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This is part two of a multi-part series on how I plan to profit from the impending Burst of the Education Bubble in the US.  If you are easily offended, mired in academia, closed minded, or simply bad at simple math and critical thinking, this is not the article for you. There, I've proffered fair warning ahead of time. Thus far, we've covered the precursor to the series,  How Inferior American Education Caused The Credit/Real Estate/Sovereign Debt Bubbles and Why It's Preventing True Recovery, and part 1 - How To Profit From The Impending Bursting Of The Education Bubble, pt 1 - A Bubble Bigger Than Subprime & More Dangerous Than Sovereign Debt!
I urge all to review those articles for the verbose nature of this topic lends to rampant cross referencing. 

A Basic Illustration Of How The Blind Pursuit Of A Debt Funded Diploma Can Lead To Personal & Intellectual Insolvency

In the previous installment of this series, I walked through the math that basically invalidates the pursuit of a 4 year degree for nearly everyone that needed to finance it through school loans at 6% or higher. The basis of this invalidation was the poor quality of the asset backing the loan, the degree itself. This installment will walk through the logic that dictates the quality of said asset, but before I delve into said diatribe, I want to illustrate for the non-finance types the relationship between assets and liabilities and the path to insolvency that ensues when you use debt to purchase inferior and/or depreciating assets - basically the crux behind the Asset securitization (subprime mortgage) and Pan-European sovereign debt crises.
In the article How Greece Killed Its Own Banks!, I illustrated the danger and folly of Greece forcing its banks to use leverage to purchase rapidly depreciating assets with fictitious (allegedly "risk free") value. 

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The same hypothetical leveraged positions expressed as a percentage gain or loss...

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Many do not think of their education as an actual investment, but if you put time (opportunity costs) and capital (actual tuition) into the pursuit of a diploma, it is a pure investment, plain and simple. As you can see from the charts above, the losses taken on investments that use leverage to purchase assets that depreciate in price can be severe. Yes, the student loan/education crisis has many similarities to the current maladies facing Greece and the EU. It is not just balance sheet insolvency I'm referring too, either. Greece has a severely impaired ability to service its debt which is why this purveyor of cash "know how" insisted that Greece would default 3 years ago as the "know that" community openly declared other wise: Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire! and The Ugly Truth About The Greek Situation That'sToo Difficult Broadcast Through Mainstream Media. As a matter of fact, I even went so far as to predict that Greece would default again before finishing defaulting the first time around, This Time Is Different As Icarus Blows Up & Burns The Birds Along The Way - Greece Is About To Default AGAIN! The reason why is the exact same malady that afflicts those who use leverage to pursue "knowledge that" (see term descriptions and definitions below).

Despite extensive, self-defeating, harsh and punitive austerity measures that have combined with a lack of true economic stimulus, Greece has (to date) failed to achieve Primary Balance. For the non-economists in the audience, primary balance is the elimination of a primary deficit, yet the absence of a primary surplus, ex. the midpoint between deficit and surplus before taking into consideration interest payments.

Greece_Primary_balance

The primary balance looks at the structural issues a country may have. Government expenditures have outstripped revenues ever since 2007 and have gotten worse nearly every year since, despite 3 bailouts a restructuring, austerity and a default!

Greece_Primary_deficit_copy

Part 1 of this series illustrated exactly how those who pursue levered "know that" can and likely will fall into the exact same structural insolvency by having their fixed expenses born from the pursuit of the diploma on a leveraged basis outstrip their income. Reference this excerpt from How To Profit From The Impending Bursting Of The Education Bubble, pt 1:

...assume a $40k per year tuition for a 4 year business management degree, purchased with money borrowed at 6% (from our dear government guaranteed lenders (SLM, et. al.), deferred for and average of 2 years. An oversimplified straight calculation puts you roughly $178,000 in debt upon graduation for a piece of paper that would fetch you roughly $43,000 per year. Reference ehow.com:

In July 2009, people who hold a bachelor's of science (BS) in business management averaged $39,551 during their first year of employment and $43,022 for the first one to four years. A professional with a BS in business management typically averaged $78,669 once they reached 20 years of employment.
Read more: Average Salaries for a Bachelor's Business Degree | eHow.com http://www.ehow.com/facts_5240719_average-salaries-bachelor_s-business-degree.html#ixzz2Gw6sriN5

Real wages have likely dropped since then, but even using the nominal assumptions above you would have been driven into the hole when factoring in real life expenses of:

  • Taxes: Yes, you'd have to subtract local, state and federal taxes from said monies... At roughly 35% (bound to go up after we finish this cliff nonsense), we're now talking $27,964 average over four years. That puts you in the hole to the tune of roughly $12,035 per year you spent on that degree.
  • Living expenses: Food, shelter (rent), clothing, transportation. In a NYC, even assuming the much less expensive outer boroughs,

Combined, we're talking roughly $3,000 per month or so, assuming you won't take in roommates. If you do, you can drop that figure to about $2,500 per month. Using the lower bound of this assumption, you are underwater (structural deficit) to the tune of about $2,000 per year. Please keep in mind that primary balance calculations and structural deficits don't take into consideration interest payments (for the sake of comparison). The underwater comment does not take into consideration the actual paying back of your loan yet, either. 

So, on the fifth year following your freshman orientation, assuming you studied well, you would have laid out $176,000 facing annual debt service of about $12,000 or so - offset by a net income stream of roughly $28,000 to cover roughly $30,000 of living expenses. The negative $2,000 per year cash flow would result in a chart that is very, very similar to the Greek charts featured above.

So, why do these numbers look so bad? Well, the answer to that question lies in the value of the asset that knowledge seekers encumber themselves to acquire. The levered purchase of depreciating assets or assets with fictitiously high values is bound to lead to insolvency. Enter... 

The Topic Of Knowledge

Knowledge is a familiarity with someone or something. That familiarity can include facts, information, descriptions, or skills acquired through education, which also includes experience. Knowledge refers to both the theoretical and practical understanding of a subject. Knowledge can be implicit (as with practical skill or expertise) or explicit (as with the theoretical understanding of a subject). I am here to sell implicit knowledge, better known to the old school as know how, or more formerly known as "Knowledge How"....

Knowledge that vs Knowledge How

In academia, the kind of knowledge usually proffered is propositional knowledge, more colloquially described as "knowledge that." "Knowledge that" or "know that" is distinct and should be discerned from "knowledge how" (know how). The best way to describe this concept is to use simple real life examples. In mathematics, it is commonly known that (hence knowledge that, or know that) 1 +1 = 2, but there is also knowing how to add the numbers one plus one together and understanding what their sum (two) is. 
In physics, we can take this concept even farther. It has been argued to by college age students of knowledge that (who are currently mired in academia) that a physics engineer cannot approach know how without being first well versed in know that. This is a mindset that is the result of today's modern academic group think.
This concept is also easily enough disproved by using a common example known to most of us, and that is riding a bicycle. The theoretical knowledge of the physics involved in maintaining a state of balance on a bicycle (knowledge that, or know that) cannot substitute for the practical knowledge of how to ride (knowledge how, or know how). The importance of understanding how to ride a bike is obvious, established and grounded - at least to those interested in bike riding. There is absolutely no prerequisite of having the theoretical knowledge of the physics involved in maintaining the state of balance of the bicycle to learn to ride the bicycle, nor to ride it proficiently, nor to pass this knowledge on to others. Thus, it is obvious and clear that an engineer does not need to be versed in "know that" to move on to "know how". Any failure to acknowledge the distinction between knowledge that and knowledge how can lead to vicious regresses.
 
 
In philosophy, an infinite regress in a series of propositions arises if the truth of proposition P1 requires the support of proposition P2, the truth of proposition P2 requires the support of proposition P3, ... , and the truth of proposition Pn-1 requires the support of proposition Pn and n approaches infinity. This is more commonly known as the circular argument, as explained in Greece Reports: "Circular Reasoning Works Because Circular Reasoning Works" - Or - Here Comes That Default!!!
 
A distinction must be made between infinite regresses that are truly "vicious" and those that are comparatively benign. A truly vicious regress is an attempt to solve a problem that by and large re-introduced the initial problem in the (or as the) proposed solution. Examples of this can be found in today's global Ponzi scheme of using more debt to solve the debt dilemma of Greece, thus the ease of my predicting serial re-default. This is not truly a practical (or doable) solution, and as one continues along these lines, the initial problem will recur infinitely and will never be solved. Not all regresses are vicious, however the truly circular argument is. This is the crux behind the article, "How Inferior American Education Caused The Credit/Real Estate/Sovereign Debt Bubbles and Why It's Preventing True Recovery" and the reason why the Pan-European sovereign debt crisis is nowhere near being solved (again reference  Greece Reports: "Circular Reasoning Works Because Circular Reasoning Works" - Or - Here Comes That Default!!!). Remember, failure to acknowledge the distinction between "know that" and "know how" leads to vicious regresses. With academia being a bastion of "know that" rooted in the rote memorization of facts and information bits, those well versed in know how can literally run circles around those immersed in said schools of thought once it comes to problems solving, value creation and getting things done (or undone) in the real world. 
 
It is the reason why the legion's of ivy league academics failed to foresee following while I clearly articulated the risks and consequences well beforehand: 
I have a rich history in seeing and benefiting from the things that the "know that" crowd cannot perceive. Reference Who is Reggie Middleton? for more about me.

What Is This Really About?

There is a very important and distinct difference between "knowing that" and "knowing how," with the crux of the distinction being the difference between this initiative and that vast swath of modern academia. "Know that" is a function of rote memorization of static information, passed down from the Prussian method of education implemented over 200 years ago and still common use today and "know how" is basically understanding of how to get things done...
"Know how" is what has separated the labor intensive low margin industries of the far east from the Intellectual Property rich industries found in the US, at least until now. After decades of toiling in an antiquated teaching system producing a legions of leveraged "know that" recipients who then seek "know how" in the work force (basically asking employers to pay to learn on the job what they should have learned from school) to pay off or compensate for hundreds of thousands of dollars of tuition bills and debt, the US is finally paying the piper for its lackadaisical approach to real education. Asian companies such as Samsung are actually outperforming their sterling US counterparts such as Apple in both product capability, product quality and even market share. In order to stem this tide, true "know[ledge] how" must become - once again - the aim, goal and accomplishment of the education system, similar to the apprenticeships of old.
 
The basis of doing things and solving real world problems by thinking through them and value creation (making things) by applying a real, true skill. Academia is primarily interested in the first, Reggie Middleton is deeply ensconced in the latter.
 
The next installment will focus on a sampling of individual schools that peddle and push leveraged "know that" to the masses, ranging from the gleaming ivy league towers to the workshop tutoring courses down the street. This pandering of leveraged "know that" is to the dismay of all who relied on the so-called scholars from said schools to actually know what they were talking about in predicting crises, managing assets and conducting policy through said crises, and coming up with solutions for the same. I have already laid my "know[ledge] how" track record for all to see (reference Who is Reggie Middleton?) and it would be interesting to perform an apples to apples comparison to those purveyors of "leveraged know that" to see if this blogger cum entrepreneurial investor is on to something or not. I don't possess a masters degree, not to mention one from the ivy league, yet I feel I have run circles around many, if not the vast majority of those that have. You can view the data and judge for yourself - Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best? It's not necessarily the raw intelligence, that has enabled this, but the ensconced approach to learning. 
 
I currently have my analysts working on explicit ROIs for degrees (both cash and levered) from the following schools: Harvard, Yale, Wharton, Princeton, NYU, Capella, University of Pheonix, DeVry, CUNY, SUNY with explicit comparisons to investing borrowed funds in the NASADAQ and S&P 500 over the same time period(s) and interning for free at various institutions who hire from said schools. This installment will also review the business models of said schools and the following installment will illustrate my answer to this mess.

In the mean time and in between time, subscribers can glean my view of one of the big private post secondary educators who is  having a problem with volatile earnings that are probably going to get worse.

file iconEducation Co. 1-3-2013

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What makes this truly ironic is that anyone who truly received a real business admin, management or finance education would be able to run these rudimentary calculations and thought processes themselves which would result in the invalidation of the actual degree to which they are seeking...

One of the most popular (although I feel not popular enough, considering the importance of the subject matter) articles of BoomBustBlog 2012 was my pieces on the near uselessness of the US education system - How Inferior American Education Caused The Credit/Real Estate/Sovereign Debt Bubbles and Why It's Preventing True Recovery. The accompanying graphic easily encapsulates a material portion of the piece, basically illustrating how the public school system serves as a mass indoctrination machine which has close to nothing in common with true education, knowledge dissemination, creativity or value creation. 

The post secondary and private school systems are simply continuations of the same, but worse yet, charge exorbitant fees for said injustice. Many poor victim either saves up a half lifetime of savings or worse yet goes into insolvency skirting debt to purchase a so-called education (which as described above is nothing of the sort) that is represented buy a piece of paper known as a diploma that is literally not worth the paper it is written on. 

For those who think that I'm exaggerating, assume a $40k per year tuition for a 4 year business management degree, purchased with money borrowed at 6% (from our dear government guaranteed lenders (SLM, et. al.), deferred for and average of 2 years. An oversimplified straight calculation puts you roughly $178,000 in debt upon graduation for a piece of paper that would fetch you roughly $43,000 per year. Reference ehow.com:

In July 2009, people who hold a bachelor's of science (BS) in business management averaged $39,551 during their first year of employment and $43,022 for the first one to four years. A professional with a BS in business management typically averaged $78,669 once they reached 20 years of employment.
Read more: Average Salaries for a Bachelor's Business Degree | eHow.com http://www.ehow.com/facts_5240719_average-salaries-bachelor_s-business-degree.html#ixzz2Gw6sriN5

If I'm not mistaken, wages have dropped on a inflation adjusted basis since then, but I digress. Using the figures above you would have just about broken even over an 8 year period, save a few common sense facts.

  • Taxes: Yes, you'd have to subtract local, state and federal taxes from said monies... At roughly 35% (bound to go up after we finish this cliff nonsense), we're now talking $27,964 average over four years. That puts you in the hole to the tune of roughly $12,035 per year you spent on that degree.
  • Debt service: Oh, yeah! Since you borrowed the money you'd probably would have to pay it back, but since you also have to work and pay rent (you can forget a mortgage at these income levels) you'd be paying back the minimum levels and scraping to do so. You'd better hope and pray you don't live in Manhattan or downtown Brooklyn too!
  • Oppurtunity costs: Yes, you could have used those four years and $176,000 to do something else maybe a tad bit more productive.

So, on the fifth year following your freshman orientation, assuming you studies well, you would have laid out $176,000 facing annual debt service of about $12,000 or so - offset by a net income stream of roughly $28,000. The $16,000 per year positive cash flow (assuming you didn't need food, shelter, clothing, transportation or anything else) would give you about 12 years or so to pay off the debt and break even. I'm not even goint to run the math on the ROI, so let's just pick something outrageously generous like 8% (remember, this is over a 16 year period).

To wit, let's compare some other basic investments  - that is assuming someone besides your school and your lender actually consider your academic mis-education an actual investment.

The NASDAQ composite returned 98% over the last for years. Dumping the money in the NAZ comp would have brought you close to doubling it - although you would not have had access to all of the funds at once for a lump sum investment, a roughly 50% gain looks likely. Now, you would have gained 4 years of simplistic (as in index watching) experience as compared to your competitor's fancy schmancy 4 year degree, yet you would had nearly a quarter million in cash, as well as roughly $70,000 in equity while he would have had $173,000 in debt, interest payments due immediately and the hope of finding a job with which his trusty diploma would surely help him, right? If you had a small financial business, who would you hire? The fool or the entrepreneurial investor???

Suppose you Interned for free with Apple, Google or Facebook while simply leaving the monies in the bank at .25% interest? You would have had a superior education and only been in the hole for $16,000, as well as having $160,000 in cash to play with. How about starting your own business? Invested in commercial real estae? Scalping Greek bonds post bailout? You see, there are so very few who compare getting a diploma or getting a loan for a diploma with other investments because they are brainwashed to believe this is the way to get ahead in life. It is not! It's the way to get educator entities and banks ahead in life, as you become a debt slave. 

What makes this truly ironic is that anyone who truly received a real business admin, management or finance education would be able to run these rudimentary calculations and thought processes themselves which would result in the invalidation of the actual degree to which they are seeking, alas... I digress...

Why the student loan bubble is worse than the subprime bubble 

Zerohedge has run an interesting series of the student loan bubble in the recent past, hence I will not rehash what has already been done in such exquisite detail. For those who have not been following, this is the case in a nutshell...

Student loan delinquencies break the 20% mark as total student debt tops a trillion dollars, rivaling and likely surpassing the subprime debt debacle.

This is how the Fed described this "anomaly": 

Outstanding student loan debt now stands at $956 billion, an increase of $42 billion since last quarter.  However, of the $42 billion, $23 billion is new debt while the remaining $19 billion is attributed to previously defaulted student loans that have been updated on credit reports this quarter. As a result, the percent of student loan balances 90+ days delinquent increased to 11 percent this quarter.

oh and this from footnote 2: 

As explained in a Liberty Street Economics blog post, these delinquency rates for student loans are likely to understate actual delinquency rates because almost half of these loans are currently in deferment, in grace periods or in forbearance and therefore temporarily not in the repayment cycle. This implies that among loans in the repayment cycle delinquency rates are roughly twice as high.

And more from ZH:Over $120B in student loans currently in default. For private private  institutions lead the way with a 22% default rate.

Today's public school system diploma, post secondary diploma, and for the most part, many if not most graduate degrees and PhDs are a waste of good ink and (relatively) valuable paper. This paper is quite similar to the MBS and sovereign debt paper which I have written so presciently and accurately on over the last 6 years (see Asset securitization crisis and Pan-European Sovereign Debt Crisis). The crises from these essentially depreciating assets stemmed from the piling of excessive debt on top of assets with fictional value. Trust me, I can see these things clearly, as can anyone who takes an objective view. When have we had instances similar to this Student Loan Bubble (or Stubble)? When I made a small fortune shorting...

I can go on for a while (particularly on RE and sovereign debt), but I feel you've got the point. The pattern is inevitable. There is a  true business opportunity here, for many college graduates couldn't earn their way out of a wet paper bag, and many of those that could are squandered by toiling away in a system of derivatives of derivatives based upon synthetic products (think of mortgage CDO cubed traders) which are merely shadows of social constructs, versus the inception, design, production and sales of real, value creating, tangible (as well as intangible) assets, products and services.

My next article on this topic will show how I am positioning myself and others to capitalize on this education bubble burst on both the short side and the long side. In the mean time and in between time, subscribers can glean my view of one of the big private post secondary educators who is  having a problem with volatile earnings that are probably going to get worse.

file iconEducation Co. 1-3-2013

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Here are the most popular articles on BoomBustBlog over the last 364 days as we close out the 2012 year. As those who have been reading my work and following for the last 6 years know, I tend to call out trends early relative to the the pop pundits and sell side analysts. Unfortunately, these days, relatively early means before markets collapse or companies utterly dominate their industries.  Without further adieu... 

The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You...

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Last January, while oil price shocks, Israeli military tensions and beef with Iran dominated the headlines, I turned my focus on the single most overrated economy in the developed world - Germany! While not poised for utter collapse like you know who, many portfolios, bank balance sheets, insurance company actuarial analyses, etc. assumed this country can bailout out its own profligate banks, insolvent peripheral EU countries, and itself as its economy enters recession surrounded by trading partners who also are re-entering a recession (which they truly never left). To say the least, somebody is likely to be proven to be severely mistaken.

 

How Inferior American Education Caused The Credit/Real Estate/Sovereign Debt Bubbles and Why It's Preventing True Recovery

This is a lengthy, highly provocative article illustrating in explicit detail my thoughts on how America's inferior education system made the Great Recession not only a foregone conclusion of indoctrinated GroupThink, but prevents a true recovery from recovery due to the abject fear of price clearing. You may need to put your thinking caps on and exercise some patience and restraint with this one. I am going to follow it up with an explicit example of said groupthink by going against the conventional grain (yet again) and pointing out what many in the mainstream consider to be the most likely threat to economic prosperity in 2012 (and no, Iran is not even in the running on this one). I blame indoctrinated GroupThink for the inability of Wall Street to see the excessive coniferous expanse due to tree bark blindness! Until the next post, though...

The Ugly Truth About The Greek Situation That's Too Difficult Broadcast Through Mainstream Media

A clear example of how simple math on a web-based spreadsheet unequivocally demonstrated that Greece HAD TO DEFAULT in 2012, and said default was arithmetically obvious as far back as 2010! 6th grade math, made easy (for everybody outside of the EC!).

 

Trading Physical Gold: Is Gold In A Bubble?

 

gbi-_gold_bullion_international

This is the 4th installment (of 5) of my interview of the CEO of GBI (Gold Bullion International), a small firm located on Wall Street that allows investors (retail & institutional) to actually buy, sell, trade and store physical gold in the investor's own name. The previous installments (listed below) feature some very tough questions. BoomBustBlog interviews are not pushovers or advertisements. You must be able to hold your own.

Bernanke's Lying Through His Teeth and Not A Single Pundit/Analyst/Banker Has Called Him On It!!!

As the Fed Chairman continues to bedazzle them with the Bullsh1t, I point out a multitude of nonsensical statements culminating with the obvious, another concerted bank bailout at the expense of Joe Sixpack. The video (published shortly after the story was penned) tells the story with pictures instead of prose...

Apple's iPad Is Losing Market Share And Profit Margin As Apple Hits All Time High

Oh, this one may not have been the most well-liked, but it was damn sure well viewed. I literally had thousands of comments knocking the analysis until it proved absolutely correct, then all that can be heard was crickets.... Let's not forget the follow-up posts a quarter or so later...

 Right On Time, My Prediction Of Apple Margin Compression 8 Quarters From My CNBC Warning Landed Right On The Money!

Deconstructing The Most Hated Trade Of The Decade, The 375% BoomBustBlog Apple Call!! 

... and going into detail with Deconstructing The Most Accurate Apple Analysis Ever Made - Share Price, Market Share, Strategy and All

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The Final Facebook Forensic IPO Analysis: the Good, the Bad & the Ugly

Illustrating the farce that was the most anticipated IPO in the history of the US equity markets, the Facebook story was told well in advance on BoomBustBlog, actually over a year in advance. I warned that this company's shares were drastically overpriced while it was still trading as a private company on websites over the Internet. Through all of the froth and broth brought out by the highest paid, high pressure salesmen in the world (sell side bankers), the stock IPO'd at $38, rose to forty something that day, then fell to just over $17, to settle at around $27 or so today. Here is the analysis, released in large part to the public.

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I recently recieved this email and thought it may spark conversation if I posted it to the general site.

I had some general finance questions about CA's massive debt. 

I read that CA issued 55 billion in new debt in the 10-11 year, I'm assuming much of this new debt are CABs (capital appreciation bonds) as CA can't really spend a dime more on any new debt as we're not paying our existing debt. 

Who is buying this "unserviced" debt and are they taking a 20-30 year "call bet" on the assets and collecting NO interest?  
Or are investors & funds booking "fictional interest gains" from CA's unpaid debt? (later to be written off)

If the "investors" of CA's CAB debt are getting interest, from whom are they getting the interest?

And do the payers of that interest get preference in claims over the bond holders?  
Other CA debt, CALPERS & the City of San Bernardino seem to be rewriting federal bankruptcy law avoiding the inevitable (default) I don't think bond holders will ever get their money back (except from their insurer LOL)
Water district debt, are you following the Central Basin Water district scene in LA County? 
Some cities made some uncompensated water withdraws (over $100,000,000.00 worth) from the "community water bank" unlike fiat currency banks water banks can't "cook the books", if you don't keep the water bank's "minimum funding standards" with real water (as opposed to certificates of water) the aquifer gets ruined with saltwater forever.
Now the aquifer is low, needs refilling, and the people that drained it are broke.

And on that note, from two and a half years ago as reported by the Wall Street Journal:

Stanford's Institute for Economic Policy Research released a study suggesting a more than $500 billion unfunded liability for California's three biggest pension funds—Calpers, Calstrs and the University of California Retirement System. The shortfall is about six times the size of this year's California state budget and seven times more than the outstanding voter-approved general obligations bonds. The pension funds responsible for the time bombs denounced the report. Calstrs CEO Jack Ehnes declared at a board meeting that "most people would give [this study] a letter grade of 'F' for quality" but "since it bears the brand of Stanford, it clearly ripples out there quite a bit." He called its assumptions "faulty," its research "shoddy" and its conclusions "political." Calpers chief Joseph Dear wrote in the San Francisco Chronicle that the study is "fundamentally flawed" because it "uses a controversial method that is out of step with governmental accounting standards."

Now let's take a closer look at that.

The Stanford study uses what's called a "risk-free" 4.14% discount rate, which is tied to 10-year Treasury bonds. The Financial Accounting Standards Board requirescorporate pensions to use a risk-free rate, but the Government Accounting Standards Board allows public pension funds to discount pension liabilities at their expected rate of return, which the pension funds determine. Calstrs assumes a rate of return of 8%, Calpers 7.75% and the UC fund 7.5%. But the CEO of the global investment management firm BlackRock Inc., Laurence Fink, says Calpers would be lucky to earn 6% on its portfolio. A 5% return is more realistic

Two years later... CalSTRS posts 1.8% return on investment:

West Sacramento-based California State Teachers’ Retirement System reported a low return rate of 1.8 percent on Friday. The public pension plan was considerably below its assumed rate of return of 7.5 percent for the fiscal year that ended June 30, according to CalSTRS. In comparison, it ended the 2010-2011 fiscal year with a 23.1 percent investment return.

The three-year return is 12.0 percent. CalSTRS CEO Jack Ehnes said in a statement. He said that investments alone can’t return the pension fund to solid footing, and that the government needs to enact a plan to increase contributions. Christopher Ailman, CalSTRS chief investment officer, said the slowing economy has hit long-term investors such as the public pension fund through instability in Europe and slowing global growth. CalSTRS predicts a 0.3 percent of return over five years, 6.5 percent over 10 years and 7.5 percent over 20 years.

Feel free to comment freely below.

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While perusing the news today, I came across this most interesting article in Bloomberg, Swaps ‘Armageddon’ Lingers as New Rules Concentrate Risk'. Before we delve into it, I want to review how vehemently I've sounded the alarm on this topic over the last 6 years. Let's start with So, When Does 3+5=4? When You Aggregate A Bunch Of Risky Banks & Then Pretend That You Didn't?, where I've aggregated my warnings into a single article. In a nutshell, 5 banks bear 96% of the global derivatives risk. The argument to defend such ass backwards risk concentration is "but it's mostly hedged, offset and netted out". Right! You know that old trader's saying about liquidity? It's always available, that is until you need it!

Even though I've made this point of netting = nonsense multiple times, I must admit, ZH did a more loquacious job, as follows:

..Wrong. The problem with bilateral netting is that it is based on one massively flawed assumption, namely that in an orderly collapse all derivative contracts will be honored by the issuing bank (in this case the company that has sold the protection, and which the buyer of protection hopes will offset the protection it in turn has sold). The best example of how the flaw behind bilateral netting almost destroyed the system is AIG: the insurance company was hours away from making trillions of derivative contracts worthless if it were to implode, leaving all those who had bought protection from the firm worthless, a contingency only Goldman hedged by buying protection on AIG. And while the argument can further be extended that in bankruptcy a perfectly netted bankrupt entity would make someone else who on claims they have written, this is not true, as the bankrupt estate will pursue 100 cent recovery on its claims even under Chapter 11, while claims the estate had written end up as General Unsecured Claims which as Lehman has demonstrated will collect 20 cents on the dollar if they are lucky.

The point of this detour being that if any of these four banks fails, the repercussions would be disastrous. And no, Frank Dodd's bank "resolution" provision would do absolutely nothing to prevent an epic systemic collapse. 

Hey, there ain't no concentration risk in US banks, and any blogger with two synapses to spark together should know this... From An Independent Look into JP Morgan.

Click graph to enlarge

 image001.pngimage001.pngimage001.pngimage001.png

Cute graphic above, eh? There is plenty of this in the public preview. When considering the staggering level of derivatives employed by JPM, it is frightening to even consider the fact that the quality of JPM's derivative exposure is even worse than Bear Stearns and Lehman‘s derivative portfolio just prior to their fall. Total net derivative exposure rated below BBB and below for JP Morgan currently stands at 35.4% while the same stood at 17.0% for Bear Stearns (February 2008) and 9.2% for Lehman (May 2008). We all know what happened to Bear Stearns and Lehman Brothers, don't we??? I warned all about Bear Stearns (Is this the Breaking of the Bear?: On Sunday, 27 January 2008) and Lehman ("Is Lehman really a lemming in disguise?": On February 20th, 2008) months before their collapse by taking a close, unbiased look at their balance sheet. Both of these companies were rated investment grade at the time, just like "you know who".

So, the Bloomberg article that got this rant started basically says that the risk is being shifted from the banks to clearing houses, who demand above board, translucent collateral for transactions. This should solve the problem, right? Hardly! You see, the Fed and US banking regulators have made it legal and acceptable for banks to outright lie about the qualit of their collateral and the condition of their finances. It all came to light with my research on Lehman (and Bear Stearns, amonst others). These mistakes are so repetitive of the ones made in the past, I literally do not have to right any new material, let's just re-read what was written several years ago:

Lehman Brothers and Its Regulators Deal the Ultimate Blow to Mark to Market Opponents

Let's get something straight right off the bat. We all know there is a certain level of fraud sleight of hand in the financial industry. I have called many banks insolvent in the past. Some have pooh-poohed these proclamations, while others have looked in wonder, saying "How the hell did he know that?"

The list above is a small, relevant sampling of at least dozens of similar calls. Trust me, dear reader, what some may see as divine premonition is nothing of the sort. It is definitely not a sign of superior ability, insider info, or heavenly intellect. I would love to consider myself a hyper-intellectual, but alas, it just ain't so and I'm not going to lie to you. The truth of the matter is I sniffed these incongruencies out because 2+2 never did equal 46, and it probably never will either. An objective look at each and every one of these situations shows that none of them added up. In each case, there was someone (or a lot of people) trying to get you to believe that 2=2=46.xxx. They justified it with theses that they alleged were too complicated for the average man to understand (and in business, if that is true, then it is probably just too complicated to work in the long run as well). They pronounced bold new eras, stating "This time is different", "There is a new math" (as if there was something wrong with the old math), etc. and so on and associated bullshit.

So, the question remains, why is it that a lowly blogger and small time individual investor with a skeleton staff of analysts can uncover systemic risks, frauds and insolvencies at a level that it appears the SEC hasn't even gleaned as of yet? Two words, "Regulatory Capture". You see, and as I reluctantly admitted, it is not that I am so smart, it is that the regulator's goals are not the same as mine. My efforts are designed to ferret out the truth for enlightenment, profit and gain. Regulators' goals are to serve a myriad constituency that does not necessarily have the individual tax payer at the top of the hierarchical pyramid. Before we go on, let me excerpt from a piece that I wrote on the topic at hand so we are all on the same page: How Regulatory Capture Turns Doo Doo Deadly.

You see, the banking industry lobbied the regulators to allow them to lie about the value and quality of their assets and liabilities and just like that, the banking problem was solved. Literally! At least from a equity market pricing and public disinformation campaign point of view...

A picture is worth a thousand words...

fasb_mark_to_market_chart.pngfasb_mark_to_market_chart.pngfasb_mark_to_market_chart.png

So, how does this play into today's big headlines in the alternative, grass roots media? Well, on the front page of the Huffington Post and ZeroHedge, we have a damning expose of Lehman Brothers (we told you this in the first quarter of 2008, though), detailing their use of REPO 105 financing to basically lie about their
liquidity positions and solvency. The most damning and most interesting tidbit lies within a more obscure ZeroHedge article that details findings from the recently released Lehman papers, though:

On September 11, JPMorgan executives met to discuss significant valuation problems with securities that Lehman had posted as collateral over the summer. JPMorgan concluded that the collateral was not worth nearly what Lehman had claimed it was worth, and decided to request an additional $5 billion in cash collateral from Lehman that day. The request was communicated in an executive?level phone call, and Lehman posted $5 billion in cash to JPMorgan by the afternoon of Friday, September 12. Around the same time, JPMorgan learned that a security known as Fenway, which Lehman had posted to JPMorgan at a stated value of $3 billion,was actually asset?backed commercial paper credit?enhanced by Lehman (that is, it was Lehman, rather than a third party, that effectively guaranteed principal and interest payments). JPMorgan concluded that Fenway was worth practically nothing as collateral.

Well, I'm sure many are saying that this couldn't happen in this day and age, post Lehman debacle, right? Well, it happened in 2007 with GGP and I called it -  The Commercial Real Estate Crash Cometh, and I know who is leading the way! As a matter of fact, we all know it happened many times throughout that period. Wait a minute, it's now nearly 2013, and lo and behold.... When A REIT Trading Over $15 A Share Is Shown To Have Nearly All Of Its Properties UNDERWATER!!!

Paid subscribers are welcome to download the corporate level valuation of PEI as well as all of the summary stats of our findings on its various properties. The spreadsheet can be found here - File Icon Results of Properties Analysis, Valuation of PEI with Lenders' Names. In putting a realistic valuation on PEI, we independently valued a sampling of 27 of its properties. We found that many if not most of those properties were actually underwater. Most of those that weren't underwater were mortgaged under a separate credit facility.   

PEI Underwater  Overly Encumbered Properties

What are the chances that the properties, whole loans and MBS being pledged by PEI's creditors are being pledged at par? Back to the future, it's the same old thing all over again. Like those banks, PEI is trading higher with its public equity despite the fact that its private equity values are clearly underwater - all part of the perks of not having to truly mark assets to market prices.  

 From Bloomberg: Swaps ‘Armageddon’ Lingers as New Rules Concentrate Risk

Clearinghouses cut risk by collecting collateral at the start of each transaction, monitoring daily price moves and making traders put up more cash as losses occur. Traders have to deal through clearing members, typically the biggest banks and brokerages. Unlike privately traded derivatives, prices for cleared trades are set every day and publicly disclosed.

And what happens when everybody lies about said prices? Is PEI's debt really looking any better than GGP's debt of 2007?

GGP Leverage Summary 2007

Properties with negative equity and leverage >80% 32
Properties with leverage >80% 44
% of properties with negative equity (based on CFAT after debt service) 72.7%

PEI Summary 2012

PEI Underwater  Overly Encumbered Properties

Both of these companies have debt that have been pledged by banks as collateral. Would you trust either of them? The banks then use the collateral to do other deals leading to more bubbles. What's next up in bubble land? I warned of it in 2009...

Check this out, from "On Morgan Stanley's Latest Quarterly Earnings - More Than Meets the Eye???" Monday, 24 May 2010:

Those who don't subscribe should reference my warnings of the concentration and reliance on FICC revenues (foreign exchange, currencies, and fixed income trading).  Morgan Stanley's exposure to this as well as what I have illustrated in full detail via the  the Pan-European Sovereign Debt Crisis series, has increased materially. As excerpted from "The Next Step in the Bank Implosion Cycle???":

The amount of bubbliciousness, overvaluation and risk in the market is outrageous, particularly considering the fact that we haven't even come close to deflating the bubble from earlier this year and last year! Even more alarming is some of the largest banks in the world, and some of the most respected (and disrespected) banks are heavily leveraged into this trade one way or the other. The alleged swap hedges that these guys allegedly have will be put to the test, and put to the test relatively soon. As I have alleged in previous posts (As the markets climb on top of one big, incestuous pool of concentrated risk... ), you cannot truly hedge multi-billion risks in a closed circle of only 4 counterparties, all of whom are in the same businesses taking the same risks.

Click to expand!

bank_ficc_derivative_trading.pngbank_ficc_derivative_trading.png

So, How are Banks Entangled in the Mother of All Carry Trades?

Trading revenues for U.S Commercial banks have witnessed robust growth since 4Q08 on back of higher (although of late declining) bid-ask spreads and fewer write-downs on investment portfolios. According to the Office of the Comptroller of the Currency, commercial banks' reported trading revenues rose to a record $5.2 bn in 2Q09, which is extreme (to say the least) compared to $1.6 bn in 2Q08 and average of $802 mn in past 8 quarters.

bank_trading_revenue.pngbank_trading_revenue.png

High dependency on Forex and interest rate contracts

Continued growth in trading revenues on back of growth in overall derivative contracts, (especially for interest rate and foreign exchange contracts) has raised doubt on the sustainability of revenues over hear at the BoomBustBlog analyst lab. According to the Office of the Comptroller of the Currency, notional amount of derivatives contracts of U.S Commercial banks grew at a CAGR of 20.5% to $203 trillion by 2Q-09 from $87.9 trillion in 2004 with interest rate contracts and foreign exchange contracts comprising a substantial 84.5% and 7.5% of total notional value of derivatives, respectively. Interest rate contracts have grown at a CAGR of 20.1% to $171.9 trillion between 4Q-04 to 2Q-09 while Forex contracts have grown at a CAGR of 13.4% to $15.2 trillion between 4Q-04 to 2Q-09.

In terms of absolute dollar exposure, JP Morgan has the largest exposure towards both Interest rate and Forex contracts with notional value of interest rate contracts at $64.6 trillion and Forex contracts at $6.2 trillion exposing itself to volatile changes in both interest rates and currency movements (non-subscribers should reference An Independent Look into JP Morgan, while subscribers should referenceFile Icon JPM Report (Subscription-only) Final - Professional, and File Icon JPM Forensic Report (Subscription-only) Final- Retail). However, Goldman Sachs with interest rate contracts to total assets at 318.x and Forex contracts to total assets at 11.2x has the largest relative exposure (see Goldman Sachs Q2 2009 Pre-announcement opinion Goldman Sachs Q2 2009 Pre-announcement opinion 2009-07-13 00:08:57 920.92 Kb,  Goldman Sachs Stress Test ProfessionalGoldman Sachs Stress Test Professional 2009-04-20 10:06:45 4.04 MbGoldman Sachs Stress Test Retail Goldman Sachs Stress Test Retail 2009-04-20 10:08:06 720.25 Kb,). As subscribers can see from the afore-linked analysis, Goldman is trading at an extreme premium from a risk adjusted book value perspective.

bank_forex_exposure.pngbank_forex_exposure.png


Back to the Bloomberg article:

Disaster Scenario

The need for a Fed rescue isn’t out of the question, said Satyajit Das, a former Citicorp and Merrill Lynch & Co. executive who has written books on derivatives. Das sketched a scenario where a large trader fails to make a margin call. This kindles rumors that a bank handling the trader’s transactions -- a clearing member -- is short on cash.

Remaining clients rush to pull their trading accounts and cash, forcing the lender into bankruptcy. Questions begin to swirl about whether the remaining clearing members can absorb billions in losses, spurring more runs.

“Bank customers panic, and they start to withdraw money,” he said. “The amount of money needed starts to become problematic. None of this is quantifiable in advance.” The collateral put up by traders and default fund sizes are calculated using data that might not hold up, he said.

The collateral varies by product and clearinghouse. At CME, the collateral or “margin” for a 10-year interest-rate swap ranges between 2.89 percent and 4.06 percent of the trade’s notional value, according to Morgan Stanley. At LCH, it’s 3.2 percent to 3.41 percent, the bank said in a November note.

How Much?

The number typically is based on “value-at-risk,” and is calculated to cover the losses a trader might suffer with a 99 percent level of confidence. That means the biggest losses might not be fully covered.

It’s a formula like the one JPMorgan used and botched earlier this year in the so-called London Whale episode, when it miscalculated how much risk its chief investment office was taking and lost at least $6.2 billion on credit-default swaps. Clearinghouses may fall into a similar trap in their margin calculations, the University of Houston’s Pirrong wrote in a research paper in May 2011.

“Levels of margin that appear prudent in normal times may become severely insufficient during periods of market stress,” wrote Pirrong, whose paper was commissioned by an industry trade group.


Oh, but wait a minute? Didn't I clearly outline such a scenario in 2010 for French banks overlevered on Greek and Italian Debt (currently trading at a fractiono of par)? See The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs!

The problem then is the same as the European problem now, leveraging up to buy assets that have dropped precipitously in value and then lying about it until you cannot lie anymore. You see, the lies work on everybody but your counterparties - who actually want to see cash!

 

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!

image006image006

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. The risk of a capital haircut for European banks with exposure to sovereign debt of fiscally challenged nations is inevitable.

You see, the risk is all about velocity and confidence. If the market moves gradually, the clearing house system is ok. If it moves violently and all participants move for cash at the same time against bogus collateral... BOOMMMM!!!!!!!

Back to the Bloomberg article...

Stress Levels

What’s more, clearinghouses can’t use their entire hoard of collateral to extinguish a crisis because it’s not a general emergency fund. The sum represents cash posted by investors to cover their own trades and can’t be used to cover defaults of other people.

Clearinghouses can turn to default funds to cover the collapse of the two largest banks or securities firms with which they do business. They have the power to assess the remaining solvent members for billions more, enough to cover the demise of their third- and fourth-largest members.

But wait a minute, the other members are only solvent because they have hedges against the insolvency of the insolvent members. If those hedges fail, then the so-called solvent members are insolvent too! Or did nobody else think of that?

After all, this circular reasoning worked out very well for Greece, didn't it? See Greece's Circular Reasoning Challenge Moves From BoomBustBlog to the Mainstream...

 

 


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Isn't it amazing that you can get more notoriety for showing your ass and a pretty smile than you can get for outing the scam of the decade through intellectual analysis? More money was lost through the Facebook scam IPO at $38 than Bernie Madoff could ever have pulled off. Notice that Bernie went to jail for his relative pennies, while the bankers selling and snake oil in the form of overpriced Facebook shares got paid record bonuses on the back of taxpayer bailouts!!!Often times people can see a blatant fact, a seemingly undeniable truth, and totally ignore it as if it doesn't exist. In the US, the Wall Street banks are masters of this marketing derived form of prestidigitation. Wall Street banks pay humongous bonuses (from your tax dollars) based on the dispensing of bogus advice, despite the fact that it can be proven beyond a shadow of a doubt that there are many other entities that have advised better, considerably more accurately and have done so consistently (Did Reggie Middleton, a Blogger at BoomBustBlog, Best Wall Streets Best of the Best?). Go figure...

Media celebrities are also adept at garnering significant mind share, although it's a bit more understandable why this is so. Some are beautiful, some sound good, others act well on stage - basically, they are capable of doing more than simply muppetizing clients (Goldman Sachs Executive Director Corroborates Reggie Middleton's Stance: Business Model Designed To Walk Over Clients). This article looks to counter that magic that allows those who consistently under perform to continuously be looked upon as masters of the universe, while those who have performed consistently are thought of as "alternative" or "fringe", simply because they don't garner the mindshare of the sexy celebrity or the "Masters of the Intellectual Universe Investment Bank". Well, there's a new sheriff in town! Here comes that new, "Intellectual Celebrity". One should consider me the Kim Khardashian of global finance and investment. Instead of big ass and a pretty face, I offer a massively analytical perspective, a damn near offensive intellectual honesty and an unyielding penchant for spitting the facts that few want to hear. So, it's not Jay-Z! It's Reg-G!. Here we go...

Reggie_Middleton_hunting_the_Squid_Known_As_Goldman_Sachs_GSThere's a new celebrity in town. He sports acute intellectual capacity instead of ass, is much more aggressive and aims to make the masses aware, despite who he may offend. Yes, I know... It may take some getting used to!

This article is segmented, and those who have followed me can skip my history with Facebook valuation vs the Wall Street banks and move forward to the Google+ Communities vs Facebook Groups comparison...

How the Facebook story got started...

Facebook started its institutional investment life as a very popular, very well known company. Goldman took this story (private) stock and went bananas with it, as meticulously illustrated in the following blog posts:

  1. Facebook Registers The WHOLE WORLD! Or At Least They Would Have To In Order To Justify Goldman’s Pricing: Here’s What $2 Billion Or So Worth Of Goldman HNW Clients Probably Wish They Read This Time Last Week!
  2. Facebook Becomes One Of The Most Highly Valued Media Companies In The World Thanks To Goldman, & Its Still Private!
  3. Here’s A Look At What The Goldman FaceBook Fund Will Look Like As It Ignores The SEC & Peddles Private Shares To The Public Without Full Disclosure
  4. The Anatomy Of The Record Bonus Pool As The Foregone Conclusion: We Plug The Numbers From Goldman’s Facebook Fund Marketing Brochure Into Our Models
  5. Did Goldman Just Rip Its HNW and Institutional Clients Once Again? Facebook Growth Slows Pre-IPO, Just As We Warned!

I issued private research to my subscribers while publicly warning that Facebook at, or anywhere near, its IPO price was a blatant bald faced SCAM & RIPOFF!!!

  1. The World's First Phenomenally Forensic Facebook Analysis - This Is What You Need Before You Invest, Pt 1
  2. The Final Facebook Forensic IPO Analysis: the Good, the Bad & the Ugly

As the actual IPO arrived, JP Morgan, Morgan Stanley, Goldman Sachs, etc. piled on the Bullshit, basically espousing how great an investment this was at $38, screaming that this was a once in a lifetime opportunity. Basically, they took the opposite stance of yours truly. And how did that worked out??? BoomBustBlog Challenges Face Ripping Facebook Share Peddlers That Left Muppets Faceless And Nearly 50% Poorer After IPO.

The stock debuted at $38, went up to about $44 that day, then hasn't seen the high or IPO price since, dropping to $17 or so and now trading around $27 on additional analyst upgrades (because the Muppets didn't get bent over hard enough the first time around).

All should still be aware of the primary factor in this "growth company" stock's story....

image002

These facts should not have been a surprise, and blog subscribers were made aware nearly a 2 years ago, as excerpted from our 2nd most recent forensic analysis.

 

FB IPO Analysis  Valuation Note Page 04

I want to focus on the Google+ effect mentioned in the research page above. JC Kendall of SocialMedia Today posed the question "Google+ Communities: The Last Nail In The Facebook Coffin?". Basically, he ponders whether or not the release of the Google's recent answer to Facebook's Groups product will drive Facebook the way of MySpace. I will excerpt the parts pertinent to this discussion, but I urge you to visit the full article and also keep in mind that Mr. Kendall is a socail media professional, hence may have a different perspective than that of the casual user. Here's some very interesting highlights of what he had to say:

  • Back in March of 2012, Facebook reported that on average only 16% of Facebook Brand Page posts were read on average by the fans of those pages.  For all the money spent on Facebook advertisements, they resulted in a CRT (click-through-rate) of 0.051%.
  • In May of 2012, Facebook began allowing business to “Promote their Posts” after killing off the previous “Reach Generator”, a program that GUARANTEED at launch that it would reach 75% of Facebook users that had liked a Brand Page, but only produced an average of 16% reach. 
  • In June 2012, fed up with what he concluded as Facebook blocking his ability to reach his huge audience of Facebook fans, George Takei of [Lieutenant Sulu] Star Trek fame contacted Facebook about his concerns, and was told “buy more promoted posts.”  Takei watched his reach dwindle while the number of his posts remained the same, and decided it was due to EdgeRank, the Facebook algorithm that determines who gets to see a user’s updates. ....Facebook determines who sees users posts, not the users and you get to pay for this!   In June, George Takei established a profile on Google+, where 100% of his messages would be available to his friends at zero cost.  
  • {In} Google+, all posts, no matter how large the audience, are free of charge to 100% of your followers. 

When I talk to businesses about why, in the face of such dismal advertising returns, they are still concentrating their Social Media efforts on Facebook, the answer is the same, about 90% of the time:  Facebook Groups.  

Google+ Communities is less than a week old, and its growing like a weed!

  • ... all those things you did from your Facebook Groups to develop a relevant and interested audience for your business, could be done easier, smarter, more effectively, and free of charge? Google+ Communities, because of the added services available to Google+ Users and integration with all the other benefits of the Google infrastructure, simply blows Facebook Groups out of the water. 
  • ...Here is the kicker:  All of the content from a Public Google+ Community is indexed, and discoverable through Search on both Google and Google+. This is something that Public Google+ Community Moderators need to consider when creating their destinations.
  • ... to maintain a level of real privacy, there are two options for Private Communities as well. Private Communities can be restricted to its invited members only, but remaining discoverable by search.  Or, a fully private Community can be created, similar to a private YouTube channel, where it can be found only by knowing the specific URL of the Community. 
  • Any organization can create a Google+ Community that is open and available to anyone without an invitation necessary.  To get the word out, all the moderator needs to do on Google, is share their Community to the Public Stream, which will inform not only 100% their circled followers,  but the announcement is now part of the worldwide Google Index, and available through a keyword search, along with the content of every post, every image, every video. 
  • Contrast this with Facebook, where after a Facebook Group is created, the moderator now has to determine whether or not they wish to pay.  The price is determined by the number of Facebook friends who might see it, in order to reach 100% of their audience.  Consider that this is true not only to announce the Group, but the organization must also pay for EVERY update (promoted post) they make during the lifecycle of the Group’s initiative. For any Business or Organization with their eyes on the bottom line, the choice is clear. You can spend your  budget on managing and performing your daily activities from a Google+ Community,  with its various ways to allow users to either see you or find you, or you can devote a chunk of your resources to paying Facebook for the right to let all of your friends know what you are doing, with no guarantee of a decent CTR result. 
  • If I were a decision maker for an organization migrating from Facebook to Google+,  I may pay to send a single promoted post to my Facebook friends and followers, to let them know that my charity drive now and for the future can be found  now be found on Google+.  But, if my Facebook friends have any problem finding my Community Based Charitable initiative, not to worry, because they can (duh) GOOGLE IT. 
  • It is not as though someone cannot be a member of both Google+ and Facebook at the same time, so why would an Organization of any kind, pay more for much less on Facebook?  In addition, the SEO (search engine optimization) advantages of Google+ Communities cannot be overstated, along with the Google Authorship potential for preventing fraudulent association or duplication with your Google+ Community.

Google Hangout is a group video conferencing and video broadcast platform within Google+. It's very handy for multi-media publishing and has no match anywhere near its price - of free!

  • Google+ Hangouts can be scheduled by event and run from within a Google+ Community, with Hangout invitations sent to all members automatically.  Members of communities do not have to be within their community to share comments and information; they can post directly to their Communities from their public streams. 
  • On Google+, users can share files from Google drive both inside and outside their Google+ Communities. Users can both link to and distribute documents of all kinds, and even HOST A WEB SITE from their Google Drive with JavaScript support built in.  Pow! 
  • Suppose two (or up to ten) persons within a Google+ Community share an interest and want to speak RIGHT NOW to each other? They have the option of starting a video Hangout together, or should one of the two not have a web cam, use Google’s Voice services to place a free international call to the other person from within the hangout itself!  Did I mention FREE, and no limit to amount of usage?
  • Google, with the introduction of Google+ communities, has essentially matched or surpassed every level of functionality available on Facebook for a Business to develop its brand, and attract a growing number of followers to its audience. The additional features of SEO, Authority, and Trust associated with a Google+ presence is a difficult thing to pass up, and I predict that the steady stream of Businesses building a Brand Presence on Google+ will soon, with the addition of Google+ Communities will soon become a flood. 

  • Because Facebook has no public search engine, all content is confined within its forums. Facebook will not be able anytime soon to emulate what Google has done with SEO, Authorship or even Hangouts.  You see, the video performance of Hangouts cannot be duplicated without an associated fiber-network between datacenters like those Google has built. 
  • Google+ users connect through this network, away from all of the latency adding routers, switches, repeaters that connect together the rest of the internet. Creating desktop video conferencing for up to 10, or (15 users with a paid Google Apps account) is basically impossible given today’s video compression standards.  Google has promised HD Hangouts in the not too distant future.  I would expect to see those first along Google’s Fiber rollout for users in Kansas City, MO. 

Whew! That's a lot of info to digest. I apologize for excerpting so much of JC's content, but he had so much of relevance to contribute I had to. This is not all of it, by a long shot, so I again urge you to read the original SocialMedia Today article. The obvious question is, "Does he actually make a valid point?" BoomBustBloggers as well as FB and Google investors really need to know. Even though Facebook Does The Reverse Gravity Thing, Defies Logic, I still had to quip  - Hey Muppets, Only Another 100% Climb In Share Price To Go Before You Break Even With MS/GS/FB Investment Advice. Let's turn to my site's stats to reveal some actual facts and stats.

 image017

As you can see from the chart above, the social network to beat for actual site referrals is Twitter. I believe that is due in large part to the nature of my site (financial analysis, which has a penchant towards real time information seekers). It is also due in part to a social media push that I have started, in which Twitter has the richest 3rd party publishing tools - something that I feel the other participants in the chart have erred in not directing significant resources. Time will tell if I'm correct.

Google search has always been a large contributor to site traffic, and when combined with Google Plus and Google.com referrals, is still number one despite the aggregate social media push. Google has integrated Google Plus into practically all of it properties, which makes the use of almost any Google product an indirect use of Google Plus. A wise move, one that (at least at this time) benefits the end user, and a move that significantly disadvantages its competitors - primarily Facebook! My Facebook account has been active for a couple of years, yet I just started a Facebook Company page last year, and it has been mostly inactive. I recently started adding content to it, along with a Google Plus page and LinkedIn Page (used to be active, then I stopped adding content and recently started again). Twitter has been active for about a year. At this point all of the major social media platforms get the same content posted simultaneously, and you can see the results. The content is formatted for Twitter, which may give Twitter an edge in this comparison.

What makes this comparison even more interesting is the fact that Google Plus is less than a year old while all of the other competitors are several years old. That makes Google Plus's competitiveness and growth appear outstanding. It is a true, clear, and credible threat to Facebook (as well as the others, and that's without considering the tech advancements) and I feel that FB investors are hardly giving this the attentition that it deserves. Google is out-Facebooking Facebook at an incredibly alarming rate!

 image019

The site stats mirror my description of the newness of my social media push. The new visits come mostly from my push onto new social media platforms. Of interest is the fact that Google Plus has a very high bounce rate, which denotes a lower quality of traffic, but the small amount of sample data being used is not conclusive. In addition, since the content is being formatted for Twitter's short form input rules, it fails to take full advantage of Facebook's and Google Plus's rich media capabilities. I will experiment with this theory by hosting a Google Plus Hangout Group Video session on my Facebook and Google research and opinion to see if this materially changes the stats. I believe it will, for the interaction in the content that I've posted on Google Plus, when there is interaction, is much greater than the other platforms - Twitter included!

 image016

The pages per visit metric is another measure of the quality of traffic. Here you see the Google search properties reign supreme, primarily because that traffic is pushed onto my site (the people are actively looking for me) as opposed to being pulled onto the site (I'm pushing content to them to entice them to come in). By effectively combining search with social media (which Google is doing) Google can convert Plus into a push versus pull scenario. Now for the most important point: Google Plus has just been launched, and it is now just launching new aspects of the platform. All of these platform aspects from Google are absolutely free. If you factor in the cost of paid advertising on LinkedIn, Twitter, or Facebook and cost per page visit, Google Plus shoots way up to the top. WAAAAYYYYYYY UPPPP!!!! Try ti for yourself. Divide the cost of advertising on these platforms plus the cost of content creation and management by the net visitor or engagment session or purchase (or however you measure success) and you will find Google Plus to end up at the top of the list - and that is despite its highly nascent state! Imagine what happens once Google actually gets the ball rolling!!!

This is going to be a problem for all of those social media sites whose business models are predicated on ad revenue. How can you charge for something when your competitor gives the same thing away (arguably on a better platform) for free? This is the question of doom that proved to be the death of the classifieds industry, soon the news industry as we know it, and the smartphone OS industry (ask RIMM if I know what I'm taking about BoomBustBlog Research Performs a RIM Job!, or even Apple Deconstructing The Most Hated Trade Of The Decade, The w 375% BoomBustBlog Apple Call!! and Deconstructing The Most Accurate Apple Analysis Ever Made - Share Price, Market Share, Strategy and All).

Google is able to disintermediate these industries through a process known as cost shifting - basically offering a competitors cash cow product for free to the end user by shifting the cost of making and delivering said product to a natural producer who must incur said costs anyway, thereby totaly disrupting the business models and crushing the margins of the established status quo. With the newness of Facebook et. al., it may be hard for old timers to consider them status quo, but in Internet Time, Facebook is old school and faces disintermediation through cost shifting if they don't figure something out, and figure it out fast! 

Here I break down Google Cost Shifting on the Max Keiser (who, after being broadcast on China TV, may very well be the most seen independent newscaster in the world) Show

So, why aren't you hearing this from those big Wall Street banks that were clamoring to sell you those Facebook shares at $38?

Well, I've Told You Before, And I'll Tell You Again - Goldman Sachs Investment Advice Sucks!!! I thought everyone would be asking the question Is It Now Common Knowledge ThatGoldman's Investment Advice Sucks?, but since they aren't I'm here to fan the flames. The reason why you don't here this from those banks is because their business model is predicated upon your ignorance. Independent investors and analysts (say BoomBustBlog) are to the extant, big Wall Street bank as Google Plus is to Facebook, a source of pending disintermediation and margin compression. As excerpted from BoomBustBlog Challenges Face Ripping Facebook Share Peddlers That Left Muppets Faceless And Nearly 50% Poorer After IPO:

I made it clear that those who lost roughly half of their capital at or near the IPO price simply forfeited those funds from not reading BoomBustBlog, and this situation was virtually guaranteed. I felt so strongly about it that I made much of my opinion available for free this time.

Here's where I broke it down on Capital Account

I also happened to do the same on the Max Kesier show...

I discussed Facebook on the Peter Schiff radio show, the Facebook excerpt is below...

Additional Facebook analysis, valuation and commentary.

On Max Keiser, go to the 13:55 marker for more on Facebook...

Double your money by shorting the Street's advice! Once Again!

Here is a full year of free blog posts and paid research material warning that ANYBODY following the lead of Goldman, Morgan Stanley and JP Morgan on the Facebook offering would get their Face(book)s RIPPED!!! Could you imagine me on a reality TV show based on this stuff??? Well, it's coming...

  1. Facebook Registers The WHOLE WORLD! Or At Least They Would Have To In Order To Justify Goldman’s Pricing: Here’s What $2 Billion Or So Worth Of Goldman HNW Clients Probably Wish They Read This Time Last Week!
  2. Facebook Becomes One Of The Most Highly Valued Media Companies In The World Thanks To Goldman, & Its Still Private!
  3. Here’s A Look At What The Goldman FaceBook Fund Will Look Like As It Ignores The SEC & Peddles Private Shares To The Public Without Full Disclosure
  4. The Anatomy Of The Record Bonus Pool As The Foregone Conclusion: We Plug The Numbers From Goldman’s Facebook Fund Marketing Brochure Into Our Models
  5. Did Goldman Just Rip Its HNW and Institutional Clients Once Again? Facebook Growth Slows Pre-IPO, Just As We Warned!
  6. The World's First Phenomenally Forensic Facebook Analysis - This Is What You Need Before You Invest, Pt 1
  7. The Final Facebook Forensic IPO Analysis: the Good, the Bad & the Ugly
  8. On Top Of The 2x-10x Return Had Off Of BoomBustBlog Facebook Research, Our Models Show How Much More Is Available...
  9. Is Time For Facebook Investors To Literally Face the Book (Value)?
  10. Facebook Bubble Blowing Justification Exercises Commence Today
  11. Facebook Options Are Now Trading, Or At Least The PUTS Are!
  12. Reggie Middleton breaks down "Muppetology," Face Ripping IPO's, and the Chinese Wall!
  13. Facebooking The Chinese Wall: How A Blog Has Outperformed Wall Street For 5 Yrs
  14. Why Shouldn't Practitioners Of Muppetology Get Swallowed In A Facebook IPO Class Action Suit?
  15. Shorting Federal Facebook Notes Are Not Allowed Today ?
  16. As I Promised Last Year, Facebook Is Being Proven To Be Overhyped and Overpriced!

It would seem that Facebook Finally Faces The Fact Of BoomBustBlog AnalysisProfessional and institutional BoomBustBlog subscribers have access to a simplified unlocked version of the valuation model used for this report, available for immediate download - Facebook Valuation Model 08Feb2012. I just nominally input some very generous numbers and the best case scenario chart (see the chart tab after your own individual inputs) is quite revealing, indeed! The full forensic opinion is available to all subscribers here FaceBook IPO & Valuation Note Update, and the latest iteration can be found here FB IPO Analysis & Valuation Note - update with per share valuation 05/21/2012. It is recommended that subscribers (click here to subscribe) also review the original analyses (file iconFB note final 01/11/2011).

 

Industry Leading, Subscription Based Google Research

All paying subscribers should download the Google Q1-2012 Valuation Summary, wherein we have updated the valuation numbers for Google using a variety of metrics. Click here to subscribe or upgrade

Google still exhibits the likelihood that they will control mobile computing for the balance of the decade.

Subscription research:

file iconGoogle Final Report 10/08/2010

A couple of bits from our archives...


There are currently 7 Google reports available. Select the "Google Final Report" and click the "Download" button. You will receive a 63 page analysis that looks like this on the cover...

The table of contents outlines how we have broken Google down into distinct businesses and identified both the individual business models and the potential revenue streams, as well as  valuation for each business line.

Page 57 of the analysis shows a sensitivity table which outlines the various scenarios that can come into play and how it will change our outlook and valuation opinion.

Professional/institutional subscribers can actually access a subset of the model that we used to create the sensitivity analysis above to plug in their own assumptions in case they somehow disagree with our assumptions or view points. Click here for the model: Google Valuation Model (pro and institutional). Click here to subscribe or upgrade.

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Lenine Imperialisme stade supreme du capitalismeMonday, I posted As Promised, Greece Guts Naive Investors Once Again… (a must read for those who don't know my extensive history on this topic), and received some very interesting if somewhat unbelievable feedback from the muppets among my readers (for those not versed in Muppets and muppetology, see Goldman Sachs Executive Director Corroborates Reggie Middleton's Stance: Business Model Designed To Rip Off Clients). As hard as it is to believe, there are actually still those who are of the mindset that the events of recent past were somehow solely or at least primarily market driven. Not trying to be facetious, or anything of the sort, but you muppets need to get a grip on reality. I'm going to reintroduce BoomBustBlog research from earlier in the year in three distinct topical sections, all in an attempt to expand the consciousness of the muppets amongst us. Professional and Institutional BoomBustBlog subscribers who don't want the brief in socio-economic theory and history can download our file iconGreek debt restructuring & maturity extension model and just get busy. Everyone else should continue on....

New Age Imperialism = Economic Colonization

As far back as 1920, Lenin explained what is happening to Greece (and likely soon Italy, Portgual, Spain and Ireland), and did so in exquisite detail may I add - as I excerpt from from Wikipedia's Imperialism, the Highest Stage of Capitalism:

In order for capitalism to generate greater profits than the home market can yield, the merging of banks and industrial cartels produces finance capitalism — the exportation and investment of capital to countries with underdeveloped economies. In turn, such financial behaviour leads to the division of the world among monopolist business companies and the great powers. Moreover, in the course of colonizing undeveloped countries, Business and Government eventually will engage in geopolitical conflict over the economic exploitation of large portions of the geographic world and its populaces. Therefore, imperialism is the highest (advanced) stage of capitalism, requiring monopolies (of labour and natural-resource exploitation) and the exportation of finance capital (rather than goods) to sustain colonialism, which is an integral function of said economic model.[3][4] Furthermore, in the capitalist homeland, the super-profits yielded by the colonial exploitation of a people and their economy, permit businessmen to bribe native politicians — labour leaders and the labour aristocracy (upper stratum of the working class) — to politically thwart worker revolt (labour strike); hence, the new proletariat, the exploited workers in the Third World colonies of the European powers, would become the revolutionary vanguard for deposing the global capitalist system.

Imperialism, the Highest Stage of Capitalism (1917), by Lenin, describes the function of financial capital in generating profits from imperial colonialism, as the final stage of capitalist development to ensure greater profits. The essay is a synthesis of Lenin’s modifications and developments of economic theories that Karl Marx formulated in Das Kapital (1867).[1]

the highest stage of capitalism, represents the stage at which a country's consumers cannot buy all the products that have been produced, and additional markets must be sought after. The dominant feature of imperialism is the repatriation of invested capital.

Cecil Rhodes and the Cape-Cairo railway project. Rhodes founded the De Beers Mining Company, owned the British South Africa Companyand had his name given to what became the state of Rhodesia. He liked to "paint the map British red" and declared: "all of these stars ... these vast worlds that remain out of reach. If I could, I would annex other planets."[4]

For those of you who don't see the connection yet, let's peruse some sample output from file iconGreek debt restructuring & maturity extension model :

So When It Comes To The Indebted, When Does 2 Euro + 24 Euro = Less Than 2 Euro, or You Can't Solve Insolvency By Piling On More Debt!

The first section of the graphic below shows Greece's funding requirement from the open market after it implements 65% haircuts across the board of its debt and reduces coupon rates in half by substituting existing debt with new debt as a Zero Coupon Bond Roll-up with 20 yr amortization. As you can see, such a plan (if it were doable) puts the country on relatively stable footing. Of course, if it were to do so the markets would extract their pound of flesh in terms of markedly higher coupon rates, which Greece presumably would not be able to afford (presumably). So, what do TPTB do? They push/offer 240B euros of bailout aid in the form of debt - debt that has to be serviced at some time in the short to medium term future since it is understood that Greece will not be able to get this funding from the market (is it understood, or presumed?). This debt is a multiple of what Greece can afford to service. It is a multiple of the debt that it has now, and this is not considering its condition after the still ongoing and draconian austerity measures forced upon it - thus cutting its GDP and revenue generating capability nearly in half (or so-ish).

Looking at the graph below, without adjusting for the austerity effect, Greece is considerably worse off after the bailout package, then before.

 BoomBustBlog Greek Debt Model sustainabilty

When observed over time, all this bailout and default/haricuts/restructuring buys Greece (in terms of time) is one year. In 2014, it's time to pay the piper and default once again as it begs for more bailouts with the overly stringent austerity price tag...

BoomBustBlog Greek Debt Model sustainabilty alt chart  

Now, who is lending this money that can easily be seen with a simple spreadsheet to be IMPOSSIBLE to pay back? It's the Troika, that's who. But these ivory tower beings who reign above us mere bloggers and investors from NYC must have supreme knowledge in the fact that they are assisting the unwashed, profligate masses, right????

Who Are These New Age Imperialists? The New Economic Colonizers Of The Globe???? 

Faithful BoomBustBlog readers should remember the empirical rant, How the US Has Perfected the Use of Economic Imperialism Through the European Union!, wherein the following was preached:

... the Euro members’ loan will be pari passu with existing sovereign debt i.e. it will not be considered senior. Although there is no written, hard evidence to support this claim, it is our view that otherwise there will be no incentive for investors to hold the debt of troubled countries like Greece, which will ultimately defeat the whole purpose of the rescue package. Moreover, there are indications that support this idea. As per Dutch Finance Minister Jan Kees de Jager, “We are not talking about a special preference for the eurogroup loans, that’s not possible because then you would have the situation that already-existing rights of creditors at the moment would be harmed.” (reference http://www.businessweek.com/news/2010-04-16/netherlands-excludes-senior-status-for-greek-aid-update1-.html). Of course, if more investors did their homework and ran the numbers, that same disincentive can be said to exist with the IMF's super senior preference given the event of a default and recoverable collateral after the IMF has fed at the trough.

The ramifications:

IMF’s preferred creditor status coupled with the expensive Euro members’ loans which are part of the rescue package can create a public debt snowball effect that could push the troubled countries towards insolvency when the IMF debt becomes repayable in three years time.

If you look at the output from our BoomBustBlog model, that event is clearly illustrated and articulated using simple (not complex) addition and subtraction (and some minor bond math).

This could be seen particularly in case of Greece (subscribers, please reference Greece Public Finances Projections). Even if all the spending cuts and revenue raising are achieved as planned for Greece, its debt will peak to 149.1% of the GDP in 2013. Please keep in mind that these numbers are based on what we perceived (as does simple math) to be pie in the sky optimism.

Being that this article is well over a year old, that pie in the sky optimism proved to be just that as we now Greek debt to GDP will break 200%!!!

I urge all readers to reference Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!.

image005.png

Notice how dramatically off the market the IMF has been, skewered HEAVILY to the optimistic side. Now, notice how aggressively the IMF has downwardly revsied their forecasts to still end up widlly optimistic.

 image018.png

Ever since the beginning of this crisis, IMF estimates of government balance have been just as bad…

image013.png

Many of my readers have inquired as to why the IMF has been so inaccurate in their estimates throughout the crisis. I doubt very seriously that it is a case of ineptitude. If one were to be a skeptic, and realize that the IMF charges stringent rates and can (and does) usurp the hierarchy of the claims upon assets upon its entrance, then one can clearly see a motivation in undershooting certain estimates. I am not saying that this is the case, but I would be remiss in failing to broach the topic. Remember, this is not your typical mainstream media publication, It's BoomBustBlog, and nothing is off limits.

IMF Economic Forecasts (%) 2010 2011 2012 2013 2014
Economic Growth 04 -2.6 1.1 2.1 2.1
Debt as % of GDP 133.3 145.1 148.6 149.1 144.3
Budget Deficit 8.1 7.6 6.5 4.9 3

The year 2013, with a IMF-proclaimed debt ratio of a tad under 150%, is the time when Greece will have to refinance the debt to pay the IMF (remember the charts above that show how optimistic the IMF has been historically). However, since the current debt raised by Greece is at fairly high rates, new debt will only be available at much higher rates (as markets should price-in the risk of high debt rollover) unless there is some saving grace of a drastic plunge in world wide interest rates and a concomitant plunge in the risk profile of Greece. At a 150% debt ratio, historically low artificially suppressed global interest rates that have nowhere to go but higher and prospective junk ratings from the US rating agencies, we don' t see this happening. Thus, the cost of borrowing for in 2013 is likely to be much higher in the market than the nearly five percent for the existing debt. Greece will either be unable to fund itself in the markets at all, and will have to convince the Euro Members and the IMF to extend the three-year lending facility just announced (reference What We Know About the Pan European Bailout Thus Far) or, it will get the debt refinanced at very high rates. In both cases the total debt as a percentage of GDP will continue to rise, and this is not a sustainable scenario over the longer-term. In addition, if it accepts the EU/IMF package and there is an event of default or restructuring, the IMF will force a haircut upon the private and public debtors beyond what would have normally been the case. This essentially devalues the debt upon the involvement of the IMF, a scenario that we believe many sovereign bondholders (particularly Greek, Spanish and Irish) may not have taken into consideration. This also leaves the possibility of a significant need for many banks to revalue their sovereign debt - particularly Greek sovereign debt - holdings.

As illustrated above, there is a higher probability for a Greek sovereign debt restructuring in 2013, which will definitely not hurt IMF (since it has a preferred right) but the Euro Members and other investors who will be holding the Greek debt.

So, now that we know who loses, who actually benefits?

image021

Members' quotas and voting power, and Board of Governors

Major decisions require an 85% supermajority.[19] The United States has always been the only country able to block a supermajority on its own.[20]

Table showing the top 20 member countries in terms of voting power (2,220,817 votes in total):[21]

IMF member country↓Quota: millions of SDRs↓Quota: percentage of total↓Governor↓Alternate Governor↓Votes: number↓Votes: percentage of total↓
United StatesUnited States 37149.3 17.09 Timothy F. Geithner Ben Bernanke 371743 16.74
JapanJapan 13312.8 6.12 Naoto Kan Masaaki Shirakawa 133378 6.01
GermanyGermany 13008.2 5.98 Axel A. Weber Wolfgang Schäuble 130332 5.87
United KingdomUnited Kingdom 10738.5 4.94 Alistair Darling Mervyn King 107635 4.85
FranceFrance 10738.5 4.94 Christine Lagarde Christian Noyer 107635 4.85
People's Republic of ChinaChina 8090.1 3.72 Zhou Xiaochuan Hu Xiaolian 81151 3.66

And there you have it. An encapsulated lesson on global imperialism (or how the US in now colonizing Europe, unlike the first time around during those pre-Boston tea party days). Is this or is this not an interesting way to introduce the concept of Greek bond defaults???

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Last week I warned if readers were tired of hearing me say "I told you so", they should ignore the topic of Greece, and a month ago I warned "As The Year Comes An End The Ability Of Greece To Kick The Can Mirrors The Chances Of A Man With No Feet". Eleven months ago, I publicly displayed the relatively simple mechanics behind a SERIAL Greek default (that's right, multiple bacl to back defaults), both on CNBC and on my blog... This situation will simply get worse, considerably worse, before it get better. I demonstrated in the post The Ugly Truth About The Greek Situation That's Too Difficult Broadcast Through Mainstream Media that anyone who purchased the last set of bailout bonds from Greece will simply lose their money as well (that's right, just like those who purchased the previous set) since Greece is still running deep in structural problems and can't afford the interest nor the principal on its borrowing. It's really that simple. The aforementioned link has an embeeded spreadsheet that walks you throught the scenario as well as my opinion on CNBC.

February 11, 2012, S&P at 1358, (roughly where it is right now on Dec. 3rd)

Yes, it's that easy to see coming - yet..... Here we are after a bond swap and a default, and a stern warning from BoomBustBlog that any who bought the new bonds in the bond swap would be facing redefault in less than three years and we have the following from Bloomberg: Greece Makes $13 Billion Buyback Offer as Merkel Floats Writeoffs

Greece offered 10 billion euros ($13 billion) to buy back bonds issued earlier this year as the bailed-out nation attempts to cut a debt load that may threaten future international aid.

Greek bonds rallied after the so-called modified Dutch auction was announced today by the Athens-based Public Debt Management Agency. PDMA offered an average maximum purchase price for the bonds maturing from 2023 to 2042 of 34.1 percent, based on information in the statement. The offer runs until 5 p.m. London time on Dec. 7.

Success of the buyback is crucial to releasing aid that’s been frozen since June. The offer was part of a package of measures approved by euro-area finance ministers last week to cut the nation’s debt to 124 percent of gross domestic product in 2020 from a projected 190 percent in 2014.

... The bid to ease Greece’s debt curden underscores a move away from austerity-first measures European leaders have embraced since the financial crisis began in 2009.

Because, even the most dense Eurocrat is now realizing that now matter how much you subtract something from zero, you will still get a negative number... Duhh!!!

German Chancellor Angela Merkel yesterday opened the possibility that Germany may ultimately accept a write-off of Greek debt, previously a taboo in the biggest contributor to euro bailouts.

Because the Germans have no choice but to come to grips with the fact that they are holding a bunch of zero paper (that's zero value, not zero coupon), and sooner or later they'll have to pay the piper.

Greek bonds rose for a third day, pushing the 10-year yield below 15 percent for the first time since the nation’s debt was restructured in March. The yield on the 2 percent securities maturing in February 2023 fell 151 basis points, or 1.51 percentage points, to 14.63 percent at 9:45 a.m. London time, leaving the price at 39.31 percent of face value. 

... Investors who join the buyback will receive payment in six- month bills from the European Financial Stability Facility, the Greek debt agency said.

Oh, they will get paid in that new funny munny paper that was just downgraded itself - EFSF, European Stability Mechanism Ratings Cut by Moody's, after it was downgraded before that - S&P downgrades European bailout fund. Keep in mind that these downgrades are from entities that are playing with kid gloves because, contrary to popular belief, they fear the EU states retribution - reference EU Allowing Rating Agencies To Be Sued For Errors Should Backfire Spectacularly - Cause Massive Downgrades Across The Continent!

The International Monetary Fund set the 2020 debt-cut target as a condition for continuing to fund a third of Greece’s bailout program. IMF Managing Director Christine Lagarde said after the euro-area finance ministers’ meeting that the fund will examine the results of the buyback before deciding whether to approve disbursement of additional aid.

The buyback accounts for 11 percentage points, or more than half of the 20 percentage points of the planned drop.

Yeah, right!!! Like the IMF has any idea what the hell its doing. Once again, as a reminder to the not-so-distant financially historically challenged, I bring you Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse!:

Let's take a visual perusal of what I am talking about, focusing on those sovereign nations that I have covered thus far.

image005.pngimage005.pngimage005.png

Notice how dramatically off the market the IMF has been, skewered HEAVILY to the optimistic side. Now, notice how aggressively the IMF has downwardly revsied their forecasts to still end up widlly optimistic. image018.pngimage018.pngimage018.png

Ever since the beginning of this crisis, IMF estimates of government balance have been just as bad...

image013.pngimage013.pngimage013.png

The EU/EC has proven to be no better, and if anything is arguably worse!

image031.png

 While Greece has gotten pledges for 240 billion euros of aid, the funds have been blocked since June as the government tries to get its bailout program back on track after it was disrupted by two elections and a deepening recession.

 Check this out - "the government tries to get its bailout program back on track after it was disrupted by two elections". That damn democracy bullshit. Get's in the way of debt slavery a bit too much more my taste, eh??? 

Then there's " as the government tries to get its bailout program back on track after it was disrupted by... a deepening recession." Well, my friends, the recession would not be deepening so as much if the χώρα που δεν εξαναγκάζονται σε χρέος που προκαλείται από την υποτέλεια στο όνομα της λιτότητας! You can guess what that says if you don't read Greek!

Keep in mind that this is after the Greeks said they didn't have any problems (Greek Crisis Is Over, Region Safe”, Prodi Says – I say Liar, Liar, Pants on Fire!), after I Explicitly Forewarned, Greece Is Well On Its Way To Default, and Previously Published Numbers Were Waaaayyy Too Optimistic!, after an actual default and after a full restructuring. Said restructuing was actually guaranteed to produce another default, as clearly articulated and illustrated in  Beware The Overly Optimistic Greek Speculators As Icarus Comes Crashing Down To Earth! - to wit:

By the 2nd quarter of 2010 I clearly and articulately detailed exactly how Greece would default with specific structures in play- What is the Most Likely Scenario in the Greek Debt Fiasco? Restructuring Via Extension of Maturity Dates. Due to a few institutions who were skeptical, I attempted to make it a bit more real - A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina.

Well, Greece defaulted according to plan, despite all of the "people in the know" saying otherwise -  - from government officials to the EC and IMF - Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! Even after the default, I made clear that this wasn't over for Greece, for the default actually left Greece worse off fundamentally, not better. Go wonder... I know I did, reference the warning from 5 months ago:

This will be exacerbated by a re-default of the Greek debt that was designed to bail out the defaulted Greek debt. Why will this happen? Greece has severe, rigid structural problems that simply cannot (and will not) be solved by throwing indebted liquidity at it. As a matter of fact, the additional debt simply exacerbates the problem - significantly! This was detailed in the post Beware The Overly Optimistic Greek Speculators As Icarus Comes Crashing Down To Earth!

..Subscribers can download my full thoughts on Greece's sustainability post bailout here - debt restructuring_maturity extension blog - March 2012. Professional and institutional subscribers should feel free to email me in order to receive a copy of the Greek restructuring model used to create these charts and come to these conclusions.

    • Even with the elimination of interest payments Greece will spiral downward.
    • Even with the near total absolution of its debt, as in a 90% haircut of the most recent bonds issued (which were swapped for bonds of which investors took an effective 74% haircut), Greece will spiral downward.
    • That is the likely reason why these newest bonds back by EU/IMF bailout economic capital are already trading 70 points below par and rated CCC.
    • These bonds are almost definitely slated for a 90%+ haircut by 2016

Ponder the excerpts from the news clips above as you keep these two charts in mind, the same charts that I've posted at least twice in the last 45 days. A picture is worth a thousand drachma...

Greece_Primary_balanceGreece_Primary_balanceGreece_Primary_balance

The primary balance looks at the structural issues a country may have.

Government expenditures have outstripped revenues ever since 2007 and have gotten worse nearly every year since, despite 3 bailouts a restructuring, austerity and a default!

Greece_Primary_deficit_copy

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Reggie_VPRO_Ratings_agenciesReuters reports that the EU now has made it easier to sue the ratings agencies for errors they have made, as excerpted:

Michel Barnier, the European commissioner in charge of regulation who helped broker a deal on the new law, said it aimed to reduce the over-reliance on ratings and establish a civil liability regime.

The new rules should make it easier to sue the agencies if they are judged to have made errors when, for example, ranking the creditworthiness of debt.

The agencies came under fire for giving top-notch AAA credit scores to debt that later unravelled and they provoked more criticism by downgrading countries at sensitive moments of the crisis.

The EU PTB need to make up their collective minds. If the agencies are to correct the (purposeful) errors made in giving entities AAA ratings that didn’t deserve them, then those very same entities will (and should’ve) been downgraded at sensitive moments in the crisis. This is the kicker, and the statement really should make the EU officials regret they did this, as well as bring back true returns on fundamental analysis realistic market pricing:

The EU's executive said that the new rules ensured that a rating agency could be held liable in cases of negligence or intent that damaged an investor.

You see, if you can really sue the agencies for being wrong, slow or negligent, then the Pan-European Sovereign Debt Crisis is a civil litigators 30 year capitalized Christmas present come true (even if they are Jewish). Let’s look at how this would have played out with the Greek debt and banks which should have traded as junk nearly 3 years ago as foretold by BoomBustBlog:

  1. Lies, Damn Lies, and Sovereign Truths: Why the Euro is Destined to Collapse! It was clear all were too optimistic regarding the Greek situation.
  2. Moody’s Follows Suit Behind Our Analysis and Downgrades 4 Greek Banks Moody's downgrades after the fact, and after investor losses are taken - LAWSUITS???!!!
  3. As I Explicitly Forwarned, Greece Is Well On Its Way To Default, and Previously Published Numbers Were Waaaayyy Too Optimistic! Greece's default was a foregone conclusion easil seen on BoomBustBlog, yet the agencies didn't reflect this in ratings. LAWSUITS???!!!
  4. A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina Greece's bond restructuring would have had to have been extreme (as in damn near no recovery) to have had a chance of being effective. Did the agencies tell us this? LAWSUITS???!!!!
  5. This Time Is Different As Icarus Blows Up & Burns Greece's redefault was clearly visible before they even competed their first default. This was not reflected in agencies' opinions, analysis or reporting. LAWSUITS anyone???!!!

Greece's primary balance went long term negative in 2004, save the bubble levitated year of 2006...

Greece_Primary_balanceGreece_Primary_balanceGreece_Primary_balance

The primary balance looks at the structural issues a country may have.

Government expenditures have outstripped revenues ever since 2007 and have gotten worse nearly every year since, despite 3 bailouts a restructuring, austerity and a default! Simple addition and subtraction shows that there's no way in hell Greece can service its debt, defautled debt, or even its redefaulted debt or the round of debt after that. 

Greece_Primary_deficit_copyGreece_Primary_deficit_copyGreece_Primary_deficit_copy

We don't have to dwell in the past to prove this point either. Why hasn't Italy been dramatically downgraded? It's a wonder they finally got around to downgrading France (The Beginning Of The Great French Unwind…), after all of the evidence that I put forth - reference Italy Woes Lead To French Lows. Believe It… Let's stay on topic, about Italy? The 10 page BoomBustBlog report (subscribers, download the full report here File Icon Italy public finances projection, click here to subscribe) excerpted below is approaching 3 years old and it clearly outlined the tumult that is today's Italy and did so well in advance. My analytical staff is small in than Moody's stamp licking staff, yet somehow they fail to warn what I unequivocally cautioned on years ago. What was it did that EU official proclaim? Oh yeah... 

"The EU's executive said that the new rules ensured that a rating agency could be held liable in cases of negligence or intent that damaged an investor."

 Italy public finances projections Page 01Italy public finances projections Page 02Italy public finances projections Page 03

Subscribers (click here to subscribe) can dig in the archives for this still highly relevant and profitable Italy research:

File Icon Italy Exposure Producing Bank Risk
File Icon Italian Banking Macro-Fundamental Discussion Note

icon Sovereign Contagion Model - Retail (961.43 kB 2010-05-04 12:32:46)

File Icon Sovereign Contagion Model - Pro & Institutional

Tell me, why do you have to hear this from me versus the rating agencies? Here's the reason...

What Is More Valuable, The Opinion Of A Major Rating Agency Or The Opinion Of A Blog? Go Ahead, I DARE You To Answer!

There are many areas where ratings agenceis still are not putting enough pressure, a few of which have been pointed out at the blog:

For those who haven't seen this documentary on the rating agencies by VPRO, it is more than worth your time...

Reggie_VPRO_Ratings_agenciesReggie_VPRO_Ratings_agencies

Continuing my rant on the effectiveness (not) of the ratings agencies, I bring to you an interesting documentary on the rating agencies' effect on the sovereign debt crisis in Europe, produced by VPRO Tegenlicht out of Amsterdam. You can see the full video here, but only about half of it is in English. I appear in the following spots: 4:00, 22:30, 40:00...

Reggie Middleton Discussing the Rating Agencies effect on Sovereign Europe

 

 

 

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Wednesday, 28 November 2012 05:49

Italy Woes Lead To French Lows. Believe It!

As a quick reminder, we're still looking out for the Great French Unwind, for it will start as The Pandemic Bank Flu Spread From Italy To France To ... You see, as I see it, the duopoly of those controlling the EU purse strings is far from invulnerable. As a matter of fact, from many perspectives, they have the farthest to fall. All you need to do is sit back and wait... Wait for the time when The Duopolistic Owners Of The EU Printing Presses Disagree On The Color Of The Ink! That's when the stinky brown stuff spatters from the fan blades. France will likely be the first to crack, with Italy as impetus, then recessionary Germany will stand alone, no? Not! For those hopium smoking Eurocrats who feel that Germany still will pull out of this unscathed, I reference the riddle: The Biggest Threat To The 2012 Economy Is??? Not What Wall Street Is Telling You...

I know all of this can get confusing, but it was easily foreseen back in 2010, and we've built a contagion model that helps track possible paths of mayhem. Of course, it's difficult to predict when things will go down or the precise route, but the how is really rather obvious. On with the concept of obvious, as stated many times in BoomBustBlog, French banks, hence the bank bailing socialist French government, is highly levered into Italy and Italian debt, among other porcine based fixed income instruments...

image008

Subscribers can reference French Bank Observations & Focus on...(519.21 kB 2012-06-28 08:36:37).  Part and parcel to this common sense update is recognition of the fact that Italy will bust French banks, causing France to do the socialist bailout thingy. See this chart from the report...

French bank Italian exposure

This exposure leaves France quite sensitive to Italian woes, considerably more so than your typical rating agency may lead you to believe even when downgrading France from AAA status - albeit it a year or so too late (Moody's Actions Add Pressure To The Inevitable In France?). Today, we see the MSM outlet CNBC espousing the obvious regarding Italy: Will Italy Need a Bailout in 2013? As you read this, remember they are essentially talking about France as 2nd derivative:

“We still see as our baseline scenario that Italy will likely be forced to ask for an international bailout at some point in 2013,” said Citi Analyst Giada Giani in a report on the country.

“Italian economic fundamentals have not really improved, despite some improvement in market conditions. The negative feedbacks from fiscal austerity on growth have been severe, as the ability of the private sector to absorb fiscal tightening by lowering its saving rate is limited.”

Economists at other banks and research institutions agreed that Italy’s recession will be deeper than financial markets are currently pricing in.

“The composition of austerity so far — skewed towards increases in taxation rather than cuts in expenditure — and the tight credit conditions, will weigh very negatively on the economy and the market will have to take stock of it,” said Nomura Economist Silvio Peruzzo.

“Weaker growth will have implications for fiscal plans and debt sustainability and could trigger a return of tensions.”

Mark Willis, an economist at Roubini Global Economics, said market focus on Greece’s and Spain’s economic woes had distracted investors from the structural weaknesses inherent in both Italy’s economy, and its political system.

He added that Italy suffered from three “core vulnerabilities” of weak growth, very high levels of public debt and regular bouts of political instability, the latter of which is likely to reappear in the build-up to the spring 2013 general election.

Italian woes lead to French Lows. Believe it! Subscribers are recommended to review the document icon Italy Exposure Producing Bank Risk (788.3 kB 2012-11-28 06:00:45)

As stated in the seminal pieces, The Anatomy Of A European Bank Run: Look At The Banking Situation BEFORE The Run Occurs! and The Fuel Behind Institutional “Runs on the Bank” Burns Through Europe, Lehman-Style!Bank runs are inevitable! 

Excerpted from our professional series File Icon Bank Run Liquidity Candidate Forensic Opinion:

BNP_Paribus_First_Thoughts_4_Page_01BNP_Paribus_First_Thoughts_4_Page_01BNP_Paribus_First_Thoughts_4_Page_01

This is how that document started off. Even if we were to disregard BNP's most serious liquidity and ALM mismatch issues, we still need to address the topic above. Now, if you were to employ the free BNP bank run models that I made available in the post "The BoomBustBlog BNP Paribas "Run On The Bank" Model Available for Download"" (click the link to download your own copy of the bank run model, whether your a simple BoomBustBlog follower or a paid subscriber) you would know that the odds are that BNP's bond portfolio would probably take a much bigger hit than that conservatively quoted above.  Here I demonstrated what more realistic numbers would look like in said model... image008image008image008

Yes, European bank runs are inevitable, but the causes of the bank runs are not. That's the problem. Instead of addressing the root causes of the bank runs, EU decision makers opt to throw more paper money into a gaping furnace to be burned as fast as it can be shoveled. 

Since the problems have not been cured, they're literally guaranteed to come back and bite ass. Guaranteed! So, as suggested earlier on, download your appropriate BoomBustBlog BNP Paribas "Run On The Bank" Models (they range from free up to institutional), read the balance of this article for perspective, then populate the assumptions and inputs with what you feel is realistic. I'm sure you will come up with conclusions similar to ours. Below is sample output from the professional level model (BNP Exposures - Professional Subscriber Download Version) that simulates the bank run that the news clippings below appear to be describing in detail...(Click to enlarge to printer quality)

image014

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