Obama Claims Credit for Making America Great Again

Nothing like the stench of dirty politics polluting our every breath. Yes, it's election time again and the Cabal's machine is running at full power. When the Fake Media promotes an idea, we know that reality resides somewhere geometrically opposed to what they say. Believing what they say is akin to eating the CIA's koolaid in granular form.

Recently, Obama tried to argue that it was he who Made America Great Again. This despite the fact that he will soon face military tribunals for treason for his involvement in Iran's manufacturing of a nuclear head that was to be detonated within the continental US. Yes, the Cabal continues to lose ground.

Following is the transcript from a presentation by Chairman of the Council of Economic Advisers, Kevin Hassett, to the press at the White House. As expected, the 4 AM memo from the CIA gave the media their talking points the following day. All, tried their version of 'debunking'. Unfortunately, anyone following my blog knows that capital spending is at the core of economic growth and that it had gone to zero during Obama's terrible tenure. 

And then there is the fact that dozen's of Cabal-controlled pseudo-economists had claimed for eight Obama years that the era of economic expansion had come to an end and that we would only now experience the 'New Economic Reality'. Following the Cabal's agenda, we were made to believe that higher than 1% growth would be impossible in the future. Well, the future came quickly thanks to Trump and growth blew all their mechanized prognostication. 

Enjoy the charts.

CHAIRMAN HASSETT: 

You know, one of the hypotheses that’s been floating around about the economy lately is that the strong economy that we’re seeing is just a continuation of recent trends. And, you know, since we’re the nerds at the White House, we decided that this is a testable hypothesis. And so what we can do is we can go out and we can estimate recent trends — that is, trends that ran in the economy up to the point of the last election — and then compare the latest data to the recent trends.

In most cases, by the way, the estimates of the trends that we present to you here are very statistically significant, as are the deviations from the trend.

And so now I’m going to, as I always do, show you a few slides. Could I have the next slide, please? That’s the first slide again. There we go.

So the first slide that we’re looking at is small-business optimism. And this is basically — for parallel construction, you’re going to see that each of the slides we go through is going to look a lot like this. And so the blue part to the left of the slide is what happened from the 2012 election through the 2016 election. And the dotted blue line is the trend that President Trump inherited from the previous President. And the red line is what actually happened with the data.

And so, I think that if you look at this chart, you can see that the first thing is small-business optimism. The middle chart is the percent reporting now as a good time to expand. The last one is the percent expecting higher real sales in six months. I think if you look at any of those, you’d say, “Gee, that doesn’t really look like the continuation of a recent trend.”

The next chart is something that, in my first presser here, way back last fall, we talked a lot about. It’s business investment, which is more than $300 billion over the trend. Again, if you look at the blue line on the left, the first chart is nonresidential fixed investment. And the dotted line is the trend and the growth rate to that, that President Trump inherited.

For the middle chart is structures, or buildings. And that, as you can see, the dotted line is something that is headed straight down.

And then, the final chart is equipment investment, and that went straight down before President Trump was elected.

And I think that if anyone were to assert that the capital spending boom that we’re seeing right now was a continuation of the trend that President Trump inherited, then, well, you know, they wouldn’t get a high grade in graduate school for that assertion.

Durable goods orders, capital goods orders — it’s a key part of the economy, and it’s one of the factors that we look at most closely because it characterizes, basically, the good-paying jobs, the jobs that affects normal Americans — blue- collar Americans.

And the first chart is core capital goods orders, and the second chart is core capital goods shipments. And if you look at it, the blue again shows a clear downward trajectory and billions of dollars. And then that trajectory reversed itself completely when President Trump was elected.

If you were going to assert that the current good news is just the extension of a recent trend, then you’d just simply be factually incorrect.

Here we’re looking at the ISM purchasing managers index, which is a survey of people who are purchasing managers for manufacturing firms. And so they’re the folks that, you know, as the title suggests, manage the purchases. And so it’s a really great indicator of the economy because you can survey them and say, “Hey, have you been buying lots of stuff this month or have you not?” And the index shows what their responses look like.

And you can see that the trend on the purchasing managers index was pretty much flat when President Trump took office. And the red line shows you what happened since, that there’s a clear inflection right at the election and a clear break in the trend.

Now, one of the things that I can remember at the American Enterprise Institute talking a lot about before I came in here was the fact that entrepreneurship in America was falling off. And one of the ways we can measure entrepreneurship is that, if you start a new business, that you have to apply for an ID number — a tax ID number — for your business.

And so, in this chart, we’ve plotted the EIN applications for new businesses. And if you look at the blue line, they were heading up because we were at a recovery, but there’s clear upward trajectory way above the trend at the end.

And, you know, Sarah — like John Roberts — is a calculus geek. And so she looked at that one, and said, “Jeez, that looks like a very strong second derivative to me.” (Laughter.) And then, I said, “I didn’t know you did calculus.” And she said, “I like calculus better than talking to these guys.”

The next chart is prime-age workers reentering the labor force. And again, if you look at the trend, one of the things people said when we put out our growth forecast that said that we’d have 3 percent growth was we said that President Trump’s policies are going to bring factories back to the U.S., give you the capital spending boom that you saw in the previous chart, and that was going to bring people back into the labor force at precisely the right time. Once again, you can see that there’s clear break in the trend.

And so, if you see a break in the trend in the capital spending, the new plant formation that gives blue-collar workers their jobs — go to the next slide, please — then maybe we see a break in the trend in blue-collar workers employment as well. And so this is employment for people in goods-producing industries.

If you look, again, at the blue part on the left, you can see that there’s a clear downward trend going on in the growth rate of that for President Obama, and then a clear inflection timed almost precisely, once again, at the election. And the notion, again, that somebody might defensively attempt to assert that this is a continuation of the trend is almost laughable if you look at this chart and, you know, look at the rest of them.

Now, somebody might say, if you’re showing a bunch of charts, well, gee, maybe it depends on when you estimate the trend. And I’m sure that if you went back and began your estimate of the trend at the Civil War, and then thought about, well, what trend do we get then — well, then, maybe we’re not — yeah, well, you would get a different answer from what we see.

But another way to sort of test whether the data that I just showed you is a fair representation of what a trend looked like when President Trump was elected is just to compare it to what nonpartisan bodies were saying.

So if I could have a look at my final chart here. I know — guys, I heard this sigh of relief when I said “final chart.” So if you look at the final chart, you’ll see that the black line is, in June of 2017, what the CBO — Congressional Budget Office, a nonpartisan agency that has a job, really, of looking at recent trends and projecting it — what they said would happen to capital spending back in 2017. The blue line is what they said in April 2018. And the red line is what’s actually happened.

And so, I would assert that if you look at the collective body of evidence, the notion that what we’re seeing right now is just a continuation of recent trends is not super defensible. And I think that — I know that we’re in a political time and passions are high. But, as geeky economists, one of the things we have to do is think ahead to what historians will think when they look back at this time. And I can promise you that economic historians will 100 percent accept the fact that there was an inflection at the election of Donald Trump, and that a whole bunch of data items started heading north. They will, of course, argue for a long time about why that happened.

But my final thought for you is just this: That when they do that, and when you watch people do that in the media going forward, with op-eds and so on, that you should watch out for ex-post theorizing. As an economist, one of the things I most care about is an ex-ante theory — something that happens before, and then let’s watch the data, and then see if it agrees with a theory. That’s how you test a theory.

You might recall that I came back here last fall, and I told you that if we had the tax cuts that President Trump advised that we have, that he pursued — if we passed them, then there would be a boom in capital spending this year.

In fact, we provided estimates at the time last fall that said that capital spending this year would go up about 11 percent because of the tax cuts. So far, in the first half of the year, capital spending is up 10 percent.

And so you don’t have to really reach far for a theory of what happened. President Trump deregulated the economy; we’ve talked about how that affects growth. The tax cuts have had exactly the predicted effect on the economy that’s brought businesses back to the U.S., factories back to the U.S., and created jobs for ordinary Americans. It clear in the data that there’s been a trend break.

Following is a video edit that includes the above White House presentation. 

Tax Rhetoric Hides Real Issue

Media Noise on Tax Reform

Talk about tax reform is everywhere in the news these days. The media tells us that the proposed changes are bad for us. Understandably, those proposing the changes disagree. So what does all the noise mean to you and your business?

The problem with the subject of taxation is that it poses special difficulties to those attempting to forecast outcomes. It's possible for diametrically opposed tax plans to promise the same positive outcome, for example. Therefore, the subject lends itself to manipulation by unethical politicians and news people alike. The natural complexity also serves to hide what's really important to all of us. So, let's understand the effects of tax changes. Then, let's consider the real threat to the wellbeing of our nation; a subject no one is talking about.

To understand why tax reform outcomes are so difficult to interpret we need to look at how complex systems work. Complex systems act in a seemingly random fashion as participants within the system change their behavior in response to other participants.

Let me explain with the following scenario. Assume that we get together a thousand of the smartest PhD's in the country. We'll call them the Federal Reserve or FED for short.

Federal Reserve Board, 1917

This FED has the responsibility to ensure a better economic future for all of us. The FED will study the economic market; a flexible group of players following their self interest. Then, when it sees trouble ahead, the FED will intervene to prevent any negative outcomes. Ironically, the FED will thus become the largest player in the system.

This game really begun in December of 1913. So far, the super smart people at the FED have never anticipated a single economic downturn. In fact, the FED now accepts that they are 'data dependant'; they admit to being myopic. Without visibility past their nose, they utterly 'depend' on where 'data' is right now. To make matters more confusing, other players follow every action by the FED as a sign of what's to come. It's a real case of the blind leading the blind.

At times, complex systems follow a single general direction. For example, we know that more people in a market will make the number of transactions grow. While the relationship between number of players and number of transactions is not precise, the general correlation is positive. As population has continued to grow, the number of transactions has done the same in what looks like limitless duration.  

Complex System

But then there are times when these systems periodically return to their base or mean. Market risk is a good example. The risk faced by market players alters direction because it can't continue to increase or decrease indefinitely.

The problem with complex systems is that they represent the total combination of many of these two types of movements. At times, linear movements dominate only to suddenly give in to reversion to the mean.

Think about it. It's even possible for the same participants to act differently when faced with the same circumstances. Their actions could be altered by their memory of recent success or failure, for example.

All these facts make it impossible to establish rigid expectations. So don't be surprised when the smartest scientist can't guess the path of a hurricane a few days before it makes land or when the Federal Reserve makes a catastrophic mistake with the economy. Both, the economy and the weather are complex systems. Likewise, do you really expect the TV host to be able to correctly determine what will happen after a new tax structure is implemented? No chance.

Here, please pardon the fact that I took way too long to elaborate my point; I really wanted to make it very clear. News people are as clueless as any of us. Don't waste your time listening to their opinion disguised as a news fact. For a more productive outcome, read a fiction novel instead.

Still, the media will try to convince you. And since most of the media has a left bias, they'll generally argue that paying more taxes and a bigger government are better.

Government Skeptics

Now that if you see big government with skepticism, don't distress. You are not alone. In fact, you are in great company. Our nation's forefathers shared the same skepticism. This is why our constitution was written to limit government power.

Our constitution has served us well for close to 230 years; resulting in the most successful nation in history. Our system is in fact so great that countries all around the world voluntarily adopt many of its characteristics. Subsequently, billions of people have left poverty behind.

Yes, before Europeans started to brag about their young and relatively untested socialist system of big government and heavy taxation, they needed our help rebuilding after their past mistakes. So, when the left leaning media tries to tell you that European's pay more taxes and manage to live better than we do, remember that their opinion isn't so correct.

Look at Holland. To get all the extra goodies dished out by their government, the land of public sex displays has severely mortgaged their future. To revert path, Holland will have to cut national expenditures by 10% and then endure 10 years of doubling tax rates to 100%. Their debt is so humongous that it can only be solved with 10 years of complete slavery to the government. Now you see why their politicians are so happy. There is more than cannabis behind their smirk.

Historic Tax Rates

Another strong argument the media exploits to defend their position is that higher post-WWII taxes resulted in a better economy for the US. Here again, they are missing about half of the complex system's picture. Yes, the US had tremendously high taxes in paper after WWII. But no, people didn't actually pay them.

Does anyone recall that business schools were nonexistent until much after the big war? Before universities found a way to educate future business leaders most CEO's were attorneys. Back then, being a lawyer was essential for guiding a company around government regulation.

Tax rates down; tax revenue up.

When looking at government tax receipts on a per capita basis and adjusted to inflation, it's sad to see that we pay much higher taxes today than we did after WWII despite having a lower rate. The chart clearly shows how tax rates have gone down while tax collections have gone up.

Reagan found that tax evasion eased when taxes were seen as reasonable. The inverse of this fact is why Greece collects no taxes at all. When taxes are unbelievably high, people will do anything not to pay.

In the economic complex system, players will be more willing to increase their activity in an environment of fair taxation. Then, higher player activity will conceivably result in tax receipts sufficient enough to compensate for the loss by rate reductions. This is when politicians use the term "revenue neutral". Nonetheless, don't believe them when they use it. Both sides can easily claim revenue neutrality from clearly opposing plans.

Yet, tax receipts won't be enough for our present government expenditures. Right now, our government borrows an additional 48 cents for every dollar in taxes we pay them. It's clear we can't afford our present government. We would need to cut government spending by 32%¹ to get back to break even. This will do nothing about paying off our debt. We would simply stop the bleeding.

US Total Budget, 2016

Look at the pie chart here and tell me what part of government would you cut to get the 32% reduction? I bet you can't. We are accustomed to the good stuff even when clearly insolvent.

Then, to compound our challenges, we spend the equivalent to little less than half of our massive military budget on interest payments alone. We are buried under a pile of debt.

Do you want to experience real fear? Consider the fact that our debt pays close to zero percent in interests. Think of it, if interest rates go to their 4% long term average, we will be spending double the current military budget on interests alone.

Let me make my opinion clear. Talking about taxes is important. But the real conversation to have is about debt. We are broke. We have to tighten the belt and figure how to get us back to balance sheet health. We can argue the best way to solve it. But there is no escaping the subject. Your business' future and that of your family are at risk. Let's redirect the conversation as soon as possible.

¹ Take one dollar plus 48 cents. Then calculate it's inverse. Then subtract 1 to come up with the 32 cents or 32% needed in lower government expenditures to bring us back to a point where we are not borrowing any more money.

Black Friday Boom

Could this coming Friday be our economy's Black Friday? No, not Thanksgiving's Black Friday when all companies finally make a profit for the year. 

S&P Index Futures show a peak being formed

Instead, is this Friday going to become the top of the equities and bond bubbles artificially created by the Federal Reserve?
Surely I am not talking about bubbles that made things better for all of us. The recent highs in the equities market have demonstrated that while Wall Street can be joyfully celebrating, 'main street' can continue to suffer all along from a post-recessionary hangover.
During Obama's term, the cost of money for large organizations went so low that many CEO's decided to mortgage their company's future by padding their own bank accounts with lots of options on shares bought back from the market on borrowed money.

Stock Buybacks

This was a clear misallocation of resources; of the kind that central governments often incentivize. The cheap money allowed CEO's to buy back shares, thus improving the per share profit performance. This in turn made CEO's look so good that their job-well-done was rewarded with stock options. In a way, cheap Fed money allowed a transfer of wealth from investors to CEO's. Let's also remember that in a few years, all the current CEO's will be gone and not held to account any more. Yet, all company loans will have to be repaid with the future profits that would otherwise go to investors. You got to love the way the game is played. The stock market's optimistic booming picture disproportionally benefits company leaders more than any other stakeholder group.
Meanwhile, Obama also brought us a drying of the otherwise available capital that was needed for small business growth. For eight years, the cost of borrowing sky rocketed for small businesses regardless of where the Fed set their rates. But how could this happen? Well, it all resulted of the so-called economic stimulus by the Fed.
When the government bought so many of their own bonds, through transactions between the Fed and Treasury, most low risk assets were drained out of the market. This pressed low risk-tolerance lenders to compete for higher risk corporate bonds. The greater number of lenders competing for the same number of bonds pushed prices (interests) down. At the same time, this left lender portfolios with a higher risk profile than would normally be preferred. So, they then had to increase the price (interest) for small business loans to bring their risk profile back into shape. In a nutshell, next time the government tells you they are trying to help you, the small business owner, run for the exits. No matter how many PhD's work at our central bank, their actions will continue to result in big failures similar to those from Mao Tse Tung's great leap forward where 45 million people died after their government tried to help them.

Corporate Bond Cycle

For thirty years, the Fed has pushed interests lower and lower. Always with the goal of 'helping' the economy. Today, we are at the very end of one of those cycles that reverses about every 30 years. But whether the Fed actually prices interest rates higher or not, let's remember that bond prices are no more than a gauge of trust. If capital holders trust the environment, money flows into markets. When trust is lost, prices of bonds go sky high and capital drains out of markets. Interestingly, the same trust is what holds the price of stocks high. So, it is not unreasonable to think that we could face a pivotal change in the cost of money and a pivotal change on the cost of stocks, both at the same time. While bond charts show no more signs of peaking other than their cycle's maturity, equity markets are screaming 'top" like never before.

Elliot Wave Analysis of S&P 500

First, there is the fact that most large traders set price levels using the same technical analysis that shows that we are at a point where several longterm Fibonacci studies converge as tops.
Second, many more large traders look at what is called 'Elliot Wave' which is now calling for an end of an eight year move.
Finally, it's October. You know, all bad things in the stock market happen in October.
So, whether the bond and equity tops happen this Friday or the next, it seems clear that the difference is academic at best. The end of the current run seems upon us.
But, is it possible that I could be wrong; after all, there have been many calls for the top in recent years? Well, yes. I could be wrong.
Still, this week's relentless push upwards has the characteristic price action of a top. This week's price movement seems to be creating a Doji, a well known top formation used by 'Japanese Candle Sticks' chart readers. Yes, I know it all sounds funny and surreal. Still, these people make millions of dollars every year from looking at these studies that go back centuries.

In any case, I believe that, as a leader, one must be aware of any potential change in market sentiment. If a recession starts this month, it would last at least a year and a half. During such time, loans would be called back everywhere as lenders will try to reduce their risk profile. Capital will probably dry up. In extreme cases even trust between banks could create international commerce seizures due to an absence of international letters of credit. For a single day during the last recession, this same picture became a reality and all global commerce almost came to a halt. The risks are simply too high to ignore.
You have been forewarned. Let's hope I am wrong.

Congratulations to Britain!

BREXIT

Once again, the British nation has acted with courage and decorum. They have followed the most difficult of paths knowing that they were doing the right thing. To all my British friends I send you a resounding thank you for continuing to be our inspiration.

Having lived in the UK, I know firsthand that the United States has no other partner as solid and as reliable as the British nation. I am also witness to their strong sense of identity and individuality. No, the Brits are not European. They are Brits. The only way for an American to relate is to see how Texans are Texans. Don't dare to tell a Texan that they are either southerners or mid-westerners. They are Texans before anything else. 

This time, the Brits faced their challenge with the same kind of resolution that they displayed when being incessantly bombed by the Nazis during the Second World War. We all know that the French just folded as soon as they saw Nazi hats. But the Brits stood despite incredible destruction all around them. 

Magna Carta

History has shown that the British nation will always do the right thing. They first gave average people a path to a better living thanks to the Magna Carta. They started one of the most incredible global advances thanks to the Industrial Revolution. They first understood the double face nature of central-national management and bloated-bureaucracies. And now, they faced the so called Globalists which want to destroy democracy in the name of a safe future for the powerful and wealthy. Yes, people like George Soros have long proposed a world vision that would safeguard their wealth. 

First, Globalists promote a world where populations have no way to defend themselves from tyrannical governments. Look at Venezuela. People are dying daily from starvation, from a lack of clean water and from a total absence of medicine. Yet, people can't defend themselves. The political way-out has been completely eliminated by a government that changes the constitution and laws whenever it wants. Moreover, the army and the militia are both controlled by the government while arms are made illegal for citizens to own. The Globalists talk about weapons as the cause of all evil, but their plan is simply to create defenseless societies that will comply to all government demands. 

Venezuela: A Compliant Society

Second, the Globalists are not about global markets, they are instead about globally controlled governments. Unfortunately their "global" name creates the illusion that they are seeking economic well being for people. But they don't. They initially tried to scare the people of Britain by telling them that the Brits would lose access to the EU's markets and that it would mean an end of their economy. But the Brits new better. Whether adjusted to GDP or on a per-capita basis, Switzerland sells more stuff to Europe than the UK despite not being part of the EU. Switzerland doesn't even have to pay the massive taxes the Brits have to in order to be part of the bureaucratic club. So the Swiss get the benefit without the fees. Why couldn't the Brits do the same. Furthermore, the Brits are not the sellers to Europe but buyers. They buy much more from the EU than they sell to it. Do you think that the Germans will say no to selling to the UK? They would be crazy.

So the Brits realized that all the scare tactics from the powerful elites were simple bluffs. They also understood that the European Community has created a massive government with great regulatory power over British citizens but without any accountability. Bureaucrats in Brussels pass rules in secret that affect all citizens while they face no concern for losing their jobs. The EU is a safe heaven for all retired politicians. They simply can't get fired while enjoying great salaries paid by the people of member nations. Yes, this is the real Globalist vision. To them, the best government is one where power over people is abundant but accountability to the same people is nonexistent. 

Do you think that Americans are immune to central management with impunity? 

The FED: incredible power without accountability

How about the Federal Reserve. They completely overshadow all other market participants in the economy. Our future is 100% dependent on their decisions. Yet, the Fed is not elected and thus fear nothing about losing their jobs due to an upset public.  

Finally, the Globalist want central management. Yes, they promote the same type of central government as that from all communist countries of yore but without the loss of property rights that happens in Communism. The Globalists call this Socialism. The right unfortunately calls it Big Government, which misses the real issue completely. By having a government that promotes public dependency rather than independence, Globalists ensure safety for their families and property. No risk of a Bastille-like revolution where kings would lose all. Instead, Globalists want a big and powerful government to protect their property. But their plans have no regard to the fact that central management has failed in every country it has ever been tested. Again, look at Venezuela and the total absence of toilet paper and basic necessities like medicine. 

SDR's for more global inflation

It is just like smoking. It would be easy to talk to a smoker who swears they'll face no harm from smoking and who offers her experience as evidence. She shows you that she is in great health.
Europe is already there. They already have the disease. But like all smoke-addicts, they simply don't see that their seeming success has only been tested over a very short term when placed within a historic frame. Yes, fifty years of Socialism are nothing when compared to say the Roman Empire. They should know better, especially under the circumstances they already face. Think of it, Europe is just getting started with Socialism and they are already looking at building a government that will protect the powerful when the system fails and people try to get out of it. Moreover, the International Monetary Fund is already testing SDR's; the future global currency that will allow central bankers to continue to inflate, thus maintaining the illusion of financial growth while allowing governments to operate while insolvent. Thankfully the Brits figured the risk before they had to face an American-style secession war to get out of the EU. We could call it a near-miss. 

The Brits have served us a great lesson in civility, again!

Thank you.

After the article was published, Nigel Farage, the architect of Brexit, addressed the European Parliament. If you like British humor, his speech was a gas. Enjoy the video that captured the moment: 

Capital Misallocation DuJour

Let's polish your financial and accounting skills. What price would you put on the stock of the following Fort Lauderdale based company? 
Their Investor Relations web site reads as follows (minus a few crossed-out words to keep the suspense going):

"The Xxxxxxx, Inc. is an American entrepreneurial “emerging growth” company with a brand and xxxx that is widely followed throughout the nation. We believe that xxxxxxx is the “new xxxxx”.  The Xxxxxxx is a fast growing, early mover in the xxxxxxx industry. Management believes that we are one of the most followed xxxxxxx on Facebook, and we believe we are the only known xxxxxxx verified by Twitter.

Many quality xxxxxxxxxxx go into every xxxxxxxx we make which is what we believe elevates our xxxxxxxxxx above the rest and why people line up in front of our xxxxxx sometimes for over an hour to get one of our xxxxxxxxx creations. Our goal is to make people happy with our xxxx.

Our xxxxxxx have received numerous accolades, including being listed as one of the best xxxxxxxxxx in the country."

Don't let their "Management believes" and "we believe" statements throw you off. Clearly, both were made by the same person (natural or legal). Let's remember that the speed of growth associated with start-ups often results in simple message mistakes like this one. Now that you can call me old fashion, but I am not sure of the bragging value from being "verified" by Twitter.
And in case you doubt it, the company is real. It's even publicly traded. Their latest 10Q shows revenue at just over $995K, That's "K" as in Thousands.
COGS show at over $920K, and Total Operating Expenses at $959K.
Like with any other up-and-coming company, their 18 million shares-outstanding trade with some volatility. The recent market correction pushed this company's stock down by 29%.

Key assets are deployed in LA and Phoenix

Their key assets are deployed in two important metropolitan areas: Los Angeles, CA and Phoenix, AZ.
As for their balance sheet, liabilities equate to 280% of their assets; thus leaving them with a stockholder's deficit rather than the usual equity. Translation, their founders either blew up all their money or have no skin in the game. Both are bad, if you wonder.
But the market is nonetheless quite confident. That much is evidenced by their rich valuation. How rich, you ask? Well, have you guessed how much capitalization do they deserve?
Say you give up.
Wall street has valued their shares-outstanding at a whopping $71,000,000; which is down from their recent valuation in excess of $100,000,000.
What? These guys are insolvent and losing money by the boat load. Why would anyone give them more funds? Their negative Cash Flows from Operations amount to about 250% of their revenues. Are investors off their tree?
But wait, something important must be missing among all these facts. Why else would financial experts dish out such rich valuation for what amounts to garbage, right?
Let's see, their President / interim CFO has an MBA from the University of Miami. Meanwhile, the CEO has an undergraduate from Jarvis Christian College. Could their pedigree be the reason for so much market good faith?
If you haven't taken a look at the company's name by clicking on the 10Q link above, let me share that the special product they tout is a cheese sandwich... Well, a "gourmet" cheese sandwich. So their main assets deployed are food trucks. To be exact, we are talking about four (4) food trucks.

Is it possible that each of these trucks will deliver value in excess of $17 Million?
I thought long and hard and continue to be convinced that the trucks must be special. Certainly a mission critical project like theirs calls for military-spec vehicles with anti-ballistic features and vertical jet liftoff capabilities...
... and it goes without saying that the cheese used in their splendid sandwiches must carry self-propelled cancer-fighting nano-agents...
... all features that are highly valued by beer guzzling fairground attendees in LA and Phoenix.

At this moment, I feel the need to clarify that I hope no one has been hurt by my sarcasm.

... drum roll please...

The name of the company is The Grilled Cheese Truck, Inc. I think that it vividly illustrates the orgasmic nature of the Wall Street party that is taking place right now; thanks to the keg sponsors at the Federal Reserve. 

Two days ago, I proposed that the presently inflated stock market valuations were not a sign of economic health. 

Even the best marketing guys I know can't come up with this much fluff-ware.
Financial bubbles anyone?

Why would a billionaire need life insurance?

It is generally believed that life insurance is only for those who aren't wealthy. This is because people tend to think of life insurance as a way to cover the needs of a destitute widow and her children. But nothing could be further from the truth.

A life insurance policy is a high-leverage financial instrument like no other. It also enjoys unique tax treatment privileges equal to no none. In a nutshell, there isn't a single financial product that can deliver the power of markets in a single laser-focused product. It can uniquely add liquidity at a time when illiquid assets turn your net-worth into no more than meaningless data noise.
Let me sound the warning bell for those running a successful business, those who are asset rich and those who are passing through the most productive time in their lives. By no means should you assume that there is no place for an insurance policy just because money seems to rain all around you. Last I checked, those who earn big also take on larger bets. And it is these bets that can drain liquidity at the worst moment.
There's a simple way to determine the absolute lowest amount of life insurance needed by an individual; including these asset rich billionaires.

In the video link above, CNBC discusses how even the mega-rich must have life insurance to cover the cash needed for the so called death taxes and for paying off all loans outstanding. Here is the formula in detail:

Min Coverage    =    All Debt    +    Possible Capital Gains    +    (0.45  x   Net-Worth)

The formula is simple. Total all your outstanding loans. They are going to get called after death. If you don't have the cash to pay for them now, how exactly will your family do it then?
Then add any capital gains from the sale of assets that may need to be liquidated. Here, a guesstimate would be preferred to doing nothing. In any case, this is not the biggest factor within the formula.
Finally, add 45% of all your net-worth. It will be owed to the IRS in the form of estate tax; which is often referred to as death tax. Ask yourself: would you be able to immediately write the IRS a check for 45% of all your assets? No? What a surprise.
While an argument can be made that, for many, estate taxes are irrelevant due to the aggregate value of assets falling below the $5.25 Million minimum for 2013, I would like to warn against quick conclusions; especially when a business is part of the estate transfer. Keep in mind that without mark-to-market price discovery it would be difficult to set a price for the business that the IRS would agree with. You may think that for tax reasons, your business is not very valuable as an inheritance. Surely soon after, the IRS will disagree. Would you like to pick a fight with the IRS about how much taxes they should collect based on such business valuation? Would you like to have your heirs take on the challenge without your help instead? With the cost of term life insurance being so low, the risk/reward ratio favors erring on the side of having to pay estate taxes.

Do note the caveat that no part of the resulting amount will be targeted to cover death related expenses, wealth transfer costs or replace any lost future earnings. This calculation will only serve to preserve the value of assets already held. That's it; just asset-loss elimination. As a result, I find that insuring for anything less would be irresponsible since the certainty of taxes and loan calls is always high.
This back-of-the-napkin calculation can simplify the decision of how much to protect as a minimum. Am I then suggesting that this is all the insurance you need? Of course NOT. You should also cover the value of all future productivity and hedge other business and family risks.
My goal here is humble. I want to simply show those who are successful today that their net-worth is not as much of a reliable hedge as they originally thought; that their asset wealth may not be enough to cover everything life brings. Look deeper into it. There are plenty of inexpensive solutions available.



Finally here is the caveat de rigueur:
This material is provided for educational purposes only and is not intended to be legal, financial or fiscal advise. Please seek the advise of a licensed professional in your state.

Is the Venezuelan Circus our own Show

What's happening to Venezuela? Is democracy failing them or is it totally absent?

I agree with the contemporary idea that democracy is not for everyone; especially democracy the way Americans define it. History shows plenty of communities where democratic levels were weak, yet progress abounded. Just look at China today.
Also consider the fact that a high degree of democracy in a nation of ignorance will lead to great consensus but definite failure.
Thus, I feel that Venezuela's problems did not arise from its democratic level. But, while democracy isn't for all, food surely is. The real shame of the Venezuelan regime is that it has turned one of the best economies in Latin America into a circus. Whether suffering from a shortage of toilet paper or milk, whether today or fifty years ago, these regimes have yet to learn that central planning by bureaucrats never succeeds.
The worst that could happen now is for oil to drop in price. The country would then have to borrow more from a market already reluctant to buy their bonds. But such is the luck of oil economies.
Income from high oil prices made Chavez' economic incompetence look like brilliance. When the price of oil is high, the leader in place looks like a hero. When oil goes down, the boss gets excommunicated.
The only constant is the dependency on high oil prices and the cyclicality of the pain. If only these so called leaders would help the economy diversify while things are cyclically great, the result would be the opposite. Instead, they opt to spend surplus funds on things that keep them in power; things that do not improve national productivity.
American's are very familiar with the problem. Borrowing money from the Chinese to acquire Wal-Mart stuff to fill their closets is wasteful. Buying Wal-Mart stuff results in the accumulation of things that nobody wants to buy from us. We become the end of the chain.
The inverse took place during the fifties when any money borrowed went into business spending. Investing in businesses created things that others value. We were then an important part of the chain.
The formula is simple. Opt for saving rather than buying personal things; meanwhile invest aggressively in business for maximum results. While this article begins with a question about the source of Venezuela's difficulties, it is evident that the problems of Venezuela can easily replicate elsewhere; including the US. The only thing helping America is the fact that it is already diversified. Unlike Venezuela, the US has plenty of vibrant industries that have succeeded with or without government intervention. The problem for us is that, like Venezuela, our leadership is focused on the kind of entitlement spending that doesn't lead to the creation of things that others would want to buy. How does a union change whether others want to buy things from us or not? How effective is paying irresponsible teachers a higher wage when it comes to making our products more desirable? In either case the benefit is for either the unions or the irresponsible teachers only. They add zero value to our marketable products. In America, we are forgetting to curve personal spending and to invest in business first.
While I am not optimistic that Venezuela will recover any time soon, I am hopeful that we do. I would love to see us prioritize business investing once again.

Valuation; a Tricky Business

Will you sell your business now that you are looking at retirement. What is your business worth? 

How much is your business worth?

If you are like many baby-boomers, it is getting close to the time when you'll need to divest from your assets to pay for retirement. It is now time to sell the business. But how much is it worth?
There are many books and articles covering different ways to value a business. Some use profit multiples. Others look at revenues. And there are those from the tech-boom years that focus on future growth.
The reality of it all is that none of these methods matter if the author is not willing to buy the business from you. How much is a valuation worth if no one would pay it? In a market, prices are set by market players willing to sell or buy an asset. Everyone else is just noise.
Let's look at Apple's stock to help us understand better. Two days ago, on January 28th at 10:30 AM, AAPL reached a per-share valuation of $513.00. Today, also at 10:30 AM, each share dropped to $498.69. In just two days, the shares dropped $14.31.

Apple Inc. Logo

The change in price was not due to earnings surprises or anything that could hurt valuation. In fact, Apple's earnings were announced on January, 27th, leaving enough time for the market to adjust.
Can an industry analyst argue that the company remains just as valuable today as it was two days ago? Yes, of course. I am even sure that the analyst would offer great reasons why the valuation should remain at the $513.00 price. But his opinion is garbage. To talk costs nothing and thus has no value. There is no way in hell that Apple is worth the $513.00 today. How do I know? Simple; because no one paid that price. No one who was willing to part from their cash was willing to do it at $513.00. And believe me, with close to 25 million shares sold, there were plenty of opportunities for someone to pay the higher price. Yet, not a single buyer did.
What's interesting is that all sellers would have preferred to sell at the higher price of two days ago. But with no willing buyers, they had to settle for the lower price. Alternatively, their other choice was to sit on the shares and not sell.
The same applies to your business. You may think that your business is worth, say, a million dollars. You may even have documented evidence of why it's worth the price. But does it mean that it's worth the million? No! Not if the highest bidder offers much less for it. This means that you too may have to select between taking a lower price or to not sell if your highest bid is lower than the million.
The problem here is that many business owners never plan an exit strategy. As a result, they usually try to sell the business when they have no more time to wait. This is why, after listing a business for sale with a broker, the owners often get tired and give up. They take home whatever inventory is left and break the lease. From one day to the next, a viable business is closed. Because of a lack of planning and the unwillingness to take a lower price, the owners run out of time and get nothing instead.

Do you have an exit strategy?

Think about it. How many people do you know who are out there looking to buy a business? How many have the money to do so? For sure, I know many people who want to start a business, but they are not thinking about buying one. In fact, most of them lack the business experience to know that brokers exist. Moreover, these aren't the kind of people who would walk into your business to ask if you would sell. So even with willing sellers, these buyer don't know where to find them. In short, there aren't enough buyers available who know where the sellers are. In technical terms, this means that the market of small businesses for sale lacks transparency and liquidity.
When it comes to buyers and sellers finding each other, selling a business is worse than the real estate market. Just the fact that a home seller is willing to advertise to everyone while the business seller isn't should clarify the reasons behind the difference.
Compare this to buying Apple stock. Within a fraction of a second, I can sell my APPL shares without any concern of who is at the other end of the transaction. There is plenty of liquidity in the Apple shares market. Furthermore, I know the exact price it is worth at any time. Pricing information is publicly available through the stock exchanges. Better yet, the price is not determined by analysts but by buyers putting out their cash. There is a high degree of transparency in this market. Clearly, selling your business lacks both, transparency and liquidity in the market. This means that selling requires adapting.

Time compensates for liquidity

What can you do? Well, first understand that allowing plenty of time is essential for a successful sale. This is the only way to compensate for the lack of market liquidity. Plan ahead. Don't leave this until your optimism for the business fades. Most people fail to plan because they think that tomorrow will be better than today. So they get their heads deep into the business. This means that the blinders only come off once they starts losing interest. By that time, doing what's necessary to get a higher valuation for the business will be impossible. It will be too late.
Remember that your goal all these years was to run the business in a way that would give you the highest standard of living rather than the highest valuation. They are not the same. In fact, many common business practices destroy valuations. Now that if this happens to you, don't worry; you are not the first.
Next, you should understand that any valuation given to you by an expert is garbage. The only valuation that you can take to the bank is that from a willing buyer with cash on hand. So, have some flexibility.
There is nothing wrong with thinking that you are the best negotiator in the world and that you will get the best deal; every business owner thinks the same. But no amount of negotiation will reliably help you sell your business if your valuation is unreasonable. If you ask me, I think that your odds would be close to those from playing the lottery. I would advise to take an alternative with a higher probability of success instead.
Think of the following:, buyers do not want to buy your business just to make you happy. Rather, real investors, the kind who would know how to find you, are interested in making money and don't care much about anything else.
To make money is not to buy and sell stuff. Many businesses buy and sell every day until they go bankrupt. High profit percentages aren't good enough either, if sales are so low that receipts do not cover costs. Even high profits in paper are useless. Most naive business owners fall under the trap of thinking that the P&L is all that matters to the business.
No! They don't want funny P&L's. Investors want positive net cash flows. Just look at what commercial banks measure when deciding on a loan for your business. Cash it's what matters. Even Warren Buffet is famous for looking at cash rather than the P&L.

When cash flows are negative

Did you know that Enron had great P&L's before they collapsed? Their whole mirage begun to unravel after short-seller Richard Grubman challenged Enron's CEO, Jeff Skilling, for the absence of a cash flow statement with their earnings during the earnings call on April 17, 2001. In paper, Enron was the most profitable company in the world. But, like a Ponzy scheme, they were running out of cash and needed to create new ways to get capital infusions to stay alive. Just like a Ponzy scheme, they eventually failed; leaving a trail of total devastation. They weren't producing any cash.
So tell me, how much is your business equipment worth if your business is not creating positive cash flows? The answer is "nothing". How much is the building worth, assuming that you own it, if there are no cash flows? Zero! Have you ever heard that many businesses are worth more broken apart than together? Well, you now know why. If your business is located in a building you own, I may advise to sell them separately. If the business produces very little cash, it will drag the value of the building down. Subsequently, a buyer looking at having to buy both may not be willing to pay the price you are asking for; which will surely make you think that the buyer is unreasonable. But in reality the opposite is true. Think of it in the following way. If a buyer seeks to get the highest return on his capital, why would he put cash into a asset that doesn't improve returns. Often, large capital outlays will reduce return on capital. This is why Dell's model is much more profitable than Apple's. Dell never had to use cash to buy a piece of inventory. Apple does.

What is your return on capital?

You see, to buy a building, the buyer will have to park a large amount of money in exchange for small savings with the hope that it will appreciate in the future. This is why businesses who keep a close eye on return on capital prefer to pass the burden of sinking lots of cash to financial institutions and opt to rent instead. This is a way to leverage other people's capital. The math is simple. If you can get higher returns on the cash you have by renting rather than buying, then rent. This is certainly the case when rapidly growing a business. It is best to put valuable cash into whatever yields the fastest turns. And buying a building achieves exactly the opposite. It turns scarce capital into slow money.
I can not stress enough the point that the way you run your business may not be what gets you the highest valuation. Things like high net cash flows, fast growth, and high returns on capital are very important when attracting serious buyers. As you can see, these three prioritize money. Your management style, on the other hand, prioritized you.
Finally, be flexible. Whenever I look for buyers, I always try to find what the buyer values more: P&L, Statements of Cash Flows or Balance Sheet. Are they seeking to show the highest difference between input and outputs? Are they in a capital intensive business or are they growing fast? Are they trying to improve their Debt Ratio? This is because a buyer may be willing to pay a higher price if it helps them improve cash. Terms are a great alternative in such cases. This brings me to asking you: which of the three is most important to you. Knowing what matters to you and to the buyer will help you both get a deal where everybody gets what they want. The message here is that you need to customize to get the best deal.
In conclusion, plan your exit as soon as possible. Do not wait a minute more. After your business earns you a comfortable living, learn the things that can get you a higher valuation. Incorporate this knowledge into your business. Give yourself time to find the best buyer. Be flexible with the price. There are ways to exchange an asset for something other than just cash-at-front. Be creative when making the deal. Good luck.