tag:blogger.com,1999:blog-74784082999550665552024-03-10T15:12:57.209-04:00Deep ThroatDeep Throathttp://www.blogger.com/profile/02712515268051858186noreply@blogger.comBlogger96125tag:blogger.com,1999:blog-7478408299955066555.post-29999428152626118902020-04-19T16:30:00.000-04:002020-04-19T16:30:09.151-04:00NEW CONTENT LOCATION<div dir="ltr" style="text-align: left;" trbidi="on">
As of November of 2019 we are posting all new content on:<br />
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<span style="color: blue;"><span style="font-size: large;"><b> <span style="color: blue;"><a href="http://www.deepthroatipo.com/">http://www.DeepThroatIPO.com/</a></span></b></span></span><br />
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Please follow my musings on Twitter as well....<br />
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<span style="font-size: large;"><b><span style="color: blue;"><a href="https://twitter.com/DeepThroatIPO">@DeepThroatIPO</a></span></b></span></div>
Deep Throathttp://www.blogger.com/profile/02712515268051858186noreply@blogger.com0tag:blogger.com,1999:blog-7478408299955066555.post-59130284364976882322019-10-18T22:42:00.000-04:002019-10-21T09:24:02.974-04:00Repo-Acalypse Now....<div dir="ltr" style="text-align: left;" trbidi="on">
Before we get into the nitty-gritty of today's post I'd like to spend a few minutes (3:31) exploring some philosophical perspective on "point of view". The short clip below illustrates the importance of understanding the "dots", in a well presented context, by Alan Watts entitled "It All Makes Sense". I don't ask much of my readers, but please spend 3:31 of your life listening to this analysis. Feel free to skip any ads that might come up as they are irrelevant. (I guess Alan needs a few bucks...philosophy is apparently no longer the gold mine it once was). It's critical to understand where the rest of this post is going. Go ahead, I'll wait, I'm a patient man.<br />
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<b><span style="color: red;">Note: If you've followed my work at all, and you don't have the time to read every line of my highly entertaining banter, you'll recall that the really important concepts are highlighted in RED for emphasis. Good Luck! </span></b><br />
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<span style="font-size: large;"><b><u>The Repo-Acalypse</u></b></span><br />
<b><u><span style="font-family: inherit; font-size: large;"><br /></span></u></b><span style="font-family: inherit;">In all probability, if you are reading this post and follow my work, you are also probably well aware of the recent implementation of the <span style="color: blue;"><a href="https://www.newyorkfed.org/markets/opolicy/operating_policy_191004"><span style="color: blue;"><b>FED's brand spanking new overnight ($75 Billion) and 14 day ($45 Billion) Repo program</b></span> </a></span>which they've announced October 4th, to continue (at this time) through November 4th. <b><span style="color: red;">If you aren't aware of this expanding/accelerating ($75+ Billion of Overnight plus another "up to" $205+ Billion, if fully subscribed, since the multiple 14 Day $35 Billion and $45 Billion Funding rounds will overlap) Monetary Policy announcement you should be. To put this figure in perspective, this figure ($280 Billion) is roughly equivalent of the combined Shareholder Equity of Goldman Sachs (GS) ($90 Billion) and JP Morgan ($220 Billion) for YE 2018.....and the US Financial system seems to need this emergency funding to function effectively over the next few weeks. Ouch!...</span></b></span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiB2jIzVXO2rFDTdbCP4YUBXGT3P-XIHyDHw9IyAFKR5jNxjJEP7HQRQcXk-erElmyyklzJhKQ1BiWXTqcQeDx93Dnjd54PaSeDnuYnGcd2bmeo7dusmu7qzxrq04w-GpNIKjQPI14ed9w/s1600/Repo_Dates_Announcement.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="774" data-original-width="822" height="602" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiB2jIzVXO2rFDTdbCP4YUBXGT3P-XIHyDHw9IyAFKR5jNxjJEP7HQRQcXk-erElmyyklzJhKQ1BiWXTqcQeDx93Dnjd54PaSeDnuYnGcd2bmeo7dusmu7qzxrq04w-GpNIKjQPI14ed9w/s640/Repo_Dates_Announcement.png" width="640" /></a></div>
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<span style="font-family: inherit;">At the risk of oversimplification, I'll try to put today's material in a format that even technocratic, myopic, closed minded, "data driven" Central Bankers can understand. The reason the FED needs to make "overnight/short-term money" available to the financial system is that there is suddenly some sort of mysterious hiccup in the financial plumbing where a systemic player (or close to it) suddenly needs money (liquidity). Hopefully, the FED folks know exactly who it is and how/why it happened. Here are the specifics as to why this player (or players) must indeed be a "systemic" player/players:</span><br />
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<span style="font-family: inherit;">1.) The cost of <a href="https://www.wsj.com/articles/why-were-they-surprised-repo-market-turmoil-tests-new-york-fed-chief-11569777702"><span style="color: blue;"><b>"Overnight money" spiked to 10% on Sept 17th</b></span></a>, indicating that Banks (with spare money/reserves) were unwilling to lend to a particular Entity or Entities under current conditions, so the FED (Through Dealers they are implicitly guaranteeing) are instructed to step in as the lender of last resort.</span><br />
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<span style="font-family: inherit;">2.) The Bank(s)/Entity/Entities in question are likely systemic otherwise the FED/FDIC would have simply "done their thing", as they often do, on a Friday night, at close of business, showed up at the problem Bank/Entity's door step and closed it down, only to open, recapitalized, the following Monday under a new banner. There would be no Repo Facility needed. </span><br />
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<span style="font-family: inherit;">3.) The expansion of this Repo facility is likely just buying time for the FED to come up with a game plan on how to resolve/unwind this particular, presumably systemic problem.</span><br />
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<span style="font-family: inherit;">4.) </span><span style="font-family: inherit;">The identity of this Bank/Banks/Entity/Entities is always a closely guarded secret since the disclosure of same would most likely make matters worse, causing a "run" and/or involved counter-parties to make decisions not to play in the sandbox (e.g. Bear Sterns/Lehman/etc.)</span><br />
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<span style="font-family: inherit;">5.) There are insiders and government bankers/officials who know exactly who the suspected culprit(s) is/are and there are (hopefully) meetings taking place as I type, to come up with a resolution plan to deal with it. At least we all hope so. </span><br />
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<span style="font-family: inherit;">To continue my "oversimplification theme" there are only two (2) reasons a bank gets into trouble and suddenly needs significant infusions of "overnight money". The first is a a macro dislocation of some type, i.e.) a bank dedicated/over-weighted in a specific market niche, e.g.) significant lending to an industry or customer base that suddenly experiences severe headwinds or disruptions (Oil, </span>Commodities, Manufacturing Supply Chains, Farming, Commercial Real Estate lending concentrated in a specific bubble-iscious market, etc. all might come to mind) the loans (Bank Assets) go bad and need to be restructured. Usually, these disruptions take place in, or more likely near, the end of a long recession or down business/debt cycle. The bank(s) has/have been juggling the books/funds for a while and it all finally comes home to roost. Given the current length of the expansion and the lack of significant disruption in the US Economy and financial markets, it's unlikely that this is the problem causing the current Repo facility requirement, at least for the time being.<br />
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So let's focus on the other possible cause for the disruption, which is, a rapid, immediate dislocation/shortage of deposits at a particular large institution (or two/three). i.e.) a "run" where only a few folks in the know, decide that, perhaps, for whatever reason, they're not doing business with a particular institution and they pull their deposits. The bank(s) in question would have four choices to continue to meet their immediate obligations when they get the avalanche of withdrawals, wire transfer and SWIFT request(s):<br />
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1.) Shore up their deposits/cash position through short term borrowing (i.e. Repo Money)<br />
2.) Quickly sell assets (often at fire sale prices) to reduce their balance sheet and generate liquidity.<br />
3.) Call the loans they've made to "non-systemic" banks.<br />
4.) All three.<br />
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It goes without saying that the lower the particular banks "cash on hand" (asset) when compared to its "deposits" (liability), the quicker the problem rears its ugly head. The obvious problem here is to balance good-old "immediate demand for cash" risk versus the earnings hit suffered by not assuming the "stretch for less-liquid yield" risk. I've long opined that, at least in theory, big-systemic banks with unlimited access to FED liquidity have absolutely no requirement to maintain any cash balances at all (While still complying with the Basel requirements). Because of the instantly available FED liquidity these behemoths are insulated from "runs" and in fact, although they would vehemently deny it publicly, look forward to these liquidity crunches as an opportunity to expand market share, absorbing their smaller "non-systemic" rivals and picking up distressed assets at bargain prices. Because of this implicit bail-out guarantee, they are able to invest their "free capital" in any dog-shit, boondoggle, deals they choose as long as they generate significant fees, which is exactly what they've done. Conversely, "non-systemic banks", without direct FED/liquidity access and "free capital" are forced to maintain higher cash balances, have no/little access to these global-fee-generating-boondoggles, starving them of albeit fleeting/fake earnings. Because of this structure, non-Systemic banks have become dangerously dependent on the generosity and largess of the Big "Systemic" banks to lend a helping hand when times get tough.<br />
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This is, of course, the primary reason that the number of FDIC insured US banks is roughly half (4,605 vs. 8,620) of what it was 20 years ago even while the money supply has increased three fold. You'd think that more money would spawn more opportunity and expansion in the banking business, but because of the above described pricing and financing preferences, the exact opposite has happened. Consolidation, in any industry, is the expected result when a government guarantees risk-free capital preferences to certain systemic actors and starves the "little guys" out. (See: Amazon vs. Main Street Retail; Agri-Business vs. the Family Farm; Uber/Lyft vs. Cabbies, etc.) So it goes.... <br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiQB-e8onZuxjSN2qPjMpeztXeTpo_Q9DRJcomNL6MV62tzwlDOg-wcdgxaXZ1YJURvdFVof6Q5x582Htkmajpvspy64GttBsOdODNrKgyLo762LeAvx6dYgVxnZPa5Z1HpR4B_6iwD5Pw/s1600/Commerical_Banks_v_M3.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="842" data-original-width="1056" height="510" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiQB-e8onZuxjSN2qPjMpeztXeTpo_Q9DRJcomNL6MV62tzwlDOg-wcdgxaXZ1YJURvdFVof6Q5x582Htkmajpvspy64GttBsOdODNrKgyLo762LeAvx6dYgVxnZPa5Z1HpR4B_6iwD5Pw/s640/Commerical_Banks_v_M3.png" width="640" /></a></div>
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Of course, because of the breadth, depth and resilience of the US Financial system, the sudden, immediate need for secure overnight financing would indeed take a gargantuan, unlikely series of unfortunate events, that nobody could possibly have seen coming, to cause a disruption of such magnitude, requiring, for example, a quickly expanding short term $75 Billion+ FED Repo Facility and a $205 Billion Term Facility, where, if it didn't exist, certain, unnamed, anonymous "non-systemic" banks would be relegated to either paying 10%+ (the observed market rate) for overnight money, or fail to make the required wire transfers that their fleeing depositors may have requested. Neither path would contribute to the perception of longer term viability for these decision-tree challenged, non-systemic victims of their own ill-advised endeavors. "Free Markets" can be tough....<br />
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<span style="font-family: inherit;"><br /></span><b><u><span style="font-family: inherit; font-size: large;">US Dollars "Owned" by Foreign Entities</span></u></b><br />
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Now, let's take at the look at two of my favorite "profusions of dots under the microscope" as Alan Watts described above. We're going to examine two of my favorite data sets: The Bank of International Settlements (BIS) International Bank Liabilities/Deposits data, and the US Treasury International Capital (TIC) data.<br />
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Before we get too far into this, let me assure you, what we are about to discuss is a complex topic, that nobody talks about. It's boring, takes a significant understanding of economics and monetary policy and is generally never going to appear on the front page of the Wall Street Journal or the New York Times. Nobody cares. In fact, the only people who truly understand what's happening are Chinese Central Bankers and they don't give interviews. As you are reading this, if you start to get a headache, stop reading for a few minutes, take a break, maybe fix yourself a stiff drink, or maybe even get some sleep, regroup and carry on. You'll get through it. This really is an "urgent and horrifying news story".<br />
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<b><u><span style="font-family: inherit; font-size: medium;">The Bank of International Settlements - </span></u></b><b><u><span style="font-family: inherit; font-size: medium;">US Dollars "Owned" by Foreign Entities Outside of the US Banking System </span></u></b><br />
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We will start with the BIS Quarterly report on "Local and Cross-Border Bank Liabilities and Claims". (Please stop applauding/cheering and focus....I understand this is some of your favorite reading material, but let's get a grip and press on)<br />
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The BIS is an incredible repository for unintelligible "dots" that nobody seems to look at, primarily because it's dated, published six months in arrears and significant players (i.e. China and the US) don't report "local" data anyway. China and the US report "Cross Border positions" only. But like life, when whatever you have to work with isn't exactly what you need/want, you have to make the best of it. I'm hopeful that our friendly Central Banker decision makers have better, more precise data at their disposal.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhXVfbMkhmuqZNWLTriCaWuQdZz7dB1O_zgBRoa1dFqzYqLVIKxxoN4vxX0nuUzVee6L04-gTqNZuiUhn8v0H-7ADDnJwowOpS1WLg6_fRMZHVUgmh_5GvaVB3mVg_S0kfO87HSvEbEf88/s1600/BIS_All_Reporting_Countries_Q1-19.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="455" data-original-width="512" height="566" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhXVfbMkhmuqZNWLTriCaWuQdZz7dB1O_zgBRoa1dFqzYqLVIKxxoN4vxX0nuUzVee6L04-gTqNZuiUhn8v0H-7ADDnJwowOpS1WLg6_fRMZHVUgmh_5GvaVB3mVg_S0kfO87HSvEbEf88/s640/BIS_All_Reporting_Countries_Q1-19.png" width="640" /></a><br />
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<a href="https://stats.bis.org/statx/srs/table/A5?c=5A&p="><b><span style="color: blue;">https://stats.bis.org/statx/srs/table/A5?c=5A&p=</span></b></a><br />
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So what exactly are these "meaningless dots" we are looking at, trying to make heads or tales of, above? For the purpose of our analysis today, let's focus on the following (all of the figures are presented in USD equivalents):<br />
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1.) The table above shows all of the "Money" scattered all over the planet, (bank and some non-bank). "Money" is presented in equivalent US Dollars. For the purpose of our analysis we will use "liabilities" as a surrogate for bank and non-bank "deposits" and "short term debt instruments" (CD's & demand notes, etc.) or ...."Money" as described "By Instrument" above.<br />
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2.) We see that per the BIS, Total Global Deposits/Liabilities/(Money) is $99.4 Trillion comprised of "Local" Liabilities/Money of $69.5 Trillion, "Cross Border" (Off-Shore) Liabilities/(Money) (money held outside of the home country) of $27.3 Trillion and "Un-allocated" Liabilities/Money of $2.7 Trillion. (Apparently this $2.7 Trillion is "on the books" but the BIS can't tell exactly where it is. No matter, it's only $2.7 Trillion (15% of US GDP) so we'll treat it as a rounding error....Yeeeshhh<br />
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3.) If we examine the "<span style="background-color: blue; color: white;">Blue Highlighted Figures</span>" we note that US Dollar denominated "Local" Liabilities/(Money) is $3.9 Trillion, "Cross Border" (Off-Shore) US Dollar Liabilities/(Money) is $10.2 Trillion. $671 Billion is "Un-allocated" (I love rounding errors don't you? The rough equivalent of Market Cap of the five biggest US Banks is somehow sitting somewhere in the world unaccounted for). Which in aggregate comprises a total of $14.8 Trillion. In other words "The World" outside of the United States is somehow getting by on only $14.8 Trillion USDs.<br />
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4.) The simple math tells us that, since the US and China do not report "Local" Liabilities/(Money), the US Dollar comprises roughly 54% of all "Cross Border" (Off-Shore) money, dwarfing any other currency, with the next closest currency being the Euro at $4.2 Trillion (14%), with the Pound Sterling and the Yen amounting to roughly 3% each. These four currencies comprise roughly 74% of all "Cross Border" (Off-Shore) Money.<br />
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5.) Keep in mind that "Cross Border" Money could be foreign ownership of US Dollars residing in either US "Local Banks" or foreign banks or branches domiciled in the US. (<i>This is really important...put this concept in a safe place in your cerebral cortex as we'll be discussing it a little bit more later</i>)<br />
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6.)Again, as a point of emphasis, we have no idea, at least from BIS public data, what the level of "Local" US Dollar Deposits looks like in off shore Chinese Banks.<br />
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7.) The RMB, of course, is not relevant since it has no material "Off-Shore" presence. Again, China does not disclose "Local" Liabilities/Money, presumably, most of which would most likely be RMB, but again, we have no idea what, if any, are the real US Dollar balances held in/by Chinese depositors in Chinese banks.<br />
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8.) Even if we did have official deposit/liability figures from the Chinese Government or PBOC they would probably be inaccurate due to the Chinese Communist Party generally being a bunch of lying liars who lie.<br />
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So now let's take a look at the Off-Shore Money trend over the last few years.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjZz0PNagLbp9QRa5G61Ww3zwIo-3Q5qCmlxUEdWrmsc6zidQzTE8gR3Lr5S53eQyLleZVeRRkyzKlAcKX9kOOnUZn7vUESirl1JdRpXK32s8hiD0x5IjZgaOR7_LvdtMI6XrhJK9Q4zcw/s1600/US%2524_OffShore_Combined_Chart.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1027" data-original-width="1179" height="556" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjZz0PNagLbp9QRa5G61Ww3zwIo-3Q5qCmlxUEdWrmsc6zidQzTE8gR3Lr5S53eQyLleZVeRRkyzKlAcKX9kOOnUZn7vUESirl1JdRpXK32s8hiD0x5IjZgaOR7_LvdtMI6XrhJK9Q4zcw/s640/US%2524_OffShore_Combined_Chart.png" width="640" /></a></div>
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So what do the above charts tell us?<br />
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1.) The first chart shows us that the amount of "Total Dollars held Off-Shore" (Outside the US Banking System) has increased by about $800 Billion since 1/1/17, to $14.8 Trillion.<br />
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2.) The increase is primarily in China and Hong Kong ($330 Billion), the United Kingdom ($300 Billion) and Cross Border (Off-Shore) deposits/liabilities controlled by US Depositors ($100 Billion). The remaining $100 Billion is spread around the rest of the world in the following BIS Reporting Countries.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEikADC64947CGUx9J_dPSnkC3TY9NdQpvJ6kF2T-T2JiYghKFncR3iDnD7DQ8aFF1jlhaBefX21JkhdzB34go82j4y4XZsuwpq19yvmfBoA84F3EHc_v7-ZO11_xGb0NgBjU_UE1ta287g/s1600/BIS_Reporting_Countries.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="528" data-original-width="991" height="340" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEikADC64947CGUx9J_dPSnkC3TY9NdQpvJ6kF2T-T2JiYghKFncR3iDnD7DQ8aFF1jlhaBefX21JkhdzB34go82j4y4XZsuwpq19yvmfBoA84F3EHc_v7-ZO11_xGb0NgBjU_UE1ta287g/s640/BIS_Reporting_Countries.png" width="640" /></a></div>
3.) Interestingly, there are roughly the same amount of USDs (combined Local and Cross-Border) $2.2 Trillion in the UK as are held as US Cross Border deposits/liabilities. China Cross Border USD values are nearly as high at $1.9 Trillion.<br />
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4.) According to the BIS figures, just under half (42% - $6.2 Trillion) of the World's Off-Shore USDs are concentrated in China, Hong Kong, the UK and US Cross Border. The remainder (58% - $8.6 Trillion) is scattered all over the rest of the planet.<br />
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<b><span style="color: red;">5.) Most importantly, again for emphasis, the Global USD increase over the last two years was primarily attributable to domiciles outside the United States (88%), with only 12% of the USD increase attributable to US Cross-Border Bank Liabilities/Deposits. In other words, the Global inventory of "newly printed" USDs is rapidly being absorbed by foreign ownership. </span></b><br />
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<b><span style="font-size: medium;"><u>Treasury International Capital "TIC" Data - </u></span></b><b><u><span style="font-family: inherit; font-size: medium;">US Dollars "Owned" by Foreign Entities In the US Banking System</span></u></b><br />
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Now, let's take a look at Foreign holdings of deposits/liabilities "inside" the US Banking System. Again, the data available is unfortunately "rear view" mirror data, i.e.) It gives a perspective of the size of the potential disruption but it gives us no indication as to current direction or flow. The most current data available form the Treasury is as of Q2, 6/30/19. I'm hopeful our FED leadership has better, more current data, but again, I, sadly, I'm unaware of it and/or don't have access to it.😠<br />
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<a href="https://ticdata.treasury.gov/Publish/bliabs_cntry.txt">https://ticdata.treasury.gov/Publish/bliabs_cntry.txt</a><br />
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<a href="https://www.treasury.gov/resource-center/data-chart-center/tic/Pages/index.aspx">https://www.treasury.gov/resource-center/data-chart-center/tic/Pages/index.aspx</a><br />
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<a href="https://ticdata.treasury.gov/Publish/lb_99996.txt">https://ticdata.treasury.gov/Publish/lb_99996.txt</a><br />
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We see a couple of interesting data points in the chart above.<br />
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1.) Total Liabilities/Deposits held inside the US Banking system by foreigners has increased $167 Billion in the last year. Total US Dollar deposits held by foreigners is $5.3 Trillion.<br />
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2.) Of that $5.3 Trillion, $1.9 Trillion is held by Europeans, $1.6 Trillion is held by Cayman Islanders, $400 Billion is held by Japanese depositors, $200 Billion is held by the Chinese and $1.2 Trillion is held by depositors in the "Rest of the World".<br />
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3.) I find it interesting that the Cayman Islands, a couple of tiny Caribbean Islands, populated by roughly 60,000 people, has somehow managed to accumulate 20,000 Investment Funds, a presence of 130 Global Banks, the home of nearly every Chinese ADR listed on US Stock Exchanges (roughly 190 listings with a market cap north of $2 Trillion) and US Bank deposits nearly the size of all of Europe. The only conclusion we can draw, despite the Treasury classification above, is that the deposits are actually "someone elses money" rather than the property of the wonderful citizens of the Cayman Islands. But I digress...<br />
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4.) Since we have no way of knowing who actually controls these deposits, it would not be a stretch to think that a significant amount of this liquidity is actually owned/controlled by Chinese entities.<br />
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5.) Of the $1.9 Trillion European deposits $1.4 Trillion (70%) are held in the UK and Tax Havens (Ireland, Luxembourg, Netherlands and Switzerland). Again, because of the anonymity afforded by these financial centers, we again, have no way of knowing who the real owners of these deposits are. i.e.) How much of these Tax Haven deposits is really controlled by the Chinese Communist Party?<br />
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6. Since the above described funds are currently in the US Banking System we can also see that foreign ownership of these deposits represents roughly 38% of US Broad Money (M3).<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEioWY2M7zYvcvEJT0WFom2tjVsIjkjAM1GZKDul1VQK0q1a35sv2BUvtkupbcPLoxp7LNd3QgoCQ-DHhbpK4uMEbQN_llHgrFro19QNv1sd6uzoD6gNwWxRf9pciUmE6vvYh0I1724coxk/s1600/M3_US_CN_EU_JPN_2008-2019.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="455" data-original-width="969" height="297" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEioWY2M7zYvcvEJT0WFom2tjVsIjkjAM1GZKDul1VQK0q1a35sv2BUvtkupbcPLoxp7LNd3QgoCQ-DHhbpK4uMEbQN_llHgrFro19QNv1sd6uzoD6gNwWxRf9pciUmE6vvYh0I1724coxk/s640/M3_US_CN_EU_JPN_2008-2019.png" width="640" /></a><br />
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7.) When we examine the M3 Chart above we also see that China (RED) is the outlier, more than doubling their domestic money supply when compared to the US, Europe and Japan. The PBOC has been able to accomplish this "say so" exchange rate since the RMB, again, like so many things Chinese, is a fake currency with a pegged value which has nothing to do with economic reality. <span style="color: red;"><b>The second largest economy in the world has a closed, inflated currency which nobody uses. Yup....that's a fantastic idea. As you historians might recall, the Reichsbank tried the same thing in 1920. But they didn't have computers/wires/SWIFT so it was easier to spot. The reason the Mark failed was that they actually tried to use this currency to pay their international bills (WWI Reparations) and the Allies caught on.</b></span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjF8trPARnbi0XtpD2xu1wyFoWbW7gABeGIQy-bMg-A-nLrqAe53HGjeipdj0XzYAz46nJ5gePX0C_9BUuiWvdunqMwnnAdpOda19Vd0WwhyphenhyphenQuWODGIAdqAP_5dH2k52vTmchDgElOxqPY/s1600/Billion_Mark_Note.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="156" data-original-width="323" height="307" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjF8trPARnbi0XtpD2xu1wyFoWbW7gABeGIQy-bMg-A-nLrqAe53HGjeipdj0XzYAz46nJ5gePX0C_9BUuiWvdunqMwnnAdpOda19Vd0WwhyphenhyphenQuWODGIAdqAP_5dH2k52vTmchDgElOxqPY/s640/Billion_Mark_Note.jpg" width="640" /></a></div>
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8.) Note that the RMB, despite the Chinese economy being the world's second largest, remains a useless, closed currency for both international trade and global investment (at least for now), yet Chinese (all domestic) M3 is more than double the world's other major economies, even though China GDP is roughly half of US GDP. Also remember that the People's Bank of China releases its M3 figures nearly a half year in arrears, again, the presumed Occam's Razor explanation for this is that the figures are suspect/fake, and again, that the Chinese Communists are, for emphasis, "lying liars who lie".<br />
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Now, let's take a look at the US Broad Money Supply (M3) TIC data in conjunction with the above described Off-Shore Bank Liabilities/Deposits as provided by the BIS, and make an effort to see how it all fits together. In the Table below I describe the comparative levels of US Dollars in various jurisdictions in four "time snapshots". I chose YE-2003 (a relatively stable economic time just after the bursting of the dot-com bubble), YE 2007 at the peak of the pre-GFC froth, YE-2008 (The commencement of the Great Financial Crisis) and last, Q2 2019 (The most current data available). Let's take a peek.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjZnqL2PQWFZ_b_2YPD-YpIJL75BrEQqXvqWqn2vgJCF5OuEsyo345RGUE_njO64qeHLL2Pl-F7MlaJvst9yU95K4oVoeXtfuceRnzTM8yoC8OpSdK-P2nWyRojUzLkmbVX2q35se4z4lI/s1600/US_Dollar_TIC_BIS_Deposit_Analysis_A.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1081" data-original-width="1264" height="546" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjZnqL2PQWFZ_b_2YPD-YpIJL75BrEQqXvqWqn2vgJCF5OuEsyo345RGUE_njO64qeHLL2Pl-F7MlaJvst9yU95K4oVoeXtfuceRnzTM8yoC8OpSdK-P2nWyRojUzLkmbVX2q35se4z4lI/s640/US_Dollar_TIC_BIS_Deposit_Analysis_A.png" width="640" /></a></div>
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Of course I'll be the first to acknowledge that there is absolutely some double counting here since, for example, there is no way that I know of to eliminate certain overlaps in the figures, such as:<br />
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1.) Some of the foreign Cross-Border BIS Dollars from "Country A" could be domiciled in US Banks as well as other countries banking systems. We have no way of determining the overlap.<br />
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2.) US Cross-Border BIS Dollars could be reported as "Local" US Dollar deposits in the particular jurisdiction. <br />
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3.) In this analysis, we use "Net" M3 (M3 less USD deposits held by foreigners per TIC) to approximate what should be, if they were disclosed by the BIS, defined US Local Dollars, which are not shown with certainty.<br />
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4.) We have no way of knowing the extent of "Local" US Dollar deposits in China. They are not reported in the BIS Data. I'd suggest that the figure might be substantial. The TIC data shows us a relatively low balance of $135 Billion (US Dollar deposits owned by Chinese depositors in the US Banking System). I'd also suggest that the aggregate Dollar deposits that the Chinese Government actually controls might/should be much larger. i.e.) They've obtained/controlled several hundred billion US Dollars per year derived from continuous trade surpluses, for the last 20 years. If properly invested, these US Dollars should have compounded to at least $15 Trillion, likely invested in Chinese controlled Western Financial Assets and Real Estate. (I'll attempt to prove this concept a bit farther down the post....please be patient) Remember, and I just want to reemphasize this, the Chinese Communist Party is an amalgamation of lying liars who lie. (....are you getting this theme yet?)<br />
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So now that we've discussed what's wrong/inaccurate with/about these numbers, let's discuss what they are telling us since they were consistently compiled over time.<br />
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<b><span style="color: red;">1.) The first thing we notice is that Total Global US Dollar Deposits has more than doubled, to $29.571 Trillion since 2003.</span></b><br />
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<b><span style="color: red;">2.) Domestic US Dollar deposits, used to support America's "main street" economy </span></b><b><span style="color: red;">(Dollar Deposits held by US Depositors in the US) </span></b><b><span style="color: red;">are 32% of total Global US Dollars in circulation. </span></b><br />
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<span style="color: red;"><b>3.) As the issuer of the World's Reserve Currency, America has assumed the role of currency purveyor to the rest of the world. (As of June 2019, 69% of US Dollars in circulation were held by foreign entities either in US Banks or Cross-Border in foreign Banks).</b></span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiekCIgXo06Rmdh0lBydPtr7Y0w9bQ_Jz9NC6z_OfFlFo9abIwmCndbPfOotBgoD_U_EypzS1lVKpEAEoGSVdofiz14O-R_NYsFoTa0VdcoNX48u9kb3jWqaKF_YSmzOxpBWg4-P-SaMlA/s1600/Global_USD_Deposits_Chart_A.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1205" data-original-width="978" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiekCIgXo06Rmdh0lBydPtr7Y0w9bQ_Jz9NC6z_OfFlFo9abIwmCndbPfOotBgoD_U_EypzS1lVKpEAEoGSVdofiz14O-R_NYsFoTa0VdcoNX48u9kb3jWqaKF_YSmzOxpBWg4-P-SaMlA/s640/Global_USD_Deposits_Chart_A.png" width="518" /></a></div>
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Again, the Chart above, derived from the previously described BIS/TIC data, illustrates the following very important concepts:<br />
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<b><span style="color: red;">1.) Roughly half of all US Dollar Deposits in circulation are held by foreign entities in foreign Banks.</span></b><br />
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<b><span style="color: red;">2.) Roughly 20% of all US Domestic US Bank Deposits reside in accounts owned by foreign entities and individuals.</span></b><br />
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<b><span style="color: red;">3.) Only 32% of all US Dollar deposits in circulation, roughly $9.4 Trillion, are owned by US Entities and individuals and held in Domestic US Banks. (The "Green" area on the above chart)</span></b><br />
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<b><span style="color: red;">The point of the above is that the US dollar, through the FED's relentless, forced, monetary expansion, has somehow morphed from a secure, reliable currency, desperately needed to transact international trade, to a ubiquitous repository for the world's financial asset inflation. </span><span style="color: red;"> In short, as we will see in the next section, there's a real chance that the FED has lost what used to be de facto control of the dollar. They just don't know it yet. They (presumably) have no idea why so many dollars ($29 Trillion+) have made their way into places that, to be blunt, constitute a national security risk, when less than a third of that amount is required to run the US domestic economy. They are following the CPC "pump and dump" game plan right into the abyss. </span></b> They provide dollar liquidity at any and all cost. The problem, as I see it, is that the FED, and for that matter, the world's Central Bankers, rather than stopping, taking a breath and the time to understand the impact of what their policies are really doing, are blindly dumping money down the QE toilet without bothering to figure out where the sewer line might be leaking or what that overwhelming stench might be. At some point we're all going to be knee deep in monetary <span style="background-color: white;"><b><span style="color: #222222; font-family: inherit; white-space: pre-wrap;">拉屎.</span> </b></span> <br />
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<b><span style="font-family: inherit; font-size: large;"><u>Where's the Money Lebowski?</u></span></b><br />
<b><span style="font-family: inherit; font-size: large;"><u><br /></u></span></b><span style="color: red; font-family: inherit;"><b>After decades of $500 Billion (plus/minus) annual global trade surpluses you'd suspect that the Chinese must own not only a significant amount of US Dollar deposits scattered all over the world, but significant financial assets (Stocks, Bonds, Real Estate, etc.) as well, and you'd be correct. Over the last two decades the West has transferred roughly $11.266 Trillion (in Dollars, Euros, Yen, Sterling, etc.) as a result of these trade surpluses. </b></span><br />
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<span style="color: red; font-family: inherit;"><b>Through the miracle of compounding interest, we can estimate that the value of Western Assets (including the Chinese portion of the above described bank deposits) controlled and direct-able by Chinese Communist Party, members and agents is roughly $27.321 Trillion (give or take) if invested at the S&P Total Return as described in the table below. Again, we know this with certainty, since there are no material RMB deposits or RMB denominated financial assets in any non-Chinese Banking systems anywhere in the world. This $27.321 Trillion can move freely around the globe between US Dollars, Euros, Sterling, Yen, Hong Kong Dollars, Canadian & Aussie Dollars, Rupees, Pesos, etc. etc. etc., but it's never been converted to RMB.</b></span><br />
<span style="color: red; font-family: inherit;"><b><br /></b></span>
<span style="color: red; font-family: inherit;"><b>This approximately $27.321 Trillion, Chinese money/assets </b></span><b style="color: red;">is still lurking in the Western Financial System somewhere.</b><br />
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<b style="color: red; font-family: inherit;">(Note: The figure could be much greater since the Chinese, as large depositors, have had unlimited access to excellent financial advisers, and leverage, provided gleefully by our friendly US Investment Bankers. The CPC has </b><b style="color: red; font-family: inherit;">most likely beaten</b><b style="color: red; font-family: inherit;"> the S&P Returns with consistency) </b><br />
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<span style="color: blue; font-family: inherit;"><a href="https://oec.world/en/visualize/line/hs92/show/chn/all/all/1995.2017/"><b>https://oec.world/en/visualize/line/hs92/show/chn/all/all/1995.2017/</b></a></span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj511QFmSWjl6IdTdCgbnuEmvMPSSvUNLGNyTk_NdWs0L5r_qZJi2zO9DV3bByq9xPI-UZDMkuCNWEukNOL8c0S-u8cOdBuXNjHQwx72Tx66JwMFPs7GxKwDp6pIAcZWCdo2qA_lH6T498/s1600/China_Trade_Balance_1999-2016.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="536" data-original-width="672" height="510" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj511QFmSWjl6IdTdCgbnuEmvMPSSvUNLGNyTk_NdWs0L5r_qZJi2zO9DV3bByq9xPI-UZDMkuCNWEukNOL8c0S-u8cOdBuXNjHQwx72Tx66JwMFPs7GxKwDp6pIAcZWCdo2qA_lH6T498/s640/China_Trade_Balance_1999-2016.png" width="640" /></a></div>
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Of course, there are many differences between Western democratic and Chinese Communist philosophies. The most relevant of which, in the context of today's topic is, and that what Westerners universally get wrong involves "property rights". <b><span style="color: red;">Westerners believe that the right to own private property is inviolate, separate and immune from state interference in all but specific, predefined circumstances. Authoritarian Chinese Communism, on the other hand operates under a pseudo-privatization model, where the 90 million party members believe and fully understand that they own property only at the party's behest. </span></b> They know full well that this "right" can be abrogated and snuffed out in the blink of an eye if they fail to toe the party line and/or somehow fall out of political favor. <br />
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For the sake of argument, lets just imagine that there are financial, social and political incentives, as well as onerous "disincentives" (re-education, ostracism and possible mysterious disappearance or "accidents" befalling the party member and/or their loved ones) which party members are made well aware of.<br />
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<b><span style="color: red;">Using this management style, it wouldn't be far fetched to believe that the Chinese Communist Party would be fully capable of orchestrating and directing a symphony of 90 million people, investing and managing money exactly the way they are told to. Under the direction of the CPC this giant hive, comprised of 90 million individual worker bees, has been buzzing away for decades, redeploying their $27.321 Trillion, slave-labor trade surplus to Western bank deposits, financial assets, stocks, bonds, Real Estate and businesses, etc.</span></b><br />
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Western Bankers see tens of thousands of off shore entities, as well as millions of individual depositors and investors, home/condo buyers in targeted cities and job seekers in high tech industries and Western financial centers, all needing loans, bank accounts and fee generating services. Western Bankers welcome "newly minted" Chinese billionaires with no discernible background or verifiable history showing up on their doorsteps with millions (or even billions) of US Dollars to invest, as well as dubious IPO business plans where, when asked about specifics or details, either decline to respond citing "state secrets" or simply threaten to pull the deal (recruiting another banker to get the job done). If one banker won't sell out America, the next one will. The deal, of course, always somehow gets done.<br />
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<b><span style="color: red;">Where the West has failed, is that we have blindly (or not) chosen to take all of these transactions at face value, naively treating these individual deals as "Westernized" free-market transactions, believing that the preservation of Western-style property rights and Tax Haven anonymity would prevail and that the rights of the individual Chinese banking customer must therefore also prevail. In reality we should be treating all of these transactions as if they are all consummated by one, and only one, gigantic bad actor, the Chinese Communist Party.</span></b><br />
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How would Western Governments react if today, a Chinese Government delegation showed up in Washington DC and made an offer to buy lots of Manhattan and Bay Area Real Estate and a third of America's stock and bond markets at a deep discount, also making a relatively forceful demand that we close down and/or recapitalize half of our financial institutions, disrupting the global purchasing power of our currency, as part of the "trade deal"? I doubt that this proposal would get very far.<br />
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Unfortunately, it's already happened, we've just failed to collectively see it.....<br />
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I've written, in a bit more detail in a previous post entitled "<a href="https://deep-throat-ipo.blogspot.com/2019/03/a-modest-proposal.html"><span style="color: blue;"><i><b>A Modest Proposal</b></i></span></a>", on our need to prevent the inevitable capital flight in order to have any chance of surviving this as a nation. The point of the exercise is that we need to quickly figure out and take measures to freeze CPC controlled bank accounts and financial assets. We need to take a page out of the People's Bank of China play book. We need put an iron-clad wall around US Banks and prevent US Dollars from fleeing. We need to implement emergency "Hotel California Monetary Policy" for identifiable Chinese Communist Party agents/operatives/entities/assets....in simple terms "they can check out anytime they like....but their money can never leave".</div>
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<span style="color: red; font-family: inherit;"><b>As an alternative, again, taking a page out of the PBOC playbook, we might consider an overnight "split" our currency, similar to the mechanism deployed for CNY vs. the CNH. (Except the values would remain market driven...both the Offshore Dollar and the On-Shore dollar would float independently) We would define the US Dollar as the "USDO" or USD residing in US Banks "On-Shore" and "USDF" or USD residing in Off-Shore Banks, controlled by Non-US depositors or in Foreign Banks On-Shore in the States. The framework would require a separate exchange rate, locking all of these dollars off-shore, making them relatively worthless/frozen until a market rate can be determined/established. FED policy would obviously focus on the supply of USDO, with the USDF as an afterthought. </b></span><br />
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<b style="color: red; font-family: inherit;">Of course, we'd have to do some calculations to determine the impact on the economy and liquidity as well as determine which accounts to freeze, and an expedited process to unfreeze them in the event of an error, but I am sure that the FED and the Big Banks have some pretty sharp economists, IT folks and </b><b style="color: red;">mathematicians</b><b style="color: red; font-family: inherit;"> who are up to the task. I'd also suggest we get this in place after markets close on the next </b><b style="color: red;">feasible</b><b style="color: red; font-family: inherit;"> Friday night. I know it's a lot of work, but it seems to have worked out pretty well for the PBOC. As an aside, based on the above, we probably wouldn't need all of that Repo money.... </b><br />
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<b style="color: red; font-family: inherit;">We would immediately "win" the trade war by discounting all of the Chinese Controlled USD Assets. Alternatively, we could continue on the path we're on, learn to speak Mandarin and prepare for "reeducation". </b><span style="color: red;"><b>Desperate</b></span><b style="color: red; font-family: inherit;"> times call for </b><span style="color: red;"><b>desperate</b></span><b style="color: red; font-family: inherit;"> measures.</b><br />
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<b style="color: red; font-family: inherit;">Of course, the good, brave people of Hong Kong understand this style of government all too well, which is why they are fighting for their collective lives.</b><br />
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<b><span style="font-family: inherit; font-size: large;"><u>High Value Targets</u></span></b><br />
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<a href="https://en.wikipedia.org/wiki/Billy_Mitchell"><b>General Billy Mitchell</b> </a>said it best...."The nation who control's the air control's the sea".<br />
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For those of you who have never heard of General Billy Mitchell, he was the father of America's modern Air Force. The video clip below shows how he "proved" that lots of rickety little airplanes carrying bombs could actually be used to sink previously thought unsinkable battleships. <br />
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Actually, for the purpose of today's discussion, I'd like to modify Billy's statement to "the nation that controls the global financial system, control's the world".<br />
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Keeping the above in mind, let's take a look at, for no particular reason, other than it's the biggest US gorilla in the global financial jungle, your favorite predatory bank (and mine), our old friend, JP Morgan Chase.<br />
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Before we begin, it's come to my attention, that, shockingly, some of you don't spend nearly enough time wading through the bales of "big bank" filings on a regular basis. I'm disheartened by this, but I'll take the time to get you caught up. As always, I'm here to help. By way of background, for today's discussion, I also feel it's important to start with <a href="https://www.sec.gov/ix?doc=/Archives/edgar/data/19617/000001961719000054/corp10k2018.htm"><b><span style="color: blue;">JPM's 2018 10K</span></b></a> and get a handle on one of my/our favorite topics. Drum roll......"Tier 1 Capital".....rim shot!<br />
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Let's start with the basics: What exactly is the "Tier 1 Capital Ratio?"<br />
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That one is easy: The Tier 1 Capital is the ratio is the ratio of "Risk Weighted Assets" divided by "Tier 1 Capital". For JPM, the Tier 1 Capital Ratio came in at 13.7. In other words, JPM's "Fortress like Balance Sheet" has $1 of "Tier 1 Capital" for every $13.7 dollars of "Risk Weighted Assets". Awesome!<br />
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So what is "Tier 1 Capital"?<br />
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That one is also pretty easy: "Tier 1 Capital" is Shareholder's equity with a few adjustments for intangible assets and preferred stock. (pg. 40) <br />
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"Risk-Weighted Assets, on the other hand, is a bit tougher to get a handle on. Here's the language from the 10-K (pg. 89)<br />
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<i><span style="background-color: white; box-sizing: border-box; color: #212529; font-family: "amplitude"; font-size: 13.3333px; font-weight: bold;">RWA: “Risk-weighted assets”</span><span style="background-color: white; box-sizing: border-box; color: #212529; font-family: "amplitude"; font-size: 13.3333px;">:</span><span style="background-color: white; box-sizing: border-box; color: #212529; font-family: "amplitude"; font-size: 10pt;"> </span><span style="background-color: white; box-sizing: border-box; color: #212529; font-family: "amplitude"; font-size: 13.3333px;">Basel III establishes two comprehensive approaches for calculating RWA (a Standardized approach and an Advanced approach) which include capital requirements for credit risk, market risk, and in the case of Basel III Advanced, also operational risk. Key differences in the calculation of credit risk RWA between the Standardized and Advanced approaches are that for Basel III Advanced, credit risk RWA is based on risk-sensitive approaches which largely rely on the use of internal credit models and parameters, whereas for Basel III Standardized, credit risk RWA is generally based on supervisory risk-weightings which vary primarily by counterparty type and asset class. Market risk RWA is calculated on a generally consistent basis between Basel III Standardized and Basel III Advanced.</span></i><br />
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I'm not kidding, that's what it ways. Fortunately, I'm sure there are all sorts of sophisticated calculations buried in the "internal credit models and parameters" which guarantee that there is absolutely no monkeying around with these numbers, which might make it impossible not to hit compliance targets. Of course, there is also no calculation of the composition of "Risk-Weighted Assets" other than the disclosure of the amount used to calculate the 13.7 Tier 1 Capital Ratio, or $1.529 Trillion on ( pg. 89). That sure looks safe doesn't it? I mean, the bank has $1.5 Trillion of liquid assets that can easily/immediately be converted to cash if there's a "run"....isn't that what that means?<br />
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As an old time, simple minded bookkeeper I prefer a much easier and in my opinion, a more informative ratio. I refer to it as the "Cash to Deposits" ratio. As of the 2018 10K, JPM's "Cash to Deposits" ratio was 0.17 ($256B/$1,471B), or 17 cents of cash on hand for every dollar of deposit "liabilities". Of course "Bank Deposits" are the most current of current liabilities. "Current" means "I want my money NOW!" In other words, if 17% of JPMs "demand" deposits are moved/transferred or "demanded" they would run out of cash and would have to "do something" (i.e. borrow Repo money. call loans to non-systemic banks or sell assets overnight/immediately). In the "good old days" when we actually had a "time value of money" and a normalized yield curve, it made sense for a systemic bank like JPM, knowing the FED is a reliable/immediate backstop, to operate with as little cash on hand as possible (approaching zero) in order to maximize income. This strategy still makes sense today, but with a yield curve that looks like it got hit by a steamroller going down hill, it's significantly less profitable. Of course, smaller "non-Systemic" banks that don't have access to immediate/overnight money (<a href="https://en.wikipedia.org/wiki/List_of_banks_acquired_or_bankrupted_during_the_Great_Recession"><span style="color: blue;"><b>e.g. Lehman, Bear, National City, Countrywide, WAMU, Wachovia, etc. etc.</b></span></a>) simply are closed/absorbed if too many of their depositors suddenly "Can't wait until Friday and want their Money NOW!"<br />
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Now let's take a look at JPM's deposit composition ($1.471 Trillion) and cash on hand ($256 Billion) in relation to the world's supply of dollars.<br />
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1.) Per the above, we know that the sum total value of the world's bank deposits is $114.2 Trillion (Excluding RMB deposits since RMB deposits aren't reported by either the BIS or TIC).<br />
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2.) Of the world's $114.2 Trillion in bank deposits, $29.6 Trillion (26%) are denominated in US Dollars.<br />
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3.) Of these $29.6 Trillion, $20.2 Trillion (68%) are "Owned" by foreign depositors/entities.<br />
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4.) JPM, is arguably the biggest gorilla in the global jungle, with total deposits that represent a hefty 5% of total US Dollar global deposits, but with "Cash on Hand" of only $278 Billion representing less than 1% of all of the dollars on the planet. <br />
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5.) Given that 68% of the world's dollar deposits are controlled by foreign entities: The big question we have to ask is: What amount of JPM's deposits (or for that matter, any of the big bank deposits) are controlled by foreigners, specifically Chinese Communist Party members, agents and operatives and secondly, under what conditions might they want to just wire it off shore to another non-US Bank? The next big question we must ask is: Are there any mechanisms to prevent these deposits from suddenly moving offshore, out of the reach of US Banks?<br />
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In other words, if I were a bad actor (i.e. the Chinese Communist Party) and I had enough resources (which they probably do), and my goal was to start a liquidity crisis in a particular market or at a particular bank, I'd:<br />
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1.) Sell a US dollar asset (real estate/stocks/bonds/etc.)<br />
2.) Wire the money off shore to the Bank of China, ICBC, China Construction Bank, Agricultural Bank of China, Hong Kong, Caymans or Singapore Banks, etc. etc.<br />
3.) Repeat<br />
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The above figures tell us that, specifically in the case of JP Morgan, if the Chinese Communist Party has a few hundred billion in movable deposits at JPM they could immediately absorb the entire, current FED "emergency" Repo facility. Poof!<br />
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The next question we should immediately ask is: What is the level of CPC deposits (and corresponding cash on hand) that Citi, Goldman, Bank of America, Wells Fargo, etc. have?....and are they at risk of a "Run" as well? <br />
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<b><span style="font-family: inherit; font-size: large;"><u>So What Does All of This Have to Do with Repos? What does it all mean?</u></span></b><br />
<b><span style="font-family: inherit; font-size: large;"><u><br /></u></span></b>
<span style="font-family: inherit;">I wrote the following prophetic paragraphs in a blog post eight months ago in February of this year.</span><br />
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Most of what I'd described in the post (<i style="font-weight: bold;"><a href="https://deep-throat-ipo.blogspot.com/2019/02/dalios-big-debt-crisisthe-fsb-report.html">Dalio's "The Big Debt Crisis"....the FSB Report and Financial War Games</a>) </i>seems to be coming to fruition. Deposits are leaving the US Banking System, there's apparent, sudden confusion at the FED, with a rush to replace liquidity, yet as of the other day we continued our commitment to keep selling soy beans and other agricultural products to the Chinese and we delayed tariffs once again. It looks like the CPC efforts remain "on plan".<br />
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As a diversion we are apparently following CPC/Russian foreign policy advice, chosing to screw around with Turkey, Syria and the Kurds in yet another "Wag the Dog" distraction.<br />
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There's a good chance that what we're seeing at the New York FED's Open Market/Repo Desk is the beginning of the inevitable liquidity crisis and asset valuation reset many of us have been expecting for quite a while. The numbers make it obvious, yet our central bankers seem much more amenable to taking the easy path, continuing to print money until investors decide that perhaps, the US Dollar is no longer the safest of safe havens that they once thought it was. Everything will become relative once again. <br />
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As of this writing, the FED's emergency Repo facility is the first, yet soon to prove inadequate solution to a problem they don't yet understand. The FED's ad hoc remedy generally dumps money into the system without targeting the specific problem. Again, rather than pouring money down the toilet, I'd suggest a more surgical approach, figuring out exactly where the money is going, why it's going there and make a relentless effort to stop it from going there.<br />
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Again, the below described "<i><a href="https://deep-throat-ipo.blogspot.com/2019/05/our-inevitable-monetary-journey.html"><span style="color: blue;"><b>Inevitable Monetary Journey</b></span></a></i>" chart describes that at some point soon the Chinese Communist Party will be accelerating their "Pump and Dump" and increasing liquidity pressure on US Banks, who will continue to look the FED for short term financing. The FED will continue to provide funds, failing to understand that they are dealing with a long term structural problem.<br />
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There is no question, at least in my mind, that the Chinese Communist Party has accumulated more than enough US Dollar and Forex resources to accomplish their dollar devaluation exercise. I'd discussed the evolution of the nominal composition of US Money and Financial Assets a while ago. Note that under my model, the FED Balance Sheet will expand from the current $3.9 Trillion to $16.4 Trillion, and US Domestic M3 will increase by nearly $4 Trillion by 2023 (God only knows what off-shore dollar deposits will look like, but God doesn't do interviews either) if we stay on this path, attempting to both support nominal asset values and the current, unquenchable global thirst for US Dollars.<br />
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The table below describes (in comparison to last decades self induced Great Financial Crisis) the movement of major Asset Class Valuations. We see that US M3 increases $2.2T (15%), The FED Balance Sheet increases by $8.5T (216%) as they go "Tarping", US Equities Decline $10T (33%) US Residential Real Estate declines $6.3T (18%), As in most estimates/models the timing and adjustment amounts can be questioned, but I would imagine that these valuation adjustments are at least directionally correct, and probably optimistic depending on the rapidity of the "dump". <br />
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<img src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgIj7ZlZxRYllVcai0YbVdgvkqp25xVxe2TNDuZOYj0R4PTqd70LXqnm5CxNCu1pU2xz0ibuB_6NNZOiAIvbUZKvnhRrEhnwxQHSNwT7MZB2cz1lHgbBJzo8D4vpAjJvSh13nStIrpceTs/s640/Pro-Forma-US-Assets_Today-thru-2023.png" /><br />
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<b><span style="color: red;">Given the above, the optimal time frame for the Chinese to begin releasing the RMB into the global financial system, will be bottom of the "NGFC" (The <i>Next Great Financial Crisis). </i> Obviously, since they caused the carnage, they will be able to call the bottom.</span></b><br />
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<b><span style="color: red;">Generally, here's how this will go down. Chinese "investors" will come riding in on a white horse, offering to loan money, buy property, stocks, bonds and financial assets. Only this time, the offers will be made in RMB rather than US Dollars. With every other currency on the planet weakening, with the only notable exception being the RMB (because nobody uses it), the CPC will be offering the RMB at an exchange rate of probably somewhere around a managed/fake exchange rate of 6:1. This awesome plan will be pitched by our friendly US Investment Bankers, presumably coming up with all sorts of exotic RMB products which will finally integrate the RMB into the global financial system. They will opine that this "opening up of the RMB" plan will be the only way to save the global financial system from ruin (for some hefty fees). Once again, the arsonists will have transitioned to the role of fire fighter. From my point of view, this is not the "only" plan. From my point of view, rather than selling off America a piece at a time for a fake ponzi-scheme currency, we should seize every Chinese held, USD denominated asset, close and revoke the charters of any Chinese Banks and CPC controlled ShellCos doing business in the US, cancel any suspect SWIFT numbers and immediately stop any off shore wire transfers where the final recipient can't be verified in anticipation of the above "splitting" of the USD.</span></b><br />
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<b><span style="color: red;">As an aside, I would see nothing wrong with firing every US Banker with the term "International" on his or her business card with a title above "VP" as well as some relentless prosecution and multi-decade jail time for the arsonists, as opposed to relying on them to fix the problem (for hefty fees). We didn't do this after the GFC and look where it got us.</span></b><br />
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<b><u><span style="font-size: large;">Demand for the Almighty Dollar</span></u></b><br />
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Nevertheless, today, the US Dollar is the place to be. Even though we're expanding the money supply at an unprecedented rate, the exchange rate is indeed solid as a rock and in fact, recently appreciating. Everyone wants dollars......"Dollars, dollars everywhere and all the banks did shrink, dollars dollars everywhere and nor drop to spend" <i>(Plagiarized/adapted and butchered from <a href="https://www.poetryfoundation.org/poems/43997/the-rime-of-the-ancient-mariner-text-of-1834"><span style="color: blue;"><b>Samuel Taylor Coleridge "The Rime of the Ancient Mariner</b></span></a>")</i><br />
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You'd think it would be unlikely that the dollar might strengthen in the face of declining interest rates, an inverting yield curve and increasingly accommodative, mid-cycle Quantitative Easing (which no one at the FED seems to confirm as QE), but the explanation that the dollar has become the newly designated WMD of the Chinese Communist Party and the resulting demand for same will continue until sufficient damage is done, would seem to be a rational explanation for the strength. The dollar will keep appreciating until the Chinese no longer want it to, and they decide that they will no longer be hording dollars. The dollar will stop appreciating when the CPC finally convinces the rest of the world to accept RMB in exchange for the rest of the world's rapidly depreciating, readily available currencies,with the dollar finally succumbing to gravity. <br />
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The FED has, apparently unbeknownst to them, abandoned their mandate to use monetary policy to 1.) Provide full employment, and 2.) Maintain price stability. I'd also argue that we are long past the point where any additional stimulus has any impact whatsoever on the "real", domestic, US economy. The domestic economy apparently only needs 32% of the US Dollars in circulation to keep chugging along, yet, the FED keeps printing. The balance of whatever level of stimulus the FED chooses to provide, and it has become overwhelmingly substantial, has been, and will continue to be siphoned off as a store of value for global banks, foreign investors and the Chinese Communist Party, hopeful that the dollar will, for the time being, continue to be a safe alternative to the dog-turd stocks, bonds and currencies of their respective floundering economies.<br />
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As the FED continues to provide "Nominal Asset Value Supporting Dollars" at a pace heretofore unprecedented, at least since the post WWI Wiemar Republic, these dollars will eventually have to go somewhere (and rapidly devalue). We've already established that there's no mechanism, and 20.2 Trillion (and growing) reasons, which prevents these dollars from moving into the main street economy where they could actually get "spent". Foreign investors will be forced to look for safer, better alternatives than US Financial Assets as they continue to hoard deposits. The previously obvious choice between the rest of the world's financial dog-turds and those slightly less malodorous doggie-doo assets sitting in US Markets will become a bit cloudy. Once the world loses its appetite for US Dollars, it must begin investing, storing and converting it to "other stuff". What that "stuff" might be is up for debate, but it's clear that whatever it is will be deeply discounted, as will the assets currently denominated in US Dollars. Of course, the ultimate end game is that the Chinese Communist Party is betting that RMB assets will finally be a viable global alternative to US Financial and European Financial Assets . Based on the above, the idea that the RMB could become globally viable at an exchange rate that would not destroy the current/fake value of Chinese Assets is not not nearly as far fetched as I might have thought just a few years ago. If and when that conversion actually starts to happen, it will also become painfully obvious for America and the rest of the free world. <br />
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Let's just hope it doesn't start next week, since it's clear to me that the FED isn't ready for it.<br />
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<b><span style="font-size: large;"><u>Bonus Footage: The New York FED Open Market Ops Desk</u></span></b><br />
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As an added bonus in today's post, I'm adding some behind the scenes footage from the New York FED Open Market Operations Desk. It's gotta be hell over there. "I love the smell of SOFR guidance in the morning.....smells like....victory....... Someday this war's gonna end son...."</div>
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<b><u><span style="font-size: large;">Additional Reading</span></u></b><br />
<a href="https://www.wsj.com/articles/new-york-fed-adds-82-7-billion-to-financial-system-in-latest-repo-transaction-11570801329">https://www.wsj.com/articles/new-york-fed-adds-82-7-billion-to-financial-system-in-latest-repo-transaction-11570801329</a><br />
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FED REPO Operations<br />
<a href="https://apps.newyorkfed.org/markets/autorates/temp">https://apps.newyorkfed.org/markets/autorates/temp</a><br />
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BIS - China Q1<br />
<a href="https://stats.bis.org/statx/srs/table/A5?c=CN&p=">https://stats.bis.org/statx/srs/table/A5?c=CN&p=</a><br />
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BIS - US Q1<br />
<a href="https://stats.bis.org/statx/srs/table/A5?c=US&p=">https://stats.bis.org/statx/srs/table/A5?c=US&p=</a><br />
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BIS - All Reporting Entities - Q1<br />
<a href="https://stats.bis.org/statx/srs/table/A5?c=5A&p=">https://stats.bis.org/statx/srs/table/A5?c=5A&p=</a><br />
<br />
FED - Daily REPO REFERENCE RATES<br />
<a href="https://www.newyorkfed.org/markets/treasury-repo-reference-rates">https://www.newyorkfed.org/markets/treasury-repo-reference-rates</a><br />
<br />
FED - Repo & Term Operations<br />
<a href="https://www.newyorkfed.org/markets/domestic-market-operations/monetary-policy-implementation/repo-reverse-repo-agreements/repurchase-agreement-operational-details">https://www.newyorkfed.org/markets/domestic-market-operations/monetary-policy-implementation/repo-reverse-repo-agreements/repurchase-agreement-operational-details</a><br />
<br />
Cayman Monetary Authority - Listing of Funds<br />
<a href="https://www.cima.ky/upimages/commonfiles/1499783502ListMutualFunds.pdf">https://www.cima.ky/upimages/commonfiles/1499783502ListMutualFunds.pdf</a><br />
<br />
CEIC - China Imports<br />
<a href="https://www.ceicdata.com/en/indicator/china/total-imports">https://www.ceicdata.com/en/indicator/china/total-imports</a><br />
<br />
CEIC - Exports<br />
<a href="https://www.ceicdata.com/en/indicator/china/total-exports">https://www.ceicdata.com/en/indicator/china/total-exports</a><br />
<br />
S&P 500 Total Return<br />
<a href="https://ycharts.com/indicators/sp_500_total_return_annual">https://ycharts.com/indicators/sp_500_total_return_annual</a><br />
<br />
<img alt="Image" src="https://pbs.twimg.com/media/EF3RCkhWoAIdUCO?format=png&name=900x900" /></div>
Deep Throathttp://www.blogger.com/profile/02712515268051858186noreply@blogger.com0tag:blogger.com,1999:blog-7478408299955066555.post-45352752717529871582019-09-24T18:37:00.001-04:002019-09-25T00:05:08.721-04:00Today, let's talk about "Emoluments"......and "Sleepy Joe"<div dir="ltr" style="text-align: left;" trbidi="on">
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Today we're going to talk about "Emoluments", specifically how they apply to "Sleepy Joe" Biden and why he should absolutely not be the next leader of the free world. <br />
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Sorry Joe, I love ya man, but you've got to let it go.<br />
<span style="font-family: inherit; font-size: large;"><b><u><br /></u></b></span>
<span style="font-family: inherit; font-size: large;"><b><u>What is an "Emolument"?</u></b></span></div>
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<span style="font-family: inherit;">We hear this phrase kicked around often now, generally, an Emolument is a kickback by a foreign government/entity/agent given to an "Officer" of the United States Government, presumably to get said "Officer" to act in the best interests of the foreign government/agent/entity rather than in the interests of the United States Government. The Constitution describes an "Emolument" as follows: </span></div>
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"No Title of Nobility shall be granted by the United States: And no Person holding any Office of Profit or Trust under them, shall, without the Consent of the Congress, accept of any present, Emolument, Office, or Title, of any kind whatever, from any King, Prince, or foreign State."</div>
<cite style="border: 0px; color: #073f5d; display: block; font-family: callunaregular, Georgia, "times new roman", serif; font-size: 13px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;">ARTICLE I, SECTION 9, CLAUSE 8</cite><cite style="border: 0px; color: #073f5d; display: block; font-family: callunaregular, Georgia, "times new roman", serif; font-size: 13px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><br /></cite><span style="font-family: inherit;">Of course, there is loads of case law describing exactly what an emolument is, as well as the clarification of the spirit of the framers intent. Here are a few excellent/descriptive examples of emoluments:</span><br />
<span style="font-family: inherit;"><br /></span>
1<i>.) Payments to a Nuclear Regulatory Commission employee by an American
consulting firm for work regarding the construction of a Mexican government
power plant</i> <b><i><u>(Application of the Emoluments Clause of the Constitution and the Foreign Gifts and
Decorations Act, 6 Op. O.L.C. 156, 156 (1982)) </u></i></b><br />
<b><i><br /></i></b>
<i>2.) Payments to a part-time Nuclear Regulatory Commission staff consultant by an
American corporation for work on a contract with the government of Taiwan. (</i><b><i><u>Application of Emoluments Clause to Part-Time Consultant for the Nuclear Regulatory
Commission, 10 Op. O.L.C. at 96.)</u></i></b><br />
<br />
<i>3.) Payments to members of the Administrative Conference of the United States,
by those members’ law firms, of “a share of partnership earnings", where some
portion of that share is derived from the partnership’s representation of a foreign
government. (</i><b><i><u>Applicability of the Emoluments Clause to Non-Government Members of ACUS, 17 Op.
O.L.C. 114, 120 (1993))</u></i></b><br />
<b><i><u><br /></u></i></b>
<i>4.) A retired U.S. Air Force member’s employment “as a teacher in a local borough high school" in the United Kingdom. </i><b><i><u>Comptroller General, Matter of: Major James D. Dunn & Senior Master Sergeant
Marcus A. Jenkins, B-251084 (Oct. 12, 1993). </u></i></b><br />
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<i><span style="font-family: inherit;">5.) A Navy surgeon’s receipt of a “token of thankfulness” from a foreign
government for his services on behalf of one of its citizens. </span></i><b><i><u>A Resolution allowing Doctor E.K. Kane, and the Officers associated with him in their
late Expedition to the Artic seas, in search of Sir John Franklin, to accept such Token of
Acknowledgment from the Government of Great Britain as it may please to present, Aug. 30,
1856, 11 Stat. 152. </u></i></b><br />
<cite style="border: 0px; color: #073f5d; display: block; font-family: callunaregular, Georgia, "times new roman", serif; font-size: 13px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><br /></cite><cite style="border: 0px; color: #073f5d; display: block; font-family: callunaregular, Georgia, "times new roman", serif; font-size: 13px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><br /></cite>In my way of thinking, the above case examples (there are many more) establish four very important principles:<br />
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1.) Officers of the US Government have long been held accountable and the rules are well established to prevent them from accepting benefits from a foreign entity without congressional approval.<br />
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2.) The amount of the benefit is irrelevant. Appearance of impropriety is just as important when determining the existence of an emolument as the actual mechanics of the scheme.<br />
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3.) The Officers held accountable are usually those (un-elected) "lesser Officers" who may or may not think they did anything wrong. In fact, I'm hard pressed to come up with a single emoluments case brought against an elected officer of the government...ever. (I am of course excluding the current Cases v. the President as the disposition of same is currently in doubt). Perhaps some of you legal historians can come up with a few, but I am currently unable to locate a successful precedent where a sitting elected official was sanctioned for an "emolument". If any of you know of one I'd like to read the case(s).<br />
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4.) Since most citizen actions "lack standing" for one reason or another, emoluments issues and enforcement are usually policed internally, i.e.) By the US Government Agency involved against the Government Officer recipient in the alleged emolument. For White house officials, Congressmen/Women and Senators they are theoretically (and selectively) self policing.<br />
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That said, we live in a complex world. Given the above, contemporary emolument enforcement issues/limitations have more to do with structure, investigative methods and the ability to detect them, than with the framers Constitutional intent. i.e.) If it looks like a duck and quacks like a duck, it might just be a duck....but you still have to prove it. In duck hunters parlance, the problem is that it's getting really difficult and time consuming to set our gun sites on these mother-fluttering, flocks of ducks. They are everywhere, but they either seem to be out of range, or we don't have enough ammunition.<br />
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For example, would the following be "Emoluments"?<br />
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1.) A foreign SOE (State Owned Enterprise) enters into a partnership with an American Citizen to start a Cayman Islands LLC. The LLC makes a loan to another American Citizen and the Citizen uses the money to fund a PAC which specifically provides soft money advertising support and campaign funding to specific candidates who agree to support the PAC's agenda.<br />
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2.) A foreign government directs its citizens to "invest" in specific residential real estate projects either by purchasing individual units or entering into leases at above market rates, where the US Government Officer or an immediate family member has a specific interest in an LLC, which owns part of the real estate project(s). <br />
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3.) A foreign government/agency communicates, in advance of a public announcement, with a US Government Officer, insider information on a particular US Listed Foreign Stock (Alibaba for example) in which the Government Officer might take a financial position or two, directly benefiting that Officer. There's a reason our lawmakers arrive in Washington in debt and leave with wheelbarrows full of treasure.<br />
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Most people who understand what's happening would say "Of course these are Emoluments!" which could influence the decision making and legislation biases of the targeted government officer. But when you really begin to peel the onion back, how in the world do you investigate this, or even find out about it? Any investigator can ask lots of questions, but without significant leg work, whistle-blowers and/or resource/time spent, it's likely schemes like this will go undetected for a long time, or perhaps forever. The paperwork and trail all seems to match up. Everything looks legitimate. "Nothing to see here". When every little piggy in the good-old-boy network is racing to the trough, it would be the rare piggy indeed who'd refuse the never ending buckets of slop, and spoil the party for the entire pigsty.<br />
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<b><u><span style="font-size: large;">So now let's talk about "Sleepy Joe".... </span></u></b><br />
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In 2008, America's Vice President-to-be along with several other close friends, investors and family members established a number of ShellCos in New York and Delaware, but let's focus on a specific Delaware Investment Company (<i>Biden Real Estate Holding Company, LLC</i>) ostensibly formed in order to invest at least a portion of Joe's massive $169,500 per year windfall Vice Presidential Salary, and I'm sure, along with "other funds" that may somehow end up in his accounts from time to time.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi2RpyvGsJyT9JWsb8Q-nAW-s5mrtDHlHolmPY1YhSSCb_XrWylqOMiiRT8HpU233dPkPs1K3pmgsoZHc2qoYPnkHihMUrmQ_D1EGOdKO__LunRsupqHZlmeiWqdPN-2x-9XteNRHMPL8U/s1600/BIDEN_RE_HOLDING_CO_LLC.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="463" data-original-width="635" height="466" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi2RpyvGsJyT9JWsb8Q-nAW-s5mrtDHlHolmPY1YhSSCb_XrWylqOMiiRT8HpU233dPkPs1K3pmgsoZHc2qoYPnkHihMUrmQ_D1EGOdKO__LunRsupqHZlmeiWqdPN-2x-9XteNRHMPL8U/s640/BIDEN_RE_HOLDING_CO_LLC.png" width="640" /></a></div>
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text-transform: uppercase; vertical-align: baseline;"><br /></cite><cite style="border: 0px; color: #073f5d; display: block; font-family: callunaregular, Georgia, "times new roman", serif; font-size: 13px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><br /></cite><cite style="border: 0px; color: #073f5d; display: block; font-family: callunaregular, Georgia, "times new roman", serif; font-size: 13px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><br /></cite><cite style="border: 0px; color: #073f5d; display: block; font-family: callunaregular, Georgia, "times new roman", serif; font-size: 13px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><br /></cite><cite style="border: 0px; color: #073f5d; display: block; font-family: callunaregular, Georgia, "times new roman", serif; font-size: 13px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><br /></cite><cite style="border: 0px; color: #073f5d; display: block; font-family: callunaregular, Georgia, "times new roman", serif; font-size: 13px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><br /></cite><cite style="border: 0px; color: #073f5d; display: block; font-family: callunaregular, Georgia, "times new roman", serif; font-size: 13px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><br /></cite><cite style="border: 0px; color: #073f5d; display: block; font-family: callunaregular, Georgia, "times new roman", serif; font-size: 13px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><br /></cite><cite style="border: 0px; color: #073f5d; display: block; font-family: callunaregular, Georgia, "times new roman", serif; font-size: 13px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><br /></cite><cite style="border: 0px; color: #073f5d; display: block; font-family: callunaregular, Georgia, "times new roman", serif; font-size: 13px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><br /></cite><cite style="border: 0px; color: #073f5d; display: block; font-family: callunaregular, Georgia, "times new roman", serif; font-size: 13px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><br /></cite><cite style="border: 0px; color: #073f5d; display: block; font-family: callunaregular, Georgia, "times new roman", serif; font-size: 13px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><br /></cite><cite style="border: 0px; color: #073f5d; display: block; font-family: callunaregular, Georgia, "times new roman", serif; font-size: 13px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><br /></cite><cite style="border: 0px; color: #073f5d; display: block; font-family: callunaregular, Georgia, "times new roman", serif; font-size: 13px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><br /></cite><cite style="border: 0px; color: #073f5d; display: block; font-family: callunaregular, Georgia, "times new roman", serif; font-size: 13px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><br /></cite><cite style="border: 0px; color: #073f5d; display: block; font-family: callunaregular, Georgia, "times new roman", serif; font-size: 13px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><br /></cite><cite style="border: 0px; color: #073f5d; display: block; font-family: callunaregular, Georgia, "times new roman", serif; font-size: 13px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><br /></cite><cite style="border: 0px; color: #073f5d; display: block; font-family: callunaregular, Georgia, "times new roman", serif; font-size: 13px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><br /></cite><cite style="border: 0px; color: #073f5d; display: block; font-family: callunaregular, Georgia, "times new roman", serif; font-size: 13px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><br /></cite><cite style="border: 0px; color: #073f5d; display: block; font-family: callunaregular, Georgia, "times new roman", serif; font-size: 13px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><br /></cite><cite style="border: 0px; color: #073f5d; display: block; font-family: callunaregular, Georgia, "times new roman", serif; font-size: 13px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><br /></cite><cite style="border: 0px; color: #073f5d; display: block; font-family: callunaregular, Georgia, "times new roman", serif; font-size: 13px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><br /></cite><cite style="border: 0px; color: #073f5d; display: block; font-family: callunaregular, Georgia, "times new roman", serif; font-size: 13px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><br /></cite><cite style="border: 0px; display: block; font-family: callunaregular, georgia, "times new roman", serif; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><span style="color: blue;"><b><br /></b></span></cite><cite style="border: 0px; display: block; font-family: callunaregular, georgia, "times new roman", serif; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><span style="color: blue;"><span style="font-style: normal;">(search "Biden" for related ShellCos) </span></span></cite><br />
<b><a href="https://icis.corp.delaware.gov/Ecorp/EntitySearch/NameSearch.aspx"><span style="color: blue;">https://icis.corp.delaware.gov/Ecorp/EntitySearch/NameSearch.aspx</span></a></b><br />
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Shortly after formation, the <i>Biden Real Estate Holdings LLC</i> entered into a private partnership (or some sort of contractual agreement) with a series of New York LLC's (<i>Hudson Waterfront Company A, B, C, etc.</i>). T<i>he Hudson Waterfront Company LLC's, et al</i> primary purpose was to re-market and redevelop a struggling, underfunded NYC real estate project known as the "Riverside Boulevard Project".<br />
<br />
The Riverside Boulevard Project consists of three residential/condo towers:<br />
<br />
200 Riverside Boulevard (46 stories, 360 Units, Built in 1997)<br />
220 Riverside Boulevard (48 stories, 412 Units, Built in 2000)<br />
240 Riverside Boulevard (31 stories, 166 Units, Built in 2004)<br />
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At the time of <i>Biden Real Estate Holding Company LLC's</i> investment, (after more than eleven years for 200 Riverside, eight years for 220 Riverside and nearly four years for 240 Riverside) the property was approximately half sold, most units were still either held for rent with (likely) significant unfinished/vacancy. The plan for the development was to refinance the property, make significant capital improvements, cut some operating costs, re-position the brand and sell off remaining units at a higher price point.<br />
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Of course, these investments were made just prior to, and during the financial crisis and you would have thought that a troubled project like this might have been one of the first to succumb to the downturn and end up as yet another failed dream on the scrapheap of insolvency, like so many other ill conceived and ill timed projects did at the time. But fast forward to 2019 and behold, the project not only survived but is apparently flourishing.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhpjCNsWJPFOym-iAhoyRF30Al1n8xZnED5nL3ubmmJ4qtGRwAN8VXS1mDDcgWvQN0kXIm4jf86l7WnFGWWi3RUPQvCxulQDMZYqoFYhgCnezoDX0zgQV10_AjMaUrO32RmoEkjPwZiJ68/s1600/200-220-240_Riverside_Pic.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="238" data-original-width="510" height="298" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhpjCNsWJPFOym-iAhoyRF30Al1n8xZnED5nL3ubmmJ4qtGRwAN8VXS1mDDcgWvQN0kXIm4jf86l7WnFGWWi3RUPQvCxulQDMZYqoFYhgCnezoDX0zgQV10_AjMaUrO32RmoEkjPwZiJ68/s640/200-220-240_Riverside_Pic.png" width="640" /></a></div>
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The skill and perseverance of the management team, as well as the business model must have been state of the art, as other projects faced horrific headwinds and many failed at the time. Somehow, the Riverside Boulevard project survived and in fact seems to be thriving today. I'd also venture an educated guess that the financial help, connections and business acumen of the Vice President of the United States probably didn't hinder the inevitable, eventual success of this project either. <br />
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<b><u><span style="font-size: large;">Riverside Boulevard Today.....</span></u></b><br />
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Interestingly enough, I have good friends that live in this complex and have visited a number of times. Although much of the complex still seems to be unoccupied (no lights on at night) the buildings seem to be well maintained and the service is excellent. The apartments are spacious, the views of the river and the city are gorgeous and, per our good friends, the rent is very competitive and a great value compared to other similar properties.<br />
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One phenomenon that piqued my curiosity is that often, when I'm in the lobby or the elevator of their building, it often seems as though I'm the only person who uses "English as a first language". Of course, there is nothing inherently wrong with this, I just found it peculiar.<br />
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As you, my readers know, when I see something peculiar, I tend to try to understand it and determine what the peculiarity really means, along with the genesis of said peculiarity.<br />
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Fortunately, I also have good friends who have access to all sorts of data, who are extremely generous with their time and expertise. In this case, my friend Alex Bresler <span style="color: blue;"><a href="https://twitter.com/abresler">@ABresler</a> </span>has provided transaction/ownership data from ACRIS, the NYC Real Estate database to try to analyze exactly what might be going on here. Here's the raw data dump. Feel free to import it into an Excel Spreadsheet (CSV) if you want to take a look at it.<br />
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<a href="https://gist.githubusercontent.com/abresler/891e4b646a8f800233bca8a47f1637cf/raw/1e2131a96366e8441a6a8011389cc2a9448ef957/riverside_transfers.csv"><span style="color: blue;"><b>https://gist.githubusercontent.com/abresler/891e4b646a8f800233bca8a47f1637cf/raw/1e2131a96366e8441a6a8011389cc2a9448ef957/riverside_transfers.csv</b></span></a><br />
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Let's look at a few slices/dices of that data. Between 1997 and today, there were 1,146 ownership-change (transfer) transactions recorded in ACRIS. We'll start with a breakdown of the building ownership as of 1/1/2009, shortly before the Great Financial Crisis really kicked into high gear, and just prior to "Sleepy Joe's" investment company, the <i>Biden Real Estate Holding Company LLC,</i> began making investments in the <i>Hudson Waterfront Companies. </i> Note that ACRIS provides limited buyer profile information in the transaction data. For the purpose of our analysis we will focus primarily on "Entity" and "Asian" (mostly Chinese surnames) ownership classifications as described by the City of New York.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj3AQ_x4OGTZjDJI0C9u8Ca2EQ0XIpFAFaTZx2G4V1pNBz4rxhmUDP7gmVwqmtqG_VreBx4TExYKrgc1nCrQT-VmFjrvEmGNa57M9OXHfR0ElBZ5WgSdYhQ5n8tpsHyxw0uDYnWwUUXK6g/s1600/Riverside_Boulevard_Project_Total_2009_OwnershipXXX.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="545" data-original-width="1050" height="332" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj3AQ_x4OGTZjDJI0C9u8Ca2EQ0XIpFAFaTZx2G4V1pNBz4rxhmUDP7gmVwqmtqG_VreBx4TExYKrgc1nCrQT-VmFjrvEmGNa57M9OXHfR0ElBZ5WgSdYhQ5n8tpsHyxw0uDYnWwUUXK6g/s640/Riverside_Boulevard_Project_Total_2009_OwnershipXXX.png" width="640" /></a></div>
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Here are a couple of things that jump out at us:<br />
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1.) After 11 years for 200 Riverside, 8 years for 220 Riverside and 4 years for 240 Riverside, total sponsor sales were 511 Units or 54% of the total 938 Units available for sale.<br />
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2.) Asian ownership was 121 units (13%) and Entity (ShellCo & LLC) ownership was 52 units (6%), representing 19% of project ownership.<br />
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3.) At the time, 714,688 sq/ft. at $1,187 per sq/ft, was sold. If we extrapolate at 54% sold, we can estimate the total project value at $1.570 Billion.<br />
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4.) 240 Riverside, in just four years is 94% sold out, while 200 and 240 are still roughly half sold with 417 Units remaining in <i>Hudson Waterfront Companies </i>inventory.<br />
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5.) We don't know what the status of the unsold 427 Units (46%) really is. Are they finished/rented? If so, who's renting them? Are they unfinished/held for resale? Why are they unsold? Is this part of the plan or are there economic limitations preventing the project from selling out?<br />
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Now let's fast forward 11 years to August 1st 2019. The current status of the project has changed dramatically for the better and is described below:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiEAzK2O2NZ7r0hRe9aXJBaLaJAEkGwhwOJM2AKJlRkHuxQKo1KcJWA0KipIMZcy09JnmtYICAPA7tCOXgI_NnGQ1QArBOQE_lIRdygL3-TDQYUPMuXQzfvo7CCOAehcFOA0du-YnL4TGY/s1600/Riverside_Boulevard_Project_Total_Current_2019_Ownership.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="546" data-original-width="1156" height="302" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiEAzK2O2NZ7r0hRe9aXJBaLaJAEkGwhwOJM2AKJlRkHuxQKo1KcJWA0KipIMZcy09JnmtYICAPA7tCOXgI_NnGQ1QArBOQE_lIRdygL3-TDQYUPMuXQzfvo7CCOAehcFOA0du-YnL4TGY/s640/Riverside_Boulevard_Project_Total_Current_2019_Ownership.png" width="640" /></a></div>
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Here are the bullet points.<br />
<ol style="text-align: left;">
<li>Based on current ownership unit purchase prices the project has a value of roughly $1.905 Billion.</li>
<li>The project is 72% owned (675 units), with the remaining 263 units under management by the <i>Hudson Waterfront Companies</i> either to be rented or remain vacant. They remain unsold, for whatever reason.</li>
<li>240 Riverside (the newest building) is "sold out". 100% owned by residents/investors, of which 39% are "Asian" and "Entity" owners.</li>
<li> 72% of the entire project is "owned". Asian buyers own 17% and entities (ShellCos & LLCs) own 11%. </li>
<li>28% of the units remain unsold/managed/rented, roughly the same percentage as is owned by Asian and Entity owners. </li>
<li>African Americans apparently don't want to live there, for whatever reason.</li>
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<b><u><span style="font-size: large;">Other Things We Know and Questions We Might Have....</span></u></b><br />
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<span style="font-family: inherit;">1.) What might have caused the ownership mix to change so dramatically? Asian and ShellCo ownership was at 173 Units (19%) on 1/1/2009 and it increased to 265 units (29%) as of 8/1/2019.</span><br />
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<span style="font-family: inherit;">2.) Of the additional 164 units sold in the period from when "Sleepy Joe" got involved to just recently, a net of 92 of them (56%) were sold/transferred to Asian buyers and ShellCos/LLCs. Why? What is driving this phenomenon?</span><br />
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<span style="color: red; font-family: inherit;">3.) We know, again with relative certainty, that the continued influx of Chinese Money (by definition directed and controlled by the Chinese Communist Party.....i.e.) Chinese people aren't allowed to invest millions of dollars overseas without explicit party sponsorship) not only dramatically contributed to the projects success, but I might also proffer that the absence of these buyers might have actually guaranteed the project's failure.</span><br />
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<span style="color: red;">4.) We also know (with relative certainty) that during the time in question, the only bank providing the financing in this project, for whatever reason, was Deutsche Bank.</span><br />
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5.) Those of you who have followed my work know that I've long been critical of the "relationships" that Deutsche Bank has been cultivating over time, more precisely, my concerns over their <a href="https://www.wsj.com/articles/deutsche-bank-in-late-2016-raced-to-shed-loan-it-made-to-russian-bank-vtb-11549147289"><b><span style="color: blue;">deals</span></b></a> with Russia's often/continually<span style="color: blue;"><b> <a href="https://www.treasury.gov/press-center/press-releases/pages/jl2590.aspx"><span style="color: blue;">sanctioned</span></a> </b></span>VT Bank (money laundering, terrorism support and a plethora of failing to "know your customer" financial crimes) as well as their indirect involvement with China's SAFE (State Administration of Foreign Exchange) and SOE's as discussed in my prior post "<a href="https://deep-throat-ipo.blogspot.com/2019/06/how-ineffective-bill-becomes.html"><span style="color: blue;"><b>How an ineffective Bill becomes an Ineffective Law...</b></span></a>" Today, HNA, China's fake SRE (State Run Enterprise) still owns 4% of Deutsche Bank, down from the nearly 10% they had acquired in 2017, making HNA (and by extension, the Chinese Communist Party) Deutsche Bank's largest shareholder at the time. Again, presumably, the CPC has had significant influence over Deutsche Bank's management decisions and capital deployment for quite sometime. Further, just thinking out loud here, but you'd think that having "Sleepy Joe", the Vice President of the United States of America as a grateful benefactor of your largess regarding the struggling <i>Riverside Boulevard Project </i>might just have some real financial and political value to the CPC at some point down the road. <br />
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6.) It would also not be a stretch to believe that the odd concentration of these investments (several hundred million dollars in this project) made by the agents of and at the behest and direction Chinese Communist Party were done solely to generate and influence an "Emolumental" relationship with the Vice President of the United States and the White House at the time. We can still see evidence of this in "Sleepy Joe's" pro-China, "they are not a threat" to us rhetoric, on the campaign trail today.<br />
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I might even argue that a Biden campaign would be at a minimum "cheered on" by the Chinese Communist Party, as well as, even more likely, the recipient of some additional passive or even active "emolumental" Party support. When you really think about it, and listen to his message, why the hell else would he be running?<br />
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<span style="font-family: inherit; font-size: large;"><u><b>More Chinese Communist Party Pressure on "Sleepy Joe".... </b></u></span><br />
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I'm not going to bother rehashing the odd, global, Ukrainian/Russian and Chinese related dalliances of Hunter Biden here, <b><i><u><a href="https://www.newyorker.com/magazine/2019/07/08/will-hunter-biden-jeopardize-his-fathers-campaign"><span style="color: blue;">Adam Entous</span></a></u></i></b> did an admirable, more than capable job of that a few months ago, but could you imagine being the Vice President of the United States, not only having to work to keep the Chinese Communist Party in your corner on your NYC Real Estate Investments, but having to simultaneously deal with, deflect and field media and investigator questions about the out of control behavior and chronic bad/illegal/fraudster decision making process of your son, who you love, involved in the following on a daily/public basis:<br />
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<span style="font-family: inherit;">1.) Hunter Biden's acceptance of a 2.8 Carat diamond from a Chinese energy tycoon, Ye Jianming. <span style="font-family: inherit;">Mr. Jianming had hoped that Hunter might</span></span><span style="font-family: inherit;"> "use his contacts" to help identify investment opportunities for Ye’s company, CEFC China Energy, in liquefied-natural-gas projects in the United States. </span><span style="font-family: inherit;">More likely, these gifts were intended to pressure him to coerce his Vice President Dad to "get with the program". </span><br />
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2.) Hunter's efforts to openly, bravely beat a drug/alcohol addiction as he makes his way through his life.<br />
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3.) Hunter and Jimmy Biden's ill-fated, fiasco-like dealings with Paridigm Partners, a failed hedge fund, putting them deeply in debt due to investment losses and legal fees.<br />
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4.) Hunter's involvement in Seneca Global Advisors and Rosemont Seneca Partners, pitching small and mid-sized business on "opening up global markets", or perhaps a thinly veiled vehicle to make a few bucks off of presumed White House access.<br />
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<span style="font-family: inherit;">5.) Hunter's relationship with Jonathan Li and Bohai Capital, again with a goal of investing Chinese funds in US Businesses, eventually creating BHR Partners where Hunter became an unpaid member of BHR’s board. Hunter apparently did not take an ownership interest in BHR Partners until after his father left the White House, in an apparent attempt to bolster the appearance that there are "no emoluments to see here".</span><br />
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<span style="font-family: inherit;">6.) Hunter's Relationship, through Rosemont Realty with Mykola Zlochevsky and Burisma, one of Ukraine’s largest natural-gas producers. Hunter was made a Burisma board member in 2014, while the Obama Administration was ostensibly cracking down on Russian and Ukranian Corruption, including investigations of Bursima. The idea that the Biden's son could ethically maintain a board seat while simultaneously directing contracts and funding, on an organization under investigation for corruption by his own White House is preposterous at best. </span><br />
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<span style="font-family: inherit;">7.) The eventual collapse of the CEFC "Monkey Island deal" following Mr. Ye's arrest.</span><br />
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<span style="font-family: inherit;"><span style="font-family: inherit;">8.) </span>In 2017, Mr. Ye (from the "diamond" note #1 and the "monkey island" note #7) asked Hunter to represent one of his associates, Patrick Ho. Hunter, who also works as a private lawyer, agreed to represent Ho, and tried to determine whether Ho was in legal jeopardy in the U.S. Apparently, Mr. Ho was indeed in jeopardy since, just after Ye and Hunter agreed on the Monkey Island deal, U.S. authorities arrested Ho. Mr. Ho was later sentenced to three years in prison for his role in a multiyear, multimillion-dollar scheme to bribe top government officials in Chad and Uganda in exchange for business advantages for CEFC. </span><br />
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Based on the above, it's clear that Hunter Biden was either one of the worst judges of character and veracity in history, or had no problem with using his father's position to make a few bucks. I would also imagine that Joe had a hard time, and I'd say, failed miserably, at keeping Hunter on the straight and narrow. Emoluments all around!<br />
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Rudy Giuliani did a great job the other night on CNN taking nearly a half an hour of air time to cogently describe the issues above to Chris Cuomo.....here's the abbreviated, bullet point version:<br />
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On further review, the only thing we really learned from this painful exchange is that Rudy should no longer be allowed to play with scissors in the West Wing or run with sharp objects on the White House lawn.<br />
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<span style="font-size: large;"><b><u>Putting It All Together....</u></b></span><br />
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What's been going on in our country, for decades, is about as removed from the intent and aspirations of the framers of our Constitution as could possibly be imagined. A functioning Democracy, the shunning of "emoluments" in favor of a government of/for/by the people, as envisioned by America's forefathers/mothers has given way to political alliances, special interests and "money talks" legislation and enforcement, heretofore thought to be unimaginable by any reasonable, unbiased observer of political history. The corruption and apparently legalized pay to play has progressed from an envelope or two of "Joe Kennedy Cash" to buy a few votes in a rural swing state/district to complex networks of international, communist funded SOEs, SREs and syndicates financing triads, "think tanks", PACs, media campaigns and untraceable shell company investment into virtually every financial and political arena, where the sole purpose of the endeavor is to advance some form of systemic elitism and/or authoritarian domination with the inescapable, inevitable consequence being the destruction of democracy as we know it. <br />
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It seems that today, no party, business, financier, politician, legislator, executive or thinker is immune to this rapidly metastasizing disease. It's always been hard to turn down a free lunch, now we've come to the point where we don't even care or ask who's picking up the tab. It's become perfectly acceptable to take a seat at the banquet table and finish the meal with no questions asked. Again, this isn't a Republican, Democrat, business or labor problem...."taking the money" has become endemic in our society. We've accepted, as a people, and by design, that for certain classes of untouchable leadership, regardless of political affiliation or party, a "free lunch" is acceptable. Apparently, since everyone is doing it, it's no longer a "party" problem or an occasional isolated instance, it's gone systemic and has become a uniquely American problem. Politicians can't address corruption and "emoluments" by their brethren because it's likely they themselves are the beneficiaries of same......and our very Democracy is threatened because of it. <br />
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<i><b><span style="color: red; font-family: inherit; font-size: large;"><u>CORRECTION:</u> </span><span style="color: red; font-family: inherit; font-size: medium;">There are many, many reasons why Joe Biden should not hold public office, much less the Presidency of the United States of America, but the "Riverside Boulevard Project" is not one of them. For those of you who know anything about New York City Real Estate you've probably already deduced that "Sleepy Joe" has nothing to do with the Riverside Boulevard Project. 200/220/240 Riverside are actually all Trump Properties. The "Asian" and "LLC" ownership and financing data is all accurate, but it's a Trump emolument, not a Biden emolument. The point of this exercise is, that, this pay-to-play and influence peddling cancer is running amok in our government. Party affiliation, polls </span></b></i><b><i><span style="color: red; font-size: medium;">and popularity doesn't/shouldn't matter wh</span></i></b><i><b><span style="color: red; font-family: inherit; font-size: medium;">en determining whether there are emoluments and Foreign Corrupt Practices violations that put the very foundation of democracy at risk.</span></b></i><br />
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<i><b><span style="font-family: inherit;"><span style="font-size: medium;"><span style="color: red;">Moreover, as I've mentioned before in a </span><a href="https://deep-throat-ipo.blogspot.com/2018/10/when-will-xi-click-sell-button.html"><span style="color: blue;">prior post</span></a><span style="color: red;">, the pattern repeats with one of my other favorite, nearly failed real estate projects (Trump Tower Chicago, 401 N Wacker Dr.) where</span></span><span style="color: red; font-family: inherit; font-size: medium;"> t</span></span></b></i><span style="color: red; font-family: inherit; font-size: medium;"><b><i><span style="background-color: white;">here are no units listed above the 49th floor on the Cook County Assessors Website, even thought there are </span><span style="color: red;"><a href="https://lucidrealty.com/trump_tower.php" style="background-color: white;">254 Units shown on the floor plan</a><span style="background-color: white;">. I've also noticed that the lobby and elevators, like the Trump Riverside Buildings, have a disturbingly, almost unnaturally-high percentage of occupants with a "First language other than English" i.e.) Chinese and Russian visitors and occupants. Perhaps some enterprising journalist or investigator who knows the ropes on the inner workings of the Cook County Assessors office might be able to get the bottom of it. </span> </span></i></b></span><br />
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<span style="background-color: white; white-space: pre-wrap;"><b><span style="color: red; font-family: inherit; font-size: medium;"><i>Finally, these deal structures are, of course, built and are sufficiently complex to make the discovery of a conspiracy and the resulting "emoluments" nearly impossible to detect and prove. But there is no question in my mind, that all of the above, regardless of party politics or affiliation, absolutely flunks the smell test.</i></span></b></span><br />
<span style="background-color: white; white-space: pre-wrap;"><b><span style="color: red; font-family: inherit; font-size: medium;"><i><br /></i></span></b></span>
<span style="background-color: white;"><span style="color: red; font-size: medium;"><i><span style="font-family: inherit; white-space: pre-wrap;"><b>So we've determined above that the Chinese Communist Party likely exercises significant leverage over the Trump White House through financial incentives connected to his finances, banking relationships and Real Estate Projects. If you really, honestly examine this "Reality TV" Presidency, you'll quickly conclude that there have been no policies implemented that have either materially </b></span><span style="white-space: pre-wrap;"><b>benefited American interests and/or</b></span><span style="font-family: inherit; white-space: pre-wrap;"><b> adversely impacted China.</b></span></i></span></span><br />
<span style="background-color: white;"><span style="color: red; font-size: medium;"><i><span style="font-family: inherit; white-space: pre-wrap;"><b><br /></b></span></i></span></span>
<span style="background-color: white;"><span style="color: red; font-size: medium;"><i><span style="font-family: inherit; white-space: pre-wrap;"><b>The ineffective tariffs, never-ending trade talks, benign financial/monetary policy, destruction of agreements and relationship infrastructure like NAFTA and the TPP, cozying up to Putin and Autocrats while abandoning and destroying relationships with long time NATO allies, Hong Kong indifference, increased Chinese IMF and MCI inclusion, the unregulated/unabated/unrelenting "Dollar Grab" with a fake closed RMB, continued SEC tolerance of absurd, unregulatable VIE listings on US Exchanges (Currently about US$2.3 Trillion) ,etc. etc. are all either "Wag the Dog" distractions or well designed, camouflaged efforts to directly benefit and support Chinese global interests and isolate America. If I were to design a plan to destroy a democracy this would be the prototype.</b></span></i></span></span><br />
<span style="background-color: white;"><span style="color: red; font-size: medium;"><i><span style="font-family: inherit; white-space: pre-wrap;"><b><br /></b></span></i></span></span>
<span style="background-color: white;"><span style="color: red; font-size: medium;"><i><span style="font-family: inherit; white-space: pre-wrap;"><b>Biden's political and strategic weakness, of course, is his above described "known or should have known" relationship with, and fatherly instincts to protect, his less than cerebral, prodigal son who couldn't make a good decision if it came gift wrapped and left on his front porch. Moreover, Joe's misplaced "hold over" trust and affinity from the good old days, for China's unlikely, thirty year Trojan Horse transition to globalism with "Chinese Characteristics" is only exceeded in deficiency by his obvious inability to recognize what's truly unfolding around him. As I've said, Joe, you are a great guy and a wonderful, caring father, but you should not be the next President of the United States, even though the Chinese Communist Party would likely be fine with the presumed continuation of your Obama era pro-China administration and policy. </b></span></i></span></span><br />
<span style="background-color: white; white-space: pre-wrap;"><b><span style="color: red; font-family: inherit; font-size: medium;"><i><br /></i></span></b></span>
<span style="background-color: white; white-space: pre-wrap;"><b><span style="color: red; font-family: inherit; font-size: medium;"><i>Worst case, if I am indeed correct, it would seem that the Chinese Communist Party actually owns (or at least has significant influence over) the two leading horses, Trump and Biden, in what's shaping up to be a two horse race for the Presidency. The CPC has positioned itself so that they can't possibly lose.</i></span></b></span><br />
<span style="background-color: white; white-space: pre-wrap;"><b><span style="color: red; font-family: inherit; font-size: medium;"><i><br /></i></span></b></span>
<span style="background-color: white; white-space: pre-wrap;"><b><span style="color: red; font-family: inherit; font-size: medium;"><i>Personally, I believe that our founding fathers might have preferred that the bar for our elected officials today should be far higher than: </i></span></b></span><br />
<span style="background-color: white; white-space: pre-wrap;"><b><span style="color: red; font-family: inherit; font-size: medium;"><i><br /></i></span></b></span>
<span style="background-color: white; white-space: pre-wrap;"><b><span style="color: red; font-family: inherit; font-size: medium;"><i>"We couldn't actually prove he/she is a criminal, and/or we don't want to upset our dumb-ass base, which has been manipulated by foreign actors with our permission and at our request, but he/she is still our guy/gal....so anything he/she does is OK"</i></span></b></span><br />
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<span style="background-color: white; white-space: pre-wrap;"><b><span style="color: red; font-family: inherit; font-size: large;"><i>America deserves better than that.</i></span></b></span><br />
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<b><u><span style="font-family: "arial" , "helvetica" , sans-serif; font-size: large;">Other Fun Reading...</span></u></b>
<cite style="border: 0px; color: #073f5d; display: block; font-family: callunaregular, Georgia, "times new roman", serif; font-size: 13px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><br /></cite><cite style="border: 0px; color: #073f5d; display: block; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><span style="font-family: inherit; font-style: normal;">Deutsche Bank - Loan to vt bank</span></cite><cite style="border: 0px; color: #073f5d; display: block; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><a href="https://www.wsj.com/articles/deutsche-bank-in-late-2016-raced-to-shed-loan-it-made-to-russian-bank-vtb-11549147289"><span style="font-family: inherit; font-style: normal;">https://www.wsj.com/articles/deutsche-bank-in-late-2016-raced-to-shed-loan-it-made-to-russian-bank-vtb-11549147289</span></a></cite><cite style="border: 0px; color: #073f5d; display: block; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><span style="font-family: inherit; font-style: normal;"><br /></span></cite><cite style="border: 0px; color: #073f5d; display: block; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><a href="https://www.heritage.org/constitution/#!/articles/1/essays/68/emoluments-clause"><span style="font-family: inherit; font-style: normal;">https://www.heritage.org/constitution/#!/articles/1/essays/68/emoluments-clause</span></a></cite><cite style="border: 0px; color: #073f5d; display: block; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><span style="font-family: inherit; font-style: normal;"><br /></span></cite><cite style="border: 0px; color: #073f5d; display: block; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><span style="font-family: inherit; font-style: normal;">VT BANK - us treasury sanctions</span></cite><cite style="border: 0px; color: #073f5d; display: block; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><a href="https://www.treasury.gov/press-center/press-releases/pages/jl2590.aspx"><span style="font-family: inherit; font-style: normal;">https://www.treasury.gov/press-center/press-releases/pages/jl2590.aspx</span></a></cite><cite style="border: 0px; color: #073f5d; display: block; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><span style="font-family: inherit; font-style: normal;"><br /></span></cite><cite style="border: 0px; color: #073f5d; display: block; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><span style="font-family: inherit; font-style: normal;">Appeals Court Dismisses Emoluments Suit due to standing</span></cite><cite style="border: 0px; color: #073f5d; display: block; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><a href="https://www.washingtonpost.com/local/legal-issues/appeals-court-dismisses-emoluments-lawsuit-involving-president-trumps-dc-hotel/2019/07/10/4a4b6190-886e-11e9-98c1-e945ae5db8fb_story.html?noredirect=on&utm_term=.1a7df7d746dd"><span style="font-family: inherit; font-style: normal;">https://www.washingtonpost.com/local/legal-issues/appeals-court-dismisses-</span></a></cite><cite style="border: 0px; color: #073f5d; display: block; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><span style="font-family: inherit; font-style: normal;"><br /></span></cite><cite style="border: 0px; color: #073f5d; display: block; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><a href="https://www.washingtonpost.com/local/legal-issues/appeals-court-dismisses-emoluments-lawsuit-involving-president-trumps-dc-hotel/2019/07/10/4a4b6190-886e-11e9-98c1-e945ae5db8fb_story.html?noredirect=on&utm_term=.1a7df7d746dd"><span style="font-family: inherit; font-style: normal;">emoluments-lawsuit-involving-president-trumps-dc-hotel/2019/07/10/4a4b6190-886e-11e9-98c1-e945ae5db8fb_story.html?noredirect=on&utm_term=.1a7df7d746dd</span></a></cite><cite style="border: 0px; color: #073f5d; display: block; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><span style="font-family: inherit; font-style: normal;"><br /></span></cite><cite style="border: 0px; color: #073f5d; display: block; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><span style="font-family: inherit; font-style: normal;">vt bank - eu sanctions</span></cite><cite style="border: 0px; color: #073f5d; display: block; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><a href="https://www.reuters.com/article/us-russia-eu-ukraine-sanctions/eu-court-upholds-eu-sanctions-vs-russian-banks-companies-over-ukraine-crisis-idUSKCN1LT185"><span style="font-family: inherit; font-style: normal;">https://www.reuters.com/article/us-russia-eu-ukraine-sanctions/eu-court-upholds-eu-sanctions-vs-russian-banks-companies-over-ukraine-crisis-idUSKCN1LT185</span></a></cite><cite style="border: 0px; color: #073f5d; display: block; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: right; text-transform: uppercase; vertical-align: baseline;"><span style="font-family: inherit; font-style: normal;"><br /></span></cite><cite style="border: 0px; color: #073f5d; display: block; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><span style="font-family: inherit; font-style: normal;">Democrat's emolument's Case</span></cite><cite style="border: 0px; color: #073f5d; display: block; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><a href="https://www.washingtonpost.com/context/federal-court-opinion-on-trump-emoluments-case-brought-by-democrats/bf8ea41e-6cb7-4425-85ba-657f4fc11e60/?utm_term=.1867b52af2b6"><span style="font-family: inherit; font-style: normal;">https://www.washingtonpost.com/context/federal-court-opinion-on-trump-emoluments-case-brought-by-democrats/bf8ea41e-6cb7-4425-85ba-657f4fc11e60/?</span></a></cite><cite style="border: 0px; color: #073f5d; display: block; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><a href="https://www.washingtonpost.com/context/federal-court-opinion-on-trump-emoluments-case-brought-by-democrats/bf8ea41e-6cb7-4425-85ba-657f4fc11e60/?utm_term=.1867b52af2b6"><span style="font-family: inherit; font-style: normal;">utm_term=.1867b52af2b6</span></a></cite><cite style="border: 0px; color: #073f5d; display: block; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><span style="font-family: inherit; font-style: normal;"><br /></span></cite><cite style="border: 0px; color: #073f5d; display: block; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><span style="font-family: inherit; font-style: normal;">hna acquires deutsche bank stake and majority stake in scaramucci's skybridge capital</span></cite><cite style="border: 0px; color: #073f5d; display: block; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><span style="font-family: inherit; font-style: normal;"><a href="http://www.chinadaily.com.cn/business/2017-02/21/content_28278046.htm">http://www.chinadaily.com.cn/business/2017-02/21/content_28278046.htm</a></span></cite><cite style="border: 0px; color: #073f5d; display: block; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;"><br /></cite><cite style="border: 0px; color: #073f5d; display: block; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; text-align: left; text-transform: uppercase; vertical-align: baseline;">Initial Emoluments Complaint - Blumenthol vs Trump</cite><br />
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<a href="https://www.theusconstitution.org/wp-content/uploads/2018/01/Blumenthal_v_Trump_DDC_Original_Complaint_Final.pdf">https://www.theusconstitution.org/wp-content/uploads/2018/01/Blumenthal_v_Trump_DDC_Original_Complaint_Final.pdf</a><br />
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Delaware Secretary of State - Name Search<br />
<a href="https://icis.corp.delaware.gov/Ecorp/EntitySearch/NameSearch.aspx">https://icis.corp.delaware.gov/Ecorp/EntitySearch/NameSearch.aspx</a><br />
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Biden - Politico<br />
<a href="https://www.politico.com/story/2019/03/18/joe-biden-2020-money-wealth-1221934">https://www.politico.com/story/2019/03/18/joe-biden-2020-money-wealth-1221934</a><br />
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Hunder Biden - Diamond Interview<br />
<a href="https://www.msnbc.com/morning-joe/watch/hunter-biden-opens-up-about-addiction-in-new-interview-63031365709">https://www.msnbc.com/morning-joe/watch/hunter-biden-opens-up-about-addiction-in-new-interview-63031365709</a><br />
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FARA<br />
<a href="https://www.justice.gov/nsd-fara">https://www.justice.gov/nsd-fara</a><br />
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All FARA Docs<br />
<a href="https://asbcllc.com/trelliscopes/fara/all_filings/index.html">https://asbcllc.com/trelliscopes/fara/all_filings/index.html</a><br />
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<b><u>New Yorker - Adam Entous - Hunter Biden Article/Interview and excerpts</u></b><br />
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<a href="https://www.newyorker.com/magazine/2019/07/08/will-hunter-biden-jeopardize-his-fathers-campaign">https://www.newyorker.com/magazine/2019/07/08/will-hunter-biden-jeopardize-his-fathers-campaign</a><br />
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<span style="font-family: "adobe caslon" , "georgia" , "times new roman" , "times" , serif; font-size: 21px;">I</span><span style="font-family: "adobe caslon" , "georgia" , "times new roman" , "times" , serif;"><span style="font-size: x-small;">n 2006, Hunter and his uncle Jimmy Biden, along with another partner, entered into a twenty-one-million-dollar deal to buy Paradigm, a hedge-fund group that claimed to manage $1.5 billion in assets. Hunter said that the deal sounded “super attractive,” but that it fell apart after he and Jimmy learned that the company was worth less than they thought, and that the lawyer they were working with was a convicted felon awaiting sentencing. Hunter and Jimmy, who together went on to buy a stake in the company, estimated that they lost at least $1.3 million on the initial venture, which Hunter described as “a tragicomedy.” To help repay a law firm that had put up the money to initiate the transaction, Hunter obtained a million-dollar note against his house from Washington First Bank, which was co-founded by Oldaker. On January 5, 2007, two days before Biden announced his decision to run for President, Hunter and Jimmy were sued by their former partner in New York. The suit was settled but resulted in a flurry of headlines.</span></span><br />
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<span style="font-family: "adobe caslon" , "georgia" , "times new roman" , "times" , serif; font-size: 21px;">I</span><span style="font-size: x-small;"><span style="font-family: "adobe caslon" , "georgia" , "times new roman" , "times" , serif;">n September, 2008, Hunter launched a boutique consulting firm, Seneca Global Advisors, named for the largest of the Finger Lakes, in New York</span><span data-page="page_5" style="box-sizing: inherit; font-family: "adobe caslon" , "georgia" , "times new roman" , "times" , serif;"></span><span style="font-family: "adobe caslon" , "georgia" , "times new roman" , "times" , serif;"> State, where his mother had grown up. In pitch meetings with prospective clients, Hunter said that he could help small and mid-sized companies expand into markets in the U.S. and other countries. In June, 2009, five months after Joe Biden became Vice-President, Hunter co-founded a second company, Rosemont Seneca Partners, with Christopher Heinz, Senator </span><a class="ArticleBody__link___1FS03" href="https://www.newyorker.com/tag/john-kerry" style="-webkit-font-smoothing: antialiased; background-image: linear-gradient(rgb(255, 255, 255), rgb(255, 255, 255)), linear-gradient(rgb(255, 255, 255), rgb(255, 255, 255)), linear-gradient(rgb(0, 0, 0), rgb(0, 0, 0)); background-position: 0px 87%, 100% 87%, 0px 92%; background-repeat: no-repeat, no-repeat, repeat-x; background-size: 0.05em 1px, 0.05em 1px, 1px 1px; box-sizing: inherit; font-family: "Adobe Caslon", Georgia, "Times New Roman", Times, serif; margin-left: 1px; position: relative; text-decoration-line: none; text-rendering: geometricprecision; text-shadow: rgb(255, 255, 255) 0px 1px 0px, rgb(255, 255, 255) 0px 2px 0px, rgb(255, 255, 255) 0px -1px 0px, rgb(255, 255, 255) 0px -2px 0px, rgb(255, 255, 255) -1px 1px 0px, rgb(255, 255, 255) -1px 2px 0px, rgb(255, 255, 255) 1px 1px 0px, rgb(255, 255, 255) 1px 2px 0px, rgb(255, 255, 255) -1px 0px 0px, rgb(255, 255, 255) 0px -3px 0px; z-index: 0;">John Kerry</a><span style="font-family: "adobe caslon" , "georgia" , "times new roman" , "times" , serif;">’s stepson and an heir to the food-company fortune, and Devon Archer, a former Abercrombie & Fitch model who started his finance career at Citibank in Asia and who had been friends with Heinz at Yale. (Heinz and Archer already had a private-equity fund called Rosemont Capital.) Heinz believed that Hunter would share his aversion to entering into business deals that could attract public scrutiny, but over time Hunter and Archer seized opportunities that did not include Heinz, who was less inclined to take risks.</span></span><br />
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<span style="font-family: "adobe caslon" , "georgia" , "times new roman" , "times" , serif; font-size: 21px;">I</span><span style="font-family: "adobe caslon" , "georgia" , "times new roman" , "times" , serif;"><span style="font-size: x-small;">n 2012, Archer and Hunter talked to Jonathan Li, who ran a Chinese private-equity fund, Bohai Capital, about becoming partners in a new company that would invest Chinese capital—and, potentially, capital from other countries—in companies outside China. In June, 2013, Li, Archer, and other business partners signed a memorandum of understanding to create the fund, which they named BHR Partners, and, in November, they signed contracts related to the deal. Hunter became an unpaid member of BHR’s board but did not take an equity stake in BHR Partners until after his father left the White House.</span></span><br />
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<span style="font-family: "adobe caslon" , "georgia" , "times new roman" , "times" , serif; font-size: 21px;">I</span><span style="font-size: x-small;"><span style="font-family: "adobe caslon" , "georgia" , "times new roman" , "times" , serif;">n December, 2013, Vice-President Biden flew to Beijing to meet with President </span><a class="ArticleBody__link___1FS03" href="https://www.newyorker.com/tag/xi-jinping" style="-webkit-font-smoothing: antialiased; background-image: linear-gradient(rgb(255, 255, 255), rgb(255, 255, 255)), linear-gradient(rgb(255, 255, 255), rgb(255, 255, 255)), linear-gradient(rgb(0, 0, 0), rgb(0, 0, 0)); background-position: 0px 87%, 100% 87%, 0px 92%; background-repeat: no-repeat, no-repeat, repeat-x; background-size: 0.05em 1px, 0.05em 1px, 1px 1px; box-sizing: inherit; font-family: "Adobe Caslon", Georgia, "Times New Roman", Times, serif; margin-left: 1px; position: relative; text-decoration-line: none; text-rendering: geometricprecision; text-shadow: rgb(255, 255, 255) 0px 1px 0px, rgb(255, 255, 255) 0px 2px 0px, rgb(255, 255, 255) 0px -1px 0px, rgb(255, 255, 255) 0px -2px 0px, rgb(255, 255, 255) -1px 1px 0px, rgb(255, 255, 255) -1px 2px 0px, rgb(255, 255, 255) 1px 1px 0px, rgb(255, 255, 255) 1px 2px 0px, rgb(255, 255, 255) -1px 0px 0px, rgb(255, 255, 255) 0px -3px 0px; z-index: 0;">Xi Jinping</a><span style="font-family: "adobe caslon" , "georgia" , "times new roman" , "times" , serif;">. Biden often asked one of his grandchildren to accompany him on his international trips, and he invited Finnegan to come on this one. Hunter told his father that he wanted to join them. According to a Beijing-based BHR representative, Hunter, shortly after arriving in Beijing, on December 4th, helped arrange for Li to shake hands with his father in the lobby of the American delegation’s hotel. Afterward, Hunter and Li had what both parties described as a social meeting. Hunter told me that he didn’t understand why anyone would have been concerned about this. “How do I go to Beijing, halfway around the world, and not see them for a cup of coffee?” he said.</span></span><br />
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<span style="font-family: "adobe caslon" , "georgia" , "times new roman" , "times" , serif; font-size: 21px;">F</span><span style="font-size: x-small;"><span style="font-family: "adobe caslon" , "georgia" , "times new roman" , "times" , serif;">or another venture, Archer travelled to Kiev to pitch investors on a real-estate fund he managed, Rosemont Realty. There, he met Mykola Zlochevsky, the co-founder of Burisma, one of Ukraine’s largest natural-gas producers. Zlochevsky had served as ecology minister under the pro-Russian government of </span><a class="ArticleBody__link___1FS03" href="https://www.newyorker.com/news/our-columnists/the-trump-russia-investigation-and-the-mafia-state" style="-webkit-font-smoothing: antialiased; background-image: linear-gradient(rgb(255, 255, 255), rgb(255, 255, 255)), linear-gradient(rgb(255, 255, 255), rgb(255, 255, 255)), linear-gradient(rgb(0, 0, 0), rgb(0, 0, 0)); background-position: 0px 87%, 100% 87%, 0px 92%; background-repeat: no-repeat, no-repeat, repeat-x; background-size: 0.05em 1px, 0.05em 1px, 1px 1px; box-sizing: inherit; font-family: "Adobe Caslon", Georgia, "Times New Roman", Times, serif; margin-left: 1px; position: relative; text-decoration-line: none; text-rendering: geometricprecision; text-shadow: rgb(255, 255, 255) 0px 1px 0px, rgb(255, 255, 255) 0px 2px 0px, rgb(255, 255, 255) 0px -1px 0px, rgb(255, 255, 255) 0px -2px 0px, rgb(255, 255, 255) -1px 1px 0px, rgb(255, 255, 255) -1px 2px 0px, rgb(255, 255, 255) 1px 1px 0px, rgb(255, 255, 255) 1px 2px 0px, rgb(255, 255, 255) -1px 0px 0px, rgb(255, 255, 255) 0px -3px 0px; z-index: 0;">Viktor Yanukovych</a><span style="font-family: "adobe caslon" , "georgia" , "times new roman" , "times" , serif;">. After public protests in 2013 and early 2014, the Ukrainian parliament had voted to remove Yanukovych and called for his arrest. Under the new Ukrainian government, authorities in Kiev, with the encouragement of the Obama Administration, launched an investigation into whether Zlochevsky had used his cabinet position to grant exploration licenses that benefitted Burisma. (The status of the inquiry is unclear, but no proof of criminal activity has been publicly disclosed. Zlochevsky could not be reached for comment, and Burisma did not respond to queries.) In a related investigation, which was ultimately closed owing to a lack of evidence, British authorities temporarily froze U.K. bank accounts tied to Zlochevsky.</span></span><br />
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<span style="font-family: "adobe caslon" , "georgia" , "times new roman" , "times" , serif; font-size: 21px;">I</span><span style="font-family: "adobe caslon" , "georgia" , "times new roman" , "times" , serif;"><span style="font-size: x-small;">n early 2014, Zlochevsky sought to assemble a high-profile international board to oversee Burisma, telling prospective members that he wanted the company to adopt Western standards of transparency. Among the board members he recruited was a former President of Poland, Aleksander Kwaśniewski, who had a reputation as a dedicated reformer. In early 2014, at Zlochevsky’s suggestion, Kwaśniewski met with Archer in Warsaw and encouraged him to join Burisma’s board, arguing that the company was critical to Ukraine’s independence from Russia. Archer agreed.</span></span><br />
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<span style="font-family: "adobe caslon" , "georgia" , "times new roman" , "times" , serif; font-size: 21px;">W</span><span style="font-size: x-small;"><span style="font-family: "adobe caslon" , "georgia" , "times new roman" , "times" , serif;">hen Archer told Hunter that the board needed advice on how to improve the company’s corporate governance, Hunter recommended the law firm Boies Schiller Flexner, where he was “of counsel.” The firm brought in the investigative agency Nardello & Co. to assess Burisma’s history of corruption. Hunter joined Archer on the Burisma board in April, 2014. Three months later, in a draft report to Boies Schiller, Nardello said that it was “unable to identify any information to date regarding any current government investigation into Zlochevsky or Burisma,” but cited unnamed sources saying that Zlochevsky could be “vulnerable to investigation for financial crimes” and for</span><span data-page="page_6" style="box-sizing: inherit; font-family: "adobe caslon" , "georgia" , "times new roman" , "times" , serif;"></span><span style="font-family: "adobe caslon" , "georgia" , "times new roman" , "times" , serif;"> “perceived abuse of power.”</span></span><br />
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<span style="font-family: "adobe caslon" , "georgia" , "times new roman" , "times" , serif;"><span style="font-size: large;">V</span><span style="font-size: x-small;">ice-President Biden was playing a central role in overseeing U.S. policy in Ukraine, and took the lead in calling on Kiev to fight rampant corruption. On May 13, 2014, after Hunter’s role on the Burisma board was reported in the news, Jen Psaki, a State Department spokesperson, said that the State Department was not concerned about perceived conflicts of interest, because Hunter was a “private citizen.” Hunter told Burisma’s management and other board members that he would not be involved in any matters that were connected to the U.S. government or to his father. Kwaśniewski told me, “We never discussed how the Vice-President can help us. Frankly speaking, we didn’t need such help.”</span></span><br />
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<span style="font-family: "adobe caslon" , "georgia" , "times new roman" , "times" , serif;"><span style="font-size: large;">S</span><span style="font-size: x-small;">everal former officials in the Obama Administration and at the State Department insisted that Hunter’s role at Burisma had no effect on his father’s policies in Ukraine, but said that, nevertheless, Hunter should not have taken the board seat. As the former senior White House aide put it, there was a perception that “Hunter was on the loose, potentially undermining his father’s message.” The same aide said that Hunter should have recognized that at least some of his foreign business partners were motivated to work with him because they wanted “to be able to say that they are affiliated with Biden.” A former business associate said, “The </span></span><em class="" style="box-sizing: inherit; font-family: "Adobe Caslon", Georgia, "Times New Roman", Times, serif; font-size: small;">appearance</em><span style="font-family: "adobe caslon" , "georgia" , "times new roman" , "times" , serif; font-size: x-small;"> of a conflict of interest is good enough, at this level of politics, to keep you from doing things like that.”</span><br />
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<span style="font-family: "adobe caslon" , "georgia" , "times new roman" , "times" , serif;"><span style="font-size: large;">I</span><span style="font-size: x-small;">n December, 2015, as Joe Biden prepared to return to Ukraine, his aides braced for renewed scrutiny of Hunter’s relationship with Burisma. Amos Hochstein, the Obama Administration’s special envoy for energy policy, raised the matter with Biden, but did not go so far as to recommend that Hunter leave the board. As Hunter recalled, his father discussed Burisma with him just once: “Dad said, ‘I hope you know what you are doing,’ and I said, ‘I do.’ ”</span></span><br />
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<span style="font-size: large;">H</span><span style="font-size: x-small;">unter said that, in<span data-page="page_10" style="-webkit-font-smoothing: antialiased; box-sizing: inherit; text-rendering: geometricprecision;"></span> divorce proceedings, he offered to give Kathleen “everything,” including a monthly payment of thirty-seven thousand dollars for alimony, tuition, and child-care costs for a decade. Hunter told me that he was living on approximately four thousand dollars a month; he was hardly poor, but it was an adjustment. On occasion, transactions on his credit cards were declined.</span></div>
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<span style="font-size: large;">O</span><span style="font-size: x-small;">ne of Kathleen’s motions contains a reference to “a large diamond” that had come into Hunter’s possession. The motion seems to imply that it was one of Hunter’s “personal indulgences.” When I asked him about it, he told me that he had been given the diamond by the Chinese energy tycoon Ye Jianming, who was trying to make connections in Washington among prominent Democrats and Republicans, and whom he had met in the middle of the divorce. Hunter told me that two associates accompanied him to his first meeting with Ye, in Miami, and that they surprised him by giving Ye a magnum of rare vintage Scotch worth thousands of dollars.</span></div>
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<span style="font-size: large;">H</span><span style="font-size: x-small;">unter was on the board of the World Food Program USA, a nonprofit that generates support for the U.N. World Food Programme, and he had hoped that Ye would make a large aid donation. At dinner that night, they discussed the donation, and then the conversation turned to business opportunities. Hunter offered to use his contacts to help identify investment opportunities for Ye’s company, CEFC China Energy, in liquefied-natural-gas projects in the United States. </span></div>
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<span style="font-size: large;">A</span><span style="font-size: x-small;">fter the dinner, Ye sent a 2.8-carat diamond to Hunter’s hotel room with a card thanking him for their meeting. “I was, like, Oh, my God,” Hunter said. (In Kathleen’s court motion, the diamond is estimated to be worth eighty thousand dollars. Hunter said he believes the value is closer to ten thousand.) When I asked him if he thought the diamond was intended as a bribe, he said no: “What would they be bribing me for? My dad wasn’t in office.” Hunter said that he gave the diamond to his associates, and doesn’t know what they did with it. “I knew it wasn’t a good idea to take it. I just felt like it was weird,” he said.</span></div>
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<span style="font-size: large;">H</span><span style="font-size: x-small;">unter began negotiating a deal for CEFC to invest forty million dollars in a liquefied-natural-gas project on Monkey Island, in Louisiana, which, he said, was projected to create thousands of jobs. “I was more proud of it than you can imagine,” he told me. In the summer of 2017, Ye talked with Hunter about his concern that U.S. law-enforcement agencies were investigating one of his associates, Patrick Ho. Hunter, who sometimes works as a private lawyer, agreed to represent Ho, and tried to figure out whether Ho was in legal jeopardy in the U.S. That November, just after Ye and Hunter agreed on the Monkey Island deal, U.S. authorities detained Ho at the airport. He was later sentenced to three years in prison for his role in a multiyear, multimillion-dollar scheme to bribe top government officials in Chad and Uganda in exchange for business advantages for CEFC. In February, 2018, Ye was detained by Chinese authorities, reportedly as part of an anti-corruption investigation, and the deal with Hunter fell through. Hunter said that he did not consider Ye to be a “shady character at all,” and characterized the outcome as “bad luck.”</span></div>
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<span style="font-size: large;">B</span><span style="font-size: x-small;">iden’s approach was to deal with Hunter’s activities by largely ignoring them. This may have temporarily allowed Biden to truthfully inform reporters that his decisions were not affected by Hunter. But, as Robert Weissman, the president of the advocacy group Public Citizen, said, “It’s hard to avoid the conclusion that Hunter’s foreign employers and partners were seeking to leverage Hunter’s relationship with Joe, either by seeking improper influence or to project access to him.”</span></div>
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Deep Throathttp://www.blogger.com/profile/02712515268051858186noreply@blogger.com0tag:blogger.com,1999:blog-7478408299955066555.post-39043543629430686332019-08-20T00:01:00.001-04:002019-08-20T10:09:31.511-04:00The BABA Investor Call.......Trade War?...What Trade War?<div dir="ltr" style="text-align: left;" trbidi="on">
As I've been doing every quarter since the BABA IPO back in September of 2014, I've taken the time to listen to Thursday morning's investor call, review the presentation and read the press release and 6K for this financial dumpster fire. For me, like driving past a bad car accident on the freeway, it's difficult and painful to see, but for some reason, I can't bring myself to look away.<br />
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The relevant links to same are listed directly below for your own personal amusement and/or self-abuse.<br />
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<b><u>PRESS RELEASE</u></b><br />
<a href="https://www.alibabagroup.com/en/news/press_pdf/p190815.pdf">https://www.alibabagroup.com/en/news/press_pdf/p190815.pdf</a><br />
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<b><u>PRESENTATION</u></b><br />
<a href="https://www.alibabagroup.com/en/ir/presentations/pre190815.pdf">https://www.alibabagroup.com/en/ir/presentations/pre190815.pdf</a><br />
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<b><u>WEBCAST</u></b><br />
<a href="https://edge.media-server.com/mmc/p/8fyipmop">https://edge.media-server.com/mmc/p/8fyipmop</a><br />
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<b><u>CALL TRANSCRIPT</u></b><br />
<a href="https://finance.yahoo.com/news/alibaba-group-holding-limited-baba-163122944.html">https://finance.yahoo.com/news/alibaba-group-holding-limited-baba-163122944.html</a><br />
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<b><u>SEC Filing - 6K</u></b><br />
<a href="https://www.sec.gov/Archives/edgar/data/1577552/000110465919046150/a19-17229_1ex99d1.htm">https://www.sec.gov/Archives/edgar/data/1577552/000110465919046150/a19-17229_1ex99d1.htm</a><br />
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<b><u>SEC Filing - 20F</u></b><br />
<a href="https://www.sec.gov/Archives/edgar/data/1577552/000104746919003492/a2238953z20-f.htm">https://www.sec.gov/Archives/edgar/data/1577552/000104746919003492/a2238953z20-f.htm</a><br />
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I must say, that before we dive headlong into this looking glass, that I feel I do some of my most introspective work from the deck/cabin of a sailboat, where I wrote/researched/pondered much what I wrote over the weekend. The serenity and peace of being on the water cleanses and soothes me as I force myself to delve into this maelstrom of accounting rule abuse. Here are a few pictures from the weekend....<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhMHSqCs_MLDeNt-7HTGSzWnOrL6msSvpOQw9XALCa5MTfzFoR3YYV2wYaqAenikA8saN063zfIHiQblXSmrjqzb4z6SsmfB8GSaNm3cndyHe4ytwajoMti8CyX0n4dop94IAZjjaEZXIU/s1600/Erie_Sunset.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1200" data-original-width="1600" height="300" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhMHSqCs_MLDeNt-7HTGSzWnOrL6msSvpOQw9XALCa5MTfzFoR3YYV2wYaqAenikA8saN063zfIHiQblXSmrjqzb4z6SsmfB8GSaNm3cndyHe4ytwajoMti8CyX0n4dop94IAZjjaEZXIU/s400/Erie_Sunset.jpg" width="400" /></a></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiNkrXPdETcvx9zT3km-6m5vpR0o7YBWK5odgYJ792-TLowkL2jUiO267gVGPSHcKcheYLmSV0dn9LPquySwqpEGgpdVXFtiVxqA5yJTQasmFsxXb9pa0tVOCEewS_nEqUXz3_A4pbOHU8/s1600/Erie_EAST_BANK.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1200" data-original-width="1600" height="300" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiNkrXPdETcvx9zT3km-6m5vpR0o7YBWK5odgYJ792-TLowkL2jUiO267gVGPSHcKcheYLmSV0dn9LPquySwqpEGgpdVXFtiVxqA5yJTQasmFsxXb9pa0tVOCEewS_nEqUXz3_A4pbOHU8/s400/Erie_EAST_BANK.jpg" width="400" /></a></div>
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For those of you new to this "Alibaba Investor Call" reality show, the format for these quarterly extravaganzas is generally the same. They open up with a motivational speech by Joe Tsai, describing the nearly boundless, macro opportunities that are just waiting to jump into the lap of every US investor, if they are just bold enough and wise enough to get aboard this unstoppable Chinese Communist express train to riches.<br />
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Next Daniel Zhang stumbles and bumbles through some brand new made up metrics for a few minutes and Maggie spends some time going through the fake financial statements.<br />
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The call ends with a few analysts displaying their adoration for management genius, extolling their virtues and asking some irrelevant "if you were a tree...what kind of tree would you be?" questions.<br />
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In this particular call:<br />
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<span style="background-color: white; color: #424242;"><i><u><span style="font-family: inherit;"><b>Eddie Leung - Bank of America Merrill Lynch</b></span></u></i></span> asked about "user engagement in less developed markets" and "synergies"<br />
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<span style="background-color: white; color: #424242;"><span style="font-family: inherit;"><b><u><i>Piyush Mubayi - Goldman Sachs</i></u></b></span></span> asked about the "Internet of Things" and "5G"<br />
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<b><i><span style="font-family: inherit;"><span style="font-family: inherit;"><u><span style="background-color: white; color: #26282a;">Alicia Yap </span><span style="background-color: white; color: #26282a;">- </span></u></span><span style="background-color: white; color: #26282a;"><u><span style="font-family: inherit;">Citigroup</span></u><span style="font-size: 15px;"> </span></span></span></i></b>asked about the T-Mall Flagship store 2.0 upgrade and "monetization"<br />
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<b><i><u><span style="font-family: inherit;"><span style="background-color: white; color: #26282a;">Grace Chen</span><span style="background-color: white; color: #26282a;"> - </span><span style="background-color: white; color: #26282a;">Morgan Stanley</span></span></u></i></b> asked about "Margin Performance" (Maggie said it was fine)<br />
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<b><i><u><span style="font-family: inherit;"><span style="background-color: white; color: #26282a;">Binnie Wong</span><span style="background-color: white; color: #26282a;"> - </span><span style="background-color: white; color: #26282a;">HSBC</span></span></u></i></b> asked about the "strong top line growth"<br />
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<b><i><u><span style="font-family: inherit;"><span style="background-color: white; color: #26282a;">Gregory Zhao</span><span style="background-color: white; color: #26282a;"> - </span><span style="background-color: white; color: #26282a;">Barclays Capital </span></span></u></i></b> asked about monetization in lower tier cities, efficiencies and priorities.<br />
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<b><i><span style="font-family: inherit;"><u><span style="background-color: white; color: #26282a;">Jerry Liu</span><span style="background-color: white; color: #26282a;"> - </span><span style="background-color: white; color: #26282a;">UBS</span></u> </span></i></b>apparently believes he works for Alibaba since he discussed <span style="font-family: inherit;"><i>"</i><span style="background-color: white; color: #26282a; font-style: italic;"><u>our</u> investments that <u>we've </u>done so far this year</span><i> " </i><span style="font-family: inherit;">and he is </span></span><span style="background-color: white; color: #26282a; font-family: "helvetica neue" , "helvetica" , "arial" , sans-serif; font-size: 15px;"> </span><span style="font-family: inherit;"><span style="background-color: white; color: #26282a;">"<i>wondering if there's more monitization <u>we can continue to do</u> to continue this trend".</i></span> I, for one, think that it's wonderful that Jerry is so helpful. He's a part of the team. "<i>Great quarter guys!</i>" </span><br />
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Now, if you have no financial background, have a love of buzzwords and can't tell a "Balance Sheet" from "Balance Shit" these quarterly calls are for you! The above questions were actually a poorly disguised trailer-load-of-irrelevant-flaming-financial-turd-softballs of misdirection aimed at all of the starry-eyed China bulls looking to buy the dip, but, in today's Topsy-Turvy financial world, this is what Alibaba's, and dare I say, securities "analysis" in general, has become.<br />
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I'm sure that the questions flying at Eddie, Piyush, Alicia, Grace, Binnie. Greg and Jerry during the inevitable Congressional hearings will be a bit more pointed than those they chose to lob at Alibaba management, but I digress. It is what it is.....<br />
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<b><u><span style="font-family: inherit; font-size: x-large;">What Wasn't discussed in the Investor Call?</span></u></b><br />
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I actually think this is much more important than the info in the call. Here we go.<br />
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<b><u><span style="color: red; font-size: large;">1.) Alibaba's "Core" Revenue (despite reporting 42% YOY combined growth) is probably in decline</span></u></b><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjxK1ot6gbuciYcbNQVQNw-En9yza3iuaw5UeJUqdLOsb5rWlSBRBzhAHcS_hW-03WuTnC7Sy9j1u7vLh1rqniq0foQ7OUjyhPARM4FbtQhdaJyxNnCoiQMRStFJC8MnrCl5-yfGlikgJA/s1600/BABA_20F_Consolidated_Entities_8-17-19.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1149" data-original-width="520" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjxK1ot6gbuciYcbNQVQNw-En9yza3iuaw5UeJUqdLOsb5rWlSBRBzhAHcS_hW-03WuTnC7Sy9j1u7vLh1rqniq0foQ7OUjyhPARM4FbtQhdaJyxNnCoiQMRStFJC8MnrCl5-yfGlikgJA/s640/BABA_20F_Consolidated_Entities_8-17-19.png" width="288" /></a>Alibaba has been "buying" and consolidating revenue increases for years. Since there were no new acquisitions in the quarter, as described in the 6/30/19 6-K, we can assume that significant revenue increases are due to continued "step acquisitions" as described in the 20-F. When we examine Footnote 4 of the that document we see that there is a long list of these step acquisitions where a significant measure of Revenue wasn't available or allowed to be reported in the June, 2018 Quarter 20-F. Now that the company has completed additional "steps" they are able to include/consolidate this revenue. Of course, the actual consolidated revenues are no longer disclosed or described for these businesses in the filings.<br />
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Note that there is also a US$1.1 Billion dollar "other" investment which might be a lucrative source of increased reported revenue. Unfortunately, we just can't tell.<br />
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Again, BABA Management and accountants, and for that matter, every entity controlled by the Chinese Communist Party, all have a long history of liberal use of accounting methods, misrepresentation and improper application of accounting/disclosure rules to goose revenue over the years. Although we can't tell for certain, by design, since there is no disclosure of the revenue impact for the current quarter for any of these step acquisitions during the prior year, we would suspect that based on the amount of US Shareholder Capital deployed to accomplish these insider driven boondoggles that it must be substantial.<br />
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<a href="https://www.sec.gov/Archives/edgar/data/1577552/000104746919003492/a2238953z20-f.htm">https://www.sec.gov/Archives/edgar/data/1577552/000104746919003492/a2238953z20-f.htm</a><br />
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Moreover, nearly every third party (Non-CPC published) metric, whether it be new car sales, electricity usage, retail spending, etc. is contracting (check any Western source). Alibaba is apparently, according to their numbers, impervious to an economic slow down, trade war, recession or any economic trade winds whatsoever. It defies logic that BABA is somehow generating organic double-digit YOY growth anywhere near what they are claiming without their typical use of accounting Shenanigans.<br />
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<b><u><span style="color: red; font-size: large;">2.) Operating Margins and Income from Operations are actually on the decline as well</span></u></b><br />
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As any senior financial person knows, producing quarterly statements in a struggling organization is an iterative process. It goes something like this:<br />
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1.) The Accounting department produces the "first pass" numbers and presents them to management.<br />
2.) Management's reaction is that "we can't show those numbers to anyone" go back and find a way to fix them.<br />
3.) The accounting department scours the relevant accounting literature and regulations and solicits advice from their public accounts as to what they might be able to get away with, fully intending to stretch the limits of both the meaning of the rules and the spirit of the profession.<br />
4.) Eventually, they come up with some sort of scheme generally involving the capitalization of expenditures that should have been expensed, thus deferring the expenses to future accounting periods and boosting current period profits.<br />
5.) Depending on how aggressive the effort and how gutless the public accounting firm, the accounting team can come up with some miraculous profit/margin improvements quite quickly.<br />
6.) Remember, for a financial professional, success is not dependent on how reasonable the adjustments are, but more so on the ability of the professional to defend it and explain it under oath with a straight face. <br />
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Here's what the Alibaba accounting team did this quarter. There are two things we can identify with relative certainty:<br />
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The first is the use of an older (2016) FASB Accounting Standard Update that they must have just stumbled across.<br />
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<b><u><i>Press Release: (pg.23)</i></u></b><br />
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<i>(1) We adopted ASU 2016-02, “Leases (Topic 842)” beginning in the first quarter of fiscal year 2020 using the modified retrospective method and no adjustments are made to the comparative periods. Adoption of the standard resulted in the recognition of operating lease right-of-use assets of approximately RMB24.9 billion and operating lease liabilities of approximately RMB19.4 billion on the consolidated balance sheet as of April 1, 2019. Operating lease right-of-use assets are included in <span style="color: red;">non-current prepayments, receivables and other assets</span>, and operating lease liabilities are included in current accrued expenses, accounts payable and other liabilities and other non-current liabilities on the consolidated balance sheets. </i><br />
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The net impact of adopting this accounting change is to increase "<i>Non-Current Prepayments, Receivables and Other Assets"</i> by $3.64 Billion with an associated improvement of $803 Million to <i>Income from Operations</i> in the current quarter. They don't exactly spell it out, do they? Actually, I'm surprised they disclosed anything at all.<br />
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As an aside, and just as interesting, according to the footnote, they booked the lease "Asset" entirely as long term, but the payment of the lease obligation is mostly "current"....so the payment is due this year, but the most of the value of these "assets" is to be amortized over a period of years.<br />
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The second accounting gimmick can be defined as a "generally more aggressive improvement in accounting department attitude". i.e.) Coming up with creative ways to prevent expenses from hitting the bottom line. Thanks to the miracle of double entry bookkeeping, when you prevent expenses from hitting profits, either asset values must increase (most popular) or liabilities must be understated (less popular...because the people you owe the money to, generally catch on and complain vociferously). Otherwise, without either effort (pumped asset values or missed liabilities) the books don't "balance".<br />
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Somehow the Alibaba accounting department, I'm sure championed by Maggie, implemented some sort of a plan to prevent the expenditure of money they've pissed away from hitting the bottom line. My guess is that there was a systemic push by Maggie, in each and every one of the now 1,300 consolidated operating entities, to try to determine which expenditures just might benefit future periods and therefore could be capitalized rather than expensed. Somehow, the Alibaba accounting department managed to book an increase in both long term and current "Prepayments, Receivables and Other" by $4.532 Billion in just six months, after the figure had been relatively rock-solid at about US$11 Billion for more than a year. Note that the <i>ASU 2016-02, “Leases (Topic 842)” </i>adjustment accounts for US$3.64 Billion of this "improvement" alone<i>. </i> The rest, my friends, a total of $15.956 Billion now, is a hell of a lot of prepaid postage and office supplies.<br />
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Actually, perhaps Grace Chen may have realized how implausible it might have been for margins and operating income to double as a percent of revenue in one quarter for an enterprise the size of Alibaba, so she asked about it in the Q&A. Here's her question and Maggie's response.<br />
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<div class="canvas-atom canvas-text Mb(1.0em) Mb(0)--sm Mt(0.8em)--sm" content="<strong>Grace Chen</strong> -- <em>Morgan Stanley -- Analyst</em>" data-reactid="134" style="background-color: white; font-family: "Helvetica Neue", Helvetica, Arial, sans-serif; font-size: 15px; margin-bottom: 1em;" type="text">
<i><span style="color: blue;"><span style="font-weight: bolder;">Grace Chen</span> -- Morgan Stanley -- Analyst</span></i></div>
<div class="canvas-atom canvas-text Mb(1.0em) Mb(0)--sm Mt(0.8em)--sm" content="Thank you. Thank you very much for taking my call. In this call, it's very encouraging to see Alibaba's strong margin performance, so it would be great if management could elaborate a bit more about what efforts management has done to help improve the margin performance, especially in core commerce and digital media and entertainment, and where we're going to see the strong margin performance will continue in the following quarters. Congratulations. Thank you." data-reactid="135" style="background-color: white; font-family: "Helvetica Neue", Helvetica, Arial, sans-serif; font-size: 15px; margin-bottom: 1em;" type="text">
<i><span style="color: blue;">Thank you. Thank you very much for taking my call. In this call, it's very encouraging to see Alibaba's strong margin performance, so it would be great if management could elaborate a bit more about what efforts management has done to help improve the margin performance, especially in core commerce and digital media and entertainment, and where we're going to see the strong margin performance will continue in the following quarters. Congratulations. Thank you.</span></i></div>
<div class="canvas-atom canvas-text Mb(1.0em) Mb(0)--sm Mt(0.8em)--sm" content="<strong>Maggie Wu -- </strong><em>Chief Financial Officer</em>" data-reactid="136" style="background-color: white; font-family: "Helvetica Neue", Helvetica, Arial, sans-serif; font-size: 15px; margin-bottom: 1em;" type="text">
<i><span style="color: blue;"><span style="font-weight: bolder;">Maggie Wu -- </span>Chief Financial Officer</span></i></div>
<div class="canvas-atom canvas-text Mb(1.0em) Mb(0)--sm Mt(0.8em)--sm" content="Thank you, Grace, for the question. Let me elaborate on what we have done to bring out operating efficiency. First of all, the revenue growth is very strong. That's obviously coming from -- driven by user growth, and also, all of our efforts on user experience enhancement have paid off. Now, when you look at the costs and expenditures, we started late last year emphasizing on all of the efficiency of this spending, not only on the marketing, but also on the headcount, the accountants, et cetera. So, we do have specific measures to the team to review and measure the ROI of this spending. That's No. 1." data-reactid="137" style="background-color: white; font-family: "Helvetica Neue", Helvetica, Arial, sans-serif; font-size: 15px; margin-bottom: 1em;" type="text">
<i><span style="color: blue;">Thank you, Grace, for the question. Let me elaborate on what we have done to bring out operating efficiency. First of all, the revenue growth is very strong. That's obviously coming from -- driven by user growth, and also, all of our efforts on user experience enhancement have paid off. Now, when you look at the costs and expenditures, we started late last year emphasizing on all of the efficiency of this spending, not only on the marketing, but also on the headcount </span><span style="color: red;">(Author's Note: Headcount increased by 1,748 people from the last quarter)</span><span style="color: blue;">, the accountants, et cetera. So, we do have specific measures to the team to review and measure the ROI of this spending. That's No. 1.</span></i></div>
<div class="canvas-atom canvas-text Mb(1.0em) Mb(0)--sm Mt(0.8em)--sm" content="No. 2 is that we have seen so much synergy coming out of not only Alibaba Group, but also a synergy with our sister company. So, things like marketing spending -- we're targeting another 200-300 million of potential users -- consumers -- coming to our platform. So, this is also the target of Ant Financial, and this is where we can work together. They are good at acquiring consumers in the lower-tier cities, and Taobao is good at retaining these consumers so that we don't have to spend it twice. It's a very effective way of doing the marketing on the core users. I hope that helps." data-reactid="138" style="background-color: white; font-family: "Helvetica Neue", Helvetica, Arial, sans-serif; font-size: 15px; margin-bottom: 1em;" type="text">
<i><span style="color: blue;">No. 2 is that we have seen so much synergy coming out of not only Alibaba Group, but also a synergy with our sister company. So, things like marketing spending -- we're targeting another 200-300 million of potential users -- consumers -- coming to our platform. So, this is also the target of Ant Financial, and this is where we can work together. They are good at acquiring consumers in the lower-tier cities, and Taobao is good at retaining these consumers so that we don't have to spend it twice. It's a very effective way of doing the marketing on the core users. I hope that helps.</span></i></div>
<div class="canvas-atom canvas-text Mb(1.0em) Mb(0)--sm Mt(0.8em)--sm" content="Oh, DME -- you see the negative margins get narrowed, so, 65% negative margin from last year and 35%. Actually, there was a one-off last year, which was the World Cup spending, so if you take that out, last year's negative EBITA margin would have been somewhere around 42%, but still down by a lot. I think the DME negative margin narrowing is mainly coming from our discipline on the spending, particularly in the content spending." data-reactid="139" style="background-color: white; font-family: "Helvetica Neue", Helvetica, Arial, sans-serif; font-size: 15px; margin-bottom: 1em;" type="text">
<i><span style="color: blue;">Oh, DME -- you see the negative margins get narrowed, so, 65% negative margin from last year and 35%. Actually, there was a one-off last year, which was the World Cup spending, so if you take that out, last year's negative EBITA margin would have been somewhere around 42%, but still down by a lot. I think the DME negative margin narrowing is mainly coming from our discipline on the spending, particularly in the content spending.</span></i></div>
<div class="canvas-atom canvas-text Mb(1.0em) Mb(0)--sm Mt(0.8em)--sm" content="Oh, DME -- you see the negative margins get narrowed, so, 65% negative margin from last year and 35%. Actually, there was a one-off last year, which was the World Cup spending, so if you take that out, last year's negative EBITA margin would have been somewhere around 42%, but still down by a lot. I think the DME negative margin narrowing is mainly coming from our discipline on the spending, particularly in the content spending." data-reactid="139" style="background-color: white; color: #26282a; font-size: 15px; margin-bottom: 1em;" type="text">
<span style="font-family: inherit;">Based on the accounting shenanigans I described above, when I heard Maggie's response, the unprecedented level of lameness actually convulsed me. My gag reflex kicked in and I did everything I could to keep from puking on my laptop. </span></div>
<div class="canvas-atom canvas-text Mb(1.0em) Mb(0)--sm Mt(0.8em)--sm" content="Oh, DME -- you see the negative margins get narrowed, so, 65% negative margin from last year and 35%. Actually, there was a one-off last year, which was the World Cup spending, so if you take that out, last year's negative EBITA margin would have been somewhere around 42%, but still down by a lot. I think the DME negative margin narrowing is mainly coming from our discipline on the spending, particularly in the content spending." data-reactid="139" style="background-color: white; color: #26282a; font-size: 15px; margin-bottom: 1em;" type="text">
<span style="font-family: inherit;">Let's be clear, Maggie is the Chief Financial Officer of this mess. She is either the most incompetent, clueless financial person in history (doubtful) or, more probably, the criminal mastermind of this poorly constructed and relatively obvious financial fraud.</span></div>
<div class="canvas-atom canvas-text Mb(1.0em) Mb(0)--sm Mt(0.8em)--sm" content="Oh, DME -- you see the negative margins get narrowed, so, 65% negative margin from last year and 35%. Actually, there was a one-off last year, which was the World Cup spending, so if you take that out, last year's negative EBITA margin would have been somewhere around 42%, but still down by a lot. I think the DME negative margin narrowing is mainly coming from our discipline on the spending, particularly in the content spending." data-reactid="139" style="background-color: white; color: #26282a; font-size: 15px; margin-bottom: 1em;" type="text">
<span style="font-family: inherit;">Deploying our patented <i><u><b>Dick Fuld Banker Speak Translator (BST)</b></u></i> here's how Maggie really meant to answer Grace's question if she were fully transparent:</span></div>
<div class="canvas-atom canvas-text Mb(1.0em) Mb(0)--sm Mt(0.8em)--sm" content="<strong>Maggie Wu -- </strong><em>Chief Financial Officer</em>" data-reactid="136" style="background-color: white; font-family: "Helvetica Neue", Helvetica, Arial, sans-serif; font-size: 15px; margin-bottom: 1em;" type="text">
<i><span style="color: blue;"><span style="font-weight: bolder;">Maggie Wu -- </span>Chief Financial Officer</span></i></div>
<div class="canvas-atom canvas-text Mb(1.0em) Mb(0)--sm Mt(0.8em)--sm" content="Thank you, Grace, for the question. Let me elaborate on what we have done to bring out operating efficiency. First of all, the revenue growth is very strong. That's obviously coming from -- driven by user growth, and also, all of our efforts on user experience enhancement have paid off. Now, when you look at the costs and expenditures, we started late last year emphasizing on all of the efficiency of this spending, not only on the marketing, but also on the headcount, the accountants, et cetera. So, we do have specific measures to the team to review and measure the ROI of this spending. That's No. 1." data-reactid="137" style="background-color: white; margin-bottom: 1em;" type="text">
<i><span style="color: blue;"><span style="font-family: "helvetica neue" , "helvetica" , "arial" , sans-serif;"><span style="font-size: 15px;">Thank you, Grace, for the question. Yes, it's true, our margins have improved at an unbelievable pace through this last quarter. We are brilliant accounting professionals to be sure. The improvement is due primarily from our analysis of all the money we've wasted building software, marketing, kickbacks and dumb-ass projects that just don't work, probably never will and are not yet being used by anybody. Since it's so cutting edge, we've determined that, even though it's "useless shit" (technical term) right now, we've capitalized all of the costs, payroll and kickbacks associated with these projects because, by definition, if these payments don't benefit the business in the current quarter, they will surely benefit the business sometime in the future. In any event, we are amortizing the cost of all of these tiny, immaterial projects scattered over our 1,300 consolidating operating entities (so PWC can't possibly figure this out) over 5 years rather than expense these costs in the current period, as we had been incorrectly doing in prior quarters. Lucky we caught it! Also, Joe told me that I had to "hit the number or else my next vacation will be in Xinjiang" so we came up with this cockamamie crock of steaming turds of an accounting change, ran it by PWC, increased their fees and just hope that dumb-ass US Investors don't catch on to what we're doing. Anyway, I'm safe in China so if that ungrateful bastard Jay Clayton has any problem with what we're doing, after all of the fees we paid him at Sullivan & Cromwell, he and his SEC and that pain int the ass FBI can stick their subpoenas "where the sun don't shine". </span></span></span></i><br />
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<i><span style="color: blue;"><span style="font-family: "helvetica neue" , "helvetica" , "arial" , sans-serif;"><span style="font-size: 15px;">Next question? </span></span></span></i></div>
<div class="canvas-atom canvas-text Mb(1.0em) Mb(0)--sm Mt(0.8em)--sm" content="Thank you, Grace, for the question. Let me elaborate on what we have done to bring out operating efficiency. First of all, the revenue growth is very strong. That's obviously coming from -- driven by user growth, and also, all of our efforts on user experience enhancement have paid off. Now, when you look at the costs and expenditures, we started late last year emphasizing on all of the efficiency of this spending, not only on the marketing, but also on the headcount, the accountants, et cetera. So, we do have specific measures to the team to review and measure the ROI of this spending. That's No. 1." data-reactid="137" style="background-color: white; margin-bottom: 1em;" type="text">
<span style="font-family: inherit;"><span style="font-size: 15px;">That said, as described in the schedule below, when we compare the June, 2019 to the March 2019 and the June, 2018 quarters, reversing the accounting adjustment for the Capitalized leases and the unreasonable increases in "Prepayments, </span></span><span style="font-size: 15px;">Receivables</span><span style="font-family: inherit;"><span style="font-size: 15px;"> and Other" costs of unknown origin, which were likely capitalized rather than expensed, we can conclude that Alibaba is actually making very little money from operations. "Income from Operations" is reduced to roughly 3% of Revenue and there's a good chance, based on the continued, expected lack of veracity of their filings, even this figure is probably still overstated.</span></span><br />
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<div class="canvas-atom canvas-text Mb(1.0em) Mb(0)--sm Mt(0.8em)--sm" content="Thank you, Grace, for the question. Let me elaborate on what we have done to bring out operating efficiency. First of all, the revenue growth is very strong. That's obviously coming from -- driven by user growth, and also, all of our efforts on user experience enhancement have paid off. Now, when you look at the costs and expenditures, we started late last year emphasizing on all of the efficiency of this spending, not only on the marketing, but also on the headcount, the accountants, et cetera. So, we do have specific measures to the team to review and measure the ROI of this spending. That's No. 1." data-reactid="137" style="background-color: white; margin-bottom: 1em;" type="text">
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<div class="canvas-atom canvas-text Mb(1.0em) Mb(0)--sm Mt(0.8em)--sm" content="Oh, DME -- you see the negative margins get narrowed, so, 65% negative margin from last year and 35%. Actually, there was a one-off last year, which was the World Cup spending, so if you take that out, last year's negative EBITA margin would have been somewhere around 42%, but still down by a lot. I think the DME negative margin narrowing is mainly coming from our discipline on the spending, particularly in the content spending." data-reactid="139" style="background-color: white; margin-bottom: 1em;" type="text">
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<span style="color: red; font-family: inherit; font-size: large;"><b><u>3.) The "Gravy Train" to Communist Party Insiders Continues</u></b></span></div>
<div class="canvas-atom canvas-text Mb(1.0em) Mb(0)--sm Mt(0.8em)--sm" content="Oh, DME -- you see the negative margins get narrowed, so, 65% negative margin from last year and 35%. Actually, there was a one-off last year, which was the World Cup spending, so if you take that out, last year's negative EBITA margin would have been somewhere around 42%, but still down by a lot. I think the DME negative margin narrowing is mainly coming from our discipline on the spending, particularly in the content spending." data-reactid="139" style="background-color: white; color: #26282a; font-size: 15px; margin-bottom: 1em;" type="text">
<span style="background-color: transparent;">It's not often you see a business loan hundreds of millions of dollars of US Shareholder money to a Chinese Communist Party member, but incredibly, Alibaba has done it not once, but twice. The first time was the Simon Xie debacle, where, after running afoul of the SEC for making a direct loan to Simon, BABA restructured the loan and purchased US$1.1 Billion of wealth management products to be pledged as collateral for an unnamed Chinese bank to make the loan to Simon in order to purchase a controlling interest in Wasu Media (Which Alibaba also has an undeterminable ownership position through another partnership controlled by Jack Ma and Yuzhu Shi) is described on pages 42 & 202 of the 2019 20-F. This is of course, ongoing with Alibaba advancing Simon additional money to pay interest on the outstanding loan. To be frank, that's never a good sign. </span></div>
The most recent US$ 730 Million dollar loan (@6.85:1) to a Chinese Communist Party member occurred just a few months ago in March of this year. The transaction is described below in footnote 4(k) of the 20F.<br />
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<span style="font-size: x-small;"><b>(k) STO Express Co., Ltd. ("STO Express")</b></span></div>
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<span style="font-size: x-small;">STO Express, a company that is listed on the Shenzhen Stock Exchange, is one of the leading express delivery services companies in the PRC. In March 2019, the Company made a loan to the controlling shareholder of STO Express with a principal amount of RMB5.0 billion for a term of three years. The controlling shareholder of STO Express has pledged a portion of its equity interest in STO Express in relation to the loan. The loan is accounted for at amortized cost and is recorded under investment securities (Note 11) on the consolidated balance sheets.</span></div>
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<span style="font-size: x-small;">In addition, the Company entered into a share purchase agreement to acquire a 49% equity interest in an investment vehicle to be established by the controlling shareholder, which will hold a 29.9% equity interest in </span><span style="font-size: x-small;">STO Express for a cash consideration of RMB4.7 billion. The completion of this transaction is subject to customary closing conditions.</span></div>
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Here's the current chart for STO (below). The company currently has a market cap of RMB 34 Billion (US$ 4.85 Billion) Although the filing is silent on who this RMB 5 Billion loan is made to, the primary suspect would be <a href="https://www.marketscreener.com/business-leaders/De-Jun-Chen-0GQY00-E/biography/">De Jun Chen</a> , Chairman and General manager of STO. According to Bloomberg he's been on the job as Chairman for two and a half years. My guess would be that he's also a well connected Communist Party Member (Again, presuming that the only way to accumulate wealth in China is through the Party) and MarketScreener reports his net worth to be roughly US$2.1 Billion with virtually all of it tied up in STO.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi7U3dBsaUD0qdQNBNj_yyMNvel_kLQKu8pq1c3q5FbHPxkmv9teTcI4az_MbU3J2EfRDTLdb2pnIMdUU8OyHEAtLiWRlV-w3AP1RB19xd1EaB19_XVKBbC-P9_IvYZwUwQbNmf8-wboIo/s1600/STO_Chart.png" imageanchor="1" style="clear: left; display: inline !important; margin-bottom: 1em; margin-right: 1em; text-align: center;"><img border="0" data-original-height="464" data-original-width="633" height="467" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi7U3dBsaUD0qdQNBNj_yyMNvel_kLQKu8pq1c3q5FbHPxkmv9teTcI4az_MbU3J2EfRDTLdb2pnIMdUU8OyHEAtLiWRlV-w3AP1RB19xd1EaB19_XVKBbC-P9_IvYZwUwQbNmf8-wboIo/s640/STO_Chart.png" width="640" /></a><br />
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Here's what we know about Mr. Chen...<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg0_AUAypPT2iIV39MCnVU7UogxsVKC4b-wUPqmIyvpHGJq-7wm8TdZWK4w4Be5RFQMBnztJceY8urTpFvz79NGi0UixvAny-YT97pTx-IbUL_Q8VwceS_PqnQe8Kq1T0VPOFlFhS9Oevo/s1600/Chen_Dejun_Profile.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="631" data-original-width="792" height="508" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg0_AUAypPT2iIV39MCnVU7UogxsVKC4b-wUPqmIyvpHGJq-7wm8TdZWK4w4Be5RFQMBnztJceY8urTpFvz79NGi0UixvAny-YT97pTx-IbUL_Q8VwceS_PqnQe8Kq1T0VPOFlFhS9Oevo/s640/Chen_Dejun_Profile.png" width="640" /></a></div>
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As with so many things endemic to these Chinese businesses, there's a certain level of uncomfortable weirdness associated with this enterprise, for example, they've established odd regional, global shipping offices, in seemingly random places like......<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiIIJ7vWxVl5aZVucN-m7hUCuVd-5EiEtncyKtJwvokA8G69Cbx98Lk_vW_X-QmvZUquENBBgD8-QZ9Fcpb3Wf4JTE1GycVjGGN3p8ne0tt8zVGNtw6odhqdkVC6LQvlq3kobIQY2WmxvA/s1600/STO_EXPRESS_US_SHOPS.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="852" data-original-width="758" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiIIJ7vWxVl5aZVucN-m7hUCuVd-5EiEtncyKtJwvokA8G69Cbx98Lk_vW_X-QmvZUquENBBgD8-QZ9Fcpb3Wf4JTE1GycVjGGN3p8ne0tt8zVGNtw6odhqdkVC6LQvlq3kobIQY2WmxvA/s640/STO_EXPRESS_US_SHOPS.png" width="569" /></a></div>
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<b><span style="color: red;"><br /></span></b>That's right....VEGAS (and Peoria) BABY!<br />
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As far as I can tell, these are the only US locations. There are no US Locations listed on the STO.cn website. I tried to check for US locations on the STOExpress.us site over a period of a few days, but the website was always down. Totally understandable....these things happen all the time at FedEX and UPS and since STO probably runs on BABA cloud servers we can also probably expect some access interruption, our computers to be occasionally infected or our identities to be stolen from time to time.....but again, I digress.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiouUcgSvJandVfuIpUECIKsYaUWAiB3j84rNK-CDyj3YHGK3t5esNEkvr74CPJaytr83nLOxLB5u1CWGugcMs7cbdiIRk1f1430Xp_TP1A5ZFHiYTjWJADtrhsyJw5tdPBvItxQoLjefM/s1600/STO_Website_Down.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="633" data-original-width="867" height="466" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiouUcgSvJandVfuIpUECIKsYaUWAiB3j84rNK-CDyj3YHGK3t5esNEkvr74CPJaytr83nLOxLB5u1CWGugcMs7cbdiIRk1f1430Xp_TP1A5ZFHiYTjWJADtrhsyJw5tdPBvItxQoLjefM/s640/STO_Website_Down.png" width="640" /></a></div>
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When this deal was first announced, oddly enough, the press release didn't mention anything about the RMB 5 Billion (US$730 Million @6.85:1) loan to a Communist Party Member to fund the purchase. The Reuters headline simply read:<br />
<span style="background-color: white; color: #3f3f40; font-family: , sans-serif; font-size: large; font-weight: inherit;"><br /></span><span style="background-color: white; color: #3f3f40; font-family: , sans-serif; font-size: large; font-weight: inherit;">"Alibaba invests $693 million for stake in Chinese courier STO Express"</span><br />
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<a href="https://www.reuters.com/article/us-sto-alibaba/alibaba-invests-693-million-for-stake-in-chinese-courier-sto-express-idUSKBN1QS0D8">https://www.reuters.com/article/us-sto-alibaba/alibaba-invests-693-million-for-stake-in-chinese-courier-sto-express-idUSKBN1QS0D8</a><br />
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<b><span style="color: red;">So here's what we really have:</span></b><br />
<b><span style="color: red;"><br /></span></b>
<b><span style="color: red;">Alibaba took $730 million of US Shareholder Money and loaned it to a CPC Member, so he could create a brand new unnamed ShellCo, which will hold/acquire a 29.9% stake in STO. Further, Alibaba agreed to buy 49% of this brand new entity for RMB 4.7 Billion (US$686 Million)</span></b><br />
<b><span style="color: red;"><br /></span></b>
<b><span style="color: red;">If we do the math, when this transaction is completed, Alibaba will have paid US$686 Million for a 14.65% minority stake (29.9% x 49%) in STO which is currently worth $711 Million today.....not too bad, except that they've also allegedly "invested" $730 million in the loan (terms undisclosed) to Mr. Chen. Moreover, if we examine the chart above, we note that the value of STO Express was roughly a third less than it is now just a few months ago (i.e. it was worth US$470 Million before the Alibaba investment was announced and Chinese shareholders assigned the "CPC Stamp of Approval Premium" to the company). </span></b><br />
<b><span style="color: red;"><br /></span></b>
<span style="color: red;"><b>Even if we can somehow get past the diversion of funds to a CPC Member, the odd structure of this deal and the misrepresentation and missing details in the press release, what makes this even worse is the probability that this is yet another weird, fake CPC business, shipping fentanyl and synthetic opioids around the globe, laundering money and somehow facilitating the never ending CPC dollar grab and financial asset purchases. </b></span><br />
<span style="color: red;"><b><br /></b></span>
<span style="color: red;"><b>I might also ask, if Alibaba management was truly intent on buying a 14% stake in a goofy, hot-mess of a fake company like this, why would they go through all of this intrigue and these odd structural mechanics? Why not just call a broker and buy the shares on the exchange over the next three years? Unless, perhaps, they are setting this up to record yet another series of step acquisition "valuation gains" like they did with Alibaba Pictures, Alibaba Health, Wasu Media, Cainiao, etc. etc...to continue to goose the bottom line with fake asset valuation income...</b></span><br />
<span style="color: red;"><b><br /></b></span>
<span style="color: red;"><b>Gotta keep the enthusiasm and the Ponzi going!</b></span><br />
<span style="color: red;"><b><br /></b></span>
<span style="color: red; font-size: large;"><b><u>4.) Share Based Compenstion</u></b></span><br />
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Even though they are cooking the books, and fully understand that the business is no longer profitable/viable as currently constituted at this scale, they continue to award massive Share-Based Compensation (kickbacks to party members). US$1.036 Billion this quarter. Roughly 1/3rd of "fake" Net income.<br />
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Incredible.<br />
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<b><span style="color: red; font-size: large;"><u>5.) Ant Financial</u></span></b><br />
<b><span style="color: red; font-size: large;"><u><br /></u></span></b>
<span style="font-family: inherit;">Here's the sole note regarding the Ant Financial Royalty fees and Service Arrangement from page 12 of the press release:</span><br />
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<span style="font-family: inherit;"><i>"Royalty fees and software technology service fees under our profit sharing
arrangement with Ant Financial amounted to RMB1,627 million (US$237 million) in the quarter ended June
30, 2019, compared to RMB910 million in the same quarter of 2018." </i></span><br />
<span style="font-family: inherit;"><i><br /></i></span>
<span style="font-family: inherit;">Yes indeed. That's all there is. I'm just going to cut and past a modified note I had from a prior post since the disclosure situation hasn't changed, I particularly liked my wording when I wrote this. Perhaps you may not have read it or remembered its relevancy. </span><br />
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<span style="font-family: inherit;"><span style="background-color: white; color: #666666;"><i>"I think the Ant Financial reporting and relationship is great! A gigantic monopoly, with a self described market value of $150 Billion has finally made a little bit of money in a quarter!...after years of apparently undercharging its 1 billion+ customers. Even though Alipay/Ant is joined at the hip with Alibaba (and US Shareholders by default) there has never been any meaningful, verifiable financial information disclosed for this beast. </i></span></span><br />
<span style="font-family: inherit;"><span style="background-color: white; color: #666666;"><i><br /></i></span></span>
<span style="font-family: inherit;"><span style="background-color: white; color: #666666;"><i>If Ant actually charged a meaningful arms length "escrow service fee" (e.g. 1% of US$ 700 Billion = US$ 7 Billion/yr.) on Alibaba transactions it would render the business model unsustainable immediately.</i></span></span><br />
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<i><span style="font-family: inherit;"><span style="background-color: white; color: #666666;">Could it be that these escrow payment schemes are simply </span></span><span style="background-color: white; color: #666666;">the tools of "earnings management" and</span><span style="background-color: white; color: #666666; font-family: inherit;"> indeed a "state secret" as the CPC would have us believe, or is it more likely that this business is, more probably, yet another cesspool of CPC money, stolen from Chinese citizens soon to be used to facilitate the destruction of US Dollar hegemony?" </span></i><br />
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<b><span style="color: red; font-size: large;"><u>6.) The Hong Kong secondary listing wasn't mentioned. </u></span></b><br />
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Alibaba Management had accomplished the 8:1 share split as described in the filings, but there was no mention of a time table or plans to list the stock in Hong Kong during the investor call. I guess we are to assume that everything is just fine and dandy and on schedule....full speed ahead. What could possibly go wrong??<br />
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<b><span style="color: red; font-size: large;"><u>Summary:</u></span></b><br />
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I think Mark Baum (Steve Carell) said it best.....Alibaba is "dog shit wrapped in cat shit...."<br />
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Deep Throathttp://www.blogger.com/profile/02712515268051858186noreply@blogger.com0tag:blogger.com,1999:blog-7478408299955066555.post-1732438145219071762019-06-28T00:05:00.000-04:002019-06-28T14:50:01.118-04:00How an Ineffective Bill becomes an Ineffective Law...<div dir="ltr" style="text-align: left;" trbidi="on">
As you might suspect, one of my favorite leading indicators for something about to go "off the rails" is a sudden rush of ill-conceived, ineffective legislation put forward by our lawmakers who are told by their constituents, lobbyists, staff and advisers that they "MUST to do something" ....even though they have only a peripheral, shallow understanding of the issues at hand. Thus we end up with proposals like we've seen over the last few weeks.<br />
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As always, I know you are pressed for time, so feel free to simply read the <b><span style="color: red;">"RED" highlighted</span></b> text for the bottom line analysis.<br />
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<b><span style="color: red;">As of this writing, we've' received, from various lawmaker camps, not one (1), not two (2) but three (3) shallow, off-center, attempts at legislative fixes that will accomplish very little, other than to take everyone's eye off the real issues at hand regarding CPC sponsored fraud in US Markets. Whenever lawmakers rush to get special interest sponsored, bipartisan legislation on the floor, you can bet that something's fishy.</span></b><br />
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They are (Links below):<br />
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<b><u>1.) Marco Rubio's Bill, the EQUITABLE ACT</u></b>; or <b>E</b>nsuring <b>Q</b>uality <b>I</b>nformation and <b>T</b>ransparency for <b>A</b>broad-<b>B</b>ased <b>L</b>istings on our <b>E</b>xchanges (Marco's missing the "U" but you get the idea)<br />
<a href="https://www.rubio.senate.gov/public/_cache/files/c2630968-1e66-44d4-bebf-458a86188e7b/2A963878FD61C08209B01D9DA41D1FDB.equitable-act-legislative-text.pdf"><span style="color: blue;"><b>https://www.rubio.senate.gov/public/_cache/files/c2630968-1e66-44d4-bebf-458a86188e7b/2A963878FD61C08209B01D9DA41D1FDB.equitable-act-legislative-text.pdf</b></span></a><br />
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<b><u>2.) Carolyn Maloney (NY), came up with HR 2513</u></b>, the ‘‘Corporate Transparency Act of 2019"<br />
<a href="https://www.congress.gov/116/bills/hr2513/BILLS-116hr2513ih.pdf"><b><span style="color: blue;">https://www.congress.gov/116/bills/hr2513/BILLS-116hr2513ih.pdf</span></b></a><br />
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<b><u>3.) Mark Warner (VA) sponsored a Bill entitled, get ready for it.....the ILLICIT CASH ACT:</u></b><br />
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<b>I</b>mproving <b>L</b>aundering <b>L</b>aws and <b>I</b>ncreasing <b>C</b>omprehensive<b> I</b>nformation <b>T</b>racking of <b>C</b>riminal <b>A</b>ctivity in <b>S</b>hell <b>H</b>oldings (ILLICIT CASH) Act.</div>
<a href="https://www.warner.senate.gov/public/index.cfm/2019/6/warner-cotton-jones-rounds-unveil-draft-legislation"><span style="color: blue;"><b>https://www.warner.senate.gov/public/index.cfm/2019/6/warner-cotton-jones-rounds-unveil-draft-legislation</b></span></a><br />
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No need to read them in their entirety unless you are a glutton for punishment. I've listed the bullet points for each below:<br />
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<b><u>1.) The EQUITABLE ACT:</u></b><br />
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<ol style="text-align: left;">
<li>Amends the Sarbanes-Oxley Act to require the (PCAOB) <i>Public Company
Accounting Oversight Board </i>to maintain a list of certain foreign issuers. </li>
<li>The "list" will name all entities which are required to file an "audit report" where the report is NOT able to be inspected/verified because of actions by a foreign government/body. </li>
<li>The "list" will identify the public accounting firm responsible for the audit/certification and their country/jurisdiction. </li>
<li>The PCAOB will prepare/update the list "at least annually".</li>
<li>For the "list", each foreign issuer will be required to disclose to the PCAOB the "percentage of shares" beneficially owned by a "government entity". </li>
<li>For the "list", each foreign issuer would be required to disclose whether the "government entity" interest considered a "controlling interest".</li>
<li>For the "list", the name of any official of the Chinese Communist Party who is a member of the board of directors of the issuer or related entity.</li>
<li>The SEC will issue regulations within nine (9) months of enactment and will be in force on that date. </li>
<li>Will establish Broker/Dealer disclosure rules which notify the purchaser of the foreign issuer's securities that it has not issued an acceptable audit report.</li>
<li>New issues which don't meet the EQUITABLE "list" requirements will not be allowed to list on exchanges.</li>
<li>Existing issues currently trading on applicable exchanges will have until 2025 to comply.</li>
<li>Applicable Exchanges will have 90 days to respond and will be required to implement SEC required regulations within one year of enactment. </li>
</ol>
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<span style="color: red;"><b>Isn't that AWESOME! After the EQUITABLE ACT passes, we are going to get a list of potential accounting problems! After ten (10) years of letting this junk (600+ listings, US$2.3 Trillion in Market Cap as of last Spring, with roughly 200 listings already having "gone dark") on our Exchanges, with virtually no disclosure requirements or enforce-ability, we are waiting five more years to do something about it. From my perspective, this proposal is like asking a bank robber to "sign a guest book" right after he pistol-whips the teller, shoots the guard and runs off with the money, so we can make a fainthearted effort to extradite him sometime in 2025. </b></span><br />
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<b><u>2.) HR 2513, the ‘‘Corporate Transparency Act of 2019" </u></b><br />
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<ol style="text-align: left;">
<li>HR 2513 requires that any Corporation or LLC formed in the United States be required to report all beneficial owners identifying information to FINCEN (Financial Crimes Enforcement Network of the Department of the Treasury.)</li>
<li>FINCEN will be required to establish a process to update the information on the "list" at least annually. </li>
<li>The Department of the Treasury will develop an enforcement process for beneficial owners who fail to report. </li>
<li>The Department of the Treasury will be responsible for enforcement for willful violation with Civil penalties of up to $10,000 as well as Criminal Penalties up to 3 years in prison.</li>
<li>The penalties will not apply to minors, agents, nominees, intermediaries, custodians, lawyers, or anyone acting on behalf of another person or beneficial owner.</li>
<li>The penalties will also not apply to: Broker/Dealers, Banks, Credit Unions, Exchanges, Advisers, Insurance Companies, Investment Companies, Accounting Firm, Charities, etc. as defined. (pg. 20-22)</li>
<li>Maximum, initial amount of funding for the program is $40 million for the DOJ & FinCen.</li>
<li>Not later than 5 years after the date of enactment of this Act, the Comptroller General of the United States shall conduct a study and submit to the Congress a report assessing the effectiveness of incorporation practices implemented under this Act and the amendments.</li>
</ol>
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<b><span style="color: red;">HR 2513 is even MORE AWESOME! Now we have a second list of misrepresented, bad information, which only applies to US beneficial owners (Caymans/BVI/Cyprus/HK/etc. Corporations and LLCs are exempted) with no penalties whatsoever assigned to the folks (Bankers/Brokers/</span></b><b><span style="color: red;">Dealers/</span></b><span style="color: red;"><b>Attorneys/Agents, etc.) who are supposed to be responsible for complying with anti-money laundering "know your customer" laws when they are setting up these corporations/entities. The relatively tiny penalties only apply to the "beneficial owners" (who are probably safe in China). Our lawmakers apparently intend is to put these lists in place and follow up in five (5) years to see how we did. Unfortunately, in five (5) years, the Western Financial System will be nothing but a fond memory unless we actually DO SOMETHING to prevent its destruction. To carry on with my "bank robber" analogy above, HR 2513, </b></span><span style="color: red;"><b>the ‘‘Corporate Transparency Act of 2019" </b><b> </b></span><b style="color: red;">would effectively legalize the role of the "getaway car driver" and allow him/her to keep his/her cut from the heist. </b></div>
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<b><u>3.) Improving Laundering Laws and Increasing Comprehensive Information Tracking of Criminal Activity in Shell Holdings (ILLICIT CASH) Act</u></b><br />
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<ol style="text-align: left;">
<li style="box-sizing: border-box;"><span style="box-sizing: border-box;">Establish federal reporting requirements mandating that all beneficial ownership information </span>be maintained in a comprehensive federal database, accessible by federal and local law enforcement.<span style="box-sizing: border-box; font-weight: 700;"></span></li>
<li style="box-sizing: border-box;"><span style="box-sizing: border-box;">Help recruit and retain top talent at the Financial Crimes Enforcement Network (FinCEN)</span> by putting employees on a pay scale comparable to that of federal financial regulators.<span style="box-sizing: border-box; font-weight: 700;"></span></li>
<li style="box-sizing: border-box;"><span style="box-sizing: border-box;">Create a hub of financial expert investigators </span>at FinCEN to investigate potential AML-CFT activity in collaboration with federal government agencies.<span style="box-sizing: border-box; font-weight: 700;"></span></li>
<li style="box-sizing: border-box;"><span style="box-sizing: border-box;">Create a team of FinCEN technology experts to further the development of new and essential technologies</span> that can assist financial institutions and the federal government in their efforts to combat money laundering.<span style="box-sizing: border-box; font-weight: 700;"></span></li>
<li style="box-sizing: border-box;"><span style="box-sizing: border-box;">Facilitate communications between the Treasury and financial institutions</span> by establishing a Treasury financial institution liaison to seek and receive comments regarding AML-CFT rules, regulations, and examinations.</li>
<li style="box-sizing: border-box;"><span style="box-sizing: border-box;">Require the Department of Justice (DOJ) to provide the Treasury Department with metrics </span>on the usefulness of AML-CFT data from financial institutions for law enforcement purposes, as well as data on the past and current trends identified by DOJ in the AML-CFT landscape.<span style="box-sizing: border-box; font-weight: 700;"></span></li>
<li style="box-sizing: border-box;"><span style="box-sizing: border-box;">Require law enforcement to coordinate with financial regulators </span>to provide periodic feedback to financial institutions on their suspicious activity reports.<span style="box-sizing: border-box;"></span></li>
<li style="box-sizing: border-box;"><span style="box-sizing: border-box;">Prioritize the protection of personally identifying information </span>while establishing a clear path for financial institutions to share AML-CFT information for the purposes of identifying suspicious activity.</li>
<li style="box-sizing: border-box;"><span style="box-sizing: border-box;">Prevent foreign banks from obstructing money laundering or terrorist financing investigations </span>by requiring these banks to produce records in a manner that establishes their authenticity and reliability for evidentiary purposes, and compelling them to comply with subpoenas. This legislation would also authorize contempt sanctions for banks that fail to comply.</li>
<li style="box-sizing: border-box;"><span style="box-sizing: border-box;">Ensure the inclusion of current and future payment systems in the AML-CFT regime </span>by updating the definition of “coins and currency” to include digital currency.</li>
</ol>
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjjglNYUlZhANtgkLQHdS-Nt29jMNiZtWYYzMkU10LoFgKrVWqlXfhJoPwWFk4DG8rv9hwp_ClM86GIkCplkB2qDWpIgOibB_SykLhVCmGvPNJVVb2t6IyI2s8XvlIEU30lNmReT5QZb-o/s1600/Bank_Fines_Since_GFC.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="595" data-original-width="538" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjjglNYUlZhANtgkLQHdS-Nt29jMNiZtWYYzMkU10LoFgKrVWqlXfhJoPwWFk4DG8rv9hwp_ClM86GIkCplkB2qDWpIgOibB_SykLhVCmGvPNJVVb2t6IyI2s8XvlIEU30lNmReT5QZb-o/s320/Bank_Fines_Since_GFC.png" width="289" /></a><br />
<b><span style="color: red;">Since the "ILLICIT CASH ACT" is the most recent of these "panic bills" to be promoted, we see a lot duplication of effort as well as similar naivety as to what's really going on. Our government will be hiring more people and expanding "list development" at a break-neck pace. We further note an increase in the use of buzzwords as well as some tough sounding language regarding "petty cash" sanctions applied to foreign banks as a cost of doing business if they fail to comply (US Banks are apparently Exempted? I wasn't clear on this.) In any case, the "fine the banks" for criminal activity doesn't seem to be working very well here in America, so I'm not sure why we might think that a fine or two might put the fear of God in </span></b><a href="https://www.treasury.gov/resource-center/sanctions/programs/pages/programs.aspx"><span style="color: red;"><b>VTB, Caymans or Chinese Banks.</b></span></a><br />
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<span style="color: red;"><b>If we want to develop a "list" of potential "perps" quickly, all we need to do is pass legislation that puts a mandatory 5 year minimum Federal Prison sentence on "helpers" unless they report the suspect and enter required contact info on a FinCen website within 60 days of enactment of the law. After all, it's not like the "helpers" don't know who the "perps" are. </b></span><br />
<span style="color: red;"><b><br /></b></span>
<span style="color: red;"><b>We'd have our list of targets immediately. </b></span><b style="color: red;">Once they are on the list, the Treasury could freeze their assets and bank accounts until they figure out what's going on. (FYI - The IRS already knows exactly how to do this.) </b><b style="color: red;">As far as a list of foreign banks chronically laundering money, the Treasury has plenty of firepower to shut these beasts down already. (<a href="https://home.treasury.gov/policy-issues/terrorism-and-illicit-finance/311-actions">Section 311 of the Patriot Act</a>) No need to, yet again, reinvent the wheel. For emphasis, we have plenty of "laws" and "lists" all we need to do is use them.</b><br />
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The video below does a nice job of describing the sophistication of this legislative process. I remember watching it with my kids and I've got fond memories of it.....if you've already seen <i>School House Rock - I'm just a Bill</i> feel free to skip ahead.<br />
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For those of you who have never been involved in the legislative process, the slightly embellished, directionally accurate portrayal of the types of preliminary meetings, which are a mainstay of the our political landscape, as illustrated in the <b><i>(BST)</i></b> <i><u>Dick Fuld Banker Speak Translation (tm)</u></i> dialogue below, should shed some light on how a "an ineffective, ill-conceived bill becomes an ineffective, ill-conceived law" in America today.<br />
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<b><u><span style="font-family: "times new roman" , serif; font-size: 18pt;">The Negotiation</span></u></b><span style="font-family: "times new roman" , serif; font-size: 13.5pt;"><o:p></o:p></span></div>
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The first thing that legislators do when trying to solve a perceived problem is to gather the best and brightest experts in the topics and respective fields to be addressed, as well as the stakeholders (and their lobbyists) and other interested parties (PACs) together in a secret location (usually a really nice place/island/resort provided gratis by the stakeholders) so they can gather their thoughts in solitude and forge the legislative metal of a profitable solution for every stakeholder involved.<br />
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The following is a hypothetical meeting that may or may not have taken place sometime over the last few months, at a really nice place, sponsored by an imaginary group named something like the <u><i>Americans for Equitable Off Shore Banking PAC. </i></u><br />
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<b><u><span style="font-family: "times new roman" , serif;">Mr. Rubio:</span></u></b><span style="font-family: "times new roman" , serif;"> "Well...I''m really glad that you all
could make it today. First, I'd like to thank the various industry groups and PACs who've graciously hosted us and provided heartfelt support for our agenda today. Now, since we're pressed for time, we've got a round of golf, a pig roast and a limbo contest later this afternoon, I'd like to get right to it. So...what can we do to
prevent all of the fraudulent Chinese stock IPOs going forward and how can we
get these companies to comply with US Accounting and Exchange Rules at some point in the not too distant future?"<o:p></o:p></span></div>
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<b><u><span style="font-family: "times new roman" , serif;">Ms. Maloney:</span></u></b><span style="font-family: "times new roman" , serif;"> "I'd like to add that we should also try to get to the bottom of these millions of freshly set up, anonymous shell companies and eventually figure
out who owns these entities and why...ummm....unless it's anyone in this room of course....(chuckle...chuckle)"<o:p></o:p></span></div>
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<b><u><span style="font-family: "times new roman" , serif;">Mr. Warner:</span></u></b><span style="font-family: "times new roman" , serif;"> "Absolutely agreed....I'd also like to chime in and state
emphatically that it's really important that we create all sorts of new lists
and buzzwords and nebulous cross-agency and public/private partnerships so we
can convince American voters that we are totally on top of this.....so who
wants to start?" <o:p></o:p></span></div>
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<b><span style="font-family: "times new roman" , serif;"><u>Citi Banker:</u></span></b><span style="font-family: "times new roman" , serif;"> "Well, I'll go first if I may, just
thinking outside the box here....don't hold me to this.... but what about
criminal penalties, personal liability and mandatory sentences for any banker,
lawyer, accountant or anyone acting as an agent assisting foreign interests in setting up
shell corporations or bank accounts without proper disclosure i.e.) FARA, FBAR and AML
reporting?....that might do the trick?"<o:p></o:p></span></div>
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<b><u><span style="font-family: "times new roman" , serif;">JP Morgan Banker:</span></u></b><span style="font-family: "times new roman" , serif;"> "Hey, along those same lines, why
don't we permanently bar senior managers from the industry as well as include
personal liability and jail time if this stuff goes on during their watch....you know, subject them to penalties under the
"known or should have known" theory.....if your staff is
participating in money laundering you just look three levels up the org chart
and the guys are toast....no questions asked. I'm sure Jamie has some
dead wood he can throw under the bus....done deal!"<o:p></o:p></span></div>
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<b><u><span style="font-family: "times new roman" , serif;">Wells Fargo Banker:</span></u></b><span style="font-family: "times new roman" , serif;"> "I agree...this is some serious
shit. It's not like we're charging a bunch of our sucker customers for insurance products they
never agreed to buy....this is actually big. I'm thinking that if these foreign listings go bust
on our watch, for any reason, that we should be fined an automatic 5x the
highest market cap achieved by these dogs as restitution to the
shareholders. Clawbacks....yeah.. that's the ticket! That should
teach us a lesson. It would cost us tens of billions, but we deserve it for
marketing this junk to widows, orphans and pensioners. <o:p></o:p></span></div>
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<b><u><span style="font-family: "times new roman" , serif;">Goldman Banker:</span></u></b><span style="font-family: "times new roman" , serif;"> "That's all well and good, but until
you start giving our CEO's jail time this just won't stop. I'm thinking
that we extend SARBOX to our CEO's and require them, under penalty of personal
criminal liability to sign off on any Foreign IPO on US Exchanges. Automatic jail time if they go bust....they really should know better. If we
put that law in there, we probably won't be doing too many of them
anymore....so it won't be that much work."<o:p></o:p></span><br />
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<span style="font-family: "times new roman" , serif;"><b><u>Bank of America Banker: </u></b>"You know, with all of these foreign banks and entities laundering money, I was thinking.....now hear me out....if we suspect there's a problem, why don't we just shut them down and freeze their US assets.....I mean....we all have lists of these bad actors already. Why don't we just stop the transactions until we're satisfied that the transactions are for legitimate business purposes? ....am I wrong?" </span></div>
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<b><span style="font-family: "times new roman" , serif;"><u>NYSE Representative:</u></span></b><span style="font-family: "times new roman" , serif;"><u> </u> "I know this sounds crazy, but what
if we just make the filing and reporting requirements for foreign companies that
same as US Domestic Companies? Instead of filing those goofy 20-F's and
6-K's whenever they want, why don't we make them file 10-K's & 10-Q's just
like US Listings? ...and further.....since they all seem to just go dark and
run off with the money.....why don't we require that they post a bond payable
(or Cash) from a US Bank of a material amount, just in case these things go
sideways.....no bond?....no IPO? That should protect shareholders!....what do you think?"<o:p></o:p></span></div>
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<b><u><span style="font-family: "times new roman" , serif;">Mr. Rubio:</span></u></b><span style="font-family: "times new roman" , serif;"> "Holy Cats guys.....I love the
enthusiasm but there's no need to dive on this grenade. We are all on the
same team here.....you guys are systemically important to America....we need
you! ....and we, as lawmakers need your support! Besides, we really don't want to actually solve this problem....that
would totally disrupt your revenue streams and we can't have that. All we
need to do is convince the dufus American voters that we are <i>trying</i> to solve
the problem....it's not our fault....it's the<i> Communists fault!</i>...yeah....that's the ticket.....we can sell that.....no need to get all serious.....let's all take a chill pill."<o:p></o:p></span></div>
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<b><u><span style="font-family: "times new roman" , serif;">Ms. Maloney:</span></u></b><b><span style="font-family: "times new roman" , serif;"> </span></b><span style="font-family: "times new roman" , serif;">"Totally agree.....I was actually going to write in some
legal protections for you guys in my bill....again, the goal here is to make
everyone think that we are doing something about this. Remember, we're a
team.....we've got your back."<o:p></o:p></span></div>
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<b><span style="font-family: "times new roman" , serif;"><u>Mr. Warner: </u></span></b><span style="font-family: "times new roman" , serif;">"Ditto for me guys....all we need you to do
is to complete some paperwork and maintain some lists. We'll handle the
rest. The final drafts of our bills will be ready for your review next week. We'll get
them to you and await your input. Don't worry....when this blows up the bail outs are ready to go! Steady as she goes."<o:p></o:p></span></div>
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<b><span style="font-family: "times new roman" , serif;"><u>PAC Representative:</u></span></b><span style="font-family: "times new roman" , serif;"> "I think I speak for all of your
constituents when I say that you folks are doing a wonderful service for
America. So, just to be clear, we should send the checks to the usual
offshore accounts? Do you need any checks made payable to 'cash'?.... I
know you folks have expenses...."<o:p></o:p></span></div>
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<b><span style="font-family: "times new roman" , serif;"><u>Rubio, Maloney &
Warner (roughly in unison):</u></span></b><span style="font-family: "times new roman" , serif;"> "Whatever
you want to do is fine with us....again, we're on the same team. God
Bless America!"<o:p></o:p></span></div>
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So steady as she goes, yet more silly bills and legislation being presented that not only prevent a problem from being addressed, but provide rock solid legal protections for those "helpers" at the trough, who are intimately involved in and profit handsomely from its perpetuation.<br />
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Keep in mind this framework applies to just about all of our legislation....healthcare, defense spending, education, banking, etc. All of the legislation is designed by the "helpers" in exchange for campaign contributions and support. Could you imagine if Corporate America (openly) operated this way? What if CEO's and Purchase managers (openly) accepted "contributions" from domestic and foreign operatives in order to get them to play ball?<br />
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I'm thinking that it's just about time to rename our country from America to Americonflict-of-interest.<br />
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Once again, we can indeed confirm that America has, by far, the best government money can buy....<br />
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<b><u><span style="font-size: large;">Some Data....</span></u></b><br />
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So why is this coordinated shortfall of proper legislative and corrective/enforcement action so important and potentially destructive? Let's take a look at some data that my readers and I have been discussing. <b><span style="color: red;">Again, if this were just "petty theft", a few million dollars here or there, like it has been for decades, I wouldn't bother taking the time to write about it. Unfortunately, we've reached the tipping point where fraud, specifically, perpetrated by the Chinese Communist Party has become systemically relevant, and as I've described in prior posts, will be putting the Western Financial System at risk at some point.</span></b><br />
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First, let's discuss some private, subscription only data out there which provides asset ownership information. There are several good information platforms out there. Since this was sent to me by a reader, I won't disclose the trade name of the information provider, but suffice it to say that it's a name that anyone in the business would recognize.<br />
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<u style="font-weight: bold;">Methodology:</u> The goal was to run a query to locate and describe, via "tree functions", the association of various global businesses with SAFE (China's State Administration of Foreign Exchange) as an investor. i.e.) SAFE invests in Company A, which owns Company B, which owns Company C, etc. Through these daisy chains we can make an educated guess as to which "end businesses" might be substantially influenced by SAFE and the CPC.<br />
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The following table illustrates the type of data that came up in the initial SAFE query. Through the "tree" relationships we determine that the Company (Colum 1), has an immediate Parent Company (Colum 2) and an Ultimate Corporate Parent (Colum 3). The query is intended to show the relationship between individual Companies which have an Ultimate Parent as a US listed Company or a Caymans domicile.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgxZOVh8omyh4ONF0MMCuWGygNleWzXcZtMYoUnyeWDsYL7UBlHBSbVxk2tglXiywpaa4WLWBeHXlGCJTV6js1vu1czUnhDhowSDJSmgtWxLM3TBAAyOrsUyt_HAKL3dcXswqmvXcWfO1I/s1600/SAFE_US_Holdings_CORP_TREE_US_Interests_graphic.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1183" data-original-width="840" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgxZOVh8omyh4ONF0MMCuWGygNleWzXcZtMYoUnyeWDsYL7UBlHBSbVxk2tglXiywpaa4WLWBeHXlGCJTV6js1vu1czUnhDhowSDJSmgtWxLM3TBAAyOrsUyt_HAKL3dcXswqmvXcWfO1I/s1600/SAFE_US_Holdings_CORP_TREE_US_Interests_graphic.png" /></a></div>
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.........abbreviated due to space limitations....<br />
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<b><u>Query Results:</u></b><br />
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<ul style="text-align: left;">
<li>The results of this Query described 2,869 SAFE Investments scattered around the globe. Of that sample, there were 1,146 distinct records which represent SAFE Investments in US and US related (Off-shore/Caymans or off-shore subsidiaries) businesses where the ultimate corporate parent is a US entity. </li>
<li>Of these 1,146 businesses, the "Ultimate Corporate Parent" of 945 (82%) of them were distributed among just three entities. They are, in order, The AES Corporation - NYSE-AES (376 investments) a large energy company. Blackstone - NYSE-BX (315 investments) a large Real Estate/Alternative Asset Management Company and finally Alibaba (BABA) (254 investments). </li>
<li>Honorable mentions go to Cheniere Energy, Inc. AMEX:LNG (43 investments) and<br />AirBnB (19 investments)</li>
<li>The winner of the goofiest SAFE investment award is: Alpine Ridge Apartments, LLC (located in Flagstaff, AZ), which is owned by Bascom Arizona Ventures, LLC (located in Los Angeles, CA) whose sister companies are Oaktree Capital Group Holdings GP, LLC, and China Investment Corporation (Beijing, CN) whose ultimate corporate parent is Oaktree Capital Group Holdings, L.P. (Los Angeles, CA). I guess my question is: Why would the Chinese government want to own an off campus college apartment complex in Flagstaff? It's also interesting that their website Alpineridge.com is down....perhaps they are fully rented and don't need a website? </li>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhr9OMzRZNbMAsuyC52nIEdrAzChxaUpdVwBx9G6l9e6KlOSprkqMnD0jIFl2Pf78fkAtPPHrvC9ii1ozYm5MR5QoMoN7gmNDVZNb7XnFBbJJqcSg8fejQFPGbxqgDirSTC6DbY56QT36M/s1600/Alpine_Ridge_Apartments.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="529" data-original-width="975" height="345" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhr9OMzRZNbMAsuyC52nIEdrAzChxaUpdVwBx9G6l9e6KlOSprkqMnD0jIFl2Pf78fkAtPPHrvC9ii1ozYm5MR5QoMoN7gmNDVZNb7XnFBbJJqcSg8fejQFPGbxqgDirSTC6DbY56QT36M/s640/Alpine_Ridge_Apartments.png" width="640" /></a></div>
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<li><table border="0" cellpadding="0" cellspacing="0" style="border-collapse: collapse; width: 694px;"><colgroup><col style="mso-width-alt: 7204; mso-width-source: userset; width: 148pt;" width="197"></col><col style="mso-width-alt: 4973; mso-width-source: userset; width: 102pt;" width="136"></col><col style="mso-width-alt: 5851; mso-width-source: userset; width: 120pt;" width="160"></col><col style="mso-width-alt: 2925; mso-width-source: userset; width: 60pt;" width="80"></col><col style="mso-width-alt: 4425; mso-width-source: userset; width: 91pt;" width="121"></col></colgroup></table>
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Bloomberg info is not-surprisingly sparse as well....</div>
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<a href="https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=226838379">https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=226838379</a><br />
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<ul style="text-align: left;">
<li>Further, when we more closely examine the 2,869 global SAFE/CPC investments we see that in 263 of them, that VTB Bank (our favorite sanctioned Russian bank) (LSE:VTBR) (<a href="https://www.treasury.gov/resource-center/sanctions/OFAC-Enforcement/Pages/20151222.aspx"><span style="color: blue;"><b>See Treasury Sanction list</b></span>)</a>appears as the ultimate parent. I might ask, if VTB is involved in all of these investments, and they are directly funding CPC activity overseas, is there a material difference in the outcome if VTB funds CPC investment in the Sudan, Iran or Iraq, etc. while the CPC uses "clean" funds and ownership structures to invest in Western Assets? Shouldn't this be considered all one big corrupt cesspool? If VTB is funding everything but Western asset acquisitions.....how can you separate it? </li>
<li>Even though VTB is prohibited from doing business in the US we see one really odd listing on the SAFE query, must be a mistake....why in the world would SAFE/CPC investment find its way to a dumpy, little, nondescript, management company located at<span style="color: blue;"> <span style="font-weight: bold;"><a href="https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=331394139"><span style="color: blue;">713 Yonkers Avenue, Yonkers, NY</span>?</a> </span></span> According to Bloomberg, the immediate corporate parent "<a href="https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=331393849"><span style="color: blue;"><b>Gals Garant</b></span></a>" is a wholly owned subsidiary of <b><a href="https://www.bloomberg.com/profile/company/1348975D:RU"><span style="color: blue;">Gals-Invest OOO</span></a></b>, 35 Str. 4, Ul.tatarskaya B. Moscow, 115184 Russia. <b><span style="color: red;">So now we have the CPC/SAFE in partnership with a sanctioned Russian Bank and a Russian General contractor "investing" in the enterprise below. Doesn't anyone find this strange?</span></b><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhi5HfOPWs0TTmQyq_o2psut-r7XC00na8D1BqiY_zpnBsuwd9Mx2BxZL3c1FkLkqSgGnnoINA_4jYVkcVEreSQnuDKFViHPpo6yKm-hsMAqvGRKdu69SqQxhWdF1ns0E-9mXhH8IUaZ3o/s1600/VTB_Yonkers_Apartments.png" imageanchor="1" style="clear: left; display: inline !important; margin-bottom: 1em; margin-right: 1em; text-align: center;"><img border="0" data-original-height="35" data-original-width="605" height="37" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhi5HfOPWs0TTmQyq_o2psut-r7XC00na8D1BqiY_zpnBsuwd9Mx2BxZL3c1FkLkqSgGnnoINA_4jYVkcVEreSQnuDKFViHPpo6yKm-hsMAqvGRKdu69SqQxhWdF1ns0E-9mXhH8IUaZ3o/s640/VTB_Yonkers_Apartments.png" width="640" /></a></li>
</ul>
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<ul style="text-align: left;">
<li><b><span style="color: red;">Again, staying with the theme of "what in the world is going on here?" When we examine the SAFE investments where Alibaba (BABA) or Ant Financial is the Ultimate Parent, in conjunction with the 20-F's, at no time in the disclosures within the filings, does Alibaba management mention that they are the recipient of SAFE funding. You'd think that if Alibaba would actually be operating as a Chinese SOE that the extent of state financial involvement should be prominently disclosed.</span></b></li>
</ul>
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<ul style="text-align: left;">
<li><span style="color: red;"><b>Moreover, Blackstone's 10-K was silent as to any mention of SAFE, Chinese investments, amounts or carrying values, preferring to, presumably bury the amounts in "Asia" funds/Investments. From my point of view, don't you think it would be relevant if a significant amount of Blackstone's business was funded and supported by the Chinese Communist Party? I'd suggest that the specifics, amounts and details would/should require disclosure and have a bearing on investors risk perception.</b></span></li>
</ul>
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<b style="color: red;"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgCKZWNMkjCVn_Fci5DkyRF-4921oGUXz2zWbFyFV1dF491bh3yv_t9tqfAUxBOEvD4dSpMwaVrzaXiya9gDYjs3ExFH4ZMBlZBWFY6QIpbHp3DmRa1YqgRJVUr1SRx5dXkz5938ESaLnQ/s1600/Blackstone_Chart.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="595" data-original-width="992" height="382" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgCKZWNMkjCVn_Fci5DkyRF-4921oGUXz2zWbFyFV1dF491bh3yv_t9tqfAUxBOEvD4dSpMwaVrzaXiya9gDYjs3ExFH4ZMBlZBWFY6QIpbHp3DmRa1YqgRJVUr1SRx5dXkz5938ESaLnQ/s640/Blackstone_Chart.png" width="640" /></a></b></div>
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Blackstone (BX) Most recent 10-K<br />
<a href="https://www.sec.gov/Archives/edgar/data/1393818/000119312519061011/d663205d10k.htm"><span style="color: blue;"><b>https://www.sec.gov/Archives/edgar/data/1393818/000119312519061011/d663205d10k.htm</b></span></a><br />
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<li><span style="color: red;"><b>I might also ask the same questions about AES. Why is their most recent 10-K silent about any involvement whatsoever in CPC/SAFE partnerships and investments? Again, I would think that this be a material disclosure that should be included in the financial statements. </b></span></li>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEioTgK-_jQ1mJNQl-98Bf4oBRzlI1N42QdWJc4EgAOzunu22yb3VD2t4ApkN8zjk5Hd05lN91vSewpAx3laXbxle4knEgo3DH6B0QzwaQgTrr5EQ8SyQbg7kbY1MU-_nzfQc82aN67xumo/s1600/AES_Chart.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="584" data-original-width="949" height="392" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEioTgK-_jQ1mJNQl-98Bf4oBRzlI1N42QdWJc4EgAOzunu22yb3VD2t4ApkN8zjk5Hd05lN91vSewpAx3laXbxle4knEgo3DH6B0QzwaQgTrr5EQ8SyQbg7kbY1MU-_nzfQc82aN67xumo/s640/AES_Chart.png" width="640" /></a></div>
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The AES Corporation (AES) most recent 10-K<br />
<span style="color: blue;"><b><a href="https://www.sec.gov/ix?doc=/Archives/edgar/data/874761/000087476119000012/a2018form10-k.htm">https://www.sec.gov/ix?doc=/Archives/edgar/data/874761/000087476119000012/a2018form10-k.htm</a></b></span><br />
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As an aside, per the TSLA 10-K, our good friend Elan Musk also has failed to disclose anything regarding the cost of the Shanghai Gigafactory that the CPC is building for TESLA, other than on page 46:<br />
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<span style="text-indent: 5.24%;"><i>"We expect much of the investment in Gigafactory Shanghai to be provided through local debt financing, supported by limited direct capital expenditures by us. "</i></span><br />
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<span style="color: red;"><b>So the Chinese government is "buying" Tesla, America's high-tech "Crown Jewel", a Gigafactory, and the financial statements and 10-K are silent on the terms. I'm sure CFIUS and the SEC are fine with all of this. "Funding Secured!"</b></span><br />
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<span style="color: blue;"><a href="https://www.sec.gov/Archives/edgar/data/1318605/000156459019003165/tsla-10k_20181231.htm"><b>https://www.sec.gov/Archives/edgar/data/1318605/000156459019003165/tsla-10k_20181231.htm</b></a></span><br />
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<b><u><span style="font-size: large;">More Data....</span></u></b></div>
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A very bright and talented friend of mine and avid follower of my work <a href="https://twitter.com/abresler" style="color: blue; font-weight: bold;"><span style="color: blue;">@Abresler</span></a><b style="color: blue;"> </b>recently took some time to parse through the American Enterprise Institute's <i>China Investment</i> database and came up with yet another interesting data-set illustrating CPC Capital shenanigans.<br />
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Of course, very little of it matched the information filed by SAFE in the data described above, but lets take a look at it nevertheless.<br />
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<b><u>Methodology:</u></b><br />
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Alex dumped the CSV data out onto a website which allows us to parse and sort it with just about any software we feel comfortable with. Since I'm not a programmer and the number of records was manageable, I used Excel. Here's the data.<br />
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<a href="https://gist.githubusercontent.com/abresler/0f82312cd43021887d2998c3fe99fabd/raw/23fadd28e8c23ecc6521fa9b80f1d698fa1f0b2e/aei_fdi.csv"><span style="color: blue;"><b>https://gist.githubusercontent.com/abresler/0f82312cd43021887d2998c3fe99fabd/raw/23fadd28e8c23ecc6521fa9b80f1d698fa1f0b2e/aei_fdi.csv</b></span></a><br />
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And a sample of the abbreviated header data for US Investments....<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg6AOPg2MiVtbjrv8Q1LgbdJsPGAHNjZf4Zixgp8yGtSBkHw9_yAGKuzwvCBupzMt3fjNWDQzFpdLubEPdtfpgRS7azbkbX2arv4WlJIWrRc8cAxgs9y0Ggjy7xN8C0muw9bgZkgmuZNRY/s1600/AEI_China_Investmants_2005-2019.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="803" data-original-width="931" height="552" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg6AOPg2MiVtbjrv8Q1LgbdJsPGAHNjZf4Zixgp8yGtSBkHw9_yAGKuzwvCBupzMt3fjNWDQzFpdLubEPdtfpgRS7azbkbX2arv4WlJIWrRc8cAxgs9y0Ggjy7xN8C0muw9bgZkgmuZNRY/s640/AEI_China_Investmants_2005-2019.png" width="640" /></a></div>
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The AEI data is taken from various sources, primarily from press releases I would imagine. The data includes investments made from 2005 through the present and would probably include deals that were never consummated (i.e. CFIUS stopped the MoneyGram Acquisition)<br />
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<b><u>Query Results:</u></b><br />
<ul style="text-align: left;">
<li>According to the data, since 2005, the CPC has made/announced 3,302 global investments for a total value of $2.322 Trillion. 304 of them (9% in number) have been made in the United States, for a total of $254 Billion (11% in value). </li>
<li>Investments made by Alibaba totaled ten (10) as compared to the 254 SAFE investments made, where Alibaba was the ultimate corporate parent, as described above.</li>
<li>According to the data, there were two (2) Investments in AES, rather than the 376 investments as listed in the SAFE data.</li>
<li>According to the data, there were twenty-seven (27) Blackstone Investments listed, rather then 315 investments listed in the SAFE data.</li>
<li>Finally, there are only two VTB Bank relationships reported, compared to the 254 separate VTB/China relationships reported as part of the SAFE data above.</li>
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<b><span style="color: red;">I guess the question I'd have to ask is "Why are the CPC press releases so different from the detail provided by an investor data service? Why do they fail to disclose presumably sizable financial relationships with Alibaba, AES, Blackstone and VTB Bank?" </span></b><br />
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<b><span style="font-size: large;"><u>More Data from Alex.....</u></span></b><br />
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There's been a lot written about how Chinese Investors have taken over certain real estate markets around the world, Manhattan, San Francisco, Vancouver, Sydney, Hong Kong, etc. all come to mind.<br />
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Alex has been pulling data on NYC real estate transactions for years and here's what he's come up with.<br />
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<a href="https://asbcllc.com/asbc_projects/project_accumulator/analysis/historic_sales/annual_sponsor_sales_by_classification/index.html">https://asbcllc.com/asbc_projects/project_accumulator/analysis/historic_sales/annual_sponsor_sales_by_classification/index.html</a><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjF4ygBzg9zfiJ_vGXp99cFSyyQDRMORkgxLJa1vq6tF4hrRbOgDKexnDPfL5rzsZjcf_4DOxzjf-7urBGcd7nsQtdwqR3Mvyl_OxGrUSyDfIqGpns7S50SauOdWLXONkwH9NKS4xLa330/s1600/NYC_Real_Estate_Sales_by_QTR.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="452" data-original-width="975" height="296" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjF4ygBzg9zfiJ_vGXp99cFSyyQDRMORkgxLJa1vq6tF4hrRbOgDKexnDPfL5rzsZjcf_4DOxzjf-7urBGcd7nsQtdwqR3Mvyl_OxGrUSyDfIqGpns7S50SauOdWLXONkwH9NKS4xLa330/s640/NYC_Real_Estate_Sales_by_QTR.png" width="640" /></a></div>
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<b><u>Methodology:</u></b><br />
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The above chart illustrates the ratio of "Asian" and "Shell-Co" purchases of Manhattan real estate by year since 2003. When we parse the above data some things jump out at us:<br />
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<li>Beginning after the GFC, purchases by "Anglo" buyers decreased dramatically when compared to the Asian and Shell-Co purchases. Asian and Shell-Co purchases increased from roughly half of the purchases in 2010 to 3/4ths of the purchases by 2016.</li>
<li>Transactions peaked in 2016 and are on the decline. </li>
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Since I always like to personalize a story to illustrate what's going on here, I'll take a minute to talk about one (1) actual transaction. Like many of these transactions, this particular transaction absolutely jumped out of the data at me. I'll keep the actual names and addresses a secret here, since I wouldn't want to breach anyone's privacy (although everything I've posted is either public record or provided by the buyers themselves on-line). I'll again stress, that nobody here has done anything illegal per se. Just like the last financial crisis, everything that's happened in this particular transaction is a perfectly legal, clever microcosm/misuse of the system specifically designed (by our lawmakers and "helpers") and intended to produce a potentially catastrophic series of horrific macro results. This transaction, as well as tens of thousands of others, similar in structure, scattered throughout Western real estate markets, are likely one of the many CPC vehicles that will cause the eventual destruction of the Western Financial System and the resulting restructuring of global reserve currency mechanics. <br />
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Let's meet our contestants, shall we?<br />
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First, we have a wonderful young man I'll refer to as "Mr. Wang"....<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjy40-psKB3KH66uPzXnk409nYGD863wL5xzqAh2kncT47TPN3BXKfHNyTqSz_jtYNxh0KwHg2KXnCqV4zPZ17Z2ktNnjA05TCOwSV3EFA1dPoWlSI7N31uyVRjHQivgcWRDi_R7bENsMY/s1600/CPC_Male_Linked_In.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="626" data-original-width="898" height="446" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjy40-psKB3KH66uPzXnk409nYGD863wL5xzqAh2kncT47TPN3BXKfHNyTqSz_jtYNxh0KwHg2KXnCqV4zPZ17Z2ktNnjA05TCOwSV3EFA1dPoWlSI7N31uyVRjHQivgcWRDi_R7bENsMY/s640/CPC_Male_Linked_In.png" width="640" /></a></div>
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In 2012 Mr. Wang was working as an Intern at Tencent in Guangzhou, China. There is a gap in his resume until 2014 (presumably for some CPC training) until he showed up in New York as an Intern working for Google and as a Teaching Assistant at Columbia, while he worked on his Masters Degree there. In 2015 he took a job as a "data engineer" at Facebook/Instagram. Per his LinkedIn account he was/is:<br />
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<i>"<span style="background-color: white; color: rgba(0 , 0 , 0 , 0.9); font-family: , , "blinkmacsystemfont" , "segoe ui" , "roboto" , "helvetica neue" , "fira sans" , "ubuntu" , "oxygen" , "oxygen sans" , "cantarell" , "droid sans" , "apple color emoji" , "segoe ui emoji" , "segoe ui emoji" , "segoe ui symbol" , "lucida grande" , "helvetica" , "arial" , sans-serif;">Tech Lead on Instagram Search. Focused on indexing/retrieval/candidate ranking. </span><span style="background-color: white; color: rgba(0 , 0 , 0 , 0.9); font-family: , , "blinkmacsystemfont" , "segoe ui" , "roboto" , "helvetica neue" , "fira sans" , "ubuntu" , "oxygen" , "oxygen sans" , "cantarell" , "droid sans" , "apple color emoji" , "segoe ui emoji" , "segoe ui emoji" , "segoe ui symbol" , "lucida grande" , "helvetica" , "arial" , sans-serif;">Played some fun projects in Instagram, including Following Hashtags and IGTV."</span></i><br />
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He sounds like a really nice young man. Presumably, while he was at Columbia, he met a very nice young lady (below) I'll refer to as Ms. Chung.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhp9xgMNFp2rTOtFcc_D2YJqj_ZyK44LlBy8XsTrW-WeDMU4LIar6gty0hl_pZeGHhqcxQqZ-O9jAidQx8ZpvSdpzT2LxLmwiTb7m8NGMUNx5AIYf2l3Dj29FMlVitKJw_ko8zezsiTGmY/s1600/CPC_Female_Linked_In.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="746" data-original-width="982" height="486" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhp9xgMNFp2rTOtFcc_D2YJqj_ZyK44LlBy8XsTrW-WeDMU4LIar6gty0hl_pZeGHhqcxQqZ-O9jAidQx8ZpvSdpzT2LxLmwiTb7m8NGMUNx5AIYf2l3Dj29FMlVitKJw_ko8zezsiTGmY/s640/CPC_Female_Linked_In.png" width="640" /></a></div>
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Ms. Chung had a similar career path as Mr. Wang in that she was working in China as an Intern until 2013 when she somehow made her way to NYC, was accepted by Columbia, got her Master of Arts degree and in 2016 landed a job as a data scientist at the NYC office of<b><span style="color: blue;"> <a href="https://feedzai.com/">Feedzai</a></span></b>, a Portuguese company specializing, oddly enough, in using "big data" to assist banks and financial institutions in detecting financial fraud. (<b><a href="https://www.bloomberg.com/research/stocks/private/snapshot.asp?privcapId=133851254">Bloomberg - Feedzai</a></b>)<br />
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Anyway, to continue the story, Mr. Wang and Ms. Chung must have totally hit it off because just a few weeks ago they teamed up to buy a $1,395,000 condo located at 150 Rivington, NYC....this place is the bomb. Even though they've only been in the workforce (and America) for a couple of years, they had enough money saved up (even with those gigantic tuition bills) to buy this awesome pad. They must be doing really well.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjGs0N8OkDwytN62GAU1iAApRcmjJPe_pnhTrwuoFFsmknxvtWMtLcfUs6C-pd9Dho6EYopQjn5HwY96AvI5cDY866c1d5n6Bp9m9Eb0jNZEXF9XE2iSlVC-fYv-hyGOo1RUDYZqB6-gi4/s1600/150_Rivington.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="454" data-original-width="557" height="520" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjGs0N8OkDwytN62GAU1iAApRcmjJPe_pnhTrwuoFFsmknxvtWMtLcfUs6C-pd9Dho6EYopQjn5HwY96AvI5cDY866c1d5n6Bp9m9Eb0jNZEXF9XE2iSlVC-fYv-hyGOo1RUDYZqB6-gi4/s640/150_Rivington.png" width="640" /></a></div>
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Oooppsss.....perhaps I misspoke. I just took a peak at the mortgage filing for these two and it looks like they couldn't quite afford the place without some additional financing. As luck would have it, since they were probably unable to afford such a great place after only a few years in the workforce, one of our favorite banks, Wells Fargo stepped in and again, even though these two wonderful folks had only had full time jobs in America for a few years, and are still Chinese citizens, Wells Fargo was generous enough to approve Mr. Wang and Ms. Chung for a $1,107,200 Jumbo Mortgage. Never let it be said that, when significant fees are involved, that Wells Fargo couldn't step up to the plate and get a transaction done, especially when they can package up the mortgage (and others like it) in a wonderful MBS tranche, slap a AAA rating on it and and sell it to pension/mutual funds, no matter what the metrics and underwriting might indicate. <br />
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So to sum up Mr. Wang and Ms. Chung's activities over the last few years, they are either:<br />
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1.) Two wonderful, young Chinese people experiencing the American dream, landing great jobs and reaching for the stars as they enjoy their freedom, the fruits of their efforts and a taste of democracy in the Big Apple...."Everybody Have Fun Tonight!". Hopefully, they will live happily ever after!<br />
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<iframe allowfullscreen="" class="YOUTUBE-iframe-video" data-thumbnail-src="https://i.ytimg.com/vi/NfTcq5AWRsc/0.jpg" frameborder="0" height="266" src="https://www.youtube.com/embed/NfTcq5AWRsc?feature=player_embedded" width="320"></iframe></div>
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....or:<br />
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2.) They are actually highly trained, loyal and motivated CPC stealth operatives, who were strategically placed in the West to fulfill a mission, like hundreds of thousands, or perhaps millions of their colleagues, whose assignment is to acquire US dollar assets, waiting patiently, under-cover, for a command from the Politburo to sell the assets, "come back home" and bring/transfer their dollars/euros/pounds/yen back to the CPC with them.<br />
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<b><u><span style="font-family: inherit; font-size: large;">The Macro Impact of Battalions of Wangs and Chungs....and Some Friendly Bankers</span></u></b><br />
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So now that we've confirmed that Wells Fargo is probably one of the more aggressive, accomodative lenders out there, based solely on the above Jumbo Loan to two wonderful, young, energetic, (alleged) CPC members, let's take a look at the mortgage transaction volume they do in NYC. According to the New York City Office of the Register, through their 26 new York metro branches, Wells Fargo has filed 13,036 Mortgage transactions. (501 transactions per branch in the last year). Lots of work indeed!<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhlhsId666_EyTAqmWDE_nwWuUwUOYHyN1ctZbfryB3QVDUwnyndLDa8c3FmGyZNHwf1lNJLL47_SZJ0GySsqZ8F_pNddOAoBKHmGIUwwLZs0ZntKc0ylBd3F3N7RxxbqNHmir8JzXAeMo/s1600/Wells_Fargo_Mortgage_Records_6-26-19.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="482" data-original-width="941" height="326" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhlhsId666_EyTAqmWDE_nwWuUwUOYHyN1ctZbfryB3QVDUwnyndLDa8c3FmGyZNHwf1lNJLL47_SZJ0GySsqZ8F_pNddOAoBKHmGIUwwLZs0ZntKc0ylBd3F3N7RxxbqNHmir8JzXAeMo/s640/Wells_Fargo_Mortgage_Records_6-26-19.png" width="640" /></a></div>
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Now lets compare Wells Fargo's workload to the Bank of China's effort. We see (running the same query) that the Bank of China, through their three little teensey-weensey generally un-staffed offices in Midtown, Flushing and Chinatown (The Chinatown Office doesn't even have a sign on the street) have somehow managed to file 1,624 Mortgage transactions in the last year (541 per branch) . The CPC is clearly mastering the concepts of "asset light" and "doing more with less" <br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEizB1oaIq7rqrpDS2oMTfANAXJPIeYnXsM21GvJSO48HrFOknL1RnXUlzeNAqQA0RMyd6iSaQDB-4ueoe_wpFdGI5I2CHM19IQZQP-b6P8H8P5EvVnTTdAmHziANQeVY-oQvBlHfVBgL8E/s1600/Bank_of_China_Mortgage_Records_6-26-19.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="500" data-original-width="956" height="334" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEizB1oaIq7rqrpDS2oMTfANAXJPIeYnXsM21GvJSO48HrFOknL1RnXUlzeNAqQA0RMyd6iSaQDB-4ueoe_wpFdGI5I2CHM19IQZQP-b6P8H8P5EvVnTTdAmHziANQeVY-oQvBlHfVBgL8E/s640/Bank_of_China_Mortgage_Records_6-26-19.png" width="640" /></a></div>
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<b><u><span style="font-size: large;"><br /></span></u></b><u><b><span style="font-size: large;">A Few of the Big <i>Bank of China</i> Deals in just the Last Year:</span></b></u><br />
<u><br /></u>So let's see what the <i>Bank of China</i> has been financing....it looks like they are doing a lot more than just handling single family residential.<br />
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The Alexander - Queens NY - $252,543,607 Mortgage - 12/12/2018<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhCUobrOfRBt4BF3FeMiulx41UNwSqvuk8OXg1jcsktrrKNjyMvPBOMMWvzTF0WaOqq-jJJ60nYCRN3tc1wZPsazUWG8juevf1W3iuHDc0PO-F1IOQnEoEBdf9fHpWoHpAnUIpwlPxUwDk/s1600/The_Alexander_Queens.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="463" data-original-width="670" height="442" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhCUobrOfRBt4BF3FeMiulx41UNwSqvuk8OXg1jcsktrrKNjyMvPBOMMWvzTF0WaOqq-jJJ60nYCRN3tc1wZPsazUWG8juevf1W3iuHDc0PO-F1IOQnEoEBdf9fHpWoHpAnUIpwlPxUwDk/s640/The_Alexander_Queens.png" width="640" /></a></div>
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565 Broome Street - $196,374,473 - 6/7/2019<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPvz5RpN-nD-8QLTEYJRn-oFkMlXppu2vjkhfVFcjMR1JpZiVi4vWvmQ-Jz_5XwljAXcyTP_2Hrl7QckHKjbJmWklNRkHrQ9R2DaylMJz5XO5cgVs-2zahNyvr3X2dYuWCxflNRLBgG3k/s1600/565_Broome_Street_NY.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="484" data-original-width="682" height="454" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjPvz5RpN-nD-8QLTEYJRn-oFkMlXppu2vjkhfVFcjMR1JpZiVi4vWvmQ-Jz_5XwljAXcyTP_2Hrl7QckHKjbJmWklNRkHrQ9R2DaylMJz5XO5cgVs-2zahNyvr3X2dYuWCxflNRLBgG3k/s640/565_Broome_Street_NY.png" width="640" /></a></div>
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640 & 650 W 5th & 6 W 52nd - $500,000,000 - 6/7/2019 (Note: in this deal they threw in the 2 story Sara Jessica Parker shoe store over on West 52nd...probably needed it to round up the the half billion collateral value ......nice!)<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj368DteiTUhyphenhyphenrS0AADcoT7xrxtMDtoKRiTPFrsCDCoMR5mReyib8e_w0egsJFugBRG0k-eyi4vUfM7gdeBuX3u4Su55ZNtuBwmaoC42wQG_M7nakvZYzuW8X5bELEGFrcnzK0gYug0o38/s1600/640-650_5th_Ave.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="233" data-original-width="587" height="254" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj368DteiTUhyphenhyphenrS0AADcoT7xrxtMDtoKRiTPFrsCDCoMR5mReyib8e_w0egsJFugBRG0k-eyi4vUfM7gdeBuX3u4Su55ZNtuBwmaoC42wQG_M7nakvZYzuW8X5bELEGFrcnzK0gYug0o38/s640/640-650_5th_Ave.png" width="640" /></a></div>
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339 W 5th & 474 7th - $45,000,000<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg_0Hx6-No2Ixa3G1LorjbXptp_5JYSwXMC9FQ9-Ml08_6LRknJqiZUJ0I1NYL7z0EHtjEY3MTcfuTMFT1TWbAbHM7smcH2Ykq1CFRkELziyL2975FbmNCdbb3qwLuBQ5VJN8tQNUF4Ls8/s1600/339_5th_474_7th_.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="296" data-original-width="1007" height="188" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg_0Hx6-No2Ixa3G1LorjbXptp_5JYSwXMC9FQ9-Ml08_6LRknJqiZUJ0I1NYL7z0EHtjEY3MTcfuTMFT1TWbAbHM7smcH2Ykq1CFRkELziyL2975FbmNCdbb3qwLuBQ5VJN8tQNUF4Ls8/s640/339_5th_474_7th_.png" width="640" /></a></div>
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200 W 72nd Street - $37,295,197 - 8/20/2018<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiCVhmY44KEDzgkG-kHAGpzg5zSAgJjPq8of9sf47KzfzBA7KbH0EQTc4nKlURTVPkvbIE7GJKcO3IXaCS1ar8zpLoHjbiXy3JILvg0axvQqFkrZomC3ttqPj_zaurY7j7pbXq4VXDaL5c/s1600/200_W_72nd.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="486" data-original-width="793" height="392" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiCVhmY44KEDzgkG-kHAGpzg5zSAgJjPq8of9sf47KzfzBA7KbH0EQTc4nKlURTVPkvbIE7GJKcO3IXaCS1ar8zpLoHjbiXy3JILvg0axvQqFkrZomC3ttqPj_zaurY7j7pbXq4VXDaL5c/s640/200_W_72nd.png" width="640" /></a></div>
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195 W 66th Street, NY - $140,560,000 - 4/12/2019<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjsPfIRyvIth1zh1J2McJ-d3KKX5q4Gauaws9O55TBe97a_nfZkvxho1FufvN0E8Vtj3Mvdg6e2u9QBium0eLuTPNUtfzgu8O3uWIhXvY4Ihe0OBh3MjPzoK_6zdgu0wKSvZ_XxMnYBRPk/s1600/165_E_66th_ST_NY.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="481" data-original-width="774" height="396" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjsPfIRyvIth1zh1J2McJ-d3KKX5q4Gauaws9O55TBe97a_nfZkvxho1FufvN0E8Vtj3Mvdg6e2u9QBium0eLuTPNUtfzgu8O3uWIhXvY4Ihe0OBh3MjPzoK_6zdgu0wKSvZ_XxMnYBRPk/s640/165_E_66th_ST_NY.png" width="640" /></a></div>
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200 5th Ave, NY - $600,000,000 - 11/30/2018<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJ1BAbv9P9AjRLlpHH6VIJuFDDx0URdYrskm7BX4zDk8sl4ZFqV5yIw2m4JORj0oncdqy8kWIaD3yzaQMARmDwjAuIH36l3bRF-do9OaXtP7vKoGYGz_3mP-f-H_rwoWQ90uaPClwQVP0/s1600/200_5th_Ave.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="445" data-original-width="806" height="352" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjJ1BAbv9P9AjRLlpHH6VIJuFDDx0URdYrskm7BX4zDk8sl4ZFqV5yIw2m4JORj0oncdqy8kWIaD3yzaQMARmDwjAuIH36l3bRF-do9OaXtP7vKoGYGz_3mP-f-H_rwoWQ90uaPClwQVP0/s640/200_5th_Ave.png" width="640" /></a></div>
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So it looks like The Bank of China, out of their three little tiny offices, Bryant Park, Flushing and Chinatown have written $1.771 Billion in mortgages in the last few months. As I had mentioned, the Chinatown office doesn't even have a street sign...it's a couple of desks, some phones and a SWIFT Account: <span style="background-color: white; color: #14171a; font-family: "segoe ui" , "arial" , sans-serif; font-size: 14px; white-space: pre-wrap;"><b>SWIFT:BKCHUS33CTX </b></span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJjK-663JTxKtXlnQCj0xzLL9R6Zpdxd_GT0GGUeOyCfbFpe2l2000_ZqYC16LknOSWAQsw2B_nKiJ3muhxfkGVElccBv2CD0dLcE-e01EMuXqh7ZP7rLpbQECFFtWjZX-1oHNPqbnBOg/s1600/BOC_Offices.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="286" data-original-width="359" height="508" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJjK-663JTxKtXlnQCj0xzLL9R6Zpdxd_GT0GGUeOyCfbFpe2l2000_ZqYC16LknOSWAQsw2B_nKiJ3muhxfkGVElccBv2CD0dLcE-e01EMuXqh7ZP7rLpbQECFFtWjZX-1oHNPqbnBOg/s640/BOC_Offices.png" width="640" /></a></div>
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By way of comparison, during the same period, out of the 13,000+ mortgage records filed, Wells Fargo, one of the more aggressive "we can get you financed" operations in NYC, only did a handful of deals over $10 Million. Almost all were residential, single unit mortgages. Wells must have a much different business model....ya think?<br />
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For those of you who have never been to a US branch of the <i>Bank of China</i> (or for that matter, ICBC, China Construction Bank or the Agricultural Bank of China, it doesn't matter, they are all the same) as I mentioned, it's a couple of desks, some computers and a SWIFT account. There is (usually) no FDIC insurance, so if your deposits are somehow "lost" they just tell you...."ahhh....poof!...it's gone!....next in line please!" For your reference and amusement and to familiarize you with CPC banking, I've posted below, what I'm told is some behind the scenes footage of the <i>Bank of China</i>, NYC Chinatown branch, operation:<br />
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<iframe allowfullscreen="" class="YOUTUBE-iframe-video" data-thumbnail-src="https://i.ytimg.com/vi/OtpwAg0KTeA/0.jpg" frameborder="0" height="266" src="https://www.youtube.com/embed/OtpwAg0KTeA?feature=player_embedded" width="320"></iframe></div>
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<b><span style="color: red;"><u><span style="font-size: large; text-decoration-line: underline;">So What Do We</span><span style="font-size: large; text-decoration-line: underline;"> </span><span style="font-size: large;">Really Have Here?</span></u></span></b><br />
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<b><span style="color: red;">Let's recap:</span></b><br />
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<b><span style="color: red;">1.) We have three ineffective, ill-conceived Bills (<i>The EQUITABLE Act, The Corporate Transparency Act and the ILLICIT CASH Act</i>) sponsored by special interests and presented to Congress which will not only do nothing to protect America from the destruction caused by anonymous capital flow, but will actually protect the "helpers" from any sort of legal liability for their borderline treasonous acts.</span></b><br />
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<b><span style="color: red;">2.) We've established that the CPC/SAFE is intimately involved in establishing corporate beach-heads through Financial Asset Acquisitions in the United States. Three public companies, Alibaba (BABA), AES (AES) and Blackstone (BX) are apparently, intimately involved in financing these businesses, yet, none of this is disclosed in their filings. I'd think that some subpoenas or at least a few SEC interrogatories might be in order here.</span></b><br />
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<b><span style="color: red;">3.) VTB, a Russian SOE Bank, embroiled and <a href="https://www.bloomberg.com/news/articles/2018-11-29/trump-s-ex-lawyer-cohen-reaches-guilty-plea-on-lying-to-congress"><span style="color: blue;">implicated in the Michael Cohen "Russian Project"</span></a> and sanctioned by the US Treasury continues to participate in and indirectly finance a significant number (254 documented) of SAFE investments/transactions. Again, you'd think the Treasury might be interested in this. </span></b><br />
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<b><span style="color: red;">4.) We've identified and discussed the tip of the iceberg for CPC global real estate investment focusing on real estate purchases by Chinese nationals and Shell-Cos in Manhattan. The CPC has adopted a similar game plan in the Bay Area, Vancouver, Toronto, Sydney, Melbourne, etc. </span></b><br />
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<b><span style="color: red;">5.) We've discussed the three teeny-tiny Bank of China NYC Branches, which all, for some reason need individual SWIFT Access, so they can transfer US Dollars anywhere on the planet at a moments' notice. These itsy-bitsy, stealth branches, with a handful of employees, have somehow placed more NYC area mortgages ($1.7 Billion) in the last few months than Wells Fargo has done through their 26, heavily staffed, full service branches over the same period. Again, another China Miracle! </span></b><br />
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<b><span style="color: red;">6.) We've also discussed how the CPC/</span></b><b style="color: red;">Chinese government is "buying" Tesla, our US high-tech-Crown-Jewel, a Gigafactory, and the financial statements and 10-K are silent on the terms. You'd think investors (and CFIUS) would want some answers.</b><br />
<b><span style="color: red;"><br /></span></b><b><span style="color: red;">7.) One more tidbit I thought I'd mention....today CALPERS, America's largest Pension fund is now being directed by <a href="https://www.calpers.ca.gov/page/about/organization/executive-officers/ben-meng"><span style="color: blue;">Ben Meng</span></a>, a really nice guy, but presumably a Chinese Communist Party member (Again, anyone who is even moderately successful on the mainland is a party member by default....it's a prerequisite for employment). So Ben will have final say on the deployment of CALPERS $358 Billion. The 2018 <a href="https://www.calpers.ca.gov/docs/forms-publications/annual-investment-report-2018.pdf"><span style="color: blue;">Asset Allocation of 26% foreign stocks and 24% US Stocks</span></a> will now be managed by Ben, with an already stated directive of moving into more private equity and alternative strategies.....let's hope he's not working with SAFE and VTB as any of his "alternatives". Even though Ben had worked at SAFE for three years as deputy Chief Investment Officer, like most US politicians, I'm sure that in his new role he will absolutely set aside any conflict of interest he might have with either SAFE or VTB and not let these relationships, or the possibility of his family members being held at a Xinjiang re-education camp, have any impact on his decision making.</span></b><br />
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<b><span style="color: red;">7.) Ok....one more tidbit...sorry,..I hate to rattle on.....just in case you haven't read this anywhere. Mitch McConnell's daughter-in-law (Elaine's daughter) is <a href="https://www.angelachao.org/2017/01/26/independent-non-executive-director-of-the-bank-of-china/"><span style="color: blue;">Angela Chao, an executive director at the Bank of China</span></a>. Again, I'm sure there's no conflict there either. The family holidays (Chinese New Year) must be a blast at the McConnell mansion. I've been wrangling for an invitation for some Kentucky dim-sum for years with no success. Anyway, this seems like yet another totally legit, above board, completely isolated, walled off relationship to me. </span></b><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgD1CE3ry8nKzrL1nQObCxMW2ktjdCTQJt_9C8pvsRLSjV5cWQHZvCvxEFYWmgIzvHcGplN9Sf2rYDwWjtQlbO12S5llXhfgbRvyfmVPDW-5dUSC8FRXSuQiEerggDyjpNDwIuc90TKRD0/s1600/Mitch_Mcconnell.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="183" data-original-width="275" height="265" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgD1CE3ry8nKzrL1nQObCxMW2ktjdCTQJt_9C8pvsRLSjV5cWQHZvCvxEFYWmgIzvHcGplN9Sf2rYDwWjtQlbO12S5llXhfgbRvyfmVPDW-5dUSC8FRXSuQiEerggDyjpNDwIuc90TKRD0/s400/Mitch_Mcconnell.jpg" width="400" /></a></div>
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<span style="color: red;"><b>It's totally normal for a handsome, worldly, Senate Majority Leader from Kentucky to have a communist party member (again by default) as a daughter in law....I can only guess that it must have been the twinkle in his eye and his cool Savoir-faire, Brad Pitt-like, sexy demeanor that first attracted Elaine, and the the entire Communist Party to his camp. I must say, if I were a Chinese Communist woman, I'd certainly find Mitch absolutely adorable.</b></span><br />
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<b><u><span style="font-size: large;">Ok....all kidding aside....</span></u></b><br />
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So why is all of this important? Here's the bullet point version:<br />
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<b><span style="color: red;">1.) In China, only CPC members have significant money.</span></b><br />
<b><span style="color: red;">2.) CPC members are zealots, dedicated to their cause, to the death if necessary. </span></b><br />
<b><span style="color: red;">3.) There are 90 million party members. </span></b><br />
<b><span style="color: red;">4.) If half of them, each, individually deploy $500,000 in Western "risk assets" that's $22.5 Trillion sitting in Real Estate, stocks, bonds, Shell-co passive entities or anything their little hearts desire.</span></b><br />
<b><span style="color: red;"><br /></span></b><b><span style="color: red;">SO....WHAT HAPPENS IF/WHEN THEY SELL?</span></b><br />
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Am I the only one who sees these incredible coincidences here? Isn't it starting to become obvious, even to the most head-in-the-sand, pro China global trade advocates that something is amiss? Isn't it odd that the world's "second biggest economy" won't allow its currency to be used anywhere but on the mainland? Isn't it strange that every one of their financial statements and NBS releases have glaring, ludicrous, laughable misrepresentations in them? Isn't it incredible that they've deployed indentured/slave labor for decades to make cheap, knock off sneakers, clothes, phones, electronics to the tune of a $25 Trillion (plus) cumulative trade/investment surplus and no economist or Central Banker has ever wondered why there's only $3 Trillion of FOREX on the PBOC balance sheet? Nobody has thought to ask...."Hey, Xi....where's all the f&%$ing Western Money??!!!"<br />
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Nobody asks about how the Tibetans or the Uyghurs are doing? American business, for decades, has accepted IP theft as a cost of doing business, so as not to disrupt the dream or even the remote possibility that "some day" China will actually open its' markets? Lawmakers, business people and bankers, to protect their own self interests, have designed an incredible global system of anonymous "capitalist" liquidity which the CPC has mastered and is about to use to its permanent, irreversible advantage as the ultimate WFD (Weapon of Financial Destruction). It's indeed ironic that we never found the WMD's that we were absolutely, positively sure were there in Iraq, yet we can't seem to see the WFD's that are lurking everywhere, in every nook and cranny of every banker's, lawyer's and accountant's office around America today. It's always difficult to seek truth when you are paid not to look for it....<br />
<br />
"When we hang the capitalists, they will sell us the rope...." (Lenin....Vladimir...not John)<br />
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My fear, as I've said, is that we are far too late to stop what's about to happen to us. Frankly, I don't know where to start. I'm hard pressed to believe that there are enough investigators, subpoenas, judges and courts to figure this mess out in time and keep this tsunami from resetting US Asset Values, the exchange rate of the US Dollar and consequently, its position as the dominant global reserve currency.<br />
<br />
The CPC is (collectively) a group of tough, brilliant strategists playing the long game. Conversely, our Western leadership has long been mired in "transactional" mode for years. We ask for, or even demand "this"....in hopes that we eventually might get "that". As negotiations progress, it looks like it's going to work, we're optimistic.... then it doesn't....and we start over. Our negotiators are always, perpetually, "90% there" on a deal. After a decade of this failed, strategic futility, we are, unfortunately, still exactly where we are, have been, and will always be. We're on a road to nowhere without a map.<br />
<br />
Every day I become more convinced that our leadership doesn't see, nor will they ever see this coming. I've had the Democratic Presidential debates running in the background as I had been typing this and, though the issues I've described herein are, by far, the greatest threat to Western Civilization, they don't appear to be on anyone's radar. Our candidates for the "leader of the free world" seem to be much more enamored with criticizing each other and "appealing to a demographic" than they are with saving our country from the CPC. They/we are lambs to the slaughter.<br />
<br />
Decades from now our great grand children, before being tucked into bed at their re-education camps, will be reading text books describing exactly how the great American dream, the beautiful experiment of democracy, government by the people, for the people, etc. suddenly imploded, falling prey to the ultimate financial shell game of Chinese Communism, solely as a result of Western leaderships' greed, avarice, incompetence and lack of vision. Unfortunately, if our leadership doesn't take decisive, bold action soon, rather than having "meetings", fundraisers, campaigns and team building sessions designed to support special interests, get elected and preserve the status quo....those textbooks will be written in Mandarin.<br />
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<br />
<b><u><span style="font-size: large;">Other Reading:</span></u></b><br />
<br />
EQUITABLE ACT<br />
<a href="https://www.rubio.senate.gov/public/_cache/files/c2630968-1e66-44d4-bebf-458a86188e7b/2A963878FD61C08209B01D9DA41D1FDB.equitable-act-legislative-text.pdf">https://www.rubio.senate.gov/public/_cache/files/c2630968-1e66-44d4-bebf-458a86188e7b/2A963878FD61C08209B01D9DA41D1FDB.equitable-act-legislative-text.pdf</a><br />
<br />
Warner AML Bill<br />
<div class="MsoNormal">
Improving Laundering Laws and Increasing Comprehensive
Information Tracking of Criminal Activity in Shell Holdings (ILLICIT CASH) Act<o:p></o:p></div>
<a href="https://www.warner.senate.gov/public/index.cfm/2019/6/warner-cotton-jones-rounds-unveil-draft-legislation">https://www.warner.senate.gov/public/index.cfm/2019/6/warner-cotton-jones-rounds-unveil-draft-legislation</a><br />
<br />
ILLICIT CASH ACT<br />
<a href="https://www.scribd.com/document/412943793/ILLICIT-CASH-Act-Summary-and-Section-By-Section-060719">https://www.scribd.com/document/412943793/ILLICIT-CASH-Act-Summary-and-Section-By-Section-060719</a><br />
<br />
Washington Post - imaginary conflict between Washington and Wall Street<br />
<a href="https://www.washingtonpost.com/opinions/2019/06/06/washington-presses-wall-street-solve-its-china-problem/?utm_term=.c2231ad22843">https://www.washingtonpost.com/opinions/2019/06/06/washington-presses-wall-street-solve-its-china-problem/?utm_term=.c2231ad22843</a><br />
<br />
How a Bill becomes a law....<br />
<a href="https://www.youtube.com/watch?v=FBpdxEMelR0">https://www.youtube.com/watch?v=FBpdxEMelR0</a><br />
<br />
<br />
VTB Bank, Russian State Owned Bank, Treasury Sanctions, etc.<br />
<a href="https://www.treasury.gov/press-center/press-releases/pages/jl2590.aspx">https://www.treasury.gov/press-center/press-releases/pages/jl2590.aspx</a><br />
<br />
VTB to Finance Trump Tower Moscow<br />
<a href="https://www.newsweek.com/bank-allegedly-planned-finance-trump-tower-moscow-purchased-leading-russian-1355045">https://www.newsweek.com/bank-allegedly-planned-finance-trump-tower-moscow-purchased-leading-russian-1355045</a><br />
<br />
Bank Fines since the GFC<br />
<a href="https://www.marketwatch.com/story/banks-have-been-fined-a-staggering-243-billion-since-the-financial-crisis-2018-02-20">https://www.marketwatch.com/story/banks-have-been-fined-a-staggering-243-billion-since-the-financial-crisis-2018-02-20</a><br />
<br />
CHINA INVESTMENT DATA - @AEI<br />
<a href="https://gist.githubusercontent.com/abresler/60e955f205bc4b58ef40c56a47d5697b/raw/64a9a69e891ca3a6f1eac99c13a958410908c2a3/rhodium_dfi_data.csv">https://gist.githubusercontent.com/abresler/60e955f205bc4b58ef40c56a47d5697b/raw/64a9a69e891ca3a6f1eac99c13a958410908c2a3/rhodium_dfi_data.csv</a><br />
<br />
<br />
Technical Analysis of how non-FDIC insured banks work<br />
Bank of China....behind the scenes depositor footage....<br />
<a href="https://youtu.be/NmFo-LKHGY0">https://youtu.be/NmFo-LKHGY0</a><br />
Long Version - 1:42<br />
<a href="https://youtu.be/OtpwAg0KTeA">https://youtu.be/OtpwAg0KTeA</a><br />
<br />
Alchemy/Carlyle - Bank of the Ozarks $100 million Financing - with one condo going for $25 Million.<br />
<a href="https://therealdeal.com/2019/05/09/anonymous-buyer-picks-up-sponsor-unit-at-alchemys-ues-condo-for-26m/">https://therealdeal.com/2019/05/09/anonymous-buyer-picks-up-sponsor-unit-at-alchemys-ues-condo-for-26m/</a><br />
<br />
CPC Flags as far as the eye can see in San Francisco<br />
<a href="https://twitter.com/i/status/1144374314080202753">https://twitter.com/i/status/1144374314080202753</a></div>
Deep Throathttp://www.blogger.com/profile/02712515268051858186noreply@blogger.com0tag:blogger.com,1999:blog-7478408299955066555.post-28832392904702914032019-05-16T01:02:00.000-04:002019-05-16T15:41:08.302-04:00BABA:...an "Earnings Call" without discussing "Earnings"<div dir="ltr" style="text-align: left;" trbidi="on">
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:<br />
<br />
<b><u>Webcast:</u></b><br />
<a href="https://edge.media-server.com/m6/p/8zqz2d4o"><span style="color: blue;"><b>https://edge.media-server.com/m6/p/8zqz2d4o</b></span></a><br />
<b><u>Presentation:</u></b><br />
<a href="https://www.alibabagroup.com/en/ir/presentations/pre190515.pdf"><span style="color: blue;"><b>https://www.alibabagroup.com/en/ir/presentations/pre190515.pdf</b></span></a><br />
<b><u>Press Release:</u></b><br />
<a href="https://www.alibabagroup.com/en/news/press_pdf/p190515.pdf"><b><span style="color: blue;">https://www.alibabagroup.com/en/news/press_pdf/p190515.pdf</span></b></a><br />
<b><u>Filing:</u></b><br />
<a href="https://www.sec.gov/Archives/edgar/data/1577552/000110465919029738/a19-10031_1ex99d1.htm"><b><span style="color: blue;">https://www.sec.gov/Archives/edgar/data/1577552/000110465919029738/a19-10031_1ex99d1.htm</span></b></a><br />
<b><span style="color: blue;"><br /></span></b>
<br />
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.<br />
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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:<br />
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The <span style="color: red; font-weight: bold;">Appropriate Earnings Call Questions</span>, which I might expect a real analyst to ask, are highlighted in<b><span style="color: red;"><u> RED</u></span></b> below.<br />
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<b><u><span style="font-size: large;">What the "Analysts" didn't ask about....</span></u></b><br />
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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.<br />
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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?<br />
<br />
There's limited discussion in the documentation (including the 6-K) as to what this gigantic gain was attributable to....here's the language:<br />
<br />
<div style="text-align: left;">
<span style="color: blue;"><i>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.</i> </span></div>
<div style="text-align: left;">
<span style="color: blue;"><br /></span></div>
<div style="text-align: left;">
<span style="font-family: inherit;">Note: Alibaba pictures was actually written down by <span style="background-color: white; color: #666666;">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. </span></span></div>
<div style="text-align: left;">
<span style="font-family: inherit;"><span style="background-color: white; color: #666666;"><br /></span></span></div>
<div style="text-align: left;">
<span style="font-family: inherit;"><span style="background-color: white; color: #666666;">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".</span></span><br />
<span style="font-family: inherit;"><span style="background-color: white; color: #666666;"><br /></span></span>
<span style="font-family: inherit;"><span style="background-color: white; color: red;"><b><u>Appropriate Earnings Call Question: </u></b> "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?"</span></span></div>
<div style="text-align: left;">
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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.<br />
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<b style="color: red;"><u>Appropriate Earnings Call Question: </u></b><span style="background-color: white; color: red;"> "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?"</span><br />
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<br />
<span style="font-family: inherit;">4.) <i>Property and Equipment </i>continues to increase with no explanation. <span style="background-color: white; color: #666666;">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? </span></span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhysgCacvM0EUcOQwm2Yq_E9LsKpejkbRZynpHwNkhvjo2GYtW7xnQh4snT9GLHVsqr44mcPhnTEO8Cm5ho_JX3zVTSElZ2mrdwO1csnqsoUZ0X-rJkYRguUwwXmyG0me9MavGVc3x8l7Y/s1600/Burj_K_4x_5-15-19.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="318" data-original-width="1019" height="198" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhysgCacvM0EUcOQwm2Yq_E9LsKpejkbRZynpHwNkhvjo2GYtW7xnQh4snT9GLHVsqr44mcPhnTEO8Cm5ho_JX3zVTSElZ2mrdwO1csnqsoUZ0X-rJkYRguUwwXmyG0me9MavGVc3x8l7Y/s640/Burj_K_4x_5-15-19.png" width="640" /></a></div>
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....or maybe they bought 800 buildings like their Caymans Corporate Headquarters? (below)....anyway....it would be nice to know...<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhCwZJogZHExInsoU4xxE1kOk5Bwx_GHFQxTvmi4cL1Lbu5dR4_uBtmdQE3vLILe9OZH2pUrrM7G9bxAB0ShjT_mZ9eTckxoUaejQTXQy4Vk2etqVtSFCkKx5qLb7sPdN13yxPf5Bxo0_U/s1600/BABA_HQ_One_Trident_Place.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="418" data-original-width="640" height="261" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhCwZJogZHExInsoU4xxE1kOk5Bwx_GHFQxTvmi4cL1Lbu5dR4_uBtmdQE3vLILe9OZH2pUrrM7G9bxAB0ShjT_mZ9eTckxoUaejQTXQy4Vk2etqVtSFCkKx5qLb7sPdN13yxPf5Bxo0_U/s400/BABA_HQ_One_Trident_Place.png" width="400" /></a></div>
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<b style="color: red;"><u>Appropriate Earnings Call Question: </u></b><span style="background-color: white; color: red;"> "Could you please provide a detailed schedule of the $5 Billion spent on 'property' this year?"</span><br />
<br />
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:<br />
<br />
<span style="color: blue;"><i>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></span><br />
<br />
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. <br />
<br />
<b style="color: red;"><u>Appropriate Earnings Call Question: </u></b><span style="background-color: white; color: red;"> "Could you please provide full audited financial statements for Ant/Alipay?"</span><br />
<br />
6.) Employees - <i><span style="color: blue;">"As of March 31, 2019, we had a total of 101,958 employees, compared to 101,550 as of December 31, 2018."</span></i> (pg 18.) Interestingly, in their 20-F last year they had only 66,421 employees (pg. 121).<br />
<br />
Here's the language: <i style="background-color: white; color: #666666;"><span style="color: blue;"><span style="font-family: inherit;">As of March 31, 2016, 2017 and 2018, we had a total of 36,446, 50,097 and 66,421 full-time employees, respectively.</span></span></i><br />
<i style="background-color: white; color: #666666; font-family: "Trebuchet MS", Trebuchet, Verdana, sans-serif; font-size: 13.2px;"><span style="color: blue;"><br /></span></i>
<span style="background-color: white;"><span style="font-family: inherit;">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. </span></span><br />
<span style="background-color: white;"><span style="font-family: inherit;"><br /></span></span>
<span style="background-color: white;"><span style="font-family: inherit;"><b style="color: red;"><u>Appropriate Earnings Call Question: </u></b><span style="color: red;"> "Could you please provide a detailed head count by business unit/location?"</span></span></span><br />
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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.<br />
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<b style="color: red;"><u>Appropriate Earnings Call Question: </u></b><span style="background-color: white; color: red;"> "Could you please provide and discuss a summary of the settlement, agreements, concessions and terms?" </span><br />
<br />
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 <i><u>combined</u></i>, 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.<br />
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<b style="color: red;"><u>Appropriate Earnings Call Question: </u></b><span style="background-color: white;"><span style="color: red;"> "Could you please provide a schedule of GMV by NBS category? You report these figures to the NBS on a monthly basis, correct?"</span></span><br />
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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.<br />
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<b style="color: red;"><u>Appropriate Earnings Call Question: </u></b><span style="background-color: white; color: red;"> "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?" </span><br />
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<b><u><span style="font-size: large;">Going Forward....</span></u></b><br />
<br />
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.<br />
<br />
<span style="font-family: inherit;">Something I mentioned in my prior post "<b><i><a href="https://deep-throat-ipo.blogspot.com/2019/05/our-inevitable-monetary-journey.html"><span style="color: blue;">Our Inevitable Monetary Journey</span></a></i></b>" comes to mind again. I've been thinking about my Dad a lot lately. Don't know why. M<span style="background-color: white;">y late father, a tough-old-crotchety lawyer once told me that, and I'm paraphrasing here:</span></span><br />
<span style="font-family: inherit;"><br style="background-color: white;" /></span><span style="font-family: inherit;"><i><span style="background-color: white; color: #45818e;">"Sometimes my clients get involved in things where it could look like they are criminals.... </span></i></span><br />
<span style="font-family: inherit;"><i><span style="background-color: white; color: #45818e;">...alternatively, it could be that they were just really incompetent and stupid. </span></i></span><br />
<span style="color: #45818e;"><span style="font-family: inherit;"><i><span style="background-color: white;"><br /></span></i></span>
<span style="font-family: inherit;"><i><span style="background-color: white;">It's my job to convince a jury that they were just really incompetent and stupid."</span> </i></span></span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">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'. </span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">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. </span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">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 </span><span style="font-family: inherit;">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.</span><br />
<span style="font-family: inherit;"><br /></span>
You and your employers are indeed responsible and culpable:<br />
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Alex Yao – J.P. Morgan<br />
Grace Chen – Morgan Stanley<br />
Piyush Mubayi – Goldman Sachs<br />
Eddie Leung – Bank of America Merrill Lynch<br />
Gregory Zhao – Barclays<br />
Alicia Yap – Citigroup<br />
Binnie Wong – HSBC<br />
Zachary Schwartzman – RBC Capital Markets<br />
Han Joon Kim – Deutsche Bank<br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Also, I forgot to ask, have you met my good friend <a href="https://www.nytimes.com/2016/12/12/business/dealbook/rico-charge-in-pharmaceutical-case-may-signal-tougher-tactics.html"><span style="color: blue;"><b>RICO</b></span></a>? He's fair, honest and bipartisan, but he can get a little cranky, so you might want to be careful around him. </span><br />
<span style="font-family: inherit;"><br /></span><span style="font-family: inherit;">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.</span> <span style="font-family: inherit;"><br /></span><br />
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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. <div>
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Best of luck to you wherever your life takes you....<span style="background-color: white; color: #333333; font-family: Arial, Helvetica, sans-serif; font-size: 14px;"><br /></span>
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Deep Throathttp://www.blogger.com/profile/02712515268051858186noreply@blogger.com0tag:blogger.com,1999:blog-7478408299955066555.post-64288155864610250152019-05-07T21:56:00.000-04:002019-05-09T12:55:57.368-04:00Our Inevitable Monetary Journey....<div dir="ltr" style="text-align: left;" trbidi="on">
I've received much feedback from my readers on my last post... and for that, I'm grateful.<br />
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Thank you.<br />
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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.<br />
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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:<br />
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We're going to be conversing primarily in bullet points and charts today.<br />
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<span style="letter-spacing: 0.27px; white-space: pre-wrap;"><span style="color: blue; font-family: inherit;"><span style="background-color: white;"><i>It would help if you were more straightforward in describing a cause & effect scenario. i.e.
</i></span></span></span><br />
<span style="letter-spacing: 0.27px; white-space: pre-wrap;"><span style="color: blue; font-family: inherit;"><i><span style="background-color: white;">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</span><span style="background-color: white; font-family: inherit;"> </span></i></span></span><span style="background-color: white; white-space: pre-wrap;"><i><span style="color: blue; font-family: inherit;">silent, relative collapse of all Western currencies with the RMB achieving "real" parity".</span></i></span><br />
<span style="background-color: white; white-space: pre-wrap;"><span style="color: blue; font-family: inherit;"><i>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.</i></span></span><br />
<span style="background-color: white; white-space: pre-wrap;"><span style="color: blue; font-family: inherit;"><i>7.) If Capital Controls are ineffective the CPC will have replaced the USD with the RMB as an alternate reserve currency. </i></span></span><br />
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<span style="color: red;"><b>So here are the Bullet Points for Today's Post:</b></span><br />
<span style="color: red;"><b><br /></b></span>
<span style="color: red;"><b>1.) My forecast of the USD Money Supply and US Macro-Asset Categories over the next five years using <i>Great Financial Crisis </i>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. </b></span><br />
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<b><span style="color: red;">2.) China (and the World) is running out of "available" dollars (and why I think that), as well as two supporting, simple calculations.</span></b><br />
<b><span style="color: red;"><br /></span></b>
<b><span style="color: red;">3.) Two Anonymous Case Studies (and a not-so-anonymous case study - Yangtze River & Interactive Brokers)</span></b><br />
<b><span style="color: red;"><br /></span></b>
<b><span style="color: red;">4.) The FED's May 1st Press Conference and why most of what we've heard is problematic.</span></b><br />
<b><span style="color: red;"><br /></span></b>
<b><span style="color: red;">5.) Our Financial<i> Pearl Harbor.....</i> I hope we're sending out "Scout Planes" behind the scenes rather than continue along as "data dependent".</span></b><br />
<b><span style="color: red;"><br /></span></b>
<b><span style="color: red;">All of this is related....</span></b><br />
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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. <br />
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Keep in mind that some variation of this is inevitable now. Here are the numbers.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgIj7ZlZxRYllVcai0YbVdgvkqp25xVxe2TNDuZOYj0R4PTqd70LXqnm5CxNCu1pU2xz0ibuB_6NNZOiAIvbUZKvnhRrEhnwxQHSNwT7MZB2cz1lHgbBJzo8D4vpAjJvSh13nStIrpceTs/s1600/Pro-Forma-US-Assets_Today-thru-2023.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="792" data-original-width="1076" height="468" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgIj7ZlZxRYllVcai0YbVdgvkqp25xVxe2TNDuZOYj0R4PTqd70LXqnm5CxNCu1pU2xz0ibuB_6NNZOiAIvbUZKvnhRrEhnwxQHSNwT7MZB2cz1lHgbBJzo8D4vpAjJvSh13nStIrpceTs/s640/Pro-Forma-US-Assets_Today-thru-2023.png" width="640" /></a></div>
Well, that doesn't look too bad....it's just a spreadsheet. Right?.....<br />
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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.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjRrZt_sCBWCe7WWrmBFe4HQR5jElyJr2ONE1Uhh13TdsWolJR_Rz2UlQLkgoqpCxK29dZ8ClUuQ1T7pWrVfRyYElgiMaYZhPUb0lvHTC0Xhwu5A6ddYfeeJ1sBY5Vb0WSr4amRbO_ulzc/s1600/Pro-Forma-US-Financial_Assets_Today-thru-2023_graph.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1288" data-original-width="1518" height="542" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjRrZt_sCBWCe7WWrmBFe4HQR5jElyJr2ONE1Uhh13TdsWolJR_Rz2UlQLkgoqpCxK29dZ8ClUuQ1T7pWrVfRyYElgiMaYZhPUb0lvHTC0Xhwu5A6ddYfeeJ1sBY5Vb0WSr4amRbO_ulzc/s640/Pro-Forma-US-Financial_Assets_Today-thru-2023_graph.png" width="640" /></a></div>
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Now let's take a look at the % change of the composition during the projected period.....which closely mirrors what happened during the <i>Great Financial Crisis</i> in direction, but is, of course, much greater in magnitude.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhZAdsbOi4kMzhg3YJBJ17-1NgESNh7ZI46mj8nHwJgRO_Gl9QLyCqVKbX_q6FfrWaAu-cc5aOvK8vBLic_2z8J6g_2zDhnQjoWRC_Uf6W12-8mPT9SQvGP8yophLg0dso9q9yFOn8B8jQ/s1600/Pro-Forma-US-Assets_Today-thru-2023_percent_change.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1300" data-original-width="1216" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhZAdsbOi4kMzhg3YJBJ17-1NgESNh7ZI46mj8nHwJgRO_Gl9QLyCqVKbX_q6FfrWaAu-cc5aOvK8vBLic_2z8J6g_2zDhnQjoWRC_Uf6W12-8mPT9SQvGP8yophLg0dso9q9yFOn8B8jQ/s640/Pro-Forma-US-Assets_Today-thru-2023_percent_change.png" width="598" /></a></div>
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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 <i>Great Financial Crisis,</i> if you are running a "non-systemically important" business...unfortunately, you are on your own. Good luck. <i> </i>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. <br />
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<b><u><span style="font-size: large;">The Dollar vs. The RMB</span></u></b><br />
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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:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjdLJ1vOcxS7xSYOlvQWbK1UMtxTzVCpEnByWWiWa75Aoo3-_5sRmAwFbcwZCgbYCTYWmstcRTIXbdTVg9ovd4nH1XrrlZLGP0rp1CtgkLmn5vU376rwVO8BurXbgav0KhWu4bU-C-AYj0/s1600/Pro-Forma-US-M3vChina-M3_Today-thru-2023.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1198" data-original-width="1580" height="484" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjdLJ1vOcxS7xSYOlvQWbK1UMtxTzVCpEnByWWiWa75Aoo3-_5sRmAwFbcwZCgbYCTYWmstcRTIXbdTVg9ovd4nH1XrrlZLGP0rp1CtgkLmn5vU376rwVO8BurXbgav0KhWu4bU-C-AYj0/s640/Pro-Forma-US-M3vChina-M3_Today-thru-2023.png" width="640" /></a></div>
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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. <br />
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Here are the numbers:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhKeT5Ddal8Zno4nEEYofgfiffJteoMDssQJMQQNhhauNboilZpI-7Gvub_qvcPdRulPlYGAcYxq5j71StU42lg2w2ThoFU1GU73lyZVgavZ9EvyxoFLvNCqar9QDoOxvczn9tFBYe_ABw/s1600/Pro-Forma-US-M3vChina-M3_Today-thru-2023_TABLE.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="419" data-original-width="1351" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhKeT5Ddal8Zno4nEEYofgfiffJteoMDssQJMQQNhhauNboilZpI-7Gvub_qvcPdRulPlYGAcYxq5j71StU42lg2w2ThoFU1GU73lyZVgavZ9EvyxoFLvNCqar9QDoOxvczn9tFBYe_ABw/s1600/Pro-Forma-US-M3vChina-M3_Today-thru-2023_TABLE.png" /></a></div>
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<a href="https://pbs.twimg.com/media/DvIf7-NV4AAN6j7.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="320" src="https://pbs.twimg.com/media/DvIf7-NV4AAN6j7.jpg" width="304" /></a>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?"<br />
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We could be getting quarterly "<i>Mnuchin-grams</i>" 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.<br />
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Like World Wars, at some point we'll have to start numbering these financial crises. As I recall, we referred to WWI as the "<i>Great War</i>" before we had the second one....and realized that we'd have to start numbering them....so the upcoming "<i>Great Financial Crisis II"</i> seems fitting.<br />
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Taking a walk down memory lane, here's one of my favorite video clips from the relatively recent "<i>Great Financial Crisis I"</i> describing the above phenomenon better than any bullet-point narrative or chart could:<br />
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Grayson: "Ben....where did the half trillion dollars go?..."<br />
Bernanke: "I don't know...."<br />
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<iframe allowfullscreen="" class="YOUTUBE-iframe-video" data-thumbnail-src="https://i.ytimg.com/vi/n0NYBTkE1yQ/0.jpg" frameborder="0" height="266" src="https://www.youtube.com/embed/n0NYBTkE1yQ?feature=player_embedded" width="320"></iframe></div>
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<b><u><span style="font-size: large;">China's Running out of Dollars!</span></u></b><br />
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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.<br />
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These China watchers and Investors are brilliant, smart, talented, capable people....and they are absolutely right.<br />
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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.<br />
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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.<br />
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"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. <br />
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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.<br />
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They are starving the world of Dollars, Euros and Yen.<br />
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To support the above statements I'd suggest two very simple calculations.<br />
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<b><u>Calculation #1</u></b><br />
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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)<br />
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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.<br />
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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$17.4 Trillion. Quite a tidy sum indeed.<br />
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We know with certainty that this Western FOREX hasn't been exchanged for overseas RMB. If it had, there would be large RMB deposits in Western Financial Institutions or offshore RMB Assets on the Western Central Bank balance sheets. There aren't. The CPC still "owns" this Western money somewhere. Moreover, the explosive growth in Anonymous, Off-Shore, Tax Haven Assets (Caymans, Luxembourg, Netherlands, Hong Kong, etc.), home for this CPC controlled Western money, has increased at a corresponding rate as discussed throughout previous blog posts.<br />
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Yet the PBOC only reports US$ 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...<br />
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"Where's the money?" </div>
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<a href="https://atlas.media.mit.edu/en/visualize/line/hs92/show/chn/all/all/1995.2017/">https://atlas.media.mit.edu/en/visualize/line/hs92/show/chn/all/all/1995.2017/</a> <br />
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<img src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJlt0xAEFMpKaNqL_J-LUYMctZs9j8bzB78xOloL0aNuaBt6hoC44OE8e-uL2ubAuT4ieqrfS4zxChB_3cAXOI-ZCMCfIOCkUeQfHh6tjjNananYr7Bb-HqVnDap-urKPYJOkuXzNIZR8/s640/OEC_China_World_Trade_Surplus.png" /><br />
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<b><u>Calculation #2</u></b><br />
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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)<br />
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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$100 Trillion today. <br />
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Moreover, all of these Swaps/Forwards/Commitments are OBS (Off-Balance Sheet) and require no disclosure other than in footnote form on entity financial statements. The FED has no/little idea what the underlying collateral of these Swaps/Forwards/Commitments might be. Again, all of these contracts will have to be offset/closed/rolled at some point, or the collateral will need to be cashed in to cover the default. Reminds me of our old friend the <i>Credit Default Swap. </i> What could possibly go wrong?<br />
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<a href="https://www.bis.org/statistics/d5_1.pdf">https://www.bis.org/statistics/d5_1.pdf</a><br />
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I don't know how any economist or Central Banker can look at these macro-metrics (and growth rate) in this relatively flat global economic environment and remain unconcerned with what the underlying driver of this acceleration might be.<br />
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My simple question, similar to Alan Grayson's line of questioning back in the good old days of the <i>Great Financial Crisis I</i> is:<br />
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Why is this happening? What is all of this financing being used for?<br />
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"Where's all the F%$@ing Money Lebowski?"<br />
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<iframe allowfullscreen="" class="YOUTUBE-iframe-video" data-thumbnail-src="https://i.ytimg.com/vi/9X_Ne3S5FAU/0.jpg" frameborder="0" height="266" src="https://www.youtube.com/embed/9X_Ne3S5FAU?feature=player_embedded" width="320"></iframe></div>
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<a href="https://youtu.be/9X_Ne3S5FAU">https://youtu.be/9X_Ne3S5FAU </a></div>
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My fear is that the answer is similar to Ben's "I'don't know"...<br />
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...but we're about to find out.<br />
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<b><span style="font-size: large;"><u>Two Anonymous Case Studies (CIC & FATRAT) </u></span></b><br />
<b><span style="font-size: large;"><u>....and a Not-So-Anonymous One - Yangtze River (YRIV:NASDAQ)</u></span></b><br />
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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.<br />
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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.<br />
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<b><u>Case Study #1 "China Inc Capital"</u></b><br />
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I was reviewing some filings and stumbled upon this particular money manager. Which I'll refer to as: <i>China Inc Capital </i>(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)<br />
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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:<br />
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Here's what we know:<br />
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1.) In 2018 CIC owned 71 securities that were required to be listed on their 13F totaling $28 Billion.<br />
2.) Half (52.5%) of that value was concentrated in the above 10 tech stocks.<br />
3.) Of the total AUM of $35.4 Billion they owned "Non-13F" assets of roughly $7.4 Billion.<br />
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.<br />
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.<br />
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In any case, even though <i>China Capital Inc </i>is a private money manager<i>,</i> so we can't tell how well they are doing,<i> </i>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 <i>CIC, presumably </i>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.<br />
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<b><u>Case Study #2 "</u></b><b><u>Financial Alternative Trust & </u></b><b><u>Real Asset Trust" (FATRAT)</u></b><br />
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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<i> GFC I</i>), relentlessly-fearless and even more confident than ever in their own abilities to raise cash.<br />
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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 <i>Great Financial Crisis I</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<span style="color: blue;"> <span style="font-family: inherit;"><i>"<span style="text-align: justify;">the world’s largest institutional investors, sovereign wealth funds and individuals".</span></i></span></span><br />
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<b><u>Case Study #3 Yangtze River Port & Logistics, Ltd. (NASDAQ:YRIV)</u></b><br />
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You can read all about this mess <a href="https://www.bloomberg.com/news/articles/2019-04-29/china-firm-s-plunge-is-said-to-cost-interactive-brokers-millions"><span style="color: blue;">now that lawsuits have been filed</span></a>, but suffice it to say that a few folks saw this one coming from a mile away. I believe Anne Stevenson-Yang <a href="https://twitter.com/doumenzi"><span style="color: blue;">@doumenzi</span></a> 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.)<br />
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<div style="font-family: "Times New Roman", Times, serif; font-size: 10pt; font-stretch: normal; font-variant-east-asian: normal; font-variant-numeric: normal; line-height: normal; margin-bottom: 0pt; margin-top: 0pt;">
<span style="color: blue; font-size: 10pt;"><b><u>Overview</u></b></span></div>
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<span style="color: blue; font-size: 10pt;">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.</span></div>
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<span style="color: blue; font-size: 10pt;">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.</span></div>
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<span style="color: blue; font-size: 10pt;">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.</span></div>
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<span style="font-family: inherit;">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 <span style="background-color: white;">U.S. headquarters at 41 John St., Suite 2A., </span><span style="background-color: white;">a two-bedroom Manhattan apartment. Yangtze River</span> 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).</span><br />
<span style="font-family: inherit;"><br /></span>
<a href="https://www.sec.gov/Archives/edgar/data/1487843/000121390019006523/f424b5041619_yangtzeriver.htm">https://www.sec.gov/Archives/edgar/data/1487843/000121390019006523/f424b5041619_yangtzeriver.htm</a><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">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.</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">The auditors, according to the Prospectus Update, are <span style="text-align: justify; text-indent: 48px;">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?</span></span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">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. </span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">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. </span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLVuS_wlwlV7MiOEoQewEx5wUVtdvpLr-YC7-iaffLjU93MOR2qFAY_jMjmv4Xgch-fIQsobY_s7MLbRrT45Fag_xZo9LZybBLsjKrR8KC4-WfzYKKvdqF-o_k_9EI1SeN9eOAt4xQQS8/s1600/YRIV_Chart.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="668" data-original-width="933" height="458" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjLVuS_wlwlV7MiOEoQewEx5wUVtdvpLr-YC7-iaffLjU93MOR2qFAY_jMjmv4Xgch-fIQsobY_s7MLbRrT45Fag_xZo9LZybBLsjKrR8KC4-WfzYKKvdqF-o_k_9EI1SeN9eOAt4xQQS8/s640/YRIV_Chart.png" width="640" /></a></div>
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<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">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.</span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhh_gS1HN-ORS7AnIWikfaL8dSD4lvZVkzKzoesYNy-MmbWE-07omrqsKB9EMuvwYm8D0SvMX8UlJcu3MrY5VbQiMTTVPGRQZTK7qNJxh1bMUeq3zZSiyrWaB7TJskemGqTaAr8mbK4fog/s1600/Interactive_Brokers_Chart.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="654" data-original-width="922" height="451" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhh_gS1HN-ORS7AnIWikfaL8dSD4lvZVkzKzoesYNy-MmbWE-07omrqsKB9EMuvwYm8D0SvMX8UlJcu3MrY5VbQiMTTVPGRQZTK7qNJxh1bMUeq3zZSiyrWaB7TJskemGqTaAr8mbK4fog/s640/Interactive_Brokers_Chart.png" width="640" /></a></div>
<span style="font-family: inherit;"> </span><br />
<span style="font-family: inherit;">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? </span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">You just can't make this stuff up.</span><br />
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<b><u>The Common Thread Connecting CIC, FATRAT, YRIV & IBKR</u></b><br />
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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?<br />
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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<span style="font-family: inherit;"> <span style="background-color: white;">Xinjiang-like re-education camps. Nothing happens in China without explicit party approval. Party loyalty is indeed a matter of survival. </span></span><br />
<span style="font-family: inherit;"><span style="background-color: white;"><br /></span></span>
<span style="font-family: inherit;"><span style="background-color: white;">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. </span></span><br />
<span style="font-family: inherit;"><span style="background-color: white;"><br /></span></span>
<span style="font-family: inherit;"><span style="background-color: white;">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. </span></span><span style="background-color: white;">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.</span><span style="background-color: white; font-family: inherit;"> 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". </span><br />
<span style="font-family: inherit;"><span style="background-color: white;"><br /></span></span>
<span style="font-family: inherit;"><span style="background-color: white;">We Americans will have lost a war we didn't even know we were in. The CPC will have won without firing a shot.</span></span><br />
<span style="font-family: inherit;"><span style="background-color: white;"><br /></span></span>
<span style="font-family: inherit;"><span style="background-color: white;">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. </span></span><br />
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So, getting back to our three case studies......<br />
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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, <i>"<span style="text-align: justify;">the world’s largest institutional investors, sovereign wealth funds and individuals"</span></i> 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.<br />
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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.<br />
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My late father, a tough-old-crotchety lawyer once told me that, and I'm paraphrasing here:<br />
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"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."<br />
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....and the destruction the US Dollar as the world's reserve currency will commence. <br />
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<b><u><span style="font-size: large;">How Can This Happen?</span></u></b><br />
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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.<br />
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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.<br />
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FED Audited Financial Statements - 2018<br />
<a href="https://www.federalreserve.gov/aboutthefed/files/combinedfinstmt2018.pdf">https://www.federalreserve.gov/aboutthefed/files/combinedfinstmt2018.pdf</a><br />
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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.<br />
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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".<br />
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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.<br />
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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!"<br />
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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?<br />
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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?<br />
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<b><u>Wages</u></b><br />
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Let's talk about wages. Since <i>GFC I</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 <i>GFC I</i>.<br />
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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) <br />
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<img src="https://pbs.twimg.com/media/D5qYWbfX4Aoknn5.png" /><br />
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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.<br />
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<img src="https://pbs.twimg.com/media/D5qYaeOWAAY8UPx.png" /><br />
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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)<br />
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<img src="https://pbs.twimg.com/media/D5pPkNGWsAAZqCm.png" /><br />
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We see that this ratio, since <i>GFC I</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.<br />
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<b><u>GDP</u></b><br />
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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:<br />
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<span style="color: blue;"><strong style="background-color: white; box-sizing: border-box; font-family: Lato, sans-serif; font-size: 16px; font-variant-ligatures: none;">Real gross domestic product</strong><span style="background-color: white; font-family: "lato" , sans-serif; font-size: 16px;"> (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.</span> </span><br />
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<img height="271" src="https://www.bea.gov/system/files/inline-images/gdp1q19_adv.png" width="640" /><br />
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<a href="https://www.bea.gov/index.php/news/2019/gross-domestic-product-1st-quarter-2019-advance-estimate"><span style="color: blue;"><b>https://www.bea.gov/index.php/news/2019/gross-domestic-product-1st-quarter-2019-advance-estimate</b></span></a><br />
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Now let's parse some of the summary language using our patented <i>Dick Fuld Banker-Speak Translator (BST). </i>The parts in <span style="color: blue;"><b>"Blue"</b></span> are clipped from the report.<br />
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<div style="background-color: white; box-sizing: border-box; font-family: Lato, sans-serif; font-size: 16px; font-variant-ligatures: none; margin-bottom: 11px;">
<span style="color: blue;">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.</span></div>
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<u style="font-family: inherit; font-weight: bold;"><i>BST Translation:</i></u><span style="font-family: inherit;"> 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. </span></div>
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<strong style="box-sizing: border-box; color: blue;">Current dollar GDP</strong><span style="color: blue;"> </span><span style="color: blue;">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).</span></div>
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<u style="font-family: inherit; font-weight: bold;"><i>BST Translation:</i></u><span style="font-family: inherit;"> 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. </span></div>
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<span style="color: blue;">The</span><span style="color: blue;"> </span><strong style="box-sizing: border-box; color: blue;">price index for gross domestic purchases</strong><span style="color: blue;"> </span><span style="color: blue;">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.</span></div>
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<u style="font-family: inherit; font-weight: bold;"><i>BST Translation:</i></u><span style="font-family: inherit;"> 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".</span></div>
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<strong style="box-sizing: border-box; color: blue;">Current-dollar personal income</strong><span style="color: blue;"> </span><span style="color: blue;">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.</span></div>
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<u style="font-family: inherit; font-weight: bold;"><i>BST Translation:</i></u><span style="font-family: inherit;"> 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. </span>I wouldn't want to take a big/passive/investment income pay-cut if I were in their shoes. <span style="font-family: inherit;"> </span></div>
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<strong style="box-sizing: border-box; color: blue;">Disposable personal income</strong><span style="color: blue;"> </span><span style="color: blue;">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.</span><span style="color: blue;"> </span><strong style="box-sizing: border-box; color: blue;">Real disposable personal income</strong><span style="color: blue;"> </span><span style="color: blue;">increased 2.4 percent, compared with an increase of 4.3 percent.</span></div>
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<u style="font-family: inherit; font-weight: bold;"><i>BST Translation:</i></u><span style="font-family: inherit;"><i> </i>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!</span></div>
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<strong style="box-sizing: border-box; color: blue;">Personal saving</strong><span style="color: blue;"> </span><span style="color: blue;">was $1.11 trillion in the first quarter, compared with $1.07 trillion in the fourth quarter. The</span><span style="color: blue;"> </span><strong style="box-sizing: border-box; color: blue;">personal saving rate</strong><span style="color: blue;"> </span><span style="color: blue;">-- 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.</span></div>
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<u style="font-family: inherit; font-weight: bold;"><i>BST Translation:</i></u><span style="font-family: inherit;"> 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) </span></div>
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<span style="font-family: inherit;"><br /></span></div>
<span style="font-family: inherit;">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. </span></div>
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<b><u><span style="font-size: large;">The Sneak Attack</span></u></b><br />
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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.<br />
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<a href="https://youtu.be/Sv1niwxQgoY">https://youtu.be/Sv1niwxQgoY</a></div>
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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.<br />
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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.<br />
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So much for being "data-dependent".<br />
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<b><u><span style="font-family: inherit; font-size: large;">Additional Reading/Viewing</span></u></b><br />
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FED Press Conference May 1st, 2019<br />
<a href="https://www.youtube.com/watch?v=nEVZJQob_5w">https://www.youtube.com/watch?v=nEVZJQob_5w</a><br />
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FED Fin Statements<br />
<a href="https://www.federalreserve.gov/aboutthefed/files/combinedfinstmt2018.pdf">https://www.federalreserve.gov/aboutthefed/files/combinedfinstmt2018.pdf</a><br />
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Kyle Bass & Keith McCullough<br />
<a href="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">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</a><br />
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<b><u>Below: CPC Propaganda Video</u></b> - 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.<br />
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<br /><br />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!.<img height="480" src="https://pbs.twimg.com/media/D47O0gjUUAA0XRz.jpg" width="640" /><br />
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Deep Throathttp://www.blogger.com/profile/02712515268051858186noreply@blogger.com4tag:blogger.com,1999:blog-7478408299955066555.post-32567630145079192932019-03-23T21:06:00.001-04:002019-03-24T20:55:39.704-04:00A Modest Proposal....<div dir="ltr" style="text-align: left;" trbidi="on">
<b>TO: Don</b> <a href="https://twitter.com/realDonaldTrump"><span style="color: blue;">@realDonaldTrump</span></a> , <b>Mike</b> <a href="https://twitter.com/VP"><span style="color: blue;">@VP</span></a>, <b>Mitch</b> <a href="https://twitter.com/McConnellPress"><span style="color: blue;">@McConnellPress</span></a>, <b>Kevin </b><a href="https://twitter.com/GOPLeader"><span style="color: blue;">@GOPLeader</span></a>, <b>Chuck</b> <a href="https://twitter.com/SenSchumer">@SenSchumer</a>, <b>Nancy</b> <a href="https://twitter.com/SpeakerPelosi"><span style="color: blue;">@SpeakerPelosi</span></a>,<br />
<b>Steny</b> <a href="https://twitter.com/LeaderHoyer"><span style="color: blue;">@LeaderHoyer</span></a>, <b>Lindsey</b> <a href="https://twitter.com/LindseyGrahamSC"><span style="color: blue;">@LindseyGrahamSC</span></a>, <b>Alexndria</b> <a href="https://twitter.com/AOC"><span style="color: blue;">@AOC</span></a>,<br />
<b>Sherrod</b> <a href="https://twitter.com/SenSherrodBrown"><span style="color: blue;">@SenSherrodBrown</span></a> , <b>Bernie</b> <a href="https://twitter.com/SenSanders"><span style="color: blue;">@SenSanders</span></a>,<b> Rob</b> <span style="color: blue;"><a href="https://twitter.com/senrobportman"><span style="color: blue;">@senrobportman</span></a>, </span><br />
<b>Steve</b> <a href="https://twitter.com/stevenmnuchin1"><span style="color: blue;">@stevenmnuchin1</span></a>, <b>Jay </b><span style="color: blue;"><a href="https://twitter.com/federalreserve"><span style="color: blue;">@federalreserv</span>e</a> </span><br />
<span style="color: blue;"><br /></span>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.<br />
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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.<br />
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We have work to do. We have to save the Western Financial System.<br />
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<b><span style="color: red;">As always, for those of you following my work, you'll know that the really important concepts are in RED below.</span></b> Feel free to skim past my humorous, anecdotal banter if you are pressed for time.<br />
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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.<br />
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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.<br />
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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.)<br />
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For the love of God.....Please focus....<br />
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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..."<br />
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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.<br />
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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.<br />
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<b><span style="font-size: large;"><u>The Threat to Western Civilization</u></span></b><br />
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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 <u><span style="color: blue;"><b>(Below)</b></span></u> which you might find informative, but if you already believe that the <b><span style="color: red;">following thesis<span style="color: red;"> (in RED)</span></span> </b>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.<br />
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<b><a href="https://deep-throat-ipo.blogspot.com/2019/02/dalios-big-debt-crisisthe-fsb-report.html"><span style="color: blue;">Dalio's Big Debt Crisis....the FSB Report and Financial War Games.... </span></a></b><br />
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<b><a href="https://deep-throat-ipo.blogspot.com/2019/01/keeping-it-simple-short-and-to-pointand.html"><span style="color: blue;">Keeping is Simple....China has $50.1 Trillion of Brand New Financial Assets</span></a></b><br />
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<b><a href="https://deep-throat-ipo.blogspot.com/2018/12/twas-night-before-christmas.html"><span style="color: blue;">Twas the Night Before Christmas....</span></a></b><br />
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<b><a href="https://deep-throat-ipo.blogspot.com/2018/10/when-will-xi-click-sell-button.html"><span style="color: blue;">When will Xi Click the "Sell Button"</span></a></b><br />
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I'll also cite two excellent and extremely wonkish BIS working papers, written, of course, using generally unintelligible economic jargon <span style="color: blue;"><u><b>(Below)</b></u></span> which also reference what we're discussing today.<br />
<span style="color: blue;"><br /></span>
<b><a href="https://www.bis.org/publ/work684.pdf"><span style="color: blue;">Triffin: dilemma or myth?</span></a></b><br />
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<b><a href="https://www.bis.org/publ/qtrpdf/r_qt1709e.pdf"><span style="color: blue;">FX swaps and forwards: missing global debt?</span></a></b><br />
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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.<br />
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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 <i>60 Minutes</i> 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.<br />
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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. <br />
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Jay Powell - 60 Minutes - Full Transcript & Inverveiw - All is well.....<br />
<a href="https://www.cbsnews.com/news/jerome-powell-federal-reserve-chairman-60-minutes-interview-2019-03-10/"><span style="color: blue;">https://www.cbsnews.com/news/jerome-powell-federal-reserve-chairman-60-minutes-interview-2019-03-10/</span></a><br />
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In normal, regular, every-day, non-economist lingo, as far as you folks are all concerned, here's where we are today:<br />
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<span style="color: red;"><b><u>In a nutshell, here are our two choices:</u></b></span><br />
<span style="color: red;"><br /></span><span style="color: red;">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.... </span><br />
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<span style="color: red;"><br /></span></div>
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<span style="color: red;">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.</span><br />
<span style="color: red;"><br /></span>
<span style="color: red;">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! </span><br />
<span style="color: red;"><br /></span>
<span style="color: red;">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. </span><br />
<span style="color: red;"><br /></span>
<span style="color: red;">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. </span><br />
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<b><u><span style="color: red;">GIVEN: </span></u></b><br />
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<span style="color: red;">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. </span><br />
<span style="color: red;">2.) The Chinese Communist Party (CCP) currently controls <b><i><u>at least US$25 Trillion</u></i></b> of Western Financial Assets through anonymous Off-Shore Tax Haven entities. </span><br />
<span style="color: red;">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.)</span><br />
<span style="color: red;"><br /></span>
<span style="color: red;"><b><u>THESIS: </u></b> </span><br />
<span style="color: red;"><br /></span>
<span style="color: red;">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. </span><br />
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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 <b><i>Behavioral Economics</i></b>. 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. <br />
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Following Rich's lead, we'll need to incentivize, or <i>nudge</i> "good" financial behavior and penalize "bad" financial behavior.<br />
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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.<br />
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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.<br />
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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." <br />
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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.<br />
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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.<br />
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As always, I welcome your input.<br />
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<b><u><span style="font-size: large;">The Goal</span></u></b><br />
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The obvious concern (as described in my <a href="https://deep-throat-ipo.blogspot.com/2019/02/dalios-big-debt-crisisthe-fsb-report.html" style="color: blue; font-weight: bold;">Dalio's Big Debt Crisis....the FSB Report and Financial War Games.... </a>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.<br />
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<b><u><span style="font-size: large;">The Manafort Indictment - An Illustration of the Problem</span></u></b><br />
<b><u><br /></u></b>The <a href="https://www.politico.com/f/?id=0000015f-6d73-d751-af7f-7f735cc70000"><span style="color: blue;"><b>Manafort Indictment</b></span></a> 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.<br />
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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:<br />
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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.<br />
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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.<br />
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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.<br />
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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.<br />
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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".<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgefBHByFa10rtryM6okQsZ2vDS-Xkc6rgz6O3OR_-HlLok3J_8JrPBjnz_ilzwUeCWaWQZWv8r0o-2KDU_aKRyYKUgSe-vA8bzj8OMFqPp74UJYc3WxfilS0CqA8R1nCEZdtU7iiv64eQ/s1600/Mueller_Investigation_Costs.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1397" data-original-width="619" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgefBHByFa10rtryM6okQsZ2vDS-Xkc6rgz6O3OR_-HlLok3J_8JrPBjnz_ilzwUeCWaWQZWv8r0o-2KDU_aKRyYKUgSe-vA8bzj8OMFqPp74UJYc3WxfilS0CqA8R1nCEZdtU7iiv64eQ/s1600/Mueller_Investigation_Costs.png" /></a><br />
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<b><a href="https://www.usatoday.com/story/news/politics/2019/02/12/mueller-russia-investigation-costs/2736507002/"><span style="color: blue;">https://www.usatoday.com/story/news/politics/2019/02/12/mueller-russia-investigation-costs/2736507002/</span></a></b><br />
<b><br /></b>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.<br />
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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.<br />
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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.<br />
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<b><u><span style="font-size: large;">The Incentive for "Good Behavior" (the Carrot)</span></u></b><br />
<b><u><span style="font-size: large;"><br /></span></u></b>
<b><u><span style="color: red;">Long Term Capital Gains Tax Reduction</span></u> - </b> 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.) <br />
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<b><span style="color: red;">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.</span></b><br />
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<b><span style="color: red;">Currently, the amount of Capital gains taxes paid in relation to both Financial Asset appreciation and GDP are indeed insignificant. </span></b><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgblEW58Yv8ChBKOs-vulKU1Mzo4mqtF05k22clZlrhY3hESVtftfxlQeY7QhHX-iexf6qR_RlBGLvgxLGK2n4kIwO-hKABWCJhVvppGWKqAnGMgmx_3JFsUdnXIjKbAtMkyWmNIm6sxxo/s1600/IRS_TAX_BREAKDOWN_CAP_GAINS.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="933" data-original-width="539" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgblEW58Yv8ChBKOs-vulKU1Mzo4mqtF05k22clZlrhY3hESVtftfxlQeY7QhHX-iexf6qR_RlBGLvgxLGK2n4kIwO-hKABWCJhVvppGWKqAnGMgmx_3JFsUdnXIjKbAtMkyWmNIm6sxxo/s640/IRS_TAX_BREAKDOWN_CAP_GAINS.png" width="368" /></a></div>
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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.<br />
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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! <br />
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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:<br />
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<b><span style="color: red;">US Capital Gains Taxes Collected Since 2008 have averaged US$69 Billion Per Year.</span></b></div>
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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:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEinxDBwHzvbg9ceeDPtfNnOjN0LGMMzS-aIojE-yMv0SeWa9USLVRMBe-IgOKgFxapsNF5qx3p39YMxvISLcYaN3D9pdBeCSVFJZ6LyrNXBXHKGpx8fxllXcGxStjHtEn6rWahGRttZy44/s1600/CAP_GAINS_PERCENTS.png" imageanchor="1" style="clear: left; display: inline !important; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="946" data-original-width="1339" height="451" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEinxDBwHzvbg9ceeDPtfNnOjN0LGMMzS-aIojE-yMv0SeWa9USLVRMBe-IgOKgFxapsNF5qx3p39YMxvISLcYaN3D9pdBeCSVFJZ6LyrNXBXHKGpx8fxllXcGxStjHtEn6rWahGRttZy44/s640/CAP_GAINS_PERCENTS.png" width="640" /></a><br />
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Here's the Treasury Data:<br />
<span style="text-align: -webkit-right;"><a href="https://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/Taxes-Paid-on-Long-Term-Capital-Gains.pdf"><span style="color: blue;">https://www.treasury.gov/resource-center/tax-policy/tax-analysis/Documents/Taxes-Paid-on-Long-Term-Capital-Gains.pdf</span></a></span><br />
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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),<br />
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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.<br />
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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.<br />
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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)<br />
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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.<br />
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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.<br />
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...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.<br />
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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.<br />
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<img height="365" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhkL_SdwiQGMR0qOZOGmg2_IhhzSytp-q4VT8SZX5M7wM9fR-M9N2YIOzE0Hxagu2EIEkPLhB43UsdWYmBy4pioUWkEwl1_4NE8drmgrbFOo9ox6yR46EdIaCIoFtHeIdryhp2NfgXi0l0/s640/Global_Financial_Assets_Table.png" width="640" /><br />
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<b><span style="color: red;">Once the leadership of a nation refuses, or is unable to finance its society......anarchy will eagerly step in to replace it...</span></b><br />
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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.<br />
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<b><span style="color: red;">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.</span></b><br />
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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.<br />
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@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.<br />
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<b><span style="color: red;">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?"</span></b><br />
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<span style="font-size: large;"><b><u>The Enforcement Tools for "Bad Behavior"...(the Sticks)</u></b></span><br />
<span style="font-size: large;"><b><u><br /></u></b></span>
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.)<br />
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<b><span style="color: red;">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.</span></b><br />
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<u style="font-weight: bold;"><span style="color: red;">Increased Tax Return Reporting Requirements on US Entities with Foreign Relationships</span></u><b> -</b> 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. <br />
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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)<br />
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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.<br />
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<u><b><span style="color: red;">Off-Shore Tax Haven Accounts - Ownership and Balance Reporting</span></b></u> - 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.<br />
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For example, when we look at the eight page official "<a href="https://www.cima.ky/upimages/commonfiles/1499794669STATEMENTOFCOOPERATION.pdf"><span style="color: blue;"><b>Statement of Cooperation</b></span></a>" 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.<br />
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<b><u><span style="color: red;"><span style="text-decoration-line: underline;">Off-Shore Balance Excise Tax</span> </span></u></b>- 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.<br />
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<b style="text-decoration-line: underline;"><u><span style="color: red;">Excise Tax on Wire Transfers "Money Out"</span></u></b> - 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.<br />
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<b style="text-decoration-line: underline;"><u><span style="color: red;">Increased Civil and Criminal Penalties</span></u></b> - 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.<br />
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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.<br />
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<u><span style="color: red;"><b style="text-decoration-line: underline;">Properly Fund IRS Enforcement</b> </span></u>- 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. <br />
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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.<br />
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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?<br />
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<b><span style="color: red;">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!</span></b><br />
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Again, all of the above are important, necessary steps to separate and identify legitimate offshore money from illegitimate offshore money.<br />
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<b><u><span style="font-size: large;">Acts of Financial War - (Even Bigger Sticks)</span></u></b><br />
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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. <br />
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<b><u><span style="color: red;">Currency Controls</span></u></b> - 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 <i>modus operandi</i>. We need to replicate a version of these currency controls in America and have them ready to go should the need arise.<br />
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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 <i>non-US Banks</i> 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.<br />
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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. <br />
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In other words, we'll need to provide institutions and bankers the latitude to stop the illegitimate, foreign drivers of the "run".<br />
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<b style="text-decoration-line: underline;"><u><span style="color: red;">Chinese Branch Banks</span></u></b> - 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.<br />
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<b><u><span style="color: red;">Western Banks Operating in China</span></u></b> - 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.<br />
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<b><u><span style="font-size: large;">What We Hope To Accomplish</span></u></b><br />
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<span style="color: red;">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:</span><br />
<span style="color: red;"><br /></span>
<span style="color: red;">1.) Stabilize the Western money supply.</span><br />
<span style="color: red;">2.) Understand the flow of "real" money/assets vs. "fake" CCP money/assets. </span><br />
<span style="color: red;">3.) Provide the FED with On-Shore/Off-Shore "usable" Money flow/domicile data.</span><br />
<span style="color: red;">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)</span><br />
<span style="color: red;">5.) Increase Revenue and deincentivize Off-Shore Tax Havens by increasing the tax cost. (Excise Taxes on Off-Shore balances and transfers "out".)</span><br />
<span style="color: red;">6.) Increase Revenue through Tax Collections/Enforcement on illegal funds.</span><br />
<span style="color: red;">7.) Streamline/automate the tax collection matching process on offshore tax schemes and intentional failure to report (FBAR Violations) through international bank cooperation agreements. </span><br />
<span style="color: red;">8.) Develop an efficient criminal enforcement mechanism for "aiding and abetting" the "Manaforts" of the world. </span><br />
<span style="color: red;">9.) Rebalance the tax base by collecting an appropriate tax on Off-Shore capital appreciation.</span><br />
<span style="color: red;">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. </span><br />
<span style="color: red;">11.) Fully understand and be ready to respond with targeted liquidity when Xi does indeed "press the sell button".</span><br />
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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.<br />
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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.<br />
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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.<br />
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I, for one, am getting way to old to start over without putting up a fight..... breaking up is indeed, really hard to do.....<br />
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<span style="text-align: -webkit-right;">Finally, if we fail, and we're required to</span> begin teaching our children how to say "at your service exalted one" .....在你的服务高举一个 .....in simplified Chinese, <span style="text-align: -webkit-right;">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.....</span><br />
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<span style="text-align: -webkit-right;">I hope you'll think long and hard about that.</span><br />
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<b><u><span style="font-size: x-large;">Additional Reading/Viewing</span></u></b><br />
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Mueller Investigation Costs<br />
<a href="https://www.usatoday.com/story/news/politics/2019/02/12/mueller-russia-investigation-costs/2736507002/">https://www.usatoday.com/story/news/politics/2019/02/12/mueller-russia-investigation-costs/2736507002/</a><br />
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Yi Gang - pledges "No Intervention"....well....he doesn't need to intervene....he has enough off-shore monetary firepower already.<br />
<a href="https://www.bloomberg.com/news/articles/2019-03-10/pboc-s-yi-says-prudent-monetary-policy-is-also-counter-cyclical"><span style="color: blue;">https://www.bloomberg.com/news/articles/2019-03-10/pboc-s-yi-says-prudent-monetary-policy-is-also-counter-cyclical</span></a><br />
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SAFE Controls - $50,000/yr.<br />
<a href="https://www.ft.com/content/b69166fa-ee01-11e7-b220-857e26d1aca4">https://www.ft.com/content/b69166fa-ee01-11e7-b220-857e26d1aca4</a><br />
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Caymans Cooperation Agreement<br />
<a href="https://www.cima.ky/upimages/commonfiles/1499794669STATEMENTOFCOOPERATION.pdf">https://www.cima.ky/upimages/commonfiles/1499794669STATEMENTOFCOOPERATION.pdf</a><br />
Offshore Money transaction Tax<br />
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1120<br />
<a href="https://www.irs.gov/pub/irs-pdf/f1120.pdf">https://www.irs.gov/pub/irs-pdf/f1120.pdf</a><br />
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5472<br />
<a href="https://www.irs.gov/pub/irs-pdf/f5472.pdf">https://www.irs.gov/pub/irs-pdf/f5472.pdf</a><br />
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851<br />
<a href="https://www.irs.gov/pub/irs-pdf/f851.pdf">https://www.irs.gov/pub/irs-pdf/f851.pdf</a><br />
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Manafort indictment<br />
<a href="https://www.politico.com/f/?id=0000015f-6d73-d751-af7f-7f735cc70000">https://www.politico.com/f/?id=0000015f-6d73-d751-af7f-7f735cc70000</a><br />
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Jay Powell - 60 Minutes - Full Transcript & Inverveiw - All is well.....<br />
<a href="https://www.cbsnews.com/news/jerome-powell-federal-reserve-chairman-60-minutes-interview-2019-03-10/"><span style="color: blue;">https://www.cbsnews.com/news/jerome-powell-federal-reserve-chairman-60-minutes-interview-2019-03-10/</span></a><br />
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Kyle Bass - Thoughts on "not wasting" the trade talks. So much to do....so little time....<br />
<a href="https://www.bloomberg.com/opinion/articles/2019-02-11/trump-can-t-waste-china-trade-talks"><span style="color: blue;">https://www.bloomberg.com/opinion/articles/2019-02-11/trump-can-t-waste-china-trade-talks</span></a><br />
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Trade Balance for China - OED - $20T Western Currency from Trade Alone<br />
<a href="https://atlas.media.mit.edu/en/visualize/line/hs92/show/chn/all/all/1995.2017/">https://atlas.media.mit.edu/en/visualize/line/hs92/show/chn/all/all/1995.2017/</a><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJlt0xAEFMpKaNqL_J-LUYMctZs9j8bzB78xOloL0aNuaBt6hoC44OE8e-uL2ubAuT4ieqrfS4zxChB_3cAXOI-ZCMCfIOCkUeQfHh6tjjNananYr7Bb-HqVnDap-urKPYJOkuXzNIZR8/s1600/OEC_China_World_Trade_Surplus.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="780" data-original-width="1140" height="436" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJlt0xAEFMpKaNqL_J-LUYMctZs9j8bzB78xOloL0aNuaBt6hoC44OE8e-uL2ubAuT4ieqrfS4zxChB_3cAXOI-ZCMCfIOCkUeQfHh6tjjNananYr7Bb-HqVnDap-urKPYJOkuXzNIZR8/s640/OEC_China_World_Trade_Surplus.png" width="640" /></a></div>
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EXPORTS $29,869,203,365,116 <br />
IMPORTS $18,277,591,290,356<br />
BALANCE $11,591,612,074,761 </div>
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BAL Invested at 6% - $20,005,189,141,954 <br />
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<span style="text-align: -webkit-right;">World Currency Transaction Breakdown</span></div>
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<span style="text-align: -webkit-right;"><a href="https://www.thebalance.com/world-currency-3305931">https://www.thebalance.com/world-currency-3305931</a></span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgOYgBjxYHjYPFxEDBwZnttuIWYMOvuUFdbc5827pJex02zc8I7NuboCro6tzyaaBTKdny-lshExlhY5gXdes448tAxAbkv6SC_KgRigCXN7G4q4D4AWGY0B55-lVEbDd-H3qfdKEZJUBY/s1600/Currency_Usage_by+Country.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="627" data-original-width="1087" height="368" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgOYgBjxYHjYPFxEDBwZnttuIWYMOvuUFdbc5827pJex02zc8I7NuboCro6tzyaaBTKdny-lshExlhY5gXdes448tAxAbkv6SC_KgRigCXN7G4q4D4AWGY0B55-lVEbDd-H3qfdKEZJUBY/s640/Currency_Usage_by+Country.png" width="640" /></a></div>
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<span style="text-align: -webkit-right;"><br /></span><span style="text-align: -webkit-right;"><br /></span><span style="text-align: -webkit-right;"><br /></span><span style="text-align: -webkit-right;"><br /></span><span style="text-align: -webkit-right;"><br /></span><span style="text-align: -webkit-right;"><br /></span><span style="text-align: -webkit-right;"><br /></span><span style="text-align: -webkit-right;"><br /></span><span style="text-align: -webkit-right;"><br /></span><span style="text-align: -webkit-right;"><br /></span><span style="text-align: -webkit-right;"><br /></span><span style="text-align: -webkit-right;"><br /></span><span style="text-align: -webkit-right;"><br /></span><span style="text-align: -webkit-right;"><br /></span><span style="text-align: -webkit-right;"><br /></span><span style="text-align: -webkit-right;"><br /></span><span style="text-align: -webkit-right;"><br /></span><span style="text-align: -webkit-right;"><br /></span><span style="text-align: -webkit-right;"><br /></span><span style="text-align: -webkit-right;"><br /></span><span style="text-align: -webkit-right;"><br /></span><span style="text-align: -webkit-right;"><br /></span><span style="text-align: -webkit-right;">US $2 Trillion of illegal money flow from China to the West</span><br />
<span style="color: blue; text-align: -webkit-right;"><a href="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">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</a></span><br />
<span style="text-align: -webkit-right;"><br /></span><span style="text-align: -webkit-right;"><br /></span><span style="text-align: -webkit-right;">IRS - Gross Collections</span><br />
<span style="color: blue; text-align: -webkit-right;"><a href="https://www.irs.gov/pub/irs-soi/17databk.pdf">https://www.irs.gov/pub/irs-soi/17databk.pdf</a></span><br />
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<span style="text-align: -webkit-right;">Capital Gains Taxes Paid thru 2014</span><br />
<a href="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">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</a><br />
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BIS Working Paper - Missing Global Debt?<br />
<a href="https://www.bis.org/publ/qtrpdf/r_qt1709e.pdf"><span style="color: blue;">https://www.bis.org/publ/qtrpdf/r_qt1709e.pdf</span></a><br />
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BIS Working Paper - Triffin Dilemma? of Myth?<br />
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<a href="https://www.bis.org/publ/work684.pdf" style="color: #003399; line-height: 1.2em;" target="_blank">https://www.bis.org/publ/work684.pdf</a></div>
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<span style="text-align: -webkit-right;"></span><span style="text-align: -webkit-right;">FATCA/IGA Compliance</span>
<span style="text-align: -webkit-right;"><br /><a href="https://www.reuters.com/article/us-usa-tax-fatca/cayman-islands-u-s-reach-pact-to-fight-tax-evasion-idUSBRE97D17U20130814">https://www.reuters.com/article/us-usa-tax-fatca/cayman-islands-u-s-reach-pact-to-fight-tax-evasion-idUSBRE97D17U20130814</a></span><br />
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<span style="text-align: -webkit-right;">TAX Issues</span><br />
<span style="color: blue; text-align: -webkit-right;"><a href="https://americansfortaxfairness.org/tax-fairness-briefing-booklet/fact-sheet-offshore-corporate-tax-loopholes/">https://americansfortaxfairness.org/tax-fairness-briefing-booklet/fact-sheet-offshore-corporate-tax-loopholes/</a></span><br />
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<span style="text-align: -webkit-right;">IRS-Abusive Off-Shore Tax Schemes</span><br />
<span style="color: blue; text-align: -webkit-right;"><a href="https://www.irs.gov/businesses/small-businesses-self-employed/abusive-offshore-tax-avoidance-schemes">https://www.irs.gov/businesses/small-businesses-self-employed/abusive-offshore-tax-avoidance-schemes</a></span><br />
<span style="text-align: -webkit-right;"><br /></span><span style="text-align: -webkit-right;">Citi - The RMB as Global Currency...."Not so much"</span><br />
<span style="text-align: -webkit-right;"><a href="https://www.citivelocity.com/citigps/waiting-waiting-global-renminbi/"><span style="color: blue;">https://www.citivelocity.com/citigps/waiting-waiting-global-renminbi/</span></a></span><span style="text-align: -webkit-right;"><br /></span></div>
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Deep Throathttp://www.blogger.com/profile/02712515268051858186noreply@blogger.com3tag:blogger.com,1999:blog-7478408299955066555.post-8987101294111623342019-02-21T23:06:00.000-05:002019-02-22T10:02:48.950-05:00Dalio's "The Big Debt Crisis"....the FSB Report & Financial War Games<div dir="ltr" style="text-align: left;" trbidi="on">
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While I was on vacation, doing some fishing and sailing, (Our good friends have a boat in the Bahamas and they invite us to join them on occasion....it's good to have friends with boats in the Bahamas...) reading Ray's wonderful, new(er) book "<a href="https://www.amazon.com/Big-Debt-Crises-Ray-Dalio/dp/1732689806/ref=asc_df_1732689806/?tag=hyprod-20&linkCode=df0&hvadid=312111907622&hvpos=1o1&hvnetw=g&hvrand=11204772730852950028&hvpone=&hvptwo=&hvqmt=&hvdev=c&hvdvcmdl=&hvlocint=&hvlocphy=9051739&hvtargid=pla-526427664156&psc=1"><b><i><span style="color: blue;">The Big Debt Crisis</span></i></b></a>", it just so happened that the Financial Stability Board (FSB) published their frightening, yet riveting, can't put it down, <b><i><a href="http://www.fsb.org/2019/02/global-monitoring-report-on-non-bank-financial-intermediation-2018/"><span style="color: blue;">Global </span></a></i></b><span style="background-color: white; font-family: inherit;"><b><i><a href="http://www.fsb.org/2019/02/global-monitoring-report-on-non-bank-financial-intermediation-2018/"><span style="color: blue;">Monitoring Report on Non-Bank Financial Intermediation</span></a></i></b><span style="color: #555555;">, </span></span><span style="background-color: white; color: #555555; font-family: inherit;">which, as you also know, I've been following for years. </span></div>
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So, in order to kill three canaries with one coal mine, I thought I'd combine my take on the two tomes, 1.) Ray's "how we got here" historical perspective on the next "Big Debt Crisis", combined with and followed by 2.) A more current update vis-a-vi the FSB's data/findings in anticipation of the next "Big Debt Crisis" and finally, 3.) A "What the heck is going to happen next in the virtually guaranteed, next, upcoming "Big Debt Crisis?" and exactly how it's going to go down. (Spoiler Alert: the Chinese Communist Party might be referred to as "Individual #1" in the scenario.) Of course I'll try to fold-in some fun pop-culture and awesome financial gallows humor when I can. Remember, the stated goal of my work and tag line is, and has always been:</div>
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<b><i>Let's Make Global Financial Armageddon Fun Again!</i></b></div>
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....did I mention that today we're going to talk about the next "<i>Big Debt Crisis</i>"? </div>
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As always, I've read these hundreds of pages and distilled them for you in a few bullet points... so that you don't have to.....that's the value I try to bring to the table. Further, as in past posts, if you are a dry, lifeless, economist and/or financier who doesn't have the time, or feel like trudging through my colloquial, comedic quips, clips, wit and wisdom, <span style="color: red;"><b>feel free to just check out the charts & graphs and skip through to the TEXT IN RED</b></span>....that's where I'll highlight the really important conclusions, financial metrics and analysis of same. </div>
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But first, to set the cheery, optimistic mood, I've included a few vacation pictures below....some of the advertising and public relations people I know have mentioned that I should make an effort to identify with the masses (you, my dear readers) and show them (you) I am actually a loving, caring "human being" rather than a cold, heartless, game-theory-automaton economist. Moreover, some of my readers have mentioned that my take(s) on the upcoming, apocryphal, global financial Armageddon can be a bit of a downer.....so here you go..... </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiawJ1KLT13JuvvGziQ7oJXCeoWxebrdwZovrBqxe4NHERAmULXfBhyqy_CNr01WtZxXpibHct8y-lK4ocIEkWdKMnL6Xt6S1nNboQiGFmMCuyNrcljezXydSRE-AQDpKHoiqi63dvtorg/s1600/Bahamas_Vacation_Pix.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="992" data-original-width="1345" height="468" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiawJ1KLT13JuvvGziQ7oJXCeoWxebrdwZovrBqxe4NHERAmULXfBhyqy_CNr01WtZxXpibHct8y-lK4ocIEkWdKMnL6Xt6S1nNboQiGFmMCuyNrcljezXydSRE-AQDpKHoiqi63dvtorg/s640/Bahamas_Vacation_Pix.png" width="640" /></a></div>
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Ok....Got it? Pretty isn't it? Heaven on Earth....Feel better? Now back to work. Strap yourselves in.....this is going to be a doozy...</div>
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<b><u><span style="font-size: x-large;">Ray Dalio's "Big Debt Crisis"</span></u></b></div>
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One of the best, most instructive, valuable books I've ever read....period....exclamation point! Of course I have to acknowledge that everyone's taste and interest in fine financial/economic literature is personal and unique, but this bad boy really was a page turner. The searchable pdf version is a bit long at 471 pages (with citations and references that might actually consume a lifetime of financial research should you choose to explore them), but it's so entertaining I had finished it before I knew it....Like any great author, Ray left me wanting more. I'm looking forward to the sequel. I bought the hard copy as well....I figured Ray could use another $50.00. </div>
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<b><u><span style="font-size: large;">What Ray's Book Is:</span></u></b></div>
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The book is a three volume set describing/analyzing Monetary Policy throughout history and the correct, efficient, adequate, (or abysmal) use of same. The first volume is actually the "summary" of the "Archetypal Debt Crisis", indicating that throughout history these F%#&ing things actually happen quite often. Everyone with any interest in economics and finance should, at a minimum, read this first volume. It summarizes the findings and similarities of the last 48 "big" debt crises as described in Volume 2 & 3. Ray chose to deploy his sizable Bridgewater resources, some of the brightest economic and financial minds on the planet and had them research debt crises throughout history in search of common ground/data. His stated goal, is to provide a framework for policy makers and investors to properly understand and deal with the next, inevitable, debt crisis.<br />
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<b><u>Volume I</u></b><br />
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Perhaps Jay Powell read the book, saw something (we'll get to that later when we talk about the FSB Report) and pulled the "pivot"?....here's the text from his recent statement....</div>
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<span style="white-space: pre-wrap;"><span style="color: blue; font-family: inherit;"><i style="background-color: white;">"industrial production and factory employment remain at all-time highs through April, measures of construction had rebounded sharply after falling in the first quarter". </i></span></span></div>
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Geezz.....I'm sorry, I've gotta get my notes in order....the above was actually from the Federal Reserve Bulletin issued in June of 1929. Where was I, Oh yeah.....here's the text of Jay's interview on MSNBC, at least as best as I can remember.....it went something like....<br />
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<i><span style="color: blue;">"Hey guys ...the economy is fine....everything is rosy....nothing to see here...we're going to continue our mechanical, predictable, rock-solid march toward interest rate and balance sheet normalization......(pause....leafing through pages of the Financial Stability Board (FSB) Report...shuffle ....shuffle).....OH CRAP!......never mind what I just said.....but we're going to stop raising rates and are actually considering cutting them now..... and that balance sheet normalization thing ain't happenin' anytime soon... thanks for having me on today.....Sorry for the pump fake.....really, everything is just fine and dandy......Oh man look at the time....gotta go.....oh....and I like beer...."</span></i></div>
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Of course the FED Analysts/Pundits cleaned up the language a bit for the news clips....</div>
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Anyway, back to work.....in the first volume, here's what Ray says:</div>
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<i><span style="color: blue;">"From my examination of these cases, the biggest risks are not from the debts themselves but from a) the
failure of policy makers to do the right things, due to a lack of knowledge and/or lack of authority, and b) the
political consequences of making adjustments that hurt some people in the process of helping others. It is from a
desire to help reduce these risks that I have written this study."</span></i></div>
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The Next significant point(s) Ray makes are <span style="background-color: yellow;">(My emphasis added)</span>:</div>
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<b><span style="color: red;"><span style="color: blue;"><i><span style="color: blue;">1) </span>When debts are denominated in foreign currencies</i></span><span style="background-color: yellow;"><span style="color: blue;"><i> </i></span>(USA)</span> <i><span style="color: blue;">rather than
one’s own currency </span></i><span style="background-color: yellow;">(China)</span>, <i><span style="color: blue;">it is much harder for a country’s policy makers to do the sorts of things that spread out
the debt problems, and 2) the fact that debt crises can be well-managed does not mean that they are not
extremely costly to some people.</span></i> <span style="background-color: yellow;">(Lost Jobs, Bankruptcies, Jumping out Windows, Alcoholism, Drug addiction, Homelessness, etc. things you and I, the "little people" have to work through.)</span></span></b></div>
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<b><span style="color: red;"><span style="background-color: yellow;"><br /></span></span></b></div>
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He also describes how there are two types of "Depressions":</div>
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<b><u><br /></u></b></div>
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<span style="color: blue;"><b><u>Deflationary Depressions - </u></b> Debt restructuring and austerity dominate, without being balanced by adequate stimulation
(especially money printing and currency depreciation). </span> <span style="color: red;"><b>Deflationary depressions typically occur in countries where most of the unsustainable debt was
financed domestically in local currency</b></span><span style="color: blue;">, so that the eventual debt bust produces forced selling and defaults,
but not a currency or a balance of payments problem.</span> <b><span style="color: red;"><span style="background-color: white;">(i.e. The "Great Depression" 1929 and </span><span style="background-color: yellow;">China 2019 - ?</span><span style="background-color: white;">)</span></span></b></div>
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<b><u><br /></u></b></div>
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<b><u>I<span style="color: blue;">nflationary Depressions -</span></u><span style="color: blue;"> C</span></b><span style="color: blue;">lassically occur in countries that are reliant on foreign capital flows and so have built
up a significant amount of debt denominated in foreign currency that can’t be monetized (i.e., bought by
money printed by the central bank). When those foreign capital flows slow, credit creation turns into credit
contraction. In an inflationary deleveraging, capital withdrawal dries up lending and liquidity at the same
time that currency declines produce inflation.</span> <span style="color: red;"><b>Inflationary depressions in which a lot of debt is denominated
in foreign currency are especially difficult to manage because policy makers’ abilities to spread out the pain
are more limited.<span style="background-color: white;"> (i.e. the Weimar Republic 1920-1924 and the </span><span style="background-color: yellow;">USA 2019 - ?</span><span style="background-color: white;">) </span></b></span></div>
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Ray further points out that Debt Cycles are historically broken down into six "parts".</div>
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<br /></div>
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1.) Early Part</div>
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2.) Bubble</div>
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3.) Top</div>
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4.) Depression</div>
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5.) Beautiful (or "not so Beautiful" depending on policy) Deleveraging</div>
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6.) Normalization (or...Pushing on a string)</div>
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<br /></div>
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He goes on to describe and chart how, in aggregate, various indicators/indexes (Equity Prices, Yield Curves, Interest Rates, Money Supply, Capital Flows, Inflation, etc.) have moved and reacted throughout the cycle(s) as well as what the cycle duration(s) might reasonably be expected to be. </div>
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Here's an example of the format:</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgxWVNhDpaEjmhuzkRrnvQeqNo-tT2GAZRPOnhXESudJyDY4sWeszpOiZLvFLP-lXCMY2Mg-0OYhGI3XWquPoggQTtn74Eb19XpsMrdFWbume_c4SV_jBc8mgYwml9rs0ZYww2au0wQwXk/s1600/Big_Debt_Crisis_Chart_Equities%2526Debt.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="625" data-original-width="802" height="498" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgxWVNhDpaEjmhuzkRrnvQeqNo-tT2GAZRPOnhXESudJyDY4sWeszpOiZLvFLP-lXCMY2Mg-0OYhGI3XWquPoggQTtn74Eb19XpsMrdFWbume_c4SV_jBc8mgYwml9rs0ZYww2au0wQwXk/s640/Big_Debt_Crisis_Chart_Equities%2526Debt.png" width="640" /></a></div>
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We note that these cycles last roughly 11 years (give or take...60 months to the "top" and another 84 months to a loosely defined normalization...i.e.) Minimal "window jumping".)</div>
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Ray further describes the tools available to policy makers (pg 36) ranked by effectiveness. These are obvious, but there's some heft behind these if you choose to refer to the book. For the sake of this discussion I'll be brief.</div>
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<br /></div>
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<b><u>Monetary Policy #1</u> </b>- Cut Interest rates. Most effective, but unavailable and obviously less effective as rates approach 0%.</div>
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<b><u><br /></u></b></div>
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<b><u>Monetary Policy #2</u> </b>- Central Bank Buying Assets - Effective, but QE primarily benefits investors/savers (i.e., those who own financial assets) much
more than people who don’t, thus widening the wealth gap. The impact to economic activity/growth is limited. The money isn't "spent". </div>
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<b><u><br /></u></b></div>
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<b><u>Monetary Policy #3 </u></b>- Print Money putting more directly into the hands of spenders instead of investors/savers and
incentivize them to spend it. This is (all sorts of variations of) "Helicopter Money"....some of these include: Debt-financed fiscal spending, Public Works Projects, Debt Write-downs/offs, "Cash for Clunkers", Home Buyer Credits, etc. Universal Basic Income (UBI) or anything to get people spending money, creating jobs and get the economy moving again.</div>
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Continuing in Volume I, there are a number of important observations/guidelines directed primarily toward policy makers generally presented in a subtle format similar to "if this happens, consider this....not that" that differentiate whether a de-leveraging is "well managed" or "poorly managed".</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhEHyUmWM8ql3lcuPlB0I5QKq15lGrWOKShINJsIJtRjXBzuTt9mb5veD_zfFUgnOjtfvbGF8nzWxaUd5NedaZwAAv8F5Z_tCGsTQvrIwOlybqgW4p0tRLdDxTb61dUQpcGGxqaFOiwbJM/s1600/Big_Debt_Crisis_Chart_Policy_Decision_Table.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="326" data-original-width="725" height="286" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhEHyUmWM8ql3lcuPlB0I5QKq15lGrWOKShINJsIJtRjXBzuTt9mb5veD_zfFUgnOjtfvbGF8nzWxaUd5NedaZwAAv8F5Z_tCGsTQvrIwOlybqgW4p0tRLdDxTb61dUQpcGGxqaFOiwbJM/s640/Big_Debt_Crisis_Chart_Policy_Decision_Table.png" width="640" /></a></div>
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<br />
From what I could tell, and I was looking for it when I read the book, Ray never actually comes out and explicitly says we're currently at the "top" of a debt cycle.....but based on the character of the current data and the timeline, I think I'd find it hard to argue that we've not topped out. Even if we're not yet at the top, again based on the data, it can't be far off.<br />
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<b><u>Volume II</u></b><br />
<br />
I found Volume II to be the "meat" of the book. I really enjoyed the layout. The section is a wonderful study of policy issues and challenges of the three greatest Debt Cycle Bubbles in history. The discussion of the German Debt Crisis and Hyperinflation (1918-1924) was followed by that of the US Debt Crisis and Adjustment (1928-1937) and finally an analysis of the US Debt Crisis (2007-2011). I particularly enjoyed the way the narrative, stats, commentary and policy explanations flowed through the "center" of the pages with newspaper headlines, quotes from politicians and relevant citations in the margins of the pages. I'm not going to recap the details here because Ray does such a great job, I couldn't do it comparative justice. If you are a serious student of finance, economics and/or political history, you'll thoroughly enjoy this section. I'm hopeful you'll read it with the enthusiasm and vigor I did.. <br />
<br />
Since Ray didn't include many photos, even though I've always images tell a story tell the story pretty well, I've attached a few of my favorite images that might have been included in the section below, just to compliment his work...<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiy9LseWu1QIeMlL35MgfqjnsFS2833ESrq8qNidAKI7P6_2gLsoBVQykLcmbAePlnGX3EtYa2SXwmIInNto8p-XPyYpg4_tGBZmyFtrRoFAWiYQvdqU_xGyyzzEzcweCScdxRH5Xym7Ic/s1600/Three_Debt_Crisis_Pix_2.png" imageanchor="1" style="clear: left; display: inline !important; margin-bottom: 1em; margin-right: 1em; text-align: center;"><img border="0" data-original-height="1519" data-original-width="1145" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiy9LseWu1QIeMlL35MgfqjnsFS2833ESrq8qNidAKI7P6_2gLsoBVQykLcmbAePlnGX3EtYa2SXwmIInNto8p-XPyYpg4_tGBZmyFtrRoFAWiYQvdqU_xGyyzzEzcweCScdxRH5Xym7Ic/s1600/Three_Debt_Crisis_Pix_2.png" /></a><br />
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<b><u>Volume III</u></b><br />
<b><u><br /></u></b>
Volume III is a compendium of the data derived from the Forty Eight (48) Debt Crises studied. This section provides the core (summary) data which was used to develop the "archetypal template" discussed in section one. To be frank, and to confess my ignorance, being a Midwestern American, generally isolated from global mishaps, I had not even known about most of these "crises" since they didn't seem to effect me, nor was I familiar with the hardship and sadness that must have been endured by the folks around the globe as they made their way through all of them. As a prototypical American, I was, of course, naively brought up to believe that it's always been "all about us". My memory could be foggy, but I don't believe I'd even heard the term "monetary policy" until I'd been enrolled in the University Wisconsin Business School for a few years. On the other hand, I was taught to "hide under my desk" to protect myself from a nuclear blast in second grade. Apparently, according to the school system, rural Wisconsin was a strategic ICBM target at the time. As an eight year old sitting under my desk, after Mrs. Mc Neil passed around ominous, frightening pictures of mushroom clouds and their destructive aftermath, I remember thinking "sitting under my desk isn't going to help....this is really stupid". I guess misguided educational/curriculum bias has been around for a while and continues today. Anyway, these debt "cycles" are apparently a very regular, predictable thing....someone's always "in one", sitting under their desk, somewhere ....who knew?<br />
<br />
As I was reading through the few pages dedicated to each of these crises, I quickly found myself analyzing them and contemplating them in the context of Ray's archetypal template, as described in Volume I. I was often thinking "Hey, this one is a lot like the Wiemar Republic, just not as bad, with a communist twist" or "Oh man...this one was just like the US Great Depression....why are they tightening??!!"<br />
<br />
Anyway, there's far too much here and much of it is beyond the scope of this post, but I'd encourage you to read/scan through Volume III if you have the time, at least just to get the idea. It's a brilliant, worthwhile read. Here's the Table of Contents for review, and perhaps to pique your curiosity.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh0Yl0bN8oytm2EQhZ7UZ9B_JlHa7BaA4pgY0w4YPA_U7_04bKLKL7J0TmdTNF296UfYOS2rm3k2JAy1cWMVimnY9adPxGWNrlstRKLggEqMjMsngFSosp3WUSX8Z0KZry4PEFg5L3p-3w/s1600/Dalio_Big_Debt_Crisis_TOC_Vol_3.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1113" data-original-width="1106" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh0Yl0bN8oytm2EQhZ7UZ9B_JlHa7BaA4pgY0w4YPA_U7_04bKLKL7J0TmdTNF296UfYOS2rm3k2JAy1cWMVimnY9adPxGWNrlstRKLggEqMjMsngFSosp3WUSX8Z0KZry4PEFg5L3p-3w/s640/Dalio_Big_Debt_Crisis_TOC_Vol_3.png" width="634" /></a></div>
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<br />
<b><u><span style="font-size: large;">What Ray's Book Isn't:</span></u></b><br />
<br />
Finally, one of the most interesting things about the book is that throughout its 471 pages Ray references the word "China" a grand total of twenty eight (28) times. Twenty seven (27) of these occurred within a brief discussion of the Chinese role and their 2008/2009 participation/funding of the American "Great Recession" which I'll also refer to later on in this post, with a discussion of Hank Paulson's frequent trips to Beijing aptly described in the prologue of Richard McGregor's wonderful work "The Party"....but I digress. The other lone reference to "China" benignly pertained to the 2015 Chinese Stock Market crash, when comparing indicators present in past bubbles as a validation of the data. Again, Ray does not take even one page to discuss the decade long, greatest money printing, debt build up in history, currently happening on mainland China. I find that remarkable.<br />
<br />
As many of you know, my background is in the insurance business. I own a wonderful insurance agency where I spend my day advising people on insurance coverage for their homes, cars, small businesses and the "stuff" that most of us would hate to be without if something horrible happened. Occasionally, because we put insurance policies in place to protect these folks, a few times a year, because of a house fire, a horrific traffic accident, a tornado, lawsuit, etc. I find myself trying to help someone through what just might be the 2nd worst day of their life. (By definition, I'd guess, the last day of your life is probably the worst one.)<br />
<br />
Anyway, the "Big Debt Crisis" is strictly an economic and policy analysis of the statistics that comprise what are probably some of the "worst days" of many peoples' lives. Ray, as you'd expect, is relatively clinical in his discussion of how Monetary Policy and debt cycles impact people in terrible, often irreparable ways. Here's an example of a quote from page 61 in a discussion of "War Economies":<br />
<br />
<i><span style="color: blue;">"....the debts and the outcome of the war (whether it is won or lost) will be enormous. The worst thing a country, hence a country’s leader, could ever do is get into a lot of debt and lose a war because there is nothing more devastating. ABOVE ALL ELSE, DON’T DO THAT"</span></i><br />
<br />
Again, Ray is focusing on the economics of these cycles, policies and their financial impact. Even though, in World War II for example, roughly 80 million people were killed, an untold number were injured and traumatized, families destroyed, their homes, towns and entire cities were obliterated, and tens of millions became refugees, the <i>Big Debt Crisis</i> refrains from any detailed discussion of the human suffering associated with these "policy" decisions. I'd humbly suggest that a failure to win the war and properly finance it, running up big debts in the process, might be far from "the worst thing" (I'm thinking, the Holocaust, or "lobbing nukes at each other" for example) a leader could do.<br />
<br />
Another quote relating to war economies, which is absolutely accurate from a decision tree perspective, but again, in my mind, falls a bit short on the "appreciation of human suffering" scale, again on page 61 is:<br />
<br />
<span style="color: blue;"><i>History has shown that through time, there are two broad types of relationships, and that what occurs depends on
which type of relationship exists. The two types of relationships are: </i></span><br />
<span style="color: blue;"><i><br /></i></span>
<span style="color: blue;"><i>a) Cooperative-competitive relationships in which the parties take into consideration what’s really important
to the other and try to give it to them in exchange for what they most want. In this type of win-win relationship,
there are often tough negotiations that are done with respect and consideration, like two friendly merchants
in a bazaar or two friendly teams on the field. </i></span><br />
<span style="color: blue;"><i><br /></i></span>
<span style="color: blue;"><i>b) Mutually threatening relationships in which the parties think about how they can harm the other and
exchange painful acts in the hope of forcing the other into a position of fear so that they will give in. In this
type of lose-lose relationship, they interact through “war” rather than through “negotiation.” </i></span><br />
<i><span style="color: blue;"><br /></span></i>
<i><span style="color: blue;">Either side can force the second path (threatening war, lose-lose) onto the other side, but it takes both sides to go
down the cooperative, win-win path. Both sides will inevitably follow the same approach. </span></i><br />
<i><span style="color: blue;"><br /></span></i>
<i><span style="color: blue;">In the back of the minds of all parties, regardless of which path they choose, should be their relative powers. In
the first case, each party should realize what the other could force on them and appreciate the quality of the
exchange without getting too pushy, while in the second case, <b><u>the parties should realize that power will be defined
by the relative abilities of the parties to endure pain as much as their relative abilities to inflict it. </u></b></span></i><br />
<i><span style="color: blue;"><br /></span></i>
<i><span style="color: blue;">When it isn’t
clear exactly how much power either side has to reward and punish the other side because there are many untested
ways, the first path is the safer way. On the other hand, the second way will certainly make clear—through the
hell of war—which party is dominant and which one will have to be submissive. That is why, after wars, there are
typically extended periods of peace with the dominant country setting the rules and other countries following
them for the time it takes for the cycle to happen all over again. </span></i><br />
<i><span style="color: blue;"><br /></span></i>
Ray's clinical analysis, of this complex, point of no return, "go to war or not" decision tree, with so many unknown variables, where US Citizens "vote" (are less willing to endure pain) and Chinese citizens are "arrested" (all too familiar with having pain imposed upon them) caused me to recollect this relatively recent presidential quote as reported by the <span style="color: blue;"><i><a href="https://www.washingtonpost.com/politics/donald-trump-doesnt-read-much-being-president-probably-wouldnt-change-that/2016/07/17/d2ddf2bc-4932-11e6-90a8-fb84201e0645_story.html?utm_term=.10aab23cb21c"><b>Washington Post</b></a></i>.</span>....<br />
<br />
<span style="color: blue; font-family: inherit;"><i>He said in a series of interviews that he does not need to read extensively because he reaches the right decisions “with very little knowledge other than the knowledge I [already] had, plus the words ‘common sense,’ because I have a lot of common sense and I have a lot of business ability.”</i></span><br />
<br />
.....my immediate thought was......"Uh-oh"....<br />
<br />
Ray also refers to the 2008/2009 US Financial Crisis as an example of a "Beautiful" deleveraging, where the FED and Central Bankers (generally) made the best policy decisions they could have possibly made, at least under the circumstances. He refers to the policy responses at that time as a template for what should be done in the event something like this (God help us) ever happens again. As I recall, during the Financial Crisis, roughly 10 million Americans lost their jobs, 8 million people lost their homes and 2.5 million businesses closed. Many folks lost their life savings and their financial future and prospects changed dramatically for the worse. The life and future they thought they had was gone in the blink of an eye. What I'm saying is that I guess the term "Beautiful" is relative.....beautiful compared to World War II or a nuclear winter perhaps, but far from "beautiful" for those who were irreparably harmed by the (latest) financial crisis.<br />
<br />
Finally, as I mentioned, the book makes no "going forward" mention of the current global Financial Asset and debt build up and what might or should be done from a policy standpoint, to mitigate the impact of what appears to be the next "inevitable" debt cycle/crisis. I found that omission to be remarkable as well.<br />
<br />
I think American policy makers could use, and might appreciate a little help and guidance here. I eagerly await Ray's sequel.<br />
<br />
<br />
<b><u><span style="font-size: x-large;">The Financial Stability Board Report</span></u></b></div>
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<br />
As I've mentioned above, I've been following the Financial Stability Board's work for years. It's outstanding and desperately needed in the globalized financial world we live in today.<br />
<br />
Here' the link to the pdf.<br />
<a href="http://www.fsb.org/wp-content/uploads/P040219.pdf"><b><span style="color: blue;">http://www.fsb.org/wp-content/uploads/P040219.pdf</span></b></a></div>
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<br />
Like Ray's book, there's a lot of great, interesting information that jumped off the page at me. I'd invite you to read it if you can spare the time. For the purpose of this post I'll just just focus on a couple of, what I consider, really important things.<br />
<br />
<b><u>Non-Bank Financial Assets</u></b><br />
<br />
<i><span style="color: blue;">Pg 5 - The narrow measure of NBFI grew by 8.5%, to $51.6 trillion in 2017.....Since 2011, the Cayman Islands, China, Ireland and Luxembourg have together accounted for over two-thirds of the narrow measure’s dollar value increase.</span> </i><br />
<br />
Assets held by "Non-Bank Financial Institutions" (NBFIs) are now 14% of all Global Financial Assets. NBFI Assets are, by definition, assets held by entities that are not Banks (no government protections or direct access to central bank liquidity) and subject to "runs". NBFIs are businesses like Broker Dealers, Investment Funds, Hedge Funds, Insurance Companies and Private Investment vehicles that typically maintain relationships with banks. Also by definition, individually, these US$51.6 Trillion NBFI assets are (generally) not systemically important and could be "allowed to fail".<br />
<br />
When we look at the data we also see that Tax Haven money has been expanding at an extraordinary pace. The graphic below (page 14) of the Report illustrates the tremendous concentration of Tax Haven Money (in relation to GDP). When we examine the left hand graphic on Exhibit 2-3 we see that the concentration in (KY) The Caymans, (LU) Luxembourg, (IE) Ireland, (HK) Hong Kong, (CH) Switzerland and (SG) Singapore is primarily comprised of "Other Financial Intermediaries" is many multiples of the respective domicile GDP. For Example, the roughly US$8 Trillion of Caymans Financial Assets represents 186,128 x GDP. i.e.) These Tax Haven jurisdictions hold significant levels of Financial Assets that are subject to "runs" and have little/no relationship to their domiciles' domestic GDP. The first "Real" economy that shows up on the list is the Great Britain (UK) debuting at #6 with financial assets hovering at 1,200% of GDP. Japan (JP) comes in at #9, at about 700% of GDP. As you would suspect, and I've said often, these Tax Haven jurisdictions are increasingly important as anonymous, liquid, global hiding spots for "someone else's money". <br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhu5GE9ByJmN0Xgogx1NByRVB_HCEMz2bx0I2_AQB7k7mw3yK4hyr2rm6-0WiluFCwJ-5TrxNGIlAl9hVpVPHK9LEGCcCmjc1xq_40YfaBoTEUpfsSoItE1jOcJ6GtJoa-1aiRqpjh7Rq4/s1600/Global_Financial_Assets_Composition.png" imageanchor="1" style="clear: left; margin-bottom: 1em; margin-right: 1em; text-align: center;"><img border="0" data-original-height="503" data-original-width="968" height="332" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhu5GE9ByJmN0Xgogx1NByRVB_HCEMz2bx0I2_AQB7k7mw3yK4hyr2rm6-0WiluFCwJ-5TrxNGIlAl9hVpVPHK9LEGCcCmjc1xq_40YfaBoTEUpfsSoItE1jOcJ6GtJoa-1aiRqpjh7Rq4/s640/Global_Financial_Assets_Composition.png" width="640" /></a><br />
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Now let's take a look at an updated version of the graphic I had originally produced for a post I had done a couple of months ago, <i><b><a href="https://deep-throat-ipo.blogspot.com/2018/12/twas-night-before-christmas.html"><span style="color: blue;">Twas the Night Before Christmas....</span></a></b></i> updated using the 2017 data-set in the newly issued FSB report. The graphic below is intended to illustrate the incredible expansion of Chinese, <i>Tax Haven</i> and "<i>Other</i>" money around the world since the Financial Crisis. Simply put, we see that the lion's share of the incredible US$123 Trillion monetary expansion that took place since 2008 took place almost entirely in what I refer to as "Fake Money" jurisdictions, i.e.) China, <i>Tax Havens </i>and "<i>Other</i>" (Primarily Emerging or "Troubled" Markets). "Old Money" domiciled (US, Germany, France, Great Britain and Japan) Financial Assets have grown at a much slower pace, with German/French/British Assets actually declining, despite a decade of ECB ZIRP. I could also argue that a significant portion of the growth (US$28.9 Trillion) and appreciation in US Domiciled Financial Assets is also attributable a significant infusion of Chinese/Global Capital, investing in the "safest/smallest mine in the field" (i.e. should I invest in US Treasuries's or Kazakhstan Crypto today?) but we'll get to that later in the post. </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhtT6xid6rr41ighb2sWdlrMa6uIOzUE4WIwvdSmzRaXCO_N_hZrHiqm-2ohgb9aCV1QXVvokNdQ5burkyK8DLp-2drWg-zLcvsoTV2lLhD8CsoSy4F_zz2Dk6dUFnQtT0c272DbTN9jkA/s1600/Global_Financial_Assets_Chart_2017.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1315" data-original-width="1196" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhtT6xid6rr41ighb2sWdlrMa6uIOzUE4WIwvdSmzRaXCO_N_hZrHiqm-2ohgb9aCV1QXVvokNdQ5burkyK8DLp-2drWg-zLcvsoTV2lLhD8CsoSy4F_zz2Dk6dUFnQtT0c272DbTN9jkA/s640/Global_Financial_Assets_Chart_2017.png" width="579" /></a></div>
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Of course, when we're analyzing Chinese Financial data we have to be skeptical, primarily because it's usually badly translated and very complex by design, but secondly, because it's almost always total, unadulterated bullshit. When I do my analysis I like to revert to a little game my kids taught me when they were growing up. They called it "one of these things is not like the other".<br />
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Oddly enough, the data for the FSB report and China's Financial Stability Report (FSR) are both provided by the PBOC, yet the FSB reports 2017 Chinese Financial Assets at US$56.7 Trillion and the PBOC Financial Stability Report (page 62) Reports total Financial Assets at us $85.3 Trillion (Adding Bank and "Shadow Bank" Assets together at the then current Exchange Rate). Financial Assets are a "good thing" right? China is HUGE!!....correct? This must be some kind of weird US$30 Trillion rounding error? <br />
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Here's a link to my analysis and the PBOC FSR.<br />
<a href="https://deep-throat-ipo.blogspot.com/2019/01/keeping-it-simple-short-and-to-pointand.html"><span style="color: blue;">https://deep-throat-ipo.blogspot.com/2019/01/keeping-it-simple-short-and-to-pointand.html</span></a><br />
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<b style="background-color: white; color: #666666; font-family: "Trebuchet MS", Trebuchet, Verdana, sans-serif; font-size: 13.2px;"><span style="color: blue;"><a href="http://www.pbc.gov.cn/english/130736/index.html" style="color: #33aaff;"><span style="color: blue;">2018 Financial Stability Report</span></a> (page 62)</span></b><br />
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<span style="background-color: white;"><span style="font-family: inherit;">Taking it a step further, here's what the breakdown looks like if we plug the PBOC Financial Asset figures into the previous chart. </span></span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhxXCyB2NROvOeN5PXk2Kv8_YowkxwMapF8SVbQWDsXI4qxxxanJ4f4gdKwN7PCRaJ2xRzqPo_zD1_yuMZGZrzRY-KW0UOaxFlyPaVybIO9YbAbZpT3fkM1A_cAVjHAB2mXNWd_ryulLLY/s1600/Global_Financial_Assets_Chart_adj_PBOC-FSR_2.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1294" data-original-width="1194" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhxXCyB2NROvOeN5PXk2Kv8_YowkxwMapF8SVbQWDsXI4qxxxanJ4f4gdKwN7PCRaJ2xRzqPo_zD1_yuMZGZrzRY-KW0UOaxFlyPaVybIO9YbAbZpT3fkM1A_cAVjHAB2mXNWd_ryulLLY/s640/Global_Financial_Assets_Chart_adj_PBOC-FSR_2.png" width="590" /></a></div>
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We find, from the above, that:<br />
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<li>Chinese, Tax Haven and "Other" (Primarily Emerging Market or "Troubled Economy" Assets) now comprise more than half of all global assets. (US$211 Trillion) up from about one third of total Financial Assets (US$90 Trillion) prior to the Financial Crisis.</li>
<li>Financial Assets have increased from 4x Global GDP in 2008 to 5x GDP in 2017. </li>
<li><b><span style="color: red;">From 2008 to 2017 the world has "created" US$151 Trillion "new" Financial Assets in exchange for an additional US$17 Trillion of GDP, or US$9 of Assets for every dollar of GDP. (As a side note, much of China's unproductive GDP is wasting away in vacant residential housing. If we apply a "productive GDP" factor the figure is probably about US$12 of Assets for ever dollar of PGDP ) </span></b></li>
<li>We must keep in mind that the data is more than a year old. It's unlikely that a decade long trend has suddenly reversed, so we can assume that the Asset values are much higher (i.e. the problem is much worse) today. </li>
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Going back to "The Big Debt Crisis", Ray's analysis dissected and identified the impact that each set of policy choices had on each individual economy. In his numbers, the amount of internal and external debts and the impact policy adjustments had on the respective country's financial system were always identifiable and quantifiable. Off-Shore, Tax Haven Financial Assets, at the current level are a relatively new phenomenon and a decade ago (with the exception of Switzerland and Hong Kong), were a fraction of what they are today.</div>
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Where is all of this new "fake" money coming from and why is it there? </div>
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<b><span style="color: red;">The simple, logical, Occam's Razor-esque answer is that a significant chunk of these anonymous, Off-Shore Assets are actually controlled by the Chinese Communist Party. There is no other rational, logical explanation for it.</span></b><br />
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The chart below describes the impossible relationship between the USD/RMB exchange rate in relation to US and China money supply growth. While the Chinese money supply skyrocketed in relation to the US Money Supply, the exchange rate remained rock solid. In economic terms this should be an impossible condition. When the relative "supply" of a commodity (RMB) increases, the price of that commodity (exchange rate) should fall and the currency (RMB) should weaken. Again, this hasn't happened....not at all.</div>
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How has the CCP been able to accomplish this FOREX prestidigitation? After running decades of capital/current account surpluses, resulting from the CCP's meteoric rise as the slave/child labor funded "factory to the world" they controlled the exchange rate by keeping their currency (RMB) off the world stage. There's comparatively little RMB used in international trade (<2%) of all settlements are in RMB (nobody wants RMB because they can't spend it anywhere) and the total RMB held offshore has actually been falling even though the Chinese money supply has been skyrocketing. Offshore (internationally usable) RMB is probably less than 0.5% of total RMB in circulation now.<br />
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This protection and overvaluation of the RMB, enabled by a continually increasing balance of payments surplus, is the cornerstone of China's master plan. The CCP has no/little external funding requirement or debt. </div>
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Remember Ray's discussion of "Deflationary Depressions"?</div>
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<span style="color: blue;"><b><u>Deflationary Depressions - </u></b> Debt restructuring and austerity dominate, without being balanced by adequate stimulation (especially money printing and currency depreciation). </span><span style="color: red;"><b>Deflationary depressions typically occur in countries where most of the unsustainable debt was financed domestically in local currency</b></span><b><span style="color: red;">, so that the eventual debt bust produces forced selling and defaults, but not a currency or a balance of payments problem.</span></b><span style="background-color: white;"> <b><span style="color: red;">(i.e. The "Great Depression" 1929 and China 2019 - ?)</span></b></span> </div>
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<span style="color: red;">Today, the CCP has been able to avoid a depression because they've already accomplished the "money printing" part of the stimulation, something that wasn't done by the FED in the "Great Depression" of 1929. In other words, they are "printing" in advance of the Depression in order to avoid it altogether. </span>They've also been able to avoid an RMB devaluation because, to be blunt, they've not let anybody use it. To date, the world doesn't seem to care all that much about the value of the currency since it can't be used in a meaningful way. The RMB remains locked on-shore in the mainland. Up to this point, the CCP has managed to keep its domestic financial system walled off from the rest of the world. According to Ray's thesis, China's current condition can't possibly result in a currency or balance of payments problem, until, of course they "uncage" their currency. </div>
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Luckily, everyone in the world uses the US dollar. It's the currency of choice for every international trade and financial/capital transaction. In God, and America, we trust.</div>
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What could possibly go wrong? </div>
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<b><u><span style="font-size: large;">Case Study: FRANCE</span></u></b></div>
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Interestingly enough, for the first time in economic history, and since the above described monetary tides are ebbing and flowing across the globe, we actually have a current "control group" test case study brewing, describing in vivid, certain terms, what can happen to a proud, old money economy when "local" capital begins to flee to a better/safer, more preferable place and it's <i><u>not</u></i> replaced by, some other source. (i.e. Perhaps in a hypothetical case, somewhere else in the world, anonymous CCP capital might be used to prop up asset values and fund another struggling economy, but this hasn't happened in France.)</div>
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Ladies and gentleman, for your pleasure, I present to you.....(drum roll).....</div>
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THE REPUBLIC OF FRANCE!</div>
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<img alt="Image result for france yellow vest riots" height="358" src="https://encrypted-tbn0.gstatic.com/images?q=tbn:ANd9GcQkRc3vpWyvyh-wtb88nz9E-YeqzYqf3sLHnX5iZ9XC4l7DMB1e" width="640" /></div>
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Now, the first question you are probably asking is "What in the world does the French government have against school crossing guards?....and why are there so many of them?....is the French economy really in that big of a mess?" And you'd be correct to ask! There is definitely an oversupply of unemployed, highly pissed-off, school crossing guards running amok on the streets of "Gay Paree" right now. </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEid06b9GF-fStCF6RIO_HorfHzkNTHkWMvx-RCztTXHQJqVoCrsXBQni5ZuO30IwNWHfQ9vMF-plB0QAMxuRrR_2ZLuO0fz1mc2xSkTJ0amMTS2hE7ECRbpEFCz7ERX7qhATsqE1_5UwHA/s1600/France_Yellow_Vests.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="403" data-original-width="317" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEid06b9GF-fStCF6RIO_HorfHzkNTHkWMvx-RCztTXHQJqVoCrsXBQni5ZuO30IwNWHfQ9vMF-plB0QAMxuRrR_2ZLuO0fz1mc2xSkTJ0amMTS2hE7ECRbpEFCz7ERX7qhATsqE1_5UwHA/s640/France_Yellow_Vests.png" width="503" /></a></div>
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Of course, I could waste your time and talk about all of the "little" stuff. Housing, labor, credit availability, the short work week, lagging GDP, politics, the rise of populism, the continuing epic struggle between the elite "haves" and the bourgeois "have nots", etc. etc. but unfortunately, there's one and only one reason the French school crossing guards are in the pickle they are in today. </div>
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I've been told that nobody wants to hear this (especially the pissed-off school crossing guards). They want to blame Macron, the Brits and the rest of the "crooked" European politicians and anyone else who looks like they have some level of authority/culpability, but the real problem (at least right now) is not politics. The real problem is that years of really bad ECB Monetary policy, with no recognition of what "free market" capital movement can do to an otherwise healthy economy, has irreversibly and finally come home to roost. </div>
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Simply put, years ago French wealth began to leave the country for easily accessible tax haven destinations, primarily Luxembourg, the Netherlands and Switzerland, with very little coming back in. (Apparently the Chinese aren't fond of escargot). This is of course, a double headed swinging guillotine.</div>
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As domestic money leaves, it both erodes the tax base and stifles the economy. Fleeing capital means no new investment, no new innovation, no new jobs and no new hope. As we've seen, It apparently does indeed lead to scores of pissed off, fire bombing, school crossing guards.</div>
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Ironically, this dramatic capital flight took place under Super Mario's Near-ZIRP decade of monetary expansion and unprecedented stimulus. Unfortunately, the stimulus just wasn't going to the French people....it was going to Luxembourg, the Netherlands and Switzerland....some/much of the wealth is still owned by French elite, but invested somewhere else anonymously, perhaps in NYC Condos or US Tech Stocks, at probably more than a few basis points higher than it could have earned at home. Rich people, as we all know, are always willing to sell out their homeland for a few basis points and a tax cut.</div>
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Let's refer to and review the figures from the FSB Report, shall we? If you'll notice, the outlier on the previous chart above, the only global region to actually show a decrease in financial assets since the 2008 Financial Crisis is the "Old Money" Great Britain. Germany and France region. Although the decrease isn't much, it's enough by comparison. The above photos are a stark reminder of the political, social and economic impact wrought by money fleeing these domiciles to off-shore tax havens, when there isn't anything replacing it. The more Mario "prints" the faster it leaves.</div>
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What we see is that over the last few years capital has been flowing out of France like <i>foie gras</i> through a goose. From 2008 to 2017 Financial Assets in Germany, France and Britain have been reduced from US$69.1 Trillion to US$66.7 Trillion causing corresponding (negative) adjustments to investment, tax base and growth. If I can be bold enough to give some advice to the highly pissed-off-school-crossing-guard gang, although I understand your anger and frustration....your antics are not helping to get this capital flowing back. </div>
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Luckily, nothing like this could ever happen in America. Even though they are heavily armed, America's school crossing guards are highly compensated professionals, always in a good mood and the envy of the free world.<br />
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God Bless America.....and....</div>
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Vive' la France!<br />
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<b><u><span style="font-size: large;">Why the CCP Pump & Dump will Eventually Break the Dollar</span></u></b><br />
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Deng Xiaoping often referred to “<i>Tao guang yang hui</i>” or roughly translated.....<br />
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<span style="font-size: large;"><i>“Hide your brightness, bide your time.”</i> </span></div>
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We "invisible hand", "free market Westerners waving the flag of individual rights, freedom of choice, and <i>government intervention only as a last resort</i>, collectively, truly don't understand what we're up against here. We Westerners can't conceive of markets without individual choice and independent capital flows. <b><span style="color: red;">Let me be clear, the "rise" of China is <u>NOT</u> now, nor has it ever been an "opening up" of ideas, markets and financial freedom. That's not up for debate. That statement is an etched in stone, unchallengeable, unimpeachable fact.</span></b><br />
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<b><span style="color: red;">Propping up the RMB in order to artificially increase its purchasing power, acquiring Western Assets on the cheap, is the cornerstone of the master plan. </span></b><br />
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<b><span style="color: red;">All of the financial devices, shell companies, subsidiaries, and entities created with newly printed, anonymous Tax Haven money, managed, directed and owned by China's new "entrepreneurs" are the cleverly disguised genesis of a centrally planned, monolithic, financial "death star" under construction, with its primary weapon locked and loaded on the Western Financial System. </span></b><br />
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<b><span style="color: red; font-size: large;">Let's pause and let that sink in for a minute....</span></b></div>
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Ok, deep breath....let's carry on....So how did all of these CCP Controlled Assets accumulate in the Western banking systems? I covered the "Boomerang Greenback" in a prior post entitled "<a href="https://deep-throat-ipo.blogspot.com/2018/04/the-new-phone-books-herethe-new-phone.html"><span style="color: blue;"><b><i>The New Phone Books are Here!</i></b></span></a> a while back (feel free to refresh your memory). I've defined "Boomerang Greenbacks" as Western Currency paid for Chinese goods and services where the currency never makes its way back to the Chinese Mainland. It's never exchanged/converted to RMB and hence never used to benefit the Chinese economy. The chart below illustrates "Boomerang Greenbacks" using Apple/Foxconn familiar logos, but the model is virtually the same for every importer of Chinese goods. Whether the goods go to Walmart or Amazon and/or their respective "off the books" storefronts, or Mom & Pop retailers who sell clothes, shoes and "plastic stuff", all the money goes back into the continually recirculating CCP coffers, to be reinvested in Western Financial Assets.<br />
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<img src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEinOBAiPBs-1sZCdmfFfwwhRV9xJSx1WWZdqUYM42xFaqLNDZr2kkLmmm2dWL7hC_tlLkd88nkSGt3638GgEvX63XZLnbTstsA3G5XgyfN5AEoabFyuFHRjniCddQ5XZtKzuRZ-6RxBe-E/s640/Dollar_RMB_Flow.png" /> <br />
Since it's impossible to determine with any precision (because of our wonderfully constructed global banking system) the exact level of financial assets held or controlled by the CCP, let's throw around some numbers and make some SWAG assumptions based on the above described FSB/PBOC figures.<br />
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First, we must assume that the lions share of the global asset growth is the result, either directly or indirectly, of Chinese fake money printing, the exchange rate anomaly and its proliferation around the world. We must assume that the CCP is acting as a highly coordinated team. Again, there is no other explanation for it. No other Central Bank is expanding their money supply anything close to what the Chinese have done. <b><span style="color: red;">The FED, ECB, BOJ and BOE are no longer leading the monetary expansion. They are following it.</span></b><br />
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Next, we can assume that a significant portion of the "Tax Haven Assets" and the "Other" (as well as a significant, unidentifiable amount of US & European Domiciled Assets) are controlled or influenced by the CCP through these offshore devices and Chinese citizens directly/indirectly in a coordinated effort. For fun, let's just guess that the number is roughly 20% of the Tax Haven and "Other" Assets (20% of US$ 58.7T plus $66.7T) or about US$25 Trillion give or take. Further, let's assume that the CCP, because they know a bargain when they see one, also focused on owning non-financial assets (Real Estate) purchased in cash deals (i.e. no Financial Assets involved, just a deed/title transfer) to a Chinese citizen living in America, deploying capital and acting on behalf of the CCP. These are the 35 year old "Crazy Rich Asians" who are given newly "printed" CCP funded bank accounts and told to go to America and buy all those $1 million condos with cash. So let's assume, again just for fun, maybe a few hundred billion dollars globally for real estate. (This figure is probably low as well, but it's chump change for the CCP)<br />
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<span style="color: red;"><b>So now we have roughly US$25+ Trillion (probably a low number) Anonymously Invested in Western Assets by the Chinese Communist Party as a result of the West's naive acceptance a fake RMB exchange rate. </b></span><br />
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Now that the CCP has provided US$25 trillion of funding to US and global markets (demand), bidding up prices for these financial assets, what happens if the CCP starts selling off these US$25 Trillion in assets?...well, currently US M3 (Broad Money) is only US$14.3 Trillion. Like any "Pump & Dump" the CCP is probably going try to be the first one out.<br />
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My guess is that if the Chinese start selling, the CCP will decide to leave the proceeds of the sales of equities, real estate, bonds and businesses in "cash and USD equivalents". They would remain flexible. The cash paid to the CCP from the sale of these assets will have to come from Western sellers. There will be a stealth liquidity crunch, depending on where and how they redeploy the cash. It will remain sitting in CCP controlled accounts, essentially removed from the economy, waiting to be invested at the lower/reset asset values.<br />
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<b>Some of the things I'd expect the CCP to start doing once <a href="https://deep-throat-ipo.blogspot.com/2018/10/when-will-xi-click-sell-button.html"><span style="color: blue;">Xi clicks the SELL BUTTON</span></a>:</b><br />
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<li>The CCP will probably avoid "clicking the button" until they are absolutely sure they can pull it off. Only the CCP knows how much money they have under control in Western Economies. Western Central Bankers can't possibly have a clue, since we've designed the infrastructure to support anonymity. There's no system in place to identify the origin and real ownership of the funds. I'd guess that the CCP has very talented people in a war room somewhere tracking this project to the dollar. The question they are asking themselves is two fold: 1.) How much do we need to break the dollar and consequently the US/Global economy? 2.) Do we have enough yet? Despite their odd, intentionally misleading statistics, financial statements and press releases, Chinese folks are generally very smart and really good at math.</li>
<li>Once they "click the sell button" there will be no going back. Remember, they had "printed" the money to buy the Western Assets in the first place, their economic basis/cost is relatively small, so paper losses on the Western Assets are irrelevant, since they've not paid much for them in the first place. </li>
<li>I'd imagine that they would try to sell the less liquid assets (Real Estate, businesses, private equity, etc.) first. (HNA's Deutsche Bank stake, Dalian Wanda's AMC, Anbang's Waldorf/Starwood, Tencent's gaming, etc. etc.) We can expect to see real weakness in the NYC, Bay Area, Vancouver, Toronto, Sydney, etc. Real Estate markets as Chinese buyers disappear and Chinese owners start selling. You won't see any Chinese sellers selling to Chinese buyers.</li>
<li>We can expect to see the yield curve fully invert as the CCP parks increasing levels of money in short term Dollar/Euro/Yen cash equivalents. They will, of course, stop buying bonds and keep the money in short/cash equivalents, ready to buy some assets back once the price seems right. Since they are in control of the liquidity, there is a great chance that they will be able to "call the bottom". In any case, "usable liquidity" will start to dry up. When the dust settles, the CCP will buy it all back and own a much greater percentage of Western Assets than when they initially "pushed the sell button"....they will have "sold high and bought low".</li>
<li>In America, we cherish and revere property rights, no matter whose property it is. If an American Banker sees lots of CCP LLC controlled cash sitting on his/her bank's balance sheet, it will simply look like Tier 1 Capital, to be immediately re-deployed and loaned out under the rules of our wonderfully efficient fractional banking system, even though that capital funding the new loans can be "wired out" in the blink of an eye. </li>
<li>As the CCP Capital is redeployed, there will be really confusing dislocations and liquidity issues with Western banks. Generally, the more intimately a bank is involved with the CCP, the more vulnerable it may be. Let's say, just for example, that you're a bank like JP Morgan, which has a longtime, close relationship with Chinese Communist "Investors". Today, JP Morgan has got $350 Billion of Cash & Equivalents on the Balance Sheet, significant for JPM but not so much for the CCP. Suddenly, like a bolt from the heavens, JPM Bankers around the globe start getting a series of seemingly unrelated anonymous requests to transfer hundreds of billions of US Dollars (Coming from anonymous CCP controlled accounts) to Hong Kong, Caymans and Singapore Banks. In America, since we believe in the sanctity of property rights, in this particular case, JPM, with it's "fortress balance sheet" a term I've always chuckled at, for an entity levered at a 13:1 (based on tangible assets), will make the transfers (or not) and immediately flunk every banking safety ratio you can think of.....and looking for an overnight bail-out....yet again. (American voters will LOVE THAT!) The CCP will effectively be able to determine which US Banks live and die by moving money around. I would imagine, in the CCP Financial War Room they've got a list of "high value targets" on the board. The bankers and regulators won't be able to tell who's moving the money or why. All they'll see is that a bunch of off-shore LLC's with "funny" sounding names want their money back. </li>
<li>We'd also expect to see confusion at the FED. It will look like there's plenty of liquidity in the system, popping up here and there, but since it's controlled by the CCP, it won't be "available", or it may be re-deployed in unexpected, nonsensical ways. "Hey....let's mess with Citi today!" These "false signals" will prevent the FED from implementing or understanding proper policy. They'll spend their days putting out fires, effectively handcuffed and won't be able to throw a lifeline to the "real" economy. </li>
<li>As CCP liquidity is removed, with real estate and equity markets collapsing, the economy will follow. Businesses with supply chains dependent on the Chinese "factory to the world" will fail. Apple, Walmart, and most retailers will be mired in operational issues with their respective supply chains disrupted as their source for cheap inventory evaporates. Imagine Walmart and Amazon as well as nearly every publicly held retailer, with half of their current SKUs at double the price. I'm thinking that might put a damper on earnings. US Farmers will keep shipping soybeans to China though....the Chinese people will still need to eat. </li>
<li>The only viable option, Ray's "Monetary Policy #3 - Helicopter Money" will be unavailable, at least for a time, because of the inherent confusion, finger pointing, political differences, debates and delays. By the time a scaled down version is finally implemented the economy will be needlessly, irreparably slowed/harmed. </li>
<li>Stock Markets will continue their fits and starts as money managers continue to "buy the dip" redeploying newly printed money from "loans" mistakenly made based on CCP "collateral". After all, that's what these money managers have been trained to do and it's worked flawlessly (with a few bumps along the way) since 1932. Money will continue to be destroyed as equity prices decline and loans default, the FED will keep printing/replacing it and it will be immediately redeployed back into equities. Investors, convinced that this was just another "mini-bear" market, will jump back in and the money will then be re-destroyed as markets re-collapse. Because of the CCP catalyst, market behavior will resemble the period from 1929 through 1932, when the DJIA dropped nearly 90%, the "buy the dip" financial gurus will be dead wrong, because they won't understand what's really happening. Take a look at the "mini bull" markets described in the chart below (+20%, +30%, +40% and more) embedded in the Bear Market. (Dalio, <i>Big Debt Crisis</i> - pg, 71) </li>
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Though painful for our Communist friends, the CCP will be able to accomplish all of these things without destroying their own economy, again because the RMB is currently isolated. Remember the graph of what China's currency looks like today? (I know you remember it from above but I wanted to reemphasize it here) I've long opined that the condition can't exist. Again, I've long said that the RMB should be valued at 20:1 and it will have to devalue. Traders have been crushed on this trade for years.<br />
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<b><span style="color: red;">I want to be clear here:</span></b><br />
<b><span style="color: red;"><br /></span></b>
<b><span style="color: red;">I WAS WRONG! </span></b><br />
<b><span style="color: red;"><br /></span></b>
<b><span style="color: red;">The RMB isn't going to devalue. That's not what the clever Chinese Communist Bankers are up to. Their diabolically clever plan is to force Western economies to reset asset values through the ultimate "Pump & Dump", requiring the Western Central Bankers to print money like there's no tomorrow. As the Western money supplies increase, the CCP will slowly remove the PBOC SAFE/Currency/Capital controls while (hopefully) keeping everything in balance. Through this carefully constructed mechanism, the RMB won't weaken toward the Western currencies, Western currencies will weaken toward the real, current, intrinsic, economic value of the RMB. </span></b><br />
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Here's the total guess of a graph of what I think is going to happen once Central Banks around the world are forced to print money and monetize their debts......just as the CCP/PBOC has already done domestically.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjTlKytyf8KUrdI5jg8RrImYljCap2bDPD9n3rwfoLisoNKbZGDIk-arqVIZn4R5c-hjpi7fQgafdP3UgGr19VRvVFVvgjFVpWD0olmWiEgW1sSUjFNnUe4klF_6cZv-BfQsPpGw7b-OH4/s1600/Exch_Rate_Force_Up.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="767" data-original-width="1405" height="348" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjTlKytyf8KUrdI5jg8RrImYljCap2bDPD9n3rwfoLisoNKbZGDIk-arqVIZn4R5c-hjpi7fQgafdP3UgGr19VRvVFVvgjFVpWD0olmWiEgW1sSUjFNnUe4klF_6cZv-BfQsPpGw7b-OH4/s640/Exch_Rate_Force_Up.png" width="640" /></a></div>
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<span style="font-size: medium;">As the SAFE controls are relaxed and the RMB begins to work its way into the global financial system, moving toward full convertibility, I'd expect its usage in global settlements to increase and that the off-shore supply would also increase to facilitate the usage. </span><br />
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<span style="color: red; font-size: medium;"><b>After a few years, the Dollar will no longer be the world's Reserve Currency. The RMB, through the greatest financial shell game in history, will have replaced it as the primary global settlement vehicle. That's the ultimate end game.</b></span><br />
<span style="color: red; font-size: medium;"><b><br /></b></span><span style="color: red; font-size: medium;"><b>I've been posing this "theory" to very smart people over the last few weeks and their universal, immediate response is: </b></span><br />
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<span style="color: red; font-size: medium;"><b>That can't be possible....Why would the CCP do this? </b></span><br />
<span style="color: red; font-size: medium;"><b><br /></b></span><span style="color: red; font-size: medium;"><b>My answer is: They are doing it because they have to. They have no choice. They have painted themselves into a suffocating debt corner with their incredible domestic monetary expansion. They are pulling the best possible policy rabbit from a hat filled with really bad bunny turds. Unless they cause the Western currencies to devalue they will be caught in Ray's Archetypal "Deflationary Depression" dominated by forced selling and defaults. The "Pump and Dump" is actually the best possible alternative (for the CCP) because it minimizes their domestic pain. Conversely, it's the most painful path for the US and Western Economies. (Remember Ray's "ability to both inflict and endure pain" discussion?)</b></span><br />
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<b><u><span style="font-size: large;">Financial War Games (in general)</span></u></b></div>
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I've always thought (and I'd be surprised if this wasn't happening at least at some level) that, like our CIA, we have a highly skilled team of cracker-jack analysts at the Treasury and the FED that would spend their days conducting simulated Financial War Games, assigning probabilities to events and coming up with pre-determined responses. I'd also presume that the Treasury might launch occasional clandestine (financial) "first-strikes" when the need arose, similar to a financial version of what <span style="color: blue;"><b><a href="https://nsarchive2.gwu.edu/NSAEBB/NSAEBB435/"><span style="color: blue;">Kermit Roosevelt Jr. and the CIA did in Iran</span></a> </b></span>(Also see <i><b><a href="https://www.goodreads.com/book/show/46347.All_the_Shah_s_Men"><span style="color: blue;">All the Shah's Men</span></a></b></i> - Kinzler - Great read) with limited bloodshed of course. Bankers, economists and accountants are generally a peaceful lot, they just tend to take your money and/or home away when you least expect it. </div>
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Generally, I presume in a financial war game exercise, the scenario would go something like: </div>
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1.) We see something happening in a part of the world that doesn't align with our interests.</div>
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2.) We come up with a financial plan to fix it.</div>
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3.) We Deploy Resources (funds, bankers, etc.)</div>
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4.) We analyze outcomes and react to unplanned collateral damage.</div>
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5.) We reassess and repeat.</div>
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Hypothetically, here's a discussion that may or may not have taken place surrounding these hypothetical Financial War Games as they may or may/not pertain to Venezuela.</div>
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<b><u>Treasury Operative #1:</u></b> <i>"Ok....here's the thing....Maduro isn't playing ball...gotta get him out of there..."</i><br />
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<b style="text-decoration-line: underline;"><u>Treasury Operative #2:</u> </b><i>"Yeah.....I'll get with Larry....he'll loan that Commie dope a ton of money they can't pay back, crash the Economy, the masses revolt, we back the opposition and Maduro leaves with whatever he can take. We get the oil....shit we've got Ciitgo on the ground there already...piece of cake...Regime change brought to you by Blackrock...."</i></div>
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Two years later....</div>
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<b style="text-decoration-line: underline;">Treasury Operative #1: </b><i>"What do you mean the Chinese are in? Maduro's not gone? WTF?"</i><br />
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<span style="text-decoration-line: underline;"><b style="text-decoration-line: underline;">Treasury Operative #2: </b><i>"Things went sideways....that One-Belt-One-Road bullshit is a pain in the ass....don't worry....I'm on it...this one's easy....it's not like it's France....."</i></span></div>
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My assumption is that these Financial War Games are going on and these "operations" are being conducted all over the planet by major Central Banks, behind closed doors. The masses (you and I) are oblivious to what's happening. I'd also be really shocked if the Chinese Central Bank wasn't participating, at least on some level. I'm eagerly awaiting a plausible public denial from the SCMP, along with some goofy article on how badly the US Banks are ruining the Chinese financial landscape, followed by a few thousand emails from Chinese trolls telling me how ignorant and far off base I am. If I'm correct, that this is all part of a monetary covert-ops game plan, it stands to reason that if Central Bankers weren't involved in this type of counter intelligence driven financial warfare, they'd be risking the health of their respective economies. The only thing we can do, as card carrying members of the great unwashed, on a personal financial level, is block/hedge for these "War Games" as best we can and hope we survive the carnage and ultimate fallout.<br />
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Here's the behind the scenes (Freedom of Information Act) video of a conversation between Treasury Analyst #1 and an unnamed Blackrock Executive. Please be discrete, parental discretion advised:<br />
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Oh....and Venezuela a few days ago....or is it Baltimore?....crap....I gotta keep my notes straight....<br />
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<b><u><span style="font-size: large;">The Big War Game (Financial WW I)</span></u></b><br />
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In order to truly understand what's happening today we have to go back to the "good old days" of the 2008/2009 US Financial crisis, tracking the frequent trips that Hank Paulson, first in his role as CEO of Goldman Sachs and later as Treasury Secretary under George W. Bush. Hank was making dozens of trips, along with teams of prominent US Investment Bankers, to Beijing in order to first, "open up" the US Economy to Chinese Investment and later, as the banking crisis began to unravel, ostensibly to "save the US economy" from complete collapse, reaching out, hat in hand to Wang Quishan and the PBOC, like the stunned debtors they were, praying for a bail out.<br />
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<a href="https://pbs.twimg.com/media/DzJSfRXWwAA5RV1.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="200" src="https://pbs.twimg.com/media/DzJSfRXWwAA5RV1.jpg" width="135" /></a>These dozens of visits are wonderfully described in the prologue of Richard McGregor's "The Party", an epic book shedding some much needed light on the Rise of China's political and financial system, as well as the mood and tenor of the Sino-US relationship at the time. Hank's visits were initially described as a hands across the water quest for opportunity, to show Chinese financiers how to develop a sophisticated financial system (for hefty fees) in exchange for access to China's rapidly evolving consumer markets, but as the US Financial System spiraled out of control, as Treasury Secretary, Hank's visits quickly morphed into a cry for help.<br />
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What Hank had not counted on was the ability of his new, motivated students to grasp the rules of the game as quickly as they had. Not surprisingly, Wang Quishan, Vice Premier of the financial sector and Lou Juwei, the head of China's Sovereign Wealth Fund and the rest of Hanks Chinese counterparts were conscientious, motivated students. While Hank was reaching out for a helping hand he was also inadvertently teaching these CCP Financiers the intricacies of global investment banking and putting them in touch with the very US Investment Bankers which would help spearhead their foray into the global financial markets. Hank's pals (again, for hefty fees) taught the Chinese bankers about off shore accounts, Tax Haven anonymity and off-the-books Currency Swap financing. They showed them how to launch hundreds of IPOs using VIE's on US Exchanges (US$2.7 Trillion in Market Cap at their high point in the Spring of 2018). The eager Chinese students learned all about the USD as a Reserve Currency and how to issue dollar debt obligations to eager third world banana republic "customers" in exchange for bartered steel, cement, services and labor. They learned how to subvert third world economies with One Belt One Road, by following the US playbook, throwing them into un-repayable dollar debt and foreclosing on assets and access in lieu of dollars if repayment wasn't possible. They learned how to prop up their currency by closing off their capital accounts and keeping "boomerang" Dollars, Euros and Yen anonymously offshore, using this secret Tax Haven money to invest in Bay Area real estate, NYC Condos, Hotel Chains and Western Businesses, again, all with the help of their new Investment Banker friends (for even heftier fees).<br />
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The CCP also quickly learned that through their very lucrative continued association with Hank's Investment Banker friends and their lawyers and lobbyists, that with the right financial incentives, they could actually have American laws changed to to their benefit, accelerating their quest for eventual reserve currency status. With the right lobbyists, and the help of Citizen's United, with their sales pitch to legislators masquerading as a quest for openness and globalism, ostensibly benefiting the US Consumer/voter, along with the proper political contributions, they could get the US Post Office to ship their packages of eCommerce name-brand knockoffs, Opioids and Fentanyl for next to nothing direct to the homes of American citizens. They learned they could build Amazon and Walmart into gigantic economic engines by sending shipping container loads of their cheap goods produced by Chinese slave/child labor into the American heartland, destroying small towns, retail and manufacturing jobs and any hope of opportunity for these good people in the process. The Chinese bankers learned all of this and small town, fly-over America never knew anything about it.<br />
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"Joe lunch bucket" Americans (us) and politicians alike just assumed that the world was changing, it was all about "technology" or some such load of crap du jour, they didn't (and still don't) understand. Even as their towns were deteriorating and their jobs were going away they still had no idea what global monetary policy was or does. They blindly assumed things were getting tougher and they had to work harder to make a buck. How did the Chinese people do it? Suck it up America! Like the French school crossing guards today, you either get on board, get left behind or eventually....start burning shit down.<br />
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Thanks a bunch Hank.....nice work.<br />
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<span style="font-size: large;"><u><b>Davos!....Let's solve the world's problems!</b></u></span><br />
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So here we are today. Of course, I'd be remiss in this post if I didn't mention Davos at least once. For those of you peasants that couldn't make it (...the $300 hot dogs and beluga relish were to die for!) ....the global playground of the elite, where the rich and famous gather to discuss the plight of the downtrodden bourgeois (us), was a tad bit melancholy this year. I pulled one of my favorite video clips (below) where Ray, a Swiss Banker and two representatives of the CCP Public Relations Team talk about all of the incredible opportunities that the CCP is dangling in front of the world...if only the world is just foolish enough to grasp them. I have to say these two, young, energetic Chinese folks really know how to work the crowd. The charming, sincere young lady, I believe her Chinese name translates to "Cruella" if I'm not mistaken, I'm sure will make some unsuspecting Politburo party boss a wonderful ex-wife someday.<br />
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Moving along, the only time that the currency problem I've described above comes up is Ray's mention of it in minute 39:00 of the video clip (below). I was expecting him to give a "WTF are you talking about?" commentary/rant, but I imagine he felt that Davos just wasn't the time or place to challenge the veracity or methods of the Chinese Communist Party...probably better to tackle it on safer, more secure American soil. Actually, I probably would have done the same thing, being the risk adverse individual that I am. I wouldn't want my jet to experience CCP inspired "mechanical problems" on the way home to Cleveland.<br />
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The point Ray made related to the fictional "opening up" of the financial and currency markets and transitioning the RMB toward reserve status. He clumsily (Sorry for using that adjective Ray but if you review the clip you'd probably agree that your delivery re: these concepts could have been a little better) went into professorial mode through a mini-history lesson of reserve currency and financial center transition from Amsterdam (Dutch Gilder) to London (Sterling) and finally to New York (USD). Again implying that China wasn't ready to take this on since they don't yet have a "real" financial center and truly functioning markets.<br />
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Again, you can judge for yourself, but when talking about the currency, Ray seemed a little flustered or perhaps nervous as he was bringing this up. Perhaps he didn't want to piss off the wrong people? Who knows? He further suggested that this transition might be problematic based on the amount of debt ("bonds are piles of cash paid over time") that America would have to sell/transition to fund current deficits, over the next few years (or to infinity...whichever comes last), if there were a sudden (or not so sudden) change in the status quo. Ray recommended, as I have discussed, that the Chinese allow the RMB to move within a given range as it marches toward becoming a floating currency, implying that this should/must be done ever so slowly, over time. That's right..."EVERYTHING IN THE TILL....NO SUDDEN MOVES!<br />
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Of course, the Chinese sales team nodded in agreement further indicating that they have no desire to, or ever would consider, doing anything to upset the American apple cart. Trust us! our numbers are right, we are your friends! We didn't steal that intellectual property....Huawei??.. ..ZTO?...An Bang?....what about 'em....they're good people!....it's all a misunderstanding!<br />
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In substance Ray and I agree, but I believe, much like my take on Ray's comments regarding "Don't Borrow Money to Finance a World War and Lose!" that the human sacrifice, pain and suffering about to be generated by, and attributable to, this inevitable transition, which at some point could spiral into anything but "gradual", will be much greater than a simple movement to an open capital account for the CCP. God help us, but we might have to recruit Hank to start making those "hat in hand...please sir I want some more" Dickensian trips to Beijing again. As they say, history rarely repeats, but it often rhymes.<br />
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Feel free to listen to Ray's comments for yourself below.<br />
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<b><u>Relevant Dalio comments:</u></b><br />
<b>Beginning at Minute 8:00 of the above clip. His Currency Commentary is at Minute 39:00. </b><br />
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1.) The world (America, Europe & China) are in the midst of a slowdown and at the end of a mini-debt cycle.<br />
2.) Ray's greatest concerns are: a.) Limitations on the effectiveness of Monetary Policy going forward, b.) The rise of Populism, Polarity and Antagonism around the globe.<br />
3.) <b><span style="color: red;">Ray, in his cheery optimistic way, compares the current US macro environment to 1929-1932. Really, he does....it's not just me saying it. </span></b>He describes the 1929 US Market Collapse, the Great Depression followed by "money printing" and the accelerating populism, followed by the rise of a competing power like China. (referring to Hitler's Third Reich). <br />
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<span style="background-color: white; color: #0a0a0a; white-space: pre-wrap;"><span style="font-family: inherit;"><b><u>Relevant CCP PR Team - Fang Xinghai, China Securities Regulatory Commission vice-chairman and Jin Keyu, London School of Economics professor (aka Highly Compensated CCP Sales People) comments: </u></b></span></span><br />
<span style="background-color: white; color: #0a0a0a; white-space: pre-wrap;"><span style="font-family: inherit;"><b>Beginning at Minute 16:00, and various comments throughout the the above clip </b></span></span><br />
<span style="background-color: white; color: #0a0a0a; white-space: pre-wrap;"><span style="font-family: inherit;"><br /></span></span>
<span style="background-color: white; color: #0a0a0a; white-space: pre-wrap;"><span style="font-family: inherit;">1.) The general theme of the discussion was that: China's greatest challenge is.... that the rest of the world truly doesn't understand how great China is! I'm not going to go into any details of this incredible, absurd, misrepresented, "opening up" sales pitch because it was a flaming crock, but feel free to watch it if you have the stomach for it. If they were really serious about "opening up" they'd allow my silly little blog to get past the "great firewall". I could use another billion followers or so..... </span></span><br />
<span style="background-color: white; color: #0a0a0a; white-space: pre-wrap;"><span style="font-family: inherit;"><br /></span></span>
<span style="background-color: white;"><span style="font-family: inherit;">The questions at the end of the presentation, given the context discussed in this post, were, well, to be blunt, pretty lame. </span></span><span style="background-color: white;">The "questions" at these events are generally in the format: 1.) "Here's my important sounding title" followed by 2.) My "pontification of some sort designed to show you how smart I am" followed by 3.) Some "off the wall irrelevant shit that the panel doesn't care about". </span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">The three questions asked were, first, about the PBOC Forex reserves decreasing, (this one was actually Ok). The next was a question about Latin America (out of context given the panel) and finally the Chairman of JP Morgan Chase </span><span style="background-color: white;">International got up, rambled about how "we need to do some policies" and that the "overwhelming subject of risk" faced globally is "the Cyber". Nobody seemed to know what the hell he was talking about and there was no response from the panel. Unfortunately, this guy is an actual "decision maker" and is probably in charge of a significant part of the Chinese Laundry, so his lack of context was a little disturbing to me. His question would have been pretty entertaining if it wasn't also so frightening. </span><br />
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<span style="background-color: white;"><span style="font-size: large;"><b><u>Final Thoughts</u></b></span></span><br />
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Finally, (Please take me seriously here) I don't want anything discussed herein to be construed as China Bashing, China phobia or "I hate China" rhetoric. I have a number of Chinese friends and acquaintances who I admire and respect. I have great admiration for what the Chinese people have accomplished and empathy for the oppression they've endured over the years. Today the Chinese people are in relatively the same position as Westerners. We are all the victims of incredibly shitty egalitarian Monetary policy that's gone woefully amok. <br />
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The Chinese people are not the enemies of America....CCP Monetary policy is. I just prefer that their horrific policy choices don't destroy Western Civilization. What happens in Beijing should stay in Beijing.<br />
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Again, this blog post is about epically bad financial and monetary policy, historically designed to benefit the "1%", at the expense of the 99%, all over the planet and how to recognize it and deal with it going forward, nothing more.<br />
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I also suspect that you are thinking that everything I've discussed above is most likely, dramatically different form what you thought you knew. I also hope that you take the time to digest all of the the above and let all it all sink in.<br />
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Again, as you know, I've been writing for years in this blog about the imbalances in the Chinese currency, overstated/fake economic metrics, gigantic debt burden, "fake" IPOs and massive Off-Shore Tax Haven Asset Build Up. Consequently, I've been predicting that the Chinese currency will eventually collapse under it's own weight. I've said the RMB should be valued at 20:1 (or worse) rather than 7:1, for years.<br />
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Again, one more time, to be crystal clear, in summary, I was wrong.<br />
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<b><span style="color: red;">I've concluded, over the last few months that it's not the RMB that will collapse.....the path we're on is that Western Currencies will be devaluing to the intrinsic value of the "already collapsed" RMB. Further, I'm probably the only person saying this. Most economists wouldn't imagine anything like this could possibly happen until they take a really unconventional, outside the box, look at the numbers. That's exactly what the CCP is counting on. </span></b><br />
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As a result of what's about to happen, the wholesale global sell off of CCP Controlled Tax-Haven Assets and resulting liquidity crisis (See: <b><a href="https://deep-throat-ipo.blogspot.com/2018/10/when-will-xi-click-sell-button.html" style="color: blue;"><span style="color: blue;">"When will Xi hit the Sell Button?"</span></a>)</b> Central Banks around the world will be forced to implement Ray's Monetary Policies #1,#2 and #3 as best they can, full blast, printing money, increasing the supply at a breakneck pace, never seen before at any time in history. The longer they delay, the worse it's going to get. On an absolute basis, this expansion will make the post WWI Wiemar republic look like run of the mill QE. Western Currencies will weaken to the current "fake" value of the RMB. Once money supplies equalize, the "fake" RMB valuation will be realized and the CCP will be able to fully release the peg. The RMB will then become the "cleanest dirty shirt in the Chinese laundry." If US leadership allows this to happen, the PBOC will finally be able to let the RMB float......and <b><span style="color: red;">the US Dollar will no longer be the world's reserve currency. The CCP will have broken the dollar with a fake, shell game currency scam.....we will have been robbed by little old Chinese guys in a motorized cart.....and we didn't even see it coming!</span></b><br />
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<b><span style="color: red;">That, my friends, is China's end game and I believe they are nearing the point where they will have enough off-shore financial firepower to push the button. Let's just hope and pray that it doesn't happen overnight. </span></b><br />
<b><span style="color: red;"><br /></span></b>If we, collectively as Americans (The highly-pissed-off-French-school-crossing-guards or the Venezuelans certainly aren't going to figure it out) don't do something about this mess, the greatest Financial Crime in history could very well go unsolved and America will have forfeited its hegemony because of it. The US & EU bankers certainly aren't going to admit their culpability today....they have been the enablers and benefactors, or in criminal terminology, they are "accomplices" and/or "accessories after the fact"....."It was just a systemic failure that nobody could possibly have seen coming!" they will opine, even as they had continually lobbied to get banking laws and consumer protections tossed on the regulatory trash heap. Politicians won't admit or describe their complicity, as that would be tantamount to accepting responsibility for what used to be "criminal behavior" and "collusion with foreign agents" or their accomplices..... and that just doesn't happen anymore. Everyone is just "making deals".<br />
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In a future post I'll be presenting some (relatively) simple, unilateral policy recommendations that should absolutely be implemented, behind closed doors, without political fallout and fanfare, to EVER SO SLOWLY....NO SUDDEN MOVEMENTS ......begin to reverse what's happening. It's not too late to save Western Civilization, but we've come way too far down this ugly path for a change in direction to be easy and painless....<br />
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<span style="color: red;"><b>Let's hope our DC leadership starts to work together, get focused and make some really good systemic policy decisions, solely in the interest of the American people......</b></span><br />
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<span style="color: red;"><b>I can't believe I just typed that.....but hey, as my Mom & Dad always told me.....even though I'm sure they never thought they'd be, a generation removed, indirectly instrumental in saving Western Civilization from financial collapse...</b></span><br />
<b><span style="color: red;"><br /></span><span style="color: red;">"Ya' gotta Aim High.....But remember to celebrate the little successes...." </span></b></div>
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<b>PS: Ray, @RayDalio</b> - If you have a chance, please feel free to comment on this thesis. My guess is that you are most likely conflicted between your love for America, the country that gave you virtually unlimited opportunity to follow your passions, live your dreams and accumulate riches beyond anyone's wildest imagination.....and your desire to make a few bucks on this trade. Of course, if you are contemplating, or already are going terrifically "short" the dollar (i.e.Western Civilization) and/or "long" China I'd fully understand your continued silence on the topic. All the best....<br />
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Deep Throathttp://www.blogger.com/profile/02712515268051858186noreply@blogger.com13tag:blogger.com,1999:blog-7478408299955066555.post-20135486180262892452019-01-30T21:47:00.000-05:002019-01-31T12:28:16.310-05:00Alibaba Q3 Earnings Call:<div dir="ltr" style="text-align: left;" trbidi="on">
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Well I just spent another hour of my life (that I'll never get back) listening to the just released recording of the Alibaba December 2018 Quarter Investor Call. </div>
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I'll make this brief. Here are the Links:</div>
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<b><u>Presentation:</u></b></div>
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<b><a href="https://www.alibabagroup.com/en/ir/presentations/pre190130.pdf"><span style="color: blue;">https://www.alibabagroup.com/en/ir/presentations/pre190130.pdf</span></a></b></div>
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<b><u>Press Release:</u></b></div>
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<b><a href="https://www.alibabagroup.com/en/news/press_pdf/p190130.pdf"><span style="color: blue;">https://www.alibabagroup.com/en/news/press_pdf/p190130.pdf</span></a></b></div>
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<b><u>Investor Call Recording:</u></b></div>
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<b><a href="https://edge.media-server.com/m6/p/65n9gwmf"><span style="color: blue;">https://edge.media-server.com/m6/p/65n9gwmf</span></a></b></div>
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<b><u>SEC.GOV - 6-K</u></b></div>
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<a href="https://www.sec.gov/Archives/edgar/data/1577552/000110465919004478/a19-3718_1ex99d1.htm"><span style="color: blue;"><b>https://www.sec.gov/Archives/edgar/data/1577552/000110465919004478/a19-3718_1ex99d1.htm</b></span></a></div>
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<b><u>Here are the Bullet Points:</u></b></div>
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1.) Revenue grew 41% from Q3 2017. MAUs and AACs (Customers) grew 20% over the same period. They did not distinguish, (at least that I could see) the difference between "newly consolidated" or "new retail" revenue from organic growth. Everything is still one big "blob".</div>
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2.) Cash and Cash "Equivalents" declined by $5.095 Billion USD from December 2017. Remember, in China (Unlike under GAAP and IFRS Rules) Cash "Equivalents" include demand notes payable from insiders, party members, off shore Shell-Companies and executive family members, whether they have gambling/drinking problems or not.</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjc-YNK9LTUOwTZzGaIdyVRZqdOOAimxATh5O-ako34esR3HD9sMLhdo6PwCk5qDGLJB7AdbiXuxYW2gfi-etEokFSJCc630xqNFKmXS9BanndqXPB_CKbdkBP2WzyBlht_qHZdqJYScis/s1600/Burj_Khalifa.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="864" data-original-width="928" height="185" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjc-YNK9LTUOwTZzGaIdyVRZqdOOAimxATh5O-ako34esR3HD9sMLhdo6PwCk5qDGLJB7AdbiXuxYW2gfi-etEokFSJCc630xqNFKmXS9BanndqXPB_CKbdkBP2WzyBlht_qHZdqJYScis/s200/Burj_Khalifa.jpg" width="200" /></a>3.) Property & Equipment, (net) purchases were US$1.456 Billion in the quarter. (With No mention of what it might be comprised of) That would make property acquisitions during the (3 month) quarter the rough equivalent of the cost to build the Burj Khalifa. (i.e. the tallest building in the world) Impressive indeed, but if I were a BABA investor or analyst, I might like to have a bit of "color" describing what this gigantic, material increase was. </div>
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3.) SBC (Share Based Compensation) continued on the unprecedented trajectory, US$1 Billion for the quarter (25% of income). Management's benevolence with US Shareholder money to CCP members, insiders and their Off-Shore Shell Companies continues to have no bounds. (pg. 27 of the Press release)</div>
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4.) The only mention of Ant Financial's operations (Page 12 of the Press Release), the biggest elephant in the room, anywhere in the documents was:</div>
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<i><span style="color: blue;">"During the
quarter, we did not recognize any royalty fees and software technology service fees under our profit sharing
arrangement with Ant Financial. 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
affiliates have over 1 billion annual active users globally. In the coming quarters, Ant Financial expects to
continue investments aimed at capturing the strategic opportunities amid the digital transformation of
China’s real economy." </span></i></div>
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Perhaps an analyst asked a question about this and I may have missed it, I nodded off a couple of times during the recording. If so, forgive me. To my ears, Daniel Zhang's calm, serene, angelic voice sounds a bit like the ocean and it lulls me to sleep.....but I digress.</div>
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So Ant Financial, with Alipay's 1,000,000,000 active users is not making any money for all their effort..... and may indeed be losing money, perhaps boatloads of money if their loan underwriting is anything like Alibaba's accounting. </div>
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It's rumored that the following Analyst Comment re: Ant Financial was made off-the-record shortly after the close of the Investor Call:</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhexyIPFW5CTK7ZX2hwcMXh6C7HhWExYs7UcmBk4T8UeNsvkRbhFSuI8y_-2EaBTPY3BHE6XVVoKPaDLnUNpvs9tsZO2sgmgvnLZp9JrY8V3P1N-stsxi8P6Lu1GnsUbl5RiT9K60jW-PA/s1600/Trump_Tower.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1067" data-original-width="1600" height="133" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhexyIPFW5CTK7ZX2hwcMXh6C7HhWExYs7UcmBk4T8UeNsvkRbhFSuI8y_-2EaBTPY3BHE6XVVoKPaDLnUNpvs9tsZO2sgmgvnLZp9JrY8V3P1N-stsxi8P6Lu1GnsUbl5RiT9K60jW-PA/s200/Trump_Tower.jpg" width="200" /></a>5.) Alibaba Management also managed to write up yet another US$2.4 Billion (about half of their current quarterly income) as a result of "Deemed Disposals & Revaluations" (pg. 27 of the Press Release). By comparison, US$2.4 Billion is the rough Construction cost of eight (8) Trump Towers at US$300 Million apiece, built in just one quarter. There is no description of the "write up" transactions or what the accounting treatment or source/citation might have been that requires or necessitates the write ups. I would think it might be interesting, especially to savvy Alibaba investors, to know and understand what skyrocketing economic value might actually prompt write ups of this size. <b><u><span style="color: red;">(See UPDATE 1/31/19 below - Correcting my error/omission above. This Write-Up was discussed peripherally in the Presser and 6-K)</span></u></b><br />
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6.) During the presentation, the Alibaba Crew again raved about the success of their "Luxury Pavilion".<br />
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<i><span style="color: blue;">"During the quarter, brands including Valentino, Ermenegildo Zegna, Stuart Weitzman and Sergio
Rossi opened Tmall flagship stores and joined our Luxury Pavilion. Launched in August 2017, Tmall
Luxury Pavilion now offers more than 80 brands. Products range from apparel and beauty items to
watches and luxury cars."</span></i><br />
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When you search the TMall site you see thousands of these "luxury" items listed with pictures and prices.....along with "0" in the "monthly turnover" and maybe a meager (handful) number of views and few/no reviews.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZAowBNSjiG4ls7XfbCSqRgPAFLQKMEtxCilts1-CCmidPNiLXu4wI8bJN4rAv8Kc2dqnDy0vYd_Z36admNQ68JmeSnDVgpPeqEjGaJEedNTXQNHd70zM7ellLtnlp5cq6wFt81tifwlU/s1600/TMall_Valentino.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="525" data-original-width="920" height="364" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiZAowBNSjiG4ls7XfbCSqRgPAFLQKMEtxCilts1-CCmidPNiLXu4wI8bJN4rAv8Kc2dqnDy0vYd_Z36admNQ68JmeSnDVgpPeqEjGaJEedNTXQNHd70zM7ellLtnlp5cq6wFt81tifwlU/s640/TMall_Valentino.png" width="640" /></a></div>
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When you pull the financial statements from these "luxury brands" you'll see that, the maximum volume, at the most, that could possibly be derived from these sales, even if you credit Alibaba with the entire annual volume of "Asia" for the brands listed on TMall (For example: Yoox-Net-A-Porter aka Moschino <a href="http://www.ynap.com/">http://www.ynap.com</a>/ et al) you'd see that total sales can't be more than a few million dollars. The "luxury pavilion" sales on the Alibaba platform probably dosn't even come close to being material or relevant.<br />
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Conversely, there was again no discussion of the rapidly expanding TMall/Taobao "Court Ordered Troubled Asset and Bad Loans" division. I can't believe they once again left this high-growth arena off of the 6-K discussion.<br />
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So why would Alibaba waste valuable space on a 6-K and significant presentation time to even bother mentioning these goofy low volume "luxury pavilion" businesses and gloss over something like....Oh....I'don't know...acquiring $1.456 Billion in fixed assets (e.g. the Burj Khalifa) or describing a US$2.4 Billion accounting gain (Eight (8) Trump Towers) in the quarter? I sure wish an analyst would ask about THAT!<br />
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7.) Operating Costs for this "New Retail" gambit are apparently out of control. When we examine page 17 of the presentation, we can see expenses (Cost of Revenue, R&D and SG&A, all excluding Share Based Compensation) increased from 49.4% of revenue in the December 2017 quarter to 80.7% today. Alibaba management seems to be willing to pay an ever increasing, perhaps limitless, price for the next dollar of revenue.<br />
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8.) Questionable Assets (Investment Securities, Investment in Investees, Intangibles & Goodwill) increased a whopping US$10 Billion in the quarter. (That's 33 Trump Towers in just One Quarter folks!.....Yowzahh!!) Again, no real, rational explanation. This crap-olla just keeps going up. It's 58% of the balance sheet now....up from 0.0% in 2015.<br />
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9.) When we look at the Segment Income (Loss) we see that the only Segment making money is the "Core" Business. (Page 20 of the Press Release) The rest of the business segments (Cloud Computing, Digital Media and Entertainment, Innovation Initiatives & Other and "Unallocated") continue to lose US$2 Billion a quarter like clockwork. Total Segment Income actually decreased by 20% over the comparable year to date period in 2017. (2017 RMB 60,093 vs. 2018 RMB 48,139) It appears as though "earnings", for the Alibaba Management team is more of a theoretical concept than an action item or goal.<br />
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<b><u><span style="font-size: large;">So....What did Mr. Market think of all of this?</span></u></b><br />
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He absolutely loved it! Up 7%!<br />
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Volume ended the day at twice the 30 Day average....36 million shares traded.....but it was actually on the low end of what you might expect. There have been many 50 million share plus days, usually on the way down. Now that the CCP has reestablished a pricing/value expectation, we can probably expect a pullback, but with BABA.....who the heck knows?<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDwjEsqRvkTnlPLvw86CMV0dSPvKhV4__LAS3FS8zSEqETVbIgZ6LgKKVoOYTPTU-NMAYTR4_LQFduwzkwPffuZtpQnuYdZ1EccesjJdKvhlVVxU-n4JgnqT3TzN2GD07aM278r-15u98/s1600/Alibaba_Stock_Price_1-30-19.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="341" data-original-width="602" height="362" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgDwjEsqRvkTnlPLvw86CMV0dSPvKhV4__LAS3FS8zSEqETVbIgZ6LgKKVoOYTPTU-NMAYTR4_LQFduwzkwPffuZtpQnuYdZ1EccesjJdKvhlVVxU-n4JgnqT3TzN2GD07aM278r-15u98/s640/Alibaba_Stock_Price_1-30-19.png" width="640" /></a></div>
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The above is exactly why you can't short this beast. My thesis has long been that the CCP funded "Caymans Crew" steps in and drives the price up just when you think the numbers are so silly that nobody would believe them. This is the same methodology the CCP deploys to support the offshore RMB trade. The RMB trades at 6.80:1 today but based on Mainland money supply expansion it should be the financial equivalent of a roll of Charmin tissue. Thank goodness Chinese currency is at least "squeeze-ably soft" and will eventually be put to good use by those unfortunate enough to be stuck with it.<br />
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The SEC, by design, has no jurisdiction and no ability to see who's making these trades. CCP trades are placed from off-shore accounts and the trail stops dead-cold with the impenetrable iron curtain of tax haven banking regulation. As far as the Treasury and the SEC are concerned these trades and support levels might as well be designed and implemented by extra-terrestrials. The source is beyond their jurisdiction. Here's a video clip (below) of the latest joint SEC and House Banking Committee Task Force meeting where they are trying to figure out exactly what the hell is going on:<br />
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<b><span style="font-size: large;"><u>In Summary </u></span></b><br />
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There is absolutely no doubt, at least in my mind, that this is the greatest, systemic and by far most entertaining financial fraud in history....the post WWI Wiemar Republic "paper mark" scam was good, but this Chinese money mess, as far as creativity, enormity and sheer chutzpah, absolutely leaves those cranky old German bankers in the dust. Of course, all of this was brought to you by our "heads in the sand", good old boy political and financial leadership......hey a guy's gotta make a buck!<br />
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<b><u><span style="font-size: large;">Additional Reading:</span></u></b><br />
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For more gory details feel free to take a look at my last Alibaba 20-F discussion....<br />
<b><a href="https://deep-throat-ipo.blogspot.com/2018/08/the-baba-20-ffinancial-comedy-gold.html"><span style="color: blue;">https://deep-throat-ipo.blogspot.com/2018/08/the-baba-20-ffinancial-comedy-gold.html</span></a></b><br />
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<b><u><span style="color: red;">UPDATE 1/31/19</span></u></b><br />
My Bad.....one of my readers pointed out that the Press Release did indeed contain analysis of the <u style="font-weight: bold;">Interest and Investment Income (net)</u> Here's the text below (Page 12 of the Press Release). I can't believe I missed it. Too much fishing....LOL<br />
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<i><span style="color: blue;">Interest and investment income, net in the quarter ended December 31, 2018 was RMB11,560 million
(US$1,681 million), which mainly included a non-cash gain of RMB21,990 million (US$3,198 million)
arising from the revaluation of our previously held equity interest in Koubei when we obtained control in
December 2018. The gain was partly offset by impairment charges of RMB7,059 million (US$1,026 million)
on certain investments, as well as net loss arising from the change in fair value of certain equity investments. </span></i><br />
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So roughly 70% of Alibaba's Net Income for the Quarter was derived from a US$ 3.198 Billion write up of a money losing business. Nice.....</div>
Deep Throathttp://www.blogger.com/profile/02712515268051858186noreply@blogger.com4tag:blogger.com,1999:blog-7478408299955066555.post-72518604305135201832019-01-10T22:52:00.000-05:002019-01-10T22:52:51.581-05:00Our Rich Uncle Sam.....Today's T-Bond Auction...and the Stock Market Dumpster Fire....<div dir="ltr" style="text-align: left;" trbidi="on">
Let's talk about today's 30 Year T-Bond Auction.....fascinating stuff....<br />
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I normally don't have time to post as often as I have lately, but there's so much happening, I feel compelled to comment on it. Finance, when it works well, is relatively boring. It's "making the donuts" day after day, no comment needed. When finance doesn't function well, when there are so many odd, generationally unique, structurally cataclysmic events taking place, as is the case today, as an observer, hot topics abound. We're in a "target rich environment" as they say.<br />
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<b><u><span style="font-size: large;">The 30 Year T-Bond Auction - 1/10/19....Ouch! </span></u></b><br />
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The 30 Year Treasury Auction was just completed a few hours ago...and it didn't go well. As you know our incredibly wealthy <i>Uncle Sam</i> was looking for a small 30 year mortgage (He tried to sell $16 Billion...30 Yr. bonds...a paltry sum in the grand scheme of things....chump change really) and as normal for really wealthy guys, he summoned the world's preeminent bankers and dealers over to his place (the "Treasury") and had them compete for the privilege of loaning him some money. Well, the general consensus was that these astute financiers were perfectly OK with giving <i>Uncle Sam</i> some short term "Payday loans" at some hefty interest rates, as per the recent T-Bill auctions, but they were really uncomfortable with giving old <i>Sam</i> a 30 year mortgage, locking their money up on anything close to what good old <i>Uncle Sam</i> was hoping for. Here are the results:<br />
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<b><u>Offering Announcement: </u></b><br />
<a href="https://www.treasurydirect.gov/instit/annceresult/press/preanre/2019/A_20190103_5.pdf"><span style="color: blue;"><b>https://www.treasurydirect.gov/instit/annceresult/press/preanre/2019/A_20190103_5.pdf</b></span></a><br />
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<b><u>Auction Results:</u></b><br />
<b><u><span style="color: blue;">https://www.treasurydirect.gov/instit/annceresult/press/preanre/2019/R_20190110_3.pdf</span></u></b><br />
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We can note a couple of things.....<br />
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1.) BTC (Bid-To-Cover is the measure of interest in the auction. BTC = $ bids/$ accepted bids) was abysmal at 2.19. The average 30 YR BTC for 2018 was 2.4. Recent T-Bill (safe money) Auctions have had BTC's running at 3+. The BTC for Direct Bidders fell to 1.2. This auction probably should have been canceled for lack of interest.<br />
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2.) As far as we can tell, Indirect Bidders (Foreign Central Bank buyers?) bought most of the bonds: $9.2 Billion (57% of the Bonds). The grass is always greener I guess. The Indirect Bidder ratio was 63% for 2018 Auctions.<br />
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3.) The yield moved up slightly to 3.035% on the 3-3/8% Coupon.<br />
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4.) Direct Bidders represented 15% of the Accepted bids.<br />
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Of course <i>Uncle Sam</i> was probably pretty bummed out by this. His party was a flop and he most likely took it as a personal insult. Did I mention that our <i>Rich Uncle Sam</i> has become a bit of a belligerent wind bag in his old age? Lately, he's been going, well, a little berserk when he doesn't get his way.<br />
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Below is the transcript from the hypothetical (<i>Dick Fuld Banker Speak Translator</i> - <b><i>BST)</i></b> discussion that took place during the auction this afternoon:<br />
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<b><u>Uncle Sam:</u></b> "Come on guys.....buy these things....it's all guaranteed... risk free.....you'll get your money back....I promise!.....or if you don't buy 'em at least give me some competitive bids. Come on....the show must go on....This is bullshit...."<br />
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<b><u>Bankers/Dealers:</u></b> "I don't know.....we have so many better places to put our money.....given everything that's going on we really don't want to get into a 30 Yr. /Coupon at 3-3/8% at par value. Can't you just do more of those 2 month bills? Anything under a year is fine....we'll buy it all day. We can get 4% short term AAA debt in the Cayamans, Hong Kong, Luxembourg, Singapore, you name it, if you guys raise rates we're going to get killed on the 30 yr."<br />
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<b><u>Uncle Sam:</u></b> "C'mon Man.....don't you clowns remember 2009?....I saved your collective asses....I gave you the FDIC & opened the window, I shit-canned the Volker Rule, Glass Steagall, Dodd-Frank and got rid of all kinds of regulation.... and I even looked the other way when you clowns started doing all that off-shore shit in the Caymans and Luxembourg.....I made you rich.....you f&%ing owe me! I'll even loan you the money to buy this shit!........ Besides....I've got Powell in my back pocket...he'll buy it if you don't......what could possibly go wrong?"<br />
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<b><u>Bankers/Dealers:</u></b> " Geezzz....when this goes South are you going to bail us out? How about our jobs? Bonuses? Those are still "no touchies" right?"<br />
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<b><u>Uncle Sam:</u></b> "Of course, of course, come on, have I ever let you guys down before? If you can't trust me...who the hell can you trust? Those schmucks in Hong Kong and the Chinese banks aren't going to bail you out...."<br />
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<b><u>Bankers/Dealers: </u></b>(short pause while thinking about Dick Fuld, Jimmy Cayne and Angelo Mozilla, etc. etc....)<br />
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<b><u>Saudi Banker - Representative from JPM: </u></b> "I'm in for $1 Billion...."<br />
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<b><u>Chinese Banker - Representative from NYB/Mellon: </u></b>"We will do what we can...." (Thinking: is my jet ready? I gotta get out of here......Caymans for the weekend...) <br />
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Here's the problem......<br />
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Under normal circumstances, Investors understand the time value of money. They expect to receive a lower interest rate (compensation) for the flexibility of a short term commitment (a few months) than they would receive for 10, 20 or 30 years. Better said, they should expect a significant premium for a 30 year commitment. They expect that the Federal Reserve would keep their social contract with the American Worker and Investor and manage interest rates and the money supply, keeping inflation in check, while also keeping the economy (and asset values) chugging along properly and in proportion.... and like Goldilocks, everything should be just right.<br />
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This makes perfect sense in a "guaranteed" Treasury environment where there's (theoretically) no risk of default. The time value of money is a given. It's understood. The problem is that often, the math doesn't work. Investors lose faith. They lose faith in institutions, politicians, the FED, asset valuations and become conflicted by their own perceived inability to cope with the forever looming risk du jour. Like an attractive, young, bright, single woman who can't decide on which lucky young man she should settle on, in times of uncertainty, investors want to keep their options open. They shy away from any 10, 20 or 30 year commitments.<br />
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Generally, when there's a bit of uncertainty (or as I've described in this blog for the last few years, questionable asset valuations, global bubbles and misrepresentations, the likes of which have never been seen before in financial history) Investors, once they start to figure it out, of course, begin to look for a safe place, usually, cash, money market, short term high grade & government debt, etc.. They move out of risk assets (stocks/funds/low-grade-long bonds, etc.). They want to hide out until the mess blows over and things settle down.....but you all know that.<br />
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Wealthy foreign investors and Multi-National Businesses who can put their money anywhere, generally choose the most regulated, stable (and/or least taxed) financial systems, markets and vehicles, wherever located. They look for places around the globe to park money when their respective economies "hiccup". Historically, the US, the dollar and US government securities have been such a destination. "In God (and <i>Uncle Sam</i>) We Trust". Of course, when we see investors flock to T-Bills and short term government debt, they bid up the price (and push down the yield). People and institutions are willing to pay dearly to park money in safe places. When the world is in flames, I'd be happy to pay $1,001 for a one month $1,000 T-Bill (-1.2% Yield) if I absolutely know, <i><u>with certainty</u></i>, I'm going to get my $1,000 back in a month. That's how we get to 0% (or negative) Interest rates. People fight over access to "<i>Will Rogers Money" ...they are more concerned about the "return of" rather than the "return on" their money.</i><br />
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Interestingly, this hasn't happened... yet. Yields on T-Bills are at about 2.5% and the 30 Year Long Bond is, as of a few hours ago, just over 3%.....we've got a "flat" yield curve.<br />
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<span style="font-size: large;"><b><u>Yield Curves - Today vs. the Last Three Recessions....</u></b></span><br />
<span style="font-size: large;"><b><u><br /></u></b></span>
All data, except the yield on today's Auction (inserted ad hoc), is derived from Treasury.gov.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGNUqgGfhwamGbkwqHHNNy3tzMZd-wwrBiYxbYPM5w8BIYPyIcrNW_IAdwi0yt9OjWITbRzaAgvNjb62DCn45uVPr5ZphnXj9J2wMSk6QxiUieIxjjczPOS6NOQmb9PyQ40prta_ghTEM/s1600/Yield_Curve_1-10-19.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="326" data-original-width="750" height="276" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiGNUqgGfhwamGbkwqHHNNy3tzMZd-wwrBiYxbYPM5w8BIYPyIcrNW_IAdwi0yt9OjWITbRzaAgvNjb62DCn45uVPr5ZphnXj9J2wMSk6QxiUieIxjjczPOS6NOQmb9PyQ40prta_ghTEM/s640/Yield_Curve_1-10-19.png" width="640" /></a></div>
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<b><u>Daily Treasury Yields - Treasury.gov</u></b><br />
<a href="https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2019"><span style="color: blue;">https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2019</span></a><br />
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I've charted the current yield curve (1/10/19 <b><span style="color: red;">Solid RED</span></b> Line) and compared it to the "Great Recession" 12/31/07 Pre-CrisisYield Curve (<b><span style="color: red;">Dashed RED</span></b> Line) and the 12/31/09 (Slightly Healthier looking, more normalized, Post Crisis <span style="color: #6aa84f;"><b>Dashed GREEN</b></span> line)<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgRqI81z84KP3BJRp2LR4ymU3uiw4pNC-O0wIpkX40FQfmpDkPUwtJQq-fY9bJJ36AZJShtIsdEVEWOXlY0N6ReExuP3jjQ4zzQqrz6KIACLrGRa5T-9-udphziUY-9hyphenhyphenzpZJOamGxtl9g/s1600/Great_Recession_Yield_Curve.png" imageanchor="1" style="clear: left; display: inline !important; margin-bottom: 1em; margin-right: 1em; text-align: center;"><img border="0" data-original-height="763" data-original-width="1099" height="444" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgRqI81z84KP3BJRp2LR4ymU3uiw4pNC-O0wIpkX40FQfmpDkPUwtJQq-fY9bJJ36AZJShtIsdEVEWOXlY0N6ReExuP3jjQ4zzQqrz6KIACLrGRa5T-9-udphziUY-9hyphenhyphenzpZJOamGxtl9g/s640/Great_Recession_Yield_Curve.png" width="640" /></a><br />
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When we compare the current curve to the curves prior to and following the <i>Great Recession</i> we note a couple of things.<br />
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1.) The slope of the curve today more closely resembles the "Pre Recession" curve than the "Post Recession" curve.<br />
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2.) The 30 Year Bond Yield held relatively constant at about 4.5% through the 2008/2009 Recession.<br />
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3.) When we look at the "Post Recession" curve, we see that the yield on short term Treasuries collapsed as dealers bid up the price of the notes and bills. Dealers/Investors at the time, apparently had no problem making low interest "Pay Day" loans to our <i>Rich Uncle Sam</i> in exchange for flexibility and his guarantee that nothing could possible go wrong. They were concerned about the "<i>return of</i>" not the "<i>return on</i>" their money.<br />
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We also note that the pattern is similar for the two recessions prior to the "Great" one.<br />
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When we examine the curves from the Dot-Com (2000-2001) Recession (below), again, we have a flat "Pre-Recession" curve with rates running between 5% and 6% for the length of the curve. The 2007 "Post Recession" curve exhibits similar characteristics as the 2008/2009 Post-Recession curve. The (Safe Money) short term yields collapsed and the long end of the curve held relatively constant at Pre-Recession levels (5.5%), about 2.5% higher than today.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiSHcInXnBaJn_PE3XmW449YjpYt9nkSvy_3dIM1PwuoJ-rFDdfw4zkCysa5vfPeneEgJIOYbuBOxO8Xo1LLHBj8Fy5_I0xpIoNpkAhhn2LSY7Gon-yeLPs3JnK-Wvq46AIPvAotTeJqA8/s1600/Dot-Com_Recession_Yield_Curve.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="788" data-original-width="1103" height="456" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiSHcInXnBaJn_PE3XmW449YjpYt9nkSvy_3dIM1PwuoJ-rFDdfw4zkCysa5vfPeneEgJIOYbuBOxO8Xo1LLHBj8Fy5_I0xpIoNpkAhhn2LSY7Gon-yeLPs3JnK-Wvq46AIPvAotTeJqA8/s640/Dot-Com_Recession_Yield_Curve.png" width="640" /></a></div>
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Now let's take a look at my favorite recession, the 1990/1991 "Post Reagan Recession". At the time, I had been working my way up the corporate ladder and had just been given my first controller-ship. I was promptly handed both the "Crash of 1987" and the 1990/1991 Post Reagan Recession to work my way through. I had no idea what the hell was going on. Good times!<br />
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We can see that the Pre-Recession and Post Recession Curve comparisons are consistent with both the above 2008/2009 Financial Crisis and the 2000/2001 "dot-com" implosion.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJBNe95fVORo4wiM6W06sh7MhjTTGLMV42a7-iwR29g-q_B5n1NlB962eAJGRMG_WmxMcxgzHBv0bXjdAtBcRoV9IQHhXeezbC2ZIjET3QnKhW4bkbA8EB42m5H6TstCC64yRNjqOnMSI/s1600/Post-Reagan_Recession_Yield_Curve.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="774" data-original-width="1099" height="450" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgJBNe95fVORo4wiM6W06sh7MhjTTGLMV42a7-iwR29g-q_B5n1NlB962eAJGRMG_WmxMcxgzHBv0bXjdAtBcRoV9IQHhXeezbC2ZIjET3QnKhW4bkbA8EB42m5H6TstCC64yRNjqOnMSI/s640/Post-Reagan_Recession_Yield_Curve.png" width="640" /></a></div>
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We also note that the "Post Reagan" Pre-Recession Curve was again flat, with all rates hovering at about 8%, a full 5% higher than the flat curve today. Post recession, once again, we note that short term yields fell significantly lower (4% less...about half of the Pre-Recession yield) while the long term rates remained about the same as Pre-Recession levels (8%)<br />
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Again, thinking through what's happening today, if the curve shape holds, we can anticipate that once the flight to safety hits, short term rates will most likely move to zero or marginally negative (that "<i>Will Rogers rule</i>" again), while longer term rates will remain at roughly 2.5% to 3%....or GAP UP!. Unfortunately, because rates have been so low for so long, I'm not sure how much rate relief our friends at the FED will be able to give us.....or our rich Uncle Sam.<br />
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As Uncle Sam continues to go to the bond markets and starts to unload an increasing number of those awesome 10,20 and 30 Year Bonds, trying to finance his drunken sailor deficit spending, my guess will be that, like today, these bond issues will stumble a bit and will eventually fall flat on their face. Investors will demand that the "time value of money" must be restored.....so <i>Uncle Sam</i> is in the unenviable position where his Treasury holds the auction and private investors, dealers and banks are only willing to submit outrageous bids (by <i>Uncle Sam's</i> standards). If the bonds are to be sold, the primary (and perhaps only) buyer could be the FED.....the Treasury will be printing fresh American "Troubled Assets" and the FED will be implementing auto-TARP the second the bonds hit the street.....Ouch!<br />
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<b><u><span style="font-size: large;">My Little Cheat Sheet...</span></u></b><br />
<b><u><span style="font-size: large;"><br /></span></u></b><b style="color: red;">If you fully, really, truly, absolutely understand how bond math works, feel free to skip ahead to "What the 30 Year Auction Told Us Today...." Personally, I just find bond math fascinating to think about....</b><br />
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I've used this handy little chart (below) for years. Remember, common stocks are Voodoo and magic....stock pricing requires guesses about the business, management, prospects, products, projections, business models, opportunity, CEO persona, etc. It's lots of fun and really invigorating!<br />
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High Grade Bonds are just boring old math.....no Voodoo involved.<br />
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We know <i><u>exactly</u></i> how a Treasury bond/note is going to behave as interest rates change....unless that "risk free return" concept somehow goes awry.<br />
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The following comments refer to my "cheat sheet" below.....<br />
(<i>Note that these calculations are based on the Net Present Value - NPV of one coupon payment paid the end of each year. There are more sophisticated products/calculations which take coupon timing and exact days outstanding into account and accurately calculates the precise yield of a specific issue. You can make one quite easily on any spread sheet program. My "full" Cheat Sheet starts at an interest rate of 0.5% and runs to 20.0%. I've pasted the section from 2.0% to 5.0%. (today's relevant range) to illustrate. The "Cheat Sheet" is for illustration purposes only and should be "directionally" correct.....again, because of variables with each bond/note issue, it's more of a guideline than a rule...)</i><br />
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When you buy a bond, and hold it to maturity you are buying two things 1.) The present value (NPV) of the principal payment you'll receive down the road, and 2.) The present value (NPV) of the income stream (coupon payments) you'll receive on a periodic basis.<br />
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The "Cheat Sheet" below describes the NPV of the Principal Repayment and the NPV of the Coupon/Interest payments for a $1,000 principal invested at various terms from 1 yr. through 30 years. (I've omitted the "Bill" calcs for simplicity) You can see that as the term of the bond increases the present value of the principal repayment decreases. The greater the interest rate, and the longer the term, the more "discounted"and the less valuable the principal becomes. Using the 2% rate, $1,000 paid back next year (NPV $980.39) is worth much more than $1,000 paid back 30 Years from now (NPV $602.41), or discounted at 5% 30 years from now (NPV $377.36)<br />
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Further, at higher interest rates, the present value of the coupon income increases. At a 2% interest rate, the present value of the coupon stream on a 30 Year Bond is $447.93. It's $768.52 at a 5% Interest rate.<br />
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As a bond owner, if interest rates and inflation remain constant at 2% you get $20/yr. for "renting" your money out to <i>Uncle Sam</i>. After 30 Years, you've got a NPV of both the Principal Repayment and the Income Stream of $1,050.34. You're $50.34! ahead! ....and you've incurred zero default risk!<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhOly0F2FJK89OwVAy-1DCuQlqwf_LfihYPSSNnoQxNDLIRBwe5zgSogMsy789DPfhR4E8z5YbqNChSuqAm32UdoaA-tipy6LohgWvpb-bFdPbd0oDqz7l2laknJSh5IYeSYJDKUdxpicE/s1600/Bond_Pricing_2%2525vs5%2525.png" imageanchor="1" style="clear: left; display: inline !important; margin-bottom: 1em; margin-right: 1em; text-align: center;"><img border="0" data-original-height="608" data-original-width="752" height="515" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhOly0F2FJK89OwVAy-1DCuQlqwf_LfihYPSSNnoQxNDLIRBwe5zgSogMsy789DPfhR4E8z5YbqNChSuqAm32UdoaA-tipy6LohgWvpb-bFdPbd0oDqz7l2laknJSh5IYeSYJDKUdxpicE/s640/Bond_Pricing_2%2525vs5%2525.png" width="640" /></a><br />
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We also note, sadly, that as interest rates go up, bond holders get...well....to be blunt....killed. If I own a 30 Year Bond with a 3% coupon, and interest rates go to 5%, the NPV of my Bond Principal (To be paid back in 30 Years) decreases by $125. ($502-$377=$125) and I'm stuck with the 3% Coupon ($30/yr.) which would also be discounted at the "new" 5% rate, when I should be getting my 5% Coupon ($50/yr.). So a 2% increase in interest rates destroys $127 of my Coupon NPV ($588-$461 = $127). By holding the bond to maturity I lose $252 ($125+$127) or about 23% of the NPV of my bond. If I were to sell the bond I'd experience this $252 loss immediately, since my bond NPV is only worth $838 now....rather than the NPV of $1,090 I was expecting.<br />
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Note that on the way down the math actually works in reverse.....the NPV of the principal payment INCREASES and we get to KEEP the income stream from the higher coupon. So the value of my bond INCREASES by (about) 23% as interest rates fall 2%! If you bought a ton of 30 Year T-Bonds in 1991 and held on to them, you've done pretty well....your NPV on the Principal has increased substantially and your 8% Coupon is looking pretty good right now...and has been for quite sometime. Talk about stimulus!<br />
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After all of the above calculations, given that UST's are "guaranteed undefaultable", even though their NPV can change dramatically as interest rates move, they remain the ultimate collateral. Which, of course, also means that sharp traders and investors can design all sorts of awesome devices to lever up. Futures, swaps, derivatives, ETF's, etc. etc. are all designed to hedge risk, or amplify speculative gains (and unfortunately... losses). Then of course, we had to invent "Credit Default Swaps" which protect the holder of derivatives and related securities from default by the institution backing the derivative, which is tied to all of this guaranteed safe collateral. Let's just hope everyone knows exactly what they are doing. <br />
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To sum it up, that's why it drives me nuts when people say things like "what's the big deal...it's only 25 basis points"!....it's not the move in rate that causes the disruption....the problem is that the rate change impact is compounded over 10, 20 or 30 years and has an immediate, guaranteed impact on the NPV of the security as well as anything else tied or leveraged to it.<br />
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In other words Jay Powell has absolutely no idea what's going to happen when he announces an interest rate change. Nobody does....and nobody could.<br />
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<b><u><span style="font-size: large;">What the 30 Year Auction told us today......</span></u></b><br />
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Last year in my discussions with my very knowledgeable, bond trader friend, Tim Bergin, we discussed why so many bond market transactions were "failing" as well as the possibility of a "gap up" in interest rates. You can read (or reread) the discussion here. <b><a href="https://deep-throat-ipo.blogspot.com/2018/01/treasury-fails-revisited.html"><span style="color: blue;">Treasury Fails Revisited....</span></a></b><br />
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The "gap up" occurs when the price a buyer is willing to pay for a T-Bond drops significantly (and the yield pops) since the security has fallen out of favor and trust in the FED, the economy and the implied social contract, or all of the above, are broken. Like Cinderella, today, the 30 Year T Bond wasn't invited to the Prince's ball.<br />
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There are dire consequences to this. My guess is that we will be seeing this play out in future auctions on a regular basis. Once note/bond owners/buyers/holders collectively decide "hey...we need a better return" they bid less for the bonds and push the yield up. Possibly wayyy up.<br />
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At some point, the FED will no longer have control of interest rates. No matter how dovish FED policy becomes, once long bond holders even sniff the hint that debt will be monetized, interest rates will go where the debt owners (lenders) choose to take them. Either the time value of money will be restored to their satisfaction, or they won't buy the bonds (make the loans). <br />
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Here are two Dallas FED charts I really like. The first shows the total Federal Debt (Treasury Securities) outstanding over time. The second shows the aggregate debt in relation to par value.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiO3m4umX6KoYpfqTs4KoFUqkd6l5NH7e5KP767CmUq3qmWBdIIxXfgUvWIjzE7-CpPR7Ujfa8UlJZX_rgajuNxXukHKfWaHs5EO8p-KSz6Xj_oOCoJEOMVEPiRc9rjyW5sSp3Ka_9GkkE/s1600/Market_Value_of_US_Govt_Debt.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="563" data-original-width="988" height="363" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiO3m4umX6KoYpfqTs4KoFUqkd6l5NH7e5KP767CmUq3qmWBdIIxXfgUvWIjzE7-CpPR7Ujfa8UlJZX_rgajuNxXukHKfWaHs5EO8p-KSz6Xj_oOCoJEOMVEPiRc9rjyW5sSp3Ka_9GkkE/s640/Market_Value_of_US_Govt_Debt.png" width="640" /></a></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhm8IyRUBbiUOCu8HAx9OP6SXi_5f9O_7Jr2qRiUpsHmtwrr7dXey2jSywSViP7XrnnAtAWdcCXcOtq1alGc5OyKD5zr8rPCw-rUDnCjhlW-n6pkmudENvHbmUlUzj43WZgqUfGlsI00b0/s1600/Market_Value_Index_of_US_Govt_Debt.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="615" data-original-width="1006" height="390" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhm8IyRUBbiUOCu8HAx9OP6SXi_5f9O_7Jr2qRiUpsHmtwrr7dXey2jSywSViP7XrnnAtAWdcCXcOtq1alGc5OyKD5zr8rPCw-rUDnCjhlW-n6pkmudENvHbmUlUzj43WZgqUfGlsI00b0/s640/Market_Value_Index_of_US_Govt_Debt.png" width="640" /></a></div>
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Total US Debt Markets (Public & Private) are somewhere around US$70 Trillion now (or about 3x Us Equity Markets). "Risk-Free" Government Debt (UST's, etc.) are about $22 Trillion of the US$70 Trillion total. By definition, the $48 Trillion of "non Treasury" debt has at least some level of default risk. These notes and bonds may (or may not) have been underwritten properly and may (or may not) have a proper risk premium attached. In any case.....it's not "chump change".<br />
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It's also interesting to note that for the first time since 1995 (Chart 3 Above) the Market Value of government debt has dipped below par value, which would be expected in periods of rising interest rates (see circa Volker days) even though the FED Funds target has only increased 2% in the last two years. We're seeing more debt bought/sold at a discount to par than any time in recent history, again due to the impact higher interest rates have on the NPV of longer term debt.<br />
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<span style="font-size: large;"><b><u>So....Why is the Stock Market Selling Off? and why will the Sell Off continue?</u></b></span><br />
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I know you want answers, you deserve the truth....I just hope you can handle it...<br />
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As I've described above, people who really, truly understand what's happening, know that the Bond Markets (eventually) set long term interest rates, not the FED. Our Rich <i>Uncle Sam</i> has been borrowing money from us (Investors) via the Debt Markets at an ever accelerating pace. Like you, me or our businesses, when we are employed, sales are up, we're successful, we have paid down our debts and have some savings in the bank, lenders are clamoring to loan us long term money (mortgages, car loans, business loans, etc.) at favorable rates. They trust us. When times are tough, perhaps we're between jobs, we've not been wise with our money, had a bad break or two, or we've acted like drunken sailors on leave, lenders decline our loan requests and saddle us with higher interest rates, fees and usurious "Pay Day" style options. They raise the rates and fees because there's an increasing probability they won't be paid back. (i.e. we'll default) <br />
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Now, remember those charts above? The flat yield curve with the bottom dropping out of the short end (Pay Day Loans) when times get tough? We also see the long end (20 yr. & 30 yr.) "Gapping Up", as it did a teeny tiny bit today and when lenders (Debt Markets) require ...you know....a little something for the effort.....other than "total consciousness".<br />
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When we look at the balancing that's been done over the years we see that, to elaborate, our financial leadership (Greenspan, Bernanke, Yellen and now Powell) seems to have backed us into a bit of a corner. The two <b><a href="http://budgetmodel.wharton.upenn.edu/issues/2018/8/15/when-debt-rises-the-treasury-rebalances-to-long-term-securities"><span style="color: blue;">Wharton Charts</span></a></b> below (Wharton kids, for the most part, are pretty sharp cookies!) illustrate the problem pretty well. In 2007, Marketable Government debt amounted to $4.52 Trillion, of which $1.94 Trillion (43%) had a maturity of 4 years or more.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSnNhmZNZz_IQmOORoNqvrzenHHQu3AW4jrqTKYXGUvy8vRy2HF8fU95h1M3ZEMuxS7xFp1plShqKbttcHMVlH_nEOQC07v41DHX8zffKAGlS4dGwpdE85ah42XKa6iFvf3sbNM93MGio/s1600/Maturity_Structure_Federal_Debt_2007.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="757" data-original-width="1059" height="456" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgSnNhmZNZz_IQmOORoNqvrzenHHQu3AW4jrqTKYXGUvy8vRy2HF8fU95h1M3ZEMuxS7xFp1plShqKbttcHMVlH_nEOQC07v41DHX8zffKAGlS4dGwpdE85ah42XKa6iFvf3sbNM93MGio/s640/Maturity_Structure_Federal_Debt_2007.png" width="640" /></a></div>
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Now, let's fast forward to 2017, described in the second Wharton chart below. Marketable Government Debt amounted to $14.38 Trillion, of which $7.2 Trillion (50%) had a maturity of 4 years or more. So today we have about $5 Trillion more longer term debt out there ($10 Trillion total) than we did "Pre-Crisis". Remember my "Cheat Sheet" above? All of this debt will have to be discounted, and the present value of both the principal and the coupon flows will be beaten down as interest rates rise. The longer the term of the debt, the more brutal the beating. Discounts on this debt will be exaggerated (and yields will spike) as they always do, until we reach some sort of equilibrium. Even the rating agencies (who normally don't pull their heads out of the sand until well after the insolvency or bankruptcy filing(s)) are <a href="https://www.reuters.com/article/usa-rating-fitch-idUSL8N1Z92B1"><span style="color: blue;"><b>beginning to take notice</b></span>.</a><br />
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With perfect 20/20 hindsight, this problem would have been much easier to solve and unwind had our <i>Rich Uncle Sam</i> been less aggressive and issued short maturity debt rather than long maturity. It would have been much less painful to bring interest rates back up to normalized levels. Uncle Sam did exactly what any smart borrower would do.....he locked in favorable rates for as long as possible. The problem is....that the lender is the American people....it's us.....our <i>Rich Uncle Sam</i> screwed us....we American voters are not getting paid enough for letting him piss away our money.....he really got the best of us on that deal.<br />
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Again, with the benefit of perfect 20/20 Hindsight, I'd imagine that if all of the American savers, workers and retirees were still getting 4% on their really simple, straight forward "golden passbooks" and Certificates of Deposit and had been adequately compensated for the time value of <i>their</i> money, they wouldn't have blindly redeployed all of their savings into hot, indecipherable funds and vehicles brimming with risk assets which had those assets anonymously shipped off shore... and the world would have never become one giant "risk on" bubble....but I digress.<br />
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Today, the FED can only cut the Funds target so much (2.5%) by my rudimentary math. Of course, the debt markets can force the yield negative if the demand for safe money accelerates. After today's relatively pathetic showing on a paltry US$16 Billion Auction, the Markets are flashing the Treasury a pretty clear signal....They are saying....please stop.<br />
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Are we entering an era where we have a yield curve with 0% on the short end and 15% (October 1981) on the long end?.....since the market will soon be loathe to make a 30 year commitment? Or will <i>Uncle Sam</i> take the less embarrassing road and simply stop issuing long dated debt (Like they did in Circa 2002 thru 2006). Will our government financing be done on a Pay Day Loan basis forever?....will that be our only option?<br />
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In the past, the FED has cut rates going into the recession/panic (see VenabalePark.com chart below) in an effort to stabilize markets and/or save the financial system. At a 2.5% T-Bill Yield I might question whether going back to zero would even be enough. If you've read my past work in this blog, the Chinese have "created" out of thin air, an additional<a href="https://deep-throat-ipo.blogspot.com/2019/01/keeping-it-simple-short-and-to-pointand.html"> <span style="color: blue;"><b>US$50.1 Trillion of brand spanking new Financial Assets</b></span> </a>that are just a hiccup or two away from going bad. <br />
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<img height="288" src="https://pbs.twimg.com/media/DwUvBZ2U8AAgfxK.jpg:large" width="640" /><br />
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<a class="ProfileCard-screennameLink u-linkComplex js-nav" data-aria-label-part="" data-send-impression-cookie="true" href="https://twitter.com/CoryLVenable" style="background: rgb(255, 255, 255); color: #66757f; font-family: "Segoe UI", Arial, sans-serif; font-size: 14px; outline: 0px; text-decoration-line: none !important;"><span class="username u-dir" dir="ltr" style="direction: ltr !important; unicode-bidi: embed;">@<span class="u-linkComplex-target" style="text-decoration-line: underline !important;">CoryLVenable</span></span></a><br />
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As I peruse the after-market-close postmortem commentary and Twitter feeds from the talking heads every day, I can only emphasize that what's happening to markets today (both debt and equity), no matter what you are being told, even though it's incredibly entertaining, what's happening today has nothing to do with the <i>Trade War</i>, <i>White House Tweets</i>, the <i>Wall</i>, the <i>Shutdown</i>, <i>Democrats</i>, <i>Republicans</i>, <i>Mexicans</i>, <i>Russians</i> or <i>Bob Mueller</i>.....it has everything to do with a decade of horrific, politically motivated, easy way out, global monetary policy. And we are at risk of forfeiting the American Dream because of it. <br />
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<b><u><span style="font-size: large;">Advice....</span></u></b><br />
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Finally, for all of you <i>moon-phase watching</i>, <i>double shoulder fanatic</i>, <i>contango observing</i>, "<i>Buy the Dip</i>", "<i>Stocks ALWAYS go up in the long run</i>", "<b><a href="https://youtu.be/VNYNMM0hXXY"><i>Oooppsss I hit a rogue wave</i></a></b>" dudes and dudesses out there who have somehow convinced people that you know exactly what you are doing and fully understand what's happening......You don't! This post was dedicated to you. I'm trying to help you.<br />
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You are continually told about the "strong economy" and that everything is going along just fine and dandy. You are repeatedly told about low unemployment (where everyone has three jobs just to get by, unless you work in healthcare of finance), low inflation (that's true, we may never have CPI inflation again, at least in my lifetime, since none of the monetary expansion has made it down to the "three jobs" people who would actually spend the money), average wages continue to rise (that's true as well, wage increases for six-figure finance and healthcare workers by far outpace the wage increases for the "three job" people). You absolutely should not be listening to this "everything is just fine and dandy" folly. We are already in the middle of a crisis, you just don't see it yet. Please take steps to protect yourselves and your clients if you can.<br />
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To be clear, unless you are a global titan of finance, you have no idea what the next 24, 48 or 72 hours holds in store for you, much less the next six months. (<b><u>Hint:</u></b> If you are running ads on Sunday morning local TV and/or holding "informational meetings" at Applebee's or Red Lobster trying to convince retirees and grandmothers to pony up their/your $10,000 minimum so you can "protect" their hard earned money....you are probably not a "titan of finance".)<br />
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I want you to really think about this and try your best to protect your and your client's money. This is not a "buy the dip....don't worry be happy" event....this is the beginning of an Armageddon-like financial meltdown of Biblical proportions.<br />
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Here's the last chart of the day....<br />
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Referring to the chart above. To sum up what's been happening over the last few months in both the bond and equity markets, it's an unmistakable flight to safety. Remember... "Smart" money, defined as that invested by "Titans of Finance" (higher volume <b><span style="color: red;">RED BAR</span></b>) "gets out" on the way down...."Dumb" money, defined as money invested by nice naive folks like you and me (lower volume <span style="color: #38761d;"><b>GREEN BAR</b></span>) continues to buy the dip....at least as long as they/we have money to buy it with.<br />
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Oh....and I almost forgot.....if you've been following my work you already know that because of China/CCP/PBOC monetary policy and the world's opaque off-shore banking system, the <span style="color: blue;"><b><a href="https://deep-throat-ipo.blogspot.com/2018/12/twas-night-before-christmas.html"><span style="color: blue;">global financial system is also imploding</span></a>.</b>...</span><br />
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Happy investing....and don't say I never warned you.....<br />
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<b><u><span style="font-size: large;">Finally, I know exactly what you are about to ask......</span></u></b><br />
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You want to know how I can possibly write all of this analysis so soon after the results of the auction are published? Literally just a few hours ago? The answer is relatively straight forward. I wrote most of this last weekend when I had a little free time. I just filled in the details today, updated the charts and hit the publish button once today's Auction and Market Results came in. It's relatively easy to analyze things, and life becomes much simpler, when you are pretty sure you know exactly what's going to happen. I just can't tell you exactly <i><u>when</u></i> it will happen.<br />
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But I'm sure you already knew that I was going to say that.....<br />
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<b><span style="font-size: large;"><u>Additional References</u></span></b><br />
Daily Treasury Yields - Treasury.gov<br />
<a href="https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2019"><span style="color: blue;">https://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yieldYear&year=2019</span></a><br />
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Market Value of US Government Debt<br />
<span style="color: blue;"><a href="https://www.dallasfed.org/research/econdata/govdebt#tab2">https://www.dallasfed.org/research/econdata/govdebt#tab2</a></span><br />
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Fitch UST Downgrade warning 1/9/19<br />
<span style="color: blue;"><b><a href="https://www.reuters.com/article/usa-rating-fitch-idUSL8N1Z92B1">https://www.reuters.com/article/usa-rating-fitch-idUSL8N1Z92B1</a></b></span><br />
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Deep Throathttp://www.blogger.com/profile/02712515268051858186noreply@blogger.com7tag:blogger.com,1999:blog-7478408299955066555.post-13083611915155459362019-01-01T20:16:00.000-05:002019-01-02T09:02:40.082-05:00Keeping it Simple, Short and to the Point....and China has US$50.1 Trillion of new Financial Assets!<div dir="ltr" style="text-align: left;" trbidi="on">
Over the holidays I've been asked by a number of my readers and friends to make an effort to simplify the issues I've been discussing over the last few years. One of the suggestions, from a very astute money manager/friend of mine was "Nobody get's it!.....could you just put the most important stuff in one chart or table with citations?"<br />
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My response, not fully knowing exactly how I was going to approach this pile of financial spaghetti, was...."I guess I can try..."<br />
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So here goes.....<br />
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If you want a 30 Second Summary, just scan the graphics and <b><span style="color: red;">read the text in RED</span></b>.<br />
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After making my iron clad commitment to simplicity, almost on cue, the PBOC, on December 28th, published the long awaited (several months overdue), English version of their epic, annual, "no problem...nothing to see here" <i>Financial Stability Report</i>.<br />
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As usual, it's a laugh out loud gut-buster of a document filled with classic economic humor and side splitting financial one liners. But, in keeping with the spirit and direction of my informal, reader focus group, I'm <i><u>not</u></i> going to attempt to dissect the entire 246 pages of the report.<br />
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I'll confess, I don't understand some of it. I've tried. Believe me, I've tried. The problem is, to be kind, that it's a compendium of silly flotsam and odd financial jetsam, set adrift in a sea of irrelevant drivel. There are probably nuggets of accuracy buried in it somewhere, but I've, as of yet, failed to identify them with certainty.<br />
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The purpose of the PBOC's <i>Financial Stability Report</i>, as far as I can tell, is to fully describe the financial condition of the Chinese economy and let the world know that "China" is on top its game and doing a great job ....at everything. All's well.....nothing to see here.<br />
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As you also know if you've been a long time reader of this blog, I've been really concerned about China's meteoric "Questionable Financial Asset" growth and the impact that it might have on the global economy.<br />
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Keeping with the new "<i>Simple,Short to the Point</i>" theme, I'm going to try to boil this entire mess down to a couple of <i>Simple, Short and to the Point Tables</i>, complete with page number references......here they are:<br />
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The chart below has been compiled primarily from figures from the just released <b><span style="color: blue;"><a href="http://www.pbc.gov.cn/english/130736/index.html"><span style="color: blue;">2018 Financial Responsibility Report</span></a> (page 62)</span></b><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEitTHd0NvSD0donRzKeItpkq4nBwlhnR-6m4XcFGnQjhYG9zQ_hVHuG_5KEYTsitCc_rbkn91OGA30bg_9I53W6e1QV41zeBDNwfLN4wkBz1l0fvYw0lIPCmJQNJlDLTyrXIjffIE8u4Q0/s1600/PBOC_2014thru2018_FSR_EST_ASSETS.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="386" data-original-width="754" height="326" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEitTHd0NvSD0donRzKeItpkq4nBwlhnR-6m4XcFGnQjhYG9zQ_hVHuG_5KEYTsitCc_rbkn91OGA30bg_9I53W6e1QV41zeBDNwfLN4wkBz1l0fvYw0lIPCmJQNJlDLTyrXIjffIE8u4Q0/s640/PBOC_2014thru2018_FSR_EST_ASSETS.png" width="640" /></a></div>
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Highlights of the above:<br />
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<b><span style="color: red;">1.)</span></b> <b><span style="color: red;">In four short years the Chinese Government has "created" 380 Trillion RMB or US$ 50.1 Trillion (US$ equivalent) in Financial Assets out of thin air. The US$ (currency adjusted) value of these Financial Assets increased a whopping 22% in 2017 and forecast growth of 8% for 2018.</span></b><br />
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2.) The 2015 & 2016 figures include the "newly discovered" (Restated) Off-Balance Sheet (OBS) Assets disclosed in the 2017 Report (For YE 2016).<br />
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3.) During this incredible run, Non-Preforming loan ratios actually improved. Chinese bankers have always had a reputation as tough, relentless underwriters. (For you Chinese bankers reading this....that was what we call "sarcasm" in America). Here's the quote (pg. 60) <i><span style="color: blue;">"Downward pressure on assets quality alleviated. By end-2017, the total outstanding NPLs of banking institutions recorded RMB 2.39 trillion, an increase of RMB 195.7 billion y-o-y. The NPL ratio dropped by 0.06 percentage point y-o-y to 1.85 percent." </span></i><br />
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4.) In the 2017 FSR (2016 YE Data) the PBOC appeared to be extremely concerned about the OBS Asset growth. Here's the quote from page 48 of the report: <span style="color: blue;">"<span style="font-style: italic;">In 2017, the foundation for a resilient economy
and a sound financial market is still not firm,
the downside pressure on real economy
cannot be overlooked, and great attention
should be attached to the challenges and risks
confronted by the banking sector. The banking
sector will remain committed to the mandate
of contributing to the real economic growth,
attach more importance to risk prevention,
improve risk management and hold on to the
bottom line of preventing systemic risks from
happening." </span></span><span style="color: #666666; font-style: italic;"> </span>Since the time of this prophetic writing the PBOC has continued to "pay great attention"..."improve risk management" and try their best to "prevent systemic risks from happening"......by supporting Financial Asset growth at an annual rate of 14%! ....uh oh...<br />
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5.) By extrapolation and applying the demonstrated 2017 Financial Asset growth rate (quantifying the PBOC's commitment to financial austerity and tight money) to 2018 we can calculate/forecast that Chinese Financial Assets (as of yesterday) now amount to roughly 634 Trillion RMB (US$ 92.2 Trillion) or probably about 1/4th of all financial assets on the planet at current exchange rates.<br />
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6.) During the same time period the RMB has weakened by only 13%. (6:05 v 6:88)<br />
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<b><span style="color: red;">7.) No economy, in history, has ever created financial assets, in equivalent reserve currency at this pace or level.....EVER.</span></b><br />
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Given the above, relatively shocking Asset Growth (even though the PBOC says "All's well...nothing to see here"), let's compare the above PBOC Figures to those previously provided to the <i>Financial Stability Board</i> for the <i>Global Shadow Banking Monitoring Report</i>. The FSB Figures (2014, 2015 & 2016) are taken from the <a href="http://www.fsb.org/2018/03/global-shadow-banking-monitoring-report-2017/"><span style="color: blue;"><b><i>2017 Data Set</i></b></span></a>. 2017 Data should be available in the March 2019 Report (2018 Data Set)<br />
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When reviewing the figures we note a significant disparity between the <i>PBOC Financial Stability Report</i> and those provided to the <i>Financial Stability Board </i>(Since the numbers are all being reported by the PBOC, one would think they should be the same). Here are the bullet points<br />
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1.) We note that the figures reported in 2014 were about the same (give or take a "Trillion" or two! US$ 40.0 Trillion vs. US$ 42.1 Trillion) At that time Chinese Financial Assets were roughly 12% of Global Financial Assets as reported by the FSB. Moving forward to 2016, the disparity grew to 20.6% vs. 14.4%. (The "newly discovered" OBS Assets)<br />
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2.) When we fast forward to 2018, extrapolating the trend and accounting for an estimated decline in Total Global Asset Values over the last month we can forecast, based on 2017 growth rates that Chinese, Mainland RMB Assets are now roughly 27% of all Global Assets. (in dollar terms as of 12/31/18).<br />
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3.) In the 2017 FSR (2016 YE Data) the PBOC attempts to explain the US20.9 Trillion disparity between their own financial asset figures, and those reported to the <i>Financial Stability Board,</i> while half-heartedly acknowledging the risk associated with the meteoric growth of mainland Shadow Banking. Here's the absurd quote found buried on page 151. <span style="color: blue; font-style: italic;">"Such business is of low transparency and is easy to evade regulatory requirements for loans. Moreover, part of the money is invested in prohibited areas and most of the money is not yet covered by statistics of the TSF (Total Social Financing)" </span><span style="color: red;"><b>I believe that what the PBOC FSR is saying is that they don't include significant Shadow Bank Assets in their reporting to the to the FSB. Like most things Chinese, if it makes them look bad....they leave it out... </b></span><br />
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In other words, there's a good chance that, at the current exchange rate, Chinese Asset Values now exceed total US Financial Assets at the end of 2018 (Total US Financial Assets were US$90.2 Trillion as of 2016 per the FSB data Set). How could this happen?.....because very little is written off or written down. Bad Assets are rewritten, refinanced, rolled over and/or revalued. US$ Trillions are locked into <span style="color: blue;"><a href="https://www.scmp.com/economy/china-economy/article/2179289/chinese-state-bank-chief-warns-against-buying-property-now">f<span style="color: blue;">ar from liquid, vacant, overvalued residential real-estate, mortgages and wealth management products tied to same</span></a>. </span> There's no such thing as a default or a non-performing loan or WMP in China.<br />
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<b><span style="font-size: large;"><u>Why Are the Numbers Different?</u></span></b><br />
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From my perspective, the numbers produced by the PBOC in their "Financial Stability Report" (an oxymoron if there ever was one) should exactly match the numbers they provide to the <i>Financial Stability Board</i>. Total Bank Assets and Off Balance Sheet Assets are specific terms with specific definitions, yet, the figures seem to "jump around" and differ by tens, or even hundreds of Trillions of RMB depending on the document/source. There are a number of possible explanations for this....here they are:<br />
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1.) I'm (<i>DeepThroatIPO</i>) making a mistake in my reading of the reports and really don't understand what I'm looking at. There could be some sort of definition issue or translation problem which causes the Trillions of dollars of differences in the figures and there's a simple answer for this anomaly. Everyone who matters is already aware of it and I'm last to the party. (I doubt it since the PBOC Report was just issued last Friday night). If any economist or banker out there has a handle on what's really happening, or if you believe I'm dead wrong, I'd love to hear from you.<br />
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2.) The PBOC has a "second set of books" that they provide to the <i>Financial Stability Board. </i>This also makes perfect sense, you know, just like the silly filings on the US$2.733 Trillion (Feb. 2018 valuation) of goofy Chinese IPOs on US Exchanges. I'm told "Dual Bookkeeping" is nearing epidemic levels in China.<br />
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3.) The PBOC simply has no idea what it's doing and just "makes shit up". None of these numbers are actually calculable or accurate from the mish-mash, duct-taped-together financial systems they've conjured up and they just want to issue a rosy, feel good report for all the world to see. "Assets" are a good thing....right? The "trillions" could also be typos, slipped decimal points or mistakes, as been posed by a few of my troll-ish readers. As a rebuttal, I'd suggest that typos and math errors are occasionally acceptable for bloggers, journalists and pundits, but they shouldn't be present in Central Bank documents. <br />
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4.) The PBOC reports are politically motivated propaganda tools disbursed by the CCP. The authors simply report big, gigantic, impressive numbers that they believe Xi wants to see, so they don't end up in one of those Xinjiang region re-education camps along with the <a href="https://www.bbc.com/news/world-asia-china-45474279" style="color: blue; font-weight: bold;">Uighurs</a><span style="color: blue; font-weight: bold;">. </span> Avoiding re-education is most likely a primary career objective for most Chinese Bankers and Economists nowadays.<br />
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The point I'm making is that the idea that these disjointed, nonsensical, inconsistent, figures could possibly be accurate, reliable or free from bias is laughable.<br />
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<b><span style="color: red;">TO BE CRYSTAL CLEAR, SIMPLE, SHORT AND TO THE POINT.......IF THE PBOC FSR IS ACCURATE, THEN THE FINANCIAL STABILITY BOARD REPORT IS DEAD WRONG! </span></b><br />
<b><span style="color: red;"><br /></span></b>
<b><span style="color: red;">THE FSB REPORT WOEFULLY UNDERSTATES THE LEVEL OF GLOBAL ASSETS, DUBIOUS SHADOW ASSETS AND THE INHERENT RISK OF DEFAULT ASSOCIATED WITH SAME.</span></b><br />
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<b><span style="color: red;">THERE ARE ROUGHLY US$ 28.2 TRILLION ($92.2T-$64T) OF FINANCIAL ASSETS OUT THERE (AS OF YESTERDAY) THAT THE WORLD'S CENTRAL BANKERS DON'T KNOW ARE THERE, NOR DO THEY UNDERSTAND THE SIGNIFICANCE RE: MONETARY POLICY </span></b><br />
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<b style="font-size: x-large;"><u>The Relationship of China's Financial Assets to "Fake" GDP</u></b><br />
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Here's a nice graphic I like, describing 2017 Global GDP by region/country.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgrbf7SJqt1zJAOLaZGsYct2-GYOaazrnl1fXadyNOpKcg6RcVPkpkVC4dgKnSbivXih7ptVaSg3d_cEYSXImbkjvaGJW32TfuaA2ELEW8KHiCLO6-nAZ44FGZEpdgPn0SpuhfrDFhtiPw/s1600/world-economy-gdp.jpg" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1415" data-original-width="1600" height="564" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgrbf7SJqt1zJAOLaZGsYct2-GYOaazrnl1fXadyNOpKcg6RcVPkpkVC4dgKnSbivXih7ptVaSg3d_cEYSXImbkjvaGJW32TfuaA2ELEW8KHiCLO6-nAZ44FGZEpdgPn0SpuhfrDFhtiPw/s640/world-economy-gdp.jpg" width="640" /></a></div>
<b><u><span style="font-size: large;"><br /></span>
Focusing on the period from 2014 thru 2017:</u></b><br />
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In 2014, China GDP was US$10.48 Trillion compared to Total Financial Assets of US$42.1 Trillion (i.e. Financial Assets were 4x GDP). By 2017, China GDP increased to US$ 12.24 Trillion and Mainland Financial Assets increased to US$85.3 Trillion (i.e. a multiple of 7x GDP)<br />
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As a point of reference US Total Financial Assets have been relatively constant at roughly 5x GDP (FSB figures) over the same time period. <br />
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<b><u>The Simple Question is:</u></b> How in the name of Paul Volker could any economy (China) create an additional US$43.2 Trillion (US$85.3T - US$42.1T) in Financial Assets in three (3) years, while increasing GDP by only about US$400 Billion a year.<br />
<b><span style="color: red;"><br /></span></b>
<b><span style="color: red;">In the three year period from 2014 thru 2017 the Chinese economy created US$25.00 of new Financial Assets for every dollar of GDP. If we use PGDP (Productive GDP) in the ratio, it's probably about US$40.00 of Financial Assets per dollar of PGDP. How could this possibly happen?</span></b><br />
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<b><u>The Simple Answer is</u></b>: It can't!<br />
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<b><u><span style="font-size: large;">There You Have It! </span></u></b><br />
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Simple, Short and to the Point.....I invite you to read the PBOC report in its entirety. It's a hoot!<br />
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Here are just a few of my favorite quotes from the Executive Summary :<br />
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<i><span style="color: blue;">The economic and financial development and reform and the defusing and
tackling of major risks during the past one year have not only reduced financial
risks, improved stability of the financial system, laid the foundation for the
economic transformation and development in the next five years or an even
longer period, but also contributed to growth and sustained recovery of the
global economy. </span></i><br />
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Well.... based on the numbers, that's not exactly what I might have concluded. Apparently, they are looking for a "thank you" from the world?<br />
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<span style="color: blue;"><i>The Chinese economy is going through the
transformation of high-speed growth to high-quality growth and structural
adjustment, thus some financial risks of a grey rhinoceros nature may still
come up.</i></span><br />
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I'm glad they are concentrating on quality over quantity, otherwise they might have created US$100 Trillion of junk assets rather then just US$50.1 Trillion. I also wish the PBOC wouldn't refer to the POTUS as a "grey rhinoceros". So disrespectful.<br />
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<i><span style="color: blue;">However, the fundamentals of the Chinese economy featured by the
large volume, huge market and strong resilience have remained unchanged.
The basic policy orientation of reform and opening up has remained and
will not change.</span></i><br />
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"Opening up?" Really? Do you have any Uighurs, Muslims or Tibetans working at the PBOC? Have you talked to any US Tech Companies about how open you are? Can your "regular" citizens transfer money offshore without a financial rectal exam? Can your workers move to a new Chinese city or take another job without getting CCP approval? Do you still bulldoze Chinese houses and throw the homeowners on the street when a crooked, connected party member developer wants to put up a high rise? Why are all of those journalists and college professors deported or re-educated? What exactly do you have against Canada? How about unblocking this blog on the mainland? Openness my ass.....Just sayin'......<br />
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That said, Chinese self reported Financial Asset growth doesn't make any sense. It could be that the PBOC FSR is accurate, or the Financial Stability Board is accurate or "none of the above" is accurate. In any case, managing intelligent, functioning monetary policy in this environment is not possible.<br />
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Right now, again if we were to guess, since China doesn't publish any real/believable numbers, debt service, at current mainland interest rates on US$92.2 Trillion of non-performing Financial Assets is rapidly approaching half of China's fake GDP. The assets might actually exist in some form, but if they do they are poised for monetization, their economic values to be inflated away (currently underway) or default over time. The only remaining question is, when will this devastation finally hit the exchange rate, properly reflecting the true value of the Chinese economy.<br />
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The Chinese Financial Cancer is now officially terminal and the malignancy has spread to every corner of the globe, thanks to the world's anonymous, offshore banking system and sophisticated Off-Balance-Sheet financial tools (Swaps, Repos, Cross Border Listings, FOREX Bonds/Notes/Loans, Cryptos, etc. and any other derivative tool our amazingly creative American, Japanese and EU Bankers can dream up.)<br />
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If you'd like to read more detail about how US Banks, Regulators and the off shore financial system have at best failed us, and at worst have been complicit in this debacle (for hefty fees), please feel free to peruse some of my prior posts. Here are two of my relatively recent, better efforts that you might enjoy.<br />
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<a href="https://deep-throat-ipo.blogspot.com/2018/12/twas-night-before-christmas.html"><span style="color: blue;"><b>Twas the Night Before Christmas...</b></span></a><br />
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<b><a href="https://deep-throat-ipo.blogspot.com/2018/10/when-will-xi-click-sell-button.html"><span style="color: blue;">When Will Xi hit the Sell Button?....</span></a></b><br />
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<b><u><span style="font-size: large;">One Final "What the Hell?"</span></u></b><br />
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This just popped into my inbox from a reader.....it appears that as the Chinese Equity Markets dry up, Chinese fraudsters.....I'm sorry....I meant to say "Chinese entrepreneurs" have continued to scour the world for dopey "China Dream" investors courtesy of US Investment banks. For the first time in history, at least that I'm aware of, a nation's "off shore" new listings & corresponding capital raises have actually surpassed that same nation's "on shore" raises.<br />
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<span style="font-family: inherit;">In 2018, <span style="background-color: white; color: #222222;">the capital raised by Chinese IPO listings in the US & HK (offshore) of US$40 Billion, was greater than capital raised on the mainland US$18 Billion.....again, these figures might all be suspect....but who the hell knows anymore.....</span></span><br />
<span style="font-family: inherit;"><span style="background-color: white; color: #222222;"><br /></span></span>
<span style="color: #222222;"><span style="background-color: white;">That's right, an economy the size of China's is raising more equity money via off-shore listings than on-shore. Apparently, Chinese mainland investors have very little faith in their "entrepreneurs". </span></span><br />
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<a data-saferedirecturl="https://www.google.com/url?q=https://www.ft.com/content/36e15a18-07a1-11e9-9fe8-acdb36967cfc&source=gmail&ust=1546349592188000&usg=AFQjCNFMWL6Op9xuUwB6rzV0SyH-fnoKtw" href="https://www.ft.com/content/36e15a18-07a1-11e9-9fe8-acdb36967cfc" style="background-color: white; color: #1155cc; font-family: arial, helvetica, sans-serif; font-size: small;" target="_blank">https://www.ft.com/content/<wbr></wbr>36e15a18-07a1-11e9-9fe8-<wbr></wbr>acdb36967cfc</a></div>
<div style="color: #222222;">
<span style="font-family: inherit;"><br /></span><span style="font-family: inherit;">Does that make any sense at all?</span></div>
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Anyway.....<br />
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<b><span style="font-size: large;">HAPPY NEW YEAR!</span></b><br />
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<b><span style="font-size: large;"><u>Resources:</u></span></b><br />
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PBOC - All FS Reports - 2018 Report Published 12/28/18 (English Version)<br />
<a href="http://www.pbc.gov.cn/english/130736/index.html"><span style="color: blue;">http://www.pbc.gov.cn/english/130736/index.html</span></a><br />
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Financial Stability Board - Global Shadow Banking Monitoring Reports and Data Sets<br />
<a href="http://www.fsb.org/2018/03/global-shadow-banking-monitoring-report-2017/"><span style="color: blue;">http://www.fsb.org/2018/03/global-shadow-banking-monitoring-report-2017/</span></a><br />
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Actual Text - pg 62 of the 2018 PBOC FSR<br />
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SCMP - China Construction Bank Chair Warns of housing bubble....<br />
<a href="https://www.scmp.com/economy/china-economy/article/2179289/chinese-state-bank-chief-warns-against-buying-property-now">https://www.scmp.com/economy/china-economy/article/2179289/chinese-state-bank-chief-warns-against-buying-property-now</a></div>
Deep Throathttp://www.blogger.com/profile/02712515268051858186noreply@blogger.com5tag:blogger.com,1999:blog-7478408299955066555.post-24305913842872846222018-12-19T16:51:00.002-05:002018-12-25T22:47:22.040-05:00Twas the night before Christmas.....<div dir="ltr" style="text-align: left;" trbidi="on">
<i><span style="color: blue;">....and all through the bank.....not a creature was stirring.....ne'er the ghost of "Old Hank"....</span></i><br />
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<i>Our investments were placed by the chimney with care in hopes that FED accommodation, continuing and exacerbating years of horrific, politically motivated policy decisions, soon would be there.....Oooppss.....Not happenin' today!</i></span><br />
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I know, I know....my poetry doesn't exactly flow.....but it's accurate....<br />
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Yes, it's that time of year once again. It's that special holiday time when we take a moment or two to reflect on the year's events, set backs and successes. We think about all of the wonderful times, family and friendships we've been blessed with. We rejoice and marvel in how fortunate we've been to somehow skip gleefully, unscathed through the mine field of life, oblivious to the myriad financial disasters lying in wait for us at every turn and round every corner.<br />
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Last week, a friend of mine stopped by my office to share some Christmas cheer and, as is the norm with our discussions, our banter eventually morphed from the insurance industry, local business gossip, Holiday events and parties, family, gifts and the Cleveland Browns, to, finally, of course, Chinese Monetary policy.....as nearly all office conversations do nowadays. Typical Yuletide chit chat.<br />
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When we were discussing the relative dollar/RMB strength, my (very smart) friend brought up a reference and a few related thoughts that I hadn't considered since I was a wet-behind-the-ears finance student at the University of Wisconsin, many, many years ago. Thus, the genesis of today's post. The term that came up was.... the "<i>Triffin Dilemma</i>".<br />
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For those of you who don't recall, or never had the pleasure of meeting Bob, the <i>Triffin Dilemma</i> is a reference to the work and related 1959 Congressional testimony of Yale economist Robert Triffin, who argued, in a nutshell, that if the US Dollar is/was to remain as the preferred currency to settle the world's international trade, the Treasury would be required to supply "the world" with sufficient US Dollar currency to support global trade growth. As global economic activity would grow, specifically, trade transactions where America wasn't a party (but dollars were....think today's Petro Dollar transactions) the United States would have to run increasingly larger Balance of Payments deficits to support these transactions. (i.e. providing a stable reserve currency for the world's trade). <br />
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Simply put, continued, increasing, Balance of Payment (Current Account) deficits would be required by the United States if the US Dollar were to be used as the world's reserve currency.<br />
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Triffin argued, well ahead of his contemporaries, that the system would eventually become unsustainable ( the "Dilemma") as the amount of currency (backed by gold) required would mandate unfundable, ever increasing Balance of Payments deficits and/or threaten the confidence/stability of the US Dollar's gold backing/guarantee. The Treasury would be forced to starve the world of dollars.<br />
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As is most often the case for truly revolutionary, yet painfully obvious economic thinking, Professor Triffin's work was largely ignored by politicians, bankers and business people until 1971 when everything he'd predicted became reality and what we now refer to as the "Nixon Shock", as Triffin expected, materialized. The administration was forced to abandon the Bretton Woods Agreement, taking America off the gold standard, closing the "gold window", leaving the world with the US Dollar as a floating reserve currency. The US Treasury would no longer exchange US Dollars for gold on demand. The world would become a floating, market dependent <i>fiat </i>currency world. The value of every currency would henceforth be determined by market forces (i.e. relative availability relating to supply and demand). In theory, everything would, of course, be just fine.<br />
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So let's take a look at what's happened to the US Economy since we've dumped Bretton Woods, using one of my favorite charts. (I can't take credit for it....citation below)<br />
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<img height="513" src="https://upload.wikimedia.org/wikipedia/commons/4/49/Real_GDP%2C_Real_Wages_and_Trade_Policies_in_the_U.S._%281947%E2%80%93_2014%29.png" width="640" /><br />
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Beginning in 1947 (when my dad had just come back from his all-expense-paid French vacation on the beaches of Normandy courtesy of the US Army) up to 1971, we note that the bellwether indicators, Real Wages, inflation and GDP were in relative lockstep. This is of course, before Al Gore invented the Internet, and high tech bankers came up with all sorts of sophisticated banking devices. Once we entered a floating world, we observe that the indicators have diverged dramatically over time. US GDP, both per capita and per FTE have skyrocketed. We also note, to our chagrin, (using the collective "our" here presuming that most folks reading this will have some sort of a "job") that Real Weekly Earnings for full time workers are about the same as they were in 1971, even though Real GDP per capita/FTE has skyrocketed, as an apparent byproduct of productivity, as well as labor and capital seeking both its optimum use and lowest financial price-point/cost. Economies around the world have been set free to export (and import) labor (jobs) capital and technology in competitive pursuit of lower costs and greater efficiencies and profits for the businesses who could navigate the new globalism. The chart below describes the net impact of these monetary and regulatory policies on Western governments over time.<br />
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<img height="409" src="https://signsofthelastdays.org/wp-content/uploads/2018/12/paris-france-riots.jpg" width="640" /> <br />
Ooopppsss......Oh Geezzz.....I'm sorry, by bad, that's actually a picture of last week's riots in Paris.....my mistake, I'm sure I'll locate that "productivity" graphic shortly, or at least by the time they put the fires out on the Champs-Élysées.<br />
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Anyway, as I was saying, here's the chart I was referring to.....<br />
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<img height="335" src="https://fm.cnbc.com/applications/cnbc.com/resources/img/editorial/2016/11/02/104071786-RTX2QM5I.1910x1000.jpg" width="640" /><br />
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Oh crap.....I screwed this up again....this is actually last month in Venezuela, I guess a little government corruption and "a million percent" inflation, wiping out the life savings of main street folks (they probably didn't get their cash converted to Offshore USD/Euros in time) will rub those poor, pathetic huddled masses the wrong way from time to time. We better get that wall up quickly, the US Southern border is just a few year's walk (maybe six months if they are in good physical shape) for these malnourished, unemployed, starving, "last resort" criminals.....I'll bet they are all members of MS13, or ISIS, or at least being actively recruited....if we could just come up with tear gas that doesn't hurt pregnant women, kids and old people....now that would be a technology worth an IPO!<br />
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Ok, now I've got it, here's the chart I was looking for (see below). This chart, although not as graphic as the above photos, should absolutely scare the living-holiday-reindeer-snot out of any highly trained (or barely competent) economist reading it. In economic terms, this chart depicts millions of people on the verge of starvation, going homeless or being shot and/or beaten to death in "real life". Highly trained Economists, as we all know, have a completely different fear threshold than mere mortals.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg3ENj8f0yHGDHKPOStV2YI4RwVp-ZWPFec7y4kaxYJV1l2ClWuT0Xk5GoSr-gMOqlpjQDWxJUjoTF7trP-PyDyVW7kSQu4yD1C5czCNeK7KZkEH_498Ud4ODdfhuII-UNsYdqGhwQxyn8/s1600/Global_Financial_Assets_Chart.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1314" data-original-width="1371" height="612" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg3ENj8f0yHGDHKPOStV2YI4RwVp-ZWPFec7y4kaxYJV1l2ClWuT0Xk5GoSr-gMOqlpjQDWxJUjoTF7trP-PyDyVW7kSQu4yD1C5czCNeK7KZkEH_498Ud4ODdfhuII-UNsYdqGhwQxyn8/s640/Global_Financial_Assets_Chart.png" width="640" /></a><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhkL_SdwiQGMR0qOZOGmg2_IhhzSytp-q4VT8SZX5M7wM9fR-M9N2YIOzE0Hxagu2EIEkPLhB43UsdWYmBy4pioUWkEwl1_4NE8drmgrbFOo9ox6yR46EdIaCIoFtHeIdryhp2NfgXi0l0/s1600/Global_Financial_Assets_Table.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="583" data-original-width="1022" height="364" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhkL_SdwiQGMR0qOZOGmg2_IhhzSytp-q4VT8SZX5M7wM9fR-M9N2YIOzE0Hxagu2EIEkPLhB43UsdWYmBy4pioUWkEwl1_4NE8drmgrbFOo9ox6yR46EdIaCIoFtHeIdryhp2NfgXi0l0/s640/Global_Financial_Assets_Table.png" width="640" /></a></div>
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The chart and table above were constructed based on data from the<a href="http://www.fsb.org/2018/03/global-shadow-banking-monitoring-report-2017/"> <span style="color: blue;"><b>Financial Stability Board's 2017 Shadow Banking Monitoring report data set (2016 data)</b></span></a> and the World Bank Development Indicators Data set (citations below).<br />
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The following is the most important statement in this post:<br />
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<span style="color: red;"><b>In broad, yet definitive terms, the chart above shows, with clarity, that the US Treasury and the FED have most likely lost control of the US, and by default, the global money/financial system. (Please read that again....it's really important!....I'll wait....go ahead....read that one more time.....let it sink in.)</b></span><br />
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Ok....take a deep breath.....let's keep going...<br />
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A few days ago Janet Yellen discussed the idea that "The FED has no idea what they are doing" as a hypothetical topic (my words not Janet's), in general terms, blaming their "lack of tools", although not fully understanding or acknowledging that her continuation of "Bad Gauges" monetary policy was a major contributor to the gigantic mess we're in today. Basing monetary policy on fudged, sampled, limited domestic metrics when the bulk of the systemic stress relates to foreign monetary policy (China), unregulated (off shore) funds flow, selective dedolarization and the Triffin-esque inability for the US Dollar to remain as the world's reserve currency, has become the undoing of the global financial system as we currently know it. <br />
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<span style="background-color: white;"><span style="color: blue; font-family: inherit;"><i>“I am worried that we are in a deregulatory mode and I see a lot of pressures building in the system to go further to really weaken fundamental safeguards that were created in Dodd-Frank. We are a decade after the financial crisis so that would be worrisome and wrong to do,” </i><span style="color: blue;"><b><a href="https://www.marketwatch.com/story/janet-yellen-is-worried-about-the-next-financial-crisis-2018-12-13?mod=mw_share_twitter"><span style="color: blue;"><i>J</i>anet Yellen - speaking at the Women in Housing and Finance holiday event (12/12/18)</span></a>.</b></span></span></span><br />
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Hindsight being what it is, all of these "pressures" and off shore capital flight could have been mitigated, at least to some extent, had we begun to normalize interest rates sooner, put in China-style "selective" off shore capital restrictions, both in and out (Caymans, Luxembourg, et al), and taken steps to understand the true origin and exposure to the "brand-spanking-new" US$150+ Trillion in globalized "<i>Fake Money</i>" Financial Assets, destined for default, that US Bankers (read US Taxpayers) will be intimately involved in cleaning up. As usual, the bankers made the mess, the regulators and legislators allowed it to happen....and the taxpayer will pay the bill.<br />
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Apparently, the FED has learned little from history, in <a href="https://www.federalreserve.gov/monetarypolicy/files/FOMC20081029meeting.pdf"><span style="color: blue;"><b>October 2008, then New York Fed President Timothy Geithner observed</b></span></a> that Europe “<i><span style="color: blue;">ran a banking system that was allowed to get very, very big relative to GDP, with huge currency mismatches and with no plans to meet the liquidity needs of their banks in dollars in the event that we face a storm like this</span></i>.” From the FOMC meeting transcript.<br />
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Here's some recent, behind the scenes video of the daily routine at the NY Fed's Open Market desk. Note the sophisticated decision process, based on state of the art data and metrics. The global economy, as we well know, depends on the meticulous execution of FED policy.<br />
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It's always been interesting to me that Amazon can track a US$4 parcel, time and date stamped, from Shanghai, to Paramus, to my Cleveland office (knowing virtually everything necessary about the parties involved) and the FED/Treasury can't tell the origin, final destination or purpose (without a court order in a complying jurisdiction) of a $50 Billion, US Dollar, layered wire transfer from Hong Kong to a Cayman Islands Bank. Weird huh?<br />
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The FED's ability to manage the US money supply, while other entities are free to create trillions of Off Balance Sheet USD obligations is the equivalent of Amazon trying to do eCommerce without package tracking or inventory control.<br />
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Bear in mind that the most recent data (above) is the YE 2016 Data Set. I would suspect that the data has been trending in a similar direction for the past two years. i.e.) it looks much worse today. Based on projected Asset Growth Rates we may have somewhere north of US$370 Trillion of Assets/Obligations on the world's books now, of which a significant chunk could be a tad over valued and poised to default. Of course we won't get the 2018 numbers until the Spring of 2020, which is unfortunate. As always, while the world's economists and politicians are relegated to looking in the rear view mirror, stocks, bonds, debt, derivatives and currencies are being priced in real time.<br />
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As you can see (above), I break the data/chart out into two sections, the first is what I call the "<i>Old Money"</i> and the other is what I lovingly refer to as "<i>Fake Money</i>". <i>Old Money</i> is described as that held by established, seasoned, open economies with highly developed transparent, banking, taxation, and monetary systems. <i>Fake Money</i> is best described as money held in jurisdictions where there is less transparency (perhaps a bit of chicanery) with financial asset location/creation and monetary policy, all having little to do with the underlying productivity of the related domestic economies. I've included China, the "usual suspect" Tax Havens (Caymans, Luxembourg, Switzerland, Hong Kong, et. al.) and "Other" (defined as everywhere else) as <i>Fake Money</i>. Before I get bombarded with Greek, Italian, Middle Eastern, etc. emails resulting from my "Other" being defined as "<i>Fake Money</i>" located "everywhere else", keep in mind that as monetary policy goes, and I know you "Other" folks hate to hear this, but you are all along for the monetary ride. Your sovereignty is a wonderful "feel good" convention, but it's largely irrelevant when compared to the Chinese/US/Tax Haven tsunami heading your/our way. <br />
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The observations I'd make are as follows, regarding the change in composition from 2008 to 2016:<br />
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<b><u><span style="font-size: large;">The "Old Money"</span></u></b><br />
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<ol style="text-align: left;">
<li>Since the financial crisis the "World" has created additional financial assets (obligations) of US$81 Trillion (31% increase). </li>
<li>During the same period, Reported Global GDP has increased US$12.5 Trillion (19% Increase or about 2% at a compound rate) This figure is several US$ Trillion less if you adjust for China's PGDP overstatement.</li>
<li>Financial Assets housed in the UK, France and Germany have actually declined by 17%. No wonder Paris is burning and Brexit is either happening or not based on the hourly headlines. btw - Do you own any Deutsche Bank stock?</li>
<li>Financial Assets housed in the Developed "Old Money" jurisdictions (US, UK, Germany, France & Japan) have increased a modest US$12.5 Trillion (7.4% increase or a 1% compound increase)</li>
<li>The "Old Money" increase, offsetting the decline in the UK, German and France Financial Assets primarily took place in the United States ($22.4 Trillion or a 33% increase) presumably due to "Reserve Currency" obligations (i.e. the Triffin requirement)</li>
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<b><u><span style="font-size: large;">The "Fake Money"</span></u></b><br />
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<li>If you've been reading this blog, or any other economic journals, papers or publications for that matter, you won't be shocked to hear that there's a sizable group of us who believe that the Chinese Communist Party has been cooking their books on reported GDP, Debt Levels, Currency, financial statements, transactions, NPL's, Asset Values, SEC filings, etc. etc. and virtually every economic statistic they've published over the last few decades. Shocking....I know...but It's truly bordering on the absurd now. (Luckily this blog is blocked on the Mainland and the CCP probably isn't reading this, so there's little/no chance that I'll be included in the Wanzhou Meng prisoner exchange package....I hope...) Anyway.....</li>
<li>The "Off Shore" money is comprised of financial assets housed in the Cayman Islands, Luxembourg, the Netherlands, Ireland, Hong Kong, Singapore and Switzerland. (US$51.7 Trillion) In 2016 "Off Shore" assets were approximately the equivalent of all financial assets housed in the UK, France and Germany combined. There is little/no "GDP" directly associated with these Assets. They are "Somebody else's money". But whose?</li>
<li>The same holds true for "Other". i.e.) Every economy outside of the "Off Shore" Money, the US, China, Japan, the UK, France & Germany...the "rest of the World", houses the equivalent financial assets (US$57 Trillion). Again, this "Other" figure is about the same, in big round numbers, as that of the UK, France and Germany.</li>
<li>Chinese domiciled financial assets increased from US$13.2 Trillion in 2008 to US$49.1 Trillion in 2016. A 257% increase, or at about a 20% compound rate. (again...not a typo)</li>
<li>Even though the USD is currently the world's reserve currency, the currency of choice in most trade and global financial transactions, NEARLY ALL of the US$81 Trillion increase in Financial Assets took place in <i>Fake Money</i> jurisdictions.</li>
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During the same period (2008 to 2016) Global GDP grew at a compound growth rate of just over 2%. An eyeballing of the figures would suggest that the world didn't require an additional US$81 Trillion of financial assets to create this meager growth. More likely, this relatively large increase in Financial Assets (Generally $6 of assets per year for every $1 of GDP) was a byproduct of capital misallocation, kicking the can down the road, as Central Bankers attempted to stem the inevitable tide of defaults.<br />
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In the chart below we examine selected M3 from December 2008 thru August of 2018. We also note that M3 generally tracks the asset growth in the Old Money/Fake Money chart above, with a few notable divergences....I would emphasize, that in the history of economics, we've never seen Money Supply growth/management like this in mature, industrialized economies. Never. We, for emphasis, now have to look at the world's monetary policy through Banana Republic spectacles. That's where we're at. <br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEici95OIDUb8TgUVdoyLXNTVUe6_qDB9C395Se2_CMpRQ-hqUHImWn62SYNicIzBFm1Way65ZdjBR9WOwYAfQM6Mj42gFFVNkYKD3rLw9_-2A7jiq3gjAggWRYzgGaO76IcSId47-bdbDM/s1600/Major_Economy_Money_M3_Growth.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="333" data-original-width="461" height="288" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEici95OIDUb8TgUVdoyLXNTVUe6_qDB9C395Se2_CMpRQ-hqUHImWn62SYNicIzBFm1Way65ZdjBR9WOwYAfQM6Mj42gFFVNkYKD3rLw9_-2A7jiq3gjAggWRYzgGaO76IcSId47-bdbDM/s400/Major_Economy_Money_M3_Growth.png" width="400" /></a></div>
From the figures, we immediately note that the Eurozone M3 (Including the UK) has increased a whopping 54% (a 5.5% compound rate) while the Financial Assets of Germany, France and the UK have actually been on the decline (see above). The ECB has been funding/carrying under-performing EU economies to the detriment of fiscally responsible economies for a decade. Unfortunately, Mario's amusement park is about to close.<br />
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Chinese M3 growth has been, well, I don't know that there's a word for it, a historic outlier perhaps? The Chinese money supply has been growing at a compound rate of 20% (again, that's not a typo either). Also note that China's M3 has declined slightly since the spring of 2018 when it surpassed US$28 Trillion. As we all are well aware, China's fake GDP target has long been 7%-ish. <i>Productive GDP</i> (PGDP) is probably about 4% +/-. A 20% compound increase in M3 and related Financial Asset Values (loans/debt) should be frightening to any economist when compared to a PGDP that low. What could possibly go wrong? <br />
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Moving ahead, the world's dollar denominated obligations/assets today are truly unknown. In the "good old days", financial assets in a specific jurisdiction were largely denominated in the domestic currency. Foreign currency was electronically sent "back to where it came from" since domestic markets had little use for it. Italian Citizens didn't own US Treasuries. Russian Oligarchs didn't buy NYC penthouses through shell companies in the Caymans. Chinese "entrepreneurs" didn't put "the world's biggest IPO" on the NYSE. Now they do. Today, there are roughly 200 currencies on the planet and about half of them (my guess) are pegged in some way to the US dollar. Foreign Banks and businesses routinely take (and hold) USDs for domestic transactions, perhaps hedging the currency risk with creative domestic financial products or perhaps not. Per the BIS, there is roughly US$110 Trillion in debt out there now (about a third of all financial assets), about double from 2005. International Debt Securities comprise about US$23 Trillion of that. Of course, most international debt is issued in or pegged to USDs. <br />
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We also know that Dollar Loans (i.e. debt that must be serviced and repaid in USD) made to Non-US, Non-Bank Borrowers is about US$10 Trillion now. Note the growth of same....<br />
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Today, particularly in the Tax Haven Jurisdictions, we have no way of knowing (at least that I'm aware of) the composition, by currency, of the financial assets (and hence, obligations) held. (Tim Geithner's concerns from the above FED FOMC minutes coming home to roost.) We know that 90%+/- of the FOREX transactions around the globe have the US Dollar on one side of the trade. There must be a reason for that, don't you think?<br />
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Anyway, the point of all of this is that all sorts of organizations, businesses and governments, outside the jurisdiction of the FED and the US Treasury, are issuing obligations in US Dollars. Everyone seems to be making promises in US Dollars that, by definition (since access to US Dollars is at least theoretically, at the discretion of the US Financial System, FED/Treasury) they may not be able to keep.<br />
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Speaking of "promises" here's a Bridgewater chart from the <i>The Long View</i> <span style="background-color: white;"><span class="username u-dir" dir="ltr" style="color: #657786; direction: ltr; font-family: "segoe ui" , "arial" , sans-serif; font-size: 14px; font-weight: 700; outline: 0px; unicode-bidi: embed;"><a class="ProfileHeaderCard-screennameLink u-linkComplex js-nav" href="https://twitter.com/HayekAndKeynes" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; color: #657786; font-family: "segoe ui", arial, sans-serif; font-size: 14px; font-weight: 700; outline: 0px;">@<span class="u-linkComplex-target" style="font-weight: normal; text-decoration-line: underline !important;">HayekAndKeynes</span></a></span> </span>I particularly liked:<br />
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<img height="491" src="https://pbs.twimg.com/media/Ddu_sDoVwAAobN7.jpg:large" width="640" /><br />
The chart is yet another example of the burgeoning obligations being forced, or some would say, self-inflicted, on the US financial system. Some/many of these promises, either foreign or domestic, won't be kept. The only remaining question is which ones and when?<br />
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<b><u><span style="font-size: large;">The Changing World.....</span></u></b><br />
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The point of all of the above is that the world and the way we finance it has changed significantly since 2008.....the waters are complex and muddied....let's sum it up:</div>
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"Money" is leaving the "Old Money" Domiciles and showing up in Off Shore Tax Havens at an unprecedented rate. The impact here is two fold: First, the fleeing money largely escapes taxation in the originating, home domicile (or anywhere), causing domestic tax revenue shortfalls and increasing budget deficits. Infrastructure and government services become underfunded/unfundable as a result of the capital flight and declining tax base. Second, when this money moves offshore it's rarely used to fund "main street" economic growth anywhere. It's not used to build businesses, bridges, roads or pay wages. It's not spent, it's saved. The money stays in financial products seeking/chasing a higher yield. It creates bubbles and the cycle continues.<br />
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We can observe the same thing about Chinese Money, but to a much greater degree. I've written ad nauseam about China's pegged Exchange Rate. Chinese newly printed fake money and related influence is splattered all over the planet now, from Luxembourg to the OBOR participants, to the US$2.733 Trillion (Feb 2018) silly/fake IPO's on US exchanges, to a good chunk of luxury real estate in NYC, Vancouver, Silicon Valley and the Bay Area, etc. etc. With the Chinese Money Supply growing at a 20% compounded clip since 2008, it should not be remotely possible for the exchange rate to remain constant (within a range) when compared to every other major currency, as described in the FRED Chart below (RED Line is the RMB), yet the condition continues to exist. The Chinese Communist Party has managed to "print" trillions of dollars and buy up Western Assets at a huge discount. I've said this often....this was brilliant!<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj-VSqMIl1nnWNnXoDRLHG1Nr8CdvRXqOaPRRIZjI_g-Fqcq0ceH-J9VHjobdLysUQafpBXq20InqBBaocws6arjxQ4CU4nKo-S3PU2AaLEsd8G8jFHuvf40AJ5Mxib9Hajwt5l7oVLtM4/s1600/FRED_Exchange_Rates.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="342" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj-VSqMIl1nnWNnXoDRLHG1Nr8CdvRXqOaPRRIZjI_g-Fqcq0ceH-J9VHjobdLysUQafpBXq20InqBBaocws6arjxQ4CU4nKo-S3PU2AaLEsd8G8jFHuvf40AJ5Mxib9Hajwt5l7oVLtM4/s640/FRED_Exchange_Rates.png" width="640" /></a><br />
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Per the Triffin effect, the FED is left with two options, the first is to provide sufficient (ever increasing) dollar funding as globalization increases, putting tremendous pressure on the dollar and effectively monetizing US financial obligations (this might actually happen "by accident"). Under the current model, as global trade grows, more, cheaper dollars would be required by "the world". Alternatively, the US could tighten (as is happening ever so slightly now), taking dollars out of the system, forcing the world to get by with fewer dollars and/or force a deglobalization/dedollarization, where everyone takes their political & monetary balls and bats and goes home. We're actually starting to see this now e.g. Bop! Zonk! Splat!....it's "<i>Tariff Man!</i>".<br />
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(The Long View <span style="background-color: white;"> <span class="username u-dir" dir="ltr" style="color: #657786; direction: ltr; font-family: "segoe ui" , "arial" , sans-serif; font-size: 14px; font-weight: 700; outline: 0px; unicode-bidi: embed;"><a class="ProfileHeaderCard-screennameLink u-linkComplex js-nav" href="https://twitter.com/HayekAndKeynes" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; color: #657786; font-family: "segoe ui", arial, sans-serif; font-size: 14px; font-weight: 700; outline: 0px;">@<span class="u-linkComplex-target" style="font-weight: normal; text-decoration-line: underline !important;">HayekAndKeynes</span></a>)</span></span><br />
<img height="640" src="https://pbs.twimg.com/media/DuWR1JnWoAAPdCh.jpg" width="573" /><br />
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The graphic below is from the <a href="https://www.yardeni.com/pub/peacockfedecbassets.pdf"><span style="color: blue;"><b>December 17th, 2018 Yardini Research briefing</b></span></a>. Total Central Bank Assets (FED, ECB, BOJ, PBOC) declining (tightening) by roughly US$1 Trillion since earlier this year to US$19.4 Trillion at the end of November. I discussed these concepts and consequences in a 2016 post entitled:<span style="color: blue;"> <i style="color: blue;"><a href="https://deep-throat-ipo.blogspot.com/2016/08/the-theory-of-financial-relativity.html"><span style="color: blue;"><b>The Theory of Financial Relativity....</b></span></a> </i></span>The conclusion at the time was "this can go on....until it can't". After reviewing recent central bank activity, it looks like the clock is about to strike "can't". <br />
<span style="color: blue;"><i><br /></i></span>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgRMPgUYRbyY2mNnFIL-rP7imBFJoM0JGfrYqkiO5UwZERcFXn763Ghe71DSeDL4PehMJFyJuK0PP9gclm-05pUE5wAtlHiEzc99sKowobEIBpeumX_ldSis6eFIy8rYREc6RXCN2TuySY/s1600/Central_Bank_Assets_2008-2018.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="309" data-original-width="391" height="504" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgRMPgUYRbyY2mNnFIL-rP7imBFJoM0JGfrYqkiO5UwZERcFXn763Ghe71DSeDL4PehMJFyJuK0PP9gclm-05pUE5wAtlHiEzc99sKowobEIBpeumX_ldSis6eFIy8rYREc6RXCN2TuySY/s640/Central_Bank_Assets_2008-2018.png" width="640" /></a></div>
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Central Banks are beginning to shut off the printing presses, shrink balance sheets and tighten. It's the equivalent of "taking away the punch bowl", however, not when the party just gets started, but after a two week bender in Vegas. Remember all of those dollar bonds? Global interest rates are finally (hopefully ever-so slowly and carefully) going up. Remember my 9% rule? For every 1% increase in interest rates, the value of a long bond drops by 9%? That math is going to become painfully relevant again.<br />
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If the rest of the world is going to keep "trading", and globalization is going to continue, the "world" will need to come up with a substitute reserve currency, payment system or hybrid. We need some sort of Utopian "floating" world with no cross border exchange restrictions for the dollar to be supplanted. Since, we've come too far down the fiat currency path to go back (cryptos, pork bellies, bologna futures, oil, Glenn Beck's "doomsday" gold coins, or just about any surrogate "hard" assets, are all insufficient in both quantity and infrastructure to support the US$370 Trillion in current financial assets) the most probable course would be, believe it or not, that we continue down the same foolish, special interest supported, meandering path that we've been on, causing all sorts of senseless disruption.<br />
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I'd also suggest that today's political environment makes it impossible to solve this problem in a painless fashion. "Cooperation" is a dirty word. Cheating is in vogue. Interestingly, history shows that horrific economic decisions are self correcting over time, although the results can be a bit unpredictable. A heavily armed insurrection or two somewhere wouldn't be out of the question if this spins horribly out of control. History also shows that the Dictators, Kings, Emperors, Imperial Grand Poobahs, <i>El Presidentes'</i> and their regimes rarely thrive when the commoners successfully storm the castle, so we can also expect some relatively radical changes in the way the world works coming to a Twitter feed near you. Civilizations rise and fall based on monetary and economic policy....so let's hope and pray in the spirit of the holidays that this all somehow works out.<br />
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We're starting to see fragmented evidence of this "accidental accelerated deglobalization" already.<br />
<ol style="text-align: left;">
<li>Global asset values are beginning to correct. Asset prices, real estate, equities, etc. will seek their economically supportable values over time, as they always do. The DJIA swinging down 900 points today (24,057 down to 23,162 in response to a 1/4 point FED rate increase and some guidance) would be one small indicator that this process is underway.</li>
<li>Current agreements, alliances and "promises" will be broken, NAFTA, TPP, the EU, the WTO, IMF, ACA, NATO, WTF, etc. etc. </li>
<li>There will be a rush to alliances between global trade partners and financiers based on perceived equitable relationships. The operative word is "perceived" the less astute will be taken advantage of. e.g..) The Chinese will "own" sub Saharan Africa, Venezuela, Pakistan, etc. etc. and all of the issues that go with these nations. We're already beginning to see this with bilateral <a href="https://www.frbsf.org/banking/asia-program/pacific-exchange-blog/banking-on-china-renminbi-currency-swap-agreements/"><span style="color: blue;">currency/swap</span></a> agreements, OBOR, investment commitments, etc. (<a href="https://www.cfr.org/interactives/central-bank-currency-swaps-since-financial-crisis?cid=otr-marketing_use-currency_swaps#!/central-bank-currency-swaps-since-financial-crisis?cid=otr-marketing_use-currency_swaps"><span style="color: blue;">Recent update</span></a>)</li>
<li>There will be a<span style="color: blue;"> <a href="https://www.scmp.com/economy/china-economy/article/2178037/trade-war-rages-china-may-step-efforts-create-alternative-us"><span style="color: blue;">fitful, fragmented, fruitless movement</span></a></span> toward a standard global, universal currency, perhaps based on an IMF/SDR concept as is resurrected by the CCP, as you'd expect, from <a href="http://www.nbcnews.com/id/29865124/ns/business-world_business/t/chinese-official-calls-new-global-currency/#.XBVV29tKiCh"><span style="color: blue;">time</span></a> to<span style="color: blue;"> <a href="https://abcnews.go.com/Business/story?id=7168919&page=1"><span style="color: blue;">time</span></a></span>. The PBOC has to do something to prevent the RMB from seeking its true value as they run out of options. <span style="color: blue;"><b><a href="https://ftalphaville.ft.com/2018/09/19/1537329600000/China-s-currency-will-not-replace-the-US-dollar/"><span style="color: blue;">Per the IMF</span></a> and SWIFT</b></span> today the RMB is used in roughly 2% of global payments. The RMB comprises only about 2% of Global Central Bank reserves. To be blunt, the idea that a propped currency which Chinese citizens feel compelled to stuff in their underwear as they board a plane, just so they can convert it to anything but RMB, might somehow become a "reserve currency" is delusional. My guess is that, again based on the current political environment, all of this effort would be unworkable and the current IMF/SDR framework will simply erode or become non-functional over time. Again, we'll see more trading partners leaving the sandbox as others get burned. The Chinese will blame America and the Americans will blame the Chinese. So it goes. </li>
<li>Enthusiasm for cross border listings is, of course, on the decline. The <a href="https://www.marketwatch.com/story/regulators-revive-china-audit-dispute-but-miss-prime-opportunity-to-fully-explain-why-2018-12-12?mod=mw_share_twitter"><span style="color: blue;">SEC actually came out with a recent statement</span></a>, inexplicably complaining about insufficient audits on Chinese companies that they, oddly enough, are responsible for regulating and chose to approve to list on US Exchanges. Saying in their statement: "<i>224 companies listed on U.S. exchanges, with a combined market capitalization of more than $1.8 trillion, have auditors located in countries that prohibit PCAOB inspections, most of them member firms of the Big 4 global audit networks. Almost all of the audit firms are in China or Hong Kong</i>." To reiterate, the figure I calculated was US$2.733 Trillion in February of 2018 so based on current price declines, US Investors are already down US$900 Billion this year because of these shams. Only US$1.8 Trillion to go..... Nice work Jay!</li>
</ol>
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<b><u><span style="font-size: large;">The "Deep Throat Conundrum" or "Theft by Va</span></u></b><b><u><span style="font-size: large;">luation"</span></u></b></div>
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Of course, the rarely discussed corollary to the <i>Triffin Dilemma</i> is what I'll refer to as the "<i>Deep Throat Conundrum</i>". <br />
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The <i>Deep Throat Conundrum. </i>simply put, states that, in a floating currency world, an economy which continually runs large Balance of Payments (Current Account) Surpluses, using sufficient currency/capital controls can manage their exchange rate to a pegged value. The "Impossible Trinity" can, for a frightening period of time, become possible.<br />
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If said economy (China) so chooses, that economy/country is able to print money and "buy" foreign assets at a whopping discount. (i.e. Today, the PBOC by virtue of accumulated US Dollar reserves, rather than market forces determines the value of the RMB). This "theft by valuation" (e.g. I print money in my basement and you sell me the Waldorf Astoria!....such a deal!) will most likely reset global asset values and topple the global financial system as currently constructed.<br />
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The "Conundrum" is only possible because the financial system we've (collectively "the world") developed and accepted is one built on the rationalization of amoral transactions and devices, justified by and in exchange for, significant compensation to the promulgators of same. Carefully crafted legal work, perspective and related legislation directed by special interests, in the name of protecting privacy and promoting free markets has made just about any movement of money both impossible to regulate and "technically" not illegal per se.<br />
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Quite a Conundrum indeed.<br />
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<b><u><span style="font-size: large;">Our Leadership</span></u></b><br />
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Since it looks like we're up against a good old fashioned market meltdown followed by QE money printing the likes of which we've not seen since the Wiemar Republic, enormous debt monitization, an eventual dollar devaluation/crash and an economic contraction of biblical proportions, it's indeed fortunate that we are guided by highly compensated financial professionals, relentless regulators and statesmen whose only concern is the well being of the American people.<br />
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Over the last few weeks, as the equity markets have begun to "take a dump" (technical bankers term), Yellen, Clayton, Geithner, <a href="https://www.cnbc.com/2018/12/13/jim-chanos-says-theres-something-wrong-with-the-stock-market-when-rates-this-low-cause-panic.html?__source=twitter%7Cmain"><span style="color: blue;">Chanos</span></a>, FED Officials, investors and the talking heads alike have all weighed in, in some form or another, describing in various degrees and terminology that something is a bit "wrong" with the markets. Ray Dalio, a relatively busy guy, actually just took the time to produce a 450 page tome entitled "A Template for Understanding Big Debt Crises". I'm forging through it over the holidays....as you might suspect, it's wonderfully written, but a really a tough read. Lots to absorb and think about. I'd also suspect that, since Ray has always been a big picture, time is of the essence kind of guy, I doubt that while he was writing this, he was thinking that:<br />
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"Hey.....everything is fine and dandy right now....perhaps I'll chronicle my concerns about something that could crop up around 2040....I've got nothing better to do.....no time like the present!"<br />
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That said, if you recall, back in 2008 "stay the course", "steady as she goes", "no need to panic" and "buy the dip" were all drinking games. Here's just one of the many, many examples of the fantastic, well thought out guidance the US Retail Investor has available at their beck and call on the Internet:<br />
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<iframe allowfullscreen="" class="YOUTUBE-iframe-video" data-thumbnail-src="https://i.ytimg.com/vi/1QEKdsEfLY0/0.jpg" frameborder="0" height="266" src="https://www.youtube.com/embed/1QEKdsEfLY0?feature=player_embedded" width="320"></iframe></div>
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If that's not inspirational enough for you, the video below is an outstanding example of the integrity, truthfulness and transparency that US CEO's have become known for, standing by their decisions, relentlessly, fairly representing the unvarnished truth to their investors regardless of consequences or the impact on their stock price.<br />
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<iframe allowfullscreen="" class="YOUTUBE-iframe-video" data-thumbnail-src="https://i.ytimg.com/vi/qJpo4YHyad0/0.jpg" frameborder="0" height="266" src="https://www.youtube.com/embed/qJpo4YHyad0?feature=player_embedded" width="320"></iframe></div>
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Finally, during the Holidays, in this festive time of jubilation, as we share tidings of great joy with our fellow men/women, we must be totally grateful for our political leadership. We are truly blessed to be led by dedicated, compassionate, grounded intellectuals who use their giant "<a href="https://www.mediaite.com/online/trump-claims-in-wild-interview-my-gut-tells-me-more-sometimes-than-anybody-elses-brain-can/"><b>brains</b></a>" to analyze complex problems, carefully calculating all of the possible permutations, consequences and ramifications of their meticulously crafted bipartisan policy, with their sole concern being the well being of the American people. I, for one, am confident our future is in the best of hands. If anyone can get us through the soon to commence financial crisis, our current leadership can! This administration, working in lockstep with Congress, as our founding fathers had intended, will deftly guide us toward the re-illumination of our <i>shining city on the hill</i>.... <br />
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Oh Geeezzz.....we are so screwed.....<br />
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Oh.....I almost forgot......MERRY CHRISTMAS!<br />
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<b><u><span style="font-size: large;">Additional Reading</span></u></b><br />
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World Bank Development Indicators<br />
<a href="https://datacatalog.worldbank.org/dataset/world-development-indicators">https://datacatalog.worldbank.org/dataset/world-development-indicators</a><br />
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Gross GDP for China<br />
<a href="https://fred.stlouisfed.org/series/MKTGDPCNA646NWDB"><span style="color: blue;">https://fred.stlouisfed.org/series/MKTGDPCNA646NWDB</span></a><br />
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GDP World<br />
<a href="https://fred.stlouisfed.org/series/NYGDPMKTPCDWLD"><span style="color: blue;">https://fred.stlouisfed.org/series/NYGDPMKTPCDWLD</span></a><br />
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<i>FSB Shadow Bank Monitoring Report - Excel Dataset</i><br />
<i><a href="http://www.fsb.org/2018/03/global-shadow-banking-monitoring-report-2017/"><span style="color: blue;">http://www.fsb.org/2018/03/global-shadow-banking-monitoring-report-2017/</span></a></i><br />
<i><br /></i><i>Venezuela is in trouble....</i><br />
<a href="https://www.cnbc.com/2016/11/02/venezuelas-problems-get-worse-as-protests-and-riots-become-more-violent.html">https://www.cnbc.com/2016/11/02/venezuelas-problems-get-worse-as-protests-and-riots-become-more-violent.html</a><i><br /></i>
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China - call for new reserve currency<br />
<span style="color: blue;">https://www.ft.com/content/7851925a-17a2-11de-8c9d-0000779fd2ac</span><br />
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The World's Reserve Currency - USD<br />
<span style="color: blue;"><a href="https://www.thebalance.com/world-currency-3305931">https://www.thebalance.com/world-currency-3305931</a></span><br />
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Carnagie Endowment - US Foreign Policy Impact on Middle Class America<br />
<a href="https://twitter.com/i/broadcasts/1yoKMjmkLPzGQ">https://twitter.com/i/broadcasts/1yoKMjmkLPzGQ</a><br />
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Michael Pettis - Thoughts on China & de-Globalization<br />
<a href="https://twitter.com/i/status/1073253716030095360">https://twitter.com/i/status/1073253716030095360</a><br />
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Jim Chanos - Something wrong.....<br />
<a href="https://www.cnbc.com/2018/12/13/jim-chanos-says-theres-something-wrong-with-the-stock-market-when-rates-this-low-cause-panic.html?__source=twitter%7Cmain"><span style="color: blue;">https://www.cnbc.com/2018/12/13/jim-chanos-says-theres-something-wrong-with-the-stock-market-when-rates-this-low-cause-panic.html?__source=twitter%7Cmain</span></a><br />
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US Budget Deficit Widens in November<br />
<a href="https://www.bloomberg.com/news/articles/2018-12-13/u-s-budget-deficit-hits-widest-on-record-for-month-of-november">https://www.bloomberg.com/news/articles/2018-12-13/u-s-budget-deficit-hits-widest-on-record-for-month-of-november</a><br />
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Janet Yellen Comments - Inability of FED Policy to react to the next financial crisis - Market Watch<br />
<a href="https://www.marketwatch.com/story/janet-yellen-is-worried-about-the-next-financial-crisis-2018-12-13?mod=mw_share_twitter"><span style="color: blue;">https://www.marketwatch.com/story/janet-yellen-is-worried-about-the-next-financial-crisis-2018-12-13?mod=mw_share_twitter</span></a><br />
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BIS - International Credit Markets<br />
<a href="https://www.bis.org/ifc/events/ifc_armenia_2018/Tissot.pdf"><span style="color: blue;">https://www.bis.org/ifc/events/ifc_armenia_2018/Tissot.pdf</span></a><br />
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Really Smart "Brains" are Required<br />
<span style="color: blue;"><a href="https://www.mediaite.com/online/trump-claims-in-wild-interview-my-gut-tells-me-more-sometimes-than-anybody-elses-brain-can/">https://www.mediaite.com/online/trump-claims-in-wild-interview-my-gut-tells-me-more-sometimes-than-anybody-elses-brain-can/</a></span><br />
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McKinsey - A helping hand to authoritarian government<br />
<span style="color: blue;"><a href="https://www.nytimes.com/2018/12/15/world/asia/mckinsey-china-russia.html">https://www.nytimes.com/2018/12/15/world/asia/mckinsey-china-russia.html</a></span><br />
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Yardini - Central Bank Balance Sheets<br />
<span style="color: blue;"><a href="https://www.yardeni.com/pub/peacockfedecbassets.pdf">https://www.yardeni.com/pub/peacockfedecbassets.pdf</a></span><br />
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China's Crumbling Reeducation System - The Onion<br />
(For my Chinese readers out there, this is what's referred to as "Weisenheiming Sarcasm")<br />
<span style="color: blue;"><a href="https://www.theonion.com/chinese-officials-vow-to-fix-nation-s-crumbling-reeduca-1819577410">https://www.theonion.com/chinese-officials-vow-to-fix-nation-s-crumbling-reeduca-1819577410</a></span><br />
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The OBOR "dollar problem" - Financial Times<br />
<a href="https://ftalphaville.ft.com/2018/12/18/1545130791000/The-Belt-and-Road-s-dollar-problem/">https://ftalphaville.ft.com/2018/12/18/1545130791000/The-Belt-and-Road-s-dollar-problem/</a><br />
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The RMB won't replace the dollar - Financial Times<br />
<a href="https://ftalphaville.ft.com/2018/09/19/1537329600000/China-s-currency-will-not-replace-the-US-dollar/">https://ftalphaville.ft.com/2018/09/19/1537329600000/China-s-currency-will-not-replace-the-US-dollar/</a><br />
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Deep Throathttp://www.blogger.com/profile/02712515268051858186noreply@blogger.com8tag:blogger.com,1999:blog-7478408299955066555.post-1182928310687363342018-12-03T00:37:00.000-05:002018-12-03T00:37:39.104-05:00More Dirty Laundry.....<div dir="ltr" style="text-align: left;" trbidi="on">
Earlier this year I had written about how the epidemic money laundering conducted on Alibaba, Amazon and Walmart.com store fronts had contributed to the economic devastation of heartland America over the years. See my <a href="https://deep-throat-ipo.blogspot.com/2018/05/amazon-walmartchinese-potting-soiland.html"><span style="color: blue;"><b><i>Amazon, Walmart,,,,,Chinese Potting Soil and the 34th Amendment....</i></b></span></a> post.<br />
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The <i>New York Times</i> recently picked up on the problem, as described in a wonderfully entertaining, head scratching article by Jenny Odell, cited below.<br />
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<b><a href="https://www.nytimes.com/interactive/2018/11/27/style/what-is-inside-this-internet-rabbit-hole.html?smid=tw-share"><span style="color: blue;">https://www.nytimes.com/interactive/2018/11/27/style/what-is-inside-this-internet-rabbit-hole.html?smid=tw-share</span></a></b><br />
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It's clear from the article that Jenny is a very bright, talented and inquisitive writer. She's a faculty member and lecturer at Stanford. I love the way she investigates and writes. It's also clear that she's not a forensic accountant, since she, unfortunately, missed the main theme of what she's written about. What Jenny has discovered and wonderfully described has been hiding in plain sight for years. Jenny has stumbled onto an exceptional mini-chronicle of "weirdness" that's become endemic in US eCommerce. Simply put, the Chinese Communist Party has designed an incredible ecosystem to facilitate money laundering, in their never ending quest for US dollars, using silly, questionable American e-Commerce storefronts. The CCP has become relentlessly adept at running exceptionally goofy eCommerce frauds operating right under regulatory noses, which move untold amounts of US Dollars off shore in exchange for no real value. <br />
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There is no other possible explanation for this coordinated buffoonery. There's no apparent, easy way to fix this problem without significant Amazon and Walmart participation. Unfortunately, both are effectively paid to look the other way. <br />
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This is much more significant to the US Economy and monetary policy than we are prepared to imagine. </div>
Deep Throathttp://www.blogger.com/profile/02712515268051858186noreply@blogger.com0tag:blogger.com,1999:blog-7478408299955066555.post-78162978139745240652018-11-18T21:32:00.000-05:002018-11-20T22:03:47.714-05:00OptionSellers.com.....a prologue of what's to come.....<div dir="ltr" style="text-align: left;" trbidi="on">
I don't know James Cordier and had never heard of him before last week. He's the CEO of <b><a href="http://optionsellers.com/"><span style="color: blue;">OptionSellers.com</span></a></b>. It appears that he somehow lost somewhere between $70 million and $150 million of his client's money (290 high net worth investors) last week. His website has gone dark.....his mea culpa video (below) is heartfelt, sad, disturbing and unfortunately, darkly comedic.<br />
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I'm sure Jim's a really nice guy, but like so many money managers, I'd suspect he got caught up in at least some level of success, with the resulting sense of infallibility and hubris, most likely causing him to double down on his "I know I can't be wrong" bets with other people's money. For today's Money Managers, being absolutely right ten years from now is the equivalent of being dead wrong for a decade. <br />
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I particularly enjoyed the personal apologies to his clients, friends and "family" along with his emphasis on how hard he had worked to "keep the boat from capsizing from the rogue wave" that consumed him. He recalled "walleye fishing on Lake Erie", regretted that he couldn't take the same clients "Bass fishing", thanked his Kansas City investors for the great barbecue sauce, owed another client a "Cuban sandwich" (probably not adequate compensation) and regretted not being able to join his French clients in Marseilles on the Riviera (presumably because the court is going to pull his passport). His relating of how he was so consumed with protecting his client's money that he would "pour a glass of red wine" and trade right through dinner was also touching.<br />
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I also liked the reference to his father, steering an "800 footer" on the Great Lakes and that he was unable to navigate that darned "rogue wave" that "capsized our boat".<br />
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There are lots of great salesman masquerading as a strategists/experts out there right now.....I'd guess that this is the first (and perhaps most interesting) of what I believe will be a tsunami of collapses and odd video apologies coming from money managers whose salesmanship skills by far exceeded their ability to actually manage money. You should probably view this clip as soon as possible as I'd guess his lawyers will probably have him pull it soon.<br />
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Jim, if you are reading this, and you really are sincere about your repentance, I'm hoping you have a loving family and support system behind you. You'll recover from this and hopefully, at some point, find solace in a new career that makes better use of your salesmanship skills and far less of your decision making prowess. If by some chance you aren't sincere, and you've already gutted the company, as is most often the way these things go, wiring what's left of your client's money into personal off shore life boats, I'm sure that will come out in the investigation(s) and well.....never mind what I said about that loving family and support system. You won't be seeing them for a while. In either case, you must be under tremendous stress right now, hopefully, you are making the right choices in consultation with your legal team as you work your way through this mess. I sincerely wish you all the best.<br />
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That said, here's the first solicitation for what I presume will be more that a few <b><span style="color: blue;"><a href="https://www.johnschapman.com/investment-fraud/optionsellers-investment-loss-recovery/"><span style="color: blue;">recovery law suits</span></a>.</span></b> Chapman/Albin, a Cleveland Ohio law firm apparently thinks there's at least some recovery avenue available against <a href="https://finance.yahoo.com/quote/INTL?p=INTL" style="font-weight: bold;"><span style="color: blue;">INTL FCStone, Inc.</span></a><b style="color: blue;"> </b>, or they wouldn't have taken this on (lawyers generally don't take cases where there's little/no probability of getting paid).<b style="color: blue;"> </b> <a href="https://finance.yahoo.com/quote/INTL?p=INTL"><b><span style="color: blue;">INTL FCStone, Inc.</span></b></a> is <i>OptionSellers.com</i>'s clearing broker and in all likelihood Chapman/Albin's recovery effort will be directed to breaches of "due diligence" and "know your customer" violations. Discovery on these things is always interesting. The phrase "what the hell were you thinking???" is often uttered under the claimant counsel's breath and a modified version of same is often described in the final settlement. At least, as far as <i>OptionSeller.com</i>'s 290 clients are concerned, they should consider themselves fortunate that there's a possible "deep pockets" involved in this mess. Most wronged clients aren't always that fortunate.<br />
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<b><u><span style="font-size: large;">The Only Reason I'm Writing This... </span></u></b><br />
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Let me be clear, in the grand, macro scheme of things, <i>OptionSellers.com</i> is irrelevant (though it doesn't seem like it right now to the 290 clients who lost everything). The only reason I bring this up is that the complacency, naïveté and refusal to acknowledge the incredible level of risk building in bloated asset prices is everywhere today. As I've said throughout this blog, the risk inherent in global markets today is unprecedented. Of course, there are lots of great money managers out there who are fully capable of navigating past "rogue waves". But there are also far too many likable Jim Cordier's and "<i>OptionSellers.com's"</i> out there who just don't "get it".<br />
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<i>OptionSellers.com</i> is a sobering illustration of what can happen to the money of hard working people, literally overnight, when they put their money in the wrong hands.<br />
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<b><u><span style="font-size: large;">Additional Reading:</span></u></b></div>
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OptionsSellers.com Podcasts</div>
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<a href="https://optionsellerspodcast1.podomatic.com/">https://optionsellerspodcast1.podomatic.com/</a></div>
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James Cordier Describing how Commodities can be used as valuable diversification strategy.</div>
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<a href="https://www.smarteranalyst.com/bloggers-corner/commodities-prove-valuable-diversifiers-amid-stock-chaos-kellogg-company-k-philip-morris-international-inc-pm/">https://www.smarteranalyst.com/bloggers-corner/commodities-prove-valuable-diversifiers-amid-stock-chaos-kellogg-company-k-philip-morris-international-inc-pm/ </a></div>
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Deep Throathttp://www.blogger.com/profile/02712515268051858186noreply@blogger.com6tag:blogger.com,1999:blog-7478408299955066555.post-66537963660902884182018-11-11T20:47:00.000-05:002018-11-11T20:47:04.233-05:00Hello from The Maldives!.....and today's Quiz....<div dir="ltr" style="text-align: left;" trbidi="on">
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Geeezzzz.......I leave the states for a couple of weeks and everything goes to heck in a hand basket!.....</div>
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Alibaba announced unbelieveable singles day GMV today! Fantastic! US$ 31 Billion of socks, underwear, court ordered non-performing loans, failed construction projects and Jumbo Jets in receivership...all sold in one day by the vaunted Alibaba ecosystem! Bravo! Totally unbelieveable! This GMV is more than an average non-holiday season month's sales through Walmart's global distribution system ....shipped by Alibaba in just one day!<br />
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Amazing! </div>
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Keep in mind though that Walmart has thus far failed to monetize the lucrative "court ordered non-performing liquidation asset market" ....I don't see these asset classes on Walmart.com anywhere, so the figures aren't directly comparable.</div>
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For their next trick Alibaba management is going to pull a rabit out of their.....<span style="background-color: white; color: #212121; font-family: "roboto" , "helveticaneue" , "arial" , sans-serif; font-size: 33px; white-space: pre-wrap;">屁股</span></div>
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<span style="background-color: white; color: #212121; font-family: "roboto" , "helveticaneue" , "arial" , sans-serif; font-size: 33px; white-space: pre-wrap;"><b><u>Today's Quiz</u></b></span></div>
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Which three publicly traded common stocks have produced the greatest Market Cap decline (from top to bottom) in history:</div>
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Hint....it wasn't Lehman, Enron or even Facebook's hiccup.....and all three are ongoing....</div>
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Scroll down for the answer....</div>
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First, I've posted a few pictures of the Maldives below to stimulate your thought process. The Maldives atolls truly are paradise on earth.</div>
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Fauna.....(crabs everywhere....cute harmless, curious little guys.....check your shoes before you slip them on.....just sayin')<br />
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Flora.....(wild flowers everywhere)<br />
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Maldavian heavy industry....OBOR money at work. USD & Euros accepted everywhere...but nobody wants RMB....hmmmmm. Interestingly, there's tons of new construction funded by USD loans from China. Chinese bankers wouldn't be so stupid as to finance long term construction, using US$ with short term swap money run through the Caymans and Luxembourg? They can't be that dumb....or are they they that brilliant?</div>
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A friend of a friend of a friend's home in Bangalore. I thought I'd swing by to say hello. Nice <span style="font-size: 16px;">place. He wasn't home. Should have called ahead. Security politely asked me to leave....bad timing. Maybe next time.</span></div>
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Having a Diwali beer in Delhi.......</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhBrm9d0_sf4McupOP8S7sOGpAlzqhRck0Qg1_ztm57_obeL5PXyLBf3jfmtfYr4JAWoEeIRk1Tcs4WOyrdDhE-al-N5Ng3MsyTb4a4Uzs4tnHSgphxXzG79Q-ErqQeXLfgDTj8rVRSs7c/s1600/IMG_20181106_202600620.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1600" data-original-width="1200" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhBrm9d0_sf4McupOP8S7sOGpAlzqhRck0Qg1_ztm57_obeL5PXyLBf3jfmtfYr4JAWoEeIRk1Tcs4WOyrdDhE-al-N5Ng3MsyTb4a4Uzs4tnHSgphxXzG79Q-ErqQeXLfgDTj8rVRSs7c/s640/IMG_20181106_202600620.jpg" width="480" /></a></div>
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<b><span style="font-size: x-large;"><u>Quiz Answer</u></span></b></div>
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(as of 7:00 AM 11/11/18 Maldavian time)</div>
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The three (3) greatest (ongoing) market cap declines in history are:</div>
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1.) PetroChina - US$ 807 Billion</div>
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2.) Tencent - US$ 235 Billion</div>
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3.) Alibaba - US$ 163 Billion</div>
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I think I'm beginning to see a pattern here.....</div>
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<b><u><span style="font-size: large;">Calculations/Sources</span></u></b><br />
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1.) PetroChina - 2007-2008 - $807 Billion $1.01 Trillion - $203 Billion</div>
<span style="font-family: "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif;">https://www.cnbc.com/2018/08/02/petrochina-did-not-fare-well-after-reaching-1-trillion-in-market-cap.html</span><br />
<span style="font-family: "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif;"><a href="https://www.bloomberg.com/quote/PTR:US">https://www.bloomberg.com/quote/PTR:US</a></span><br />
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2.) Tencent - High - HK476x 9.45B shares = HK4.498T /7.8exrate = US$576B</div>
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Low - HK300x 9.45B shares = HK2.658T /7.8exrate = US$341B dif = US$235B</div>
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<span style="font-family: "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif;"><a href="https://www.bloomberg.com/quote/700:HK">https://www.bloomberg.com/quote/700:HK</a></span></div>
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3.) BABA - $211.7 x 2.54B = $537.7 B compared to $145 x 2.54B = $375B = $163B</div>
<span style="font-family: "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif;"><a href="https://www.bloomberg.com/quote/BABA:US">https://www.bloomberg.com/quote/BABA:US</a></span></div>
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Deep Throathttp://www.blogger.com/profile/02712515268051858186noreply@blogger.com8tag:blogger.com,1999:blog-7478408299955066555.post-58131782365049215062018-11-02T21:25:00.000-04:002018-11-02T21:25:32.418-04:00Off the grid....<div dir="ltr" style="text-align: left;" trbidi="on">
I skipped the BABA earnings call this morning as I'm pressed for time. I'm catching a flight to India shortly and am going to be off the grid (intentionally limited/spotty access) for a couple of weeks.<br />
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That said, I can't resist taking 20 minutes and review a few things from the Press Release that absolutely jumped off the page at me. I'm sure, because of my limited time, I've missed some excellent comedy, nevertheless, I'll forge ahead.<br />
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<b>Press Release:</b><br />
<span style="color: blue; font-family: inherit;"><b><a href="https://www.alibabagroup.com/en/news/press_pdf/p181102.pdf">https://www.alibabagroup.com/en/news/press_pdf/p181102.pdf</a></b></span><br />
<b>Presentation:</b><br />
<a href="https://alibabagroup.com/en/ir/presentations/pre181102.pdf"><span style="color: blue;"><b>https://alibabagroup.com/en/ir/presentations/pre181102.pdf </b></span></a><br />
<b>Webcast:</b><br />
<b><a href="https://edge.media-server.com/m6/p/8fd6emny"><span style="color: blue;">https://edge.media-server.com/m6/p/8fd6emny</span></a></b><br />
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<b><u><span style="font-size: large;">Here are the Bullets:</span></u></b><br />
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<span style="color: red;"><b>A.)</b> </span>The format of the presentation has been completely updated! Lots of pictures & graphics. Sophisticated Investors LOVE pictures and graphics! Nice work!<br />
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<b><span style="color: red;">B.)</span> </b>On page five (5) of the Press Release, they reduced guidance giving the following rationale:<br />
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<i>"In light of current fluid macro-economic conditions, we have recently decided not to monetize, in the near
term, incremental inventory generated from growing users and engagement on our China retail marketplaces.
We expect this decision to benefit SMEs on our marketplace platforms."</i><br />
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Again, I didn't get a chance to listen to the Investor Call Q&A, but I'm hoping that at least one of the analysts asked something like "exactly what the hell does that mean?"<br />
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<b><span style="color: red;">C.)</span> </b>They've somehow managed to really tighten their belts, keeping Share-Based Compensation (SBC) at only US$1 Billion for the quarter, constant at 8% of Revenue from the same prior year quarter. (Pg. 10 & 11) This is, of course, down substantially from the June 30th 2018 quarter where SBC topped 20% of revenue. I'm not sure how the management team and the all those elite with their hands in the cookie jar can possibly scrape by on this pittance, but I'm sure US Shareholders are grateful.<br />
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<b><span style="color: red;">D.) </span></b>Equity Investees are continuing to be consolidated (hidden from view) yet the businesses in the catch-all category of "Other Investees" have somehow, in aggregate, turned their fortunes around, booking a profit (increased valuation) of US$282 Million in the quarter. Thank goodness they've finally got these undisclosed, money losing boondoggles under control.<br />
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<b><span style="color: red;">E.)</span></b> "Questionable Assets" (Investment Securities, Equity "Investees", Intangibles and Goodwill) now sit at US$71 Billion (59%) of the balance sheet, up from 51% of the Balance Sheet at the March 31st 2018 Year End and up from zero (0%) at the time of the 2015 IPO. I'm sure these businesses are worth every penny of their current book value. Balance Sheet (pg 24)<br />
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<b><span style="color: red;">F.)</span></b> They also posted yet another "Gain on deemed disposals" of US$771 million in the quarter. They are "deeming" asset write-ups and gains all over the place. Seems odd when Chinese Stock Markets are in the dumper. (Pg 29)<br />
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<b><span style="color: red;">G.)</span></b> The most amazing pronouncement in the Presser was that the self-proclaimed E-Payment juggernaut, Ant Financial actually lost money "net" in the quarter. (Pg 14) Here's what they said.<br />
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<i>"The loss was primarily due to net loss
sustained by Ant Financial during the quarter as a result of its investments in user acquisition, product
innovation and international expansion. In the September 2018 quarter, Ant Financial strategically stepped
up its investment to acquire more users and capture growth opportunities of the offline payment market by
leveraging its technology for financial service industries. During the quarter, domestic annual active users
exceeded 700 million, almost 70% of which used three or more categories of Ant Financial’s services." </i><br />
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Interestingly, Alibaba is (by far) Ant's biggest Customer. If I'm reading this correctly, this "net" loss is the loss incurred after the processing/escrow fees incurred, accrued and paid by Alibaba to Ant. So what was the processing/escrow fee actually incurred by Alibaba to Ant?<br />
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If they are indeed losing money "net" we'd be hard pressed to justify the US$150 Billion (monopoly-like) valuation indicated by the completion of the insider led Series C US$14 Billion funding round they trumpeted in the June Presser/Filing.<br />
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Ant/Alipay, by all accounts is as close to a state supported monopoly as it could be. Incurring a loss on this business is tantamount to Rockefeller calling J.P. Morgan, at the height of the Standard Oil Trust empire and opining "Yeah....we had a really bad quarter...I just can't figure out how to raise prices!"<br />
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There are only three possible explanations for this:<br />
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1.) Ant Financial management is the most incompetent management team on the planet.</div>
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2.) The losses are actually due to all sorts of ill-advised, undisclosed, non performing SME loans (see "incompetent management" in #1 above)</div>
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or:</div>
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3.) Alibaba/Ant, most likely at the behest of the CPC, has built an amazing electronic payment system using the benevolence of US Shareholder philanthropy. Chinese consumers and by extension, Alibaba (and US Shareholders) must be paying minuscule, unsustainable escrow/processing fees, inflating Alibaba net income, presumably to support the stock price. It's the essence of earnings management. It looks like yet another effort to move cost out of the BABA "ecosystem" reflecting a much higher economic value on the business than it deserves. Salivating US investors have continued to take the bait (until recently), piling in as CPC insiders have been bailing out at ever higher valuations. American investors, as the world well knows, have always been generous souls, giving much and asking for little in return. It's what globalization is all about. </div>
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If you'd like some more in depth "comedy gold" on the evolution of these concepts, feel free to check out my 20-F analysis from the March 31, 2018 Year End.<br />
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<b><a href="https://deep-throat-ipo.blogspot.com/2018/08/the-baba-20-ffinancial-comedy-gold.html"><span style="color: blue;">https://deep-throat-ipo.blogspot.com/2018/08/the-baba-20-ffinancial-comedy-gold.html</span></a></b><br />
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Anyway, that's all for today.....I'm off to India.....<br />
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All the best!<br />
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Deep Throathttp://www.blogger.com/profile/02712515268051858186noreply@blogger.com2tag:blogger.com,1999:blog-7478408299955066555.post-3529317940802539952018-10-28T16:20:00.000-04:002018-10-29T08:00:56.779-04:00The Most Disturbing Statement...<div dir="ltr" style="text-align: left;" trbidi="on">
The following is the most disturbing statement in the most disturbing report, prepared by the (2nd) most disturbing group of bureaucrats America has ever known. (The SEC crew that approved the BABA F-1/424(b)4/IPO filings being, by far, the most disturbing group). Here's the statement:<br />
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<span style="font-size: large;"><i>Treasury is deeply disappointed that China
continues to refrain from disclosing its foreign exchange intervention.</i> (Page 4 of the Report)</span><br />
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<b><u>MORE BREAKING NEWS:</u></b> <i>Generalissimo Francisco Franco is still dead....</i><br />
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There really hasn't been much serious, mainstream discussion about the recent "<a href="https://home.treasury.gov/system/files/206/2018-10-17-%28Fall-2018-FX%20Report%29.pdf"><b><span style="color: blue;">Don't Worry....Everything is Fine.... China is NOT a Currency Manipulator" US Treasury Report to Congress</span></b></a>, although, from my vantage, it's the most important issue facing the world today. (No bullshit....it really is.)<br />
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<a href="https://home.treasury.gov/system/files/206/2018-10-17-%28Fall-2018-FX%20Report%29.pdf"><b><span style="color: blue;">https://home.treasury.gov/system/files/206/2018-10-17-%28Fall-2018-FX%20Report%29.pdf</span></b></a><br />
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Sadly, the Treasury report discussed herein should have begun with "Once upon a time" as its opening line. It truly is a fairy tale. It's now clearer to me than ever that the boys and girls at Treasury need a little help here, so I'll be happy, as always, to step in and lend a hand. After all, it's my duty as an American citizen. Consider this the first installment of my brand new, annual "<b><u><i>World Trends in Finance</i></u></b>" <b><i>(WTF) Report</i></b>. I'll publish it every October....that is, of course, providing that our financial markets are still functioning in October of 2019....if not, I won't bother since I'll be too busy trying to locate food and shelter for my family.<br />
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<b><u>But First....a Little Commentary on How These Things Happen....</u></b><br />
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Economists, bureaucrats and regulators are unfortunately, for lack of a better term, "odd ducks".....we are "rule followers". We are machines. Our personalities are devoid of imagination and creativity. We see only what's in front of us, put our blinders on and get the job done. We parse and crunch absurd data without even considering the source, accuracy, veracity or potential impact of the (potentially nefarious) issuer's decision making and disclosure motivations. (The PBOC Financial Stability Report describing the US$25 Trillion of "newly discovered....Oooppssss" Shadow Bank assets and the subsequent elimination of the report that disclosed same, is an incredible piece of evidence....but I digress.)<br />
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Economics is the only profession where we bring together all sorts of conflicting, contradictory data sources, produced and collected by all sorts of self interested governments, agencies and businesses, carefully throw it all into a pot and after much consternation, throw up our hands because nothing makes sense. But that doesn't stop us. As seasoned Economists, we forge ahead and give an opinion anyway, or worse, advise people to go full speed ahead and bet the farm on our analysis. (That's how economists get paid). I, for one, am glad we don't design (and build) buildings, bridges and airplanes that way.<br />
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On the other hand, economists also become frustrated without "perfect data"....we continue the crunching, iterating and parsing, angered that we don't know the precise weight and speed of the (out of control) train hurtling toward us....therefore, we can't calculate the exact arrival time or the amount of destruction it will cause when it smashes into our train station. We can't come up with data indicating that there's anything amiss, so by default, the train must be running just fine...... ..unfortunately, we are forced to make these errant, incomplete calculations and recommendations while standing on the tracks. <br />
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The Treasury folks, financial people, regulators and economists all seem to be analyzing today's economic reports/data as though it's just another day at the train station......when, and we'll see this very clearly in hindsight (we always do) that they should, instead, be examining the financial environment as if it were a crime scene....because it is.<br />
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Ok....enough picking on Economists...we all have our shortcomings. Time to dig into the report.<br />
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<span style="font-size: large;"><b><u>Here's What the Treasury Department Came Up WIth...</u></b></span><br />
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I've listed a few of the more entertaining quotes from the Report below, along with a translation provided by my patented <b><i><u>Dick Fuld Banker Speak Translator (BST)</u></i></b>:<br />
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<b><i><u>Page 11</u></i></b><br />
<i>At the end of the second quarter of 2018, the U.S. net international investment position
stood at a deficit of $8.6 trillion (42.3 percent of GDP), a deterioration of more than $900
billion compared to end-2017. The value of U.S.-owned foreign assets was $27.1 trillion,
while the value of foreign-owned U.S. assets stood at $35.7 trillion. Recent deterioration in
the net position has been due in part to valuation effects from an appreciating dollar that
lowered the dollar value of U.S. assets held abroad, as well as the relative
underperformance of foreign equity markets compared to U.S. stock markets in 2018</i><br />
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<b><i><u>BST Translation:</u></i></b> - Remember in my last post "<a href="https://deep-throat-ipo.blogspot.com/2018/10/when-will-xi-click-sell-button.html"><span style="color: blue;"><b>When Will Xi Click the SELL Button?</b></span></a>" A breakdown of what's included in the $35.7 Trillion would have been helpful.....Stocks? Bonds? Real Estate? By country? China? Tax Havens? Who owns it and why?<br />
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<b><i><u>Page 17</u></i></b><br />
<i>Treasury remains deeply concerned by this excessive trade imbalance which is exacerbated by persistent non-tariff barriers, widespread non-market mechanisms, the
pervasive use of subsidies, and other unfair practices which increasingly distort China’s
economic relationship with its trading partners. Treasury urges China to create a more
level and reciprocal playing field for American workers and firms, implement
macroeconomic reforms that support greater consumption growth, reduce the role of state
intervention, and allow a greater role for market forces.</i><br />
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<b><i><u>BST Translation:</u></i></b><br />
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<b><i><u>Page 18</u></i></b><br />
<i>Nonetheless, the persistent presence of sizeable net errors and
omissions, which have been negative for seventeen consecutive quarters, could suggest
continued undocumented capital outflows....... Treasury also strongly urges China to provide
greater transparency of its exchange rate and reserve management operations and goals.</i><br />
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<b><i><u>BST Translation:</u></i></b><br />
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<b><u><span style="font-size: large;">The Unexplainable Chart......</span></u></b><br />
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So given the "<i>US$/RMB exchange rate is just fine and dandy....China is not a manipulator</i>" report conclusion, fully described in the "Yay us....look what a great job we're doing" Report to Congress, while fully acknowledging that the Treasury is working with China's "cooked books" I would be grateful if someone at Treasury would take the time to explain to the American people, in a way we can understand, how the relationships in the chart below could possibly exist in an environment of relatively stable exchange rates.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiVA8JUSVHJhpFz5x9uzaXGdtj36mSUQBsKK0Gn7AzErhuNifvcNV6dFbALBbhKMAtLS-yMC6PPtqdZNgRcp0QOQ0hLvE5WRrHNlvDAAK0vGScU4P4eVfVjjvTOoWyp68gFUzsBaIGZANQ/s1600/FRED_M3_US_China_EU_JP.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="400" data-original-width="780" height="328" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiVA8JUSVHJhpFz5x9uzaXGdtj36mSUQBsKK0Gn7AzErhuNifvcNV6dFbALBbhKMAtLS-yMC6PPtqdZNgRcp0QOQ0hLvE5WRrHNlvDAAK0vGScU4P4eVfVjjvTOoWyp68gFUzsBaIGZANQ/s640/FRED_M3_US_China_EU_JP.png" width="640" /></a></div>
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The above chart describes the impossible (exchange rate adjusted) M3 relationship for the US$ (<b><span style="color: blue;">Blue Line</span></b>) Yen (<b><span style="color: lime;">Green Line</span></b>) Euro (<b><span style="color: #a64d79;">Purple Line</span></b>) and the RMB (<b><span style="color: red;">Red Line</span></b>) in Trillions of US$.<br />
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In open currency markets, you'd expect that as the supply of a currency increases/decreases then the exchange rate (relative value) would (generally) decrease/increase accordingly over time. Like any commodity, the greater the "supply", the lower the value should be. When we look at the M3 data above we see that as of 1/1/2007 all four major money supplies were within a range of between US$4 Trillion and US$8 Trillion (The RMB at the lower bound with the Euro at the higher), presumably enough currency to run the respective economies effectively. Fast forward to 2018 and we note that Europe, Japan and the US have generally tracked. The three (3) Money Supplies have increased to a range of US$ 9 Trillion to $14 Trillion, this time with US M3 taking the lead at the top of the range with US $14 Trillion and the EU bringing up the rear at US $9 Trillion. Now let's take a look at China's M3, hitting a high of US$ 28 Trillion in the Spring of this year before the recent "China dip" down to US$ 26 Trillion.<br />
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Based solely on the gigantic relative increase in China's M3, you'd think that the RMB would weaken substantially. Now let's take a look at the three exchange rates, RMB, Euro and Yen, relative to the US$.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj-VSqMIl1nnWNnXoDRLHG1Nr8CdvRXqOaPRRIZjI_g-Fqcq0ceH-J9VHjobdLysUQafpBXq20InqBBaocws6arjxQ4CU4nKo-S3PU2AaLEsd8G8jFHuvf40AJ5Mxib9Hajwt5l7oVLtM4/s1600/FRED_Exchange_Rates.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="420" data-original-width="783" height="342" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj-VSqMIl1nnWNnXoDRLHG1Nr8CdvRXqOaPRRIZjI_g-Fqcq0ceH-J9VHjobdLysUQafpBXq20InqBBaocws6arjxQ4CU4nKo-S3PU2AaLEsd8G8jFHuvf40AJ5Mxib9Hajwt5l7oVLtM4/s640/FRED_Exchange_Rates.png" width="640" /></a></div>
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The exchange rate movement of both the Euro and the Yen makes some sense based on the M3 Relationship. Both currencies have strengthened slightly compared to the dollar, as US M3 has expanded more quickly than Europe's and Japan's. Note that the Chinese exchange rate, presumably because of the currency/capital account controls and limitations, has remained in the same managed range 6.75:1 +/- for years. <br />
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You'd think that, based on the above schedule and the Treasury Report commentary, that the CPC/PBOC would have us believe that they've actually achieved the "<b><a href="https://www.scmp.com/business/global-economy/article/2085078/chinas-pursuit-economics-impossible-trinity-sure-path"><span style="color: blue;">Impossible Trinity</span></a></b>". They've been able to accomplish free capital flows, independent monetary policy and a fixed/managed exchange rate. The "Impossible Trinity" condition has long thought to be, well, impossible....yet, at least for now, it exists.<br />
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I'd suggest, as food for thought, since no economist on the planet believes that the "Impossible Trinity" is achievable, that the relationship above is actually a ticking time bomb to the global financial system.<br />
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<b><u><span style="font-size: large;">What if I Were a Chinese Banker?</span></u></b><br />
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Now, again with the aid of the <b><i><u>Dick Fuld Banker-Speak Translator (BST)</u></i></b>, I'd like to spend a few minutes playing that hot, new party game that's taking Chinese living rooms by storm. I'm of course referring to "<i>What would I do if I were a Chinese Banker</i>?" It's all the rage.<br />
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Here are the rules: The party host asks his guests "If you were a Chinese Banker and your book was comprised of 40% dog-shit, non-performing loans; and you knew the RMB was imploding; and you had hundreds of party bosses breathing down your neck, forcing you to help them get their stolen funds offshore, what would you do? (A <a href="https://foreignpolicy.com/2018/09/13/48-ways-to-get-sent-to-a-chinese-concentration-camp/"><span style="color: blue;"><b>Xinjiang prison camp</b></span></a> is, of course, always an option.)<br />
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The guests take turns and imagine stepping into the poor beleaguered bankers shoes, giving their opinion on how they'd handle the situation. The best answers are submitted to the party for implementation. The CPC has always been big on focus groups.<br />
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So now, let's pretend that the following, possibly real life version of a hypothetical, party game discussion (over lunch) between <a href="http://www.boc.cn/en/investor/ir6/201504/t20150402_4830131.html"><span style="color: blue;"><b>Mr. Sun Yu, Chief Overseas Business Officer of the Bank of China</b></span></a>, might (or might not) have actually taken place on a Yacht, moored in Georgetown, Grand Cayman, sometime in the winter of 2015, between Mr. Yu and a group of bankers we'll refer to as <i>Jimmy P Money, Gary Sacks and Sonny Street</i>. The following is a <b><i><u>Dick Fuld - BST Translation</u></i></b> of this totally imaginary, hypothetical discussion that, again, may or may not have taken place.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4zZPC7XYE8kKm5ptylPtbUzp3b6I2P3t8rPpK5hFTz1xDA_FzRxEQPi_0gAHZpVYKDYxXTdb19qcontc1G2nV_tjUjVdZ8Kk0XOz9pmUuBk6HtF1Ihpk6NzYioqTp4CYU4X3ujtM4SE8/s1600/Caymans_Yacht.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="394" data-original-width="972" height="256" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4zZPC7XYE8kKm5ptylPtbUzp3b6I2P3t8rPpK5hFTz1xDA_FzRxEQPi_0gAHZpVYKDYxXTdb19qcontc1G2nV_tjUjVdZ8Kk0XOz9pmUuBk6HtF1Ihpk6NzYioqTp4CYU4X3ujtM4SE8/s640/Caymans_Yacht.png" width="640" /></a><br />
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Mr. Yu is seated at the second deck galley table. Mr. Money, Mr. Sacks and Mr. Street enter the cabin from the starboard, aft entrance and begin the obligatory small talk. Then, the food is served, Caribbean lobster and conch, and they get down to business.<br />
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<i><b style="text-decoration-line: underline;">Mr. Yu:</b> "O</i><i>k...here's the thing.... I've got about US$2 Billion RMB I need to move. I need FOREX Swaps, forwards & Repos at my discretion. Dollars & Euros for RMB today. You get your Dollars and Euros back down the road. I don't want loans. It's gotta be OBS. What can you guys do for me?</i><br />
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<i><b><u>Mr. Money:</u></b> "Well....what the hell are we going to do with RMB? It's toilet paper."</i><br />
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<i><b><u>Mr. Yu:</u></b> "I'll give you 2% over Libor and two more points up front to do the deal."</i><br />
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<i>(Silence.....they are all thinking they can find a cheaper way to hedge the RMB & lay off the FOREX risk. They can probably swap the RMB back for Dollars or Euros in Hong Kong.)</i><br />
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<i><b><u>Mr. Street:</u></b> "Libor plus 2 to hold your cash?....and two points up front? Really? All OBS? What's the term?</i><i>" </i><br />
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<i><b><u>Mr. Yu: </u></b> "Five years"</i><br />
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<i><b><u>Mr. Sacks:</u></b> "I'll go one."</i><br />
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<i><b><u>Mr. Money:</u></b> "I'll go six months."</i><br />
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<i><b><u>Mr. Street:</u></b> "I'll go one.."</i><br />
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<i><b><u>Mr. Yu:</u></b> "Three years or no deal....I've got other options."</i><br />
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<i><b><u>Mr Sacks, Mr. Money and Mr. Street: </u></b> "Done....three years it is."</i><br />
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<i><b><u>Mr. Yu:</u></b> "Agreed. Gentlemen, It's been a pleasure doing business. We'll wire the RMB tomorrow & expect your return dollar wire same day. On your way out would you mind asking the guys from CITI to come aboard? They should be waiting on the dock. I'm a busy man...." </i><br />
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I'd suggest that variations of this hypothetical conversation have taken place on yachts, at country clubs and in offices in the Caymans, BVI, Bermuda, Luxembourg, Hong Kong, Singapore and all over the planet like they never have before. Like our old friends, Mortgage Backed Securities (MBSs), Collateralized Debt Obligations (CDOs) and the linked Credit Default Swaps (CDSs), the OBS Forex Market and the misunderstood risk associated with these contracts will be ground zero for the (next) upcoming financial crisis.<br />
<i><br /></i>Let's be clear. There are only two (2) Reasons to participate in FOREX Swap/Repo/Forward transactions.<br />
<ol style="text-align: left;">
<li>Insulate other transactions from foreign currency risk.</li>
<li>Speculation.</li>
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For those of you who need a quick refresher course on FOREX Swaps here are a couple of sentences describing same for the purpose of this post. Mr. Yu above is willing to "Swap" the notional value (today's value) of US$2 Billion RMB for the same value in US Dollars. In three years (by agreement) Mr. Yu will "Swap" the same dollars he held back to the Caymans Bankers in exchange for the same RMB he pledged as collateral. In essence, the Swap is an OBS (Off Balance Sheet) loan of US Dollars, secured by the RMB he "swapped". Mr Yu is willing to pay interest on the RMB and the Caymans Bankers are willing to pay interest on the swapped dollars at the prevailing or negotiated rates. Mr. Yu is now able to use the dollars as collateral and lever up on other US/European Assets. The US$2 Billion RMB (notional value) is now converted to US$2 Billion of dollar collateral sitting in the Caymans. Depending on how aggressive Mr. Yu is, if he's operating on a capital ratio of 20% he can lever up, loan out and invest US$10 Billion. Because the transaction is "Off Balance Sheet" the only reporting required is that the notional value (in aggregate) must be reported in the financial statement footnotes. i.e.) He still has bank Capital of the US$ 2 Billion with levered bank assets of $10 Billion. The expenses associated with the transaction would be:1.) Net Interest paid on the Swap. 2.) The gain/loss on the notional value of the Swap as the currency is marked to market.<br />
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For an illustration of just how significant the exposure to Swaps/Forwards/Repos/Derivatives can be, I'd refer you to the post I published three years ago entitled "<a href="https://deep-throat-ipo.blogspot.com/2015/10/why-genius-is-about-to-failagain.html"><span style="color: blue;"><b>Why Genius is about to fail.....Again.....</b></span></a>" <br />
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In that post I focused on the fragile, opaque, insufficient capital structure of America's big banks. When we look at the "Big Three" custodial, global banks (JPM, State Street and Citi) we see that OBS activity for all derivative classes (FOREX, Interest Rate and Equity Based Contracts) and the related exposure continues to increase geometrically.<br />
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<li>JP Morgan Assets Under Custody $23.469 Trillion (12/31/17) up from $16.120 Trillion 12/31/2010 (<a href="https://www.sec.gov/Archives/edgar/data/19617/000001961718000057/corp10k2017.htm"><span style="color: blue;"><b>10-K - Page 66</b></span></a>)</li>
<li>Citi Bank - Assets Under Custody $17.4 Trillion (12/31/17) up from $12.6 Trillion 12/31/2010 (<a href="https://www.sec.gov/Archives/edgar/data/831001/000083100118000040/c-12312017x10k.htm"><span style="color: blue;"><b>10-K - Page 24</b></span>)</a></li>
<li>State Street - Assets Under Custody (12/31/17) $33.12 Trillion up from $21.5 Trillion 12/31/2010 (<b><a href="https://www.sec.gov/Archives/edgar/data/93751/000009375118000471/exhibit992-3q18earningsrel.htm"><span style="color: blue;">10-K - Page 2</span></a></b>) </li>
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The Off Balance Sheet (OBS) notional inventory/exposure for the AUC held be the three (3) banks above has increased by 50%, to US$74.02 Trillion up from US$50.2 Trillion. Again, let me be clear, there is no detail provided whatsoever, other than the GAAP reporting requirement to disclose that the notional amount in aggregate. Investors have no idea what the US$74 Trillion consists of. Of course, it shouldn't have any impact on the profitability of the banks, because they are custodial assets. The only thing we know for sure is that these assets exist, and whoever owns the assets would naturally absorb the valuation risk. <br />
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Note that the 10-K's of JP Morgan, Citi and State Street all have very clear boiler plate language stating that they are very conservative and don't speculate on these OBS assets. Like the casino operator, apparently they are just facilitators for someone else's speculative addiction. So that should at least make us feel a little better about all of this.<br />
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How much of it is RMB exposure? Of course we'll never know until it's too late. No matter how you look at it, the activity, and hence the risk and exposure (to someone) is growing much faster than we can possibly understand.<br />
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However, as you also might suspect, unlike our friends at the Treasury, who would probably respond to a car jacking by requesting that the perpetrators "Please stop waiving that gun in our face, and, if at all possible, when you're done with my car, if you could return it with a full tank of gas I'd be grateful....no hard feelings!"...... based on just about every document prepared by the CPC, I'd suspect that the Chinese government has a great deal to do with the gigantic increase in OBS Assets. <br />
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<b><u><span style="font-size: large;">Holy Cats!....Forex Swaps...Would Ya Look at That!</span></u></b><br />
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Probably the best source for data on Off Balance Sheet Assets (Forex Swaps) is the Bank of International Settlements. Last fall, (September 2017) the BIS published a thought provoking report entitled <a href="https://www.bis.org/publ/qtrpdf/r_qt1709e.pdf"><b><span style="color: blue;">FX swaps and forwards: missing global debt?</span></b></a><br />
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The focus of the report is, as I've described, that the volume of these Off Balance Sheet transactions (and the related risk) continues grow at an unprecedented pace. Here's my favorite chart:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEig07h3gmQZ4P1yo443P32wV0zYWJWYxtjdM97jCu1vQYN5cCQwWjcfZP5z8JWCoBgsGztEimrYS9kumn2il37iS0VLHSSc2sDxVZjNfTJIlB5aHoFUqZM6m0mqMPZRn596sFna5hIqrNk/s1600/BIS_Forex_OBS_Assets_10-27-18.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="706" data-original-width="1320" height="342" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEig07h3gmQZ4P1yo443P32wV0zYWJWYxtjdM97jCu1vQYN5cCQwWjcfZP5z8JWCoBgsGztEimrYS9kumn2il37iS0VLHSSc2sDxVZjNfTJIlB5aHoFUqZM6m0mqMPZRn596sFna5hIqrNk/s640/BIS_Forex_OBS_Assets_10-27-18.png" width="640" /></a></div>
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We observe, as of the end of 2016, open FOREX swaps (notional value) stood at roughly US$ 60 Trillion, nearly doubling from 2009. About 75% of the contracts were one year term (or less). i.e.) the contracts have to be closed out or rolled over within a year. Roughly 60% of the contracts are written/held by non-dealer counter parties.<br />
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Now let's take a look at the most current data (12/31/17).<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjaRCysrcQtGfUvBpqVkb4frG0u6VAD18v0UohcXwVNEXbZDLvi800TFcq1UztvGfvJ9b2KC5aawRrBqvrsHhGBN_fMCq7qIsN0rvCBs-Hr_pw2rzGjxIGzigxmH2WHiyBi5eHX_Q4DqUQ/s1600/BIS_Forex_OBS_Assets_Table_10-28-18.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="439" data-original-width="578" height="486" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjaRCysrcQtGfUvBpqVkb4frG0u6VAD18v0UohcXwVNEXbZDLvi800TFcq1UztvGfvJ9b2KC5aawRrBqvrsHhGBN_fMCq7qIsN0rvCBs-Hr_pw2rzGjxIGzigxmH2WHiyBi5eHX_Q4DqUQ/s640/BIS_Forex_OBS_Assets_Table_10-28-18.png" width="640" /></a></div>
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When we look at the <a href="https://stats.bis.org/statx/srs/table/d5.1?p=20172&c="><b><span style="color: blue;">most current data (12/31/17)</span></b></a> we see that total Forex Swaps have increased to US$76.438 Trillion (US$50.487 Trillion + US$10.679 Trillion), up roughly US$16 Trillion in just the last year. Eighty Five percent (85%) of these Swaps (Including Options) have the US$ as the currency on "one end" of the transaction. US$33.5 Trillion or Thirty Eight Percent (38%) of these Swaps (Including Options) have "Other Currencies" reported as a currency on the "other end" of the transaction. Although not reported, it would be a worthwhile endeavor to determine exactly how much of this "other currency" is relevant and related to Chinese capital flight. How much of the "Other Currencies" is RMB?<br />
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<b><u><span style="font-size: large;">Final Thoughts</span></u></b><br />
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Don't get me wrong. The Treasury (like the SEC) has an abundance of brilliant, capable, experts who have access to detailed transaction data and are fully capable of investigating this. Our only hope is that the "<i>Everything is Fine....China is NOT a Currency Manipulator</i>" Treasury Report is a public head-fake intended to give confidence to naive, main street investors, while the Treasury is actually "all over" this, working behind the scenes to unwind this mess and minimize the damage. <br />
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On the other hand, if there is actually no covert, behind the scenes effort by the Treasury to unwind this, and they really don't see any of this coming, the "<a href="https://home.treasury.gov/system/files/206/2018-10-17-%28Fall-2018-FX%20Report%29.pdf"><b><span style="color: blue;">Don't Worry....Everything is Fine.... China is NOT a Currency Manipulator" US Treasury Report to Congress</span></b></a> is the equivalent of Freddie Fleet shouting from the crows nest of the Titanic.... "Hey guys....I think I see a few ice cubes floating ahead.....I sure wish I had some data on it ...nothing to worry about though....full speed ahead!"<br />
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It should also be crystal clear now that, like the freeze up of the credit markets back in 2009, as the CPC deleverages, there will be an ever increasing, cleverly disguised pressure on OBS assets, Forex markets and eventually credit markets. As these Swaps fail to close and the cost to roll them over becomes prohibitive, like Lehman's plight, nobody will want to play in this sandbox, the Swaps will default and US institutions will be left holding the bag.<br />
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The RMB exchange rate will finally reset and much of the paper wealth of the world, which has been artificially created over the last half decade will be destroyed. A significant portion of this fake wealth has already been transferred to China through this con game. The CPC has managed to print fake currency and exchange it for hard assets, businesses, real estate, ghost cities, infrastructure, transportation, intellectual property, industrial know how on the mainland and, according to the US Treasury, some portion of the $35.7 Trillion of US Assets held by foreign owners, along with, I'd imagine a comparable proportion of European, African and South American assets. This is the mother of all contagions building and it can't possibly end well.<br />
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<b><span style="font-size: large;"><u>Additional Reading:</u></span></b><br />
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Japan China Swap Agreement<br />
<a href="https://uk.reuters.com/article/uk-china-japan-agreements-swap/china-japan-sign-three-year-forex-swap-deal-of-up-to-30-billion-idUKKCN1N00GN">https://uk.reuters.com/article/uk-china-japan-agreements-swap/china-japan-sign-three-year-forex-swap-deal-of-up-to-30-billion-idUKKCN1N00GN</a><br />
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State Street Assets Under Custody (9/20/18) $30.12 Trillion up from $21.5 Trillion 12/31/2010<br />
<a href="https://www.sec.gov/Archives/edgar/data/93751/000009375118000471/exhibit992-3q18earningsrel.htm">https://www.sec.gov/Archives/edgar/data/93751/000009375118000471/exhibit992-3q18earningsrel.htm</a><br />
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JPM Assets Under Custody $23.469 Trillion (12/31/17) up from $16.120 Trillion 12/31/2010<br />
<a href="https://www.sec.gov/Archives/edgar/data/19617/000001961718000057/corp10k2017.htm">https://www.sec.gov/Archives/edgar/data/19617/000001961718000057/corp10k2017.htm</a><br />
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Citi AUC $17.4 Trillion (12/31/17) up from $12.6 Trillion 12/31/2010<br />
<a href="https://www.sec.gov/Archives/edgar/data/831001/000083100118000040/c-12312017x10k.htm">https://www.sec.gov/Archives/edgar/data/831001/000083100118000040/c-12312017x10k.htm</a><br />
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Swaps BIS Stats<br />
<a href="https://stats.bis.org/statx/srs/table/d5.1?p=20172&c=">https://stats.bis.org/statx/srs/table/d5.1?p=20172&c=</a><br />
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China Uses Swaps Market to slow RMB slide<br />
<a href="https://www.wsj.com/articles/china-uses-lower-profile-swaps-market-to-slow-yuans-slide-1533654315">https://www.wsj.com/articles/china-uses-lower-profile-swaps-market-to-slow-yuans-slide-1533654315</a><br />
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The first time I taked about this is in my post....<br />
<a href="https://deep-throat-ipo.blogspot.com/2015/10/why-genius-is-about-to-failagain.html">https://deep-throat-ipo.blogspot.com/2015/10/why-genius-is-about-to-failagain.html</a><br />
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China Japan FOREX Swap Deal<br />
<a href="https://uk.reuters.com/article/uk-china-japan-agreements-swap/china-japan-sign-three-year-forex-swap-deal-of-up-to-30-billion-idUKKCN1N00GN">https://uk.reuters.com/article/uk-china-japan-agreements-swap/china-japan-sign-three-year-forex-swap-deal-of-up-to-30-billion-idUKKCN1N00GN</a><br />
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Sun Yu - BOC - Chief Overseas Business Officer<br />
<a href="http://www.boc.cn/en/investor/ir6/201504/t20150402_4830131.html">http://www.boc.cn/en/investor/ir6/201504/t20150402_4830131.html</a><br />
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Bank of China - America Branches<br />
<a href="http://www.boc.cn/en/aboutboc/ab6/200812/t20081216_494260.html">http://www.boc.cn/en/aboutboc/ab6/200812/t20081216_494260.html</a><br />
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UST Report<br />
<a href="https://home.treasury.gov/system/files/206/2018-10-17-%28Fall-2018-FX%20Report%29.pdf">https://home.treasury.gov/system/files/206/2018-10-17-%28Fall-2018-FX%20Report%29.pdf</a><br />
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Deep Throathttp://www.blogger.com/profile/02712515268051858186noreply@blogger.com8tag:blogger.com,1999:blog-7478408299955066555.post-71938908793151383422018-10-14T13:03:00.000-04:002018-10-15T23:47:05.515-04:00When will Xi click the "SELL" button?.....<div dir="ltr" style="text-align: left;" trbidi="on">
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<span style="font-family: inherit;">Today, we're going to take a little time to try to tie the findings of a few of my favorite, very important documents together into one nice neat package. I've been following two (2) annual studies for years and I'm proud to say that there's a good chance I'm the only person on the planet who actually takes the time to read both of these tomes from cover to cover. Links to the most recent documents/reports are listed below.</span></div>
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<span style="font-family: inherit;"><b>They are:</b></span></div>
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<b><u><a href="http://www.pbc.gov.cn/english/130721/3390064/2017092716540370024.pdf"><span style="color: blue;">PBOC Financial Stability Report - 2017 </span></a></u></b>- 199 pages. (Published July of of 2017 based on 2016 YE data). Since the PBOC has produced this report <a href="http://www.pbc.gov.cn/english/130736/index.html"><span style="color: blue;">every year since 2006</span></a>, usually published midyear for prior year data, I was hoping to have been able to review the 2018 report (based on 2017 data) by now, but alas, perhaps after the debacle last year (the "newly discovered" US$25+ Trillion Off-Balance-Sheet Assets) it appears they've decided to discontinue the report.</div>
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<a href="http://www.pbc.gov.cn/english/130721/3390064/2017092716540370024.pdf"><span style="color: blue;"><b>http://www.pbc.gov.cn/english/130721/3390064/2017092716540370024.pdf</b></span></a></div>
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<span style="font-family: inherit;">I've described the ramifications of this mess in detail in my <b><span style="color: blue;"><a href="https://deep-throat-ipo.blogspot.com/2017/10/the-sum-of-all-fearsand-few-related.html"><span style="color: blue;">The Sum of all Fears</span> </a></span></b>post......</span><br />
<span style="color: blue; font-family: inherit;"><a href="https://deep-throat-ipo.blogspot.com/2017/10/the-sum-of-all-fearsand-few-related.html"><b>https://deep-throat-ipo.blogspot.com/2017/10/the-sum-of-all-fearsand-few-related.html</b></a></span><br />
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I'd invite you to reread that post to re-familiarize yourself with the issues we'll be discussing today.<br />
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<b>And.... </b><br />
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<span style="font-family: inherit;"><a href="http://www.fsb.org/wp-content/uploads/P050318-1.pdf"><b><span style="color: blue;">The Financial Stability Board (FSB) - Global Shadow Banking Monitoring Report </span></b></a>- 103 pages. (Published March of 2018 based on 2016 YE data)</span><br />
<span style="color: blue; font-family: inherit;"><b><a href="http://www.fsb.org/wp-content/uploads/P050318-1.pdf">http://www.fsb.org/wp-content/uploads/P050318-1.pdf</a></b></span><br />
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<span style="font-family: inherit;">I've covered the relevant concepts </span><span style="font-family: inherit;">("Boomerang Money" & the build up of Chinese Controlled Off-Shore Assets) in my </span><a href="https://deep-throat-ipo.blogspot.com/2018/04/the-new-phone-books-herethe-new-phone.html"><span style="color: blue;"><b>The New Phone Book's Here!</b></span></a>.....(4/9/2018)<br />
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<span style="color: blue; font-family: inherit;"><b><a href="https://deep-throat-ipo.blogspot.com/2018/04/the-new-phone-books-herethe-new-phone.html">https://deep-throat-ipo.blogspot.com/2018/04/the-new-phone-books-herethe-new-phone.html</a></b></span><br />
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<span style="font-family: inherit;">You might want to refresh your memory by re-reading this post as well, but it's not absolutely necessary. You'll get an idea as to where we're headed shortly.</span><br />
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<a href="https://images-na.ssl-images-amazon.com/images/I/51VjrKu7mdL._SX336_BO1,204,203,200_.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="320" src="https://images-na.ssl-images-amazon.com/images/I/51VjrKu7mdL._SX336_BO1,204,203,200_.jpg" width="216" /></a><span style="font-family: inherit;"></span></div>
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<span style="font-family: inherit;">By way of additional background, I've also included a link to a book that was recommended to me by several of my readers, which I really enjoyed. The book is "<a href="https://www.amazon.com/Party-Secret-Chinas-Communist-Rulers-ebook/dp/B003L77ZTS/ref=dp_kinw_strp_1"><span style="color: blue;"><b><i>The Party</i></b></span></a>" by Richard McGregor. I found it to be a fascinating, wonderfully written, historical account and analysis of the development and ascension of the Communist Party in China. Since the book was written in 2012, prior to the transition to the new CPC Financial Master-Plan and before the adoption of many of the mechanisms we've been discussion in this blog, it's also not absolutely necessary to read the <i><u>The Party </u></i> for a thorough understanding of today's discussion. Nonetheless it's a terrific, worthwhile read to get a perspective of the CPC philosophy, structure and political framework underpinning the transformation to what the world will have to deal with going forward. </span><br />
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<span style="font-family: inherit;"><br /></span><span style="font-family: inherit;">Of course, the usual format applies: Read the <b><span style="color: #cc0000;"><u>"Red" Executive Summary</u></span></b> to get a feel for the section/topic if you don't feel like reading the gory details. You can always skip ahead to the next section if pressed for time.</span>
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<span style="font-family: inherit;"><b><span style="font-size: large;"><u>US Leadership Finally Seems to be "Getting It"....sort of...</u></span></b><br /> </span><br />
<span style="color: #cc0000; font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><b><span style="text-decoration-line: underline;"><u>Executive Summary:</u></span><i> We analyze and describe both the progress and the shortcomings of the USCC Report to Congress. The Commission is vastly underestimating the impact Chinese investments have on the US Financial System. Chinese financial activity is the greatest "Pump and Dump" in history. Make sure to read the "Tweetable" summary of this post below.</i></b></span><br />
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<span style="font-family: inherit;">I mentioned above that we were going to try to "tie some things together" </span><span style="font-family: inherit;">in this post. To that end, I'd like to bring in yet another document that we've thus far, neglected to </span>dissect in this blog<span style="font-family: inherit;">. The document I'm referring to is the U.S.- China Economic and Security Review Commission (USCC) Annual Report to Congress. </span><br />
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<span style="font-family: inherit;"><a href="https://www.uscc.gov/sites/default/files/annual_reports/2017_Annual_Report_to_Congress.pdf"><b><span style="color: blue;">2017 USCC Report </span></b></a>- 657 Pgs. (Published November of 2017 - Based on 2016 data)<br /><a href="https://www.uscc.gov/sites/default/files/annual_reports/2017_Annual_Report_to_Congress.pdf"><b><span style="color: blue;">https://www.uscc.gov/sites/default/files/annual_reports/2017_Annual_Report_to_Congress.pdf</span></b></a></span><br />
<span style="font-family: inherit;"><br /></span><span style="font-family: inherit;">The report has been <a href="https://www.uscc.gov/Annual_Reports"><span style="color: blue;"><b>published annually since 2004</b></span></a>. The original intent of the report was to provide analysis to US lawmakers regarding China's political, economic, military, trade and national security activities. The report has been increased in both scope and content over the years. It's been an excellent source of public information on what the US Government believes the CPC is actually up to. </span><br />
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<span style="font-family: inherit;">Interestingly the 2017 Report (based on 2016 data) was the first report that addressed the increased presence of the CPC in US Financial Markets and investment in US Assets. Keeping in mind that the data in the report </span>(along with the "most current" data in the the above described PBOC and FSB Reports) <span style="font-family: inherit;">is roughly two years old now, we can nevertheless, note the following:</span><br />
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<span style="font-family: inherit;">The most current, 2017 Report (2016 data), was remarkable in a number of ways. This is the first report report which actually:</span><br />
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<span style="font-family: inherit;">1.) Mentioned Chinese listings (Alibaba, JD.com, etc.) on US Equity Markets and discussed the inherent structural risk(s) and problems, fraud and inability of US Investors and Regulatory Agencies to cope with same. </span><br />
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<span style="font-family: inherit;">2.) Discussed Chinese FDI in US Assets.</span><br />
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<span style="font-family: inherit;">3.) Attempted to describe and quantify Chinese penetration into US Financial Markets and the US Economy.</span><br />
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<span style="font-family: inherit;">4.) Discussed Chinese monetary policy, noting concerns regarding the rapidly expanding money supply and resulting mainland credit bubble. </span><br />
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<span style="font-family: inherit;">5.) Reversed the prior, long held position, from the 2016 Report (2015 data - Pg. 5 of the Executive Summary) that: "</span><i>The Chinese government’s deliberate undervaluation of the
renminbi makes U.S. products more expensive to Chinese consumers
who therefore purchase fewer of them. Conversely, China’s
undervalued currency also makes Chinese products cheaper
in the United States, and therefore U.S. consumers purchase
more of them."</i> This thinking, though true a decade ago, always makes for great "save American jobs" political rhetoric, but based on the gigantic expansion of the Chinese money supply, this thinking is just plain wrong today and has been for quite some time. The (relatively) small annual US trade deficit with China is far eclipsed by the Trillions of dollars of Western Assets purchased using an OVER-valued (not undervalued) RMB. Undervalued currencies simply don't experience Capital Flight. <br />
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6.) For the first time, the Commission has begun to acknowledge the potential risk involved in the world's acceptance of a pegged or managed Renminbi (RMB). The report acknowledges the possibility of a "destabilizing devaluation" (Page 52) and generally describes the mechanisms that the PBOC is deploying to deal with their "Impossible Trinity" problem. i.e.) by limiting capital flows. As an aside, <a href="https://www.marketwatch.com/story/treasurys-mnuchin-warns-china-against-currency-devaluations-as-yuan-falls-report-2018-10-10"><span style="color: blue;"><b>Steve Mnuchin just recently (October 10th) "warned"</b></span></a> China against a currency devaluation in the face of the Yuan's recent fall. From my perspective this rhetoric is tantamount to threatening gravity after your parachute fails to open. A futile gesture proffered against an inevitable outcome. Economic forces and the certitude of math will always outlast disbelief, a rattling saber or a Twitter tantrum. <br />
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The above documents (along with 10's of thousands of pages of supporting documents and testimony) are the first steps in a road map describing what's happened thus far, and consequently, when properly analyzed, what's about to happen to the world's financial system(s). Not to get all "Nietzsche-ian" here, but the world's Central Bankers are staring into the abyss waiting for the abyss to wink back. <br />
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<span style="font-family: inherit;">However, before we get into the nitty-gritty of these page-turners, if I've learned anything from our political leadership, it's that in today's social media driven environment, my findings absolutely must be "<i>Tweetable</i>". Sadly, It really doesn't matter if my work is cutting edge, accurate, intelligent or in fact makes any sense at all. Even the most brilliant work imaginable is worthless today if it doesn't get "eyeballs" and page views. To that end, I understand that today's most successful communication must be simple, direct, extremely controversial and filled with dramatic, emotional entertainment. </span><br />
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<span style="font-family: inherit;">All that said, here's what's going on in the complex world of international finance today in a "<i>Tweetable</i>" format. I'm not a big <i><a href="https://twitter.com/DeepThroatIPO"><span style="color: blue;"><b>tweeter</b></span></a></i>, I generally use it to see what other smart people are saying, but I'll <i><a href="https://twitter.com/DeepThroatIPO"><b><span style="color: blue;">tweet</span></b></a></i> this post as soon as I finish proofing the rest of the numbers below. I think this nails it: </span><br />
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<b><u><span style="font-family: inherit; font-size: x-large;">Today's Post in a <i>Tweetable</i> Format</span></u></b></div>
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<span style="font-family: inherit; font-size: large;">First..... print boat loads of Money in the basement of the PBOC.....wire it all over the world to accounts controlled by Chinese political elite.....and make sure you keep the exchange rate constant....</span><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjc5Cc8cEZu53jF5UaBdD46UF0VnkH7j_-fUGejmqVEvtzqdK9t6SrEJd32qcxOPoi9nWSxWeV2Ofj1YpYcmw007dIsVaoe1eQ26t9qJe1SCz8LznHbni43MYFqxmhVYwUTgUPESyJB468/s1600/Xi_Money_Printing_3.png" imageanchor="1" style="font-family: "helvetica neue", helvetica, arial, "lucida grande", sans-serif; font-size: 16px; margin-left: 1em; margin-right: 1em; text-align: center;"><img border="0" data-original-height="433" data-original-width="681" height="406" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjc5Cc8cEZu53jF5UaBdD46UF0VnkH7j_-fUGejmqVEvtzqdK9t6SrEJd32qcxOPoi9nWSxWeV2Ofj1YpYcmw007dIsVaoe1eQ26t9qJe1SCz8LznHbni43MYFqxmhVYwUTgUPESyJB468/s640/Xi_Money_Printing_3.png" width="640" /></a></div>
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<span style="font-family: inherit; font-size: large;">Next, go shopping all over the planet for all kinds of "cool" Western financial assets, real estate and businesses.......driving up prices & values.... money is no object (because you've just printed/wired it)...... Purchase these awesome assets using Caribbean, Hong Kong, Luxembourger, Netherlands and Swiss Shell Corporations to keep it all top secret....</span><br />
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<span style="font-size: large;"><span style="font-family: inherit;">Finally.....at some point.....start selling it all off!........the greatest "Pump and Dump" in financial history!</span></span></div>
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<span style="font-family: inherit; font-size: x-large;"><b><u>The Nitty Gritty of the 2017 USCC Report</u></b></span></div>
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<span style="color: #cc0000; font-size: small;"><b><span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><span style="text-decoration-line: underline;"><u>Executive Summary:</u></span> </span><i><span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;">We discuss China's enormous Bank & Non-Bank "Shadow" Asset growth and describe the risk associated with Chinese "Tax Haven" Assets. Coordinated capital flight is the driving force behind this tsunami of off-shore asset accumulation. This is the "Pump" before the "Dump". </span><span style="font-family: "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif;"> </span></i></b></span><br />
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<span style="font-family: inherit;">First, to be clear, I'm not going to discuss any of the military, political, national security, IP theft, hacking and human rights issues described in the report. I'm not going to discuss the "<b><a href="https://deep-throat-ipo.blogspot.com/2018/07/the-folly-of-tariffs-on-chinese-goods.html"><span style="color: blue;">Trade War Folly</span></a></b>" since I've covered it in prior posts. Though critically important, I believe that bringing in these topics would detract from the spirit and focus of this post, taking my (and your) eye off the ball, so to speak. I'm concentrating on China's money, banking system and economy here since, from my vantage, this is the most important, yet misunderstood global risk factor looming on the horizon today. </span><br />
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<span style="font-family: inherit;">To be painfully blunt, this post is a humble plea to the USCC to dig a bit farther, talk to a few more experts and add some emphasis and clarity, to the long overdue position they've just begun to take. </span><br />
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<span style="font-family: inherit;">In short, the US China Commission, though I'm sure well intentioned, has thus far missed the scope (badly) of the financial risk involved in the integration and assimilation of China's "investment" in Western Markets and Assets. Simply put, the CPC has a two pronged game plan. First, they are selling "fake" stocks/securities for "real" money. Second, they are buying "real" assets using "fake" money. I'll add further details shortly.</span><br />
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<span style="font-family: inherit;">The CPC is either diabolically brilliant or the most disjointed economic hot mess the world has ever seen. Unfortunately US and EU policy has enabled them every step of the way.</span><br />
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<span style="font-family: inherit;">First, let's take a look at what's really happening to China's money supply as per one of the more illustrative charts I've seen in a while. The chart below, from Crescat Capital, shows the remarkable growth of China's banking system assets or "money" in relation to the rest of the world. I've been able to publish directionally similar charts through FRED (St. Louis FED) data sets, but I've not seen a better representation of China's "money" as compared to the rest of the developed world. </span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhGAgE8F_C5_p4wROr93uGi_4IRL5WD7NqadDzzYn0rYCDrKfEBTNY19ugYek-b8ODyg9c4eSuakCYfAVsa2S80IalAO55zhza_0WNqmTYEvfqKa2g1J6Wo6G80evPcWMH6rgJV33GtnAc/s1600/Bank_Asset_Growth_Crescat_PBOCvWest_edited.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="903" data-original-width="1000" height="576" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhGAgE8F_C5_p4wROr93uGi_4IRL5WD7NqadDzzYn0rYCDrKfEBTNY19ugYek-b8ODyg9c4eSuakCYfAVsa2S80IalAO55zhza_0WNqmTYEvfqKa2g1J6Wo6G80evPcWMH6rgJV33GtnAc/s640/Bank_Asset_Growth_Crescat_PBOCvWest_edited.png" width="640" /></a></div>
<span style="font-family: inherit; font-size: 16px;">As mentioned above, I've discussed this phenomenon in my </span><a href="https://deep-throat-ipo.blogspot.com/2018/04/the-new-phone-books-herethe-new-phone.html" style="font-family: inherit; font-size: 16px;"><span style="color: blue;"><b>The New Phone Book's Here! </b></span></a><span style="font-family: inherit; font-size: 16px;">post in conjunction with my "Productive GDP" or PGDP definition. This meteoric rise in both Bank Assets as well as Shadow Bank (Off-Balance-Sheet) Assets is attributable to a half decade of "kicking the can down the road" and misdirected funding, rather than the conventional (lack-of) wisdom, that this level of "money" is needed to support China's (fake) burgeoning GDP growth. </span><br />
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<span style="font-family: inherit;">Here's what the PBOC says (per the 2017 PBOC Financial Stability Report, page. 48)</span></div>
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<i><span style="color: red;">It is
important to remain committed to the decisions
of the CPC Central Committee and the State
Council with regard to the five priorities—
cutting overcapacity, reducing excess
inventory, deleveraging, lowering costs and
strengthening areas of weakness. The PBC
will continue to pursue a prudent and neutral
monetary policy that is neither too tight nor
too loose, conduct appropriate fine-tunings and
preemptive adjustments through flexible use of price-based and quantity-based monetary
policy instruments, polish the policy toolkit,
straighten out the transmission channels for
the monetary policy and provide a facilitating
monetary and financial environment for the
sustainable economic growth.</span></i></div>
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<span style="font-family: inherit;">I'm not kidding, that's what it actually says. I'd ask you, in the context of the five fold (US$30 Trillion+) increase in mainland Bank Assets, in conjunction with the "newly discovered" (US$25 Trillion+ totaling US$32 Trillion) Off-Balance-Sheet Assets, could any economist, banker or even Finance 101 student possibly describe this as "</span><span style="color: red; font-style: italic;">prudent and neutral monetary policy that is neither too tight nor too loose</span><i>"? </i>Seriously?<span style="font-family: inherit;"> </span><br />
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<span style="font-family: inherit;">As many economists and bankers have long opined, these odd, silly policy statements call into question the veracity of just about every piece of data released by the CPC. </span></div>
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<span style="font-family: inherit;">So what exactly does the USCC report say that I fundamentally disagree with? Again, the report hits on the main issues, but, for reasons we'll discuss shortly, badly misses the scope and magnitude of the problem. The report fails to recognize the global scale of the "<a href="https://www.dw.com/en/china-cracks-down-on-ant-moving/a-37742232"><span style="color: blue;"><b>Ants Moving House</b></span></a>" phenomenon, treating all Chinese off-shore/tax-haven money as independently managed, when, in reality the world should be treating these assets as one gigantic China Inc. "Blob" of PBOC/SOE directed Assets Under Management, subject to the will/whim of the CPC. </span><br />
<span style="font-family: inherit;"><br /></span><span style="font-family: inherit;">We must think of China Inc. as the equivalent of several thousand Warren Buffetts working in concert as a well-oiled machine. Could you imagine what might happen if the world gave this incredible team of brilliant Warren Buffetts the ability to print their own currency? Providing instant, virtually unlimited financing? And finally, what if the world's bankers based their participation and "partnering" with China, Inc. on ludicrous, incomplete, concocted and contrived financial information, in exchange for a small commission, just to get the deals done? </span><br />
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<span style="font-family: inherit;">No need to imagine what might happen, it already has. The only thing to ponder is how the world will eventually recover from it. </span><br />
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<span style="font-family: inherit;">The most important, brief, yet esoteric discussions in the USCC Report, which I believe none (if any) of the lawmakers copied on this report truly understand, are described on pages 42-53 & 76-101. </span></div>
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<span id="yiv6543955501yui_3_16_0_ym19_1_1536707065437_27546" style="font-family: inherit; font-size: 16px;">The Executive Summary of the entire report is on pg. 1, with the (rather frightening) Commission Recommendations on pg. 29 & 597. As I've said, I believe the Commission is finally focused on the right things, but is vastly underestimating the severity of the problem. If they don't recommend steps to immediately accomplish investor transparency, simultaneously addressing China's SAFE/Capital controls and their pegged/managed "dual" currency, the Commission's financial and market reform recommendations are the equivalent of band-aids on a gaping <span style="font-family: inherit;">wound.</span></span><br />
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One of the more misguidedly-misleading charts appears on page 93 of the report. The report was produced by the Rhodium Group and included without fanfare. It describes the origin of Foreign Private Issuers (FPI's) on the NYSE. Chinese stocks come in a distant third, behind the UK, Canada and "Tax Havens". Don't get me wrong, the chart is not "wrong" per se, but like so many things emanating from Chinese data, it only tells part of the story and deserves a little more explanation.</span></div>
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<span style="font-family: inherit;"><i><b>USCC Report pg. 92 - </b></i></span><i style="font-family: inherit;">Since 2000, many FPIs listing in the United States have been
incorporated in offshore locations, where underdeveloped financial
standards and disclosure requirements allow issuers to operate with
relative anonymity and circumvent U.S. regulations. As of May
2017, tax havens like Switzerland, the Cayman Islands, and Luxembourg were home to 94 FPIs listed on the New York Stock Exchange
(NYSE)—21 percent of all FPIs listed on the NYSE—and boasted a
combined market capitalization of nearly $900 billion (see Figure
3). Tax havens are the third-largest source of FPIs listed on the
NYSE by total market capitalization, trailing the United Kingdom
($1.2 trillion) and Canada ($1.1 trillion). China, meanwhile, is the
fourth-largest source of FPIs, with a total market capitalization of
$742 billion.</i></div>
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<span style="font-family: inherit;"><i><b>USCC Report pg. 94 - </b></i></span><i style="font-family: inherit;">As of July 2017, a total of 126 Chinese companies were listed on
the NASDAQ, NYSE, and American Stock Exchange (AMEX), with
a total market capitalization of $960 billion.</i></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;">So in not so many words, the USCC is telling lawmakers that the total financial exposure in US Equity markets through China FPI's is roughly a Trillion dollars, give or take, or roughly 3% of the total US Stock Market Capitalization. Not so bad? Right? Chinese FPI stocks have about the same Market Cap as Apple or Amazon. So, by extension, if either of those businesses suddenly went bust it wouldn't be all that big of a deal to US Investors? Agreed? </span></div>
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<span style="font-family: "arial" , "helvetica" , sans-serif;"><span style="font-family: inherit;"><span style="font-family: inherit;"><br />Further note, as I mentioned, that the page 93 chart also lists an interesting figure, that the third largest issuer of FPI's is "<i>Tax Havens</i>". The "<i>Tax Haven</i>" FPI's listed have a Market Cap of roughly $900 Billion. So, humor me here, what if the lions share of this money is actually Chinese money anonymously invested in US Stocks and FPI's through "<i>Tax Haven</i>" Shell Corps.? So now we're talking about roughly $2 Trillion (Amazon AND Apple) worth of Chinese influence on US Stock Markets. Can we say that if $2 Trillion in Market Cap disappeared overnight, the equivalent of both Amazon and Apple going under simultaneously, it would be just a minor market hiccup....can we really say that?</span><br /><br /><span style="font-family: inherit;"> N</span></span><span style="font-size: 16px;">ow let's take a look at this concept through the lens of one of the charts I had included in my analysis of the<span style="color: blue; font-size: 16px;"> </span></span><b style="font-size: 16px;"><span style="color: blue;"><a href="http://www.fsb.org/wp-content/uploads/P050318-1.pdf"><span style="color: blue;">The Financial Stability Board (FSB) - Global Shadow Banking Monitoring Report </span></a> </span></b><span style="font-size: 16px;"> covered in </span><span style="font-size: 16px;">my </span><span style="color: blue; font-size: 16px;"><b><a href="https://deep-throat-ipo.blogspot.com/2018/04/the-new-phone-books-herethe-new-phone.html" style="font-size: medium;"><span style="color: blue;">The New Phone Book's Here!</span></a> </b></span><span style="font-size: 16px;">post, while simultaneously keeping in mind the meteoric increase in Chinese Bank Assets as depicted in the Crescat Capital Chart above. </span></span></div>
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<span style="font-size: 16px;">Also, please bear in mind that this <i>Tax Haven</i> data is now nearly two (2) years old, but the growth trend over the last few years is un-mistakable, continuing and from my point of view.....frightening.</span></span><br />
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<span style="font-family: inherit;">Nearly 1/3rd (US$104 Trillion) of the worlds US$340 Trillion Financial Assets are now held in China and the seven (7) <i>Tax Havens</i>. The Assets in these jurisdictions have grown 12% from 2015 to 2016 while GDP has remained about the same.</span>
<span style="font-family: inherit;">We can see from the chart that combined "<i>Tax Haven</i>" and Chinese OFI Assets (Hedge Funds/Private <span style="font-family: inherit;">Equity/Investment Funds) totaled $44 Trillion (44% of the World's $99 Trillion) up a whopping 24% from 2015.</span> The point is that when we see YUGE! increases like this, mirroring the gigantic increases in mainland China's Bank Assets, while the rest of the world's Bank Assets are growing slowly (or in the case of the EU actually declining) it wouldn't be far fetched to conclude that the a large chunk of this "<i>Tax Haven</i>" funding is actually Chinese money anonymously and cleverly disguised as <i>Tax Haven</i> capital flight invested in US and European Assets. </span><br />
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<span style="font-family: inherit;">This, because of the pegged exchange rate, is the "fake" money chasing "real assets I referred to earlier.</span></div>
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<span style="font-family: inherit;">In just one year, between 2015 and 2016, $8.4 Trillion moved into these <i>Tax Havens</i>. Substantially more than the roughly $960 Billion identified as invested in US Equity markets by the USCC. When we look at the Caymans the increase is remarkable. Other Financial Intermediaries (OFI) (i.e. Hedge Funds, etc.) Assets increased 23% to US$6.2 Trillion during the year. (Again emphasizing that we're looking at 2016, nearly two year old data) Now let's take a look at the composition. </span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjsvHnFxpxPzqZlXZaQtM23olWZgxaODGsEPoOyKUrob57lIPHFCItO_E2MMXPPh4SnhZZM7T3FuNOLxR_LDnnITHDcLuGeRo-NNCuYdfZiDvSenPmndD6ogcQoRRKVlBGX7VjzBMvsw9A/s1600/CIMA_Legal_Holder.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="434" data-original-width="232" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjsvHnFxpxPzqZlXZaQtM23olWZgxaODGsEPoOyKUrob57lIPHFCItO_E2MMXPPh4SnhZZM7T3FuNOLxR_LDnnITHDcLuGeRo-NNCuYdfZiDvSenPmndD6ogcQoRRKVlBGX7VjzBMvsw9A/s640/CIMA_Legal_Holder.png" width="340" /></a><span style="font-family: inherit;">One indicator of the true source of these funds is the <a href="https://www.cima.ky/upimages/publicationdoc/InvestmentsStatisti_1515159474.pdf" style="color: blue; font-weight: bold;">Cayman Islands Monetary Authority (CIMA) Annual Investments Statistical Analysis</a><b style="color: blue;">. </b>From my perspective, this report is a terrific example of accurate data presented to obscure the true, ugly underbelly of what's really happening in the Caymans. We'll start on page 13 with Figure 11. The truncated chart is intended to identify and describe the ownership jurisdiction of the funds under management. First, let's focus on the number of Cayman funds, which increased by more than 400, to 3,551 from 2015 to 2016. Contrast that with the number of Chinese funds, way down the list, with 247 designated as "owned" by a Chinese entity or person.</span><br />
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When we examine Figure 9 on page page 10 (below), we see that the 3,551 Cayman Islands Funds hold Portfolio Assets of US$1.060 Trillion (an average of $300 million per fund). Since it's doubtful that the 60,000 permanent residents of the Cayman Islands are all multi-millionaires ($17.7 million for every man, woman and child on the Islands) who are setting up Investment funds at a record clip, we can focus on the more logical explanation, that the 10%+ "Legal Holders" of these funds are actually other Cayman Islands domiciled corporations, perhaps entities with monikers like <i>Kung Fu Panda LTD</i>, <i>Wang-Chung-Big-Fun, Inc</i>. or maybe <i>Xi-mania</i> <i>Enterprises, LLC</i>. But I digress....<br />
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Moreover, when we examine the 247 Chinese funds holding US$30 Billion in Portfolio Assets, and compare it to documents like, for instance, the Alibaba, JD.com, etc. 424(b)s, and 20-Fs , we can probably identify many of the 247 Caymans domiciled entities attributable to Chinese political elites. The point is that these <i>Tax Haven </i>entities are structured to mask ownership. These intentionally camouflaged ownership veils, combined with the misleading reporting conventions do exactly that.<br />
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There is also plenty of anecdotal evidence of the commitment Caymans Financial Planners, Trust Services and Administrators have in cultivating business from elite Chinese investors, many of the websites boast Hong Kong and Luxembourg offices as well as Chinese translators and website versions. Chinese investors are welcomed with open arms. They flock to the Caymans, the best, easiest and least cost path to anonymous ownership of (relatively) stable US Financial Assets. <br />
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My final commentary regarding the above would be, that if most of this Cayman Islands money didn't come from China, where in the name of J.P. Morgan did it come from? <i> </i><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh9F7AVujXqfz1Mk5d_4sc_zq6yH3J9pwvvkybH7XNexuRnFoHYJpVuJwFYArxXwzTJ1XvqnC3b7et02tX6QzKkdAOf8EmoJce4IKrG1W393IUv2GhvYVoSNfnI-Tk4N_zF5-qxwzco5R4/s1600/CIMA_Legal_Holder_%2524.png" imageanchor="1" style="clear: left; display: inline; margin-bottom: 1em; margin-left: 1em; text-align: center;"><img border="0" data-original-height="673" data-original-width="801" height="536" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh9F7AVujXqfz1Mk5d_4sc_zq6yH3J9pwvvkybH7XNexuRnFoHYJpVuJwFYArxXwzTJ1XvqnC3b7et02tX6QzKkdAOf8EmoJce4IKrG1W393IUv2GhvYVoSNfnI-Tk4N_zF5-qxwzco5R4/s640/CIMA_Legal_Holder_%2524.png" width="640" /></a><br />
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<span style="font-family: inherit;">So now let's take a look at another <i>Tax Haven</i>, most specifically, Luxembourg. Although the Caymans model is generally the blueprint for the China Inc.'s global effort, i.e.) set up Offshore Shell Corps. and "buy cool assets", the scale of what's gone on in Europe is incredible as well. A few years ago (2014) PWC issued a document entitled </span><a href="https://www.pwc.lu/en/china/docs/pwc-where-do-you-renminbi.pdf"><span style="color: blue;"><b>Where Do You Renminbi?</b></span></a>, which I've referenced in prior posts, <span style="font-family: inherit;">promoting Luxembourg as "<i>the</i>" EU financial center for Chinese Investors. More recently (2017) PWC issued a follow up report, </span><a href="https://www.pwc.lu/en/china/docs/pwc-luxembourg-a-location-ideally-suited-to-chinese-investors-en.pdf"><b><span style="color: blue;">Luxembourg-A location Ideally Suited to Chinese Investors</span></b></a>,<span style="font-family: inherit;"> again intended as a marketing piece to attract Chinese money to Luxembourg. </span></div>
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<span style="font-family: inherit;">When we look at where we are today we can see that PWC and the government of Luxembourg were remarkably successful and prophetic in their projected appeal of Luxembourg to Chinese Investors. The flow of funds into Luxembourg is described in the FSB Report. OFI Assets have increased to $14.6 Trillion in 2016, up 46% from 2015. An astonishing rate of growth given the relatively stagnant European economy. Again, there is no data or source I am aware of which would describe the origin of the gigantic increases in these assets, but, based on what we've seen in the Caymans, it wouldn't be much of a stretch to think that a big chunk of this increase was from Chinese funding as well.</span></div>
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<span style="font-family: inherit;">However, one prognostication that PWC missed badly on in their initial 2014 Report was that the Renminbi would quickly become a global currency. Here are a few of the quotes from page 29.</span></div>
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<i><span style="color: red;">"We expect that by 2020 that 28% of China's International Trade will be settled in RMB, some $3 Trillion a year..." <br /><br />"In a recent study, 69% of high net worth individuals predicted that the RMB will be one of the three strongest currencies in the world throughout the next 30 years..."<br /><br /> "Within the next 5 to 10 years 39% of the European Central Bank Reserve Managers would consider investing in the RMB"</span></i><br />
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By almost any/every measure, the Internationalization of the RMB hasn't happened and isn't going to. China Inc. is hoarding and building up FOREX denominated investments off-shore while propping up the mainland economy, spinning plates, kicking cans and plugging holes with a rapidly expanding on-shore money supply. Inflation is funneled into property bubbles and bad-loan refinancing, preventing mainland defaults, protecting offshore asset prices and exchange rates. Supporting the currency and preventing its collapse has become the primary CPC directive. The chart below shows how off-shore RMB balances ("usable" supply) has actually been decreasing over the last few years. If the RMB were truly moving in the direction of a convertible, international currency, you'd expect the opposite. <br />
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<a href="https://ecp.yusercontent.com/mail?url=https%3A%2F%2F1.bp.blogspot.com%2F-O2QjujT1shk%2FWq6y2jF9hoI%2FAAAAAAAABxs%2FShwgvstlkOEdPbTMrzbHq13qMtzgmktdwCLcBGAs%2Fs1600%2FRMB_Deposits_2011_thru_2017.png&t=1536715782&ymreqid=dc6a04f1-9b67-8ac1-0183-930114010000&sig=lpFkFqxw2QNKcHczo6FtYA--~C" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-left: 1em;"><img border="0" class="yiv6543955501" height="500" id="yiv6543955501yui_3_16_0_ym19_1_1536707065437_25326" src="https://ecp.yusercontent.com/mail?url=https%3A%2F%2F1.bp.blogspot.com%2F-O2QjujT1shk%2FWq6y2jF9hoI%2FAAAAAAAABxs%2FShwgvstlkOEdPbTMrzbHq13qMtzgmktdwCLcBGAs%2Fs1600%2FRMB_Deposits_2011_thru_2017.png&t=1536715782&ymreqid=dc6a04f1-9b67-8ac1-0183-930114010000&sig=lpFkFqxw2QNKcHczo6FtYA--~C" style="border: 0px;" width="640" /></a><br />
The video clip below is a nice little summary which describes how Chinese Political Elite accomplish capital flight, you can insert a Cayman/Luxembourg Shell Corp. as an apparatus that could be used to facilitate every one of these examples/mechanisms.<br />
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We can assume that the big Chinese fish are moving money off shore with CPC permission and/or by directive, the rest of the capital flight is attributable to the frightened, littler fish trying to avoid the inevitable RMB devaluation that the rest of the world seems to be either in denial of or ambivalent to.<br />
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<span style="font-family: inherit;">So coming full circle to the USCC report, when we look at the total amount, US$44 Trillion of <i>Tax Haven OFI "Shadow"</i>Assets (Per the FSB Report) we can conclude with some level of certainty that at least some significant portion of these investments are actually Chinese funds pouring into Western assets. Oddly enough, the USCC was aware of the FSB Report (they cited same in an obscure reference to "<i>Fintech and Financial Innovation</i>" in the footnotes found on page 150) but they've apparently not connected the dots. </span><br />
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<span style="font-family: inherit;">Contrary to the $960 Billion in ADR/FPI risk that the USCC has indeed identified (i.e. "Fake" Chinese Companies sold for "Real" money), I'd suggest that the real valuation risk is closer to that US$2 Trillion in US stock markets as well as some percentage of US$44 Trillion (i.e. "Fake" money used to buy "real" assets, driving up asset prices) from these anonymous, disguised funds. So another US$5 Trillion?......US$10 Trillion? invested in US Stocks? Bonds? Real Estate? All owned by anonymous Chinese Shells or both "little fish" and "big fish"? My thesis, to be tested over time, is that the USCC and consequently, our legislators and regulators have all vastly underestimated the risk of what's going on.</span></div>
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<span style="font-family: inherit;">This is an incredible mess.</span></div>
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<span style="font-family: inherit; font-size: large;"><b><u>So How Much of America does Xi & Company Actually Own? </u></b></span><br />
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<span style="font-family: inherit;"><span style="color: #cc0000; font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif; font-size: small;"><b><u>Executive Summary:</u> <i>In this section we explore the relationship between Tax Haven Assets and skyrocketing residential real estate values in selected hot markets, as well as some of the causes for same. </i></b></span></span><br />
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<span style="font-family: inherit;">This is a tough one. Because of our awesome American investment bankers, lawyers, regulators and lobbyists and the willful ignorance driven by the wonderful fees associated with these anonymous "<i>Tax Haven</i>" machines, we apparently have no way of knowing for sure. When we look at the composition of the Caymans funds it can, however, provide some additional insight.<b><span style="color: blue;"> <a href="https://www.cima.ky/upimages/publicationdoc/InvestmentsStatisti_1515159474.pdf"><span style="color: blue;">CIMA Report pg. 5 </span></a></span></b></span></div>
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<span style="font-family: inherit;">When we look at the allocations it's pretty much as you might expect. NAV is spread out over Equities and Bonds (long/short) as well as a few more exotic asset classes. There is also a significant allocation (US$1.254 Trillion) to <i>Master Funds</i>.....another layer of anonymity. Total Leverage of 2:1 ($7.108T/$3.592T) doesn't seem all that aggressive, but like so many of these devices, the amount of leverage isn't nearly as important as who's doing the levering and what's being levered....</span><br />
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<span style="font-family: inherit;">Again, because of the anonymity, it's impossible to know for sure, but if I had to bet, I'd think that there is significant money going into US Real Estate. Could Master Fund allocations be moving into REITs? We will, of course, never know for sure....until it's too late to do anything about it. </span></div>
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<span style="font-family: inherit; font-size: large;"><b><u>Luxury Real Estate....the Piggy Bank for the World's Elite....</u></b></span></div>
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<span style="font-family: inherit;"><span style="background-color: white; color: #767676; font-family: "guardian text sans web" , "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif; font-size: 12px;">Photograph: Jimmy Jeong/Reuters</span></span></div>
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<a href="https://i.guim.co.uk/img/media/cd8ece46fe8bf7a93898c3b8d7965120749d7ce6/0_0_4000_2669/master/4000.jpg?width=300&quality=85&auto=format&fit=max&s=7333ee6f435ef81592155dab0919da2b" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-left: 1em;"><img alt="protest house prices Vancouver" border="0" src="https://i.guim.co.uk/img/media/cd8ece46fe8bf7a93898c3b8d7965120749d7ce6/0_0_4000_2669/master/4000.jpg?width=300&quality=85&auto=format&fit=max&s=7333ee6f435ef81592155dab0919da2b" /></a><span style="font-family: inherit;">To get an anecdotal idea as to what might be going on we only have to look at the headlines. </span><span style="font-family: inherit;">When we see one cockroach we almost have to assume there are more hiding in the walls. Remember those awesome <i>Mortgage Backed Securities (MBS) </i>we had a little problem with a few years ago? There are lots of articles out there now on how <a href="https://www.nytimes.com/2015/11/29/business/international/chinese-cash-floods-us-real-estate-market.html"><span style="color: blue;"><b>Chinese buyers are snapping up real-estate everywhere</b></span></a>. You'd think from the press clippings that the Chinese were buying up nearly all of San Francisco, Dallas, NYC, Vancouver (I know Vancouver is in Canada ....but humor me.), etc. You'd think that local buyers getting priced out of housing markets like these, given the relatively steady (some might say sluggish) wage growth after all of those years of near-ZIRP would be unlikely. But it seems that Chinese buyers, funded by "fake" money are driving up prices beyond the reach of US home buyers who are forced to try to pay for the home with "real" money, u</span>nless they choose to take on an "unconventional" mortgage. Quite a dilemna.</div>
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<span style="font-family: inherit; font-size: 16px;">To get a feel for what's going on at street level, so to speak, we need look no farther than.....drum roll....<a href="https://therealdeal.com/2017/03/27/the-death-of-the-all-cash-chinese-buyer/"><b><span style="color: blue;">Quontic Bank in Queens NY</span></b></a>! For years Chinese home buyers were showing up in NYC and buying homes and apartments in all cash deals. Those "<a href="https://www.youtube.com/watch?v=ZQ-YX-5bAs0"><span style="color: blue;"><b>Crazy Rich Asians</b></span></a>! But once the CPC put the clamps on capital flight after the 2015 RMB hiccup, clever Chinese buyers were forced to start looking at alternatives to get the deals done. From <a href="https://therealdeal.com/2017/03/27/the-death-of-the-all-cash-chinese-buyer/"><span style="color: blue;"><b>The Real Deal</b></span></a>: </span><br />
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<i><span style="font-family: inherit;">"As a result, the Chinese investment market in New York City, which for years was defined by splashy all-cash purchases, has morphed into one grounded by more traditional financing. The shift offers a growing opportunity to a handful of lenders such as Quontic, HSBC, Guardhill Financial, Cathay Bank and Abacus Federal Savings Bank."</span></i></div>
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<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif; font-size: 16px;">Because of the ever creative US Banker and the ability to package and securitize mis-rated risk, the deals didn't slow down. According to the National Association of Realtors, Chinese individual purchasers remained the #1 foreign purchaser of US residential real estate in 2018. </span><br />
<span style="color: blue;"><br /></span><span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><a href="http://economistsoutlook.blogs.realtor.org/2018/07/27/chinese-buyers-still-1-according-to-nar-2018-international-survey/"><b><span style="color: blue;">NAR’s 2018 survey results</span></b></a> suggest that Chinese buyers were not as adversely affected by rising prices and dwindling inventory when compared with other foreign buyers. Note, that the NAR survey includes individual purchases only and does not include "Shell Corp" purchases, the preferred structure for more expensive deals. <span style="font-family: inherit;"> Here are a few of my favorite lines from the <a href="https://therealdeal.com/2017/03/27/the-death-of-the-all-cash-chinese-buyer/"><span style="color: blue;"><b>March 2017 "The Real Deal" article</b></span></a> along with a pithy <i>Banker-Speak-Translation (BST). </i>I'd invite you to read the entire article:</span><i><span style="font-family: inherit;"> </span><span style="font-size: 16px;"> </span></i></span></div>
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<i><span style="color: blue;">In the days that followed, numerous callers told Ho, a senior loan officer at Queens-based Quontic Bank, that they were unable to get their money out of China to finance real estate investments in New York. “They’re saying, ‘What’s the max I can borrow?’ and they’ll figure out other means [for repayment] later,” Ho said.</span></i><br />
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<span style="font-family: inherit;"><b><u><i>BST Comment:</i></u></b> That's just what I'd want to hear right before I make someone a loan.</span></div>
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<i><span style="color: blue;">Most large retail banks don’t lend to foreign buyers because it’s harder to comply with “Know Your Customer” regulations, but also because they already command so much market share. Sensing an opportunity, smaller banks have made lending to nonresident – especially Chinese – buyers their specialty.</span></i><br />
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<span style="font-family: inherit;"><u style="font-style: italic; font-weight: bold;">BST Comment:</u> Yup....totally agree....just another example of government red tape keeping really smart business people from making a buck.</span>
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<i><span style="color: blue;">Astoria-based Quontic will finance 65 percent of a purchase if the buyer has a green card. Without a green card or passport, the figure drops to 50 percent and the bank requires employment documentation and proof of local funds. To mitigate the bank’s risk, Quontic also requires foreign buyers to open an account holding at least six months worth of mortgage payments. Ho said he recently had a client who was prepared to pay more than $700,000 for an apartment in Flushing, but had to slash her budget by $200,000. She still wound up borrowing 60 percent. “She wasn’t able to get that much [money] over, so getting a mortgage was her option,” he said. “Unfortunately, it was her only option.”</span></i><br />
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<u style="font-size: 16px; font-style: italic; font-weight: bold;">BST Comment:</u><span style="font-size: 16px;"> This is an outrage!.....bankers are forced do extra paperwork to make six figure loans to illegal aliens? (no passport or green card)....and they must ask if they have a job and/or any money in America? I had no idea that mortgages were so tough to get and that bankers were under such duress. Things have changed a lot since I got my last mortgage....I thought it was a moral victory when I was able to negotiate my way out of the cavity search, </span><br />
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<i><span style="color: blue;">Some banks, like First American International Bank, founded by Chinese immigrants in Brooklyn in 1999, have begun to offer what they call “portfolio loans” to grab new customers. Those mortgages don’t require tax returns or pay stubs, and instead the bank requests a letter from the borrower’s employer certifying how much the applicant makes. Buyers are required to put down 40 percent. The bank had $382 million in residential mortgages on its books as of Sept. 30, 2016, up from $296 million a year earlier, due in some part to such loan programs. “People pay; it’s a tremendous thing,” CEO Mark Ricca told The Real Deal last year.</span></i></div>
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<u style="font-size: 16px; font-style: italic; font-weight: bold;">BST Comment:</u><span style="font-size: 16px;"> Absolutely right again. It is "<i>a tremendous thing"</i>....people will always pay....until, of course, they can't/don't/won't.....I'm getting pretty scared right now. </span><span style="color: blue;"><i><br /></i></span><br />
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<span style="font-size: 16px;"><a href="http://nymag.com/news/features/foreigners-hiding-money-new-york-real-estate-2014-6/#print"><b><span style="color: blue;">Andrew Rice at </span></b><i><b><span style="color: blue;">New York Magazine</span></b></i></a> put together a prophetic report on Manhattan real estate describing the emerging tsunami.</span><br />
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"<i>According to data compiled by the firm<span style="font-size: 16px;"><span style="background-color: white; color: #232323; font-family: "georgia" , "garamond" , "times" , "times new roman" , serif; font-size: 14.6667px;"> </span><a href="http://www.propertyshark.com/mason/" style="background-color: white; color: #1f638a; font-family: Georgia, Garamond, Times, "Times New Roman", serif; font-size: 14.6667px; text-decoration-line: none;" target="new">PropertyShark</a><span style="background-color: white; color: #232323; font-family: "georgia" , "garamond" , "times" , "times new roman" , serif; font-size: 14.6667px;">, </span></span>since 2008, roughly 30 percent of condo sales in large-scale Manhattan developments have been to purchasers who either listed an overseas address or bought through an entity like a limited-liability corporation, a tactic rarely employed by local homebuyers but favored by foreign investors.</i>" <br />
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Ryan Cooper followed up with an <a href="http://theweek.com/articles/736313/how-foreign-investors-launder-money-new-york-real-estate"><span style="color: blue;"><b>Op-Ed piece in<i> The Week</i></b></span></a> in November of 2017.<br />
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<i>"The flood of outside cash rolling into New York real estate has numerous downsides. Most obviously, it drives up prices for actual New Yorkers who are looking to buy. But it also drives up rents, by keeping many perfectly good apartments empty. Many foreign investor properties are rented out, but many are not. Per the<span style="color: #333333; font-family: minion-pro;"><span style="background-color: white; font-size: 20px;"> </span></span><a href="http://nymag.com/news/features/foreigners-hiding-money-new-york-real-estate-2014-6/#print" style="background-color: white; color: #5788aa; font-family: minion-pro; font-size: 20px; text-decoration-line: none;">New York</a><span style="color: #333333; font-family: minion-pro;"><span style="background-color: white; font-size: 20px;"> </span></span>article: "The Census Bureau estimates that 30 percent of all apartments in the quadrant from 49th to 70th Streets between Fifth and Park are vacant at least 10 months a year." ....... a great many of the foreign investors and associated shell companies are laundering money."</i><br />
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Now let's take a look at the concentration. The <a href="https://www.nytimes.com/interactive/2015/11/23/business/china-factor-real-estate.html"><span style="color: blue;"><i>New York Times</i></span></a> graphic below illustrates where identifiable Chinese buyers are putting their cash.<br />
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<span style="font-family: inherit;">To be more specific, Chinese buyers are snapping up property in Manhattan, the Bay Area, Seattle/Redmond/Vancouver, Miami and interestingly enough, <i>Trump</i> projects in Chicago and <a href="https://www.bloomberg.com/news/articles/2016-03-07/trump-tower-financed-by-rich-chinese-who-invest-cash-for-visas"><span style="color: blue;"><b>New Jersey</b></span></a>. The Bloomberg video below describes how developers have been using the EB-5 Visa program to finance development projects. Generally speaking, the EB-5 Visa program allows foreign investors to "buy" a visa if they invest a minimum of US$500,000 (but in many cases a $1 million or more) in "job creating" US projects. The program has somehow morphed into "Buy a million dollar luxury condo, get a two year US Visa!" Once they have a visa, Chinese investors can open US Bank and Brokerage Accounts. The EB-5 has become so popular for Chinese Nationals that the State Department has a Mandarin version of the application and instructions on the website. This is pretty handy for wealthy Chinese investors trying to get money out of the country, converting wealth from the inevitably imploding RMB to US Dollars.</span></div>
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As we can see from the chart below, the EB-5 Visa program as been wildly successful and used by Chinese investors to great advantage for years. It's given them the opportunity to buy real estate in all of the hottest markets in America. Roughly 70% of the annual 10,000 Visas available have gone to Chinese investors over the last few years. </div>
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<a href="https://iiusa.org/blog/wp-content/uploads/2017/12/Navigating-EB-5-Visa-Usage-Statistics2C-A-Historical-and-Current-Perspective.pdf"><span style="color: blue;">https://iiusa.org/blog/wp-content/uploads/2017/12/Navigating-EB-5-Visa-Usage-Statistics2C-A-Historical-and-Current-Perspective.pdf</span></a><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjIS5oZqQ_UEvRwpMo5yJx6Ty-IHml3I18xWMTuggd4PFAt1MQSYfeYoLgx0v7R3UIoMelad_PLz7Mna79KMO-8yv3WYxFVn-sXn_vuxpXIXEtv5HN68dc2-NWnWkJz66Lx0pZRY7MjYMo/s1600/EB5_Visas_State_Dept_50900.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="431" data-original-width="841" height="326" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjIS5oZqQ_UEvRwpMo5yJx6Ty-IHml3I18xWMTuggd4PFAt1MQSYfeYoLgx0v7R3UIoMelad_PLz7Mna79KMO-8yv3WYxFVn-sXn_vuxpXIXEtv5HN68dc2-NWnWkJz66Lx0pZRY7MjYMo/s640/EB5_Visas_State_Dept_50900.png" width="640" /></a></div>
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<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;">We can see from the chart above that roughly 50,900 visas were issued through 2017. If we add the projected 6,000 for FY2018 we get a total on 56,900 issued to Chinese Investors since the inception of the program. If we apply an average $750,000 Investment per application, we can calculate an EB-5 Investment, inception to date, of $42.5 Billion from Chinese Investors. Of course, this doesn't sound like all that much when compared to the US$44 Trillion of <i>OFI Shadow Assets</i>, but to put it in perspective, as an example, the total value (Market Cap) of Ford Motor Company is $38 Billion. Or, to frame it another way, the Market Value of all of the residential real estate in the Cleveland, Ohio Metro Area is $37 Billion. Simply put, Chinese Investors could have paid cash for either the 2nd largest US Car Maker or every house in the Cleveland Ohio Metro Area using the EB-5 Visa Program. </span><br />
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<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;">Could you imagine what Chinese Investors could do with US$44 Trillion?</span><br />
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<b><u><span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif; font-size: large;">My Favorite Building!</span></u></b><br />
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<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;">I visit Chicago often, and I have to say that one of my favorite places to have a beer is on the 16th floor Terrace of 401 N. Wabash. Great views of the city and they have this large format, pear flavored Weiss beer (I can't remember the name of it...a few of my friends refer to it as "girly beer"). I like to pound down a few on a nice summer day...or any season really. Since this is one of my favorite buildings in Chicago I thought I'd take a look at how the EB-5 Program might have impacted the financing of this project. So I went to the Cook County Assessors Office to see what I might come up with.</span><br />
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<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;">401 N. Wabash is a 92 story luxury hotel complex which is home to 487 very cool Condominium Residences (floors 29 thru 85 with some <a href="http://www.chicagotribune.com/business/ct-confidential-trump-tower-sale-1209-biz-20141208-column.html"><span style="color: blue;"><b>really expensive penthouses</b></span></a> on floors 86 thru 89) , a 339 room hotel (floors 12 thru 27), a Conference Center and all kinds of amenities that the world's rich and famous would find appealing.....like pear flavored Weiss beer. </span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEieZocwZ3Ac8lAGAvlm68EULKFEsXmLtQ1hdMc33BQA08QlbAd6sxzS5eVXcWaGbWVzIkp4yxfUGM_YstnELQ3hhjfuwCV3PUJCl9yUM9YsKlNLt8RIlCzNiqerMJxwtE4EQLKJua6-wtM/s1600/401_Wabash_Bldg_Diagram.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="1242" data-original-width="799" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEieZocwZ3Ac8lAGAvlm68EULKFEsXmLtQ1hdMc33BQA08QlbAd6sxzS5eVXcWaGbWVzIkp4yxfUGM_YstnELQ3hhjfuwCV3PUJCl9yUM9YsKlNLt8RIlCzNiqerMJxwtE4EQLKJua6-wtM/s1600/401_Wabash_Bldg_Diagram.png" /></a></div>
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Interestingly, the Cook County records seem to be incomplete. Of the 486 Residential Units, only 197 are listed on the Assessors Office, along with 203 parking spaces owned by building residents. I've got an email request out the the Assessors office to see why the ownership records of 289 of the units don't appear on the website. Here are the bullet points of what I can make out of the records provided.<br />
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<li>The total Market Value of the 197 Units is $241 Million.</li>
<li>The average Market Value per unit is $1.2 Million.</li>
<li>Parking Spaces have a Market Value of $75,000.</li>
<li>The Penthouse on the 89th floor sold for <a href="http://www.chicagotribune.com/business/ct-confidential-trump-tower-sale-1209-biz-20141208-column.html"><span style="color: blue;"><b>$17 million in December of 2014</b></span></a> (Marked down from $32 Million....such a deal!)</li>
<li>There are 203 Parking Spaces listed on the Assessors Website. </li>
<li>There are no Units listed above the 49th floor on the Assessors Website, even thought there are <a href="https://lucidrealty.com/trump_tower.php"><span style="color: blue;"><b>254 Units shown on the floor plan</b></span></a>.</li>
<li>11 Investors own two or more Units.</li>
<li>33 Units (17%) are owned by an LLC or a Trust. </li>
<li>16 Units (8%) are owned by 401 N. Wabash LLC, the holding company for the building. (The seller)</li>
<li> 56 Units (28%) have owners with Russian or Asian surnames.</li>
<li> 8 of the 10 Units (80%) on the 29th floor are listed on the Assessors Website.. </li>
<li> 106 of the 132 units (80%) on floors 30 thru 40 are listed on the Assessors Website.</li>
<li> 82 of the 90 units (91%) on floors 41 thru 49 are listed on the Assessors Website.</li>
<li> We also note that none of the 339 "Hotel Condominium" units owned as investments by individual purchasers, as described in a <a href="https://caselaw.findlaw.com/us-7th-circuit/1669488.html"><span style="color: blue;"><b>2014 Lawsuit</b></span></a>, are listed on the Assessors website either. The purchase price of the two units in question was $2.2 Million ($1.1 Million each). </li>
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I guess the question I'd have to ask, and I'm hoping the Assessors Office can add some clarity, is: "what's so top secret about the ownership of the 254 Units listed above the 49th floor?....and why are none of the 339 'Hotel Condominium' Units listed either as residential or commercial?" A spreadsheet listing the data from the Cook County Assessor is listed below in "Exhibit T" below. I wonder how many of these owners (or the owners of the unlisted properties) are benefactors of the EB-5 Program? My understanding, per Bloomberg, is that this program has been an incredible boon to luxury property developers. Again, I'd emphasize that nobody is doing anything wrong here. Clever developers and business people have simply come up with a wonderful plan to help struggling foreign millionaires/billionaires park their money. Everybody wins! ....as they say.<br />
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The other odd piece of trivia I'd mention is that the EB-5 Visa program isn't mentioned at all in the USCC report. Not once. I find it hard to believe that a program which gives Chinese Investors this type of access ($42.6 Billion) to US Assets isn't even discussed as a topic for strategic review. You'd also think that the Administration must be aware of the program, after all, many of the folks working in the White House have at least some familiarity with luxury residential real estate. Weird....I can't believe they missed this.<br />
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<b><u><span style="font-family: inherit; font-size: large;">What Happens When Buyers Suddenly Leave The Market?</span></u></b><br />
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<b><span style="color: #cc0000; font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><u>Executive Summary:</u><i><span style="color: red;"> In this section we discuss the ramifications of the "dump" aspect of Xi's "Pump and Dump" as it related to US Real Estate Markets.</span></i></span></b><br />
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What happens when all of the Chinese property owners decide, rather than buying luxury real estate, they want to start selling it off? Right now, especially in the "hot" markets there's a growing divergence between the price of residential real estate, the leverage that buyers are willing to assume and their ability to service the debt. The FRED (St. Louis FED) Chart below tells the tale.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhOA9lvzWZkh88wmCn249udXs473XKiYDwtEMQhNBapLjR5cllDNEWFamYk0C7rT-Yg7jgHV0DDtE21T6dyOUP72cpe6wib5x-pDEG3Sryd6F5rUvqTJJx4T6NTYj6ylydwUIhunbk7TVs/s1600/FRED_Real_Estate_Price%2526Mortgage_Debt.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="460" data-original-width="710" height="414" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhOA9lvzWZkh88wmCn249udXs473XKiYDwtEMQhNBapLjR5cllDNEWFamYk0C7rT-Yg7jgHV0DDtE21T6dyOUP72cpe6wib5x-pDEG3Sryd6F5rUvqTJJx4T6NTYj6ylydwUIhunbk7TVs/s640/FRED_Real_Estate_Price%2526Mortgage_Debt.png" width="640" /></a></div>
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The chart above describes the indexed values (1/1/2005 = 100) for US Mortgage Debt (Red Line) Residential Property Prices (Black Line) and "Full Time Wages" for all workers (Blue Line). We see that as of Q2 2018:<br />
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<li>Mortgage Debt is the highest it's ever been $15.8 Trillion (140% of 2005 levels). </li>
<li>Real Full Time Wages are 104% of 2005 levels. (about the same)</li>
<li>Real Estate Values are at 90% of 2005 Levels. Up a bit from the 2012 bottom of 65% of 2005 levels but not fully recovered, or anywhere near the all time high of 2006.</li>
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In other words, borrowing is up substantially but aggregate home prices and wages haven't kept pace. Ideally, with Near-ZIRP in place for so long we would have hoped to have seen the Black line (price/value/collateral) and the Blue line (wages) approach or cross the Red line (Mortgage Debt) but that hasn't come close to happening. Americans don't seem to be building equity in their homes as quickly as we might have hoped. On the other hand, realtors have done an amazing job of promoting the perceived value of the American Dream (home ownership) while clever bankers have continued to figure out new and ever more creative ways to finance it.</div>
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<span style="font-family: inherit;">The reason I'm bringing up is that we're starting to see signs that, as described above, Chinese buyers are still out there, but now they are applying some leverage to the transactions. All cash deals are declining. We're starting to see the "hot" markets cool off. </span><br />
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<span style="font-family: inherit;">My favorite quote from a recent (September 21st) <a href="https://www.bloomberg.com/news/articles/2018-09-21/nyc-home-sellers-cutting-prices-like-it-s-2009-and-then-some"><b><span style="color: blue;">Bloomberg article</span></b></a> is from Grant Long, senior economist at <i>StreetEasy</i>, when describing the number of NYC listings that took price cuts as "the most for any seven-day period in data going back to 2006". </span><br />
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<i><span style="font-family: inherit;">“We’re at a period in the sales market where sellers have been incredibly ambitious with the prices they’re asking. They’re having to come down and bring prices to where demand actually exists.”</span></i></div>
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As a financial person, I've always felt that the asking price should be somewhere close to "where demand actually exists"....but hey, that's just me.<br />
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As all mortgage bankers are well aware, in a hard market, it's really important to loosen up underwriting guidelines in order to keep getting the deals done, the pipeline filled and the business rolling in. A guy's gotta make a buck! In another recent <i><a href="https://therealdeal.com/2018/08/07/for-some-young-buyers-stock-options-are-the-ticket-to-entering-the-nyc-market/"><b><span style="color: blue;">The Real Deal</span></b></a></i> article (August 2018), <a href="https://therealdeal.com/looks/Meenal%20Vamburkar/by"><b><span style="color: blue;">Meenal Vamburkar</span></b></a> describes the wonderful accommodations bankers are beginning to extend in order to continue to make loans to new, inexperienced millennial buyers. As every realtor knows, millennials, particularly those working in banking, finance and technology, are particularly attractive targets, since they believe they are invincible, have never been through a bear market and believe that if they "lose everything" a couple of times that they are still young enough to recover. Besides, the property they're bidding on is sure to double in value in five years so it doesn't matter how much equity they have. The important thing is to get the deal done.....at least that's what their realtor and banker are telling them. (For you Chinese Bankers out there, reading this blog for the first time, this last paragraph was, what we refer to in America, as "<i>dripping with sarcasm</i>") </div>
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Here are a few of my favorite lines from the article:</div>
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<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><i><span style="color: #1b1b1b;">With nonbank lenders, some guidelines can be more flexible, said </span><a href="https://therealdeal.com/new-research/topics/people/alan-rosenbaum/" style="color: blue; text-decoration-line: none;">Alan Rosenbaum</a><span style="color: #1b1b1b;">, CEO of Guardhill Financial. </span><span style="color: red;">Even if a customer doesn’t fully meet requirements related to income, debt and reserves, lenders are willing to look at deals </span><span style="color: #1b1b1b;">on a case-by-case basis, he said. In part, that’s a loosening up of rules set in place after the financial crisis — which some deemed too strict. </span></i><i style="color: #1b1b1b;">“We’re seeing a more realistic, more common-sense approach to underwriting,” said Rosenbaum.</i></span></div>
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<i><span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><span style="color: #1b1b1b;">At the same time, the share of nonbank mortgage lending is </span><a href="https://therealdeal.com/2018/05/24/nonbank-lenders-are-cashing-in-on-government-insured-mortgages-for-the-poor/" rel="noopener" style="color: blue; text-decoration-line: none;" target="_blank">increasing</a><span style="color: #1b1b1b;"> in the city. </span><span style="color: red;">Last year, 29 percent of home purchase loans in New York were made by nonbank lenders</span><span style="color: #1b1b1b;">, up from 22 percent in 2013</span></span></i></div>
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<span style="background-color: white; color: #1b1b1b;"><span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><i>For some borrowers, stock options have been necessary to qualify for a prime rate loan, said Mira Dick, senior managing director at Luxury Mortgage Corp. One, for example, was a customer who worked in the tech industry. Without stock option income, their debt ratio would’ve been 46 percent, too high to qualify for a prime rate loan. Adding stock option income based on a 24 month average brought the debt ratio down 10 percent — allowing them to qualify</i></span></span></div>
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<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><i><br />(Referring to stock options included in the denominator of the debt/income ratio) <span style="color: red;">The most important consideration is whether a borrower can liquidate the asset and how quickly</span>, said mortgage broker Melissa Cohn. </i></span><br />
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<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><i><u>Pithy <b>BST </b>Commentary</u></i>: Yes.... that's exactly what young millennials should do to start their professional lives off on the right foot, take on a seven figure loan, based on a the inflated value of stock options that could vaporize overnight. New buyers need to be able to quickly monetize (cash out) all of their other assets in order to make their mortgage payments on a condo that's under water. Luckily, the market will come back...it always does. What could possibly go wrong?</span><br />
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<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><a href="https://therealdeal.com/2018/05/24/nonbank-lenders-are-cashing-in-on-government-insured-mortgages-for-the-poor/"><b><span style="color: blue;">According to Bloomberg</span></b></a><span style="color: #1b1b1b;">, Independent mortgage companies are making almost half of new </span><a href="https://therealdeal.com/issues_articles/another-residential-loan-wave-swells-in-nyc/" rel="noopener" style="color: blue; text-decoration-line: none;" target="_blank">home loans</a><span style="color: #1b1b1b;"> in the U.S. now, mirroring lending practices from the subprime crisis.</span></span></div>
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<span style="font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;">"<i>Non-banks, more loosely regulated than large banks such as JPMorgan Chase, dominate the market for providing loans to borrowers with weak credit and lower incomes</i>" Bloomberg reported. </span><br />
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<span style="font-family: inherit;">Non-bank debt now accounts for nearly 80 percent of government-insured loans, according to the same report.</span></span><br />
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<span style="font-family: inherit;">The more things change, the more they stay the same.</span></span></div>
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<b><u><span style="font-size: large;">A Little Out Of Step with the Big Picture...</span></u></b><br />
<b><u><span style="font-size: large;"><br /></span></u></b><span style="color: #cc0000; font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><b style="text-decoration-line: underline;"><u>Executive Summary:</u></b><i> <b>We discuss how US Investment Banks are continuing full speed ahead in global underwriting efforts, specifically the "Dollar Bond" market, despite the concerns of the USCC. We discuss the likely outcomes of a deleveraging in Dollar Bonds and the probability of a "Gap Up" in interest rates.</b></i></span><br />
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Years ago when I was a younger man just cutting my teeth in finance, a crotchety old treasurer, (who I really miss now that he's left this world) often recited a variation of:<br />
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<i>"If they can't or won't pay you back, terms and interest rates are irrelevant...."</i><br />
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Apparently the big US Investment Banks haven't got the message or haven't been following the tone of the USCC Report. It looks like they've been full speed ahead, making sure that blue chip, or any fake foreign business for that matter, has access to cheap US capital. JP Morgan, Goldman, Citi, Morgan Stanley, Bank of America, etc. have all been developing global <i>Dollar Bond</i> Markets at a head spinning pace, for some handsome fees, of course.<br />
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For those of you unaware of the magnitude of this operation, over the last few years Chinese businesses and even the Chinese government (as well as businesses and governments all over the world) have been borrowing money (issuing bonds) denominated in US Dollars, paying interest denominated in US dollars, and eventually, these same businesses will have to pay off (or refinance) these bonds/ debts in US dollars. Last July Bloomberg published a nice little piece discussing the <b><u><a href="https://www.bloomberg.com/news/articles/2018-07-29/china-s-huge-u-s-currency-bond-market-grew-after-dollar-attacks"><span style="color: blue;">$500 Billion Market that the World Never Thought it Would See</span></a></u></b>... The piece chronicles the development of the Dollar Bond Market since the financial crisis and describes the fake/silly reasons, posed by biased industry experts, that cash strapped mainland property developers, with no discernible need for dollar financing, are finding it advantageous to issue Dollar Bonds. I guess if you are going to default, you might as well default on a bondholder who will have a tough time collecting. <br />
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Wolf Richter also did a nice analysis entitled "<a href="https://wolfstreet.com/2017/10/11/dedollarization-not-yet-usd-denominated-debt-outside-us/"><span style="color: blue;"><b>De-Dolarization Not Now</b></span></a>" on the topic a year ago (October of 2017) describing the phenomenon. I want to take a minute to re-post a chart I thought was relevant at the time and even more so now.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjP-NMRwsC8SrhbwxfuGe_f0y7FZ_k_lcOLFATosb7WTuondlsIjp6cqy8c0Wo1K-OxKlQpMxolQRgaFl0ElvoXAjqhfDqqvni3LWmttCydnjzFkzpQk3JRBa6hJi64r6OdimbEHdoacuA/s1600/BIS_USD_Debt_NONUS_Issuers.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="480" data-original-width="369" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjP-NMRwsC8SrhbwxfuGe_f0y7FZ_k_lcOLFATosb7WTuondlsIjp6cqy8c0Wo1K-OxKlQpMxolQRgaFl0ElvoXAjqhfDqqvni3LWmttCydnjzFkzpQk3JRBa6hJi64r6OdimbEHdoacuA/s400/BIS_USD_Debt_NONUS_Issuers.png" width="307" /></a></div>
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We can see from the chart that, since the financial crisis, the "world" has created roughly US$6 Trillion of US Loans (Money) outside of the US Banking System. If you or I "print US money" in our basements it's a felony, but when Investment Banks "print US money" and loan it to anonymous foreign borrowers it's "globalization"...again, for a hefty commission.<br />
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Foreign borrowers, courtesy of the "good old American Ingenuity" of US Investment Banks have somehow created legal obligations (bonds) funded by (and eventually repayable in) US Dollars which in aggregate are now approaching the equivalent of US M3 (US$14 Trillion). To fully put this in perspective, as another point of reference, Total (Aggregate) US Commercial Bank Assets (loans) are now just about US$16 Trillion. (See below compared to China M3 of nearly US$26 Trillion at current exchange rates....note that pesky little "dip" that I referenced in the Crescat Capital Bank Asset chart earlier in this post.) In other words, loans (bonds), the equivalent of nearly the entire US Broad Money Supply have been sold, underwritten and must eventually be refinanced or repaid in US Dollars. <br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiLmhDeKqcEtETZu8Pz-vwTq0ATciQCyKNtSb9WBCrqV-pDR7OBKTHI8h0guiMbfli7XJx-W1HxSOq-L7BafB2F_Jrs-vXRGq-75A9C9ngb-DcCjZAvk7noBYz5xXsjeY5cr98Bj6FEeww/s1600/FRED_M3_Bank_Assets_USvCHINA.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="374" data-original-width="879" height="272" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiLmhDeKqcEtETZu8Pz-vwTq0ATciQCyKNtSb9WBCrqV-pDR7OBKTHI8h0guiMbfli7XJx-W1HxSOq-L7BafB2F_Jrs-vXRGq-75A9C9ngb-DcCjZAvk7noBYz5xXsjeY5cr98Bj6FEeww/s640/FRED_M3_Bank_Assets_USvCHINA.png" width="640" /></a></div>
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Now let's take a look at "the dip" in Chinese M3. Here's a close up of the FRED data above, focusing on M3 growth from January 2016 to current. The chart below shows PBOC reported M3 in terms of US$ (converted using the then current exchange rate). As we observe, China's money supply had been on a relentless upward trajectory peaking at nearly US$ 28 Trillion until, for the first time in more than a decade, it abruptly reversed course in April of 2018....when it began to "dip". Again, we'll discuss this "dip" shortly.....I just want to keep emphasizing the importance of "the dip" to build what I'll call "overly-dramatic economic suspense" culminating in my upcoming grand finale of monetary analysis. Your patience, as always, is appreciated.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEijBGUSTp1AO6xg5xDh4ilxa7JDaieCwNu1osNx33pfwDBD_XjG6tYIIvn3H0ONlUu3b1acxaetWKU69MgEZCl9WgVgm3UnKYOdI9sWyxEVFC2FBc1A5s1Gpa_4yXBonVPmR8R7ONhue1U/s1600/M3_Dip.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="778" data-original-width="1171" height="424" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEijBGUSTp1AO6xg5xDh4ilxa7JDaieCwNu1osNx33pfwDBD_XjG6tYIIvn3H0ONlUu3b1acxaetWKU69MgEZCl9WgVgm3UnKYOdI9sWyxEVFC2FBc1A5s1Gpa_4yXBonVPmR8R7ONhue1U/s640/M3_Dip.png" width="640" /></a></div>
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Moving ahead, since Wolf's analysis is more than a year old, I thought I'd go back to the BIS Data (Bank of International Settlements) drill down and update key data relevant to China's contribution to the dollar bond phenomenon. The table below describes the US Dollar Bond Amounts and growth attributable to Chinese issuers. i.e.) Chinese Bonds issued, serviced and to be repaid in US Dollars.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgEokE_66jc-RVwqi-PnHhwK5xspL9uV33zw4zvd_Tq5u7sJsJtCh1YtoOy_4cVECjBNDG3FkHG1IOOwgyMXQZs1AwCdbBne5wXpmAS4MsfeVrKoPo7Q8iB6vKUkZlVprAEl4K3ovnZuvM/s1600/China_Dollar_Bonds_1H2018.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="661" data-original-width="847" height="497" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgEokE_66jc-RVwqi-PnHhwK5xspL9uV33zw4zvd_Tq5u7sJsJtCh1YtoOy_4cVECjBNDG3FkHG1IOOwgyMXQZs1AwCdbBne5wXpmAS4MsfeVrKoPo7Q8iB6vKUkZlVprAEl4K3ovnZuvM/s640/China_Dollar_Bonds_1H2018.png" width="640" /></a></div>
<b><a href="https://www.bis.org/statistics/index.htm"><span style="color: blue;">https://www.bis.org/statistics/index.htm</span></a> </b><br />
<b><a href="http://stats.bis.org/statx/srs/table/c3?c=CN&p=20134"><span style="color: blue;">http://stats.bis.org/statx/srs/table/c3?c=CN&p=20134</span></a></b><br />
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We note the following from the above:<br />
<ol style="text-align: left;">
<li>Dollar Bonds issued by Chinese entities have grown nearly five fold in less than 5 years.</li>
<li>Dollar Bonds issued by Chinese entities have increased to nearly US$1 Trillion or by comparison, to roughly 1/12th of US Domestic M3. (Or 1/26th of China's Domestic M3)</li>
<li>Dollar Bonds issued by Chinese entities are roughly 1/12th of all Dollar Bonds issued, and 1/3rd of all Dollar Bonds issued by developing countries.</li>
<li>My understanding is that many of these issues are junk rated. (I'm working on zeroing in on that number/percentage.)</li>
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It should also be noted that <a href="https://www.scmp.com/property/hong-kong-china/article/2064953/chinas-property-developers-flock-us-dollar-bond-market"><span style="color: blue;"><b>Chinese property developers</b></span></a> have been the unlikely benefactors of these bond issues. Per Bloomberg:</div>
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<i><span style="font-family: inherit;">Among corporate issuers, property developers have been particularly aggressive in selling dollar debt. Although without dollar revenue of their own, builders eagerly tapped the dollar-bond market in an environment of a stable exchange rate and lower yields offshore than at home. They ramped up issuance 300 percent in 2017 from the previous year, to $42 billion, according to data compiled by Australia & New Zealand Banking Group Ltd.</span></i><br />
<span style="font-size: 18px;"><i><span style="font-family: inherit;"><br /></span></i></span>
<i><span style="font-family: inherit;"><b><u>BST Translation:</u></b> Debt laden property Developers don't need US$'s for operations but they borrow the money to speculate on other US$ Financial Assets. I wonder how much of this money somehow finds its way back into US Luxury Real Estate through the Caymans?</span></i><br />
<i><span style="font-family: inherit;"><br /></span></i></div>
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Just last week, the <a href="https://asia.nikkei.com/Business/Markets/China-to-raise-billions-in-rare-US-debt-deal-as-trade-tensions-persist?"><span style="color: blue;"><b>Chinese government announced that they were issuing another $3 Billion in US dollar denominated sovereign debt</b></span>.</a> Perhaps I'm showing my ignorance here, but two questions immediately jump to mind:<br />
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1.) Why would the Chinese government be borrowing US Dollars? I don't see the FED, the BOJ or the ECB selling RMB denominated debt?<br />
2.) The PBC already has roughly US$ 3 Trillion of FOREX Securities on their balance sheet. (US$1.1 Trillion of US Treasury Securities) Why do they need another, paltry, US$ 3 Billion? </div>
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Of course, US Investment Banks gotta' lend a helping hand to get this deal done.....</div>
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<i>The dozen banks handling the sale include Bank of China, China Construction Bank, Deutsche Bank, Goldman Sachs and J.P. Morgan, according to a memo to investors seen by The Wall Street Journal.</i><br />
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My first concern, of course, is not that mainland issuers/borrowers, who have no need for the currency, are borrowing money in US$ because it's somehow advantageous for them. My concern is that naive, yield hungry foreign investors are more than willing to unwittingly jump in to the fray as an under-priced lender of last resort. My second concern is the same as I've had with all of the dubious "<b><u><a href="https://www.forbes.com/sites/markhughes/2018/03/30/review-the-china-hustle/#791f97b73357"><span style="color: blue;">China Hustle</span></a></u></b>" FPI's on US Exchanges. Namely, if the securities somehow go bad and default, there's no venue available for foreign bond investors to settle any claim(s) against the mainland issuer/borrower. The money is simply gone. </div>
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From a Finance 101 perspective, once the demand for an asset drys up (It's irrelevant whether the waning demand is caused by an inability to pay or a lack of enthusiasm for the asset class), be it a NYC (or Beijing) Condo, a house in Omaha, a new car, a yacht, fine art, a stock or a bond, the value of the asset declines along with perceived wealth of the holder/owner of the asset. An asset is only worth what you can sell it for.<br />
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When we add debt (leverage) to the cycle asset prices naturally increase along with the "ability to pay". When we "deleverage", removing the "ability to pay" i.e.) make fewer new loans and refuse to roll over "bad" loans the ability to pay is reduced (Note: "bad" is sometimes difficult to define, the line between investment and philanthropy often becomes blurred.)<br />
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In a deleveraging cycle, investors holding assets (loans) with "inability/unwilling to pay" characteristics begin to scramble. Bad loans "destroy" money. As more wealth (money) is destroyed, it becomes harder to get (tighter) and investors demand a higher yield since there's less money to go around. The perceived value (price) of a Bond (a financial asset) drops, that pesky "9%.Rule of Thumb" in action. The yield (interest rate return) demanded by investors increases. This is the "Gap Up" I had discussed in an interview with Tim Bergin, <b><u><a href="https://deep-throat-ipo.blogspot.com/2018/01/treasury-fails-revisited.html"><span style="color: blue;">Treasury Fails Revisited....</span></a></u></b>earlier this year.<br />
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The BIS data at the time of my <b><u><span style="color: blue;"><a href="https://deep-throat-ipo.blogspot.com/2018/01/treasury-fails-revisited.html"><span style="color: blue;">Treasury Fails Revisited....</span></a></span></u></b> post (Q2 2017) showed roughly US$91 Trillion of rate sensitive securities out there …..$39T US issues, $12T Japan, $10T China & $30T for Europe and “everybody else”. Fast forward to the just released, most current <a href="https://www.bis.org/statistics/bulletin1809.pdf"><b><span style="color: blue;">September BIS data</span></b></a> (Q1 2018) and we see that in just 9 months, total rate-sensitive securities (bonds) have ballooned to US$103.5 Trillion a whopping US$12.5 Trillion increase. The figures are now $40T in the US, $13.5T Japan, $12.5T China and $37.5T for Europe and "everyone else". Again, bear in mind that the BIS is reporting six month old data. Unfortunately for investors, bonds are priced in real time.</div>
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When we contemplate this US$103.5 Trillion in financial obligations (bonds are of course, a contractual obligation), many of which are included it the US$44 Trillion in <i>Tax Haven</i> money (much of it bonds/debt) with the above US$12 Trillion Dollar Bonds in circulation (albeit a portion would be potentially double-dipped) we might come up with a few concerns. Since nothing like this has ever happened before (I seem to be saying that a lot lately) and this analysis is slightly above my pay-grade, I'm wondering:</div>
<ol style="text-align: left;">
<li>What is the possibility that offshore underwriting problems, credit quality or defaults (can't/won't pay) spill over into a US Liquidity crisis? The scale of off shore dollars obligations vs. domestic (on-shore) dollar obligations has never been higher. i.e.) As Dollar denominated assets/bonds default and are written down/off. The US Money Supply could be destroyed at a rate faster than the FED can backstop it?</li>
<li>The FED could potentially lose control of the US money supply and interest rates? The infamous "Gap Up" that bond traders live in fear of? </li>
<li>Based on the fragile state of the US Real Estate Market, as described above, are we about to revisit 2008/2009? Rather than MBS defaults, the initial catalyst might be the liquidation of dollar bonds and <i>Tax Haven</i> Assets? Spilling over into the MBS markets? </li>
<li>Because 1.) US Bank Assets are more concentrated in the largest banks than ever before, and 2.) US Bank off balance sheet assets are as high as they've ever been, and 3.) US Policy Makers are constrained by self imposed, politically untenable limits (e.g. the ugly, populist, legislative sausage making "bail 'em out" process of another TARP-like spectacle) are we headed for an "un-fundable" systemic default? Note: Chinese policy makers have no such constraints. (i.e. they've proven that they can consistently back-fill every every hole with new liquidity in an instant. (US$25 Trillion of newly discovered/created "shadow bank" assets as an example). </li>
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That said, I was fortunate enough to attend a closed door meeting at the FED a few weeks ago. I wanted to get a handle on what's really happening with these offshore assets and whether US Monetary policy is properly accounting and blocking for potential liquidity issues arising from same. Without breaking any laws, at least that I'm aware of, I was able to secretly record Jay Powell's discussion with a few Investment Bankers re: the above. Here's what Jay had to say..... </div>
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<b><u><span style="font-size: large;">When will Xi hit the Sell button?....there's a good chance he might already be clicking away.....</span></u></b><br />
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<span style="color: #cc0000; font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><b style="text-decoration-line: underline;"><u>Executive Summary:</u></b><i> <b>There's a good chance China's deleveraging has already begun. We describe the change in composition of onshore Asset growth (Rhodium Group Research) and discuss whether it's real and how rapid the deleveraging might be.</b></i></span><br />
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When we examine PBOC data, we, of course need to take it for what it is. From the disclosures, we really can't tell "what they know" from "what they think they know" and "what they want us to know". Analyzing PBOC press releases, reports and disclosures is like looking through reams of conflicting medical test data trying to diagnose a malady that you've never seen before.<br />
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A few days ago Logan Wright from the Rhodium group did a wonderful presentation, which I was unable to attend, but luckily, a friend of mine was kind enough to share the slide deck with me. The slide below absolutely jumped out at me.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgwPGmBXfVSXuyR1AdASd-mdAvYsmgA2ZPJE8SANoLCr_1wADPuYFCnknSrqylEQS_QJGOOhxH_f5tT515CP1R2ahYcn73WJEc4FYZyGDbWtfDgQkN47PxOnvDF9DPtr4O09CVbYL6ICFY/s1600/Rhodium_Group_Deleveraging_10-9-18.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="655" data-original-width="1119" height="372" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgwPGmBXfVSXuyR1AdASd-mdAvYsmgA2ZPJE8SANoLCr_1wADPuYFCnknSrqylEQS_QJGOOhxH_f5tT515CP1R2ahYcn73WJEc4FYZyGDbWtfDgQkN47PxOnvDF9DPtr4O09CVbYL6ICFY/s640/Rhodium_Group_Deleveraging_10-9-18.png" width="640" /></a></div>
When working with Chinese financial data, whether it's fake SEC filings or ridiculous, impossible economic statistics, it's important to compare different sources and try to reconcile what it is you think you are seeing. Let's dissect the "what we think we're seeing" in the Rhodium Group chart above. The chart represents a "12 month rolling sum" from April of 2007 through August of 2018. We see that beginning in April of 2007 China's Bank Assets were growing at an annualized rate of roughly 6 Trillion RMB (or about US$900 Billion at today's exchange rate). The composition of the growth at the time was roughly 2/3rds <span style="background-color: #ffe599;">Domestic Bank Loans and Corporate Bonds (<b>Yellow</b>)</span> and 1/3rd <span style="background-color: #9fc5e8;">Foreign Bonds/Reserves (<b>Blue</b>)</span>. The <span style="background-color: #ea9999;">Shadow Non-bank lending industry (<b>Red</b>)</span> and <span style="background-color: #b6d7a8;">Chinese Government loans (<b>Green</b>)</span> apparently weren't necessary and were insignificant at the time.<br />
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As the CPC loosened credit and "cranked up the presses" we see that the annualized growth rate accelerated to a peak of more than 31 Trillion RMB (US$ 4.5 Trillion at today's exchange rate) as of December 2016. The asset composition changed significantly. Bank Loans and Bonds <span style="background-color: #ffe599;">(<b>Yellow</b>)</span> were roughly 1/3rd of the growth, with the remaining 2/3rds split about evenly between Chinese Government Loans <span style="background-color: #b6d7a8;">(<b>Green</b>)</span> , Foreign Bonds <span style="background-color: #9fc5e8;">(<b>Blue</b>)</span> and Shadow Bank loans <span style="background-color: #ea9999;">(<b>Red</b>)</span>. <br />
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Today, or at least as of August 2018, the annual growth rate has slowed to about 18 Trillion RMB (US$ 2.6 Trillion at today's exchange rate). Again, the asset composition has changed dramatically. The growth is concentrated in <span style="background-color: white;">Domestic Bank Loans and Corporate Bonds </span><span style="background-color: #ffe599;">(</span><b style="background-color: #ffe599;">Yellow</b><span style="background-color: #ffe599;">)</span><span style="background-color: white;"> and Chinese Government loans </span><span style="background-color: #b6d7a8;">(</span><b style="background-color: #b6d7a8;">Green</b><span style="background-color: #b6d7a8;">).</span><span style="background-color: white;"> The growth rate of Foreign Bonds </span><span style="background-color: #9fc5e8;">(</span><b style="background-color: #9fc5e8;">Blue</b><span style="background-color: #9fc5e8;">)</span><span style="background-color: white;"> is neutral/flat and Shadow Bank loans </span><span style="background-color: #ea9999;">(<b>Red</b>)</span><span style="background-color: white;"> are actually in decline.</span><br />
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<span style="background-color: white;">Although China's current US$2.6 Trillion annual increase in bank assets (money supply) is far from miserly, if we are to believe this data, mainland deleveraging has begun and financial assets (loans) are being retired (paid/written off).</span><br />
<span style="background-color: white;"><br /></span>
<span style="background-color: white;">On the other hand, the CPC has never been adverse to telling the world what it wants to hear. If the world wants to hear that China's GDP is running at 7%, or Alibaba GMV is growing at 60%, or that Chinese eCommerce is state of the art, or that the NBS numbers are accurate, or that the PBOC has an iron clad grip on their economy, then like magic, it gets reported and it becomes reality.</span><br />
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<b><u><span style="font-family: inherit; font-size: large;">So What Can Xi "Sell"?</span></u></b><br />
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<span style="color: #cc0000; font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><b><u>Executive Summary:</u><i> We summarize the list of assets the CPC might sell (as described above) and the probably consequences of the deleveraging. Hint: It's not good....</i></b></span><br />
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In order to protect the RMB (exchange rate), the CPC needs FOREX. I've discussed, some would say ad nauseum in this blog, the various methods and mechanisms available to the CPC to "round trip" FOREX, keeping it hidden off shore to invest/leverage and create ever larger fund pools influencing the valuation of Western assets. If the Chinese are actually going to deleverage at home it would stand to reason that they would need to fund the deleveraging (pay off the mainland RMB debts) and protect the RMB somehow. <br />
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Here are a few asset classes, with page number references to the <a href="https://www.uscc.gov/sites/default/files/annual_reports/2017_Annual_Report_to_Congress.pdf"><b><span style="color: blue;">USCC</span></b></a> report that could be involved is a CPC fire sale at some point relatively soon.</div>
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1.) $1.07 Trillion in US Treasuries and US$2 Trillion of non-US FOREX assets. (USCC page 51)</div>
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2.) Up to $960 Billion of Chinese FPI's (USCC Page 93)<br />
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3.) Up to $900 Billion of <i>Tax Haven</i> FPI assets (USCC Page 92) </div>
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4.) US Real Estate roughly $400 Billion (Not addressed in the <span style="color: blue;"><a href="https://www.cnbc.com/2016/05/16/chinese-investors-have-spent-300-billion-on-us-property-mbs-rosen-study-finds.html"><b><span style="color: blue;">USCC Report</span></b></a>)</span></div>
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5.) Chinese <i>Dollar Bonds </i>- $960 Billion. (Not addresses in the USCC Report)<br />
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6.) Some portion of <i>Tax Haven OFI</i> Assets (up to $44 Trillion) (FSB Report)<br />
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<b>Expected Consequences:</b><br />
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1.) The aforementioned "Gap Up" in interest rates. The <a href="https://www.thestreet.com/markets/u-s-10-year-bond-auction-draws-highest-yield-since-2011-overall-demand-wanes-14740859"><b><span style="color: blue;">US Treasury holds an auction</span></b></a>..... like it did last week....and there's a painful lack of enthusiasm to support the funding of US budget deficits. <br />
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2.) With more than $103 Trillion of interest rate sensitive debt out there, it will have to be repriced and/or default. Money will get more expensive, as there will be less of it available after the write offs. Central Bankers will be working some OT.<br />
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3.) World stock markets are over $100 Trillion now, with the <a href="http://www.multpl.com/shiller-pe/"><span style="color: blue;"><b>Shiller CAPE at 31.2</b></span></a> at the second highest level in history (It hit 44:5 during the dot.com bubble). Stock markets usually over correct to the historical average. The historical mean over the last 150 years is 16.58, so many of us (at least the investors who don't see this coming) can expect to lose about 2/3rds of our 401k equity allocations.<br />
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4.) Apple, depending on the level of supply chain disruption, will be a shell of what it once was.<br />
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5.) Chinese FDI will be permanently delisted from US Exchanges based on populist outcry. For example, Alibaba will be gone. By association, Tencent, Altaba and Softbank will also cease to exist as currently constituted. <br />
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6.) Based on the above FRED Home Price/Mortgage/Wages chart. We're looking at a secondary (Real Estate driven) financial crisis part deux. When mortgage rates go up and jobs go away it never ends well. US$15 Trillion in American mortgages and the associated mortgage backed securities will need to be repriced with some determined to be permanently underwater. Again, there's that pesky "9% rule of thumb"<br />
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Of course, with a sea change of this magnitude, there will be some unexpected consequences. There always are. It will be really interesting, and possibly horrifying to see how these things unfold. I'll leave it up to you, my beloved readers to come up with a few more "unexpected consequences".<br />
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<b><u><span style="font-size: large;">USCC Report Recommendations - The Final Disconnect</span></u></b></div>
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<span style="color: #cc0000; font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><b><span style="color: red;"><span style="text-decoration-line: underline;"><u>Executive Summary:</u></span><i> There are only a few relevant recommendations in the USCC Report and they are generally toothless. There's no mention of measures to reign in US Investment Banks,address the "pegged" RMB or address any </i></span><span style="color: red;"><i>of the risks, issues and festering cataclysm discussed above.</i></span></b></span><br />
<i style="color: red;"> </i><br />
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The only Recommendations that the U.S.-CHINA ECONOMIC AND
SECURITY REVIEW COMMISSION made, relating to the financial topics I've discussed today are made on page 29 of the Executive Summary. Feel free to review the full text and details, but the relevant bullet points are "pasted" below. They are:</div>
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<i>👉 Congress consider legislation updating the Committee on Foreign Investment in the United States (CFIUS) statute to address current and evolving security risks. (Sub bullets are listed describing the expansion of CFIUS authority)</i></div>
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<i>👉 Congress consider legislation to ban and delist companies seeking to list on U.S. stock exchanges that are based in countries that have not signed a reciprocity agreement with the Public Company Accounting Oversight Board (PCAOB). </i><br />
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<i>👉 Congress amend the Foreign Sovereign Immunities Act (FSIA) of 1976 to: </i><br />
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<ol style="text-align: left;"><i>
<li><i>Allow U.S. courts to hear cases against a foreign state’s corporate affiliates under the commercial activity exception. </i></li>
<li><i>Require Chinese firms to waive any potential claim of sovereign immunity if they do business in the United States.</i></li>
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<i>👉 Congress consider legislation conditioning the provision of market
access to Chinese investors in the United States on a reciprocal,
sector-by-sector basis to provide a level playing field for
U.S. investors in China.</i><br />
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That's it. There's no mention of the risks, issues and festering cataclysm discussed above. Our leadership has been sitting on their collective asses watching this tsunami build offshore for a half decade. They've failed to learn anything from the 1987, 1999 and 2009 financial crises and have done absolutely nothing to stop this next financial onslaught, or at least insulate the American Main Street Economy from its inevitable impact.<br />
<br />
It should be obvious by now that the everyday, "little guy" investor needs to modify his/her Buffett-like "buy and hold" Rip Van Winkle philosophy for these all too predictable debacles brought to our front door by scurrilous investment bankers, gutless regulators and ineffective politicians. We can no longer "buy great businesses at a fair price" and expect to be rewarded over time. We must append that philosophy with "buy great businesses at a fair price.....and know when to take your money and run..."<br />
<br />
The most remarkable thing about this unfolding drama is the ever-expanding vacuum of leadership. Once again, when the dust settles, there will be nobody to blame. The American people will again be fed the line, as we were in 1987,1999 and 2009 that "nobody could have possibly seen this coming"... ... even though some of us have been writing about this oncoming implosion for years.<br />
<br />
Investment bankers will continue to do "God's work", regulators will continue to "facilitate capital formation", politicians and lawmakers will continue to profess to be on the side of the "little guy" while somehow, on modest five figure (some at a low six figure) government salaries, amass more wealth than most of us can imagine.<br />
<br />
The only silver lining here, though remote as it might be, is that this "China Dip" will be so cataclysmic that we might finally elect leadership who care more about the American economy than they do about getting reelected.<br />
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Good luck to all.....and may God Bless America....we're really going to need a blessing or two, and perhaps a little divine intervention to get through this.<br />
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<span style="font-family: inherit; font-size: large;"><b><u>Additional Reading</u></b></span><br />
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<span style="font-family: inherit;">Real Estate $300 Billion China spent on Real Estate</span></div>
<span style="font-family: inherit;"><a href="https://www.cnbc.com/2016/05/16/chinese-investors-have-spent-300-billion-on-us-property-mbs-rosen-study-finds.html">https://www.cnbc.com/2016/05/16/chinese-investors-have-spent-300-billion-on-us-property-mbs-rosen-study-finds.html</a></span><br />
<span style="font-family: inherit;"><span style="font-family: "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif;"><br /></span></span>
<span style="font-family: inherit;"><span style="font-family: "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif;">China's Realestate Rush</span></span><br />
<span style="font-family: inherit;"><span style="font-family: "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif;"><a href="https://www.nytimes.com/interactive/2015/11/23/business/china-factor-real-estate.html">https://www.nytimes.com/interactive/2015/11/23/business/china-factor-real-estate.html</a></span><span style="font-family: "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif;"><br /></span><span style="font-family: "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif;"><br /></span></span><br />
<span style="font-family: inherit;"><span style="font-family: "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif;">Nov. 2015 - NYT Article - Chinese Real Estate all over the US & the world - US$Trillions</span></span><br />
<span style="font-family: inherit;"><a href="https://www.nytimes.com/2015/11/29/business/international/chinese-cash-floods-us-real-estate-market.html">https://www.nytimes.com/2015/11/29/business/international/chinese-cash-floods-us-real-estate-market.html</a></span><br />
<span style="font-family: inherit;"><span style="font-family: "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif;"><br /></span><span style="font-family: "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif;">March 2017 - The real Deal - Local Banks lending to Chinese buyers - </span></span><br />
<span style="font-family: inherit;"><a href="https://therealdeal.com/2017/03/27/the-death-of-the-all-cash-chinese-buyer/">https://therealdeal.com/2017/03/27/the-death-of-the-all-cash-chinese-buyer/</a></span><br />
<span style="font-family: inherit;"><span style="font-family: "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif;"><br /></span><span style="font-family: "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif;">The Real Deal - China Capital Flight</span></span><br />
<span style="font-family: inherit;"><a href="https://therealdeal.com/2016/03/10/everything-you-need-to-know-about-the-flight-of-capital-of-out-china/">https://therealdeal.com/2016/03/10/everything-you-need-to-know-about-the-flight-of-capital-of-out-china/</a></span><br />
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<span style="font-family: "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif;">Op Ed - China...it's all your fault...</span><br />
<span style="font-family: "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif;"><a href="https://www.washingtonpost.com/news/global-opinions/wp/2018/09/26/as-china-u-s-feud-enters-uncharted-territory-beijing-can-only-blame-itself/?utm_term=.4d88813e72a6">https://www.washingtonpost.com/news/global-opinions/wp/2018/09/26/as-china-u-s-feud-enters-uncharted-territory-beijing-can-only-blame-itself/?utm_term=.4d88813e72a6</a></span><br />
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<span style="font-family: "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif;"></span>RMB Internationalization....not there yet...2017 Forbes<br />
<a href="https://www.forbes.com/sites/sarahsu/2017/05/11/rmb-internationalization-are-we-there-yet/#4f3eed186ad4">https://www.forbes.com/sites/sarahsu/2017/05/11/rmb-internationalization-are-we-there-yet/#4f3eed186ad4</a><br />
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USCC Report<br />
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<span style="font-family: "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif;"><span id="yiv6543955501yui_3_16_0_ym19_1_1536707065437_25147"><a href="https://www.uscc.gov/sites/default/files/annual_reports/2017_Annual_Report_to_Congress.pdf" id="yiv6543955501yui_3_16_0_ym19_1_1536707065437_25146" rel="nofollow" style="color: #196ad4; margin: 0px; outline: none; padding: 0px;" target="_blank">https://www.uscc.gov/sites/default/files/annual_reports/2017_Annual_Report_to_Congress.pdf</a></span></span></div>
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<span style="font-family: "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif;">Vancouver Real Estate</span></div>
<span style="font-family: "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif;"><a href="https://www.theguardian.com/cities/2016/jul/07/vancouver-chinese-city-racism-meets-real-estate-british-columbia">https://www.theguardian.com/cities/2016/jul/07/vancouver-chinese-city-racism-meets-real-estate-british-columbia</a></span><br />
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<span style="font-family: "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif;">National Chinese Real Estate Purchases - US -$28B in 2015 Canada $20B</span><br />
<span style="font-family: "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif;"><a href="https://www.huffingtonpost.ca/2016/03/24/chinese-buyers-vancouver-real-estate_n_9535748.html">https://www.huffingtonpost.ca/2016/03/24/chinese-buyers-vancouver-real-estate_n_9535748.html</a></span></div>
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New Jersey - EB5 Visas</div>
<a href="https://www.bloomberg.com/news/articles/2016-03-07/trump-tower-financed-by-rich-chinese-who-invest-cash-for-visas" style="font-family: "times new roman"; font-size: medium;">https://www.bloomberg.com/news/articles/2016-03-07/trump-tower-financed-by-rich-chinese-who-invest-cash-for-visas</a><span style="font-family: "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif;"></span><br />
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<span style="font-family: "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif;">Ruh Roh</span></div>
<span style="font-family: "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif;"><a href="https://www.youtube.com/watch?v=K3Q6j6ZdVlY">https://www.youtube.com/watch?v=K3Q6j6ZdVlY</a></span><br />
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<span style="font-family: "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif;"><span style="font-family: "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif;">Youtube Link - China Capital Flight</span></span></div>
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<span style="font-family: "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif;"><a href="https://youtu.be/zoWWLpv_qVg%C2%A0"><span style="font-family: "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif;">https://youtu.be/zoWWLpv_qVg</span> </a></span></div>
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EB5 Visas Instructions State Department - Chinese Version - so prevelant<br />
<a href="https://www.uscis.gov/working-united-states/permanent-workers/employment-based-immigration-fifth-preference-eb-5/about-eb-5-visa-classification">https://www.uscis.gov/working-united-states/permanent-workers/employment-based-immigration-fifth-preference-eb-5/about-eb-5-visa-classification</a><br />
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EB5- Set to Expire.<br />
<a href="https://www.cnbc.com/2017/03/08/another-us-visa-program-under-fire.html">https://www.cnbc.com/2017/03/08/another-us-visa-program-under-fire.html</a><br />
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<span style="font-family: inherit;"><br /></span></div>
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<div style="font-size: 16px;">
<span style="font-family: inherit;">EB5 Stats</span></div>
<a href="https://blog.lucidtext.com/2018/01/23/fy2017-eb-5-visas-by-country/">https://blog.lucidtext.com/2018/01/23/fy2017-eb-5-visas-by-country/</a><br />
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Trump Chicago Property description<br />
<a href="https://web.archive.org/web/20090624112623/http://www.trumpchicago.com/_files/pdf/brochure.pdf">https://web.archive.org/web/20090624112623/http://www.trumpchicago.com/_files/pdf/brochure.pdf</a></div>
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<span style="font-family: inherit;">Trump Tower Floor Plans - 486 Units</span></div>
<a href="https://lucidrealty.com/trump_tower.php">https://lucidrealty.com/trump_tower.php</a><br />
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Cook County - 197 Units listed - up to floor 45. 203 Parking Spaces - $241 Million ave value $1.2 Million.<br />
<a href="http://cookcountyassessor.com/Search/Property-Search.aspx">http://cookcountyassessor.com/Search/Property-Search.aspx</a><br />
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<span style="font-family: "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif;">Cayman's analysis - Ownership masking</span></div>
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<a href="https://www.cima.ky/upimages/publicationdoc/InvestmentsStatisti_1515159474.pdf" style="font-family: "helvetica neue", helvetica, arial, "lucida grande", sans-serif;">https://www.cima.ky/upimages/publicationdoc/InvestmentsStatisti_1515159474.pdf</a><br />
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Trump Tower Chicago Penthouse</div>
<div style="margin: 0px; orphans: 2; text-align: left; text-decoration-color: initial; text-decoration-style: initial; text-indent: 0px; widows: 2;">
<a href="http://www.chicagotribune.com/business/ct-confidential-trump-tower-sale-1209-biz-20141208-column.html">http://www.chicagotribune.com/business/ct-confidential-trump-tower-sale-1209-biz-20141208-column.html</a></div>
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<a href="https://streeteasy.com/blog/nyc-housing-market-financial-crisis-one-decade-later/">https://streeteasy.com/blog/nyc-housing-market-financial-crisis-one-decade-later/</a><br />
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<a href="https://therealdeal.com/2018/08/07/for-some-young-buyers-stock-options-are-the-ticket-to-entering-the-nyc-market/">https://therealdeal.com/2018/08/07/for-some-young-buyers-stock-options-are-the-ticket-to-entering-the-nyc-market/</a><br />
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Dollar Bonds - Property Developers<br />
<a href="https://www.scmp.com/property/hong-kong-china/article/2064953/chinas-property-developers-flock-us-dollar-bond-market">https://www.scmp.com/property/hong-kong-china/article/2064953/chinas-property-developers-flock-us-dollar-bond-market</a><br />
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Dollar Bonds - China Sovereign Wealth Funds<br />
<a href="https://asia.nikkei.com/Business/Markets/China-to-raise-billions-in-rare-US-debt-deal-as-trade-tensions-persist?" style="font-family: "times new roman";">https://asia.nikkei.com/Business/Markets/China-to-raise-billions-in-rare-US-debt-deal-as-trade-tensions-persist?</a><br />
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Red October<br />
<a href="https://www.youtube.com/watch?v=hNWBsWihYjM">https://www.youtube.com/watch?v=hNWBsWihYjM</a><br />
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Dollar Bonds<br />
<a href="https://www.businessinsider.com/china-is-binging-on-dollar-denominated-debt-2017-10">https://www.businessinsider.com/china-is-binging-on-dollar-denominated-debt-2017-10</a><br />
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<div style="margin: 0px; orphans: 2; text-align: left; text-decoration-color: initial; text-decoration-style: initial; text-indent: 0px; widows: 2;">
Exhibit "T" - Condo Owners of 401 N. Wabash</div>
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<a href="http://cookcountyassessor.com/Search/Property-Search.aspx">http://cookcountyassessor.com/Search/Property-Search.aspx</a></div>
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Deep Throathttp://www.blogger.com/profile/02712515268051858186noreply@blogger.com13tag:blogger.com,1999:blog-7478408299955066555.post-19262407736745482532018-08-26T23:57:00.003-04:002018-08-29T08:41:39.015-04:00The "Call"....and an Open Letter to Securities Lawyers Everywhere.....<div dir="ltr" style="text-align: left;" trbidi="on">
Well, last week I took some valuable time out of my jam packed schedule to try to work with the Alibaba analysts in anticipation of the earnings call. What can I say, I like to help whenever duty calls. I'm a "giver". Anyway, I have to say, after a couple of reaching-out-hands-across-the-water efforts....it didn't seem as though they wanted my help at all. I was shocked....<br />
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Here's the email I sent in an effort to try to rev them up and point them in the right direction for the upcoming investor call. I'm no Tony Robbins, but hey, I gave it a shot:<br />
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<span style="color: red; font-family: inherit;"><i><b id="yui_3_16_0_ym19_1_1535069255475_6878">From:</b> DeepThroatIPO</i></span><br />
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<span style="color: red; font-family: inherit;"><i><span id="yui_3_16_0_ym19_1_1535069255475_6877"><b>Sent:</b> Wednesday, August 22, 2018 12:22:47 AM<br clear="none" /><b>To:</b> </span><span style="background-color: white;">Fan Liu <fan.liu@ghsl.cn>; Alicia Yap <alicia.yap@citi.com>; Alex Yao <alex.yao@jpmorgan.com>; Wendy Huang <wendy.huang@macquarie.com>; Thomas Chong <thomas.chong@credit-suisse.com>; Eddie Leung <eddie.leung@baml.com>; Chi Tsang <chitsang@hsbc.com.hk>; Gregory Zhao <gregory.x.zhao@barclays.com>; Piyush Mubayi <piyush.mubayi@gs.com></span><span style="background-color: white;"> </span>Youssef.Squali@SunTrust.com; Grace.H.Chen@morganstanley.com; jerry.liu@ubs.com; mark.mahaney@rbccm.com; Anne Stevenson-Yang</i></span></div>
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<span style="color: red; font-family: inherit;"><i><b><br /></b></i></span>
<span style="color: red; font-family: inherit;"><i><b>Subject:</b> Re: Upcomming BABA Investor Call</i></span><br />
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<span style="color: red; font-family: inherit;"><i>Hmmmm.....I've not heard back from any of you....that's strange......it's not like my work is a secret anymore. If you take a minute to Google "Alibaba 20-F" my work comes up 5th out of 43 million results......Wolf Richter put it out there....great guy...perhaps you know him?.</i></span></div>
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<span style="color: red; font-family: inherit;"><i>Anyway, I was hoping for some insightful questions from at least a few of you.... or perhaps that you might at least send me the perfunctory "thanks for your interest" email response while kicking this up the food chain to your respective bosses for some guidance. That's probably what I would have done....while carefully documenting the communication(s). </i></span></div>
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<span style="color: red; font-family: inherit;"><i>I've also learned over the years that these career decisions are usually very difficult. Your life can change in the blink of an eye....for better or worse depending on your choices.</i></span></div>
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<span style="color: red; font-family: inherit;"><i>That said, I've also been in "Corporate America" long enough to have seen some really good people get unceremoniously thrown under the bus when big fat financial turds plop into the dumper. It's BS.....I know....it's not your fault...but it's the world we live in. Blame must be delegated. Isn't that right Mark?</i></span></div>
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<span style="color: red; font-family: inherit;"><i>By some odd twist of fate, you have all been charged with the daunting responsibility of analyzing this beast we call BABA. You are the point men/women at the epicenter of the most incredible financial fiasco in history. </i></span></div>
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<span style="color: red; font-family: inherit;"><i>But, from my vantage, and I don't mean to be so blunt, but as a casual observer, it looks like, collectively, you are all standing on the curb distracted, as the biggest financial Greyhound in history is hurtling toward your bus stop with no brakes. Sadly, there will always be folks in your organization(s), who are more than willing to give you a shove once the bus gets too close to them.....but you already knew that.</i></span></div>
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<span style="color: red; font-family: inherit;"><i>Hopefully, it will be a really informative and lively discussion on Thursday. </i></span></div>
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<span style="color: red; font-family: inherit;"><i>All the best.....</i></span></div>
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<span style="background-color: transparent;">Well.....not that it was all that surprising, but I never heard back from anyone. I guess they were comfortable in forging ahead without my help, insight and guidance. I was at least hoping, during the Investor Call, they might have been a little more aggressive, bringing up some of the amazing accounting issues I've been discussing over the last few years. After all, you know you are on the right track when you get a </span><a href="http://fortune.com/2016/02/10/nasty-things-ceos-say/" style="background-color: transparent;"><span style="color: blue;"><b>Jeff Skilling "Asshole" response</b></span></a><span style="background-color: transparent;">.....</span></div>
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That said, perhaps:<br />
<br />
1.) The Analysts got the email and chose not to read it? (Only Fan Liu & Chi Tsang emails were returned as undelivered.)<br />
2.) Perhaps their company policy is not to respond? (Understandable...<a href="https://dealbook.nytimes.com/2012/10/26/citigroup-pays-fine-and-fires-analysts-over-facebook-i-p-o/"><span style="color: blue;"><b>discussing non-public info prior to an earnings call is a problem</b></span></a>. Which analysts are all well aware of....or at least should be.)<br />
3.) Perhaps they got my email, looked it over and kicked it up to their respective bosses?<br />
4.) Perhaps they read it with great interest and used it as the framework for their Investor Call Q&A?<br />
<br />
Sadly, until and unless subpoenas are issued we'll never know what actually happened.<br />
<br />
<b><u><span style="font-size: large;">The Time Line</span></u></b><br />
<br />
So now let's take a look at what happened once the YUGE! "61%" number hit the street at 7:30 AM on Thursday August 23rd. Pre-market (presumably neophytes vs. insiders) generally went nuts, pushing the opening number up $7.00, to $184.00 from the prior day close of $177.00. Once the market opened, BABA average daily volume (20 Million shares +/-) was traded in roughly the first hour of the trading day at about the $184.00 number, occasionally caressing $186.50 with 2x average daily volume traded by 11:00AM.<br />
<br />
Here are the links to the foldurol that caused all of the initial hubbub....<br />
<br />
<b><u>Press Release:</u></b><br />
<b><a href="https://www.alibabagroup.com/en/news/press_pdf/p180823.pdf"><span style="color: blue;">https://www.alibabagroup.com/en/news/press_pdf/p180823.pdf</span></a></b><br />
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<b><u>Webcast:</u></b><br />
<b><a href="https://edge.media-server.com/m6/p/8atk8jbj"><span style="color: blue;">https://edge.media-server.com/m6/p/8atk8jbj</span></a></b><br />
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<b><u>Presentation</u></b><br />
<b><a href="https://www.alibabagroup.com/en/ir/presentations/pre180823.pdf"><span style="color: blue;">https://www.alibabagroup.com/en/ir/presentations/pre180823.pdf</span></a></b><br />
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<span style="font-family: inherit;"><b><u style="background-color: white;">6-K (Filed with the SEC on 2018-08-23 16:29:54 - "end of day")</u></b></span><br />
<a href="https://www.sec.gov/Archives/edgar/data/1577552/000110465918053369/a18-21099_1ex99d1.htm"><span style="color: blue;"><b>https://www.sec.gov/Archives/edgar/data/1577552/000110465918053369/a18-21099_1ex99d1.htm</b></span></a><br />
Now, of course, once "professional" investors and commentators had a chance to analyze the presentation, and most importantly the Q&A of the investor call, we see that the mood, during the day, quickly evolved from euphoria to "what the hell?" and BABA eventually ended the day down $5.75......a $15.00 swing from top to bottom. For example, Clay Chandler (<a href="https://view.email.fortune.com/?qs=c764cab4a155952fc8b355769d1ca744e3142403c038f19f69be03107e7c34646db6c37bc3ff977dc2866d4bbd6d748fc32b78f9300825d7cf969fb12fab5b09993cc0005a2df772"><span style="color: blue;"><b>Time</b></span></a>), and Tim Culpan (<a href="https://www.bloomberg.com/view/articles/2018-08-23/alibaba-baba-earnings-exceptions-are-the-new-rule?eminfo=%7b%22EMAIL%22%3a%22a6VbunsnP8rAWIVx1XrYn3IEL96Kl33JRsq2GrBbersBbsn%2bQvna8Q%3d%3d%22%2c%22BRAND%22%3a%22FO%22%2c%22CONTENT%22%3a%22Newsletter%22%2c%22UID%22%3a%22FO_DLY_AD1371F7-DEFA-444B-8B45-CFC294CF6CC9%22%2c%22SUBID%22%3a%2256877455%22%2c%22JOBID%22%3a%22862289%22%2c%22NEWSLETTER%22%3a%22CEO_DAILY%22%2c%22ZIP%22%3a%2215282%22%2c%22COUNTRY%22%3a%22%22%7d"><b><span style="color: blue;">Bloomberg</span></b></a>) both did a nice job of parsing through the numbers.<br />
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The reason that this happened (among other things) has to do with the difference between <i>Professional</i> investors and <i>Amateur</i> investors. A "<i>Professional</i>" investor is a savvy, intelligent person who is capable of reading between the lines and deciphering the difficult language and nuances of these investor calls. An <i>Amateur</i> Investor is, well, not so much...<br />
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I also want to acknowledge that the Analysts on the call did a fantastic job of probing the inner meaning and real implications of management's comments. Based on what's expected from analysts today, they did an AWESOME JOB of signaling the markets and <i>Professional</i> Investors as to what's actually going on!<br />
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First, not once (with the exception of Alicia Yap at Citi and her "congrats on 'solid' results" comment) did any analyst offer any orgasmic adulation regarding the quarterly results.....baby steps. (<b><i><u>Note:</u></i></b> In today's vernacular, the term "solid results" usually refers to a business teetering on bankruptcy which managed to somehow reduce the quarterly loss.) <br />
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Second, the Analysts bravely and cleverly walked, and never crossed, the ever-so-thin line between pissing management off, getting tossed off the call, risk being referred to as "that asshole analyst" on Twitter forever...... and actually doing their job. Bravo!<br />
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As you might suspect, the problem is, that we live in a world where everything is a "Strong Buy". Today, a "Strong Buy" can mean anything from "Hey....this stock is actually a strong buy! No kidding!" to "Geeezzz....run for the hills!". That said, it's become all the more important to understand the subtle nuances buried in the dialogue between the Analysts and management on these investor calls, to differentiate the levels and gradations of "Strong Buy".<br />
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To that end, I think it's only appropriate, as a public service to <i>Amateur</i> investors and the investing public at large, that we deploy my patented <b><i><u>Dick Fuld Banker-Speak Translator (BST),</u></i></b> to fully analyze the implications of the Analyst Q&A on the Alibaba Investor Call. The <b><i><u>BST</u></i></b> will read between the lines, probing what the analysts were "really" asking. As usual, management's responses were largely irrelevant, so we'll ignore them for now. Feel free to read the full text of the entire call courtesy of <i>Seeking Alpha</i>. I've posted the full text and the <a href="https://seekingalpha.com/symbol/BABA/earnings"><span style="color: blue;"><b>link to the transcript </b></span></a>at the end of this post.<br />
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The eight (8) Analysts on the call with speaking parts in this awesome show of solidarity were:<br />
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Leung - Merrill Lynch<o:p></o:p></span></div>
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Yap - Citigroup<o:p></o:p></span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Grace
Chen - Morgan Stanley<o:p></o:p></span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Thomas
Chung - Credit Suisse<o:p></o:p></span></div>
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Mahaney - RBC Capital Market<o:p></o:p></span></div>
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Zhao - Barclays<o:p></o:p></span></div>
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Huang - Macquarie<o:p></o:p></span></div>
<span style="font-family: "times new roman" , serif; font-size: 12pt;">Alex
Yao – JPMorgan</span><br />
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Here are the Eight (8) hard hitting, laser focused Questions they asked:<br />
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– Eddie Leung - Merrill Lynch</span></b></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Good
evening. Thank you for taking my question. Could you share your thoughts first
on the e-commerce competitive landscape given the fast growth of some of your
peers in the lower price point market so to speak? Just -- many years ago, if
you remember, Taobao also started more in the lower price point market then
developed into today's scale. So just wondering, how you think about the
difference today versus many years ago? And then if you guys can -- could you
also comment a little bit on the outlook of your customer management business.
There has been a bit of deceleration, of course, we know there is a high base
affect. But any color going into second half of this year would be helpful.
Thank you.<o:p></o:p></span><br />
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><b><i><u>Eddie's Question (BST) Translation:</u></i> </b><i>Hey guys, I don't mean to be so harsh here, but what the hell is going on with your margins? When I compare your operating metrics from a year ago by quarter, I see that you're operating margins have decreased from 38.8% all the way down to 12.5%....and since you don't break anything out by business segment I have no way of knowing what's going on.</i></span><br />
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<i>From what I can see, "New Retail" means "No profit".....are you following the Amazon model where we can expect that you won't make any real money for a couple of decades?</i><br />
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<b><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Q - Alicia
Yap - Citi</span></b><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Hi,
good evening, management, Joe, Daniel and Maggie. Thanks for taking my
questions and congrats on solid results. I have some follow-up on these
combined online core commerce. So with GMV growth and commissions lightly to
experience potentially high base as well from last year, we see CMR also lapse
out a tough comp. I think management previously commented about the increasing
page view and time spent on the numbers of the recommended feed pagers. So are
we still on track to introduce new potential some additional add lows to those
second lending pages later this year? And also second question quickly is just,
can you reconcile -- help us reconcile the 34% physical GMV versus the 55%
commission revenue growth. Is that implying the take rate actually increasing?
Thank you.<o:p></o:p></span><br />
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><br /></span>
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><i><b style="text-decoration-line: underline;">Alicia's Question (BST) Translation:</b> Even though you don't disclose GMV on a quarterly basis anymore, you put a growth rate in the press release (even though we don't know what it's grown from...) and for some reason Maggie talked about it growing 34%, so even though you've already told me in the dress rehearsal before the call that the take rate isn't actually increasing, I thought I'd go off the reservation and ask it again so you could again explain to the investing public how sales "commissions" apparently have no relationship to the amount of goods sold on the platform. </i></span></div>
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<b><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Q - Grace
Chen - Morgan Stanley</span></b><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">My
question is about the New Retail business. Alibaba has been doing several
mergers and acquisitions, and also has been sending out Hema and partnerships
with various companies to lay out the foundations for the New Retail business.
So I'm wondering is there any -- is there still any missing parts in your
business portfolio to implement your New Retail strategy? And after the recent
merger and acquisitions, what is your critical next step to execute the New
Retail strategy? Thank you.<o:p></o:p></span><br />
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><u style="font-style: italic; font-weight: bold;">Graces's Question (BST) Translation:</u> <i>Hey, from the latest 20-F (page 118) we know that you've created about 600 new legal entities over the last two years under your "Enhancement" program, getting more friends, family and political cronies involved in the dilution of the Capital Structure. So, I guess my question is "how long is this bullshit going to go on?"</i></span><br />
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<b><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Q - Thomas
Chung - </span></b><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span><span style="font-family: "times new roman" , serif; font-size: 12pt;"><b>Credit Suisse</b></span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">My
question is about food delivery business. Can management comment about the
competitive landscape and our strategies and becoming the number one in this
segment? Thank you.<o:p></o:p></span><br />
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><b><i><u>Thomas Chung (BST) Translation:</u></i></b> Geezzz....<i>I need to talk about something irrelevant so as not to tick off management, while at the same time, signal to the market that I don't want to talk about the financial results. I wish I never would have got that stupid email from DeepThroatIPO....what a pain in the ass that douche bag is. And now, my boss told me I couldn't call in sick so I actually have to ask a question on this fu@#!ing call. Let's see....Food delivery!....yeah! That's the ticket. Never mind that the Ele.me/Starbucks/Hema/Koubei thing is an insignificant part of their business, probably generating losses and is mentioned only in passing, without numbers on page 3 & 4 of the press release, and I only have one question to ask....FOOD DELIVERY! THAT'S WHAT I'M GOING TO GO WITH!</i></span></div>
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<b><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Q
– Mark Mahaney - RBC</span></b><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
<span style="font-family: "times new roman" , serif; font-size: 12pt;">I
wanted to ask about the sustainability of the digital media revenue growth. It
seems like you had a nice impact from World Cup there. Could you talk about
whether some of the newer customers or some of the newer business that came out
of that event whether that looks like its sustainable, whether you -- those are
new customers that will stay with the service. Anything you can tell about what
their activity has been like post the World Cup? Thank you very much.</span><br />
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<span style="font-family: "times new roman" , serif; font-size: 12pt;"><b><i><u>Mark Mahaney (BST) Translation:</u> </i></b><i>Geeezus Christ!....now I've gotta follow Tom's lead....I gotta let the market know that I don't want to talk about this mess.....maybe I should talk about Share Based Compensation (SBC), maybe it has decreased significantly in the quarter in a relentless effort to control costs?......Oh Crap!...outstanding shares have actually increased another 15 million shares (US$ 2.7 Billion @ $180/share)...I can't talk about that.....how about "digital media" and the World Cup?....yeah!....that's it....there are no actual numbers released and it's a touchy-feely topic. Everybody loves sports?...right? Oh wait.....Digital Entertainment Revenue only increased US$63 million (7%) since the March Quarter so the World Cup couldn't have had that much of a Revenue impact. Professional Investors will see what I'm doing....They will see that I'm signaling that this is a God-awful cluster-filing . I can't believe I'm in this mess. After that Facebook thing at Citi blew up I really needed this gig.....and now I'm stuck in the middle of this....</i></span><br />
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<b><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Q - Gregory
Zhao - Barclays</span></b><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">My
first question is about your international -- some international brands, which,
during the quarter, more international brands coming on to your Tmall
marketplace. So how shall we expect the advertising and the commission revenue
contribution from these new players? And how shall we expect growth trends
going forward? And very quick follow-up is on your 88 VIP. So how do we expect
the membership to integrate your existing services and improve user engagement?
And can you share some initial metrics of the business? Thank you.<o:p></o:p></span><br />
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<span style="font-family: inherit;"><b style="font-family: "times new roman", serif; font-size: 12pt; font-style: italic;"><u>Greg's Question (BST) Translation:</u></b><span style="font-family: "times new roman" , serif; font-size: 12pt; font-style: italic;"> </span><span style="font-family: inherit;"><i>Ok....US Shareholders should love it when we talk about "international shit" that they understand. I'm really hoping, even though there's very little in the press release talking about International Brands, that maybe management will talk about something interesting. Maybe they'll disclose some of the sales of the brands listed in the TMall "Luxury Pavilion". They mentioned household names like </i></span><span style="font-family: inherit;"><i>MCM, <a href="https://en.wikipedia.org/wiki/Moschino"><b><span style="color: blue;">Moschino</span></b></a> and <b><a href="https://en.wikipedia.org/wiki/Giuseppe_Zanotti"><span style="color: blue;">Giuseppe Zanotti</span></a></b> <span style="background-color: white;"><span style="font-family: inherit;">in the filing. Of course, I'm not a fashionista, but I have no idea who these retailers are. I tried to look these companies up in Wikipedia, but the Wikipedia pages indicated that </span></span>"<span style="background-color: white;"><span style="color: blue;">This article </span><b style="color: blue;">contains content that is written like <a href="https://en.wikipedia.org/wiki/Wikipedia:What_Wikipedia_is_not#Wikipedia_is_not_a_soapbox_or_means_of_promotion" style="background-attachment: initial; background-clip: initial; background-image: none; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;" title="Wikipedia:What Wikipedia is not">an advertisement</a></b><span style="color: blue;">.</span></span><span class="hide-when-compact"><span style="background-color: white;"><span style="color: blue;"> Please help </span><a class="external text" href="https://en.wikipedia.org/w/index.php?title=Moschino&action=edit" style="background-attachment: initial; background-clip: initial; background-image: none; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; color: blue; padding: 0px;">improve it</a><span style="color: blue;"> by removing </span><a href="https://en.wikipedia.org/wiki/Wikipedia:Spam" style="background-attachment: initial; background-clip: initial; background-image: none; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; color: blue;" title="Wikipedia:Spam">promotional content</a><span style="color: blue;"> and inappropriate </span><a href="https://en.wikipedia.org/wiki/Wikipedia:External_links" style="background-attachment: initial; background-clip: initial; background-image: none; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; color: blue;" title="Wikipedia:External links">external links</a><span style="color: blue;">, and by adding encyclopedic content written from a </span><a href="https://en.wikipedia.org/wiki/Wikipedia:Neutral_point_of_view" style="background-attachment: initial; background-clip: initial; background-image: none; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial; color: blue;" title="Wikipedia:Neutral point of view">neutral point of view</a><span style="color: blue;">.</span></span><span style="background-color: white;">"</span></span> which usually means that there's some sort of issue verifying the veracity and background of these International Fashion Icons. When I go to the websites, Moschino.com (an Italian designer that's a public company listed in Hong Kong?) and GiuseppeZanotti.com (which oddly enough has a few storefronts scattered all over the world but only three in Italy) they look a little...well....funny. I'm sure everything's Ok though, It would be really weird if Alibaba Management allowed fake businesses to be listed in an SEC filing. Here's the T-Mall Luxury Pavillion page for Moschino (below). </i></span></span><br />
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<i>Oh Man.....I know why I've never heard of Moschino.....they really don't have much of an International presence at all.....per their website they only have two stores in the US. Their store in LA at 8933 Beverly Blvd West Hollywood, Los Angeles United States, and their flagship store in New York at 73 Wooster Street, New York, New York, United States. Geeezzz ....no wonder I've never heard of these guys....when I look at Google Maps the flagship store on a NYC side street looks, well, kinda small and empty.....</i></div>
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<i>Then when I use Google street view to look across the street, the neighborhood looks, well, kind of dumpy....</i></div>
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<i>I was really expecting that an International Fashion Icon listed in an SEC Filing from one of the largest businesses the world would be up on Fifth Ave over by Tiffany's, Prada and the Trump Tower....probably just that "new retail" concept kicking in. </i><br />
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<i>Well Moschino is apparently selling lots of cute teddy-bear T-Shirts for US$307.48 each all over the world now. I think it would be really interesting to know how much volume MSM, Moschino and Giuseppe Zanotti are doing at these flagship stores since, by definition, it must be material as these businesses are listed in the filing. But sadly, it wasn't disclosed. Anyway, I don't see stuff like this when I google Prada or Armani, so I suppose it couldn't hurt to ask about it...</i><br />
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<b><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Q - Wendy
Huang - </span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><o:p></o:p></span><span style="font-family: "times new roman" , serif; font-size: 12pt;">Macquarie</span></b></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Two
very quick questions. The first, your revenue growth is very strong yet the
adjusted EBITDA growth was only the 13% this quarter. And given that you've
mentioned the New Retail's margin was structurally different from previous. So
should we expect the EBITDA growth to stay at the current level for extended
period of time? And second, very quickly, on your overseas strategy so there
has been some new reports talking about US$5 billion investment in the Indian
market, in the Reliance Retail. So can you give us update on your overseas
expansion and investment? Thank you.<o:p></o:p></span><br />
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><b><i><u>Wendy's Question (BST) Translation: </u></i></b> <i>Hey guys I want to elaborate on Eddie's question above re: the erosion of margins, but I'm going to coyly rephrase it as a reduction in EBITDA growth. How long is this going go on and how bad will the margins eventually get? I also know that you don't have any interest in Reliance India but since your PR department keeps releasing these little nuggets to generate enthusiasm from Amateur US Investors, I at least want to hear you deny it in the Investor Call. </i></span><i><span style="font-family: "times new roman" , serif; font-size: 16px;">(Note: Wendy clearly went off the grid on this one. She wasn't copied on my email, is new to the group, and most likely won't be invited back for the next call. It's a shame, we'll miss her. Let's wish her all the best wherever her career takes her.)</span><span style="font-family: "times new roman" , serif; font-size: 16px;"> </span></i></div>
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<b>Q - </b><span style="font-family: "times new roman" , serif; font-size: 12pt; font-weight: bold;">Alex
Yao - JP Morgan</span><br />
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Okay.
So number one, for the formation of the local service holding company, why do
you want to seek external investors and the funding source? Number two, in
light of the consolidation of Koubei, and more investment in Ele.me, can you
talk about the financial impact in FY 2019 from this local service holding
company? Thirdly, in addition to investments in Ele.me, are there any other
areas that you think it will worth investing in terms of the local delivery?
Thank you.<o:p></o:p></span><br />
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<span style="font-family: "times new roman" , "serif";"><u style="font-size: 12pt; font-style: italic; font-weight: bold;">Alex's Question (BST) Translation:</u><span style="font-size: 12pt;"> </span><i><span style="font-size: 12pt;">Yet another "Enhancement"? Are you kidding me? Softbank AGAIN? Other than the future write-ups and associated/expected future valuation gains, why do you need to get Softbank Involved on a deal like this? I know Masa Son's.... ummm..."advice" will add all sorts of valuable insight to the transaction. He's done an amazing job personally redesigning Sprint's 5G Network on the back of a napkin, refrained from self immolation in public forums and no longer lies about his golf score, but that doesn't make him an </span>indispensable<span style="font-size: 12pt;"> part of this fire drill. This type of consultation is, of course, not unprecedented. It happens all the time in China. As I recall, as a parallel to Western financial transactions, Al Capone routinely sought the counsel and input from both the Gambino and the Genovese crime families before ordering a "hit". It's important, in business, to look at transactions from different angles and build a consensus.</span></i></span><br />
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><br /></span><span style="font-family: "times new roman" , "serif"; font-size: large;"><b><u>So....What Happened Next?</u></b></span><br />
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">As I mentioned earlier, it was a wild ride once investors started to decipher the Analyst-speak and take a look at the numbers. As furious as the buying was when the market opened, the momentum reversed abruptly. Of the 990 prior trading days since the IPO, Thursday, August 23rd, at almost 78 million shares, was the fifth highest volume day on record.</span><br />
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><br /></span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><span style="font-family: "times new roman" , serif;">September 19th 2014, of course, was the date of the IPO. Here are the bullet points describing briefly what transpired during the other four (4) highest volume days.</span></span><br />
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<li><span style="font-family: inherit;">November 30th 2015 - 98 Million shares - no news - (up 3.3%)</span></li>
<li><span style="font-family: inherit;">June 8th 2017 - 81 Million shares - Volume was the result of an <span style="font-family: "times new roman" , serif;"><b><a href="https://www.marketwatch.com/story/alibabas-stock-enjoys-record-rally-to-record-close-2017-06-08"><span style="color: blue;">increased sales forecast press release.</span></a><span style="color: blue;"> </span></b>(up 13%)</span></span></li>
<li><span style="font-family: inherit;">May 31st 2016 - After close of market that day <a href="https://www.reuters.com/article/us-alibaba-stocks-softbank-group/japans-softbank-plans-to-sell-7-9-billion-in-alibaba-stock-to-cut-debt-idUSKCN0YM2MA"><span style="color: blue;"><b>Softbank announced a "fake" sale of BABA shares</b></span></a><span style="color: blue;"><b>.</b></span> BABA dropped 6% the next day. It's really surprising how much volume was traded just prior to an announcement like that! I'll bet some <i>Professional </i>Investors were involved!</span></li>
<li><span style="font-family: inherit;">January 29th 2015 - 77 Million shares - Disappointing<b><span style="color: blue;"> <span style="color: blue;"><a href="https://www.alibabagroup.com/en/news/press_pdf/p150129.pdf"><span style="color: blue;">Quarterly Earnings Announced</span></a> </span></span></b>before market open. (down 9%) Interestingly, volume was a robust 42 Million shares the day prior to the earnings release as well. More <i>Professional </i>Investor involvement?<span style="color: blue;"> </span></span></li>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><span style="font-family: "times new roman" , serif;">Presumably, with US$ 14 Billion in shares traded in one day, last Thursday, people who knew what they were doing must have made a lot of money. Again, those who didn't know what they were doing....didn't.</span></span><br />
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Of course the SEC has all sorts of tools to monitor "suspect" trading activity, but even the most sophisticated software would most likely fail to detect a coordinated, whack-a-mole, offshore effort, funded by at least US$3 Trillion of CCP money through <a href="https://www.cima.ky/upimages/commonfiles/1499783502ListMutualFunds.pdf"><span style="color: blue;"><b>thousands of</b></span></a> various <a href="https://www.cima.ky/investment-funds"><span style="color: blue;"><b>legal entities</b></span></a>, protected by Caymans Banking/Privacy laws. I'm guessing that "Hey I've got a hunch" wouldn't be probable cause for a Caymans/BVI Banker or CIMA Official to hand over records. The SEC might have been able to track and figure out what Bud Fox was doing with Blue Star, but I doubt they would get very far with Alibaba. </span><br />
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">We also learned another thing, as I've opined in previous posts, since, when you are trading BABA stock and the Chinese Communist Party (CCP) has the other side of your trade, Thursday August 23rd has established and confirmed a benchmark. We now understand that the CCP, through Cayman's and BVI Shell Corporations, will have no problem, going forward, supporting a share price on volumes of </span><span style="font-family: "times new roman" , serif; font-size: 12pt;">at least 80 million shares or US$14 Billion, on any particular trading day. My guess would be, since this is a brilliantly diabolical CCP plan, that they have developed and maintain some sort of model that determines how many shares of BABA "they" own collectively throughout their Caribbean <i>Professional Investor</i> ecosystem. They will keep supporting the share price as long as they (in aggregate) can continue to generate enthusiasm from US Investors through their PR effort. They can "sell high" and "buy it back" at a lower price. If there ever comes a point where US Investors aren't participating at acceptable levels, the CCP will most likely cash out. </span><br />
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<span style="font-family: "times new roman" , serif; font-size: 12pt;">We can expect an increasing number of fantastic, incredible take-your-breath-away, not-to-be-believed-for-a-second press releases and statements from richly compensated interviewees extolling the virtues of Alibaba and the China dream, when, in reality, this is the greatest wealth grab and tool for capital flight/conversion in history.</span><br />
<span style="font-family: "times new roman" , serif; font-size: 12pt;"><br /></span><span style="font-family: "times new roman" , serif; font-size: 12pt;">To make a comparison, from a global financial perspective, this is the equivalent of and in some aspects, even worse than, the Cuban Missile Crisis. Weapons of Mass Destruction are parked just a few miles off shore in the Caribbean, except (thank goodness) there are no missiles. The Chinese Government chose to use Shell Corporations, and a pegged/fake RMB to accomplish their mission. In one respect, it's actually worse than the Cuban Missile Crisis, as thus far, our government doesn't seem to understand or acknowledge the existence of the threat.</span><br />
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<span style="font-family: "times new roman" , "serif"; font-size: large;"><b><u>The "Open Letter"</u></b></span><br />
<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><br /></span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Finally, I promised an open letter to all my Securities Lawyer Friends out there. Of course, you all know, I'm not a lawyer and I don't play one on TV. I've listed a few things that you might want to think about as you follow this saga through to its logical, inevitable conclusion You all know how I enjoy bullet points by now..... so here you go: </span><br />
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">1.) You should be actively looking for lead plaintiffs for your class actions now. The members of the class(es) will include all investors who were directly harmed by the collapse of Alibaba. You might include interest holders of Altaba, Softbank, EFT's, Mutual Funds, Pensions, etc. In short, just about everyone.</span><br />
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">2.) You might consider working on your complaint/filing immediately. You'll want to be the first to file in your respective jurisdictions. The first pig to the trough always gets the best/most slop! </span><br />
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">3.) Your complaint will be a professional liability claim based on the willful ignorance of professional standards, lack of due diligence and "what a normal standard of care would require a professional adviser to know or should have known". You should all know your particular statutes, procedures and jurisdictions and can decide when and how you want to file. </span><br />
<span style="font-family: inherit;"><br /><span style="font-family: "times" , "times new roman" , serif;">4.) Surprisingly enough, the target(s) of your law suit(s) won't be Alibaba or Alibaba's management. You'd be wasting your time. If you went that direction you might win a judgement or two, but you won't get a big pay day. Alibaba and their/your money will be safely untouchable off-shore. The targets of your suits will actually be the above listed co-conspirator Banks promoting this mess and putting their quarterly stamps of approval on this disaster. (Merrill Lynch, Citigroup, Morgan Stanley, Credit Suisse, RBC Capital Market, Barclays, Macquarie, JPMorgan and of course PWC Hong Kong.)</span></span><br />
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5.) If you folks are capable of generating civil fines and settlements against Wells Fargo for some <span style="color: blue;"><a href="https://money.cnn.com/2018/08/01/investing/wells-fargo-settlement-mortgage-loans/index.html" style="font-weight: bold;"><span style="color: blue;">mortgage mis-rep</span></a> </span>($2.09 Billion) and some <a href="https://money.cnn.com/2018/04/20/news/companies/wells-fargo-regulators-auto-lending-fine/index.html"><span style="color: blue;"><b>bad insurance sales practices</b></span></a> ($1 Billion) can you imagine what you might be able to do with material like this? You would be front and center in a "known or should have known" conspiracy which destroyed the Western Financial system. That should be a YUGE! pay day for you. Of course, US Taxpayers would end up, as always, footing the bill, but it would be well worth it to send a message that a "strong buy" recommendation, no matter what the Investor Call "signals", on every piece of dog-shit that somehow gets listed on an Exchange, will no longer be tolerated. </span><br />
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Well, that's about it folks.....we'll see where this thing goes from here. As I've said for a while now. This is going to be an incredible ride..... Strap yourselves in, hang on and as always, practice <i>safe investing</i>.</span>
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<span style="font-family: "times new roman" , "serif"; font-size: large;"><b><u>Additional Reading</u></b></span><br />
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><b><span style="font-family: "times new roman" , "serif"; font-size: 14.0pt;"><a href="https://seekingalpha.com/article/4201652-alibaba-group-holding-ltd-baba-ceo-daniel-zhang-q1-2019-results-earnings-call-transcript?part=single">https://seekingalpha.com/article/4201652-alibaba-group-holding-ltd-baba-ceo-daniel-zhang-q1-2019-results-earnings-call-transcript?part=single</a><o:p></o:p></span></b></span></div>
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><b><span style="font-family: "times new roman" , "serif"; font-size: 24.0pt;">Alibaba
Group Holding Ltd. (BABA) CEO Daniel Zhang on Q1 2019 Results - Earnings Call
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<span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Aug.
23, 2018 2:13 PM ET <o:p></o:p></span></span></div>
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About: </span><a href="file:///C:/symbol/BABA"><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Alibaba Group Holding Limited (BABA)</span></a><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;"> <o:p></o:p></span></span></div>
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<span style="font-family: "times new roman" , "serif";"><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Q1:
08-02-18 Earnings Summary <o:p></o:p></span></span></div>
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<span style="font-family: "times new roman" , "serif";"><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">Alibaba
Group Holding Ltd. (NYSE:</span><a href="https://seekingalpha.com/symbol/BABA"><span style="mso-bookmark: "Alibaba_Group_Holding_Ltd\._Sponsored_ADR";"></span><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">BABA</span></a><!--[if !supportNestedAnchors]--><a href="https://www.blogger.com/null" name="Alibaba_Group_Holding_Ltd._Sponsored_ADR"></a><!--[endif]--><span style="font-family: "times new roman" , "serif"; font-size: 12.0pt;">) Q1 2019
Earnings Call August 23, 2018 7:30 AM ET<o:p></o:p></span></span></div>
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Deep Throathttp://www.blogger.com/profile/02712515268051858186noreply@blogger.com15tag:blogger.com,1999:blog-7478408299955066555.post-71817704461433656002018-08-08T23:53:00.001-04:002018-08-12T22:47:28.234-04:00The BABA 20-F....Financial Comedy Gold!!<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="font-family: inherit;"><span style="background-color: #fefefe;"><span style="color: #444444;">Well, here we go folks. They've done it again. The Alibaba Accounting Department, after a couple of fits and starts and a month delay, at the 11th hour, finally managed to file yet another, laugh-out-loud, gut-buster of a </span><a href="https://www.sec.gov/Archives/edgar/data/1577552/000104746918005257/a2235254z20-f.htm"><b><span style="color: blue;">20-F Annual Report</span></b></a><span style="color: #444444;">. Needless to say, as always, they did not disappoint! </span></span></span><br />
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<span style="font-family: inherit;"><span style="background-color: #fefefe; color: #444444;">Financial Comedy Genius!....Kudos!.....Bravo! </span><span style="background-color: #fefefe; color: #444444;">Like a George Lucas franchise, just when you thought it couldn't possibly get any better, they come up with the financial equivalent of "Jar Jar Binks". </span></span><br />
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<span style="color: #444444; font-family: inherit;"><span style="background-color: #fefefe;">It's a page turner...it has to be....it's </span></span><span style="background-color: #fefefe; color: #444444; font-family: inherit;">233 pages with an additional 93 pages of circular footnotes, charts and tables, laden with nonsensical, legal sounding gibberish that would make a Securities Lawyer blush with envy and/or question his virility. I've spent the last few evenings going through it (I have a day job...) and I have to say, I couldn't put it down. It's riveting.</span><br />
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<span style="color: #444444; font-family: inherit;"><span style="background-color: #fefefe;">Sadly, in this issue, they've left out the family photos, advertising and screen shots of the fake/knock-off products they sell, presumably to save some space. My guess is that some dull-as-a-butter-knife PWC accountant probably talked them out of including the personal, Horatio Alger scrap-book stuff. It's a shame really. </span></span><br />
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<span style="font-family: inherit;">So let's start with the press release......it sets the tone:</span><br />
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<span style="background-color: #fefefe; color: blue; font-family: "helvetica neue" , "helvetica" , "arial" , "lucida grande" , sans-serif; font-size: 14px;"><i>The company aims to build the future infrastructure of commerce. It envisions that its customers will meet, work and live at Alibaba, and that it will be a company that lasts at least 102 years.</i></span><br />
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<a href="https://www.businesswire.com/news/home/20180727005591/en/">https://www.businesswire.com/news/home/20180727005591/en/</a><br />
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Yup....that's right....they are guaranteeing that the company will be around not 100 years, not 101 years.....but at least 102 Years! Alibaba will be my (our) life....Alibaba is where we will live, work, meet and eventually be buried.....we'll raise our kids there and our pets will poop on our little slice of heaven that is the Alibaba front lawn. Kind of creepy if you ask me.<br />
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As an aside...why aren't they issuing 102 year bonds to show their confidence in the business model?<br />
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As always, for your convenience, and because I value your time, feel free to read the <b><u><span style="color: red;">RED Executive Summary</span></u></b> at the beginning of each section. If the topics don't pique your curiosity, you can move along to the next section and the next <u><b><span style="color: red;">Executive Summary</span></b></u> as the spirit moves you.<br />
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<b><u><span style="font-size: large;">The Capital Structure...</span>(Now you see it....now you don't...)</u><span style="font-size: large;"> </span></b><br />
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<b><u><span style="color: red;">Executive Summary:</span></u></b><span style="color: red;"> In this section we explore the following observations:</span><br />
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<span style="color: red;">1.) There are now 920 separate operating entities in the Alibaba ecosystem. 500 in the PRC and 420 scattered all over the rest of the planet. Alibaba has created 300 new "legal" entities a year for the last two years.</span><br />
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<span style="color: red;">2.) They've "Enhanced" their Capital Structure. The lawyers have been busy beavers.</span><br />
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<span style="color: red;">3.) Major Business Segments and Operating Entities appear and disappear from the 20-F's. There is no explanation in the footnotes.</span><br />
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So where do we start? As you my readers know, I like to jump into really, really important, seemingly innocuous documents (Like Chinese 20-F's) which most people, without a ton of effort, generally can't begin to understand. By virtue of this lack of understanding, they (understandably) don't seem to care too much about these documents until there's a painful enlightenment smacking them in the face somewhere down the road....followed by a chorus of "if only I'd understood this!" and the consequent, requisite Congressional hearings focusing on "blame delegation". That's where I try to add value. I try to help good folks like you, my cherished readers, see what's just over the horizon. As always, I'm here to help.<br />
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So, speaking of "things we can't begin to understand without putting in a ton of effort" let's start out by talking about Alibaba's Capital Structure......I know, I know.....stop jumping up and down with glee....try to contain yourselves. It's just accounting.....Geez....<br />
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So like we always do with an Alibaba 20-F review, with absolutely no rhyme nor reason, let's pick a random page.....let's start on page.....Oh....I don't know.....how about page 115?<br />
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It starts off with some some wonderfully amazing information:<br />
<span style="background-color: white;"><span style="font-family: "times"; font-size: x-small;"><br /></span></span>
<i><span style="color: blue; font-family: inherit;"><span style="background-color: white;">As of March 31, 2018, we conducted our business operations across approximately 500 subsidiaries and consolidated entities incorporated in China and approximately 420 subsidiaries and consolidated entities incorporated in other jurisdictions.</span><span style="background-color: white;"> </span></span></i><br />
<span style="background-color: white; font-family: "times"; font-size: x-small;"><br /></span><span style="background-color: white;"><span style="font-family: inherit;">That's right, Alibaba now has 920 Separate Operating Entities! Over the last two years Alibaba has created, out of thin air, or acquired, roughly <b><i><u>300 material Operating Companies per year</u></i></b>. That's roughly 600 new businesses, one new company every business day for two years. The Alibaba lawyers have been working a ton of overtime. They must be exhausted. </span></span><br />
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<span style="background-color: white;"><span style="font-family: inherit;">Let's pause for a moment of silence.....in solemn gratitude.....for the lawyers. </span></span><br />
<span style="background-color: white;"><span style="font-family: inherit;"><br /></span></span>Moving along,<span style="color: blue;"> </span><a href="https://www.sec.gov/Archives/edgar/data/1577552/000104746918005257/a2235254zex-8_1.htm"><span style="color: blue;"><b>Exhibit 8.1</b></span></a><span style="background-color: white;"><span style="font-family: inherit;"><span style="background-color: white;"><span style="background-color: white; color: blue;"><b><a href="https://www.sec.gov/Archives/edgar/data/1577552/000104746918005257/a2235254zex-8_1.htm"> </a> </b></span><span style="background-color: white;">(Ref: on Pg 231) lists "Significant Subsidiaries & Consolidated Entities". There are forty-six (46) businesses apparently deemed to be significant. Sixteen (16) of these businesses are located in the PRC (China), Twelve (12) in the Caymans, Nine (9) in the BVI, Six (6) in Hong Kong, Two (2) in Singapore and finally, One (1) in Luxembourg. </span></span></span></span><br />
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<span style="color: blue;"><b><a href="https://www.sec.gov/Archives/edgar/data/1577552/000104746918005257/a2235254zex-8_1.htm"><span style="color: blue;">https://www.sec.gov/Archives/edgar/data/1577552/000104746918005257/a2235254zex-8_1.htm</span></a></b></span><br />
<span style="background-color: white; font-family: inherit;">So, I guess, by definition, the remaining 874 businesses (920 - 46) are "insignificant"? </span><br />
<span style="background-color: white;"><span style="font-family: inherit;"> </span></span><br />
<span style="background-color: white;">When we drill down a little farther we see that there are really only fifteen (15) businesses that I'll call "Super Significant" (See the Chart on Pg. 115 below) </span><br />
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<span style="background-color: white;">And of these fifteen (15) "Super Significant" businesses, three (3) of them are brand spanking new in the last fiscal year! <span style="font-family: inherit;">And what's really weird, is that </span></span><span style="font-family: inherit;"><span style="background-color: white;">Zhejiang Cainiao Supply Chain Co., Ltd., </span><span style="background-color: white;">Youku Internet Technology and </span><span style="background-color: white;"> </span><span style="background-color: white;">Youku Information Technology aren't even on the list of </span><span style="background-color: white;">"Significant Subsidiaries & Consolidated Entities". (Exhibit 8.1) Is it a typo? So maybe they are not Significant? Just "Super Significant". Puzzling to say the least....</span><span style="background-color: white;"> </span></span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgySIOdTHTEH8GbogMTX8NcwzGnjIwySJfqq0lROEeFK0cUZqAlknlXMTjenDu00s3qtoFG7nMLDRqT2QRelg5l2T0_9br1v_KN3wuzZrohq9CSyBWWTwGTr9kz0DZXWu4RrJpRwsoVtCE/s1600/2018_Org_Structure_Chart.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="342" data-original-width="627" height="348" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgySIOdTHTEH8GbogMTX8NcwzGnjIwySJfqq0lROEeFK0cUZqAlknlXMTjenDu00s3qtoFG7nMLDRqT2QRelg5l2T0_9br1v_KN3wuzZrohq9CSyBWWTwGTr9kz0DZXWu4RrJpRwsoVtCE/s640/2018_Org_Structure_Chart.png" width="640" /></a></div>
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<span style="background-color: white;"></span><span style="background-color: white; font-family: inherit;">Zhejiang Cainiao Supply Chain Co., Ltd. is only mentioned once in the report, on page 91 under "Regulation of Foreign Investment"</span><br />
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<span style="background-color: white;">The only time Youku Internet Technology is mentioned in the report is on pg 119 as a party to a contract that "Gives us Control over VIE's". </span><span style="background-color: white;">Youku Information Technology is not mentioned at all.</span><span style="background-color: white;">...here's the ridiculous language re: Youku Internet Technology....</span></span><br />
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<span style="background-color: white; font-family: inherit;"><i><span style="color: blue;">The parties to the loan agreement for each of our material variable interest entities are Jack Ma and Simon Xie or other shareholders of those entities (in respect of the existing VIE structure) or, following the VIE Structure Enhancement, the relevant PRC investment holding company, on the one hand, and Taobao (China) Software Co., Ltd., Zhejiang Tmall Technology Co., Ltd., Alibaba (China) Technology Co., Ltd., Zhejiang Alibaba Cloud Computing Ltd. and </span><span style="color: red;">Youku Internet Technology (Beijing) Co., Ltd</span>., <span style="color: blue;">the respective wholly-foreign owned enterprise, on the other hand.</span></i></span><br />
<span style="background-color: white; font-family: "times"; font-size: x-small;"><br /></span><span style="background-color: white; font-family: inherit;">Forget for a moment that there are now oodles of undisclosed/un-described loan agreements all over the planet with insiders, which is frightening enough, now, on one hand (or the other) we have three new "Significant" businesses, we know nothing about, that have somehow just shown up in the filings this year, that are somehow being "Enhanced".</span><br />
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<span style="background-color: white; font-family: inherit;">Let's dig a little further.</span><br />
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<span style="background-color: white; font-family: inherit;">When we look at last years (20-F YE 3/31/17 pg. 111) chart we see that Alibaba.com Limited (Caymans) and Alibaba.com Investment Holding Limited (BVI) are both missing from this year's chart, yet they are still included on Exhibit 8.1. A text search of the pdf shows that, oddly enough, the only other time they are mentioned in the filing is in the biography of Walter Kwauk. So where did these "Significant" businesses go? Are they still relevant? </span><br />
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<span style="background-color: white; font-family: inherit;"><span style="color: blue;"><b>Walter Teh Ming KWAUK ( <img alt="GRAPHIC" height="12" src="https://www.sec.gov/Archives/edgar/data/1577552/000104746918005257/g143090.jpg" width="36" /> )</b></span><span style="color: blue;"> has been our director since September 2014. He previously served as an independent non-executive director and chairman of the audit committee of </span><span style="color: blue;"><i>Alibaba.com Limited</i></span><span style="color: blue;">, one of our subsidiaries......</span></span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJmYDbscqtqAd5VWt5TwAg5_Tlhe74UffXNElLc_QGUTS0ayssGFyeFQbW8cnbrIjbu336bHc_j6JKSn8xQuTXNrMjxuhN6CL-RhaOhOMKMF4B4i-GE3exr3uGgg86l2zri76D0Ot__1U/s1600/2017_Org_Structure_Chart.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="812" data-original-width="1329" height="390" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJmYDbscqtqAd5VWt5TwAg5_Tlhe74UffXNElLc_QGUTS0ayssGFyeFQbW8cnbrIjbu336bHc_j6JKSn8xQuTXNrMjxuhN6CL-RhaOhOMKMF4B4i-GE3exr3uGgg86l2zri76D0Ot__1U/s640/2017_Org_Structure_Chart.png" width="640" /></a></div>
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Since Mr. Kwauk is on the Alibaba Board, and is, in fact, the head of the Alibaba (BABA) audit committee and amazingly "satisfies the criteria of an audit committee financial expert as set forth under the applicable rules of the SEC" (Pg. 184) perhaps, with all of this expertise, he can tell us why the hell these two businesses were removed from the Alibaba Org chart? ....or maybe help us figure out what the three brand-spanking-new businesses that just showed up actually are?<br />
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<span style="font-family: inherit;"><span style="background-color: white;"><b><u>VIE Structure "Enhancement"</u></b></span></span><br />
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<span style="background-color: white;"><span style="font-family: inherit;">Everyone pretty much understands the structure of the Alibaba ecosystem. In broad brush, general terms, it's a group of 36 "partners" listed on page 176 of the filing, who are charged with the responsibility of scouring the world for cash. </span></span><br />
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<span style="background-color: white;"><span style="font-family: inherit;">Through a convoluted web of dubious financial entities (now 920 in number), designed to meet the legal requirements of Chinese "ownership" and un-auditability, the partners, after careful deliberation, vote to piss away the money raised on kickbacks and political payoffs, in exactly the direction Jack and the CCP tell them to piss it, adjusting for wind, as needed. </span></span><br />
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<span style="background-color: white;"><span style="font-family: inherit;">Now, you'd think that this would be a pretty easy (and fun) set of marching orders to follow, but over time, we all know how confusing, off-track and complex financial shenanigans can get. Fortunately, last year, Alibaba's lawyers finally grabbed the bull by the horns and undertook a massive effort to simplify Alibaba's capital structure. So let's see what they did, keeping in mind that there are 920 entities in the BABA ecosystem now, with 420 "offshore", mostly located (presumably) in Hong Kong, the Caymans and BVI. </span></span><br />
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<span style="background-color: white; font-family: inherit;">On pg. 116 of the filing, management describes the "<b><u>VIE Structure Enhancement</u></b>". This is the summary (in actual English "words") of what they were doing....followed by a "simple" diagram.</span><br />
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<span style="background-color: white; font-family: "times"; font-size: x-small;"><br /></span><span style="background-color: white; color: blue; font-family: inherit;"><i>Upon the completion of the VIE Structure Enhancement for each VIE, the equity interest of each such variable interest entity will, instead of being held by a few individuals, be directly held by a PRC limited liability company, which in turn will be indirectly held (through a layer of PRC limited partnerships) by selected members of the Alibaba Partnership or our management who are PRC citizens. This new structure institutionalizes the governance framework of our VIEs.</i></span><br />
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<span style="background-color: white; font-family: inherit;">Isn't that Awesome (and really smart sounding)! The diagram below describes how the legal structure of the Variable Interest Entities looked <i>BEFORE</i> the "Enhancements" got underway.</span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgQT67M-md5753AjgFWvKpKDacTR92kqbIN3dxL9pV4uvfjqrFH3KKUIW-eoJXYHLRmyvWr1Qohp97H1Gnx6GM19ySt37YHCUkGP0gS-T1j97PaGgNlxiiOAbC9TLQvd-IHgYsuAxme8PE/s1600/Old_VIE_Structure_Generic.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="417" data-original-width="945" height="281" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgQT67M-md5753AjgFWvKpKDacTR92kqbIN3dxL9pV4uvfjqrFH3KKUIW-eoJXYHLRmyvWr1Qohp97H1Gnx6GM19ySt37YHCUkGP0gS-T1j97PaGgNlxiiOAbC9TLQvd-IHgYsuAxme8PE/s640/Old_VIE_Structure_Generic.png" width="640" /></a></div>
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<span style="background-color: white; font-family: inherit;">Pretty simple huh?</span><br />
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<span style="font-family: "times" , "times new roman" , serif;">1.) BABA owns WFOE's through offshore shells (Cayamans/BVI/HK) </span><br />
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<span style="font-family: "times" , "times new roman" , serif;">2.) The WFOE's secure contracts, "call options" and various agreements with both the VIE's and the VIE shareholders in exchange for loans/cash.</span></div>
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<span style="font-family: inherit;">After the "Enhancement" here's what we have.....on pg. 118....much simpler...</span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiQJHF8xvT5zdRFgfgRTmTZVDhYQxxtQ97ny4dwRiUWabbJ4maR8Ops4N6anG97QI9U2P9urgaduITkOnC3HttOYtPKukE4ZUxTfONZqTmlHPmMVWg70E7fMZoQIvswJ3Yi9SXrMw0hDHM/s1600/New_VIE_Structure_Generic.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="484" data-original-width="777" height="393" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiQJHF8xvT5zdRFgfgRTmTZVDhYQxxtQ97ny4dwRiUWabbJ4maR8Ops4N6anG97QI9U2P9urgaduITkOnC3HttOYtPKukE4ZUxTfONZqTmlHPmMVWg70E7fMZoQIvswJ3Yi9SXrMw0hDHM/s640/New_VIE_Structure_Generic.png" width="640" /></a><br />
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After the "Enhancement"....<br />
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<span style="font-family: "times" , "times new roman" , serif;">1.) BABA owns WFOE's through offshore shells (Cayamans/BVI/HK).<br />2.) The WFOE's enter into contracts and agreements with the VIE's.<br />3.) Each VIE is owned by a PRC Investment Holding Company.<br />4.) The PRC Investment Holding Company is owned by various Limited Partnerships. <br />5.) The Limited Partnerships are owned by Individual Limited Partners and various PRC LLCs as General Partners. <br />6.) The General Partner LLC is owned by individual shareholders and/or PIE's (Political Insider Elite's). <br />7.) The WFOE's negotiate contracts and agreements in exchange for loans/cash with ALL of the above entity types. <br />8.) Again, there are now 920 entities involved in the Alibaba ecosystem and I'd suspect that the number will be growing geometrically.</span>
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</span>The consolidation of all of these entities, VIE's and WFOE's - "Wholly-Foreign Owned Enterprises" is described in F-18 (Footnote 2(c)) Feel free read through the painful details of this footnote if you have the stomach. The only thing that pops out is that these entities, combined are a relatively small piece of the pie. Total Liabilities are RMB 61.699 Billion compared to Total Assets of RMB 54.463 Billion (i.e. insolvent by RMB 7.236 Billion) Compared to BABA's Total Balance sheet of RMB 717 Billion.<br />
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I, for one, am so glad that Alibaba management has finally acknowledged, through this new Capital Structure "Enhancement", their obligation to be forthright and transparent in their filings. Baby steps....<br />
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<span style="font-size: large;"><b><u>So Who Actually Owns the Ordinary/ADS Shares?</u></b></span><br />
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<span style="color: red;"><b><u>Executive Summary:</u></b></span><br />
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<span style="color: red;">1.) ADS Shares at US Financial Institutions have ballooned from 196 million four years ago to 1.669 Billion now. Per the 20-F these shares are concentrated in 128 US Financial Institutions held in "street name".</span><br />
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<span style="color: red;">2.) A significant number of the shares in US Institutions are held by Chinese insiders through Offshore Shell Companies. 450 Million shares are held by the largest 20 Institutions.</span><br />
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<span style="color: red;">3.) The Chinese Communist Party (CCP) is manipulating the bid/ask through myriad offshore entities on a relatively small population of "arms length" trades in order to create the illusion of a market made at a price that defies financial gravity. The risk of collapse grows larger by the day.</span><br />
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The statement on page 188 of the 20-F is illuminating:<br />
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<span style="background-color: white;"><i><span style="color: blue; font-family: inherit;">As of July 18, 2018, <b>2,592,184,258 of our ordinary shares were outstanding. To our knowledge, 1,669,625,497 ordinary shares, representing approximately 64% of our total outstanding shares, were held by 128 record shareholders with registered addresses in the United States</b>, including brokers and banks that hold securities in street name on behalf of their customers. We are not aware of any arrangement that may at a subsequent date, result in a change of control of our company.</span></i></span><br />
<span style="background-color: white; font-family: "times"; font-size: x-small;"><i><span style="color: blue;"><br /></span></i></span><u><i><b>
Authors Note:</b></i></u> Why in the world did they pick Wednesday July 18th 2018 as the date to disclose the ordinary shares outstanding? My guess would be that they wanted a date that was not comparable to any public filing date so these numbers would be impossible to validate/verify. A Wednesday in the middle of July sounded like a good day to "make shit up".<br />
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<span style="background-color: white;"><span style="font-family: inherit;">The 20-F, in the table on pg. 187, with a little bit of "Enhancement" math, shows us the distribution of these shares (One (1) Ordinary Share equals one (1) ADS (American Depository Share)):</span></span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiYFubn-zP98_YaGcf5SgcSHypzeV2RjE8p2Dk_izsefGKOud7pN1WWvGZNFmw1TKs-VuhWEc7xKZjzaJ2ZTLsnooe6BlmOFa4GLnTeZGNxguHzauzuea8mttSy-C9TDH1EYZcyZxkK-2I/s1600/BABA_SHares_Owned_7-18-18.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="280" data-original-width="399" height="448" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiYFubn-zP98_YaGcf5SgcSHypzeV2RjE8p2Dk_izsefGKOud7pN1WWvGZNFmw1TKs-VuhWEc7xKZjzaJ2ZTLsnooe6BlmOFa4GLnTeZGNxguHzauzuea8mttSy-C9TDH1EYZcyZxkK-2I/s640/BABA_SHares_Owned_7-18-18.png" width="640" /></a></div>
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When we look at the table above we see that there's an "Overlap". Roughly 455 million shares must be in two places. Presumably, some of Altaba's (Yahoo!) shares, plus a hundred million (or so) shares held by, for example, offshore (Caymans/BVI) shells, in "street name" at the 128 identified US Financial Firms/Brokerages/Banks, are in both places. (Remember how Softbank "sold" some BABA shares to <i><a href="https://deep-throat-ipo.blogspot.com/2017/02/softbankthe-art-of-self-dealing.html"><span style="color: blue;"><b>West Raptor Holdings</b></span></a>? Yet they are still beneficially owned?</i>) I guess that the "Overlap" might make at least some sense in an odd sort of way.<br />
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So now, let's compare that to where we were back in 2014, Post IPO (<a href="https://www.sec.gov/Archives/edgar/data/1577552/000119312514347620/d709111d424b4.htm"><span style="color: blue;"><b>pg. 250 thru 254 of the 424(b)4 filing</b></span>)</a><br />
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<span style="background-color: white; font-family: inherit;">The statement on page 254 of the filing is illuminating:</span><br />
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<span style="background-color: white; color: blue; font-family: inherit;"><i><span style="text-indent: 4%;">As of August 31, 2014,<b> 196,373,235 of our outstanding ordinary shares were held by shareholders of record in the United States</b>, principally Yahoo. We are not aware of any arrangement that may at a subsequent date, result in a change of control of our company.</span><span style="text-indent: 4%;"> </span> </i></span><br />
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So let's restate the 2014 - POST IPO figures to compare to the schedule above. The chart below describes how the ownership of BABA would look right after the IPO:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-wURr3SV70n565MnMchyZQUewf4x9fviEaNeAFCSyqlOrYfZVnr1Cq2me4wfOaRjZsPThy0epzxuvVxLSA5OUi-R7D9MGxlsQ3HnHg7WzAqpv1FZfkFfhHnhCygd0thAYftwYJ7omnKw/s1600/BABA_Shares_Post_IPO.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="277" data-original-width="414" height="428" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh-wURr3SV70n565MnMchyZQUewf4x9fviEaNeAFCSyqlOrYfZVnr1Cq2me4wfOaRjZsPThy0epzxuvVxLSA5OUi-R7D9MGxlsQ3HnHg7WzAqpv1FZfkFfhHnhCygd0thAYftwYJ7omnKw/s640/BABA_Shares_Post_IPO.png" width="640" /></a></div>
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Now let's focus on the "Other Ordinary Shareholders" above. US "Shareholders of Record" have increased from 196 Million shares (8% of Outstanding Shares) immediately after the IPO to 1,669 Million shares (64%) today. Put another way, immediately after the IPO, 30% (745 Million) BABA shares were held outside the US (presumably) by Non-US shareholders in China. It would seem that Jack, Joe, Softbank, Altaba, Officers, Directors and insiders as a group (through offshore shells in "street name") have moved the lions-share of the custodial relationship(s) to US Financial Institutions, where, just thinking out loud, they can pledge these shares as collateral and do all sorts of wonderful "leveragey" things with them. The faith that they've shown in the US Financial System is gratifying and extraordinary. <br />
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Now let's go back to page 250 of the 2014 IPO Document (424(b)4 Filing). At the time, we can see below that there were roughly 190 Million shares held by Caymans/BVI Shell Corps.<br />
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4M1SDo5zmelEQJYIQ0aKypoNrU_CuYeiI1349HKIz4cElTQ3qTI23tb_tQpHkZwayZXs6PJcYpEvx6D8hkbbTzcV8A_-5DhZB7Pz8AkSgue1LylGaqtA7AIlAxQTGntYR5Xj-KhOrmrI/s1600/IPO_Insiders.png" imageanchor="1" style="clear: left; display: inline !important; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="461" data-original-width="963" height="304" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh4M1SDo5zmelEQJYIQ0aKypoNrU_CuYeiI1349HKIz4cElTQ3qTI23tb_tQpHkZwayZXs6PJcYpEvx6D8hkbbTzcV8A_-5DhZB7Pz8AkSgue1LylGaqtA7AIlAxQTGntYR5Xj-KhOrmrI/s640/IPO_Insiders.png" width="640" /></a><br />
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The following Shell Corps. were listed in the notes as shareholders:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjfsc7OEwkjCDAVNxNvnj9ND-_3ILzzh9BKS1LQFin9aL27WA0fA0UKGUZp5-emZudGqmxq7hfdadcqeVPCwAEisVi_CG48ZNxzSbFHpLzeLRQmmb-HhOokEEaQRTSxiVbUCKq6wDSUqAw/s1600/Significant_BABA_Shareholders_IPO.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="687" data-original-width="662" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjfsc7OEwkjCDAVNxNvnj9ND-_3ILzzh9BKS1LQFin9aL27WA0fA0UKGUZp5-emZudGqmxq7hfdadcqeVPCwAEisVi_CG48ZNxzSbFHpLzeLRQmmb-HhOokEEaQRTSxiVbUCKq6wDSUqAw/s640/Significant_BABA_Shareholders_IPO.png" width="614" /></a><span style="background-color: white; font-family: "times";"></span><br />
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<span style="background-color: white; font-family: "times";"><span style="background-color: white; font-family: "times";"><br /></span></span><span style="background-color: white; font-family: "times";"><span style="background-color: white; font-family: "times";"><br /></span></span><span style="background-color: white;"><span style="background-color: white; font-family: inherit;">Interestingly, when we do PDF searches of the recent 20-F, the sixty-one (61) entities listed above and apparently integral to the pre-IPO financing structure, we see that these entities are either nonexistent or listed in the periphery today, like, for example, the benign discussion of Jack's "Relationship With Investment Funds" (Pg. 204) </span></span><br />
<span style="font-family: inherit;"><span style="background-color: white;"><span style="background-color: white;"><br /></span></span>
<span style="background-color: white;"><span style="background-color: white;">My guess would be that these businesses and their relationships with Alibaba are far from over. These Shells, and probably many more like them, most likely continue to spearhead the proliferation and ADS price management of the Ordinary Shares into the US Financial System. I've described this phenomenon as "<a href="https://deep-throat-ipo.blogspot.com/2018/05/amazon-walmartchinese-potting-soiland.html"><span style="color: blue;"><b>Boomerang Money</b></span></a>" in prior posts. </span></span></span><br />
<span style="font-family: inherit;"><span style="background-color: white;"><span style="background-color: white;"><br /></span></span>
<span style="background-color: white;"><span style="background-color: white;">Next, let's take a look at the most current 13-F Summary information available on Yahoo! Finance, apply a few ratios, and compare it to the Alibaba 20-F disclosures.</span></span></span><br />
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<span style="background-color: white; font-family: "times";"><a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiYIYhDGKM5eO9QomkRM-4BocnPM8eXogsglUZjuQ92Wrmh37gXcyh0fRLlXFjxTtw_hB1FrAi0CffLra67HUITZbned7-f0gZgnFOIuN-rCNOqM0wvAsXZWO60d1UIE7eSIGHuwGRSHqY/s1600/BABA_top_Institutional_Holders.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="802" data-original-width="849" height="598" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiYIYhDGKM5eO9QomkRM-4BocnPM8eXogsglUZjuQ92Wrmh37gXcyh0fRLlXFjxTtw_hB1FrAi0CffLra67HUITZbned7-f0gZgnFOIuN-rCNOqM0wvAsXZWO60d1UIE7eSIGHuwGRSHqY/s640/BABA_top_Institutional_Holders.png" width="640" /></a><span style="background-color: white; font-family: "times";"><br /></span></span><br />
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<span style="background-color: white; font-family: "times";"><span style="background-color: white; font-family: "times";"><br /></span></span><span style="background-color: white; font-family: "times";"><span style="background-color: white; font-family: "times";">A few things jump off the page at us:</span></span><span style="background-color: white; font-family: "times";"><span style="background-color: white; font-family: "times";"><br /></span></span>
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<li><span style="background-color: white; font-family: "times";">First, we see that Yahoo! Finance shows that there are 1,926 US Institutions holding Alibaba Shares as of 12/31/17, rather than the 128 Institutions listed in the 20-F as of 7/18/18. Quite a disparity.</span></li>
<li><span style="background-color: white; font-family: "times";">Yahoo Finance shows 1.051 Billion Shares held by Institutions (rather than 1.669 Billion per the 20-F). Again, quite a difference </span></li>
<li><span style="background-color: white; font-family: "times";">Float, or unrestricted shares available to trade was 1.214 Billion shares, or 46.85% of outstanding shares per Yahoo! Finance. So apparently "Float", at that time was significantly less that the 1.669 Billion shares held by US Institutions today? Are some of these shares still restricted? Unless I'm misinformed, I thought the "Lockups" had long passed.</span></li>
<li><span style="background-color: white; font-family: "times";">Roughly 40% of float, as of 12/31/17 was concentrated in twenty (20) US institutions.</span></li>
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<span style="font-family: inherit;"><span style="background-color: white;">This is so worrisome I'm going to type it again: </span><i><span style="color: blue;"><b> "1,669,625,497 ordinary shares, representing approximately 64% of our total outstanding shares, were held by 128 record shareholders with registered addresses in the United States"</b></span></i>....or roughly US$300 Billion is now sitting in US Banks and Brokerages ready, willing and able to be pledged as "rock solid" collateral for (presumably) Caymans/BVI Shells.</span><br />
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<span style="font-family: inherit;">Moreover, do any of you readers remember "<a href="https://deep-throat-ipo.blogspot.com/2017/10/1289-billion-of-failed-treasury.html"><span style="color: blue;"><b>Re-Hypothecation</b></span></a>"? <span style="font-family: inherit;">The practice where banks and brokerages use their customer/client collateral as their own? <span style="background-color: white;"><span style="font-family: inherit;">Let's lever up and hit the gas? </span><span style="font-family: inherit;">Oh sure you remember this.....it's what caused the liquidity crisis that threw Lehman Brothers into bankruptcy.....is it coming back to you now? Could anything like this be happening here?....food for thought.</span></span></span></span><br />
<span style="font-family: inherit;"><span style="background-color: white;"><span style="font-family: inherit;"><br /></span></span></span>
<span style="font-family: inherit;"><span style="background-color: white;"><span style="font-family: inherit;">So who's right? The BABA 20-F Filing (1.6 Billion shares in 128 US Institutions) or Yahoo! Finance's analysis of the 13-F Filings? (1.1 Billion shares held at 1,926 Institutions). </span></span></span><br />
<span style="font-family: inherit;"><span style="background-color: white;"><span style="font-family: inherit;"><br /></span></span></span>
<span style="font-family: inherit;"><span style="background-color: white;"><span style="font-family: inherit;">There's a good chance that both might be correct. It could be that there was a massive increase in shares held by US Institutions in the last 6 months. It could be that the insider owned Shells have been going absolutely bonkers....moving more than 600 million shares into US Institutions and consolidating them down from 1,926 banks/brokerages to just 128 in the same time frame. You'd think that BABA management should be very accurate (down to the share) in their filings. You'd also think that Yahoo! Finance is also generally pretty accurate at tabulating 13-F data. They don't usually make mistakes either. </span></span></span><br />
<span style="font-family: inherit;"><span style="background-color: white;"><span style="font-family: inherit;"><br /></span></span></span>
<span style="background-color: white; font-family: inherit;">So here's my thesis re: Alibaba's Capital Structure:</span><br />
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Is it possible that, like the RMB, the CCP has opened the same playbook, manipulating the bid/ask through myriad offshore entities on a small population of trades in order to create the illusion of a market made at a price that defies financial gravity? A team of Chinese Communist Party (CCP) Members in the Caymans is relentlessly trading, coordinated with other teams of CCP Members in the BVI, all pitted against a smattering of tidal-chart-watching, butterfly-correlation-coefficient following, nearly retired, fund managers, day traders and self-proclaimed "Seeking Alpha" financial wizards, as the US custodial "street name" share count increases geometrically? Boatloads of these shares continue to find their way onto the books of US Institutions. At some point the 20-F might actually (accidentally) proclaim that there are indeed more shares on deposit in US Financial Institutions than are actually issued/outstanding, in yet another BABA-esqe feat of financial prestidigitation to look forward to!<br />
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All that said, the big hypothetical question is, what happens when the CCP decides to hit the "sell" button? <br />
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<b><u><span style="font-size: large;">Employees and their Office Space!</span></u></b><br />
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<span style="color: red; font-family: inherit;"><b><u>Executive Summary:</u></b></span></div>
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<span style="color: red;">1.) In the last year Alibaba has added roughly "Fifteen Pentagons" in office space with only 16,000 additional FTE's, or roughly 3,400 new square feet per new employee. Real Estate is expensive, yet, overhead stayed about the same. Weird.....</span><br />
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<b><u>2017 20-F Pg 115</u></b><br />
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<i><span style="color: blue;">As of March 31, 2017, we occupied facilities around the world with an aggregate gross floor area of office buildings owned by us totaling 558,080 square meters. (6,007,173 square feet)</span></i><br />
<i><span style="color: blue;"><br /></span></i><b><u>2018 20-F Pg 121</u></b></div>
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<b><br /></b><i><span style="color: blue;">As of March 31, 2018, we occupied facilities around the world with an aggregate gross floor area of office buildings owned by us totaling approximately 5.7 million square meters. (61,354,800 square feet.)</span></i><br />
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<span style="color: red;">(<b>Authors Note: </b>Whooooaaaa!!! 61 million square feet of OFFICE BUILDINGS OWNED by Alibaba!!!???)</span><br />
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<b><u>2018 20-F Pg 121</u></b></div>
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<i><span style="color: blue;">As of March 31, 2016, 2017 and 2018, we had a total of 36,446, 50,097 and 66,421 full-time employees, respectively.</span></i></div>
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As a point of reference, the US Pentagon, I'm told, is the world's largest office building, with about 6,500,000 sq ft (600,000 m2), of which 3,700,000 sq ft (340,000 m2) are used as offices. The Pentagon houses roughly 26,000 Office Employees.</div>
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So in just one (1) year Alibaba has increased their office space the equivalent of fifteen (15) Pentagons? That's amazing! So I guess real estate expense & overhead should be going up a bit??.....<br />
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I also understand that they just redid the bathrooms and put in new Berber carpet at their World-Wide Global Headquarters in the Caymans (<i>Alibaba Group Holding Limited, Trident Trust Co (Cayman) Ltd, One Capital Place 4th Floor, Georgetown, Cayman</i>). Gorgeous! Ain't she a beauty? Money is apparently no object.</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgq-KvGQH7Op4l3ywyTRMBznj_f22neymI_5_xxj-v1D8Clq3VijvRVGkZFKk8-p5oyA_qneGDiA01EH2QDpHcl4MfHojd42SipseSvcWEgZ1k7hguGJSZXHGpekl_pLXd6ErwkWf55l7o/s1600/BABA_HQ_One_Trident_Place.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="418" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgq-KvGQH7Op4l3ywyTRMBznj_f22neymI_5_xxj-v1D8Clq3VijvRVGkZFKk8-p5oyA_qneGDiA01EH2QDpHcl4MfHojd42SipseSvcWEgZ1k7hguGJSZXHGpekl_pLXd6ErwkWf55l7o/s640/BABA_HQ_One_Trident_Place.png" width="640" /></a></div>
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Taking the analysis a step further, since the US Government has been long renowned as the world's foremost efficiency expert, using the appropriate Pentagon ratios, we can calculate that 61,354,800 square feet of office space (the world's biggest cube farm) would accommodate 430,711 employees, each of whom would be allotted 142 square feet of gross office space.</div>
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When we compare this to Alibaba's space usage we see that even though they've added "15 Pentagons" of Office Space, they've only added 16,324 FTE's. This would give each new employee roughly 3,390 sq. ft. of new lounging area . Spacious indeed! No wonder everyone wants to work at Alibaba.!<br />
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Moreover, when we look at the book value of the newly acquired "15 Pentagons" we see that the new space doesn't seem to be nearly as luxurious as the currently owned space. When we compare the Balance Sheet values of Property & Equipment (net of depreciation) for 2018 and 2017 (F-5 of the respective 20-F's) we see that the Book Value per square foot, including the newly added 55 million square feet of space drops from $488.75 per square foot down to $172.77. Since the bulk of the 2018 $10.6 Billion is newly acquired space with presumably very little depreciation, it looks like Alibaba, as always got an incredible deal!<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgHLhp-pasdO7afdTe1zacJgUqucEeVs7JgFzaldd-bOzUUcJIVg4LDWqjIWU5jO_7OLSARtzjARM7ARbbo782QXGUBV0IjF8kCN1MAEhZk-7xRdA87ShUcwVDaeUBqnpF6u0KWy-ZkRvM/s1600/BABA_Office_Space_2018.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="227" data-original-width="526" height="274" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgHLhp-pasdO7afdTe1zacJgUqucEeVs7JgFzaldd-bOzUUcJIVg4LDWqjIWU5jO_7OLSARtzjARM7ARbbo782QXGUBV0IjF8kCN1MAEhZk-7xRdA87ShUcwVDaeUBqnpF6u0KWy-ZkRvM/s640/BABA_Office_Space_2018.png" width="640" /></a></div>
Since these numbers are so cattywampus a schedule showing the addresses of major buildings, their square footage and cost basis would have been appreciated. </div>
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<b><u><span style="font-size: x-large;">GMVVVVVVVVV!</span></u></b></div>
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<span style="color: red;"><u><b>Executive Summary:</b></u></span><br />
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<span style="color: red;">1.) Alibaba has a retail presence roughly 1.5 x Walmart now. GMV is US$ 768 Billion vs. Walmarts piddling US$ 500 Billion.</span><br />
<span style="color: red;"><br /></span>
<span style="color: red;">2.) BABA has developed a huge new revenue stream, winding down the huge, and rapidly growing supply of China's Non-Performing Loans (NPLS), yet, this business segment wasn't mentioned in the 20-F at all.</span><br />
<span style="color: red;"><br /></span>
<span style="color: red;">3.) Based on the value of "real" retail GMV the Market Cap of Alibaba should be about the same as Target (NYSE:TGT) (US$ 40 Billion) rather than US$ 470 Billion, the company's current Market Cap. </span><br />
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Gross Merchandise Volume (GMV) has long been a favorite topic of discussion for Alibaba watchers, even though it seems to have evolved into a much less important management metric over the last few years. It's only disclosed annually (and once on "Singles Day") now. (For Example: In the IPO filing "GMV" was mentioned 223 times, while in this years 20-F it was mentioned just 29 times, most of the references were related to the table on page 7 described below). </div>
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The supposition by most of us is that Alibaba can't possibly be selling anywhere near the amount of socks, underwear, winter coats, TV's and phones, etc. that they purport to sell. They've never disclosed anything close to a "product mix" analysis for their GMV. Of course there have been all sorts of anecdotes and funny stories about how <a href="https://deep-throat-ipo.blogspot.com/2017/11/the-blob.html"><span style="color: blue;"><b>Alibaba sells boatloads of Yachts, Bad-Assets, Auctioned NPL's, Skyscrapers, Estonian Real Estate and Jumbo Jets</b></span>.</a></div>
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<img src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhIFd9ikkdJWEN_VIjzt-GpTC7GC9GR1Sp9Jcj0reBfGz-HWLlQDBzCZqiokFN7Vehr-W78zi5376J9HpQ0-OVo69s3qf4ceQg57yCdetHbmb68SkQWV1DnUIZoW8FNJX6ayIzoadbLR-M/s640/747_Taobao_Auction.png" /></div>
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We are told often by Alibaba management that they continue to be ever vigilant and on the lookout for knock-offs and fakes, even though a third grader with an iPhone can come up with pages of questionable SKU's instantly by typing "Gucci" or "Prada" in a T-Mall or Taobao search box. Jack, for all of his effort, assurances and representations, apparently doesn't have his best men/women on it....</div>
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There's also some <b><a href="https://macropolo.org/cleanup_analysis/returning-to-its-roots/"><span style="color: blue;">excellent research</span></a></b>, sent to me by one of my readers, done by the Paulsen Institute and <i>Marco Polo</i>, which makes a solid attempt to quantify at least some of this silliness. Apparently, winding down the ever growing basket of China's non-performing loans (NPL's) has become a significant part of the Alibaba business model. Here are a few bullet points from the July 25th, 2018 article:<br />
<ul style="text-align: left;">
<li>Alibaba, through its Taobao platform, has assumed a uniquely broad role in helping China’s financial sector extract value from bad loans.</li>
<li>Taobao has the potential to become the single most important platform for NPL auctions. In 4Q 2017 NPLs with a face value of 33 billion yuan (US$ 5.3 Billion) were auctioned on Taobao.</li>
<li>Meanwhile, Taobao has become the judicial system’s platform of choice, with some 3,500 courts throughout China currently using it for judicial auctions.</li>
</ul>
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For some reason, this new, high-growth aspect of Alibaba's business model (US$20+ Billion on an annualized run rate) wasn't mentioned anywhere in the 20-F or during the Investor Call. Strange....<br />
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All that said, according to their numbers, Alibaba now controls more GMV in their ecosystem than Walmart's global merchandise sales. Here are the numbers.</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgntYN3H3MQ4uZxgO99kHT_mkrbQOaVh5KFqX_weIgaj7gg4Nl3ZmoR3hLoJWv1-g2M8OMEp9Ic-IBQ-QuvSq4T4bInE-BNoQz665-iiJeD7SwdS6o4cjbYvZv6I40REB0CCPDm537lLyg/s1600/GMV_3-31-18.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="336" data-original-width="965" height="222" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgntYN3H3MQ4uZxgO99kHT_mkrbQOaVh5KFqX_weIgaj7gg4Nl3ZmoR3hLoJWv1-g2M8OMEp9Ic-IBQ-QuvSq4T4bInE-BNoQz665-iiJeD7SwdS6o4cjbYvZv6I40REB0CCPDm537lLyg/s640/GMV_3-31-18.png" width="640" /></a></div>
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Alibaba's GMV is now US$768 Billion (RMB 4,820B/6.276) (2018 20-F Pg. 7) Compared to Walmart's meager $500 Billion in Revenue. Again, in just a few short years Alibaba has grown its GMV retail presence to 150%+ of Walmart's global revenue. BABA GMV is up nearly 3x from the $296 Billion it reported at the time of the IPO. </div>
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Of course, there are all sorts of estimates and guesses out there that "real" retail GMV is probably about a third, or half of what they've reported, but that doesn't seem to bother investors. US Investors are willing to shell out hard earned dollars to get in on the ground floor of this China eCommerce dream. When I mention the GMV issues, BABA boosters will often come back with "yeah....the books are probably cooked....but it doesn't matter, the business model is solid.....that's just the way it is in China!" </div>
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Here's the "simple math" as to why it does indeed matter. Let's say that Alibaba's GMV is actually 1/3rd of what it's reporting (humor me here) and that the rest of the GMV actually is overstatements, returns, puffing, bad assets, kickbacks, balance transfers, NPL's and low margin/value transactions not necessarily associated with retail/eCommerce. So BABA's "Retail Presence" drops from US$768 Billion down to US$ 256 billion. BABA is, of course, valued as an ECommerce Retailer based on their market presence. You'd think that Business (A) with a third of the market presence of a similar Business (B) would be worth much less.<br />
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Further, let's look at the RMB/USD Exchange Rate (See how this is all related??) <a href="https://deep-throat-ipo.blogspot.com/2018/04/the-new-phone-books-herethe-new-phone.html"><span style="color: blue;"><b>From my prior posts</b></span></a> we can conclude with a SWAG that the Exchange Rate is also overstated by a factor of three (3), which would further reduce the US$ value of Alibaba's "Retail Presence" from US$256 Billion down to US$85 Billion. As a point of reference, Target's Revenue is $72 Billion with a Market Cap of US$ 40 Billion. Alibaba's current Market Cap is just shy of US$470 Billion.<br />
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I'm feeling a bit of a valuation disconnect here. </div>
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<b><span style="font-family: inherit; font-size: medium;"><u><span style="font-size: large;">"Investees" </span>(More Preseidigitation!)</u></span></b><br />
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<b><u><span style="color: red;">Executive Summary</span></u></b><br />
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<span style="color: red;">1.) We examine Footnote 4 of the 20-F where we see that Book Values (Cost Basis plus write-ups) of Investees have increased roughly US$22.3 Billion in the current year.</span><br />
<span style="color: red;"><br /></span>
<span style="color: red;">2.) A number of former "Flagship" businesses (<span style="font-family: inherit;">Auto Navi, UC Web, OneTouch, Singapore Post, Weibo, Meizu) are all missing in action. They've disappeared without a trace or mention in the 20-F.</span></span><br />
<span style="font-family: inherit;"><span style="color: red;"><br /></span></span>
<span style="font-family: inherit;"><span style="color: red;">3.) Consolidating money-losing-dog-shit businesses using all sorts of valuation shenanigans to hide what's happening, and/or bailing out friends with US Shareholder Money seems to have consumed much of management's time and resources.</span></span><br />
<span style="font-family: inherit;"><span style="color: red;"><br /></span></span>
<span style="font-family: inherit;"><span style="color: red;">4.) We examine the footnotes for Alibaba Pictures, Cainiao, Wanda, OFO, Alibaba Health and Wasu. These are AWESOME!!</span></span><br />
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When we examine Footnote 4 (one of my favorite footnotes) this year a few things jump out at us. But before we get into the nitty-gritty I'd like to take a moment to congratulate the Alibaba Accounting Department on their continuing effort (similar to their effort to root out fake, knock-off merchandise and Capital Structure "Enhancement") in moving toward complete transparency on their disclosures. I particularly like:<br />
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<ul style="text-align: left;">
<li>That Footnote 4 (Pg. F-36) must be read in conjunction with Footnote 11 (Pg. F-71) and Footnote 13 (Pg. F -76), giving the reader practice in both turning pages and maintaining concentration as he/she tries to figure out what's going on.</li>
<li>Even though the 20-F is published for US Shareholders, in English, for shares traded on the NYSE, the report presents values, randomly switching between RMB, HK$ and US$, giving the reader the chance to familiarize himself with global exchange rates at various points in time.</li>
<li>Unlike last year, they've chosen not to report both carrying value of the acquired businesses or "life to date" gains booked associated with the step-acquisitions of individual businesses. Rather than bury them in confusing footnotes they've chosen to omit them all together so the reader doesn't get overwhelmed.</li>
<li>We had to "back into" the valuation for "Other" (RMB 6,406 Million = US$1.020 Billion)) since management decided to show the change in balances rather than the original Cost/Investment. (RMB 5,292 Million + RMB 834 Million) </li>
<li>They've added a teeny-tiny paragraph following 2(ag) showing the US$6 Billion of transactions that they've committed to, but haven't quite closed (Focus Media, DSM, ZTO, etc.) over the couple of months since year end. It looks like the spending spree is accelerating. </li>
</ul>
The table below illustrates where we were last year, published in my "<b><a href="https://deep-throat-ipo.blogspot.com/2017/06/finding-inner-peace-in-dharamsala-and.html"><span style="color: blue;">Finding Inner Peace in Dharamsala .....and thoughts on the Alibaba 20-F....</span></a></b>" post.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj2wcx3cpue85Q4pIv64nyqZ4ELewSSq71rWJdobn6SQuK7DTJ1w0Xv2nlyuRg8hJ8IiI9nDyK1a0dlksYkShW9M7vwQ7PFB97IL17nyNByH1Jrj8avgcrSn3p7Z5shmB1y8Jj2NrOJ8oM/s1600/Investees_Purchase_Price_Gain.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj2wcx3cpue85Q4pIv64nyqZ4ELewSSq71rWJdobn6SQuK7DTJ1w0Xv2nlyuRg8hJ8IiI9nDyK1a0dlksYkShW9M7vwQ7PFB97IL17nyNByH1Jrj8avgcrSn3p7Z5shmB1y8Jj2NrOJ8oM/s1600/Investees_Purchase_Price_Gain.png" /></a><br />
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So as of the 2017 year-end 20-F Alibaba had "invested" US$ 33.903 Billion in these businesses and booked US$ 7.299 Billion in valuation gains "Life to date". Good. Got it. Now, fast forward to this year's 20-F.<br />
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Interestingly, in this year's 20-F the only place the aggregate "Gain on Deemed Disposals of Assets" of US$ 4.137 Billion is mentioned is on page 4 in the "Reconciliation of Net Income to Non-GAAP Income". If it were me, I would have put together a schedule prominently describing the composition of this gigantic figure and what businesses/disposals it relates to, especially since it represents roughly a third of Non-GAAP Income. But that's just me.<br />
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The table below compares the 2018 "Note 4" to the 2017 "Note 4" Investment/Purchase values. Again, note that the "valuation gains" assignable to each Investee are no longer disclosed.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiXwk8VU-AwanjC5-mGqv7OsBNVWbux7xIif-MHcyA13LGUW1Erll53-xo_ICFaIZDMFbRZtMXAe5gZnpj-LmFpI87KQUdqavrtCsNaD-ILhbweldE3laZRB2NBtrsbZQsiqqCrptQeZ6A/s1600/BABA_Investees_Note_4_2018.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="1188" data-original-width="578" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiXwk8VU-AwanjC5-mGqv7OsBNVWbux7xIif-MHcyA13LGUW1Erll53-xo_ICFaIZDMFbRZtMXAe5gZnpj-LmFpI87KQUdqavrtCsNaD-ILhbweldE3laZRB2NBtrsbZQsiqqCrptQeZ6A/s1600/BABA_Investees_Note_4_2018.png" /></a></div>
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<span style="font-family: inherit;">Based on the footnotes, Investments and Commitments (soon to close) in these businesses increased by US$ 22.3 Billion last year.</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Interestingly, we also have a number of new "Investees" that showed up on the Alibaba books this year:</span></div>
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<span style="font-family: inherit;"><br /></span></div>
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<span style="font-family: inherit;">Wanda, Easy Home, OFO, Sun Art, Yiguo, China Unicom, Sauche, Best Inc, Tokopedia, </span><br />
<span style="font-family: inherit;">Onshore/Offshore, Focus Media, DSM Group, ZTO, Huitonga, Shiji Retail and Kaiuan. "New" Investments totaled RMB 86.831 Billion (US$13.835 Billion). </span></div>
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<span style="font-family: inherit;"><br /></span></div>
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<span style="font-family: inherit;">We also note that a number of Alibaba's flagship investments are missing from Footnote 4:</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">Auto Navi, Alibaba Pictures, UC Web, OneTouch, Singapore Post, Weibo, InTime, Cainaio, Meizu totaling RMB 45.538 Billion (US$ 7.256 Billion) are missing in action.</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">PDF searches of the 20-F document reveal that:</span></div>
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<ul>
<li><span style="font-family: inherit;">Auto Navi is discussed 10 times in the boilerplate "for example" language unchanged from the prior year, but there is no discussion of the business. It's a shame, from reading the IPO docs you would have thought this business was one of Alibaba's crowned jewels.</span></li>
<li><span style="font-family: inherit;">Alibaba Pictures was removed from Footnote 4 and discussed separately.</span></li>
<li><span style="font-family: inherit;">UC Web is no longer referred to as "UC Web". It shows up in the 20-F as "UC Browser". The only current (non-boilerplate) reference in the filing appears on page 81: "<i><span style="color: blue;">UC Browser is one of the top three mobile browsers in the world and the number two mobile browser in India and Indonesia by page view market share in March 2018, according to StatCounter (http://gs.statcounter.com)"</span></i></span></li>
<li><span style="font-family: inherit;">OneTouch was mentioned once on page 162 under "Allowance for Doubtful Accounts Relating to VAT Receivables". The note was the same as last year, management probably just forgot to remove it from that paragraph. In any case OneTouch has disappeared without a trace.</span></li>
<li><span style="font-family: inherit;">The Singapore Post is also gone. We don't know what happened to this great business, at least from the filings. </span></li>
<li><span style="font-family: inherit;">Any mention of the RMB 7,310 Million (US$ 1,165 Million) valuation for Weibo is missing in action as well.</span></li>
<li><span style="font-family: inherit;">InTime was consolidated following the acquisition of the majority of outstanding shares. (Note: 4(c))</span></li>
<li><span style="font-family: inherit;">Cainaio was consolidated (Note: 4(b))</span></li>
<li><span style="font-family: inherit;">Meizu's RMB 3,619 Million (US$ 567 Million) valuation has disappeared as well. Perhaps a half-billion-plus dollars is no longer a material amount to Alibaba?</span></li>
</ul>
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<span style="font-family: inherit; font-size: large;"><b><u><i>Featured Notes worth discussing:</i></u></b></span><br />
<span style="font-family: "times" , "times new roman" , serif;"><br /></span>
<u><b><span style="font-family: inherit;">Alibaba Pictures - Page. 162 </span></b></u><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">After years of delay they've finally written down (and consolidated) Alibaba Pictures, taking an impairment charge of RMB18.116 Billion (US$2.888 Billion). They were also careful to mention on page 162:</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="background-color: white; font-family: inherit;"><i style="color: blue;">Nonetheless, the market value of our investment in Alibaba Pictures as of March 31, 2018 remains well above our original investment amount that we paid in June 2014. </i></span><br />
<span style="font-family: inherit;"><span style="background-color: white;"><i><span style="color: blue;"><br /></span></i></span>
This Alibaba Pictures write down was coincidentally offset by a consolidation gain for the write up of Cainiao, here's the note buried on page 129.</span></div>
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<span style="font-family: inherit;"><br /></span></div>
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<i><span style="color: blue; font-family: inherit;">In October 2017, as a further step to implement our New Retail strategy, we completed a subscription for newly issued ordinary shares of Cainiao Network for a cash consideration of US$803 million. Following the completion of the transaction, our equity interest in Cainiao Network increased from an approximately 47% to an approximately 51% and Cainiao Network became our consolidated subsidiary. We expect that Cainiao Network will help enhance the overall logistics experience for consumers and merchants across our ecosystem, and enable greater efficiencies and lower costs in the logistics sector in China.</span></i></div>
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<i><span style="color: blue; font-family: inherit;"><br /></span></i></div>
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<span style="font-family: inherit;">The amount of the gain is buried on page 145.</span></div>
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<span style="color: blue; font-family: inherit;"><i><br /></i></span></div>
<i><span style="color: blue; font-family: inherit;">The increase was primarily due to a non-cash gain of RMB22,442 million (US$3,578 million) arising from the revaluation of our previously held equity interest in Cainiao Network when we acquired control over Cainiao Network in mid-October 2017.</span></i><br />
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<span style="font-family: inherit;"><span style="background-color: white;"><span style="font-family: "times"; font-size: xx-small;"><br /></span></span>
<span style="background-color: white;"><span style="font-family: "times"; font-size: xx-small;"></span></span></span><br />
<span style="font-family: inherit;">It is indeed fortuitous that wonderful write-up opportunities like Cainiao pop up just when a businesses like Alibaba Pictures begin to falter. Alibaba management is truly blessed. <span style="background-color: white;"><br /></span></span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">The obvious question I have is, the total gain booked is US$4.137 Billion (Pg. 4) and that includes the Cainiao gain of US$3.578 Billion that would indicate that there's another US$559 Million in write ups that are not described anywhere else. In a mainland investment environment where equities are down substantially in the last six months, could it be that these write ups might be illusory and there are more write-downs/offs on the horizon?</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="background-color: white; font-family: inherit;"><b><u>Wanda - Note 4(k) F-52</u></b></span><br />
<span style="font-family: inherit;"><span style="background-color: white;"><br /></span>
<span style="background-color: white;"></span></span><br />
<span style="font-family: inherit;"><i><span style="color: blue;">Wanda Film, a company that is listed on the Shenzhen Stock Exchange, is principally engaged in the investment and management of cinemas and film distribution businesses. In March 2018, the Company completed an investment in existing ordinary shares of Wanda Film for a cash consideration of RMB4,676 million, representing an approximately 8% equity interest in Wanda Film. Such investment is accounted for under the cost method (Note 13) given that a readily determinable fair value is not available due to the suspension of trading of its shares for an extended period as of March 31, 2018.</span></i><span style="background-color: white;"><br /></span>
<span style="background-color: white;"><br /></span></span><br />
<span style="background-color: white; font-family: inherit;">This was a really shrewd move, showing the brilliance of Alibaba management, as well as their benevolence, helping Xi's buddy, <a href="https://www.wanda-group.com/chairman/"><b><span style="color: blue;">Wang Jianglin</span></b></a> out of a real jam since trading had been suspended for nearly a year (since July 4th, 2017) at the time of the Alibaba "investment" . Alibaba was able to swoop in and pick up this stock at a bargain price while it was suspended/pending-de-listed. Also, thanks to the generous nature and unwavering faith of US Shareholders, Alibaba management knew full well that there would be no repercussions from failing to book the US$750 Million write off/down and burying this transaction in a one paragraph disclosure deep in the bowels of the footnotes of the 20-F. As we all know, in China, suspension of trading, or even better, a de-listing is a vote of confidence for management and validates a businesses intrinsic value. It's a confirmation that management has <a href="https://variety.com/2018/film/news/dalian-wanda-consolidate-film-units-china-1202857977/"><span style="color: blue;"><b>everything under control</b></span></a>. (For you Chinese readers out there, that was what we Westerners refer to as "sarcasm".) </span><br />
<span style="background-color: white; color: blue; font-family: inherit;"><b><br /></b></span>
<b><span style="color: black;"><a href="https://www.forbes.com/sites/bizcarson/2018/07/18/ofo-bikes-us/#56b1374e2785">OFO Bike Sharing (F-52)</a></span></b><br />
<span style="background-color: white; font-family: inherit;"><b><br /></b></span>
<i><span style="color: blue; font-family: inherit;"><b>(m) Investment in OFO International Limited ("OFO")</b><br /><br />OFO is one of the leading bike-sharing companies in the PRC. During the year ended March 31, 2018, the Company completed an investment in existing and newly issued preferred shares of OFO for a total cash consideration of US$343 million (RMB2,272 million). As of March 31, 2018, the Company's equity interest in OFO was approximately 12% on a fully diluted basis. Ant Financial is also an existing minority shareholder of OFO. Such investment is accounted for under the cost method (Note 13).</span></i><br />
<i><span style="color: blue; font-family: inherit;"><br /></span></i>
<i><span style="color: blue; font-family: inherit;"><a href="https://www.forbes.com/sites/bizcarson/2018/07/18/ofo-bikes-us/#78fed8872785">https://www.forbes.com/sites/bizcarson/2018/07/18/ofo-bikes-us/#78fed8872785</a></span></i><br />
<i><span style="color: blue; font-family: inherit;"><br /></span></i>
<span style="font-family: inherit;">This picture pretty much says it all.....I'm sure everything is just fine and dandy at OFO. </span></div>
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<i><span style="color: blue; font-family: inherit;"><br /></span></i></div>
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<img alt="Image result for piles of for bikes" height="426" src="https://cdn.theatlantic.com/assets/media/img/photo/2018/03/bikes/b12_RTX35CJ5/main_900.jpg?1521743422" style="font-family: Times, "Times New Roman", serif;" width="640" /></div>
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<span style="background-color: white;"><b><span style="font-family: inherit;"><u>Alibaba Health (F-52 (4(i))</u></span></b></span><br />
<span style="background-color: white; font-family: "times" , "times new roman" , serif;"><b><span style="font-size: medium;"><u><br /></u></span></b></span>
<span style="background-color: white;"><span style="font-family: inherit;">I discussed the recent history of Alibaba Health and Yunfeng (Jack's Piggy Bank) in my analysis of last year's 20-F. Feel free to refresh your memory by rereading the section entitled</span></span> <a href="https://deep-throat-ipo.blogspot.com/2017/06/finding-inner-peace-in-dharamsala-and.html"><span style="color: blue;"><b><i>Alibaba Health ....More of the same.</i></b></span></a><br />
<span style="background-color: white;"><span style="color: blue;"><b><i><br /></i></b></span></span>
<span style="background-color: white;"><span style="font-family: inherit;"></span><span style="font-family: inherit;">We see a familiar game plan. Create a fake valuation based on a small piece of the pie and value the entire enterprise based on that piece, as you make "step" acquisitions and book valuation "gains".</span></span><br />
<span style="background-color: white;"><span style="font-family: inherit;"><br /></span></span>
<span style="background-color: white; color: blue; font-family: inherit;"><i>In May 2018, the Company agreed to transfer its business relating to certain medical devices, healthcare and adult products and the medical and healthcare services on Tmall to Alibaba Health for an aggregate consideration of HK$10.6 billion, which will be settled through the issuance of approximately 1.8 billion newly issued ordinary shares of Alibaba Health. The completion of this transaction is subject to a number of conditions including the approval by the shareholders of Alibaba Health and certain regulatory authorities. Upon the closing of this transaction, the Company's effective equity ownership of Alibaba Health will increase to approximately 56%.</i></span><br />
<span style="background-color: white; color: blue; font-family: inherit;"><i><br /></i></span>
<span style="font-family: inherit;"><span style="background-color: white;">Since the value of Alibaba Health (HK:241) nearly doubled after the announcement, a</span> statement like this absolutely screams for the deployment of the <b><i><u>Banker Speak Translator (BST</u></i></b>). Here's what the note really says:</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;"><i><b><u>BST: </u></b>This is AWESOME! we took a bunch of floundering product categories out of TMall that nobody knows the value of, said they were worth HK$ 10.6 Billion and had a company we control (Alibaba Health) issue shares in that amount, increasing the Shareholder Equity in the company without spending a dime of cash! (Shit!....we should have made it HK$20.0 Billion!) And now that we have a 56% ownership interest we can probably just consolidate it and get it off that that pesky Hong Kong stock exchange where uninformed shareholders can "vote" on the value of the business every day and muck up the works.</i></span><br />
<span style="font-family: inherit;"><i><br /></i></span>
<span style="font-family: inherit;">Maybe I'm over simplifying, but it looks like the only thing that the shareholders of Alibaba Health got for their HK$ 10.6 Billion of dilution is a link on the Alihealth.cn home page redirecting to the Tmall Health page where they can buy all sorts of cheap, questionable medications. Try it....it's kind of funny/lame.</span><br />
<span style="font-family: inherit;"><br /></span>
<span style="color: blue; font-family: inherit;"><a href="http://www.alihealth.cn/"><b>http://www.alihealth.cn/</b></a></span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiaWp2oPb5JzvpkDSPY7tGlln3B2FU8ngvJTSKiGSuAFNMsRHPwYnZq0A5GnGm2r7egihfe_CCEHCeQ5eOhwqzF4EQyR23j8HtQFjyb7RgQOm5r7fbvHWRyhHyse52hqUFvNsNXmNVeDRs/s1600/Alihealth_CN.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="530" data-original-width="964" height="350" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiaWp2oPb5JzvpkDSPY7tGlln3B2FU8ngvJTSKiGSuAFNMsRHPwYnZq0A5GnGm2r7egihfe_CCEHCeQ5eOhwqzF4EQyR23j8HtQFjyb7RgQOm5r7fbvHWRyhHyse52hqUFvNsNXmNVeDRs/s640/Alihealth_CN.png" width="640" /></a></div>
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<span style="font-family: inherit;">So here's what Alibaba Health looks like today. Note that the stock nearly doubled since the May announcement that Alibaba was "trading" the TMall health care business for HK$ 10.6 Billion of dilution: </span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJd91vNt5Q-5tOnnV3xeGimb5IuxWiGUuoNhJM3Fmxj7J_dDQIr7P7aSnJGyNjOoMWHiwHdDGWf8mIoMHX_O-_QJKEitL8INwUxUu9MdivGvpghsdoXS7twBQKoqAlwskk_wtnP0u906M/s1600/Alibaba_Health_8-7-18.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="463" data-original-width="720" height="410" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhJd91vNt5Q-5tOnnV3xeGimb5IuxWiGUuoNhJM3Fmxj7J_dDQIr7P7aSnJGyNjOoMWHiwHdDGWf8mIoMHX_O-_QJKEitL8INwUxUu9MdivGvpghsdoXS7twBQKoqAlwskk_wtnP0u906M/s640/Alibaba_Health_8-7-18.png" width="640" /></a></div>
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<span style="font-family: inherit;"> </span><br />
<span style="background-color: white;"><span style="font-family: inherit;">My guess is that they will be consolidating this mess at some point (another valuation gain is on the horizon) and they won't have to discuss the gory details again in next year's 20-F. With the issuance of the HK$ 10.6 Billion new shares, they will have (by my calculations from these footnotes) spent RMB 65.429 Billion (Including the RMB 18.603 valuation gains booked in prior years) to acquire 56% of Alibaba Health. The Market Cap of Alibaba health today is RMB 79.0 Billion (Even after the recent run up....Note that the Market Cap was RMB 40 Billion just prior to the May, 2018 announcement.). A 56% interest in Alibaba Health should be worth about RMB 44.24 Billion now. </span></span><br />
<span style="background-color: white;"><span style="font-family: inherit;"><br /></span></span>
<span style="background-color: white;"><span style="font-family: inherit;">I'll be the first to admit that I had a really hard time going through the footnotes and currency conversions in order to do these calculations and I'd appreciate any guidance or help from anyone familiar with this transaction. As an aside, it would have been nice if they just would have disclosed that:</span></span><br />
<span style="background-color: white;"><span style="font-family: inherit;"><br /></span></span>
<span style="background-color: white;"><span style="font-family: inherit;"> "Our Cost Basis (What we Paid for the business + "write ups") is US$ XXX Billion"</span></span><br />
<span style="background-color: white; font-family: inherit;"> "The current market value (3/31/18) of the 56% of the business we own is US$ YYY Billion"</span><br />
<span style="background-color: white; font-family: inherit;"> "We carry the investment at cost so we have an unrealized gain/loss of US$ ZZZ Billion"</span><br />
<span style="background-color: white; font-family: inherit;"><br /></span>
<span style="background-color: white; font-family: inherit;">Wouldn't that be better than burying all of these step transactions, recapitalizations and valuation changes in the footnotes for the poor, uninformed reader to stumble through and try to decipher?</span><br />
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<span style="background-color: white;"><span style="font-family: inherit;">So after all of the smoke clears, it looks like they've got yet another unrecorded/unrealized loss of RMB 21.189 Billion (US$ 3.854 Billion) at the current market value of Alibaba Health (HK:241), that will have to hit earnings at some point in time.</span></span><br />
<span style="background-color: white;"><span style="font-family: inherit;"><br /></span></span>
<span style="background-color: white;"><span style="font-family: inherit;">All of these unrecognized "US$ Billions" of losses are going to start adding up...</span></span><br />
<span style="background-color: white;"><span style="font-family: inherit;"><br /></span></span>
<span style="background-color: white;"><span style="font-family: inherit;"><b><u>Wasu Media (F-58 Note 4(ag))</u></b></span></span><br />
<span style="background-color: white;"><span style="font-family: inherit;"><b><u><br /></u></b></span></span>
<span style="background-color: white;"><span style="font-family: inherit;"><span style="font-family: inherit;">We covered the </span>incestuous<span style="font-family: inherit;"> relationship between Wazu Media, Jack and Simon Xie in last year's <b><a href="https://deep-throat-ipo.blogspot.com/2017/06/"><span style="color: blue;">Finding Inner Peace in Dharamasal 20-F post</span></a></b>. I'd encourage you to re-read it.....it's pretty entertaining even if I do say so myself. </span></span></span><br />
<span style="background-color: white;"><span style="font-family: inherit;"><span style="font-family: inherit;"><br /></span></span></span>
<span style="background-color: white;"><span style="font-family: inherit;"><span style="font-family: inherit;">In a nutshell, Simon got Jack to spend US$ 1 Billion of US Shareholder's money on "Wealth Management Products" to use as collateral so that an unnamed Chinese banker would make Simon a loan to buy a minority interest in "Wasu Media". </span></span></span><br />
<span style="background-color: white;"><span style="font-family: inherit;"><span style="font-family: inherit;"><br /></span></span></span>
<span style="background-color: white;"><span style="font-family: inherit;"><span style="font-family: inherit;">There's no change described in the structure of this absurd deal in this year's 20-F. Simon still owes the US$1 Billion to the unnamed Chinese banker and he's still paying the interest on the loan using the money from his other loan directly from Alibaba. The money drawn on this RMB 2 Billion Line of Credit given to Simon Xie (to pay the interest on the Billion US dollar loan keep this thing afloat) has increased by another RMB 400 Million to RMB 1.137 Billion. So it continues to bleed.</span></span></span><br />
<span style="background-color: white;"><span style="font-family: inherit;"><span style="font-family: inherit;"><br /></span></span></span>
<span style="background-color: white;"><span style="font-family: inherit;"><span style="font-family: inherit;">So Alibaba is on the hook for both the principal and interest. Tell me again, one more time, why we need Simon Xie involved?</span></span></span><br />
<span style="background-color: white;"><span style="font-family: inherit;"><span style="font-family: inherit;"><br /></span></span></span>
<span style="background-color: white; font-family: inherit;">Here's a summary of how Wasu Media has done since the Spring of 2015 when Simon got his hands on the reins of this juggernaut. Looks like the stock tanked from 60 to 8....Ouch! I'll bet that "unnamed Chinese banker" isn't too happy. </span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj8sTk2aLJUUuHpYLxbSWSmqhhymg7fgUGoszkmXPaviTRKCqncwwA8mqAZqZrOHFYvC5B2ycPcdRTbnYmRpfS8Hmr6jjB8dRkuTRtWCpQ-8r5LeHFFB_Xf-2ekcqCJ3CIG7pcWmQR8ohQ/s1600/Wasu_Media_Bloomberg_2018.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="509" data-original-width="706" height="460" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj8sTk2aLJUUuHpYLxbSWSmqhhymg7fgUGoszkmXPaviTRKCqncwwA8mqAZqZrOHFYvC5B2ycPcdRTbnYmRpfS8Hmr6jjB8dRkuTRtWCpQ-8r5LeHFFB_Xf-2ekcqCJ3CIG7pcWmQR8ohQ/s640/Wasu_Media_Bloomberg_2018.png" width="640" /></a></div>
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<span style="background-color: white;"><span style="font-family: inherit;"><br /></span></span><b><span style="font-family: inherit; font-size: large;"><u>Jay Clayton's SEC</u></span></b><br />
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<b><u><span style="color: red;">Executive Summary:</span></u></b><br />
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<span style="color: red;">The SEC, our best and brightest financial regulator is absolutely, completely OK with everything I've described above. Steady as she goes.....don't want to rock the boat. Jay should be really proud of his trained puppy dogs. "Roll over!...Play dead!....that's such a good boy!" </span><br />
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<b>This year: 2018 20-F Pg 61<br />ITEM 4A. UNRESOLVED STAFF COMMENTS - Not Applicable.</b><br />
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<b>Last yeas: 2017 20-F Pg 115<br />ITEM 4A. UNRESOLVED STAFF COMMENTS - Not Applicable.</b><br />
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<b>2018 20-F Pg 209 <br />Pending SEC Inquiry</b><br />
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<i><span style="color: blue;">I</span><span style="color: blue;">n early 2016, the SEC informed us that it had initiated an investigation into whether there have been any violations of the federal securities laws. The SEC has requested that we voluntarily provide it with documents and information relating to, among other things: our consolidation policies and practices (including our prior practice of accounting for Cainiao Network as an equity method investee), our policies and practices applicable to related party transactions in general, and our reporting of operating data from Singles Day. We are voluntarily disclosing this SEC request for information and cooperating with the SEC and, through our legal counsel, have been providing the SEC with requested documents and information. The SEC advised us that the initiation of a request for information should not be construed as an indication by the SEC or its staff that any violation of the federal securities laws has occurred.</span></i><br />
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The only text omitted from the prior year 20-F (Pg 31) was:<br />
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<i><span style="color: blue;">This matter is ongoing, and, as with any regulatory proceeding, we cannot predict when it will be concluded.</span></i><br />
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Of course, as we'd expect, Alibaba Management's omission of this text is intended to be relatively subtle/liberal/favorable. By the omission of this statement, I guess we can infer that the investigation is winding down and they can indeed predict that it will be concluded. Apparently, the only reason the SEC opened the investigation in the first place is that Jay is overstaffed and he's just trying to find busy work SEC newbies. Gotta promote that "Capital Formation" at all cost! The way this reads, the request for information should be viewed as a "vote of confidence" or a learning experience for the SEC staffers. Thank God the SEC is all over this, securing the financial future for US Investors.<br />
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I'd guess that the entire note will be omitted, without discussion, in the 2019 20-F.<span style="background-color: white; font-family: inherit;"> </span><b style="background-color: white; font-family: inherit;"><a href="https://deep-throat-ipo.blogspot.com/2018/03/up-old-wasuand-why-jay-clayton-will.html"><span style="color: blue;">Jay and the gang will have closed the investigation without fanfare by then</span></a>.</b></div>
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<b><u><span style="font-size: large;">Ant Financial </span></u></b><br />
<b><u><span style="font-size: large;"><br /></span></u></b>
<b><u><span style="color: red; font-family: inherit; font-size: medium;">Executive Summary:</span></u></b><br />
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<span style="color: red; font-family: inherit;">Even though Alibaba and Ant Financial are joined at the hip, US Investors continue to see only half of the story. In this section we question the economic value of the processing fees charged and the Ant "profit sharing" payments accrued to Alibaba. If Ant Financial/Alipay had charged a market rate for the transaction processing fees and escrow services, Alibaba would most likely be unprofitable.. ....even after taking into account all of the other financial silliness we've discussed above.</span><br />
<span style="background-color: white;"><span style="font-family: "times"; font-size: x-small;"><br /></span></span>
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Let's take a look at the Profit Sharing agreement with Ant Note 4(a) - F-40<br />
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<i><span style="color: blue;">Profit sharing is recorded as the sum of an expense reimbursement plus 37.5% of the consolidated pre-tax income of Ant Financial, subject to certain adjustments. </span></i><br />
<i><span style="color: blue;"><br /></span></i>
<i><span style="color: blue;">Income in connection with the Profit Share Payments, net of costs incurred by the Company, of RMB1,122 million, RMB2,086 million and RMB3,444 million, were recorded in other income, net in the consolidated income statements for the years ended March 31, 2016, 2017 and 2018, respectively (Notes 6 and 21).</span></i><br />
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F-84 - Financial Transactions with Ant Financial and its Affiliates.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgS7ZcDGw-vRPdJOgWCSVbuLQxf0exFFzt4dtHKu87NAws1woI8GzF32D9QSebwSug2Rn7xRmzbotEGjesjzIQzdYQ5uwYMhK1MAlQU9NXce5MrxI-sh2agku-hi5CD0pADJWT7yDMt0po/s1600/Ant_Financial_Transactions_2018-20-F.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="242" data-original-width="894" height="173" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgS7ZcDGw-vRPdJOgWCSVbuLQxf0exFFzt4dtHKu87NAws1woI8GzF32D9QSebwSug2Rn7xRmzbotEGjesjzIQzdYQ5uwYMhK1MAlQU9NXce5MrxI-sh2agku-hi5CD0pADJWT7yDMt0po/s640/Ant_Financial_Transactions_2018-20-F.png" width="640" /></a></div>
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<ul style="text-align: left;">
<li>We can infer, as long as the offsets are immaterial, that Ant Financial's pre-Tax Profits are roughly RMB 9.184 Billion (RMB 3.444 Billion/37.5%) or US$ 1.463 Billion. (Let's call it an even US$ 1 Billion after tax to keep things simple.) This would seem to me to make <a href="https://www.cnbc.com/2018/05/29/chinas-ant-financial-raises-10-billion-at-150-billion-valuation.html"><span style="color: blue;"><b>Ant's US $150 billion contemplated valuation</b></span> </a>a bit rich at a 150 P/E. (American Express has a P/E (ttm) of about 25) </li>
<li>We can infer that Ant made SME loans in the prior year of RMB 38.240 Billion (RMB 956 Million /2.5%) or roughly US$ 6 Billion.</li>
<li>We can infer that the Alipay payment processing fee ratio, if all Alibaba GMV is processed by Alipay, as is generally professed, is roughly 0.13% of all Alibaba transactions (RMB 6.295 Billion/GMV of RMB 4.820 Trillion) in 2018. This seems like a pretty sweet deal to me since the American Express Service fee, for example, generally runs between 1.5% and 4% depending on the merchant. Based on Alibaba's current income, if Alipay charged a market rate for the processing fees, Alibaba would likely be unprofitable.</li>
<li>We also see that the Alipay fee as a percent of total GMV seems to be declining every year. The fee was 0.15% in 2017 and 0.16% in 2016. </li>
</ul>
<div>
Finally, it's no secret that <a href="https://deep-throat-ipo.blogspot.com/2018/04/the-new-phone-books-herethe-new-phone.html"><span style="color: blue;"><b>China's money supply and debt levels have gone through the roof </b></span></a>over the last few years. We're told by Alibaba Management that Ant/Alipay have apparently ridden the tsunami of new money far into the curl. Sadly, when money expands like this, defaults, credit issues, tighter underwriting, Non-Performing Loans and write offs are always soon to follow. It's inevitable.<br />
<br />
Even though Ant/Alipay is an integral part of the Alibaba ecosystem, Alibaba management has never felt obligated to disclose even the most rudimentary financial information for Ant/Alipay. We might argue that neither Ant/Alipay nor Alibaba could exist as they are currently constituted (as silly as that sounds) without the other, yet US Investors in Alibaba only know half of the story.....if that....<br />
<br /></div>
<b><u><span style="font-size: large;">Audit Fees </span>(Pg 225)</u></b><br />
<b><u><br /></u></b>
<b><u><span style="color: red;">Executive Summary:</span></u></b><br />
<b><u><br /></u></b>
<span style="color: red;">You couldn't successfully audit a good sized publicly held, domestic US Car Dealership for the fees that PWC Hong Kong charges to audit a global enterprise like Alibaba </span><br />
<br />
I have no idea how PWC can audit this mess for the fees they charge. Every year, the hours of work required expand geometrically and the fees come in at about what you'd charge to audit a large US/Domestic publicly traded Car Dealership. Keep this in mind, Alibaba now has 920 Operating Units (Did I mention that?) scattered all over the globe, a massive Capital Structure "Enhancement", with many of these WFOE's and VIE's located in the PRC and all of these entities are audited from the PWC Hong Kong office. If I were trying to audit this we'd have substantial travel, staff time and training on both IFRS and GAAP accounting treatment and methods. All to be researched and applied to myriad business combinations, sales, mergers and divestitures. Incredibly, PWC Hong Kong does the whole thing, including tax services and consulting for US$12.8 million dollars ($13,900 per business unit @ US$12.8 million/920), up from US$ 8.4 Million the prior year. PWC is the the new "Dollar Store" of public accounting.<br />
<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhQFai84VBruGV82e18xYEDbGJ0dUDWBK32fWW0uJca0wM2xpc1dlS9i5xI05U8A-VbjEoLzedTH7NgdzGKDhIEf8W6epsCqegFhi9voNer-twF7ptic_EkcNyu7LBcwhLCypCUg_aYWtI/s1600/BABA_Audit_Fees_2018A.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="366" data-original-width="1171" height="200" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhQFai84VBruGV82e18xYEDbGJ0dUDWBK32fWW0uJca0wM2xpc1dlS9i5xI05U8A-VbjEoLzedTH7NgdzGKDhIEf8W6epsCqegFhi9voNer-twF7ptic_EkcNyu7LBcwhLCypCUg_aYWtI/s640/BABA_Audit_Fees_2018A.png" width="640" /></a></div>
<br />
<br />
<b><span style="font-size: large;"><u>Share-Based Compensation</u></span></b><br />
<b><span style="font-size: large;"><u><br /></u></span></b>
<b><span style="color: red; font-size: medium;"><u>Executive Summary:</u></span></b><br />
<span style="color: red;"><br /></span>
<span style="color: red;">Last year, if SBC were handed out on a pro-rata basis, Alibaba would have issued the equivalent value of $116,000 to every one of its 66,000 full time employees. (42,565,654 shares at US$180/share)</span><br />
<br />
When we look at the amount of Share-Based Compensation handed out to just about anyone with a pulse or any sort of a relationship with the Alibaba ecosystem we are amazed. In 2018 SBC expense was US$3.201 Billion, a 25% increase from the prior year representing roughly a third of the company's Net Income. I'd challenge my readers to show me any other mature business that has ever delivered SBC to their "ecosystem" employees in amounts or value anything close to this level. In 2018, 42,565,654 new shares were issued (Described on F-10) at a current value of US$7.662 Billion (@ US$180/share)<br />
<br />
If every one of Alibaba's 66,000 employees received a pro-rata distribution of these shares, the average SBC "bonus" would be US$116,000 per employee. Again, it's no wonder everyone wants to work at Alibaba!<br />
The financial equation/math for the above calculation is: SBC x <span style="font-size: x-large;">∞</span> = WTF<br />
<br />
<br />
<b><u><span style="font-size: large;">Conclusion</span></u></b><br />
<b><u><span style="font-size: large;"><br /></span></u></b>
<b><u><span style="color: red; font-size: medium;">Executive Summary:</span></u></b><br />
<span style="color: red;"><br /></span><span style="color: red;">1.) This financial cancer is everywhere. Western Markets are screwed. The outcome is certain and the party is over. At some point in the indeterminable future, the world will be tasked with cleaning up the mess.</span><br />
<span style="color: red;"><br /></span>
<span style="color: red;">2.) Oddly enough....you can't short Alibaba.....yet.</span><br />
<b><u><span style="font-size: large;"><br /></span></u></b>
Alibaba Management is somehow increasing the length and content of their 20-F's, yet, incredibly, they seem to disclose and communicate an even smaller snippet of "meaningful" financial information every year. In fact, there's no longer any doubt in my mind, that they actually go out of their way to deliver ever larger bales of content-free financial silliness. They are not "unfamiliar with Western Financial Reporting Conventions" or doing things "the way they do it in China" as some pundits would have us believe. Math is math no matter where you are on the planet. Gravity is the same whether you are in London, New York or Beijing. Alibaba Managers are in fact masters of manipulation, bending the truth brilliantly to suit their needs. Perhaps they are banking on the premise that nobody actually reads their filings/drivel anyway? (The SEC staff doesn't seem all that concerned!)<br />
<div>
<br /></div>
If, by some strange, impossible happenstance, I'm completely, totally wrong.... and Alibaba isn't actually the tip of the spear for the CCP's full frontal assault on the Western Financial System, the only other conclusion I can possibly come to is that Alibaba the goofiest, most convoluted, opaque, mis-managed accounting mess and business structure in history. That, unfortunately, is the "best case" scenario.<br />
<br />
Yet, Alibaba (BABA) continues to trade higher as increasing numbers of shares find their way into US Financial/Custodial Institutions. Because its value, like the RMB, at least for a time, is pegged/driven by the CCP through off-shore mechanisms, the risk of collapse grows larger by the day. At some point it all has to come tumbling down. But when? That's the immediate, multi-trillion-dollar question.<br />
<br />
The next, more cerebral, philosophical question that we have to ask ourselves is:<br />
<br />
"<i>Why in the world do we even bother with Public Accountants, Audits and the SEC.... or any financial regulation at all for that matter?" </i><br />
<br />
I'm serious, why bother? Let's just take our stock picks from our airport taxi driver or bar tender and be done with it. These silly "stamps of approval" and mountains of gyrating, made-up paperwork just give untrained, novice, dufus investors a false sense of security anyway. "It must be ok!...it's audited...and it's listed on a major exchange!"<br />
<br />
We're investing in a brave new world right now. Why don't we just openly acknowledge that it's OK for management to put anything they want in a financial statement as long as they smile and sell it with a straight face during the investor call. Auditors, Analysts and Regulators passively do what they're told. They don't want to rock the boat (or lose their jobs)....so they sign off on just about anything that's put in front of them, no matter how absurd it is. It's just easier that way....conflict is tough.<br />
<br />
Of course, the genesis of all of this crime and (lack of) punishment rests on our long held understanding that there are, and will always be, minimal (if any) repercussions for financial scam artists and con men. Only the most egregious/obvious non-politically-connected, domestic fraudsters, within the reach of US Regulatory jurisdiction, ever go to jail. And even then, if the crooks are naive or unlucky enough to get caught with their hands in the till, with proper planning, they are most likely set for life with a pile offshore/island money anyway. Even as the doors to the gray-bar resort-hotel and spa slam shut behind them.....usually for only a few months with good behavior and a couple of appeals, they begin planning their book tours, locating new funding and with luck, a Netflix series if all goes according to plan.<br />
<br />
That said, don't worry about Jack, Joe, Maggie, Daniel and the good old boys at the Big Banks, PWC or the SEC....I'm sure they'll all be fine.<br />
<br />
<b><u>FINAL NOTE: YOU CAN'T SHORT THIS BEAST!</u></b><br />
<br />
In anticipation of the question that I'm always asked whenever I comment on BABA .... I'll say it again....You can't short this stock until there are clear signs that the CCP is capitulating. None of those signs are present yet. The CCP/PBOC has the other side of your trade. This ain't your normal, everyday, fraud. It's a conspiracy that spans the globe.<br />
<br />
Like the RMB, because of the offshore price support, Alibaba could hold steady in its current trading range for the foreseeable future...or it could go to $300. I promise, I'll let you know when Xi has thrown in the towel. Again, from what I can see, we're still a long way off.<br />
<br />
Alternatively, if US Regulators, Policy Wonks, Bankers and Politicians don't wise up.....Xi won't be the one tossing in the towel....<br />
<br />
<br />
<b><span style="font-size: large;"><u>Additional Reading</u></span></b><br />
<br />
The 2018 Alibaba 20-F<br />
<a href="https://www.sec.gov/Archives/edgar/data/1577552/000104746918005257/a2235254z20-f.htm#balance"><span style="color: blue;">https://www.sec.gov/Archives/edgar/data/1577552/000104746918005257/a2235254z20-f.htm#balance</span></a><br />
<br />
The 2017 Alibaba 20-F<br />
<a href="https://www.sec.gov/Archives/edgar/data/1577552/000104746917004019/a2231121z20-f.htm"><span style="color: blue;">https://www.sec.gov/Archives/edgar/data/1577552/000104746917004019/a2231121z20-f.htm</span></a><br />
<br />
<br /></div>
</div>
</div>
Deep Throathttp://www.blogger.com/profile/02712515268051858186noreply@blogger.com42tag:blogger.com,1999:blog-7478408299955066555.post-83701036948318046142018-07-24T00:25:00.000-04:002018-07-29T10:47:41.089-04:00The Folly of Tariffs on Chinese Goods..... <div dir="ltr" style="text-align: left;" trbidi="on">
I had initially thought I'd be doing a post about Alibaba's 20-F Annual Report right about now since they usually file in the middle of June. Unfortunately, it's still not been filed, even though by SEC Rule, it's due by 8/1/18. Luckily, Alibaba's reality TV show accounting department, as we've learned over the years, has mastered the art of suspense and slight-of-hand, always revealing amazing, incredible information at the eleventh hour, when the market least expects it.<br />
<br />
Since they are taking so long to get it done I'm sure this filing will be an absolute masterpiece! I can't wait to see what they come up with.....more gigantic gains from new asset valuations? Hundreds of newly formed off-shore money laundering "investees"? Giant CCP funded stock buy-backs? Brand new classes of stock issued, allowing even more investors all over the globe to get in on the ground floor of this unstoppable beast? Perhaps E-Commerce in Antarctica? A distribution hub ecosystem at McMurdo base? My heart's a flutter with anticipation!<br />
<br />
On the other hand, when you're just "makin' shit up" we might wonder why it's taking so long to prepare the report in the first place?<br />
<br />
Anyway, since the 20-F isn't out and I've got some free time after a wonderful, refreshing Canadian sailing vacation, visiting some friends across Lake Erie, I thought I'd take a few pages to tackle the gory details of our relatively new, wag-the-dog, easy to win TRADE WAR!!!!<br />
<br />
<br />
<b><u><span style="font-size: large;">THE TRADE WAR!!!!!! </span></u></b><br />
<br />
Let's start, by way of background, on the political and economic policy that got us to where we are today.<br />
<br />
The best example of the driving force and philosophy behind our escalating trade war and Section 301 Case with China (and to some extent the world) is Peter Navarro's June 2018 tome entitled:<br />
<br />
<b><u>How China’s Economic Aggression
Threatens the Technologies
and Intellectual Property of the
United States and the World</u></b><br />
<br />
Since the title of this report, issued on White House letterhead, scared the living crap out of me, I thought best that I read it in its entirety. I'd invite you to do the same.<br />
<br />
<a href="https://www.whitehouse.gov/wp-content/uploads/2018/06/FINAL-China-Technology-Report-6.18.18-PDF.pdf"><b><span style="color: blue;">https://www.whitehouse.gov/wp-content/uploads/2018/06/FINAL-China-Technology-Report-6.18.18-PDF.pdf</span></b></a><br />
<br />
As you can see, it's a lengthy piece with roughly 20 pages of allegations, 150 footnotes and a 30 page Appendix documenting China's decade of "cheating" and economic atrocities that the rest of the world has, unfortunately, allowed to happen. According to Navarro, China is apparently the West's financial version of a "smokin' hot bad girlfriend" who keeps getting drunk and maxing out our credit cards on spas, handbags and designer clothes. We tolerate it for a while because she's smokin' hot....but eventually, we have to move on.<br />
<br />
Navarro did a great job of documenting exactly what's been happening. Whether it be outright IP Theft, Acquisitions, Counterfeiting, Reverse Engineering, etc. Mr. Navarro points out, for lack of a better descriptor, that China has been, kicking America's technology-ass for about a decade. Because I'm on a mixed-metaphoric roll today, like the guy who's been playing and losing the shell game, the administration has finally taken the time to describe how, once enlightened, they've discovered that there was never a "pea" under any of the shells in the first place. (Our "smokin' hot BGF" has, of course, had her deceptive little hand on the shells the entire time.)<br />
<br />
For example, after Apple contracts with FOXCONN to manufacture all of their products on mainland China, should we really be surprised when ZTE, Huawei and Lenovo start selling devices that look and feel exactly like iPhones for half the price? (Author's Note: I actually Like my Moto Z-Force 2 better than my wife's iPhone) It also should be no surprise that Chinese software seems to have the same code that was initially designed by US developers, prior to the CCP persuading those same, US educated developers to quit working at Google and "come home". Should we be shocked and dismayed to see every US and EU luxury brand for sale on Amazon, for pennies on the dollar, through third party off-shore sponsored store fronts? When we search "GUCCI bags" on Amazon we get <a href="https://www.amazon.com/s/ref=sr_blf_1_14?fst=fsl%3AGucci..GG&rh=i%3Afashion%2Cn%3A7141123011%2Ck%3Agucci+bag%2Cp_89%3AGucci..GG&sort=price-asc-rank&keywords=gucci+bag&ie=UTF8&qid=1531878211"><span style="color: blue;">lots of items that look just like the real thing</span></a> (from third party store fronts littered with grammar and spelling mistakes) on sale for under $50! Awesome!<br />
<br />
Taking it further, if you follow my blog, you know I believe that most Chinese financial statements should begin with "Once upon a time" and these misrepresentations have caused roughly $2 Trillion of Western Capital (Stocks, Bonds & Debt) to be misallocated to businesses of, to be kind, dubious value.<br />
<br />
When we look at real estate in China we see miles of vacant cities, fake towns and goofy decaying facades all designed to conjure an image of wealth and prosperity. We see "Little Manhattan", "Florentina" (or "little Florence"), the Hangzhou "White House", several Eiffel Towers and at least two near full size replicas of Niagara Falls. Are we really to believe that this vacant opulence is representative of the China dream? The CCP has inexplicably chosen these odd, non-productive, easy-to-do, uses of capital over <a href="https://www.scmp.com/news/china/society/article/2139244/beijing-air-quality-returns-hazardous-levels-sandstorms-and-smog"><b><span style="color: blue;">cleaning up the air in Beijing</span></b></a> or providing <a href="https://unearthed.greenpeace.org/2017/06/01/china-water-quality-data-shanghai-beijing/"><span style="color: blue;"><b>drinkable water</b></span></a> to their population.<br />
<b><br /></b>
<a href="https://www.chinaghostcities.com/"><span style="color: blue;"><b>https://www.chinaghostcities.com/</b></span></a><br />
<br />
In one breath the CCP/NBS reports rock solid 7%-ish GDP growth, like clockwork, yet they somehow stumble onto an extra <span style="color: blue;"><b><span style="color: blue;"><a href="https://deep-throat-ipo.blogspot.com/2017/10/the-sum-of-all-fearsand-few-related.html"><span style="color: blue;">$23 Trillion (Nearly twice the equivalent of the entire US Money Supply-M2) in Shadow Bank debt that they didn't know they had</span></a>?</span> </b></span> That's a hell of an "Ooppsss"!<br />
<br />
Given the above, we really have to ask ourselves, is anything the CCP does or says even remotely credible? What, if anything, can we believe? Again, these anomalies are not an accident. These are brilliant people who know exactly what they are doing and understand the costs, risks and benefits of their actions and misrepresentations. Yet, we Westerners are surprised that our technology and capital is flowing unabated into China by any means necessary? Really? From my perspective as an insurance man, it seems to me that we've left our "technology car" running with the keys in it, seemingly abandoned in a parking lot in a bad neighborhood for a couple of days and upon our return, we can't believe that it was stolen!<br />
<br />
Unlike most Administration communication, Mr. Navarro's work wasn't initially <i>Tweeted</i>, nor was it punctuated with smiley faces, exclamation marks and/or written in ALL CAPS. IMO this new, out of character delivery style really enhanced the report's credibility and emphasized the importance of this document. It was actually pretty well done.<br />
<br />
All that said, unfortunately, there was really nothing new in Mr. Navarro's report. The report was a compendium of complaints, anecdotes and violations, nearly all of which had been published and described in the various financial press referenced and properly cited in the 150+ footnotes. Anyone who's been following this has at least some recollection of most/all of these entries, events and footnotes. I'm also really hoping that there are actually vast treasure troves of "top secret" additional government data/research that further justifies Mr. Navarro's views on tariffs and the intended impact on our relationship with the Chinese, but I have my doubts.<br />
<br />
Now let's take a look at what our Congressmen and Senators have been taught to think.<br />
<br />
<br />
<b><u><span style="font-size: large;">Congressional Research Service
7-5700 (www.crs.gov) RL33536</span></u></b><br />
<br />
Probably the best source to get info on topics near and dear to our Congressional hearts and minds is the Congressional Research Service (CRS). This non-partisan army of roughly 600 Economists, Lawyers & Scientists with a $100 million plus budget, provides the nuts & bolts analysis of the issues (and talking points) for our legislators so they can wrap their minds around complex topics that, to be frank, you have to be brilliant to even begin to understand. The CRS, in essence, is the "brain" of our legislative leadership. Their work is essential. It's their job, generally, to let our Senators and Congressman know what might (or might not) happen if they pass (or don't pass) specific legislation.<br />
<br />
The link below is a list of some of the things they've recently been involved in. They provide background on everything from Supreme Court nominees to Energy Policy. It's fascinating stuff.....<br />
<br />
<a href="https://fas.org/sgp/crs/misc/index.html"><span style="color: blue;"><b>https://fas.org/sgp/crs/misc/index.html</b></span></a><br />
<br />
Anyway, the author of <span style="color: blue;"><a href="https://fas.org/sgp/crs/row/RL33536.pdf"><b><span style="color: blue;">RL33536 - US-China Trade Issues</span></b></a>,</span> is an extremely talented, highly educated, experienced gentleman by the name of Wayne Morrison (WMorrison@crs.loc.gov). I'd invite you to read the report in its entirety. It's great work.<br />
<br />
Of course, since the purpose of this blog is to save my readers some time and give a fresh perspective. Here are the bullet points of the report with a one line comment describing the content contained in the section. Feel free to reference the page number if you are intrigued.<br />
<br />
<b>Pg. 1.)</b> A Summary of the chronology of the SEC 301 Investigation which lead to the current actions the administration is taking against the Chinese Government, as first discussed in the above cited "Navarro Report".<br />
<br />
<b>Pg. 4.)</b> Summary of the development and history of US China Trade policy from 1979 to present. Excellent perspective on how we got to where we are today and the ramifications of operating under market driven rules with a closed/managed economy trading partner.<br />
<br />
<b>Pg. 17.)</b> US/China Investment Flows including US Securities and FDI. Detailed data/tables describing the amount of public & private capital flows and significant investments. <br />
<br />
<b>Pg. 30.)</b> US/China Trade Issues and "State" Capitalism. Analysis of SOE impact on the global stage.<br />
<br />
<b>Pg. 56.)</b> China's Currency Policy. A very brief, and in my view, incomplete overview of how China's managed currency can impact trade.<br />
<br />
<b>Pg. 58.)</b> The Trump Approach. The 2017 National Security Strategy Report describes a number of economic policies which the administration objected to as well as possible responses and subsequent negotiations.<br />
<br />
<b>Pg. 60.)</b> The "301" Case. Details on the various retaliatory tariffs potential economic costs of implementation and escalation.<br />
<br />
<b>Pg. 74.)</b> Made in China 2025. An analysis of the various initiatives which the Chinese government is implementing in order to become a world technology leader and preeminent world economic power.<br />
<br />
<div>
I hope you took the time to read the report. Again, it's an outstanding piece of analysis.</div>
<div>
<br /></div>
<div>
That said, just for fun, now, let's pretend we are Senators or Congressmen/Congresswomen for a moment. What's the first thing I would ask after reading the report? That's right! I'd ask myself "If I get on board the tariff train, how many votes will it get/cost me?" </div>
<div>
<br /></div>
<div>
To answer this question we can start with Figure 18 (Pg. 69). For every round of 25% tariffs on every $150 Billion of Imports the US would lose 587,000 non-manufacturing jobs (retail/delivery/ warehouse/office/etc.) and gain 132,000 manufacturing jobs. If we extrapolate with "simple math" ...(You folks know how I love "simple math"), since <a href="https://www.bloomberg.com/news/articles/2018-07-20/trump-says-he-s-ready-to-go-with-tariffs-on-all-china-imports"><span style="color: blue;"><b>we're talking about $500 Billion in tariff eligible goods now</b></span></a>, we can guess that 1.97 million (500/150 x 587,000) non-manufacturing jobs might be in jeopardy. The good news is that we'd gain 440,000 manufacturing jobs. </div>
<div>
<br /></div>
<div>
Simple math tells us that the political impact of 440,000 employed (happy) voters would be more than offset by the 1.97 million unemployed (pissed off) voters. </div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhp8jPAZZqwSgueOsy2I2fArzn1dJhinc3CnxBAj9uoqo8GPden80K_4Kb8q2lvHUxNehHRk473Dt3T1H_N_P_HO1JYX1hCYrFeQyxGP3Mtbsl9yF8ARNQfKzkT9bddYM9OOAc4LZiUhnw/s1600/CRS_301_Job_Loss.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="392" data-original-width="466" height="538" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhp8jPAZZqwSgueOsy2I2fArzn1dJhinc3CnxBAj9uoqo8GPden80K_4Kb8q2lvHUxNehHRk473Dt3T1H_N_P_HO1JYX1hCYrFeQyxGP3Mtbsl9yF8ARNQfKzkT9bddYM9OOAc4LZiUhnw/s640/CRS_301_Job_Loss.png" width="640" /></a></div>
Under the above $150 Billion retaliatory scenario the report concludes the following:<br />
<br />
<ul style="text-align: left;">
<li>U.S. GDP could fall by 0.26% or $49.2 billion (2016 dollars); </li>
<li>Farm property income could fall by 15.01% (Farmers always get screwed in America);</li>
<li>U.S. exports and imports could drop by $105.5 billion and $341.2 billion,
respectively (2016 dollars)</li>
</ul>
So now let's see which states might be most impacted if we go down the "easy to win" trade war path. Although the chart below only reflects a $30.6 Billion reduction in export losses and expected retaliation (rather than the $105.5 Billion described above) we can again rely on "simple math" to extrapolate. The states most impacted are described in Figure 19 (Pg. 70) below:<br />
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiRxoKZzxqp7WAelbCmPW5iYjRu4K9KdpUQC7eCp2NoH4a6yuWFMIdHby1GeEGX9HZnABjtdkGIvCSvviM1kh6RbldknY7sq-tRIPmr-cqCmDxxe1r6datWp8F9AONX-uWWsangpVemmJY/s1600/CRS_10_States.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="331" data-original-width="456" height="464" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiRxoKZzxqp7WAelbCmPW5iYjRu4K9KdpUQC7eCp2NoH4a6yuWFMIdHby1GeEGX9HZnABjtdkGIvCSvviM1kh6RbldknY7sq-tRIPmr-cqCmDxxe1r6datWp8F9AONX-uWWsangpVemmJY/s640/CRS_10_States.png" width="640" /></a></div>
Now let's take a look at the Senators that you'd think would be leading the bipartisan charge to prevent this tariff folly (I'll explain why this is "folly" below), hoping and fighting to keep a significant number of their voters out of the unemployment lines.<br />
<br />
Louisiana - Bill Cassidy - Republican<br />
Louisiana - John Kennedy - Republican<br />
Washington - Maria Cartwell - Democrat<br />
Washington - Patty Murray - Democrat<br />
California - Diane Feinstein - Democrat<br />
California - Kamala Harris - Democrat<br />
South Carolina - Lindsey Graham - Republican<br />
South Carolina - Tim Scott - Republican<br />
Alabama - Doug Jones - Democrat<br />
Alabama - Richard Shelby - Democrat<br />
Illinois - Tammy Duckworth - Democrat<br />
Illinois - Dick Durbin - Democrat<br />
Texas - John Cornyn - Republican<br />
Texas - Ted Cruz - Republican<br />
Kentucky - Mitch McConnell - Republican<br />
Kentucky - Rand Paul - Republican<br />
Michigan - Gary Peters - Democrat<br />
Michigan - Debbie Stabenow - Democrat<br />
Ohio - Sherrod Brown - Democrat<br />
Ohio - Rob Portman - Republican<br />
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You can, of course, also put the dozens of related House Reps into in mix. I might also consider throwing John Boozman and Tom Cotton on the list (Arkansas Republicans) since I doubt Walmart management would be all that supportive of a 25% cost increase. (See: <a href="https://deep-throat-ipo.blogspot.com/2018/05/amazon-walmartchinese-potting-soiland.html"><span style="color: blue;"><b>Amazon, Walmart and Chinese Potting Soil.....</b></span></a>). Hypothetically, I'd also guess that Amazon management would probably be fully on board with a full blown trade war. The broad brush rationale is that much of the stuff/junk for sale on the Amazon platform is knock-off product sourced from and sold on questionable storefronts, beyond the reach, or under the radar of US Regulation & Enforcement. (<a href="https://deep-throat-ipo.blogspot.com/2016/10/cheap-reading-glasses-handbagsand.html"><span style="color: blue;"><b>Tariffs aren't paid on smuggled goods</b></span></a>) and, like stopping illegal immigration and securing our border, the cost of the enforcement effort is YUGE! As a result, Amazon market share, albeit of a shrinking pie, might well increase as a result of increased tariffs and a trade war.<br />
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From a legislators perspective, a Tariff is a silent, regressive tax that raises the ire of their constituents. In fact, tariffs might be one of the most regressive forms of silent taxation available to a government, right up there with excise taxes on fuel (buried in the pump price or utility bill) and sales taxes on food and clothing (unavoidable at the register). The Tariff (or increased cost on competing domestic good) in the end, is always paid by the consumer, unless they choose to go without the product all together. The Tariff/tax is always a much greater burden on those less well off folks who consume all (or more than all) of their income when compared to wealthier consumers. In any case, because of the regressive nature of Tariffs, the end game is two fold: 1.) If demand is relatively inelastic, like with food and fuel, the Tariff/tax hits the poor harder, a reverse Robin Hood effect, if you will, potentially taking from the poor and funding, for example, an income tax cut for the 1%.... and; 2.) If demand is relatively elastic, (i.e. discretionary purchases like new cars, flat screen TV's, etc.) a Tariff causes consumers to buy less of a good, or simply not to buy it at all. Which would, of course, be recessionary.<br />
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The recessionary trade war "double whammy" here, of course, is that as consumer prices are going up, jobs are going away.<br />
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Moreover, the even more insidious "triple whammy" is that as these recessionary price increases and job losses accelerate, they would be occurring in the teeth of the FED tightening. No wonder the Administration (like every administration) has been <a href="https://www.cnbc.com/2018/07/19/trump-lays-into-the-fed-says-hes-not-thrilled-about-interest-rate-.html"><span style="color: blue;"><b>railing against the prospect of higher interest rates</b></span></a>. The danger here, as history has shown, is that the FED is always fighting the last war. Based on Chairman Powell's latest testimony, there's a good chance that the FOMC will misread the signals being sent by our "fake" economy and in a Volker-esque show of determination, continue to raise rates well into a "<a href="https://www.linkedin.com/pulse/our-biggest-economic-social-political-issue-two-economies-ray-dalio"><span style="color: blue;"><b>Bottom 60%</b></span></a>" recession while the "Top 40%" seemingly continues to thrive. <br />
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To sum it up, legislators generally don't like, or tolerate, recessionary policy which smacks their constituents around. So we can expect quite a Congressional brouhaha coming over the next few months. Simple enough?....Yes? No?<br />
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Of course, as US Prices go up and US Consumers buy less, Chinese sweat shops and factories will make fewer American goods. If the CCP can't find other markets for their output a few Chinese workers might lose their jobs and slip back into poverty. Some Chinese children will have their production line hours and quotas cut back or may even be sent home when the Walmart, Nike and iPhone orders slide. As I've opined for years, this really isn't a problem for the CCP, they will mitigate the impact by printing more money, kicking the can down the road and keeping people busy hitting their arbitrary 7% GDP target by hook or by crook. The Communist Party bosses have a tremendous advantage over our silly democratically elected leadership. China's citizens must silently accept their fate. They don't have a vote. <br />
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<b><u><span style="font-size: large;">The Currency and the "Folly"</span></u></b><br />
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Here's the problem. With a few exceptions/limitations, the US$ (as well as the Euro, Yen & Pound) can all be converted to any other major currency, at anytime, at any bank, anywhere in the world, at a market rate. The currency value (exchange rate) is calculated by bankers based solely on the available supply/demand of the currency as well as the perceived prospects or "intrinsic value" of the issuing government's underlying economy. The currency is backed by the "full faith and credit" of the issuing Central Bank. Governments, through their Central Banks, of course, intervene from time to time, but in general, market forces determine the exchange rate. Just like every other major currency (except for one), the dollar "floats".<br />
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I'm trying to be clear here, because even though he's brilliant, Mr. Morrison missed something really, really important in his report to Congress. I've copied him on this post so I'm hoping he updates his report and passes this critically important information along to our legislators. Here it is:<br />
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<span style="font-size: large;"><b>The RMB DOES NOT FLOAT!</b></span></div>
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<span style="font-family: inherit; font-size: small;">As I've mentioned <a href="https://deep-throat-ipo.blogspot.com/2018/04/the-new-phone-books-herethe-new-phone.html"><span style="color: blue;"><b>many times in this blog</b></span></a> the exchange rate (RMB valuation) is absolutely and intentionally bloated. The RMB exchange rate is based on a fraction of China's Money Supply which, like the fake facades of the "Little Manhattan" skyline and "Florentina", is intended to create a grotesque distortion of the real Chinese economy and national wealth. </span><br />
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<span style="font-family: inherit; font-size: small;">One statistic I like to keep track of is the "Offshore RMB" (ORMB) in circulation as compared to China's M3. It's an indicator of the PBOC's ability to peg the value to a target.</span><br />
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<span style="font-family: inherit; font-size: small;">In March of 2015, when the Offshore RMB hit its peak, the stockpile of Offshore RMB hit 1.8T RMB, compared to China's total M3 of 126T RMB. In other words, 1.4% of China's Money Supply was usable to close offshore transactions in March of 2015. Today, we see that China's M3 has ballooned to 174T RMB, a 46% increase in just three years, while the ORMB has actually decreased to less than 1.1T RMB today. The ratio of ORMB to China's M3 has actually decreased to 0.6%, again making it possible to set a fictitious, inflated value for the currency with minimal ongoing intervention. </span><br />
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<span style="font-family: inherit; font-size: small;">The FRED chart below (which I've published variations of in prior posts) illustrates the absurdity of this condition.</span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjOh7EY5RQb6ZZttSxiuhBCHSfXEfKM9KzISiTiviE2mxKm5b1o5sYn6O_QzXKo4JH8HKDylmxQJSK-4SNYjO4lbepO7ml9TXNlbQpBzhwvipuJMrE9-aVJcj7sIQwJ0U-HBLSvqpMSZCM/s1600/FRED_China_vs_US_M3.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="683" data-original-width="1058" height="409" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjOh7EY5RQb6ZZttSxiuhBCHSfXEfKM9KzISiTiviE2mxKm5b1o5sYn6O_QzXKo4JH8HKDylmxQJSK-4SNYjO4lbepO7ml9TXNlbQpBzhwvipuJMrE9-aVJcj7sIQwJ0U-HBLSvqpMSZCM/s640/FRED_China_vs_US_M3.png" width="640" /></a></div>
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<span style="font-family: inherit; font-size: small;">Even though China's M3 has increased 252.7% (<span style="color: red;"><b>Red line</b></span>) from 1/1/2009, compared to an increase in US M3 of "only" 69.7% (<span style="color: blue;"><b>Blue line</b></span>), the RMB has actually appreciated 2.2% (6.68 vs 6.83 - <b>Black line)</b> during the same period.</span><br />
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<span style="font-family: inherit; font-size: small;">The ramifications for this are, in the words of our administration....YUGE!</span><br />
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<span style="font-family: inherit; font-size: small;"><br /></span><span style="font-family: inherit; font-size: small;">Simply put, the reason US Tariffs on Chinese goods are a "folly" is that because of their managed/off-shore "dual" currency mechanism, the PBOC has printed (and continues to print) enough <span style="color: blue;"><b><i><a href="https://deep-throat-ipo.blogspot.com/2016/03/monopoly-money.html">Mao-nopoly</a> money</i></b></span> to pay any tariffs we choose to levy, or in fact, "buy" just about anything their little communist hearts desire without impacting the mainland economy. As expected, on cue, when the President announced he was considering expanding tariffs to all $500 Billion of Chinese imports the PBOC immediately announced an "Are you sure you want to do that? shot-across-the-bow" offsetting depreciation, roughly the equivalent of the current tariffs. </span> </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjBczkWAykeswTZSZOermjpAg5ATK_ysYfEvckniwRjRBTb-c3yhqX4ked99oNBnblH5RbYqrktHy-HG8Ie8VnwRHWTlvnmKKee6_IMIHaonBf5ZcaCVnC2p7amRK0FMOi1bc7roHoTKR4/s1600/WSJ_Dropping_Like_+Rock.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="483" data-original-width="413" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjBczkWAykeswTZSZOermjpAg5ATK_ysYfEvckniwRjRBTb-c3yhqX4ked99oNBnblH5RbYqrktHy-HG8Ie8VnwRHWTlvnmKKee6_IMIHaonBf5ZcaCVnC2p7amRK0FMOi1bc7roHoTKR4/s640/WSJ_Dropping_Like_+Rock.png" width="544" /></a></div>
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The reality is that the PBOC indeed has been manipulating the RMB for years, but not the way the administration thinks. Rather than intentionally weakening the RMB, they've been fighting tooth and nail to protect its value in the wake of the YUGE! expansion of their money supply. Think of the wealth that's been created over the last decade simply by tripling the money supply over the last few years while keeping the exchange rate constant. During the period above, on a converted US Dollar basis, China's M3 increased from US$7.2T in 2009 to US$27.4T while US M3 has increased from US$8.2T to US$14.0T. I've asked this before, but why in the name of Milton Friedman does the Chinese Economy require so much currency (twice the value of US M3) to run effectively? Again, the <i>simple math</i> tells us that it doesn't. <i>Simple math</i> tells us that, if it wasn't for the managed dual onshore/offshore currency the value of the RMB would/should be somewhere around a third of what it is today. If it wasn't for the iron clad SAFE controls and offshore restrictions, Chinese citizens, businesses and banks would be converting RMB to assets denominated in other major currencies at a breakneck pace. <br />
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In any case, what we're talking about now is semantics. We all know what's going to happen, but as Warren Buffett often quips, "We just don't know when or how big it will be.". Traders and the talking heads have proclaimed (last week) that we are on the brink of a full blown <a href="https://www.bloomberg.com/news/articles/2018-07-20/currency-war-erupts-as-trump-blasts-china-eu-for-manipulating"><span style="color: blue;"><b>currency war</b></span></a>. Economists describe all sorts of process metrics and theoretical machinations whereby financial asset classes eventually find their intrinsic value. Financiers describe the intervention methods Central Bankers use to manage their respective money supplies. The White House Tweets about the RMB "Dropping like a rock!" In any case, that seems to be where we're headed.<br />
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As I've said many times before, the PBOC will fight like a pack of rabid dogs to prop up the RMB value using any means necessary, including redoubling the onshore money supply and tightening offshore (usable) currency. So we'll see how far this revaluation/depreciation goes. It might stop at 8:1.....or <i>simple math</i>, and history (<a href="https://deep-throat-ipo.blogspot.com/2018/04/the-new-phone-books-herethe-new-phone.html"><b><span style="color: blue;">the Weimar Republic</span></b></a>), or even today's candidate for "Currency mis-manager of the year", the Venezuelan Central Bank <a href="https://www.bloomberg.com/news/articles/2018-07-23/venezuela-s-inflation-to-reach-1-million-percent-imf-forecasts"><span style="color: blue;"><b>(Hey....a million % inflation isn't so bad...)</b></span></a> tells us that there's a chance it can spiral out of control quickly. On the other hand, if the Chinese people have plenty of money, they won't think they are poor....until, of course, they start running out of food.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEieOtiprV8hszocKyax92wP6AP_iA2l6sjFA0ncr9hrVz7QUh7FZ_1nqLJtHn482I5BqyZ5AcLGmIEHaNzZ3V_qFl60n4Ol0aEclYYCmkl0ytrjnGna60mQv-lmpTa45zMNqFnQXELmfKU/s1600/hyperinflation.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="437" data-original-width="553" height="504" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEieOtiprV8hszocKyax92wP6AP_iA2l6sjFA0ncr9hrVz7QUh7FZ_1nqLJtHn482I5BqyZ5AcLGmIEHaNzZ3V_qFl60n4Ol0aEclYYCmkl0ytrjnGna60mQv-lmpTa45zMNqFnQXELmfKU/s640/hyperinflation.jpg" width="640" /></a></div>
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<b><u><span style="font-size: large;">The Economy</span></u></b><br />
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By definition, if you are reading this blog, you are familiar with the concepts and the material presented herein. Therefore, you are probably doing pretty well. Things are going great! From your point of view the economy is humming along. I'm guessing you are pretty smart, have a college education and work in a financial/professional environment. You might have some passive income, some savings, at least a few investments and generally care about your finances and the future of same. If you have followed this blog for a while, you might find this hard to believe, but we (you and I) tend to look at the world with a "glass half full" attitude. Economists might say, because of our perspective, we have an "Optimism Bias". I hate to burst your bubble, but you/we are an anomaly in America. You/we are the exception. We're not the rule.<br />
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If you are fortunate enough to own/run or be employed by a retail/service business in America, as I am, you'd have a much different perspective. If you work with America's industrious, smart, talented, working class, retired, young, poor, octogenarian, illiterate, professional, millennial, single mom, widowed, etc., etc. folks you'd conclude relatively quickly that many of them are doing everything they can....just to get by.<br />
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Oddly, when I watch/read the headlines and the financial news I see streams of blurbs nearly every day describing our "strong" and "robust" economy. The <a href="https://www.bloomberg.com/news/articles/2018-06-07/sorry-mr-president-but-best-economy-was-probably-eisenhower-s"><span style="color: blue;"><b>White House</b></span></a>, <a href="https://www.bloomberg.com/news/videos/2018-07-16/markets-are-focusing-on-strong-u-s-economy-says-abbot-downing-s-schleif-video"><span style="color: blue;"><b>Bloomberg</b></span></a>, <a href="https://view.email.fortune.com/?qs=82c7d68e16431a0d2af56f742f8267f87b287a00ba6df24a6a6ddde1851a8d1f248008e5e4e87a3b1d7319b3ac5e11962b2731c4420df2ffb717b5311a8c18991f71f8a0ec3953dd"><span style="color: blue;"><b>Fortune</b></span></a>, the <a href="https://www.wsj.com/articles/strong-spending-data-shows-u-s-economy-chugging-ahead-of-europe-and-asia-1528994914"><span style="color: blue;"><b>Wall Street Journal</b></span></a>, and even the recent <a href="https://www.federalreserve.gov/newsevents/testimony/powell20180717a.htm"><span style="color: blue;"><b>statements</b></span></a> and remarks by Jay Powell in his<b><a href="https://www.c-span.org/video/?448390-1/federal-reserve-chair-jerome-powell-testifies-monetary-policy"> <span style="color: blue;">testimony</span></a></b> before the House Financial Services Committee....and nearly everyone with a platform.... all continually marvel at the strength and resiliency of the US Economy. <br />
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The most interesting thing about this disconnect is, that the numbers don't come close to supporting the optimism/bias.<br />
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Let's start with the real wages of the good hard working folks who I've just described as "barely getting by." The chart below describes their plight.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEit3qxi1NALUL_z_ZowPijUe5JEr72cgPI3Q2j7Ti2cQHAtULCYGQCN7A8jsrIzVasHZhKgI75MitKCqwEUtMrvslo9-21FEBuzoPZzJ_2D8nrpMC6Fmv-0G-5JlZoL3WXRSJ3pRjhjzJ0/s1600/FRED_Employed_FT_Wages.png" imageanchor="1" style="clear: left; display: inline !important; float: left; margin-bottom: 1em; margin-right: 1em; text-align: center;"><img border="0" data-original-height="448" data-original-width="720" height="393" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEit3qxi1NALUL_z_ZowPijUe5JEr72cgPI3Q2j7Ti2cQHAtULCYGQCN7A8jsrIzVasHZhKgI75MitKCqwEUtMrvslo9-21FEBuzoPZzJ_2D8nrpMC6Fmv-0G-5JlZoL3WXRSJ3pRjhjzJ0/s640/FRED_Employed_FT_Wages.png" width="640" /></a>Since 2007, Median Real wages in America for folks who usually work full time have increased a whopping 4% in eleven years. Not 4% per year......4% in eleven (11) years. The wages of the American worker are barely keeping up with inflation. I will admit that there's been a bit of a recovery since 2014, but again, if an employer told you that they would guarantee you a 1% increase a year (and no more) in your paycheck....would you be salivating over the opportunity to take the job?</div>
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The talking heads also tout the "near 4%" unemployment figure indicating that the economy is running at or near full employment. I think I've even heard somewhere that the economy is running at an "all time high" or some such nonsense. </div>
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You'd think, with stagnant wage growth like we see above, that we can only assume that there are millions of folks who are unemployed or under employed......and you would be correct. </div>
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Here's the statistic I like to look at. In the chart below we calculate the percent of the total population who usually work full time, indexed to 1997. I like to look at this ratio because it calculates the the ratio of working people who are supporting non-working people, over time.</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiA-6ecG8LwkFrvAwnE9mRNxccd1O91nyisFNhpPMfM1XAG8MnLxRxrFKguqtGj4OKz4lHPuDRWe4_mroxKtT67DWJTUt0MpfO_kVibT2kMeZphC3Ob97WM8a4UCeC_hvGlLOghXzhZZpg/s1600/FRED_Employed_as_Persent_of_Population.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="453" data-original-width="714" height="403" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiA-6ecG8LwkFrvAwnE9mRNxccd1O91nyisFNhpPMfM1XAG8MnLxRxrFKguqtGj4OKz4lHPuDRWe4_mroxKtT67DWJTUt0MpfO_kVibT2kMeZphC3Ob97WM8a4UCeC_hvGlLOghXzhZZpg/s640/FRED_Employed_as_Persent_of_Population.png" width="640" /></a> </div>
As we can see, the ratio of workers to total population, after a decade of near-ZIRP interest rates, is finally back to the 1997 level, but well below the pre-Dot-com bubble and pre-Housing crisis levels. (shown by the light blue bars). I'd describe employment, at best, as improving a bit from the depths of the financial crisis....You'd think that after a prolonged period of unprecedented stimulus and record low interest rates, our economy should be humming along at a China-like 7%+ GDP growth rate. Everyone should have a job and wages should be skyrocketing if this policy were truly effective.....yet, we're far from an "all time high".<br />
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So from what I can see, we have fewer people working and they are working for relatively low wages. Combine that with <a href="https://www.linkedin.com/pulse/our-biggest-economic-social-political-issue-two-economies-ray-dalio/"><span style="color: blue;"><b>Ray Dallio's survey</b></span></a> that 60% of American's can't scrape together $400 in an emergency and that doesn't sound like most Americans might be thinking "Hey....I'm doing great!"</div>
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So why is there such a disconnect? Let's take a look at the last chart below. </div>
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<img border="0" data-original-height="370" data-original-width="570" height="412" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh8i_MVMxYuWuv2ToT4EAoNbDrewxo-5A-esQgkeW-y7NKf5B15L5OM73Gid3DVR0t_AhSeedfy6mafiSkXUgVa_08_J9SCnHYrxQ4iQ4csaN7tCuJLbj7b-Y8vd6_nkN6Pv2fdlpM7ShI/s640/FRED_Interest_Rates_vs_Wilshire_5000.png" width="640" />The simple chart above (The Wilshire 5000 Market Cap vs. the Fed Funds rate since 1997, indexed to 100) describes, I think quite well, the source of the disconnect. </div>
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<span style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;">If you are reader of my blog, a manager, investor, banker, politician or even a Federal Reserve Governor who follows these things, we can see that we've had, at least since 2009, the greatest uninterrupted investment environment, probably since the Roaring 20's. The <a href="http://www.multpl.com/shiller-pe/"><span style="color: blue;"><b>Shiller CAPE is at 32.6</b></span></a>, the second highest level in history (surpassed only by the valuation prior to the dot-com bubble). Valuations are YUGE!! </span><br />
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You, my readers, and I have likely all prospered. We've made boatloads of money. We've all watched our home values and retirement accounts relentlessly tick up year after year. It's been a great run. I don't see how it could have been any better. We should be really proud of what we've been able to accomplish, digging ourselves out of the financial crisis and recovering, even though, unfortunately, 60% of our neighbors are still in deep shit.<br />
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<u><span style="font-size: large;"><b>So Here's The End Game</b></span></u></div>
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The "easy to win Trade War" is a no win proposition for the American people. Again, it's a reality show, wag-the-dog, America First head fake intended to stir up the biases of the electorate.....that's all it can possibly accomplish.</div>
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As long as the Chinese keep the RMB under control, in a measured depreciation, everything will be fine (sort of). A couple of America's crowned jewels (Apple, Walmart, the banks, etc.) will hit a few bumps in the road. The FED, at the slightest hint of a slowdown will accommodate, replacing the "lost" money and asset values that have been silently transferred to the Chinese elites over the last decade. We'll be back to QE "infinity". Ray's "60%" will bump up to "80%", a few businesses will close up and an industry (or two) will be irreparably harmed. Politicians will, of course, blame the FED, just like they did in the good old Volker days, and life will go on.<br />
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On the other hand, the worst case scenario would be that the PBOC loses control of the depreciation and the RMB collapses. I doubt that will happen. After all, Chinese Central Bankers are really smart folks. They've been able to snooker the West out of Trillions of dollars of wealth over the years and they're not encumbered by those pesky political, human rights and Fourth Estate considerations. On the other-other (third) hand, last year they managed to stumble upon and disclose US$ 23 Trillion of Shadow debt that they apparently didn't know they had, so who the hell knows? <br />
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If the RMB does indeed end up in the Weimarian-scrap-heap of financial history's imploding currencies, at that point, all bets are off. In modern history, we've never seen anything close to the "World's Second Largest Economy" go bust. That, my friends, would be YUGE!!</div>
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Well, that's it for today. Courtesy of Chinese financial policy and the West's failure to intelligently react to it, like all good things, yet another party is coming to an end. Hopefully, we'll all be politely asked to leave, with a little fair warning and some going away presents and party favors, rather than given a surprise boot in the ass out the door at the stroke of midnight. </div>
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<b><u><span style="font-size: large;">Additional Reading</span></u></b><br />
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Chairman Powell - Opening "All's Well" Statement - 7/17/18 Congressional Hearing<br />
<a href="https://www.federalreserve.gov/newsevents/testimony/powell20180717a.htm">https://www.federalreserve.gov/newsevents/testimony/powell20180717a.htm</a><br />
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Chairman Powell - Testimony Video<br />
<a href="https://www.c-span.org/video/?448390-1/federal-reserve-chair-jerome-powell-testifies-monetary-policy"><span style="color: blue;">https://www.c-span.org/video/?448390-1/federal-reserve-chair-jerome-powell-testifies-monetary-policy</span></a><br />
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Bloomberg Comments on RMB Devaluation<br />
<a href="https://www.bloomberg.com/news/articles/2018-07-22/china-s-luck-on-yuan-devaluation-risks-running-out-on-trump-ire">https://www.bloomberg.com/news/articles/2018-07-22/china-s-luck-on-yuan-devaluation-risks-running-out-on-trump-ire</a><br />
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Bob Shiller - On the Currency War & Central Bank Independence<br />
<a href="https://www.bloomberg.com/news/videos/2018-07-20/trump-claims-china-eu-have-been-manipulating-their-currencies-video">https://www.bloomberg.com/news/videos/2018-07-20/trump-claims-china-eu-have-been-manipulating-their-currencies-video</a><br />
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Shiller P/E - 32.6<br />
<a href="http://www.multpl.com/shiller-pe/">http://www.multpl.com/shiller-pe/</a><br />
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Trump's Currency War<br />
<a href="https://www.bloomberg.com/news/articles/2018-07-20/currency-war-erupts-as-trump-blasts-china-eu-for-manipulating">https://www.bloomberg.com/news/articles/2018-07-20/currency-war-erupts-as-trump-blasts-china-eu-for-manipulating</a><br />
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The falling RMB......"Ok....let's get the Tariffs back!"<br />
<a href="https://finance.yahoo.com/news/chinas-yuan-falls-against-dollar-075544433.html"><span style="color: blue;"><b>https://finance.yahoo.com/news/chinas-yuan-falls-against-dollar-075544433.html</b></span></a><br />
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Tarrif's on $505B of Chinese goods<br />
<b><a href="http://www.msn.com/en-us/money/markets/trump-willing-to-put-tariffs-on-all-dollar505-billion-in-chinese-goods/ar-BBKQZnA?li=BBnb7Kz&ocid=iehp">http://www.msn.com/en-us/money/markets/trump-willing-to-put-tariffs-on-all-dollar505-billion-in-chinese-goods/ar-BBKQZnA?li=BBnb7Kz&ocid=iehp</a></b><br />
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Will Tariffs raise tax/govt revenue?....no....<br />
<a href="https://www.forbes.com/sites/phillevy/2018/04/12/trump-tariff-revenue-what-tariff-revenue/#3f0edb26390f">https://www.forbes.com/sites/phillevy/2018/04/12/trump-tariff-revenue-what-tariff-revenue/#3f0edb26390f</a><br />
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SCMP - China's push back<br />
<a href="https://www.scmp.com/news/china/economy/article/2154699/how-china-plans-push-back-against-donald-trump-economic-cold-war?eminfo=%7b%22EMAIL%22%3a%22a6VbunsnP8rAWIVx1XrYn3IEL96Kl33JRsq2GrBbersBbsn%2bQvna8Q%3d%3d%22%2c%22BRAND%22%3a%22FO%22%2c%22CONTENT%22%3a%22Newsletter%22%2c%22UID%22%3a%22FO_DLY_AD1371F7-DEFA-444B-8B45-CFC294CF6CC9%22%2c%22SUBID%22%3a%2256877455%22%2c%22JOBID%22%3a%22818182%22%2c%22NEWSLETTER%22%3a%22CEO_DAILY%22%2c%22ZIP%22%3a%2215282%22%2c%22COUNTRY%22%3a%22%22%7d">https://www.scmp.com/news/china/economy/article/2154699/how-china-plans-push-back-against-donald-trump-economic-cold-war?eminfo=%7b%22EMAIL%22%3a%22a6VbunsnP8rAWIVx1XrYn3IEL96Kl33JRsq2GrBbersBbsn%2bQvna8Q%3d%3d%22%2c%22BRAND%22%3a%22FO%22%2c%22CONTENT%22%3a%22Newsletter%22%2c%22UID%22%3a%22FO_DLY_AD1371F7-DEFA-444B-8B45-CFC294CF6CC9%22%2c%22SUBID%22%3a%2256877455%22%2c%22JOBID%22%3a%22818182%22%2c%22NEWSLETTER%22%3a%22CEO_DAILY%22%2c%22ZIP%22%3a%2215282%22%2c%22COUNTRY%22%3a%22%22%7d</a><br />
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Stephen Roach - US On track to "lose" a trade war....<br />
<a href="https://www.cnbc.com/2018/07/12/the-us-is-on-track-to-lose-trade-war-with-china-yales-stephen-roac.html?eminfo=%7b%22EMAIL%22%3a%22a6VbunsnP8rAWIVx1XrYn3IEL96Kl33JRsq2GrBbersBbsn%2bQvna8Q%3d%3d%22%2c%22BRAND%22%3a%22FO%22%2c%22CONTENT%22%3a%22Newsletter%22%2c%22UID%22%3a%22FO_DLY_AD1371F7-DEFA-444B-8B45-CFC294CF6CC9%22%2c%22SUBID%22%3a%2256877455%22%2c%22JOBID%22%3a%22818182%22%2c%22NEWSLETTER%22%3a%22CEO_DAILY%22%2c%22ZIP%22%3a%2215282%22%2c%22COUNTRY%22%3a%22%22%7d">https://www.cnbc.com/2018/07/12/the-us-is-on-track-to-lose-trade-war-with-china-yales-stephen-roac.html?eminfo=%7b%22EMAIL%22%3a%22a6VbunsnP8rAWIVx1XrYn3IEL96Kl33JRsq2GrBbersBbsn%2bQvna8Q%3d%3d%22%2c%22BRAND%22%3a%22FO%22%2c%22CONTENT%22%3a%22Newsletter%22%2c%22UID%22%3a%22FO_DLY_AD1371F7-DEFA-444B-8B45-CFC294CF6CC9%22%2c%22SUBID%22%3a%2256877455%22%2c%22JOBID%22%3a%22818182%22%2c%22NEWSLETTER%22%3a%22CEO_DAILY%22%2c%22ZIP%22%3a%2215282%22%2c%22COUNTRY%22%3a%22%22%7d</a><br />
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NYT - Trade War Escalation......from 18 products to 10,000 in a few months<br />
<a href="https://www.nytimes.com/interactive/2018/07/11/business/trade-war.html?nl=top-stories&nlid=70198410ries&ref=cta">https://www.nytimes.com/interactive/2018/07/11/business/trade-war.html?nl=top-stories&nlid=70198410ries&ref=cta</a><br />
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FORTUNE - Pundits seem surprised about the lack of discussion re: the "Trade War" in the mainland press.<br />
<a href="https://view.email.fortune.com/?qs=5a4bd03773da279c64aa8fe5c027c9b58461103b2c194529bc17dabbbfd91a22f916fcf29edc542bc52c4ef890b982a4e741ef37319641555eb5da117095487fb60474a795a29361">https://view.email.fortune.com/?qs=5a4bd03773da279c64aa8fe5c027c9b58461103b2c194529bc17dabbbfd91a22f916fcf29edc542bc52c4ef890b982a4e741ef37319641555eb5da117095487fb60474a795a29361 </a><br />
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WSJ - <a class="yiv9756335279enhancr2_4bf25fb4-60b8-9697-5155-7d85d4958a1b" href="https://www.wsj.com/articles/u-s-farms-factories-cant-produce-enough-to-meet-white-house-goal-to-cut-china-deficit-1526558401?eminfo=%7b%22EMAIL%22%3a%22a6VbunsnP8rAWIVx1XrYn3IEL96Kl33JRsq2GrBbersBbsn%2bQvna8Q%3d%3d%22%2c%22BRAND%22%3a%22FO%22%2c%22CONTENT%22%3a%22Newsletter%22%2c%22UID%22%3a%22FO_DLY_AD1371F7-DEFA-444B-8B45-CFC294CF6CC9%22%2c%22SUBID%22%3a%2256877455%22%2c%22JOBID%22%3a%22747912%22%2c%22NEWSLETTER%22%3a%22CEO_DAILY%22%2c%22ZIP%22%3a%2215282%22%2c%22COUNTRY%22%3a%22%22%7d" id="yiv9756335279yui_3_16_0_ym19_1_1531138666965_8720" rel="nofollow" shape="rect" style="background: transparent; color: #196ad4; margin: 0px; outline: none; padding: 0px;" target="_blank">U.S. Farms, Factories Can’t Produce Enough to Meet White House Goal to Cut China Deficit</a></div>
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Politico - <a class="yiv9756335279enhancr2_502a33d0-0162-e29a-a10a-62b642d630eb" href="https://www.politico.com/story/2018/05/17/trump-meeting-liu-he-china-595123?eminfo=%7b%22EMAIL%22%3a%22a6VbunsnP8rAWIVx1XrYn3IEL96Kl33JRsq2GrBbersBbsn%2bQvna8Q%3d%3d%22%2c%22BRAND%22%3a%22FO%22%2c%22CONTENT%22%3a%22Newsletter%22%2c%22UID%22%3a%22FO_DLY_AD1371F7-DEFA-444B-8B45-CFC294CF6CC9%22%2c%22SUBID%22%3a%2256877455%22%2c%22JOBID%22%3a%22747912%22%2c%22NEWSLETTER%22%3a%22CEO_DAILY%22%2c%22ZIP%22%3a%2215282%22%2c%22COUNTRY%22%3a%22%22%7d" id="yiv9756335279yui_3_16_0_ym19_1_1531138666965_9828" rel="nofollow" shape="rect" style="background: transparent; color: #196ad4; margin: 0px; outline: none; padding: 0px;" target="_blank">Trump casts doubt on success of China trade talks</a></div>
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The Economy is GREAT!</div>
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Trade War in Wisconsin</div>
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Peter Navarro - 65 Page Report on China's illegal trade practices</div>
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Fortune Commentary on the Navarro report - <a class="yiv9756335279enhancr2_0b7733fb-cef5-7406-d9ff-0b68d9fc6759" href="https://view.email.fortune.com/?qs=5e930ed428f4356bfeba722c2f7d950cd5b2d733e17db328ca412e5b70ff672455f3a675efbf26a9822071ddfa0722594654d8d0ea4fe9cc6c7b02ab540b5351c4bbc60337a31e29" id="yiv9756335279yui_3_16_0_ym19_1_1531138666965_12952" rel="nofollow" shape="rect" style="background: transparent; color: #196ad4; margin: 0px; outline: none; padding: 0px;" target="_blank">The Fortune CEO Daily</a></div>
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New White House Report, Authored by Trade Hawk, Blasts Chinese ‘Economic Aggression’</h2>
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By Jacob M. Schlesinger and Vivian Salama</div>
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The Trump administration is dialing up its rhetoric against Chinese trade practices, accusing Beijing in a repor...</div>
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Actual Navarro Report</div>
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<a href="https://www.whitehouse.gov/wp-content/uploads/2018/06/FINAL-China-Technology-Report-6.18.18-PDF.pdf" id="yiv9756335279yui_3_16_0_ym19_1_1531138666965_14334" rel="nofollow" shape="rect" style="background: transparent; color: #196ad4; margin: 0px; outline: none; padding: 0px;" target="_blank">https://www.whitehouse.gov/wp-content/uploads/2018/06/FINAL-China-Technology-Report-6.18.18-PDF.pdf</a></div>
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Deep Throathttp://www.blogger.com/profile/02712515268051858186noreply@blogger.com5tag:blogger.com,1999:blog-7478408299955066555.post-39687542314378796602018-05-20T21:56:00.000-04:002018-05-29T00:51:17.766-04:00Amazon, Walmart.....Chinese potting soil.....and the 34th Amendment....<div dir="ltr" style="text-align: left;" trbidi="on">
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As you, my loyal readers know, the unstated (or I suppose now it's "stated") goal of this blog is to make global finance and behavioral economics fun again!....no small task indeed. Relating macro economic policy to our daily lives, connecting the dots, and managing the minutia comprising the big picture, can be exhausting, confusing and often, even less entertaining than we might have suspected when we first approached the task. </div>
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That said, I'm going to get a little existential in today's post. One of my favorite topics has always been: </div>
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"What if?" </div>
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I've always liked to imagine (and calculate) what might happen if other things happen (or don't), like some sort of all encompassing, world-wide board game where one event causes a cascade of other actions and those actions perpetuate further actions... the ultimate "butterfly flaps its wings" sort of thing. "What if?" impacts every aspect of our daily lives in varying degrees.....what if I don't return that library book? (For those readers under twenty-five, a "library" is a public place, usually run by a local government, where old people go to borrow "books"...."books" are....well....never mind....) What if I had sunk my life savings into Berkshire Hathaway in 1968? What if I would have not skipped my annual checkup? What if I would have phrased that last rant to my former, boneheaded boss a little more carefully? What if I didn't try to run that red light with a trunk full of weed? What if American bankers would have been less zealous in facilitating near-ZIRP fueled "capital formation"? </div>
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We, as Americans, love to revisit our actions and our decisions, with justification, revision, glee and/or regret. It all depends on the outcome and product resulting from the decision. It's the essence of "What if?" Lately, for better or worse, it's become our National pastime. </div>
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In that vein, one of my favorite movies of all time, and I've probably mentioned this epic in a couple of prior posts, is Frank Capra's "It's a Wonderful Life". For you Non-US folks in the Caymans and the politburo having someone translate this Blog for you, suffice it to say it's an American Classic. The gist of the movie clip above, is that George Bailey (played by Jimmy Stewart) is granted an incredible gift from Clarence, an Angel sent down from heaven to keep George from ending his life, by showing him the true value of his existence. George finds out what the world would have been like had he never been born. To sum it up..."it ain't good." <br />
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Since this is a financial blog, dedicated to the examination and exploration of what makes global economics tick, exactly how the world works and why butterflies are routinely flapping the snot out of their wings, usually under extreme incentive-ized/motivation/duress nowadays, let's play my favorite, Jimmy Stewart-esque, "What if?" party game I like to call:<br />
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"What would have happened if Amazon and Walmart had never been born?"<br />
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The first thing we need to do is hearken back to the glimmering past, exploring our roots from ancient times, the good old days that most financial people out there barely remember, say, just taking a date out of the hat, May 15th, 1997.<br />
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We need to fully examine where we started in order to understand where we are now, as well as how and why we got here. May 15th, 1997 was, of course, the date that changed the world as we know it. May 15th, 1997 was the date of the Amazon IPO.<br />
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On the date of the IPO, Amazon (AMZN) was a struggling little book seller with US$16 million in sales, 256 employees and was losing gobs of money. By contrast, Walmart, America's largest retailer who had begun, at least by sales volume, to dominate the US retail landscape had sales of US$105 Billion, 728,000 employees and had been, like clockwork, producing billions in earnings for years. <br />
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In a market driven economy we tend to celebrate the "winners". We give them awards and accolades, showering them with praise and treasure, as fair compensation for their genius. In a market economy, the founders, financiers, inner circle and those who were wise enough to get in on the ground floor, backing the winning horse, are without question, entitled to the spoils of war, so to speak .....but what about the rest of us? What about the poor, pathetic losers?<br />
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What the US economic model never takes into account is....what did we destroy to create the enormous success? What about those who fought bravely, against overwhelming odds on an unfair, tilted playing field, only to end their careers with an inevitable failure. What about those who stood steadfast, unwavering at the helm, professionally sailing along in familiar waters, occasionally feeling a few seemingly inconsequential bumps and thuds, piloting through the angry economic seas, ever confident that because of their seamanship and years of experience, that they could weather the storm. They would sail courageously, as they always had, until one day, despite their herculean effort, they happened to notice that the ship's bow was uncorrectably pointed at an unfamiliar downward angle. They would fight valiantly to save their vessels. Alas, without ceremony, the world, and those who could have lent a hand, would fail to notice or care about their plight. They had become unnecessary, obsolete casualties of the tidal wave.. These brave men and women would eventually find themselves adrift in a life boat wondering where they had gone wrong and what the hell happened? I am, of course, metaphorically referring to the small town American Retailer (and by extension, small town America) and his/her well designed, meticulously orchestrated, consequently unavoidable, yet truly unfortunate destruction.<br />
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Not to give it away, but these wonderful people and places, as you will likely conclude while reading this post, are the ultimate casualties of a completely unfair systemic, economic ass-whooping. Just like our systematic dismantlement of America's industrial infrastructure, courtesy of Ronald Regan and Paul Volker, i.e.) Manufacturers and factories chased off shore, never to return, as a result of high interest rates and a hard dollar (different financial tools and uniquely bad policy, as well as a topic for a different day......but delivering the same destructive result).... this century's heartland retailers never knew what hit 'em.<br />
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<b><u><span style="color: red;">NEW IMPROVED FORMAT FOR THIS BLOG</span></u></b><br />
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Since I've had rave reviews on the <b><span style="color: red;"><i>"Red" Executive Summary</i></span></b> Format I had implemented in my last post, I think I'll continue the format for this one. One of the main complaints I get re: my writing is, paraphrased "You go on and on forever about economic and financial stuff that I don't understand and I don't care about.....just give me the bullet points!"<br />
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Well, since I believe the "Economic and Financial Stuff" is the heart and soul of this blog, but I fully respect the demands on your time, we need to compromise. Once again, feel free to read the <span style="color: red;"><b><i>"Red" Executive Summary</i></b></span> and if the details of the section derail your interest, just skip ahead to the next <i><span style="color: red;"><b>Red Executive Summary</b></span>!</i><br />
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OK.....let's get started....<br />
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<b><u><span style="color: red; font-size: large;">American Retail 1997 to 2017</span></u></b><br />
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<span style="color: red;"><b><u><i>Executive Summary: </i></u></b> American Retail has become grotesquely concentrated in the hands of a few businesses (i.e. Amazon and Walmart). Mom and Pop, Brick and Mortar Retail has been decimated by this tidal shift much more than we'd care to admit, threatening the economic sustainability of suburban and small town America. We've embarked on a journey of economic destruction from which there may be no return. </span><br />
<span style="color: red;"><br /></span><span style="color: red;">For your reference, the next <b><i><u>Executive Summary</u></i></b> is: <b><u><i>"The Randall Park Mall"</i></u></b></span><br />
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So let's compare a few numbers from 1997 to today and see what we see.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjt60gzyN88TRLcOVhcWXRBc1huU1QEfFRQJGee1QltJX-cMH-YeeXvNVRilmx3UOQ5Ox0bO3ILvGSP7mr_tZ5a5D-sob25W9MdYorHYrhefWappEOCbWxXiWPQZ7hf_EEuqBPXXFwRmvg/s1600/American_Retail_20_Years_of_Evolution.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="651" data-original-width="1291" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjt60gzyN88TRLcOVhcWXRBc1huU1QEfFRQJGee1QltJX-cMH-YeeXvNVRilmx3UOQ5Ox0bO3ILvGSP7mr_tZ5a5D-sob25W9MdYorHYrhefWappEOCbWxXiWPQZ7hf_EEuqBPXXFwRmvg/s1600/American_Retail_20_Years_of_Evolution.png" /></a><br />
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The above figures are from the 10k's. The first thing that jumps out at us is that American Retail, as a whole, has done very well. Revenues for the "Top 10" and Amazon have grown from $304 Billion in 1997 to a whopping $1.323 Trillion (Including Estimated GMV) in 2017. Earnings for the group have nearly tripled from $7.6 Billion in 1997 to $23.4 Billion today. Remarkably, the value (Market Cap) of these same businesses has increased nearly 10 fold from $131 Billion to $1.080 Trillion with P/E and P/S+GMV ratios roughly twice what they were 20 years ago. Bravo American Retail!<br />
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The other thing we might notice from the schedule is that if you were astute/smart/lucky enough to invest in Amazon and Walmart in their infancy, you've done really well. In fact if you bought Amazon at the IPO your initial $1,000 Investment would be worth roughly $1 Million today at a $1,500+/- per share, split adjusted stock price. Truly an incredible success story. On the other hand, if you stuck it out with the "Other 9" of the "Top 10", based on their languishing market caps and the liquidation and consolidation going on in the rest of the industry....you didn't do very well at all.<br />
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To wit, this is just another example of the winner take all, no holds barred mechanics of a market driven economy. To the victors go the spoils. If the rest of the retailers would have simply seen what was happening, thrown up websites, redeployed their capital and started doing eCommerce like gangbusters, in aggregate we would have been in the same place we are today. The total pie would have been allocated a bit more evenly, Amazon and Walmart would be smaller and the "Other 9" would be bigger, but we would be in the same place we are today because the economic needs and wants of the consumer would have been served. In "econ" terms, it doesn't matter who serves the need as long as the need is efficiently met. Unfortunately, the only possible conclusion we can come to is that the managers of the "Other 9" were all really stupid, incompetent people who couldn't see the tsunami coming and were unceremoniously washed away by the wave. Who hired those Bozo's anyway?<br />
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Does this make sense? Are we all in agreement so far? Everyone in the industry was an incompetent boob except for Jeff Bezos, Sam Walton and their respective henchmen. Perhaps the managers at Sears, K-Mart, May Company, Federated, Macy's, Toys R Us, etc. might disagree.....but hey, the numbers are the numbers.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiiO_PjdKTH2vOD0pkO5VpWDSQqwyxwNPwlXsT7mXy-lP6_aVJ_POAQXmc1NyA1IEMWI0djD2XmSUNEUtvuSuJ_yrdwxw3q0wM2zvhzOuQVCYw9S6QpkiDZROMxhglkpsUCCRvEwyhoWfk/s1600/Amazon_v_Walmart_20_yrs_of_Income.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="639" data-original-width="482" height="400" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiiO_PjdKTH2vOD0pkO5VpWDSQqwyxwNPwlXsT7mXy-lP6_aVJ_POAQXmc1NyA1IEMWI0djD2XmSUNEUtvuSuJ_yrdwxw3q0wM2zvhzOuQVCYw9S6QpkiDZROMxhglkpsUCCRvEwyhoWfk/s400/Amazon_v_Walmart_20_yrs_of_Income.png" width="300" /></a></div>
Now let's take a look at the earnings produced over the last 20 years for the two "Big Dogs" of retail. To be honest, I can't think of any other company in the history of finance that's accomplished what Amazon has. In looking at these figures, I was compelled to come up with a new metric, that until now, has never been needed. I call it the P/E20. (the ratio of a stocks Market Cap to the last 20 years of earnings).<br />
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In the last 20 years the Amazon business has produced $13.4 Billion in earnings and sports a valuation of 42.69 x those earnings, compared to Walmart's $235.9 Billion in earnings, valuing WMT at a P/E20 of 1.32. Again, I'm not talking about a Current P/E (Price/Current Earnings), of 42.69, which would be rich for any retailer. I'm talking about a P/E20, the ratio of a company's Price (Current Market Cap) divided by the last 20 years of earnings. If any of my readers know of any other large, well established business (20 years or more in existence) on the planet that has ever come close to a P/20E like this, I'd love to hear about it. <br />
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So now, let's make some calculations which illustrate the utter buffoonery of virtually every retailer in America (Except, of course, for Amazon and Walmart). The schedule below again compares the American Retail Landscape, per US Census Data, from 1997 to 2016 (2017 is not yet available, but I trust the trend is directionally correct....so humor me here.)<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjcbB7QO4MRoDyqfu9PychbcvPGPIYa1SfwhpG2ceuSv2qAKNBitv9MATj08pzy_iaT2FB1EwUTJnrGd_4Be0dhIdeborNsJqOqZiH_AODLc12MF_TcOVXb7Cg-OM_4LvJFe2Qj591KhN8/s1600/AMZN_WMT_US_Census.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="559" data-original-width="653" height="546" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjcbB7QO4MRoDyqfu9PychbcvPGPIYa1SfwhpG2ceuSv2qAKNBitv9MATj08pzy_iaT2FB1EwUTJnrGd_4Be0dhIdeborNsJqOqZiH_AODLc12MF_TcOVXb7Cg-OM_4LvJFe2Qj591KhN8/s640/AMZN_WMT_US_Census.png" width="640" /></a></div>
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We can see/infer a couple of things from the above:<br />
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<li>Amazon and Walmart today control/handle roughly 42.4% of all retail through their ecosystems, up from Walmart's share (Amazon didn't exist) of 10.4% 20 years ago. The "Top 10" Retailers (Plus Amazon) in America control about twice as much of the market (59%) as they did 20 years ago.</li>
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<li>Somehow (I'll describe the "somehow" farther along in this post), Amazon was able to accomplish this massive assault on Market share at virtually no cost. There was no meaningful requirement to supply shareholders with earnings or dividends. At the time, Shareholders were apparently tickled pink with with the potential for stock price appreciation (and in hindsight, rightly so). One of my favorite lines out of any filing (ever) was from Amazon's May 14th, 1997 S-1: <i><span style="color: #990000;">"The Company believes it will incur substantial losses for the foreseeable future... the rate at which such losses will be incurred will increase significantly."</span></i><i style="color: #444444;"> </i>I doubt that, at the time, Shareholders thought "foreseeable future" meant twenty years. I would have also been really interested to hear, again, at the time, what Shareholder reaction might have been if that statement would have appeared in a Sears, Target, K-Mart or even Walmart 10-K at the time. </li>
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<li>Amazon was able to expand their business with virtually "free" equity and more recently, debt financing. They've added leverage (Long Term Debt) to the tune of $46 Billion (35% of the $131 Billion Balance Sheet), with another $118 Billion of off balance sheet commitments (leases and the like) all taken on in the last few years. In 2010 Amazon's total Long term Debt was only $1.5 Billion (8% of a $18.7 Billion Balance Sheet). See <span style="color: blue;"><a href="https://www.sec.gov/Archives/edgar/data/1018724/000101872418000005/amzn-20171231x10k.htm#s17D6988070F55220B2E38F5A4FEC2284" target="_blank"><span style="color: blue;"><b>Notes #5, 6 & 7 on the 2017 10-K (pg. 56-58)</b></span></a> </span> </li>
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"Doing more with less" is the essence of productivity. So let's see how the "Top 10" did when compared to what we'd expect had they grown at the rate of the US Economy and Markets. The Chart and table below describe "What if?" and compare our expectation, based on the US Economy, to what actually happened. </div>
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When we look at what the "Top 10" Actually did (3rd set of columns), compared to what we would have expected them to do (2nd set of columns) we see that they've exceeded expectations. Revenue was 27% higher ($871.8B vs. $683.4B), Income was 19% greater ($20.4B vs. $17.1B) and the value of these businesses was 10% greater ($508.6B vs. $461.3B) Nice Job "Top 10"!</div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj-8icmksO5y2EVAwBu22SmROCzhB3yameVBbcd4z3vZCQlB7YiPhZmU-UNICHl9jB79LRIpTOsCC-XPRgw5idM60X95bXMO3b3mXlykS1KB3lW1k_p_mQaxW7ueQdRx7XiuAhr5Xm3SAc/s1600/TOP_10_Retail_Expected_Growth_1997-2017.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="791" data-original-width="1093" height="460" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj-8icmksO5y2EVAwBu22SmROCzhB3yameVBbcd4z3vZCQlB7YiPhZmU-UNICHl9jB79LRIpTOsCC-XPRgw5idM60X95bXMO3b3mXlykS1KB3lW1k_p_mQaxW7ueQdRx7XiuAhr5Xm3SAc/s640/TOP_10_Retail_Expected_Growth_1997-2017.png" width="640" /></a></div>
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On the other hand, when we look at the "Top 10" PLUS Amazon (4th Column). We see that this group of businesses becomes an absolute economic juggernaut compared to the rest of the economy. As a group, Revenue (Including GMV) has nearly doubled our expectations ($1,328.B vs. $683.4B). The Market Cap for these businesses has also more than doubled from what we would have expected. ($1,080.6B vs. $461.3B) Oddly enough, earnings have only increased by 36% over what we would have expected. Hmmm.....that's odd. Oh well, you know those wacky accountants, hard to tell what they are thinking when they put these numbers together. Let's move on. </div>
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Whenever we see a group of competitors, in this case the "Top 10" plus Amazon, doing "this much more with that much less" in a Market driven economy we can pretty much guarantee that somebody else has been smacked around pretty good, in economic terms of course. </div>
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I remember when I was a young accounting manager for an operating division of a Fortune 500 Company (at least it was at the time), I was bound and determine to save both time and cost by automating our financial statement preparation. At the time, the process involved gathering info from "Main Frame" general ledger reports and hand writing the numbers on a "13 column" paper spread sheet. A team of clerks added the numbers up on "ten key" adding machines with paper tapes as documentation. Once everything "balanced" and carried forward from the prior period(s) we would have the numbers typed on a paper report, which would have to be proofed and corrected until it was accurate. This, as you can imagine was an iterative process. People made mistakes and typos. It would take a dozen or so clerical staff weeks to complete the reports. </div>
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The project that we proposed and subsequently implemented, was that the financial statements were to be prepared on a "personal computer". We went this direction because we were told, by the IT Department, that it would cost "hundreds of thousands of dollars" along with additional "update costs" to program the mainframe to process the data the way we needed it.</div>
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Don't laugh, but we went out and bought one (1) Radio Shack TRS-80 "portable PC" with the "Visicalc" spreadsheet program preloaded. The system had, as I recall, something like 32k of memory. The salesman told us that we could store "hundreds of pages" of information on the 8 inch "floppy disks" and it would only take a "minute or two" to print a page on our "dot matrix" printer.<br />
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Of course, after we determined that we were indeed doing "much more with much less" and that the project was an incredible success, it was obvious that we only needed a couple of clerical people to get the data into the spreadsheets. So as we often do in Corporate America, we gave these good folks, some of them who had been with the company for decades, the boot out the door. Of course we offered a few of them jobs working in the factory and we gave a few of the more "well liked" folks "going away" parties with cake and coffee in the break room. We told them how much we appreciated their efforts over the years, wishing them all the best. I remember a wonderful lady crying on my shoulder at a local coffee shop wondering "what am I going to do?" Luckily, I'm sure she and her friends all found other, better jobs and did just fine, at least that's what we like to tell ourselves when people we are fond of become victims of "<i>doing more with less</i>". </div>
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Anyway, let's take a look at how Retail Employment has fared over the last twenty years while the "Top 10" and Amazon have flourished. The FRED (Federal Reserve Bank of St Louis) Graphic shows total retail employment indexed to January of 1997 = 100. </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEholuTkEXMKy1c0yEcpbBjPT7J4BQPeWOLzR5c_iGk_GwiK5fYP8_1MENwpq83W8v6WBlvDq8oRt-2DvQOUb0I7Nl6kHSW8WGEYlqEnwvu018eEPVVE_fL8lCsanNc-qDx1VU872Pxj4oU/s1600/FRED_Retail_Employment_1997-2017.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="453" data-original-width="709" height="408" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEholuTkEXMKy1c0yEcpbBjPT7J4BQPeWOLzR5c_iGk_GwiK5fYP8_1MENwpq83W8v6WBlvDq8oRt-2DvQOUb0I7Nl6kHSW8WGEYlqEnwvu018eEPVVE_fL8lCsanNc-qDx1VU872Pxj4oU/s640/FRED_Retail_Employment_1997-2017.png" width="640" /></a></div>
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As we can see, the numbers are pretty dismal. The actual numbers: "Total Retail" (Red Line) increased by 11% in the last 20 years. "Department Store" Employees have actually declined 22% over the same period. The entire industry is doing a "Shitload more with much, much less." We've got productivity oozing out of every orifice! <br />
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<b><u>Transparency</u></b><br />
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On more thing that has bothered me for a while now is that neither Amazon nor Walmart disclose GMV. As you know, simply put, GMV is a measure of goods that are sold through an eCommerce ecosystem even if they are someone elses (i.e. 3rd party sellers). I touched on this phenomenon a bit in my post:<span style="color: blue;"> </span><a href="https://deep-throat-ipo.blogspot.com/2016/10/cheap-reading-glasses-handbagsand.html" style="color: blue; font-weight: bold;" target="_blank"><span style="color: blue;"> Cheap Reading Glasses, Handbags and....the Wiemar Republic...</span> </a><b style="color: blue;"> </b>Both Walmart and Amazon have significant third-party GMV, yet, nowhere in there filings do they ever come out and say what the GMV actually is by quarter, <a href="https://www.usatoday.com/story/tech/news/2016/10/20/amazon-online-sales-bigger-larger/92419572/" target="_blank"><span style="color: blue;">leaving analysts to guess</span></a>. The point is that both Amazon and Walmart "control" significantly more of the retail footprint in this country than we think. Why don't they disclose these figures? From my personal experience as an underwriter, if you can't get a straight, transparent answer to a simple question, there's a very good reason for it. Unfortunately, the "good" reason often isn't all that "good".<br />
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Wouldn't it be great if some analyst on the investor calls for Amazon and/or Walmart, right after the obligatory "amazing quarter guys" intro, asked "Hey, by the way, how much GMV do you guys actually have and what percentage of that GMV comes from goods originating in China?" My guess would be that we'd get a Zuckerberg-ian "I'll have to get back to you on that...."<br />
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Anyway, rather than get actual numbers, we get charts like the one below, showing rates of growth and other<span style="color: blue;"><b> <a href="https://www.thestreet.com/story/14494348/1/walmart-disappointing-e-commerce-growth.html" target="_blank"><span style="color: blue;">ambiguous commentary</span></a></b></span>, yet we have no idea what Walmart's and Amazon's third party sales actually are. Growth rates? That's fine...but where are we starting from? Growth from what?<br />
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Even in <a href="https://www.sec.gov/Archives/edgar/data/104169/000010416918000047/earningsrelease-4302018.htm"><b>Walmart's stellar earnings release</b></a> just a few days ago, management claims that eCommerce Sales have accelerated 33% YOY, yet they don't actually tell us what the GMV actually is. The must know....otherwise, how could they calculate the percent increase? Why can't Amazon and Walmart just tell us how much third party, plastic, Chinese junk they are selling on their sites? They are the self proclaimed masters of big data, we're big kids, we can take it.....just tell us!<br />
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Anyway, at least I can't find any references to third party sales or GMV (in dollars) in the filings and I've searched pretty well. If any of my readers have these numbers, or any insight, as always, I'm all ears.<br />
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Given the aforementioned, the point of this section is to illustrate the scope and magnitude of the incredible economic ass kicking American Retailers not named Amazon and Walmart have taken over the last twenty years. </div>
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Now lets look at a case study......</div>
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<b><u><span style="color: red; font-size: large;">The Randall Park Mall </span></u></b></div>
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<span style="color: red;"><b><i><u>Executive Summary:</u></i></b> This Section is primarily a pictorial history illustrating the carnage that's taken place in America as a result of the enormous "success" of Walmart and Amazon. The Randall Park Mall was the largest mall in America when it was built and the retail centerpiece of Northeast Ohio. It's now an abandoned shell, along with hundreds of other defunct, vacant malls, shops and storefronts all over the country. Wherever a Walmart-Bomb is detonated, economic carnage is soon to follow. The pictures serve as a cautionary tale of where we've come and where we're headed. Feel free to scan through a few of the pictures or click on a video link or two if you are interested in some of the human tragedy associated with our macro-economic policies and the facilitation of what Jay Clayton refers to as "Capital Formation".... </span><br />
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<span style="color: red;">The next <b><i><u>Executive Summary </u></i></b>is: <u><b><i>Chinese Potting Soil.... </i></b></u></span><br />
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In 1976, the Cleveland Plain Dealer (Cleveland's local newspaper) ran the following piece which describes the optimism and the community feeling attached to the Randall Park Mall (RPM) development. The "mall" was the retail cornerstone of the time and the RPM was one of Eddy Debartolo's crowned jewels.<br />
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<span style="background-color: white;"><span style="color: blue;"><span style="font-family: "arial" , "tahoma" , "helvetica" , "freesans" , sans-serif; font-size: 13.2px;">Cleveland Plain Dealer</span><br style="font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px;" /><span style="font-family: "arial" , "tahoma" , "helvetica" , "freesans" , sans-serif; font-size: 13.2px;">August 9, 1976</span><br style="font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px;" /><br style="font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px;" /><i style="font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px;">Just about every superlative in the English language has been applied to <a href="http://clevelandcentennial.blogspot.com/2011/10/randall-park-mall.html" style="text-decoration-line: none;">Randall Park Mall</a>, opening this week in the southeast suburban area of the city.<br /><br />Indeed, the mall IS the world’s largest shopping center.<br /><br />Yes, it is a place of exceptional convenience and beauty, with an unusual number of outstanding department stores and many, many fine shops presented in a most expansive, luxurious arrangement.<br /><br />And it represents an enormous investment of energy, time and money by its developer, Edward J. DeBartolo of Youngstown.<br /><br />But there is more meaning than this to Randall Park Mall -- considerably more.<br /><br />The mall constitutes a community improvement in which all of Greater Cleveland can share pride. Its construction is an expression of solid confidence in the region’s economic present and future. Unquestionably, this will be a catalyst for future growth.<br /><br />It is significant that Randall Park Mall brought a new addition to merchandising in Cleveland. <a href="http://en.wikipedia.org/wiki/Joseph_Horne_Company" style="text-decoration-line: none;">Joseph Horne Co.</a>, the prestigious Pittsburgh-based retail firm, placed its department store in the distinguished company of four similar businesses that have been long established and successful here. Horne’s, it should be noted, has a 127-year history of success and growth.<br /><br />It was 12 years ago that DeBartolo first announced his plans for the future use of the Randall Park race track site which he acquired in 1961. The plans at that time proposed an $85 million development including a single-level shopping mall and three department stores.<br /><br />Unlike some developers who let their dream projects shrink or fade away, DeBartolo made his come alive and grow. The remarkable accomplishment that now is the two-level, $300 million Randall Park Mall, therefore is a testimonial also to the business courage, confidence, discernment and foresight of DeBartolo himself.<br /><br />It is good for DeBartolo that he has attracted nationwide notice as the country’s leading builder of shopping centers and malls. It is good for Cleveland, too.<br /><br />For today and the tomorrows to come, Randall Park Mall is a highly visible mark on this area as a quality place to live, work and do business.</i></span></span><br />
<span style="background-color: white;"><span style="color: blue;"><i style="font-family: Arial, Tahoma, Helvetica, FreeSans, sans-serif; font-size: 13.2px;"><br /></i></span></span><span style="background-color: white; font-size: 13.2px;"><span style="color: blue; font-family: "arial" , "tahoma" , "helvetica" , "freesans" , sans-serif;"><i><a href="http://clevelandcentennial.blogspot.com/2012/04/randall-park-mall-op-ed.html"><b>http://clevelandcentennial.blogspot.com/2012/04/randall-park-mall-op-ed.html</b></a></i></span></span><br />
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<span style="background-color: white; font-family: inherit;">Here's a wonderful Cleveland Plain Dealer archive photo of the Grand Opening of the "World's Largest Shopping Center" just 40 short years ago. You can almost feel the excitement in the air!</span><br />
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<img src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhaPEXY9ZM_7s3YDufHi8_fGM-1DL0oqoaKPkMwHiheD-EA_MiWoqLDfWjYZ2NZos7rMOY_yY1iVkKykgM49L1O42TZGOIdlMyzXOZ_AuCuUmbZEBt4Rr4MrW-sThLCqB8YR5vHxtW8_SA/s640/randallparkmalljpg-fa25496c3b6b2c3d.jpg" /><br />
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Now let's fast forward to today. The Randall Park Mall, the jewel of Cleveland Retail, closed for good in May of 2009. Here are a few pictures of what the property looks like now. I'm sure, not exactly what Eddie DeBartolo envisioned. Tragic.<br />
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Pretty sad isn't it? My...how times have changed. The "Mall" used to be the place to go. Shopping, dinner out, meet your friends, movies, shows....Realtors marketed homes based on their proximity to the mall.....now.....not so much. The Randall Park mall is our local poster child for what's happened, but the Walmart/Amazon impact is everywhere. Every small town in America has experienced this onslaught. Whether it's a <i>Walmart-Bomb</i>, dropped on a small town, wiping out every retailer within 20 miles of ground zero, or Amazon, delivering third party GMV to your door sales tax exempt (for "free" with <i>Amazon Prime)</i> local, town square retailers and their employees are largely gone now. <br />
<img src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhzUNnuGicuig1Q658TQvePHJlTyCNcqEov0J_9RdgmNndfGPNbaDK03jHdht0bmOQBNMz0S12Fbo5cFrgHlYExp8MxBJMbdyuCp2oimlE7yqAs6xCe7XUYcmrtBYINzDXE3h2oFy2EZKw/s640/Vacant_Buildings.png" /><br />
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Even Walmart is not immune to the reshaping of the American economic landscape. I think the statistic is something like <i>"90% of all Americans live within 15 miles of a Walmart"</i>, the company isn't invulnerable to a few math mistakes. Once they drop a "<i>Walmart Bomb</i>" on a community, if their calculations are a little off and the store (Combined with the Amazon impact) has caused even more destruction to a local economy than they had initially forecast, when they determine they can't meet revenue and profit targets, they simply close the store and walk away, leaving the local community and the original developer (Most of the stores are built by a third party, often local, developer and leased back on a 20/30 year lease) to deal with it.<br />
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<img src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiBC_JSum3LN0JK1zNuKSsnQxezaD6EY1hhuFmn3xIWvJavECYWxoScglfdwlPH76Jk5q3am9fC0dNYkFgEH-6SmjLyOzQByuuUpmalZ7LrCxz7izfUXdnUQvsFG_scydVTxm-h3BV6H4A/s640/Walmarts_Abandoned.png" /><br />
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The irony is that many of the above failed stores were probably the subject of an incredible competition between regional communities, in a "local government spending-spree-arms-race" offering tax abatement, free land, additional infrastructure and financing assistance to build the stores, all in the name of landing the fools gold, incredible economic growth engine that is marketed to them i.e.) a Walmart Super Center. The thinking was that people would come from miles around to work at and shop at Walmart, bringing jobs and tax revenue into the "winning" community. The good folks in the area, rather than buy the overpriced, limited selection goods from the uncompetitive local retailer up the street, would flock to the community that had "won" the Walmart. The "winning" community would be much better off than the surrounding communities. Unfortunately, what the local governments didn't/don't seem to understand when they are succumbing to the Walmart siren song, is that the profits that used to stay in their communities, with their local retailers, were now going to Bentonville and Beijing. (I'll explain why I say Beijing shortly) On the other hand, if Walmart didn't kill the local brick & mortar retailer, Amazon eventually would. So the Walmart-bomb is a bit like retailer euthanasia for those local businesses that just didn't stand a chance.<br />
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On a positive note, at least Walmart allows America's homeless folks to camp out in their parking lots now. It must be a giving back to the community, corporate responsibility sort of thing. Their new slogan should be "If you've got a car, you've got a home at Walmart!". One interviewee proclaims that "A lot of homeless people aren't bad people, they're normal people.....I was halfway normal until I started living this way."<br />
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Don't get me wrong, I'm glad Walmart is trying to be part of the solution. In hindsight, if we could go back in time, I wish they could have understood that they are also part of the problem. The clip below brings a tear to my eye.....<br />
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The final irony is that the Randal Park Mall has now been chosen as the future home of an "<a href="http://realestate.cleveland.com/realestate-news/2017/08/amazon_commits_to_north_randal.html" target="_blank">Amazon Distribution Center</a>". The competition was again fierce. The City Council relishes this as an amazing coup! The community only had to offer Amazon a 15 year, 75% property tax abatement and finance a whole smorgasbord of additional infrastructure improvements, all in exchange for a nebulous promise that Amazon would at some point employ 2,000 people, presumably lower skilled folks running between conveyor belts where it's apparently too dangerous or onerous for expensive robots to go. (This<b><span style="color: blue;"> <a href="http://money.cnn.com/2016/10/06/technology/amazon-warehouse-robots/index.html">video clip</a></span></b> shows how an Amazon package receives less than 60 seconds of human contact to be picked and shipped....it really is amazing!......but doesn't exactly bode well for the veracity of Amazon's nebulous commitment of 2,000 jobs.....I'm sure efficiency will improve and they will continue to <i>do more with less</i>.)<br />
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Of course, even with all of the assistance and Corporate Welfare provided by local and State governments and the unfettered access to low cost Wall Street <i>Capital Formation</i>, to the detriment of Mom & Pop retailers, the United States Postal Service apparently felt, for whatever reason, that the playing field wasn't sufficiently tilted in favor of Amazon and Walmart.<br />
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Amazon and Walmart's cost to ship a package via the USPS is apparently a <a href="https://www.washingtonpost.com/news/wonk/wp/2018/04/04/is-the-post-office-making-or-losing-money-delivering-amazon-packages/?noredirect=on&utm_term=.fde4d57c51a9"><span style="color: blue;"><b>closely guarded national secret</b></span></a>. The only thing we can tell for sure is that the price charged to ship a package under the terms of the Amazon and presumably, the Walmart contracts, with the US Post Office is signifficantly less than you or I pay to ship the same package. In my humble opinion, it shouldn't cost Amazon a third of what Aunt Millie pays to mail her Christmas presents.....Amazon shipments should be subsidizing Aunt Martha....not the other way around.<br />
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Moreover, <b><a href="https://www.forbes.com/sites/wadeshepard/2017/11/05/how-the-usps-epacket-gives-postal-subsidies-to-chinese-e-commerce-merchants-to-ship-to-the-usa-cheap/#529ca73840ca"><span style="color: blue;">It shouldn't cost a Chinese seller less to ship his package 12,000 miles than it costs the local hardware store to mail a package across town. But it does. </span></a></b> Think about Chinese GMV sold on Amazon and Walmart.com. These<span style="color: blue;"><b> <a href="http://about.usps.com/news/national-releases/2011/pr11_037.pdf"><span style="color: blue;">ePackets</span></a></b></span> are delivered under yet another under priced "deal" which put one more nail in the coffin of America's Heartland retailers.<br />
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In the continued relentless spirit of cost cutting and <i>doing more with less</i>, Amazon is continuing to pioneer new delivery methods which cost even less than their cost under the USPS contract. The plan involves taking advantage of the recently unemployed (perhaps former retail and manufacturing workers)<a href="https://uberpeople.net/threads/amazon-logistics-wth-is-this.114033/"> <span style="color: blue;"><b>who don't understand vehicle depreciation</b></span></a>. The <i><b><a href="http://fortune.com/2016/02/18/amazon-flex-deliveries/"><span style="color: blue;">Amazon-Flex</span></a></b></i> scheme is to have these Uber-like people, who apparently can no longer find work, deliver Amazon packages using their own vehicles for a few dollars a package.<br />
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It seems we've made the unconscious decision that small town American Retail in no longer needed. America will be fine with two large retailers controlling the supply of virtually every item that goes into every home in Heartland America along with the permanent, irreversible contribution to trade deficits that go along with this structure. If you want to truly change behavior and level the playing field, raise postage rates on the Amazon and Walmart.com contracts, eliminate the ePacket shipping subsidy and tax FedEx & UPS per delivery. Eliminate the eCommerce sales tax loophole which automatically gives Amazon.com, Walmart.com and other "non local" on-line sellers a 5%-8% discount/subsidy over local retailers.<br />
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To sum it up, Amazon, the company that was primarily responsible for putting the Randal Park Mall out of business (Economic destruction of Real Estate value to the tune of $300 Million in 1976 dollars, in addition to the years of losses accumulated by the Mall and its tenants) is now going to occupy the site at an incredible discount, with a substantial part of the new investment coming from local tax payers. As an aside, it's strange, when I renegotiated my office lease a few years ago and requested a 75% tax abatement, free rent and a slough of leasehold improvements, the property manager told me it was "take it or leave it" and suggested I just look somewhere else. Perhaps I should have gotten an Investment Bank behind me, offered to lease more space and provide 2,000 jobs at some point in the indeterminable future? I guess we'll see how this goes. <br />
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<b><u>The Worst Places to Live in America</u></b><br />
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So the question is, specifically with regard to Walmart, when we are talking about the decline of small town American Retail, and again by extension small town America, are we talking about the chicken or the egg?<br />
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As I mentioned in the opening paragraphs of this post, the high interest rate policies of Volker and Reagan, though ancient history, were the first salvos in the disembowelment of the American Economy. The best reference I can cite for this is William Greider's "<a href="https://www.amazon.com/Secrets-Temple-Federal-Reserve-Country/dp/0671675567"><span style="color: blue;"><i><b>Secrets of the Temple</b></i></span></a>", (You can pick it up on Amazon) which I first read in 1987 and took the time to re-read recently on a couple of long flights and layovers. I was considering writing a piece on it, revisiting the concepts and how the world has moved forward from then, but I wasn't sure there would be any reader interest. (i.e. In today's news cycle, If it didn't happen yesterday nobody cares)<br />
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I strongly encourage any of you who haven't read this book to get to know it. It's well worth the time even though it's slightly more than 280 characters (700 +/- pages). Suffice it to say, after the first economic shots were fired by Reagan and Volker, the second volley in the war on the American economy was fired by Amazon, Walmart and Beijing in the 1990's. Again, I'll explain this Beijing reference shortly.<br />
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So let's take a look at the relationship between America and the Walmart/Amazon competitive duopoly. Both Walmart and Amazon are the most subsidized recipients of corporate welfare in history. Tax breaks and free land with politicians and developers falling all over themselves to "land the big fish" hoping that their communities will be the last standing in the fifty mile retailer-kill-zone radius. The ultimate coup that both of these businesses were able to exploit, to the detriment of every other retailer was a carefully implemented global supply chain, subtly and cleverly influenced and designed by the Chinese Communist Party. (CCP) <br />
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But first, let's take a look at a few towns and cities that have fallen victim to the Walmart-Bomb blast radius.<br />
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Here are the Twelve (12) worst big cities and Ten (10) worst small towns in America. (Note: The lists are an opinion of each of the authors, feel free to choose your own "list" but suffice it to say that the presumptive relationship would seem to hold. The places with the greatest unemployment, highest crime rates, and most substantial economic malaise all seem to have Walmart as an "anchor tenant". i.e.) The More Walmart is involved in the local economy, the more the town seems to resemble a "shit hole" (a recently coined White House term referring to "underdeveloped" or "economically challenged"). Here are the lists:<br />
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<b><u>The Ten (10) Worst Small Towns in America</u></b><br />
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1.) Gallup, NM - <a href="https://www.walmart.com/store/906/gallup-nm/details">Walmart Super Center</a><br />
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2.) Fort Pierce, FL - <a href="https://www.walmart.com/store/973/fort-pierce-fl">Walmart Super Center</a></div>
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3.) Elkhart, IN - <a href="https://www.walmart.com/store/2679/elkhart-in/details">Walmart Super Center</a>, <a href="https://www.walmart.com/store/4399/elkhart-in/details">Walmart Super Center</a> (Note: Elkhart, IN actually has two Super Centers. Walmart is actually Elkhart's largest employer.)</div>
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4.) Leitchfield, KY - <a href="https://www.walmart.com/store/445/leitchfield-ky/details">Walmart Super Center</a></div>
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5.) Pine Bluff, AK - <a href="https://www.walmart.com/store/3331/pine-bluff-ar/details">Walmart Super Center</a></div>
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6.) Rocky Mount, NC - <a href="https://www.walmart.com/store/1197/rocky-mount-nc">Walmart Super Center</a></div>
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7.) Anderson, IN - <a href="https://www.walmart.com/store/1728/anderson-in">Walmart Super Center</a></div>
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8.) Niagra Falls, NY - <a href="https://www.walmart.com/store/1909/niagara-falls-ny">Walmart Super Center</a></div>
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9.) Ardmore, OK - <a href="https://www.walmart.com/store/129/ardmore-ok">Walmart Super Center</a></div>
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10.) Kokomo, IN - <a href="https://www.walmart.com/store/1962/kokomo-in">Walmart Super Center </a></div>
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The author of the above "The World According to Briggs" has a couple of caveats for his list, the most relevant being that he does NOT list any dumpy California small towns on the list, ostensibly because there are just so many of them that they would dominate the list.<br />
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<b><u>The Twelve (12) Worst "Big" Cities in America</u></b><br />
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1.) Camden, NJ - 9 Walmarts<br />
2.) Detroit, MI - 15 Walmarts<br />
3.) Cleveland, OH - ONLY 3 Walmarts<br />
4.) New Haven, CT - 1 Walmart<br />
5.) Memphis, TN - 7 Walmarts<br />
6.) Stockton, CA - 2 Walmarts<br />
7.) Birmingham, AL - 13 Walmarts<br />
8.) New Orleans, LA - 8 Walmarts<br />
9.) Oakland, CA - 2 Walmarts (One closed in 2017)<br />
10.) Modesto, CA - 3 Walmarts<br />
11.) Reno, NV - 6 Walmarts<br />
12.) St Louis, MO - 4 Walmarts<br />
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It's tough to argue with the accuracy of this list, even though Cleveland, my current beloved home town and the (current) home (via Akron) of LeBron James, with all of the great restaurants and night life, the 2016 Republican National Convention and the birthplace of the incredible burning Cuyahoga River trick (Don't worry that was years ago, the fire's out and we've cleaned it up.....that's just the first thing people think of when I mention Cleveland). Anyway, it would be nice to know why in the world a relatively small little berg like Camden New Jersey needs nine (9) Walmarts, or relatively tiny Birmingham Alabama needs thirteen (13)? Doesn't anyone shop anywhere else? Is the crime so bad in these cities that all the defenseless, unarmed, shopkeepers have closed their doors and are gone for good? The only source of food and clothing left in the area are highly fortified, well defended Walmart Super Centers? Walmart is the last bastion of refuge, the only sanctuary for the surviving, hopeless huddled masses?<br />
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Alternatively, is it possible that the Walmart/Amazon impact is at least partially to blame for this economic debacle. If you ask the residents of the above communities if they'd rather have "Always the Low Price" or a job, I'd guess most of the residents, at least the ones with some initiative and work ethic might respond "I'd like to have a job". On the other hand, if you ask, would you always want the "Low Price", or would you want your neighbor to keep his job?... the decision becomes much easier.<br />
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Unfortunately, whether we're a Walmart shopper or a hedge fund manager we don't make that decision consciously. We just jump for what we perceive as the best deal, value or "low price", regardless of the inevitable consequences outside of the immediate transaction. We believe that our decisions are independent, yet they are all subtly causal and ruthlessly related.<br />
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I'd suggest that the Chinese Communist Party (CCP) has long been well aware of this little nugget of market-driven wisdom and they've ruthlessly used it to their economic advantage. <br />
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<b><span style="color: red; font-size: large;"><u>Chinese Potting Soil.....</u></span></b><br />
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<span style="color: red;"><i style="font-weight: bold; text-decoration-line: underline;">Executive Summary:</i> A substantial amount of Walmart's and Amazon's Inventory as well as third party GMV, despite the perception that these businesses are great "American" businesses, is not "Made In The USA" . Moreover, much of the third party GMV is from questionable sources. </span><span style="color: red;">(Again, neither Amazon nor Walmart disclose GMV. As a matter of perspective, eBay, a much smaller company footprint by any standard, pumps out GMV of roughly US$80 Billion annually.) </span><br />
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<span style="color: red;">In this section we examine oddly priced, $250 a bag "potting soil" sold by a New Jersey Distributor "We The People" as one such example of the many dubious offerings available from un-vetted third party sellers. In all likelihood, these odd examples of absurdly priced goods sold by shell company websites are likely designed to move money to places it shouldn't go. Of course, I'm not accusing anyone of anything here, but lets say, hypothetically, that a Chinese drug smuggler wanted to get paid. He might start a New Jersey Distributor and instruct his customers to purchase "luxury potting soil" as payment for Opioids. The payment makes its way back to China, ostensibly as payment for the potting soil. I picked this example solely because I find it pushing the envelope of absurdity. There are lots of "less goofy" products out there, but they all serve the same purpose, to get money back to China via dubious GMV on Walmart and Amazon storefronts. I'm hoping this piques your curiosity since, at least to me, it's actually pretty entertaining financial comedy.</span><br />
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<span style="color: red;">The next <b><i><u>Executive Summary</u></i></b> is "</span><u style="color: red;"><i><b>Dirty Laundry....</b></i></u><span style="color: red;">" </span><br />
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Well, spring has sprung and I have some annuals I want to put in now that it's only snowing every other week here in Cleveland. Time to get busy with my gardening! We have these wonderful hanging baskets on our front porch. Wax Begonias thrive in the shade and look beautiful in the baskets. Of course, I wanted to get some new potting soil and I really prefer the best available, since the plants thrive with a high quality mix.<br />
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Obviously, the first place I went to research something like this, like everything we buy as American Consumers, was Walmart.com. Walmart, as we all know, is fantastic for things like this since they are "Always the Low Price" and there's a Walmart Super-Duper Center only 3 miles (much less than 15 miles) away from my home.<br />
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I put "Potting Soil" in the Walmart.com search bar and sorted from highest to lowest price (I always want the highest quality) and WHOOOOAHHH! I found some really expensive potting soil! $250/per bag!....$5.00 a pound for dirt! Hardly "Always the Low Price!"<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgoebSoZGuibVEX0IfLdUFZRfyCMRrYbEMNBegpt7zNmCMubMUt_PVYDuqydt3vYbIYd7OuxKNLK8_tW8HC2Vn1Mrf79_SfmrWes_Hl73KIItFZDjFS14yx9jGToe7OgLxrWBDixSuLBsE/s1600/Walmart_Expensive_Potting_Soil.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="495" data-original-width="870" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgoebSoZGuibVEX0IfLdUFZRfyCMRrYbEMNBegpt7zNmCMubMUt_PVYDuqydt3vYbIYd7OuxKNLK8_tW8HC2Vn1Mrf79_SfmrWes_Hl73KIItFZDjFS14yx9jGToe7OgLxrWBDixSuLBsE/s1600/Walmart_Expensive_Potting_Soil.png" /></a></div>
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<img height="345" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh0bQNmeU2HAGu05pb2c63nlIHAdgwLRY9dVtXyA09pwMQRLnQJW_BwTMSA3G0aORwkj7p2rvGVg3jV_YjA-48w0p23oY02AOVmHGeGXMLtDwNAgCVed24Y-62H4SGtXz_UFxkbaKbMwF8/s640/Walmart_Potting_Soil_%2524245_30lbs.png" width="640" /><br />
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<a href="https://www.walmart.com/ip/BUMPER-CROP-ORGANIC-SOIL-AMENDMENT/165159583#read-more">https://www.walmart.com/ip/BUMPER-CROP-ORGANIC-SOIL-AMENDMENT/165159583#read-more</a><br />
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I've posted these links along with the screen shots to document the existence of this "magic dirt", presuming that once this blog gets to the appropriate level of management at Walmart, that these links and "We the People" postings will be long gone......only to be replaced by other weird newly created vendors selling $1,000 dust mops or $500 garden gnomes, in the never ending game of OJ Simpsonian-Zuckerbergian whack-a-mole....and a never ending search for "the real killers".<br />
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This really awesome (and expensive) potting soil is sold by a third party seller that goes by the name of "We the People". When we examine the price points in descending order, after the "We the People" products listed on Walmart.com, the price drops off dramatically to about $30.00 for comparably sized bags/products. When I look at the same "Master Nursery" product on Amazon.com it's about $30.00. (I bought a 46 lb. bag of good old Akron, Ohio "Miracle Gro" dirt for about $8.00.) That seemed like a much better deal to me.<br />
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As an aside, if Walmart wanted to compete head to head with "We the People" in the "$250 a bag luxury dirt" segment, don't you think they could have just asked a few of their home and garden department employees to grab some shovels, go out back, dig up some dirt up and bag it off? The margin would be HUGE!<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhjB-FStUyr2HjsLraVcbnuos8SE0UX2UsXUBrwERSiTsByffYPbgD6rs9K_sx04Qg_yYFUchantFdo4Ty5xF5vql9EEgGbGy5c6Bv6p0b_PzO3n-AjTaWscVePVAWEr8wPIchTsdL1Cw8/s1600/Amazon_Expensive_Potting_Soil.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="526" data-original-width="961" height="350" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhjB-FStUyr2HjsLraVcbnuos8SE0UX2UsXUBrwERSiTsByffYPbgD6rs9K_sx04Qg_yYFUchantFdo4Ty5xF5vql9EEgGbGy5c6Bv6p0b_PzO3n-AjTaWscVePVAWEr8wPIchTsdL1Cw8/s640/Amazon_Expensive_Potting_Soil.png" width="640" /></a></div>
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Since I knew virtually nothing about luxury dirt, I needed to find out more about the "We the People" Company. Incredibly, they get hundreds of favorable reviews on their $250/bag potting soil, mostly written by people who can't spell and have problems with "good English". Their logo is also an odd version of the American flag.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgcSetcpljtsyp522U5PYlyZ_33g3pZNW-JMyIeuzaSTUdhwLpGMHwlKAfxWCjwmcHFCqHO4TJdgkOfN5T-DwcVHNGeg7alYLWiSq2qCjGcJRe_pieRRuB_Y5fpGM_sVGIsDqmgYDT1Fww/s1600/Walmart_We_the_People_Potting_Soil.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="533" data-original-width="975" height="349" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgcSetcpljtsyp522U5PYlyZ_33g3pZNW-JMyIeuzaSTUdhwLpGMHwlKAfxWCjwmcHFCqHO4TJdgkOfN5T-DwcVHNGeg7alYLWiSq2qCjGcJRe_pieRRuB_Y5fpGM_sVGIsDqmgYDT1Fww/s640/Walmart_We_the_People_Potting_Soil.png" width="640" /></a></div>
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When we click the "About this seller" link we get the following:<br />
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<a href="https://www.walmart.com/reviews/seller/335?offerId=4D3C6822EF1C49B49A0030892EEE8E2E"><span style="color: blue;">https://www.walmart.com/reviews/seller/335?offerId=4D3C6822EF1C49B49A0030892EEE8E2E</span></a><br />
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<div class="tabTitle font-semibold Price--medium" style="box-sizing: border-box; color: #444444; font-family: myriad-pro, BogleWeb, "Helvetica Neue", Helvetica, Arial, sans-serif; font-size: 1.625rem; font-weight: 600; padding: 0px 0px 20px;">
About this seller</div>
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<span style="color: #999999;">'We The People' has a combined experience of over 50 years in merchandising, consumer goods and most importantly, customer satisfaction. We come from humble backgrounds where we work hard and take care of our homes and families.</span><span style="color: #444444;"> </span><span style="color: red;">We aren't complicated people. We like having fun and helping others! </span><span style="color: #999999;">WTP offers a wide variety of merchandise at great pricing, all ready to ship right to your door! </span><span style="color: red;">Our goals is simple</span><span style="color: #444444;">, </span><span style="color: #999999;">provide the greatest shopping experience possible while continuing to make improvements on a daily basis. We strive to deliver greatness. Let us know how we can help you today!</span></div>
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I for one think that this is just AWESOME! 50 Years of EXPERIENCE! What a great American business model! Their marketing people are cutting edge! They cleverly use self deprecating, incorrect tense and odd grammar to fit in with "real" Americans! Oddly enough, there was no phone number or address listed for "We the People" on Walmart.com. There is only a mention that they don't collect sales tax in any states except New Jersey. Moreover, the only way to contact them under the customer service tab on Walmart.com is through an email address:<br />
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<span style="color: red;"><b> <span style="font-family: , "bogleweb" , "helvetica neue" , "helvetica" , "arial" , sans-serif; font-size: 16px;">support@essentialhardware.com</span></b></span><span style="color: #444444; font-family: , "bogleweb" , "helvetica neue" , "helvetica" , "arial" , sans-serif; font-size: 16px;">. </span></div>
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That's strange, who is "EssentialHardware.com"? When we do some poking around through New Jersey public filings we find that they are a relatively new company called <i><b>Dukat, LLC</b></i> (Incorporated about 6 years ago....slightly less than 50 years). Additional DBA's, which generally link to websites littered with misspellings and bad grammar are: <span style="background-color: white; color: #333333; font-family: , "helvetica" , "arial" , sans-serif; font-size: 14px;">Bargain the People, </span><span style="background-color: white; color: #333333; font-family: , "helvetica" , "arial" , sans-serif; font-size: 14px;">Essentialhardware.com, </span><span style="background-color: white; color: #333333; font-family: , "helvetica" , "arial" , sans-serif; font-size: 14px;">Grace's Greens, </span><span style="background-color: white; color: #333333; font-family: , "helvetica" , "arial" , sans-serif; font-size: 14px;">Heads Up Action,.</span><span style="background-color: white; color: #333333; font-family: , "helvetica" , "arial" , sans-serif; font-size: 14px;">Marine Screens, </span><span style="background-color: white; color: #333333; font-family: , "helvetica" , "arial" , sans-serif; font-size: 14px;">Offtopia, </span><span style="background-color: white; color: #333333; font-family: , "helvetica" , "arial" , sans-serif; font-size: 14px;">Pup Daddy, </span><span style="background-color: white; color: #333333; font-family: , "helvetica" , "arial" , sans-serif; font-size: 14px;">Skoozel, </span><span style="background-color: white; color: #333333; font-family: , "helvetica" , "arial" , sans-serif; font-size: 14px;">Tech To Commerce, </span><span style="background-color: white; color: #333333; font-family: , "helvetica" , "arial" , sans-serif; font-size: 14px;">We the People, </span><span style="background-color: white; color: #333333; font-family: , "helvetica" , "arial" , sans-serif; font-size: 14px;">Yumza</span></div>
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Here's the BBB report:</div>
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<a href="https://www.bbb.org/new-jersey/business-reviews/general-merchandise/dukat-llc-in-edison-nj-90161431/bbb-accreditation"><span style="color: blue;">https://www.bbb.org/new-jersey/business-reviews/general-merchandise/dukat-llc-in-edison-nj-90161431/bbb-accreditation</span></a></div>
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When we poke around a little more, we find some more, oddly familiar, goofy language, mimicking the Walmart.com "We the People" seller info, from their <span style="color: blue;"><a href="https://www.essentialhardware.com/company-info/about-us" style="color: blue; font-weight: bold;">EssentialHardware.com</a> website:</span></div>
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<em style="background-color: white; color: #5e5449; font-family: Arial, Helvetica, sans-serif; font-size: 14px; margin: 0px; padding: 0px;">At Essential Hardware we come from humble backgrounds where we work hard and take care of our homes. We aren’t complicated people.</em><em style="background-color: white; font-family: arial, helvetica, sans-serif; font-size: 14px; margin: 0px; padding: 0px;"><span style="color: red;"> We like having fun and helping others</span></em><em style="background-color: white; color: #5e5449; font-family: Arial, Helvetica, sans-serif; font-size: 14px; margin: 0px; padding: 0px;">, we enjoy spending time with our families, and most of all </em><em style="background-color: white; font-family: arial, helvetica, sans-serif; font-size: 14px; margin: 0px; padding: 0px;"><span style="color: red;">we’re obsessive about doing more with less</span></em><em style="background-color: white; color: #5e5449; font-family: Arial, Helvetica, sans-serif; font-size: 14px; margin: 0px; padding: 0px;">. It’s who we are - and now it’s how we do business.</em> </div>
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<span style="background-color: white; color: #5e5449; font-family: "arial" , "helvetica" , sans-serif; font-size: 13px;">Now of course with all of these items available, you might be wondering where we keep them all. Well for one thing, </span><span style="background-color: white; color: red; font-family: "arial" , "helvetica" , sans-serif; font-size: 13px;">we have warehouses all across the country tucked away in beautiful locations right near you so shipping is always efficient and speedy</span><span style="background-color: white; color: #5e5449; font-family: "arial" , "helvetica" , sans-serif; font-size: 13px;">. And our custom distribution method is the only way to deliver this many products so affordably - something we are constantly improving on to save you even more time and money.</span></div>
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<span style="background-color: white;"><span style="font-family: inherit;">According to<b><span style="color: blue;"> <a href="http://www.marketplacerating.com/walmart/we-the-people">MarketplaceRating.com</a>:</span></b> </span></span></div>
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<span style="font-size: x-small;"><span style="background-color: white;"><span style="font-family: inherit;">"</span><span style="font-family: "arial" , "helvetica" , sans-serif;">We the People"</span><span style="font-family: inherit;"> </span></span><span style="background-color: white; color: #2c3e50; font-family: "lato" , "helvetica neue" , "helvetica" , "arial" , sans-serif;">is one of the TOP 500 sellers on Walmart. The average price of all their products is</span><span style="background-color: white; color: #2c3e50; font-family: "lato" , "helvetica neue" , "helvetica" , "arial" , sans-serif;"> </span><span itemprop="priceRange" style="box-sizing: border-box; color: #2c3e50; font-family: "lato" , "helvetica neue" , "helvetica" , "arial" , sans-serif;">$35</span><span style="background-color: white; color: #2c3e50; font-family: "lato" , "helvetica neue" , "helvetica" , "arial" , sans-serif;">. They currently stock 10,000 products in Seasonal, Office, Auto & Tires, Home Improvement and Music categories.</span><span style="background-color: white; color: #2c3e50; font-family: "lato" , "helvetica neue" , "helvetica" , "arial" , sans-serif;"> </span><span style="box-sizing: border-box; color: #2c3e50; font-family: "lato" , "helvetica neue" , "helvetica" , "arial" , sans-serif; font-weight: 700;"><a href="http://linksynergy.walmart.com/fs-bin/click?id=OYCQzzP9u48&offerid=223073.7502&type=4&subid=0&tmpid=1081&RD_PARM1=https://www.walmart.com/search/?facet=retailer:We%20The%20People" rel="nofollow" style="box-sizing: border-box; color: #18bc9c; text-decoration-line: none;" target="_blank">Browse all We The People products here.</a></span><span style="background-color: white; color: #2c3e50; font-family: "lato" , "helvetica neue" , "helvetica" , "arial" , sans-serif;">. </span><span style="background-color: white; color: #2c3e50; font-family: "lato" , "helvetica neue" , "helvetica" , "arial" , sans-serif;">Last month reviews data shows, that "We The People" is in the 138th place. According to feedback numbers of the last year "We The People" was doing better - they were number 83rd. For t</span><span style="background-color: white; color: #2c3e50; font-family: "lato" , "helvetica neue" , "helvetica" , "arial" , sans-serif;">he latest reviews please check their page on</span><span style="background-color: white; color: #2c3e50; font-family: "lato" , "helvetica neue" , "helvetica" , "arial" , sans-serif;"> </span><a href="http://linksynergy.walmart.com/fs-bin/click?id=OYCQzzP9u48&offerid=223073.7502&type=4&subid=0&tmpid=1081&RD_PARM1=https://www.walmart.com/reviews/seller/335" rel="nofollow" style="box-sizing: border-box; color: #18bc9c; font-family: Lato, "Helvetica Neue", Helvetica, Arial, sans-serif; text-decoration-line: none;">Walmart</a><span style="background-color: white; color: #2c3e50; font-family: "lato" , "helvetica neue" , "helvetica" , "arial" , sans-serif;">."</span></span></div>
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<span style="background-color: white; color: #2c3e50;"><span style="font-family: inherit;">I've also posted a couple of the 550+ Walmart.com Reviews for "We The People" below. They are pretty much are all like this. Either the reviews are 1.) "Five Star" with either no comment, or misspelled, grammatically odd kudos; or 2.) "One Star", generally hateful commentary, presumably from people who had accidentally purchased something from this dubious company. Hmmmmmm......</span></span></div>
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<span style="background-color: white;"><span style="font-family: inherit;">I particularly liked <b style="font-style: italic;">"came quickly in mail, packaged carefully for a toxic product"</b></span></span><br />
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<span style="background-color: white;"><span style="font-family: inherit;">I hope they weren't talking about my luxury potting soil!</span></span><br />
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<span style="background-color: white;"><span style="font-family: inherit;"><b><i><span style="color: blue;"><a href="http://www.masternursery.com/"><span style="color: blue;">Master Nursery</span></a> </span></i></b><span style="color: #2c3e50;"> is apparently the "Manufacturer" of the products in these $250/bag "We the People" offerings. The primary distributor is "</span><b><i><u><a href="https://coastofmaine.com/product/bumpercrop/"><span style="color: blue;">The Coast of Maine</span><span style="color: #2c3e50;">"</span></a></u></i></b><span style="color: #2c3e50;"> for both the "Bumper Crop" and "Gardner's Gold" potting soil products. These products are also </span><b><a href="https://coastofmaine.com/wp-content/uploads/2016/01/omri-bumpercrop-soilbuilder.pdf"><span style="color: blue;">certified as "Organic"</span></a></b><span style="color: #2c3e50;"> by OMRI (</span><b><u><a href="https://www.omri.org/"><span style="color: blue;">Organic Materials Review Institute</span></a></u></b><span style="color: #2c3e50;">). </span></span></span><br />
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<span style="background-color: white;"><span style="font-family: inherit;"><span style="color: #2c3e50;">I reached out to these three organizations by both phone and email, asking about the "$250 a bag Walmart dirt", I provided links to the products and specifically asked where this really expensive dirt was being manufactured. Neither Master Nursery or The Coast of Maine responded. I'm guessing they thought I was a lawyer. OMRI responded via email as follows.</span></span></span><br />
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<i><span style="color: #2c3e50;">"Thank you for contacting OMRI. </span><span style="color: #2c3e50;">You will need to contact the company for more information about their product. </span><span style="color: #2c3e50;">Have a great day! </span><span style="color: #2c3e50;">Warm regards, </span><span style="color: #2c3e50;">Josna"</span></i><br />
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<span style="background-color: white;"><span style="font-family: inherit;"><span style="color: #2c3e50;">Apparently, the organization that "certifies" this $250/bag dirt as organic has no idea where this awesome dirt is made, or if they did, don't want to disclose it. </span></span></span><br />
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<span style="background-color: white;"><span style="font-family: inherit;"><span style="color: #2c3e50;">So now let's take a look at the a sample of Walmart's Inventory. Rather than plunk down $250 for designer dirt from "We The People" I thought I'd go "old school", avoid eCommerce and drive to the Walmart to pick up a bag of dirt myself. As I drove past the rows of vacant, boarded up neighborhood store fronts, ripe for redevelopment, I felt a sense of hope that maybe Amazon or Walmart might someday make use of this space, perhaps robot/drone manned kiosks? With luck, they could put a specialized, automated luxury Chinese-dirt kiosk right on the corner where that abandoned hardware store stands now....I'd never have to leave the gates of my development! </span></span></span><br />
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<span style="background-color: white;"><span style="font-family: inherit;"><span style="color: #2c3e50;"><span style="color: #2c3e50;">As I was walking through Walmart trying to find the luxury dirt bags, I came up with a wonderful game. I took my Motorola/Lenovo (Chinese) smart phone (which I really like) and took random pictures of the "Made in" tags. The rules of the game were, 1.) I would not include TV's and phones (none of those are made in America anyway and that would skew the sample), and 2.) That I would not include food or health and beauty products presuming that a.) The FDA has a reasonable control of our food supply and b.) Most of America's food and hygiene products are manufactured by </span><a href="http://www.businessinsider.com/10-companies-control-the-food-industry-2016-9"><span style="color: blue;"><b><i>great American companies</i></b></span></a><span style="color: #2c3e50;"> like Nestle', Unilever, Danone and ABF.</span></span></span></span><br />
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To accomplish this sample, I randomly walked through Walmart, took 20 or so steps, walked to a shelf, grabbed an item and snapped a picture of the inventory tag showing where the item was "Made in _____". Pictures of the tags and the results are posted below. </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhyOjaigdg932dWldk86nCPhqZUYBAMVrKsYzpB44igH4lozQxGdf4z9JI9K2skFOdo_nxxWNUXeOAt4mqNckMApUIile2Mp_DdXUJjQz6ulLlabAggg0Cnp9JLURme-Wj8dvFxoSK7JQ8/s1600/Walmart_Inventory_Samples.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="540" data-original-width="925" height="372" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhyOjaigdg932dWldk86nCPhqZUYBAMVrKsYzpB44igH4lozQxGdf4z9JI9K2skFOdo_nxxWNUXeOAt4mqNckMApUIile2Mp_DdXUJjQz6ulLlabAggg0Cnp9JLURme-Wj8dvFxoSK7JQ8/s640/Walmart_Inventory_Samples.png" width="640" /></a></div>
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The result is that, not surprisingly, virtually nothing at Walmart (6% of Sampled Inventory) is made exclusively in America. To be fair, 19% of the Inventory is actually "Made in the USA with Globally Sourced Parts" which generally means that foreign made parts are brought here, slapped together and put in a box, appropriately labeled as "Made in the USA (sort of)". i.e.) Trash bags are "Made in America with Globally Sourced Parts". I can't tell for sure but there are only two parts to a box of trash bags (the box and the roll of bags), so either the trash bags or the box were "made" in the USA. My bet would be on the box.<br />
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As expected, 19 of the 32 goods sampled (60%) are made in China. Interestingly, iconic American brands like Wrangler Jeans and America's pastime, Major League Baseball (MLB), have chosen Nicaragua as their licensed production source while the National Football League (NFL), the sport of America's heartland, went with Vietnam to produce their replica jerseys. <br />
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The only conclusion I can come to from this albeit limited, statistically insignificant sample, is that virtually nothing sold by Walmart, Amazon and by extension "American Retail" is actually "Made in America" anymore. Even though most of the goods sold directly by Amazon and Walmart (and included in Revenue) are presumably legitimate, I have significant concerns as to the "Third Party GMV" which neither Amazon nor Walmart have deemed important enough to disclose. I initially described this phenomenon in my October, 2016 post entitled: <span style="color: blue; font-weight: bold;"><a href="https://deep-throat-ipo.blogspot.com/2016/10/cheap-reading-glasses-handbagsand.html"><span style="color: blue;">Cheap reading Glasses, Handbags.....and the Wiemar Republic....</span></a> </span>where I talked about the significant level of "odd" and presumably "fake" third party sales listings on US eCommerce platforms.<br />
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<b><u><span style="color: red; font-size: large;">Dirty Laundry</span></u></b><br />
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<span style="color: red;"><b style="text-decoration-line: underline;">Executive Summary:</b> Any auditor would tell you that the easiest way to launder money is to bury smaller transactions in heaps and piles of larger transactions. Like, perhaps, buying $250 bags of luxury dirt with a Walmart <i>MoneyCard</i> on Walmart.com. The Chinese have a cute little term for this known as "Ants Moving House". The core meaning of the phrase is that the strength of one "ant" is insignificant, but armies of "ants" working as a team can actually lift a house off of its foundation and carry it to the desired relocation. This phrase was coined when describing how enterprising Chinese people get RMB off the mainland and converted to Western Currency denominated assets. In this section we'll discuss the probability that there is significant money laundering going on through both Amazon and Walmart. We'll discuss how easy it might be to set up untraceable, re-loadable Walmart <i>MoneyCards</i> and <i>AmazonCash. </i>We will discuss buying allegedly "fake" goods from "fake" Walmart or Amazon storefronts (Again, like $250 bags of dirt through "We the People" for example). </span><br />
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<span style="color: red;">We'll discuss:</span><br />
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<li><span style="color: red;">GreenDot Financial, the newly created (IPO 2010:NYSE:GDOT) <i>Walmart MoneyCard</i> issuer with their sole offshore office in Shanghai.</span></li>
<li><span style="color: red;">Practical applications of "Ants Moving House".</span></li>
<li><span style="color: red;">Amazon's rapid expansion into location based re-loadable, "no credit check needed" debit products (<i>Amazon Cash</i>)</span></li>
<li><span style="color: red;">The minimal (read none) requirements necessary to set up an Amazon or Walmart Storefront.</span></li>
<li><span style="color: red;">The ease at which anyone can set up a <i>Walmart MoneyCard</i> with no identification required.</span></li>
<li><span style="color: red;">The corporate "land rush" to get in on the lucrative "no credit check" US Money laundering business. </span></li>
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<span style="color: red;">As always, if you don't want to immerse yourself in the disturbing, yet fascinating economic details, feel free to skip ahead to: </span><span style="color: red;"><i style="font-weight: bold; text-decoration-line: underline;"><u>The Vancouver Model</u> </i> where you will most likely be even more disturbed.</span><br />
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For obvious reasons (Who wouldn't want Billions of dollars of free float!), there's a <a href="https://deep-throat-ipo.blogspot.com/search?q=moneygram">mad scramble</a> out there right now for brick & mortar chain retailers to get into the "No Credit Check" high-fee/re-loadable/debit Cash Card" business. The first, and most obvious reason to get involved in this under-served market, is that the market is huge. In 2015, roughly 40% of the adult US Population was "<a href="https://www.reportlinker.com/p03631609/Unbanked-and-Underbanked-Consumers-in-the-U-S-Edition.html"><span style="color: blue;">unbankable</span></a>" (i.e. for various reasons unable to own a bank account) and the ratio is on the rise. <br />
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<span style="font-family: inherit;"><span style="background-color: white;">Of course, there are lots of understandable reasons for good folks to lose banking privileges in America. Job loss, medical bills, disability, etc. just to name a few. There are also lots of "not so good" reasons (i.e. criminal activity, evasion of court ordered judgments, garnishments and seizures, citizenship issues, a potentially nefarious desire just to stay "off the grid", etc.) In any case, all of the aforementioned comprise the </span></span>"No Credit Check" high-fee/re-loadable/debit "Cash Card" target market<span style="background-color: white; font-family: inherit;">.</span><span style="font-family: inherit;"> </span><br />
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<span style="font-family: inherit;">Let's take a look at how easy it is to get a Walmart <i>MoneyCard</i> product. Basically, you show up at a Walmart, in person at a register or the customer service desk, give them some cash and that's it! Since I happened to be down in West/Central Texas, I stopped at a local Walmart, gave the lady at the desk $21 (There was a $1 fee for the card) and that was it! I had a card number. She said I could use it "just like cash....but even better!" I asked if she needed my name or anything like that and she said "nope....it's just like cash!" Here's the fee schedule for this great "just like cash" product. I snapped a picture (with my awesome Chinese phone) right off of the Customer Service Desk "menu board".</span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi_yWLmW566FqwnuvcySLOY9wUoFYPK3cRWnGlzEDlGH6l8cLuQaf41b8jC92zHgixWNTP06tSA2BxehYrF6T47GduNT8ohP_PvU5daAp1ZvDB-YPml8YR-VysUwi-3IvPs_wlDpmrBwqQ/s1600/Walmart_MoneyCenter_Store_Sign.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="430" data-original-width="692" height="396" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi_yWLmW566FqwnuvcySLOY9wUoFYPK3cRWnGlzEDlGH6l8cLuQaf41b8jC92zHgixWNTP06tSA2BxehYrF6T47GduNT8ohP_PvU5daAp1ZvDB-YPml8YR-VysUwi-3IvPs_wlDpmrBwqQ/s640/Walmart_MoneyCenter_Store_Sign.png" width="640" /></a></div>
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<span style="font-family: inherit;">Now, I'm not one to quibble, but I would have to disagree with the nice little old Texas lady who sold me that Walmart MoneyCard. She's dead wrong. It's even BETTER than Cash! If I have a duffel bag full of cash and I want to get over the border, I can't immediately transfer it anonymously to over 200 countries.....But I absolutely can with the Walmart/MoneyGram tool. All I need is two fake identities, one on each end of the transaction. (No wonder there's such a HUGE market for fake names, addresses, DOB's, SSN's, Addresses, etc.) Again, not to appear judgey, but as I walked around the West/Central Texas Walmart, trying to inconspicuously fit in with the Good Ol' Boy/Girl Walmart customers (I was wearing my Stetson as a covert disguise, attempting to remain inconspicuous and saying "howdy" randomly to passers by), I couldn't help but wonder where all of the demand was coming from for all of this international money transfer business (Starting at $4.75 per transaction ). So I decided to continue my research on-line.</span><br />
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<span style="font-family: inherit;">I was really shocked when I saw </span>the Walmart/MoneyGram "Location Finder". As a West/Central Texas Walmart Customer I could transfer money to, for example, Mexico where any fake compadre', pal or buddy can show up at one of the thousands of locations, in any one of the 200 countries and pick up their cash. Even more amazing is that if I am a "good old boy" in Texas and all my friends are in China (These relationships, I'm sure, are very common), I can transfer Greenbacks, Euros, Pounds and Aussie dollars to oodles of locations in Beijing (70 locations), Shanghai (90 locations) or just about any major Chinese City, all sponsored by the major Chinese banks (BOC, CITC, ICBC, etc.).<br />
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Even stranger, I can't transact business in RMB in West/Central Texas? I can only use Greenbacks, Euros, Aussie or English money? How in the name of Sam Austin is a Cowboy at a Texas Walmart supposed to do business on mainland China? What are all of those citizens in China going to do with the foreign currency I sent them? I'm sure that there's some conversion magic that happens on the back-end so these recipients of FOREX somehow get paid.<br />
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Here's the screen shot of the "<a href="https://walmart.moneygram.com/locations"><span style="color: blue;"><b>Location Finder</b></span></a>".....go ahead, give it a try, if you are a rootin' tootin' Cowboy who's just itchin' to send some Greenbacks to your friends in Guangzhou this tool is for you!<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjE3OLcEQsos28AGwpUOmbU9MoudqYU9apZKoXpplpqClAGfaOVOD5TA70PaJoX4NhDT-xNV7Q67Zi1cp7KXRi0il4D4am7fZ3KTPcHaYiy5jfBBWZU-usP4jF_O40hC_gI28DfaL13efQ/s1600/Walmart-moneygram-China_locations.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="530" data-original-width="909" height="372" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjE3OLcEQsos28AGwpUOmbU9MoudqYU9apZKoXpplpqClAGfaOVOD5TA70PaJoX4NhDT-xNV7Q67Zi1cp7KXRi0il4D4am7fZ3KTPcHaYiy5jfBBWZU-usP4jF_O40hC_gI28DfaL13efQ/s640/Walmart-moneygram-China_locations.png" width="640" /></a></div>
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<span style="font-family: inherit;"> </span><br />
<span style="font-family: inherit;"><br /></span><span style="font-family: inherit;"><span style="font-family: inherit;">I wanted to test this out so I logged the card in under my wife's name (I told her I was doing this so she wasn't surprised if she somehow found out about it. <b><i><u>Author's Marital Tip</u></i></b>: You should always tell your spouse if you are applying for credit in her name.) I went on-line, registered the card (they did ask me for her SSN for security....this might explain <b><span style="color: blue;"><a href="http://money.cnn.com/2017/09/19/technology/business/equifax-breach-social-security/index.html">the active market for SSN's and "Fullz"</a> </span></b>available <a href="https://ccfullzshop.com/login.php"><b><span style="color: blue;">for sale on the Internet</span></b></a>) </span></span><br />
<span style="font-family: inherit;"><span style="font-family: inherit;"><br /></span></span>
<span style="font-family: inherit;"><span style="font-family: inherit;">Anyway, it was easy, I had a re-loadable cash card in her name! I was immediately sent marketing emails from Walmart.com... "You can use your temporary card to shop at Walmart!" "You can sign up for automatic deposit!". Isn't that AWESOME! </span></span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiurZJQz7DovXtwjUEsnrgzEaQwm0N6PHb_lJrAxbhwTH-GHRav87-UhLyrGcynt9p4jGCHdwzJPR50j9qt_mTsjj7ph5EWkeMO11rsEQi6jO7BZ5xT7L-VBzMjk5NVJw2CPX5y0_QGE40/s1600/Walmart_Money_Card_SCREEN.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="476" data-original-width="849" height="358" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiurZJQz7DovXtwjUEsnrgzEaQwm0N6PHb_lJrAxbhwTH-GHRav87-UhLyrGcynt9p4jGCHdwzJPR50j9qt_mTsjj7ph5EWkeMO11rsEQi6jO7BZ5xT7L-VBzMjk5NVJw2CPX5y0_QGE40/s640/Walmart_Money_Card_SCREEN.png" width="640" /></a></div>
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<span style="font-family: inherit;">The great thing about the Walmart <i>MoneyCard</i>, according to their card agreement, is that you can transact up to $2,999 dollars A DAY in transactions at ANY Walmart. Theoretically, you can run up to $1,094,635 ($2,999 x 365) cash-in/cash-out transactions per year on a single Walmart <i>MoneyCard</i> by using any of their convenient locations......</span>and there's NO LIMIT to the number of cards you can have!<span style="font-family: inherit;"> You (or someone pretending to be you) can just provide the cash and/or other payment at any convenient location and you are in business. Author's notes: 1.) I'm hoping that this level of activity ($3,000 a day, every day) might generate a red flag or two, but based on my interaction with the presumably highly trained, AML (Anti Money Laundering) sleuths at the Walmart I visited, I have my doubts. I gave them the money and they took it. 2.) Again, I don't want to appear "judgey" but based solely on the appearance of the good, simple, hard working, blue collar folks I see shopping at Walmart, I'm a little confused as to why they might need a $3,000 a day limit on their "no-credit-check-high-fee-re-loadable" </span><i style="font-family: inherit;">MoneyCards</i><span style="font-family: inherit;">.</span><br />
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<span style="font-family: inherit;">The <i>MoneyCard </i>is issued by GreenDot Financial (NYSE:GDOT) and according to their Investor Presentation....</span><br />
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<span style="font-family: inherit;">"They Are Everywhere!" 100,000 "Nationwide Brick & Mortar Account Acquisition and Reload locations!"</span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiQSyVoED-B4gMGLB5u8lPZZjJOsU8KN_haApeRzyTaZtRtJuiPgZfxKfiChyphenhyphenoV6la9h_5ijDlowlty4ZYYjaz5O_YOXSROisKLXayQx3rOc9zEMESpInAL__5enzWwIpFfo1qtShA_SU8/s1600/GreenDot_EVERYWHERE.png" imageanchor="1" style="clear: left; margin-bottom: 1em; margin-right: 1em; text-align: center;"><img border="0" data-original-height="528" data-original-width="691" height="488" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiQSyVoED-B4gMGLB5u8lPZZjJOsU8KN_haApeRzyTaZtRtJuiPgZfxKfiChyphenhyphenoV6la9h_5ijDlowlty4ZYYjaz5O_YOXSROisKLXayQx3rOc9zEMESpInAL__5enzWwIpFfo1qtShA_SU8/s640/GreenDot_EVERYWHERE.png" width="640" /></a><br />
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<span style="background-color: white;"><span style="color: #001f2f; font-family: inherit;">Green Dot Corporation is headquartered in Pasadena, California, with additional facilities throughout the United States and Shanghai, China. The Company was founded in 1999 and went public in 2010 (NYSE: GDOT) I guess I might ask, why does a company that solely plays in the US </span>"</span>No Credit Check high-fee/re-loadable/debit Cash Card" business need to have their sole, non-US office strategically located in Shanghai? I'm sure there's a really good reason for this, but like I've said many times, often "good" reasons, can result from pretty bad motivations.<br />
<span style="font-family: inherit;"><span style="background-color: #f0f2f2; color: #001f2f;"><br /></span><span style="background-color: white; color: #001f2f; font-family: , sans-serif;">Per the last 10-K: "Our gross dollar volume was $31.8 billion" (Total funds run through the cards) - pg 34. This volume is up from $5.8 Billion in 2009.</span></span><br />
<span style="font-family: inherit;"><br /></span>
<a href="https://www.sec.gov/Archives/edgar/data/1386278/000138627818000013/form10-kxgdot12312017.htm" style="background-color: #f0f2f2;"><span style="font-family: inherit;">https://www.sec.gov/Archives/edgar/data/1386278/000138627818000013/form10-kxgdot12312017.htm</span></a><br />
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Besides the relatively huge $2,999 daily transaction limit, there are other excellent benefits that are automatically included with the Walmart <i>MoneyCard</i> as described in the<span style="color: blue;"><b> <a href="https://www.walmartmoneycard.com/account/legal-info-page?doc=cha&productname=mc-cbr"><span style="color: blue;">GreenDot Card Issuer Agreement</span></a></b></span>. Feel free to read this bad boy if you like horror stories. It is apparent that anyone who uses this card (for legitimate purposes) likely has nowhere else to turn. On the other hand, people who are using it for illegitimate purposes (drugs, gambling, human trafficking and general all-purpose money laundering, etc.) really don't care all that much about the cost of doing business. Their margins are usually pretty good.....<br />
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<span style="font-family: inherit;"><b><u>Advantages of the Walmart <i>MoneyCard</i>: </u></b></span><br />
<span style="font-family: inherit;"><br /></span>
<span style="font-family: inherit;">1.) The fees are slightly less than what a Pay Day Lender or traditional Loan Shark would charge to hold and process your money......and as an added bonus, your kneecaps presumably remain un-threatened and intact!</span><br />
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<span style="font-family: inherit;">2.) The card only charges a 3% "Foreign transaction fee"! Again, not to appear judgey, but when I go to Walmart I rarely say to myself "Hey....look at all of the jet setters and world travelers!"</span><br />
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<span style="font-family: inherit;">3.) No mailed statements! That's right Walmart/GreenDot does NOT mail out paper statements. It's a huge cost savings for them...and especially handy if the cardholder accidentally happens to be using someone else's identity! The "accidental" <i>MoneyCard</i> holder is never aware that someone opened an account for them by mistake since there's no statement and no credit check! This saves GreenDot/Walmart a ton of time, paperwork and money. It's always a hassle to straighten out those little "wrong name on the card"</span><span style="font-family: inherit;"> mix ups. </span><br />
<b style="font-family: inherit;"><i><br /></i></b>
<b style="font-family: inherit;"><i>Author's Note:</i></b><span style="font-family: inherit;"> I told my wife I was opening a </span><i style="font-family: inherit;">MoneyCard</i><span style="font-family: inherit;"> in her name, but for all of you disgruntled, money laundering spouses out there, apparently you don't have to tell your spouse about their new card. Walmart doesn't care at all if you are a large German guy using a card with the name of an extremely attractive Indian woman on it! If I hadn't mentioned it to her prior to my putting the card in her name, I have no idea how she would have found out until, perhaps she got a "permanent" Walmart <i>MoneyCard</i> with her name on it in the mail, but the envelope that the card comes in looks so much like the dozens of credit card offers we get every week, that she might have just tossed it without even opening the envelope.</span><br />
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<span style="font-family: inherit;">4.) There is also a strict warning that the </span><i style="font-family: inherit;">MoneyCard</i><span style="font-family: inherit;"> can under no circumstances be used for<span style="background-color: white;">: </span></span><span style="background-color: white;"><span style="color: #001f2f; font-family: inherit;">(i) unlawful domestic or international gambling web sites, or at payment processors supporting unlawful gambling web sites, or to purchase illegal goods or services (i.e. "hookers & blow"). </span><i style="color: #001f2f; font-family: inherit; font-weight: bold;">Authors Note: </i><span style="color: #001f2f; font-family: inherit;">Generally, when we see the </span><span style="color: #001f2f;">obligatory</span><span style="color: #001f2f; font-family: inherit;"> "You can't do that!" caveat on a financial agreement with criminals, it doesn't deter the activity, but it absolves the facilitating party from liability. "See ....we told them that they can't buy hookers & blow with the <i>MoneyCard </i>and they did it anyway!....not our fault!" I also always like to see the public service "Gambling problem?...call 1-800-BAD-LUCK" notices hidden away in Casinos. "See....we told them they had a problem...and they ignored the signs!" Very comforting. I guess the rationale is, if you win, you don't have a gambling problem? </span></span><br />
<span style="background-color: white;"><span style="color: #001f2f; font-family: inherit;"><br /></span></span>
<span style="background-color: white;"><span style="color: #001f2f; font-family: inherit;">I'm also guessing that the Walmart <i>MoneyCard</i> cardholder agreement was written by former Wells Fargo executives. "See ....it's right here....on page 47....we told you that you were buying insurance from us! We didn't do anything wrong!"</span></span><br />
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<span style="font-family: inherit;">5.) <span style="background-color: white;"><span style="color: #001f2f;">You may withdraw up to $400 from an ATM and $1,000 from a Walmart register in a single day and $1,500 per teller transaction, unless otherwise indicated.</span><span style="color: #001f2f;"> Again, trying again not to be judgey, but that's a lot of money when your unemployment check is $600 a month.</span></span></span><br />
<span style="font-family: inherit;"><span style="background-color: #f0f2f2; color: #001f2f;"><br /></span></span>
<span style="background-color: white;"><span style="font-family: inherit;"><span style="color: #001f2f;">6.) The agreement clearly states: "</span></span><i>You
cannot sell or transfer your Card to anyone else, and it can only be used by you or
someone you authorize. If you authorize anyone else to use your Card, you are
responsible for all transactions made by that person.</i>" <u><b>Translation:</b></u> "<i>Anyone can use the card...it's just like cash!</i>"</span><br />
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7.) The agreement clearly says: "<i>You agree not to use or allow others
to use an expired, revoked, cancelled, suspended or otherwise invalid Card. We reserve
the right to limit or block the use of the Card in foreign countries due to fraud or security
concerns or to comply with applicable law"</i>. <b><u>Translation:</u></b> "<i>Give it a try! Our systems aren't tight enough to prevent you from using invalid cards in foreign countries</i>."<br />
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8.) Finally, as an aside, there's a reason my business spam box gets dozens of emails like this (actual example below) every week:<br />
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<i>"There is a simple way that you can make more money now with just a Blank ATM card, all that you need to do is to contact this email: PhantomGhostxxxxxx@gmail.com they also offer other types of geek services."</i><br />
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<span style="color: #001f2f;"><b><i><u style="background-color: white;">Amazon Cash</u></i></b></span><br />
<span style="background-color: white;"><span style="color: #001f2f;"><br /></span>
<span style="color: #001f2f;"><span style="color: #001f2f;">Never late to the party, we can expect Amazon to be a major force and equally ubiquitous in the "No Credit Check Re-loadable Debit Card" money laundering game post-haste. Last year they began pushing their own, no ID required, Amazon Cash card, available at tens of thousands of </span><a href="https://paymentweek.com/2017-11-8-7-eleven-steps-mobile-payments-amazon-cash/"><span style="color: blue;"><b>7-11's</b></span></a><span style="color: #001f2f;">, Speedway's, Game Stops, etc. </span></span></span><br />
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<span style="background-color: white;"><span style="color: #001f2f;"><span style="color: #001f2f;">Actually, you don't even need a "name" to do this. Just hand some money to the 7-11 clerk (who is of course a highly trained money laundering specialist) and you've got a bar code on your burner phone! You're ready to send a MoneyGram to Tijuana, or buy a $250 bag of potting soil from your Chinese friends!</span></span></span><br />
<span style="background-color: white;"><span style="color: #001f2f;"><span style="color: #001f2f;"><br /></span></span></span>
<span style="background-color: white;"><span style="color: #001f2f;"><span style="color: #001f2f;">Even more surprisingly, presumably because of the enthusiastic acceptance of the Amazon Cash money laundering program here in the States, two months ago Amazon announced that it will be launching the Amazon Cash high-fee-reloadable-money-laundering card program in their first overseas market......drum roll please........</span><a href="https://www.reuters.com/article/us-amazon-com-mexico/amazon-launches-first-debit-card-in-mexico-e-commerce-push-idUSKCN1GP35A"><span style="color: blue;"><b>MEXICO!</b></span></a></span></span><br />
<span style="background-color: white;"><span style="color: #001f2f;"><span style="color: #001f2f;"><br /></span></span></span>
<span style="background-color: white;"><span style="color: #001f2f;"><span style="color: #001f2f;">Choosing Mexico as the first overseas market for a no credit check, no ID required money laundering program makes perfect sense. Why in the world would you select the EU, Canada, Japan, or other developed countries where people already shop on your website and already have established ID's? Moreover, you'd have to compete in a market already saturated with credit/debit cards owned by customers who already have a credit score, legal sources of income and money in a bank. What value could Amazon possibly add to markets like this? On the other hand, Mexico, a country where 2/3rds of the population don't have credit/debit cards or bank accounts and Mexican nationals routinely need to get money reliably back and forth across the US border anonymously, for a number of very important reasons. The program is sure to be a welcome, instant, low risk, low cost replacement for all of those unreliable "couriers" with cash stuffed in their underwear being used now. Once again, Amazon and Walmart have recognized an </span><a href="https://www.bloomberg.com/news/articles/2017-11-30/why-amazon-orders-in-mexico-need-cash-and-the-corner-store"><span style="color: blue;"><b>enormous opportunity</b></span></a><span style="color: #001f2f;"> in an under-served market. This program should be taking off like gang busters! </span></span></span><br />
<span style="background-color: white;"><span style="color: #001f2f;"><span style="color: #001f2f;"><br /></span></span></span>
<span style="background-color: white; color: #001f2f;">Based on market potential, I would imagine that Iran and Afghanistan are next up on the Amazon/Walmart "no-ID-required-money-laundering-card" roll out list, just as soon as they are removed from the State Depratment's OFAC "Countries you Can't do Business With" list. I'm sure the lobbyists are working on opening up new, lucrative markets as I type.</span><br />
<span style="background-color: white;"><span style="color: #001f2f;"><span style="color: #001f2f;"><br /></span></span></span>
<span style="color: #001f2f;"><span style="background-color: white;">Anyway, based solely on the networks being developed, it's clear to me that Amazon and Walmart are well on their way to becoming the world's premier facilitators to the creation of a subterranean network of untraceable, electronic funding sources.....if they aren't already. </span></span><br />
<span style="background-color: white;"><span style="color: #001f2f;"><span style="color: #001f2f;"><br /></span></span></span>
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<b><span style="color: red; font-size: large;"><u>The Vancouver Model</u></span></b><br />
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<span style="color: red;"><b style="font-style: italic; text-decoration-line: underline;">Executive Summary: </b>The Chinese government is actively involved, and may be the primary driver in the synthetic Opioid plague running amok in the US and Canada. We discuss the scope of the problem (roughly 55,000 est. US overdose deaths in 2017) and the work of Professor John Langdale regarding his work on what he refers to as the Vancouver Model for laundering Chinese drug money. We locate actual websites where we can purchase synthetic Opioids on-line from China mailed directly to American and Canadian addicts. </span><br />
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<span style="color: red;">The next <b><i><u>Executive Summary</u></i></b> is: <b><i><u>"Oh My God.....What Have We Done?</u></i></b></span><br />
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The other day, a good friend and customer of mine, who I'll refer to as "Fred" to preserve his anonymity, gave me a call about some changes to his insurance policies. I hadn't talked to Fred in about a year. My bad for not keeping up with him, he's a great guy and good friend, but, you know how it goes, we just get busy and the calls we should make and the things that should matter somehow get pushed aside.<br />
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Anyway, when I asked Fred how things were going, he stammered and paused for a few seconds, choked up a bit and then he told me a story.<br />
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Apparently, Fred's oldest son become addicted to opioids. According to Fred, nobody knew about his son's problems. He was employed on a construction crew, never missed a day of work, was married to a wonderful young woman and had a beautiful four year old son. By all accounts, he was a happy young man. Last fall Fred found his son early one morning in his basement bathroom slumped over the toilet, unresponsive. He was 29 years old. Later it was determined that he had overdosed on one of the many home-made versions of Fentanyl available on the streets of small town America. The police told Fred that there was a significant variation in the potency of these drugs and his son probably injected a product that was much stronger than his usual supply. He paused again for a moment. He told me that the hardest thing that he ever had to do was to bury his son.<br />
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I'm going to take a break from writing now and come back to this in an hour or two. Rated on a sorrow-per-syllable basis, that was a really hard paragraph to write.<br />
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Ok....I'm back now. I think I owe it to Fred to describe exactly why this happened, and the forces in place which caused my good friend Fred to lose his son.<br />
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Right now, according to the CDC, <a href="https://www.cdc.gov/vitalsigns/opioid-overdoses/index.html"><span style="color: blue;"><b>Opioid overdoses are increasing dramatically</b></span></a>, overdoses have increased 30% over the last year, with a 70% increase in the Midwest. Opioid deaths have generally mirrored the overdose statistics. <span style="background-color: white;"><span style="font-family: inherit;">Opioid availability, both prescription and illicit, are, of course, the main driver of drug overdose deaths. In 2016, opioids were involved in <span style="color: blue;"><b><a href="https://www.cdc.gov/drugoverdose/data/statedeaths.html">42,249 deaths</a>.</b></span></span></span><br />
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<span style="background-color: white;"><span style="font-family: inherit;">If we extrapolate a 30% growth rate we can presume that the 2017 death toll will come in at roughly 55,000 for 2017 and will rise to more than 70,000 this year. To put that number in perspective, it's about twice the number of US traffic accident deaths. A better visualization might be that we lose one (1) NFL Stadium full of citizens every year to opioid overdoses. If the opioid crisis hasn't personally impacted you yet, I assure you it will. </span></span><br />
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Interestingly, one of my Canadian readers, after digesting my last post, (<b><a href="https://deep-throat-ipo.blogspot.com/2018/04/the-new-phone-books-herethe-new-phone.html"><span style="color: blue;">The new phone book's here!</span></a></b>) on the enormous effort the Chinese Government has put into converting "hot off the press" RMB into hard Western assets at a huge, disguised discount, forwarded a couple of items to me based on the excellent work of <a href="https://www.mq.edu.au/about_us/faculties_and_departments/faculty_of_arts/department_of_policing_intelligence_and_counter_terrorism/staff/john_langdale/"><span style="color: blue;"><b>Professor John Langdale</b></span></a>. John is a professor of International Security Studies at Macquarie University in Sydney Australia. His work is summarized by what he refers to as the "Vancouver Model". In a nutshell, he describes and documents how Chinese criminal gangs are using Hong Kong financial institutions, Vancouver Casinos and willing bankers to launder transnational criminal money, eventually converting it to Vancouver Real Estate, or round tripping "boomerang" Western Assets, as I described in my last post, to offshore financial havens.<br />
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Here's a simple, quick video link describing the problem and how the Vancouver Model works:<br />
<a href="https://globalnews.ca/video/4150897/what-is-the-vancouver-model"><span style="color: blue;"><b>https://globalnews.ca/video/4150897/what-is-the-vancouver-model</b></span></a><br />
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In the interview below, British Columbia AG, David Eby comments on the crisis resulting from the Vancouver Model.<br />
<a href="https://globalnews.ca/video/4156272/extended-how-transnational-crime-groups-target-canada/"><span style="color: blue;"><b>https://globalnews.ca/video/4156272/extended-how-transnational-crime-groups-target-canada/</b></span></a><br />
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I've been trying, through John and a few other contacts to get some idea of the magnitude of the dollars/assets involved in this deadly scheme, to no avail. On the other hand, it's not surprising, Criminal enterprises don't generally file financial statements, advertise their success and are less than forthcoming about cash flow. There are anecdotal tales describing duffel bags of drug money showing up in Vancouver casinos and skyrocketing condo prices, all paid for by Chinese cash. Although it's difficult to determine exactly how much money is being laundered and pundits would argue that it's insignificant in the grand scheme of things, I'd suggest that Fred, along with the parents of the tens of thousands of unfortunate people like his late son, think that this is a bigger problem than we can imagine. <br />
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In America's Midwest, specifically in Ohio, this has become a <a href="https://www.nytimes.com/2018/05/25/us/drug-overdose-prosecution-crime.html?nl=top-stories&nlid=70198410ries&ref=cta"><span style="color: blue;"><b>nightmare</b></span></a>. Actually,<span style="color: blue;"> <a href="http://www.sciencemag.org/news/2017/03/underground-labs-china-are-devising-potent-new-opiates-faster-authorities-can-respond"><span style="color: blue;"><b>Cincinnati</b></span></a></span> has become ground zero. A few clicks on a Google search yields lots of local, China based sellers, willing to accept PayPal, Credit Cards, Amazon Cash or even a Walmart MoneyCard/MoneyGram as payment. Let me make this crystal-meth clear.....there are hundreds of websites like this out there, maybe thousands, this one jumped out based solely on the audacious content and the sites very existence. It's been going strong since 2015 and apparently US Authorities are either unaware of it, or are unable to shut it down.<br />
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<span style="color: red;"><b>http://www.theresearchchemicals.com/</b></span><br />
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<span style="color: red;">(I've not put a link on the above. Your AV Software should/will tell you that this is a HIGH RISK site. Proceed at your own peril. I access these things on what I call a "throw away" PC, disconnected from my networks, for obvious reasons.) </span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhCmAmExzRE5_KY-kORfQvGMW3UG1Kdi88hM-Xs76GCQCm5NciEBKENZMeLltuSlZhaNvKxQNxBfbS4AIwsUdXhcw1E4Axmczz7cnm-u0rav3OEzfwIz3TVmuVioNkQRq1nmwyN56tPVxA/s1600/TheResearchChemicals_site.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="528" data-original-width="961" height="350" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhCmAmExzRE5_KY-kORfQvGMW3UG1Kdi88hM-Xs76GCQCm5NciEBKENZMeLltuSlZhaNvKxQNxBfbS4AIwsUdXhcw1E4Axmczz7cnm-u0rav3OEzfwIz3TVmuVioNkQRq1nmwyN56tPVxA/s640/TheResearchChemicals_site.png" width="640" /></a></div>
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The pricing is very reasonable, usually $50 or so for a couple of fixes. There are all sorts of synthetic Cannabinoids, Opioids, Fentanyl and Carfentanil derivatives all ready to be packed and shipped, available on the site. It's the eCommerce version of <i>Breaking Bad</i>.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjnmDZpUkExSRWjCrSovPjFczeIZma8nuKJjDUWzvnNICCjcr1N0nHbL0pwCa4fy-WE3A7LKaXFLZSYTVb8f3FZpbvB0jcmKxhbXxJjS2cTSwCYspi_Cz309XP8p9dggrpjdmhoo5y2yEs/s1600/ResearchChemicals_Most_Popular.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="530" data-original-width="975" height="346" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjnmDZpUkExSRWjCrSovPjFczeIZma8nuKJjDUWzvnNICCjcr1N0nHbL0pwCa4fy-WE3A7LKaXFLZSYTVb8f3FZpbvB0jcmKxhbXxJjS2cTSwCYspi_Cz309XP8p9dggrpjdmhoo5y2yEs/s640/ResearchChemicals_Most_Popular.png" width="640" /></a></div>
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(Please Note: I didn't actually purchase anything since I prefer that the DEA doesn't come knocking on my door.....I didn't want to be "that guy" trying to explain that the illegal Fentanyl being shipped to my office disguised as printer ink cartridges was actually for a blog post.....)<br />
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When we read through the "About Us" tab, it is, as expected, littered with typos and grammatical errors. Exactly the attention to detail that I'd want if I were purchasing potentially toxic "Research Chemicals". Fully understandable, the CVS and Walgreen's websites are a mess too....those wacky Pharmacists!<br />
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This site is so absurd that at first glance, I began to think (and hope) that maybe it was a DEA bait site....but after further review, I concluded that the DEA would have done a more believable job with the content.<br />
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There's also a currency converter (on nearly every page) and a whole list of acceptable payment methods. They, of course, accept MoneyGram payments from your local Walmart, Wire Transfers, Western Union, Hong Kong Post payments as well as BitCoin! <i>TheResearchChemicals.com</i> is truly on the cutting edge of global-block-chain technology. Oddly enough, they don't accept RMB....<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiFy3h-8P1vzemC1rMgBYw155M5N4fT0MS-_V188hLhshBHHqoDoTbW2jlqU1cjWyUZeaxjT79oFrJR1-QRynD6uMGtIl5AWembwBExrXL1cnOAtv0xqpqglf9tLn1tjE-F0sAAco8lR0I/s1600/TheResearchChemicals_Pmt_Methods.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="531" data-original-width="975" height="348" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiFy3h-8P1vzemC1rMgBYw155M5N4fT0MS-_V188hLhshBHHqoDoTbW2jlqU1cjWyUZeaxjT79oFrJR1-QRynD6uMGtIl5AWembwBExrXL1cnOAtv0xqpqglf9tLn1tjE-F0sAAco8lR0I/s640/TheResearchChemicals_Pmt_Methods.png" width="640" /></a></div>
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There are also privacy policy statements purportedly protecting your rights as a chemical consumer splattered all over the site. If this wasn't so tragic, it would be stunningly hilarious.<br />
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The "About Us" tab also provides all sorts of info about the company, except, of course, an address. They guarantee speedy delivery all over the planet, as well as the highest of quality, but they also mention that if there are any "Customs" or import/export issues.....you are on your own.<br />
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Here's the intro on the "About Us" tab.....it sort of flies in the face of their "Get High Legally" Home Page Banner ....the "we're here to serve you" tone gets even sillier from there:<br />
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<i><span style="color: blue;">Welcome to ResearchChemicals, the best research chemicals shop to stock up on advanced materials for your experiments. You need someone you can trust when it comes to delivering 100% legitimate, absolutely pure chemicals and with us you can be absolutely certain in this regard. Our dedication to quality and scientific integrity has made us one of the most respected suppliers in the online market, a reputation we take very seriously and work hard to maintain.</span></i><br />
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Also of interest is their liberal return policy.....if you are not satisfied, you<b><i><u> can't </u></i></b>ship the product back.....but they will just replace it for free!<br />
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<i><b><u style="background-color: white;"><span style="color: blue;">Returns</span></u></b></i><br />
<i><span style="color: blue;">Due to the nature of the products we sell, we are unable to accept returns. Any defective, damaged or incorrect orders shipped will be replaced or refunded, if we are notified within 7 days of receiving your order and it is reasonable to do so.</span></i><br />
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Apparently, "<i>TheResearchChemicals.com</i>" website was established in 2015 in the UK anonymously through PDR, a "Godaddy" like service provider. So they've been "breaking bad" for about three years now. Requests to PDR (PublicDomainRegistry.com) for where this website is hosted and the address of the real owners went unanswered. Any bets that it's run out of Guangdong China?<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5kfqoOtEjk0JVPgeDwhsaxmy1efVjZi5VQvT99ESy6sWz6XlcVq6luPmL6aGDDFGLaDI8cu-ecynFV55qKHxz18_xvH1GgtVpWaCeEyf5Ucrds6EJOaNQMDEV4-feHOtEAOFxcoR0V6I/s1600/TheResearchChemicals_WHOIS.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="527" data-original-width="975" height="344" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj5kfqoOtEjk0JVPgeDwhsaxmy1efVjZi5VQvT99ESy6sWz6XlcVq6luPmL6aGDDFGLaDI8cu-ecynFV55qKHxz18_xvH1GgtVpWaCeEyf5Ucrds6EJOaNQMDEV4-feHOtEAOFxcoR0V6I/s640/TheResearchChemicals_WHOIS.png" width="640" /></a></div>
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To sum this up, I've posted a few more interesting sources on the US Version of the "Vancouver Model" phenomenon below. <br />
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"Purchase Chinese Opiods On-Line" - NBC News "How to Video" a producer's email conversation with a Chinese lab and the associated sales pitch, pricing and Q&A.<br />
<a href="https://www.nbcnews.com/storyline/americas-heroin-epidemic/fentanyl-crisis-deadly-drug-easily-available-online-purchase-n791311"><b><span style="color: blue;">https://www.nbcnews.com/storyline/americas-heroin-epidemic/fentanyl-crisis-deadly-drug-easily-available-online-purchase-n791311</span></b></a><br />
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The Science of Opioid Derivatives and how Chinese Labs make and ship the products to the US<br />
<span style="color: blue;"><b><a href="http://www.sciencemag.org/news/2017/03/underground-labs-china-are-devising-potent-new-opiates-faster-authorities-can-respond"><span style="color: blue;">http://www.sciencemag.org/news/2017/03/underground-labs-china-are-devising-potent-new-opiates-faster-authorities-can-respond</span> </a> </b></span><br />
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New York Times - The flood of China's pharmacological "technology" into the United States.<br />
<a href="https://www.nytimes.com/2018/04/04/opinion/carfentanil-fentanyl-opioid-crisis.html"><span style="color: blue;"><b>https://www.nytimes.com/2018/04/04/opinion/carfentanil-fentanyl-opioid-crisis.html</b></span></a><br />
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Council on Foreign Relations - Graphics/Stats on the Opioid Epidemic<br />
<a href="https://www.cfr.org/backgrounder/us-opioid-epidemic"><span style="color: blue;"><b>https://www.cfr.org/backgrounder/us-opioid-epidemic</b></span></a><br />
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China's stance on the US Opioid Epidemic - "Not our Problem"<br />
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<span style="background-color: #fefefe; color: #262626;"><span style="font-family: "arial" , "helvetica" , sans-serif; font-size: x-small;"><i>"While we don't deny that some fentanyl substances abused in the US have come from China, we don't see sufficient evidence ... that most of them have come from China," said Wei Xiaojun, deputy secretary-general of National Narcotics Control Commission, China's top drug enforcement agency.</i></span></span><br />
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<a href="https://www.cnn.com/2017/11/03/health/china-drugs-fentanyl-trump/index.html"><span style="color: blue;"><b>https://www.cnn.com/2017/11/03/health/china-drugs-fentanyl-trump/index.html </b></span></a><br />
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As per the usual game plan, rather than extending a helping hand, in the spirit of International cooperation, the CCP stance has been to deny China's involvement. Apparently, according to the CCP the roughly 2 million US addicts and this years 70,000 (projected) dead Americans have to do more with the erosion of Western values. Their position is that Chinese involvement, if any, is insignificant. <br />
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From high altitude, anyone who has been an observer of, or subjected to Chinese government, policy and operation understands that nothing in China happens without direct CCP approval. When the Chinese government wants to make something happen, it happens. Moreover, if they want to stop something from happening, they are not bothered with silly Western concepts like civil, human and property rights and/or due process. If the Chinese government decides that it doesn't like what a few of its citizens are doing, they pick them up and either the rogue citizens step in line or they disappear. That said, it's fantasy to believe or even suggest that the <i>Triad</i>/gang operation as described above, and the Opioid scourge being perpetrated on the US population through ubiquitous Chinese websites, easy payment methods, untraceable fake ID's and systemically designed money laundering, is simply an out of control, rogue criminal enterprise somehow undetected by Chinese authorities. For God's sake....the Chinese people can't even see my goofy little blog! It's no secret that my work is often openly critical of Chinese business and policy. The Chinese government controls everything, knows my blog exists and they ban it? You can only access my blog on the mainland through an un-monitored VPN? I get tens of thousands of page views every month, from all over the world and not one from the Chinese Mainland? My silly little blog is relentlessly blocked by the CCP, but <i>TheResearchChemicals.com</i> website and thousands of others are running full blast 24x7 with pick-ship operations right under the nose of the CCP? And they know nothing about it? Really?<br />
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If the Chinese wanted to stop it, they would stop it. As is SOP with the CCP, they would send their police and/or military into Guangdong or wherever the trail leads them, make arrests and lock up the suspects, like they do for just about everything else that runs contra to party interests. They would shut down websites, beat people until they ratted out their cohorts and hunt the cohorts down like the dogs they are presumed to be. (Again, to expedite the process, no trial or lawyers needed.)<br />
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More likely, similar to the dual-currency, monopoly money, "boomerang" conversion described in my last post, the rampant-run-amok purchases of US and EU hard assets with same; and the "Made in China" Walmart/Amazon/Chinese sweat-shop supply chain laying waste to middle America as described herein; the <i>Vancouver/Cincinnati Model </i>is, for all I can see, yet another brilliantly designed piece of Chinese International policy intended to destabilize and destroy the Western way of life while simultaneously bringing hard assets under Chinese control at bargain prices.<br />
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Through its policy, the Chinese government started a war on the Western civilization twenty years ago. They are about to win it without firing a shot.<br />
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The CCP is diabolically brilliant.<br />
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<span style="color: red; font-size: large;"><b><u>Oh My God....What Have We Done?</u></b></span><br />
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<span style="color: red;"><u style="font-style: italic; font-weight: bold;">Executive Summary:</u><span style="font-style: italic; font-weight: bold;"> </span>Economists (Brookings, et al) and financiers (Dalio, et al) are generally in agreement that we have a significant problem developing re: income inequality, workforce participation and the erosion of the American Middle Class. We reference work by Ray Dalio and a recent panel discussion at Brookings, as well as a couple of other relevant sources. We describe the bullet points of these references. In summary, everyone cited, America's best and brightest, have not yet recognized, as described above, that China's foreign and monetary policy, and America's failure to properly react, are the root cause of the decline and if left unchecked, destruction of America's Middle Class. </span><br />
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<span style="color: red;">The next <b><i><u>Executive Summary</u></i></b> is: "<b><i><u>The Art of the Bad Deal</u></i></b>".</span><br />
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Last fall Ray Dalio wrote a timely little piece on <span style="color: blue;"><b><a href="https://www.linkedin.com/pulse/our-biggest-economic-social-political-issue-two-economies-ray-dalio/?irgwc=1"><span style="color: blue;">LinkedIn</span></a> </b></span>chock full of all sorts of depressing findings delivered and described in a much less personal, and from my humble point of view, less entertaining format than I've described above. (Billionaires, though brilliant, can be a little dry...) I encourage you to read Ray's thoughts, but since I understand your time constraints, specifically, since you've spent so much time reading this blog, I've posted the highlights of Ray's work as follows:<br />
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1.) There are two Americas, the bottom 60 % and the top 40%<br />
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2.) <span style="font-family: inherit;">We have massive income inequality. Unlike nearly any time in history. For example: The wealth of the top one-tenth of 1% of the population is about equal to that of the bottom 90% of the population, which is the same sort of wealth gap that existed during the 1935-40 period. </span><br />
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3.) R<span style="font-family: inherit;"><span style="border: 0px; font-stretch: inherit; font-variant-east-asian: inherit; font-variant-numeric: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">eal incomes have been flat to down slightly for the average household in the bottom 60%</span> since 1980 (while they have been up significantly for the top 40%).</span><br />
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4.) O<span style="font-family: inherit;"><span style="border: 0px; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">nly about a third of the bottom 60% saves any of its income</span><span style="font-style: inherit; font-variant-caps: inherit; font-variant-ligatures: inherit; font-weight: inherit;"> </span><span style="font-style: inherit; font-variant-caps: inherit; font-variant-ligatures: inherit; font-weight: inherit;">(in cash or financial assets). As a result, according to a recent Federal Reserve study, most people in this group would struggle to raise $400 in an emergency.</span></span><br />
<span style="font-family: inherit;"><span style="font-style: inherit; font-variant-caps: inherit; font-variant-ligatures: inherit; font-weight: inherit;"><br /></span></span>
<span style="font-family: inherit;"><span style="font-style: inherit; font-variant-caps: inherit; font-variant-ligatures: inherit; font-weight: inherit;">5.) </span></span><span style="font-family: inherit;">Retirement savings for the bottom 60% are not even close to adequate and aren’t much improved as the economy and markets have recovered.</span><br />
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<span style="font-family: inherit;">6.) Addressing "Quality of Life" in a quantitative way, Ray points out that: </span><span style="font-family: inherit; font-style: inherit; font-weight: inherit;">Death rates are rising and mental and physical health is deteriorating for those in the bottom 60%. For those in the bottom 60%, premature deaths are up by about 20% since 2000. The biggest contributors to that change are an increase in deaths by drugs/poisoning (up two times since 2000) and an increase in suicides (up over 50% since 2000). The odds of premature death for those in the bottom 60% between the ages of 35 and 64 are more than two times higher, compared to those in the top 40%. </span><span style="font-family: inherit; font-style: inherit; font-weight: inherit;"> The US is just about the only major industrialized country with flat/slightly rising death rates. There is significant adverse correlation across other social metrics. Divorce rates, education, political polarity and "happiness" surveys all point to additional pressures on America's Middel Class.</span><br />
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7.) Ray concludes, as is reasonable, that the FED may be led to make significant policy mistakes if it doesn't focus on the "Two Economies" i.e.) The Buffett adage that statistics can be misleading, if you have one foot in a bucket of hot coals and the other in a bucket of ice.....on "average" you are far from comfortable!<br />
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From my perspective, Ray is really, really close to "getting it". Again, US Monetary, fiscal and foreign policy (Not just the FED) must be completely reconstructed to counter what the CCP has accomplished. <br />
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<b><u>Steve Brill..."Tail Spin"</u></b><br />
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<span style="color: blue;"><b><u><a href="http://time.com/5280446/baby-boomer-generation-america-steve-brill/">Steve Brill in a Time Magazine piece</a></u></b> </span>(Yes....magazines still exist....who knew?) blames the Baby Boomers (i.e. me and all my friends) for the inequalities that exist today. I guess I can't totally disagree. Steve's thesis is that beginning 50 years ago, we, smart industrious Americans began to use the 1st Amendment to put our "thumbs on the scale", tilting the playing field in our favor and using the American political system to our advantage, continually taking a bigger slice of the pie.<br />
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Again, I would not disagree. This is exactly what market driven, entrepreneurs do. We push the limits, look for strategic advantages and execute our Master Plans, increasing our wealth geometrically, often at someone elses expense. Capitalism can sometimes be a cruel master. On the other hand, Steve fails to address the prospect that many of our Master Plans were "Made in China". This little nugget of insight might have an impact on his perspective.<br />
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<b><u>The Brookings Institute - The Middle Class and the Economy</u></b><br />
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Following the direction of Ray's and Steve's line of thought, last week there was an excellent panel discussion on the future of the middle class sponsored by Brookings. I'd encourage you to watch the video. These folks are the best and brightest economic minds in the country. Unlike Facebook and Twitter, Brookings generally avoids putting uncredentialed schmucks on stage.<br />
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Again, these are really important concepts, bantered about by really smart people, but I'd also caution you that the two (2) plus hour video clip, <i>unless you have a PhD in Economics,</i> is a bit painful to watch and even harder to understand. <br />
<a href="https://www.c-span.org/video/?445222-2/middle-class-economy"><span style="color: blue;">https://www.c-span.org/video/?445222-2/middle-class-economy</span></a><br />
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That said, in the interest of time, let me break it down for you. I'll take a minute to summarize the bullet points:<br />
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1.) There are significant rising inequalities/gaps in wages between classes of citizens.<br />
2.) Workforce participation is declining. The "American Dream" of a rising middle class life is becoming more elusive.<br />
3.) There are concerns about the level of labor participation by classes of citizens. e.g..) older workers are working more and younger, less educated workers are working less.<br />
4.) We have very little accurate, reliable data regarding employment in a rapidly evolving economy.<br />
5.) The decline in "Prime Age Workers" accounts for 80% of the decline in the workforce participation rate.<br />
6.) Economic mobility, pulling yourself up by your bootstraps (The "American Dream") is on the wane.<br />
7.) Automation and Import Competition are the primary drivers of the decline in Workforce participation.<br />
8.) We've failed to respond to global trends. Workforce participation and the related inequalities are caused by Policy choices and are theoretically reversible.<br />
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Unfortunately, my "Elephant in the Room" work in this Blog was brought up only in the periphery. China was mentioned a few times, but only in the context of competitive job loss. Monetary policy and the RMB was not discussed. Opiods and addiction were mentioned as a growing concern relating to employ-ability statistics. None of the panelists pointed the finger at Amazon and Walmart as the <i>Angels of Middle Class Death </i>relentlessly<i> </i>subsidized by government policy, the Chinese supply chain and ruthless <i>Capital Formation</i>. <br />
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In the panelist's (Heidi, Michael, Ben & Melissa) one minute, "What's the one thing you would do to level the playing field and fix the US labor market?" <i>lightening round</i> closing comments, lots of ideas like, ""Boost Unionization", "Expand Earned Income Subsidies", "Sectoral Bargaining", "Wage Boards" and "Skill Upgrade and Training Program Investments" were thrown on the table. Although interesting, these would have virtually no impact on the grand scheme of things. In the panelists defense, it would have been out of context to propose, at the end of the discussion, coming completely out of left-field: 1.) Higher interest rates, increasing capital cost; 2.) US/Global Monetary Policy Reform re: the RMB; and 3.) A Chinese Trade Embargo as possible solutions to the problem.<br />
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My sense is that all of these really smart folks understand the problem, but they've not yet connected the dots. The panelists have generally agreed that the above bullets are a byproduct of US Economic Policy, which is true. But they've not yet understood that the failures of US Domestic policy are further driven by our failure to properly react to Chinese economic, monetary and foreign policy. I, for one, hope they get there soon.<br />
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<b><u>Our Dysfunctional "Evil" E-Society</u></b><br />
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<a href="https://www.nytimes.com/2017/11/20/opinion/how-evil-is-tech.html?action=click&pgtype=Homepage&clickSource=story-heading&module=opinion-c-col-left-region&region=opinion-c-col-left-region&WT.nav=opinion-c-col-left-region"><span style="color: blue;"><b>David Brooks, in a New York Times Op-Ed</b></span> </a>does a nice job of describing how Americans view "big tech":<br />
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<span style="font-family: inherit;">"There are three main critiques of big tech" David writes:</span><br />
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<span style="font-family: inherit;">"The first is that it is destroying the young. Social media promises an end to loneliness but actually produces an increase in solitude and an intense awareness of social exclusion. Texting and other technologies give you more control over your social interactions but also lead to thinner interactions and less real engagement with the world. </span>As Jean Twenge has demonstrated in book and essay, since the spread of the smart phone, teens are much less likely to hang out with friends, they are less likely to date, they are less likely to work."<br />
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<span style="font-family: inherit;"><span style="background-color: white; color: #333333;">"The second critique of the tech industry is that it is causing this addiction on purpose, to make money. Tech companies understand what causes dopamine surges in the brain and they lace their products with hijacking techniques that lure us in and create compulsion loops</span><span class="css-8qgvsz euv7paa0" style="background-color: white; border: 0px; color: #333333; font-stretch: inherit; font-weight: 700; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">."</span></span><br />
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<span style="background-color: white; color: #333333;"><span style="font-family: inherit;">"The third critique is that Apple, Amazon, Google and Facebook are near monopolies that use their market power to invade the private lives of their users and impose unfair conditions on content creators and smaller competitors."</span></span><br />
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<span style="color: #333333;"><span style="background-color: white;">David closes with the query: <span style="font-family: inherit;"> "</span></span></span><span style="background-color: white; color: #333333;"><span style="font-family: inherit;">Imagine if instead of claiming to offer us the best things in life, tech merely saw itself as providing efficiency devices. Its innovations can save us time on lower-level tasks so we can get offline and there experience the best things in life."</span></span><br />
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<span style="background-color: white;"><span style="color: #333333;">In a </span><a href="https://www.nytimes.com/2016/04/22/health/us-suicide-rate-surges-to-a-30-year-high.html"><b><span style="color: blue;">semi-unrelated New York Times article</span></b></a><span style="color: #333333;">, Sabrina Tavernise wrote in 2016 that the </span></span>U.S. Suicide Rate had surged to a 30-Year High. Although the 2017 numbers are not yet available, I'd imagine that the trend has accelerated. In general terms, 70% of all suicides are white men, but the suicide rate jumped for all classes. The suicide rate for middle-aged women, ages 45 to 64, jumped by 63 percent over the period of the study, while it rose by 43 percent for men in that age range, the sharpest increase for males of any age. The overall suicide rate rose by 24 percent from 1999 to 2014, according to the National Center for Health Statistics.<br />
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Correct me if I'm wrong, but wasn't Facebook launched in 2004? Is it a coincidence that suicide rates are increasing in the midst of all of this disconnectedness, e-Confusion and dot.com self-deactualization?<br />
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If you are in your 40's, and you were an early adopter, you've been subjected to Facebook, Google, Amazon, etc. and the wonders of Internet targeted advertising and opinion manipulation your entire adult life. According to Ray, Brookings, Steve and David above, you might have a hard time finding a job, you've probably got some health problems, no insurance or savings and are one bad break or two (a $400 unexpected bill?) away from being homeless. Your addicted kids are saddled with huge college debt, if they went to college at all. Your credit has been crippled because of the aforementioned..... and you log in to Facebook and see all of the people who used to be your friends and high school classmates posting puffed up bullshit about how great their life is.... you get depressed and feelings of inadequacy consume you. Sadly, in America, after a particularly bad day, it's really easy to buy some liquor and a hand gun.....and after another (and your last) bad decision, in an instant you've become a data point in an accelerating statistical socio-economic tragedy, to be discussed by economists, government officials, billionaires and bloggers.</div>
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So here's my thesis (to be tested over time):<br />
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The Internet, along with so many of our addictive "freedoms", is hazardous to the nation's mental health.....<br />
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Facebook, Amazon, Google, etc...like drugs, cars, liquor and firearms......must be used responsibly.....I'm waiting for an NFA (National Facebook Association) to form....upholding the rights of <a href="https://newsok.com/article/5595936/videos-watch-louies-shooters-youtube-videos"><span style="color: blue;"><b>depressed, friendless, mentally ill Americans</b></span></a> to use Facebook......you can take my Facebook when you pry it from my cold dead hand.....tragic.</div>
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<b><u>What to Do?</u></b><br />
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Well, for starters, we could eliminate the moral hazard of near-ZIRP Interest rates which causes capital to be deployed in unlikely and non-productive ways, without regard to earnings and profits. As a society, we've come to believe that the promise of future profits at some point in the distant future is actually much more important than current results. The guy who owns the local hardware store has to turn an immediate profit and feed his family and pay his bills, where the multinational eCommerce giant, or State Owned Enterprise (SOE) by virtue of a seemingly never ending stream of "free" capital can wait it out. Slashing prices in the short term either through a subsidized, on-line presence or by dropping a "Big-Box Proton Bomb" (the people are still there but the businesses are gone) on on a small town, does nobody any good.<br />
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In the end "fly-over America" will be a wasteland, dotted with vacant Walmarts and other empty buildings as fleets of drones and driver-less vehicles deliver our underwear and socks, Budweiser extract and legalized synthetic Fentanyl to our double-wides, paid for by our Universal Income allowance, which our rich Uncle Sam deposits on our Reloadable Walmart <i>MoneyCards</i> and Amazon <i>Cash Cards</i>. (Walmart and Amazon will be "Fly Over America's" one and only source of funding since all of the small town banks and their employees will also cease to exist.) Yup....in America's Heartland "people" will have become obsolete.</div>
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As leaders, we need to have vision as to what the future holds in store. We need to stop giving people the incentive and "freedom" to do incredibly stupid things. Being in the insurance business, I see things happen every day, that can best be described as "wrong place wrong time". These events almost always involve someone's bad judgment, yet they impact everyone. People believe that they have the "freedom" to drive at 90 miles per hour, or build a tree house for two kids, with an amazing panoramic view, and leave it unattended when there are a dozen kids in the the neighborhood clamoring to get up there. They might think that deep frying a Thanksgiving turkey in their garage (It was cold outside!) right next to their leaky old gasoline can was a stroke of genius. Why wear seat belts, install smoke detectors or upgrade that fuse box? The "man" has no right to tell me what to do. Hey....do you smell smoke? Authors Note: These are not "stupid" people. They are (or in some cases were), educated, smart, talented people who just didn't think things through. "Good Judgment" doesn't grow on trees and apparently isn't taught in school anymore, or possibly anywhere...ever. In America we reject any authority telling us what to do, no matter how good the "advice" (aka Regulation) is. We absolutely loathe regulation if it cuts into our bottom line. We relish and celebrate our "freedom" to make incredibly bad, or in some cases, horrible judgments. It's in our DNA. "That's what insurance is for!" Unfortunately, there is a cost associated with these errors that we rarely take into account when we were coming up with our plans. It always "seemed like a good idea at the time".....<br />
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In America we have the inalienable right to "shoot and get shot" and apparently, do whatever the hell we want at the expense of others. As leadership, in a caring society we should be much more focused on protecting people (or "Regulating" them....there's that dirty word again..) from other's (or their own) folly rather than providing them with an unlimited opportunity, incentive and "freedom" to make the wrong choices so we (or someone funding our campaign) can scam these freedom loving knuckleheads out of their life savings and any hope for their future.<br />
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The battle cry is always a derivative of "It's what the people want!" Agreed, there is a huge demand for drugs, guns, <a href="https://fivethirtyeight.com/features/the-supreme-court-made-it-easier-for-more-people-to-place-bad-sports-bets/"><b><span style="color: blue;">gambling</span></b></a>, prostitution, porn, liquor, tobacco, "free" money, low interest rates, etc. I have to admit, I take an aspirin once in a while, appreciate low interest rates, enjoy trap shooting, a monthly poker game and a nice scotch and a cigar on occasion. On the other hand, call me a prude, but I have no desire to spend hours at a casino (I can do math and calculate the tiny probability of winning), snorting crack, with an AK-47 on one knee and a hooker on the other, plopping down my high-fee-reloadable Walmart <i>MoneyCard</i> to pay for it, no matter how good the scotch and cigars are. That just doesn't seem like all that much fun to me.<br />
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We all need to look in the mirror....we have to admit, as a society we are not capable of seeing what's happening. We continually vote for schmucks who rant about saving the middle class, small business and American jobs through deregulation, trickle down tax cuts and unleashing the power of the American worker. They rile us up and blame the Mexicans, the Chinese, the Muslims, and any group that strikes fear into their constituents, all the while bellying up to the trough, accepting truckloads of dark money from God knows who in order to perpetuate their version (not yours) of the American Dream.<br />
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So, over the last few decades, here's what we've given the youth of America as a result of our inability to understand or react to China's "Master Plan":<br />
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We've saddled them with gigantic college debt, and/or taken away most of the jobs and hope, and provided them with unlimited access to addictive, self-destructive social media, littered with tools which buttress our overwhelming feelings of inadequacy, "how to" cool, killing-fields video games and movies, opioids, tequila and easily modifiable, semi-automatic assault weapons all available with a couple of mouse clicks, I guess when I say it like that, it doesn't sound like the best Master Plan we could have come up with.<br />
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If you are still in doubt about everything I've written thus far, I'd ask you:<br />
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What's more believable?:<br />
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A,) That a struggling Seattle bookseller, the product of a cross country road trip by a quirky engineer; and a tiny Arkansas discount store run by a few good old boys from Bentonville, fearlessly, out of the blue, took their businesses to heretofore unforeseen, unimaginable heights, developing global supply chains with foreign suppliers (specifically China) that were unduplicable by every other retailer in America, creating the most dominant, and as we've seen, destructive, locust-like businesses the world has ever known....<br />
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OR:<br />
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B.) Jeff, Sam and company had significant help from some really smart people in the Chinese government. Could it be possible that the CCP hand picked these two silly little businesses to run point on the evisceration of Heartland American Retail and the related communities, priming the pump for decades of US Trade deficits and the destruction of tens of trillions of dollars of competing business and related US Commercial Real Estate value? Is it possible that the Chinese government gave Amazon and Walmart, blessed, preferential treatment, coaching and assistance on how to navigate the Chinese supply chain better and more efficiently than their competition, to the detriment of every other American retailer? Might it be that Beijing knew full well that, because of their managed currency and supply chain, that once fake/illegal Chinese goods, laundered money and opioids became ubiquitous on US Websites it would only be a matter of time before the US Economy would be irreparably harmed? Have the Chinese elite implemented a stealth, retaliatory version of the 19th Century <i>Opium Wars</i> in a "turn about is fair play" move, accelerating their drive to become a dominant world power? Is it possible that the destruction of small town America was brilliantly planned long ago in Beijing and our leadership still hasn't figured it out?<br />
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Again, the Chinese people I know are brilliant, competitive, talented people. They know what they are doing. Coming up with a covert plan to systematically wreck the US Economy wouldn't be beyond their capability nor out of the realm of possibility.<br />
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<i>Phone rings.....circa 1999.....</i><br />
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Mr. Glass (Sam's successor)? Mr. Bezos?.....I have Beijing holding on line #1....and Wall Street on line #2....will you take the calls?<br />
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<b><u><span style="color: red; font-size: large;">The "Art of the Bad Deal"</span></u></b><br />
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<span style="color: red;"><u style="font-style: italic; font-weight: bold;">Executive Summary:</u> In this section we discuss how the American Middle Class and by extension, the US Economy is actually "in check" and a few errant moves away from "Checkmate". We discuss the CCP mastery of their understanding of our political system, as well as a hypothetical "Bad Deal" which illustrates how few good choices (and the long list of bad ones) that our Administration has left to make. The conclusion is, because of our handcuffed political system, that nothing meaningful will happen. No consensus can be achieved and no corrective measures will be taken. We will continue our gradual, inevitable slide into the abyss, guided every step of the way by the Chinese Communist Party. </span><br />
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<span style="color: red;">The next <b><i><u>Executive Summary</u></i></b> is: <b><i><u>The 34th Amendment... </u></i></b> </span><br />
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In Chess terminology, the US Economy is in "check" and just a few bad moves away from "mate".<br />
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I'm far from a Chess Master (My mind isn't quick enough. I'm not wired to respond immediately...to anything.... and I prefer to ponder and ruminate on concepts until I stumble upon what I believe to be plausible moves and outcomes....but I digress).<br />
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Anyway, any Chess Master would tell you that when you are in jeopardy, the game requires bold moves. Thankfully, for better or worse, we finally have an administration that is not adverse to "bold" moves, albeit often odd, disjointed, misguided and occasionally stemming from dubious motivation, but nevertheless "bold" moves.<br />
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Given the pickle we're in.....It will take some really BOLD moves to correct forty years of horrific economic policy. I've listed the bullet points of the "Deal" America should be looking for from the current trade negotiations with China.<br />
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<b><u>The "Bad Deal"</u></b><br />
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1.) Immediately stop these silly trade negotiations. They are irrelevant and take everyone's eye off the ball. A few billion in tariffs on soybeans, car parts, steel and Jack Daniels? For each happy lobbyist we create a sad one. Please...stop.....it's a political smoke screen to make the world believe that the Administration is actually doing something.<br />
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2.) In exchange for "Tariff Free Trade" with the United States, China must allow the RMB to float. The Administration will deliver a "strongly worded letter" to the CCP requiring that the RMB become freely convertible, to any major currency within 6 months. (Six months is probably more than enough time since the CCP can copy and improve iPhone software, load it onto ZTE phones and ship 'em to Iran in a couple of weeks. By comparison, passing policy at the Politburo shouldn't be that tough.) Moreover, all Currency Controls must be eliminated. The hard working Chinese people must be allowed to invest their savings, 3x the US Money Supply, unencumbered, anywhere they want to. Chinese banks would be required to facilitate this free flow of capital.....they would have been busy. But of course, the CCP would never allow the RMB to float, and they would never lift Capital/Currency/SAFE Controls....these are the centerpiece of their economic plan....so it's all moot.<br />
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3.) If the Chinese Government fails to comply (they will say they have complied but they will not have), after six months, the US will enact an immediate trade Embargo on all Chinese goods......(Ouch!)<br />
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4.) The Administration will fully acknowledge that this Embargo would cause a Global Depression, the likes of which we've never seen, wiping out wealth like never before. The value of America's largest companies (Apple, Walmart, Amazon, US Banks, etc.) would be decimated overnight. The value and quality of the $3 Trillion of FOREX Assets on the PBOC's balance sheet would be called into question. Oh well....easy come....easy go. <br />
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5.) The State Department, along with the FED will be responsible for briefing and coordinating policy with the world's central bankers, BOJ, ECB, BOE, etc. organizing the transition, letting these bankers know they should be prepared, in six months or sooner as need be, to open the spigots and print money, supporting their respective economies like never before. Helicopter money will become a reality. This coordination would make the Post WWII Wiemar Republic monetary policy look hawkish by comparison.<br />
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6.) Immediately Announce this plan in a prime time Presidential address because, a.) The American People should know what they are in for and b.) It would make for great theater....and ratings. We all know how the administration loves great theater/ratings.<br />
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7.) The upside, if there is one, is that no country has ever launched missiles or invaded another because of a financial/trade dispute. Although, unfortunately, many of us will have to get used to living in shelters or outdoors for a while until this all blows over.<br />
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Isn't that a great, artful "Deal"??<br />
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Of course, to play devil's advocate, the CCP understands the American Political System all too well. They know that the above negotiation, from America's perspective, is politically impossible. It would be hard to fathom that the Republican Party (or any party) could possibly retain control of the White House, Senate or House....or any elected office for that matter, if they were to lead the country into a world wide global depression.<br />
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I shudder when I imagine what the campaign slogans might be if the Administration actually dared to go forward with "The Deal" as described above.... "Make America Survivable Again"? or perhaps "Yes We Can!...uhhh....if Beijing says it's OK...."?<br />
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That said, the CCP also understands that Chinese people are much more flexible, loyal and forgiving of their leadership. Under every circumstance, they support the party, do what they are told....or they know they will disappear. Politics is much simpler, outcomes are more certain and consequences are much more immediate and direct for China's middle class than in America. Whereas, the American Middle Class meanders aimlessly, simply wondering why they have less purchasing power than last year.<br />
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The CCP, with acute clarity, fully understands the inherent weakness in democracy. Again, I'm no pollster, but I'm relatively certain that we Americans would tend to avoid voting for administrations where a global economic collapse took place on their watch.<br />
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<i><span style="font-size: small;">“When the people find that they can vote themselves money that will herald the end of the republic.” </span><span style="font-size: x-small;">Ben Franklin</span></i></h1>
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Further, American politicians don't want to vacate office or lose control, so like the Chinese people, content with their situation, rightly fearful of the consequences of "Bold" moves, our Congress and Senate would accept their fate and kick the can down the road hoping to continue to hold their respective offices and that things will eventually work out.<br />
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My guess would also be, again, since our economy is in "check" and a few moves from "mate", based on the HUGE shift in the tone of the recent <a href="https://twitter.com/realDonaldTrump">Tweet storms</a>, we are quickly moving away from:<br />
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"Trade Wars are easy to win" and "<a href="https://www.theregister.co.uk/2018/05/17/trumps_new_zte_tweets_trump_old_zte_tweets/">No deal! No talks! Fake news! China bad! So much winning!</a>".....<br />
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Toward:<br />
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There's a good chance that the new, conciliatory Presidential tone is the result of the Chinese giving our wet-behind-the-ears, inexperienced, negotiators, an ultimatum..... their own version of the aforementioned "Deal".<br />
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"Check" and "Mate".....<br />
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So I guess it's steady as she goes.....<br />
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<b><span style="color: red; font-size: x-large;"><u>The 34th Amendment</u></span></b><br />
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<span style="color: red;"><u style="font-style: italic; font-weight: bold;">Executive Summary:</u> The text below is a tongue in cheek look at what the 34th and final Amendment to the US Constitution will look like if we continue on our current economic path. I'm sure that the formal document will be written much better than this one, but the result will be the same. As they say, it's funny because it's true.....</span><br />
<i style="color: red;"><br /></i>
Let's get back to the initial question "What-if".....<br />
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So let's ask "What if" nothing changes? Let's say that we continue this disastrous domestic financial and economic policy, allowing our economy, financial markets and "<i>Capital Formation</i>" to be directed from Beijing by proxy. Let's say that Walmart, Amazon, Wall Street and our leadership continue to be covertly (unwittingly or not) directed by, or at least manipulated by the Chinese government, presumably for reasonable, maybe even more than adequate, compensation to America's elite.<br />
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Here's the path we're on:<br />
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<b><u><span style="font-size: large;">The 34th Amendment to the Constitution of the United States</span></u></b><br />
<b><u><i>(circa 2076)</i></u></b><br />
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We, the political leadership of the American people hereby solemnly declare that we've ridden this beleaguered pony as far as it would f*&ing take us. By this amendment we officially abolish that ludicrous, yet well intentioned charade of "a Government of the people, by the people, for the people....." (Sorry....the Congressional Chamber erupted in laughter when I dictated that.....where was I?...) Oh....That's right.....We're outta here! You folks are officially on your own. Good luck!<br />
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We've amassed enough wealth now where we can afford our private, self sustaining Caribbean and South Pacific sanctuary islands, private yachts and jets, as well as the requisite state of the art security systems and firepower, far enough away from "We the People" (aka "You the Rabble") that we finally feel comfortable and safe again. It was touch and go for a while.<br />
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I know you were upset when you found out we converted those vacant Walmarts to <a href="https://www.youtube.com/watch?v=6zAFA-hamZ0"><b><span style="color: blue;">Soylent Green</span></b></a> processing facilities, but really, what were we supposed to do?....we had to feed you... We couldn't let you starve!.....mass starvation would have really hurt our approval rating.<br />
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After Chicago fell and Detroit and Atlanta were burned ....AGAIN!....what is it with those towns ? I mean really? Anyway, we knew, that our days were numbered. We, your (former) revered leadership had to get out of this shit-hole. Based on the way things were heading, we thought it would be prudent to "git while the gittin's good"! In hindsight, perhaps just a teeny-tiny little bit of gun control might not have been a bad thing.....<br />
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We, your revered (former) leadership, would also like to thank you for continuing to fall for all of that "Cut your taxes, reduce government regulation and release the power of the American worker" bullshit. We are grateful that we could convince you that anyone who isn't your sponsored, fake, anonymous Facebook friend is actually your enemy not to be trusted. We are also extremely and pleasantly surprised that you totally bought into the "Government is trying to run your life 'Deep State'" crap, allowing us to skate by without any accountability, filling the swamp to the brim while simultaneously blaming the "opposition" for the failure to provide any level of health care, public safety, financial regulation and absolutely no safety nets of any kind for you whining pussies.<br />
<br />
We've given you everything you've wanted. We've provided every addictive, self destructive vice we could think of (unlimited drugs, sex, fire arms, gambling, alcohol, tobacco, etc.) at your request. We've made all of this easily available through a heavily marketed, unregulated, anonymous eCommerce system, only a few easy clicks away, delivered to you by the US Post Office from overseas at a cost far less than your late Aunt Millie used to pay to send out her Christmas presents. i.e.) In the good old days, when she had a job and money....before she OD'd, God rest her soul.<br />
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Every one of you schmucks blessed this plan (and kept voting for us) every step of the way. You cherished your inalienable right and God-Given-American <i>freedom</i> (with no associated responsibility) to do dumb-ass, self destructive crap with your money, your future and your lives. We gave you the <i>freedom</i> to spiral into oblivion and you took to it like pigs to shit. <br />
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We've given you your <i>freedom</i> and made you realize that everyone around you, the guy living in the refrigerator box across the way, or the little old ladies huddled in that abandoned church, as well as the family staying in that burned out car over on Main Street, is indeed your enemy out to get you. Since we've left, and there is no more "America" per se, there's also no more "rule of law". Just feel free to take what you want from whoever you want, keeping in mind of course, that they will do the same to you. Luckily, you are all armed to the teeth and able to defend yourselves. You will finally be able to test that "A good guy with a gun is the only thing that can stop a bad guy with a gun" thesis.<br />
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As a gesture of good faith, we'd also appreciate it if, when we send our servants and minions over to the mainland, to collect whatever valuables, rations and supplies that we might request from the former "We the People" from time to time, that you'll charge us a fair price and treat our minions and servants with the same respect and admiration that we've shown you for all of these years... ...ummm....well maybe just try to refrain from stringing them up....like us, they are/were just trying to do their job(s).<br />
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Anyway, no hard feelings and all the best!<br />
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Enacted into law this Day, July 4th 2076 heretofore to be known as "Dependence Day"....each of you poor bastards is now officially, fully dependent on your own resources (or what's left of them) and your own personal ingenuity for your very survival.....and the weak shall, unfortunately, perish from the earth. That's what I call "<i>Freedom</i>" baby! </div>
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Ex-54th President of the uncontrolled land mass formerly known as the United States of America.<br />
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PS: I can make you a great deal on some Heartland Condos I'm planning......WITH FREE INTERNET!.....just wire me a small deposit...Call me! 1-800-UPY-OURS<br />
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<b><u><span style="color: red; font-size: large;">Footnote: The Alibaba Investor Call</span></u></b><br />
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I took (i.e. wasted) the time to listen to Alibaba's Q1 Investor Call. Same old same old. There were really no changes, save for the idea that a trade war with the US (or anything else for that matter) won't have any detrimental impact on Alibaba's ecosystem. They are truly unstoppable. Presumably, it's easy exceed expectations when management is fully comfortable with fabricating just about any numbers their little hearts desire. Same fake numbers, fake metrics and lack of disclosure. Now, they've leaked that <a href="https://www.cnbc.com/2018/04/10/ant-financial-to-raise-9-billion-at-a-150-billion-valuation.html"><span style="color: blue;"><b>Ant Financial is worth $150 Billion</b></span></a>, up another $50 Billion from last quarter! They have the Midas touch indeed.<br />
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I've attached the links to the call, the press release, presentation and the filing below. Feel free to peruse at your own pace if you have the stomach. For my analysis you can refer to my quarterly posts for the last three years. Just update the numbers to reflect the current quarter. Again, nothing has changed.<br />
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<b><u>Press Release</u></b><br />
<a href="https://www.alibabagroup.com/en/news/press_pdf/p180504.pdf"><b><span style="color: blue;">https://www.alibabagroup.com/en/news/press_pdf/p180504.pdf</span></b></a><br />
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<b><u>Presentation</u></b><br />
<b><a href="https://www.alibabagroup.com/en/ir/presentations/pre180504.pdf"><span style="color: blue;">https://www.alibabagroup.com/en/ir/presentations/pre180504.pdf</span></a></b><br />
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<b><u>Webcast</u></b><br />
<b><u><a href="https://edge.media-server.com/m6/p/z742sd9z"><span style="color: blue;">https://edge.media-server.com/m6/p/z742sd9z</span></a></u></b><br />
<b><u><br /></u></b>
<b><u>6-K</u></b><br />
<b><u><a href="https://www.sec.gov/Archives/edgar/data/1577552/000110465918030651/a18-12785_1ex99d1.htm"><span style="color: blue;">https://www.sec.gov/Archives/edgar/data/1577552/000110465918030651/a18-12785_1ex99d1.htm</span></a></u></b><br />
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REMEMBER: YOU CAN'T SHORT THIS DOG YET!....THE CCP HAS THE OTHER SIDE OF THE TRADE!<br />
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<span style="color: red; font-size: large;"><b><u>Spare Change ......Selected Notes from Readers</u></b></span><br />
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This is a New Section I'll call "Spare Change": I'm often given meaningful tidbits that pique my curiosity. Usually, they are a "thing" but I'm not sure what the significance is yet....If you have something relevant/Interesting and you deem it "Spare Change" material, feel free to email it. I've found my readers are beginning to shape the direction of this blog....I had never heard of the "Vancouver Model" until a reader put me in touch with Professor Langdale.<br />
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I enjoy following the trails you put me on.<br />
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<u><b>1.) From a Reader Re: Caymans Registered Investment Companies</b></u><br />
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A reader sent me the following link. It's the Cayman Islands Investment Fund Registration list. More than 10,000 registered Investment vehicles. I'm beginning to believe that everyone on the planet has money invested in the Cayman Islands.....whether they know it or not.<br />
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<a data-saferedirecturl="https://www.google.com/url?hl=en&q=https://www.cima.ky/upimages/commonfiles/QuarterlyListofallMutualFundsregisteredandlicensedwiththeCaymanIslandsMonetaryAuthority-31March2018_1523637347.pdf&source=gmail&ust=1526471611098000&usg=AFQjCNEH0vH8-SI6RFe7aci9ZnpPhxY7tQ" href="https://www.cima.ky/upimages/commonfiles/QuarterlyListofallMutualFundsregisteredandlicensedwiththeCaymanIslandsMonetaryAuthority-31March2018_1523637347.pdf" rel="noreferrer" style="background-color: white; color: #1155cc; font-family: arial, sans-serif; font-size: 12.8px;" target="_blank">https://www.cima.ky/upimages/c<wbr></wbr>ommonfiles/QuarterlyListofallM<wbr></wbr>utualFundsregisteredandlicense<wbr></wbr>dwiththeCaymanIslandsMonetaryA<wbr></wbr>uthority-31March2018_<wbr></wbr>1523637347.pdf</a><br />
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<b><u>2.) Thoughts from Tim Bergin</u></b><br />
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The following paragraphs are taken from an email from Tim Bergin of Toronto, posted with his permission. </div>
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<i><span style="font-family: "arial" , "helvetica" , sans-serif; font-size: x-small;">It is a bit of a conundrum, higher rates means lower asset prices (equities), however this usually leads to lower bond yields. This case may be different...</span></i><br />
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<i><span style="font-family: "arial" , "helvetica" , sans-serif; font-size: x-small;">I waited to respond until after I had the chance to finish your recent post. I just finished "The new phone book's here". It was truly awesome/brilliant/all other similar adjectives. I will need to read it twice. Can I try to summarize and you let me know if I got it right? Please see below:</span></i></div>
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<i><span style="font-family: "arial" , "helvetica" , sans-serif; font-size: x-small;">China has two sealed-off and mostly independent currency markets. Domestically they are pumping in huge amounts of stimulus. But since they are a non-market based economy a lot of this stimulus is wasted as you point out the ratio of M3 to PGDP is terrible (and this relationship makes sense if you look at history). With their capital controls, and big banks facilitating external funding - this inner inflationary pressure has not (yet) hit the currency as the peg is fixed and the external money has no mechanism to readily convert to anything else. This has lead the Chinese to have it both ways, huge inner stimulation to appease the people. Strong external currency to maintain purchasing power outside. Your apple boomerang diagram was super helpful to understand all this.</span></i></div>
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<i><span style="font-family: "arial" , "helvetica" , sans-serif; font-size: x-small;">As a result the RMB is extremely overvalued. Which makes sense, if domestic Chinese entities are desperate to buy foreign assets, at any price, this does not happen if a currency is undervalued. I have also read in the past the huge haircuts rich citizens are willing to take when trying to get their money out via Macau - meaning they know its overvalued. I also had the pleasure of sitting on an airplane next to a young Chinese woman who had just purchased here first house in Canada, her question to me - How do Canadian people feel that China is using a fake overvalued currency to buy real assets? She told me it was well known in China that the currency was too high, and whenever people thought it would drop they would rush to get cash out. Interesting she told me friends of hers in the government had said that official budgets had much lower currency than the ones broadcasted publicly. This is a couple years ago, but currency has not dropped as she expected it to.</span></i></div>
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<i><span style="font-family: "arial" , "helvetica" , sans-serif; font-size: x-small;">Am I on the right path so far?</span></i></div>
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<i><span style="font-family: "arial" , "helvetica" , sans-serif; font-size: x-small;">So that leaves us with a strange situation. Domestic inflation, with a strong currency. What are the mechanisms that cause this to end? Not asking for catalyst (I hate that question, usually these things collapse of their own weight), just curious what actually occurs to break the status quo? </span></i></div>
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<i><span style="font-family: "arial" , "helvetica" , sans-serif; font-size: x-small;">What is interesting is that Chinese mainland wages are almost too high for it to be the factory of the world. So could it be possible that a recession occurs in China and that prompts loan losses, and diminished confidence internal and externally force the government to break the peg? Can a domestic recession happen if the government is willing to continually print stimulus? How else does this break?</span></i></div>
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<i><span style="font-family: "arial" , "helvetica" , sans-serif; font-size: x-small;">Also, why did they punish HNA/Anbang if they were carrying out the explicit goals? Was it because their funding bases were such jokes, and they were so big that a disorderly collapse could bring whole on-shore/off-shore currency down?</span></i></div>
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<u><b>3.) Escape From New York</b></u></div>
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A reader sent me this updated trailer from John Carpenter's Epic "<i>Escape from New York</i>" ....it's pretty entertaining......appropriately timed for the topics above.....Snake Plissken for President?<br />
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<b><u>4.) The Vancouver Model</u></b><br />
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I'd like to acknowledge a reader from Vancouver (NOT named Rob Chipman) who put me in touch with Professor Langdale. Until this e-introduction and my anonymous reader's contributions, I had no idea that the problem was as large as it is, or studied in the detail it has been. There are questions as to the size and the scope (see the link below) of the problem, but I'd suggest that my friend Fred, and roughly 50,000 (this year) Canadians and Americans who've been through similar losses, are relatively certain there's a substantial problem.<br />
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<a href="http://www.robchipman.net/money-laundering-the-vancouver-model-and-my-confusion/"><span style="color: blue;">http://www.robchipman.net/money-laundering-the-vancouver-model-and-my-confusion/</span></a><br />
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<b><u>5.) DeadMalls.com</u></b><br />
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One of my readers sent me this wonderful site about the history of American "Malls", a treasure trove of video, pictures and stories about the destruction of the American Retail landscape. Hundreds of abandoned US Shopping Malls referenced and indexed by state. It's as depressing as it is informative!<br />
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<a href="http://deadmalls.com/index.html"><b>http://deadmalls.com/index.html</b></a><br />
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<b><span style="font-size: large;"><u>Additional reading</u></span></b><br />
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Fortune 500 - 1997<br />
<a href="http://archive.fortune.com/magazines/fortune/fortune500_archive/full/1997/101.html">http://archive.fortune.com/magazines/fortune/fortune500_archive/full/1997/101.html</a><br />
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TheStreet.com Article - Walmart eCommerce - Marketplace GMV a closely guarded secret<br />
<a href="https://www.thestreet.com/story/14494348/1/walmart-disappointing-e-commerce-growth.html">https://www.thestreet.com/story/14494348/1/walmart-disappointing-e-commerce-growth.html</a><br />
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Walmart - 1/31/18 10K<br />
<a href="https://www.sec.gov/Archives/edgar/data/104169/000010416918000028/wmtform10-kx1312018.htm#sd34276b191444fa29b68b4b321c5c583">https://www.sec.gov/Archives/edgar/data/104169/000010416918000028/wmtform10-kx1312018.htm#sd34276b191444fa29b68b4b321c5c583</a><br />
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Amazon - 2017 10-K<br />
<a href="https://www.sec.gov/Archives/edgar/data/1018724/000101872418000005/amzn-20171231x10k.htm#sF2423AEEA7FB5EE886EF78CF9324C2CE">https://www.sec.gov/Archives/edgar/data/1018724/000101872418000005/amzn-20171231x10k.htm#sF2423AEEA7FB5EE886EF78CF9324C2CE</a><br />
<br />
<span style="font-family: inherit; font-size: 10pt; font-style: italic; text-indent: 32px;">Our primary source of revenue is the sale of a wide range of products and services to customers</span><span style="font-family: inherit; font-size: 10pt; text-indent: 32px;">. The products offered through our consumer-facing websites and physical stores primarily include merchandise and content we have purchased for resale from vendors and products offered by third-party sellers, and we also manufacture and sell electronic devices. Generally, we recognize gross revenue from items we sell from our inventory as product sales and recognize our net share of revenue of items sold by third-party sellers as service sales. We seek to increase unit sales across our businesses, through increased product selection, across numerous product categories. We also offer other services such as compute, storage, and database offerings, fulfillment, publishing, certain digital content subscriptions, advertising, and co-branded credit cards.</span><br />
<span style="font-family: inherit; font-size: 10pt; text-indent: 32px;"><br /></span><span style="font-family: inherit; font-size: 10pt; text-indent: 32px;">Amazon - Bigger than we think - Discussion of non-reporting of GMV </span><br />
<span style="font-size: 13.3333px; text-indent: 32px;"><a href="https://www.usatoday.com/story/tech/news/2016/10/20/amazon-online-sales-bigger-larger/92419572/">https://www.usatoday.com/story/tech/news/2016/10/20/amazon-online-sales-bigger-larger/92419572/</a></span><br />
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Private Equity - Boosting Some Brands and Crushing Others<br />
<a href="http://fortune.com/2018/04/24/retail-private-equity-investors-mall-shopping/">http://fortune.com/2018/04/24/retail-private-equity-investors-mall-shopping/</a><br />
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Walmart eCommerce<br />
<a href="https://www.thestreet.com/story/14494348/1/walmart-disappointing-e-commerce-growth.html">https://www.thestreet.com/story/14494348/1/walmart-disappointing-e-commerce-growth.html</a><br />
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Amazon IPO 5/15/1997<br />
<a href="https://www.sec.gov/Archives/edgar/data/1018724/0000891020-97-000868.txt">https://www.sec.gov/Archives/edgar/data/1018724/0000891020-97-000868.txt</a><br />
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Current year (YE March 31, 1997) sales were US$16 Million. Losses since inception were roughly US$9 Million and they were able to raise about $50 Million from the IPO. Amazon had 256 employees at the time.<br />
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Census Retail<br />
<a href="https://www.census.gov/data/tables/2016/econ/arts/annual-report.html">https://www.census.gov/data/tables/2016/econ/arts/annual-report.html</a><br />
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Walmart - 1997<br />
<a href="https://www.sec.gov/Archives/edgar/data/104169/0000104169-97-000003.txt">https://www.sec.gov/Archives/edgar/data/104169/0000104169-97-000003.txt</a><br />
1997 Revenue $104B, Net Income $3B. $27B SHE with 728,000 employees.<br />
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Sears Roebuck - 1997<br />
<a href="https://www.sec.gov/Archives/edgar/data/319256/0000319256-97-000005.txt">https://www.sec.gov/Archives/edgar/data/319256/0000319256-97-000005.txt</a><br />
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KMart - 1997<br />
<a href="https://www.sec.gov/Archives/edgar/data/56824/0000950124-97-002230.txt">https://www.sec.gov/Archives/edgar/data/56824/0000950124-97-002230.txt</a><br />
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Target - 1997<br />
<a href="https://www.sec.gov/Archives/edgar/data/27419/0000912057-97-013232.txt">https://www.sec.gov/Archives/edgar/data/27419/0000912057-97-013232.txt</a><br />
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Costco - 1997<br />
<a href="https://www.sec.gov/Archives/edgar/data/909832/0001047469-97-003493.txt">https://www.sec.gov/Archives/edgar/data/909832/0001047469-97-003493.txt</a><br />
<a href="https://www.sec.gov/Archives/edgar/data/909832/0001047469-97-003493.txt" target="_blank"><br /></a>Federated- 1997<br />
<a href="https://www.sec.gov/Archives/edgar/data/794367/0000950152-97-002943.txt">https://www.sec.gov/Archives/edgar/data/794367/0000950152-97-002943.txt</a><br />
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May Company<br />
<a href="https://www.sec.gov/Archives/edgar/data/63416/0000063416-96-000013.txt">https://www.sec.gov/Archives/edgar/data/63416/0000063416-96-000013.txt</a><br />
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Toys R Us - 1997<br />
<a href="https://www.sec.gov/Archives/edgar/data/1005414/0001005414-98-000005.txt">https://www.sec.gov/Archives/edgar/data/1005414/0001005414-98-000005.txt</a><br />
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Walgreens - 1997<br />
<a href="http://files.shareholder.com/downloads/WAG/6216740887x0xS104207-97-8/104207/filing.pdf">http://files.shareholder.com/downloads/WAG/6216740887x0xS104207-97-8/104207/filing.pdf</a><br />
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Amazon IPO - What Amazon Shares are worth today?<br />
<a href="https://www.geekwire.com/2017/live-amazon-rings-nasdaq-opening-bell-20-year-anniversary-ipo/">https://www.geekwire.com/2017/live-amazon-rings-nasdaq-opening-bell-20-year-anniversary-ipo/</a><br />
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Vacant store fronts<br />
<a href="https://www.nytimes.com/2017/11/19/opinion/nyc-empty-stores.html?action=click&pgtype=Homepage&clickSource=story-heading&module=opinion-c-col-left-region&region=opinion-c-col-left-region&WT.nav=opinion-c-col-left-region">https://www.nytimes.com/2017/11/19/opinion/nyc-empty-stores.html?action=click&pgtype=Homepage&clickSource=story-heading&module=opinion-c-col-left-region&region=opinion-c-col-left-region&WT.nav=opinion-c-col-left-region</a><br />
<br />
Store Closings = Vacant small towns all over America<br />
<a href="http://www.chicagotribune.com/business/ct-small-town-department-store-closing-0903-biz-20170830-story.html">http://www.chicagotribune.com/business/ct-small-town-department-store-closing-0903-biz-20170830-story.html</a><br />
<br />
When Walmart Stores Close - PBS<br />
<a href="https://youtu.be/JgJt4sArUHI">https://youtu.be/JgJt4sArUHI</a><br />
<br />
Vacant Walmart Stores in upstate NY -<br />
<a href="https://www.youtube.com/watch?v=gtx85nzI-M0">https://www.youtube.com/watch?v=gtx85nzI-M0</a><br />
<br />
Living at Walmart - a place to call home<br />
<a href="https://www.youtube.com/watch?v=h1AWLo_fK1U">https://www.youtube.com/watch?v=h1AWLo_fK1U</a><br />
<br />
Worst Places to Live in the US - 4.5 million views<br />
Top 3: Camden, Detroit & Cleveland (Hey!!...My hometown made the top three!)<br />
<a href="https://www.youtube.com/watch?v=8nGYkEBDjX8" target="_blank">https://www.youtube.com/watch?v=8nGYkEBDjX8 </a><br />
<br />
1.) Camden, NJ - 9 Walmarts<br />
2.) Detroit, MI - 15 Walmarts<br />
3.) Cleveland, OH - ONLY 3 Walmarts<br />
4.) New Haven, CT - 1 Walmart<br />
5.) Memphis, TN - 7 Walmarts<br />
6.) Stockton, CA - 2 Walmarts<br />
7.) Birmingham, AL - 13 Walmarts<br />
8.) New Orleans, LA - 8 Walmarts<br />
9.) Oakland, CA - 2 Walmarts (One closed in 2017)<br />
10.) Modesto, CA - 3 Walmarts<br />
11.) Reno, NV - 6 Walmarts<br />
12.) St Louis, MO - 4 Walmarts<br />
<br />
Amazon to Increase Prime Membership 20% (from $99 to $119)<br />
<a href="https://www.marketwatch.com/story/amazon-to-increase-prime-subscription-price-to-119-a-year-2018-04-26?siteid=bnbh">https://www.marketwatch.com/story/amazon-to-increase-prime-subscription-price-to-119-a-year-2018-04-26?siteid=bnbh</a><br />
<br />
Warren Buffett - "Unleash the potential of the Chinese People".....even Warren has been fooled.<br />
<span style="color: blue;"><a href="https://www.yahoo.com/finance/news/warren-buffett-china-found-secret-sauce-183809314.html">https://www.yahoo.com/finance/news/warren-buffett-china-found-secret-sauce-183809314.html</a></span><br />
<br />
CDC - Opiod Overdoses Skyrocketing<br />
<a href="https://www.cdc.gov/media/releases/2018/p0306-vs-opioids-overdoses.html">https://www.cdc.gov/media/releases/2018/p0306-vs-opioids-overdoses.html</a><br />
<br />
CDC - Opioid Deaths<br />
<span style="background-color: white; font-family: "lato" , "helvetica neue" , "helvetica" , "arial" , sans-serif; font-size: 14px;">Opioids—prescription and illicit—are the main driver of drug overdose deaths. Opioids were involved in 42,249 deaths in 2016, and opioid overdose deaths were five times higher in 2016 than 1999.</span><br />
<span style="background-color: white; font-size: 14px;"><span style="color: blue; font-family: "lato" , "helvetica neue" , "helvetica" , "arial" , sans-serif;"><a href="https://www.cdc.gov/drugoverdose/data/statedeaths.html">https://www.cdc.gov/drugoverdose/data/statedeaths.html</a></span></span><br />
<span style="background-color: white; font-size: 14px;"><br /></span>
<span style="background-color: white; font-size: 14px;">The Vancouver Model - Real Estate Pricing</span><br />
<span style="background-color: white; font-size: 14px;"><a href="https://betterdwelling.com/city/vancouver/a-brief-history-of-foreign-buying-of-vancouver-real-estate/">https://betterdwelling.com/city/vancouver/a-brief-history-of-foreign-buying-of-vancouver-real-estate/ </a></span><br />
<span style="background-color: white; font-family: "lato" , "helvetica neue" , "helvetica" , "arial" , sans-serif; font-size: 14px;"><br /></span>
<span style="background-color: white; font-family: "lato" , "helvetica neue" , "helvetica" , "arial" , sans-serif; font-size: 14px;">Amazon Debit Card - Mexico</span><br />
<span style="background-color: white; font-family: "lato" , "helvetica neue" , "helvetica" , "arial" , sans-serif; font-size: 14px;"><a href="https://www.reuters.com/article/us-amazon-com-mexico/amazon-launches-first-debit-card-in-mexico-e-commerce-push-idUSKCN1GP35A">https://www.reuters.com/article/us-amazon-com-mexico/amazon-launches-first-debit-card-in-mexico-e-commerce-push-idUSKCN1GP35A</a></span><br />
<br />
Amazon Cash at 7-11 - Video<br />
<a href="https://www.youtube.com/watch?v=3jgZ8xn4cUY">https://www.youtube.com/watch?v=3jgZ8xn4cUY</a><br />
<br />
Amazon Cash at 7-11<br />
<a href="https://paymentweek.com/2017-11-8-7-eleven-steps-mobile-payments-amazon-cash/">https://paymentweek.com/2017-11-8-7-eleven-steps-mobile-payments-amazon-cash/</a><br />
<br />
Amazon Cash - The Register<br />
<a href="https://www.theregister.co.uk/2017/04/03/amazon_gets_into_scrip_game/">https://www.theregister.co.uk/2017/04/03/amazon_gets_into_scrip_game/</a><br />
<br />
Thompson Reuters AML Training<br />
<a href="https://risk.thomsonreuters.com/en/compliance-training-courses/anti-money-laundering-aml-training.html#request-course-trial">https://risk.thomsonreuters.com/en/compliance-training-courses/anti-money-laundering-aml-training.html#request-course-trial</a><br />
<br />
Amazon Packages - Picked & Shipped with less than 1 minute of Human Contact<br />
<a href="https://www.blogger.com/"><span id="goog_394958282"></span>http://money.cnn.com/2016/10/06/technology/amazon-warehouse-robots/index.html <span id="goog_394958283"></span></a><br />
<br />
10 Worst Small Towns in America - video<br />
<a href="https://www.youtube.com/watch?v=lF2Pw_xFCn4">https://www.youtube.com/watch?v=lF2Pw_xFCn4</a><br />
<br />
10.) Kokomo, IN - <a href="https://www.walmart.com/store/1962/kokomo-in">Walmart Super Center </a><br />
9.) Ardmore, OK - <a href="https://www.walmart.com/store/129/ardmore-ok">Walmart Super Center</a><br />
8.) Niagra Falls, NY - <a href="https://www.walmart.com/store/1909/niagara-falls-ny">Walmart Super Center</a><br />
7.) Anderson, IN - <a href="https://www.walmart.com/store/1728/anderson-in">Walmart Super Center</a><br />
6.) Rocky Mount, NC - <a href="https://www.walmart.com/store/1197/rocky-mount-nc">Walmart Super Center</a><br />
5.) Pine Bluff, AK - <a href="https://www.walmart.com/store/3331/pine-bluff-ar/details">Walmart Super Center</a><br />
4.) Leitchfield, KY - <a href="https://www.walmart.com/store/445/leitchfield-ky/details">Walmart Super Center</a><br />
3.) Elkhart, IN - <a href="https://www.walmart.com/store/2679/elkhart-in/details">Walmart Super Center</a>, <a href="https://www.walmart.com/store/4399/elkhart-in/details">Walmart Super Center</a> (Note: Elkhart, IN actually has two Super Centers. Walmart is actually Elkhart's largest employer.)<br />
2.) Fort Pierce, FL - <a href="https://www.walmart.com/store/973/fort-pierce-fl">Walmart Super Center</a><br />
1.) Gallup, NM - <a href="https://www.walmart.com/store/906/gallup-nm/details">Walmart Super Center</a><br />
<br />
The Pain Hustlers - Opiod Marketing in America<br />
<a href="https://www.nytimes.com/interactive/2018/05/02/magazine/money-issue-insys-opioids-kickbacks.html?action=click&module=MagazineModule&pgtype=Article&contentCollection=Magazine&region=Header">https://www.nytimes.com/interactive/2018/05/02/magazine/money-issue-insys-opioids-kickbacks.html?action=click&module=MagazineModule&pgtype=Article&contentCollection=Magazine&region=Header</a><br />
<br />
RELOADABLE WALMART PREPAID DEBIT CARD<br />
<a href="https://www.walmartmoneycard.com/getacardnow?utm_source=WMMC_BING_search_PrepaidCard&utm_content=EA-CashRewards&msclkid=88594995e6781cfa239f1372a0a731cd">https://www.walmartmoneycard.com/getacardnow?utm_source=WMMC_BING_search_PrepaidCard&utm_content=EA-CashRewards&msclkid=88594995e6781cfa239f1372a0a731cd</a><br />
<br />
<b><u>Walmart MoneyCard </u></b>Major selling point is "No Credit Check"! I'm sure Walmart's highly trained minimum wage employees are highly trained in fraud prevention and AML rules.<br />
<a href="http://ir.greendot.com/phoenix.zhtml?c=235286&p=irol-irhome">http://ir.greendot.com/phoenix.zhtml?c=235286&p=irol-irhome</a><br />
<br />
<span style="background-color: white;"><span style="color: #25313b; font-family: , sans-serif; font-size: 14px;">IMPORTANT INFORMATION ABOUT PROCEDURES FOR OPENING A NEW CARD ACCOUNT: To help the government fight the funding of terrorism and money laundering activities, federal law requires all financial institutions to obtain, verify, and record information that identifies each person who opens a Card Account. What this means for you: When you open a Card Account, we will ask for your name, address, date of birth, and other information that will allow us to identify you. We</span><span style="font-family: , sans-serif; font-size: 14px;"><span style="color: red;"> may </span></span><span style="color: #25313b; font-family: , sans-serif; font-size: 14px;">also ask to see a copy of your driver’s license or other identifying documents. Card opening is also subject to other fraud prevention measures. While </span><span style="font-family: , sans-serif; font-size: 14px;"><span style="color: red;">there is no credit check to get a card</span></span><span style="color: #25313b; font-family: , sans-serif; font-size: 14px;">, certain features are subject to the use of a consumer report. You will be notified prior to any use.</span></span><br />
<span style="background-color: white;"><span style="color: #25313b; font-family: , sans-serif; font-size: 14px;"><br /></span><span style="color: #001f2f; font-family: , sans-serif; font-size: 18px;">GreenDot Moneycard Agreement</span></span><br />
<span style="color: #001f2f; font-size: 18px;"><a href="https://www.walmartmoneycard.com/account/legal-info-page?doc=cha&productname=mc-cbr" style="background-color: white;">https://www.walmartmoneycard.com/account/legal-info-page?doc=cha&productname=mc-cbr</a></span><br />
<span style="background-color: white;"><br /></span>
<span style="background-color: white; color: #001f2f; font-family: inherit;">1.) Max prepaid balance on card is $10,000. $2,999/day maximum. </span><br />
<span style="background-color: white; color: #001f2f; font-family: inherit;">Load/Reload Limitations. The maximum daily cash reload limit is $2,999, but maximum in-store reload limits also apply and you may not load cash to your Card at any time the funds balance on your Card exceeds $2,999. We reserve the right to accept or reject any request to reload your Card at our sole discretion. Only the primary cardholder may reload the Card. The Card is not interest bearing. General Limits on the Use of Your Card. The overall maximum amount of value that can reside on the Card is $10,000. You are not authorized to conduct transactions that in the aggregate exceed $3,000 per calendar day. For security reasons, we may limit the amount, number or type of transactions you can make on your Card and any funding or reload of your Card. You may only withdraw up to $400 from an ATM and $1,000 from a Walmart register in a single day and $1,500 per teller transaction, unless otherwise indicated. Your Card cannot be used at ATMs outside of the United States. We may, in our sole discretion, further limit your use of the Card at ATMs, and, in addition to our limits, an ATM owner or operator may impose additional withdrawal limits</span><br />
<span style="background-color: white;"><span style="font-family: inherit;"><span style="color: #001f2f;"><br /></span><span style="color: #001f2f;">You agree that you will: (i) not use the Card at unlawful domestic or international gambling web sites, or at payment processors supporting unlawful gambling web sites, or to purchase illegal goods or services; (ii) promptly notify us of any loss or theft of the Card</span></span></span><br />
<span style="background-color: white;"><span style="font-family: inherit;"><span style="color: #001f2f;"><br /></span><span style="color: #001f2f;">You also have the right to obtain a 60-day written history of account transactions at no charge by calling the telephone number above or the number on the back of your Card, or by writing us at Written History Request, P.O. Box 5100, Pasadena, California 91117-0100. Please include your name and Card number. You will not automatically receive paper statements.</span></span></span><br />
<span style="background-color: white; color: #001f2f;"><span style="font-family: inherit;"><br /></span></span>
<span style="background-color: white; color: #001f2f;"><span style="font-family: inherit;">Green Dot Corporation is headquartered in Pasadena, California, with additional facilities throughout the United States and Shanghai, China. The Company was founded in 1999 and went public in 2010 (NYSE: GDOT) </span></span><br />
<span style="background-color: white;"><span style="font-family: inherit;"><span style="color: #001f2f;"><br /></span><span style="color: #001f2f; font-family: , sans-serif;">Our gross dollar volume was $31.8 billion (Total funds run through the cards) - pg 34 up from $5.8 Billion in 2009</span></span></span><br />
<span style="background-color: white;"><span style="font-family: inherit;"><br /></span></span>
<a href="https://www.sec.gov/Archives/edgar/data/1386278/000138627818000013/form10-kxgdot12312017.htm" style="background-color: white;"><span style="font-family: inherit;">https://www.sec.gov/Archives/edgar/data/1386278/000138627818000013/form10-kxgdot12312017.htm</span></a><br />
<span style="background-color: white;"><br /></span>
<br />
<span style="background-color: white;">Walmart in China - 443 Units - Most (406) are Super Centers</span><br />
<span style="background-color: white;"><a href="https://corporate.walmart.com/our-story/locations/china#/china">https://corporate.walmart.com/our-story/locations/china#/china</a></span><br />
<br />
Walmart MoneyGram - 200 Countries. Major cities in China - 71 locations in Beijing, 90 locations in Shanghai. All major Chinese cities have handy Walmart/MoneyGram send/receive locations.<br />
<a href="https://walmart.moneygram.com/locations">https://walmart.moneygram.com/locations</a><br />
<br />
Locations in China - Through the BOC/ICBC/CITC accept and receive currency in USD, EUR, AUD, GBP. Major global currencies <i><u>excep</u></i>t RMB.<br />
<br />
<br />
The Brookings Institute - The Middle Class and the Economy<br />
<a href="https://www.c-span.org/video/?445222-2/middle-class-economy">https://www.c-span.org/video/?445222-2/middle-class-economy</a><br />
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Vancouver Real Estate</div>
<span style="background-color: white; font-size: 14px;"><a href="https://betterdwelling.com/city/vancouver/a-brief-history-of-foreign-buying-of-vancouver-real-estate/">https://betterdwelling.com/city/vancouver/a-brief-history-of-foreign-buying-of-vancouver-real-estate/ </a></span><br />
<div>
<br />
The Vancouver Model</div>
<div>
<a href="https://thebreaker.news/news/exclusive-vancouver-model/">https://thebreaker.news/news/exclusive-vancouver-model/</a></div>
<div>
<br /></div>
<div>
Canada Breaks Record for Opioid deaths</div>
<div>
<a href="https://boom997.com/news/4110583/opioid-deaths-canada-2017/">https://boom997.com/news/4110583/opioid-deaths-canada-2017/</a></div>
<div>
<br /></div>
<div>
Akron Homeless - Tent City<br />
<a href="https://www.wkyc.com/article/news/local/akron/tent-city-in-akron-faces-lawsuit-uncertain-future/95-493398395">https://www.wkyc.com/article/news/local/akron/tent-city-in-akron-faces-lawsuit-uncertain-future/95-493398395</a><br />
<br />
Akron - Tiny Homes<br />
<a href="https://www.wkyc.com/article/news/could-tiny-homes-help-the-homeless-problem-in-akron/95-546986143">https://www.wkyc.com/article/news/could-tiny-homes-help-the-homeless-problem-in-akron/95-546986143</a><br />
<br />
<br />
Making Amazon delivery less expensive<br />
<a href="http://fortune.com/2016/02/18/amazon-flex-deliveries/">http://fortune.com/2016/02/18/amazon-flex-deliveries/</a><br />
<br />
UberPeople.net Thread (Amazon Logistics Commentary)<br />
<a href="https://uberpeople.net/threads/amazon-logistics-wth-is-this.114033/">https://uberpeople.net/threads/amazon-logistics-wth-is-this.114033/</a></div>
<div>
<br /></div>
We the People Seller Reviews - Walmart<br />
<a href="https://www.walmart.com/reviews/seller/335?offerId=A80A1BED777F4AB3BFFCD03B8CFFBA38">https://www.walmart.com/reviews/seller/335?offerId=A80A1BED777F4AB3BFFCD03B8CFFBA38</a><br />
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<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg8eRLZzsFZkqdu1bHF6B6QWiS9V2ledmwDAEvk5kvbOxI6G6TT65ObngNycFKCTPSKO36XOwG56siH86SZAU99ZCStft7wvIB2VoX6wjy__BtzTXK-Q56wlAQ0bZYYuekNWAkbKxDx43I/s1600/Amazon_Master_Nursery_Potting_Soil.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="528" data-original-width="975" height="216" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEg8eRLZzsFZkqdu1bHF6B6QWiS9V2ledmwDAEvk5kvbOxI6G6TT65ObngNycFKCTPSKO36XOwG56siH86SZAU99ZCStft7wvIB2VoX6wjy__BtzTXK-Q56wlAQ0bZYYuekNWAkbKxDx43I/s400/Amazon_Master_Nursery_Potting_Soil.png" width="400" /></a></div>
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<a href="https://www.amazon.com/dp/B07772VQYX/ref=olp_product_details?_encoding=UTF8&me=">https://www.amazon.com/dp/B07772VQYX/ref=olp_product_details?_encoding=UTF8&me=</a><br />
<br />
When we search the UPC Codes we see that this product 609853100013 is listed on a number of places all over the world at prices ranging from $15 to $300.<br />
<br />
The Ebay site was<br />
<br />
<a href="https://www.upcindex.com/609853100013">https://www.upcindex.com/609853100013</a><br />
<br />
<ol style="background-color: white; color: #333333; font-family: "helvetica neue", helvetica, arial, sans-serif; font-size: 13px; margin: 0px 0px 9px 25px; padding: 0px;">
<li itemprop="itemListElement" style="line-height: 18px; margin-bottom: 10px;"><span itemprop="name">Amazon</span><ul style="list-style: disc; margin: 0px 0px 0px 25px; padding: 0px;">
<li style="line-height: 18px; margin-bottom: 10px;"><a href="https://r1.upcindex.com/r/609853100013-WjI5dlpkM2QzTG1GdFlYcHZiaTVqYjIwdlpIQXZRakEzTnpjeVRrNVVUVDkwWVdjOWRYQmphVzVrWlhndE1qQT0yeGxjM1ZqYTNN" rel="nofollow" style="color: #005580; outline: 0px;" target="_blank">Coast of Maine Organic Bumper Crop Soil Builder, CUFT</a></li>
</ul>
</li>
<li itemprop="itemListElement" style="line-height: 18px; margin-bottom: 10px;"><span itemprop="name">Amazon Canada</span><ul style="list-style: disc; margin: 0px 0px 0px 25px; padding: 0px;">
<li style="line-height: 18px; margin-bottom: 10px;"><a href="https://r1.upcindex.com/r/609853100013-WjI5dlpkM2QzTG1GdFlYcHZiaTVqWVM5a2NDOUNNRGMzTnpKT1RsUk5QM1JoWnoxMWNHTnBibVJsZUdOaExUSXcyeGxjM1ZqYTNN" rel="nofollow" style="color: #0088cc;" target="_blank">Coast of Maine Organic Bumper Crop Soil Builder, CUFT</a></li>
</ul>
</li>
<li itemprop="itemListElement" style="line-height: 18px; margin-bottom: 10px;"><span itemprop="name">Amazon UK</span><ul style="list-style: disc; margin: 0px 0px 0px 25px; padding: 0px;">
<li style="line-height: 18px; margin-bottom: 10px;"><a href="https://r1.upcindex.com/r/609853100013-WjI5dlpkM2QzTG1GdFlYcHZiaTVqYnk1MWF5OWtjQzlDTURjM056Sk9UbFJOUDNSaFp6MTFjR05wYm1SbGVDMHlNUT09MnhsYzNWamEzTQ,," rel="nofollow" style="color: #0088cc;" target="_blank">Coast of Maine Organic Bumper Crop Soil Builder, CUFT</a></li>
</ul>
</li>
<li itemprop="itemListElement" style="line-height: 18px; margin-bottom: 10px;"><span itemprop="name">Jet.com</span><ul style="list-style: disc; margin: 0px 0px 0px 25px; padding: 0px;">
<li style="line-height: 18px; margin-bottom: 10px;"><a href="https://r1.upcindex.com/r/609853100013-WjI5dlpZMnhwWTJzdWJHbHVhM041Ym1WeVoza3VZMjl0TDJ4cGJtcy9hV1E5ZFdFd1NXOXVUbVphV1RRbWIyWm1aWEpwWkQwME1UTXlNREV1TVRJd01ESTJNRFV3TVRRbWRIbHdaVDB4TlNadGRYSnNQV2gwZEhBbE0wRWxNa1lsTWtacVpYUXVZMjl0SlRKR2NISnZaSFZqZENVeVJtUmxkR0ZwYkNVeVJtVmxOakppWWpnNU5XUXpaRFF4TlRGaFpEQmxZemRrTmpaaE9HVmpOVEkzSm5VeFBYVndZMnh2YjJ0MWNDMDJNRGs0TlRNeE1EQXdNVE09MnhsYzNWamEzTQ,," rel="nofollow" style="color: #0088cc;" target="_blank">BUMPER CROP ORGANIC SOIL AMENDMENT</a></li>
</ul>
</li>
<li itemprop="itemListElement" style="line-height: 18px; margin-bottom: 10px;"><span itemprop="name">Rakuten US (Buy.com)</span><ul style="list-style: disc; margin: 0px 0px 0px 25px; padding: 0px;">
<li style="line-height: 18px; margin-bottom: 10px;"><a href="https://r1.upcindex.com/r/609853100013-WjI5dlpZMnhwWTJzdWJHbHVhM041Ym1WeVoza3VZMjl0TDJ4cGJtcy9hV1E5ZFdFd1NXOXVUbVphV1RRbWIyWm1aWEpwWkQwek9UQTBORGt1TWpnNE56YzRORGczSm5SNWNHVTlNVFVtYlhWeWJEMW9kSFJ3SlROQkpUSkdKVEpHZDNkM0xuSmhhM1YwWlc0dVkyOXRKVEpHY0hKdlpDVXlSbTFoYzNSbGNpMXVkWEp6WlhKNUxXSjFiWEJsY2kxamNtOXdMVzl5WjJGdWFXTXRjMjlwYkMxaGJXVnVaRzFsYm5RdE1pMWpkV0pwWXkxbWIyOTBKVEpHTWpnNE56YzRORGczTG1oMGJXd2xNMFpzYVhOMGFXNW5hV1FsTTBRME5qazFOelV4TXpRbWRURTlkWEJqYkc5dmEzVndMVFl3T1RnMU16RXdNREF4TXc9PTJ4bGMzVmphM00," rel="nofollow" style="color: #0088cc;" target="_blank">Master Nursery Bumper Crop Organic Soil Amendment 2 Cubic Foot</a></li>
</ul>
</li>
<li itemprop="itemListElement" style="line-height: 18px; margin-bottom: 10px;"><span itemprop="name">eBay</span><ul style="list-style: disc; margin: 0px 0px 0px 25px; padding: 0px;">
<li style="line-height: 18px; margin-bottom: 10px;"><a href="https://r1.upcindex.com/r/609853100013-WjI5dlpjbTkyWlhJdVpXSmhlUzVqYjIwdmNtOTJaWEl2TVM4M01URXROVE15TURBdE1Ua3lOVFV0TUM4eFAyWm1NejAwSm5CMVlqMDFOVGMxTURjNU1qSTRKblJ2YjJ4cFpEMHhNREF3TVNaallXMXdhV1E5TlRNek56WXlNell6T0NaamRYTjBiMjFwWkQxMWNHTXROakE1T0RVek1UQXdNREV6Sm0xd2NtVTlhSFIwY0NVelFTVXlSaVV5Um5kM2R5NWxZbUY1TG1OdmJTVXlSbWwwYlNVeVJqRTJNamMzTURRNU5EZzNOQ1V6UmpZd09UZzFNekV3TURBeE13PT0yeGxjM1ZqYTNN" rel="nofollow" style="color: #0088cc;" target="_blank">Bumper Crop Organic Soil Amendment</a></li>
</ul>
</li>
</ol>
The eBay site was particularly interesting since a bag of this stuff apparently recently sold for $265.46 with the auction just ending in February. The Auction was held by "EssentialHardwareUSA"<br />
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Bloomberg - Getting Money out of China<br />
<a href="https://www.bloomberg.com/news/features/2015-11-02/china-s-money-exodus">https://www.bloomberg.com/news/features/2015-11-02/china-s-money-exodus</a><br />
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Amazon and Walmart, taking a page out of the Alibaba playbook......no disclosure of GMV? Why?<br />
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Potting Soil<br />
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh0bQNmeU2HAGu05pb2c63nlIHAdgwLRY9dVtXyA09pwMQRLnQJW_BwTMSA3G0aORwkj7p2rvGVg3jV_YjA-48w0p23oY02AOVmHGeGXMLtDwNAgCVed24Y-62H4SGtXz_UFxkbaKbMwF8/s1600/Walmart_Potting_Soil_%2524245_30lbs.png" imageanchor="1" style="clear: left; margin-bottom: 1em; margin-left: 1em; text-align: center;"><img border="0" data-original-height="528" data-original-width="975" height="216" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh0bQNmeU2HAGu05pb2c63nlIHAdgwLRY9dVtXyA09pwMQRLnQJW_BwTMSA3G0aORwkj7p2rvGVg3jV_YjA-48w0p23oY02AOVmHGeGXMLtDwNAgCVed24Y-62H4SGtXz_UFxkbaKbMwF8/s400/Walmart_Potting_Soil_%2524245_30lbs.png" width="400" /></a></div>
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<a href="https://www.walmart.com/ip/BUMPER-CROP-ORGANIC-SOIL-AMENDMENT/165159583#read-more">https://www.walmart.com/ip/BUMPER-CROP-ORGANIC-SOIL-AMENDMENT/165159583#read-more</a><br />
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Steve Brill - Time Magazine - Tailspin<br />
<a href="http://time.com/5280446/baby-boomer-generation-america-steve-brill/">http://time.com/5280446/baby-boomer-generation-america-steve-brill/</a><br />
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U.S. Suicide Rate Surges to a 30-Year High</div>
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<a href="https://www.nytimes.com/2016/04/22/health/us-suicide-rate-surges-to-a-30-year-high.html">https://www.nytimes.com/2016/04/22/health/us-suicide-rate-surges-to-a-30-year-high.html</a></div>
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<span style="white-space: pre;"> </span> </div>
How Evil is Tech - David Brooks<br />
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<a href="https://www.nytimes.com/2017/11/20/opinion/how-evil-is-tech.html?action=click&pgtype=Homepage&clickSource=story-heading&module=opinion-c-col-left-region&region=opinion-c-col-left-region&WT.nav=opinion-c-col-left-region">https://www.nytimes.com/2017/11/20/opinion/how-evil-is-tech.html?action=click&pgtype=Homepage&clickSource=story-heading&module=opinion-c-col-left-region&region=opinion-c-col-left-region&WT.nav=opinion-c-col-left-region</a></div>
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Deep Throathttp://www.blogger.com/profile/02712515268051858186noreply@blogger.com17tag:blogger.com,1999:blog-7478408299955066555.post-8557736794529525102018-04-09T00:19:00.000-04:002018-04-16T16:26:13.008-04:00The new phone book's here!.....the new phone book's here!<div dir="ltr" style="text-align: left;" trbidi="on">
As you, my readers, are well aware, we "financial people", accountants, actuaries and economists tend to get really excited about things that most regular folks just don't care too much about. As financial people, we go to work day after day, make calculations, check and recheck our work, and sometimes for decades at a time, determine, with little or no fanfare, that everything, seems to be chugging along just fine. We review reports, statistics, financial statements and documents that validate, confirm and bless the notion that our investments are solid, our businesses are well run and all is indeed right with the world. This work, for lack of any better explanation as to why we do it, gives meaning to our lives.<br />
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That said, occasionally, we run across a document like the just released <a href="http://www.fsb.org/wp-content/uploads/P050318-1.pdf" style="color: blue; font-weight: bold;" target="_blank">2017 Financial Stability Board's (FSB)"Global Shadow Banking Monitoring Report" </a>(catchy title), which, to put it plainly, gives us a reason to get up in the morning. That's right....<br />
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The new Financial Stability Board Report is here!<br />
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To professionals like us, this document is so fascinating that, like a great detective novel, we just can't put it down. We can't wait to see how this "whodunit?" ends. I consider this and other FSB work to be an essential road map for every investor, manager, economist, government, Central Banker and, neigh dare I say, every household on the planet, to use as an essential guide describing what's about to happen to us, and with proper interpretation, help us assess our financial future.<br />
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Let me also be clear, this document is not for everybody. It's is not nearly as much "fun" as the <i>Black Panther</i>, Kardashian Tweets or watching the seemingly endless parade of White House firings <i>du jour</i>. That's real entertainment! But, also knowing full well that some of my readers might not be as interested as I am about, or truly understand the importance of, this document, nor might they have the requisite time available to fully analyze these 100 pages of technical jargon with references to the thousands of pages of prior reports, related studies and additional jargon, I want to be clear that, as always, I'm here to help.<br />
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I had previously reviewed and commented on the content of the 2016 Report (2015 Data) in my post "<a href="https://deep-throat-ipo.blogspot.com/2017/10/the-sum-of-all-fearsand-few-related.html" target="_blank"><span style="color: blue;"><b>The Sum of All Fears....</b></span></a>" but like a great mini series, the saga continues and the plot thickens.<br />
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The value that I hope today's exercise brings to the table for my readers is that together, we can painstakingly figure out what all of this complex nonsense really means, why it's happening and how it can directly impact us......we will do the heavy lifting together. We will also try our best to explain this mess in everyday, easy to understand language. Of course, if you are an economist, student, banker, investor, rich "dude" or member of your neighborhood investment club and want to check/verify my work or disagree with my thoughts/conclusions, I've posted links to the reams of source material below for your further review. Have at it!.... and see if you can come to different conclusions. Feel free to send comments/criticisms or additional thoughts/references to me at:<br />
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Deep.Throat.IPO@Gmail.com.<br />
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Finally, since this post is 1.) Much more in depth than what I've posted in the past, and 2.) What we're about to discuss is so grueling, complex, inexact and mind-numbing, and 3.) The world has come to believe that anything written with more than 240 characters is boring, irrelevant and just not worth the time, I've written this post in a new format. I've included a short <span style="color: red;"><b style="color: red; text-decoration-line: underline;">"</b><i style="color: red; font-weight: bold; text-decoration-line: underline;">One-Line Executive Summary</i><b style="color: red; text-decoration-line: underline;">" (in Red)</b> </span>along with <b><i><u>"Executive Summary Bullet Points"</u></i></b> at the beginning of every new concept/section, along with instructions to skip ahead if you don't want to get bogged down in the detail.<br />
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OK.....(deep breath....exhale....).......here we go....<br />
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<b><u><span style="color: red; font-size: large;">The 2017 Financial Stability Board (FSB) Global Shadow Banking Monitoring Report </span></u></b><br />
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<b><u><i><span style="color: red;">One-Line Executive Summary:</span></i></u></b><br />
<b><u><i><span style="color: red;"><br /></span></i></u></b>
<b><span style="color: red;">Global Financial Assets (Loans and Equity) have increased dramatically over the last few years. Most of the increase is a result of Chinese Monetary Policy on both the Chinese Mainland and Offshore Custodial Money Financial Centers (CMFCs). This accumulation and concentration constitutes a significant global, systemic financial risk. </span></b><br />
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<b><u><i>Executive Summary Bullet Points</i></u></b><br />
<ol style="text-align: left;">
<li>The Report covers
data up to end-2016 from 29 jurisdictions. (including Luxembourg for the first time). The data from these economies and financial centers represent the economic activity related to more then 80% of global GDP.</li>
<li>Global Financial Assets (Loans & Equity) for these jurisdictions have increased to US$340 Trillion as of 12/31/16, up from US$321 Trillion as of 12/31/15. (Note that when these reports were published the data was more that a year old. Further, we have no reason to believe that the trends described have not continued to accelerate.)</li>
<li>Annual compound growth of these assets has been roughly 6% since 2011, about twice the growth rate of global GDP.</li>
<li>During 2016, these assets also grew as a share of total Reporting Group GDP (from 523% to 540% of GDP).</li>
<li>The concentration of assets in "Non-Bank" OFI's (Other Financial Intermediaries) has increased to US$99 Trillion, or just under 30% of total Financial Assets. OFI's comprise all financial institutions that are <b><u><i>not</i></u></b> banks, insurance companies, pension funds, public financial institutions, etc. </li>
<li>OFI Assets have increased at an annual compound rate of roughly 9% since 2011, roughly 3x the growth rate of Global GDP.</li>
<li>Shadow Bank Assets.....a subset of OFI Assets which by definition are subject to instability and "runs" amount to US$45 Trillion at the end of 2016, up an astounding US$11 Trillion from 2015. </li>
<li>Asset Growth, specifically OFI Assets has been concentrated in both China and what I'll refer to as <i>"Custodial Money"</i> Financial Centers or <b>CMFCs</b>. A CMFC to be defined as a Financial Center where the Asset Value(s) in the Financial system bear little relationship to the GDP of that particular domicile. i.e.) The CMFCs are holding and "playing with somebody else's money". The domiciled assets of the Caymans, Luxembourg, Hong Kong, Ireland, Netherlands, Switzerland, Singapore financial systems, which I've defined as CMFC <i>"Custodial Money"<u>,</u></i> have expanded much more rapidly than asset levels in the rest of the world. </li>
<li>Combined Chinese and CMFC <span style="font-style: italic;">"</span><span style="font-style: italic;">Custodial Money" </span> (as defined above) Financial Assets have increased by US$11 Trillion (to US$104 Trillion) from 2015 to 2016. These assets now represent roughly 1/3rd of the all of the Financial Assets (wealth) on the planet. OFI Assets, for the same jurisdictions, increased US$8 Trillion for the same period, comprising the lion's share of the total US$11 Trillion increase. OFI Assets in these jurisdictions now represent nearly half (44%) of all OFI Assets on the planet. </li>
<li>The Executive Summary of the Report concludes with four (4) Recommendations summarized as follows. 1.) Enhance the system-wide oversight of shadow banking. 2.) Authorities are encouraged to seek further granularity on cross-border
interconnectedness between banks and non-banks. 3.) Authorities should supplement flow of funds data, where needed. 4.) Authorities should closely monitor and share information and, where possible, data on
emerging financial stability risks that are growing quickly and may become concerning.</li>
<li><i><u>Author's Note:</u></i> Based on the rapid growth of these asset classes (and their curious domicile) in relation to Global GDP, the above described FSB recommendations seem quite similar to Captain Edward John Smith's well thought out, calmly delivered instruction to his crew to "try to carefully and accurately measure all the seawater that's pouring in from those gigantic iceberg holes in the hull."</li>
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Remember if you hate gory details <u style="color: red; font-weight: bold;">ONLY READ THE RED "<i>One-Line Executive Summaries</i>"</u> and <b><i><u>Executive Summary Bullet Points</u></i></b><br />
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<b style="color: red;"><u><br /></u></b></div>
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<b><i><u>Non-Executive Gory Details Begin Here - Feel Free to skip ahead to "<span style="color: red;">So where is all of the CMFC money coming from?"</span> if you don't want to deal with the details....</u></i></b><br />
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So let's take a look at what the FSB refers to as the "macro-mapping" of the worlds Financial Assets. The 2016 and 2015 Charts below illustrate the amounts and types of institutions where the increase in assets is concentrated.<br />
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<img height="494" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhoBAecXgpWjPC68K7jWQV4V6-g8pfzKhGPsGWZT6qOPMcmgA11psiNjRyArWshVY8NzBYblGYyF54A-u5wZB4JltkbDtva87CuEelLVuXuwkvSPn_i9kgVglkUyyXIyPRCGWCCBi5eNGc/s640/FSB_Monitoring_Aggregates_2016.png" width="640" /><br />
<img height="502" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh6hAKuhyphenhyphenVLabuIiA0Socu2vwoxncDjEgm9gkaXEns_PwLcOmm2gDUyWoDbhSFE3q5bZBhsOkEl75Ox20ugJlzXEQKI4z2g4BnMSxOS1-wOPLEa_8fP7S-jkobwqTmrWK_ubG5SOKpFTLg/s640/FSB_Monitoring_Aggregates_2015.png" width="640" /><br />
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When we compare the above charts, the increase in both non-bank assets (MUNFI) and Shadow Bank Assets jumps off the page. With a few offsets, we see that the entire $11 Trillion MUNFI increase is due to Shadow Bank Assets which are substantially comprised of "Assets Subject to Runs".<br />
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When we examine the types of institutions that actually have custody of these assets as well as the growth these asset classes held by these custodians over the last few years we conclude that the the higher risk OFI Asset Classes have been growing at a rate roughly 3x Global GDP, to nearly $100 Trillion at the end of 2016. Unfortunately, we'll have to wait another year for the 2017 figures, but I'd imagine that the trend has continued.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhNuQEPd_O-g-oVPncbFH4j8UBwJkiFRkmmtzzyucKL72XGY5aFryRv8KfjTpd32bsqXLfHWgHb6_9cSPCjI7gZCJPedlrD8Pev7cB8NMEvIlkJBUhOWq6HVTYReOmKSBwf55g2HAtAQeQ/s1600/FSB_Macro_Mapping.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="350" data-original-width="605" height="370" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhNuQEPd_O-g-oVPncbFH4j8UBwJkiFRkmmtzzyucKL72XGY5aFryRv8KfjTpd32bsqXLfHWgHb6_9cSPCjI7gZCJPedlrD8Pev7cB8NMEvIlkJBUhOWq6HVTYReOmKSBwf55g2HAtAQeQ/s640/FSB_Macro_Mapping.png" width="640" /></a></div>
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As described earlier and in Exhibit 2-3 below, we see that there is significant new asset concentration in both CMFCs and China. Financial Assets expressed as a ratio of GDP are substantial in the Caymans (KY), Luxembourg (LU), Ireland (IE), Netherlands (NL), Hong Kong (HK), Switzerland (CH) and Singapore (SG), generally nearing, or well in excess of 1000% of GDP for these reporting jurisdictions.<br />
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<img border="0" data-original-height="447" data-original-width="696" height="409" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjxqGEDESp2ZDs3OkvxDILJNNIwZbVDeYDGuLWF4_QJGOaqWUn86KIeR9QNnP3Pc6nocPH8P2-5MPBoQSO5IUBScLvgqETXnkVU1uM-WjKTn7tzaLsDJR1zUJUgaykNkE4sa36s00DJP28/s640/FSB_Composition_Financial_Assets.png" style="text-align: center;" width="640" /><br />
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Now let's look at the composition of the Financial Assets in these reporting jurisdictions in relation to the world. We see that roughly a third (31%) of the world's Financial Assets and nearly half (44%) of the world's OFI Assets are concentrated in these eight (8) jurisdictions. These jurisdictions represent only 18% of the worlds GDP. If we remove China from the discussion we see that US$51 Trillion (15%) of Total Assets and US$33 Trillion (33%) of OFI Assets are held by institutions on the remaining seven (7) CMFCs. These seven (7) CMFCs contribute only 3% of the world's GDP.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiAhfReZZfGzzpjIRu325zmLBROexINzhpH4SF6QLhe9Z8AWoP-OFEsvMiwfio9k0ZWTXr22qmHTCzbQftO9KUhgE6ZNYIC4oLBFGOahiQ9SyH39p9-iYQ6KIsZ80AFnWJ5VbPNH9iO1RA/s1600/FSB_Location_of_OFI_Assets.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" data-original-height="759" data-original-width="572" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiAhfReZZfGzzpjIRu325zmLBROexINzhpH4SF6QLhe9Z8AWoP-OFEsvMiwfio9k0ZWTXr22qmHTCzbQftO9KUhgE6ZNYIC4oLBFGOahiQ9SyH39p9-iYQ6KIsZ80AFnWJ5VbPNH9iO1RA/s1600/FSB_Location_of_OFI_Assets.png" /></a></div>
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Am I wrong or wasn't the world's economic activity chugging along pretty well, even before $104 Trillion in Financial Assets and the related leverage magically showed up in these secretive, opaque financial centers? <br />
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<b><i><u><span style="color: red; font-size: large;">So where is all of the CMFC money coming from?</span></u></i></b><br />
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<b><u><i><span style="color: red;">One-Line Executive Summary:</span></i></u></b><br />
<b><u><i><span style="color: red;"><br /></span></i></u></b>
<b><span style="color: red;">Because of opaque CMFC banking rules, it is impossible to tell with certainty, but these jurisdictions which have traditionally been sanctuaries for hedge fund, oligarch, cartel, tax avoidance/cheat and various forms of questionable/secretive money, have increased Financial Asset Balances to the point where the aforementioned traditional sources of funds are insufficient to justify the huge increase. The only plausible explanation is that much/most of this "money" is being created, through various vehicles, by the Chinese Government. </span></b><br />
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<b><u><i>Executive Summary Bullet Points</i></u></b><br />
<ol style="text-align: left;">
<li>In 2014 PWC produced an excellent <a href="https://www.pwc.lu/en/china/docs/pwc-where-do-you-renminbi.pdf" style="color: blue; font-weight: bold;" target="_blank">white paper/study</a><b style="color: blue;"> </b>entitled "<i>Where do you Renminbi?</i>" sponsored by the Grand Duchy of Luxembourg, which describes the flow and expansion of Chinese Investment into the world's various CMFC financial systems. </li>
<li>Chinese Money Center Banks (Bank of China, China CITC, China Construction Bank, ICBC China, etc.) have set up prominent beach-head operations in the CMFCs with presumably significant assets under management.</li>
<li>There have been thousands of Chinese owned offshore Shell Companies created to facilitate movement of wealth from the mainland. Many of these vehicles were created to hold wealth generated by IPOs and Bond issues on US Exchanges as well a Private Equity Investment. (<span style="color: blue;"><b><u><a href="https://www.sec.gov/Archives/edgar/data/1577552/000119312514347620/d709111d424b4.htm#toc709111_19" target="_blank"><span style="color: blue;">See Alibaba 424(b)4 - pg. 250-251 as an example</span>)</a></u></b></span> These businesses invest primarily in US/EU/HK/etc. Financial Assets and Real Estate.</li>
<li>There is tremendous political pressure to make things look better than they actually are with no "pants on fire" mechanism to catch and correct bad data. The favorable is trumpeted, while the bad news is buried, glossed over or omitted all together. There's more "bad data", defined as data that doesn't match or balance with other published data, out there than ever before.</li>
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</ol>
<b><i><u><br /></u></i></b><b><i><u>Non-Executive Gory Details Below - Feel free to continue on to <span style="color: red;">"Silly Numbers and 'Bad Gauges' "</span> if you don't want to deal with this....</u></i></b><br />
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<b><i><u><br /></u></i></b></div>
Over the last few months I've occasionally given a quick, informal, one question quiz to a few investors and economists I am fortunate enough to be acquainted with. They are all aware, at least at some level, of the rapidly increasing money in the Caymans/Caribbean and CMFC's. My question was "Where is all of this offshore money coming from?" The usual response was a momentary pause followed by an answer something like "US Hedge funds and asset appreciation....I guess...".<br />
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I would have thought the same thing until I started digging into it. The FSB estimates that hedge fund assets in the Cayman Islands are roughly US$3.2 Trillion, or roughly 45% of total US$7.3 Trillion Financial Assets domiciled in the Caymans. The point is that there are trillions of dollars in these mysterious assets located in CMFCs where the real origin and ownership of these assets is impossible to determine. <br />
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Just for fun, lets take a look at the "Balance of Payments" for China over the last few years. There's all sorts of complex, technical jargon involved here (Economists love technical jargon....) but the map below describes what has happened from 2013 thru 2016. Here are the bullet point concepts for you non economists out there:</div>
<div style="text-align: left;">
<ol style="text-align: left;">
<li>Businesses around the world Sell to (Export) or Buy from (Import) to Businesses in China. Chinese businesses, of course, do the same with the rest of the world. </li>
<li>All these transactions are accomplished in a designated currency. So Businesses exchange stuff for "Money" causing "flows" of each. </li>
<li>Businesses also make Investments in Assets in China. These Investments are referred to as "Foreign Direct Investments" (FDI). Of course Chinese businesses invest funds in other countries as well. This is referred to as "Outbound Foreign Direct investment" OFDI, again creating flows of money. Simply put, businesses and investors are exchanging "money" for ownership interest in overseas assets. </li>
<li>Of course transactions within the border of every country take place in the local currency.</li>
<li>Businesses either buy/sell (Import/Export) goods and services (the "Current Account") or they make investments or sell off investments (the "Financial Account"). The sums of the "Current Account" and the "Financial Account" add up to the "Balance of Payments". It's the sum of "stuff" and "ownership interests" coming into or going out of a country. </li>
<li>Therefore, the value of Exports and the value of FDI (Money coming in) increases the Balance of Payments (BoP) and the value of Imports and OFDI (Money going out) decreases the Balance of Payments.</li>
<li>In theory, the grand total of every Country's Balance of Payments (BoP) should be zero. i.e.) Given Country A & Country B; Country A's Exports are Country B's Imports and Country A's FDI is Country B's OFDI. Simply put, the world should "balance". </li>
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Given the above, and applying data from the World Bank we see what China's Balance of Payments relationship with the rest of the world looks like in the map below. Over the four years from 2013 through 2016, China "gained" US$873 Billion in "Money" and the world "gained" the same amount in "Goods & Services". China also gained a net US$285 Billion (US$972B - US$687B) in "Money" and the world gained the same amount in net "ownership" of Chinese Assets. Total "Money" gained by the Chinese during that time, increasing the <i>Balance of Payments</i> is US$1.158 Trillion. </div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjtpq3gH_b8p-ZEnNoV1xFsFyMrwJvQDyRgeYK5_8jGD6uzDeLCo5TQPyQtTY6zAcFBBm6Nd3tdeyOfOewBA0oMGD91-ew4qaTq1BdWJJa0OHyHblwpwkwoeq0krhVZsLgeoyyelNZVpnY/s1600/MAP_China_vs_World_BOP_Edited.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="1040" data-original-width="1412" height="470" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjtpq3gH_b8p-ZEnNoV1xFsFyMrwJvQDyRgeYK5_8jGD6uzDeLCo5TQPyQtTY6zAcFBBm6Nd3tdeyOfOewBA0oMGD91-ew4qaTq1BdWJJa0OHyHblwpwkwoeq0krhVZsLgeoyyelNZVpnY/s640/MAP_China_vs_World_BOP_Edited.png" width="640" /></a></div>
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Now lets look at more World Bank Data below. The only absurd, ridiculous, impossible conclusion we can draw is that: "The numbers don't add up". Let's take a look at the figures in the chart below:<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhADgK8q7faEQAivzB2est54C-vbEJzXCrlBeLatvAkZoimvGsmM_fzoi92WHrwDu0xBCzTqcmXnGLufquWIxYQhs_3XPxnpyLTzKUHMw18KfgCAXx4HeIoEEaA6Kzv1SEfxAk9Qucwa-Q/s1600/World_Bank_Impossible_BOP_1.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="1033" data-original-width="664" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhADgK8q7faEQAivzB2est54C-vbEJzXCrlBeLatvAkZoimvGsmM_fzoi92WHrwDu0xBCzTqcmXnGLufquWIxYQhs_3XPxnpyLTzKUHMw18KfgCAXx4HeIoEEaA6Kzv1SEfxAk9Qucwa-Q/s1600/World_Bank_Impossible_BOP_1.png" /></a></div>
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As far as we can tell, Current Account and Financial Account changes reported don't carry forward. There may very well be a good reason for this, perhaps I just don't understand the math. Perhaps there's something that isn't obvious that the World Bank is just not telling us. Since I'm not a World Bank accountant I may not have a full understanding of the mechanics of these calculations. But on the other hand, here's what I see:<br />
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For example, China's total reported Current Account + Financial Account Balance at the end of 2012 was US$347 Billion. If we add Net Exports and Net Inbound FDI we would expect the BoP Account Balance to increase by US$375 Billion, from US$347 Billion, totaling to an ending balance of US$722 Billion in 2013. In other words, in 2013 the reported Total Account Balance is US$236 Billion, yet the "calculated" balance should have been US$722 Billion. We seem to be missing US$486 Billion?<br />
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We see the same variance in the numbers for the US. According to the schedule above, over the four year period, the US Balance of Payments should have decreased by US$1.031 Trillion yet the reported balance actually increased by $46 Billion.<br />
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When we look at the "World" it's even more confusing. As I mentioned earlier, the World's Exports should equal the World's Imports. Outbound FDI should equal Inbound FDI. There should be no "balance". The total of both trade flows and capital flows should be zero. According to the World Bank, when we add up the data provided by individual governments, we see that, in aggregate, they must be Exporting more than they are Importing and they are investing in other countries more than other countries are investing in them. The US$1.446 Trillion overstatement in four years is a material deviation, effectively making things seem much better than they actually are. Unfortunately, Central Bankers are presumably basing policy decisions on these overstated figures. <br />
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When working with several hundred reporting entities/governments I'd expect that the data might be a bit rosy. That's human nature. The "good stuff" is always highlighted and the "bad stuff" is either omitted or minimized in the discussion. There are obvious political motivations and incentives for producing puffed up stats, yet there's no mechanism to catch errors/misrepresentations and correct them. As a World Bank accountant, when reams of massaged data come across your desk, what can you do? Do you get on the phone and call "liar liar pants on fire"?....no, you add the data up and publish it as is. Like so many financial functions in the world today, as a World Bank Accountant, you do what you are told.<br />
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How can this happen? I remember back in my days at the University of Wisconsin, I had an Intermediate Level Accounting Professor who emphasized that on any exam, no matter how brilliant a student's analysis was, he/she would get absolutely no credit for his/her answer if the journal entry didn't balance. <br />
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Perhaps, and this is just a guess, the World Bank economists and bookkeepers never took that accounting class at the University of Wisconsin. If my former professor was running the World Bank today when these governments handed their work in, he would have kicked it back to them with a lot of red marks and notes in the margin and given them all a big fat goose egg for their efforts. The red lines and notes would say "DOES NOT BALANCE!!" He'd refuse to publish the data, or if he did, he'd at least footnote it saying he doesn't believe a word of it.<br />
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<b><i><u><span style="color: red; font-size: large;">Silly Numbers and "Bad Gauges" </span></u></i></b><br />
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<b><u><i><span style="color: red;">One-Line Executive Summary:</span></i></u></b><br />
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<span style="color: red;"><b>There are so many inconsistencies and non-sensical metrics being reported now, whether it be in individual company financial statements or official Government Statistics that the world's Central Bankers are increasingly more likely to make horrific policy mistakes. Political pressures combined with a willful regulatory ambivalence has created a sunshine, lollipops and rainbows financial view in a "pants on fire" world, which, at some point, will prove to be unsustainable.</b></span><br />
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<i><b><u>This next section is a tough read.....if you don't feel up to it and are reading the Executive Summaries only.....scroll on down to <span style="color: red;">"The RMB....the Giant 'Effing' Panda in the Room...."</span></u></b></i><br />
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So now that we've taken a look at the World Bank Data above and concluded that it might have some inconsistencies, let's take a look at the data from the IMF. Perhaps the IMF can add some insight. I've attached a chart showing the "World's" Imports vs. Exports below. The official Data Set we're analyzing is the <i>DOTS (Direction of Trade Statistics - BM.GSR.GNFS.CD - Imports/Exports of goods and services comprise all transactions between residents of a country and the rest of the world involving a change of ownership from nonresidents to residents of general merchandise, non-monetary gold, and services. Data are in current U.S. dollars.)</i><br />
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Interestingly, these statistics are reported to the dollar....so they must be extremely accurate. The more precise the number, the more believable it's deemed to be. As an aside, my Accounting Professor also mentioned that he'd prefer to have no financial information rather than "bad" financial information. His rationale was that "in our profession, we can refuse to make a decision if we have no information.....on the other hand, we can easily be fooled into making a bad decision if we have bad information..."<br />
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The chart below compares the world's IMF reported Exports of "Goods, Services and Primary Income" to Imports of same.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjFx5CQTDAmNikDSEIpGAoUL9p15rPQC01i7bngA27H4_vD1rN9KpGbebNYA74pGR_g9_EBBcP7XauoLtCtJZwnTNiVomkKps_ccGeomWXi5n-VHmpTwnG3GH_2lMBroxaF-ul7gCFWslA/s1600/IMF_Global_EX_vs_Imp.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="804" data-original-width="1210" height="424" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjFx5CQTDAmNikDSEIpGAoUL9p15rPQC01i7bngA27H4_vD1rN9KpGbebNYA74pGR_g9_EBBcP7XauoLtCtJZwnTNiVomkKps_ccGeomWXi5n-VHmpTwnG3GH_2lMBroxaF-ul7gCFWslA/s640/IMF_Global_EX_vs_Imp.png" width="640" /></a></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjIFiHOoKfnv9tgacRUNA-aEUilOgM_56s9K3GINc71QkvGNU8N8uFtokPEQxQ3opu9DyL7i3SchKmN_3UobD77vzHp5lP4-8bIBZnLkSUsDyeI1k7zc6faeM4a1yj55jAzL3W-0fMG_YA/s1600/IMF_Bad_Math_Global_EX_vs_Imp_2013-2016data_2.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="136" data-original-width="971" height="89" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjIFiHOoKfnv9tgacRUNA-aEUilOgM_56s9K3GINc71QkvGNU8N8uFtokPEQxQ3opu9DyL7i3SchKmN_3UobD77vzHp5lP4-8bIBZnLkSUsDyeI1k7zc6faeM4a1yj55jAzL3W-0fMG_YA/s640/IMF_Bad_Math_Global_EX_vs_Imp_2013-2016data_2.png" width="640" /></a></div>
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<span style="text-align: left;">When we examine the chart and the underlying data we see that:</span></div>
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<li>In 1990 the world was much less interconnected, with only about US$5 Trillion in total imports/exports.</li>
<li>Back in 1990, the difference between Exports and Imports was "only" a few hundred billion dollars, not too much in the grand scheme of things.</li>
<li>Reported Exports have always been greater than reported Imports.</li>
<li>By 2014, Global Exports had increased nearly 6x to US$28.1 Trillion. The "Gap" between reported Exports and reported Imports had increased to more than US$4.9 Trillion. In other words the "World" was reporting that it was exporting nearly US$5 Trillion more than it was importing in 2014. As a point of reference US$5 Trillion is roughly the GDP of Japan, the world's third largest economy by nominal GDP. Unless some of the governments/countries reporting have located some extraterrestrial trading partners and have crafted intergalactic trade agreements, this, of course, is not possible. </li>
<li>The difference between reported Exports and Imports has been growing steadily and has settled in with Exports exceeding Imports to the tune of roughly US$4 Trillion per year over the last few years. </li>
<li>IMF Exports reported are equal to the World Bank Exports reported. (US$ 24.548 Trillion in 2016), However, IMF Imports reported (US$20.150 Trillion) are much less than World Bank Reported Imports ( US$23.963 Trillion). </li>
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<span style="text-align: left;">Being concerned about this disparity in the data, since US$ 4 Trillion+ a year isn't exactly a rounding error, I noticed a "Chat Button" conveniently located on the IMF website, reminiscent of what I've become accustomed to when inquiring about why my Amazon order arrived without the socks or boxer shorts I had ordered. So I thought I'd give the "Chat Button" a try. As an aside, I think it's absolutely awesome that all I had to do is click a button and I'd have immediate 24x7 access to a world renowned economist who could immediately answer all of my questions.</span></div>
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I clicked the button and submitted what I considered to be a carefully crafted paragraph outlining the concerns I had described above. In less than a second, I received not one but three AI generated possible responses. The only response that had anything to do with my question is posted below. The other two responses seemed to be generated because my question had the words "Import" and/or "Export" in the question.</div>
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<span style="text-align: left;">Here's the IMF's "Official" Response:</span></div>
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<b><span style="font-family: "arial" , "sans-serif"; font-size: 11.5pt;"><span style="color: #660000;">Why
do the exports of country A to country B not equal to the imports of country B
from country A in the Direction of Trade Statistics (DOTS) dataset?</span><span style="color: #999999;"><o:p></o:p></span></span></b></div>
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<span style="color: #999999; font-family: "arial" , "sans-serif"; mso-fareast-font-family: "Times New Roman";"><a href="http://datahelp.imf.org/knowledgebase" target="_blank"><span style="border: 1pt none; font-family: inherit , serif; padding: 0in;">Knowledge Base</span></a> / <a href="http://datahelp.imf.org/knowledgebase/topics/69743-methodology" target="_blank"><span style="border: 1pt none; font-family: inherit , serif; padding: 0in;">Methodology</span></a> <o:p></o:p></span></div>
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<span style="color: #999999;"><span style="color: #626568; font-family: "arial" , "sans-serif"; mso-fareast-font-family: "Times New Roman";">It is sometimes
assumed that corresponding export and import data between partner countries
should be consistent. That is, the exports from Country A to B should be equal
to the imports of Country B from A, after taking into account the insurance and
freight costs under the generally observed case that Country B imports are
valued on a cost, insurance, freight (c.i.f.) basis. The DOTS estimation system
uses this assumption in cases where one partner has not reported data.<br />
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However, notwithstanding the inclusion of insurance and freight in imports
c.i.f., it should be noted that there are several complications that can cause
inconsistency between exports to a partner and the partner</span><span style="color: #626568; font-family: "tahoma" , "sans-serif"; mso-fareast-font-family: "Times New Roman";">�</span><span style="color: #626568; font-family: "arial" , "sans-serif"; mso-fareast-font-family: "Times New Roman";">s recorded imports
f.o.b., or between imports free on board (f.o.b.) from a partner and the
partner</span><span style="color: #626568; font-family: "tahoma" , "sans-serif"; mso-fareast-font-family: "Times New Roman";">�</span></span><span style="color: #626568; font-family: "arial" , "sans-serif"; mso-fareast-font-family: "Times New Roman";"><span style="color: #999999;">s recorded exports.
The principal reasons for inconsistent statistics on destination and origin for
a given shipment are differences in 1) classification concepts and detail, 2)
time of recording, 3) valuation, and 4) coverage, as well as 5) processing
errors.</span><span style="color: #626568;"><o:p></o:p></span></span></div>
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Well...there you have it! From the IMF canned response we learn a couple of things:<br />
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<li>Enough people have asked this question that they've actually developed a canned response to it.</li>
<li>The IMF is aware of the significant difference/disparities, as evidenced by this, although insufficient, well crafted response.</li>
<li>The IMF is apparently attempting to explain away a US$4 Trillion a year disparity (roughly 1/5th of US GDP) with 1.) Classification (which should offset), 2.) Timing (Which should correct in the next period), 3.) Valuation (probably a significant error), 4.) Coverage (Doubtful.... all major economies are all reporting), and 5.) Processing Errors (US$4 Trillion of Processing errors? Really?) </li>
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Now that we've identified a US$4 Trillion a year confusion/anomaly in the Import/Export figures let's take a look at the World's Balance of Payments data, again per the IMF. The chart below illustrates what we get when we add up the reported Balance of Payments (The Financial Account PLUS the Current Account) for all IMF reporting countries. Note also that the actual figures are again reported to the nearest dollar.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgINCKP_TbWXPSlPiQuTD-KYHD9C4MnevjoghmELn1wO84-hmfttcSsY8uxICyURM0BlEGRBwSqRG4sPBFK-TezW-rfBm87JitlZ4KkfekBe_W74nQ9eF7Ce27j0NONf9GsFEeT4-3ramE/s1600/World_Bank_Impossible_BOP.png" imageanchor="1" style="clear: left; display: inline; float: left; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="819" data-original-width="984" height="528" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgINCKP_TbWXPSlPiQuTD-KYHD9C4MnevjoghmELn1wO84-hmfttcSsY8uxICyURM0BlEGRBwSqRG4sPBFK-TezW-rfBm87JitlZ4KkfekBe_W74nQ9eF7Ce27j0NONf9GsFEeT4-3ramE/s640/World_Bank_Impossible_BOP.png" width="640" /></a><br />
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The above shows us yet another level of confusion. In theory, when we add all of the World's reporting countries/economies Balance of Payments up, the "balance" should be zero ($0) or close to it. Surpluses should offset deficits. Debits should equal credits. Yet, over the last few years we see that the "world" is somehow running at a net surplus of roughly US$1 Trillion. (2013-$1.115T, 2014-$1.215T, 2015-$911T, 2016 $933T)<br />
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Again, the net result here is that these figures make the finances of some reporting entities look a bit better, or perhaps significantly better than they actually are. Moreover, it doesn't seem likely that governments would be over-reporting deficits or under-reporting export or investment growth. CEOs, Government Officials and Politicians tend to shape the numbers to look better than they are. It's in their DNA.<br />
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I'll be the first to admit that I have a tremendous advantage over world renowned economists when asking these simple straight forward questions. First, I doubt that very many people actually bother to download World Bank or IMF data, dump it into an Excel spreadsheet and parse it out and compare it in their spare time. The refutable presumption is that everything is accurate. If there's some secret, simple explanation for the above described inconsistencies, that every world renowned economist is aware of, it would be great to hear what it might be. </div>
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Moreover, since I'm just an insurance agent in Cleveland I have the luxury of being able to ask these questions with no career repercussions. I'm not afraid to look silly. I will not be laughed at or ostracized if I missed something obvious. My career will not be impacted since I dare to ask simple questions about something I don't fully understand. I consider it an intellectual advantage to feel comfortable enough in my own skin to ask what many might think is a stupid question. If I'm wrong and these are indeed stupid questions, my life will continue unchanged.<br />
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On the other hand, if I were running the World Bank or the IMF and I didn't truly understand what was happening....well.....I can imagine there might eventually be some fallout at some point.<br />
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<b><u><span style="color: red; font-size: large;">The RMB.... the "Giant Effing Panda" in the Room....</span></u></b><br />
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<a href="https://townandvillage.files.wordpress.com/2015/11/nov19-maloney-pandas-e1447973863696.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-left: 1em;"><img alt="Related image" border="0" height="257" src="https://townandvillage.files.wordpress.com/2015/11/nov19-maloney-pandas-e1447973863696.jpg" width="320" /></a></div>
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Here's a picture of my good friend Nancy Effing with her Giant "Effing" Panda.<br />
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For all of my troll friends out there who, after seeing this picture, have just jumped on the Internet and done all sorts of time-wasting research, immediately determining that this is NOT a picture of someone named "Nancy Effing"....don't worry..... I know.<br />
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It's actually New York Congresswoman Carolyn Maloney, and you trolls believe you are now poised, locked, loaded and ready to accuse me of being a liar and charlatan for posting this "Effing" picture. Before you do so, let me point out that this is what we, in America, refer to as a "joke".<br />
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<b><u><i><span style="color: red;">One-Line Executive Summary:</span></i></u></b></div>
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<span style="color: red;"><b><i><u><br /></u></i></b></span></div>
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<span style="color: red;"><b><i>The Chinese government has dramatically increased both its global presence and national wealth by managing International Financial transactions through its dual, On-shore(CNY)/Off-shore(CNH) RMB currency mechanism/scheme, to the Rest Of The World's (ROTW) financial detriment.</i></b></span></div>
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<span style="color: red;"><b><i><u><br /></u></i></b></span></div>
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<u style="font-style: italic; font-weight: bold;">Executive Summary Bullet Points</u><br />
<ol style="text-align: left;">
<li>The primary currencies for international settlement on our planet are the US$ (42% of transaction volume), Euro (31%), Pound (7%), Yen & Canadian Dollar (2% each). i.e.) Roughly 84% of all international trade and investment is settled in these currencies.</li>
<li>As of February 2018, only 1.56% of all international currency transactions are settled in RMB</li>
<li>Total RMB in circulation (M3) is just short of US$26 Trillion. China's M3 is roughly US$12 Trillion greater than (nearly double) US M3.</li>
<li>Total "Offshore" RMB (CNH) available for International transactions is currently RMB 1.15 Trillion (US$ 182 Billion), actually declining from its peak of RMB 1.85 Trillion in 2015. This total represents roughly 0.7% of all RMB in circulation.</li>
<li>Primary offshore RMB depository markets (90% of all offshore RMB) are Hong Kong, Singapore, Taiwan, London, Luxembourg and Macao. </li>
<li>By managing the global supply/inventory of the RMB and consequently the exchange rate, the Chinese Government has been able to generate US$ Trillions of additional compensation for net exports as well as purchase US$ Trillions of EU/Western/Offshore Assets at a significant discount. Simultaneously, the CCP has been selling Mainland (RMB Denominated) Assets to EU/Western/Offshore Businesses and Investors at a grossly inflated price.</li>
<li>The RMB is the only currency issued by a major economy that does not float. China is the only major economy in history to be able to pull this off.</li>
<li>It's absolutely brilliant.</li>
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<b><i><u>If you'd prefer not to go through the gory details....feel free to scroll down to <span style="color: red;">"The Cartels"</span></u></i></b></div>
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As far as international settlements go, despite the huge size of the Chinese economy and their global presence in both trade and finance, the RMB(CNY) is a nearly irrelevant currency. Currently, (as of February of 2018) only 1.56% of all international transactions are settled in RMB. The chart below illustrates the trend from December of 2015 to December of 2016. RMB settlement preference is actually declining. The primary currencies for international settlement are the US$ (42%), Euro (31%), Pound (7%) and Yen (4%) Roughly 84% of all international trade and investment is settled in these currencies, followed by the Canadian Dollar, Aussie Dollar, Hong Kong Dollar and the RMB(CNY) at about 2% each. </div>
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When we compare global settlement transaction volume to total RMB in circulation we see a stark contrast. While RMB settlements are relatively small and declining, China's M3 is increasing dramatically.<br />
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When we examine the FRED graphic below we see that China's M3 (<span style="color: #990000;"><b>Red Solid</b></span>) in circulation has nearly doubled in the last five (5) years to US$25 Trillion, nearly tripling in the last eight (8) years. During the same time frame, by comparison, US M3 (<b><span style="color: blue;">Blue Solid</span></b>) has increased 40% and 50% respectively to roughly US$14 Trillion. One might wonder why the Chinese would need so much currency (US$10 Trillion more than the US) to run their smaller economy?<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnel9bc5fD7YZX8gMTMWvr3zOP8jZm5hUFPn5_uCLUo1re2UbKJgMqoJXsxMmJkcWfjbCA4jipDfN4KI4trXTWYf1MPIuwqDztxsfDDdjfp2DNTOlNDPtCegygFWu7qQ-v_YY7H23Yq2E/s1600/FRED_USM3_vs_China_M3.png" imageanchor="1" style="clear: left; display: inline; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="432" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgnel9bc5fD7YZX8gMTMWvr3zOP8jZm5hUFPn5_uCLUo1re2UbKJgMqoJXsxMmJkcWfjbCA4jipDfN4KI4trXTWYf1MPIuwqDztxsfDDdjfp2DNTOlNDPtCegygFWu7qQ-v_YY7H23Yq2E/s640/FRED_USM3_vs_China_M3.png" width="640" /></a>On the other hand, these are absolutely brilliant folks. They are economic chess masters. They know what they are doing. When I attend University graduation ceremonies here in the States, as I do from time to time, I can't help but notice that most of the <i>cum laude</i> (or better) names announced in the math, science, business, finance and engineering disciplines are Asian sounding names that are difficult for me to pronounce without my wife's assistance. These are wonderful, smart, talented, multilingual kids who are capable of quickly doing really difficult math and grasping complex concepts (that I would likely struggle and bumble through) with ease. Of course "American" sounding names still dominate the English Lit, Sports Management and Film Making degree designations, so we've got that going for us. Anyway, that said, I'm pretty sure the folks running the Chinese economy have a firm handle on this chess game and know exactly what their next moves are going to be. They are seeing the board three moves ahead while the world's naive financial rookies are playing the equivalent of economic Tiddlywinks.<br />
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On the other, other hand, could it be that our devilishly clever US Leadership is actually the puppet master here? Could it be that, through a carefully crafted, diversionary media campaign, we've been able to convince the world that our government is no longer the Reagan era <i>Shining City on the Hill</i> but is actually run by dithering, dysfunctional Twitter-heads, who get their security briefings and economic information by watching Fox News, spend inordinate amounts of time firing henchmen, (allegedly) obstructing justice, while playing golf with lobbyists and Russian Oligarchs, occasionally resorting to bedding aging porn stars for entertainment, when in reality our leaders are cold, cunning, calculating geniuses of high moral fiber who understand every aspect of this situation and have financial countermeasures locked, loaded and ready for deployment to save our souls? Could it be that this is indeed a truly brilliant trap, concocted by the Deep State to protect us from Communism, spread Democracy and eventually, by shear coincidence, accidentally usher in an American era of world economic domination? That's one hell of a media campaign. If true, it's absolutely diabolical.<br />
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Yes! Yes!... now the absurd, ridiculous daily news diarrhea all makes sense. It's clear now that what we're seeing in the media everyday is all an elaborate, brilliantly concocted ruse. Someday, it will eventually be revealed that, behind closed doors, the US Government is a well oiled bipartisan machine and the righteous standard bearer of Democracy, immune to the influence of Special Interests, lobbyists and kickbacks. Behind closed doors the White House and Congress are in lockstep, united in the common goal of protecting and fostering the American Dream. We will find that our government is totally on top of all of this and ready to spring into action. It will be revealed that Apple, Walmart and Amazon are all CIA sponsored shell entities, products of the Deep State, created and designed to supply the American consumer with cheap phones, sneakers and plastic junk at a huge discount while taking terrible advantage of the hard working Chinese people. A billion Chinese people are working their fingers to the bone for pennies so that we can sit on our overstuffed couches and watch NASCAR on our big screen TVs....Mabel! git me another Budweiser! Hell Yeah! God Bless America! <br />
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Now, some of my American readers may have read the last two paragraphs and thought "Yeah man.....that's what I'm talking about.... MAGA Baby!" For those of you that have reacted in this manner, I'm sorry to say that this is what we economists refer to, once again, as a "joke".<br />
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Back to business......<br />
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When we modify the previous FRED graphic to compare M3 Growth for relative PGDP/GDP the contrast is even more dramatic. (PGDP or "Productive GDP" which is described as “GDP excluding all of the over-building, non-productive excess capacity and accounting games created simply
to hit the arbitrary, CCP mandated GDP growth target" See: <i><a href="https://deep-throat-ipo.blogspot.com/2017/10/the-sum-of-all-fearsand-few-related.html" target="_blank"><b><span style="color: blue;">The Sum of All Fears.</span></b></a></i>...and Michael Pettis exceptional "<a href="http://carnegieendowment.org/chinafinancialmarkets/75355" target="_blank"><b><i><span style="color: blue;">Bridges to Nowhere...</span></i></b>"</a> and <span style="color: blue;"><b><a href="http://www.econ2.jhu.edu/courses/101/China2.pdf" target="_blank"><i>GDP Growth doesn't mean what you think it means</i></a></b></span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEifHpBnEv6a0JONVUMyNAfvSPqxxJkjlbBeakw_iP0zefwkNsHEQCdtNHNn-8yfrrdceAu2nAX0XkCZ-Jh5dkl8hcptO0rQzPx9Z4CX0aT9hoF-QyJnqiV3dyWPYP2tmtBMJv1Vn3A_JtU/s1600/FRED_M3_vs_PGDP_Growth.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="660" data-original-width="998" height="420" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEifHpBnEv6a0JONVUMyNAfvSPqxxJkjlbBeakw_iP0zefwkNsHEQCdtNHNn-8yfrrdceAu2nAX0XkCZ-Jh5dkl8hcptO0rQzPx9Z4CX0aT9hoF-QyJnqiV3dyWPYP2tmtBMJv1Vn3A_JtU/s640/FRED_M3_vs_PGDP_Growth.png" width="640" /></a></div>
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When we compare GDP Growth (<span style="color: #990000;"><b>dashed Red</b></span> for China and <span style="color: #76a5af;"><b>dashed Blue</b></span> for the US) we see that the amount of GDP created per unit of money is decelerating as we'd expect. As money/debt creation outpaces GDP, the money is used to service existing debt, fund bubbles and generally kick the can down the road.<br />
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Using my predefined, random walk PGDP (<b><span style="color: #6aa84f;">Green Line</span></b>) constant of roughly 0.66 (est.) we can calculate that the actual value of (PGDP) created per unit of money (M3) in a centrally planned economy, decelerates even more vigorously. Presumably, the "can kicking" and "bubble blowing" accelerates at the same pace.<br />
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With the M3 growth described above we'd think that the Chinese economy would be experiencing both significant CPI inflation and an erosion of the exchange rate. Interestingly, in defiance of economic principles, that hasn't happened. The chart below illustrates this impossible phenomenon.<br />
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<img src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhUfxd7ISvhdzOBb5ov2mwThKFV7UiA9U39PbFWBmNI6B7W8rkM3l4RE_i3DZGEzinrlgD_cRKGmmhcgr2WgEaLJo9DaGh74Pu6FSFj7HvfBhekvwJjshRmP_OAaYfD1-9fcgyJK6iq5Nw/s640/FRED_M3_v_Exchange_Rate_1.png" /><br />
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When we examine the above, despite the dramatic growth in M3 (<span style="color: blue;"><b>blue line</b></span>) we see that the exchange rate (<span style="color: #38761d;"><b>green line</b></span>) has remained relatively constant (within a range of 6.25:1 to 6.75:1) with no detectable relationship to M3, since 2010. The reported CPI cost of living index (<b><span style="color: #990000;">red line</span></b>) has actually declined. Generally, all else being equal, as the money supply increases you'd expect inflation and a weaker currency. Again, if the Chinese were operating as a market driven economy and a floating currency, the above chart would not be possible.<br />
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In my own, albeit simplistic, way of thinking, we can explain away the CPI relationship with 1.) Price Controls. 2.) <span style="background-color: white;">CCP </span>mandated production/supply constraints, and 3.) Magical sampling/reporting methods by the NBS, all designed to show that, as always, everything going on in the Chinese economy is just fine.<br />
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So let's take a look at the "Effing" root cause of something that, in my mind, is much more important, specifically because it impacts every man, woman and child on the planet.....wait for it....yup....I'm of course referring to the exchange rate of the "Effing" RMB.<br />
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In a nutshell, the value of all that is China, is calculated based on on a "fake" exchange rate. Because the RMB value (supply/demand) is based on a tiny offshore sliver of the total amount of currency in circulation, we are faced with the proposition that virtually every economic relationship/conversion between the "Rest of the World" (ROTW) and China is based on a manipulated currency.<br />
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Think of it like this: a currency is a commodity, like oil for example. Today, let's say that the supply and demand for oil are in equilibrium. A buyer is willing to pay a specific price ($X) for a barrel of oil. If tomorrow, some enterprising entrepreneur announces that he/she has invented a process which, for about a third of the cost, could turn sea water into high grade crude oil, the supply of oil would become nearly limitless overnight and the price or "value" of oil would of course plummet....perhaps to roughly 1/3 of $X, based solely on the "new" cost to convert sea water to crude oil. "Drilled" oil and all of the extraction infrastructure would become worthless. Of course, in the real world, our hypothetical entrepreneur would immediately find himself with a price on his head and the target of an all-out OPEC, Russian, US Big Oil manhunt......but I digress.<br />
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So we've already established that dump truck loads of "Onshore" RMB have been printed/created over the last few years. Carrying through on our Crude Oil metaphor, think of the "Onshore" RMB (CNY) as the inaccessible underground reserves of Crude Oil that we know are there, but can't be accessed. We think of the "Offshore" RMB (CNH) as the immediately usable Crude Oil in the system which is priced based on current accessible supply/demand availability. What if the vast reserves of RMB suddenly became available and hit the market? Or to continue the metaphor, what if we could immediately convert sea water (The Onshore CNY) to Offshore CNH? What would happen to the exchange rate?<br />
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Now, let's think about the RMB the same way we think about our oil example above. Right now, the only value the RMB has to the "Rest of the World" (ROTW) is to facilitate trade and investment with China. Today, the dual currency system makes the value and amount of currency in circulation on the mainland (the "Reserves") irrelevant to the ROTW. Like Oil, what matters to the ROTW in terms of supply and demand is the accessible amount of RMB available to settle transactions with China. The smaller the supply, the higher the "cost" and "value" the RMB has i.e.) the exchange rate.<br />
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Printing money is easy....and it's fun! Everybody gets rich! But let's take a look at what's happened with the "Offshore" RMB, the RMB (or CNH) that the rest of the world must use to transact business with China. Unlike the Dollar, Euro, Pound and Yen, which can be converted to most currencies (and back) instantly, almost anywhere in the world (except mainland China) there are only a few places on the planet that the CCP allows RMB (CNH) to hide. In the chart below, we see that the RMB located in clearing centers around the world has been declining. Total "Offshore" RMB (CNH) available for International transactions is roughly RMB 1.15 Trillion today, actually declining from it's peak of RMB 1.85 Trillion in 2015. This RMB 1.15 Trillion total represents roughly 0.7% of all RMB in circulation, down from about 1.6% in 2015. What we're witnessing is "Offshore" tightening and the loosest "Onshore" money since the Post WWI Weimar Republic. (Slightly exaggerated for dramatic effect)<br />
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<img src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjqOV5WsM5jfaL2KyjzTadbswmxhs2mhRQU_2HZezPYG6r7mLR2xZH1sIUbhNbZwHUII99wwbhW9EnUFeMyLCC2TDGXg_FS0wZhJrg1SgnJgtDy6rqUi9w6D-n3v6Y9qbuoBtBy4ohwS00/s1600/RMB_Deposits_2011_thru_2017.png" /><br />
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As we see below the RMB that either "escapes" from China or is "released" by the PBOC finds its way to just a few financial centers. 90% of all offshore RMB reserves are housed in Hong Kong, Singapore, Taiwan, London, Luxembourg and Macao. <br />
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<img height="463" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEioHCskpXaKOFSt9bv9INN1NoY_9AoXbO1XyUe2NtaPtEorER8umCfG6rLiO126Qx_AAVz-H81-PesJDDGFK4INFeupo9cd8_VNF5lG3VHV2MCmHedk-hOn8SO9MBNi-vGjz6VhQU8FXbg/s640/RMB_Deposits_by_Country.png" width="640" /><br />
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When we look back at the first graphic in the post (The Big Map), we recall that over the four (4) year period from 2013 thru 2016 that the the net Balance of Payments increase from China's foreign transactions should have been US$1.158 Trillion. Now let's see what's happening to all of that foreign currency that should be coming into China's coffers. I've borrowed a great graphic below from Brad Setser and the Council of Foreign Relations which raises a few questions. Since, because of SAFE rules, mainland commercial banks don't hold significant FOREX and have in fact been reducing FOREX balances for the last few years. (See Victor Shi, <i><a href="https://www.merics.org/sites/default/files/2017-10/191017_merics_ChinaMonitor_42.pdf" target="_blank"><span style="color: blue;"><b>Financial Instability in China: Possible Pathways And Their Liklihood</b></span></a>, </i>MERICS Mercator Institute for China Studies).<br />
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All of this FOREX (US$1.158 Trillion) should be showing up on the PBOC Balance Sheet. But when we look at Brad's chart below, both Foreign Reserves and Assets are declining. Sure, some of it is probably <a href="https://www.forbes.com/sites/insideasia/2017/02/22/china-capital-flight-migration/#21a51f444a37" target="_blank"><b><span style="color: blue;">capital flight</span></b></a>.....Chinese elite have come up with all kinds of <a href="http://www.scmp.com/business/banking-finance/article/1551510/how-elude-chinese-foreign-exchange-laws-take-your-pick-ways" target="_blank"><span style="color: blue;"><b>gimmicks</b></span></a> and schemes to convert RMB to Western Assets outside of the SAFE rules....(there's gotta be a good reason for that don't you think?)<br />
<img height="416" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgT8lcbZOcvMTps-L6FX_zgdA1rIPIOakA1oEn3sx6OiNAi6aORNPnjRchTs-hZRj4SJmGRPnv1Y3IxjsHapny7dzngEOnaa3JwD1ASo-_k5u7MSNESkWfzcGIdnAYw7c0MpHTjY3DMltg/s640/PBOC_Forex-Asset_Changes.png" width="640" /><br />
I'd suggest that the reason the PBOC on-balance-sheet FOREX balances aren't increasing as we would expect is really very simple. The world's FOREX never gets to the mainland in the first place.<br />
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Let's take a look at the chart below. It illustrates what's really happening (hypothetically) when Apple buys a shipment of iPhones from FOXCONN. Of course the transaction structure is similar whether we're talking about phones, circuit boards, underwear, basketball shoes, or most of the stuff available from Amazon re-sellers or sitting on Walmart shelves. I've chosen Apple and the other logos for illustration purposes simply because, to me, it's just a little easier to visualize and it explains a lot of the things going on above. <br />
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So here's the process:<br />
<ol style="text-align: left;">
<li>Apple takes delivery of the iPhone shipment and has to pay FOXCONN. Apple has dollars and FOXCONN wants RMB so it can pay wages, raw material costs, utilities, kickbacks, etc. in China.</li>
<li>Apple has an account at JP Morgan and sends US$ wire instructions.</li>
<li>The Bank of China (FOXCONN's Bank) receives the US$ and forwards the equivalent RMB to FOXCONN's Bank of China Account on the Mainland. The Bank of China (Hong Kong Branch) Needs to replace the RMB so they borrow the RMB from the mainland home office. The Hong Kong branch can now loan out or invest their US$ deposits.</li>
<li>Fortunately there are lots of Caymans, Luxembourg, London, Netherlands, etc. Investment Vehicles with accounts owned by the <i>creme de la creme</i> of the Chinese Elite, who are more than happy to invest in US & EU Stocks, Bonds, Real Estate and businesses.</li>
<li>Because the<span style="background-color: white;"> CCP</span> is able to artificially inflate the value of the RMB by limiting the available supply, they, to borrow a phrase, not only "Buy American"....if this imbalance goes on unchecked, over time, they will actually be able to "Buy America!" (anonymously)....one business, stock, bond and luxury condo at a time.</li>
<li>Again, the only reason this is possible is that the world's Central Bankers and Regulators have allowed the "<i>second biggest</i>" economy to operate in a world where they are able to "assign" a value to the RMB rather than have it float, like every other major currency on the planet. Authors Note: I put the "<i>second biggest</i>" in quotes since if we restate PGDP (GDP x 0.66) by the "Real" Exchange rate (18:1) we see that China's economy actually drops to 4th on the list, right behind Germany, similar to that little dip the Russian economy took a few years ago when the Ruble crashed.</li>
<li>All things considered, this really is a brilliant, diabolical plan.....of course, again, none of it would have been possible without the help of US, Swiss & EU Investment Bankers, their insatiable thirst for fees and naive Central Bankers who've apparently been asleep at the switch for years.</li>
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The above, at least partially, explains: </div>
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<li>The meteoric increase in CMFC money.</li>
<li>Why the US, Japanese and the EU financial systems have operated in a Near-ZIRP environment for nearly a decade and have experienced comparatively anemic "main street" GDP growth with no inflation. i.e.) The funding has been siphoned off and sent overseas, to boomerang back in the form of asset bubbles. </li>
<li>It explains why a partially finished apartment in a half vacant building in Beijing "costs" the same as a Park Avenue or Kensington Condo.</li>
<li>It explains why large swaths of New York, Bay Area, LA & Miami Real Estate are owned by Chinese shell companies in all cash deals.</li>
<li>It explains why PBOC FOREX Assets and Reserves are holding relatively steady (or slowly declining) when, as the "factory to the world", these balances should be increasing significantly. </li>
<li>It explains why eight (8) of the ten (10) largest businesses in China, the "factory to the world", are Banks and Insurance Companies. (The other two are oil companies.) </li>
<li>It explains why absurdly run, opaque companies with suspect business models, like Alibaba, Ant Financial, Tencent, Evergrande, Fosun, AnBang, JD.com, HNA, and hundreds (perhaps thousands) of others, even exist in the first place. These are not the CCP's foray into market driven capitalism....far from it. These businesses are CCP sponsored vehicles created and designed to convert "monopoly money" into hard Western assets at a discount. </li>
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What can I say.....in Nancy's words....this is a "Effing" mess.....<br />
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<b><i><u><span style="color: red; font-size: large;">"The Cartels"</span></u></i></b><br />
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<b><u><i><span style="color: red;">One-Line Executive Summary:</span></i></u></b></div>
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<b><i><span style="color: red;">When thinking about what the Chinese Government has been able to accomplish with their RMB "monopoly", limiting the supply in order to control the price (exchange rate), the term "Cartel" seems applicable. When we think about the context, there are three famous (or infamous) Cartels that immediately come to mind. They are: De Beers, OPEC and the Post World War I Weimar Republic. (Bear with me on the Weimar Republic, it will make sense in a minute.) </span></i></b><b><i><span style="color: red;">De Beers is, by my measure/criteria, the most successful of the three. OPEC had a great run. The Weimar Republic....well, not so much. So the question is: Is China's dual Onshore/Offshore RMB "monopoly" more like De Beers, OPEC or the Post WWI Weimar Republic? </span></i></b></div>
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<i><b><u>Executive Summary Bullet Points</u></b></i></div>
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First, I'm not going to spend much time going through the history of De Beers, OPEC and the Weimar Republic herein. The activities of these organizations and their history has been well chronicled. I've posted a few links to what I think are some entertaining references to same at the end of this post if you have interest.<br />
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1.) The First, and by far the most successful of the three cartels, De Beers, has relentlessly held market prices for diamonds well above cost for more than a century by: 1.) Controlling the global supply of diamonds. 2.) Creating a "Diamonds are forever" intrinsic value. and 3.) The most successful navigation of the worlds geopolitical landscape in modern history.</div>
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2.) OPEC was able to control world oil prices quite effectively in the 1970's and 1980's by virtue of access to a restricted, disproportionate supply of cheap, easily extractable crude oil. Over time, with the world's adoption of new technology and the discovery and development of new, cheap reserves outside of the OPEC umbrella, their ability to control prices has waned. </div>
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3.) The Post WWI Weimar Republic was the first/only significant attempt in modern history where a major economy/government tried to "print" two currencies, to be used for two distinct purposes. The "Onshore" <i>gold mark</i> backed by and pegged to gold was to be used as the benchmark currency for Germany's internal trade and investment/finance. The "Offshore" <i>paper mark</i> fiat currency, backed by a nebulous relationship to the <i>gold mark</i> and its fading perception of value, was to be used to repay war debts and reparations. For a number of reasons, this plan resulted in unprecedented hyperinflation crippling the German economy. </div>
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<b><i><u>If you'd like to skip ahead....feel free to scroll down to <span style="color: red;">"The Financial Crime of the Century!"</span></u></i></b></div>
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A Cartel can only function effectively by restricting supply, fostering demand and consequently generating out-sized economic returns on whatever commodity it happens to be "<i>Cartel-ing</i>".<br />
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<b><u>De Beers</u></b><br />
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With De Beers, there is no question that they've been masterful at creating a timeless brand and an unflinching market for incredible, beautiful, shiny little pieces of carbon. Two hundred years ago, nobody cared about, owned or placed much value on diamonds. They were nice little rocks found in South American Streams. When significant diamond deposits were found in South Africa in the late 1800's De Beers was born. Over time the firm has been able to convince most of the young men around the world, using catchy slogans, Hollywood Stars and British Royalty wearing sparkling product samples, that it's mandatory to spend a few months of gross wages (at a minimum) on De Beers inventory to prove your love for the woman of your dreams.<br />
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As additional discoveries were made and mines were opened in Siberia in the 1950's in Australia in the 1980's, De Beers deftly adjusted their political and marketing strategies to keep the huge additional supply under control and metered into the market profitably. Expanding demand with "Anniversary", "chocolate" and "Eternity" products to match the volume of smaller/cheaper and discolored stones released into the market, etc. as an example.<br />
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Unlike so many other businesses that have come and gone over the last century, De Beers has demonstrated an incredible ability to maintain both margins and market share. No small feat. In terms of longevity, profitability and consistency, De Beers may just be the most successful business in history. Unlike Real Estate, Tulip Bulbs and Dot.com stocks, the De Beers Cartel has, over the last 100 years, proven that the price of diamonds does indeed never go down. Perhaps diamonds actually are forever! <br />
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<b><u>OPEC</u></b><br />
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OPEC/Middle East producers have long been the lowest cost crude oil producers on the planet, able to generate significant margins at virtually any price level. In short, they drill a hole and oil comes gushing out of it. Unfortunately (for OPEC) there is also plenty of crude oil on the planet, it's just not as easy to get to as OPEC oil. Supply, albeit higher cost, has significantly increased over the years, primarily from Russian and US fields and projects. Improvements in extraction technologies combined with accelerated CAPEX over the last twenty years have brought higher cost fields on-line and producers are reluctant to shut production down even at lower margins. Reduced margins, as long as the projects are covering variable costs, would seem to be a reasonable sacrifice in exchange for positive cash flow. The result is that crude prices have reset in a much lower relative range.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiX1ZTZhX2oVHupHc6BRwVCrUZzLrdSsftX9z6_WHUZEPLSj8PixbiyefhwOk0fg96darcVpl9PMalF0YqfDM8iTqY8t1urlstaBfSa1VLiLUYu2uEN7ANaSQJPMg58LS9ZKEiu5HgT6Z0/s1600/WTI_Crude_Price_Chart.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="904" data-original-width="1401" height="409" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiX1ZTZhX2oVHupHc6BRwVCrUZzLrdSsftX9z6_WHUZEPLSj8PixbiyefhwOk0fg96darcVpl9PMalF0YqfDM8iTqY8t1urlstaBfSa1VLiLUYu2uEN7ANaSQJPMg58LS9ZKEiu5HgT6Z0/s640/WTI_Crude_Price_Chart.png" width="640" /></a><br />
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There's enough non-OPEC supply on line now that OPEC members have concluded that cutting their own production would no longer have a meaningful impact on global supply. Even if they were able to drive the price up, higher prices would only further increase non OPEC production/supply, making more expensive projects viable, bringing them on-line. The graphic below illustrates the number of significant projects which become profitable/viable as oil prices increase.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhGh13IClZ446EszQfEgvJziDkLYDvo-mCVsQHVoFdJjdaguJQtalR8v7AIOes2eXa3PWBufDiQ9azfKGgVDTKSRMVZ3CXT2MJ-PT5oIOjMRxjc6lJzZOFpkQdikyiG5dEoFK1apAYIyHs/s1600/Oil_Projects_Cost_Curve.png" imageanchor="1" style="margin-left: 1em; margin-right: 1em;"><img border="0" data-original-height="302" data-original-width="754" height="256" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhGh13IClZ446EszQfEgvJziDkLYDvo-mCVsQHVoFdJjdaguJQtalR8v7AIOes2eXa3PWBufDiQ9azfKGgVDTKSRMVZ3CXT2MJ-PT5oIOjMRxjc6lJzZOFpkQdikyiG5dEoFK1apAYIyHs/s640/Oil_Projects_Cost_Curve.png" width="640" /></a></div>
When we examine the graphic we see that numerous Brazil and US deep water projects and a few US and Canadian shale projects are viable at less than $60/bbl.<br />
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Given that these investments are usually operating over a ten to twenty year cycle it's unlikely, again because of cash flow, that once these projects are brought on-line, that they would be shut down for anything other than a long term collapse in demand/price.<br />
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When we account for the continuing, forecast reduction in world demand resulting from increased fuel efficiency, alternative energy strategies, and environmental awareness, we can further conclude that there is simply too much infrastructure either on-line or waiting in the wings for OPEC to move prices up over the long term. OPEC had a great run, but the days of "gas lines" and other than conflict related temporary price spikes, should be over.<br />
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<b><u>The Post WWI Weimar Republic</u></b></div>
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The Weimar Republic, when confronted with the proposition of having to finance WWI, issued war bonds and adopted a dual currency system to finance the war. The essence of the plan was that, once victorious, the German government would demand reparations from the defeated Allied opposition, confiscate valuable French resources and pay the money back. Even the "War to end all wars" had to deal with the bookkeepers and bankers.<br />
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At the onset of the war, circa 1914, the the German government, presumably anticipating the inflationary consequences of their pre-war debt levels, abandoned the gold standard and issued two classes of currency, the "<i>gold mark</i>", which could be converted to gold and the "<i>paper mark</i>" which could not. </div>
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Of course, the "winning the war" part of the plan backfired and the German government was put in a position where it was required to pay back both pre-war debt/bonds and unworkable WWI reparations to the Allied governments. The German government began to "print" their way out of the problem. In a clever effort to pay war debts, through financial prestidigitation, since the "<i>paper mark</i>" was thought to be just (or nearly) as valuable as the "gold mark" at the time, the German government printed truck loads of <i>paper marks, </i>converted it to foreign currency and used foreign currency to pay their war debts and reparations. This actually worked pretty well for a few years. The German government was able to pay debts and reparations until the world's financiers figured out that the supply of <i>paper marks</i> was increasing geometrically and the <i>paper mark</i> soon became worthless. </div>
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This was the first significant attempt, at least that I'm aware of, in modern history where a major economy/government tried to "print" two currencies, to be used for two distinct purposes. The "Onshore" <i>gold mark</i> backed by and pegged to gold was to be used as the benchmark currency for Germany's internal trade and investment/finance. The "Offshore" <i>paper mark</i> fiat currency, backed by a nebulously defined convertibility relationship to the <i>gold mark</i> and its fading perception of value, was to be used to pay back war debts and reparations.<br />
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As I mentioned, this dual currency plan, much like their "winning the war" plan, didn't go all that well. There was no mechanism to control the flow of <i>paper marks</i> in circulation and it became obvious, as bankers noticed that German citizens were using wheelbarrows of paper marks to buy loaves of bread, that paper marks had become worthless. As a footnote, the German government finally<span style="color: blue;"><b> <a href="http://content.time.com/time/world/article/0,8599,2023140,00.html" target="_blank"><span style="color: blue;">paid the last US$94 million installment</span> </a></b></span>on the <i>Treaty of Versailles</i> negotiated (and regularly renegotiated) war debt and reparations, in October of 2010, nearly 90 years after the debt was first established. <br />
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Let's look at the convertibility of <i>paper marks</i> to <i>gold marks. </i>The chart below describes the relationships.<br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhURdrg_xPLmTknOb52EsqPEYQ3yViaDaUhq4zE-aVBbQCQmFdL3BhSTfkkEJJuR7BAPWNoF_CqPAW9ux9V0m3g5Aw0b2QsAsGf71WoOLq2iYToYbMYEKrED56gJo4WwKdCbICyM30OqPk/s1600/Gold_Mark_v_Paper_Mark_1918-1923Img-Z121706-0001.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-left: 1em;"><img border="0" data-original-height="533" data-original-width="537" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhURdrg_xPLmTknOb52EsqPEYQ3yViaDaUhq4zE-aVBbQCQmFdL3BhSTfkkEJJuR7BAPWNoF_CqPAW9ux9V0m3g5Aw0b2QsAsGf71WoOLq2iYToYbMYEKrED56gJo4WwKdCbICyM30OqPk/s1600/Gold_Mark_v_Paper_Mark_1918-1923Img-Z121706-0001.jpg" /></a></div>
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It's unclear as to exactly how large the German money supply actually was at the time, but according to a <span style="color: blue;"><b><a href="https://www.richmondfed.org/~/media/richmondfedorg/publications/research/economic_quarterly/2002/winter/pdf/hetzel.pdf" target="_blank"><span style="color: blue;">white paper by the Richmond Fed</span></a>,</b></span> there were roughly 6 Billion <i>marks</i> in circulation in 1913. From the end of World War I until 1924,
the price level rose almost one trillion-fold. Conventional, simple math would lead us to believe that the related money supply had also grown more than a trillion fold. To be sure, when you can no longer do the conversion math without a super computer, you're looking at hyperinflation.<br />
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Below we see a 50 Trillion <i>mark</i> note. (see conversion table on the graphic above) This single note, issued in November of 1925 represented more then 8,300 times the number of <i>marks</i> in circulation just eight(8) years earlier. <br />
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<img height="332" src="https://upload.wikimedia.org/wikipedia/commons/f/f3/50_Billionen_Mark_Stolberg_Eschweiler_001.jpg" width="640" /><br />
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Unlike today, rather than simply putting an electronic credit in an account, in 1923 if a Central Bank wanted to increase the money supply geometrically, they actually had to create paper money "notes" to do it. It became obvious to the world that the mere existence of 50 Trillion notes was evidence that the German money supply was increasing at unprecedented, uncontrolled levels. Could you imagine being a banker or investor holding, say for example 10 Billion <i>marks </i>of pre-war debt and being presented with this newly printed 50 Trillion <i>paper mark</i> note from the German government in full payment of the debt....and then asked to make change?<br />
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At some point through 1919 and 1920 the world started to catch on that the Reichsbank was simply printing money to pay the country's debts and European and US Bankers stopped exchanging foreign currency for <i>paper marks</i> at anywhere near the exchange rates just a year or two prior. Any foreign banker or investor holding <i>paper marks</i> would soon be holding worthless currency. Like so many financial events in history, once Mr. Market figures out what's going on, he refuses to play the game, illustrating what can happen to a commodity (i.e. the <i>mark</i>) once the supply becomes unlimited.<br />
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The question we need to ask is: Does the CCP and the RMB today more closely resemble:<br />
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1.) De Beers and Diamonds?<br />
2.) OPEC and Oil?<br />
3.) The Post WWI Weimar Republic and the "<i>paper mark</i>"?<br />
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<b><i><u><span style="font-size: large;"><br /></span></u></i></b>
<b><i><u><span style="color: red; font-size: large;">The Financial Crime of the Century!</span></u></i></b><br />
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<b><i><span style="color: red;"><u>Executive Summary: </u> Feel free to read this last section in its entirety.</span></i></b><br />
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<i>"The only accurate piece of information on the front page of a Chinese newspaper is the date."</i><br />
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I'm not sure when or where I heard this quote the first time. I wish I could take or give credit for it, or cite the source since it's more relevant today than ever. But I'm sorry, I can't. Maybe one of my readers might chime in?<br />
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We're taught from a very young age that "lying" is just plain wrong. It is illegal, at least in theory, to tell lies on a witness stand, in a courtroom or write them in a public document. We refer to it as mis-representation, perjury or fraud. There are severe penalties and repercussions, again, in theory, for perpetrating these acts.<br />
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First, let me be clear, the dual currency scheme I've described above is absolutely brilliant. It's also the greatest crime in financial history. The CCP has devised a system to take advantage of what can only be considered systemic flaws in a market driven world. The best parallel I can draw is the conniving used car dealer. The slick car dealer locates all sorts of oil-burning, salvage-title, odometer-rolled-back, "cream puffs" and he/she coaches, motivates and compensates his even slicker team of sales reps to move these sweet rides to naive buyers. Of course, in their minds nobody is doing anything wrong, the sales reps didn't officially know about the salvage titles or bad odometers. It burns oil? Really? It was in a wreck? You're kidding? I had no idea. The best part of all of it is, even if the slick dealer is caught in a lie, there's no enforceable penalty. Let the buyer beware. Gotta move the cream puffs and collect my profit and sales commission! That's capitalism!<br />
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The above described impending financial mess <i>du jour </i>would never have happened if the world's bankers would have required that the RMB absolutely must float before the Chinese could play in the global sandbox. But the CCP knew full well, again, relentlessly relying on the free trade model which they were taught, oh so well at Western Universities, that the market-driven, used-car-dealer-like Western Investment Bankers could be convinced to make really bad deals for America and Europe if it made them really rich individually. The CCP set out to create the forced labor camp "factories to the world" which would eventually produce so much output (exports) that the value provided by the intelligent, hard working, woefully underpaid Chinese worker would become indispensable to the ROTW. The "money" would continue to flow into Chinese coffers, to the point where Chinese Elite could eventually "boomerang" the Greenback as I've described, slowly buying significant chunks of America and Europe anonymously. As long as the Western "money" continues to flow the CCP/PBOC will continue to be able to print money, roll their massive internal debt over and protect the fake value of their currency. But let's take a look at what happens if/when the ROTW figures out what's happened and the flow of money into China slows, stops or even reverses as a result of, for example, just thinking out loud here...some black swan event......like a trade war.....<br />
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You'd expect that the PBOC would do everything in its power to maintain the fake value of the offshore currency. It's the bedrock of their economic model. If you are familiar with the NBS data, every press release begins with something like:<br />
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<i>"The (<u>insert fake statistic name)</u> once again exceeded expectations attesting to the solid nature of the economy and the insightful leadership of the party. Everything is just fine and dandy in China and it always will be." </i><br />
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Since we are inundated with head fakes, goofy deals, silly numbers and "bad gauges" coming out of China we have to look at other indicators to determine when the inflow might start slowing, or God help us, reversing. We can only hope that Central Bankers around the globe, rather than blindly focusing on their own country's GDP growth, Unemployment and Inflation Rates, managing their money supply accordingly, understand what's really happening and take measures to insulate their markets and capital from the effects of China's pullback.<br />
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In short, the CCP would be doing everything a struggling enterprise might be doing to remain liquid, as they make the successful transition from global lender to....gulp....global borrower.<br />
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Here are <i>the things we should be looking for</i> (***** indicates that it's already happening):<br />
<ul style="text-align: left;">
<li>A continuing reduction the relative amount of offshore RMB deposits available to fund Current Account (Import/Export) transactions. (*****)</li>
<li>Reduction of Western exports into China....The Soybean seems to be in the news right now. About 1/3rd of all US Soybean production goes to China. So what if a few Chinese citizens go hungry....it wouldn't be the first time that's happened. (*****) </li>
<li>The Chinese try to hold exports steady or increase them. They need the "money". So far the White House hasn't mentioned anything about slapping fat tariffs on consumer electronics or phones. Thank goodness. (*****)</li>
<li>Stricter SAFE enforcement on "unauthorized" capital flight. Authors Note: Capital that can "flee" the mainland is fleeing. Moreover, Capital is not currently "fleeing" into China. The declining amount of capital showing up on the mainland is being dragged in, kicking and screaming. Again, there's a reason for that. (*****)</li>
<li>Slowing of Outbound FDI. There would be fewer announcements and more importantly, fewer completions, of "blockbuster" acquisitions of Western Assets. e.g.) CFIUS and Ant Financial/Moneygram. (*****) </li>
<li>Less Chinese participation on the buy-side in the debt/treasury markets as well as the winding down of current positions. When significant capital is pulled from these markets we should be seeing credit markets tightening and interest rates/yields beginning to gap-up. (*****)</li>
<li>More borrowing. Chinese businesses will be looking for increases in both RMB (Dim Sum bonds) issued as well as more "Baba-like" bonds/debt underwritten and hitting US, European and Japanese markets. (*****) </li>
<li>More equity raises. More attempts at cross border ADR's/IPO's and secondary offerings.(*****)</li>
<li>Accelerated Regulatory approval of Western/Mainland dual listings, designed to raise on-shore capital and support Chinese offshore ADR values. (*****)</li>
<li>Liquidation/reduction of offshore financial assets (Caymans/Luxembourg/Netherlands/Swiss, etc.) Balances begin to level off or decline. Effectively using offshore FOREX under Chinese control to protect the RMB. (TBD)</li>
<li>Real Estate Asset prices fall in markets previously preferred by Chinese Investors/Buyers (NYC, LA, San Francisco, Miami, etc.) as a result of less participation from Chinese buyers. Luxury condos/homes will remain on the market longer. (TBD) </li>
<li>Continued deleveraging, bail-outs or outright seizure of dubious mainland, international serial acquirers. (AnBang HNA, etc.) I understand there are some large chunks of Deutsche Bank, Hilton and the Waldorf Astoria, flagship properties of HNA and AnBang, up for sale at a discount right now. (*****)</li>
<li>China's Elite will be "strongly urged" to repatriate their FOREX holdings. As the CMFC money drains from Western markets we'll see a pullback and continuing price pressure on US & European Debt, Equity and Real Estate. This contraction may already be happening based on recent declines, but since so much of this offshore money is anonymous it's impossible to tell exactly what's happening. On the other hand.....somebody knows. (TBD)</li>
<li>Finally, as the last line of defense, so to speak, we'd expect to see significant declines in PBOC FOREX Balances and Reserves as the RMB depreciates, again in an effort to protect the RMB. On the other hand, given the number of "bad gauges" out there, taken in the context of the "Front page of a Chinese Newspaper" quip above as well as press releases like the recent <span style="color: blue;"><b>"<a href="https://deep-throat-ipo.blogspot.com/2017/10/the-sum-of-all-fearsand-few-related.html" target="_blank"><span style="color: blue;">Hey we just found out that our US$37 Trillion of Shadow Bank debt is about twice as much as we thought we had....</span></a>"</b></span> PBOC announcement, I'd find it difficult to give much credence to any economic data published with the CCP stamp of approval. (Who knows??)</li>
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For you skeptics out there who are questioning everything I've described, if I am indeed wildly wrong and none of this matters, simply ask yourself: If the Chinese Government were to open up their Capital Account, remove SAFE limitations and make the RMB immediately convertible, like every other major currency, would the RMB remain rock solid at the current exchange rate? Based on the money supply and debt levels, which way would it go? Why are SAFE restrictions so tight in the first place? </div>
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That said, we all hope and pray that we will see a slow, measured decline in the exchange rate/value of the RMB to a more reasonable equilibrium. Cooler heads should prevail. A reset, moving toward a depreciated RMB value in the 18:1 range would be more in line with what a floating RMB might look like in relation to China's money supply and burgeoning debt levels. If the Chinese government could accomplish this depreciation over a period of a few years it would be the best possible outcome for everyone on the planet. Unfortunately, as I've said before in this blog, I doubt everything will go according to plan on these all to predictable, decennial "unwindings". It never does.<br />
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As China transitions from a net lender to a net borrower on the global stage (Yes...you read that correctly....I believe I'm the only blogger/pundit suggesting this transition is on the horizon) it will be painful. When the global value of the RMB decreases to a third of its current level, the value of any RMB denominated assets are also devalued in global purchasing power terms. The same amount of RMB will only buy a third of that NYC, LA or London Condo. That unfinished Beijing Condo in the half empty building will no longer be priced like it's located on Park Avenue.....it will get a more representative DesMoine-esque asking price. After the forced-pseudo-floating reset of the RMB, the assets of those huge Chinese Banks will be worth a third of what they were worth today. The value of Chinese exports will also be a third of their current value. FOXCONN workers will get a huge pay cut in terms of purchasing power. Imported goods will cost Chinese consumers three times as much in real terms. All of the "bad assets" and off-the-books accounting shortfalls will need to be written off and/or re-financed and the cost of this debacle will be placed squarely on the shoulders of the hard working, intelligent and soon to be really pissed off Chinese people once they understand that their global purchasing power will be a third of what it used to be.<br />
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I first discussed the aforementioned carnage in my March of 2016 <b><a href="https://deep-throat-ipo.blogspot.com/2016/03/monopoly-money.html" target="_blank"><span style="color: blue;">Monopoly Money</span></a></b> post. Let's revisit some of the relatively obvious casualties from this blow back:<br />
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<b><u>The "Biggest Losers" in the RMB depreciation:</u></b><br />
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1.) The hard working Chinese people. Their work and effort, assets and bank accounts will be worth a third (or less) of what it once was, had China's financial architects not taken the path they did. I'm sure that Xi does not believe that there is any chance at all of hyperinflation, but on the other hand, I'm sure, neither did Kaiser Wilhelm.<br />
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2.) US Universities will lose foreign student enrollment and tuition. The cost of a Western education will be 3x what it once was in relative terms.<br />
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3.) US Investors. Chinese financial assets listed on Western markets will be revalued. ADRs will be repriced. Bond issues will be repriced and/or default. The direct effect (loss) will be roughly $2.5 Trillion. The multiplier impact is incalculable, but enormous.<br />
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4.) Western Holders of RMB denominated collateral, specifically HK & EU banks (HSBC, Deutsche, Credit Suisse, Standard Chartered) who have significant interests in Mainland Real Estate collateral will be hurt badly. When 90% of a project is financed and the underlying collateral takes a 66% haircut, the math no longer works. <br />
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5.) Chinese Retail Investors and equity markets. We had a prelude to this in August of 2015. There will be a flight to safety. Capital inflow will dry up. Mainland equity markets will collapse. Loans will default, real estate values will be reset and life savings will be lost. Tienanmen Square II?<br />
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6.) CMFC financial systems will revert to "pre-China" circa 2010 levels. There are (probably) huge leveraged Bets out there going the wrong way. We just don't know who's swimming naked. We'll find out only after it's too late to do anything about it.<br />
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7.) US retail Investors. Those of us who continue to blindly plow a percentage of our paychecks into Index funds and Mutuals in the mistaken belief that US Stocks, like real estate, will always go up "for the long run" and that a CAPE of 35 should be the "new normal".<br />
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8.) The FED and by extension, the US Taxpayer. Once everything is revalued we'll need a TARP II (maybe even a three and four) to hold all of the troubled assets generated by yet another mess brought to us by the US Banking System. Moreover, if all of this carnage takes place in a zero-interest rate environment, all bets are off as to what the FED might be able to do to support capital formation and keep the economy out of a recession/depression. Quadruple M2, to keep up with the EU and China? Negative 10% Interest Rates? Again, we'd be in uncharted waters.<br />
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9.) US Investment Banks. There will be a populist uprising to "break 'em up"...."close the borders"...."build a wall"...."get 'em outta here". This time, someone might actually be going to jail. (Just kidding...there's no way...) Money will flow out of Wall Street and back to Main Street. Capital formation, despite Jay Clayton's best effort, will be crippled for years, perhaps decades to come. We'll be back to the days of "intelligent" i.e.) local capital formation.<br />
<br />
10.) International Trade - There will be a political "Anti-Global-Anti-China-Anti-Trade" backlash the likes of which we've never seen. Like the the aftermath of the housing bubble, when interest rates declined and the cost of getting a mortgage on a home was dramatically reduced, the cost of trade may actually decrease....but try to get a mortgage (or a trade deal) done. Similarly, the cost of Chinese goods will be next to nothing (plus freight), but the probable administrative, political, compliance, tariff, regulatory costs and red-tape would likely increase geometrically. More than half the resellers on Amazon will be gone. Walmart's prices will double and product selection will become relatively limited.<br />
<br />
11.) New York City, Bay Area and Silicon Valley Real Estate prices will correct/collapse. Foreign money would dry up with an RMB revaluation. No more vacations and second homes in America for rich Chinese Elite's. $5 Million condos with a view of the Bay or the River will become a thing of the past and banks will be writing off/down mortgages in these markets at a pace that will make 2010 look like a walk in the park.<br />
<br />
12.) Alibaba, Yahoo and Softbank, along with their market caps, will all be gone, as will many of the Unicorns in the pipeline.<br />
<br />
13.) Bankers will have to find jobs and move to the country's new financial centers, Chicago, Omaha, Denver, Atlanta and Cleveland (OK....I admit Cleveland is a bit of a reach...but you get the drift).<br />
<br />
14.) The PBOC. After loosing control of the currency and the Chinese economy, Chinese bankers will no longer be allowed unrestricted playtime in the global financial sandbox.<br />
<br />
15.) Apple. With a depreciated RMB, production/import costs will, of course, decrease dramatically.....expanding the huge margins and competitive moat Apple already enjoys. On the other hand, with virtually all of its production and supply chain run through FOXCONN on the Chinese mainland any significant disruption (e.g.) political turmoil or an ill conceived, black swan accelerated trade war) would be devastating to the company.<br />
<br />
Finally, nothing like this, in the history of economics and finance, has happened before. The conditions are developing into a perfect storm. We are talking about tens of Trillions of dollars of Assets that will have to be repriced or vaporized. This slick-used-car-dealer manipulation of the RMB is indeed the greatest financial misrepresentation in history. Incredibly, the world's governments and regulators allowed it to happen. It makes Bernie Madoff's printing fake account statements in his back office and Jeff Skilling's "ass hole" testimony pale by comparison, not only in audacity, but by the sheer scope and magnitude of this con. Madoff and Enron generated a few Billion in losses. That amount was a pittance compared to this mess.<br />
<br />
It's not like we shouldn't have seen this coming. Wouldn't you think that the ROTW's bankers and regulators might have at least thought it a bit peculiar when jumbo jets full of citizens from a country whose GDP per capita was only a few thousand US dollars, started showing up on tarmacs in New York, L.A., San Francisco, Luxembourg and London, escorted by US lawyers and armed with seven figure wire transfers? Might they have at least wondered "Hey....where did you guys get all of this money?" If you or I showed up in a bank lobby with steamer trunks full of currency don't you think it would raise some eyebrows? Wouldn't the bankers and regulators want to know exactly where we got all of that money? Rather than try to figure out what's really going on, in the case of Chinese investors, the bankers happily set up accounts and provided the wire instructions hoping there was indeed "more where that came from" while the regulators looked the other way.<br />
<br />
As I mentioned, I'm hoping and praying that the world's Central Bankers and regulators, who are famous for occasionally driving the financial bus over the cliff while looking in the rear view mirror, are paying less attention to largely irrelevant and arguably misleading traditional economic metrics and have retrained their laser-like focus on the list of "<i>the things we should be looking for" </i>as described above, feverishly working on a contingency plan to minimize the carnage.<br />
<br />
More likely, when this eventually hits the fan, just like every financial crisis, it will be marketed to the masses as yet another once in a lifetime, black swan event that no Central Banker, world leader, economist or financial professional could have possibly seen coming. Those responsible for regulating and managing the world's financial systems will once again publicly feign shock and outrage that there's actually been gambling going on in this casino! The wealth transfer will continue and the suffering will be ratcheted up a notch from the pain of the last crisis. We will grapple for political solutions and common ground on Facebook and Twitter to make sure that, under no circumstances, once again, nothing like this ever happens again, every decade, in our lifetime again, or even every ten years, like it always does ....again.<br />
<br />
The Investment Bankers, who've made gobs of money on these debacles, will hire an army Madison Avenue media wizards to again convince the dumb-ass American people (us) that the bankers are indeed looking out for our best interests, doing "God's work" and facilitating essential "capital formation". Sufficient time will pass and then we'll do it all over again.......You know, just like we've handled school shootings, gun suicides, tobacco deaths, on-line identity theft and drug overdoses. A good advertising campaign will make us understand that this is again, unavoidable and we'll all feel much better about what's happened....again. <br />
<br />
Finally, when the dust settles and the smoke clears, and sufficient time passes, we will all wait with bated breath as the world's next generation of high-energy, creative, newly energized and empowered investment bankers come up with the next wave of ballyhooed, self-inflicted, shell-game "capital formation"....and like lemmings, we'll all just jump right in. The beat goes on....<br />
<br />
The world will most likely also find it peculiar, that when all of this finally implodes, that an insurance agent in Cleveland had been writing about this impending crisis, in detail for years. They might further ask, if a Cleveland insurance agent can figure this out....why can't the smartest guys (Investment Bankers) in the room? The simple answer is: They already have.<br />
<br />
If only Kaiser Wilhelm had been here to guide us through it all.....<br />
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<br />
<br />
<br />
<b><u><span style="font-size: large;">Additional Reading/References</span></u></b><br />
<br />
The Bank of International Settlements thinks China is one of the countries most likely to suffer a banking crisis, due to its debt and the high level of its debt servicing ratio. In its quarterly review, the bank also said that Canada and Hong Kong were at risk of banking crises, partly due to an increase in property prices. However, it was keen to stress than it wasn't saying any of these three countries were definitely heading for a crisis. CNBC<br />
<br />
FSB - Global Shadow Banking Monitoring Report - 2017<br />
Pg 10 Composition - $340T up 7.5% from 2015<br />
Caymans GDP US$3.2 Billion in 2016 - US$7.9T Total AUM.<br />
<a href="http://www.fsb.org/wp-content/uploads/P050318-1.pdf">http://www.fsb.org/wp-content/uploads/P050318-1.pdf</a><br />
<br />
<i>Pg 50 - As in previous years, the US had the largest narrow measure,
at $14.1 trillion in 2016, representing 31% of the total narrow measure assets reported by the
29 jurisdictions (Exhibit 4-5). The eight participating EU jurisdictions comprised the next
largest share (with a combined $10.1 trillion, 22%), followed by China ($7.0 trillion, 16%), the
Cayman Islands ($4.7 trillion, 10%), and Japan ($2.8 trillion, 6%).</i><br />
<br />
FSB - Global Shadow Banking Monitoring Report - 2016<br />
Pg 10 Composition - Inclusion of Luxembourg<br />
Caymans GDP US$3.2 Billion in 2016 - US$7.9T Total AUM.<br />
<a href="http://www.fsb.org/wp-content/uploads/global-shadow-banking-monitoring-report-2016.pdf">http://www.fsb.org/wp-content/uploads/global-shadow-banking-monitoring-report-2016.pdf</a><br />
<br />
FSB - Global Shadow Bank Monitoring Report - 2014 (Inclusion of China & Cayman #'s)<br />
Pg 44 - Assets Caymans US$3.3T 1,600x GDP;<br />
<a href="http://www.fsb.org/wp-content/uploads/r_141030.pdf">http://www.fsb.org/wp-content/uploads/r_141030.pdf</a><br />
<br />
FSB - Global Shadow Banking Report - 2012<br />
<a href="http://www.fsb.org/wp-content/uploads/r_121118c.pdf">http://www.fsb.org/wp-content/uploads/r_121118c.pdf</a><br />
<br />
Hong Kong Monetary Authority - Hong Kong - Global Business Hub<br />
<a href="http://www.hkma.gov.hk/media/eng/doc/key-functions/monetary-stability/rmb-business-in-hong-kong/hkma-rmb-booklet.pdf">http://www.hkma.gov.hk/media/eng/doc/key-functions/monetary-stability/rmb-business-in-hong-kong/hkma-rmb-booklet.pdf</a><br />
<br />
IMF - Global GDP bumping along at 3% since the financial Crisis. Financial Assets have been growing at 2x that rate.<br />
<a href="http://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD">http://www.imf.org/external/datamapper/NGDP_RPCH@WEO/OEMDC/ADVEC/WEOWORLD</a><br />
<br />
Dr. Michael Pettis<br />
GDP as an Input<br />
<a href="http://carnegieendowment.org/chinafinancialmarkets/75355">http://carnegieendowment.org/chinafinancialmarkets/75355</a><br />
<br />
CNBC - BIS<br />
<a href="https://www.cnbc.com/2018/03/12/bank-of-international-settlements-countries-at-risk-of-banking-crisis.html">https://www.cnbc.com/2018/03/12/bank-of-international-settlements-countries-at-risk-of-banking-crisis.html</a><br />
<br />
BIS - Quarterly Review<br />
<a href="https://www.bis.org/publ/qtrpdf/r_qt1803.pdf">https://www.bis.org/publ/qtrpdf/r_qt1803.pdf</a><br />
<br />
Softbank Cashing out<br />
<a href="https://www.bloomberg.com/gadfly/articles/2018-03-11/masa-son-is-finally-cashing-out-but-he-s-forgetting-something">https://www.bloomberg.com/gadfly/articles/2018-03-11/masa-son-is-finally-cashing-out-but-he-s-forgetting-something</a><br />
<br />
Yukon Hunang<br />
China's Economy is different<br />
<a href="https://www.nytimes.com/2018/03/13/opinion/china-economy-corruption.html">https://www.nytimes.com/2018/03/13/opinion/china-economy-corruption.html</a><br />
<br />
Brad Setser - China's Unnecessary Fiscal Consolidation<br />
<a href="https://www.cfr.org/blog/chinas-own-goal-unnecessary-and-counterproductive-budget-fiscal-consolidation?sp_mid=56183499&sp_rid=ZGVlcC50aHJvYXQuaXBvQGdtYWlsLmNvbQS2">https://www.cfr.org/blog/chinas-own-goal-unnecessary-and-counterproductive-budget-fiscal-consolidation?sp_mid=56183499&sp_rid=ZGVlcC50aHJvYXQuaXBvQGdtYWlsLmNvbQS2</a><br />
<br />
WSJ - Relisting in China<br />
<a href="https://www.wsj.com/articles/china-tech-titan-alibaba-plans-stock-market-homecoming-1521116131"><span style="color: #1155cc; font-family: "arial" , sans-serif;"><span style="background-color: white; font-size: 12.8px;">https://www.wsj.com/articles/</span></span><wbr></wbr><span style="color: #1155cc; font-family: "arial" , sans-serif;"><span style="background-color: white; font-size: 12.8px;">china-tech-titan-alibaba-</span></span><wbr></wbr><span style="color: #1155cc; font-family: "arial" , sans-serif;"><span style="background-color: white; font-size: 12.8px;">plans-stock-market-homecoming-</span></span><wbr></wbr><span style="color: #1155cc; font-family: "arial" , sans-serif;"><span style="background-color: white; font-size: 12.8px;">152111613</span></span>1</a><br />
<br />
Brad Setser - Bad Trade Practices<br />
<a href="https://www.cfr.org/blog/forming-alliance-us-allies-against-bad-chinese-trade-practices-wont-be-enough-bring-trade?sp_mid=56199508&sp_rid=ZGVlcC50aHJvYXQuaXBvQGdtYWlsLmNvbQS2">https://www.cfr.org/blog/forming-alliance-us-allies-against-bad-chinese-trade-practices-wont-be-enough-bring-trade?sp_mid=56199508&sp_rid=ZGVlcC50aHJvYXQuaXBvQGdtYWlsLmNvbQS2</a><br />
<a href="https://www.cfr.org/blog/forming-alliance-us-allies-against-bad-chinese-trade-practices-wont-be-enough-bring-trade?sp_mid=56199508&sp_rid=ZGVlcC50aHJvYXQuaXBvQGdtYWlsLmNvbQS2" target="_blank"><br /></a>
Brad Setser - PBOC Balance of Payments<br />
<a href="https://www.cfr.org/blog/balance-payments-world-changed-2014?sp_mid=56211509&sp_rid=ZGVlcC50aHJvYXQuaXBvQGdtYWlsLmNvbQS2">https://www.cfr.org/blog/balance-payments-world-changed-2014?sp_mid=56211509&sp_rid=ZGVlcC50aHJvYXQuaXBvQGdtYWlsLmNvbQS2</a><br />
<br />
Mizuho - CNY vs CNH dated "cheat sheet for dummies"<br />
<a href="https://www.mizuhobank.com/fin_info/cndb/rmb/pdf/double.pdf">https://www.mizuhobank.com/fin_info/cndb/rmb/pdf/double.pdf</a><br />
<br />
RMB Deposits by Country<br />
<a href="https://www.globalcapital.com/rmb/data/offshore-deposit-tracker">https://www.globalcapital.com/rmb/data/offshore-deposit-tracker</a><br />
<br />
PWC - Offshore RMB Primer - 2015<br />
<a href="https://www.pwc.lu/en/china/docs/pwc-where-do-you-renminbi.pdf">https://www.pwc.lu/en/china/docs/pwc-where-do-you-renminbi.pdf</a><br />
<br />
RMB - Offshore Deposits<br />
<a href="https://www.globalcapital.com/rmb/data/offshore-deposit-tracker">https://www.globalcapital.com/rmb/data/offshore-deposit-tracker</a><br />
<br />
FRED - China - M3/Exchange Rate/CPI Chart<br />
"The only accurate information on the front page of a Chinese newspaper is the date"<br />
<a href="https://fred.stlouisfed.org/series/MABMM301CNQ189S#0">https://fred.stlouisfed.org/series/MABMM301CNQ189S#0</a><br />
<br />
World Bank - China Net FDI Outflow<br />
<a href="https://data.worldbank.org/indicator/BM.KLT.DINV.CD.WD?end=2016&locations=CN&start=2010&view=chart">https://data.worldbank.org/indicator/BM.KLT.DINV.CD.WD?end=2016&locations=CN&start=2010&view=chart</a><br />
<a href="https://data.worldbank.org/indicator/BM.KLT.DINV.CD.WD?end=2016&locations=CN&start=2010&view=chart" target="_blank"><br /></a>
<br />
World Bank - 2016 GDP by Country<br />
<a href="https://databank.worldbank.org/data/download/GDP.pdf">https://databank.worldbank.org/data/download/GDP.pdf</a><br />
<br />
World Bank - Intractive GDP By Year<br />
<a href="https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?end=2016&name_desc=false&start=2015" target="_blank">https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?end=2016&name_desc=false&start=2015 </a><br />
<br />
ECB - Report on Financial Structures<br />
<a href="https://www.ecb.europa.eu/pub/pdf/other/reportonfinancialstructures201610.en.pdf">https://www.ecb.europa.eu/pub/pdf/other/reportonfinancialstructures201610.en.pdf</a><br />
<br />
OEC State - China Import/Export Graphics<br />
<a href="https://atlas.media.mit.edu/en/profile/country/chn/">https://atlas.media.mit.edu/en/profile/country/chn/</a><br />
<br />
Steve Martin - The Jerk<br />
<a href="https://youtu.be/-7aIf1YnbbU">https://youtu.be/-7aIf1YnbbU</a><br />
<br />
OECD - FDI & OFDI<br />
<a href="http://www.oecd.org/daf/inv/investment-policy/investmentnews.htm">http://www.oecd.org/daf/inv/investment-policy/investmentnews.htm</a><br />
<br />
OECD Trade In Goods & Services<br />
<a href="https://data.oecd.org/trade/trade-in-goods-and-services.htm#indicator-chart">https://data.oecd.org/trade/trade-in-goods-and-services.htm#indicator-chart</a><br />
<br />
World Bank - Exports<br />
<a href="https://data.worldbank.org/indicator/NE.EXP.GNFS.CD?end=2016&locations=CN&name_desc=false&start=2013">https://data.worldbank.org/indicator/NE.EXP.GNFS.CD?end=2016&locations=CN&name_desc=false&start=2013</a><br />
<br />
Listing of 158 Licensed Banks in the Cayman Islands<br />
<a href="https://thebanks.eu/banks-by-country/Cayman-Islands">https://thebanks.eu/banks-by-country/Cayman-Islands</a> 158 Banks in the Caymans<br />
<br />
Nice PWC Summary of RMB sponsored by the Grand Duchy of Luxembourg</div>
<div>
<a href="https://www.pwc.lu/en/china/docs/pwc-where-do-you-renminbi.pdf">https://www.pwc.lu/en/china/docs/pwc-where-do-you-renminbi.pdf</a><br />
<br />
China's Capital Capital Controls<br />
<a href="https://www.forbes.com/sites/ywang/2017/03/16/chinas-crackdown-on-capital-flight-is-claiming-some-of-its-first-and-biggest-victims/#5912c2933da6">https://www.forbes.com/sites/ywang/2017/03/16/chinas-crackdown-on-capital-flight-is-claiming-some-of-its-first-and-biggest-victims/#5912c2933da6</a><br />
<br />
China's US$3.8 Trillion in Capital Flight in the last Decade<br />
<a href="https://www.forbes.com/sites/insideasia/2017/02/22/china-capital-flight-migration/#21a51f444a37">https://www.forbes.com/sites/insideasia/2017/02/22/china-capital-flight-migration/#21a51f444a37</a><br />
<br />
SCMP - Non Convertibility of the RMB<br />
<a href="http://www.scmp.com/business/investor-relations/article/2024014/chinas-yuan-set-become-only-imf-reserve-currency-isnt">http://www.scmp.com/business/investor-relations/article/2024014/chinas-yuan-set-become-only-imf-reserve-currency-isnt</a><br />
<br />
SCMP - 3/18 - 1.56% of global transactions are settled in RMB.<br />
<a href="http://www.scmp.com/business/banking-finance/article/2139462/renminbi-slips-7th-domestic-and-international-payments">http://www.scmp.com/business/banking-finance/article/2139462/renminbi-slips-7th-domestic-and-international-payments</a><br />
<br />
OPEC - How OPEC lost its power - 2014 The Conversation<br />
<a href="https://theconversation.com/opec-v-oil-prices-how-the-worlds-biggest-oil-cartel-lost-its-power-34923">https://theconversation.com/opec-v-oil-prices-how-the-worlds-biggest-oil-cartel-lost-its-power-34923</a><br />
<div>
<br />
Richmond Fed - German Monetary History<br />
<a href="https://www.richmondfed.org/~/media/richmondfedorg/publications/research/economic_quarterly/2002/winter/pdf/hetzel.pdf">https://www.richmondfed.org/~/media/richmondfedorg/publications/research/economic_quarterly/2002/winter/pdf/hetzel.pdf</a><br />
<br />
All FRED Citations:<br />
<a href="https://fred.stlouisfed.org/series/MABMM301CNQ189S#0">https://fred.stlouisfed.org/series/MABMM301CNQ189S#0</a><br />
<h4 class="section-title" style="background-color: white; box-sizing: border-box; color: #333333; font-family: "Lucida Sans", Lucida, verdana, arial, sans-serif; font-size: 12px; line-height: 1.1; margin: 0px; padding-bottom: 5px; text-rendering: optimizeLegibility;">
Suggested Citation:</h4>
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<div class="citation" style="box-sizing: border-box; margin-bottom: 10px;">
Organization for Economic Co-operation and Development, Current Price Gross Domestic Product in China [CHNGDPNQDSMEI], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/CHNGDPNQDSMEI, April 2, 2018.</div>
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SCMP - Wealthy Chinese - Methods of Capital Flight<br />
<a href="http://www.scmp.com/business/banking-finance/article/1551510/how-elude-chinese-foreign-exchange-laws-take-your-pick-ways">http://www.scmp.com/business/banking-finance/article/1551510/how-elude-chinese-foreign-exchange-laws-take-your-pick-ways</a><br />
<br />
SCMP - Sneaky Cross Border Transactions - Moving money out of China<br />
<a href="http://www.scmp.com/news/china/economy/article/2096032/chinas-watchdog-tracks-underground-cash-trail" target="_blank">http://www.scmp.com/news/china/economy/article/2096032/chinas-watchdog-tracks-underground-cash-trail </a><br />
<br />
<i><a href="https://www.merics.org/sites/default/files/2017-10/191017_merics_ChinaMonitor_42.pdf" target="_blank"><span style="color: blue;"><b>Financial Instability in China: Possible Pathways And Their Liklihood</b></span></a>, </i>MERICS Mercator Institute for China Studies)<br />
<a href="https://www.merics.org/sites/default/files/2017-10/191017_merics_ChinaMonitor_42.pdf">https://www.merics.org/sites/default/files/2017-10/191017_merics_ChinaMonitor_42.pdf</a></div>
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De Beers - Advertising</div>
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<a href="https://www.youtube.com/watch?v=uRGp0x8ZE8w">https://www.youtube.com/watch?v=uRGp0x8ZE8w</a></div>
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<br />
De Beers - WBGH<br />
<a href="https://www.youtube.com/watch?v=xWWuFHMKesI">https://www.youtube.com/watch?v=xWWuFHMKesI</a></div>
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<br />
Opec</div>
<div>
<a href="http://theconversation.com/opec-v-oil-prices-how-the-worlds-biggest-oil-cartel-lost-its-power-34923">http://theconversation.com/opec-v-oil-prices-how-the-worlds-biggest-oil-cartel-lost-its-power-34923</a></div>
<div>
<br />
The Brookings Institute - 2011 - Arthur Kroeber<br />
The RMB: The Political Economy of a Currency<br />
<a href="https://www.brookings.edu/research/the-renminbi-the-political-economy-of-a-currency/">https://www.brookings.edu/research/the-renminbi-the-political-economy-of-a-currency/</a></div>
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Deep Throathttp://www.blogger.com/profile/02712515268051858186noreply@blogger.com38tag:blogger.com,1999:blog-7478408299955066555.post-41131453493011290522018-03-06T23:39:00.000-05:002018-03-08T17:19:44.801-05:00Up the "Wasu".....and why Jay Clayton will resign...<div dir="ltr" style="text-align: left;" trbidi="on">
<span style="background-color: white;">Before we get to the meat of this post, I'd like to acknowledge that much of the material herein has been provided anonymously by a few of my loyal readers. These wonderful folks have entrusted these references to me, I presume, in hopes that I might be able to assemble these puzzle pieces into a beautiful full-table jigsaw, suitable for framing. I'm honored by their faith and I'll do my best not to let them down. </span><br />
<span style="background-color: white;"><br /></span>
<span style="background-color: white;">The first item of interest was located on a <a href="https://www.facebook.com/nazrilow.robert/videos/913379385498293/" target="_blank"><span style="color: blue;"><b>Public Facebook Page (Urban Farmer) in Singapore</b></span></a>. To date, the video has roughly 200,000 page views. I doubt that very many US Investors have seen it yet.</span><br />
<span style="background-color: white;"><b><br /></b>
</span><br />
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<span style="background-color: white;"><span style="font-family: inherit;">The text from my reader/source: </span> <i style="font-family: calibri, helvetica, sans-serif;"><span style="color: blue;"><b>"Genuine Chinese e-commerce. The subscript is just telling people to join the WeChat group that follows eCommerce. The last caption says 'This is how your package arrives in Guizhou'."</b></span></i></span></div>
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<span style="font-size: 12pt;"><iframe allowfullscreen='allowfullscreen' webkitallowfullscreen='webkitallowfullscreen' mozallowfullscreen='mozallowfullscreen' width='320' height='266' src='https://www.blogger.com/video.g?token=AD6v5dws-ReYawEbnBNNbi560HBF2IdYwZFOzSSj4wqvBQHmnuMZXaPUl4pDzZm-Rr6ck0OfXa2-Wx8pOUycCaoK1A' class='b-hbp-video b-uploaded' frameborder='0'></iframe></span><span style="font-family: inherit;"><br /><br />Given Alibaba's self proclaimed dominance of "all that is eCommerce" it would not be a reach to believe that the lion's share of these packages are Alibaba/Cainiao deliveries in progress. At 45 seconds into the video we observe the highly skilled eCommerce specialists using sophisticated "hand scanners", presumably powered by Alibaba AI, enabling up-to-the millisecond tracking of every package placed in the capable, caring hands of Alibaba eCommerce "ecosystem" employees. I'm dismayed that it's not being used as a training video at Cainiao. <br /><br /><br /><br /> I know Jack, Joe, Maggie and Daniel must be so proud that their "New Retail" eagle is finally soaring....Look out Amazon, Chinese high-tech is coming to get ya.... </span></div>
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<a href="https://www.facebook.com/nazrilow.robert/videos/913379385498293/" style="background-color: white; font-family: "times new roman"; font-size: medium;">https://www.facebook.com/nazrilow.robert/videos/913379385498293/</a></div>
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<span style="font-family: inherit; font-size: large;"><b><u style="background-color: white;">An Apology to my Analyst Friends.....</u></b></span></div>
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<span style="background-color: white;">Have you ever experienced that feeling, right after an Investor Call or Conference, once you've had a chance to digest the content, that there was a topic you had wished that you (or another analyst) might have brought up? I'd like to take a minute to apologize to my analyst friends, <i>Eddie Leung (Bank of America-Merrill Lynch), Alicia Yap (Citigroup Global Markets), Alex Yao (JPMorgan Securities), Piyush Mubayi (Goldman Sachs), Youssef Squali (SunTrust Robinson Humphrey, Inc.), Grace Chen (Morgan Stanley) and Gregory Zhao (Barclays Capital, Inc.)</i>. </span></div>
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<span style="background-color: white;">I just didn't think of this question until a few of my loyal readers refreshed my memory and therefore, I apologize. ....I let you all down. </span></div>
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<span style="background-color: white;">Here's the question that I wish one of you might might have asked:</span></div>
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<i><span style="color: red; font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><b style="background-color: white;">"So Joe.... for my first question, I see that, according to the last 20-F (F-61, Note 4(ad)) that you've been carrying your interest in Wasu Media Holdings at roughly a US$ 1.2 Billion on the balance sheet. Now that trading has been suspended (12/25/17) and the CEO has resigned and been replaced, has there been any thought given to writing down/off the carrying value of the investment, or has there been any demand on the US$1.2 Billion of the WMP collateralized loan guarantee or the additional US$ 300 Million 'interest payment' loan that you've given to Simon Xie for his 'personal' investment in same? The exposure to this transaction seems to be at least $1.5 Billion now, although we can't tell from the 6-Ks. I also notice that the 6-Ks have been silent on Wasu's current condition since the 20-F.....can you give us an update?."</b></span></i></div>
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<i><span style="color: red; font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><b style="background-color: white;">"For my second question, I was curious, since you've guaranteed these loans to Simon Xie, who is also in partnership with Yuzhu Shi, another revered Chinese Media executive, do you have any comment on the reports that Mr. Xie, Mr. Shi and Yunfeng Capital have been making 'heads I win, tails you lose' cryptocurrency bets, indirectly using US Shareholder funds, by virtue of the Alibaba loan guarantees? </b></span></i></div>
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<span style="background-color: white; font-family: inherit;">Of course, I'll explain the genesis of these questions and the implied accusations in the following paragraphs. My guess is, the reason the questions weren't asked is that once any of my analyst friends would have brought up <i>Wasu Media</i> in the Investor Call, they would have suddenly experienced "phone problems", been quickly summoned into the bosses' office and after a short, one-sided debate, asked to pack up their desk. On the other hand, if indeed they had chosen to ask the above questions, the discussion would have gone down in history as one of the greatest management/analyst exchanges in ever....right up there with the <a href="https://www.youtube.com/watch?v=FSK0v0vTgXA" target="_blank"><span style="color: blue;"><i><b>Richard Grubman/Jeff Skilling "Asshole" Q&A</b></i></span></a>.....</span><br />
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<span style="background-color: white; font-family: inherit;">Don't get me wrong. I'm not un-empathetic. </span><span style="font-family: inherit;">I fully understand. </span><span style="font-family: inherit;">The choice to become an unemployed hero is always a difficult choice to make. </span><br />
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjA9sVV6T8Z-M9ABUJWrr3_a4BSFlaXr6xtnCOAJ9g6X1xo6JDNpGvIlN34CHbhrUPlRBJbtjyBIQNZIdnUE1bXZR82QDehfbz3w6kPgmbeS5uHz3Ib_-ZCkOnDCQSbpgq8Zrw5UOOLY74/s1600/Wasu_Stock_Chart_1.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><span style="background-color: white;"><img border="0" data-original-height="507" data-original-width="442" height="640" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjA9sVV6T8Z-M9ABUJWrr3_a4BSFlaXr6xtnCOAJ9g6X1xo6JDNpGvIlN34CHbhrUPlRBJbtjyBIQNZIdnUE1bXZR82QDehfbz3w6kPgmbeS5uHz3Ib_-ZCkOnDCQSbpgq8Zrw5UOOLY74/s640/Wasu_Stock_Chart_1.png" width="557" /></span></a></div>
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<span style="font-family: inherit; font-size: large;"><b><u>So, As Always....Let's Look at the SEC Filings!</u></b></span></div>
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<span style="background-color: white;">We touched on this in the comments of my last post. The last reported carrying (Balance Sheet) value of <i>Wasu Media</i> was roughly US$1.2 Billion as of the last 20-F (F-61, Note 4(ad)). In April of 2015, when the <i>Wasu</i> stock was trading in the CNY 50.00 (US$8.00) range Simon Xie jumped into this with borrowed money guaranteed by Alibaba. After a fitful couple of years <i>Wasu Media</i> trading was suspended on 12/25/17 with the final closing price settling in at CNY 11.40 (US$1.83). As of today, trading has not resumed. Since then there have been a few cryptic "all is well....not to worry" press releases, but I'm sure that the current <i>Wasu</i> situation is much different than the hundreds of other Chinese stocks that have "gone dark" leaving shareholders SOL (Shenzhen outa' luck) over the years. No doubt, the company will emerge from this trading suspension ready, willing and able to create untold wealth for the remaining minority shareholders who are determined and patient enough to stick it out. Yup....that's the way these things sometimes go (not). </span></div>
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<span style="background-color: white;">Unfortunately, the collapse of the share price and updates on the financial condition of <i>Wasu Media</i> were conspicuously omitted from the June, September and December 6-K's, just like the collapse of Alibaba Pictures (until the US$2.8 Billion current quarter loss which I had maintained should have been booked on last years Audited 20-F) and <span style="color: red;"><b><i>Alibaba Health</i> (HK:0241) Roughly US$6 Billion Loss yet to be written off per the 20-F, F-61 Note 4(h)</b></span>. I'm sure management views the "possibly other than temporary" losses as immaterial, or perhaps this is yet another oversight in the disclosures. In any case, an update on the loan guarantees, collateral, the probable $7+ Billion write-down/off and, of course, a well thought out go-forward plan would have been, I'm sure, appreciated by investors.</span><br />
<span style="background-color: white;"><br /></span><span style="background-color: white;">Below are the key, painfully written passages from the 3/31/17 20-F with citations re: <i>Wasu Media</i>:</span><br />
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<span style="background-color: white;">If you don't have the time or intestinal fortitude to read this financial art work, crafted by highly skilled legal counsel (like Jay Clayton for example) and prime PWC accounting talent, I'll fully understand. Feel free to skip forward to "<i>Alibaba Health....More self-dealing...</i>" if it's too much for you....</span><br />
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<span style="background-color: white; font-family: "times" , "times new roman" , serif;"><span style="color: blue; font-weight: bold;"><a href="https://www.sec.gov/Archives/edgar/data/1577552/000104746917004019/a2231121z20-f.htm#F2">Pg 41 of the 3/31/17 YE 20-F</a> </span><span style="color: red;">(Emphasis Added)</span><br /><br />Furthermore, a company controlled by Jack serves as one of the general partners of a PRC limited partnership that made a minority investment in Wasu. <span style="color: red;">Yuzhu Shi, the founder, chairman and a principal shareholder of Giant Interactive</span>, a China-based online game company that was <span style="color: red;">previously listed on the New York Stock Exchange</span>, and an entrepreneur with significant experience in and knowledge of the media industry in China, serves as the other general partner and the executive partner. The interest of the general partner controlled by Jack in the limited partnership is limited to a return of its RMB10,000 capital contribution. In addition, <span style="color: red;">Simon Xie, a former employee who is one of our founders</span> and an equity holder in certain of our variable interest entities, is a limited partner in this PRC limited partnership. To fund this investment, in <span style="color: red;">April 2015 Simon was granted a financing with an aggregate principal of up to RMB6.9 billion by a major financial institution in the PRC. The financing is secured by a pledge of the Wasu shares acquired by the PRC limited partnership, and a pledge of certain wealth management products we purchased. In addition, we entered into a loan agreement for a principal amount of up to RMB2.0 billion with Simon in April 2015 to finance the repayment by Simon of the interest under the above financing. </span>We expect that these arrangements will strengthen our strategic business arrangements with Wasu to pursue our strategy of expanding entertainment offerings to consumers. See "Item 7. Major Shareholders and Related Party Transactions — B. Related Party Transactions — Pledge for the Benefit of and Loan Arrangement with a Related Party."<br /><br /><span style="color: red;">We cannot assure you that Jack Ma will act in our interest given his ability to control one of the general partners of the PRC limited partnership invested in Wasu</span>,<span style="color: red;"> nor can we assure you that he will not breach his obligations to us as our director,</span> including obligations not to compete with us. In addition, t<span style="color: red;">he interests of Mr. Shi, as an independent third-party, may not coincide with those of Jack as the other general partner in the PRC limited partnership, or with our interests in pursuing our entertainment strategy.</span> If any conflicts of this kind arise between Jack and Mr. Shi in conducting the business of the PRC limited partnership, it could potentially have a material adverse effect on our relationship with the shareholder of Wasu and, consequently, on our ability to achieve the strategic objectives of our alliance with Wasu. Furthermore, there is no assurance that Simon will have sufficient resources to repay the loans in a timely manner or at all. The loan that we provided to Simon is secured by a pledge of Simon's limited partnership interest in the PRC limited partnership. However, if Simon fails to repay the loan, our enforcement of our secured interests could be costly and time-consuming and would be subject to the uncertainties in the PRC legal system.<br /><br /><b><u>Page 198 of the same 20F</u></b></span><br />
<span style="background-color: white; font-family: "times" , "times new roman" , serif;"><b><u><br /></u></b><span style="color: red;">In May 2015, we entered into a pledge with a financial institution in the PRC in connection with certain wealth management products with an aggregate principal amount of RMB7.3 billion we invested in to secure an RMB6.9 billion financing provided by this financial institution to Simon Xie, one of our founders and an equity holder in certain of our variable interest entities, to finance the minority investment by a PRC limited partnership in Wasu, a company listed on the Shenzhen Stock Exchange and engaged in the business of digital media broadcasting and distribution in China. </span>In addition, we entered into a loan agreement for a principal amount of up to RMB2.0 billion with Simon Xie in April 2015 to finance the repayment by Simon of the interest under the financing. These arrangements strengthen our strategic business arrangements with Wasu to enhance our entertainment strategy. Our loan to Simon will be made at an interest rate equal to SHIBOR as specified by us from time to time and is repayable in five years. The loan is secured by a pledge of Simon's limited partnership interest in the PRC limited partnership. As of March 31, 2017, the balance of this loan was RMB749 million (US$109 million). We have entered into strategic cooperation agreements with a major shareholder of Wasu in order to enhance our capabilities and influence in the entertainment sector in China. A company controlled by Jack Ma serves as one of the general partners of the PRC limited partnership. Yuzhu Shi, the founder, chairman and a principal shareholder of Giant Interactive, a China-based online game company that was previously listed on the New York Stock Exchange, and who is also an entrepreneur with significant experience in and knowledge of the media industry in China, serves as the other general partner. Jack, through his control of one of the general partners, and Mr. Shi, as the other general partner and the executive partner, jointly control this PRC limited partnership. The interest of the general partner controlled by Jack in the limited partnership is limited to the return of its RMB10,000 contributed capital.<br /><br /><b><u>F-61, Note 4 (ad), of the Same 20F</u></b><br /><br /><b>(ad) Investment in wealth management products in relation to a founder's investment in Wasu Media Holding Co., Ltd. ("Wasu")</b><br /><br />In April 2015, the Company entered into an arrangement with a bank in the PRC to invest in wealth management products with an aggregate principal amount of RMB7.3 billion, of which RMB420 million was early redeemed in January 2017 and the principal amount was reduced to RMB6.9 billion as of March 31, 2017. <span style="color: red;">The wealth management products carry an interest rate of 5% per annum, with a maturity of five years and the return of principal and interest income on the products are guaranteed by the bank. The wealth management products have been served as collateral to the issuing bank for the issuance of a financing amounting to RMB6.9 billion to one of the founders of the Company to support his minority investment through a PRC limited partnership in Wasu, a company listed on the Shenzhen Stock Exchange which is engaged in the business of digital media broadcasting and distribution in the PRC. </span>The financing has also been collateralized by the equity interests of Wasu held by such PRC limited partnership. The founder has also pledged his interest in the PRC limited partnership to the Company. The founder is exposed to the risks and rewards of the Wasu shares held by the PRC limited partnership. The Company does not have the power to direct the activities of the PRC limited partnership. The Company entered into strategic cooperation agreements with a major shareholder of Wasu in order to enhance the Company's capabilities and profile in the entertainment sector in the PRC. Such investment in the wealth management products is accounted for as a held-to-maturity security (Note 11). <br /><br />In addition, the Company entered into a loan agreement for a principal amount of up to RMB2.0 billion with the founder in April 2015 to finance the repayment by the founder of the interest under the above financing. The outstanding loan balances were repayable in ten years and charged at a compound annual interest rate of 8.0%. Loan balances of nil and RMB749 million were drawn down as of March 31, 2016 and 2017, respectively.</span></div>
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<b><span style="font-size: large;"><u style="background-color: white;">Alibaba Health...more self-dealing....</u></span></b><br />
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<span style="font-family: inherit;">I also mentioned the looming US$6 Billion "other than temporary" write down of <i>Alibaba Health</i> above. The thumbnail sketch of this transaction is: In 2014 Alibaba and Yunfeng Capital (a group of investment companies controlled by Jack Ma) completed an "acquisition" of a 54% interest in a newly created HK listed entity, <i>Alibaba Health</i>. The purchase price was roughly US$110 Million. In July of 2015, Jack (through Yunfeng), gave up <i>Yunfeng</i> voting rights (to himself) for no consideration, permitting consolidation of <i>Alibaba Health</i> at a then current value of RMB 50.1 Billion (US$8 Billion) for both the controlling and noncontrolling interests. Because of this magic, Alibaba was also able to book a Controlling Interest valuation gain of about $3 Billion.</span></span><br />
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<span style="font-family: inherit;">The current consolidated value of <i>Alibaba's 38%</i> interest in <i>Alibaba Health</i> (HK:0241) has been trading in the US$2 Billion range for more than two years. Therefore, the US$6 billion (US$8 Billion book value less US$2 Billion market value) should have been marked to market and written off long ago. On a positive note, unlike <i>Wasu Media</i>, at least <i>Alibaba Health </i>trading hasn't been officially suspended yet. </span></span><br />
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<span style="background-color: white;">As with the <i>Wasu Media </i>language above, I fully encourage you to make an effort to read the <i>Alibaba Health </i>transaction description below, but again, I'll also understand if you throw up your hands (or just throw up) in disgust at the opaque, undecipherable nature of both the construction and language of this mess. Feel free to skip ahead to "<i>Heads I Win...Tails You Lose</i>" if you can't take it....</span><br />
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<span style="background-color: white; font-family: "times" , "times new roman" , serif;"><b><u>Conveniently located in the footnotes of the Same 20-F at F47-48</u></b><br />(<b>h) Acquisition of Alibaba Health Information Technology Limited ("Alibaba Health")</b><br /><br /><span style="color: red;">In April 2014, the Company and Yunfeng completed an acquisition of newly issued ordinary shares representing a total equity and voting interest of approximately 54% in Alibaba Health through their investments in a special purpose entity. </span>The principal activities of Alibaba Health, a company that is listed on the Hong Kong Stock Exchange, consist of pharmaceutical e-commerce, a medical services network business and the operation of product tracking platforms in the PRC. The Company holds a 70% equity interest in the special purpose entity and Yunfeng holds the remaining 30% equity interest. Cash consideration of HK$932 million (RMB741 million) was paid upon the closing of the transaction by the Company to acquire its equity interest in the special purpose entity. Although the Company controls the board of the special purpose entity, the investment and shareholders agreement provided that the underlying shares in Alibaba Health are voted by the Company and Yunfeng separately based on their respective effective equity interest, including voting rights. The Company exercised significant influence over Alibaba Health through its effective equity and voting interest of approximately 38% in Alibaba Health, and accounted for Alibaba Health as an equity method investee. <br /><br />In July 2015, in preparation of the transfer of the Tmall online pharmacy business operations of the Company to Alibaba Health (of which the agreement was subsequently terminated), the investment and shareholders agreement was amended under which <span style="color: red;">Yunfeng agreed to irrevocably give up its separate voting rights with respect to its indirect interest in Alibaba Health at no consideration. </span>Such control is important for the Company to execute its digital and data-driven healthcare strategy through Alibaba Health as its flagship vehicle in this sector, indirectly benefiting all shareholders including Yunfeng economically. As a result of the amendment, the Company obtained control over the entire 54% equity interest in Alibaba Health through its control over the board and majority of voting rights of the special purpose entity. <span style="color: red;">Consequently, Alibaba Health became a consolidated subsidiary while the Company's effective equity interest in Alibaba Health remains at approximately 38%. </span><br /><br /><span style="color: red;">The equity value of Alibaba Health of HK$64,319 million (RMB50,723 million), estimated based on the market price of the issued shares of Alibaba Health listed on the Hong Kong Stock Exchange which was the more readily determinable fair value as of the deemed acquisition date, was used to allocate the fair value of net assets acquired and the fair value of noncontrolling interests, and calculate the gain of RMB18,603 million. </span>Such gain was recognized in relation to the revaluation of previously held equity interest relating to obtaining control of Alibaba Health in interest and investment income, net in the consolidated income statement for the year ended March 31, 2016. <br /><br /><b><u>Conveniently located on Pg. 197 same 20-F</u></b><br /><br /><b>Relationship with Investment Funds Affiliated with Our Executive Chairman</b><br /><span style="color: red;"> Jack Ma currently has an approximately 40% interest, held directly and/or indirectly, in the general partners of each of three Yunfeng Capital-sponsored investment funds</span> in which he is entitled to receive a portion of carried interest proceeds, namely, Shanghai Yunfeng Equity Investment (Limited Partnership), Shanghai Yunfeng New Innovation Enterprise Equity Investment (Limited Partnership) and Smart System Investment Fund, L.P. Jack Ma also currently has an approximately 26.7% indirect interest in the general partner of Yunfeng Fund II, L.P. and KHL, L.P., each of which is also a Yunfeng Capital-sponsored investment fund in which he is also entitled to receive a portion of carried interest proceeds. Of the five Yunfeng Capital-sponsored funds in respect of which Jack Ma holds an interest in the general partner entities thereof and is entitled to receive carried interest proceeds, one is a U.S. dollar denominated fund, or the U.S. Dollar Fund, two are RMB denominated funds, or the RMB Funds, one is a co-investment fund of the U.S. Dollar Fund and one is a parallel fund of the U.S. Dollar Fund. We refer to these funds collectively as the Yunfeng Funds. Jack Ma also currently has a 40% interest in each of Shanghai Yunfeng Investment Management Co., Ltd. and Shanghai Yunfeng New Innovation Investment Management Co., Ltd., which are the investment advisor entities of the RMB Funds and which, together with Yunfeng Capital Limited, the investment advisor entity of the U.S. Dollar Fund, we collectively refer to as Yunfeng Capital. Jack Ma, his wife, a trust established for the benefit of his family and an entity controlled by Jack and his wife have committed, directly or indirectly, approximately US$4.0 million and US$26.0 million as general partners and limited partners, respectively, to the U.S. Dollar Fund, and approximately RMB20.0 million and approximately RMB201.1 million as general partners and limited partners, respectively, to the RMB Funds. The U.S. Dollar Fund has accepted approximately US$1.1 billion in capital commitments and the RMB Funds have accepted over RMB5.0 billion in capital commitments.<br /><br /><br /> Jack has agreed to donate all distributions of (x) carried interest proceeds he may receive in respect of the Yunfeng Funds and (y) dividends he may receive with respect to his holdings of shares in any member of Yunfeng Capital, which we collectively refer to as the Yunfeng Distributions, to, or for the benefit of, the Alibaba Group Charitable Fund or other entities identified by Jack that serve charitable purposes. In addition, Jack has agreed that he will not claim any deductions from his applicable income tax obligations resulting from payment of the Yunfeng Distributions to the Alibaba Group Charitable Fund or any other entity identified by Jack that serves charitable purposes. See "— Commitments of Jack Ma to Alibaba Group." We expect that, through its expertise, knowledge base and extensive network of contacts in private equity in China, Yunfeng Capital will assist us in developing a range of relevant strategic investment opportunities.<br /><br /><span style="color: red;"> Yunfeng Funds have historically, and may in the future, enter into co-investment transactions with us and third parties.</span> We have also invested in other businesses in which Yunfeng Funds are existing shareholders, such as Damai, a leading online ticketing platform for live events in China. In addition, in May 2014, we committed US$80 million as a limited partner of Yunfeng Fund II, L.P. through one of our investment vehicles, Alibaba Investment Limited. In addition, Yunfeng Fund, L.P. was an indirect holder of approximately 84,600 convertible preference shares purchased by an entity wholly-owned by it in September 2012, and the convertible preference shares were automatically converted into our ordinary shares upon the completion of our initial public offering in September 2014.</span><br />
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<b><span style="font-size: large;"><u style="background-color: white;">Heads I win Tales You Lose.....fun with Simon and Yuzhu!</u></span></b><br />
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<span style="background-color: white;">So now we've established that, in April of 2015, Jack, Simon and Yuzhu Shi have taken the US$1 Billion personal bank loan, guaranteed by Alibaba (US Shareholders) collateralize by pledged Alibaba Wealth Management Product(s) (WMP's) and invested the proceeds in <i>Wasu Media</i> (or whatever their little hearts desired) at the apparent peak market valuation of <i>Wasu</i>.</span><br />
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<span style="background-color: white;">We also know that Yuzhu Shi was run out of the NYSE under a<span style="color: blue;"><b> <a href="http://securities.stanford.edu/filings-documents/1052/GIGI00_01/2014619_r01c_14CV02177.pdf" target="_blank"><span style="color: blue;">flurry of shareholder lawsuits</span></a></b></span>, re: Generally, his failure to disclose material events, failure to act in the best interest of US Shareholders and his involvement in <a href="https://www.prnewswire.com/news-releases/giant-interactive-issues-a-statement-to-clarify-recent-misinformation-resulting-from-an-online-article-238858831.html" target="_blank"><span style="color: blue;"><b>YunFeng Capital </b></span></a>when he "confiscated" Giant Interactive at an artificially deflated price per share. The players never seem to change. </span><br />
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<span style="background-color: white;">We've also seen all sorts of off the books machinations with <i>Alibaba Health</i> resulting in book gains and carrying values well above the current market value for these shares with no hint of a required write down/off in the filings.</span><br />
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<span style="background-color: white;">We fully understand that throughout these filings, Alibaba Management has continually given notice to US Investors that Jack Ma and other managers and "partners" are engaged in numerous other transactions with Ant, Yunfeng, and other related parties that may or may not be in the best interest of US Shareholders.</span><br />
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<span style="background-color: white;">In the good old days, when management acted in their own best interest, casting asunder the interests of their shareholders we used to call it "white collar crime". Now it seems to be SOP. (Shanghai Operating Procedure)</span><br />
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<span style="background-color: white;">But wait, there's more.....in a recent <span style="color: blue;"><b><a href="https://www.morningstar.com/news/pr-news-wire/PRNews_20180214HK05840/qlink-teams-up-with-block-array-to-enable-network-access-for-trucks-in-transit.html" target="_blank"><span style="color: blue;">Morningstar article</span></a> </b></span>(You know Morningstar.....the wonderful organization which rates all of your mutual funds and investments...) we find that Simon Xie and Yuzhu Shi have formed yet another set of formidable, world changing ventures. I'm hoping that Morningstar, since the article was displayed prominently in their "Market News" tab, has verified at least some of the information in this article, after all, they are indeed a trusted platform giving investment advice to millions of US Investors. Here's a condensed summary of the article:</span><br />
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<li><span style="background-color: white;"><span style="color: #151515; font-family: "verdana" , "arial" , "helvetica" , sans-serif; font-size: 13px;">Qlink and Block Array today announced that they have signed a Memorandum of Understanding (MoU) to work together........</span><span style="color: #151515; font-family: "verdana" , "arial" , "helvetica" , sans-serif; font-size: 13px;">Qlink was co-founded by a team of blockchain and telecom innovators.....</span><span style="font-family: "verdana" , "arial" , "helvetica" , sans-serif; font-size: 13px;"><span style="color: #151515;">Qlink has a strong investor and advisory board such as </span><b><span style="color: red;"><i>Xie Shihuang (Simon Xie)</i></span></b><span style="color: #151515;">, one of the co-founders of Alibaba....</span></span><span style="color: #151515; font-family: "verdana" , "arial" , "helvetica" , sans-serif; font-size: 13px;">.......</span><span style="color: #151515; font-family: "verdana" , "arial" , "helvetica" , sans-serif; font-size: 13px;">Block Array is a blockchain startup based in </span><span class="xn-location" style="border: 0px; box-sizing: border-box; color: #151515; font-family: "verdana" , "arial" , "helvetica" , sans-serif; font-size: 13px; font-stretch: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">Chattanooga, TN</span><span style="color: #151515; font-family: "verdana" , "arial" , "helvetica" , sans-serif; font-size: 13px;"> focused on applying vertically integrated blockchain solutions to amolerate issues facing 3rd-party logistics companies, supply chain management and the logistics industry......</span><span style="color: #151515; font-family: "verdana" , "arial" , "helvetica" , sans-serif; font-size: 13px;">The joint partnership was defined and put together by Amplifi Capital</span><span style="color: #151515; font-family: "verdana" , "arial" , "helvetica" , sans-serif; font-size: 13px;">, an early stage investor in both companies.</span><span style="color: #151515; font-family: "verdana" , "arial" , "helvetica" , sans-serif; font-size: 13px;"> </span></span></li>
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<span style="font-family: inherit;">Who is Qlink you ask? Qlink was founded by Alan Li and the folks from YouYou Mobile of course. <span style="text-align: justify;">Alan Li is the founder and former CEO of the company, which after only a few short years in business, apparently no longer exists? Here's the video of the</span><span style="text-align: justify;"><span style="color: blue;"> <b><a href="https://www.youtube.com/watch?v=ky2SQvQ_TYs" target="_blank">YouYou "Manager" giving the YouYou pitch</a></b> </span></span><span style="text-align: justify;">in May of 2015. At the time she represented that they were growing at "35% to 40% per month" and caught up to their much bigger, ten year old competitor in just a couple of years. Apparently they invented the "mobile hot spot". </span></span></span><br />
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<span style="font-family: inherit;"><span style="text-align: justify;">Their<span style="color: blue;"> <a href="https://translate.google.com/translate?hl=en&sl=zh-CN&u=http://www.youyoumob.com/&prev=search" target="_blank"><b><span style="color: blue;">dubious website coverage map</span></b></a> </span>indicates they have coverage just West of Hudson Bay, Northern Siberia and Iran. They don't offer coverage in places like "London" and "China". You can get WiFi in NYC for RMB 39/day. They even have a picture of the Statue of Liberty illustrating their commitment to the United States market! Perhaps they haven't heard that many places in America, like, for example, nearly every hotel, coffee shop and restaurant, etc. already provide free Wifi..... and nearly every smart-phone sold today can also be used as a WiFi hot-spot. I'd guess that this development might have hurt their business model, but they are apparently unfazed and marching on. </span></span></span><br />
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<span style="font-family: inherit;">I also have to admit that it was strategic brilliance for a </span><span style="text-align: justify;">tech titan like Qlink to team up with a cutting edge, secretive, block-chain innovator like BlockArray, located in the silicon valley of the Bible-belt, Chattanooga, Tennessee. I also have to admit that, presumably because of BlockArray's high security and secretive nature, it was a little difficult to track down anything about this company. </span><span style="font-family: inherit;">When I started my detective work, I knew I had to start out in the birthplace of all that is tech in America, the <a href="https://wyobiz.wy.gov/Business/FilingDetails.aspx?eFNum=194233093042252065214212135204218164137096245026" target="_blank"><span style="color: blue;"><b>Wyoming Secretary of State</b></span></a>. </span></span><br />
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<span style="background-color: white;"><span style="font-family: inherit;">According to the State of Wyoming, <a href="https://blockarray.com/" target="_blank"><b><span style="color: blue;">BlockArray LLC</span></b></a> was first incorporated in Wyoming on 12/4/17 </span><span style="font-family: inherit;">with its principal address at 1953 WATERBURY LN, </span></span><span style="background-color: white; font-family: inherit;">CHATTANOOGA, TN 37421 USA.</span></div>
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<span style="background-color: white;">Here's the Google view of the address at 1953 Waterbury Lane which, oddly enough, is a nice, single family home in an upscale Chattanooga, residential neighborhood.</span></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjIk7scQ6RktmDZVa_n-6PFPy_X-635HX6yGSq7V81B-n66-Hg30BDaQ_1L-x2_NNAL7p6VI4xl_ILr8ei0z9_6gq2E41g2-40zSVtTupuOC4ZCDkeV_hkk3_A9NZErivgQzKxCH1Td3dY/s1600/Block_Array_1953_Waterbury_Chatanooga.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-left: 1em;"><span style="background-color: white;"><img border="0" data-original-height="504" data-original-width="975" height="330" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjIk7scQ6RktmDZVa_n-6PFPy_X-635HX6yGSq7V81B-n66-Hg30BDaQ_1L-x2_NNAL7p6VI4xl_ILr8ei0z9_6gq2E41g2-40zSVtTupuOC4ZCDkeV_hkk3_A9NZErivgQzKxCH1Td3dY/s640/Block_Array_1953_Waterbury_Chatanooga.png" width="640" /></span></a></div>
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<span style="background-color: white; color: #151515; font-family: "verdana" , "arial" , "helvetica" , sans-serif; font-size: 13px;"><span style="color: black; font-family: "times new roman"; font-size: small;"><br /></span></span>
<span style="background-color: white; color: #151515; font-family: "verdana" , "arial" , "helvetica" , sans-serif; font-size: 13px;"><span style="color: black; font-family: "times new roman"; font-size: small;"><br /></span></span>
<span style="background-color: white; color: #151515; font-family: "verdana" , "arial" , "helvetica" , sans-serif; font-size: 13px;"><span style="color: black; font-family: "times new roman"; font-size: small;"><br /></span></span></span>Even more confusing, when we perform searches on this address, the only business that comes up is <a href="https://www.chamberofcommerce.com/chattanooga-tn/39492194-larry-schmitt-construction-inc"><span style="color: blue;"><b>Larry Schmitt Construction</b></span></a> per the Chattanooga Chamber of Commerce. Like any good detective/journalist/blogger, I decided to give them a call <b>(Phone: 423-344-0076)</b> since both <span style="background-color: white;"><span style="background-color: white; font-family: inherit;">BlockArray and Larry Schmitt Construction were apparently living under the same roof. But after several failed attempts, no answer and no ability to leave a message, I tried to call the phone number listed on the<b><span style="color: blue;"> </span></b></span></span><b><a href="http://www.siclists.com/tennessee/chattanooga/Larry-Schmitt-Construction-Inc_5hst.html" target="_blank"><span style="color: blue;">Larry Schmitt Construction's SIC Listing</span></a></b><span style="background-color: white;"><span style="background-color: white; font-family: inherit;"> </span><b style="background-color: white; font-family: inherit;">(Phone: 423-899-6177)</b><span style="background-color: white; font-family: inherit;">, again with no</span><span style="background-color: white; font-family: inherit;"> answer and no ability to leave a message. Maybe I'm being overly critical, but I'd think that the inability to get someone to answer the phone and/or leave a message must really cut into their business.</span></span><br />
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<span style="background-color: white;"><span style="font-family: inherit;">Next, when we go to the <a href="http://assessor.hamiltontn.gov/Print.aspx?AccountNumber=140899" target="_blank"><span style="color: blue;"><b>Hamilton County Assessors office</b></span></a> we see that 1953 Waterbury Lane is actually owned by a <a href="https://health.usnews.com/doctors/ahmad-ibrahimbacha-767500" target="_blank"><span style="color: blue;"><b>doctor and his wife</b></span></a> who bought the home in September of 2002. So you can imagine my confusion when I found that BlockArray and Larry Schmitt Construction were both registered with agencies such as D&B, SIC, the Wyoming Secretary of State and the Chattanooga Chamber of Commerce all listing their principal business location as a private residence of a pulmonologist currently practicing at Tennova Health Care located in Cleveland, Tennessee. Talk about a paperwork mix up! I'll bet it's really hard to keep all of these records and filings straight. I sure wish, after a half dozen calls to the two listed numbers, that someone would have answered the phone to help explain this silliness to me.</span></span><br />
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Per the Morningstar Report, the third company involved in this triumvirate of Tech Superstars is Amplifi Capital. Unfortunately, when I clicked on the Amplifi link listed in the Morningstar report, my anti-virus software gave me the dreaded DO NOT OPEN THIS LINK! message so I won't post the link here. Moreover, when we perform a <a href="https://registrydb.com/amplifi.capital" target="_blank"><span style="color: blue;"><b>"WhoIs" search for Amplifi.Capital's (infected) website</b></span></a> listed in the Morningstar report we see that the Website was created on 1/20/2018, with the registered owner listed as "Anonymous" with a street address of: </span><br />
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<span style="background-color: white;">P.O. Box 0823-03411</span><br />
<span style="background-color: white;">Panama, Panama </span><br />
<span style="background-color: white;">Phone 507-836-5503</span><br />
<span style="background-color: white;">Fax 511-705-7182</span><br />
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<span style="background-color: white;">That makes perfect sense. Reputable financial businesses usually put up a new, infected website in Panama a few weeks before their first documented public appearance in Morningstar.</span><br />
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<span style="background-color: white;"><span style="background-color: white;">I did indeed also locate another, similar "</span></span><b><u><a href="http://amplifi-capital.com/" target="_blank"><span style="color: blue;">Amplifi-Capital</span></a></u></b><span style="background-color: white;"><span style="background-color: white;"><span style="color: blue;">"</span> link which is a Singapore based small business loan company specializing in "daily payment" auto-bank-draft, high interest rate loans for quasi-un-bankable businesses. Interest rates at Amplifi-Capital generally run between 30% and 75% APR. They are apparently the saints of the e-Lending loan shark industry. Interestingly, there is no mention of "knee caps" on the website.</span></span><br />
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If I were to guess, the Amplifi Capital mentioned in the Morningstar press release is actually the small business lender "partnering" with BlockArray and Qlink. The "DO NOT OPEN THIS LINK" site is probably just another fake site dedicated to making the rough lives of already desperate, naive borrowers just a little bit worse than they already are. </span><br />
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The Amplifi.Capital moniker was also probably chosen by the operators of the infected/fake site to misdirect naive investors into believing that the company actually exists. People being scammed usually feel more comfortable handing over account numbers if the truly believe an enterprise is legitimate. As an aside, if I were coming up with a fake scheme like this I might have created fake financing websites with more credible names such as JPMorgin.com or CityBank.com.....these site names might have been more believable. </span><br />
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<span style="background-color: white;">So now that we've figured out the parties involved, lets dig down a little further.....</span><br />
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<span style="background-color: white;">Oh my goodness! How fortuitous! Qlink has also pioneered a brand new cryptocurrency! Beginning on 1/16/18 their currency (QLC) began trading with a "Market Cap" of US$ 112 Million. I'm absolutely sure that this must be Simon Xie's brainchild. Isn't that wonderful! Simon's QLC currency trades primarily on the KuCoin (HK) exchange right now, but I'm guessing, for reasons described below, that it will soon be a mainstay cryptocurrency dominating the OKCOIN crypto-exchange.</span><br />
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<b><a href="https://coinmarketcap.com/currencies/qlink/"><span style="background-color: white; color: blue;">https://coinmarketcap.com/currencies/qlink/</span></a></b><br />
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<span style="background-color: white;">Not to be outdone by his long time friend and partner, we also note that Yuzhu Shi has also gone "all in" on the cryptocurrency phenomenon and has been identified as <a href="http://bitcoinist.com/chinese-billionaire-and-giant-network-ceo-invests-tens-of-millions-acquires-10-stake-in-okcoin/" target="_blank"><span style="color: blue;"><b>spending "tens of millions" to acquire a 10% stake in OKCOIN</b></span></a>. Here's the text from <a href="https://btcmanager.com/can-hong-kong-bitcoin-market-replace-state/" target="_blank"><span style="color: blue;"><b>one of many press releases</b></span></a>.</span><br />
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<span style="background-color: white; color: #777777; font-family: "cuprum"; font-size: 17px;">Giant Network Group and its founder Yuzhu Shi operate one of the largest internet ventures in China. The market valuation of Giant Network Group is more than $11 billion, and its investment into OKEx is said to be the first direct investment made to a cryptocurrency exchange by a multi-billion dollar Chinese conglomerate.</span><br />
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<span style="background-color: white;">I ask you, can the exploits of these high flying executives get any goofier? I mean really? Cryptocurrency? Brand new fake companies? Untraceable documentation? Filings with the Wyoming Secretary of State and D&B? Infected websites hosted in Panama? Addresses referenced leading us to residential neighborhoods in "Good Old Rocky-Top"? Are you kidding me? </span><br />
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<b><u><span style="background-color: white; font-family: inherit; font-size: large;">Connecting the Dots...</span></u></b><br />
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Is any press release "real" anymore? As investors, do we have to investigate the veracity of every statement made to us? Do we really need to question everything that the armies of promoters tell us? Has "telling the truth" just become an occasional foray from the norm or perhaps an unachievable Utopian condition to aspire to? <br />
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<span style="font-family: inherit;">The point I'm making here is that, first, all of these parties, the principals, businesses, financiers and lawyers (Sullivan & Cromwell, Skadden-Arps, Fangda, etc.) are all horrifically interconnected. Jack Ma, Simon Xie, Yuzhu Shi, Yunfeng, Giant, Ant, etc. and their bankers and lawyers are listed, mentioned and referenced all over every one of these press releases and filings. The same names keep coming up everywhere we look. No matter how absurd, self serving and opaque the layers of these deals appear, the connections are indisputable. </span><br />
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<span style="background-color: white;">Second, given the above, could you imagine what might happen to the credibility of US Markets and the resulting <i>capital formation</i> if it became widely known that Warren Buffett, Jamie Dimon, Lloyd Blankfein, Larry Fink, or any number of other iconic American Investors were routinely setting up special purpose transactional entities specifically designed to take advantage of minority shareholders, siphoning off cash from whatever real (or fake) earnings there might be? Could you imagine what might happen if the SEC sat idly by while the giant-sucking-siphoning-sound went simply unheard and unnoticed by any regulatory body, for any period of time? I'd think it might be logical that the giant-sucking-siphoning-sound would become so deafening, and the playing field become so uneven that it would be impossible for even the most naive retail shareholders not to hear it. Consequently, the acceleration of the <i>capital formation</i> process that congress and the SEC seem so concerned about promoting, would be irreparably damaged. </span></div>
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<span style="background-color: white;">Here's a list of the current "<i>Capital Formation</i>" brought to US Investors courtesy of Chinese entrepreneurs as a result of the unfettered involvement of US Investment Banks and Wall Street Lawyers. </span></div>
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<span style="background-color: white; font-family: inherit;">As we see from the above, at of the end of February we currently had 183 Chinese Stocks trading on US Exchanges with an aggregate Market Cap of roughly US$2.23 Trillion. If I were to guess (I'm sure one of my readers has the actual number), roughly 600 or so Chinese stocks were initially listed (IPO'd) on US Exchanges over the last decade or so, the above, unfortunately are all that are left. The remaining 400+ "China Dream" businesses have been de-listed, taking US Shareholder money with them. </span></div>
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<span style="background-color: white; font-family: inherit;">Moreover, if I were to take an educated guess, right now total Market Cap of all foreign stocks listed on US Exchanges is approaching US$9 Trillion or roughly 20% of total US Exchange Traded Equities, presuming that the ratios from my "<a href="https://deep-throat-ipo.blogspot.com/2017/04/an-ipo-that-investors-snapped-up.html" target="_blank"><span style="color: blue;"><b>An IPO Investors Snapped up....</b></span></a>" post last April still hold. In that same post I also reflect on the uneven, advantageous, playing field that foreign stocks/ADR's are granted when listing on US Exchanges. The short answer is, unlike US Companies, foreign IPO's listing on US Exchanges are comparatively unregulated, with any penalties or sanctions for misconduct substantially unenforceable against foreign "Bad Actors". I'd invite anyone reading today to revisit that post if you are not already familiar with it. Based on the current regulatory climate, rather than tighten up the filing requirements and review process on dubious foreign listings, it looks like Congress is going to level the playing field and encourage capital formation by removing oversight on US stocks. Well, though not the direction I would have gone, I guess that's one way to even the score card. <span style="font-size: 14px;"> </span></span></div>
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<b><u><span style="font-family: inherit; font-size: large;">Jay Clayton</span></u></b></div>
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<span style="font-family: inherit;"><span style="background-color: white;">The first thing I'd like to say about Jay Clayton is that he's absolutely brilliant. Any professional who is at all familiar with his work would be hard pressed not to come to the same conclusion. The second thing I'll say is that Jay seems like a really nice guy. He handles himself well. He seems affable and genuine. Frankly, when this is all over and the dust clears, I'd love to sit down, have a Yuengling or two with him and get his thoughts on what happened. </span></span><br />
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<span style="font-family: inherit;">Unfortunately, as investors learn time and time again, things aren't always as they appear to be. Given the above, I'll also suggest that the best course of action Jay could possibly take for himself, his wonderful family and US Investors would be to resign and go back to Sullivan & Cromwell where he presumably had a great career and a wonderful, charmed life. I truly hope he's listening.</span></div>
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<span style="font-family: inherit;">As my readers know, I don't make these career suggestions lightly. When I first wrote in December of 2015 that Yahoo!, as was currently constituted, would soon be out of business and <span style="color: blue;"><b><a href="https://deep-throat-ipo.blogspot.com/2015/12/breaking-news-yahoo-ceo-marissa-mayer.html" target="_blank"><span style="color: blue;">Marissa Meyer would have to resign</span></a></b></span>, I had recognized and described Marissa's situation in detail roughly a year and a half before she actually chose to step down. </span></div>
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<span style="font-family: inherit;">Like Jay's current plight, at the time, Marissa was a victim of an unalterable circumstance of her own creation, trying to manage her way out of an inevitable future. Because both Marissa and Jay were/are examining their options through the only lens they know, the same lens that clouded their vision initially, Marissa never stood, and Jay doesn't stand any chance at all of succeeding. </span><br />
<span style="font-family: inherit;"><br /></span><span style="font-family: inherit;">Jay and Marissa are the type of folks that any compassionate person just can't help but feel empathy for. I believe I expressed my feelings pretty well in my comment on Ms. Meyer at the time.....</span></div>
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<span style="font-size: 13.2px;"><span style="color: blue; font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif;"><b>"As if Mother Theresa's frock were caught on railroad tracks.....there's nobody rooting for the train."</b></span></span></div>
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Of course, as an Investor, I'm pulling for Jay to somehow get us all out of this mess, but again, I'm sorry to say I don't see any chance of that happening. Since Jay is a fighter, like Marissa, Id also expect him to keep throwing punches and hang in to the bitter end. It really is a shame.</div>
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Don't get me wrong.....Marissa and now Jay will do fine. They'll somehow land on their feet. Again, what's happening today is just another somber illustration of good people finding themselves in the wrong place at the wrong time.</div>
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<span style="background-color: white;">All of that said, the best starting point for us to get to know Jay and see how he thinks, is through the video of his 2 hour, 39 minute confirmation hearing and related transcript, as well as his recent SEC white paper on </span>Cryptoc<span style="background-color: white;">urrency. Links below:</span></div>
Jay Clayton Confirmation Hearing - Transcript<br />
<a href="https://www.gpo.gov/fdsys/pkg/CHRG-115shrg24998/html/CHRG-115shrg24998.htm"><span style="color: blue;"><b style="background-color: white;">https://www.gpo.gov/fdsys/pkg/CHRG-115shrg24998/html/CHRG-115shrg24998.htm</b></span></a><br />
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Jay Confirmation Hearing - Video<br />
<b><span style="color: blue;"><a href="https://www.banking.senate.gov/public/index.cfm/2017/3/nomination-hearing"><span style="background-color: white; color: blue;">https://www.banking.senate.gov/public/index.cfm/2017/3/nomination-hearing</span></a></span></b><br />
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<span style="background-color: white;"><a href="https://frontera.net/news/asia/the-13-chinese-companies-that-listed-on-us-stock-exchanges-in-2017/">J</a>ay Clayton's view on crypto-currency </span><br />
<b><span style="color: blue;"><a href="https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11"><span style="background-color: white; color: blue;">https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11</span></a></span></b><br />
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<b><u><span style="font-family: inherit; font-size: large;">Jay's Confirmation Hearing</span></u></b></div>
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<span style="background-color: white; font-family: inherit;">Well, as always, in my zeal to save my readers some valuable time and effort, I've pasted some of the more relevant exchanges between Jay and the Senators on the Senate Banking Committee below. </span></div>
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<span style="background-color: white; font-family: inherit;">Surprisingly, at least to me, the only mention of Alibaba was Jay's veiled reference to his work on the "World's Largest IPO" min 27:50 of the video. That's it! As I've said in previous posts and is well documented, Mr. Clayton's fingerprints are all over Alibaba. Beginning with his relationship and friendship with Joe Tsai </span><span style="background-color: white;">when they worked together at Sullivan & Cromwell, to his authorship and participation in every piece of intentionally confusing, back-peddling SEC Q&A correspondence leading up to the IPO, Mr. Clayton's stamp of "what can I say to make this go away?" obfuscation was apparent at every turn. </span><span style="background-color: white; font-family: inherit;"> </span><br />
<span style="background-color: white; font-family: inherit;"><br /></span><span style="background-color: white; font-family: inherit;">For whatever reason, none of the Senators chose to ask any questions as to how this amazing, US$500 Billion Chinese ADR gorilla, that nobody understands, came to be listed on the NYSE. </span></div>
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<span style="background-color: white; font-family: inherit;">As expected in these hearings, the Senators favoring the appointment generally went on record describing what a great SEC Chair Jay would become once he's confirmed, further explaining how he would protect their "little guy" constituents. The non-supportive Senators circularly talked in circularity regarding potential conflict(s) of interest. These less than complimentary exchanges, as you would expect when appointing a highly regarded securities lawyer from a large Wall Street firm to regulate securities issued by other large Wall Street firms with significant PAC and lobbying resources, largely fell on deaf ears.</span></div>
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<span style="background-color: white; font-family: inherit;">Given the aforementioned, I'd be remiss If I didn't use all of my available resource to get to the bottom of what really happened in the hearing. To that end, presumably to wild enthusiasm on your part, I've once again brought out our patented <b style="font-style: italic;">Dick Fuld Banker-Speak Translator (BST)</b> to interpret exactly what was "really" said in the hearing. Feel free to follow along on the <span style="color: blue;"><a href="https://www.banking.senate.gov/public/index.cfm/2017/3/nomination-hearing" style="color: blue; font-weight: bold;" target="_blank">video clip</a><span style="color: blue; font-weight: bold;"> </span></span></span>as you read the interpretation:<br />
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The General format of the 5 minute Q&A is as follows:<br />
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<b><u>Republicans:</u></b> "I'd like to use my first 4 minutes talking about what a great job I'm doing for my constituents.....and the last minute explaining while you'll make a great SEC Chair......then you can say what you like...."<br />
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<b><u>Democrats:</u></b> "I hate you and here's why......don't you say a F$%^#ing word...."</div>
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<b><i><u style="background-color: white;">Min 29:30</u></i></b></div>
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<span style="background-color: white;"><b><u>Mr. Clayton.</u> </b>I am 100 percent committed to rooting out any fraud and
shady practices in our financial system. I recognize that bad
actors undermine the hard-earned confidence that is essential
to the efficient operation of our capital markets. I pledge to
you and to the American people that I will show no favoritism
to anyone.</span><br />
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<span style="background-color: white; color: red;"><b style="text-decoration-line: underline;"><u>Mr. Clayton. (BST):</u></b> Let me see....yes here it is in my notes.....If I can find any bad actors <br />that are not former or current clients of my former firm I will absolutely throw them under the bus. </span><br />
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<b><i><u style="background-color: white;">Min 30:20</u></i></b><br />
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<span style="background-color: white;"><b><u>Mr. Clayton. </u></b>In recent years, our markets have faced growing competition from abroad. U.S. listings by non-U.S. companies have slowed dramatically. More significantly, it is clear that our public capital markets are less attractive to business than in the past. As a result of these developments, investment opportunities for Main Street investors are more limited. Here I see meaningful room for improvement.</span></div>
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<span style="background-color: white; color: red;"><u><b>Mr. Clayton. (BST):</b></u> Hey...things are tough out on the streets. It's getting nearly impossible to find even close-to-believable Chinese Ponzi schemes ....right now there are only US$9 Trillion in foreign stocks listed on US exchanges....how are lawyers supposed to generate billable hours? Sullivan & Cromwell would go bust without all of these shams! We get paid to get them listed and paid again for the related defense work when they go bust....and the work is drying up......THIS IS UNACCEPTABLE! </span><br />
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<b><i><u style="background-color: white;">Min 32:00</u></i></b><br />
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<span style="background-color: white;"><b><u>Mr Clayton:</u></b> As far as the extent of my practice and whether the recusals that would be required and the potential conflicts will impair my ability to act as Chair of the Securities and Exchange Commission, I do not believe they will do so. I have discussed this at length with the SEC Ethics Office, with the Office of Government Ethics. This is not a new issue. There is a protocol in place for dealing with those matters. Most importantly, I believe that if I am recused, that my fellow Commissioners will be able to handle the matters ably and to good effect.</span></div>
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<span style="background-color: white; color: red;"><u style="font-weight: bold;">Mr. Clayton. (BST):</u> I probably won't need to recuse myself very often, remember, I'll be the boss. I can direct resources wherever I think they should go and decide who we go after. If some staff attorney comes into my office asking for permission to look into something I'm not all that keen on investigating......off to the mail room they go! </span><br />
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<b><i><u style="background-color: white;">Min 38:00</u></i></b></div>
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<span style="background-color: white;"><b><u>Mr. Clayton. </u></b>Senator, as I said in my opening statement and
I will repeat, if I am lucky enough to be confirmed, I am
committed to showing no favoritism to anyone in this position.</span></div>
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<span style="background-color: white; color: red;"><u style="font-weight: bold;">Mr. Clayton. (BST):</u> Jeezzz....I really hate repeating myself. These guys just don't get what's happening here.</span></div>
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<b><i><u style="background-color: white;">Min: 43:00</u></i></b><br />
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<span style="background-color: white;"><b><u>Senator Shelby:</u></b> I believe attorneys should never be judged by the parties
that they represent but, rather, by the quality of the
representation that they provide.</span></div>
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<span style="background-color: white; color: red;"><u style="font-weight: bold;">Senator Shelby (BST):</u> Hey I really like that line....I can't believe I came up with it.....maybe I can use it again when we get rid of Chris Wray and try to appoint Bruce Cutler, Gotti's lawyer, as the new FBI director.....he'll know where all the bodies are buried....theoretically of course...and I'm sure if he has a disagreement with the Gambino Family that they'll work it out amicably.</span></div>
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<b><i><u style="background-color: white;">Min 55:20</u></i></b></div>
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<span style="background-color: white;"><b><u>Senator Corker:</u></b> I just want to close with this, Mr. Chairman. I know there
has been some criticism of the type of people that Mr. Clayton
has represented. I used to build shopping centers around the
country and feel like I know the business pretty well and think
if this body decided there was going to be some shopping center
regulatory body, I think that would be really good.
[Laughter.] Because I know the business. And, look, I
know that you have represented numbers of large clients, and my
guess is some of them were jerks. OK? And you watched--
seriously, you watched some of your clients do some really
jerky things. And then you watched some of them do some really
great things. And my sense is that someone like you who has
represented the broad array of people that you have represented
really knows the good actors from the bad actors more so than
people who come from the outside.</span></div>
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<span style="background-color: white; color: red;"><u style="font-weight: bold;">Senator Corker (BST):</u> I thought it would be better if I referred to your criminal clients as "jerks doing jerky things". It just sounds more "down home". I hope you don't mind,</span></div>
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<span style="background-color: white; color: red;"><u style="font-weight: bold;">Mr. Clayton. (BST): </u>(Thinking...not out loud)....Thanks for the courtesy Senator. The truth is, that I've always liked working with criminals. I can charge the "jerky criminals" much higher fees.</span></div>
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<b><u><i style="background-color: white;">Min 1:10:40</i></u></b></div>
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<span style="background-color: white;"><b><u>Senator Cortez Masto. </u></b>So it just comes down to the issue of strict
liability. In other words, can executives--or do you believe
executives should be held liable for misconduct that occurs
under their watch, whether or not they had the initial intent
to do it or knowledge of wrongdoing? In other words, whether it
was just reckless, whether they intentionally did it or whether
it was just reckless disregard, do you agree with this proposal
that there should still be strict liability and they should be
held accountable? </span></div>
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<span style="background-color: white;"><b><u>Mr. Clayton.</u></b> Strict criminal liability without mens rea, I
am not--you know, I am not sure about that. Not something I
have really thought about, but it strikes me as a big step. </span></div>
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<span style="background-color: white;"><b><u>Senator Cortez Masto.</u></b> OK. Is this something that you intend
to look into and really--I guess my concern is the enforcement
side of this and your lack of ability or familiarity with it.
And as you step into this position, that is a key piece of
oversight, and I am just curious your thoughts on how you
intend to pursue or familiarize yourself with the enforcement
side of the job. </span></div>
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<span style="background-color: white;"><b><u>Mr. Clayton.</u></b> Let me try and answer your question as quickly
as I can. In all aspects of this job, if confirmed, I am going
to have to rely extensively on the very good people at the SEC,
both the Division Directors and the staff. I have a lot of
respect for the people at the SEC that I have interacted with,
including on the enforcement staff. And I do have more
familiarity with prosecutors, working with prosecutors, and, in
particular, investigations than most transactional lawyers, and
I hope to bring that experience to bear.</span></div>
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<span style="background-color: white; color: red;"><u style="font-weight: bold;">Senator Cortez Masto (BST).</u> Mr. Clayton, are you prepared to pursue criminal sanctions and jail time against executives who acted recklessly, condoning illegal acts on their watch, when any reasonable person could conclude that they knew or should have known the illegal activity was taking place?</span></div>
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<span style="background-color: white; color: red;"><u style="font-weight: bold;">Mr. Clayton (BST).</u> No.</span></div>
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<span style="background-color: white;"><br /></span>
<b><u><i style="background-color: white;">Min 1:13:30</i></u></b><br />
<span style="background-color: white;"><br /><b style="text-decoration-line: underline;"><u>Senator Kennedy.</u></b> Let me ask you about Sullivan & Cromwell.
It is a big place, blue-chip clients, you know, one of the
premier firms in the world. You do not get to pick your
clients, do you? I mean, if you are a lawyer there and a client
comes in and says, ``I am in trouble, and I need help,'' you do
not say, ``Well, I do not like the color of your suit, go
away''? </span></div>
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<span style="background-color: white;"><b><u>Mr. Clayton.</u></b> Generally not.
[Laughter.]</span></div>
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<span style="background-color: white; color: red;"><b style="text-decoration-line: underline;"><u>Senator Kennedy (BST)</u>.</b> Mr. Clayton, we just want to get it on the record that you haven't spent your entire career working with con artists and scumbags....and the ones you've defended were just assigned to you....you had no choice. Correct?</span></div>
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<span style="background-color: white; color: red;"><b style="text-decoration-line: underline;"><u>Mr. Clayton (BST).</u></b> Oh...yes....I see what you're getting at. Of course, most US Investors just don't understand exactly how large Wall Street law firms work. Let me fill you in. First, there is absolutely no competition for clients between firms. None! It's all random. Here's the way it works. When I come into my office in the morning there's usually a long line of prospects waiting at my door. Most of them are destitute, bordering on homelessness. I meet with them and listen to their pitch. After a few minutes I tell them all the same thing. If you can come up with my $5 million dollar retainer we'll get to work on your case right away!....no promises though.</span></div>
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<b><i><u style="background-color: white;"><br /></u></i></b>
<b><i><u style="background-color: white;">Min 1:25:20</u></i></b></div>
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<span style="background-color: white;"><b><u>Mr. Clayton.</u></b> To your point, it is also my experience that the bad
actors, they have been bad for a long time until they are
caught. And, you know, early on detection would be much better
than later.</span></div>
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<span style="background-color: white; color: red;"><u><b>Mr. Clayton (BST).</b></u> I think it's absolutely critical that we catch these steaming-dog-turd frauds well before they reach a $1 Trillion market cap as long as they aren't any of my firm's former clients.</span></div>
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<b><u><i style="background-color: white;"><br /></i></u></b>
<b><u><i style="background-color: white;">Min 1:29:30</i></u></b></div>
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<span style="background-color: white;"><b><u>Senator Warren. </u></b>Under the President's Executive order for ethics, the first 2 years of your tenure as SEC Chairman you would have to recuse yourself from participating in any enforcement matter involving
a former client of yours. That is about half of your term as
Chair.
So based on your personal client disclosures then, for half
of your tenure as SEC Chair, you would not be able to vote to
enforce the law against several big banks, including Goldman
Sachs, Deutsche Bank, Barclays, and UBS. Is that right? </span></div>
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<span style="background-color: white;"><b><u>Mr. Clayton.</u></b> Yes, Senator. The way---- </span></div>
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<span style="background-color: white;"><u><b>Senator Warren.</b> </u>Thank you. Those banks have repeatedly
violated securities laws in the past few years, but if they
violate securities laws again, in your first 2 years as SEC
Chairman you cannot vote to punish them, and I think that is a
problem. But it is just the tip of the iceberg.
Your recusals would not be limited just to your own former
clients. The ethics Executive order also requires you to recuse
yourself for 2 years from any matter in which your former law
firm, Sullivan & Cromwell, represents a party. Now, Sullivan &
Cromwell is a leading New York law firm with a very long list
of Wall Street clients. So for half of your term as SEC Chair,
you would not be able to vote to punish any corporation or bank
that uses Sullivan & Cromwell as their lawyer. Is that right? </span></div>
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<span style="background-color: white;"><b><u>Mr. Clayton. </u></b>I believe that is a fair summary, Senator,
yes. </span></div>
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<span style="background-color: white;"><b><u>Senator Warren.</u></b> Thank you. More potential cases with a
deadlock and no enforcement, and that is a problem.
And even beyond Sullivan & Cromwell's already long list of
Wall Street clients, any reasonably strategic company that
wanted to try to avoid an SEC enforcement action could simply
hire Sullivan & Cromwell to represent them before the agency,
and then you could not vote for enforcement against that
company. Is that right, Mr. Clayton? </span></div>
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<span style="background-color: white;"><b><u>Mr. Clayton.</u></b> I am not sure about that, Senator. </span></div>
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<span style="background-color: white;"><b><u>Senator Warren.</u></b> Well, you do know the rule that if they are
represented by Sullivan & Cromwell in front of the agency, then
you are going to be banned from being able to vote against
them. </span></div>
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<span style="background-color: white;"><u style="font-weight: bold;">Mr. Clayton.</u> If they are represented by Sullivan & Cromwell
in front of the agency, I would not be able to participate---- </span></div>
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<span style="background-color: white;"><b><u>Senator Warren.</u></b> That was my point. </span></div>
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<span style="background-color: white;"><b><u>Mr. Clayton.</u></b> ----but that does not mean that it would not
be---- </span></div>
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<span style="background-color: white;"><b><u>Senator Warren</u></b>. So more cases--more cases potentially that
you cannot participate in, meaning more cases potentially here with a deadlock and no enforcement. I think that is another problem.</span></div>
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<span style="background-color: white; color: red;"><b><u>Senator Warren (BST)</u></b>. This guy is the worst.....I wonder why the Republican's hate me so much? I can't believe Clayton didn't have anything to say while I was talking over him, cutting him off and interrupting him. What a wimp.</span></div>
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<span style="background-color: white; color: red;"><u style="font-weight: bold;">Mr. Clayton (BST).</u> She just doesn't get it. I have the votes. I'm in.</span></div>
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<span style="background-color: white;"><br /></span></div>
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<b><i><u style="background-color: white;">Min 1:39:20</u></i></b></div>
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<span style="background-color: white;"><b><u>Mr. Clayton. </u></b>Yes, Senator, and if I wanted to say what I
thought my--if I had to pick a single strength that I believe I
would bring to this position in that regard, it does go back to
what I said at the beginning. Being a transactional lawyer,
building a consensus is what your job is. People have different
views. They want to get to a place that is happy for everyone,
and that is very much what my job has been, and I want to
continue to do that if I am confirmed.</span></div>
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<span style="background-color: white;"><u style="color: red; font-weight: bold;">Mr. Clayton (BST).</u><span style="color: red;"> Yup....I'm the king of the happiness fairies....I think my personality is perfect fit for this job. Everyone knows that a good regulator has to be a trusting, nurturing, compassionate soul....sunshine, lollipops and rainbows 24x7....if we are going to fulfill the primary directive of the SEC, which is of course, <i>CAPITAL FORMATION,</i> we have to be facilitators. For example, throughout my career, I was able make Chinese oligarchs rich, generate huge fees for my firm and the Investment Banks we represent while writing protective/defensive filings that nobody could possibly understand! That way when my clients got, get or will get sued we can point to the language and say....see....it's disclosed right here on page 345.....you F-d up....you trusted us! At MY SEC we'll be <i>Capital Formation-ing</i> our asses off.....moving huge amounts of cash out of the pockets of investors who don't know what's going on right into the pockets of promoters and advisers who do! Say Hallelujah!</span></span></div>
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<b><i><u style="background-color: white;"><br /></u></i></b>
<b><i><u style="background-color: white;">Min 1:42:30</u></i></b></div>
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<span style="background-color: white;"><b><u>Senator Menendez.</u> </b>Well, let me ask you this: Does taking
away subpoena power from senior enforcement attorneys better
protect investors and deter misconduct? </span></div>
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<span style="background-color: white;"><b><u>Mr. Clayton.</u> </b>That is--I do not know the answer to that
question. </span></div>
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<span style="background-color: white;"><b><u>Senator Menendez.</u></b> Really?</span></div>
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<span style="background-color: white;"><b><u>Mr. Clayton.</u></b> No, I do not because the subpoena---- </span></div>
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<span style="background-color: white;"><b><u>Senator Menendez.</u></b> In the abstract--forgetting about--just
the proposition that taking away subpoena powers from those
line entities that are engaged in investigating misconduct and
limiting it to only one person and then having to go through a
whole process, it seems to me that we are going to largely
deter and delay investigations. </span></div>
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<span style="background-color: white;"><b><u>Mr. Clayton.</u></b> I think those are good questions. </span></div>
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<span style="background-color: white;"><b><u>Senator Menendez.</u></b> Well, the question--I am looking for good
answers.</span></div>
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<span style="background-color: white; color: red;"><b style="text-decoration-line: underline;"><u>Senator Menendez (BST)</u> </b>So you're fine with taking away subpoena power from SEC staff?</span></div>
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<span style="background-color: white; color: red;"><u><b style="text-decoration-line: underline;">Mr. Clayton (BST).</b> </u>I'm sorry Senator, It's actually moot. We're going to issue so few subpoenas I can probably just take care of it myself on weekends. I'm a hands-on guy. I think the SEC even reimburses mileage.</span></div>
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<b><i><u style="background-color: white;">Min 1:47:20</u></i></b></div>
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<span style="background-color: white;"><b><u> Mr. Clayton.</u></b> In particular, I believe, for medium-sized
companies, companies that are in their growth phase, we have
made it more difficult and less relatively attractive for them
to be public companies. I think that almost all---- </span></div>
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<span style="background-color: white;"><b><u>Senator Tillis</u></b>. What do we have to do to get on a positive
trajectory? </span></div>
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<span style="background-color: white;"><b><u>Mr. Clayton. </u></b>You know what? We have to reduce the burdens
of becoming a public company so that it is more attractive----</span></div>
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<span style="background-color: white; color: red;"><b><u>Senator Tillis (BST)</u></b>. Do you have any hot stock tips? </span></div>
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<span style="background-color: white; color: red;"><b style="text-decoration-line: underline;"><u>Mr. Clayton (BST).</u> </b> We can talk later....</span></div>
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<b><i><u style="background-color: white;">Min 1:59:00</u></i></b></div>
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<span style="background-color: white;"><b><u>Senator Perdue. </u></b>What do you think the SEC can do to help us become more competitive with the rest of the world?</span></div>
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<span style="background-color: white;"><b><u>Mr. Clayton.</u></b> Yes, Senator, and I agree with you. I believe
that a reduction in the number of public companies, which is a
function of fewer companies becoming public, is a problem for
our capital markets.
The ability to invest in a public company is one of the
most efficient ways for a Main Street investor to invest. The
price is there. Our equity markets have become very efficient.
You can invest. You can divest very easily. It is very
important. Who chooses to become a public company? The
management of the company. When they come to make that choice
as to where they are going to raise capital or how they are
going to incentivize their employees or other things that are
important when you make these decisions, they look at the
landscape now and very often say, ``It is just too
burdensome.'' And I think that is a problem. </span></div>
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<span style="background-color: white;"><b><u>Senator Perdue.</u></b> Do you think that puts us at a competitive
disadvantage with other countries? </span></div>
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<span style="background-color: white;"><b><u>Mr. Clayton.</u></b> I think it puts us at a competitive
disadvantage with other countries, and in particular, it puts
us at a competitive disadvantage in terms of something uniquely
American: the participation in the capital markets.</span></div>
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<span style="background-color: white; color: red;"><b><u>Senator Perdue (BST).</u></b> So what can we do to keep this "level playing field" charade going? </span></div>
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<span style="background-color: white; color: red;"><b style="text-decoration-line: underline;"><u>Mr. Clayton (BST)</u>.</b> Well, we did the dot.com thing, then the Mortgage thing, now we've got the ADR thing, when that blows up we're going to have to come up with another systemic excuse, drag Lloyd, Jamie and the boys in front of Congress and bitch 'em out...... and then invent yet another dumb-ass thing to sell to US Investors.....I'm thinking cryptocurrency is a possibility....but we're still working out the details on it. </span></div>
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<b><u><i style="background-color: white;">Min 2:22:00</i></u></b></div>
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<span style="background-color: white;"><b><u>Mr. Clayton.</u></b> I worry about where the risks are today. Now, the risks in 2007, 2008 were in one aspect of our economy, and it got away from us, very much got away from us, and we did not--I worry about where those risks are housed today and making sure that we do not have a repeat of that type of situation.</span></div>
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<span style="background-color: white; color: red;"><u><b><span style="text-decoration-line: underline;">Mr. Clayton (BST).</span> </b></u> I know exactly where these risks are and I'm glad my colleagues and I could pull enough money out of this looming train wreck before it goes off the rails. Hopefully we can keep it together a little while longer....and make a few more bucks off of this pony ride before the pony keels over and the music stops. </span><br />
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<b><u><i style="background-color: white;">Min 2:26:50</i></u></b></div>
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<span style="background-color: white;"><b><u>Senator Cortez Masto.</u></b> My question to you, though, was: At the end of the
enforcement matter, once it is settled and done, at that point
in time would you be willing to even change a policy if it is
different than what I am asking you to identify 1.) if you recused
yourself on that particular matter, and then 2.) why you had to
recuse yourself? </span></div>
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<span style="background-color: white;"><b><u>Mr. Clayton. </u></b>I am very open to having that dialog with the
SEC Ethics Officer and the people at the SEC who have
experience with this--it is not a new issue--finding out what
has been done in the past, and discussing it with you.</span></div>
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<span style="background-color: white; color: red;"><b style="text-decoration-line: underline;"><u>Senator Cortez Masto. (BST)</u></b> So are you going to tell us anything about your position on any enforcement actions?</span><br />
<span style="color: red;"><u><b style="background-color: white;"><br /></b></u></span>
<span style="background-color: white; color: red;"><u><b>Mr. Clayton (BST).</b></u> Nope....That ain't happenin'....</span></div>
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<span style="background-color: white;"><b><u><span style="font-family: inherit; font-size: large;"><br /></span></u></b>
<b><u><span style="font-family: inherit; font-size: large;">Mr. Clayton's View on Crypto Currency</span></u></b></span><br />
<span style="background-color: white;"><span style="font-family: inherit; font-size: large; font-weight: bold;"><br /></span>Finally, the chair of the SEC, the head of the only organization standing between promoter fraud and naive investors, the cop on the beat, our protector and the enforcer of sanctions against "bad actors" has commented, in shockingly vague, wishy-washy detail, on <a href="https://www.sec.gov/news/public-statement/statement-clayton-2017-12-11" target="_blank"><span style="color: blue;"><b>the role of Cryptocurrency in the new economy</b></span></a>. Here's his conclusion. </span><br />
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<span style="border: 0px; box-sizing: border-box; font-family: inherit; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: 600; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"><u style="border: 0px; box-sizing: border-box; font-family: inherit; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;">Conclusion</u></span></div>
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We at the SEC are committed to promoting capital formation. The technology on which cryptocurrencies and ICOs are based may prove to be disruptive, transformative and efficiency enhancing. I am confident that developments in fintech will help facilitate capital formation and provide promising investment opportunities for institutional and Main Street investors alike. </div>
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I encourage Main Street investors to be open to these opportunities, but to ask good questions, demand clear answers and apply good common sense when doing so. When advising clients, designing products and engaging in transactions, market participants and their advisers should thoughtfully consider our laws, regulations and guidance, as well as our principles-based securities law framework, which has served us well in the face of new developments for more than 80 years. I also encourage market participants and their advisers to engage with the SEC staff to aid in their analysis under the securities laws. Staff providing assistance on these matters remain available at <a class="0" href="mailto:FinTech@sec.gov" style="background: transparent; border: 0px; box-sizing: border-box; color: #757575; font-family: inherit; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; text-decoration-line: none; vertical-align: baseline;">FinTech@sec.gov<span class="0" style="border: 0px; box-sizing: border-box; font-family: inherit; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"><span class="element-invisible" style="border: 0px; box-sizing: border-box; font-family: inherit; font-stretch: inherit; font-style: inherit; font-variant: inherit; font-weight: inherit; line-height: inherit; margin: 0px; padding: 0px; vertical-align: baseline;"> </span></span></a>.</div>
Jay then follows up with a list of things for investors and their advisers to think about so they don't get taken advantage of when "investing" in cryptocurrencies. I'm not kidding.</div>
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<b style="color: red; font-family: inherit;"><i><u>BST Interpretation of the New SEC under Mr. Clayton:</u></i></b></div>
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<b style="color: red; font-family: inherit;"><i><span style="font-size: large;">"Good Luck folks....You're on your own!"</span></i></b></div>
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<span style="background-color: white;"><b><u><span style="font-family: inherit; font-size: large;">Conclusion</span></u></b></span><br />
<span style="background-color: white;">
<b><u><br /></u></b>Well, there you have it. It's become clear to me that Mr. Clayton, with loads of help and encouragement from his friends at Sullivan & Cromwell, Skadden-Arps, Fangda Partners, the Caymans, Bermuda, Panama and BVI banking systems and virtually every global Investment Bank, has spent the last decade of his career as one of the primary architects of our next global financial apocalypse. Now, by some incredible, frightening twist of fate, he has been made the chief regulator of same. In short, we have a regulator who isn't going to regulate. It's the perfect storm.</span><br />
<span style="background-color: white;"><br /></span>
<span style="background-color: white;">As he repeated many times in his confirmation hearing and nearly every opportunity since, Mr. Clayton's main focus as SEC chairman will be on facilitating <i>Capital Formation. </i>The SEC, going forward, will likely be run less as a regulator and more like a loving nurturer, destined to quench American main street investors' perceived thirst for even more IPO's like the hundreds of abandoned Chinese ADR's, the virtually un-vetted pipe dream foreign listings immune from sanctions and prosecution, and of course, the numerous home grown success stories like Zynga, Snap, GoPro, Twitter, Valeant, etc. etc., soon to be followed up by FinTech, CrowdFunding and Crypto-products </span><span style="background-color: white;">popping up on US Exchanges as I type. There will be enormous commissions and fees paid to money managers (who, by law, are not required to act in their client's best interest) as incentives to bury this valueless junk in the pensions, mutual funds and portfolios of America's naive retirees, widows and orphans. </span><br />
<span style="background-color: white;"><br /></span>
<span style="background-color: white;">It conflicts with human nature to think that Mr. Clayton, who has accepted this relatively low paying, pain-in-the-ass, public service job, in a cacophonous administration which is highly skilled at blame delegation, will suddenly find religion and begin to relentlessly hunt down and prosecute his (former) friends. That just doesn't happen. It has now officially become impossible for this story to have a happy ending, at least for most of us. </span><br />
<span style="background-color: white;"><br /></span>
<span style="background-color: white;">The way I see it, today, Mr. Clayton can wake up to reality and choose to leave the SEC now, for personal reasons, while times are still good, return to private practice and finish his career in relative peace, out of the public eye, </span><span style="background-color: white;">just like Mary Jo White and now Gary Cohn just did.</span><span style="background-color: white;"> On the other hand, if Jay chooses to stick it out at the SEC, he will inevitably go down in history as the regulator who presided over the greatest financial calamity in history, hated and reviled by both sides of the aisle and the object of derision for every "little guy" investor in America. He will be the face of the apocalypse. The collapse will have happened on his watch and there will be no forgiveness or olive branch extended during his "what did you know and when did you know it" required testimony at the obligatory congressional hearings.</span><br />
<span style="background-color: white;"><br /></span>
<span style="background-color: white;">If I were Jay, and I truly understood what was going to happen to me, I'd have to admit that the idea of spending my days fishing for trout in the cold, clear Allegheny mountain streams or hitting some golf balls at Westchester or Winged Foot on a regular basis, would actually be looking pretty darn good right about now.</span><br />
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<pre><b><u><span style="background-color: white; font-family: "helvetica neue" , "arial" , "helvetica" , sans-serif; font-size: large;">Additional Reading</span></u></b></pre>
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<pre><span style="color: #444444; font-family: "lato" , sans-serif; font-size: 16px; white-space: normal;">This is another big event regarding investment in digital currency following Shi Yuzhu, an online gaming giant, acquired 10% of OKCoin Share yesterday.</span></pre>
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<a href="http://news.8btc.com/another-chinas-it-tycoon-qihoo-360-plan-to-enter-cryptocurrency-market" style="background-color: white;">http://news.8btc.com/another-chinas-it-tycoon-qihoo-360-plan-to-enter-cryptocurrency-market</a></div>
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<span style="background-color: white;">CHINESE BILLIONAIRE AND GIANT NETWORK CEO INVESTS ‘TENS OF MILLIONS’, ACQUIRES 10% STAKE IN OKCOIN</span></div>
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<a href="http://bitcoinist.com/chinese-billionaire-and-giant-network-ceo-invests-tens-of-millions-acquires-10-stake-in-okcoin/" style="background-color: white;">http://bitcoinist.com/chinese-billionaire-and-giant-network-ceo-invests-tens-of-millions-acquires-10-stake-in-okcoin/</a></div>
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<span style="background-color: white;">South China Morning Post - (Alibaba Property) Crypto Currrency Summary </span></div>
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<a href="http://www.scmp.com/business/money/article/2128645/bitcoin-latest-prices-basics-and-background"><span style="background-color: white;">http://www.scmp.com/business/money/article/2128645/bitcoin-latest-prices-basics-and-</span>background</a></div>
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<span style="background-color: white; font-family: "helvetica neue" , "helvetica" , "arial" , sans-serif; font-size: 14px;">2017 Chinese </span>IPOs on US Exchanges</div>
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<span style="font-family: "helvetica neue" , "helvetica" , "arial" , sans-serif;"><span style="font-size: 14px;"><a href="https://frontera.net/news/asia/the-13-chinese-companies-that-listed-on-us-stock-exchanges-in-2017/" style="background-color: white;">https://frontera.net/news/asia/the-13-chinese-companies-that-listed-on-us-stock-exchanges-in-2017/</a></span></span></div>
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<span style="background-color: white;"><b><u>ENRON TRANSCRIPT</u></b></span><br />
<span style="background-color: white;">What follows is a transcript of that short exchange, taken from the now-infamous Enron conference call of April 17, 2001.</span></div>
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<span style="background-color: white;"><span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: 0px 0px; background-repeat: initial; background-size: initial; border: 0px; font-weight: 700; margin: 0px; padding: 0px; vertical-align: baseline;">Operator:</span> Richard Grubman of Highfield Capital.</span></div>
<div style="background-position: 0px 0px; border: 0px; color: black; font-family: "helvetica neue", helvetica, arial, sans-serif; font-size: 14px; margin-bottom: 15px; padding: 0px; text-align: left; vertical-align: baseline; white-space: normal;">
<span style="background-color: white;"><span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: 0px 0px; background-repeat: initial; background-size: initial; border: 0px; font-weight: 700; margin: 0px; padding: 0px; vertical-align: baseline;">Grubman:</span> Good morning. Can you tell us what the <a href="http://wiki.fool.com/How_to_Calculate_Retained_Earnings?utm_source=Fool&utm_medium=links&utm_campaign=assets&source=ihlsitlnk0000001" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: 0px 0px; background-repeat: initial; background-size: initial; border: 0px; color: #3c96df; margin: 0px; padding: 0px; vertical-align: baseline;" title="Get the definition on The Motley Fool Investing Wiki">assets</a> and <a href="http://wiki.fool.com/Accrual_Accounting_Formula?utm_source=Fool&utm_medium=links&utm_campaign=liabilities&source=ihlsitlnk0000001" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: 0px 0px; background-repeat: initial; background-size: initial; border: 0px; color: #3c96df; margin: 0px; padding: 0px; vertical-align: baseline;" title="Get the definition on The Motley Fool Investing Wiki">liabilities</a> from price <a href="http://wiki.fool.com/Checklist_for_Operational_Risk_on_Managing_Investment?utm_source=Fool&utm_medium=links&utm_campaign=risk%20management&source=ihlsitlnk0000001" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: 0px 0px; background-repeat: initial; background-size: initial; border: 0px; color: #3c96df; margin: 0px; padding: 0px; vertical-align: baseline;" title="Get the definition on The Motley Fool Investing Wiki">risk management</a> were at quarter-end, what those balances were?</span></div>
<div style="background-position: 0px 0px; border: 0px; color: black; font-family: "helvetica neue", helvetica, arial, sans-serif; font-size: 14px; margin-bottom: 15px; padding: 0px; text-align: left; vertical-align: baseline; white-space: normal;">
<span style="background-color: white;"><span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: 0px 0px; background-repeat: initial; background-size: initial; border: 0px; font-weight: 700; margin: 0px; padding: 0px; vertical-align: baseline;">Skilling:</span> We do not have the <a href="http://wiki.fool.com/Balance_sheet?utm_source=Fool&utm_medium=links&utm_campaign=balance%20sheet&source=ihlsitlnk0000001" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: 0px 0px; background-repeat: initial; background-size: initial; border: 0px; color: #3c96df; margin: 0px; padding: 0px; vertical-align: baseline;" title="Get the definition on The Motley Fool Investing Wiki">balance sheet</a> completed. We will have that done shortly when we file the Q. But until we put all of that together, we just cannot give you that.</span></div>
<div style="background-position: 0px 0px; border: 0px; color: black; font-family: "helvetica neue", helvetica, arial, sans-serif; font-size: 14px; margin-bottom: 15px; padding: 0px; text-align: left; vertical-align: baseline; white-space: normal;">
<span style="background-color: white;"><span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: 0px 0px; background-repeat: initial; background-size: initial; border: 0px; font-weight: 700; margin: 0px; padding: 0px; vertical-align: baseline;">Grubman:</span> I’m trying to understand why that would appear to be an unreasonable request, in light of your comments about daily control of all your credits. I mean, you have a trading desk with a $21 million matched book that’s two times your <a href="http://wiki.fool.com/Book_value?utm_source=Fool&utm_medium=links&utm_campaign=book%20value&source=ihlsitlnk0000001" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: 0px 0px; background-repeat: initial; background-size: initial; border: 0px; color: #3c96df; margin: 0px; padding: 0px; vertical-align: baseline;" title="Get the definition on The Motley Fool Investing Wiki">book value</a>, and you cannot tell us what the balances are?</span></div>
<div style="background-position: 0px 0px; border: 0px; color: black; font-family: "helvetica neue", helvetica, arial, sans-serif; font-size: 14px; margin-bottom: 15px; padding: 0px; text-align: left; vertical-align: baseline; white-space: normal;">
<span style="background-color: white;"><span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: 0px 0px; background-repeat: initial; background-size: initial; border: 0px; font-weight: 700; margin: 0px; padding: 0px; vertical-align: baseline;">Skilling:</span> I’m not saying we can’t tell you what the balances are. We clearly have all of those positions on a daily basis, but at this point, we will wait to disclose those until all of the netting and the right accounting is put together.</span></div>
<div style="background-position: 0px 0px; border: 0px; color: black; font-family: "helvetica neue", helvetica, arial, sans-serif; font-size: 14px; margin-bottom: 15px; padding: 0px; text-align: left; vertical-align: baseline; white-space: normal;">
<span style="background-color: white;"><span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: 0px 0px; background-repeat: initial; background-size: initial; border: 0px; font-weight: 700; margin: 0px; padding: 0px; vertical-align: baseline;">Grubman:</span> You’re the only financial institution that cannot produce a <a href="http://wiki.fool.com/How_to_Analyze_an_Owner%27s_Equity_on_a_Balance_Sheet?utm_source=Fool&utm_medium=links&utm_campaign=balance%20sheet&source=ihlsitlnk0000001" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: 0px 0px; background-repeat: initial; background-size: initial; border: 0px; color: #3c96df; margin: 0px; padding: 0px; vertical-align: baseline;" title="Get the definition on The Motley Fool Investing Wiki">balance sheet</a> or <a href="http://wiki.fool.com/Cash_flow_statement?utm_source=Fool&utm_medium=links&utm_campaign=cash%20flow%20statement&source=ihlsitlnk0000001" style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: 0px 0px; background-repeat: initial; background-size: initial; border: 0px; color: #3c96df; margin: 0px; padding: 0px; vertical-align: baseline;" title="Get the definition on The Motley Fool Investing Wiki">cash flow statement</a> with their earnings.</span></div>
<div style="background-position: 0px 0px; border: 0px; color: black; font-family: "helvetica neue", helvetica, arial, sans-serif; font-size: 14px; margin-bottom: 15px; padding: 0px; text-align: left; vertical-align: baseline; white-space: normal;">
<span style="background-color: white;"><span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: 0px 0px; background-repeat: initial; background-size: initial; border: 0px; font-weight: 700; margin: 0px; padding: 0px; vertical-align: baseline;">Skilling:</span> Thank you very much, we appreciate that.</span></div>
<div style="background-position: 0px 0px; border: 0px; color: black; font-family: "helvetica neue", helvetica, arial, sans-serif; font-size: 14px; margin-bottom: 15px; padding: 0px; text-align: left; vertical-align: baseline; white-space: normal;">
<span style="background-color: white;"><span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: 0px 0px; background-repeat: initial; background-size: initial; border: 0px; font-weight: 700; margin: 0px; padding: 0px; vertical-align: baseline;">Grubman:</span> We appreciate that?</span></div>
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<span style="background-color: white;"><span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: 0px 0px; background-repeat: initial; background-size: initial; border: 0px; font-weight: 700; margin: 0px; padding: 0px; vertical-align: baseline;">Skilling:</span> Ass-hole.</span><br />
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<span style="background-color: white;">GIANT INTERACTIVE NEWS</span><br />
<a href="https://www.prnewswire.com/news/giant-interactive-group-inc&c=n" style="background-color: white;">https://www.prnewswire.com/news/giant-interactive-group-inc&c=n</a></div>
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<span style="font-family: "helvetica neue" , "helvetica" , "arial" , sans-serif;"><span style="background-color: white; font-size: 14px;">GIANT INTERACTIVE IPO - $15.00 12/2007</span></span><br />
<a href="http://www.nasdaq.com/markets/ipos/company/giant-interactive-group-inc-759338-56405"><span style="background-color: white; font-family: "helvetica neue" , "helvetica" , "arial" , sans-serif; font-size: 14px;">http://www.</span>nasdaq<span style="background-color: white; font-family: "helvetica neue" , "helvetica" , "arial" , sans-serif; font-size: 14px;">.com/markets/</span>ipos<span style="background-color: white; font-family: "helvetica neue" , "helvetica" , "arial" , sans-serif; font-size: 14px;">/company/giant-interactive-group-inc-759338-</span>56405</a></div>
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<span style="font-family: "helvetica neue" , "helvetica" , "arial" , sans-serif;"><span style="background-color: white; font-size: 14px;">Typical Lawsuit for the GA Reverse Merger.</span></span><br />
<a href="http://securities.stanford.edu/filings-documents/1052/GIGI00_01/2014619_r01c_14CV02177.pdf"><span style="background-color: white; font-family: "helvetica neue" , "helvetica" , "arial" , sans-serif; font-size: 14px;">http://securities.</span>stanford<span style="background-color: white; font-family: "helvetica neue" , "helvetica" , "arial" , sans-serif; font-size: 14px;">.</span>edu<span style="background-color: white; font-family: "helvetica neue" , "helvetica" , "arial" , sans-serif; font-size: 14px;">/filings-documents/1052/GIGI00_01/2014619_r01c_14CV02177.</span>pdf</a></div>
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<span style="font-family: "helvetica neue" , "helvetica" , "arial" , sans-serif;"><span style="background-color: white; font-size: 14px;">The newest frauds "13 Chinese Listings in 2017"</span></span><br />
<a href="https://frontera.net/news/asia/the-13-chinese-companies-that-listed-on-us-stock-exchanges-in-2017/" style="background-color: white; font-family: "helvetica neue", helvetica, arial, sans-serif; font-size: 14px;">https://frontera.net/news/asia/the-13-chinese-companies-that-listed-on-us-stock-exchanges-in-2017/</a></div>
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<span style="font-family: "helvetica neue" , "helvetica" , "arial" , sans-serif;">The Declining Number of Public Companies</span></div>
<span style="font-family: "helvetica neue" , "helvetica" , "arial" , sans-serif; white-space: normal;"><a href="https://corpgov.law.harvard.edu/2017/05/18/looking-behind-the-declining-number-of-public-companies/">https://corpgov.law.harvard.edu/2017/05/18/looking-behind-the-declining-number-of-public-companies/</a></span><br />
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<span style="font-family: "helvetica neue" , "helvetica" , "arial" , sans-serif;">McKinsey - Chinese Stocks "going dark" </span></span></div>
<span style="background-color: white; white-space: normal;"><span style="font-family: "helvetica neue" , "helvetica" , "arial" , sans-serif;"><a href="https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/how-they-fell-the-collapse-of-chinese-cross-border-listings">https://www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/how-they-fell-the-collapse-of-chinese-cross-border-listings</a></span></span></div>
</span><span style="font-family: "times" , "times new roman" , serif;">History of Joe Tsai's relationship with Sullivan & Cromwell (Joe is an S&C Alumnai)
<a href="https://dealbook.nytimes.com/2014/01/13/the-man-behind-alibabas-eventual-i-p-o/">https://dealbook.nytimes.com/2014/01/13/the-man-behind-alibabas-eventual-i-p-o/</a></span></pre>
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Joe Tsai - Sullivan & Cromwell <br />
<a href="https://dealbook.nytimes.com/2014/01/13/the-man-behind-alibabas-eventual-i-p-o/">https://dealbook.nytimes.com/2014/01/13/the-man-behind-alibabas-eventual-i-p-o/</a><br />
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Deep Throathttp://www.blogger.com/profile/02712515268051858186noreply@blogger.com9