial estimate. How original and staying ahead of the curve? It doesn’t take a rocket scientist to work out that pulling disclosure of handset sales was the precursor. It wasn’t so long ago that the US Federal Reserve ended disclosure of its balance sheet movements. Ahead of the GFC, Ben Bernanke pulled reporting of M3 money supply right before the GFC.

Apple has lost the entire GDP of Singapore in market cap terms since last September. How many funds are up to the eyeballs in this stock that they believed had endless growth. How soon before it loses another Singapore?

No doubt the iPhone 14S XR limited edition run of 100 million units won’t turn this around.

It is usually around this time in a decayed product cycle that companies launch into random areas they have no expertise in. Watch for M&A deals at silly prices to buy bolt on businesses that bring hopes of growth in a global economy that has maxed out! Cue the goodwill write downs in year 1.

Langer should tell selectors to keep Warner out

Just do it? There are two options. Aussie cricket coach Justin Langer knows a thing or two about opening batsmen. He was one of our best. Yes, if we want a better chance of winning sooner we could easily insert David Warner post his ban. However at 32 years and 64 days (154 days when the ban ends), isn’t there an argument to develop new talent for the long term? This is merely putting expedience ahead of principle.

We can argue that Warner will have served his punishment but does the team need to risk diluting its rebirth by reintroduction of a toxic force? Are we to believe Warner will return to the team as a reformed choirboy or play his hand at being the same ruffian who believes in his own mind he’s still a rightful veteran? Proof of the pudding was his trademark celebration after scoring a century in local grade cricket. He has changed not a jot.

Yes we lost the 3rd Test today but despite the woeful batting efforts in the 1st innings, Pat Cummins (who deserved man of the match) showed what grit means. 9 wickets and approaching 100 runs with the bat. We deserved to be flogged when bowled out for 151 runs but Cummins took out the top order including India’s highest scoring batters in the 1st innings for zero in the 2nd. He single handedly rallied his team to believe mentally it wasn’t over when they would have otherwise folded. He made Aussies proud.

Justin Langer has worked some miracles with the gutted side after taking the reins from Darren Lehman. Aussie team captain Tim Paine has also been impressive. Stephen Smith has none of Paine’s tenacity. Smith was made captain for being the best batsman in the world. Ability and leadership aren’t axiomatic. Smith’s weakness was evident. He allowed Warner to bully him into burying his judgement. It speaks volumes of why Smith should never captain again. His only real crime was to be a wimp.

It is also questionable whether Smith has the mental side to regain his top spot. He may well succumb to the pressure. He wouldn’t be the first gifted sports star to fall into a deep and prolonged slump post a scandal.

Warner can play 20 over big bash leagues (BBL, IPL) to earn his keep and feed his family but do we really want to send a message to kids that cheaters can prosper in our national side? His actions were disgraceful. Cheating is cheating and no rush of blood to the head is acceptable when earning millions let alone representing one’s country. It is a privilege to wear a baggy green, not a right.

CM would prefer to lose honorably than win with players who were only ever in it for themselves. Matches like today bear out how fighting as a “team” is so much more admirable. The taste of victory will be that much sweeter. No better opportunity to cast the net wide for sleeper talent who would probably have been overlooked otherwise. Make sure current players are kept on their toes to earn their spot.

It should be impressed upon incumbent players as a deterrent that cheating means life long bans. It would also be a stronger signal that the terrible governance of the farcical former Cricket Australia board is over.

Time to start afresh. Langer should take the option of keeping Warner out of the dressing room. It’s the only sensible choice.