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The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

Pride Comes Before The…?
November 13, 2019

“I think they’re blind. I think they’re blind with rage to seeing that they are, in fact, misdiagnosing cause, and that the source of excess within the system is being driven by an unelected source. But they can’t bring themselves to acknowledge that it is, in fact, the seen hand of unelected technocratic power which bears responsibility for creating this monster. It is not the unseen hand of the market.”

David McAlvany

Kevin: We have talked in the past, Dave, about how deliberate your parents were, and especially you and your wife now with your kids. Consequences seem to be an important part. Loving your children is first, but consequences – they have to understand that there is a cause and effect. It is almost like free markets.

David: Not to get too philosophical, but the idea of agency and the idea of an individual making choices – the importance of those choices is that there are consequences to our choices.

Kevin: Both good and bad.

David: Yes. And to line out what are the logical consequences, the good logical, or the bad logical, consequences, makes someone reflect and say, “This is my life, my destiny. Boy, I can make a mess of this or I can make something really neat from this.”

Kevin: And one of the greatest ways you can show love to your children is to display that, that there are consequences, and encourage good decisions. I think about what we are seeing in the markets now. We have called them free markets in the past, but it is hardly free when governments intervene, they don’t allow companies to fail, they really don’t suffer the consequences of bad behavior. In fact, companies these days don’t really even have to have a profit to be rewarded.

David: What is fascinating to me is, if you look the Chinese exchange, ChiNext, they just changed their requirements for listing as a publicly traded company. So with so many profitless companies listing in the United States and on other exchanges, you had Shenzhen’s technology focused ChiNext exchange – they want to compete. So what do they have to do to compete in a world of profitless companies? You lower the bar to do so, so you can now list through ChiNext – ChiNext is a little bit like New York’s NASDAQ, technology focused. But up until now both Shanghai and Shenzhen, their stock exchanges, have had a multi-year, 2-3 year, profitability requirement prior to going public.

Kevin: Well, doesn’t that make sense? If you’re going to go public, shouldn’t you be making some money first?

David: There is a sense in which that is intuitive. Yes, it makes sense, to me it does, but the Chinese Securities Regulatory Commission announced that the profitability requirements were going to be scrapped for ChiNext IPOs and they are hoping that brings liquidity to fledgling companies in need of an infusion to move ahead. That’s not all bad, but what you do see, like what we have in the United States, many of the unicorns which have gone public in the last year or so are high-risk propositions, because it is not like they have revenue and sales already in tow. They are ideas, and as long as the ideas become something, as long as the dream becomes reality, that’s fine, but an investor is speculating on a dream, not on a functional operation. So that’s really where the Chinese have, to this point, basically said, “Great. If you are a functional operation, if you have profits, then we will list you. And now they are saying, well, we’re missing out on a lot of listings.

This is not ChiNext, as an example, but Alibaba came to the New York Stock Exchange for listing, raised 25 billion dollars. You can imagine the fees associated with that. And it’s the New York Stock Exchange that benefits. Would Shanghai have loved that? Absolutely. So they are realizing that unless they are more aggressive, they are losing out.

Kevin: Well, I wonder about that being more aggressive because the Chinese government themselves has been known to intervene in companies and keep them from failing, but I think they are changing that right now. They are starting to say, “Why don’t we let companies fail?”

David: That’s a fascinating coincidence in terms of time. Maybe it’s not a coincidence, but you have the Wall Street Journal this last week talking about the Chinese government moving to a new mode of operation, and it is, basically, let companies fail. Where creditors up to this point have expected the state to step in, to absorb losses, and for the investors to be made as whole as possible in that process.

Kevin: And that was through government interventions.

David: Yes, but that is not so going forward. So, fascinating, now you have 90 bankruptcy courts that have been created to deal with corporate defaults rather than the old mode of operation which was state banks just kind of sweeping everything in and being forced to act in absorbing those assets.

What it recalls for me – go back to 2005-2006, I think that was about the time that Sheila Bear came in as chief of the Federal Deposit Insurance Corporation, overseeing the interventionist possibilities within our U.S. banking system. In 2006-2007, she started staffing up, increasing staffing at the FDIC.

Kevin: Strangely, preparing for something we later saw what she was stepping up for.

David: Before we saw banks under pressure. And it’s not everybody that is blind to the potential unwind. Sheila certainly was not, and I think you have examples of not taking everyone by surprise. The idea of a black swan is kind of a misnomer to some degree if you’re going back to the mortgage-backed securities market and what was deteriorating in that timeframe. There you have Sheila Bear, gearing up, staffing up, for what she assumed was going to be a crisis, and now you see the same thing in China, 90 bankruptcy courts to deal with corporate defaults. What are they getting in front of, exactly?

Kevin: They’re getting ready for logical consequences, that’s what they’re getting ready for. We talked about that to start with. And I like that, Dave. In a way, wouldn’t it be a breath of fresh air if the free markets were allowed to be the free markets and we actually did see some creative destruction? Who was it that talked about creative destruction?

David: Joseph Schumpeter.

Kevin: And that’s good. That’s how you get growth. Remember when we had Sedlacek on? He talked about the economics of good and evil, and he likened the interventionist type of central banking to a new form of religion, and the central bankers being the high priests of that religion, a religion of continual growth without the natural shrinkage that you need sometimes to grow further.

David: Kevin, we read a lot for the Commentary, and I have to say that one of the most impactful books I have read in my adult life that pertains to economics and finance, is Sedlacek’s The Economics of Good and Evil, the economic advisor to Vaclav Havel in the Czech Republic.

Kevin: During the transition from Communism to some form of free market.

David: That’s right. So you have the chief economic advisor to this fledgling and free country, and he is 23 years old at the time – polymath, brilliant, and his objective in writing The Economics of Good and Evil, a fairly ambitious book and project, the idea that he is encapsulating there. But if you are interested at all in knowing the history of money, and the ideas that relate to economics and finance, GDP growth, and things like that, I think you have to read it, you have to study it. You don’t have to agree with it, but it will cause you to think very differently about the issues than you have ever thought before.

Kevin: Down the road, Dave, I would like to discuss more the replacement of what used to be the church’s impact on economics, that was an unelected power, being replaced now with the central bankers, sort of a new kind of religion. It was Sedlacek who really pointed that out to us.

David: The religion of growth certainly is one that is overseen by the priesthood of central bankers.

Kevin: Okay, so this stock-up of 90 bankruptcy courts in China – could it be because we are starting to see a slowdown? And the natural consequence, or the logical consequence, of a slowdown in China will be increased bankruptcy.

David: Yes. Official numbers are different than actual numbers, we’ve said that before, so you see official numbers declining to about a 6% growth rate, and as we have talked to Michael Pettis and others who are on the ground in China, the reality is it is probably more like 2%, and declining quickly. So we will get to a negative number, and officially, it will still be very beautiful, relatively speaking, but I think what we are seeing, the indications, whether it is energy usage or vehicle sales – vehicle sales have declined 16 out of the last 17 months in China. They are down 6% from last year at this time.

Coming back around to the ChiNext decision, let’s just say that late cycle dynamics in the financial world are typified by a lowering of the bar, which by default, no pun intended, raises the implicit and systemic risks that are in play. So in the credit markets you have worse credit, you have longer durations, and incongruously, as things are deteriorating, lower rates, which would ordinarily indicate lower risk. But in fact, this is where the central banks have been hiding the signals. Longer duration, worse credit should imply higher interest rates, and it has not gone that way so far, although the free markets may end up determining that it goes there in the end.

In the equity markets, it is the structure of equity shares where you have different voting rights. A shares have voting rights, B shares don’t, so the controlling interests get to determine the direction of the company, and you, as an investor, have no say. Or things like mass delusion – those are things that are on display. Or again, established profitability. Now you don’t have to be profitable in China to get a listing. All you have to have is sort of pro forma expectations, which is what our unicorns have been doing here. They have been bottling up dreams to sell. And that is what has been very effective. “You can own this six ounces of liquid Dream-A-Lot.”

Kevin: It’s like snake oil. You know, 20 years ago, right now, in 1999, we had that same type of thing happening with this incredible bubble that we now call the tech stock bubble that really popped. I mean, it doesn’t exist anymore.

This morning I was with a friend of mine who is a manufacturer. He does most of his manufacturing in Asia. He sells exercise equipment. He is leaving tomorrow for Asia. He usually goes over there for about 6 weeks, comes back for 4-6 weeks, and he goes back. But he was called and they said, “Do not come to Hong Kong.” It is too dangerous at this point for him to come to. I thought it was interesting because this is a man that for 25 years has been half in Asia and half here. In the Hong Kong situation, the state is now becoming something that is also worth looking out.

David: What is funny is, I talked to an economist just a few weeks ago who was previously with the IMF. He lives in Hong Kong but we met in New York. He said, “Actually, a lot of it in Hong Kong is overblown. There are certain neighborhoods you wouldn’t want to show up in because there is a lot of activity, but it is not as bad as the media has portrayed it.” Now, who knows, maybe in the last two weeks maybe things have really gotten to that place.

Kevin: Well, someone got lit on fire yesterday. I don’t know if you saw that in the news, but someone has been shot, someone was basically lit on fire, so I don’t whether this gentleman is going to go to Hong Kong or not.

David: But see, we still think about taking vacations to Mexico, and you have drug violence that last year took 35,000 people – this is 35,000 homicides in Mexico last year. That was an all-time record, and we’re supposed to beat that record in 2019. Again, all these things are relative – one man on fire, one man shot, one man tripped off the edge, or pushed off the edge of a balcony and fell to his death. I’m not minimizing this by any stretch. But lest we think that this is total carnage, all we have to do is go south of the border for 35,000 drug related homicides.

Back to China, the financial pressure builds in China, and the fear of the state gets put on display in more obvious ways. Last week you had a number of bank runs, nine people were arrested for inappropriate remarks on social media. These were comments about a local lender, like: they’re in deep financial crisis.

Kevin: Just a warning. It’s like what we do with banks. We do bank ratings here, and say, “Hey, this one is in trouble.”

David: But imagine being arrested for posting on social media something like, “Institution ABC or YYB is running into trouble.” That’s all I have to say, and all of a sudden I’m being arrested for a comment. We, frankly, have no imagination for the types of controls that exist within a totalitarian state, and while we can reflect on some sort of degradation of free speech or what not here in the United States or the West, our frame of reference is – it’s kind of silly.

Kevin: One of the things that we use as a guide to see if we’re getting a little too proud, a little too much hubris, is that we watch the skyline. You can see buildings being built, and usually the tallest ones are built right before a crash. We have seen that in the past. We see sometimes the very biggest deals done as far as takeovers. And I remember the IPOs, like I said, 20 years ago, the tech stock bubble. We were really reaching a peak of pride and hubris right before that.

You mentioned the NASDAQ a little bit earlier. The NASDAQ was over 5,000 points 20 years ago, and it slopped down into the low 2,000s and it stayed there for over a decade.

David: When you look at these kinds of peaks, whether it is stock market peaks or real estate market peaks, we have the same thing, I think, on display with private equity. We talked a little bit about private equity a few weeks ago coming back from the Grant’s Conference. Peak private equity is probably best captured by the deal being proposed by KKR, Kohlberg, Kravis & Roberts.

Kevin: We have heard that name now for decades, as well.

David: Huge private equity group. They are coordinating a deal for Walgreens. It is like the largest skyscraper, marking a peak in enthusiasm in real estate. Your ambitions grow, the size and scale of the project grows. So, too, the big deal in private equity are often done with great enthusiasm in and around your cyclical peak. So last real estate cycle it was the Burj Khalifa in Dubai as the largest building built, and it still is the largest building in the world.

Kevin: I remember seeing that building on a Mission Impossible. You have been there, you’ve seen the building live, but I can tell you, looking down in the movie, it is incredibly high.

David: That was the phenom of the 2005-2009 period. Now it is the Jetta Tower. That is in Saudi Arabia. The construction started a few years ago and its estimated completion is…

Kevin: How tall is that going to be?

David: Between 1,000 and 1300 meters. They haven’t been very specific, because there is another tower that is going up also in Saudi Arabia that is going to be roughly 1,000 to 1300 meters. I think they want to give themselves some latitude. But the Jeddah Tower’s estimated completion is 2023. It could have been completed sooner, but there have been some unforeseen delays. These kinds of things get built when ambitions are unbound, and ambitions are unbound when your money is unhinged, and your money is unhinged when the cost of capital is set to zero. That’s where we live, and that is what we’re saying, is that there is a bit of irony with the largest investor in the Jeddah Tower being the bin Laden Group.

But before that blows your mind or distracts you too much, what it really is with these buildings is they are symbols of hubris. They are signs of excess, and to me, they are like road markers telling you where you are on an extraordinary credit journey.

Kevin: If we go back to the Bible, Genesis 11 talks about a tower of hubris, a tower of pride, so this is deep within our psyche, as far as understanding that there is point, when you become a tower-builder, and we all are to a degree, when you start seeing the new tall ones, look out below.

David: And Sedlacek really puts some insight on the nature of a city, and who we become in the context of city life. So again, if you get a chance to read Sedlacek’s book, I would. But this 70-billion dollar deal proposed by KKR is the largest-ever private equity deal. It dwarfs the 45-billion dollar deal done with the energy company, TXU. KKR was the lead, and they did it as a partnership with TPG, the Texas Pacific Group, and these are some of the smartest guys in finance.

Kevin: But Walgreens – 70 billion dollars. Walgreens?

David: There was a merger between Alliance Boots and Walgreens not long ago. They are still smaller than CBS, but they are number two. So Steven Schwartzman, who is at Blackstone, thought that for this deal, in particular, it would be difficult to raise more than 20 billion in equity.

Kevin: I agree. It sounds to me like that is more reasonable.

David: Alibaba got 25. Could you raise 20 billion in equity for the Walgreen’s deal? What that means is, if they are talking about a 70-billion dollar deal, you are leaving it to the debt markets to fund the remainder. Does that surprise you? Again, we have ultra-low…

Kevin: Yes, but money is free right now. Ultra-low rates – zero rates, right?

David: It tempts the finance guys to do more, go bigger, because after central bankers have crunched the numbers – down, that is – almost any deal will work. It doesn’t matter if it’s marginal, it doesn’t matter if it is profitable, almost any deal works if you can crunch the numbers on the debt side low enough. That is not to say that you’re left with a viable entity, but the numbers work when the interest component is suppressed below a natural level where, really, interest should be a reflection of that balance between risk and reward. So the deal is not done, it has just been proposed, but this would include management, it would provide, fascinatingly enough, a potential exit for the CEO, who has a 16% stake in the Walgreen’s Alliance Boots company.

Kevin: Boy, that’s a payday.

David: (laughs)

Kevin: Oh my gosh, that’s a huge payday. But it is interesting, when you buy a house and take out a mortgage, the bank that actually does that loan owns that mortgage for maybe 30 seconds. They usually repackage it, send it on, and put it in pension funds, things like that. I would imagine this 50 billion dollars in excess debt that would come from this would be packaged and put in people’s pension funds and then no longer do the big guys have to worry about how viable it is.

David: Right. Again, we talked about extending durations as a consequence of a late cycle dynamic. We talked about a compromise in debt quality. You have high-yield debt, which is you’re talking BB or B, you’re still in a 3.9 to 4% range in terms of interest, pretty low interest for junk bonds.

Kevin: Right. These are bonds that if somebody sneezed would drop into junk category, or even default category.

David: Those are junk categories in themselves. The last level of investment grade is BBB. But what could go wrong when you’re adding 50 billion dollars in debt to a balance sheet? Pragmatically, positively thinking, probably nothing. And yet, you go back to that TXU buyout which Texas Pacific Group and KKR were involved with back in 2007 – they inked the deal in 2007, and there was, as you might recall, a lot of enthusiasm about the commodities market at that time. Most commodities reached a cycle peak in 2008. So they ink the deal in 2007, the cycle peak for commodities is 2008. That is relevant because TXU is energy. And there you have it. They are a bankrupt company by 2014 (laughs). So eight billion dollars in equity wiped out. The smartest guys in finance still can’t seem to recall that the cycle prevails.

Kevin: Okay, but that is commodities. A person might say, “Well, this is Walgreens. This is drugs. People are going to need this from this point forward.

David: (laughs) You’re right. Energy prices tend to be very cyclical, so you have the ebbs and flows which are, perhaps, more dramatic. But isn’t every business that way to some degree, where for a variety of reasons, earnings are volatile, and the price of the shares in the company are volatile? I think even more so today as you have innovations in technology which have been transformative to not only production processes but delivery of those products to distribution. So just because you are, in the case of Walgreens, the second-largest purveyor of hemorrhoid cream and pharmaceuticals behind CVS, you may have margins disrupted by an organization that doesn’t need those thousands of brick and mortar stores. What I am saying is there is an evolution in play, and you may find that you are, in fact, putting together a deal that is at a cycle peak.

Kevin: I wonder, is that type of industry recession-proof? How did they do the last time?

David: You could argue it is demographically well supported, but look at the charts of your health care giants, and lo and behold, you will find 35-50% declines in those stocks are not uncommon. So it suggests to me, again, that the cycle prevails. But what does it feel like to go into a down cycle carrying multiples of the debt you previously had? The smartest guys in finance are not bothered by that, and so their view is, neither should you be.

Kevin: We talked a couple of weeks ago about how these low-grade bonds right now are the only bonds that pay interest. You were talking earlier about junk bonds, but even the bonds that aren’t junk, literally, if any kind of blip in the economy occurs, they could drop to junk status. The problem is, we’re not talking about a few hundred million here, the 400 million that we were talking about to Bear Stearns back in 2007, we’re talking billions.

David: The investment grade market is eight trillion – that’s a very large market. The investment grade bond market is ginormous. This is what we were talking about a few weeks ago. As I said, you have an eight-trillion dollar market. Walgreen’s is already triple B. They’re the last rung of investment grade. Or if I said that differently, they are one notch above junk. As is, before they take on an extra 50 billion dollars (laughs) in debt.

So play this out hypothetically. The deal is done. By a miracle, Walgreen’s remains BBB rated, so they are still investment grade, a very wide demand for that. But then they hit a small speed bump, an earnings decrease. All of a sudden, debt gets shifted from investment grade to junk status. Or maybe your bondholder, in that sense, is also the bag holder.

Kevin: And we’re also at very, very low rates. What if interest rates actually were to rise some?

David: Rising interest costs in the future make debt service more difficult. I know it is a leap. I know this is just hypothetical, I know it is just a thought experiment.

Kevin: Sure, because interest rates don’t ever go up anymore.

David: But could you foresee a day where the largest debt deals done in modern finance are standing like towers on the horizon? And as they stand on the horizon line, they remind and mark out the storyline and the history of this credit bubble.

Kevin: We’ve also talked about the insiders, watching what the insiders do. I was talking about a movie before, Mission Impossible. But you remember on the Titanic, the mice, when they know a ship is going to sink, they run to the direction that the ship isn’t sinking. So that’s a good way of knowing. But with CEOs, it’s the same type of thing. If you watch what CEOs are doing during these times, they seal the deal, and then they cash out.

David: I think you meant the rats, not the mice (laughs). Are we talking about CEOs or are we talking about the vermin on the boats?

Kevin: (laughs)

David: Anyway, CEOs are departing, and what does it say? I knew a man that rose through the ranks of Bristol-Myers Squibb as internal legal counsel all the way to CEO, and he was a good CEO, but not all that was done while he was CEO was good. And I’ve always noted the departure date. He knew the company inside and out, from a legal perspective, from every angle. He was very well studied, he had spent 34 years with the company. So the share price tops out at around $70, roughly, plus or minus a few bucks, and then it drops to the low $20s. And you know, it took 16 years for the shares of Bristol-Myers Squibb to recover.

Kevin: But he got out near the high, not the low.

David: Yes. So what did Charles know at his departure? Did it make sense to cash in? And for a company that he had been a part of from basically a single-digit share price, why would you jump out when, who knows? Maybe you go to $150 a share? But certainly, the fact that Bush gave him an ambassadorship was nice.

Kevin: Well, he wanted to go into politics. That’s the only reason he sold his shares, he wanted to go into politics.

David: (laughs). Not exactly, not exactly. But to me it meant something, and it has always meant something to me when CEOs are on their way out. Better times are not directly ahead. In fact, it was only a few years later that the Bristol-Myers Squibb Company was being prosecuted for inflation earnings and channel stuffing to the tune of about 2½ billion dollars, and that was between 1999 and 2001. So shareholders were actually the bag-holders. We’ve talked about bondholders being bag-holders, potentially, with the Walgreens deal. Well, Bristol-Myers share-holders were made whole a little bit. The company was required to set aside 800 million dollars in two tranches – 500 million and then another 200 million – for restitution to shareholders for inflated earnings and things of that nature.

What was fascinating to me in that whole saga, and this is really weird, Bristol Myers agreed – this was a part of the settlement agreement – they had to endow a Chair in Business Ethics and Corporate Governance at Seaton Hall University School of Law there in Newark, New Jersey. Shouldn’t you be a paragon of ethical virtue if you are going to endow a chair? Because certainly, they will be remembered for what they gave, not for what they did and why they had to give (laughs).

Kevin: History is written by the winners.

David: So that was a part of the prosecution agreement. It was really kind of nifty. But I want to make clear, Charlie and his family are great people, and they were not implicated in the prosecution. But the point is, his departure meant something.

Kevin: When I first started with this company, with your dad, it was 1987. The stock market was hitting all-time highs, Reagan was in office, everything seemed fine. And Volcker, who had been head of the Federal Reserve, a very successful head, stepped down, and Greenspan came in just months before the largest stock market crash since 1929. Your dad was calling that, but I thought it was interesting, too, Greenspan stayed in for an awfully long time, and right before we had the 2007-2008 crisis, Greenspan stepped down and Bernanke took over. So to me, it has always been like that CEO departure thing. What do they know? Do they want to be credited with the gains, or do they want to be there for the losses?

David: It’s on my mind because you have insider selling at the same time, you have astronomically high share buybacks by these corporate titans. That, in itself, is sort of a contradiction.

Kevin: So using company money to buy back shares while the CEO sells his own.

David: That’s right. You watch what an insider does, and that is more critical than listening to, say, a CNBC interview with that same insider. Listen to what the insider says. Watch what they do, not what they say. In fairness to CNBC, on November 6th they reported that you have a record-setting pace for exits this year by the heads of U.S. business. You might argue we just put in all-time highs. Just shut up, get out there and dance and enjoy the markets. If the music is playing, get out there and dance.

Kevin: And never mind the rats running off the boat.

David: This is the key. CNBC reported, October of this year marked the highest month on record, with 172 chief executives leaving their posts.

Kevin: That’s a record number?

David: Yes. And according to Challenger, Gray & Christmas who tracks these things, CEO departures have hit a record for the year, through October, with 1,332 U.S. based companies announcing CEO departures.

Kevin: What do they know?

David: Right. Not during, not even after the global financial crisis, has there been any year with this many departures. Once gone, of course, there is greater latitude to liquidate – company shares, the stock benefits that you received. Not that insider selling has been marginal, or slight, by any means. But wholesale liquidations can be implemented in earnest. These are not your start-up folks. There are a few of those, but these are your veterans in the business.

A few weeks ago we talked about how the average to be a “veteran CEO” now is only about five years. But again, we have created an incentive structure and there is a problem in terms of remuneration and governance within companies where you do allow for somebody to come in, basically clean up, grab some stock options, hit the door, liquidate, have made a fortune, and then be in line to do it again with another. Just build your CEO resume, move on to the next company and do the same thing.

Kevin: And then maybe go into politics, whatever. Okay, so the technology companies especially, a lot of these guys who have made it in technology are exiting at this point.

David: Well, we talked about that in the 4th quarter. We said a month-and-a-half, two to three months ago, that 4thquarter selling was going to be pretty extreme because we had a number of IPOs in the middle of the year and your six-month lockup would be coming around.

Kevin: Let’s go into that because one of the reasons you would leave as a CEO is because you are locked up. A lot of times when you go IPO, or what have you, you have to hold those shares a certain amount of time. And like you said, there is greater latitude, if you leave, to sell those shares, but then also, right after a lockup you don’t have to leave.

David: (laughs) Right. Well there is kind of a confusing piece with Uber, for example, because you have Travis Kalanick, who is the ex-CEO of Uber, axed CEO because he got into trouble for a variety of things and was let go, but he was still in that lockup period. And he just got to the end of the lockup period last week. Lo and behold, no surprises. We thought it would happen. He sold a few shares of Uber. About 500 million dollars’ worth.

Kevin: That’s worth half a billion dollars of Uber.

David: (laughs)

Kevin: That’s not a vote of confidence, even though he is still a shareholder, to a degree.

David: Uber alles. So he ditched a few shares earlier, sold a partial share to Softbank and gathered in about 1.4 billion dollars. That was, of course, closer to the IPO price of 45 bucks. Last week’s sales were about half the price. So, yes, since IPO, shares are not doing that great with Uber, but yes, he still holds some shares at 5% of the company even after that last liquidation. I guess what this illustrates is that there is a proliferation of public vehicles for private gain. And whether it is private equity or chief executives playing the game, getting the stock options, cashing them out upon departure, and the general public being clueless as to how these games are played.

Here is where I am very concerned. This is why this even matters, other than being fascinated by market dynamics, I fear the wrath of the masses when they wake up, when they look at stripped pension plans and empty 401k retirement programs, and then start playing the blame game in the context of some election, where a progressive sits and is waiting there to capitalize on the angst and frustration of the moment, and is there to offer promises of something for nothing. Or frankly, if they are answering to the mob, better yet for the angry mob, something at the expense of someone else.

Kevin: Right. Well, we talked about bag-holders. When people find out that their pension fund was the actual bag-holder, when somebody says, well, you’re going to retire in 2030 so we’re going to invest your money in a 2030 retirement type of plan, you have absolutely no idea what is in that until you get to that point.

David: Take your standard pension funds today. In the last three years, do you know what they have done? They have gone from an average allocation in equities of 44% to just shy of 48%. So they are increasing risk within their portfolios. And that is just with equities. They are doing the same thing with credit quality, extending duration, lower quality, increasing as much, driving as much yield as they can. You have pensions which are buying 100-year Argentinian bonds last year like idiots.

Kevin: Yes. They are also buying shares from these corporate executives who are getting out and running off the boat.

David: (laughs) Again, what bother me is there is the social justice meme, which has, and will continue to find many expressions, where you have sort of a majority – that is democracy, a majority – ganging upon a minority. As long as there is sort of a Robin Hood spirit to it, it is totally acceptable in today’s context. Again, as long as money is involved, and the Robin Hood spirit is in motion, then it just makes sense.

Kevin: It is interesting to me who actually is jumping on that bandwagon. People you would not expect, economists, are saying, “You know, maybe there is something to this redistribution thing.”

David: It’s a baring of teeth. It’s not like a dog doesn’t have sharp canines, but you don’t really notice them until the teeth are bared. I felt like, this last week, as I was reading a number of Ph.D. economists, whether Stieglitz, Eichengreen, or Krugman, they are all sort of shedding civility, and the moderate language is being dropped and it is just more obviously redistribution-based and there is an indictment of the market economy, an indictment of everything related to free trade. There was one kind of unqualified Stieglitz quote for the week, and I think this is kind of the example, and it suffices. He says, “The credibility of neoliberalism’s faith in unfettered markets as the surest road to shared prosperity is on life support these days, and well it should be. The simultaneous waning of confidence in neoliberalism and democracy is no coincidence or mere correlation. Neoliberalism has undermined democracy for 40 years.”

Kevin: Just to be clear, what he is referring to as neoliberalism is what we would call free market conservatism. It was changed a little bit, but neoliberalism, that’s in the European context.

David: Exactly. Neo, the newer version of liberalism, and liberalism – we’re talking about classical liberalism which harkens back to Edmund Burke and Benjamin Constant.

Kevin: We’re not talking about progressives.

David: No, this is not liberal, as in, the same thing as left, and conservative on the right. Liberalism, in the classic sense of liberalism, was very “conservative” and he is saying, basically, “the free market inclinations of that conservative philosophy are destroying democracy. Can’t you see it?” Again, neo-liberalism is a philosophy, he believes, underpins laissez-faire, free market dynamics. What I think he is doing is pinning the tail on the wrong donkey.

Kevin: Right, because we don’t have free markets anymore.

David: Exactly. There is a critique, or reflection, on the corruption of capitalism, and what is actually happening, the control of the business cycle, and it is being attempted through monetary and fiscal policies. And these are not exactly expressions of “neo-liberalism” which is what he is describing. I think the failure within the financial markets, and the excesses that we see within the financial markets, even the disparity between rich and poor, is growing out of the tendency to control the business cycle, the tendency to corrupt capitalism by an infusion of liquidity and credit that, again, is inappropriate.

Kevin: We started the program talking about logical consequences, and you leave a system like a market economy alone, and it is amazing where it can go. But we have taken the logical consequences away, and actually, you were talking about neo-liberalism and this redistribution. But laissez-faire, we no longer can talk about anything without categorizing it. These guys are talking about how market economy no longer works, but if you think about the polarization, Dave, there are really only two camps anymore. I was having a discussion last night with a gentleman at the restaurant that you and I meet at. He is a very intelligent guy. He is a thinker. But the problem is, I can tell he is having a hard time distinguishing a Trump in the White House, an economy that is free market, his pension that is shrinking. Go right on down the list and he has a basket, and it is all one thing. The problem is, we don’t have free markets anymore, so how in the world can we blame them, and then accept socialism as the other answer?

David: That’s right, so it’s not actually capitalism that is failing here. It is a bastardization of capitalism which is failing. I’ve had issues that we discussed today in terms of the market economy. I have no problem with a free market economy, but there are specific issues that must be addressed, in terms of corporate governance, in terms of compensation, in terms of the corruption of capitalism via the controlled and manipulated functions of central bank monetary policy, specifically, the attempts to determine market pricing by whim within the debt markets, setting them at an unnatural rate.

The problem is not the free markets. It is the liberties taken within the free markets that have lacked sufficient accountability and oversight and consequence. This is where, I think, in all fairness to the crowd that is entirely laissez-faire, the markets are not self-regulating, and the problem is, if you look in the mirror, and if I look in the mirror, just as G.K. Chesterton did years ago when he wrote his book, What Is Wrong With the World? He said, “I am.” He started the book by saying, “I am, yours truly, G.K. Chesterton.” We are what’s wrong with the world.

What I am saying is that we cannot assume that taking imperfect agents into a system is going to make for perfect decision-making. There has to be, there is a role for, regulation. But there is not a role, in my view, for absolute top-down management and control. The technocracy which is becoming more common in Europe, has long been common in Europe, and is becoming more common in the United States, is not, I think, ultimately healthy.

So again, the problem is not the free markets, it is the liberties taken within the free markets. You bring in accountability, oversight and consequence, and we have basically forestalled logical consequences, to the benefit of a few, and the many are getting angry. The problem is with the interventions, not with the system, itself.

Kevin: The interventions are being done by the unelected. These unelected, powerful people, like central banks – they come in, they intervene, and so you really don’t have the free market system. You talk about the free markets not being self-regulating, one of the great weaknesses of the free markets is that monopolies form, and then completely crush anyone else – you know, the Amazon type of thing where everybody just starts going out of business. So you do have to have regulation.

I think of Andrew Smithers. He said, “Wait a second, guys. You’re really going to let CEOs sell their own shares at the same time that they buy back the shares with company money? There is something wrong with that.” So yes, regulation needs to come in, to some degree.

David: There are issues that deserve critique and modification, but that is different. That is different than saying the system is broken and needs to be thrown out, as many progressive academics are suggesting. The tone amongst those academics has changed in the Trump era. Again, the teeth are bared, and there is almost a Weather Underground desperation being expressed amongst the left-leaning academics. While they go about prescribing solutions to the ills of our days, I think they’re blind.

I think that they are blind with rage to seeing that they are, in fact, misdiagnosing the cause, and the source of excess within the system is, as you described, being driven by an unelected source. They want to deal radically with the system because of symptoms of unhealthy that are observable. But they can’t bring themselves to acknowledge that it is, in fact, the seen hand of unelected technocratic power which bears responsibility for creating this monster.

It’s not the unseen hand of the market.

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