Day: June 3, 2018

For Those In The “Won’t Happen Again In Our Lifetime” Camp

History is a nebulous construct depending on who you ask. The only thing more vague is trying to figure out what any sort of “history” means to someone. Just trying to find whether they consider something to be ancient or contemporary sounds like it should be any easy question, till you find yourself suddenly mired in a never-ending conversation of minutia just trying to discern if the term “ancient” means the same thing to the both of you. In other words, just trying to establish a benchmark to propose relevancy has become a near futile task, more often than not.

I am convinced today, more than ever, trying to demonstrate or provide perspective using historical benchmarks and/or clues (any!) as to formulate pragmatic risk decisions – has been relegated to the dust bin of history by far too many. But (and it’s a very big but) none more so than those that have entered the business landscape, at all levels, over the last decade.

Historical perspective for what can or will, should or could, ______(fill in the blank) not only is never given a second thought – it’s not even considered in the first place. “It’s different this time” thinking has now morphed (at least in my view) away from trying to rationalize the differences between today and yesterday, straight into a defense as to allow one not to think in the first place.

If you think this is hyperbole? I would counter you haven’t tried to have an in-depth conversation in respects to business fundamentals with anyone under 35, as of late. And – it’s getting increasingly more difficult by the day.

The reason is simple, and it’s not their fault, it’s the Central Banks and their gaggle of Ivory Tower’d Ph.D’s that profess and endorse this new monetary doctrine of lunacy.

Central Bank interventionism into the capital markets has not just adulterated historical norms – it’s perverted them.

Instead of rating agencies giving out A,B,C and AA, or BB type ratings to individual businesses and bonds – it should just rate the entire capital markets with a big and bodly placed XXX. At least that rating would be an honest one.

Here is what a decade of central bank interventionism into the capital markets has, and is, currently producing more of every year:

An enormous swath of highly indebted graduates holding business degrees, where the curriculum for magical thinking rivals Hogwarts.

Today 1+1=2 math has been replaced with =’s whatever one wants. Non-GAAP has allowed debt to become income, liabilities to become assets, and on and on.

Net profits are now considered meaningless. After-all, why make money when you can lose or burn through $Billions upon $Billions, and be rewarded far more.

Stock markets appear to be regarded only as some game or way to facilitate and keep track of their latest BTFD (buying the f’n dip) status.

Central bankers inferred sole responsibility is only to ensure one’s portfolio never suffers any meaningful loss again, ever. That, and also to allow worthless, overhyped, blatant anathemas of anything resembling a fundamental business structure (think SnapChat™) the ability for owners and VC’s to cash-out scoring $Billions in an IPO – while the investors of it watch their investment dollars disappear faster than the company’s featured product.

And this is thought of as “ethical business structures or practices.” All I’ll say too that is, “It may be called a ‘business,’ but what it ain’t is anything resembling ethical.”

Again, think this is hyperbole? Then please explain how or why (other than a cult stock) Tesla™ shares not only have barely fluctuated over the last week or so as bad news hit. But rather, seemed impervious to all that “bad news” which consisted of deaths, major malfunctions to one of its main features (e.g., autopilot,) production promises broken, CEO meltdown during earnings call, high-level executives jumping ship, government agency probes, and on, and on. And that’s just the last month or so.

Sorry, but that’s not anything resembling what “normally” happens in response to such things in a market free of central banker interventionism. Period.

And I’m not just picking on Tesla…

Ask the same about competition while throwing Amazon™ into the equation, what you’ll hear is more convoluted reasoning and cognitive dissidence it would make Carl Jung marvel.

Try using Amazon in the same discussion or construct as to rationalize or argue what is known as “dumping” type policies or events? Forget Jung – what you’ll then need is a cop. For if the term “trade” comes up, you’ll suddenly be notified that you’ve now invoked a “Trump” discussion unwittingly where slurs, swearing, and the throwing of objects might be forthcoming should one dare engage with this set any further. It’s beyond idiotic in my view.

As we sit today , like it or not, the U.S. is currently engaged in trying to level a very un-level, as well as unfair playing field when it comes to trade.

Forget about the politics of the moment when it comes to whether it’s your “guy or gal” that is involved. Negotiating deals, of any type, are messy and full of fraught, for both sides. No one wants to give up any, and I do mean any, perceived advantage. Whether real, or not.

What may at first been seen in an original agreement as some form of throwaway concession, can in fact, turn or morph into a devastating weapon of advantage that was never fully understood or conceived when original deals were put in place.

Today: There is no better contemporary example than steel to demonstrate this point.

Let’s use an overly simplistic example using only China and steel to demonstrate this point:

When the original trade deals were constructed allowing for China to enter into the world trade of steel no one expected (or considered I’ll contend) how China would allow for both the making, as well as dumping of steel (as in sanctioned politburo funding) around the world in just a few decades. Yet, here we are, and the costs of just this one “deal” has been devastating to many a nation’s “blue-collar” class employment sectors.

How much steel does China now produce? Fair question, let’s see shall we?

First: Here’s world steel production from 1967, 2000. Note China’s rise. To wit:

That’s quite the increase, wouldn’t you say? And if you are one of those like myself that grew up in the 1960’s and 70’s in what were collectively known as “mill-towns.” You understand the loss of blue-collar jobs during that time probably more acutely than most. (Japan was also a contributing factor back then, to be fair)

But that’s ancient history to most when trying to comprehend what exactly is at stake here, and the consequences of past “deals.” So let’s look at steel from just 2000 to today. e.g., ending 2016. Again, to wit:

(Source: World

What the above represents is the size of the “trade” issues at hand. Steel is just one of them, but it is emblematic as to the entire issue of trade and just what type of “deals” were made prior, and to whose detriment and/or cost. (i.e., all manufacturing trade deals of export and imports to China look ominously similar to steel)

Hint: Level playing fields, and playing by the rules, doesn’t allow for statistically inconsequential manufacturers and suppliers to go from a mere trivial supplier – to displacing not only the previous double-digit % manufacturers and suppliers into single digit, near irrelevant status. But rather, now controlling 50% of the global output in 17 years. Especially in such a vital product to a nation’s security, never-mind employment base, such as steel. Period.

That is – as long as you can understand the reasoning why Netflix™ would never exist (at least for very long) let alone be awarded $Billions in market cap under its current business model. i.e., The more subscribers they add – the more cash they burn. Yet, again, most today have no understanding of the inherent problem in that statement. And that’s a very big problem to understanding where we are – and where we could be overnight.

Far too many holding positions in business have absolutely no clue. The only thing worse is their willingness to remain in that “clueless” state. i.e., They just don’t want to hear it.

The issue at hand is that trade wars and their consequences, rightly or wrongly enacted, are designed to use and/or deliver maximum impact or pain as a negotiating tool. This “pain” is also felt via a rippling effect across the entire business landscape. Disruption in this text will not be used to describe some new “tech innovation.” Rather, it will be used to describe business upheavals where shortages or price spikes may make business near impossible for some to continue.

“Trade wars” or “renegotiation tactics” of any type are going to be messy. And publicly messy at that. Especially when one understands the magnitude of just how far off the rails of “free” and/or “equitable trade” these prior deals have gone. (just look to the above charts for context)

The real issue at hand is when these types of “deals” become as unbalanced as they are now? Trade “war” can turn into shooting wars faster than one can imagine. That’s the stakes we are now in. Make no mistake about it.

China may or will do things, and in ways first thought as inconceivable as to counter losing its now perceived “right” to dominate global trade in ways many will not contemplate.

A sudden extreme devaluation of the Yuan and more could be a tactical first strike sending the global markets into chaos. And that’s just one.

China, along with others (think E.U. types) may be setting up back door trade agreements which may allow for chaos in the near-term to roil markets as to enable China to publicly move in and “save the day.” In turn, shoring up the prospects that it (or some combination of China – E.U. as an example) is the now dominant player or players, displacing U.S. from any or all prior assumptions.

These are the stakes, and they are not trivial. Global dominance, in anything, requires global machinations to facilitate it. And communist, along with socialist leaning entities, will risk far more in human tolls than most will ever consider. History is laden with the results of such actions. And they aren’t pretty, to say the least.

Yet, this is where we now are, where it all goes from here, and too what extent, is anyones’ guess. All one can do is be vigilant and watch for clues as they may appear on the horizon.

And for those in the “It won’t happen again in our lifetimes” camp. i.e., mass disruption of markets and business. I’ll just offer up this latest historical moment that happened just over a week ago. But first a little context from an article I wrote just a bit earlier when it came to all the “Goldilock’s reasoning touted across the mainstream business/financial media just last month. To wit:

I’ll only say this: I agree 100% in the “Goldilocks” comparison if the underlying premise means – we’re currently transgressing within a pure fairytale. For if one thinks a participation rate of about 60%, give-or-take, represents “full?” I have a wonderful fairytale piece of oceanfront property in Kentucky you can have, on the cheap. “Trust me.”

Here’s the troubling issue with the above: The worst possible calamities take place when everyone buys into the premise that either: A) It won’t happen. Or B) Can’t happen, again. That’s about the same as saying a 100-year-flood can’t happen tomorrow, because it happened just 10 years ago. And yet, this is precisely the same amount of critical thinking being professed across the MSBFO’s when it comes to today’s financial and/or market climate. It’s beyond vacuous. And that’s being kind.

And when it comes to that example of “100-year-flood” being an irrelevant analogy, how’s this one, from 2016? To wit:

From USA Today, Aug. 1, 2016: “Rain that caused deadly Md. flood a ‘1-in 1,000’ year event”

Only to be followed 2 years later…

From Wall Street Journal™ May 29, 2018: “Elliott City Hit by Second ‘1000-Year Flood’ Since 2016”

And people still want to argue things can “never happen again in our lifetime.”

History proves otherwise. That is, if one still believes in reality based thinking.

© 2018 Mark St.Cyr