Mutant Capitalism issue: How "zero-profit corporations" warp the market... and why Amazon is the "monster in the shipping box." A retired nuclear weapons chief reveals three North Korea nuclear risks. A tale of two Blue Apron investors. Short seller Andrew Left in a feature profile and a deep dive into target Tesla (TSLA). And hear Glenn Beck on where conservatives go wrong.
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AUGUST 2 0 1 7 A ISM Bafflers, WTFs, Price Puzzlers, and For-Profit Not-For-Profits
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CONTENTS
AUGUST 2 0 1 7 : I SSUE 3
LOST? CLICK HERE
44
70
66
06 24
102
06 Letter From the Editor
86 What’s Andrew Left Up To Today
Editor in Chief: P.J. O’Rourke Editorial Director: Carli Flippen Managing Editor: Steven Longenecker Contributing Editors: Jesse Barron, Turney Duff, Dr. David Eifrig, Andrew Ferguson, Dan Ferris, Kim Iskyan, Michael H. Maggelet, Buck Sexton, Dr. Steve Sjuggerud Newswire Editors: Scott Garliss, John Gillin, Greg Diamond Creative Director: Erica Wood Cartoon Director: Frank Stansberry Contributing Cartoonists: Darrin Bell, Michael Ramirez, Mike Smith, Gary Varvel General Manager: Jamison Miller Advertising: Sam DeCroes, Jared Kelly, Jill Peterson Editorial feedback: feedback@ americanconsequences.com AMERICAN CONSEQUENCES
20 What Could Possibly Go Wrong?
88 What Are Corporations For? BY P.J. O’ROURKE
22 What Moved the Market
92 A Conversation With... GLENN BECK
24 Blue Apron: A Two-Sided Tale on Wall Street BY TURNEY DUFF 28 How Robber Barons Became Robin Hoods BY ANDREW FERGUSON
96 Ask These Seven Questions Before Buying Any IPO BY KIM ISKYAN
100 Read This
34 Quizzed at the Urinal BY DR. STEVE SJUGGERUD
102 The Final Word BY BUCK SEXTON
36 North Korea’s Inevitable Nuclear Threat Is Here BY MICHAEL H. MAGGELET
106 Featured Contributors
TWO SIDES TO AMAZON 46 ‘Loss Is the New Black’ BY DAN FERRIS 56 How to Get Rich Without Turning a Profit BY DR. DAVID EIFRIG
66 These Folks Aren’t Playing With Monopoly Money BY P.J. O’ROURKE 70 Andrew Left: The Bounty Hunter of Wall Street BY JESSE BARRON
American Consequences | 3
INSIDE THIS ISSUE
T his month in American Consequences , editor in chief P.J. O’Rourke investigates something strange happening to capitalism... a near- unrecognizable, terrifying mutation in American corporations. Bestselling author Turney Duff calls his buddies around Wall Street about the Blue Apron (APRN) IPO disaster... and nearly gets laughed off the phone. Except for one poor fellow on the wrong end of the trade. Veteran journalist and former speechwriter for George H.W. Bush Andrew Ferguson tells why tech titans are given a free pass by anti-business business journalists. Dr. Steve Sjuggerud has an update on the “Melt Up.” “If you have any money invested in the market, you must be aware of this trend.” And P.J. shows what happens when a grudge- holding, Monopoly-playing do-gooder grows up and becomes a regulator. Due to security classification issues, Michael H. Maggelet , a retired U.S. Air Force nuclear weapons team chief, can’t share everything he knows on North Korea’s nuclear arsenal... but he can share three important risks that almost no one is talking about: 1. An accidental nuclear detonation in North Korea... 2. A man-portable atomic bomb fielded by North Korean special forces... 3. And exo-atmospheric bursts across the U.S. that could inflict EMP damage on a mass scale. If you read nothing else: Don’t miss the two perspectives on Amazon (AMZN)... It’s one
of the greatest businesses on earth, but it’s also trading at an extraordinary valuation. Financial analyst Dan Ferris warns about the risks in trying to find the next Amazon. And Dr. David Eifrig calls Amazon about as close to a guarantee for investing success as you can get. Losses may be the new black, but you’ll freeze to death if that’s all you’re wearing when the weather changes. Dan Ferris Enterprising journalist Jesse Barron brings us a profile of noted short-seller AndrewLeft. And the American Consequences staff takes our own deep dive into one of Left’s most recent short positions – electric carmaker Tesla (TSLA). Media mogul Glenn Beck joins us to say where conservatives go wrong... why you can’t put revolution back in the bottle... and why the Farm Belt could have big problems coming. And financial publisher Kim Iskyan reveals seven questions to ask before buying any IPO ( too bad Turney’s Blue Apron buyer didn’t read this ). Finally, nationally syndicated talk radio program host Buck Sexton will close us out with a look at Google – the world's most powerful echo chamber. Enjoy the issue. And tell us what you think at feedback@americanconsequences.com . Regards,
“
Steven Longenecker Managing Editor, American Consequences
4 | August 2017
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From Editor in Chief P.J. O’Rourke
LETTER FROM THE EDITOR
THE NEW MUTANT CAPITALISM
THIRTY YEARS AGO, ITWAS SIMPLE... Now, it's as if somebody took corporations and exposed them to atomic bomb test radiation.
12 Largest Publicly Traded U.S. Corporations by Market Capitalization 2017 1987 1 Apple General Motors 2 Alphabet (Google) Exxon 3 Microsoft Ford 4 Amazon IBM 5 Facebook Mobil 6 Berkshire Hathaway General Electric 7 Johnson & Johnson AT&T 8 ExxonMobil Texaco 9 JPMorgan Chase DuPont 10 Wells Fargo ChevronTexaco 11 Bank of America Chrysler 12 General Electric Altria (Philip Morris)
Something strange has happened to capitalism. Something weird, horrible, and freakish. If you don't knowwhat I'm talking about, look at the biggest companies in America:
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6 | August 2017
Capitalism has undergone a mutation. It has become unrecognizable. When I see the 1987 Top 12 list, I can tell you what every one of those companies did. Today I'm utterly ignorant about what seven of the Top 12 companies really do. Not only am I confused by the purpose of these corporations, I'm also perplexed by how – and indeed, if – they make a measurable profit. Plus, I'm dumbfounded by the way they're priced on the stock market. Just look at the chart on the following page... Thirty years ago, it was simple... GM, Ford, and Chrysler made the cars. Exxon, Mobil, Texaco, and Chevron pumped the gas to make the cars go. Where the cars went was shopping. GE manufactured the things you went shopping for – washers, dryers, stoves, toaster ovens, locomotives, jet engines, etc. At work, you used IBM. They had typewriters you could pound on in a way that would send a modern touchscreen straight to the Mumbai e-waste disposal. They had real computers, too – not these flimsy silicon chip-dip kind, but big manly computers that took up whole rooms, spewed out punch cards, and helped put an American on the moon. While you were smoking a Marlboro cigarette, you called home on an AT&T phone that you never lost because it weighed as much as a boat anchor, and you couldn't accidently drop it in the toilet because the cord wouldn't reach that far. DuPont made the glue that held it all together and lots of other chemicals too, back when "Better Living Through Chemistry" was still
considered a good idea. Now... it's as if somebody took corporations and exposed them to atomic bomb test radiation in a cheap Japanese science-fiction movie and out sprang Godzilla, Mothra, and Rodan – or, as investors call them: Amazon, Facebook, and Google. Thirty years is a brief period in terms of economic evolution. For example, there was no evolution from the fall of the Roman Empire in 476 A.D. until the increased crop yields and trade of the 1400s. Industrialization supposedly happened at blinding speed, but in fact took 200 years to reach the far corners of the globe. I am frightened of fast-changing mutant corporations like what we have today. They fall into four scary categories: The Bafflers As far as I’m concerned, what Apple, Google, and especially Facebook sell are annoyance, noise, and distraction. I’ve got kids and dogs. Annoyance, noise, and distraction are unlimited free goods at my house. I don’t want to see photos of the adorable grandchildren of everyone I’ve ever met and videos of the cute things their cats do. Even less do I want to hear about the world’s dullest experiences and most banal thoughts – which people save up for their Facebook postings. If Facebook wants to make money from me, I’ll pay the website handsomely to go the hell away.
American Consequences | 7
LETTER FROM THE EDITOR
Biggest Public Companies in America (numbers as of late July)
Company
Ticker
Market Cap (in billions)
Net Income
P/E
Dividend
(in billions) Yield
1
Apple
AAPL
$784
$46.7
17.6x
1.7%
2
Alphabet
GOOGL
$669
$19.5
33.3x
-
3
Microsoft
MSFT
$558
$16.8
32.3x
2.1%
4
Amazon
AMZN
$489
$2.4
192.0x
-
5
FB
$470
$10.2
40.8x
-
6
Berkshire Hathaway
BRK-B
$420
$24.1
18.6x
-
7
Johnson & Johnson
JNJ
$364
$16.5
22.6x
2.5%
8
ExxonMobil
XOM
$340
$7.8
33.7x
3.8%
9
JPMorgan Chase
JPM
$327
$24.7
14.0x
2.2%
10
Wells Fargo
WFC
$277
$20.4
13.7x
2.8%
11
Bank of America
BAC
$242
$16.2
14.7x
1.3%
12
General Electric
GE
$234
$8.8
24.9x
3.6%
Google is a very handy device for getting facts... If you don’t mind the facts being wrong. I’m a journalist, so I’m in constant need of wrong facts and therefore use Google all the time. So it’s good for me. But how good it is for you, a reader of journalism, is another question. Google has caused my research skills to degenerate to the point where I have to sing the kindergarten “ABC Song” to use the dictionary. Google is like the worst librarian in the world. You ask her a question and she says, “Well, there’s a big pile of books Bankers, as we learned during the 2008 financial crisis, can be every bit as bad as hypothetical teenage daughters
over there, but we haven’t gotten around to sorting them. However, we do have a tattooed skinhead and a Bernie supporter with a braided beard and a pink pussy hat in the reading room and you could ask them.” Then there’s Apple with its gosh-darned iPhone. I hate talking on the telephone. I consider being unable to come to the phone to be one of life’s greatest luxuries. The last thing I want is a telephone that fits in my pocket, can find me wherever I go, fills my head with things like Trump tweets, bowling tournament scores, and how I didn’t win the lottery again, and calls me a cab because my wife says I should quit drinking and get home right now. I want a phone the size of a cement block, like AT&T used to make, and I want it connected to an answering machine that says I can’t come to the phone.
“
8 | August 2017
The WTFs I understand – sort of – why Microsoft is successful. It makes the most popular desktop-computer operating system. What I don’t understand is how to make that operating system quit operating. Every time I click my mouse I am confronted with complexities that wouldn’t be out of place in a Rube Goldberg cartoon. A computer is a fundamentally simple device – a combination IBM Selectric, filing cabinet, post office, and pocket calculator. But if I make one wrong move on my computer, the filing cabinet mails me the Selectric and the mailman drops the package on my desk – smashing the pocket calculator. There is no excuse for the complications of the Microsoft operating system. I picture a room the size of Redmond, Washington, full of pear-shaped nerds adding “features” because they can. I want to lock each of them in a small room with an IBM Selectric, a filing cabinet, a mail slot, and a pocket calculator... and not let them out until my computer is as simple to use as my automatic garage-door opener. There is also no excuse for Microsoft making the most popular desktop-computer operating system and then punting the mobile-device operating-system ball to Google’s Android OS on first down in the mobile-device game. Why is Microsoft considered a blue-chip stock again? JPMorgan Chase, Wells Fargo, and Bank
of America are three more WTFs. Not because of the companies themselves or their fundamentals (low P/E ratios and some dividend yield, see chart). But I have my doubts about whether banks should be among the American corporations with the highest market capitalizations. In fact, I have my doubts about whether banks should be publicly traded corporations at all – instead of partnerships, as they once were. Before 1970, the New York Stock Exchange (NYSE) banned banks from being listed. Maybe the NYSE was right the first time. All corporations face what’s known as the “agency problem.” The goals and interests of management can conflict with the goals and interests of proprietors. It’s a familiar enough problem. It happens around the house. Let’s say I have a teenage daughter. (And I do. But she’s remarkably well-behaved... Either that or she’s incredibly discreet. Anyway, I’m not using her as an
By Rube Goldberg. Originally published in Collier’s Weekly , 1931.
American Consequences | 9
LETTER FROM THE EDITOR
weren’t being hypothetical, they were going broke. For all sorts of reasons – pay, perks, ego, stock-option greed – the senior managers of banks got themselves involved in financial transactions that no ordinary stockholder could understand. And as it turned out, no senior manager could understand either. Because the banks were owned by clueless stockholders, the banks’ clueless senior managers were allowed to forget what banks are supposed to do – move money around in a safe and wise manner, taking a little cut for their trouble. Then there are two WTFs who aren’t answering attempts to contact them and determine what their mission is. “Earth to General Electric... “ “Earth to Berkshire Hathaway... “ Search for “General Electric” and something like this comes up (see below).
example. I’m using a hypothetical teenage daughter.) My hypothetical teenage daughter is at an age where she insists that she can manage her own life. Her goal is to have a good time. Her interests are clothes, boys, and loud music with obscene lyrics. Being a dad, I feel a proprietary interest in my daughter. My goal is to get her through college, settled in her career, and, eventually, happily married with adorable grandchildren whose pictures I can post on Facebook. My other interests are not paying for too many of her clothes with my credit card, letting the boys know I have a shotgun, and getting my daughter to turn down her mobile device so that I can’t hear the obscene lyrics leaking out her earbuds. Bankers, as we learned during the 2008 financial crisis, can be every bit as bad as hypothetical teenage daughters – except they
10 | August 2017
What does all that even mean? Out in the Midwest where I come from, the last “connecting wind to the land” tweet from GE would mean, “Hurry up, Maw, get down in the root cellar. There’s a twister a-coming!” “Builds, powers, moves & cures the world”? According to this description, GE produces accretion of dust and gas in the early solar system 4.6 billion years ago then asks, “Did the earth move for you too?” And when our planet suffers from climate ills, we’re supposed to call GE CEO Jeff Immelt – who just got fired – and he’ll tell us, “Take two asteroids and call me in the morning.” As for “powers... the world,” I guess we’re supposed to think that the sun shines out of GE’s... How is a retail investor supposed to think anything cogent about this kind of company? And I’m not even touching on GE’s almost innumerable subsidiaries... such as GE Capital (which GE is trying like hell to get rid of ), GE Automation & Controls, GE Wind Energy to make us less dependent on petroleum, Baker Hughes oil-field services to make us more dependent, GE Jenbacher that manufactures “cogeneration modules” whatever those may be, and Amersham with its “radioactive material for peacetime uses.” (Got a termite problem? Contact Bikini Atoll Pest Control.) Berkshire Hathaway is even more of a dog’s breakfast. I count 64 companies it controls, but it’s early in the day and the number may have gone up by now. Except for a group of insurance providers,
most of the businesses the Berkshire companies are in bear a chalk-to-cheese relationship to the businesses the other Berkshire companies are in... Here are 10 of them: 1. NetJets 2. The Omaha World-Herald 3. Acme Brick 4. Fruit of the Loom 5. Borsheims Fine Jewelry 6. GEICO 7. Burlington Northern Santa Fe Railway 8. Dairy Queen 9. Benjamin Moore 10. Duracell There’s a story in there somewhere... “Hop on a G3 and get here quick because – stop the presses – I’m marrying a brick. Need some new underwear. Already have the ring. The little lizard was going to be my best man, but he got run over by a train. We’ll serve ice cream cones at the reception then go out and paint the town red. It will recharge your batteries!” But what’s the story for the retail investor? It would take a genius to keep track of all this different stuff. Maybe Warren Buffett is a genius. But he’ll be an 87-year-old genius on August 30. Think he remembers everything he’s bought? The Price Puzzlers Amazon, which is basically a glorified yard sale, doesn’t pay a dividend, had a net income return of 0.5% on its market capitalization, and has a P/E of 192 (see chart).
American Consequences | 11
LETTER FROM THE EDITOR
Beginners” feature that uses your dad’s and your uncle’s apple orchard as an example. My dad and my uncle didn’t sell apples, they sold cars. Plow your profits back into that business and you’re buying the cars you just sold. The motives, strategies, and tactics behind “Zero-Profit Corporations” are well-explored in this issue of American Consequences. But I’ll throw in my two cents anyway. (That’s more than you’ll get from Berkshire Hathaway dividends.) Buying a stock only because I expect someone else to buy the stock later for a higher price makes me feel slightly like I’ve been plopped down in Giza between Khufu and Khafre in the land of pyramid schemes. Never taking a profit from a healthy business also reminds me – more than slightly – of my supposed savings account when I was a kid. Every Christmas and birthday $5 bill that I received... along with all of what I was paid for mowing the neighbor’s lawn... went in there. The balance was several hundred dollars. “We’re saving for your college education,” my mother would say. Maybe we were saving for my college education. But I was saving for a Wham-O slingshot. I had $2.38 in an old Prince Albert can, mostly from pop-bottle deposits and change found under the sofa cushions. To this day, I believe I would have been happier with taking one less English Lit. course and shooting a lot more squirrels and pigeons.
Meanwhile Apple, which is considered to be a legendarily brilliant and innovative company, does pay a dividend, had a 6% net income return, and has a P/E of 17.6. What’s happening here is far beyond the brain power of an old liberal-arts major like me. But I’m told Apple’s stock price is low because gigantic investment funds already own so much Apple stock that they can’t stay diversified unless they buy something else. That might cause a more conspiracy-minded person than myself to wonder how much freedom there really is in the Free Market. Four of America’s top 12 companies – Amazon, Facebook, Google, and Berkshire Hathaway – don’t pay dividends. All of them have net income (see chart). Even famed burner-through-capital Amazon had 2016 net income in excess of $2 billion and Berkshire Hathaway had 2016 net income in excess of $24 billion. Not a penny of it went to shareholders. I understand the idea behind plowing profits back into the business. There’s a website called “the balance” with an “Investing for That might cause a more conspiracy-minded person than myself to wonder how much freedom there really is in the Free Market. The For-Profit Not-For-Profits
“
12 | August 2017
“
And I could have done it if Mom had at least let me collect my savings-account interest payments. Furthermore, Jeff Bezos, Mark Zuckerberg, Larry Page, Sergey Brin, and Warren Buffett don’t seem to care about money as much as I do. Too much trouble counting it, probably. Warren Buffett lives very modestly and has promised to leave all his money to charity. I have more respect and affection for money than that... I care. Would you let somebody who didn’t care about kids take care of your kids? Allow them to jump off roofs, tease vicious dogs, and stick silverware into electric outlets? I rest my case. Fighting the Mutants Thankfully there are a couple of old school holdovers in the Top 12. ExxonMobil is standing by to wash your windshield and check your oil – or these days, to feed you fatty snacks at the gas-station convenience store. XOM’s P/E (see chart) is a non-insane 33.7 and its dividend yield is a fat 3.8%... Not bad for the middle of an oil bust. Oil prices may never again reach a peak like 1979 when the sweater-wearing peanut farmer with the thermostat set to 60 was in the Oval Office. Or a peak like 2008 when China’s tiger and India’s... sacred cow, I guess... were first unleashed. But given what a cost/benefit flop “alternative energy” has been, it will be a long time before Exxon gas
Maybe we were saving for my college education. But I was saving for a Wham-O slingshot.
stations are selling bottled water for more than unleaded premium. Johnson & Johnson, the pharmaceutical, medical-device, and personal-care products company, seems fairly priced (see chart) at a P/E of 22.6 with a 2.5% dividend yield. That’s about where the current Dow Jones averages are – a P/E of 21 and average dividend yield of 2.5%. JNJ makes baby powder, Band-Aids, and Tylenol. People aren’t going to stop having kids. Kids aren’t going to stop having skinned knees. And there are going to be some big headaches if the most bizarre of the Mutants – Amazon, 192 P/E, 0% dividend yield – go the way of Godzilla in Godzilla, King of the Monsters (1954). Spoiler alert: Dr. Serizawa’s Oxygen Destroyer. We’d better get Dr. Serizawa back to work. “Mutant Capitalism” is terrifying. But fortunately, what’s immutable is capital itself. Capital is the accumulation of wealth (of any kind, including skill and knowledge) to be used for producing more wealth. We don’t blow all our money, time, and smarts making whoopee. Instead, we deny ourselves a little bit of fun. We set aside (or we should set aside) some cash, some work hours, and some intelligence to
American Consequences | 13
LETTER FROM THE EDITOR
“
make ourselves richer, more leisured, and increasingly savvy in the future. This has been going on since cave people deliberately chipped extra flint spear points to trade with for the smoked mammoth slices the neighbors in the cave next door intentionally didn’t eat all of. And it will continue to go on until we are taking our excess gray matter to the brain farm to grow an additional medulla oblongata to exchange with space aliens for the Whoopee Rays they didn’t use up. Capitalism, on the other hand, is the means by which capital is put to work. And 'Mutant Capitalism' is terrifying. But fortunately, what's immutable is capital itself.
capitalism is capable of taking some very strange forms. For example, socialism, communism, fascism, and crony capitalism are all types of capitalism. The difference being that, unlike free-market capitalism, the capital isn’t primarily held by private parties and/or isn’t put to work according to market principles of supply and demand. • With socialism, the capital is held by dopey, dreamy, featherhead political and bureaucratic know-it-alls who are – occasionally – well-meaning but who are always self-serving. • With communism, the capital is held by murderous totalitarian thugs. • With fascism, you get the same thugs, plus the business people who have brown-nosed them. • With crony capitalism, you hold the capital... but you’d better do what Putin, the Saudi royal family, or Bill and Hillary Clinton tell you to do with it. We’ve survived the pinkos, the Reds, the Nazis, and (I hope) Bill and Hillary. If we keep a level head and put our common-sense Oxygen Destroyer to work sucking the air out of the monsters, we’ll survive Mutant Capitalism too.
Mike Smith Editorial Cartoon used with the permission of Mike Smith, King Features Syndicate and the Cartoonist Group. All rights reserved.
14 | August 2017
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P.J. O’Rourke comment: Dear Fellow PJ, quote away! That’s what we’re here for. But we always appreciate a link back to the original article and a link to the americanconsequences.com subscribe page. That way they can read us for themselves... and call us names if they like. Re: What Could Possibly Go Wrong? You say bubble. I say GREAT buyers’ market for good used cars! – PJ Wiltshire P.J. O’Rourke comment: Dear Yet Another PJ, Gosh, I hope you’re right! My 2009 Suburban just blew its front differential. And my daughter’s 2007 Volvo’s steering gear is making an ugh-ugh-ugh noise when she turns left. Re: Get Me a Quote on That The quote from Milton Friedman suggests capricious personalities “make da rules” at central banks, but he seemed himself to have a personality of a slug. Another obsession with eliminating the Fed in order to follow the PJ “get rich, stay rich” doctrine? – Bill Johnson P.J. O’Rourke comment: I had the honor of meeting Milton and Rose Friedman
Re: Welcome to American Consequences VERY glad to see you are writing again... a lot... I have been a fan since your National Lampoon days although I think your best work was for Rolling Stone. You sir, are an American Institution. Still writing on your IBM Selectric? – Stephen C. Tatum P.J. O’Rourke comment: Dear Mr. Tatum, I deeply appreciate your taste in journalism. And I agree with you about my work for Rolling Stone . Being a foreign correspondent (back before they cut your head off for it) was about as much fun as you can have with your clothes on. (Not that I always did keep my clothes on...) No, I finally gave up on my IBM Selectric. Had to – the last guy within 100 miles who knew how to repair one died. But I still think the best prose comes out of a Selectric. You had to think before you wrote or you’d be up all night retyping the article. What are the protocols for quoting brief passages in any published material in your magazine? I do not want to violate any copyright laws when using a passage from an article to refute a counterpoint to any argument that may arise over content. – PJ Clark
16 | August 2017
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several times. They were, in fact, vivacious personalities, and both were very funny. But that aside, it is important to remember that at the time Milton Friedman was writing we were facing a very different set of central- banking problems than we are today. I think Friedman’s common sense is always reliable, but sometimes the subjects he applies that common sense to need to be updated. Could Really Be Coming to the U.S. Hi Gents: Next year, the U.S. will spend in excess of $600 billion on its defence, or should we say military. According to the International Institute for Strategic Studies... the U.S. outspends the next 10 countries put together! And what’s more incredible is that the last war America ‘won’ was WWII. Korea, Vietnam, Iraq, and Afghanistan have all been quagmires. Especially Afghanistan, where America has been at war since 2001! America supposedly pulled out in 2014, and yet the bombing and droning against bearded men hiding in caves continues. The big question is this; When will the American people finally wake up and realise that spending such huge sums of Re: Well-Known Defense Expert Shows What
their tax dollars on defence is a terrible, terrible waste?
The military-industrial complex is taking roughly 20% of all U.S. government revenues. President Dwight D. Eisenhower saw this coming and actually warned the American public of its dangers. With $20 trillion of government debt, roughly $50 trillion in unfunded government entitlement programs, trillions of dollars in unfunded public employee pension funds, and several U.S. states on the verge of bankruptcy, America has reached the point of no return. The implosion of the U.S.S.R. apparently has been forgotten by American policy makers who seem to think; That could never happen here! That sort of hubris is exactly why it can happen in America. And most likely will... sooner rather than later. – Steve Previs Richard Maybury comment: Those statistics are widely used, and as far as I know, accurate, but not true. They should come with a very large footnote saying that the other governments do not have global empires to control. The U.S. “defense” budget is actually the U.S. “domination” budget. For instance, an unknown but certainly large portion of Navy spending goes to building and sending warships to ports around the world to “show
American Consequences | 17
FROM OUR INBOX
facto “protector” of dozens of nations around the world. The United States has two options: spend more or stop serving as policeman and peacekeeper to the world. We could certainly debate the fiscal wisdom of maintaining our “World Police” status until we’re blue in the face (though, I suspect we may be on the same side). But as an investor, I’m in the business of figuring out what will happen rather than what I wish would happen. And I’ve been around long enough to know that no politician who suggests a sensible, scaled- down foreign policy paired with a smaller military will gain traction with American voters. Some have tried (“What’s Aleppo?”), but if they didn’t gain followers after the obvious mistakes of Iraq and Afghanistan, they never will. As a U.K. resident, you likely have better insights into the long-term effects of global overreach than our elected officials (think British Empire). In the meantime, we expect the spending spigot will open back up. If you’re interested in learning more, read my presentation here with four steps that you should take immediately .
the flag.” This in actual practice means telling foreign populations, “See those planes, missiles, and guns? This is what can happen to you if your politicians do not follow the wishes of our politicians.” Think about it... How would Americans feel if, say, Russian or Chinese warships regularly cruised up and down U.S. coasts within sight of our cities and towns? Well, U.S. warships, and only U.S. warships, do this all over the world. Did Rome have a larger military budget than Persia, Carthage, or Egypt? Of course, and there was a reason for it. Doc Eifrig comment: Richard is right... No doubt, the dollar amounts are massive. But spending more than the next 10 nations doesn’t amount to much when you’re the de
Darrin Bell Editorial Cartoon used with the permission of Darrin Bell, the Washington Post Writers Group and the Cartoonist Group. All rights reserved.
18 | August 2017
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WHAT COULD POSSIBLY GO WRONG?
Financial follies and disaster in the making
‘Dumb money’ is dangerously complacent today... Betting on lower volatility has been “easy money” for months now. That has enticed speculators to jump into the trend in droves. You can gauge sentiment in markets like U.S. Treasury bonds, crude oil, and precious metals by following the U.S government’s Commitments of Traders (“COT”) report... Today, non-commercial traders are betting on lower volatility like never before. They’re currently holding near an all-time high net short position. These traders are called the “dumb money” because they tend to be wrong at extremes. As a group, they get super bullish at market tops and super bearish at market bottoms.
The ongoing oil bust claims its highest-profile victim yet...
The $2 billion EnerVest private-equity fund that “borrowed heavily” to buy oil and gas wells is now worth virtually nothing. Its lenders are negotiating to take control of the fund’s assets to satisfy its debts. And the fund’s investors – many of whom are high-profile institutional investors – are likely to recover just pennies on the dollar from their initial investments. Losses like this are practically unheard of among large private-equity funds. Investment firm Cambridge Associates reports that only seven billion-dollar funds have ever lost a penny for investors. And of those, losses of more than 25% are even more rare. Suffice it to say, this is a big deal . And other energy-focused private-equity funds are in a similar predicament today.
20 | August 2017
Everyone needs a roof over their heads, so they’ll pay the mortgage first. And they need to get to work, so they pay their auto loan. But the credit card has no urgency. That’s why losses on credit cards are always much higher than other types of debt. When defaults on credit cards start to soar toward crisis levels, debt and equity investors flee from these lenders. We’ve seen it before, and we’ll see it again this time. Snap’s disregard for shareholders bites it... Global index provider FTSE Russell – whose U.S. indexes are important benchmarks for large institutional investors – said it would not include Snap (SNAP), maker of the trendy photo- and video-sharing app Snapchat, in its indexes. The S&P 500 Index will also bar Snap. The company’s share structure denies voting rights to investors... and likely portends more selling in Snap shares ahead. Index inclusion tends to bring large amounts of institutional money into a stock. American Consequences contributor and real-time Newswire editor Scott Garliss notes that many IPO investors were likely sold on the promise that this institutional buying would push shares higher. Now, that is no longer the case... So if you’re an account that has been hanging on to these shares during the pullback because you were hoping the prospect of index inclusion may help things, you just lost another reason to own this name. ( If you haven’t downloaded the free Newswire app, click here to do so .)
Inflation is plunging, sticking the Fed between a rock and a hard place... Inflation has decelerated dramatically in recent months. More concerning, three- month inflation is getting close to 0% for the first time since the financial crisis. This suggests another bout of deflation – not inflation – could be the bigger risk today. If this trend continues, the Fed will have no choice but to give up its “tightening” cycle or risk triggering another crisis. Central banks are stuck... If they don’t try to tighten now, they’ll have no room to “ease” when the next downturn comes. But simply unwinding their massive stimulus programs could hasten its arrival. Delinquencies and defaults hit highest levels in seven years... Credit-ratings firm Fitch reports that 6% of borrowers have fallen behind on payments by 60 days or more. This is an early “crack” in the ice of the credit market. Delinquencies always increase before defaults. And the defaults are starting to rise, too. Investment bank Wells Fargo recently reported the cumulative default rate as of January was more than 12%, the highest rate since 2010.
Credit-card debt nearing its 2008 peak...
Total U.S. credit-card debt sits around $750 billion today. All that secures this debt is the borrower’s promise to pay. When times get tough for cardholders, credit cards and student loans are the first debts they stop paying.
American Consequences | 21
WHAT MOVED THE MARKET THE BIGGEST STORIES THAT MATTERED FOR THE MARKET LAST MONTH...
July 13 Central banks getting their heads together again. European Central Bank (ECB) President Mario Draghi confirms he'll attend the Federal Reserve's Jackson Hole Conference in August for the first time in three years. The ECB is scheduled to release a policy update less than two weeks later. Higher rates, of course, are a negative for companies growing via borrowing... and a positive for financials and banks. We'll see whether Draghi talks up eurozone growth like we saw at the ECB's annual forum last month in Portugal.
July 28 Obamacare "skinny repeal" fails.
This political setback was a positive for health care stocks. Maintaining the status quo is a welcomed outcome for investors... If Obamacare repeal happened, the necessary compliance changes to the business models for managed care, HMOs, hospitals, Big Pharma, and medical-device companies would have turned the industry upside down. Investors would have bolted for the exits. There has also been noise around drug- pricing policy, but that is on hold. Health care lobbyists are high-fiving. July 28 Second-quarter U.S. GDP reported. As we told you to expect last month, the 2.6% GDP growth number was right in the middle of our 2.3%-2.8% range. (Thanks to American Consequences reader David Hiers for asking us to follow up on our predictions. As he wrote: "Games don't matter if you don't keep score.")
EDITORS
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John Gillin Greg Diamond
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22 | August 2017
July 30-31 Firmer tax talk. A tax-reform bill is now expected in
August 23 Markit releases Eurozone
WATCH THESE DATES
Flash Composite Purchasing Managers' Index data – an indicator of direction of growth.
October and November, with a completed budget by September or October. House Speaker Paul Ryan and Kevin Brady, chairman of the House Ways and Means Committee both weighed in, and the Koch brothers also said they are getting behind the White House tax reform. August 7-15 North Korea rattles markets with nuke talk. In response to new North Korea sanctions, the country threatened retaliation – including a plan that it might fire missiles toward the U.S. territory of Guam. As the rhetoric escalated, reports surfaced that North Korea could place a mini nuclear warhead inside of a missile... and President Trump responded by saying North Korea would be "met with fire and fury... the likes of which this world has never seen before," if it failed to cease threatening the U.S. China stepped up pressure on North Korea by saying it was implementing U.N. sanctions – banning the import of certain goods. North Korea followed up by backing off its threat. And President Trump praised North Korean leader Kim Jong Un for appearing to back down...
August 24-26 The Federal Reserve's Jackson Hole Conference. The markets will be focused on Mario Draghi's appearance and commentary around stimulus withdrawal. August 30-31 The second round of second-quarter GDP and the Fed's main inflation gauge (PCE) data. This will give us a more accurate look at growth versus the preliminary figures last month, and give the Fed more direction on inflation. September 4-5 Markit releases China and U.S. Flash Composite Purchasing Managers' Index data. September 5 August recess over. House and Senate back in session. Expect debt-ceiling talk to heat up.
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September 7 ECB decision on rates.
American Consequences | 23
BLUE APRON
A TWO-SIDED TALE ONWALL STREET
I called a bunch of my old friends and asked if they played the busted meal-kit IPO... they nearly laughed me off the phone. Except for one poor fellow. Michael (name changed) likes to call himself an investor, but he admits to trading almost every day... Now retired in his 50s, he has a regular daily routine. On June 29, Michael’s alarm went off at 6 a.m. He rode his exercise bike for 30 minutes in his modest suburban home in Dix Hills, New York. After his workout and a shower, he sipped coffee from a steaming mug on the back deck, flipped open his laptop, and started reading the market news. Michael primarily trades stocks with his retail account. And when he opened his brokerage website, he found a message alerting him to a 1,000-share allocation of the Goldman Sachs- led initial public offering (“IPO”) of dinner- delivery service Blue Apron (APRN).
By Turney Duff
CLICK HERE TO READ THEWEB VERSION
24 | August 2017
Luke had already Uber’ed to work, sat through his morning meeting, and fielded calls, e-mails, and instant messages to get ready for the open. His firm didn’t put in for an allocation on the Blue Apron deal, despite having a great relationship with Goldman Sachs. The plan was to sit this one out and watch from the sidelines. But that plan changed... A day before Blue Apron kicked off its roadshow, Amazon (AMZN) announced the purchase of Whole Foods Market (WFM) which altered the entire scope of home- delivery food service. The competition for meal-kit delivery had already been heating up... Companies like Plated, HelloFresh, and Sun Basket all offer similar business models to Blue Apron. But the Amazon news was a gamechanger... and added the risk of cheaper prices and faster delivery.
He’d never received such a large allocation before, especially for a highly anticipated deal. But as the seconds turned to minutes, he began to worry. He started to speculate on why and how he received 1,000 shares. There must be a problem... He always put in for IPOs and typically got shut out. He received a few hundred shares here and there, but usually only for lukewarm deals. And when he flipped out of them, he was ecstatic if he made $1 on the trade. He poured himself a second cup of coffee and wondered what he should do on the open with his 1,000 shares. Should he immediately sell? Should he buy more? Or should he hold? Forty miles away in Midtown Manhattan, the head trader for a $500 million hedge fund was finishing up his bacon, egg, and cheese sandwich on the desk.
One of the worst things an investor can hear about a stock he owns is that Amazon is getting into the space. When you hear that, it's usually time to run – run as fast as you can.
American Consequences | 25
BLUE APRON
"LOTS OF FINGERS WERE CROSSED THAT DAY," my source said.
One of the worst things an investor can hear about a stock he owns is that Amazon is getting into the space. When you hear that, it’s usually time to run – run as fast as you can. On the first day of the Blue Apron roadshow, Luke’s firm started to work on a short thesis for the IPO. They looked at revenue growth, profitability, and if Blue Apron had a real competitive advantage even with Amazon focusing more on food. Luke made calls around the Street to get a feel for how the book was shaping up. The insight he got reaffirmed the short thesis... He learned that Goldman Sachs was having a very difficult time building a book – which simply means getting their clients to put in an indication of interest on the deal. From that alone, Luke knew to stay away. As APRN got closer and closer to opening, Luke called up a trusted no-name broker in hopes of hiding the trade from Goldman Sachs and placed an order to short 200,000 shares. Meanwhile in Blue Apron’s Soho headquarters, emotions were mixed with fear and excitement, according to a source close to the company. There’s always optimism inside the walls of a company on the day they go public. “Lots of fingers were crossed that day,” my source said.
Originally, the IPO price range was $15- $17 a share. Then it was dramatically cut to $10-$11. This was cause for concern for some investors and employees because the company was valued at $2 billion in their last private round in 2015. The price reduction meant that it was below the old valuation and some might be underwater on their investment already. Regardless, Blue Apron moved forward with their IPO – offering 30 million shares at $10 to raise $300 million for automation and supply-chain technology. Back in Dix Hills, Michael decided he was going to hold on to his 1,000-share position... Although he was skittish, he figured that a Goldman Sachs-led IPO wouldn’t “break below” the deal price of $10. Typically, the lead banker does whatever it can to support their own deal. No one likes to see a failed IPO on the first day. So Michael felt somewhat comfortable holding on. And he was glad he did as he watched the first few hours of trading... The stock rose almost 10%... at first. And then it started to sell off. But on the way down, Michael decided to double his bet
26 | August 2017
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