Saturday, July 22, 2017

This Cannot Be The New Normal / By: Bruce Wilds

The Above Chart Is Not A Reflection Of Normal! 
The confusing market action has reached the point many of us are now wondering is this the new normal. Even as the market has forged its way into new territory the new highs have done little to alleviate the concerns of many investors that something is very wrong. More important than how the economy appears to the casual observer is the strength of the foundation on which it's built. This extends to issues such as growing inequality and just where we are headed when it comes to people being able to earn a living in the future. Jobs, jobs, jobs, much of this is about what is produced and how the fruits of our labor are distributed.

The current economic trends are unsustainable and unworthy of our faith. The markets reflect what I consider a total disconnect from the economic reality of sustainability, the numbers going forward simply do not work. I find little reassurance in trends that filter much of society's money and wealth into paper assets and promises rather than what we see as real and solid tangible assets. This has masked inflation by taking newly printed money out of direct competition for tangible goods which would normally drive their prices higher. Instead, it has made many goods downright cheap in comparison to prices people pay for things that are not real and often of questionable value.

A matter that weighs heavy upon both the economy and society, in general, is the productivity debate. Economists trying to explain the apparent structural slowdown in productivity growth have been forced to ask where is the missing increase? No easy answers exist to the questions arising from our evolving economic situation and the encompassing concerns about how we measure structural shifts in the labor market, a dearth of investment opportunities, productivity-diluting technological innovations, technology-driven skills mismatches and growing inequality. Efforts to increase demand and pull productivity forward have failed and resulted in massive debt growth across the world.

As Robots Take Our Jobs What Becomes Of Us?
Whether what we produce is allowed to flow to individuals or is whisked away by government for projects they claim serve the "greater good" or in the end directed in other directions is of great importance. This even translates into the decision to produce guns or butter and should include the fundamental question of, how much productivity growth do we really want or need considering the long-term cost to our planet. It should be pointed out that for many individuals, especially those residing in the wealthier developed countries, the top priority is not simply becoming richer, but developing a richer life. Living in a way that produces a better overall outcome.

Over the long-term what the economy is presenting us with today cannot be called the new normal in that little of we call normal is reflected in this economy. While growing debt and expanding credit have moved demand forward we should not delude ourselves into thinking it will be repaid. Much of it will slip into default exacerbating future problems. It may be time for mankind to take a moment and ponder what the human animal really wants, and the fact is we are still really just an animal and the answer might be something totally different from what we are being told by those we have given the power to shape our future.

Two Very Different Pictures Of The Future
As to whether it is time to rush off and embrace what some see as a "brave new world" the debate continues. We should remember with opportunity often comes risk. One area some people see as the answer to our problems is the development of artificial intelligence also known as AI. Some forward thinkers including Elon Musk have warned of what he called the possibility of "bad utility value" saying mans position on this planet depends on his intelligence and if his intelligence is exceeded by AI it is unlikely we will remain in charge of the planet. Some of these thoughts are echoed in an article by John Havens that start out, "I, for one, do not welcome our new robot overlords"

At this point, the idea of a sustainable and balanced future seems rather elusive and it does not seem that we are on a course towards perpetual bliss. As this is being written the drums of war drown out reason and the threat of war with countries such as Russia, North Korea, or even China are all too real. Over the years as society has become richer we have seen the relative value placed on different parts of our lives shift. Overall those in charge and the elites have failed to create a compelling answer to our woes. It will be most interesting as we progress to see if we can channel our time, income, and creativity towards solving our problems rather than diverting our energy into creating new ones.

Footnote; Today we find we are still trapped in the box Ben Bernanke built with no way out, compounding our problems is the fact we never received the promised economic growth promised to flow from his financial remedy. The article below explores this situation.

Thursday, July 20, 2017

Iran And The Reason For Its Deep Distrust Of America

Iran Has Little Reason To Trust Aamerica / By: Bruce Wilds

Much of the problem America has with Iran flows from the perception that we have created over the years by portraying Iran as being a larger than life boogeyman that threatens our very way of life and existence. Remember Iran was elevated to this level when President George W. Bush used the term "Axis Of Evil" in his State of the Union Address in 2002, not only did he include Iran as being a member, but he often repeated it throughout his presidency. A big issue with me is that Washington and the politicians who reside there have lied and misled us so often it is difficult to believe them when it comes to such an important matter as this. I'm dubious of anything coming out of Washington because the government is very attuned and highly geared to serve the agendas of special interest that place lining their pockets above the common good.

When it comes to Iran's official stance towards America anyone saying that Iran has good reason not to trust the American government is making an understatement. America through its foreign policy has reeked havoc upon many countries, but few societies have been affected or suffered from our meddling as much as Iran. A neutral source without an agenda, in this case, would be Wikipedia, and a quick read of the history of Iran post-World War II shows America has constantly interfered in their internal politics. In 1953 the British M16 and the American CIA organized a military coup d'etat to oust the nationalist and democratically elected Prime Minister and form a government that allowed the country to be firmly ruled by Mohammad-Reza Shah Pahlavi, the man we all know as the Shah of Iran, in Persian Shah means king.

Under the idea that America must get along with Iran one way or another it is only fair to call attention to some very damning declassified documents released recently that shed light on the Central Intelligence Agency’s central role in the 1953 coup that brought down Iranian Prime Minister Muhammad Mossadegh. This eventually fueling a surge of nationalism which culminated in the 1979 Iranian Revolution and has poisoned the relationship between the U.S.and Iran. The approximately 1,000 pages of documents reveal for the first time the details of how the CIA attempted to call off the failing coup but it went forward because of an insubordinate spy on the ground.

The documents conflict with the U.S government's long denied involvement in the coup. The State Department first released coup-related documents in 1989 but edited out any reference to CIA involvement. Public outrage coaxed a government promise to release a more complete edition, and some material came out in 2013. Two years later, the full installment of declassified material was scheduled but the release was delayed fearing it might interfere with the Iran nuclear talks that were taking place. Now they have finally been released, it should be noted they are not complete because numerous original CIA telegrams from that period are known to have disappeared or were destroyed long ago.

What is clear and finally brought to light is the CIA plot known as Operation Ajax, was about oil. In early 1951, amid great popular acclaim, Mossadegh nationalized Iran’s oil industry. A fuming Great Britain began conspiring with U.S. intelligence services to overthrow Mossadegh and restore the monarchy under the Shah. While some of the U.S. State Department, the newly-released cables show, blamed British intransigence for the tensions and sought to work with Mossadegh plans were made for a coup. The coup attempt began on August 15th but was swiftly thwarted. Mossadegh made dozens of arrests. General Fazlollah Zahedi, a top conspirator, went into hiding, and the Shah fled the country.

At that point according to a newly declassified cable sent on August 18, 1953, the CIA under the impression the coup had failed decided to end their role. The message read, “Operations against Mossadegh should be discontinued.” Part of the logic to bury this then bury the shovel was obvious when they wrote, “Operation has been tried and failed and we should not participate in any operation against Mossadegh which could be traced back to U.S.”  The cable which Kermit Roosevelt, top CIA officer in Iran, purportedly and famously ignored, according to Malcolm Byrne, who directs the U.S.-Iran Relations Project at the National Security Archive at George Washington University.

Byrne told Foreign Policy, “One guy was in the room with Kermit Roosevelt when he got this cable,” and “[Roosevelt] said no – we’re not done here.” It was already known that Roosevelt had not carried out an order from Langley but the cable itself and its contents were kept secret. What unfolded next is pivotal, on August 19, 1953, with the aid of “rented” crowds widely believed to have been arranged with CIA assistance, the coup succeeded and Iran’s nationalist hero jailed. The monarchy quickly restored under the Western friendly Shah. The existence and extent of Operation Ajax have long been a major point of contention for many Iranians from which the flames of anti-Western sentiment have grown, in 1979 they resulted in the U.S. hostage crisis, the Shah being overthrown and the creation of the Islamic Republic.

Many Iranians Want More Freedom
Our current agreement with Iran was reached as an alternative to the unsavory option of taking military action to halt Iran from developing a nuclear bomb. History shows war to be a pathetic option to bring about positive change, war brings about change but to what degree and for how long. In truth, few Americans know much about Iran or its 78 million inhabitants or have ever visited the country. Many people would have difficulty pinpointing its location on an unmarked map and the chief source of what knowledge they do have is usually from the evening news. The official name of the country is the Islamic Republic of Iran and it is an area that history called Persia with Persian being the official language and the rial is its currency. Iran's unique political system based on its 1979 constitution combines elements of a parliamentary democracy with a theocracy governed by the country's clergy. The country is made up of several ethnic and linguistic groups but most inhabitants are officially Shia.

The Shah maintained a close relationship with America and shared our views towards the Soviet Union its northern neighbor. Iran was a strong ally in efforts to keep the Russians contained during the cold war. While the Shah westernized and modernized Iran he also ruled with a heavy hand. Arbitrary arrests and torture by the Shah's secret police were used to crush all forms of political opposition. Ayatollah Ruhollah Khomeini an active critic of the Shah publicly denounced the government and was arrested and imprisoned for 18 months. After his release when Khomeini publicly criticized the United States government he was sent into exile. When oil prices spiked in 1973 due to an oil embargo declared by OPEC and several other countries a flood of foreign currency into Iran caused double-digit inflation, waste, and corruption that was followed by a recession and social unrest. Protest and strikes spread until they reached a point where the Shah fled the country and Ayatollah Khomeini returned in 1979.

In the spring of 1979 a new government was formed and over the next several years uprisings were subdued in a violent manner as the new government went about purging itself of the non-Islamist political opposition that had joined with them to overthrow the Shah, tens of thousands were eventually executed by the Islamic regime. A part of history that lingers strongly in the minds of many Americans is that in November 1979, a group of Iranian students seized the U.S. embassy taking  52 U.S. citizens and embassy personnel hostage after the U.S. refused to return the former Shah to Iran to face trial and execution. The hostages were finally set free on Jimmy Carter's final day in office, but many Americans continue to view this as a slap in the face. A serious bone of contention among Iranians is what happened next.

America Supported Iraq Which Attacked Iran
On September 22, 1980, the Iraqi army invaded Iranian Khuzestan this signaled the start of the Iran–Iraq War. Although Saddam Hussein's forces made several early advances, by mid-1982 the Iranian forces successfully managed to drive the Iraqi army back into Iraq and Iran made the decision to invade Iraq in a bid to conquer Iraqi territory. The war continued until 1988 when the Iraqi army defeated the Iranian forces inside Iraq and pushed the remaining Iranian troops back across the border. It is clear the United States, alongside regional and international powers, supported Iraq and Saddam Hussein with loans, military equipment, and satellite imagery during Iraqi attacks against Iranian targets. Subsequently, Khomeini accepted a truce mediated by the UN, but the war cost Iran many lives and huge economic damage, half a million Iraqi and Iranian soldiers, with an equivalent number of civilians, are believed to have died, with many more injured. It must be noted that during the conflict America and the international community remained silent as Iraq used chemical weapons of mass destruction against Iran as well as the Kurds in northern Iraq.

Following the war, Iran concentrated on a pragmatic pro-business policy of rebuilding and strengthening the economy without making any dramatic break with the ideology of the revolution. Tensions with the United States dramatically increased after the 2005 presidential election brought the conservative populist candidate, Mahmoud Ahmadinejad, to power. His over the top rhetoric galvanized the feeling Iran had no intention to take a peaceful place in the world community. In 2009 protest erupted in Iran after President Mahmoud Ahmadinejad was reported to have won nearly 60 percent of the vote despite voting irregularities. Despite the relatively peaceful nature of the protests, the police and the Basij (a paramilitary group) crushed the people by using batons, pepper spray, sticks and, in some cases, firearms. Images of Neda Agha-Soltan, who was shot and died were uploaded to mass media and broadcast around the world.

Travel Documentary Shows Little Malice Towards America
It was reported that thousands were arrested and tortured in prisons around the country, with former inmates alleging mass rape of men, women, and children by the Iranian Revolutionary Guards. Relatives of those killed are forced to sign documents claiming they had died of heart attack or meningitis. The world watched and did nothing. On June 15, 2013, the electoral victory of new Iranian President Hassan Rouhani took place and since then Iran has improved relations with other countries. This recall of history is necessary to understand the real nature of the American-Iranian relationship and how we arrived at today. It should be noted that many Iranians have no malice towards America and are far more moderate than the political apparatus with its strong links to the country's clergy. A few years ago Rick Steves produced a documentary that explored Iran in a one-hour, ground-breaking travel special. This is a good place to meet the people of this nation whose government so exasperates our own.

John Kerry a key player in crafting our current agreement with Iran has stressed that if Iran fails to meet the requirements of the current deal, all options remain on the table. Sadly armed conflict tends to be a Pandora's box rather than an easy answer to our problems. We must defend ourselves, but the fact is mothers value their children just as the peasant in a rice patty field values his ox, neither want to see them killed in a war. If we look at every war ever fought we will find that most of the people affected by the violence only wanted to be left alone. It seems the first casualty of war is truth and governments often go to enormous lengths to persuade people to go to war using the tools of patriotic seduction, propaganda, and coercion. Governments convince and mobilize the people by painting a picture of an evil enemy that must be stopped. This means a lack of knowledge does not bode well for society when it comes to our ability to foster intelligent government. The term "need to know" should be revisited and changed to "we all need to know as much as possible".

With this in mind, we should not give the Obama administration too much credit for bringing us a great or even good agreement. Remember that during the Obama years many people considered foreign policy a mess as he flip flopped ignoring even the red lines he boldly drew in the sand. When Kerry talked about offsetting the boatload of money Iran was to receive when the sanctions were lifted by "upping our game in the area" questions arise as to the cost and how Washington intends to pay for this next gambit. Even a part of the one hundred and fifty billion dollars Iran received can go a long way toward funding the many proxy wars being fought in the area. While officials say this international agreement will halt much of Iran’s nuclear program and ratchet back other elements of it several U.S. senators, both Democrat and Republican, have voiced displeasure with the parameters of the agreement, arguing that the U.S. and its partners are offering too much for something short of a full freeze on uranium enrichment.

Those who are skeptical and view this as a weak agreement say Obama backed down again. President Obama noted the qualms of Israel, Saudi Arabia and other Persian Gulf allies of the United States and that they are skeptical of Iran’s intentions. An interesting thought to consider is Iran held more cards than we were told at the time because ISIS was a growing threat. In many ways when the agreement was reached Iran held the fate of Baghdad in their hands. If the Shia militias from Iran that were defending Baghdad wavered both the Iraqi capital and the American Green Zone could have come under fire from ISIS, this would have been very embarrassing for Obama and our government. For the world, the bottom-line remains that if  Iran does not halt and reverse its course any agreement means nothing. Iran can always ramp up its plans to develop a nuclear bomb at off-site locations. The fact is if current trends continue in the future Iran looks to face a defanged and economically weakened America with less power in the region. Regardless the fact remains that one way or the other we must deal with Iran and war is not a great option.

Wednesday, July 19, 2017

Ponzi Scheme 101- When It's Too Good To Be True / By: Bruce Wilds

We often hear the term "Ponzi Scheme" used to describe a financial plan that is destined to fail or appears too good to be true, however, few people know much about the term's origin. What seems familiar to me or even many Americans is not always common knowledge, sometimes we accept and use a term because it has been bantered around time and time again. To those who are unfamiliar with the term Ponzi Scheme or just would like to know more about where it originated and such please read on.
The Ponzi Scheme is a fraudulent investment operation that pays returns to its investors from their own money or the money paid by subsequent investors and not from profits it earns. The Ponzi scheme usually entices new investors by offering higher returns than other investments. The perpetuation of the high returns requires an ever-increasing flow of money from new investors to keep the scheme going. The system is destined to collapse because the earnings, if any, are less than the payments to investors.  The scheme is named after Charles Ponzi who became notorious for using the technique in 1920. While Ponzi did not invent the scheme that was described in novels as far back as the 1850s his operation took in so much money that it gained massive notoriety. Usually, the scheme is interrupted by legal authorities before it collapses because as more investors become involved,  the likelihood of authorities taking notice increases.

 Born in Italy Charles Ponzi arrived in Boston aboard the S.S. Vancouver, on November 15, 1903, he had $2.51 in his pocket, having gambled away the rest of his life savings during the voyage. "I landed in this country with $2.50 in cash and $1 million in hopes, and those hopes never left me," he later told The New York Times. He quickly learned English and spent the next few years doing odd jobs along the East Coast, eventually taking a job as a dishwasher in a restaurant, where he slept on the floor. He managed to work his way up to the position of waiter but was fired for shortchanging the customers and theft. For the next few months, he worked at a number of businesses, including his father-in-law's grocery, before hitting upon an idea to sell advertising in a large business listing to be sent to various businesses. Ponzi was unable to sell this idea to businesses, and his company failed soon after.

 A few weeks later, Ponzi received a letter from a company in Spain asking about the catalog. Inside the envelope was an international reply coupon (IRC), the purpose of the postal reply coupon was to allow someone in one country to send it to a correspondent in another country, who could use it to pay the postage of a reply. He asked about it and found a weakness in the system which would, in theory, allow him to make money. IRCs were priced at the cost of postage in the country of purchase, but could be exchanged for stamps to cover the cost of postage in the country where redeemed; if these values were different, there was a potential profit. Inflation after World War I had greatly decreased the cost of postage in Italy expressed in U.S. dollars so that an IRC could be bought cheaply in Italy and exchanged for U.S. stamps of higher value, which could then be sold. Ponzi claimed that the net profit on these transactions, after expenses and exchange rates, was in excess of 400%. He would legally profit by buying an asset at a lower price in one market and immediately selling it in a market where the price is higher.

Ponzi borrowed money and sent it back to relatives in Italy with instructions to buy postal coupons and send them to him. However, when he tried to redeem them, he ran into an avalanche of red tape. Undaunted, Ponzi went to several of his friends in Boston and promised a 50% profit within 45 days, or 100% profit within 90 days, by buying discounted postal reply coupons in other countries and redeeming them at face value in the United States. Some people invested and were paid off as promised, receiving $750 interest on initial investments of $1,250. Soon afterward, Ponzi started his own company, the "Securities Exchange Company," to promote the scheme. As word spread, investors came in at an ever-increasing rate. Ponzi was able to hire agents and paid them generous commissions for every dollar they brought in.

By February 1920, Ponzi's total take was US$5,000, (approximately US$54,000 in 2010 dollars). By March, he had made $30,000 ($324,000 in 2010 terms). A frenzy was building, and Ponzi began to hire more agents to take in money from all over New England and New Jersey. At that time, investors were being paid impressive rates, encouraging others to invest. By May 1920, he had made $420,000 ($4.53 million in 2010 terms). He began depositing the money in a small bank, the Hanover Trust Bank of Boston in the hope that once his account was large enough he could impose his will on the bank or even be made its president; he bought a controlling interest in the bank through himself and several friends after depositing $3 million. By July 1920, he had made millions. People were mortgaging their homes and investing their life savings. Most did not take their profits but reinvested.

Ponzi was bringing in cash at a fantastic rate, but the simplest financial analysis would have shown that the operation was running at a large loss. As long as money kept flowing in, existing investors could be paid with the new money. This was the only way Ponzi had to pay off those investors, as he made no effort to generate legitimate profits. Ponzi lived luxuriously: he bought a mansion in Lexington, Massachusetts, with air conditioning and a heated swimming pool. He maintained accounts in several banks across New England besides Hanover Trust. He also brought his mother from Italy in a first-class stateroom on an ocean liner. When a Boston financial writer suggested there was no way Ponzi could legally deliver such high returns in a short period of time, Ponzi sued for libel and won $500,000 in damages. Libel law in those days placed the burden of proof on the writer and the paper, his win neutralized any serious probes into his dealings.

Still, signs of his eventual ruin remained, Joseph Daniels, a Boston furniture dealer who had given Ponzi furniture earlier when he could not afford to pay for it sued Ponzi, it started people asking how Ponzi could have gone from being penniless to being a millionaire in so short a time. On July 24, 1920, the Boston Post printed a favorable article on Ponzi and his scheme that brought in investors faster than ever. At that time, Ponzi was making $250,000 a day. Ponzi's good fortune was increased by the fact that just below this favorable article, which seemed to imply that Ponzi was indeed returning 50% return on investment after only 45 days, was a bank advertisement that stated that the bank was paying 5% returns annually. The next business day after this article was published, Ponzi arrived at his office to find thousands of Bostonians waiting to invest.

On July 26, the Post started a series of articles that asked hard questions about the operation of Ponzi's money machine. The Post contacted Clarence Barron, the financial analyst who published Barron's financial paper, to examine Ponzi's scheme, he then noted that to cover the investments made with the Securities Exchange Company, 160 million postal reply coupons would have to be in circulation. However, only about 27,000 actually were. The United States Post Office stated that postal reply coupons were not being bought in quantity at home or abroad. The gross profit margin in percent on buying and selling each IRC was colossal, but the overhead required to handle the purchase and redemption of these items, which were of extremely low cost and were sold individually, would have exceeded the gross profit.

The stories caused a panic run, Ponzi paid out $2 million in three days to a wild crowd outside his office. He canvassed the crowd, passed out coffee and donuts and cheerfully told them they had nothing to worry about. Many changed their minds and left their money with him. However, this attracted the attention of the United States Attorney for the District of Massachusetts who commissioned Edwin Pride to audit the Securities Exchange Company's books, an effort made difficult by the fact his bookkeeping system consisted merely of index cards with investors' names. In the meantime, Ponzi had hired a publicity agent, William McMasters, he later described Ponzi as a "financial idiot". Finding several highly incriminating documents that indicated Ponzi was merely robbing Peter to pay Paul, he went to his former employer a paper that offered him $5,000 for the story. On August 2, 1920, McMasters wrote an article for the Post declaring Ponzi hopelessly insolvent. It claimed that while Ponzi claimed $7 million in liquid funds, he was actually at least $2 million in debt. With interest factored in, Ponzi was as much as $4.5 million in the red.

The story touched off a massive run on August 11, it all came crashing down for Ponzi. First, the Post came out with a front-page story about his activities in Montreal years earlier, including his forgery conviction and his role at Zarossi's scandal-ridden bank. That afternoon, Bank Commissioner Allen seized Hanover Trust after finding numerous irregularities in its books. This move foiled Ponzi's last-ditch plan to "borrow" funds from the bank vaults after all other efforts to obtain funds failed. With reports that he was due to be arrested, Ponzi surrendered to federal authorities on August 12 and was charged with mail fraud for sending letters to his marks telling them their notes had matured. He was originally released on $25,000 bail, but the bail bondsman withdrew the bail due to concerns he might be a flight risk. 

The news brought down five other banks in addition to Hanover Trust. His investors received less than 30 cents to the dollar. His investors lost about $20 million in 1920 dollars ($225 million in 2011 dollars). As a comparison, Bernie Madoff's similar scheme that collapsed in 2008 cost his investors about $13 billion, 53 times the losses of Ponzi's scheme. Ponzi spent the last years of his life in poverty. His health suffered, a heart attack in 1941 left him considerably weakened, his eyesight began failing, and by 1948, he was almost completely blind. A brain hemorrhage paralyzed his right leg and arm. He died in a charity hospital in Rio de Janeiro, in early 1949. In one last interview to an American reporter, Ponzi said, "Even if they never got anything for it, it was cheap at that price. Without malice aforethought, I had given them the best show that was ever staged in their territory since the landing of the Pilgrims! It was easily worth fifteen million bucks to watch me put the thing over."

So, there it is, a cautionary tail, and a note to be careful out there. I find the story of Charles Ponzi particularly important today because many investment opportunities do not make economic sense and the numbers simply do not add up. Caveat emptor - buyer beware!

Tuesday, July 18, 2017

Venezuela Has Descended Into Chaos

Venezuela has passed the tipping point and descended into chaos. Even though the country sits upon the world's largest proven oil reserves years of mismanagement and oil prices falling in half during the last two years have brought its economy to ruin. Its streets are constantly full of protesters and both violence and crime are out of control. The government is deeply in debt and in financial shambles, this has caused the country to spiral into extreme recession.

Venezuela is running out of just about everything, meaning you can't find food, toothpaste, soap, toilet paper or shampoo. President Nicolas Maduro has even asked women to stop using blow dryers because of a shortage of electricity and instituted rolling blackouts. Sadly, this nightmare has been going on for well over a year and worse. "There's a shortage of everything at some level," says Ricardo Cusanno, vice president of Venezuela's Chamber of Commerce. Cusanno says 85% of companies in Venezuela have halted production to some extent." Millions of Venezuelans have taken to the streets in recent months calling for an end to Maduro's presidency blaming the government for the shortages, a collapsing currency, and soaring inflation.

Over the years we have seen many polls showing the average American lacking in basic knowledge and being oblivious to events occurring around the world. A common example is that many people are unable to name their governor or senators. It is because of this lack of concern about world events and the general inability to recognize the importance of what is happening that I'm writing this post. We should always be aware that a breakdown of society can unfold anywhere and any time institutions and government become dysfunctional. In the case of Venezuela, both the political system and the economy have failed.

Here are a few general facts most people may or may not know about Venezuela. The country is located on the northern coast of South America and is the home of over 31 million people. It is bordered by Colombia on the west, Brazil on the south, Guyana on the east, and the islands of Trinidad and Tobago to the north-east. Venezuela covers about 352,144 sq miles, this makes it about 2.2 times the size of California. The country boasts an extremely high biodiversity and is home to some of South America's most incredible landscapes, including the worlds highest waterfall. As previously mentioned the country also sits on a massive sea of oil. 

 While being blessed in many ways Venezuela also has earned a terrible and well-deserved image problem. Hyperinflation has led to a dramatic drop in living standards and issues with the supply of basic goods as well as personal safety, particularly in the capital city of Caracas. In mid-December 2016, The U.S. Department of State warns U.S. citizens against travel to Venezuela due to violent crime, social unrest, and pervasive food and medicine shortages. Often when we talk about violence in the country we are not talking about low-level crime like purse snatching but rather events such as the killing of Sergio Vicente Goulard when paramilitaries broke into his home and shot him in the head. 

Just a few examples were documented incidents and recently noted in a New York Times article that pointed out Latin America is the most violent part of the world and a place where the victims will most likely be forgotten and the murderers remain free. They include incidents such as Luiz Carlos Barbosa who's body was found on the street in the middle of a favela controlled by two criminal gangs; he had been executed for switching his allegiance. The article recounts that Jorge Luiz Bento’s family found his corpse rotting near a stream in the municipality of Nova IguaƧu, headless and with his hands bound and how Claudeir Francisco had been cycling when he was shot; he was still clinging to his cellphone headphones as his mother wept over his body. Even carjackings result in death, Leandro Alves died in the company of his wife and son after he pulled out a gun during such an attack.

Many of the economic problems the country currently faces flow directly from the politics of the leftist socialist movement led by the late Venezuelan President Hugo Chavez, who ruled from 1999 until his death in 2013. The movement he created known as the Bolivarian Revolution sought to end corruption and the equitable distribution of wealth and revenues to help the poor. Showering the poor with subsidies paid for by oil revenues resulted in creating a great deal of support for Chavez and improving the lives of many Venezuelans. however, it poisoned the economic system. this caused a great deal of capital to flee the country and the reimposition of currency controls that existed long before Chavez took power.

Because of the special challenges Chavez created for business Venezuela's economy has become very dependent on imported goods paid for with dollars they receive from oil exports. Several currency devaluations over the decades have resulted in an inflation rate that surpassed 100% in 2015 and has only grown worse causing poverty to grow. In 2013 with this crisis growing that Nicolas Maduro was elected President. He remains in power after a very close election where the opposition raised charges of fraud. Maduro has declared a state of emergency to retain power and been accused of human rights abuse. Maduro is seeking to create a new super body called a Constituent Assembly to rewrite the constitution and dismiss the current opposition-controlled legislature. This has resulted in protest where hundreds have been killed, thousands injured and thousands to have been "arbitrarily detained" or to have "disappeared".  

In March of 2017, opposition leaders branded Maduro a "dictator" and on June 28 a policeman stole a police helicopter in Caracas to attack government buildings, Maduro denounced the attack as a terrorist attack against the institutions of the country. It seems that upon the death of Chavez the chickens of poor management have come home to roost. Today polarized Venezuela has become the poster child of a failed state and the damage ill-conceived policies can create. This situation shows a government cannot continue in the "business as usual" mode when it can no longer pay its bills. Shortages of food and medical supplies disrupt the day to day lives of its people causing them to join together in the streets to voice their outrage. Venezuela is proof we should not underestimate how the number of violent incidents and lawlessness tends to explode when society deteriorates into chaos, no country is immune to this.

Wednesday, July 12, 2017

Amazon's Engulf And Devour Strategy Problematic

Engulf And Devour Strategy Problematic!
While discussing Amazon with someone concerned about small businesses closing in the area she made the statement that "companies that compete in any way with Amazon would be nuts to buy any product or service from them at any price." Not feeding my enemy has always been a key part of my business strategy, I feel it is never wise to give anything to my adversary that strengthens them. Sadly retail giant Target which sells the Amazon Kindle and Fire in its electronics department and has not learned this valuable lesson. The same might be said about the young clerk at a Macy's store who recently told her customer she buys everything online at Amazon because of their good prices. Consider this proof people who praise and purchase produces from Amazon seem oblivious to the fact they are putting their local brick and mortar stores out of business. These are the stores that pay local taxes and supply jobs to our friends and families.

Almost every day we see articles about how Amazon is buying this or that company or expanding into another business sector. Amazon's recent announcement they were purchasing Whole Foods got me thinking their engulf and devour strategy will eventually max out then come back to haunt them by generating a backlash and scorn. With their constant efforts to extend their reach and to become everything to everybody as a one-stop total fulfillment center, they are stepping on a lot of toes. Any company stupid enough to hire Amazon to act as their agent and paying this competitor to ship their products to customers are adopting a destructive strategy akin to cutting their own throat so they can breathe more efficiently. Amazon is not our friend and of that, we should take note. This brings front and center the fact we should consider and think about what kind of society and world future generations might want to live in.

Fast approaching is an era when robots and automation may take many of our jobs and before it happens it would be wise to recognize the role of the human animal in the overall scheme of things. More and more the subject of business replacing workers with robots is becoming more common place. this should be a big concern because it goes directly to the heart of future job creation. It should be noted that companies such as Amazon are by far the chief beneficiary of such labor saving developments because only large companies and big business have the critical mass and financial resources to quickly adopt. This spells big problems for small business going forward and society in general when it comes to job growth. We should not underestimate the crucial role small business plays is our economy as its the main job creator helping to train and hone the skills of workers.

I deal with small businesses on a day to day basis and will tell you they face many challenges and that they are very important to our communities, society, and the economy. This is why "Small business failures should receive a lot more attention than they do."  Small business is hard, going into business is risky, and many people are not up to the task. Sadly we see a lot of people who start down the path of starting a small business fail and hit the wall. As a property owner that leases space to many start-ups, I have a keen interest and knowledge of the microeconomics that surrounds them and their long and short-term effect on the economy. With most business start-ups having a very short lifespan of just months or around a year, the short-term burst of spending is quickly followed by the longer-term negatives that take a toll on all of us when a small business in our community fails. 

To be blunt social engineering is what mankind and government do. We have developed governments that create the laws and rules that shape and mold how we live. The big challenge is creating something that is sustainable which means planning our future in a way that we do not set ourselves up to crash and burn at some future date. Unfortunately, long-term planning has not been something politicians excel at, motivated to consider, or are even good at, our system is geared at getting politicians re-elected and fulfilling the most pressing needs of today.  Things like profit, greed, and quenching our incessant desire for growth are placed in front of longer term issues and needs. With this in mind, it is time we level the playing field when it comes to e-commerce retail sales and how they are taxed.

While I'm fully aware of the argument that only through creative destruction can we progress and make progress Amazon is subsidized in ways that often go unnoticed. Not only does Amazon often fail to have the best price or service but buying from the company carries the hidden cost of destroying businesses rooted in our communities. While many people have heralded Amazon's disruptive nature and technology as game-changing much of the companies success is based on making little or no profit and lucking into an era where easy money and low interest rates have allowed rapid expansion mask many of its core weaknesses. To some investors, this is why the current valuation of Amazon's stock seems outrageous and brings forth the image of a Ponzi scheme driven by hype and self-promotion.

The question exists as to whether the hype machine we know as Amazon will be able to turn the corner into becoming truly profitable but if so its success should not be on the backs of those brick and mortar stores that serve our communities. We must decide where e-commerce fits into our lives and not grant it special treatment and advantages allowing it to become a destructive force that employs predatory tactics. If directed properly e-commerce can continue to bring efficiency and promote competition especially in specialty and low volume markets. Amazon, however, goes well beyond this even competing against companies it ships and sells for. This means it would be wise to shy away from working with Amazon as it rushes to engage in cross-company promotions to get its foot in the door.

Saturday, July 8, 2017

The CPI Understates Inflation And Skews Expectations

The Importance Of How the CPI Is Figured Is Massive
Consumer inflation has been estimated since the 1700s, by measuring price changes in a fixed-weight basket of goods. This method was seen as effectively measuring the cost of maintaining a constant standard of living. In the last 30 years, a growing gap has become obvious between government reporting of inflation, as measured by the consumer price index (CPI), and the perceptions of actual inflation held by the general public. Informal evidence and occasional surveys have indicated that the general public believes inflation is running well above official reporting, and that public perceptions tend to mirror the inflation experience that once was reflected in the government’s formal CPI reporting. The government is able to understate inflation due by using methodologies based on the concept of a “constant level of satisfaction” that evolved during the first half of the 20th century in academia.

The numbers government pumps out today are the result of changes made in the 1990s when political Washington moved to change the nature of the CPI.  The contention was that the CPI overstated inflation by not allowing for the substitution of less-expensive hamburger for more expensive steak. This extended into the BLS re-weightings sales outlets such as discount or mass merchandisers with Main Street shops. Those promoting the change claim it is simply another way to measure inflation and it still reflects the true cost of living. Politicians and the financial media touted the benefits of a “more accurate” CPI that would allow for the substitution of goods and services. This was viewed as a way to reduce the cost of living adjustments for government payments to Social Security recipients, etc. The fact is that by moving to a substitution-based index and weakening other constant-standard-of-living ties have muddied the water as to just how much we are being impacted by inflation.

The general argument was that changing relative costs of goods results in consumers substituting less-expensive goods for more expensive goods.  Allowing for a substitution of goods within the formerly "fixed-basket" would allow the consumer to attain a “constant level of satisfaction." This adjustment to the inflation measure was touted as more appropriate for the GDP concept in measuring shifting demand and weighting actual consumption, rather than using a fixed more ridged weightings when assessing the costs of maintaining a constant standard of living. Other tricks were also used, where the quality of the product was deemed by the government to have improved, this is something that has occurred throughout history but prices in the CPI calculations are now adjusted lower to offset the higher quality. Extending this idea the Baskin Commission Report, December 4, 1996, actually used steak and chicken for its substitution example.

The cuts in reported inflation were an effort to reduce the federal deficit without anyone in Congress having to do the politically impossible which was to register a vote that would harm the image of Social Security. These changes were promoted under the cover of academic theories. Katharine G. Abraham, then commissioner of the Bureau of Labor Statistics, laid out her recollections in an August 1996 paper: “Back in the early winter of 1995, Federal Reserve Board Chairman Alan Greenspan testified before the Congress that he thought the CPI substantially overstated the rate of growth in the cost of living.  Greenspan's testimony generated a considerable amount of discussion but the general public paid little if any attention.

What is important here is that the purchasing consumer is often not given a choice when paying out-of-pocket the full price for a product or has little or no concept of the quality improvement being acquired or the chance to opt out of paying for an improvement they do not want or need. One example is the government mandated the use of a gasoline formulation that was to improve auto emissions. It added ten cents per gallon to gasoline costs, but that cost was excluded from CPI calculations even though the person filling his or her gas tank suffered the actual out-of-pocket expense. This is also clearly seen in new computer and television features usually that are deemed quality improvements, these result in downside price adjustments made in the CPI for the changes that a consumer may not have wanted or used.

Rising Inflation Is Obvious To Consumers
The bottom-line here is that consumer concerns are for his or her out-of-pocket expenses. They care only about what they are paying for textbooks this semester or what they are paying out-of-pocket to fly from New York to Chicago and the actual out-of-pocket expense for a computer. According to the way things are figured it is cooked in the numbers that even if they may be looking just to use limited functions the numbers are adjusted so that they have no choice but to value unwanted features. Because of the above and because the effects are cumulative going forward over time.the CPI has become less of a reflection of true inflation or even meaningless to the public.

While the substitution-related alterations to inflation methodologies were made beginning in the mid-1990s the introduction of major changes to concepts geared towards making us feel better about things began in the 1980s. The aggregate impact of the reporting changes since 1980 has been to reduce the reported level of annual CPI inflation by roughly seven percentage points meaning there is no question as to the understatement of inflation. If the methodological changes did not reduce CPI inflation reporting meaningfully, the politicians would not have pushed the changes of recent decades. The important issue is that without these changes, Social Security checks would be more than double what they are today.

To understand how just how large the impact has been on the CPI it is important to note that fully 24.0% of the total current CPI-U inflation reporting reflects the category of “homeowners’ equivalent rent of residences.”  Instead of reflecting some measure of home prices, as was the case before 1983, the BLS estimates the cost of housing based on what homeowners theoretically would pay to themselves in order to rent their own homes from themselves. The BLS then estimates how much homeowners raise the rent on themselves each month. Starting in 1989, the BLS “improved” these estimates by beginning to adjust that imaginary series for quality adjustments that would make the consumer feel good or better enjoy their residence.

Years ago when America was experiencing what the late Allen Meltzer described as "The Great Inflation" his take was that inflation generally was not considered a major problem or issue until it rose into the double digit area.  I contend that all this manipulation of data and artificially lowering the official rate of inflation feeds into the illusion of both stability and that we are experiencing an economic recovery. The idea inflation is not and will not become a problem is used by individuals to plan and make decisions concerning their investments and income. I further contend that inflation would be much greater if more money was flowing into tangible goods rather than paper investments and promises. For proof as to the real cost of inflation just look at the surging replacement cost resulting from recent storms and natural disasters. Those taking the CPI numbers that are currently being reported to heart are vulnerable to future economic risk.

Footnote; The following articles are just a few related to this topic.

Tuesday, July 4, 2017

Nobody Wants Your Robocall, Louie! - Stop Calling Me!

The Answer Is, NOT ENOUGH!
Like many people, I find that I'm forced to question why my phone rings several times a week and when I answer I find a machine generated message. Often the robocall recording claims to be Heather, Sara, or Rachael claiming it is from a credit card service center or inquiring about my student loan that doesn't exist. Because of my business not answering my phone is not an option. Even being registered on the "no call list" has proven ineffective in halting this intrusion into my life,

The title of this post is dedicated to a great line from a notable movie from a 1983 American comedy film starring Dan Aykroyd, Jamie Lee Curtis, and Eddie Murphy by the name of Trading Places. It tells the story of an upper-class commodities broker named Louis Winthrope the third played by Aykroyd who was "set-up" and had his life destroyed. While down and out and trying to prove he is not a drug dealer Louis is told in no uncertain terms by those wanting to disassociate from him, "Nobody here wants your drugs, Louie!" My point is the same can be said about this constant barrage of calls that nobody wants.

The fact is every day across America hundreds of millions of unwanted calls are placed to those of us tethered to society by phone. These calls are generated by machines designed not to inform but to benefit a few at the expense of the many. After spending hundreds of billions of dollar on agencies such as the NSA it is difficult to think we do not have in place the expertise and apparatus to track down and identify the perpetrators of these calls. At least if Washington got solidly behind an effort to end such calls Americans would be getting something for all the money that has been spent. For a country plagued by elected officials in our nation's capital who do little but annoy, debate, pander, and suck the blood out of us would it be too much that we might ask relief from such calls. Sadly, both politicians and those who support them have turned to and embraced robocalls as a way to hammer their message home to a public who they see as only a phone call away.

I want to make it clear this is not an industry that hides in the shadows in fear of prosecution. Ironically, companies can not only make money off promoting robocalls but one company has a mobile app for which they charge a monthly fee to protect users from such calls. A quick search of the term "robocall'  generates a page showing several services and companies geared to this mass communication technology that has grown since the early 1990s. They see it as one of the best ways an organization or company can communicate a verbal message with its members, employees, or customers in a timely and low-cost manner. What tends to make robocalls even more obnoxious than an ordinary phone solicitation is that they continue during national holidays, this was confirmed when my phone rang this morning and the fact the same failed call rolls in time and time again only each time it is generated using a different phone number making it harder to block.

 If America is indeed a great and powerful nation is it too much to ask those we have empowered come together both passing and enforcing simple legislation to end this encroachment on our lives. The debate as to whether these calls have any merit would be short lived for even a lying politician would have difficulty presenting an argument to give any merit or justify allowing people's lives to be disrupted by such calls. Adding injury to insult is the fact is that we are paying for this every time we pay our phone bill. Legislation placing a hefty fine upon those behind what are obviously unwanted robocalls would end the incentive for companies to widely cast upon society their self-serving agenda. It is time we tell these people that "NO MEANS NO!" If Washington wants an issue that 99% of Americans can agree upon, this is it!