Cyprus-central-bankFollowing up my latest rant on the Cypriot debacle, Economic Depression Is The New Success, I want to make perfectly clear that the EU banking system in Europe is irrevocably broken. The ECB/EU has demonstrated this through Cyprus, definitively. Let me break it down...

All investors price their investments, whether consciously and prudently or frivolously, by demanding "X" units of return for "Y" units of risk. This risk/reward ration is clearly delineated in a sound banking system, where the investments with highest (perceived) likelihood of return are priced accordingly, with the most expensive risk. The dimensions of risk run the gamut from credit risk, liquidy risk, market risk, legal risk, duration risk, etc. At the top of this risk ladder or hierarchy are products such as equities, complex derivatives, etc.

In the middle tier are often fixed income instruments such as junior and senior bonds. At the bottom of this risk hierarchy are products that have relatively little (perceived) risks and high liquidity, hence offer very little return in exchange. These products includes demand deposit accounts (checking and savings accounts), certificates of deposits, etc.

So, at the top of the risk ladder you have products that may have nearly no liquidity and high credit and market risks, but can offer high returns. At the bottom of this ladder are uber-liquid (at least perceived to be so) products that feature very little "relative" risks, hence are often priced to offer very little return as well. For instance, in the US, you can receive a 300% return from a front month, OTM put option with several days, but receive only 1% return from your checking account over a period of a year, or 4% in Cyprus banks. 

So... What happens when the account that you are receiving payment from being the lowest run on the risk ladder yields the risk that exists at the top of the ladder? Or, in other words, what happens if you get robbed and misrepresented as to the true nature of the product that you purchased? This is what happened in Cyprus, where they paid their depositors savings account returns but made them assume front month put option risks!

The deposit accounts that you were getting just a few hundred basis points for have developed:

  1. Liquidity risks: The capital controls that weren't supposed to happen (see No Capital Controls In The EMU? Liar Liar Pants On Fire), happened! See Cyprus Banks Set To Reopen, To Serve As Glorified ATMs With A €300 Cash Withdrawal Limit
  2. Credit risks: Your so-called safe investments will suffer up to a 40% haircut! Mainstream Media Says Cyprus Salvaged By EU Deal, I Say Cyprus Is Sacrificed By Said Deal - Thrown Into Depression
  3. and Market risks: Demand depositers have forcibly purchased highly speculative synthetic call options with their haircuts that are unlikely to compensate anyone for anything!

The little app below calculates what return you should expect to receive to take on the risk of a potential 40% haircut. The second tab offers what recent Cyprus bank rates were. Do you see a disparity???

It's not just Cyprus either. The problems that plagued Cyprus banks plague banks in much larger nations within, and around the EU. From Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe you see institutions that are literally too big to be handled safely...

The Banks Are Bigger Than Many of the Sovereigns

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Of course, there's never only one roach, despite the back and forth coming from EU leaders... 

So, let there be no misunderstanding - if it can happen to Cyprus banks, it can likely happen to your EU bank as well. Go back up and adjust the app/calculator haircut to just 5% (you may have to scroll to the right) and see if your getting compensated for the risk that you are taking in your speculative bank!

Ready! Set! Bank Run!!!

Cyprus contagion raw

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I've been hard on Facebook over the last year or so, and especially hard over the last 30 days... Last month I opined on The Truth About Facebook That No Media Outlet Or Analyst Has Bothered To Notice. As its shares marched back up towards its ridiculous IPO price that I warned the entire year previous was basically a marketing/hype scam. I ended last week with It's Official, The Farcebook Ad Model Is A Sham!

One of the major reasons for being so bearish was that it was IPO'd at a multiple that was pure highway robbery, Cyprus savings account style! Now what I mean? And as  I warned throughout the year preceding the IPO...

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Facebook is a farce even with the froth taken off of the IPO price. Why? As gleaned from Internet World Stats...

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These stats are from the 2011-2012 YEAR! Growth has likely slowed more since then! Here's a tidbit for those who don't subscribe that clearly illustrates... When it sounds too good to be true, it's probably not true!

FB IPO Analysis  Valuation Note Page 01FB IPO Analysis  Valuation Note Page 02FB IPO Analysis  Valuation Note Page 03FB IPO Analysis  Valuation Note Page 04

As I ended my last article on this topic, this is simply Grouponzi 2.0 - just on a much larger scale!

The updated valuation for Facebook (which has actually has an increase in terms of value now that we have more information to deal with) is available to download for all paying subscribers (FB Q4-2012 Analysis & Valuation Note - update with per share valuation). I'm available to discuss this with professional and institutional subscribers via phone or Google+. Click here to subscribe or upgrade.

Published in BoomBustBlog
Tuesday, 26 March 2013 07:55

Economic Depression Is The New Success

Central Bank of Cyprus contagion rawThe Irish Times, through AP reports on the latest failure of Cyprus banks to reopen:

The announcement to keep the banks shut last night by the Central Bank of Cyprus came hours after it said all banks except the country's two largest lenders, Laiki and Bank of Cyprus, would open today.

Banks have been closed since March 16th to avert a run on deposits as the country's politicians struggled to come up with a plan that would raise enough funds to qualify for an international bailout.

Reference The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs! It won't work.

An initial plan that would seize up to 10 per cent of people's bank accounts had spooked depositors and was soundly rejected by MPs.

All except the country's two largest lenders had been due to open today after the country clinched an 11th-hour deal with euro zone and the IMF to provide Cyprus with a bailout.

Without that deal, the country's banks would have collapsed, dragging down the economy and potentially pushing it out of the euro zone.

But last night the Central Bank of Cyprus said that "for the smooth functioning of the entire banking system, the finance minister has decided, after a recommendation by the governor of the Central Bank, that all banks remain shut up to and including Wednesday".

ATMs have been functioning, but many run quickly out of cash, and a daily withdrawal limit of €100 was imposed on the two largest lenders, Bank of Cyprus and Laiki.

These are the capital controls I clearly warned of last year that are not supposed to be legal.

Under the deal reached in the early hours of yesterday morning in Brussels, Cyprus agreed to slash its oversized banking sector and inflict hefty losses on large depositors in troubled banks to secure the €10 billion bailout.

The new plan allows for the bulk of the funds to be raised by forcing losses on accounts of more than €100,000 in Laiki and Bank of Cyprus, with the remainder coming from tax increases and privatisations.

People and businesses with more than €100,000 in their accounts at Laiki face significant losses. The bank will be dissolved immediately into a bad bank containing its uninsured deposits and toxic assets, with the guaranteed deposits being transferred to the nation's biggest lender, Bank of Cyprus.

Deposits at Bank of Cyprus above €100,000 will be frozen until it becomes clear whether or to what extent they will also be forced to take losses. Those funds will eventually be converted into bank shares.

It is not yet clear how severe the losses would be to Laiki's large bank deposit holders, but the euro finance ministers noted the restructure expected to yield €4.2 billion overall. Analysts have estimated investors might lose up to 40 per cent of their money.

Speaking about the marathon negotiations in Brussels that resulted in the deal, Cyprus' president Nicos Anastasiades said "the hours were difficult, at some moments dramatic. Cyprus found itself a breath away from economic collapse".

The agreement, he said, “is painful, but under the circumstances the best we could have ensured. The danger of Cyprus' bankruptcy is definitively overcome and the tragic consequences for the economy and society are averted”.

Bullocks, Bullshit, and all that other good stuff! As I stated in Mainstream Media Says Cyprus Salvaged By EU Deal, I Say Cyprus Is Sacrificed By Said Deal - Thrown Into Depression, locking up a country's liquidity for an unspecified amount of time, then removing up to 40% of a nations small/medium/large business liquidity (permanently, they're catching haircuts) as well as that of your wealthy depositors, is tantamount to economic genocide! How in the hell do you calculate "The danger of Cyprus' bankruptcy is definitively overcome and the tragic consequences for the economy and society are averted”? 

If anything, "The danger of Cyprus' bankruptcy... and the tragic consequences for the economy and society" are just getting started! I find it amazing that the Troika has convinced so many small nations that boiling slowly in a pot of austerity flavored depression is preferable to a quick and clean exit and rebirth. Is belonging to the EU really worth undergoing an extended depression? Iceland gave the finger to the Troika and they're doing better than nearly everybody in the EU! Think about it.

From the BBC: Iceland's 'tenacity' lifts economy out of crisis

Whisper it - Iceland's economy is on its way back. The frozen island on the edge of the Arctic, which had 10 straight quarters of shrinking GDP, is suddenly on a steady run of seven quarters of growth averaging at 2.5% per annum - something that few European countries can boast. Unemployment has fallen to just below 5% and confidence is returning...

Ready! Set! Bank Run!!!

Cyprus contagion raw

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On Monday, 25 June 2012 I penned "No Capital Controls In The EMU? Liar Liar Pants On Fire". Let me excerpt the first paragraph so as to bring those who have not read it up to speed before we jump into current events...

I have outlined the upcoming EU bank runs up to two years in advance (see the many links below). Whenever one expects a bank run, the first things TPTB do is institute capital controls to stem said bank run - which of course makes the bank run that much more necessary to get your capital out - wash, rinse, repeat! Remember, by treaty, no country in the EMU may use capital controls without automatically being removed from the union. Well, do you believe that to be fact that will last? Yeah, I don't either. Simply watch as the money bleeds from the banks and the bumbletrons attempt to staunch the flow using mechanisms that will simply exacerbate the flow. Even more incredible is the fact that even to this date, with the existence of publications such as BoomBustBlog, entire nations as well as their financial advisors, leaders, regulators and politictians STILL DO NOT EVEN COMPREHEND the nature of the modern bank run. You cannot stem the tide with capital controls, you can only exacerbate it. 

Now, As Predicted Last Year, The French and the Greeks Are In A Race For The Biggest Bank Run!

 On Saturday, 23 July 2011 I penned "The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!" wherein I went through both the motive and the mechanism of a European bank run, focusing on Greece and France as impetus.

Okay, I'm writing this on 3/23/2013, referring to the events of yesterday. I apologize to my paying subscribers for being 9 months and a few miles/kilometers off, but as the more intellectually capacitive among you know, this stuff is not an exact science. Now, yesterday's headlines...

Cyprus passes laws for capital controls

Lawmakers in Cyprus passed legislation to impose capital controls on its banks and create a "solidarity fund" to pool state assets, according to media reports late Friday. The measures will help fulfill conditions for Cyprus to get a euro-zone bailout. With a Monday deadline, Cypriot lawmakers still need to vote on measures needed to restructure banks in Cyprus and possibly place levies on deposits.

I appeared on the Max Keiser show in London yesterday, and broke down the Cyprus issue as simply as could be done. In essence, "What is a bank???!!!"

In "The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!" I detailed for my readers and subscribers the mechanics of the modern day bank run, particular as I see (saw) it occurring in Europe.

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You see, the problem with this bank holiday thing is that the real damaging bank run will not be staunced by the conventional bank holidays, et. al. because it is a counterparty run that will cause the damage, not depositors. TPTB in Europe don't have the chops to stem this one, at least not from what I've seen. As for how that institutional bank run thing works, we excerpt "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style":

 

The modern central banking system has proven resilient enough to fortify banks against depositor runs, as was recently exemplified in the recent depositor runs on UK, Irish, Portuguese and Greek banks – most of which received relatively little fanfare. Where the risk truly lies in today’s fiat/fractional reserve banking system is the run on counterparties. Today’s global fractional reserve bank get’s more financing from institutional counterparties than any other source save its short term depositors. In cases of the perception of extreme risk, these counterparties are prone to pull funding are request overcollateralization for said funding. This is what precipitated the collapse of Bear Stearns and Lehman Brothers, the pulling of liquidity by skittish counterparties, and the excessive capital/collateralization calls by other counterparties. Keep in mind that as some counterparties and/or depositors pull liquidity, covenants are tripped that often demand additional capital/collateral/ liquidity be put up by the remaining counterparties, thus daisy-chaining into a modern day run on the bank!

 

 

Make no mistake - modern day bank runs are now caused by institutions!

 

And Yes!!! The fodder for bank rungs are ALL OVER THE EUROPEAN SPACE!!!!

Those that follow me know that I have been warning on Europe and its banking system years before the sell side and mainstream financial media (reference the Pan-European Sovereign Debt Crisis series). 

A reader has convinced me to consult with him on a specific situation, regarding overseas monies and the (lack of) safety of those funds, which prompted me to dig up the Sovereign Contagion Model that we developed in 2010. Long story short (if it's not already too late), my next extensive series of posts on this topic will likely spark bank runs throughout the periphery and the core of Europe, for much of the assets that depositors think are there are simply not, and I proffer ample proof for all to see. For the banks, it's too late to pull the evidence down from your various web sites, for I already have it safely stored and distributed. Keep in mind, once the fissures form in one section of the already weakeed EU, cracks widen in the other sections... 

Description: foreign claims of PIIGS

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Last month I opined on The Truth About Facebook That No Media Outlet Or Analyst Has Bothered To Notice. As its shares marched back up towards its ridiculous IPO price that I warned the entire year previous was basically a marketing/hype scam engineered to confiscate one's hard earned capital, sell side analysts and mainstream media types ignored basic yet blatant cracks in this media darlings armor yet again. For one, we know this high growth company is already experiencing negative growth in active users...

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We also know that Google has essentially caught up to Facebook as a social media platform, reference I Don't Think Facebook Investors Will "Like" This!!! Google Has Already Caught Up In Terms Of Active Users. Despite these pertinent (and quite negative) facts, FB shares have been on the rise, although recently have last some of their froth. Why did the shares pop? Irrational exuberance! The sell side marketing analysis has it that Facebook is perfecting the marketing and mobile business model, and as a result is able to monetize its massive, yet shrinking user base. 

The counter to this argument is basically that it's not true. For one, the shrinking user base is real. The school age youth, once a mainstay of Facebook, is moving on. Simply ask the one's that you know. More importantly, it's ad model is basically a Sham! Any sell side analyst who attempted to value this company based on ad revenues without actually trying out its ad system is not worth postage used to send his bonus check. I tried the ad system out. While the click through rates were actually about 2/3rds that of Google's comparable ad model, the actual sales from the ads were less than abysmal - and this is for a rather interesting product. Even worse, the delivery of the ads proved to be highly intrusive, causing a significant and material amount of negative feedback from the Facebook community. Here are some examples of the feedback received from the so-called Facebook 'ads" that I paid for...

  • "Hey, I don't like this post. Please remove it."
  • "Please remove me from your list"
  • "I am getting unsubscribed advertisements and friend request that say I approved them"

There's actually a lot more than that, this just what was sitting in my inbox before it was deleted. Here's a screenshot of a conversation I had with on of the recipients of the so-called Facebook ads which are essentially paid for placements on somebody's wall...

Facebook ad failure

"I am getting... friend request that say I approved them"??? Does that sound like a sustainable business model to you? This is simply Grouponzi 2.0, just on a much larger scale!

The updated valuation for Facebook (which has actually has an increase in terms of value now that we have more information to deal with) is available to download for all paying subscribers (FB Q4-2012 Analysis & Valuation Note - update with per share valuation). I'm available to discuss this with professional and institutional subscribers via phone or Google+. Click here to subscribe or upgrade.

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picsay-1363698572Following yesterday's highly analytical rant on Cypriotic bank nonsense, I present an interesting analysis on the value of the gas assets pledged to those who's bank accounts may be clipped by the Cypriotic government/ECB. For those who don't know, the proposal was to compensate those who were subject to the tax/levy on their bank accounts with bonds linked to the output of Cyprus natural gas mines. Of course, the first question anyone should ask is "Why not simply pledge the gas assets directly to the ECB vs stealing from the bank depositors?" I think we can all ascertain the answer to that question. I was tweeted an analyst by wherein he delved into the fundamental value of the exchange. I would like to reproduce a portion of it here. The balance can be found on his site.

Cyprus Bank Deposit Levy and Natural Gas Bonds

Cyprus' president has pledged to cover the value of its imminent savings deposit levy with an equivalent value of natural gas bonds. It's hard to say whether Cypriot savers should take this promise seriously without some analysis of its viability.
Let's use the European bailout sum for Cyprus of US$13B as a proxy for the amount of savings about to be confiscated from Cyprus' resident depositors.  I need a proxy because I have no idea how much the government of Cyprus will actually collect from this levy.  The natural gas revenue needed to back the bonds that would make savers whole would likely come from the Aphrodite field.  Title to this field is unclear; Turkey has made a competing claim for the sovereign right to control drilling.
This is the likely answer to the quetion above. If the ownership and rights to the mine are in question, then it is essentially an encumbered asset. As such, how is it Cyprus's to pledge to anybody? May I add that Turkey actually has a functional military, and Cyprus has???
There is currently no pipeline from Cyprus to either Turkey or Crete which could deliver the gas to market; that would cost US$1B to build and Cyprus has no money.  Building a $10B LNG terminal is ten times as unlikely, because Cyprus is still broke.  The energy supermajor that ends up building it will get the lion's share of the revenue from the gas field as compensation for its costs and will have to deal with the likelihood of being shut out of other projects in Turkey. 
Again, exactly how will this gas asset be monetized? I have not verified the facts and calculations behind this article, but if they ring true, then it appears that Cyprus is pledging the option of future development to a gas asset that it MIGHT own in exchange for actual cash in terms of what is being offered to bank depositors. So, the most valuable asset possible (actual cash denominated in a major currency) is being exchanged for an option on an undeveloped asset whose ownership and right to pledge/transfer is undetermined. Does this sound like a good deal to you? And we haven't even started to glean the actual fundamental value yet?
The lack of drilling and delivery infrastructure means that no Aphrodite gas will go to Europe until 2018 at the earliest.  A lot can happen with the price of natural gas in five years.  The wide availability of shale gas in the U.S. will keep the price down in North America.  Europe's need for gas is met mainly by Russia, and Gazprom can adjust its rates at will to pressure Russia's neighbors. 
And such pressure is guaranteed if Russian citizens are to lose the 2 billion or so euros to the Cyprus bailout levy that is being bandied around.
There is more to Mr. Alfidi's analysis, and I urge you to visit his site to read it. In the meantime, keep this chart from yesterday's post on Cypriotic bank nonsense in mind...

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I'm currently preparing the release of a report that will make the Cyprus affair look like peanuts as this contagion reinfects the core and I produce so much evidence of apparent fraud as to make your nose bleed. Stay tuned, and follow me:

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Reading a Bloomberg article on the topic of ass-backwards EU area government moves this morning caused me to query, "What is the extent of the fear the European (and US) governments have of the financiers?" In Cyprus, we have a case of a government that would actually rape the depositors of a bank rather than the investors who voluntarily, directly and explicitly accepted the risk of bank failure through speculative investment (ex., the bondholders). 

The bank tax was the alternative to imposing losses on investors in a so-called bail-in, a step opposed by the Cypriot government, the European Commission and the ECB, German Finance Minister Wolfgang Schaeuble said on ARD television last night.

So, you will bend the mom and pop depositors over, but leave the monies of the institutional guys who should have known better sacrosanct?

“It’s up to them to explain it to the Cypriot people,” Schaeuble said. “Clearly, the taxpayer should not be asked” to rescue banks from insolvency, he said, adding that Cyprus faced a “very difficult time” unless it accepts the tax.

Bullocks! The taxpayer should be hit before the depositor to maintain the confidence in the banking system, but they should all stand behind the bondholders who accepted the investment risk in the first place. Yes, I'm aware that the banking system of Cyprus is about 9 times the size of its real economy, but that's pretty much the case with much, if not all of the EU, as clearly delineated 3 years ago in Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe:

I will attempt to illustrate the "Overbanked" argument and its ramifications for the mid-tier sovereign nations in detail below and over a series of additional posts.

Sovereign Risk Alpha: The Banks Are Bigger Than Many of the Sovereigns

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This is just a sampling of individual banks whose assets dwarf the GDP of the nations in which they're domiciled. To make matters even worse, leverage is rampant in Europe, even after the debacle which we are trying to get through has shown the risks of such an approach. A sudden deleveraging can wreak havoc upon these economies. Keep in mind that on an aggregate basis, these banks are even more of a force to be reckoned with. I have identified Greek banks with adjusted leverage of nearly 90x whose assets are nearly 30% of the Greek GDP, and that is without factoring the inevitable run on the bank that they are probably experiencing. Throw in the hidden NPAs that I cannot discern from my desk in NY, and you have a bank that has problems, levered into a country that has even more problems.

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Of course, this boneheaded move will backfire tremendously because it appears as if the members of the Cyprus government are not aware of the true financing structure of the banking system. DEPOSITORS SHOULD REMAIN SACROSACNT! They are the most important source of funding, not to mention the most liquid (as in potential for capital flight) in the entire banking ecosystem! I reviewed this structure and the inevitability of European bank runs two years ago in The Anatomey of a European Bank Run!

image012image012

Using this European bank as a proxy for Bear Stearns in January of 2008, the tall stalk represents the liabilities behind Bear's illiquid level 2 and level 3 assets (including the ill fated mortgage products). Equity is destroyed as the assets leveraged through the use of these liabilities are nearly halved in value, leaving mostly liabilities. The maroon stalk represents the extreme risk displayed in the first chart in this missive, and that is the excessive reliance on very short term liabilities to fund very long term and illiquid assets that have depreciated in price. Wait, there's more!

The green represents the unseen canary in the coal mine, and the reason why Bear Stearns and Lehman ultimately collapsed. As excerpted from "The Fuel Behind Institutional “Runs on the Bank" Burns Through Europe, Lehman-Style":

The modern central banking system has proven resilient enough to fortify banks against depositor runs, as was recently exemplified in the recent depositor runs on UK, Irish, Portuguese and Greek banks – most of which received relatively little fanfare. Where the risk truly lies in today’s fiat/fractional reserve banking system is the run on counterparties. Today’s global fractional reserve bank get’s more financing from institutional counterparties than any other source save its short term depositors.  In cases of the perception of extreme risk, these counterparties are prone to pull funding are request overcollateralization for said funding. This is what precipitated the collapse of Bear Stearns and Lehman Brothers, the pulling of liquidity by skittish counterparties, and the excessive capital/collateralization calls by other counterparties. Keep in mind that as some counterparties and/or depositors pull liquidity, covenants are tripped that often demand additional capital/collateral/ liquidity be put up by the remaining counterparties, thus daisy-chaining into a modern day run on the bank!

 

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I'm sure many of you may be asking yourselves, "Well, how likely is this counterparty run to happen today? You know, with the full, unbridled printing press power of the ECB, and all..." Well, don't bet the farm on overconfidence.

I'm currently preparing the release of a report that will make the Cyprus affair look like peanuts as this contagion reinfects the core and I produce so much evidence of apparent fraud as to make your nose bleed. Stay tuned, and follow me:

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 software collage

Friday, the Wall Street Journal ran a piece that essentially channeled BoomBustBlog. It was quite controversial, Why spend six figures on a business degree? Students would do better to train and network on their own.

Imagine that you have been accepted to Harvard Business School. The ivy-covered buildings and high-powered faculty whisper that all you need to do is listen to your teachers, get good grades and work well with your peers. After two years, you'll emerge ready to take the business world by storm. Once you have that degree, you'll have it made.

But don't kid yourself. What matters exponentially more than that M.B.A. is the set of skills and accomplishments that got you into business school in the first place. What if those same students, instead of spending two years and $174,400 at Harvard Business School, took the same amount of money and invested it in themselves? How would they compare after two years?

If you want a business education, the odds aren't with you, unfortunately, in business school. Professors are rewarded for publishing journal articles, not for being good teachers. The other students are trying to get ahead of you. The development office is already assessing you for future donations. Administrators care about the metrics that will improve your school's national ranking. None of these things actually helps you learn about business.

Consider what you could do instead with that $174,400. The first step should be to move to a part of the country that supports your interests. If that's film, move to Los Angeles. Technology, San Francisco. Oil, Houston. You could live decently in these cities for $3,000 per month. Over the course of two years, that still leaves you $100,000 to invest in yourself.

Needless to say, I have addressed this in detail through many interviews, videos and articles over the last few months. Well, now, I offer the means to funamentally, arithmetically and convincingly prove the idealogy behind the assertion...

The Education Bubble Deflator & Valuation Software is now out of beta and available for purchase, download and use. See the end of this article for instructions on accessing the model. Here I will offer a brief overview of the model and the key findings from a hypothetical student funding his undergrad, grad and PhD studies with a 6% Sallie Mae loan. The application is designed to help individuals value their college/university education by calculating and valuing the real cash flows generated by diplomas/academic studies in addition to calculating the real world costs of obtaining said assets. 

We capture, quantify and illustrate the value of a diploma from higher education institutions across different disparate majors and give each a distinct eROI (Economic return on investment) figure for students pursuing these courses.  The app uses inputs of (1) expected salary of a student after completing a major, (2) the tuition payable for pursuing the major, (3) any loans that would be taken to finance the course fee, (4) a blended tax rate to compute disposable income, (4) interest rate for the loan, (5) household expenses that a person is likely to incur, (6) growth rates in salary, (7) Opportunity cost for pursuing a major full time, (8) and an adjustment for the unemployment rate to factor in the impact of unemployment.

The app also computes cash flows that a student is likely to earn over the life of his career after considering his installments for the loan repayment, household expenses, taxes and the opportunity cost for pursuing a course.

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Key Findings

The current weak economic environment has seriously dented the economic viability of pursuing a degree (Bachelors, Masters or a PhD) from some of the top universities in the US. The persistent decline in salaries being offered to graduates from these universities coupled with continued rise in cost of courses has resulted in a fall in economic return to students from these majors.

In the US, the trend of increasing duration of student loans and higher aggregate student loans outstanding are a matter of immediate attention. These trends have increased concern over higher student loan default in the near future, resultantly seriously raising the need for evaluation of value of securitized assets based on such loans. In essence, it’s the mortgage bubble all over again.

Return from Undergraduate Courses

Almost all universities (listed below) offer very low returns over a student’s career life if aggregated as an “all majors” category. The high cost of courses and lowering of salary being offered upon completion of courses are major drivers for lower returns.

NPV @6% p.a is negative for all schools on an aggregated basis and even on a specific, major by major basis.

 image008 copy copy 

Even when looked at on a more granular basis, we get the following...

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As can be seen, the returns are middling at best, particularly when compared with other forms of investment over time. Resultantly the break-even year impractically far in most cases - after the year 2040 (assuming a start year of 2013).

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As a matter of fact, we have actually marked the cash flows from this person's education to market, benchmarking it against several other risk assets. From an undergraduate perspective, it's a dismal comparison for the most part. The returns are far lower compared with the 30-year average return on equities (5-6%) and 20-year return on commercial real estate (>7%) and 30-year return on Gold (4.5%). When taking individual majors into consideration, the numbers get even more interesting for diversity comes into play. The accompanying app shows the divergence in value not only between different majors within a school, but also the same majors between different schools, thereby actually valuing both the majors and the schools themselves!

 image014 copy

The model conveniently allows one to actually compare returns on a specific major between schools. This is invaluable in choosing schools. Most students and their parents select schools based on nominal affordabilty and/or repuation.

Now you can compare schools based on actual economic performance upon graduation - the way it should have been done from the beginning!!!

 image017

 

Things Generally Look Much Better For Graduate Degrees, But..... The Catch 22!!!

Return from Postgraduate Courses

Postgraduate degrees offer a much better return compared with other asset classes than do undergraduate degrees. The break-even year is achieved much earlier, in most cases within 12-16 years. NPV @6% is positive in all the cases. The problem is that in order to pursue a master's degree you first must obtain an undergraduate degree which has a very high probability of putting you in the hole!

Return from PhD Courses

Similar to undergraduate courses, return from PhD courses is lower compared to postgraduate courses. The returns are also lower compared to 30-year average return on equities (5-6%) and 20-year return on commercial real estate (>7%) and 30-year return on Gold (4.5%). The break-even year is achieved after a very long time, after almost 26-28 years.

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 More on this topic...

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It all started in June of 2011, many months before the IPO of one of the biggest scams to cross the US equity exchanges (and that's saying a lot in and of itself). I posted a forensic analysis of Groupon “What Does Groupon and the Matrix Have In Common?". I warned, I valued, the company went public, and... Nov 12, 2012 Multiple Muppet Mashing Leaves Groupon Shareholders Holding The Bag After 89% Off IPO Coupon. In that particular post, I actually offered the full Groupon research to download for free. It's amazing how this obvious Ponzi scheme got so much analyst and investor attention. Any and all BoomBustBlog subscribers saw it for exactly what it was, and hopefully shorted accordingly!

Earlier, I got on the Ponzi Exposure Express once again... Sep 26, 2011 I Suggest Groupon Offer Coupons To It's IPO Investors, They're Going To Need Them. And previous to that, once again...

Here's an abstract from our June subscriber-only analysis - Groupon Forensic Analysis & Valuation (923.04 kB 2011-06-16 10:34:36):

“Groupon’s revenue consists of the gross amount paid by customers for purchased Groupon while gross profit is the amount that the company retains after paying its merchants an agreed upon percentage of the purchase price to the featured merchant. So the comparable number for price-to-sales to use for Groupon is gross profit, or the fees it collects from merchants, which the management has correctly stated as the best proxy for the value created by the company. To put things into perspective, if eBay used the same math as Groupon does, it would have reported revenues of $61bn instead of $9bn. The company reported gross profit of $530m over last 12 months. At $25bn valuation that would put the valuation at 42x “comparable sales”. To put things in perspective, Google trades at Price-to-sales of 5.8x, Apple at 4.7x, Microsoft at 3.3x, Amazon at 2.6x and Yahoo at 3.4x.“

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In the latest S-1 registration statement, the company has revised its revenue figures by more than half. The company has restated its 2010 revenues from $713m to $313m while Q1-11 revenues were restated to $296m from $645m previously. The company has restated its financial results “to correct for an error” in the way it reported revenue. The revenue accounting change is Groupon’s second since it filed to go public. The company has also changed the presentation of certain expenses to be consistent with reporting revenue. Clearly, such errors and frequent change in the accounting policies clearly puts strain on the credibility of management – and that’s putting it lightly, especially for a company that is contemplating an IPO, not to mention that such changes are top line numbers such as revenues. In another blow to Groupon, the company’s COO Margo Georgiadis is leaving the firm to join back Google.

How about... Muppets Get MASHED Once Again - Groupon Half-off (Share price) Sale, Aug 14, 2012 – CNBC reports that Groupon [GRPN 5.815 -1.735 (-22.98%)] plunged more than 20 percent...

I can go on, but why bother? This company was pumped, dumped and marketed by several big name analysts and banks. One would think independent analyst shops would be one of the biggest shops in all of Wall Street, no?

I have commented ad nauseum on the percieved need to do business with name brands, those who do God's work, and those who simply cannot trade - muppet masters and all - as I clearly articulated on the Max Keiser show.
... and on previous shows. 

Now, all of you Goldman, Morgan Stanley, et. al. lovers, don't get your muppetware in a bunch, you know that I know that you know that It Is Now Common Knowledge That Goldman’s Investment Advice Sucks???, as excerpted:

Published in BoomBustBlog

The following is a guest post by a very bright individual whom I've had the pleasure of building with on several occasions, Mr. Mordechai Grun. This is what he's had to say on the topic of Europe, with ample commentary from me along the way.

_______________________________________________________

Human behavior predications usually follow the ‘least resistance, least painful, and self serving’ path in spite of its being harmful in the long run. This disposition is even more truly said of politicians and bureaucrats. "Will is the origin of all thought." Flowing from such will we have the intellectual analysis and arguments to justify those behaviors. We will therefore look at Europe through this lens and see where it takes us.

The next major crisis in Europe is lurking just beyond the bend.

Reggie’s note: the last crisis has actually never left, so this is not the next one, just a continuation of the same. I called this exactly three years ago, in explicit detail (The Coming Pan-European Sovereign Debt Crisis – introduces the crisis and identified it as a pan-European problem, not a localized one)

It will take form as either the comeback of Bond vigilantes or as a political calamity, where some peripheral country finally votes for a party that is seriously proposing to forsake the Euro.

Reggie’s Note: The EU Has Rescued Greece From the Bond Vigilantes,,, April Fools!!!

Or… As I Warned Earlier, Latvian Government Collapses Exacerbating Financial Crisis

Some smart politician will certainly test the ECB’s resolve and do away with austerity and call their bluff. The consensus of the population can only be subjected to so much strain before it turns on itself and they vote for radical (read: costly) change. While the case can be made that the government bond-funding crisis has subdued, the economic pain of the general public has not.

Reggie’s note: Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?

The likeliest scenario is that both of these crises will play out at the same time, thus creating a Lehman-type crisis.

Faced with this crisis, only two options will present themselves:

  1. Massive sovereign debt defaults, bank runs and bankruptcies as many banks’ liabilities are larger than the GDP of the countries that are guaranteeing them – and a potentially resulting currency crisis

Reggie’s note: Ovebanked, Underfunded, and Overly Optimistic: The New Face of Sovereign Europe

 

Sovereign Risk Alpha: The Banks Are Bigger Than Many of the Sovereigns

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  1. A truly massive QE Program that not only bails out the banks and the existing governments debt and deficit, but also sponsors an enormous stimulus program for anything that can be thought of, e.g. infrastructure, education, green energy, etc.

Following scenario B, the challenge will be this: Why would the Germans and Fins want to debase their currency to send their monies elsewhere? The answer will be a mix of ‘candy and stick’, so to speak. The QE stimulus program will be structured upon some European formula – per capita or otherwise – that sends significant amounts of newly printed money to them too, while, in the alternative, if the Euro disintegrates, Germany will have to recapitalize the Bundasbank and resort to either massive stimuli or quantitative easing so to cheapen their currency and rescue their own economy. Those countries that leave the Euro will, nevertheless, default on any external bondholders, as they are restructured and recapitalized in the new currency, their banks will default as well. Why wouldn’t Germany be gracious and monetarily benevolent with funds they would lose either way? This would blend in with the fact that even the new Mark will be too expensive for their export-driven economy, and they would be pressed to cheapen it. They also won’t have destination countries to export to in Europe, as each country will turn to hyper-protectionism, safeguarding the jobs they have from disappearing in an effort to stabilize their home currency in order to avoid hyper inflation (Argentina, anyone?).

Reggie's Note: A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina - Now, referencing the bond price charts below as well as the spreadsheet data containing sovereign debt restructuring in Argentina, we get... Price of the bond that went under restructuring and was exchanged for the Par bond in 2005

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Price of the bond that went under restructuring and was exchanged for the Discount bond

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This turmoil will, obviously, generate widespread economic malaise as well. As a politician faced with this decision the answer is obvious. I can already picture the smiling politicians announcing their courageous decisions and courses of action, claiming that they have saved the Euro from certain demise while helping the people and creating new projects and job opportunities that will launch Europe into the future. It is possible that they will punish the instigator (Greece, presumably) and cut them out of the money party aka Lehman.

Is this feasible for Europe? I believe the answer is yes, as one significant minutia is overlooked. The Euro is way too high, even for Germany. This will become ever clearer as time clambers on. Europe can survive – even thrive – at 0.65 Euro to the dollar. I recall this precise scenario in Canada during the early 90s. The resulting inflation at the consumer level was much milder than expected, as taxes, services, rents, salaries and many consumer goods and products (including cars) are priced in the local currency. Of course, energy costs would rise. In Europe, though, lowering the high taxes on fuel can mitigate this. On the positive side, manufacturing and tourism in Canada flourished, generating a strong trade surplus (this was prior to the commodity boom). Europe can probably afford 6-8 trillion in QE over a 3-year period without hyperinflation, especially as this will be taking place while many other major currencies are orchestrating their own QE. If, as they do this, the peripherals restructure their own economies and bring down or solve their structural or primary deficits, the Euro may actually increase eventually, as they will have significantly lowered their debt to GDP ratios and positioned themselves on a financially sustainable path.

Reggie's note: This is code language for DEFAULT! The defaults will codify, quantify and solidify the capital destruction that we all know is there in the first place. I don't think the ride will be quite that easy. Greece has defaulted (exactly as I anticipated and clearly called) and is about to default again, and it's still f#@ked. For more on this, reference This Time Is Different As Icarus Blows Up & Burns The Birds Along The Way - Greece Is About To Default AGAIN! ... and then there's the contagion effect! Subscribers, see

All others, reference: 

 

    1. Financial Contagion vs. Economic Contagion: Does the Market Underestimate the Effects of the Latter?
    2. The Depression is Already Here for Some Members of Europe, and It Just Might Be Contagious!
    3. Introducing The BoomBustBlog Sovereign Contagion Model: Thus far, it has been right on the money for 5 months straight!
    4. With Europe’s First Real Test of Contagion Quarrantine Failing, BoomBustBloggers Should Doubt the Existence of a Vaccination

 

The sad reality, though, is that they will promise such changes and not deliver on their word.

Reggie's Note: WHAAAT???!!! You mean you can't trust the European oligarchs??? 

This will turn the crisis into only a short- to medium-term solution while eventually creating a fundamental currency crisis that will give way to no solutions.

Can the Euro handle that much QE? I believe the answer is yes. The ECB can forgive all the bonds they either own or collected as collateral for loans. Does anyone believe the principal on these loans will ever be paid down? The only stimulus from such a move will be the miniscule interest being saved.

Reggie's note: Moral hazard be damned, eh? What's to prevent other market participants from pushing to get a similar deal of borrowing money and not paying it back, expecting not to get punished. Massive forgiveness on this scale will fracture the market mechanism and destroy market pricing (as if it's not already wrecked as it is, does anybody really think core European bonds should yield what they do now?)

However, from a public confidence perspective, it would be huge, as it would drastically lower debt to GDP ratios.

Reggie's note: It will also bring about massively more stringent underwriting the next time around, effectively driving up rates anyway - you know, just as rates would have been driven up had the borrowers defaulted. Who in they're right mind would voluntarily make the same mistake twice in so short a period of time. As a reminder from my seminal link Greece Sneezes, The Euro Dies of Pneumonia! Yeah, Sounds Bombastic, Yet True!

Wait until a 2nd Greek default (virtually guaranteed as we supplied user downloadable models to see for yourself, the same model used to forecast the 1st default) mirrors history. Of the 181 yrs as a sovereign nation after gaining independence, Greece been in default 58 of them. Don't believe me! Check your history, or just read more BoomBustBlog - Sophisticated Ignorance Or Just A Very, Very Short Term Memory? Foolish Talk of German Bailouts Once Again...

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It is important to note that Europe will be faced with a stark choice: either deflate assets and wages or deflate the currency. And, since as discussed, the Euro needs a significant reduction anyway, why not milk it and bring it down through QE?  The crisis created by a country like Spain leaving the Euro will harm the Euro by much more than a giant QE would. There exists capacity for Europe to kick this one down a really long road and, with some discipline, actually solve it along the way.

Reggie's note: Possible, yes! Probable, Nah!!!

The challenge will be that, unlike the US, Europe has multiple players and can't turn on a dime. The crisis, when it comes, will be overwhelming, and will require solutions over a weekend or short bank holiday. Can so many politicians and central bankers on opposing sides of the language barrier figure out that their collective interests are far more in harmony than their differences? Prejudice, ego and vindictiveness – combined with an overly sensationalist media and so many involved players – stage the scene for things to easily get out of hand. If history is any guide, the answer is not very encouraging. However, Europe now shares a bureaucracy and central bank as well as a mostly shared corporate interest. So let's hope this time around is a bit different.

Reggie's note: I really liked this piece, and Mordechai is bright fellow. Of course I like it better with my commentary, which sort of... well.. Keeps it real!

In closing...

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Published in BoomBustBlog