Crypto Scam, The Crypto Company, Collapses on Non-Existent Volume

Content originally published at iBankCoin.com

 

This little pink sheeter ran up 20,000% because MUH Bitcoin, hitting a market cap of $12.6b, and now it"s all unraveling under the hard realities of mathematics driven by greed.

Even down 65% for the day, on 11,000 shares traded, the market cap is still over $4 billion.

According to the most recent financials published with the SEC, the company had a whole $3 million in cash.

Revenues were a touch under $500,000 with losses of $1.2 million.

Regarding their recent stock sale:

On June 7, 2017, the Company entered into (i) a Share Purchase Agreement (the “Restricted Share Purchase Agreement”) with Crypto Sub, and John B. Thomas P.C., in its sole capacity as representative for certain shareholders of the Company; and (ii) a Share Purchase Agreement (the “Free Trading Share Purchase Agreement”, and together with the Restricted Share Purchase Agreement, the “Share Purchase Agreements”) with Crypto Sub, Uptick Capital, LLC (“Uptick Capital”) and John B. Thomas P.C., in its sole capacity as representative for certain shareholders of the Company. Pursuant to the Share Purchase Agreements, the shareholders of the Company sold an aggregate of 11,235,000 shares of common stock of the Company to Crypto Sub and 100,000 shares of common stock of the Company to Uptick Capital, representing an aggregate of 100% of the issued and outstanding common stock of the Company as of such date, for aggregate proceeds of $411,650, including escrow and other transaction related fees to the selling shareholders (the “Stock Sale”). A portion of the acquisition cost equal to $399,300 is expensed as a general and administrative expense in the accompanying consolidated statement of operations.

The entire set up is highly suspect, reminiscent of the countless shell games played before by pink sheet operators.

Here are the clowns behind this brazen scheme.

On March 9, 2017, Crypto Sub issued 125,000 shares of common stock of Crypto Sub to an employee of Crypto Sub, in exchange for an initial investment made in the form of cryptocurrency, valued at $100,000, based on the fair value of the investment on the date of such investment. On June 7, 2017, the employee received (i) 1,875,000 shares of common stock of Croe in connection with the Stock Dividend issued by Crypto Sub, and (ii) 1,125,000 shares of common stock of Croe in exchange for all of the employee’s shares of Crypto Sub in connection with the Share Exchange.

On March 9, 2017, Crypto Sub issued 300,000 shares of common stock of Crypto Sub to James Gilbert, the President of the Company, in exchange for $200,000. On June 7, 2017, Mr. Gilbert received (i) 4,500,000 shares of common stock of Croe in connection with the Stock Dividend issued by Crypto Sub, and (ii) 2,700,000 shares of common stock of Croe in exchange for all of his shares of Crypto Sub in connection with the Share Exchange.

On March 9, 2017, Crypto Sub issued (i) 125,000 shares of common stock of Crypto Sub to Redwood Fund LP (“Redwood”) in exchange for $200,000; and (ii) 125,000 shares of common stock of Crypto Sub to Imperial Strategies, LLC (“Imperial Strategies”) in exchange for certain services rendered, valued at $200,000, as of the date of such issuance. Michael Poutre, the Chief Executive Officer of the Company, and Ron Levy, the Chief Operating Officer of the Company, are Chief Executive Officer and Chief Operating Officer, respectively, of Ladyface Capital, LLC, the General Partner of Redwood, and, as a result, had an indirect material interest in the shares owned by Redwood. Mr. Poutre is the sole member of MP2 Ventures, LLC, a member of Imperial Strategies, and, as of September 1, 2017, Mr. Poutre and Mr. Levy are Chief Executive Officer and Chief Operating Officer, respectively of Imperial Strategies and, as a result, have an indirect material interest in the shares owned by Imperial Strategies. On June 7, 2017, each of Redwood and Imperial Strategies received (i) 1,875,000 shares of common stock of Croe in connection with the Stock Dividend issued by Crypto Sub, and (ii) 1,125,000 shares of common stock of Croe in exchange for all of their shares of Crypto Sub in connection with the Share Exchange.

As of September 30, 2017, the Company pre-paid consulting fees of $60,000 reflected in prepaid expenses to MP2 Ventures, LLC, of which Michael Poutre, the Chief Executive Officer of the Company, is the sole member, for his services rendered as Chief Executive Officer.

Thus far, it appears James Gilbert, Michael Poutre, and Ron Levy are making a killing on this run up.

Additionally, a firm named John B. Thomas P.C., Uptick Capital, and Crypto Sub seem to be facilitating the transactions, acting as bankers for CRCW.

a Share Purchase Agreement (the “Free Trading Share Purchase Agreement”, and together with the Restricted Share Purchase Agreement, the “Share Purchase Agreements”) with Crypto Sub, Uptick Capital, LLC (“Uptick Capital”) and John B. Thomas P.C., in its sole capacity as representative for certain shareholders of the Company. Pursuant to the Share Purchase Agreements, the shareholders of the Company sold an aggregate of 11,235,000 shares of common stock of the Company to Crypto Sub and 100,000 shares of common stock of the Company to Uptick Capital, representing an aggregate of 100% of the issued and outstanding common stock of the Company as of such date, for aggregate proceeds of $411,650, including escrow and other transaction related fees equal to $1,525, to the selling shareholders (the “Stock Sale”). A portion of the acquisition cost equal to $399,300 is expensed as general and administrative expense in the accompanying statement of operations.

Crypto Sub is run by Michael Poutre, who is also CEO of CRCW.

Their CFO is a gent named Ivan Ivankovich, who was once CFO of Yellow Pages, former Ernst and Young stock.

Ivan brings more than 27 years of finance and operations management experience to his role as co-founder and Managing Partner of Full Stack Finance. The firm specializes in providing finance and accounting outsource services to early to mid stage venture-/angel-/PE-backed technology companies. His industry experience includes technology, internet services, online advertising, digital media publishing and telecommunications.

Ivan previously served as CFO of YellowPages.com and as Vice President, Portfolio Operations with Platinum Equity, a global acquisition firm specializing in the operation of technology companies. At Platinum Equity, Ivan’s primary responsibility was the management and operational supervision of its portfolio companies.

Ivan started his career with Ernst & Young joining their audit practice in Los Angeles. He is a Certified Public Accountant and a member of the California Society of CPA’s.

Mr. Poutre has a bit of a checkered past.

n July 16, 2010, Mr. Poutre entered into a Letter of Acceptance, Waiver and Consent (AWC) with the Financial Industry Regulatory Authority (FINRA) relating to alleged rule violations while he was associated with Maxx Trade, Inc. (Maxx Trade). The AWC set forth FINRA’s findings that Mr. Poutre had violated conduct rules by charging customers more than a fair markup for certain bond transactions. Without admitting or denying the allegations and findings against him, Mr. Poutre consented to a $5,000 fine and suspension from association with a FINRA member in all capacities for thirty (30) calendar days. Mr. Poutre signed the AWS without representation of counsel.

In another AWS related to Maxx Trade, on April 20, 2009, Mr. Poutre, without admitting or denying the allegations and findings against him, consented to a $5,000 fine and two-year suspension from association with a FINRA member in all capacities. FINRA alleged that Mr. Poutre had failed to provide complete responses to the staff’s requests for information and documents in violation of FINRA rules. Mr. Poutre signed the AWS without representation of counsel.

On November 8, 2006, Mr. Poutre submitted an Offer of Settlement (the “Offer”) to the National Association of Securities Dealers, Inc. (NASD), the predecessors of FINRA. The NASD accepted the Offer and issued an Order Accepting Offer of Settlement (the “Order”). Without admitting or denying the allegations and findings against him, Mr. Poutre consented to a $5,000 fine and ten business day suspension in all capacities. NASD alleged that Mr. Poutre had failed to provide certain emails the staff’s requests for emails in violation of NASD rules. Mr. Poutre signed the Offer of Settlement without representation of counsel.

In September 2009, Mr. Poutre filed a voluntary petition for a Chapter 7 bankruptcy in the U.S. Bankruptcy Court for the Central District of California. Discharge was finalized on November 16, 2010.

According to the FINRA website, Mr. Poutre has 10 disclosures and has bounced around from firm to firm like a god damned pinball since 1994.

Back in 2005, Mr. Poutre was discussed online for meddling with two bucket shops who attempted to merge.

And here are the disclosures, which are so numerous I am shocked he hasn"t been banned from the industry.

2013: Allegations

PLAINTIFF, AN EARLY-STATGE INVESTOR IN TOUCHTUNES MUSIC CORP., ALLEGES THAT THE DEFANDANTS TOUCHTUNES MUSIC INC.,

VARIOUS INSIDERS OF TOUCHTUNES AND UBS AND PAINEWEBBER ENGAGED IN "MINORITY SHAREHOLDER ABUSE, OPPRESSION, FRAUD AND SQUEEZE-OUT." PLAINTIFF ALLEGES THAT PLANINTFF MADE HIS INITIAL PURCHASE OF THE TOUCHTUNES SHARES IN 1998 AFTER

RECIEVING RESEARCH AND ADVICE FROM HIS PAINEWEBBER SECURITIES BROKER REGARDING TOUCHTUNES. TIME FRAME: 1998-2006.

Damage Amount Requested

$12,000,000.00

2010: Allegations

NASD RULES 2110, 2440 - MICHAEL A. POUTRE PLACED ORDERS FOR THE SALE OF CORPORATE BONDS AND PLACED CHARGES ON THE ORDERS FOR MARKUPS, WHICH WERE NOT FAIR AND REASONABLE, IN CONSIDERATION OF THE FACTORS SET FORTH IN NASD INTERPRETATIVE MATERIAL 2440(B). POUTRE SOLICITED SECURITIES TRANSACTIONS IN ACTIVELY TRADED, LIQUID CORPORATE BOND TRANSACTIONS FOR CUSTOMERS AND CHARGED THE CUSTOMERS MARKUPS OR MARKDOWNS THAT EXCEEDED 3% AND $400. MOST OF THE TRANSACTIONS WERE LARGE AND, BECAUSE THEY INVOLVED CORPORATE BONDS, A MARKUP OR MARKDOWN OVER 3% WOULD BE CONSIDERED EXCESSIVE. THE CORPORATE BONDS INVOLVED WERE READILY AVAILABLE AND INVOLVED LARGE TRANSACTIONS OF HIGHER PRICED SECURITIES, WHICH JUSTIFIED LOWER PERCENTAGE RATES. THE MARKUPS AND MARKDOWNS WERE NOT DISCLOSED TO THE CUSTOMERS AND THE NUMBER OF VIOLATIVE TRANSACTIONS ESTABLISHES A PATTERN OF EXCESSIVE MARKUPS AND MARKDOWNS. NOTHING IN POUTRE"S OR HIS MEMBER FIRM"S BUSINESS ACTIVITIES JUSTIFIED THE MARKUPS OR MARKDOWNS OF OVER 3%.

Resolution

Acceptance, Waiver & Consent(AWC)

Sanctions

Suspension

Registration Capacities Affected

ANY CAPACITY

Duration

30 DAYS

Start Date

8/2/2010

End Date

8/31/2010

Regulator Statement

WITHOUT ADMITTING OR DENYING THE FINDINGS, POUTRE CONSENTED TO THE DESCRIBED SANCTION AND TO THE ENTRY OF FINDINGS; THEREFORE, HE IS SUSPENDED FROM ASSOCIATION WITH ANY FINRA MEMBER IN ANY CAPACITY FOR 30 DAYS. THE SUSPENSION IS IN EFFECT FROM AUGUST 2, 2010 THROUGH AUGUST 31, 2010.

Broker Comment

IN CONNECTION WITH THE EVENTS RELATED TO THIS DISCLOSURE ON MAY 20, 2009, I FILED A LAWSUIT AGAINST MAXX TRADE IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF KENTUCKY. I CLAIMED AMONG OTHER THINGS, THAT THE PRINCIPAL OWNERS OF MAXX TRADE ADDED, WITHOUT MY KNOWLEDGE, A SEPARATE COMMISSION ON TOP OF THE FAIR AND REASONABLE COMMISSION I CHARGED MY BOND CLIENTS. THIS RESULTED IN THE IMPERMISSIBLE MARK-UPS THAT WERE THE SUBJECT OF THIS DISCLOSURE.

I ALSO MADE THESE ALLEGATIONS IN CONNECTION WITH A PARALLEL FINRA ARBITRATION AGAINST MAXX TRADE AND ITS PRINCIPALS. PURSUANT TO THE ARBITRATION, ON FEBRUARY 15, 2011 I WAS AWARDED COMPENSATORY DAMAGES, INTEREST ATTORNEYS" FEES, AND COSTS WITH RESPECT TO MY CLAIMS AGAINST MAXX TRADE AND ITS PRINCIPALS.

Here he was suspended for two years.

2010 Allegations:

FINRA RULES 2010, 8210: POUTRE FAILED TO PROVIDE A COMPLETE RESPOND TO FINRA REQUESTS FOR INFORMATION AND DOCUMENTS IN A PENDING INVESTIGATION CONCERNING HIS OUTSIDE BUSINESS ACTIVITIES.

Resolution

Acceptance, Waiver & Consent(AWC)

Sanctions

Civil and Administrative Penalty(ies)/Fine(s)

Amount

$5,000.00

Sanctions

Suspension

Registration Capacities Affected

ALL CAPACITIES

Duration

TWO YEARS

Start Date

6/7/2010

End Date

6/6/2012

Regulator Statement

WITHOUT ADMITTING OR DENYING THE FINDINGS, POUTRE CONSENTED TO THE DESCRIBED SANCTIONS AND TO THE ENTRY OF FINDINGS; THEREFORE, HE IS FINED $5,000 AND SUSPENDED FROM ASSOCIATION WITH ANY FINRA MEMBER IN ANY CAPACITY FOR TWO YEARS. THE FINE IS DUE AND PAYABLE EITHER IMMEDIATELY UPON RE-ASSOCIATION WITH A MEMBER FIRM FOLLOWING HIS SUSPENSION OR PRIOR TO ANY REQUEST FOR RELIEF FROM ANY STATUTORY DISQUALIFICATION RESULTING FROM THIS OR ANY OTHER EVENT OR PROCEEDING, WHICHEVER IS EARLIER. THE SUSPENSION IS IN EFFECT FROM JUNE 7, 2010, THROUGH JUNE 6, 2012.

Broker Comment

IN CONNECTION WITH THE EVENTS RELATED TO THIS DISCLOSURE, ON MAY 20, 2009, I FILED A LAWSUIT AGAINST MAXX TRADE IN THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF KENTUCKY. I CLAIMED AMONG OTHER THINGS, THAT THE PRINCIPAL OWNERS OF MAXX TRADE FILED CLAIMS WITH FINRA THAT WERE INACCURATE AND DEFAMATORY RESULTING IN I BECOMING THE SUBJECT OF THE FINRA INQUIRY THAT WAS THE SUBJECT OF THIS DISCLOSURE.

I ALSO MADE THESE ALLEGATIONS IN CONNECTION WITH A PARALLEL FINRA ARBITRATION AGAINST MAXX TRADE AND ITS PRINCIPALS. PURSUANT TO THE ARBITRATION, ON FEBRUARY 15, 2011 I WAS AWARDED COMPENSATORY DAMAGES, INTEREST, ATTORNEYS" FEES, AND COSTS WITH RESPECT TO MY CLAIMS AGAINST MAXX TRADE AND ITS PRINCIPALS.

This man has been a wrecking ball in the industry and now presides over a multi-billion dollar scam. Ca

The Dumbest Dumb Money Finally Gets Suckered In

Authored by John Rubino via DollarCollapse.com,

Corporate share repurchases have turned out to be a great mechanism for converting Federal Reserve easing into higher consumer spending. Just allow public companies to borrow really cheaply and one of the things they do with the resulting found money is repurchase their stock. This pushes up equity prices, making investors feel richer and more willing to splurge on the kinds of frivolous stuff (new cars, big houses, extravagant vacations) that produce rising GDP numbers.

For politicians and their bureaucrats this is a win-win. But for the rest of us it’s not, since the debts corporations take on to buy their own stock at market peaks tend to hobble them going forward, leading eventually to bigger share price declines than would otherwise be the case.

The ultimate loser? The only people traditionally willing to buy in after corporations are finished overpaying for their stock: Retail investors, of course.

Let’s see how it’s playing out this time.

First, corporations spent several years elevating stock prices with share repurchases. Note the near perfect correlation between the two lines:

Now they’re scaling back their purchases:

Saying Bye to Buybacks

(Wall Street Journal) – Companies in the S&P 500 are on pace to spend the least on buybacks since 2012

 

Large companies are repurchasing their shares at the slowest pace in five years, as record U.S. stock indexes and an expanding economy propel more money out of flush corporate coffers into capital spending and mergers.

 

Companies in the S&P 500 are on pace to spend $500 billion this year on share buybacks, or about $125 billion a quarter, according to data from INTL FCStone. That is the least since 2012 and down from a quarterly average of $142 billion between 2014 and 2016.

 

Buyback activity among top-rated nonfinancial debt issuers, many of which have regularly borrowed money to finance share repurchases, declined for the third straight quarter in the July-to-September period, according to Bank of America Merrill Lynch. Meanwhile, mergers and acquisitions among that group of companies had their biggest quarter of the year, analysts at the bank said.

 

Factors including high stock price, historically high share valuations and uncertainty over the future shape of the tax code mean that “companies may be less likely to favor buybacks over other uses of cash in 2018,” analysts at Goldman Sachs Group Inc. said in a report this week.

And – here’s the really sad part – individual investors are taking up the slack:

The emboldened retail investor may be a new catalyst to help take stocks higher — for now.

(CNBC) – “The level of enthusiasm about the market … has been building. We’re seeing more individuals come in,” said Liz Ann Sonders, chief investment strategist at Charles Schwab.

 

Sonders said she’s anecdotally seeing signs of more individuals putting money to work in the stock market in the last several months, after years of skepticism and concerns about “every variety of doom and gloom.”

 

She says she is getting fewer investors asking about bubbles or about what’s the next shoe to drop.

 

“I think it’s finally starting to suck people in … emotionally, and actually it’s hard to judge why now all of a sudden, but maybe it’s because of how persistent the move has been with so little volatility on the upside and on the downside,” Sonders said. “This year has been different. This kind of year pulls people in.”

 

Retail brokers have been reporting an influx of accounts. Charles Schwab, in its earnings release, said clients opened more than 100,000 new brokerage accounts a month in the third quarter, making for a record-breaking 10-month streak of new accounts topping 100,000. Its rival, TD Ameritrade, said on its earnings call last month that new accounts, asset inflows and other indicators are at the highest since the financial crisis.

What’s frustrating about this is the repeating pattern of government creating conditions in which smart money (that is, the guys who donate big to political campaigns) is allowed to get in early, make huge profits, and then hand the bag to regular people who aren’t connected or sophisticated enough to see what’s happening. The rich, who are or will soon be shorting the hell out of this market, get richer and the rest see their hopes for a decent (or any) retirement dashed one more time.

And the political class wonders why voters don’t like them anymore.

Signs Of The Top? Chinese Demand For 10x Levered Structured Products Surges In US... Again

In the run up to the "great recession" of 2008/2009, it was unsuspecting European and Asian buyers that supplied the marginal capital required to turn America"s plain vanilla, fed-induced housing bubble into a turbo-charged, global financial time bomb by indiscriminately scooping up highly-levered structured mortgage products with absolutely no idea what was behind those products.

Now, it seems that China"s lust for levered returns in U.S. structured products has returned and is focused this time around on the CLO market.  Per Bloomberg: 

Now, a new set of buyers from China are hoping things turn out differently. Instead of snapping up packages of risky derivatives tied to U.S. home loans, they’re buying collateralized loan obligations that bundle together corporate loans to highly leveraged companies. And while such CLOs weathered the last crisis relatively well, there’s already concern that these investors are being tempted to deploy leverage to amplify their returns.

 

On a recent trip to China, potential new investors expressed interest in the idea of applying leverage for the purchase of CLOs, even at the riskier BB level, Chan said. He estimates levered returns for the BB-rated CLO slice may be almost 20 percent. Leverage is employed using the repo financing market, where short-term loans allow investors to borrow money by lending securities.

 

"Over the last 18 months, Chinese investors have shown a marked increase in interest, awareness, and desire to be educated about CLOs, and they’re a pretty sophisticated audience,” said John Popp, global head and chief investment officer of the Credit Investments Group at Credit Suisse Asset Management. The company has $46 billion in assets under management, including CLOs that have a market value of $18.3 billion.

 

“They’ve really learned the product quickly and engage in extensive due diligence,” Popp said. “I expect to see them as steady and growing participants in the CLO market, not as tourists.”

Even though Chinese investors have yet to enter the CLO market en masse, Mitsubishi UFJ believes they could effectively double the demand for CLO new issues in a matter of just 5 years.

In some cases, investment banks and CLO managers have made as many as five trips to Asia this year, adding on special CLO-focused investor conferences in mainland China for the first time ever to raise the product’s profile. The demand to diversify into dollar assets has grown from a wide range of investors, despite Chinese-government capital controls limiting deployment of capital abroad.

 

While Japanese, Korean, Singaporean and Taiwanese investors have been buyers of U.S. CLOs for many years -- even pre-crisis deals, in the case of Japan and Korea -- mainland China is still a relatively nascent, untapped market.

 

“Mainland China is the last market for us to focus on, and we’ve been there four times already this year,” CIFC’s Wriedt said.

 

In contrast to other Asian investors, the Chinese are more willing to invest deeper down the capital structure, or even in the riskiest equity piece.

 

The Chinese investor base for CLOs may be equal to the U.S. in five years’ time if capital controls are relaxed, MUFG’s Khan said. More than $106 billion of new U.S. CLOs have priced so far this year, and the vast majority of investors are still U.S.-based. Potential Chinese investors include quasi-sovereign or insurance companies, so "even a small percentage of what they will do will lead to a large capital infusion," Khan said.

Of course, not everyone is convinced that investing in 10x levered structured products is such a great idea with yields on highly-levered bank debt hovering around all-time lows...

“It wouldn’t be wise for the Chinese to use leverage at this stage,”
said Asif Khan, head of CLO origination and distribution at MUFG. “It’s

dangerous territory. Leveraging BB-rated bonds - is that a good idea?

Any potential use of leverage by Chinese investors could pose potential

risk in case of severe volatility.”

...but what"s the worst that can happen?  It"s not as if Lehman Brothers can liquidate again...

Biggest Short Squeeze In 11 Months Sends S&P 500 Surging Above 2,600

Equity investors, corporate boards, and momo machines are panic-buying stocks this morning, sending the S&P 500 above 2600 for the first time ever... as the yield curve crashes to decade flats...

VIX down, Stocks Up...

 

While USDJPY momo is helping, stocks are quite decoupled...

 

And so are bonds...

 

But it"s all about the squeeze... the biggest short squeeze since December...

Just Two Charts

Before the cash equity market opens, we thought these two charts may help...

FX carry is not helping...

 

And bonds ain"t buying it...

 

Bonus Chart - the yield curve just hit a new cycle low...

What Risk: Deutsche Bank Ramps Up Loans Business In Desperate Scramble For Profit

We have some sympathy for John Cryan, but only to the extent that he has the near impossible task of putting the biggest German bank back on a sound footing regaining market share and generating some elusive revenue growth: a virtually impossible task as long as Europe is choked by NIRP. As we noted two weeks ago, Deutsche’s 3Q 2017 results confirmed that the situation is still getting worse:

Deutsche Bank’s Q3 2017 revenues were €6.78 billion, below market expectations of €6.88 billion. The share price fell 2.7% shortly after the European market open. The problem – like the previous quarter - was a bigger-than-expected drop in trading revenues. Trading revenue was down 30% year-on-year to €1.512 billion versus €2.162 billion in Q2 2017. The challenge for the embattled CEO, John Cryan, is that the trend is still deteriorating. Trading revenues in Q2 2017 fell 18% year-on-year to 1.666 billion euros versus 2.027 billion euros. Earlier this year, Cryan pledged to turnaround the performance of the investment bank as soon as this year.

At the time, we wondered if Cryan’s time wasn"t running out: "The countdown to Cryan"s replacement is ticking ever louder."

So if you were Deutsche CEO Cryan and you needed revenue growth and you needed it fast, what would you do? One thing is to identify a “hot” sector in capital markets with high margins and go all out for growth, never mind the risk. Which is exactly what Deutsche Bank is doing in the leveraged loan market as Bloomberg implies.

While investors are attracted to the high yields from leveraged loans, investment banks are lured by the fees. “Leveraged finance is juicy, juicy stuff,” said Tim Hall, global head of debt capital markets at Credit Agricole SA until last year. “In corporate banking, it probably hast the best margins.” Yet the fees are lucrative for a reason: banks take the risk that investor appetite for leveraged loans may suddenly disappear before they can sell on the debts. Deutsche Bank lost about 2.5 billion euros on “leveraged loans and loan commitments” in 2007 and 2008 combined, annual reports show. “Anyone getting into this sector today should have a good understanding of where we’re at in the cycle of leveraged loans,” said Knutson. “Are we closer to midnight in terms of the exhaustion of it or are we halfway through?”

So…what is Deutsche doing to generate more revenue in leveraged loans? Here"s Bloomberg:

As John Cryan mulls steps to restore growth at Deutsche Bank AG, he’s counting on U.S. companies’ appetite for ever more debt to help lead the charge. The Frankfurt-based lender added 24 managing directors and directors at its U.S. corporate finance business this year, a record hiring pace, according to Mark Fedorcik, co-head of Deutsche Bank’s global capital markets unit. Among the goals: to become a top arranger of leveraged loans again, the risky debt that has surged amid low interest rates and the prospect of a rollback of post-crisis regulations. “Next year will be a robust one for U.S. leveraged finance and we’re going to capitalize on this,” Fedorcik said in an interview. “It’s an area that we’re going to continue to invest in and regain a top-five position.”

As a result, next year might be a “robust one for leveraged finance”, then again it might not. Still, we know three things about banks’ behaviour:

• They are spectacularly “good” at pro-cyclical investment and the leveraged loan market is very “hot”, especially in the US;


• Deregulation, which loosens credit standards, always makes banks take more risk, rather than less; and


• They never learn from one crisis to the next.

 As Bloomberg explains, Deutsche might be able to tick all three of these “boxes”:

Investment banks have arranged $1.2 trillion of U.S. leveraged loans for clients so far this year, more than any other year since at least 2006 and already 18 percent more than all of 2016, data compiled by Bloomberg show. Adding to the frenzy is the U.S. Treasury Department, which has proposed loosening restrictions imposed on Wall Street banks after the 2008 financial crisis. Some analysts fear this could mean a return to the kinds of high-risk loan deals that saddled lenders -- including Deutsche Bank -- with billions of dollars of debts they couldn’t sell during the crash.

In Deutsche’s defence, it does have “form” in the leveraged loan market, having been a top 5 player before slipping down the rankings as the bank stumbled from one crisis to another. In 2017, Deutsche tumbled to ninth place in arranging US leveraged loans, it’s worst showing since 2012.

Then again, the market is already dominated by JP Morgan and Bank of America who, we suspect, are unlikely to roll over to accommodate more market share for their German rival. Consequently, a critical question is how much risk might Deutsche need to take as it seeks to regain its former market position? None according to Deutsche’s co-head speaking to Bloomberg.

The decline was caused by “a little bit of bad luck,” said Fedorcik. The firm has also been “more selective” on taking risks “in some cases,” further reducing the amount of completed deals, he said. Deutsche Bank has arranged more than 300 U.S. leveraged loans so far this year, helping clients including software giant Dell Technologies Inc. and hotel chain Hilton Worldwide Holdings Inc. borrow about $61 billion, according to data compiled by Bloomberg. The hires in the U.S. corporate finance business bring staffing level back to where they were at the beginning in 2016, before speculation about its financial strength rattled the bank and management introduced the steepest bonus cuts in the bank’s recent history. Hires this year include Philip Pucciarelli and Robert Verdier, two health-care investment bankers who joined from BMO Capital Markets. Deutsche Bank also added professionals in its trading operations, bringing in Alexandra Cannon from Barclays Plc as a director in leveraged-loan sales in July. Paul Huchro, who retired from Goldman Sachs in 2015, is joining to oversee investment-grade trading globally as well as high yield in the U.S. and Europe, the bank said last month.

Okay, but we always get nervous when we sense over-confidence on the part of investment bankers. This was the other co-head speaking to Bloomberg.

Deutsche Bank can revise its stance on how much risk it wants to take on leveraged loans at any time, said Alexander von zur Muehlen, Fedorcik’s co-head. “We have the capital and the ability for the business,” said von zur Muehlen. “U.S. leveraged finance is a core business for us.”

Dial up the risk and dial down the risk. If only it was so easy. Our sense is that Cryan is under so much pressure to deliver growth, his strategy is to close his eyes, hope for the best and go for it. After all, this was the man who last month said that “we are now seeing signs of bubbles in more and more parts of the capital market where we wouldn’t have expected them."

Clearly, he was not referring to leveraged loans. Last month, S&P Global Ratings begged to differ, noting that "the risks of this debt binge are significant, given that excessive leverage can bring down a company as fast as prudent borrowing built it up.”

Washington Is "The New Rome"

Authored by James Rickards via The Daily Reckoning,

I just got back from a trip to Washington, or what I call “New Rome” because Washington’s relationship to the rest of America is the same as Rome’s relations with the agrarian and plebeian citizens of its vast domains in late antiquity.

Washington is a parasite that sucks the rest of the country dry. The counties surrounding Washington, D.C., have the highest per capita income of any metropolitan area in the country including New York, Hollywood and Silicon Valley. The unemployment rate is also the lowest of any large region in the country.

At least New York, Silicon Valley and Hollywood all produce something we need or enjoy. Washington produces red tape, taxes and new ways to handicap innovation on a daily basis.

While America staggers after its first lost decade (2007–17) and with a new lost decade set to begin (Japan, anyone?), Washington grows fat and rich. Trust me, the hotels and restaurants in town are jammed. No depression here.

This is an important observation because it has to do with how great powers decline and fall.

The conventional view of the fall of the Roman Empire is that they succumbed to barbarian invaders. That’s only half the story. In fact, barbarians had invaded for centuries and been repeatedly repulsed by Roman citizens who valued their citizenship and were loyal to the emperor and senate in Rome.

Yet as Rome grew corrupt and decadent, it increased taxes and offered less safety in return. There came a time when barbarian rule looked better to frontier agrarians than rule from the corrupt cosmopolitan center.

When the barbarians invaded for the last time, citizens welcomed them. The barbarian policy was 10% taxes in exchange for order. Rome offered 20% taxation and disorder. Citizens went with the barbarians, and the rest is history.

Rome was not destroyed from the outside; it collapsed from the center. I see something similar happening today.

So why was I in Washington?

Well, for better or worse, this is where critical decisions are made that affect war and peace, decline or prosperity and the success or failure of enterprise. If you want to provide forward-leaning analysis to readers, it’s important to interact both with decision makers and the policy experts who advise them.

I’m always happy to share what I learn with my readers, unless it’s highly sensitive material I can’t divulge for national security reasons.

Here’s the latest readout:

There won’t be any tax cut this year. As we say in New York, “fuggedaboudit.” Maybe next year, but even that’s not clear. The stock market has “priced in” a tax cut four or five times since last November. Wall Street loves a good story. So a tax cut policy failure, similar to the failure to repeal Obamacare, could be catalyst for a 10% stock market correction in coming months.

We’ve had four stock market corrections of 10–15% in each of the past eight years, or one every two years on average. The last one was January 2016, almost two years ago. So we’re due.

A 10% stock market correction is not the end of the world. Still, a quick 2,300-point drop in the Dow Jones industrial average might get some attention. This looks like a good time to decrease your equity exposure and allocate more to cash.

Another potential catalyst to watch for is a possible government shutdown on Dec. 8. That’s the day the congressional authorization to keep the government open expires. Unlike the tax bill and some other issues, you need 60 Senate votes to keep the government running. That means Democrats have to go along.

The issues on which Democrats and Republicans disagree include funding for Trump’s border wall, Planned Parenthood, Obamacare insurance bailouts, sanctuary cities and “Dreamer” immigration status. You get the point. There’s no middle ground.

We’ve had several government shutdowns in the past seven years. Again, this is not the end of the world. But it does not inspire confidence in U.S. governance at a time when China is taking center stage and war drums are beating in North Korea. There’s nothing the stock market likes less than uncertainty. This could be a catalyst for the overdue stock market correction.

Finally, I met with President Trump’s national security adviser, Gen. H. R. McMaster, and CIA director Mike Pompeo Thursday afternoon.

It was a small group, invitation-only gathering. Most of my colleagues wanted to drill down on the Iranian portfolio, but my personal brief was all about North Korea. I’ll let my readers know what I learned in the coming days.

My rule on visits to Washington is not to stay more than two days. I don’t want to be captured by any swamp creatures.

So I’ve addressed some of the potentially negative catalysts coming out of Washington. But of course there are other catalysts from the purely market side…

Bull markets in stocks seem unstoppable right up until the moment they stop. Then comes a rapid crash and burn phase.

Is there any warning besides those I mentioned that a collapse is about to happen?

Of course there is. Analysts warn about it all the time and provide mountains of data and historical evidence to back up their analysis. The problem is that everyone ignores them!

You can talk about the dangers represented by CAPE ratios, margin levels, computerized trading, persistent low volatility, and complacency all you want — which I’ve done — but nothing seems to slow down this bull market.

Yet, there is one thing that can stop a bull market in its tracks, and that’s corporate earnings. The simplest form of stock market valuation is to project earnings, apply a multiple, and voilà, you have a valuation.

Multiples are already near record highs, so there’s not much room for expansion there. The only variable left is projected earnings and that’s where Wall Street analysts are having a field day ramping up stock prices.

Earnings did grow significantly in 2017 on a year-over-year basis, but that’s mainly because earnings were weak in 2016 so the year-over-year growth was relatively easy. Now comes the hard part.

How do you expand earnings again in 2018 when 2017 was such a strong year?

Wall Street just uses a simple extrapolation and says next year will be like this year only better. But there is every reason to doubt that extrapolation. Earnings are likely to fall short of expectations, which can lead to a correction. Once that happens, multiples can shrink as well.

Soon you’re in a full-scale bear market with stock prices down 20% or more. That’s without even considering a war with North Korea and all the dangers others I’ve already mentioned.

This may be your last clear chance to lighten up on listed equity exposure before the bubble bursts.

If you haven’t already, I recommend you move a portion of your portfolio into cash, physical gold and select gold mining stocks, plus other hard assets like real estate and fine art.

IceCap Asset Management: "We Are About To Witness The Financial Market Movement Of A Lifetime"

IceCap Asset Management"s Monthly outlook on global investment markets: October 2017, submitted by Keith Decker of IceCap Asset Management

“Should I Stay or Should I Go?”

Darlin’ you got to let me know

During the 1970s, The Clash pushed rock and roll to the edge. Their hard charging, explosive, and anger-filled style, inspired spiked hair, rocked generations and forced people to question conventional thinking.

Along the way, they rocked the casbah. They called London. They got lost in a super market and then they went straight to hell.

For many – The Clash was the only band that mattered.

For investors, they are more – much more.

Today, as investors around the world become increasingly anxious, one of the greatest Clash songs of all time is making a comeback. In board rooms, on trade desks, in living rooms and around kitchen tables – investors everywhere are nervously singing “Should I Stay or Should I go.” Stock market investors are nervous. Housing market investors are nervous. Gold and oil investors are nervous. US Dollar and Euro investors are nervous too.

After all, avoiding near-certain losses should be the most important goal for every investor.

Yet, the confusion today is that practically every talking and writing head has declared everything to be at extreme risk levels. In reality, everything cannot decline at once – money and capital just doesn’t move that way.

Yet, as chaos continues to engulf our world, traditional investment metrics seemingly make less and less sense.

And once you understand this all important fact – then and only then, will you be able to ignore the hyperbole, tune out the 24-7 talking heads, and dismiss the irrelevant quarterly commentaries from the big bank mutual funds.

For investors, these are exciting times. Markets are on the cusp of some of the most dramatic movements we’ve (n)ever seen.

In this latest IceCap Global Outlook, we examine where and why you should be nervous, what to do, and along the way – sing and enjoy the show.

The Stock Market

What can we say – there’s an awful lot of people out there saying an awful lot of awful things about the stock market. The central theme or reason for these negative views is entirely based upon stock market valuation. This view is of course wrong. And to understand why, first you must understand the background supporting these awful claims. For starters, many who proclaim stock investors are living on the edge, have actually been living on the edge themselves.

Many of these bearish investors have shockingly been out of the stock market since the 2008 crash, with others selling out just a few years later. Investors must know that despite the marketing machines, the Hollywood movies, and the internets – many investment managers are simple humans; full of emotion, full of pride, and perhaps worst of all – more stubborn than a goat.

Yes, many managers today are not insensitive, objective androids possessing the gift, the ability, the process and the flexibility to change their investment mind.

Instead – investment managers can be slotted into 3 groups:

Group 1 – this manager works for a mega-big investment firm, that is typically a part of an even bigger firm – a bank. These firms are devoid of dynamic thinking. All peripheral visions have been checked at the door. Client money comes in through the same door and then it is always invested the same way, with no consideration of any significant and obvious events on the horizon.

These managers have no market view, and if for some strange reason they possessed a market view, the compliance and enterprise risk management departments would sniff it out and exterminate it faster than a speeding macchiato. These firms did not see the tech bubble breaking until it was too late. These same firms did not see the housing bubble breaking until it was too late.

And, today these same firms continue to whistle, Disney-themed tunes as the world passes them bye.

Group 2 – these managers were burnt badly by the last crisis and therefore continue to fight the last war. In many ways - these managers are to be commended. They understand risk. They understand how the loss of capital can be devastating for their clients.

These managers have really nice intentions. Yet their deepest concerns about another stock market crash has kept them out of stocks during one of the largest rallies in stock market history.

These managers are so geared towards another market crash that they epitomize confirmation bias. Every single waking hour, day and week – which have turned into months and now years are spent agonizing over how markets are not correctly priced.

The confirmation bias first begins with showing how stocks are more expensive today than they were immediately before the 2008 crash and immediately before the 2000 crash.

And since stocks are more expensive today than compared to immediately before the 2000 and 2008 bubbles, then stocks must therefore be on the verge of crashing yet again.

But they haven’t. Another commonly trolled chart shows the VIX or market fear index:

And since this data point shows current markets are also at the exact same level as they were prior to the 2000 and 2008 bubbles, then stocks therefore must also be on the verge of cracking again.

But they haven’t.

Next, the stock bears whip out charts showing the deterioration in Consumer Credit, the effect of Stock Buy Backs on Earnings per Share, record high profit margins, lower trending GDP, Donald Trump, Brexit, Marine Le Penn, North Korea, Russia, and the beat goes on.

Yet, stocks continue to defy gravity.

Then there’s the money printing, zero interest rates, negative interest rates, financial oppression, and the socialized bad debt.

And yet, stock markets just won’t go down. In fact, not only will stocks not go down, but they continue to go up.

Yes – it’s confusing. But it’s only confusing for those using linear thinking, one-dimensional perspectives, and the refusal to consider that maybe there’s something else a foot. Here at IceCap, we completely agree with this negative assessment of all the above factors.

Yes, on a stand alone and consolidated basis, a stock market specific focus concludes nothing good is about to happen. Yet – this is the very point that is completely missed by managers in Group 2. They absolutely refuse to even consider for a moment that their analysis of risk is correct BUT maybe the risk will not be reflected in the stock market.

Throughout all of these negative reports and analysis, one major point is missing – the consideration that all of the risk in the world today certainly does exist, yet this risk lies within a market completely different than the stock market.

And since, none of these managers in Group 2 believe a major risk can ever occur outside of the stock market – then it is completely missed and dismissed.

Whereas the managers in Group 2 are singularly focused on the stock market, other managers have assessed the exact same global macro dynamics but came to a different conclusion as to where the risk really lies.

Which naturally brings us to investment managers in Group 3.

Group 3 – in many ways, these managers are similar to those in Group 2. They also have terrific intentions, possess a laser-like attention to avoiding capital losses, and a strongly held belief that markets can be pushed and pulled into extreme positions.

Yet, the difference between the two groups lies in the ability to remain asset class agnostic. Whereas the managers in Group 2 are solely focused on the stock market as being the center of all evil.

Managers in Group 3 believe that at different times, any market can be either good or evil. What we mean by this, is that these managers in Group 3 never fall in or out of love with any investment market. Just as there are times to embrace and avoid stocks, the same is true for bonds, gold, currencies and different commodities. When market conditions change, so too will the investment view of these managers. But the key point to understanding this seemingly obvious expectation – and is completely missed by those managers in Group 2; all markets are interconnected.

In other words, stock markets cannot move in isolation without impacting other markets. And of the utmost importance – other markets cannot move in isolation without impacting the stock market.

And, perhaps the single, biggest revelation of all and commonly missed by many – the financial world does not revolve around the stock market.

Yes, the global stock market is big. But it is dwarfed by bond markets, interest rate markets and currency markets. Walk onto the trading floor of any major bank and you’ll see that over 75% of the floor is dedicated to bond, interest rate & currency trading.

The remaining sliver is for the stock market.

Believing the stock market is the king of the hill, is akin to believing the tail wags the dog. Understanding this all important point, will help you see the why the conclusion of the managers in Group 2 has been wrong. Whether they realise it or not, all of their analysis has assumed that everything is fine in the bond, interest rate and currency world.

The reason for this is quite obvious. For many, the stumbling block today is the fact that during the past 35 years – every market crisis has eventually manifested itself in the stock market. And since few in the industry today have worked beyond the last 35 years, then they inherently believe that every crisis is eventually reflected in the stock market.

Here at IceCap, we clearly see that today’s global financial world contains risk unlike anything we’ve seen before in our lifetime. After all, 35 years of accumulated effects of central bank policies, bailouts, fiscal deficits, and excessive borrowings have culminated in today’s rather awkward financial position. Yet, the culmination of these awkward moments, lies in the fact that central banks and their craft have finally hit rock bottom. And in the confusing world of bonds, interest rates, debt and currencies – hitting rock bottom is really the opposite of what you’d expect.

It is bad.

The reason it is bad, is because when interest rates are falling – the bond market zooms higher and higher.

Reality is also true. When interest rates begin to zoom higher – the bond market drops like a stone. And because this stone is multiple times bigger than the stock market, the ripples turn into waves that will gush investors out of the bond market seeking safety. And contrary to every manager in Group 2 – this safety zone will be the USD, gold and yes, the stock market.

So, to answer the classic question from The Clash about the stock market – absolutely stay. The ride will be a bit rough, but it will be nothing compared to what is about to happen in the bond market.

The Bond Market: It’s coming.

And when it hits, it is going to be a doozy. The global bond market is on the verge of doing something never before seen in our lifetime. Of course, the trick to seeing and understanding this certain risk is simply acknowledging the length of your current investment experience. Just because something hasn’t occurred over the last 35 years, doesn’t mean it can never happen.

The near-complete lack of acceptance of a bond bubble is partly due in course to the fact that over the past 35 years, the investing world has only ever seen crises in the stock market. To understand why investors see it this way, see Chart 1 below.

The chart shows the history of long-term interest rates in the United States from 1962 to 2017. Note how from 1962 to 1982, long-term interest rates increased from 3% all the way up to 16%. During this 20 year period of rising long-term rates, financial markets were a disaster. No one made money. Stock investors lost money. And bond investors lost a lot of money.

If I go, there will be trouble

Life was so bad – especially for bond investors, that by the time 1982 rolled around you couldn’t give a bond away. If you were an investor or working in the investment industry at the time – you were painfully aware of the bond market and you were schooled to never, ever buy a bond again.

Of course, 1982 was actually the best time ever to buy a bond. With long-term rates dropping like a stone over the next 35 years, bond investors and bond managers became known as the smartest people in the room. But, that was then and this is now. There are 2 points to remember forever here:

1) What goes down, must come up

2) There’s no one around today to remind us of what life was like for bond investors when long-term rates marched relentlessly higher

Interest rates are secular. And with interest rates today already hitting the theoretical 0% level – they have started to rise. And when long-term rates begin to rise, (unlike short-term rates) it happens in a snapping, violent manner. Neither of which is good for bond investors.

Of course, there’s another important point to consider, the rise in long-rates from 1962 to 1982 occurred when there wasn’t a debt crisis in the developed world.

And since 99% of the industry has only worked since 1982 to today, then 99% of the industry has never experienced, lived or even dreamt of a crisis in the bond market.

This of course is the primary reason why all the negative stories about the stock market are alive and well played out in the media – they simply don’t know any better.

And this is wrong. Very wrong. After all, the bond bubble dwarfs the tech bubble and the housing bubble. Think about it.

 

And if I stay it will be double

To grasp why the bond market is on the verge of crisis, and why trillions of Dollars, Euros, Yen and Pounds are about to panic and run away, we ask you to understand how free-markets really work.

For starters, all free markets have two sides competing and participating.

There are natural buyers and there are natural sellers. The point at which they meet in the middle is the selling/purchase price and the entire process is called price discovery.

Price discovery is a wonderful thing. It always results in the determination of a true price for a product or service. However, a big problem arises when there is an imbalance between the buyers and sellers, and when one of the sides isn’t a natural buyer or seller.

This is what has happened in the bond market. And this is why bond prices (or yields) have become so distorted; the true price of a bond hasn’t existed now for almost 9 years. When the 2008-09 housing crisis crippled the world, central banks decided they would help the world recover by providing stimulus.

The stimulus to be provided was in the form of Quantitative Easing, or money printing.

What happened next has long been forgotten by the majority of the market, and is the prime reason why so few today understand and appreciate the magnitude of the stress that has been created in the bond market.

When the central banks printed money, they actually used this printed money to buy government bonds.

And with central banks suddenly becoming “buyers” of government bonds, the number of “buyers” in the bond market had instantly increased.

And with the number of buyers increasing, the price of bonds increased – which caused long-term interest rates to come down. [note that in the bond world, when prices go up, interest rates go down, and vice-versa].

In effect, the global adoption of Quantitative Easing/Money Printing meant the entire price discovery process would become suspended.

And with a suspended price discovery process, the real or true price for bonds, has not been seen for 9 years. The big point here, and it’s especially big in Europe – the elimination of the price discovery process has resulted in all countries paying lower rates of interest when they borrow.

So come on and let me know

Which, to the average person may seem good. After all, paying lower rates of interest has to be a good thing.

But it isn’t.

Instead, the manipulation of the global yield curve has created an interest rate environment that has become so stretched, shredded and tattered – that even the slightest hint of an end to this financial nirvana is enough to send investors off the deep end.

Case in point - over the last year, we’ve seen the most significant market reaction in the history of the bond world, not once but twice. Yet, the talking heads, the big banks and their mutual fund commentaries, and the stock market focused world have completely missed it.

Almost a year ago in November immediately after the American Election, over a span of 54 hours – the bond market blew up.

To put things into perspective, Chart 2 shows what happened during those fateful days. Ignoring the why’s, the how’s and the who’s – the fact remains that this tiny, miniscule increase in long-term interest rates caused the bond market to vomit over itself.

Yes, a +0.7% increase in the US 10-Year Treasury market yield created chaos, havoc and over $1.7 Trillion in losses around the world.

We’ve spoken before how we had meetings the day after with the world’s largest bond manager and they described the previous few days as registering an 8 out of 10 on the holy smokes scale. Let that sink in.

This +0.7% increase in long-term rates caused this bond behemoth to go down for an 8-count. Folks – this is not reassuring.

* * *

Much more in the full presentation below:

Snap's New Business Model

From the Slope of Hope: One of the hottest, most widely-anticipated IPOs in years took place in March of this year - - Snap, Inc., which is, of course, the owner of the Snap app (although they insistently refer to themselves as "a camera company".) Perhaps another mission statement is in order, however, as they appeared to have now expanded to..........Halloween costumes.

No, I am not making this up. The one and only product from Snap you can purchase on Amazon is, in fact, this costume in which you can pretend you are a hot dog. 

So the company has never made a dime, and in fact loses hundreds of millions of dollars, and its shareholders have managed to lose half their money since this dog (so to speak) went public:

In spite of this fiasco - - and laughable diversification of its business model - - I must again request that you cut Evan Spiegel, Snap"s CEO and founder, some slack, as he continues to be fully distracted by his new wife, Miranda Kerr, who found Mr. Spiegel terribly attractive around the time he made his gigantic fortune. How about that.

GDP Is Bogus: Here's Why

Authored by Charles Hugh Smith via OfTwoMinds blog,

Here"s a chart of our fabulous always-higher GDP, adjusted for another bogus metric, official inflation.

The theme this week is The Rot Within.

The rot eating away at our society and economy is typically papered over with bogus statistics that "prove" everything"s getting better every day in every way. The prime "proof" of rising prosperity is the Gross Domestic Product (GDP), which never fails to loft higher, with the rare excepts being Spots of Bother (recessions) that never last more than a quarter or two.

Longtime correspondent Dave P. of Market Daily Briefing recently summarized the key flaw in GDP: GDP doesn"t reflect changes in the balance sheet, i.e. debt.

So if we borrow money to pay people to dig holes and then fill them with the excavated dirt, GDP rises to general applause. The debt we took on to fund the make-work isn"t accounted for at all.

Here"s Dave"s explanation:

Once I learned about accounting, I figured out why the GDP metric wasn"t sufficient. What is missing?

The balance sheet.

Hurricanes are a direct hit to your nation"s balance sheet. The national income statement goes up because of increased spending to replace lost assets, but the "equity" part of the national balance sheet ends up taking a hit in direct proportion to the damage that occurred. Even if you rebuild everything just the way it was, your assets remain the same, while your liabilities have increased.

We know this because we use the balance sheet equation: equity = assets - liabilities. Equity is another word for wealth.

Before hurricane:

wealth = (house + car) - (home debt + car debt)

After hurricane, you rebuild your house, and buy a new car, using borrowed money:

wealth = (house + car) - (2 x home debt + 2 x car debt)

Wealth (equity) has declined by the sum (home debt + car debt)

So when you see pictures of a hurricane strike, you can now look through all that devastation and see the impact on the balance sheet. National equity (wealth) just dropped by the amount of damage inflicted by the hurricane. Whether it is ever rebuilt doesn"t actually matter; that equity is just gone. Destruction is always a downside for equity - even if there is a temporary positive impact on the income statement.

Isn"t it interesting that the mainstream economists, who don"t use banks, debt, or money in their models, largely ignore balance sheets and instead just looks at the income statement alone? Its almost as if the entire education system was organized so that people paid no attention to banks, debt, and money. Who do you think might benefit from our flock of PhD economists ignoring the extremely profitable debt-elephant in the room, and its purveyors, the banks?

Thank you, Dave, for an explanation we never see in the mainstream. And here"s a chart of our fabulous always-higher GDP, adjusted for another bogus metric, official inflation:

*  *  *

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. Check out both of my new books, Inequality and the Collapse of Privilege ($3.95 Kindle, $8.95 print) and Why Our Status Quo Failed and Is Beyond Reform ($3.95 Kindle, $8.95 print, $5.95 audiobook) For more, please visit the OTM essentials website.

Here's How People Get Fooled Into Buying Bankrupt Companies...

Authored by Simon Black via SovereignMan.com,

In 1906, American entrepreneur William T. Grant opened his very first “W.T. Grant Co 25 cent store” in a small town outside of Boston.

The store became popular and fairly profitable. So Grant opened another. And another.

Three decades later, Grant’s retail empire was generating $100 million in sales (an enormous sum back then). And by the time of Grant’s death in 1972, there were over 1,000 stores bearing his name.

Investors loved W.T. Grant Company stock for its reliable profits and high dividends.

Many of our subscribers may remember W.T. Grant. The chain was among the largest in the US at its peak.

And then something completely unexpected happened…

In 1976, W.T. Grant Company declared bankruptcy.

At the time, it was the second biggest bankruptcy in US history. And, like the downfall of Lehman Brothers and other big Wall Street institutions at the onset of the 2008 financial crisis, it was a shock to the world.

How could a company as big and profitable as W.T. Grant Co. go bust?

In the autopsy that followed the bankruptcy, accountants found that while the company was generating substantial PROFIT, it was not generating any CASH FLOW.

These two terms sound the same, but they’re dramatically different.

Profit, or more specifically net income, includes all sorts of bizarre accounting rules that don’t actually make sense in the real world.

Due to these rules, companies are often required to adjust revenue and expenses for things like “depreciation”, or “foreign exchange gains and losses”.

These are all merely accounting terms that don’t directly and immediately affect cash balances. But they can dramatically impact “profitability.”

Here’s one example from my own experience: a few years ago, the large agriculture company that I founded here in Chile purchased a farm.

We bought it for far below the property’s market value.

It was a great deal for the business. BUT… accounting rules required that our company record a PROFIT based on the difference between what we paid for the property and what it was worth.

This idiotic rule made it seem like we achieved a profit simply for buying a property.

This makes no sense. In the real world, we would only earn a profit by SELLING the property for a higher amount than we paid. You can’t profit before you sell something.

It’s rules like this that make profit an unreliable metric.

CASH FLOW is much more accurate.

Specifically, OPERATING CASH FLOW tells us how much money a company makes from its business.

It strips out all the silly rules and focuses purely on how much cash a business generates from its operations.

Then there’s FREE CASH FLOW, which is the amount of money left over for investors AFTER a company makes all of the necessary investments it requires for future growth.

Cash flow is what counts. If a company has negative cash flow, it will eventually go under.

Profit can be misleading. And that’s what happened to W.T Grant Co. It was profitable but had negative cash flow.

Today there’s another famous business in similar circumstances– our old friend Netflix.

Quarter after quarter, Netflix reports a profit.

Just yesterday afternoon the company had its quarterly earnings call, posting a profit of $553 million. Not bad.

Yet when anyone dives just a little bit deeper into the numbers, Netflix’s cash flow is absolutely gruesome.

The company’s operating cash flow is negative. In other words, after stripping out all the unrealistic accounting nonsense, Netflix’s core business LOSES MONEY.

In fact Netflix’s operating cash flow has been negative FOR YEARS. And the amount of money its losing is increasing.

Netflix’s business has lost $1.3 billion so far through the first nine months of 2017. That’s 52% worse than the $916 million operating cash flow deficit they suffered in the first nine months of 2016, and nearly three times worse than the $504 million operating cash flow deficit during the first nine months of 2015.

Throughout this period, the number of Netflix subscribers has steadily grown, now well in excess of 100 million.

And every time Netflix reports a big surge in subscribers, the stock price soars.

This is truly bizarre. Just look at the cash flow numbers: as the number of Netflix subscribers has grown over the years, the company losses have grown even more.

It reminds me of that old saying from the 1990s dot-com bubble– “We lose money on every sale, but make up for it in volume.”

But it gets worse.

The company’s negative operating cash flow doesn’t include the billions of dollars that it spends on content.

And on its quarterly earnings call yesterday, executives announced they will spend a whopping $8 billion on original content next year.

That’s $8 billion that they don’t have. And don’t forget the $1.4 billion operating cash flow deficit.

Where are they possibly going to find this money? Simple. Debt. Netflix will pile on more and more debt despite racking up enormous cash flow deficits.

Now, to be fair, it’s not unusual for a business to lose money for a period of time as part of a longer-term plan to generate strong cash flow.

But just look at this industry: it seems like EVERYONE is diving in to this original content game.

Apple. Facebook. Amazon. CBS. Disney. Google. Sony. Time Warner. Hulu. Each of these organizations has developed a streaming service with original content.

And some of them (especially Google and Facebook) have an endless war chest thanks to their cash-gushing core businesses.

Google’s parent company (Alphabet) reported free cash flow of $11.6 billion in the second quarter alone. So it could easily outspend Netflix and still have billions of dollars left over.

All of this competition is going to be great for consumers; these companies are collectively spending tens of billions of dollars to entertain us. And they’re going to lose money doing it.

But for investors this is sheer madness. Don’t be the sucker paying for other people’s entertainment.

And to continue learning how to safely grow your wealth, I encourage you to download our free Perfect Plan B Guide.

"Today, The Music Stops..."

Authored by Simon Black via SovereignMan.com,

Today’s the day.

After months of preparing financial markets for this news, the Federal Reserve is widely expected to announce that it will finally begin shrinking its $4.5 trillion balance sheet.

I know, that probably sound reeeeally boring. A bunch of central bankers talking about their balance sheet.

But it’s phenomenally important. And I’ll explain why-

When the Global Financial Crisis started in 2008, the Federal Reserve (along with just about every central bank in the world) took the unprecedented step of conjuring trillions of dollars out of thin air.

In the Fed’s case, it was roughly $3.5 trillion, about 25% of the size of the entire US economy at the time.

That’s a lot of money.

And after nearly a decade of this free money policy, there is more money in the financial system than ever before.

Economists have a measure for money supply called “M2”. And M2 is at a record high — nearly $9 trillion higher than at the start of the 2008 crisis.

Now, one might expect that, over time, as the population and economy grow, the amount of money in the system would increase.

But even on a per-capita basis, and relative to the size of US GDP, there is more money in the system than there has ever been, at least in the history of modern central banking.

And that has consequences.

One of those consequences is that asset prices have exploded.

Stocks are at all-time highs. Bonds are at all-time highs. Many property markets are at all-time highs. Even the prices of alternative assets like private equity and artwork are at all-time highs.

But isn’t that a good thing?

Well, let’s look at stocks as an example.

As investors, we trade our hard-earned savings for shares of a [hopefully] successful, well-managed business.

That’s what stocks represent– ownership interests in businesses. So investors are ultimately buying a share of a company’s net assets, profits, and free cash flow.

Here’s where it gets interesting.

Let’s look at Exxon Mobil…

In 2006, the last full year before the Federal Reserve started any monetary shenanigans, Exxon reported $365 billion in revenue, profit (net income) of nearly $40 billion and free cash flow (i.e. the money that’s available to pay out to shareholders) of $33.8 billion.

At the time, the company had $6.6 billion in debt.

Ten years later, Exxon’s full-year 2016 revenue was $226 billion, net income was $7.8 billion, free cash flow was $5.9 billion and the company had an unbelievable debt level of $28.9 billion.

In other words, compared to its performance in 2006, Exxon’s 2016 revenue dropped nearly 40%, due to the decline in oil prices.

Plus its profits and free cash flow collapsed by more than 80%. And debt skyrocketed by over 4x.

So what do you think happened to the stock price over this period?

It must have gone down, right? I mean… if investors are essentially paying for a share of the business’ profits, and those profits are 80% less, then the share of the business should also decline.

Except — that’s not what happened. Exxon’s stock price at the end of 2006 was around $75. By the end of 2016 it was around $90, 20% higher.

And it’s not just Exxon. This same curiosity fits to many of the largest companies in the world.

General Electric reported $13.9 billion in free cash flow in 2006. Last year’s free cash flow was NEGATIVE.

Plus, the company’s book value, i.e. its ‘net worth’, plummeted from $122 billion in 2006 to $77 billion in 2016.

So investors’ share of the free cash flow is essentially worthless, while their share of the net assets has also fallen dramatically.

GE’s stock was actually down slightly in 2016 compared to 2006. But the minor stock decline is nothing compared to the train wreck in the company’s financial statements.

Between 2006 and 2016, McDonalds reported only a tiny increase in revenue. And in terms of bottom line, McDonalds 2016’s profit was about 30% higher than it was in 2006.

McDonalds’ debt soared from $8.4 billion to $25.8. And the company’s book value, according to its own financial statements, dropped from $15.8 billion to NEGATIVE $2 billion.

So over ten years, McDonald’s saw a 30% increase in profits, but took on so much debt that they wiped out shareholders’ book value.

And yet the company’s stock price has TRIPLED.

Coca Cola. IBM. Johnson & Johnson.

Company after company, we can see businesses that are performing marginally better (or in some cases WORSE). They’ve taken on FAR more debt than ever before.

Yet their stock prices are insanely higher.

How is that even possible? Why are investors paying more money for shares of a business that isn’t much better than before?

There’s really only one explanation: there’s way too much money in the system.

All that money the Fed printed over the years has created an enormous bubble, pushing up the prices of assets to record highs even though their fundamental values haven’t really improved.

As the Wall Street Journal reported yesterday, “Financial assets across developed economies are more overvalued than at any other time in recent centuries,” i.e. at least since 1800.

Investors are paying far more than ever for their investments, but receiving only marginally more value in return. And they’re actually excited about it.

This doesn’t make sense. We don’t get excited to pay more and receive less at the grocery store.

But when underperforming assets fetch top dollar, people feel like they’re wealthier. Crazy.

Today the Fed should formally announce that after nearly a decade, it’s going to start vacuuming up a lot of that money it printed in 2008.

Bottom line: they’re going to start cutting the lights and turning off the music.

And given the enormous impact that this policy had on asset prices, it would be foolish to think its reversal will be consequence-free.

Do you have a Plan B?

Is the Difference Now Permanent?

From the Slope of Hope: I will start off with a chart that, in a sea of tens of thousands of charts, stood out as shocking:

What the chart represents is the percentage drop from whatever the record high was. In other words, it shows the percentage loss a person would have had if they had bought at the highest point in the history of the market.

What stunned me about the chart was how for nearly half a decade stocks have been absolutely "pinned" to the top. There was a tiny dip in late 2015, but since that time, there hasn"t been a single drop in the market of even 5%, and even those tiny 1% and 2% drops have been utterly healed.

In other words, hell on earth for an equity bear. Absolute. Living. Hell.

Of course, equity bulls are doing fine, and those who didn"t trade the market prior to 2012 must figure this is the easiest thing in the known universe. Indeed, they probably feel like geniuses. Because all you do is deposit some money, pick a few random stocks, and voila, you have more money than before.

Why should anybody even bother working, with such easy money out there?

Of course, those of us who study markets for a living know that there"s a pretty simple reason for this unidirectional "market" of ours......

Hell, it even applies right down to the individual stocks!

So the question I ponder with increasing frequency now - - and it"s a question whose potential answer chills me to the bone - - is this: what if it really is different this time? And, more important, what if this difference is permanent?

What if, in the relatively brief history of public equity markets, it simply took this much progress in technology, central bank knowledge, and economic scholarship to finally figure out how to completely control the market without serious price inflation?

What if, as recent history shows, equities will merely increase in price in perpetuity? They might not move that swiftly, but they will, more or less, become more valuable, with a sprinkling of tiny drops here and there to make sure people don"t go completely hog wild.

Let"s think of this from a different angle: as you probably know, the market for diamonds is tightly controlled. De Beers has mastered the art of the cartel. If diamonds were simply in a huge global open market, with price discovery fully allowed, there is no doubt prices would be far lower (albeit more volatile), because they actually are NOT that rare or precious.

As it is, though, De Beers has balanced massive marketing ("a diamond is forever"........."how can you make two months" salary last forever?") with artificially-controlled supply to yield a market with pretty much zero volatility and a steadily increasing price.

Maybe the chart above is the future of stocks. I really don"t know.

But do you notice there"s no active public market for buying and selling diamond as a commodity? And that there aren"t any technical analysts for diamond charts? Or that there"s no national network devoted to news related to diamonds? It"s because all of that stuff would be drop-dead boring, because prices are controlled, and predictable, and not worthy of examination. Someone figured out how to control the market. And thus the "market" no longer exists.

God help us all............us chartists especially...........if this is the new world order for equities.