Thursday, May 16, 2019

BABA:...an "Earnings Call" without discussing "Earnings"

Today's call was a truly historic moment in the evolution of alleged global financial fraud, both perpetrated by the CPC on US investors and fully supported, through their absurd "analyst" questions, by our industry experts: JP Morgan, Morgan Stanley, Goldman, Merrill, Bank of America, Barclays, Citi, HSBC, RBC Capital, Deutsche Bank, etc.  Here are the materials:

Webcast:
https://edge.media-server.com/m6/p/8zqz2d4o
Presentation:
https://www.alibabagroup.com/en/ir/presentations/pre190515.pdf
Press Release:
https://www.alibabagroup.com/en/news/press_pdf/p190515.pdf
Filing:
https://www.sec.gov/Archives/edgar/data/1577552/000110465919029738/a19-10031_1ex99d1.htm


Alibaba management (Joe, Daniel, Maggie and Robert) and their "analysts" spent much of the hour collectively congratulating themselves on the greatness of their fake 51% revenue growth and their unverifiable, fake, GMV, which has now ballooned to US$853 Billion.  This "ecosystem" GMV, due to these phenomenal, dubious growth rates, is now roughly the same size as the Global GMV of both Amazon ($277 Billion) and Walmart ($625 Billion including estimated Third Party GMV) combined.  Alibaba GMV has increased roughly ten fold since 2012.  They are on pace to Reach $1 Trillion by next year.  Alibaba's GMV sold, according to management, has quickly grown to roughly the same as Switzerland's GDP, with about the same level of opacity.  Miraculous.....perhaps even unbelievable, to say the least.

I don't want to belabor the absurdity of the analyst discussion by repeating the irrelevant, odd, focus-less Q&A (feel free to listen to it on your own if you have the stomach for it.)  To illustrate the madness, it would be easier to discuss what was NOT covered in the presentation....so...here goes:

The Appropriate Earnings Call Questions, which I might expect a real analyst to ask, are highlighted in RED below.

What the "Analysts" didn't ask about....

1.) First, Joe gave a 10 minute dissertation, on the "elephant in the room".  When I first heard that I thought "Finally...Joe is gong to come clean and admit that Alibaba is actually ground zero on the CPC's full frontal assault on the Western Financial System!", but I was wrong, he went into some silliness about how Alibaba was perfectly positioned to survive a trade war, a global recession, a currency war and, like the financial cockroach it is, anything up to and probably including a nuclear winter.  I'm sure specifics will be forthcoming in future "earnings" calls.

2.) Speaking of "earnings" there was not one question, comment or slide in the deck that mentioned earnings.  NOT ONE....an entire hour of fluff..... and "earnings" wasn't discussed, described, commented on or mentioned.   This is odd for an "earnings" call....don't you think?  When we look at the press release, we can understand why.  On page 40 there is a $2.974 Billion accounting "Gain on the revaluation of assets" which was roughly equal to net income for the quarter.  i.e.) If we exclude this gain, the business had no earnings from operations.  I guess that would explain the lack of discussion of same.  Why talk about something that doesn't exist?  Am I right?

There's limited discussion in the documentation (including the 6-K) as to what this gigantic gain was attributable to....here's the language:

Interest and investment income, net in the quarter ended March 31, 2019 was RMB18,665 million (US$2,781 million), which mainly included net gains arising from the change in fair value of listed equity investments and a non-cash gain of RMB5,825 million (US$868 million) arising from the revaluation of our previously held equity interest in Alibaba Pictures when we obtained control in March 2019. The above-mentioned gains were excluded from our non-GAAP net income. 

Note: Alibaba pictures was actually written down by US$2.888 Billion on last years 20-F, so now that they have obtained a whopping 51% control they are writing it back up and booking the gain. There was also no calculation as to the basis and the gain presented.  

Moreover, per the above, there's another $1.913 Billion in valuation gains not described or identified in the filings.  These gains are in addition to the $2.4 Billion write-up they took last quarter (ended 12/31/18).  The total valuation/accounting gains booked for the year amounted to $7.031 Billion, which was included in their Net Income of $11.955 Billion.  i.e.) Most of Alibaba's "income" is generated by unidentified Accounting/Asset write-ups, not from actual "business".

Appropriate Earnings Call Question:  "Could you please provide a detailed schedule of the $7.031 Billion "Revaluation Gain" as well as basis and current carrying value calculations for the related assets?"


3.) "Questionable Assets" (Investment Securities, Investees, Intangibles and Goodwill) increased to $85 Billion or 60% of the Balance Sheet, up from $59 Billion or 51% of the Balance Sheet in FY2018. (...and most importantly, up from 0% in FY2015).  To be blunt, most of this valuation has come from improper use and interpretation of accounting conventions which allow unscrupulous managers to write up the value of money-losing-dog-shit businesses without regard to economic reality.

Appropriate Earnings Call Question:  "I see that your balance has evolved over the years, primarily comprised of intangibles and 'investees'.  Could you provide a schedule, by acquisition date, of these assets, carrying value and associated write ups?"


4.) Property and Equipment continues to increase with no explanation.  Property & Equipment (net of depreciation of $2.227 Billion) purchases were $5.342 Billion during the year.  (There was no mention of what it might be comprised of.)  That would make property acquisitions during the year the rough equivalent of the cost to build four (4) Burj Khalifas. (i.e. the tallest building in the world) during the year.  That's right, not one (1), not two (2)....etc.  But four (4) of them.  If I were a BABA investor or analyst, I might have to ask, what exactly is all of this Real Estate and equipment?   I'd like a few street addresses and perhaps a valuation and description, or two or three, of the biggest property acquisitions.  Perhaps they bought 300,000 company cars instead of the four Burj Khalifas? 














....or maybe they bought 800 buildings like their Caymans Corporate Headquarters? (below)....anyway....it would be nice to know...



Appropriate Earnings Call Question:  "Could you please provide a detailed schedule of the $5 Billion spent on 'property' this year?"

5.) At least there was some improvement with the Ant Financial business.  As of the 12/31/18 6-K Ant Financial was actually losing money (There was no "profit-sharing" money accrued).  Here's the language in the Press Release for the 3/31/19 Quarter:

Ant Financial Alipay - Royalty fees and software technology service fees under our profit sharing arrangement with Ant Financial amounted to RMB517 million (US$77 million) in the quarter ended March 31, 2019. In the current quarter, Ant Financial continued its strategic investments to acquire new users and capture growth opportunities in the offline payment market. Currently, Alipay and its local ewallet partners have over 1 billion annual active users globally.

I think that's great!  A gigantic monopoly, with a self described market value of $150 Billion has finally made a little bit of money in a quarter!...after years of apparently undercharging its 1 billion+ customers.  Even though Alipay/Ant is joined at the hip with Alibaba (and US Shareholders by default) there has never been any meaningful, verifiable financial information disclosed for this beast.  Could it be that payment systems are indeed a "state secret" as the CPC would have us believe, or is it more likely that this business is simply yet another cesspool of CPC money, stolen from Chinese citizens, soon to be used to facilitate the destruction of US Dollar hegemony.....but I digress. 

Appropriate Earnings Call Question:  "Could you please provide full audited financial statements for Ant/Alipay?"

6.) Employees - "As of March 31, 2019, we had a total of 101,958 employees, compared to 101,550 as of December 31, 2018."  (pg 18.)  Interestingly, in their 20-F last year they had only 66,421 employees (pg. 121).

Here's the language: As of March 31, 2016, 2017 and 2018, we had a total of 36,446, 50,097 and 66,421 full-time employees, respectively.

They've gained 36,000 employees since  last year, a 55% growth rate.  Perhaps they are getting away from that "asset/people light" business model.   

Appropriate Earnings Call Question:  "Could you please provide a detailed head count by business unit/location?"

7.) Alibaba settled a class action lawsuit for $250 million during the quarter (pg. 1).  The only thing shocking about this figure is that they actually settled it.  Most Chinese ADRs just ignore the suits and eventually "go dark" with no penalty, since US Law enforcement would be hard pressed to actually get on a plane to Beijing and put anyone in handcuffs.  CPC backed "entrepreneurs" understand this all too well.

Appropriate Earnings Call Question:  "Could you please provide and discuss a summary of the settlement, agreements, concessions and terms?" 

8.)Revenue is up 51% YOY, GMV up 19% (GMV is up $137 Billion from FY2018) all with only 36,000 more employees (according to this years filing/presser) (pg 18). Again, when you do the math BABA GMV of $853 Billion is about the same as global GMV (store sales + third party) for Walmart and Amazon combined, and up 10x from the fake $80 Billion in FY2012.   The other ratio I find fascinating is GMV per employee.  Walmart's GMV per employee is $284,000.  Amazon's is $428,000.  Alibaba's is $8,366,000 per employee.  They are truly masters at doing more with less.

Appropriate Earnings Call Question:  "Could you please provide a schedule of GMV by NBS category?  You report these figures to the NBS on a monthly basis, correct?"

9.) Alibaba continues to be the most benevolent employer in history with regard to Share-Based-Compensation.  This year they gave share awards and kickbacks to employees, cronies, friends, family and apparently just about anyone with a pulse, to the tune of $5.586 Billion (10% of Revenue) of US Shareholder money.  This expense was up 87% from the last year.  Again, the generosity of US Shareholders can never be underestimated, but I'm sure it's greatly appreciated by the Communist Party Officials in charge of this project.

Appropriate Earnings Call Question:  "Could you provide a schedule of the recipients of SBC in excess of US$25,000 for the current year as well as the metrics used by the incentive plan to determine who is entitled to receive SBC?" 

Going Forward....

Let me be absolutely crystal clear here.  I've listened to this particular "earnings call" twice now.  Although I have to admit I found myself dozing off occasionally, none of the really questionable, odd,  disconcerting, accounting nightmares described above were even brought up, mentioned or apparently considered by any analyst during the Q&A on the call.

Something I mentioned in my prior post "Our Inevitable Monetary Journey" comes to mind again.  I've been thinking about my Dad a lot lately.  Don't know why.  My late father, a tough-old-crotchety lawyer once told me that, and I'm paraphrasing here:

"Sometimes my clients get involved in things where it could look like they are criminals.... 
...alternatively, it could be that they were just really incompetent and stupid.  

It's my job to convince a jury that they were just really incompetent and stupid." 


My crystal clear message to the analysts who were on the call is, when this eventually blows up, and there's no question that it will, you have to understand that the "Sorry I'm just a dumb-ass" defense won't work anymore.  The times, they are a changin'.  

You analysts (yes I'm speaking directly to you now) are all highly educated, smart, professional people.  You  are experts, or at least you are supposed to be, and you, and your respective employers are held to a much higher standard than the rest of the investing world and blogosphere.  It's assumed by naive American Investors that you know exactly what you are doing.  Your endorsement means everything.  Unfortunately, in this particular case, and many others, it looks like you are accepting a nice paycheck to do exactly what you are told by the Chinese Communist Party.  You are also committing, aiding and abetting securities fraud.  When you see the accounting travesties and inconsistencies described above, your job is to investigate them, ask tough questions, and if you find the explanations provided by management to be unsatisfactory, you must resign from the account.  Your inaction, congratulatory "we" tone and your tacit endorsement of this charade makes you an accessory, not an unwitting pawn.  You and your employers have significant legal and political liability for what's about to happen.  There will be no escaping it this time.  

To your probable surprise and eventual chagrin, once this implodes, the political environment in America will be such that you will be hunted down, like the sweet, smiling, CPC controlled puppy-dogs you are and brought to justice for your complicity.  This time, no expense will be spared and no stones will be left un-turned.  This time it is indeed different.  Bankers, analysts and anyone perceived to have been responsible for this destruction will be figuratively hung in the public square.  Your nice, sweet, friendly, cheery dispositions and professional demeanor, popularity and Facebook friends won't save you this time.  You won't be passing go.  You won't be collecting $200. You will be going to jail, directly to jail.  Your families and friends will  miss you, but yours is the price that must be paid to put an end to this madness.

You and your employers are indeed responsible and culpable:

Alex Yao – J.P. Morgan
Grace Chen – Morgan Stanley
Piyush Mubayi – Goldman Sachs
Eddie Leung – Bank of America Merrill Lynch
Gregory Zhao – Barclays
Alicia Yap – Citigroup
Binnie Wong – HSBC
Zachary Schwartzman – RBC Capital Markets
Han Joon Kim – Deutsche Bank

Also, I forgot to ask, have you met my good friend RICO?  He's fair, honest and bipartisan, but he can get a little cranky, so you might want to be careful around him. 

My advice would be, if you'd like to avoid getting into a full blown fist-fight with RICO, make sure you keep detailed, careful notes (recordings are better) on exactly who is giving you instructions, telling you what to say, who to say it to and/or when to say it.  As a matter of principle, you never want to have the chain of evidence terminate on your desk.  


Feel free to call the NYC office of the FBI to get some advice.  (212) 384-1000  They should be very helpful.  Ask for the Agent in Charge/White Collar Crime.  They can take your statements and set you up with a wire. 

Best of luck to you wherever your life takes you....



Tuesday, May 7, 2019

Our Inevitable Monetary Journey....

I've received much feedback from my readers on my last post... and for that, I'm grateful.

Thank you.

That said, it's clear that many of you folks, for myriad reasons, either disagree, don't care for my style or have significant doubts about both the concepts discussed and/or my presentation thereof.  I understand that.  There are no mainstream economists, financial folks, Central Bankers or think tanks that endorse or subscribe to what I'm describing.  My work is an outlier.  I get it.

I've also had lots of feedback that my "writing style is too wordy, not very funny, time consuming and really hard to read".   That said, here is a slightly modified, bullet-point summary of my prior post "conspiracy theory" from one of my readers.  He nailed it:

We're going to be conversing primarily in bullet points and charts today.

It would help if you were more straightforward in describing a cause & effect scenario. i.e.
1. Xi pushes the "sell button" on US$25T of Western Assets. 2. Western & USD-based markets melt down on the "Dump". 3. Massive QE is required to rescue & support Asset Values & save the system. 4. Flight from USD & Western Assets results in the silent, relative collapse of all Western currencies with the RMB achieving "real" parity".
5. Stabilizing USD requires large increase in domestic revenue and/or liquidity support. 6. Capital controls must be implemented by the West to stop capital flight.
7.) If Capital Controls are ineffective the CPC will have replaced the USD with the RMB as an alternate reserve currency.

So here are the Bullet Points for Today's Post:

1.) My forecast of the USD Money Supply and US Macro-Asset Categories over the next five years using Great Financial Crisis data as a base.  These changes/flows could take place over the next six months (ouch) or the next decade (we won't even know what happened).  Five years is represented. 

2.) China (and the World) is running out of "available" dollars (and why I think that), as well as two supporting, simple calculations.

3.)  Two Anonymous Case Studies (and  a not-so-anonymous case study - Yangtze River & Interactive Brokers)

4.) The FED's May 1st Press Conference and why most of what we've heard is problematic.

5.) Our Financial Pearl Harbor..... I hope we're sending out "Scout Planes" behind the scenes rather than continue along as "data dependent".

All of this is related....

Per my reader's request I took some time to put some thought into the numbers.  The following is a pro-forma model of what might happen to Asset values, in "big round trillions" if the CPC liquidates the estimated $US 25 Trillion of Western Assets (of which roughly US$15 Trillion are US Dollar denominated/domiciled Financial Assets).  Again, keep in mind that this adjustment could happen over six months (Ouch!) or gradually over five years as depicted by my table, or a decade or longer.  We compare key forecast asset values (M3, FED Balance Sheet, US Stocks, Credit and Residential Real Estate) to valuation behavior from 2007 to 2011. 

Keep in mind that some variation of this is inevitable now.  Here are the numbers.

Well, that doesn't look too bad....it's just a spreadsheet.  Right?.....

Let's take a look at a graphic representation of the financial assets.  Again, not too bad....total financial assets increase modestly, mostly from M3 and FED "Tarp-like" acquisitions, offset by valuation decreases in stocks.  Un-payable debt continues to be created despite defaults.
































Now let's take a look at the % change of the composition during the projected period.....which closely mirrors what happened during the Great Financial Crisis in direction, but is, of course, much greater in magnitude.






































A nasty side effect of this "Chinese Dump" is that after five years, and some ugly gyrations, the relative value of our retirement plans and homes will be worth roughly 23% and 25% less respectively.  The FED will also have enacted (probably several versions) of TARP, buying up, or strategically supporting systemically important businesses.  GE, Ford, Boeing, most of the big Banks, Amazon, Walmart, AT&T and the phone companies, etc. all come to mind as candidates for some form of SOE (State Owned Enterprise) status or bailouts. Like during the Great Financial Crisis, if you are running a "non-systemically important" business...unfortunately, you are on your own.  Good luck.  The FED Balance Sheet will have ballooned to $16.4 Trillion, up from today's $3.9 Trillion.  The Chinese will have effectively exported their state-sponsored economic model to the West. 

The Dollar vs. The RMB

So now let's take a look at a chart that describes the relative behavior of US M3 compared to Chinese M3, based on the CPC forcing the West to print money in support of Asset Values, as the CPC now fully understands what the FED & ECB will do after that little test run in Q4 2018.  Here's what's going to happen:





























Again, the chart above compares US/China actual M3 thru 2018 and forecast M3 thru 2023.  Note that as the US is forced to provide liquidity, which will be redeployed to financial asset price support, the Chinese will be theoretically able to manage/reduce SAFE controls, gradually release RMB for global "use" and keep the exchange rate relatively stable.  Total RMB (On-Shore plus Offshore) will approach US$50 Trillion and actually represent global financial assets denominated in RMB (we have no way to determine what these assets will be comprised of).  US M3 will be sucked back into US Financial Assets as described above.   

Here are the numbers:

























Again, all of the above could happen gradually, stealthily, over a decade, with our financial leadership scratching their heads over all of the odd, unexpected, liquidity hiccups happening sporadically, like Q4 2018...."Hey...why are the stocks dropping again?  Why are credit markets seizing up?"

We could be getting quarterly "Mnuchin-grams" continually reminding us that everything is just fine. This is happening because we are on an accelerating treadmill.  We have tens of trillions of US dollar assets/loans out there, of dubious origin and quality, created by the world's bankers (for a substantial fee) that will continually need to be rolled over, closed-out or replaced on a forever revolving basis.




Like World Wars, at some point we'll have to start numbering these financial crises.  As I recall, we referred to WWI as the "Great War" before we had the second one....and realized that we'd have to start numbering them....so the  upcoming "Great Financial Crisis II" seems fitting.

Taking a walk down memory lane, here's one of my favorite video clips from the relatively recent "Great Financial Crisis I" describing the above phenomenon better than any bullet-point narrative or chart could:

Grayson: "Ben....where did the half trillion dollars go?..."
Bernanke: "I don't know...."




China's Running out of Dollars!

I've heard this often......for roughly the last half decade.  China watchers continue to opine that China is either defaulting or close to defaulting on dollar obligations.  They cite that the Chinese economy is stumbling and the PBOC only has US$1T of dollar assets on their fake, misreported, balance sheet and a grand total of roughly US$3T of aggregate FOREX reserves.  China watchers cite anecdotal evidence of bond defaults, ghost cities, planted SCMP articles on how the Chinese economy is struggling under the weight of the ferocious trade war and how the CCP is struggling to complete the OBOR money grabs.  The Chinese are running out of FOREX!  It's only a  matter of time.

These China watchers and Investors are brilliant, smart, talented, capable people....and they are absolutely right.

I absolutely agree with them, with a slight augmentation/expansion of this thesis.  It's not just China that's running out of dollars.  The "world" is actually running out of dollars, primarily because of the incredible amount of dollar asset/obligations created, sucked up and covertly managed by the CPC over the last decade.  The FED can't keep up.  The giant sucking sound we all hear in the background is the CPC exchanging whatever wampum/deal/promise they think they can pawn off on gullible Westerners (for significant fees) in order to perpetuate the dollar/euro/yen grab.  As I've described in detail and examples in prior posts, the CPC is snarfing up "boomerang" dollars as quickly as possible and investing them in Western Assets held directly and/or indirectly in disguised,  CPC controlled accounts.

We see anecdotal evidence of China's "inability to pay" everywhere.  Increased SAFE restrictions,  OBOR and developer defaults or payment delays and Dollar Bond and deal restructurings.  If you just search Bloomberg over the last six months, you'll see a slough of such articles.  It looks like China's teetering on the brink.  Interestingly, it's looked like it for five years.  We see what we want to see and believe what we want to believe.....because we absolutely know it to be true.  It makes perfect sense.  Until it doesn't.

"Data Dependent" Western Central Bankers continue to look at the numbers and conclude, in perpetuity, that they need to print more money.  There never seems to be enough Western Currency in circulation, no matter how much liquidity is created.  All of this stimulus, more than a decade's worth in all, and despite what the "data" says, global economic growth remains relatively anemic while financial asset values skyrocket.  The West prints more money so the CPC can scarf it up and put it in their gigantic communist currency/asset warehouses (Western Money Managers, Banks & Off-Shore LLCs), effectively removing it from circulation in the real economy. 

The point is, as any good credit manager knows, there's a significant difference between a refusal to pay and the inability to pay.  Believe it or not, the CPC absolutely has the ability to pay, but they are refusing to do so.

They are starving the world of Dollars, Euros and Yen.

To support the above statements I'd suggest two very simple calculations.

Calculation #1

First, let's focus on Net-Exports and assume that net FDI is fully manageable/controlled by the CPC.  China's Net-Exports provide the currency needed to buy Western Assets.  Net-FDI is simply the deployment of same. Let's look at the Net-Exports from China through data provided by every other trading partner.  (i.e. We ignore the CPC data since...well.... it's probably bullshit anyway)

Through recorded Net-Exports, over the last 20 years, the CCP has collected net FOREX of $12 Trillion ($29.4T Exports less $17.4T Imports).  I say "recorded" because Chinese dollar sales/revenue through devices like Amazon & Walmart storefronts, Illegal Drugs, Casinos and money laundering probably accounted for another trillion or two during the same period.  These transactions result in the delivery of FOREX to the CPC, but look like Western transactions to Western Bankers.  See the OED Chart below as well as the link to the interactive chart.

If this surplus had been invested at 5% compounded (Of course they would have done better if they would have bought US tech stocks on margin....which they probably did) in Western Assets, the FOREX would have grown to US$17.4 Trillion.  Quite a tidy sum indeed.

We know with certainty that this Western FOREX hasn't been exchanged for overseas RMB.  If it had, there would be large RMB deposits in Western Financial Institutions or offshore RMB Assets on the Western Central Bank balance sheets.  There aren't.  The CPC still "owns" this Western money somewhere.  Moreover, the explosive growth in Anonymous, Off-Shore, Tax Haven Assets (Caymans, Luxembourg, Netherlands, Hong Kong, etc.), home for this CPC controlled Western money, has increased at a corresponding rate as discussed throughout previous blog posts.

Yet the PBOC only reports US$ 3 Trillion of FOREX Assets (US$ 1 Trillion of which are dollar assets) on their balance sheet.  Simply put....Like Alan Grayson's question to Ben Bernanke...

"Where's the money?" 

https://atlas.media.mit.edu/en/visualize/line/hs92/show/chn/all/all/1995.2017/   




Calculation #2

Second, along the same line of thinking, the notional value of FOREX Swaps and Contracts has skyrocketed in the last few years.   (See the BIS Table and link below)

FOREX swaps/forwards, simply put, are financing.  e.g.) I give you dollars today (in exchange for acceptable collateral and a fee) and you agree to give the dollars back to me in a day, a month, a year or longer.  Banks borrow the dollars and "swap 'em".  According to the BIS, the most recent published data (June 2018) OTC FOREX derivative contracts notional value increased by US$17 Trillion ($95,798B - $78,780B), a 23% increase, in just eighteen months.  At this rate of growth, these outstanding FOREX obligations are likely well in excess of US$100 Trillion today.   

Moreover, all of these Swaps/Forwards/Commitments are OBS (Off-Balance Sheet) and require no disclosure other than in footnote form on entity financial statements.  The FED has no/little idea what the underlying collateral of these Swaps/Forwards/Commitments might be.  Again, all of these contracts will have to be offset/closed/rolled at some point, or the collateral will need to be cashed in to cover the default.  Reminds me of our old friend the Credit Default Swap.  What could possibly go wrong?

























https://www.bis.org/statistics/d5_1.pdf

I don't know how any economist or Central Banker can look at these macro-metrics (and growth rate) in this relatively flat global economic environment and remain unconcerned with what the underlying driver of this acceleration might be.

My simple question, similar to Alan Grayson's line of questioning back in the good old days of the Great Financial Crisis I is:

Why is this happening?  What is all of this financing being used for?

"Where's all the F%$@ing Money Lebowski?"



My fear is that the answer is similar to Ben's "I'don't know"...

...but we're about to find out.


Two Anonymous Case Studies (CIC & FATRAT) 
....and a Not-So-Anonymous One - Yangtze River (YRIV:NASDAQ)

Now let's talk about two anonymous case studies which may (only time will tell) illustrate a small part of the big picture.  First, let me say that I have no evidence or suspicion that anyone at these two firms have done anything improper, illegal or immoral.  In fact, I'd go on to say that the people running these businesses seem like nice, smart hard working folks, just like you and me.  They are using their knowledge, skills and access to capital to maximize the value of their businesses, again, much like you and I would do if the opportunity presented itself.

I'm not going to mention the names of these businesses, but I suppose if you chose to spend time searching through filings and/or have access to Capital-IQ or similar tools you could probably narrow it down and figure out who these folks are.  I simply don't want to cause any undue scrutiny to these good people, again, because they've done nothing illegal or wrong and they are only two examples of the many, many firms that have fortuitously found themselves to be the benefactors of massive, foreign capital infusion windfalls over the last decade.

Case Study #1 "China Inc Capital"

I was reviewing some filings and stumbled upon this particular money manager.  Which I'll refer to as: China Inc Capital (fake name).  CIC has Assets Under Management (AUM) of US$35.4 Billion, chump change in the grand scheme of things....on the other hand, that figure is roughly the equivalent of all of the residential real estate in the Cleveland, Ohio metro area.  i.e.) My house and the roughly 400,000 houses of my neighbor's and friend's are worth about $35 Billion.  (Cleveland home pricing is very reasonable)

I've listed their "Top 10" 13F Securities as of 12/31/2018 and compared the holdings to what they had in June of 2014 (prior to the Alibaba IPO).  Here's what we have:









































Here's what we know:

1.) In 2018 CIC owned 71 securities that were required to be listed on their 13F totaling $28 Billion.
2.) Half (52.5%) of that value was concentrated in the above 10 tech stocks.
3.) Of the total AUM of $35.4 Billion they owned "Non-13F" assets of roughly $7.4 Billion.
4.) Six of the stocks in the "Top 10" turned over since June of 2014.  Alibaba, Netfilx, ServiceNow, Edwards, Illumina and Workday are in, replacing, Baidu, Facebook, Schlumberger, Monsanto, Biogen & Priceline.
5.) Foreign Investors or "Non-US" Pooled Funds (China & Russia) comprise 36% of the capital now.  There was no mention of foreign funds being managed in 2014.  Perhaps an oversight, but I couldn't find a reference to it in any of their investor materials.

In any case, even though China Capital Inc is a private money manager, so we can't tell how well they are doing, I'm sure, based on their portfolio holdings over the last few years must have done really well.  Anyone who put half their portfolio in Big-US-Tech had a good run.  Although their AUM has shrunk a bit since 2014, as I had mentioned, it also looks like they've been able to capture a significant piece of global capital which hadn't been on the books before.  Apparently just as US Investors were leaving CIC, presumably more profitable, foreign money started coming in.  Perhaps this new foreign (Russian & Chinese) money was also providing input as to which "non-13F" investments ($7.4 Billion) might prove to be lucrative, and covertly directing investor money into these boondoggles...uh...I mean Investments....for hefty compensation?  Alas, we'll probably never know.

Case Study #2 "Financial Alternative Trust & Real Asset Trust" (FATRAT)

FATRAT (fake name) had operated as a family owned mall/apartment building developer in North America for many years.  After a few decades of good, hard, honest, risk averse work, they had managed to accumulate AUM (mostly real estate) of just over US$27 Billion per their 2004 Financial Statements.  At that time FATRAT was a profitable, steady, well run business. Somewhere around that time the family leadership decided to step away from daily operations and brought in a few, energetic, hired guns to ostensibly take the business to the next level.  The new, enthusiastic and highly motivated management team embarked on a global shopping spree, raising capital and buying up Real Estate, projects, partnership interests and distressed (turn-around) businesses and opportunities in every corner of the globe.  Looking back, it seems that they were hard pressed to find a deal they couldn't do or didn't like, fearlessly jumping into brand new adventures in exotic locales where others dared not tread.   Again, like CIC, fueled by this never ending supply of capital that had to be deployed, by hook or by crook, they were becoming infallible (even after that little hiccup they had during the GFC I), relentlessly-fearless and even more confident than ever in their own abilities to raise cash.

Fast forward to today and they have roughly US$490 Billion in Assets and Capital under management, up a whopping US$200 Billion (Six times the value of all Cleveland Residential Real Estate) from just 2014.  They have been able to grow AUM at a roughly 23% CAGR since 2004 even through the Great Financial Crisis I hiccup.  They've been able to raise nearly limitless "pooled" private and public capital, unabated, under any conditions or in virtually any economic environment, from "the world’s largest institutional investors, sovereign wealth funds and individuals".

Case Study #3 Yangtze River Port & Logistics, Ltd. (NASDAQ:YRIV)

You can read all about this mess now that lawsuits have been filed, but suffice it to say that a few folks saw this one coming from a mile away.  I believe Anne Stevenson-Yang @doumenzi was one of the first to spot it and I'm sure I commented on is somewhere along the line.   YRIV is a "Reverse Merger" which skyrocketed to a Market Cap of near $4 Billion a couple of years ago.  The stock is still worth about $160 million as I type.  Here's the link and the text from the "updated" Prospectus filed on April 16th.  (feel free to skip through their painful dissertation, I included the snippet for authenticity sake, so you wouldn't think I was just making this up.)

Overview

Yangtze River Port and Logistics Limited is a Nevada holding corporation. We operate through our wholly-owned subsidiary, Energetic Mind Limited, a British Virgin Islands corporation, which in turn operates through its wholly-owned subsidiary, Ricofeliz Capital (HK) Limited, or Ricofeliz Capital, a Hong Kong corporation. Ricofeliz Capital which operates through its wholly-owned subsidiary, Wuhan Yangtze River Newport Logistics Co., Ltd. or Wuhan Newport, a wholly foreign-owned enterprise incorporated in the People’s Republic of China that primarily engages in the business of real estate and infrastructural development and operating a port logistics center, or Logistics Center, located in Wuhan, Hubei Province in the People’s Republic of China, or PRC.

Situated in the middle reaches of the Yangtze River, Wuhan Newport is involved in a large infrastructure development project implemented under China’s latest “One Belt One Road” initiative. We believe that the project is strategically positioned in the anticipated “Pilot Free Trade Zone” of the Wuhan port, an important trading locale for the PRC, the Middle East and Europe. To be fully developed upon completion, the Logistics Center will comprise six operating zones: port operation area, warehouse and distribution area, cold chain logistics area, rail cargo loading area, exhibition area and business-related area. The Logistics Center is also expected to provide a number of shipping berths for cargo ships of various sizes. Wuhan Newport expects to provide domestic and foreign businesses direct access to the anticipated Pilot Free Trade Zone in Wuhan. The project will include commercial buildings, professional logistic supply chain centers, direct access to the Yangtze River, Wuhan-Xinjiang-Europe Railway and ground transportation, storage and processing centers, and IT supporting services, among others.

We anticipate that income generated from the use of the warehouses, cargo loading and unloading, railway and highway transportation and logistics services and other logistics supporting services will comprise the main source of our income. It is also expected that income from the sales and leasing of commercial space will be a relatively minor portion of our expected income since we are planning to sell or lease only a small portion of our commercial properties . We will begin construction on the Logistics Center once we are able to raise funds for it.

That's correct, we have a Chinese Corp. (Wuhan) wholly owned by a Hong Kong Corp. (Ricofeliz), which is wholly owned by a BVI Corp. (Energetic Mind), which is owned by a Nevada Corp. (Yangtze River), operated out of its U.S. headquarters at 41 John St., Suite 2A.,  a two-bedroom Manhattan apartment.  Yangtze River recently hired Alliance Global Partners (AGP ) to sell another $100 million worth of shares to widows, retirees and pension funds.  Commissions & fees were disclosed (sort of).

https://www.sec.gov/Archives/edgar/data/1487843/000121390019006523/f424b5041619_yangtzeriver.htm

One other interesting part of the prospectus, as described in Section S-8, is that Yangtze has agreed to reimburse AGP for any liability for Securities Fraud that they might incur in association with the offering.  Peachy....it's always good to get a "fraud indemnification" clause in these sales agreements.

The auditors, according to the Prospectus Update, are Centurion ZD CPA & Co.  I wonder if they took the time to visit the 2 Bedroom Apartment Corporate Headquarters?  Perhaps they all got on planes and visited the offices of the wholly owned subs in the BVI, Hong Kong and the PRC, just to verify the existence of any of this silliness.  Perhaps they didn't want to spend the money on airfare just to keep the audit fees down?

In the interim, apparently Interactive Brokers (IBKR) had actually been accepting YRIV shares as collateral for margin loans to their highly sophisticated, day-trader customers, and hence recently disclosed a $59 million loss from the collapse of same.   As an aside, I'm beginning to think our entire economy is based on fees generated by the delivery of various vehicles, documents and undecipherable waivers of liability, which are engineered to destroy the financial future of people that don't know any better. 

Here's the chart for YRIV.  Not so good right now, but somebody did an amazing job of marketing this mess over the past few years.  





Here's the chart for Interactive Brokers.  They've done really well over the years too.  But like YRIV, their Market Value had ticked down over the last few months.  The stock is worth about $11 Billion less than it was last fall.

   
Perhaps investors, based on the freshly disclosed, less than rigorous underwriting scrutiny that IBKR has applied to the Yangtze River margin loan collateral, are wondering how solid the remaining US$25 billion of Interactive's Margin Collateral really is?  

You just can't make this stuff up.


The Common Thread Connecting CIC, FATRAT, YRIV & IBKR

Before we understand the commonality in these seemingly unrelated events, we need to fully understand the methods of the CPC "long game" and the faith and ideals of its 90 million members. (The number of CCP Party members is roughly the equivalent of 2/3rds of the entire US Workforce)  To familiarize ourselves with the methods and philosophy of the CPC....."our enemies can take our lives but they can't take our faith" as described by Xi Jinping in his keynote address at the 95th Anniversary Communist Party gala, lets take a look at the video, shall we?

 
Now, let's also assume that, because of the party's ability to establish an unparalleled zealotry, partly dogmatic and partly because the members fully understand that if they don't toe the party line, either they or their loved ones will go missing and/or end up in one of those Xinjiang-like re-education camps.  Nothing happens in China without explicit party approval.  Party loyalty is indeed a matter of survival.  

We know that CPC Members, over the years have fanned out, all over the globe, attending Western Universities, buying Western luxury homes and condos, and most importantly settling into the Western financial system with their newly acquired "boomerang dollars".  They have been given "party money" and instructed to go forth and invest in the West, with the tacit understanding that at some point, the music will stop.  At some point, they'll get a call from the CPC, and an order to start selling off what they own.  Non-liquid Real Estate will go first (This is already underway in NYC, Vancouver, the Bay Area, Sydney, etc.) followed by more liquid financial assets (stocks & bonds).  These vagabond party members will have done their patriotic duty and will be going back home immediately after they've completed their mission.  

When you think about it, this really is brilliant.  These individual party members did nothing illegal or "wrong" by Western standards.  They simply took advantage of the weaknesses in unregulated, anonymous, free market capitalism causing it to collapse under its own weight.  As a bonus, they've probably had a pretty good time on the "party dime" and have some great selfies and t-shirts to commemorate their role in the overthrow and destruction of the Western financial system.  When you further think about it, for young Chinese folks, this CPC master plan beats the hell out of landing on a beach with a rifle.  The resulting economic and psychological devastation caused to the American middle class (or what's left of it) will be as great, if not greater than any conceivable military conflict.  Americans have always known how to fight, and can deal with war.  We've done so for decades, but we're apparently not very good at math.  Working class disperation, disfunction, disenchantment and discontent will continue to mount.....in the words of one of my displaced GM friends on disability...."dis is bad".  

We Americans will have lost a war we didn't even know we were in.  The CPC will have won without firing a shot.

Of course, if the Chinese "investors", for some reason, have developed a fondness for the West, and their newfound democratic freedoms, choose to abandon the CPC, deciding not to follow the rules, perhaps keeping some of the CPC capital for their own use, I'd guess that they'll be looking over their shoulder and switching identities for the rest of their lives, fully knowing that their friends and family will most likely suffer the brunt of the consequences.  It's a heavy burden to bear, but such is the way of the CPC.      

So, getting back to our three case studies......

Let's say one beautiful, sunny day later on this year, that the phones start ringing and emails start coming in at CIC and FATRAT.  Suddenly, "the world’s largest institutional investors, sovereign wealth funds and individuals"  decide to treat CIC and FATRAT like "the Dude" and they want their F&%ing money back.  Without knowing anything about their respective investor capital lockup/handcuff expiration, or whether these investors have the legal right to pull their money out (I suspect that the terms are favorable to them, since, generally, when an "investor" shows up with a big check, he/she tends to get the royal treatment and "special" terms), these former good CPC friends, investors and benefactors will make a couple of formal "head in the toilet" style requests for a return of their capital.  Perhaps CIC and FATRAT will be able to find alternative financing, temporarily funding the withdrawal/run.  Perhaps not.

Let's say that the market's hiccup goes a bit farther and portions of the $25 Billion of Margin Loans at Interactive Brokers are called.  Shockingly, the day-traders might not be able to cover these loans, since the collateral quality is more "Yangtze River-like" than initially suspected... and Interactive Brokers has to start liquidating positions.  Let's also imagine that Interactive Brokers is not the outlier, but rather the norm, and has been underwriting collateral in a "competitive manner" up to the typical, industry standards, designed specifically to keep that commission revenue coming in.  i.e.) there are probably lots of Interactive Broker-like shops out there.

My late father, a tough-old-crotchety lawyer once told me that, and I'm paraphrasing here:

"Sometimes my clients get involved in things where it could look like they are criminals.... ...alternatively, it could be that they were just really incompetent and stupid.  It's my job to convince a jury that they were just really incompetent and stupid."

....and the destruction the US Dollar as the world's reserve currency will commence.   


How Can This Happen?

We need look no further than Jay's FED presser a few days ago so see how this can happen.  It can happen because nobody is looking for it.  The FOMC is a group of highly intelligent, classically trained, economic technocrats.  They are trained to look at the same, traditional, data, dot-plot it with precision, and make tiny, almost insignificant adjustments, while patiently contemplating and telegraphing the next quarter's possible adjustments accordingly.  They are brilliant.  They are the best in the world.  But they are not trained to look for anything like this.  They are "data dependent", but they are not looking at how the data is evolving and what it's really reflecting.  To the FOMC, it's just "data".   So they will either refuse to believe what I'm describing can happen, or they won't bother looking into it at all, even though all of the signs are there.  Today, in finance, doing your job the way you've always done it isn't enough.  Although, doing things the same old way will provide cover and plausible deniability when this eventually blows up, unfortunately, in this case, it's also giving aid and comfort to the enemy by allowing it to happen in the first place. To paraphrase my late father....Central Bankers will look incompetent and stupid....but they are not crooks.

Here's the video of the FED Presser from May 1st, 2019 along with the FED Financial Statements for your reference.  There's no need to wade through the entire painful clip/docs unless you have an interest, it's not necessary for our discussion here today, but I thought I'd include it for reference.


FED Audited Financial Statements - 2018
https://www.federalreserve.gov/aboutthefed/files/combinedfinstmt2018.pdf


As with most FED Press Conferences, the general theme is that "the economy is in a good place".  Everything is fine and dandy.  The headlines are GDP is up, inflation is under control, equity markets are at all time highs and unemployment is at an all time low.  If this were any other time in history we'd be referring to this as an American "golden age".  We should all feel like we're living the American dream.  Indeed, a few of us are.

Conversely, if the economy is indeed firing on all cylinders I find it strangely curious that we're seeing a parade of politicians forever fighting and giving speeches to save jobs from leaving their districts.  Here's one of our local Congressman giving a forceful soliloquy to an empty house chamber, after just losing a GM Plant in his district, along with all of the ancillary business and income multipliers that go with it.  His district has been effectively, economically eviscerated.  He's opining about the "broken economic  system".

 

I hope you took a few minutes to watch the clip if you've not seen it.  Tim spent 8 minutes delivering  a wonderful, heartfelt, but apparently ineffective plea to change our "data driven" course.  We can only assume, that since he's not a classically trained economist, that he has no idea what he's talking about.  After all, he (and his constituents) perceptions are completely at odds with Jay's "everything is peachy keen....steady as she goes" plan.

For those of you who don't know him, Tim is a great guy.  Again, although he doesn't have a PhD in economics and has no background in Central Banking or Foreign Exchange, at least that I'm aware of, he understands that something has been going horribly off the rails for quite some time......as he says...."we've been doing this for 40 years!"

So my rhetorical question is: Why is 1.) Work Force Participation declining and Real Wage Growth been flat over the last decade?  2.) Why is it that Drug Addiction (2.3 Million addicts) & Drug Deaths (75,000 & rapidly increasing - CDC 2017), Suicides (45,000 - CDC 2017), Gun Violence and Deaths (44,000 - CDC 2017), Incarcerations (2.3 Million) and Parolees (4.5 Million) are all on a historic rise and, per Ray Dalio's favorite statistic, that 60% of Americans can't scrape $400 together in an emergency?

Generally, given all of the above, Congressmen don't make impassioned speeches like this, people don't fall out of the workforce and give up, people don't turn to drugs, commit crimes or choose to end their lives in a strong vibrant economy, where everything is going along just fine.  I don't see this data on the FED's website.  Perhaps we should?

Wages

Let's talk about wages.  Since GFC I, the Real, Full-Time, Median, Weekly, Wage, per the FED's own data, has risen from $345/week. dipped down to $334/week in 2014 and now has inched back up to $353/week. (Wages in 1984 dollars.  Based on the CPI adjustment of 2.41 this equates to current wages of $850/week or $44,200/yr.)  This is the equivalent of a 2.3% wage increase in the 10 years since the GFC I.

Does anyone at the FED understand how difficult it is in America to raise a family, send kids to school and live on a full time wage roughly the equivalent of what it was 10 years ago?  (and that's if everyone in the household is in perfect health.....don't get me started on the cost of healthcare) 





Next, we note that despite all of the "New Job Creation" going on, it looks like workforce participation has declined rather abruptly by 700,000 people in the last two months.  Could it be that these people have all hit the lottery? or got rich trading Forex Futures or flipping houses? and retired early?  I'd suggest that perhaps it's more likely that they've simply given up.



Next, I like to track the proportion of people working as compared to the total population.  It makes sense to me to compare the number people working full time (earning wages, and benefits and paying taxes) to the number of people not working (those who are too young, too old, incarcerated, chronically unemployable and/or living on some sort of private or public assistance)



We see that this ratio, since GFC I has crept back up to 39.5% .  So roughly thirty-nine American's are working full time to support sixty-one Americans who don't.  Note that this little decrease from the 40.8% high back in 2000 represents 1.7 million fewer people working at the current population level than 10 years ago.  As described, the remaining employed are earning roughly the same wage as 2008.

GDP

If I didn't know better, when reviewing the US BEA (advance Estimate) of 1st Quarter GDP, I'd think I was reviewing a PBOC report, the headline was "GDP is up 3.2%"  Awesome!!... see below:

Real gross domestic product (GDP) increased at an annual rate of 3.2 percent in the first quarter of 2019 (table 1), according to the "advance" estimate released by the Bureau of Economic Analysis. In the fourth quarter of 2018, real GDP increased 2.2 percent. 



https://www.bea.gov/index.php/news/2019/gross-domestic-product-1st-quarter-2019-advance-estimate

Now let's parse some of the summary language using our patented Dick Fuld Banker-Speak Translator (BST).  The  parts in "Blue" are clipped from the report.


The acceleration in real GDP growth in the first quarter reflected an upturn in state and local government spending, accelerations in private inventory investment and in exports, and a smaller decrease in residential investment. These movements were partly offset by decelerations in PCE and nonresidential fixed investment, and a downturn in federal government spending. Imports, which are a subtraction in the calculation of GDP, turned down.
BST Translation: Personal Consumption Expenditures (PCE) is declining, inventories went up  because American's aren't "buying stuff".  Home purchases are still declining, but they declined a little less in this quarter than the last.  State & Local Government spending (mostly social services) picked up.  Exports remained about the same but because we are consuming less, and most of our consumer stuff comes from China, we are also importing less.  Generally, Americans don't "buy stuff" unless they can get credit and/or think they can afford it.  That's the way most regular people, who aren't Central Bankers think.   
Current dollar GDP increased 3.8 percent, or $197.6 billion, in the first quarter to a level of $21.06 trillion. In the fourth quarter, current-dollar GDP increased 4.1 percent, or $206.9 billion (table 1 and table 3).
BST Translation: Math is really cool.  Current Dollar GDP, which was goosed last year because of the biggest tax cut since Reagan, somehow, decreased in a quarter where everyone should have been getting all of their tax refunds.  Maybe they used the money to try to catch up on their delinquent car payments, mortgages and credit cards?  Maybe that government shutdown had something to do with the decline, but the report was silent on that, and in fact Federal Government spending actually increased slightly during the period.  Most American Taxpayers, of course, think it's an awesome idea to keep paying for government services without actually getting the services.  
The price index for gross domestic purchases increased 0.8 percent in the first quarter, compared with an increase of 1.7 percent in the fourth quarter (table 4). The PCE price index increased 0.6 percent, compared with an increase of 1.5 percent. Excluding food and energy prices, the PCE price index increased 1.3 percent, compared with an increase of 1.8 percent.
BST Translation: Since people aren't consuming, and inventories are building up, prices are not rising as fast as they did last quarter.  We can expect some BOGOS, discounts and sales!   This is how inflation "remains under control".
Current-dollar personal income increased $147.2 billion in the first quarter, compared with an increase of $229.0 billion in the fourth quarter. The deceleration reflected downturns in personal interest income, personal dividend income, and proprietors’ income that were partly offset by an acceleration in personal current transfer receipts.
BST Translation: This is really interesting.  The expected increase in Personal Income actually decreased by about a third from the prior quarter.  This reduction was due to a decline in interest, dividends and passive business income....but wages apparently remained constant?  The "1%" must have really taken a hit.  I wouldn't want to take a big/passive/investment income pay-cut if I were in their shoes.   
Disposable personal income increased $116.0 billion, or 3.0 percent, in the first quarter, compared with an increase of $222.9 billion, or 5.8 percent, in the fourth quarter. Real disposable personal income increased 2.4 percent, compared with an increase of 4.3 percent.
BST Translation: This is even more interesting.  In a healthy, robust economy, why did the rate of Disposable Personal Income (DPI) growth decline by about half from the last quarter? Ouch!
Personal saving was $1.11 trillion in the first quarter, compared with $1.07 trillion in the fourth quarter. The personal saving rate -- personal saving as a percentage of disposable personal income -- was 7.0 percent in the first quarter, compared with 6.8 percent in the fourth quarter.
BST Translation: Finally, so the personal savings rate remained flat?  The "1%" continued to save at the same pace even though their PI & DPI decelerated?  (btw - I keep referring to the 1% when I discuss savings since 60% of Americans don't have any meaningful savings)    

So what do all of these numbers really mean?  Economists spend their careers debating and interpreting the cause and effect of policy decisions.  Their biases influence their interpretation of what's really happening, just like Congressman Ryan, without even looking at the numbers, has formed an opinion about how our monetary policy is working based on the resulting devastation it's caused in his particular district.  He doesn't like it.   

The Sneak Attack


When I think about what's happening today, one of the most dramatic and disturbing movie scenes I can recall, comes to mind.  (Pearl Harbor Video Below).  When I saw the movie the first time my reaction was, how could this possibly happen?  How could this be possible?  Who was asleep at the switch?  If America only had the technology, foresight and vision to see the weaknesses in their systems/defenses or be more vigilant.  Were we blinded by hubris?  Was FDR confident that America's juxtaposition between two vast oceans would protect us?  Like our monetary policy today, could our leadership have thought through the war games scenarios and made a better effort to locate and track that fleet of Japanese aircraft carriers steaming toward Hawaii for weeks?  But this was not to be....and America entered the most brutal conflict, in terms of casualties (roughly 80 million dead) in the history of the planet.  Like today's economic/currency war....America never saw it coming.



Please don't get me wrong here......to my knowledge, no country ever started a war because of money and/or a failure to pay the bills.  (Some might argue otherwise....but there's usually a way out of economic problems if you choose the right policies....I'm also well aware of all of the FDR conspiracy theories so please don't email me on that topic....that's not the point of this closing paragraph.)  My point is that all of the data, technology and information we need, although difficult to parse through and connect the dots, is sitting right in front of us.  It's just not on the radar, so to speak.  Our Bankers are more than capable of preventing the upcoming financial Armageddon if they choose to do it, rather than continuing to blindly sell liquidity for hefty fees.

My fear, like in the movie clip above, is that our Bankers are far too busy doing their jobs and making a buck.  They will be metaphorically peeling potatoes, painting the hull of their battle ships or hung-over, sleeping it off in the back seat of their convertibles when the Chinese financial bombs start to drop.

So much for being "data-dependent".



Additional Reading/Viewing

FED Press Conference May 1st, 2019
https://www.youtube.com/watch?v=nEVZJQob_5w

FED Fin Statements
https://www.federalreserve.gov/aboutthefed/files/combinedfinstmt2018.pdf

Kyle Bass & Keith McCullough
https://app.hedgeye.com/insights/74383-webcast-why-kyle-bass-sees-recession-risk-rising?utm_campaign=Kyle+Bass+Blast+2+Activesemail+submitters+482019&utm_content=Kyle+Bass+Blast+2+Activesemail+submitters+482019+CID_62ebf8d63e574e6ca2e2b39da4893ae1&utm_medium=email&utm_source=campaignmonitor+email

Below: CPC Propaganda Video - intended to drum up support for CPC Member "ambassadors" around the globe.  Sadly, they feel as though they are treated as outcasts.  Perhaps if everything they did, said, ans filed with the SEC wasn't a flaming crock of shit, their argument would be a little less unbelievable.





This image has nothing to do with what we're talking about today, I just thought it was a hoot.  Note, that the person starting this "grass roots" campaign has the same right to vote as you and I do....God Bless America!.



Saturday, March 23, 2019

A Modest Proposal....

TO: Don @realDonaldTrumpMike @VP, Mitch @McConnellPressKevin @GOPLeaderChuck @SenSchumerNancy @SpeakerPelosi,
Steny @LeaderHoyer,  Lindsey @LindseyGrahamSCAlexndria @AOC,
Sherrod @SenSherrodBrown , Bernie @SenSanders, Rob @senrobportman
Steve @stevenmnuchin1Jay @federalreserve 

I hope you all are well.  As you of course know, after close of business on Friday, Bob finally delivered his long awaited report to our Attorney General.  I'm sure we're all looking forward to reading Bill's abbreviated "nothing to see here" presumably partisan summary of same.  Don, I'm also grateful that you've supported the idea of making the full report public, so we can all finally move on.  America is grateful.  Whether the report indicates we need wholesale regime change/resignations/indictments or a tacit understanding that there is no "there" there, I think we can all agree that we need to make whatever decisions we need to make expeditiously so we can all get this behind us as soon as is practical.

Anyway, even though this report will probably be consuming much your time, and although, I'm sure, difficult for you, I'd like you, for the moment, to set it aside and move on to a different, dare I say, much more important topic.

We have work to do.  We have to save the Western Financial System.

As always, for those of you following my work, you'll know that the really important concepts are in RED below.  Feel free to skim past my humorous, anecdotal banter if you are pressed for time.

As you know, we Americans have been following your careers (and the careers of your predecessors) closely for quite some time now.  I think we can all agree that your collective progress, in no particular order, on Health Care, Taxation, Education, Environment, Infrastructure, 2nd Amendment issues, Drugs, Immigration, Banking/Financial/Market Reform, Trade, Monetary Policy, Consumer Protection, etc. etc. etc. has indeed been, well,  remarkable.  We appreciate your effort.

To be direct, what's also remarkable, is that in an effort to remain in office, you have all come to believe that through your collective efforts and carefully crafted public relations campaigns, you have been able to appeal to our darkest, most destructive, visceral emotions and fears, convincing roughly half of the American electorate (based on any poll of your choosing) that you and your counterparts on the other side of the aisle are all to be despised and vilified with a passion heretofore unimaginable, by roughly one half of the electorate or the other.  This is an incredible, unthinkable, yet effective achievement and quite a prolific legacy indeed.   You should all be proud.

The partisan, petty and often patently false distractions and narratives that you and your constituents have all chosen to shout from the mountaintops, bring front and center, and elevate to an unproductive, destructive public debate, is something I could not imagine seeing in my lifetime.  I may be overstepping my bounds here, but like emotionally damaged children forced to watch their dysfunctional parents scream, fight and antagonize each other, I'd suggest that most of us Americans would prefer to have the ugly, legislative sausage making done behind closed doors.  But, alas, here we are.  Through your carefully choreographed public displays of disturbing, irrelevant discourse, our reputation as a nation is quickly evolving from the "shining city on the hill" to a "how to" manual for, every third world Banana Republic on the planet.  (I'm sure I'll get hate email from "Banana Republic" supporters for that last comment.....but I digress.)

For the love of God.....Please focus....

At any other time in history, my reaction to your antics would have been, "Geezzz.....what a mess....but that's Ok.....we've got a strong democracy and another election on the way....American voters are good hearted and wise...we'll find some reasonable people to put in office and we'll get through this..."

Unfortunately, today, delay and "waiting" for the next election is no longer an option.  We are quickly running out of time.  Unless you folks are incredible poker players and you are somehow feverishly working together as a cohesive unit behind the scenes to implement workable versions of the policies I'm going to discuss below, the American dream as we've known it, is doomed to extinction.

That said, I feel compelled, as an American citizen, to speak up.  I'm trying to help you.  I'm trying to help you save Western Civilization.


The Threat to Western Civilization

If you have indeed been following my work, and I know some of you (or your staffs) have been (Google Analytics is a wonderful thing), you are at least suspicious that I might actually be on the right track.  I'll refer you to four recent posts (Below) which you might find informative, but if you already believe that the following thesis (in RED) may indeed be accurate, or at least merit further investigation, there's no need to rehash the concepts here.  I'd refer you to Jay, Steve and their teams, as they have a much greater/better resource/data-set than I have access to.

Dalio's Big Debt Crisis....the FSB Report and Financial War Games....  

Keeping is Simple....China has $50.1 Trillion of Brand New Financial Assets

Twas the Night Before Christmas....

When will Xi Click the "Sell Button"

I'll also cite two excellent and extremely wonkish BIS working papers, written, of course, using generally unintelligible economic jargon (Below) which also reference what we're discussing today.

Triffin: dilemma or myth?

FX swaps and forwards: missing global debt?

Again, no need to wade through these two working papers if you don't have time, I understand you folks are busy.  I'll try to sum both of them up in a sentence or two.  The "Triffin" paper discusses the history of monetary policy, debating the legitimacy of Bob Triffin's "Dilemma", that America at some point will be unable to supply enough "safe" dollar assets and reserve currency to satisfy the global demand for same.  Referenced and described in the "Missing Global Debt" paper, as of 2017 there are at least US$21.4 Trillion (both Balance Sheet and Off-Balance Sheet) of known, non-bank dollar debt lurking outside of the United States. (i.e. out of the FED's purview)  That amount is growing rapidly.  The looming question is whether the FED, when subjected to demands for Eurodollars (and now clandestinely, and more appropriately, "Chinadollars"....as a point of reference, I believe I'm actually coining the phrase "Chinadollars" in this post, since most economists don't believe or understand that they actually exist) could effectively backstop a dollar shortage. The thinking is that It would be much more difficult to do so now, as off-shore dollar (Eurodollar & Chinadollar) requirements are much larger than they were prior to the Great Financial Crisis.  The requirements, to support exchange rate equilibrium are also growing rapidly.  Any rescue package the FED puts together would have to be on a much larger scale today.  The conclusion of both of these, in my words rather than the respective authors, is that we are in uncharted territory.  Western Central Bankers will be putting in some overtime at some point soon.

Jay, I think you know what I'm talking about....I'm guessing this is what drove your "pivot" and keeps you up at night.  I have to say, that after your 60 Minutes interview I'm a bit concerned that you don't see this tsunami coming.  Perhaps you are just trying to calm the masses and project an air of confidence.  I certainly hope that's the case.


Unfortunately, I have this recurring nightmare that you and the other governors are in the cockpit of an out of control airliner, you've skipped a few  training classes and are frantically paging through the operators manual.  With the frightened passengers screaming in the background, your eyes widen as you discover the manual is written in Mandarin....That's when I wake up in a cold sweat.       

Jay Powell - 60 Minutes - Full Transcript & Inverveiw - All is well.....
https://www.cbsnews.com/news/jerome-powell-federal-reserve-chairman-60-minutes-interview-2019-03-10/

In normal, regular, every-day, non-economist lingo, as far as you folks are all concerned, here's where we are today:

In a nutshell, here are our two choices:

Option #1.) Disengage with the Chinese under a managed policy, temporarily disrupting both Western and Chinese economies and markets, leaving the lion's share of the inevitable global economic pain to be absorbed on mainland China. Or.... 

Option #2.) Continue on the current path, allowing the CCP to destroy the US and Western economies, filling the void with their own shell game ideology, eventually breaking the dollar as the world's preferred reserve currency.

The obvious problem with this decision tree, is that "Option 2", kicking the can forever down the road, which ends with the US ceding financial hegemony to the CCP, actually keeps all of you in office and supports the current status quo until it's too late to prevent the collapse of Western financial systems.  Ouch!  

Whereas, "Option 1", the option where we survive financially as the leaders of the free world, and our own corrective fiscal and financial policies (i.e. those designed jointly by both Republicans and Democrats) will temporarily depress asset values, destroy market cap (Apple, Walmart, Amazon, American Retail, our Large/Global Banks and any business with a Chinese supply chain significantly embedded in their business model, etc. etc.)....and cost millions of global jobs, does, unfortunately, not keep all/any of you in office...any politicians (you) who are deemed to have caused this malaise will be blamed.  The American people will revolt at the ballot box.  Of course, the CCP understands this all too well.  

If you do indeed opt for and succeed in implementing "Option #1"  you'll have to come up with yet another "it's not our fault" wag-the-dog blame scenario.  I'll leave that public relations battle/framing up to you.  


GIVEN:  

1.)The RMB exchange rate has been manipulated through currency controls.  The exchange rate should be 20+:1 rather than 7:1 based on relative money supply growth.  This imbalance has been accomplished through these currency controls, making the RMB virtually unusable outside of the Chinese mainland. 
2.) The Chinese Communist Party (CCP) currently controls at least US$25 Trillion of Western Financial Assets through anonymous Off-Shore Tax Haven entities.  
3.) These assets were purchased at significant discounts through their pegged/overvalued currency.  (i.e. using the aforementioned CCP Currency Controls and money supply expansion.)

THESIS:  

The CCP intends to weaponize these financial assets, selling them off in a coordinated "Pump & Dump", disrupting/destroying Western Financial Markets, forcing Western Central banks to "print money" like never before.  The end game being the US Dollar will no longer be the world's reserve currency and the RMB will finally be "marked to market" along with the newly weakened dollar.  The CCP will have effectively exported their self inflicted debt problem to the rest of the world.      

In order to save Western Civilization we'll need to refer to our wonderful, brilliant compadre', Dr. Richard Thaler's work and look to some basic principals of Behavioral Economics.  I'd suggest you bring him on this.  He's really a bright guy.  I'm sure he'd free some time to help us save Western Civilization. 

Following Rich's lead, we'll need to incentivize, or nudge "good" financial behavior and penalize "bad" financial behavior.

Because the USD/RMB exchange rate is currently so flawed, we'll also need to do everything we can to shore up liquidity in Western Financial Systems prior to the dam bursting. (You'll notice that Jay and Mario are beginning to take steps already) We further need to distinguish between "real" Western Money/Financial Assets and "fake" Chinese/CCP owned Money/Financial Assets.

My premise is that when the CCP financial asset "dump" begins, we must be prepared to do everything possible to prevent the inevitable capital flight which would destroy the Western Banking/Financial systems.  Extraordinary times require extraordinary measures.

Again, I'll emphasize, the hundreds of thousands of Chinese Accounts, Shell Companies, and investments sitting off shore (and on-shore) poised to "send money home" are not "free market" independently owned finances of Chinese entrepreneurs and investors who will make independent (rational or not) decisions on what to do with "their" money.  In the eyes of the CCP, the money doesn't belong to these Chinese citizens and entities.  It's not "their" money.  It's CCP money.  These entrepreneurs and investors will do exactly what they are told to do, and exactly when to do it, by the CCP.  They will move these "printed from thin air" Financial Assets in a carefully choreographed, weaponized yard sale designed and implemented to collapse the Western Financial System.  When Xi clicks the sell button....."Everything must go."   

The "Financial War Games" tools I describe below are general/strategic in nature, but must be developed and ready to launch as soon as is practical.  I don't have the resources or data to come up with the nitty-gritty particulars and probable "what-if" implications behind each of these tools (you folks do....or at least you should), but I believe each of my recommendations below are important and directionally correct. It's also important to note that, throughout history, each of these recommendations has been implemented with varying levels of success (or not) depending on their relationship to a holistic policy framework.  In any case, if/when the circumstances warrant, these (or directionally similar) recommendations must be implemented in their entirety.  Putting a couple of band-aids in place won't accomplish what we'll need to get done.

I'm hopeful that you will have carefully crafted, well thought out versions of the below recommendations ready to deploy by executive order at the drop of a hat, well in advance of when we actually need them....and we needed them yesterday.  When the clock strikes midnight, we can't endure months of Congressional debate.  We won't have that kind of time.  We have to think these "what-ifs" through now.  If we do indeed dawdle, muddle and stumble, pausing to figure these things out, under extreme stress, in a vacuum of politically motivated misinformation, as we did with the last financial crisis, it will all be over before we know it.

As always, I welcome your input.

The Goal

The obvious concern (as described in my Dalio's Big Debt Crisis....the FSB Report and Financial War Games....  post) is that once the CCP begins the "Dump" and Western Central Banks move to support markets and liquidity, we'll need to make sure that Western Currency doesn't leave (or become idled within) the respective Western financial systems under dubious circumstances.  i.e.) Dollars sitting in offshore Forex accounts will be of no use to the US Banking system.  Central banks will have to "print it again" to replace it.  (I'll refer to US/Canadian/Aussie Dollars, Yen & Euros as Western Currency for the purpose of this discussion....the world's currencies, many pegged to the dollar, of course will all be caught up in this spectacle, but that analysis is well beyond the scope of this post)  In short, we'll need to curtail the flow of Western money off-shore, while simultaneously providing a significant advantage to Domestic Investors to keep money on-shore (and usable) which does not currently exist today.  To steal a phrase, we'll need to "Build a Wall"......but this one will actually be necessary, and will actually have to work.


The Manafort Indictment - An Illustration of the Problem

The Manafort Indictment is instructional on a number of fronts.  First, it's really a poster child for the ease in which someone, with a little bit of access and a criminal mindset can hide and launder significant amounts of money, avoid paying taxes on foreign income, theoretically forever, if he/she were operating with less hubris.  Second, it illustrates the level of resources, and dogged relentlessness, required to adequately investigate and prosecute these relatively complex cases.  Finally, we can presume from the infrastructure that exists to facilitate these schemes, and the rapidity in which financial assets have ballooned offshore, that there are tens of thousands of "Manaforts" out there.  If you have a chance to read through the relatively short (34 page) indictment I'd encourage you to do so, as it's quite entertaining.

For the purpose of this analysis, I'm going to ignore the FARA (Foreign Agent Registration Act) violations contained within the Indictment as they are not relevant to this discussion.  When we review the Indictment, we see that Manafort accomplished the following, all fully described in the indictment:

1.) Manafort/Gates ran approximately US$75 Million through accounts owned and controlled by twenty three (23) domestic entities and fourteen (14) foreign entities under his direction and control.  The foreign entities were domiciled in Cypress, St. Vincent, the Grenadines and the UK.  Manafort also failed to complete and file the FBAR (Foreign Bank Account Reports) as required by the US Bank Secrecy Act.

2.) Through these entities he laundered approximately US$18 million in funds used to purchase US Real Estate, property, goods and services, concealing these transactions form the Treasury, Department of Justice and US Banking Authorities.  Manafort directed these hundreds of wire transfers for his personal benefit, failing to report and pay income taxes on the funds.

3.) During the time period between 2008 and 2014 Manafort made hundreds of wire transfer transactions (documented in the indictment) to roughly two dozen "vendors" who accepted payment from foreign entities under his control.  The indictment was silent as to whether the vendors broke any US laws.

4.) Once the money was effectively laundered, Manafort used the funds to acquire Real Estate in New York and Virginia, using the properties as collateral for additional bank loans, thereby committing mortgage fraud, misrepresenting both his financial relationships and the occupancy of the properties purchased.

5.) According to the recent USA Today chart below, the cost of the investigation is now roughly $25.5 Million with the expected recovery being approximately US$28.6 Million.  The investigation, by virtue of seizures and asset forfeitures, at least to date, looks like it has actually "made money".



















































































https://www.usatoday.com/story/news/politics/2019/02/12/mueller-russia-investigation-costs/2736507002/

When we further examine the extent of this network, we can also appreciate the level of difficulty and amount of forensic accounting work necessary to put a case like this together.  It's currently impossible to locate and bring all of the "Manaforts" out there to justice in anything approaching an efficient manner, without the expeditious and immediate cooperation of off-shore financial institutions.  For emphasis, there are currently no systems in place to match (currently nonexistent) third party, Off-Shore Foreign Bank data/reports with the FBAR documents and Tax Returns.  Today, it's simply too easy to "get away with it" and the Manafort wannabe's out there know it.

If this case wasn't such a high profile crime spree, perpetrated by a national political figure, promulgating a raid on Mr. Manafort's home, we might never have known the extent of this fraud.  Some believe, and I'm one of them, we probably still don't, and perhaps never will, have the full grasp of what happened.  Dozens of investigators, attorneys and professionals were assigned to this case.  Under the current construct, enormous resources are required to investigate, prosecute and conclude these cases.   The Manafort case is, unfortunately, the exception, rather than the rule.  Most tax cheat cases don't "make money"....the money is long gone.

Moreover, to my knowledge, none of the bankers involved have been charged with violations of US Anti-Money-Laundering (AML) "know your customer" laws, which US Financial Professionals are, of course, required to follow.   After a multi year investigation, costing $25.5 million and counting, we caught one high profile tax cheat.....probably 10,000 or so cheaters to go.  So it goes.


The Incentive for "Good Behavior" (the Carrot)

Long Term Capital Gains Tax Reduction Before the Republicans (copied herein) erupt with glee and you Democrats (also copied herein) deride me as yet another "rich bastard" (Misplaced though it is, I don't take offense....I'm comfortable and happy to have benefited by our current system...but it's nevertheless a harsh moniker that comes with harsh times) who wants to give yet another tax break to the other "rich bastards" (no offense intended to present company copied herein as well).....please hear me out.  The Tax Code's dirty little secret is that the "Capital Gains Tax" along with the "Death Tax" are the two gigantic, fake taxes that publicly strike fear in the hearts of America's wealthy/elite, yet, privately, behind closed doors, nobody (at least anybody who knows what they are doing or is properly advised) ever actually has to pay.  For example, taxes like "earned/wage" income taxes, property taxes, sales taxes, excise taxes or generally anything that inures to the responsibility of the "little people" are paid by (taken from) us/them before we ever see it.   Conversely, as "rich bastards" we have been given the privilege to "choose" to pay taxes on Capital Appreciation whenever we feel like it (triggering event), let it grow in tax deferred accounts, hedge it to prevent the triggering event, or for some modest fees, choose to avoid these taxes all together off-shore.  (Consult your tax advisers for a long list of legitimate devices/tools you can use to avoid paying these taxes.....the list is significant.) 

I could argue, quite successfully, that the US Capital Gains Tax Structure today, when combined with both offshore and "tax-purpose" entities/devices is the most regressive tax structure in history.

Currently, the amount of Capital gains taxes paid in relation to both Financial Asset appreciation and GDP are indeed insignificant. 



The figures in the chart to the left are taken from the latest (2017) IRS Data Book.  You'll note that in 2017 the IRS Collected roughly $3.4 Trillion of total taxes, broken out, in big round numbers (my long time readers know how much I enjoy "big round numbers") as $1.9 Trillion for Individual Income Taxes, $1 Trillion for "Payroll Taxes" (half individual & half business), about $400 Billion for Business Income Taxes, with Excise Taxes and "Death Taxes" bringing up the rear as insignificant in the grand scheme of things.

So what's missing you might ask?  That's right, where are the Capital Gains Taxes?  Well, unfortunately, in the IRS Data Book Capital Gains Taxes Paid/Collected are not broken out anywhere.  In the entire 86 page report, Capital Gains Taxes are not mentioned once.  That's weird.... Huh?  You might guess that the only reason that the Long Term Capital Gain Tax collected isn't in the report is that these taxes are buried in both of the "big" individual and business taxes or they are irrelevant in the grand scheme of things.....and you'd be right on both counts! 

The best source (and only public source that I'm aware of) of data describing historical Capital  Gains Taxes Collected, comes from a report issued by the US Treasury in 2016, although the data is no longer published, presumably because of its insignificance, we can calculate that since the Financial Crisis, net Long Term Capital Gain Taxes paid, despite the incredible increase in Financial Assets (aka wealth) have averaged roughly US$69 Billion per year.  Please read that figure again and let it sink in:

US Capital Gains Taxes Collected Since 2008 have averaged US$69 Billion Per Year.

If we assume the "average" continued on in 2015-2017 (Note in 2019 with the new income indexing, exempting lower income taxpayers....the ones who actually pay the tax....we can expect Capital Gains Tax collections to decrease even further) we conclude the following:



Here's the Treasury Data:
https://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/Taxes-Paid-on-Long-Term-Capital-Gains.pdf







































1.) Capital Gain Taxes Collected are 14.4% of "Total Net Gains", yet, they are only 2.47% of all Taxes Collected during the period (2008-2017) ($27.8T),

2.) Capital Gain Taxes collected were 2.37% of the Increase in Value of all US Financial Assets during the period (2008-2017 = $28.9T) Note: if we include the portion for US owned Financial Assets residing in Tax Haven accounts for "tax purposes" the % is much lower.  Total Off-Shore Tax Haven Assets are US$58.7 Trillion as of 2017, of which US Investors own a significant percentage, but these figures are, of course unavailable.

3.) When we further compare the Capital Gains Taxes Paid during the period (2008-2017) to current US Wealth (i.e. Total US Financial Assets of  $96.8T as of 2017), the ratio becomes 0.71%.  Again, if we make the same adjustment for Off-Shore Tax Haven Assets, the percentage would be significantly reduced.

4.) Finally, when we compare the Capital Gains Taxes Paid in relation to US GDP over the same period (2008-2017 = $165.1T) the ratio approached zero....at 0.42%.  (Note:  All Federal Tax Collections for the same period amounted to 16.8% of GDP)

Further note that since the financial crisis, total tax collections have increased by roughly a $1 Trillion since 2009.  The increase is comprised almost exclusively of Individual Income Taxes and Payroll Taxes.  In America, we no longer tax capital appreciation, and under the current tax structure, it appears we never will.






It appears that America is well on the way to following the French capital flight model, where French capital abandoned the country to Luxembourg, the Netherlands, Ireland and Switzerland....searching for a better return.  A tax exemption and a few basis points compounded over time makes quite a difference in a portfolio.


...or Great Britain, which doesn't necessarily want to leave the EU but refuses to shoulder the financial burden of the French, the Italians, the Greeks, the Spaniards, etc...etc....with no way to pay for it.



Bear in mind that un-taxed financial assets in Luxembourg/Netherlands/Ireland/Switzerland Tax Havens, since the financial crisis, have increased by at least US$12 Trillion, as taxed financial assets in the UK/France/Germany have decreased by roughly the same amount.  Yet another remarkable coincidence.



Once the leadership of a nation refuses, or is unable to finance its society......anarchy will eagerly step in to replace it...

When I look at the numbers above, I find it hard to understand from a tax/incentive perspective, why anyone would actually "work for a living" anymore.  I'm surprised that the American workforce just doesn't go out, get 0% interest rate loans, set up LLC's in the Caymans and trade Treasuries and FOREX futures from their couch all day....Oh....that's right.....it's Ray Dalio's "60% of American's can't scrape $400 dollars together because they can't afford an education, can't find a decent job and consequently their credit is really shitty dilemma".....quite a dilemma indeed.

The more worrisome and frightening aspect of this is that in America, unlike France and Great Britain, the potential "Yellow-Vest" recruits are heavily armed.

I'm also sure there's a very good reason why every Cabinet member and most members of Congress have offshore accounts.  They (you) fully understand how this mechanism works, after all, they (you) along with help from lobbyists and influencers created it.  After all, it's important to have a safe place to keep your unaccounted-for PAC money.

@AOC, I love your enthusiasm, but you are probably too new to the game to truly understand this. You seem to be preoccupied with "saving the environment", irritating billionaires and promulgating a 70% personal tax rate (which nobody who understands tax structured entities today would pay).  These endeavors, though entertaining, are simply not a productive use of your time, but, I'm sure, if you ask a few lobbyists, they will get you in touch with capable advisory help and put you on the right track.  You owe it to your constituents.

Based on the above, along with a few more modifications, though counter-intuitive, we must LOWER the Capital Gains Tax Rate to collect more taxes.  I'll suggest a preliminary 5% rate implemented along with the recommendations below.  The rate must be low enough, compared to alternatives, that investors will choose to pay it.  To paraphrase Don's words, although relating to a different topic... "You've got nothing now....what the hell do you have to lose?"


The Enforcement Tools for "Bad Behavior"...(the Sticks)

Generally, in order to understand economic activity and thus, make correct monetary policy decisions, Jay and company must get a handle on the "usable" liquidity within the the US Financial System and by definition, the amount of "unusable" US dollar liquidity outside of the system.  i.e.) Doubling M1 doesn't help Main street America if it immediately jumps into Caymans accounts owned by the CCP.  Once we've rewarded "good behavior" with low domestic Long Term Capital Gains Rates, we must raise the cost of offshore "legal" avoidance, and of course, bring the hammer down on "illegal" tax evasion, bringing the money supply "home".  (As you can see, I've become really fond of using "quotes" to emphasize these terms.)

Don't get me wrong, there are lots of good reasons for US Taxpayers and Foreign Investors to have overseas financial relationships.  There are also lots of "not so good" reasons.  We simply need to separate the two and apply the proper cost/tax structure to each of them.

Increased Tax Return Reporting Requirements on US Entities with Foreign Relationships - Today, we have a wonderful system of tax filing and reporting where you simply check some boxes on your 1040/1120/1065/5472/851/etc. etc. forms describing your relationship with a foreign entity.  If you have an interest in, or signing authority on a foreign bank account you are also required to file a Foreign Bank Account Report (FBAR).  Since there really isn't much detail required (links to the forms below) I can imagine that if it just slips your mind to mention any of these relationships to your tax preparer that these boxes might easily just go unchecked.  The IRS also has all sorts of brochures and training materials for tax preparers as to what to look for and "red flags" but again, if these relationships aren't disclosed, I doubt that the IRS would be able to pick up on it without an onerous, cumbersome and costly level of investigation.  I also imagine that, since relatively few tax returns have these "foreign" boxes checked, if you do indeed check these boxes there would be an increased level of IRS scrutiny....at least there should be.  This presumed, insufficient level of "unchecked box" oversight might further incentivize a tax payer's accidental memory failure when it comes to "box checking".  Of course, this lack of oversight probably didn't happen by accident.  There was most likely, significant resource, forethought and lobbying effort by wealthy investors and industry groups, emphasizing the importance of the free flow of capital which stymied of any sort of enforcement funding directed at lackadaisical "box checking".  As we all know, the free, anonymous, unrestricted flow of capital and firearms is absolutely necessary to make America great again. 

That said, from a national security perspective, I'd also think, and recommend, that if a US taxpayer is indeed entering into significant overseas transactions and/or maintains ownership of foreign bank accounts, that transaction amounts and the details of the particular accounts involved should also be disclosed and easily verifiable/cross checked by the Treasury.   (This disclosure was absent in the Paul Manafort "Poster Child" Indictment above)

To that end, I would add one question block to the form 5472 (and/or any other applicable forms), the purpose of which would be to identify whether the the Taxpayer has any off shore bank accounts.  The bank name and routing number would be required to be disclosed along with the total debits/credits and ending balance for the tax year, to be retained by the IRS in easily accessible/searchable electronic form. I'd contract the folks at Google and have them get to work on it....if Google can figure out how to archive every aspect of our lives and chronicle our every movement, matching up some bank account information should be a piece of cake.

Off-Shore Tax Haven Accounts - Ownership and Balance Reporting - Develop acceptable framework/treaties to work with Tax Haven jurisdictions (Caymans/Luxembourg/Netherlands/Hong Kong/Singapore/Switzerland/Ireland/Cypress, etc.) to develop Anti Money Laundering (AML) disclosures and electronically share "true" ownership and signing authority of accounts/records.  Require Foreign Banks doing business with US Banks to gather Tax ID numbers and electronically transmit monthly balances, total debits and credits by routing number for same.  The foreign banks should be required, like US Employers are required for 1099's and W2's, and US Banks/Brokerages are required with 1099-INT/DIV's, to electronically file these notices with the IRS and copy the taxpayer on what was filed....just to jog his/her memory.  The Treasury should set reasonable compliance deadlines and revoke access to the US Banking System/SWIFT should foreign financial institutions fail to comply.

For example, when we look at the eight page official "Statement of Cooperation" issued by the Cayman Islands Monetary Authority (CIMA) intended to state its commitment to the FED, FDIC, et al, with regard to "information sharing", we see that the statement is filled with "will endeavor to", "under certain circumstances", "upon request" and "where warranted" fake-helpful-ish language, indicating that the CIMA currently has no intention of assisting the US Treasury in getting to the bottom of tax fraud cases.  The statement is so vague and non-committal that it's actually pretty comical.  This is type of "cooperation" is not acceptable.

Off-Shore Balance Excise Tax - Simply put, there should be a cost to US Investors for keeping funds off shore.  A small percentage of say 3%/yr. (Feel free to run the numbers and come up with your own reasonable percentage) on the offshore financial assets/balances required to be reported by US Taxpayers/Entities should be sufficient.  These taxes would be collected along with annual tax return filings and reported on the modified 1040/1120/1065/etc. forms described above.

Excise Tax on Wire Transfers "Money Out" - There should also be a cost to moving money off shore.  I'd recommend a 1% excise tax on on overseas wire transfers.  (Again, feel free to do some research and come up with a better number).  This excise tax would be applied similarly to gasoline taxes, collected by banks and remitted to the Treasury "at the pump" so to speak, as off shore wire transfers are completed.  There would, of course, be no tax on money coming in, the excise tax would be a "one way" tax on money leaving.

Increased Civil and Criminal Penalties - As a "real" national emergency and a matter of national security, we must enhance the penalties for improper or misleading statements on US Tax returns regarding foreign funds.  After all, we're not talking about meaningless documents like those silly SF-86 White House Security Background Check forms, where it's easy to forget about hundreds of contacts with unregistered foreign agents.  I mean really, we all  know how easy it is for these secret  "agents of a foreign government" meetings to slip one's mind.  Luckily, with those forms, once an error is pointed out by investigators, the subject is simply allowed to amend the form as often as is necessary, until he/she get's it right.

US Tax returns, are arguably the most important, sacrosanct, intimate document an American citizen produces on a periodic basis.  For those of us who are blessed to have worked hard and received the bounty of this country, we owe it to the American public to make sure that these documents are carefully and accurately prepared by professionals.  They should be error free.  They should be perfect.  Consequently, there should be significant, per incident, civil, monetary penalties for each "error" on these tax forms including and up to forfeiture of any property involved in the non-disclosure, per existing 18 US Code 981 & 982 and 18 US Code 2461 requirements/guidelines.

Properly Fund IRS Enforcement - We must properly develop an electronic matching system which compares Foreign Bank reported data to US Tax Returns and Identify discrepancies or reporting failure.  We must implement a system to identify discrepancies between foreign bank reports and US Tax Returns.  There should be significant administrative, "by the book" penalties for non compliance.  i.e.) if you didn't check a box, or your figures are wrong, without any determination as to whether there is a tax liability involved, there's a significant "failure to disclose" fine.  I might even suggest a reasonable "amnesty window" allowing a penalty free, but NOT tax free, window for compliance.  Non-compliant taxpayers would be allowed one chance to get the data right and amend prior tax returns with no criminal penalties.  Like those SF-86's.....Everyone deserves a limited number of second chances.   

The IRS would be tasked with hiring a small army of analysts, programmers, investigators and prosecutors to gather and compare the newly acquired third party foreign bank account data to taxpayer reported data.  Currently, as I'll discuss below in the Manafort analysis, it's not yet practical or cost effective for the IRS to investigate and hunt down tax cheats until the third party bank data is fully accessible and automated.

Of course, it will be important to fully publicize the favorable compliance window as well as the thunderous level of enforcement resources under development, which will soon be crashing down on tax cheats in the near future.  It should also be clear to taxpayers that the newly funded, increased enforcement action on offshore accounts will be treated as a profit center for the IRS. Now, there's a new MAGA jobs program that might prove to be worthwhile, hiring 50,000 new IRS examiners, agents and IT professionals....that might help make America great again....don't you think?

I think American voters would absolutely be willing to jettison the MAGA slogan and get behind a MATCH program "Make America Tax Cheat Hell!"  I can visualize it on red baseball hats all over the heartland!

Again, all of the above are important, necessary steps to separate and identify legitimate offshore money from illegitimate offshore money.

Acts of Financial War - (Even Bigger Sticks)

The following mechanisms will have to be available once we've separated and identified legitimate offshore funds from CCP and/or illegal/criminally controlled funds.  The CCP will likely consider these actions an escalation of "financial war" and respond in a predictable, retaliatory manner. 

Currency Controls - When this mess goes south, we'll need to protect the dollar.  Which means that we won't be honoring what were previously considered free market commitments to those who would have improperly obtained US/Western Assets through nefarious, questionable means or with illegitimate funds of unknown origin.  We need to develop a system where we can vet or pre-approve larger transactions in advance.  Based on the incredible increase in offshore Tax Haven Assets (roughly US$58 Trillion as of 2017 with an estimate of roughly US$65 Trillion currently) we'll need to take a page out of China's play book (SAFE) and develop a framework to prevent deposits of questionable origin from leaving Western Financial Systems.  As a point of reference, today, if you are a Chinese Citizen and you attempt to take more than $50,000/yr. of your currency off shore without specific CCP permission, you'll get a stern talking to as well as some "reeducation".  Your family might wonder where you've been for the last few weeks/months, but it's all part of the CCP modus operandi.  We need to replicate a version of these currency controls in America and have them ready to go should the need arise.

My concern of course is that once the CCP begins the "Dump" the owners of the US$25+ Trillion of Western Currency (the CCP controlled portion of the US$65 Trillion) will attempt to get it out of usable circulation, transferring it to Chinese banks to bolster foreign currency reserves.  Since this has become a matter of national security, US Bankers must have the authority or discretion to delay or stop larger transfers of questionable origin to non-US Banks until they can determine whether the transfers are legitimate and/or might cause systemic liquidity risk to their institutions.  The framework must be coordinated with other Western Central Banks and financial systems.

As a point of reference, the CCP is already doing this with US Investor funds on the mainland today. US Investors are having trouble getting their money off the mainland.  This isn't publicized as the investors are trying to work out the issues through back channels at mainland banks, rather than have their funds seized outright. 

In other words, we'll need to provide institutions and bankers the latitude to stop the illegitimate, foreign drivers of the "run".

Chinese Branch Banks - Develop a framework to immediately shut down and suspend operations (unplug) the CCP Branch banks operating in US Markets on US soil.  (ICBC, Bank of China, China Merchants Bank, CITC and the Agricultural Bank of China).  We should encourage other Western Nations to do the same.  I don't care if we have to cut power to their buildings, large amounts of Western Currency must not be allowed to improperly leave the US banking system through these CCP conduits.

Western Banks Operating in China - By my count, the US currently has nine (9) banks operating in China.  There are at least forty-five (45) additional foreign banks with branches on the Chinese mainland.  (Hong Kong (5), UK/EU/Swiss (17), Japan/Singapore/South Korea (10), Other (13)) There should be an executive order "shelf-plan" ready to go, if necessary, to immediately close US Branches on the Chinese Mainland, and suspend, pending further review, transfers to banks actively involved in transferring/exchanging Western Currency to the mainland (CCP controlled accounts).  Most likely, these operations will be considered casualties of financial war.  Let's just do our best to negotiate, evacuate and get our bankers home.




What We Hope To Accomplish

So let's sum it up.  Here's what we need to accomplish before the US$25+ Trillion tsunami of sell orders on Chinese owned, dollar/euro denominated Financial Assets washes away our Western financial system:

1.) Stabilize the Western money supply.
2.) Understand the flow of "real" money/assets vs. "fake" CCP money/assets. 
3.) Provide the FED with On-Shore/Off-Shore "usable" Money flow/domicile data.
4.) Provide "Onshore Stimulus" via significant Capital Gains Tax Cuts, incentivizing money to "come home".  Reduce the Long Term Capital Gain tax rate to 5% (keeping the 0% rate for lower income taxpayers)
5.) Increase Revenue and deincentivize Off-Shore Tax Havens by increasing the tax cost. (Excise Taxes on Off-Shore balances and transfers "out".)
6.) Increase Revenue through Tax Collections/Enforcement on illegal funds.
7.) Streamline/automate the tax collection matching process on offshore tax schemes and intentional failure to report (FBAR Violations) through international bank cooperation agreements.   
8.) Develop an efficient criminal enforcement mechanism for "aiding and abetting" the "Manaforts" of the world. 
9.) Rebalance the tax base by collecting an appropriate tax on Off-Shore capital appreciation.
10.) Provide meaningful, usable data to the FED, Treasury and Banking System allowing them to stop and/or review illegitimate Off-Shore transfers prior to completion.  
11.) Fully understand and be ready to respond with targeted liquidity when Xi does indeed "press the sell button".

Again, I can't emphasize enough how difficult this will be for all of us.  The sacrifice that will  be required to get the country and the world through this will be enormous.  Kicking the can down the road is no longer an option.

Finally, you all have it within your combined power, here and now, to change history.  We can continue on the same path, put out fires and scratch our heads, wondering why the economy isn't reacting to all of this stimulus.  (I know, I know....some of you think that everything is great...that's part of the problem)  We can continue to keep our heads in the sand and believe that the CCP is simply a second tier, bumbling competitor not-ready for prime time on the global stage, letting our arrogance and self importance blind us to what's actually happening to our great country.  We can continue to dream that someday, the Chinese Communist Party will somehow see the light and march with us, hand in hand to a Kumbaya Utopian world order, where every voice is heard and the entire planet, not just America, becomes the land of the free and the home of the brave.  Yes....we can continue to take that unlikely, improbable path.....because it's easy.

Today, at least for a short time, the choice is ours.  The sooner we act, the better off America will be.  We can all, as a united coalition, galvanize our resolve for the good of the American people.  We can choose to engage with each other and disengage with the CCP.   We can chose to acknowledge our problems, together, and fix them.  We can either do something together, soon, as American leadership, or continue our "all is well" Rip Van Winkle sleep walk into the forfeiture of Western hegemony's whirring-buzz-saw.

I, for one, am getting way to old to start over without putting up a fight..... breaking up is indeed, really hard to do.....



Finally, if we fail, and we're required to begin teaching our children how to say "at your service exalted one" .....在你的服务高举一个 .....in simplified Chinese, I want you to visualize that, fifty years from now, when some little boy/girl in Iowa does a "Who caused the demise of Western Civilization?" subliminal, state-monitored Wang-ipedia search through the (stolen IP) Huawei chip surgically implanted in his/her cute little head at birth, your names, faces and biographies will all come up.....

I hope you'll think long and hard about that.


Additional Reading/Viewing

Mueller Investigation Costs
https://www.usatoday.com/story/news/politics/2019/02/12/mueller-russia-investigation-costs/2736507002/

Yi Gang - pledges "No Intervention"....well....he doesn't need to intervene....he has enough off-shore monetary firepower already.
https://www.bloomberg.com/news/articles/2019-03-10/pboc-s-yi-says-prudent-monetary-policy-is-also-counter-cyclical

SAFE Controls - $50,000/yr.
https://www.ft.com/content/b69166fa-ee01-11e7-b220-857e26d1aca4

Caymans Cooperation Agreement
https://www.cima.ky/upimages/commonfiles/1499794669STATEMENTOFCOOPERATION.pdf
Offshore Money transaction Tax

1120
https://www.irs.gov/pub/irs-pdf/f1120.pdf

5472
https://www.irs.gov/pub/irs-pdf/f5472.pdf

851
https://www.irs.gov/pub/irs-pdf/f851.pdf

Manafort indictment
https://www.politico.com/f/?id=0000015f-6d73-d751-af7f-7f735cc70000







Jay Powell - 60 Minutes - Full Transcript & Inverveiw - All is well.....
https://www.cbsnews.com/news/jerome-powell-federal-reserve-chairman-60-minutes-interview-2019-03-10/

Kyle Bass - Thoughts on "not wasting" the trade talks.  So much to do....so little time....
https://www.bloomberg.com/opinion/articles/2019-02-11/trump-can-t-waste-china-trade-talks

Trade Balance for China - OED - $20T Western Currency from Trade Alone
https://atlas.media.mit.edu/en/visualize/line/hs92/show/chn/all/all/1995.2017/



























EXPORTS $29,869,203,365,116
IMPORTS $18,277,591,290,356
BALANCE  $11,591,612,074,761 
BAL Invested at 6% - $20,005,189,141,954


World Currency Transaction Breakdown























US $2 Trillion of illegal money flow from China to the West
http://www.antimoneylaunderinglaw.com/2017/01/qa-on-the-2-trillion-in-proceeds-of-corruption-removed-from-china-and-taken-to-us-australia-canada-and-netherlands.html


IRS - Gross Collections
https://www.irs.gov/pub/irs-soi/17databk.pdf

Capital Gains Taxes Paid thru 2014
https://www.taxpolicycenter.org/statistics/historical-capital-gains-and-taxeshttps://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/Taxes-Paid-on-Long-Term-Capital-Gains.pdf

BIS Working Paper - Missing Global Debt?
https://www.bis.org/publ/qtrpdf/r_qt1709e.pdf

BIS Working Paper - Triffin Dilemma? of Myth?

FATCA/IGA Compliance
https://www.reuters.com/article/us-usa-tax-fatca/cayman-islands-u-s-reach-pact-to-fight-tax-evasion-idUSBRE97D17U20130814


TAX Issues
https://americansfortaxfairness.org/tax-fairness-briefing-booklet/fact-sheet-offshore-corporate-tax-loopholes/

IRS-Abusive Off-Shore Tax Schemes
https://www.irs.gov/businesses/small-businesses-self-employed/abusive-offshore-tax-avoidance-schemes

Citi - The RMB as  Global Currency...."Not so much"
https://www.citivelocity.com/citigps/waiting-waiting-global-renminbi/