Monday, August 31, 2020

Extorting the "Little Guy": The Special "Screw You" of Junk Bond Bailouts

LENDING is now the sucker's game.
Editor's note: This is a guest post by my friend and colleague Zeus Yiamouyiannis, Ph.D., who has contributed essays to Of Two Minds since 2009.
So this is the program: Devalue or deflate everything owned by the "little people", buy it up for pennies on the dollars with unlimited free money, and attempt to use this massive financial asymmetry between the super-wealthy and the ordinary to manipulate markets back upward through artificially goosed "demand" backed by empty, cheap-money purchasing power.
Big banks only care about low interest rates so it can be gentleman-"lent" (i.e. given) to big corporations with huge fees attached (a major source of profit). Won't that make lending impossible and unworkable to mom-and-pop businesses, etc.? Isn't lending a big part of Big Bank business?
Answer: Less and less! Credit unions and smaller banks make lending a big part of THEIR business, but now less than half of Big Bank business and profit comes from lending money to the little people.
Big banks make more and more of their big money through manipulation of assets and gambling in the market and in investment and insurance scams confirmed and accelerated from 2008 onward. And why wouldn't they? They can afford to gamble on higher return risks indefinitely (they think) because they will always be backstopped, no matter how immoral or even criminal their behavior. Too big to fail, too big to jail has become not just a mantra but a business plan.
The real world has been severed from the minds and wallets of the elites for some time, at least since 2008, and arguably since Reagan in the early 1980's... and they've gotten away with it now for four decades. Have they used up stores of wealth or extracted them in a predatory, unbalanced manner? You bet! Have they gotten away with it, and continue to be rewarded more richly with each audacious theft and transfer of wealth? You bet!
It is simple psychology and blindness created by self-interest over and against a collective interest. These so-called cheating "elites" no longer think they have to pay attention to the vast majority of the world's population (even though they should, and this will eventually come to bite them).
I predict this plays like a Sylvester and Tweety cartoon. Think of Sylvester teasing and ridiculing the brutish bulldog on the chain (much like the traders who called honest investors they took advantage of "muppets"-- recall that?).
This works until the bulldog is no longer chained, and then there is hell to pay. This chain comes off when the rip-offs are so ridiculous and arrogant that you get a full-on revolt.
Big banks and global elites will continue to extrapolate and chase ever more gaudy returns by manipulating asset prices (esp. stocks) upward, in a way that is disconnected completely from the markets and in a way that savages the stores of wealth of ordinary people. Zero to negative interest only add grease to the rails and fuel to the fire.
What can you look toward as a 'canary in the coal mine' indicator of when things will go south in the equities market? My bet: Junk bonds and junk bond ETFs may well serve as the internal black swan to this teetering mafia-like financial enterprise. Junk bond markets are a special kind of crazy right now, but they follow an oddly transparent logic of manipulation when you look at them closely.
Evidence #1? On April 9, 2020 for the "first time in its 107 year history" (Counterpunch) the Fed changed its terms and bought junk bonds, bailing out at the trashiest level yet, the deceits of the big players, particularly private equity firms.
This chart from Counterpunch shows the effects of this insane enabling.
What did this predictably teach insolvent companies and private equity firms? If the lowest of the low are being rescued, then it's a sure bet that ANY company with a sizable footprint in the market will be rescued.
Evidence #2: There is an exponential rise in the Fed's free backstop/money-printing program for zombie companies like Carnival Cruises. In short, it's feeding time at the zoo for financial predators and scavengers.
According to Wolf Richter's August 26, 2020 blog, The Zombie Companies Are Coming:
In the second quarter, companies that had been taken over by private-equity firms issued over $31 billion in junk-bonds, the highest level since 2014, according to Dealogic. The third quarter is on the same track: In July, companies owned by private-equity firms issued $10 billion in junk bonds... And it goes far beyond private equity firms....
Carnival, the largest cruise-ship operator, with a deep-junk credit rating of triple-C, and whose revenues collapsed to near nothing as all its cruises have been canceled, while the restart of its cruises gets pushed out further and further, well, in early August, it sold its third bond issue since the Pandemic: $900 million in junk bonds, with a yield of nearly 10%.
Is this sustainable? Of course not, but I am almost certain this will be the short term reality.
The gaudy returns in specious value of stocks manipulated upwards (and whatever bets are placed on this movement, i.e. derivatives, swaps, etc.), will far outstrip whatever benefit or damage TO BIG BANKS (they don't care about the broader economy) created by cratering the lending industry along with the savings of mom and pop.
Disaster capitalism has a long and lowly history among these guys, but it has always "benefited" them to make others feel pain and then use that pain to leverage their own positions, the "gun to the head" approach. Name one time in the last four decades this hasn't worked? There has been substantial talk of the Fed backstopping the stock market by buying up stocks directly if needed, because now the financial markets are entangled in the equities markets.
LENDING is now the sucker's game. You get paid back in inflated poor man's dollars on an asset that has skyrocketed-- the worst of both worlds, whereas BORROWING has the best of both worlds, cheap or free money to endlessly invest in limited assets, that by so investing pushes their prices even higher!
You see the twisted logic. Stick mom and pop with the consequences, people who have to make a real living in the real world, and use your manipulation of a fake world to extract real wealth, and create a cycle of concentration that keeps exchanging things of counterfeit value (derivatives, borrowed money) for things of real value (hard assets, businesses, etc. as private equity firms do) and then inflate the value of the real thing by artificially manipulating money supply.
This has been done for decades by private equity firms/leveraged buyout/corporate raiders. They profit HANDSOMELY by hollowing out the economy and creating stress and debt, which they take advantage of by breaking up these companies or allowing them to go bankrupt (after they've sold their shares) and by selling the chop-shopped parts. This same strategy will be waged at large to hollow out and ravage nations. There is nothing I can see that stands in the way of this obvious looting. Bernie Sanders would have, but Trump won't and Biden has no history of standing in the way of looting. The people themselves will have to demand justice.
What will this justice look like? In the short term it's going to mean, strategically refusing to patronize these zombie companies, and sticking strictly to locally-owned businesses, and getting involved on the local political and civic level to create forms of decentralized exchange, but that will be for a future essay.
What is the way out of this for the common person? Part 4 will discuss fighting and winning against the big bullies. Part 5 will discuss the 3 C's --”Cash, Coin, and Community" as alternative forms of value and economy to guide an independent, non-predatory, non-parasitic, creativity-driven economy.
copyright 2020 Zeus Yiamouyiannis
This is part of series entitled When the World Market Itself Is Fake, Economic "Value" Loses Any Real Meaning.
Parts 4 and 5 will discuss healthy, pro-democratic, creative alternatives to the current rigged system.
Recent Podcasts:
My COVID-19 Pandemic Posts


My recent books:
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


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Posted by Charles Hugh Smith at 10:02 PM

Sunday, August 30, 2020

Deflation of the Citizenry's Hard Assets Will Be a Huge Buying Opportunity for Insider Power Elites

The gravy train will have to stop at some point, but right now the global elites have pushed their chips on to the U.S. dollar and stocks.
Editor's note: This is a guest post by my friend and colleague Zeus Yiamouyiannis, Ph.D., who has contributed essays to Of Two Minds since 2009.
I believe there will be a massive contraction/deflation in the near term in certain sectors of the U.S. and world economy as demand flees from commercial real estate, as jobs do not come back full force, small businesses close down, and/or people migrate to home offices. Demand for residential real estate will also likely contract in the short term as people are forced to go into living with family or shared housing. Even with the money-pump operating at full speed, flooding the market with cash (which should cause inflation), there will be an opposite effect for the ordinary person.
Why? There are tons of people with no actual money to buy up, lease, or rent real estate assets. Cash and borrowing collateral is tilted so much to super-wealthy, that the vast majority of people will not have access to cash to invest in real estate and other durable goods. Far fewer ACTUAL PEOPLE can pursue certain goods even if the SYSTEM is flooded with cash. It's not in their pockets!
Now this might be partially corrected by some form of Universal Basic Income (UBI), but this will take time, and people will initially use it to shore up their survival. I look at what happened in real estate after 2006, where it crashed and was successfully hyperinflated again. Ordinary people lost their homes, and private equity firms bought them up with cash and re-inflated the real estate bubble. Look at what has happened to gold, which should be $4,000 to $5,000/ounce right now, but manipulation of gold paper (and selling gold "assignments" over actual gold) has kept a kibosh on its meteoric rise.
One should not underestimate how much the global elite has tied the welfare of a fearful global populace into their own program and benefit. They are using an intensely immoral extortion (and should be illegal, but it is in fact rewarded) that says, "We get ours first, and you might get some scraps... We don't get ours first (and most) and you get NOTHING! Yes, it is a bullying tactic that would create revolution if they ever acted upon, or we ever called them on it (and I hope we do) but current retirees are also very powerful and they firmly toe the line with the status quo. They have enough of the loot to want to protect it and keep a broken system going.
Witness Joe Biden's nomination to see how people are ideologically and politically drawn to symbols of their own self-interest. Biden did not lift a finger to gain the nomination (he had a few campaign offices, never really campaigned, raised little significant money, and drew pitiful crowds). Biden set a record that I doubt will ever be beaten in winning the nomination after placing fourth in the first nominating state, Iowa, and FIFTH in New Hampshire. He would have been toast in any fair contest, except for older suburbanites who still feel they can ride the system of graft, aligned with the Power Elite, into retirement and eventually a comfortable grave.
People under 50 were 70% for Bernie Sanders, and people over 50 were 70% for Joe Biden. No more stark a contrast and commitment to completely different regimes can you see. The first is geared toward riding the system and resisting change, the second is in transforming and doing away with system as a threat to a future survival that those who support the current system will never see (unless you believe in reincarnation).
Is this sustainable? No way. Can it be pursued for another ten to twenty years in defiance of reality while the beneficiaries die off? We shall see. Young people have NOT been exercising their political power, not even voting in decent numbers, but rather adapting to and tolerating whatever is thrown their way. That may change, especially as conditions get both worse and more globally distributed.
There are some signs as very young progressive Democratic candidates (Cori Bush, Jamaal Bowman, etc.) are actually winning races against heavily-favored and funded incumbents. De-growth and distribution of productivity gains will emerge as new war cries, both to save the environment and to make a living possible, as harsh and unequal realities deepen.
That may be the future, but there are no current sufficiently strong political, social, or economic barriers to this rank abuse of fiduciary trust and dignity. The government will be forced to subsidize underwater mom and pop America with a UBI type infusion, but that won't be enough even to survive amid deflated relative wages and inflated assets, not to mention a continuing Covid-19 shutdown that sees no end in sight until at least January 2021 because of a completely absent federal coordinated response.
This ennui and anxiety, this rudderless and leaderless and morality-free ship cannot simply drift hither and thither, or have some brigand seize the wheel and drive it towards his own private beach, forever. But it will happen in the short term, as it is now.
This year, dividends have NEVER been lower in the history of the stock market, yet the S&P 500 hit a new high? Billionaires are making tens of billions of dollars more!
The tsunami has not hit yet, and it will come falling on Joe Biden's head if he gets elected, and no corporate apparatchik will have a solution.
The solutions Charles Smith has mentioned in his books and essays will be the only real solutions-- radical community reliance, localization, and decentralization, because these are the only things that can put food in your mouth and these are the only things you will be able to rely upon.
Multinational corporations seek only to leverage rent, not to fix the proverbial toilets. U.S. currency already has a built in defense-- it is the reserve currency of the world's economic elite. It will not be allowed to fail easily, no matter how irresponsibly domestic policies are conducted-- including endless money printing and using the Fed to buy up equities.
The global elite are all invested in U.S. currency and stocks, and they know if the world's largest consumer economy goes down, THEY go down (including Putin, by the way--what would happen to his petro industry if U.S. demand and dollar collapsed?). Not so with just about anything else. Zero to negative interest rates will continue to "benefit" them and their interests, because it will artificially goad stock prices higher and create a dominance for the U.S. dollar.
These guys WANT inflation, because inflated markets (especially in oil, real estate, and equities) means increasing value on the money they already invested in these assets. These global elites are by far the biggest borrowers, buyers, AND debtors. What better way to solve that problem then to make interest rates zero or negative!
The gravy train will have to stop at some point, but right now the global elites have pushed their chips on to the U.S. dollar and stocks. We should use that breathing room to make our choice away from this rigged game.
copyright 2020 Zeus Yiamouyiannis
This is part of series entitled When the World Market Itself Is Fake, Economic "Value" Loses Any Real Meaning.
Part 3 of this series will explore where we are right now and what to look for in the tough times ahead.
Parts 4 and 5 will discuss healthy, pro-democratic, creative alternatives to the current rigged system.
Recent Podcasts:
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.
NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
Thank you, Howard R. ($5/month), for your splendidly generous pledge to this site -- I am greatly honored by your support and readership.
 
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Posted by Charles Hugh Smith at 9:43 PM

Saturday, August 29, 2020

Nihilism Embodied: Our Lawless Financial System

Not only have the billionaire class made money, they have tightened their monopolistic grip on the levers of money supply and distribution, turning a global rigged casino into a global company town.
Editor's note: This is a guest post by my friend and colleague Zeus Yiamouyiannis, Ph.D., who has contributed essays to Of Two Minds since 2009.
I wrote this predictive observation in the January 28, 2011 Of Two Minds post entitled, Abused Fundamentals and Fake Markets: How They Play Out (later published and updated in 2013 in my book: Transforming Economy: From Corrupted Capitalism to Connected Communities):
So we have a lawless system. What does this mean for citizens and investors? In the near term it means that the fundamentals will not apply. Anything that maintains or augments elite wealth and increases elite options will be supported, and anything that consumes or converts common people's wealth and labor and restricts their choices will be pursued.
Anything that reinforces accountability, rational response, or cause and effect will be actively suppressed. Forget reversion to the mean. One only has to observe where the respective value/wealth of each party resides and where it gets channeled to know what the market will do and where policy will go. When the stock market should crash, it won't... until some time frame far longer than even the most generous fundamentals would dictate...
Analyses that try to predict near term market moves based on Laffer curves, Elliot Waves, and historical cycles will almost definitely fail. We don't have a 'new era', but we definitely have unprecedented coordinated global intervention dedicated almost solely to the fortunes of the top 1%. That is the new rule that will govern until there is a serious breakdown.
The chickens are now coming home to roost, and proving to a greater and greater degree that markets are no longer markets at all, or even casinos. They are clearinghouses for transfers of wealth from the many to the few. Period. No credible argument can be made otherwise. Therefore, we must first and foremost understand the rigged system to inform active resistance and effective alternatives. In so doing, we must also transform ignorance into awareness, obedience into civil disobedience, and fearful attachment into creative interdependence.
In brief, here is how I believe this latest round of audaciously escalating fraud will play out. Given that "too big to fail, too big to jail" is now established worldwide policy, the logical next move for the billionaire class will be buy up everything of hard value with unlimited free unbacked money and massive debt. Think private equity firms, but on a colossal scale: Extract and savage this wealth from every known stored value, and leave the mess for someone to clean up. This is a project now supported by every major central bank and it involves monopoly ownership of every avenue of value assignment and measurement by a handful of people and companies.
What proof do I have that there no longer exists a "market" at all in terms of fundamentals?
Exhibit A: Why are the dollar, stocks, gold, oil, and even Bitcoin all moving in the same direction, when, according to fundamentals, they should move in opposite directions?
Most financial news media give technical definitions. Jeff deGraaf in Marketwatch explains "As real yields turn negative, opportunity costs for holding non-yielding assets essentially vanish, particularly when viewed through the historical lens of fiat currencies and their purchasing power."
Gold, and I would add the U.S. dollar, create a convenient floor at the zero to positive level, to potential black swans that might sweep the more "risky" fake markets (and cause them to fall before they are rescued again upward).
Therefore, I expect the U.S. Dollar to remain strong, gold to hold its value, as a stable foundation and exchange medium for wealth extraction. Bitcoin will also hold its value and be dominated by the big players in order to control the gateway to democratized value exchange (and they can do so by borrowing unlimited 0% interest U.S. dollars to buy up as much Bitcoin as they want).
All traditional, modern, and post-modern forms of value exchange will be dominated by the same players and manipulated to their advantage to extract and concentrate greater wealth. Manipulate the stock market, gold, oil, and Bitcoin up, get the suckers to pile on, then sell, let it crash, and buy again, an unending cycle of wealth extraction. Use government subsidies, bailouts, and tax shelters to hide and sequester wealth. Rinse and repeat.
What basic precursors do you need to stampede wealth toward the few?
First, you need unlimited cost-free money, preferably the U.S. dollar as the world's reserve currency. This has been accomplished with zero-percent interest rates going on twelve years now (effectively negative interest rates when adjusted to inflation). Paying nothing or next to nothing for both savings and borrowing, does two things: 1) This converts trillions of dollars worth of ordinary-people value in lost savings interest to frictionless manic borrowing and gambling by the big guys. 2) This induces John and Jane Doe and their companies' pensions to participate in and inflate a rigged stock market if they want any return at all.
Combine this zero-interest, unlimited, frictionless money with allowing unlimited stock buybacks, and the value of stocks no longer has to even be connected with earnings! Tesla's price to earnings (PE) ratio is at the time of this writing over 1,100! PE's of 30 or 40 used to be considered irrational exuberance. What would you call this? Is there any longer even a theoretical limit?
Second, you need dominant global corporatism and oligarchy in which all asset valuation, production, government regulation, and monetary policy is geared toward the maximum financial enhancement of a tiny billionaire elite. This allows a divorce between risks and consequences, where the little guy accepts all liability and the big guy gets all the profits.
How much have billionaires made since the collapse of the market in March 2020? They have made 637 billion dollars according to an August 3, 2020 Business Insider article, which also notes that this separation and concentration of wealth is only accelerated by government bailouts that go overwhelmingly (some 90%) to a wealthy hyper-minority (with tax loopholes and shelters that allow them to keep those ill-gotten gains).
Meanwhile, 30+ million ordinary people lose their jobs, and as many as half of small businesses may be closing their doors, while multi-billion dollar hedge funds are showered with "small business" cash because they have less than 50 employees.
As Ryan Detrick said in a tweet on April 30th, 2020.
Third, you need austerity and disaster capitalism for the little guy so you can force them to sell off their assets at rock-bottom prices. You also need controlled political systems run by technocrats and bureaucrats that don't mind exploiting and abusing the little guy as long as they get a slice of the pie to maintain their own lifestyles. And it doesn't hurt to have bloviating nationalist dictators, and various "deep state" conspiracy theories to arouse the emotions of the public and direct these emotions to anything (anger at immigrants, and black and brown people, abortion, feminists) but not at the very entities anger should be directed toward-- corrupt capitalists, lawless corporations, and predatory oligarchs.
The one thing we can say right now, unless something drastically changes, is that there are no upper level champions for the ordinary citizen. Donald Trump has already proven to be an alarmingly agile lackey for the power elite, dumping trillions into their coffers, hiring them as advisors, and getting rid of any kind of financial or environmental regulation. Joe Biden's advisors are touting "austerity" for the little guy, while promising Big Oil that they will not have their subsidies cut (despite Biden's platform promise to cut subsidies), and promising Big Finance that they will remain unchecked.
It remains to be seen which Joe Biden will show up, the neo-liberal bootlicker or the one that follows through on this own policy platform to rein in the out-of-control abuse of the power elite. Congress is no better. Any attempts to get money directly to the ordinary public is being thwarted outright by Mitch McConnell, who simply uses legislative extortion to guarantee that the lion's share will always go to the super-wealthy.
Not only have the billionaire class made money, they have tightened their monopolistic grip on the levers of money supply and distribution, turning a global rigged casino into a global company town. Though the supply of dollars is and will become more and more ridiculous, the demand for those dollars among the elite will become even more ridiculous.
Will we have another flash crash, and fear and want, resulting in consolidation of poverty for the many and material ownership for the few? Will people drastically downsize, suffer through austerity policies, while Big Everything (Oil, Pharma, Finance, etc.) continues to get bailed out and get multi-billion dollar subsidies even when they bring in record profits?
Will we have a massive collapse of commercial and residential real estate, because of people moving in together and millions of small businesses closing, which will allow private equity firms to sweep in and buy properties up in collusion with corrupt banks for pennies on the dollars?
The big banks don't have to worry, because their assets will be backstopped. However, will small banks and credit unions who rely on lending be forced into bankruptcy, where they can be swallowed as well? This is where we are heading if "we the people" do not stand up to this multi-headed hydra.
This is part of series entitled When the World Market Itself Is Fake, Economic "Value" Loses Any Real Meaning.
Parts 2 and 3 of this series will explore where we are right now and what to look for in the tough times ahead.
Parts 4 and 5 will discuss healthy, pro-democratic, creative alternatives to the current rigged system.
Recent Podcasts:
Money and Work Unchained $6.95 (Kindle), $15 (print) Read the first section for free (PDF).


If you found value in this content, please join me in seeking solutions by becoming a $1/month patron of my work via patreon.com.
NOTE: Contributions/subscriptions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.
Thank you, Dave M. ($5/month), for your splendidly generous pledge to this site -- I am greatly honored by your support and readership.
 
Thank you, Hail C. ($5/month), for your marvelously generous pledge to this site -- I am greatly honored by your support and readership.

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Posted by Charles Hugh Smith at 12:48 PM
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