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>>> ‘Dark oxygen’ on ocean floor may rewrite Earth’s origins of life
Deep sea nodules could be making their own oxygen without sunlight.
Popular Science
BY ANDREW PAUL
JUL 22, 2024
https://www.popsci.com/science/dark-oxygen-ocean/
Polymetallic nodules scattered across bottom of the ocean floor
The formations can be found as deep as 20,000 feet below the ocean's surface.
It’s one of the earliest things you learn in elementary school science class—Earth’s life-sustaining oxygen is produced by plants and algae during photosynthesis using a combination of carbon dioxide and sunlight. But the recent discovery of what researchers call “dark oxygen” may upend conventional notions of how the critical element can be created–and what that might mean for the origins of life.
According to a study published in Nature Geoscience on July 22, natural mineral deposits known as polymetallic nodules located at the bottom of the ocean appear capable of generating oxygen without any source of light. These nodules are found as far as 20,000 feet below the ocean surface and range in size from particles to nodules as large as a human hand. Because they contain combinations of cobalt, copper, lithium, and manganese, they have long been eyed by large-scale mining companies as a potential untapped source of coveted metals needed to produce batteries and other electronics. But as lucrative as they may be for industrial uses, they now seem far more vital to life within ocean ecosystems.
The first indications that something strange was occuring within polymetallic nodules arrived over 10 years ago in a northeastern region of the Pacific Ocean. While on a sampling expedition in the area’s mountainous submarine ridge known as the Clarion-Clipperton Zone, Andrew Sweetman of the Scottish Association for Marine Science (SAMS) noticed odd readings on his equipment.
“When we first got this data, we thought the sensors were faulty because every study ever done in the deep sea has only seen oxygen being consumed rather than produced,” Sweetman says in an accompanying statement. “We would come home and recalibrate the sensors, but, over the course of 10 years, these strange oxygen readings kept showing up.” After double checking the findings using a different sensor array, Sweetman and his team knew they were “onto something groundbreaking and unthought-of.”
In 2023, Sweetman contacted Northwestern University electrochemistry expert Franz Geiger about the strange evidence and sent him multiple pounds of polymetallic nodules. Electrolysis, the process of splitting a target into its separate elements, needs only 1.5 volts to initiate in seawater—and after attaching sensors to a single nodule, Sweetman and Geiger detected voltages as high as 0.95 volts. This power increased even more when they placed the formations close together, much like stacking batteries.
“It appears that we discovered a natural ‘geobattery,’” Geiger says in a statement. “These geobatteries are the basis for a possible explanation of the ocean’s dark oxygen production.”
The existence and possible source of this dark oxygen may eventually rewrite the narrative of how life originated on Earth. As Sweetman explains, experts have long theorized that the planet’s aerobic life began due to oxygen created by photosynthetic organisms like early plants and algae. Now that they know oxygen can be produced even in the ocean’s lightless depths, these theories may need updating.
“I think we… need to revisit questions like: Where could aerobic life have begun?” says Sweetman.
But polymetallic nodules may not have just helped start life on Earth—they may also continue to keep it going near the ocean floor. And this poses a major issue for viewing them as a potential natural mining resource. Geiger explains in Monday’s announcement that 2016 and 2017 examinations by marine biologist examinations of deep sea areas mined during the 1980s revealed total dead zones that lacked even the presence of bacteria.
“Why such ‘dead zones’ persist for decades is still unknown,” Geiger says. “However, this puts a major asterisk onto strategies for sea-floor mining as ocean-floor faunal diversity in nodule-rich areas is higher than in the most diverse tropical rainforests.”
Unfortunately, all that deep ocean biological diversity may mean little to the corporations that view polymetallic nodules as potential profits. Geiger notes that the total mass of all the formations within the 4,500 miles that compose the Clarion-Clipperton Zone is likely enough to supply global energy demands for decades. But as countless examples already show, the destruction of one seemingly distant ecosystem can initiate deadly and dangerous ripple effects elsewhere.
“We need to rethink how to mine these materials, so that we do not deplete the oxygen source for deep-sea life,” Geiger warns.
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Texas Pacific Land (TPL) - >>> A passive company packed with passive income potential
https://finance.yahoo.com/news/think-crude-oil-going-100-094500311.html
Daniel Foelber (Texas Pacific Land): Formed out of the bankruptcy of Pacific Railroad in the 19th century, Texas Pacific Land owns around 880,000 acres of land in West Texas. If you've ever been to West Texas, you know the terrain can be inhospitable to human settlement. But it is gushing with oil reserves.
Texas Pacific makes money from its land through royalties, water sales, and other factors. It typically makes more money when oil and gas prices are higher, but it isn't as correlated to the price of fossil fuels as an exploration and production company.
For example, it reported significantly lower realized oil, natural gas, and natural gas liquids (NGLs) prices in 2023 compared to 2022. The price per barrel of oil equivalent, which is basically a weighted average for oil, natural gas, and NGLs, was 30% lower in 2023 than in 2022. Yet overall revenue was down less than 6%, and net income was down a little over 9% thanks to higher water royalties.
Category
2022
2023
Oil and gas royalties
$452.43 million
$357.39 million
Water sales
$84.73 million
$112.20 million
Produced water royalties
$72.23 million
$84.26 million
Easements and other surface-related income
$48.06 million
$70.93 million
Land sales and other operating revenue
$9.97 million
$6.81 million
Total Revenue
$667.42 million
$631.6 million
In the following chart, you can see that Texas Pacific Land consistently makes a profit no matter the cycle due to its low cost and passive business model. It also converts a majority of revenue to net income.
Texas Pacific rewards its shareholders with quarterly dividends, which vary in size based on its earnings. For example, the company paid $32 per share in 2022 dividends but just $13 per share in 2023.
Texas Pacific isn't the ideal company if you're looking for predictable passive income or to supplement income in retirement. Still, it is a good choice if you want to invest in oil and gas but avoid the volatility that comes with severe downturns.
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>>> Weyerhaeuser Company (NYSE:WY) -- Average Analyst Price Target: $37.50
https://finance.yahoo.com/news/14-best-real-estate-realty-131053697.html
Upside Potential: 7.42%
Number of Hedge Fund Holders: 30
A total of 30 hedge funds were long Weyerhaeuser Company (NYSE:WY) in the fourth quarter, with a total stake value of $255.9 million.
Weyerhaeuser Company (NYSE:WY) is a timber REIT based in Seatlle, Washington. The company is among the world's largest private owners of timberlands, owning and operating about 11 million acres of timberlands in the US.
On January 29, RBC Capital reiterated an Outperform rating and a $39 price target on Weyerhaeuser Company (NYSE:WY).
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>>> Occidental Petroleum Corporation (OXY), together with its subsidiaries, engages in the acquisition, exploration, and development of oil and gas properties in the United States, the Middle East, North Africa, and Latin America. It operates through three segments: Oil and Gas, Chemical, and Midstream and Marketing. The company's Oil and Gas segment explores for, develops, and produces oil and condensate, natural gas liquids (NGLs), and natural gas. Its Chemical segment manufactures and markets basic chemicals, including chlorine, caustic soda, chlorinated organics, potassium chemicals, ethylene dichloride, chlorinated isocyanurates, sodium silicates, and calcium chloride; and vinyls comprising vinyl chloride monomer, polyvinyl chloride, and ethylene. The Midstream and Marketing segment gathers, processes, transports, stores, purchases, and markets oil, condensate, NGLs, natural gas, carbon dioxide, and power. This segment also trades around its assets consisting of transportation and storage capacity; and invests in entities. Occidental Petroleum Corporation was founded in 1920 and is headquartered in Houston, Texas.
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>>> Never Liked Weyerhaeuser? Time for a Fresh Look.
Motley Fool
by Brent Nyitray, CFA
Jun 28, 2023
https://www.fool.com/investing/2023/06/28/never-liked-losing-stock-time-for-a-fresh-look/?source=eptyholnk0000202&utm_source=yahoo-host&utm_medium=feed&utm_campaign=article
KEY POINTS
Weyerhaeuser is heavily levered to residential construction.
Homebuilding is an early-stage cyclical.
Housing construction might be ready to turn around.
The past year has been pretty awful for companies in the residential real estate industry. The rapid increase in interest rates threw a wet blanket on the entire sector. Mortgage originators have struggled with collapsing mortgage volume. Mortgage real estate investment trusts (REITs) have seen the value of their asset portfolios underperform Treasuries. Homebuilders have struggled with affordability issues.
That said, the homebuilding sector has been showing some signs of life, and the entire real estate sector might be bottoming. If a rebound in homebuilding is coming, then a big beneficiary will be timber REIT Weyerhaeuser (WY).
Weyerhaeuser is highly levered to residential construction
Weyerhaeuser is one of the biggest private operators and owners of timberland in North America. Weyerhaeuser owns and operates 10.6 million acres of timberland in the U.S. and manages another 14.1 million acres in Canada. The company also manufactures wood products including structural lumber, oriented strand board, and engineered wood products. The company, which converted into a REIT in 2010, is highly levered to residential construction.
Residential construction (especially single-family residences) has been depressed ever since the residential real estate bubble popped in 2006. Part of this was due to overbuilding during the bubble years, but homebuilding collapsed in the Great Recession and has been slow to recover. According to some estimates, the U.S. has a housing shortage of 5.5 million to 6.8 million units. Housing starts are more or less near the average they have been since the 1950s, despite the population increasing 86% since 1960.
Homebuilding is an early-stage cyclical industry
Homebuilding is a classic early-stage cyclical industry, which means it is one of the first sectors to recover after a recession. This is because the Federal Reserve typically cuts interest rates during a recession, which makes housing more affordable. While the U.S. economy has yet to show much indication that it is in a recession, the last time the Fed hiked rates so dramatically (in the early 1980s) it triggered a nasty recession. The S&P SPDR Homebuilder ETF has outperformed the S&P 500 by 18 percentage points year to date.
Weyerhaeuser has an unusual dividend structure
Weyerhaeuser has an interesting dividend structure. The company pays a quarterly dividend, which is meant to be sustainable throughout the entire housing cycle. It then pays a special dividend at the beginning of the year to reflect the actual earnings of the company. In 2022, Weyerhaeuser paid four quarterly dividends of $0.18 a share and then paid a special dividend of $0.90 in February 2023. Based on the 2022 dividends, Weyerhaeuser has a dividend yield of 5.2%.
Weyerhaeuser is probably going through trough earnings for this housing cycle. The peak of this cycle was probably 2021, when the company paid $2.63 in dividends when you include the special dividend paid in early 2022. This would give the company a dividend yield of 8.6%. During 2021, lumber prices were considerably higher than today.
An investor buying Weyerhaeuser is making a bet that housing construction is about to turn around. The latest housing starts number showed a pickup in starts. Even if there isn't a recession, the long-awaited boom in home construction might still be around the corner. Investors who want to participate in the boom should take a look at Weyerhaeuser.
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MP Materials - >>> Did Apple Just Spell Doom for This Rare-Earth Elements Stock?
Motley Fool
By Nicholas Rossolillo
Nov 11, 2022
https://www.fool.com/investing/2022/11/10/did-apple-just-spell-doom-for-this-rare-earth-elem/?source=eptyholnk0000202&utm_source=yahoo-host&utm_medium=feed&utm_campaign=article
KEY POINTS
Apple CEO Tim Cook talked about recycling rare-earth elements in Apple's most recent earnings call.
MP Materials is the only U.S.-based rare-earth elements producer of its kind and Cook's comments are worth taking note of.
At this point, MP is still enjoying strong growth as it ramps up its operations.
MP Materials stock could still be a wait-and-see play.
With rising demand for advanced computing hardware and renewable energy solutions, many investors have hope for the rare-earth elements (REEs) niche of the mining industry. These materials are prized for their high electric conductivity and magnetic properties, but they can be quite expensive to mine. Fortunately, just a trace amount of a REE like cerium, neodymium, lanthanum, or terbium can go a long way in the manufacture of all sorts of items from batteries to medical equipment.
More REEs will be needed in the decade ahead and some estimates point to this corner of the mining industry growing at a double-digit percentage in the next five years or so.
Most REE production takes place in China, so many investors looking for a U.S.-based company have landed on MP Materials (MP -1.50%) as a top way to invest in this space. It's the only publicly traded U.S.-based REE producer, and it's been a wild but profitable ride since MP became a publicly traded company a couple of years ago. But did Apple (AAPL 0.04%) just douse the party with cold water?
When Apple talks, people listen
Rare-earth elements are getting plenty of hype, and MP is benefiting. Not only is global demand headed up, but there's also political motivation for a U.S.-based producer to succeed to reduce dependence on China's REE market. Though shares have been hit fairly hard by the bear market of 2022, MP has still doubled in price since its 2020 IPO, clobbering the 5% return of the S&P 500 over that same span of time.
But not everyone wants to keep increasing use of newly mined REEs. During the company's Oct. 27 earnings call with analysts, Apple (AAPL 0.04%) CEO Tim Cook said:
Across our entire product lineup, we also continue to source more materials through recycling while taking less from the Earth. Every iPhone 14 is made with 100% recycled rare-earth elements in all magnets, including those used in MagSafe. And in a first for Apple Watch and iPad, we're using recycled gold in the plating of multiple printed circuit boards in our newest devices. While we're working to reduce the footprint of our hardware, we're making changes to our software to be more environmentally friendly with the soon-to-be released Clean Energy charging feature for iPhone.
While details of its recycled REE supply chain are scant, to say the least, a few tiny REE recycling businesses have appeared in the U.S. in recent years. One recycling technology developed by a segment of the U.S. Department of Energy has apparently been licensed by a small materials engineering company based in Iowa. Other government initiatives are underway to spur on REE recycling, too.
Investors in MP Materials will want to watch how things develop and how Apple influences the industry.
Is MP Materials sunk?
On one hand, maybe MP stock won't be a great investment after all if Apple leans into this. Apple is one of the largest tech hardware companies and it has quite the track record of finding novel ways to squeeze its material suppliers to maximize its own profit margins. Besides being able to tout its earth-friendly (or maybe "earth-friendlier") recycled products supply chain, no doubt Apple's switch to reused REEs comes with a long-term profit margin improvement target.
On the other hand, demand for rare-earth elements is rising quickly, and even some early estimates for REE recycling growth merely match the expected growth rate of overall demand. Mined or reprocessed, the world will need more of these elements for use in things like electric cars and energy grid storage (giant battery packs).
And though MP's growth has slowed as 2022 has dragged on, it isn't exactly hurting. Q3 2022 revenue increased 25% year over year to $124 million, and net income increased 48% to $63 million. The company currently derives its revenue from the sale of REE concentrate, but it's busy working on a material refining facility and a value-added magnetics operation as well. The company is also working on REE recycling efforts.
At this point, there isn't much indication that Apple's recycled iPhone components will dent demand for MP's production. But if you're an MP shareholder, it's worth keeping tabs on this development now that MP has the ball rolling on its mining operations. Shares of MP Materials now trade for 22 times trailing-12-month earnings, close to the cheapest valuation it's had since going public, so it's worth a look.
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>>> Avery Dennison Corporation (AVY) manufactures and markets pressure-sensitive materials and products in the United States, Europe, Asia, Latin America, and internationally.
The company's Label and Graphic Materials segment offers pressure-sensitive label and packaging materials; and graphics and reflective products under the Fasson, JAC, Avery Dennison, and Mactac brands, as well as durable cast and reflective films. It provides its products to the home and personal care, beer and beverage, durables, pharmaceutical, wine and spirits, and food market segments; architectural, commercial sign, digital printing, and other related market segments; construction, automotive, and fleet transportation market segments, as well as traffic and safety applications; and sign shops, commercial printers, and designers.
The company's Retail Branding and Information Solutions segment designs, manufactures, and sells brand embellishments, graphic tickets, tags and labels, and sustainable packaging solutions, as well as offers creative services; radio-frequency identification products; visibility and loss prevention solutions; price ticketing and marking solutions; care, content, and country of origin compliance solutions; and brand protection and security solutions. It serves retailers, brand owners, apparel manufacturers, distributors, and industrial customers.
The company's Industrial and Healthcare Materials segment offers tapes; pressure-sensitive adhesive based materials and converted products; medical fasteners; and performance polymers under the Fasson, Avery Dennison, and Yongle brands. It serves automotive, electronics, building and construction, general industrial, personal care, and medical markets. The company was formerly known as Avery International Corporation and changed its name to Avery Dennison Corporation in 1990. Avery Dennison Corporation was founded in 1935 and is headquartered in Glendale, California.
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https://finance.yahoo.com/quote/AVY/profile?p=AVY
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The new FAANG -- Fuel, Agriculture, Aerospace/Defense, Nuclear, Gold and critical metals -
>>> How about a new FAANG? This grouping outperforms the tech giants
MarketWatch
March 23, 2022
By Steve Goldstein
https://www.marketwatch.com/story/how-about-a-new-faang-this-grouping-outperforms-the-tech-giants-11648033932?siteid=yhoof2
The FAANG grouping of stocks has been so 2021.
Facebook parent Meta Platforms FB, +2.86%, Amazon.com AMZN, +0.15%, Apple AAPL, +2.27%, Netflix NFLX, +0.33% and Google parent Alphabet GOOGL, +2.38% have struggled this year, thanks to rising interest rates, and in the case of Facebook and Netflix, softer demand.
The NYSE FANG+ NYFANG, +1.56% index has slumped 11% this year.
Doug Kass, the president of Seabreeze Partners Management, proposes a new FAANG:
F - for fuel
A - for agriculture
A - for aerospace and defense
N - for nuclear
G - for gold and critical metals.
These all are plays that have benefited from Russia’s invasion of Ukraine and the ensuing sanctions that have sent commodity prices surging and the world scrambling to wean itself from Russian supplies.
A MarketWatch-compiled average of his new FAANG assets, equal weighted using popular exchange traded funds, yields a 27% return for 2022.
Kass says he’s long the GLD GLD, +0.73% exchange-traded fund and has invested in stocks in the other sectors, and expects supply/demand imbalances to keep boosting these themes.
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Chevron - >>> My Top Picks To Play A Weakening US Dollar Entering 2022
Zacks
by Daniel Laboe
December 22, 2021
https://finance.yahoo.com/news/top-picks-play-weakening-us-204308136.html
Chevron (CVX) and its best-in-class operations provide the perfect way to buy the dip in this momentum-charged sector with the highest return potential.
Chevron is an energy powerhouse with LNG operations that position it for the future of (lower emission) energy. With its savvy purchases across the Permian and Marcellus basins, the enterprise has established itself as a leader in the US oil industry (2nd largest US energy company behind ExxonMobil). I dare to call CVX an oil growth stock, but it has all the makings of a long-term winner.
Despite what oil critics say, I can assure you that the world economy is far from kicking its addiction to fossil fuels. Analysts project that natural gas and oil demand will continue to rise over the next decade with revving energy needs (LNG is expected to be a winner). CVX is poised to drive substantial profits throughout the roaring 20s.
I deem that Chevron's 4.7% dividend yield is almost as safe as US Treasury Note. The oil industry's commitment to maintaining its dividend regardless of financial adversity (short of bankruptcy) is unprecedented. Chevron has proven to have the liquidity to support its endlessly growing yield in even the most devastating economic environments. Chevron maintained its dividend through the past 18-months of economic shutdowns and actually raised its quarterly payout in Q2, which none of its major competitors can boast of.
The firm has already returned to pre-pandemic profitability levels, remarkably faster than most of its competitors, yet its share price remained below its pre-COVID high in January 2020. I expect that currency tailwind will further fuel CVX's upside potential.
Sell-side analysts have been getting increasingly optimistic about CVX, with 13 out of 17 analysts calling this a buy today and a consensus price target of nearly $130 (more bullish targets above $150).
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>>> How to Invest in Farmland
Benzinga
by Chris Davis
August 31, 2020
https://www.benzinga.com/money/how-to-invest-in-farmland/
The investment mainstream has mostly forgotten commodities since their historically high 2009 levels. Farmland rents reached record levels along demand from emerging markets and net farm income (NFI). But even as commodities prices fell in the late 2010s, rents stayed at their zenith. Economists expect NFI to continue dropping during the coronavirus, meaning that the high rents must be paid from lower and lower amounts of income.
Investing in farmland means understanding a cross-section of factors — weather patterns, soil type, telephone pole location, cropping history, field size — and balancing that against the farmland rent you can extract from the tenant. Investors must also contend with the higher number of retail investors in the commodities market, a relatively recent change that causes higher volatility in the short-term market.
Contents
How to Invest in Farmland
Best Brokers and Platforms for Investing in Farmland
Why Invest in Farmland
Don’t Forget the Fundamentals
How to Invest in Farmland
Learning how to invest in farmland means learning a number of different financial vehicles. Most retail investors do not have the means or the access to directly purchase pastureland. There can be a huge upfront cost because of the volume of land involved, not to mention you would need to find someone who could properly maintain the land and pull a profit from it.
Modern technology provides a plethora of new ways to invest in farmland, from direct investment to passive real estate investment. Here are some basic tips to keep in mind regardless of the financial vehicle you choose.
Tip 1: For Direct Investors
The direct purchase of farmland to rent brings the highest returns and the highest risk. The upfront cost is high because you must purchase a plot of land large enough to house a farm. Your 1st step is to find a good price because farmland can vary widely from county to county, state to state.
You can purchase land a number of ways:
Land conversion – Just like you can buy a house to upgrade and flip, you can buy land to convert to pastureland or cropland. Conversions can be advantageous because of the low sale price — as long as the conversion costs are kept low, as well.
Sale-leaseback – Some farmers don’t want the added responsibility of owning the land they work on, or they may be unable to handle the costs. In these cases, they may sell the land to you and pay rent to continue profiting from its utility.
Buy-lease – You have an opportunity for high returns if you buy farmland with no tenant, as long as you can find one.
Tip 2: For Communal Investors
If you want to invest passively in farmland with other investors, you can invest through a real estate investment trust (REIT) with a specialization in farmland. Currently, Gladstone Land Corporation (NASDAQ: LAND) and Farmland Partners (NYSE: FPI) are 2 publicly-listed choices and great real estate investing for beginners in the farmland space.
Farmland Partners – The largest publicly-traded U.S. farmland REIT, FPI manages more than $1 billion in assets, featuring over 150,000 acres in 17 states. The company leases to more than 100 tenants with a diversified portfolio of crops.
Gladstone Land Corporation – LAND manages 111 farms in 10 states with a specialty in health foods. Its farms are valued at around $890 million and comprise more than 86,000 total acres.
Tip 3: For Passive Investors
Crowdfunding brings together funds from many investors and provides access to farmland. Although the 1st wave of these platforms is limited to accredited investors (high net worth individuals with more than $1 million in assets or 2 years of $200,000+ income per annum), managers have stated they will have options available for nonaccredited investors soon.
Best Brokers and Platforms for Investing in Farmland
Connect to farmland investments through the reputable brokers and platforms mentioned here. Although we have vetted all of these platforms for basic viability, you should still compare them closely to see which ones you like best.
Read Review
Minimum Investment
$10,000
Fees
1% of your total investment + 1% per year in asset management fees
GET STARTED
1. Best Broker for Farmland: FarmTogether
Using FarmTogether, you can earn your returns from quarterly rent payments and land appreciation. The website is intuitive and beginners benefit from the extensive investor education tools. They specialize in institutional quality farmland, so investment minimums can be high.
Min Investment: $10,000
Fees: 1% of your initial investment, 1% management fee
Read Benzinga’s full FarmTogether review.
Read Review
Minimum Investment
Between $3,000 and $10,000, depending
Fees
0.75% and 1% per year based on asset value
GET STARTED
2. Best Investing Platform for Farmland: AcreTrader
AcreTrader allows investors access to income-producing farmland with low minimum investments and a marketplace for selling back shares. You must be an accredited investor to join, however.
Min Investment: $10,000
Fees: 0.75%-1% annual management fee
Read Benzinga’s full AcreTrader review.
Minimum Investment
$5,000 to $25,000.
Fees
Varies
GET STARTED
3. Best for Accredited Investors: Harvest Returns
Harvest Returns is a great way for investors to support smaller family farms. The company has marketed the platform as a way to get involved in tax-advantaged opportunity zones.
Min Investment: $5,000
Fees: Variable
GET STARTED
4. Best for Investing in Sustainable Farms: Steward
If you are looking to invest in human-scale farms that would have trouble getting funding from traditional sources, Steward is your platform. The minimum investment is tiny, and you enjoy a very close relationship with the farms you choose.
Min Investment: $100
Fees: 1% annual service fee based on invested capital
GET STARTED
5. Best for Commodity Farmland: Farmland LP
As stated on its website, Farmland LP is focused on organic food and the farmland market. They manage more than $160 million in assets across 2 funds with hundreds of investors “that showcase how large-scale sustainable agriculture is more profitable than conventional.”
Min Investment: Variable
Fees: Variable
Minimum Investment
$10,000 to $100,000, depending
Fees
Varies
GET STARTED
6. Best for Agricultural Operations: FarmFundr
If you prefer to invest with guidance from an experienced team, Farmfundr may be the platform for you.
Min Investment: $10,000
Fees: 0.75%-1% annual management fee; 3% sponsor fee when FarmFundr doesn’t take direct equity
Why Invest in Farmland
The USDA reports that farmland has returned 11.5% since 1991 on average, which places it as the 2nd best performing asset class in that 30-year time period. The value of farmland in the U.S. over the past 5 decades has gone up an average of 6.1% per annum. Having 2 simultaneous streams of value evens out the volatility, making farmland a great investment for risk-averse traders or those nearing retirement.
Farmland also enjoys a low correlation with the rest of the stock market. You don’t have to worry about recessions and the higher frequency of the boom-bust cycle, and commodities also benefit from inflation.
Don’t Forget the Fundamentals
Despite all of the attention on newer, shinier industries, farmland continues to be a solid, valuable investment that pays off in cash rent yields and land appreciation. There is nothing wrong with speculating in these industries as they can certainly be profitable. If you speculate in tandem with good fundamentals, you can actually take on more risk while protecting your portfolio’s downside.
Experts estimate that investor groups hold more than 30% of active U.S. farmland, so there is plenty of room for passive investors or investors without huge amounts of capital. With the access that new technology provides, there’s no reason not to consider this always essential part of the American economy in your portfolio.
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>>> Oil Spike Lifts Energy ETFs
Yahoo Finance
Dan Mika
June 22, 2021
https://finance.yahoo.com/news/oil-spike-lifts-energy-etfs-150000081.html
The stars are aligning for a bull run in the oil markets, as the world continues to shed its pandemic-induced cabin fever with road trips and flights amid uncertainty over how flexible the supply of the commodity will be in handling that demand.
Prices for the U.S. benchmark West Texas Intermediate recovered from the $40 per barrel mark at the start of the year to hit $70 per barrel earlier in June on the back of massive demand for travel in places where COVID-19 is on the retreat.
The International Energy Agency’s latest projections expect global oil demand to recover to prepandemic levels by the end of 2022, leading to domestic surplus drawdowns and a possible lag in refineries being able to keep up in turning crude into gasoline.
Consider the Invesco DB Energy Fund (DBE), which tracks energy-related futures contracts and has posted year-to-date returns of 38.93%. Let’s compare it to the other largest commodity baskets in the ETF realm.
Invesco DB Base Metals Fund (DBB), industrial metals: 12.98%
Invesco DB Agriculture Fund (DBA), agriculture: 9.54%
Aberdeen Standard Physical Precious Metals Basket Shares ETF (GLTR), precious metals: -4.26%
Here’s what’s driving oil prices higher, and how ETF investors can get into the market.
Geopolitics & Demand Flip
The crude oil crash last March was driven by both ends of the supply and demand curve. Much of the world went into lockdown to avoid the spread of COVID-19, which kept people from driving and flying, sending demand down substantially.
At the same time, Saudi Arabia and Russia began an oil production war after the latter walked out of OPEC negotiations on how the cartel’s members would react to the pandemic. The spat between the world’s second- and third-largest producers depressed prices further until early April, when the two countries agreed to curtail production.
The world was awash in oil that it didn’t need late last spring, so much so that the price of West Texas Intermediate went negative on April 20 as traders with expiring oil futures were forced to pay buyers to take those contracts on instead of taking delivery of oil they couldn’t store.
Now, the scenario is flipped on its head.
Americans are itching to travel after nearly a year and a half at home, and other countries are opening up to travel as more people get vaccinated.
At the same time, geopolitics in the Middle East could complicate global oil supplies. Iranian President-elect Ebrahim Raisi told reporters on Monday that he would not meet with U.S. President Biden or negotiate on other matters, while demanding the U.S. lift its banking and shipping sanctions on the country.
A hardline approach could scuttle attempts to revive the Iran Nuclear Deal and leave the country unable to export to other countries that move money through American financial institutions.
Tying Investment To Crude Prices
The ETF most closely following the whims of the oil market is the US Oil Fund LP (USO), which holds futures contracts expiring within two months into the future at the latest. Its closest competitor is the Invesco DB Oil Fund (DBO), which is less prone to price swings because it moves its expiring contracts into whatever month is most attractive within the next 13 months on the market.
However, the funds have respective expense ratios of 0.79% and 0.78%, both fairly pricey compared to the broader ETF market. Plus, both funds are structured as commodity pools, so long-term holders could incur greater capital gains taxes.
A less volatile option is the ProShares K-1 Free Crude Oil Strategy ETF (OILK), which splits its exposure equally between contracts that roll each month and contracts that expire semiannually. This fund is structured as an open-ended fund rather than a commodities pool, which keeps investors from having to make a separate filing come tax time, and which an expense ratio of 0.68%.
Producers & Refiners
The simplest way to get exposure to the companies in the oil space is by using the Energy Select Sector SPDR Fund (XLE). The benchmark fund following U.S. energy companies in the S&P 500 has year-to-date returns of 43.98% and an expense ratio of 0.12%.
Alternative options for a broader energy portfolio include the Vanguard Energy ETF (VDE), which has a wider share of holdings, and produced 47.48% returns so far this year. It has a 0.10% expense.
An option with narrowed focus is the VanEck Vectors Oil Refiners ETF (CRAK), the only fund right now that’s solely tracking the companies that turn crude oil into the stuff that goes into gas tanks. However, it carries a relatively pricey expense ratio of 0.60%.
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>>> Timber ETFs Sag As Rally Fades
ETF.com
by Jessica Ferringer
June 18, 2021
https://finance.yahoo.com/news/timber-etfs-sag-rally-fades-201500053.html
Lumber prices have been on fire over the past few months, fueled by the surge in demand as the country emerges from COVID. Now it appears the rally has run out of gas.
Lumber prices are an input into one of the major leading economic indicators, the housing market. And though housing demand is currently red hot at a time when supply is running thin, homebuilders have been delaying construction as sky-high lumber prices have driven up costs.
This was evidenced when May housing starts rose less than expected, while homebuilder confidence fell to a 10-month low.
Lumber Prices
However, the trailing month has shown a reversal of the trend, with lumber prices falling significantly from their peak in early May.
What prices do from here is anybody’s guess. But one thing we have seen with other reopening trades is volatility, and volatility creates opportunity for investors. When it comes to ETFs, there are two ETFs offering exposure to the lumber industry through equities.
Though both the iShares Global Timber & Forestry ETF (WOOD) and the Invesco MSCI Global Timber ETF (CUT) offer exposure to the global timber space, there are some clear distinctions between the two.
WOOD is 15 basis points cheaper, with an average spread of 0.21% relative to CUT’s 0.24%. While WOOD has 25 holdings, CUT takes a less specific and more diversified approach, with 203 holdings (two-thirds of which are due to a 0.23% position in the Invesco India ETF (PIN)).
Of the two ETFs, CUT was first to market, with an inception date in November 2007 relative to June 2008 for WOOD. However, investors seem to be drawn to the lower expense ratio, with WOOD having more than triple the assets of the smaller CUT, and seeing about 8x as much daily volume on average. When considering these two ETFs, it seems that here, diversification will cost a little extra. Nearly all of WOOD’s holdings are included in CUT’s portfolio, with the exception of Sumitomo Forestry, which is 3.2% of the portfolio.
In spite of their differences, both ETFs have been the beneficiary of skyrocketing lumber prices over the past year, rising more than 60% over the trailing one-year as of June 15.
Demand for lumber soared as homeowners in lockdown decided to renovate, and cheap mortgages kindled housing starts. On the supply side, lumber mills, like many other industries, faced labor market challenges.
However, over the past month, CUT has fallen by 3.4%, and the more concentrated WOOD has dropped by 6.0%.
Performance Chasers Beware
Analyzing these ETFs using the ETF Fund Flows Tool helps to illustrate the important but too-often-forgotten lesson of the perils of chasing performance.
Both funds had been relatively quiet in terms of flows, beginning to gain traction in April and May, when lumber prices were set aflame.
WOOD experienced its highest daily inflow on May 11, with nearly $17.5 million coming into the fund, and the following day seeing an additional $17.3 million. CUT’s flows tell a similar story, with $4 million in flows on May 7.
Since then, WOOD has seen outflows, while CUT’s investors seem to be holding steady.
But what does performance look like since early May?
In investing, time horizon is an important consideration. If you are trying to time the market with lumber prices, good luck. If you are looking for a buy-and-hold position in the industry, the choice between ETFs comes down to costs since the overlap is heavy and, not surprisingly, returns have mostly been in lockstep.
Those with shorter time horizons might want to consider paying up for slightly more diversification, as, at least for the moment, WOOD appears to be more negatively impacted by the crash in lumber prices.
For prior articles on Timber ETFs, check out our Timber ETFs channel.
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>>> 3 reasons why lumber prices will tumble 30% by year end, according to a veteran portfolio manager
Market Insider
by Isabelle Lee
Aug. 28, 2021
https://markets.businessinsider.com/news/commodities/lumber-price-outlook-3-reasons-decline-michael-gayed-housing-sawmill-2021-8
The price of lumber has yet to bottom - and will fall as much as 30% off by the end of the year, Micheal Gayed says.
Gayed is an award-winning portfolio manager for Toroso Investments who has long touted lumber as a powerful indicator for the US economy. He gave three reasons why lumber could fall to $357 per thousand board feet by the end of 2021.
The price of lumber has yet to bottom and will shed as much as 30% by the end of the year, veteran portfolio manager Micheal Gayed said.
This means the commodity could slip to as low as $357 per thousand board feet, from around $510 per thousand board feet lumber was trading at on August 27.
Gayed, an award-winning portfolio manager for Toroso Investments who has long touted lumber as a powerful indicator for the US economy, said there are three reasons the commodity will see a protracted slide. First is the slow down in housing construction as elevated prices dissuade buyers and sap demand, he said. The market is set to reverse, and if housing cools, so will construction, he added. Various data show that the housing crisis is getting worse in the US.
"Lumber is sort of your closest real-time gauge of housing activity," Gayed, who also runs the ATAC Rotation Fund, told Insider. "Housing activity is probably just due to slow down aggressively."
Lumber prices have slipped 70% from record highs of $1,711 reached in May. Prior to that record, prices had skyrocketed more than 500% during the COVID-19 pandemic amid supply-chain disruptions.
Gayed's second reason is an oversupply in lumber as sawmills rushed to meet demand, he said. Lumber production, which starts in the mills, was severely disrupted when much of the economy shut down.
But now, many analysts see North America's biggest lumber producers set up for a rebound following an immense blow during the height of the pandemic caused by lockdowns and raging wildfires.
The third reason, Gayed said, is that the market will soon realize that inflation is indeed transitory. Lower inflation typically results in lower Treasury yields, and yields, he says, generally move in the same direction as lumber.
Gayed is well known for his 2015 report on the relationship between gold, lumber, and the economy, and when to play "offense" and "defense." If lumber is outperforming gold in roughly four months, Gayed said, investors should take a more aggressive stance as this indicates economic strength. If gold is outperforming lumber in the same time period, he advises investors to do the opposite.
A final reason lumber could see a further downturn - one which Gayed says is less talked about - is the looming crisis related to the debt ceiling, which US Republican lawmakers have recently signaled they will not lift.
"The implication is that if S&P and Moody's downgrade US debt like they did in 2011, and the reaction is the same, it ... would broadly hurt economic activity."
Gayed pointed to the massive correction in 2011 when the US stock market crashed after a credit rating downgrade by S&P - the first time the country was downgraded.
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>>> Best Water ETFs for Q3 2021
FIW, CGW, and PHO are the best water ETFs for Q3 2021
Investopedia
By NATHAN REIFF
Jun 2, 2021
https://www.investopedia.com/articles/etfs/top-water-etfs/?utm_campaign=quote-yahoo&utm_source=yahoo&utm_medium=referral
Water is one of the planet's most coveted and widely used resources. Like other commodities, such as oil and gold, water assets can add significant diversification to any portfolio. One of the best ways to gain exposure to the water industry is through a water exchange-traded fund (ETF). These ETFs invest in companies involved in the treatment and purification of water, as well as its distribution. Some notable names include Germany-based BASF SE (BAS.DE), 3M Co. (MMM), and ITT Inc. (ITT). As an essential commodity, water ETFs are often used as a defensive position in a portfolio. To the extent that water scarcity becomes a growing threat, these ETFs could be a significant offensive play as well.
KEY TAKEAWAYS
Water ETFs have outperformed compared to the broader market in the past year.
The water ETFs with the best 1-year trailing total returns are FIW, CGW, and PHO.
The top holdings of these ETFs are Pentair plc, American Water Works Company Inc., and Roper Technologies Inc., respectively.
Compared to other types of ETFs, the water ETF universe is small, comprised of 4 funds that trade in the U.S., excluding inverse and leveraged ETFs, as well as ETFs with fewer than $50 million in assets. These ETFs do not invest in water as a commodity or in water rights, but focus on water resources companies. These funds have outperformed relative to the S&P 500, which posted a 1-year trailing total return of 41.0% as of May 28, 2021.1 The best-performing water ETF based on performance over the past year is the First Trust Water ETF (FIW). We examine the top 3 water ETFs as measured by 1-year trailing total returns below. Numbers for the first two funds below are for May 30, and numbers for the third fund are for May 31, 2021.
First Trust Water ETF (FIW)
1-Year Trailing Total Returns: 51.1%
Expense Ratio: 0.54%
Annual Dividend Yield: 0.47%
3-Month Average Daily Volume: 59,434
Assets Under Management: $985.8 million
Inception Date: May 8, 2007
Issuing Company: First Trust
FIW is a multi-cap ETF that invests in a blend of value and growth stocks. It tracks the ISE Clean Edge Water Index. The index is comprised of exchange-listed companies deriving a substantial portion of their revenue from the potable and wastewater industry. They are selected according to market cap, liquidity, and other requirements.3 The fund's top three holdings include Pentair plc (PNR), an American water treatment company incorporated in Ireland; Roper Technologies Inc. (ROP), a maker of industrial solutions including pumps and fluid handling systems; and Xylem Inc. (XYL), a water technology provider to residential, commercial, industrial, and agricultural clients.
Invesco S&P Global Water Index ETF (CGW)
1-Year Trailing Total Returns: 47.5%
Expense Ratio: 0.57%
Annual Dividend Yield: 1.24%
3-Month Average Daily Volume: 71,275
Assets Under Management: $930.9 million
Inception Date: May 14, 2007
Issuing Company: Invesco
CGW is a multi-cap blended fund that tracks the S&P Global Water Index. The index is comprised of a portfolio of companies from developed markets representing water utilities, infrastructure, equipment, instruments, and materials. The large majority of CGW's portfolio represents either industrial or utilities companies.5 The top holdings of CGW include American Water Works Company Inc. (AWK), a water public utility company; Xylem; and Veolia Environnement SA (VIE:PAR), a France-based water and waste management and energy services company.
Invesco Water Resources ETF (PHO)
1-Year Trailing Total Returns: 46.4%
Expense Ratio: 0.60%
Annual Dividend Yield: 0.32%
3-Month Average Daily Volume: 97,797
Assets Under Management: $1.6 billion
Inception Date: Dec. 6, 2005
Issuing Company: Invesco
PHO is a multi-cap blended fund that targets the Nasdaq OMX US Water Index. The index tracks U.S.-listed companies that create products to conserve or purify water. As such, PHO holds companies ranging from water utilities to infrastructure as well as materials and water equipment businesses. Machinery stocks, the largest share of PHO's portfolio, comprise more than a third of assets, while water utilities and industrial companies are the second- and third-largest areas, respectively.7 The top three holdings include Roper Technologies; Xylem; and Danaher Corp. (DHR), a designer and provider of professional, medical, industrial, and commercial products to a variety of sectors, including the environmental sector.
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>>> How to Invest in Land
Investopedia
By TROY ADKINS
Jul 16, 2020
https://www.investopedia.com/articles/investing/050614/there-are-more-ways-invest-land-you-think.asp?utm_campaign=quote-yahoo&utm_source=yahoo&utm_medium=referral
It's often been recommended that people should buy land due to its scarcity. With this in mind, investors need to understand the practicality of owning land and of running a land-based business venture. They also need to be aware of the specific types of land-related investment options available through investment products such as exchange traded funds (ETFs) and exchange traded notes (ETNs).
Types of Land Investments
Independently wealthy people can purchase land for personal use, recreation, and yes, investment. Unfortunately, most people do not fall into this category. This begs the question: Are land-ownership opportunities and business ventures capable of generating an acceptable return on investment for small investors, while still affording them the joys and attributes associated with land ownership? To answer this question, you need to be able to evaluate 10 general categories of potential land investments:
Residential development land
Commercial development land
Row crop land
Livestock-raising land
Timberland
Mineral production land
Vegetable farmland
Vineyards
Orchards
Recreational land
Residential and Commercial Land Investments
Residential and commercial land development offers a feasible entryway into investment because virtually an unlimited number of land development opportunities can be structured to meet an investor’s capital and time constraints. For most small investors, real estate investment trust (REIT) ETFs are an ideal choice because they do not require direct management, they are broadly diversified by property type, they are geographically diversified, they can be purchased or sold on a real-time basis, and they are very inexpensive. Some specialize in a type of real estate, but others, such as the Vanguard REIT ETF (VNQ), provide diversified exposure to industrial, office, retail, healthcare, public storage, and residential property developments.1?
Unfortunately, these types of investments negate the ability of the landowner to enjoy using the land. Therefore, residential and commercial land developments are not feasible options for people that want to truly experience the feeling of land ownership.
Row Crop Land and Land for Livestock Operations
Land purchased for row-crop farming or for running a livestock operation affords the ability to enjoy land in the homeowning sense, as well as from the standpoint of generating income. However, there are a host of problems for small investors who purchase land in order to operate these types of enterprises. First, the scale required to operate a row-crop operation or livestock operation has to be very large to be financially viable. This, in turn, requires a significant upfront capital outlay far beyond what most people can afford. Moreover, the ongoing fixed costs associated with running these types of farming operations are extremely high.
This, in turn, means that the financial leverage and business risk for such operations are very high as well. As a result, a significant amount of stress is put on the landowner to make these types of business ventures financially successful. In many cases, the stress level far exceeds the benefits that people yearn for as landowners. With this in mind, it is a fair assessment to say that most small investors should avoid pursuing these types of large-scale farming operations, as the risks and hardships of such activity will likely exceed any benefits.
While owning a traditional row-crop or livestock farming operation is probably not feasible for most small investors, many agricultural investment options provide acceptable investment exposure to traditional farming enterprises. For example, some funds provide exposure to soybeans, corn, wheat, cotton, sugar, coffee, soybean oil, live cattle, feeder cattle, cocoa, lean hogs, Kansas City wheat, canola oil, and soybean meal. Therefore, by investing in this product, small investors will have broad investment exposure to traditional farming operations. This, in turn, can be used by the investor to help keep abreast of traditional farming practices, as well as to generate an attractive return on investment over time.
Small investors can also utilize a variety of exchange traded notes (ETNs) to invest in specific types of traditional farming operations. For example, the iPath Bloomberg Agriculture Subindex Total Return ETN (JJATF) provides investment exposure to soft commodities such as corn, wheat, soybeans, sugar, cotton, and coffee, and the iPath Series B Bloomberg Livestock Subindex Total Return ETN (COW) provides investment exposure to cattle and hogs.2??3?
In terms of utilizing ETFs and ETNs as land- and agriculture-related investment options, investors need to understand that many of these types of products use derivative instruments such as futures contracts to generate market exposure. As a result, investors need to perform a thorough due diligence on these types of investments to fully understand their potential risks and rewards. Nevertheless, the use of ETFs and ETNs are likely to pose the best opportunity for engaging in traditional large-scale farming operations.
Small Farm Investment Opportunities
For small investors to truly enjoy the more traditional sense of land ownership, perhaps the best options are timber farms, mineral development lands, vegetable gardens, orchards, vineyards, and recreational land. These types of agricultural endeavors are much more attractive to small investors: The scale of the land purchase can be tailored to meet the investor’s capital constraints; operations have the potential to generate an ongoing income stream, and investors can enjoy being on the land while it is being used.
With that said, a host of ETFs and ETNs also are directly tied to these types of farming endeavors. Therefore, small investors may want to consider investing in them, if they decide that running a small-scale farming operation requires too much of their time and resources.
The Invesco MSCI Global Timber ETF (CUT) is designed to track the performance of timber companies around the world and includes holdings in firms that own or lease forested land and harvest the timber for commercial use and sale of wood-based products.4? In addition, the SPDR S&P Oil & Gas Exploration & Production ETF Fund (XOP) is one of the many investment options that provide exposure to mineral land development.5?
Issues to Consider
Once the decision has been made to purchase raw land as an investment or for development, investors need to understand many issues about the legalities associated with the use of specific parcels of property. For example, land-use restrictions may curtail the manner in which the land can be used by the owner, land easements may grant access to a portion of the property to an unrelated party, and the conveyance of mineral rights may grant an unrelated party the authorization to extract and sell minerals for financial gain.
In addition, riparian and littoral rights may stipulate the access that the landowner has to adjacent waterways, and the lay of the land may dictate if it lies in a flood plain, which would greatly impact the manner in which the land could be utilized. Fortunately, prospective land buyers can get answers to these questions by reviewing the legal specification for a parcel of land, which is found in a document known as a land deed. This type of document is typically available to the public via the internet, or it can be obtained the old-fashioned way, by visiting the land records and deeds division of the appropriate county clerk’s office.
In addition to legal issues, small investors should consider the land’s access to basic utilities such as electricity or telecommunications. Investors should also review the land’s annual property-tax obligation, assess the potential for trespassing violations, and analyze the remoteness of the land from the landowner, as well as from the nearest community. All of these issues are important, because the lack of utilities may greatly hinder the ability to utilize the land, the land's remoteness may impact the opportunities a landowner has to enjoy the property, and property taxes may impact the land owner’s finances. With these issues in mind, prospective landowners should undertake a comprehensive due-diligence assessment before deciding to purchase land.
General Overview of Land Valuation
Investors considering a raw-land purchase need to realize that they are engaging in a purely speculative investment. This is because undeveloped land does not generate any income, and therefore any return on investment will have to come from the potential capital gain that may be received once the land is sold. With this in mind, the cost of debt for a farm real-estate loan can be used to help conduct a preliminary investment analysis.
From a pure investment standpoint, raw land has a very unattractive return on investment, particularly when one considers the length of time that investors typically must own land to generate a return on investment. Plus, interest rates for farm-land loans may increase in the future, which means that the break-even rate for future land purchases will rise as well.
If the cost of debt for a farm real-estate loan does not dissuade small investors from wanting to purchase land as a speculative investment, and they truly believe they can establish a small farming operation that will meet their capital requirements, income requirements and time constraints, many valuation reports are readily available. These reports can be obtained from the agricultural departments of public state universities to help assess the feasibility of establishing a small-farm business operation. Therefore, small investors that want to establish a timber farm, vegetable farm, vineyard, or orchard should be able to find a comprehensive and timely analysis that explains how to establish these types of operations, the amount of work they will likely entail, the capital outlay required, the length of time necessary to receive a return on investment, and the likely return on investment that the small-farm operation will achieve over time.
Finally, and perhaps most importantly, investors need to understand that investing in land to operate a small-farm business enterprise is likely to be the most difficult and risky type of business venture that can be pursued. This is because, in addition to the risk found in all business endeavors, farming operations take on a host of risks that non-farm businesses do not have to deal with. Examples are the threat of a variety of crop diseases, the potential for pest infestations, an ever-changing weather environment, and unstable market prices. For these reasons, coupled with the fact that operating a small-farm business takes a significant amount of physical strength, stamina, and a very strong work ethic, the vast majority of investors will not likely be able to handle all of the farming demands on a sustainable basis.
The Bottom Line
Buying raw land is a very risky investment because it will not generate any income and may not generate a capital gain when the property is sold. Moreover, utilizing a farm real-estate loan to purchase land is very risky. With these points in mind, it is recommended that most small investors with a yearning to own land or operate a small farm business should utilize the wide variety of ETFs and ETNs which are now made available to small investors that were once only available to hedge funds. By utilizing these types of investment products, investors should be able to fulfill their desire for land-related recreational activities while generating a reasonable return on investment over time.
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>>> Archer-Daniels-Midland Company (ADM) procures, transports, stores, processes, and merchandises agricultural commodities, products, and ingredients in the United States and internationally. The company operates through three segments: Ag Services and Oilseeds, Carbohydrate Solutions, and Nutrition. It procures, stores, cleans, and transports agricultural raw materials, such as oilseeds, corn, wheat, milo, oats, rice, and barley. The company also engages in the agricultural commodity and feed product import, export, and distribution; and structured trade finance activities. In addition, it offers vegetable oils and protein meals; ingredients for the food, feed, energy, and industrial customers; crude vegetable oils, salad oils, margarine, shortening, and other food products; and partially refined oils to produce biodiesel and glycols for use in chemicals, paints, and other industrial products. Further, the company provides peanuts, tree nuts, peanut-derived ingredients, and cotton cellulose pulp; sweeteners, corn and wheat starches, syrup, glucose, wheat flour, dextrose, and bioproducts; alcohol and other food and animal feed ingredients; ethyl alcohol and ethanol; corn gluten feed and meal, as well as distillers' grains; and citric acids. Additionally, the company provides natural flavor ingredients, flavor systems, natural colors, proteins, emulsifiers, soluble fiber, polyols, hydrocolloids, and natural health and nutrition products, including probiotics, prebiotics, enzymes, and botanical extracts; and other specialty food and feed ingredients; edible beans; formula feeds, and animal health and nutrition products; and contract and private label pet treats and foods. It also engages in futures commission merchant and insurance services. The company was founded in 1902 and is headquartered in Chicago, Illinois.
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>>> This ETF Could Beckon if Energy Stocks Rebound
ETF Trends
December 4, 2019
https://finance.yahoo.com/news/diversification-benefits-real-asset-etf-205827675.html
There are rumblings that the energy sector, a laggard for much of this year, could be ready to rebound in 2020. Investors can participate in that action without making a full commitment to the sector via the FlexShares Morningstar Global Upstream Natural Resource Index Fund (GUNR) .
The FlexShares global natural resources strategy takes an “upstream” focus that targets companies with ownership or direct access to the raw materials. These natural resource companies have revenues, earnings, cash flows, and valuations that are closer linked to natural resources. The upstream focus provides improved correlation to commodity futures compared to downstream operations, granting investments greater inflation protection.
While GUNR is not 100% allocated to energy stocks, it's top 10 lineup is home to many of the higher quality American and European oil majors that currently look attractive on valuation, including Exxon Mobil (XOM), a stock Bank of America Merrill Lynch is bullish on for 2020.
“BAML said the stock was its top U.S. oil major pick for 2020 and that countercyclical investments and asset sales should vanquish market skepticism over whether it can outperform its peers,” reports Barron’s.
GUNR specifically identifies upstream natural resources equities based on a Morningstar industry classification system, with a balanced exposure to three traditional natural resource sectors, including agriculture, energy, and metals.
Bullish On Oil
Some analysts are bullish on global oil names, such as BP Plc (BP), Royal Dutch Shell (RDS-A) and France’s Total (TOT). That's good for GUNR because those names are also found among the ETF's top 10 holdings.
The expected global supply glut is also the latest threat to the Organization of the Petroleum Exporting Countries and other producers, which have already enacted production caps in an attempt to stabilize prices and balance the market. Predictably, geopolitical headwinds factor into the oil equation. Fortunately, more supply cuts could be in the offing.
One reason some investors may be revisiting GUNR is that the energy sector is being viewed as a value destination and there has recently been a rotation to value away from growth.
Analysts also expect the volume of U.S. crude oil in storage should diminish in the weeks ahead before reversing course at the end of peak driving season, along with the start of the seasonal refinery maintenance period.
“Energy could surprise and emerge as one of the top sectors in the next 10 years. Stoeckle favors Chevron (CVX) , ConocoPhillips (COP) , BP (BP) , and Total (TOT) . The European stocks are particularly cheap, in part because of the divestment effort. BP stock, at $37, and Royal Dutch Shell, at $58, both trade for just 13 times projected 2019 earnings and yield 6.5%,” according to Barron’s.
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>>> Ben Bernanke: ‘Wile E. Coyote’ Economy Will Go Off A Cliff In 2020
Donald Trump gave away the store at the wrong time, warns ex-Fed chairman.
Huffington Post
6-8-18
By Mary Papenfuss
https://www.huffpost.com/entry/wile-e-coyote-economy-2020-bernanke_n_5b19ef26e4b0adfb82676ade
Former Federal Reserve Chairman Ben Bernanke warned that the Trump administration’s massive, unfunded $1.5 trillion tax cut and about $300 billion in new spending pose serious problems for the future.
“What you are getting is a stimulus at the very wrong moment,” Bernanke said at the American Enterprise Institute, a Washington think tank, Bloomberg reported Thursday. “The economy is already at full employment.”
Stimulus packages are used when the economy is flagging. When the economy does slump in the future, there may be few reserves to spend to get it going again. Bernanke predicted a “Wile E. Coyote” moment when the fallout hits, referring to the endlessly failing character in the “Road Runner” cartoons.
The stimulus “is going to hit the economy in a big way this year and next year, and then in 2020, Wile E. Coyote is going to go off the cliff,” Bernanke warned.
The Congressional Budget Office forecast in April that the stimulus would lift growth to 3.3 percent this year and 2.4 percent in 2019. It was already at 2.6 percent in 2017 before the tax cut. The CBO predicts growth will slow to 1.8 percent in 2020, when Trump’s first term will be ending.
Bernanke was chairman of the Fed from 2006 to 2014 and is currently a fellow at the Brookings Institute.
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>>> The Great American Bubble Machine
From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression — and they’re about to do it again
July 2009
By MATT TAIBBI
Rolling Stone
https://www.rollingstone.com/politics/politics-news/the-great-american-bubble-machine-195229/
The first thing you need to know about Goldman Sachs is that it’s everywhere. The world’s most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. In fact, the history of the recent financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled dry American empire, reads like a Who’s Who of Goldman Sachs graduates.
By now, most of us know the major players. As George Bush’s last Treasury secretary, former Goldman CEO Henry Paulson was the architect of the bailout, a suspiciously self-serving plan to funnel trillions of Your Dollars to a handful of his old friends on Wall Street. Robert Rubin, Bill Clinton’s former Treasury secretary, spent 26 years at Goldman before becoming chairman of Citigroup — which in turn got a $300 billion taxpayer bailout from Paulson. There’s John Thain, the asshole chief of Merrill Lynch who bought an $87,000 area rug for his office as his company was imploding; a former Goldman banker, Thain enjoyed a multi-billion-dollar handout from Paulson, who used billions in taxpayer funds to help Bank of America rescue Thain’s sorry company. And Robert Steel, the former Goldmanite head of Wachovia, scored himself and his fellow executives $225 million in golden-parachute payments as his bank was self-destructing. There’s Joshua Bolten, Bush’s chief of staff during the bailout, and Mark Patterson, the current Treasury chief of staff, who was a Goldman lobbyist just a year ago, and Ed Liddy, the former Goldman director whom Paulson put in charge of bailed-out insurance giant AIG, which forked over $13 billion to Goldman after Liddy came on board. The heads of the Canadian and Italian national banks are Goldman alums, as is the head of the World Bank, the head of the New York Stock Exchange, the last two heads of the Federal Reserve Bank of New York — which, incidentally, is now in charge of overseeing Goldman — not to mention …
But then, any attempt to construct a narrative around all the former Goldmanites in influential positions quickly becomes an absurd and pointless exercise, like trying to make a list of everything. What you need to know is the big picture: If America is circling the drain, Goldman Sachs has found a way to be that drain — an extremely unfortunate loophole in the system of Western democratic capitalism, which never foresaw that in a society governed passively by free markets and free elections, organized greed always defeats disorganized democracy.
The bank’s unprecedented reach and power have enabled it to turn all of America into a giant pump-and-dump scam, manipulating whole economic sectors for years at a time, moving the dice game as this or that market collapses, and all the time gorging itself on the unseen costs that are breaking families everywhere — high gas prices, rising consumer credit rates, half-eaten pension funds, mass layoffs, future taxes to pay off bailouts. All that money that you’re losing, it’s going somewhere, and in both a literal and a figurative sense, Goldman Sachs is where it’s going: The bank is a huge, highly sophisticated engine for converting the useful, deployed wealth of society into the least useful, most wasteful and insoluble substance on Earth — pure profit for rich individuals.
The Feds vs. Goldman
They achieve this using the same playbook over and over again. The formula is relatively simple: Goldman positions itself in the middle of a speculative bubble, selling investments they know are crap. Then they hoover up vast sums from the middle and lower floors of society with the aid of a crippled and corrupt state that allows it to rewrite the rules in exchange for the relative pennies the bank throws at political patronage. Finally, when it all goes bust, leaving millions of ordinary citizens broke and starving, they begin the entire process over again, riding in to rescue us all by lending us back our own money at interest, selling themselves as men above greed, just a bunch of really smart guys keeping the wheels greased. They’ve been pulling this same stunt over and over since the 1920s — and now they’re preparing to do it again, creating what may be the biggest and most audacious bubble yet.
If you want to understand how we got into this financial crisis, you have to first understand where all the money went — and in order to understand that, you need to understand what Goldman has already gotten away with. It is a history exactly five bubbles long — including last year’s strange and seemingly inexplicable spike in the price of oil. There were a lot of losers in each of those bubbles, and in the bailout that followed. But Goldman wasn’t one of them.
BUBBLE #1 The Great Depression
Goldman wasn’t always a too-big-to-fail Wall Street behemoth, the ruthless face of kill-or-be-killed capitalism on steroids —just almost always. The bank was actually founded in 1869 by a German immigrant named Marcus Goldman, who built it up with his son-in-law Samuel Sachs. They were pioneers in the use of commercial paper, which is just a fancy way of saying they made money lending out short-term IOUs to smalltime vendors in downtown Manhattan.
You can probably guess the basic plotline of Goldman’s first 100 years in business: plucky, immigrant-led investment bank beats the odds, pulls itself up by its bootstraps, makes shitloads of money. In that ancient history there’s really only one episode that bears scrutiny now, in light of more recent events: Goldman’s disastrous foray into the speculative mania of pre-crash Wall Street in the late 1920s.
Wall Street’s Big Win
This great Hindenburg of financial history has a few features that might sound familiar. Back then, the main financial tool used to bilk investors was called an “investment trust.” Similar to modern mutual funds, the trusts took the cash of investors large and small and (theoretically, at least) invested it in a smorgasbord of Wall Street securities, though the securities and amounts were often kept hidden from the public. So a regular guy could invest $10 or $100 in a trust and feel like he was a big player. Much as in the 1990s, when new vehicles like day trading and e-trading attracted reams of new suckers from the sticks who wanted to feel like big shots, investment trusts roped a new generation of regular-guy investors into the speculation game.
Beginning a pattern that would repeat itself over and over again, Goldman got into the investmenttrust game late, then jumped in with both feet and went hogwild. The first effort was the Goldman Sachs Trading Corporation; the bank issued a million shares at $100 apiece, bought all those shares with its own money and then sold 90 percent of them to the hungry public at $104. The trading corporation then relentlessly bought shares in itself, bidding the price up further and further. Eventually it dumped part of its holdings and sponsored a new trust, the Shenandoah Corporation, issuing millions more in shares in that fund — which in turn sponsored yet another trust called the Blue Ridge Corporation. In this way, each investment trust served as a front for an endless investment pyramid: Goldman hiding behind Goldman hiding behind Goldman. Of the 7,250,000 initial shares of Blue Ridge, 6,250,000 were actually owned by Shenandoah — which, of course, was in large part owned by Goldman Trading.
The end result (ask yourself if this sounds familiar) was a daisy chain of borrowed money, one exquisitely vulnerable to a decline in performance anywhere along the line. The basic idea isn’t hard to follow. You take a dollar and borrow nine against it; then you take that $10 fund and borrow $90; then you take your $100 fund and, so long as the public is still lending, borrow and invest $900. If the last fund in the line starts to lose value, you no longer have the money to pay back your investors, and everyone gets massacred.
In a chapter from The Great Crash, 1929 titled “In Goldman Sachs We Trust,” the famed economist John Kenneth Galbraith held up the Blue Ridge and Shenandoah trusts as classic examples of the insanity of leveragebased investment. The trusts, he wrote, were a major cause of the market’s historic crash; in today’s dollars, the losses the bank suffered totaled $475 billion. “It is difficult not to marvel at the imagination which was implicit in this gargantuan insanity,” Galbraith observed, sounding like Keith Olbermann in an ascot. “If there must be madness, something may be said for having it on a heroic scale.”
BUBBLE #2 Tech Stocks
Fast-forward about 65 years. Goldman not only survived the crash that wiped out so many of the investors it duped, it went on to become the chief underwriter to the country’s wealthiest and most powerful corporations. Thanks to Sidney Weinberg, who rose from the rank of janitor’s assistant to head the firm, Goldman became the pioneer of the initial public offering, one of the principal and most lucrative means by which companies raise money. During the 1970s and 1980s, Goldman may not have been the planet-eating Death Star of political influence it is today, but it was a top-drawer firm that had a reputation for attracting the very smartest talent on the Street.
It also, oddly enough, had a reputation for relatively solid ethics and a patient approach to investment that shunned the fast buck; its executives were trained to adopt the firm’s mantra, “long-term greedy.” One former Goldman banker who left the firm in the early Nineties recalls seeing his superiors give up a very profitable deal on the grounds that it was a long-term loser. “We gave back money to ‘grownup’ corporate clients who had made bad deals with us,” he says. “Everything we did was legal and fair — but ‘long-term greedy’ said we didn’t want to make such a profit at the clients’ collective expense that we spoiled the marketplace.”
But then, something happened. It’s hard to say what it was exactly; it might have been the fact that Goldman’s cochairman in the early Nineties, Robert Rubin, followed Bill Clinton to the White House, where he directed the National Economic Council and eventually became Treasury secretary. While the American media fell in love with the story line of a pair of baby-boomer, Sixties-child, Fleetwood Mac yuppies nesting in the White House, it also nursed an undisguised crush on Rubin, who was hyped as without a doubt the smartest person ever to walk the face of the Earth, with Newton, Einstein, Mozart and Kant running far behind.
Rubin was the prototypical Goldman banker. He was probably born in a $4,000 suit, he had a face that seemed permanently frozen just short of an apology for being so much smarter than you, and he exuded a Spock-like, emotion-neutral exterior; the only human feeling you could imagine him experiencing was a nightmare about being forced to fly coach. It became almost a national clichè that whatever Rubin thought was best for the economy — a phenomenon that reached its apex in 1999, when Rubin appeared on the cover of Time with his Treasury deputy, Larry Summers, and Fed chief Alan Greenspan under the headline The Committee To Save The World. And “what Rubin thought,” mostly, was that the American economy, and in particular the financial markets, were over-regulated and needed to be set free. During his tenure at Treasury, the Clinton White House made a series of moves that would have drastic consequences for the global economy — beginning with Rubin’s complete and total failure to regulate his old firm during its first mad dash for obscene short-term profits.
The basic scam in the Internet Age is pretty easy even for the financially illiterate to grasp. Companies that weren’t much more than potfueled ideas scrawled on napkins by uptoolate bongsmokers were taken public via IPOs, hyped in the media and sold to the public for mega-millions. It was as if banks like Goldman were wrapping ribbons around watermelons, tossing them out 50-story windows and opening the phones for bids. In this game you were a winner only if you took your money out before the melon hit the pavement.
It sounds obvious now, but what the average investor didn’t know at the time was that the banks had changed the rules of the game, making the deals look better than they actually were. They did this by setting up what was, in reality, a two-tiered investment system — one for the insiders who knew the real numbers, and another for the lay investor who was invited to chase soaring prices the banks themselves knew were irrational. While Goldman’s later pattern would be to capitalize on changes in the regulatory environment, its key innovation in the Internet years was to abandon its own industry’s standards of quality control.
“Since the Depression, there were strict underwriting guidelines that Wall Street adhered to when taking a company public,” says one prominent hedge-fund manager. “The company had to be in business for a minimum of five years, and it had to show profitability for three consecutive years. But Wall Street took these guidelines and threw them in the trash.” Goldman completed the snow job by pumping up the sham stocks: “Their analysts were out there saying Bullshit.com is worth $100 a share.”
The problem was, nobody told investors that the rules had changed. “Everyone on the inside knew,” the manager says. “Bob Rubin sure as hell knew what the underwriting standards were. They’d been intact since the 1930s.”
Jay Ritter, a professor of finance at the University of Florida who specializes in IPOs, says banks like Goldman knew full well that many of the public offerings they were touting would never make a dime. “In the early Eighties, the major underwriters insisted on three years of profitability. Then it was one year, then it was a quarter. By the time of the Internet bubble, they were not even requiring profitability in the foreseeable future.”
Goldman has denied that it changed its underwriting standards during the Internet years, but its own statistics belie the claim. Just as it did with the investment trust in the 1920s, Goldman started slow and finished crazy in the Internet years. After it took a little-known company with weak financials called Yahoo! public in 1996, once the tech boom had already begun, Goldman quickly became the IPO king of the Internet era. Of the 24 companies it took public in 1997, a third were losing money at the time of the IPO. In 1999, at the height of the boom, it took 47 companies public, including stillborns like Webvan and eToys, investment offerings that were in many ways the modern equivalents of Blue Ridge and Shenandoah. The following year, it underwrote 18 companies in the first four months, 14 of which were money losers at the time. As a leading underwriter of Internet stocks during the boom, Goldman provided profits far more volatile than those of its competitors: In 1999, the average Goldman IPO leapt 281 percent above its offering price, compared to the Wall Street average of 181 percent.
How did Goldman achieve such extraordinary results? One answer is that they used a practice called “laddering,” which is just a fancy way of saying they manipulated the share price of new offerings. Here’s how it works: Say you’re Goldman Sachs, and Bullshit.com comes to you and asks you to take their company public. You agree on the usual terms: You’ll price the stock, determine how many shares should be released and take the Bullshit.com CEO on a “road show” to schmooze investors, all in exchange for a substantial fee (typically six to seven percent of the amount raised). You then promise your best clients the right to buy big chunks of the IPO at the low offering price — let’s say Bullshit.com’s starting share price is $15 — in exchange for a promise that they will buy more shares later on the open market. That seemingly simple demand gives you inside knowledge of the IPO’s future, knowledge that wasn’t disclosed to the day trader schmucks who only had the prospectus to go by: You know that certain of your clients who bought X amount of shares at $15 are also going to buy Y more shares at $20 or $25, virtually guaranteeing that the price is going to go to $25 and beyond. In this way, Goldman could artificially jack up the new company’s price, which of course was to the bank’s benefit — a six percent fee of a $500 million IPO is serious money.
Goldman was repeatedly sued by shareholders for engaging in laddering in a variety of Internet IPOs, including Webvan and NetZero. The deceptive practices also caught the attention of Nicholas Maier, the syndicate manager of Cramer & Co., the hedge fund run at the time by the now-famous chattering television asshole Jim Cramer, himself a Goldman alum. Maier told the SEC that while working for Cramer between 1996 and 1998, he was repeatedly forced to engage in laddering practices during IPO deals with Goldman.
“Goldman, from what I witnessed, they were the worst perpetrator,” Maier said. “They totally fueled the bubble. And it’s specifically that kind of behavior that has caused the market crash. They built these stocks upon an illegal foundation — manipulated up — and ultimately, it really was the small person who ended up buying in.” In 2005, Goldman agreed to pay $40 million for its laddering violations — a puny penalty relative to the enormous profits it made. (Goldman, which has denied wrongdoing in all of the cases it has settled, refused to respond to questions for this story.)
Another practice Goldman engaged in during the Internet boom was “spinning,” better known as bribery. Here the investment bank would offer the executives of the newly public company shares at extra-low prices, in exchange for future underwriting business. Banks that engaged in spinning would then undervalue the initial offering price — ensuring that those “hot” opening-price shares it had handed out to insiders would be more likely to rise quickly, supplying bigger first-day rewards for the chosen few. So instead of Bullshit.com opening at $20, the bank would approach the Bullshit.com CEO and offer him a million shares of his own company at $18 in exchange for future business — effectively robbing all of Bullshit’s new shareholders by diverting cash that should have gone to the company’s bottom line into the private bank account of the company’s CEO.
In one case, Goldman allegedly gave a multimillion-dollar special offering to eBay CEO Meg Whitman, who later joined Goldman’s board, in exchange for future i-banking business. According to a report by the House Financial Services Committee in 2002, Goldman gave special stock offerings to executives in 21 companies that it took public, including Yahoo! cofounder Jerry Yang and two of the great slithering villains of the financial-scandal age — Tyco’s Dennis Kozlowski and Enron’s Ken Lay. Goldman angrily denounced the report as “an egregious distortion of the facts” — shortly before paying $110 million to settle an investigation into spinning and other manipulations launched by New York state regulators. “The spinning of hot IPO shares was not a harmless corporate perk,” then-attorney general Eliot Spitzer said at the time. “Instead, it was an integral part of a fraudulent scheme to win new investment-banking business.”
Such practices conspired to turn the Internet bubble into one of the greatest financial disasters in world history: Some $5 trillion of wealth was wiped out on the NASDAQ alone. But the real problem wasn’t the money that was lost by shareholders, it was the money gained by investment bankers, who received hefty bonuses for tampering with the market. Instead of teaching Wall Street a lesson that bubbles always deflate, the Internet years demonstrated to bankers that in the age of freely flowing capital and publicly owned financial companies, bubbles are incredibly easy to inflate, and individual bonuses are actually bigger when the mania and the irrationality are greater.
Nowhere was this truer than at Goldman. Between 1999 and 2002, the firm paid out $28.5 billion in compensation and benefits — an average of roughly $350,000 a year per employee. Those numbers are important because the key legacy of the Internet boom is that the economy is now driven in large part by the pursuit of the enormous salaries and bonuses that such bubbles make possible. Goldman’s mantra of “long-term greedy” vanished into thin air as the game became about getting your check before the melon hit the pavement.
The market was no longer a rationally managed place to grow real, profitable businesses: It was a huge ocean of Someone Else’s Money where bankers hauled in vast sums through whatever means necessary and tried to convert that money into bonuses and payouts as quickly as possible. If you laddered and spun 50 Internet IPOs that went bust within a year, so what? By the time the Securities and Exchange Commission got around to fining your firm $110 million, the yacht you bought with your IPO bonuses was already six years old. Besides, you were probably out of Goldman by then, running the U.S. Treasury or maybe the state of New Jersey. (One of the truly comic moments in the history of America’s recent financial collapse came when Gov. Jon Corzine of New Jersey, who ran Goldman from 1994 to 1999 and left with $320 million in IPO-fattened stock, insisted in 2002 that “I’ve never even heard the term ‘laddering’ before.”)
For a bank that paid out $7 billion a year in salaries, $110 million fines issued half a decade late were something far less than a deterrent —they were a joke. Once the Internet bubble burst, Goldman had no incentive to reassess its new, profit-driven strategy; it just searched around for another bubble to inflate. As it turns out, it had one ready, thanks in large part to Rubin.
BUBBLE #3 The Housing Craze
Goldman’s role in the sweeping global disaster that was the housing bubble is not hard to trace. Here again, the basic trick was a decline in underwriting standards, although in this case the standards weren’t in IPOs but in mortgages. By now almost everyone knows that for decades mortgage dealers insisted that home buyers be able to produce a down payment of 10 percent or more, show a steady income and good credit rating, and possess a real first and last name. Then, at the dawn of the new millennium, they suddenly threw all that shit out the window and started writing mortgages on the backs of napkins to cocktail waitresses and ex-cons carrying five bucks and a Snickers bar.
None of that would have been possible without investment bankers like Goldman, who created vehicles to package those shitty mortgages and sell them en masse to unsuspecting insurance companies and pension funds. This created a mass market for toxic debt that would never have existed before; in the old days, no bank would have wanted to keep some addict ex-con’s mortgage on its books, knowing how likely it was to fail. You can’t write these mortgages, in other words, unless you can sell them to someone who doesn’t know what they are.
Goldman used two methods to hide the mess they were selling. First, they bundled hundreds of different mortgages into instruments called Collateralized Debt Obligations. Then they sold investors on the idea that, because a bunch of those mortgages would turn out to be OK, there was no reason to worry so much about the shitty ones: The CDO, as a whole, was sound. Thus, junk-rated mortgages were turned into AAA-rated investments. Second, to hedge its own bets, Goldman got companies like AIG to provide insurance — known as credit default swaps — on the CDOs. The swaps were essentially a racetrack bet between AIG and Goldman: Goldman is betting the ex-cons will default, AIG is betting they won’t.
There was only one problem with the deals: All of the wheeling and dealing represented exactly the kind of dangerous speculation that federal regulators are supposed to rein in. Derivatives like CDOs and credit swaps had already caused a series of serious financial calamities: Procter & Gamble and Gibson Greetings both lost fortunes, and Orange County, California, was forced to default in 1994. A report that year by the Government Accountability Office recommended that such financial instruments be tightly regulated — and in 1998, the head of the Commodity Futures Trading Commission, a woman named Brooksley Born, agreed. That May, she circulated a letter to business leaders and the Clinton administration suggesting that banks be required to provide greater disclosure in derivatives trades, and maintain reserves to cushion against losses.
More regulation wasn’t exactly what Goldman had in mind. “The banks go crazy — they want it stopped,” says Michael Greenberger, who worked for Born as director of trading and markets at the CFTC and is now a law professor at the University of Maryland. “Greenspan, Summers, Rubin and [SEC chief Arthur] Levitt want it stopped.”
Clinton’s reigning economic foursome — “especially Rubin,” according to Greenberger — called Born in for a meeting and pleaded their case. She refused to back down, however, and continued to push for more regulation of the derivatives. Then, in June 1998, Rubin went public to denounce her move, eventually recommending that Congress strip the CFTC of its regulatory authority. In 2000, on its last day in session, Congress passed the now-notorious Commodity Futures Modernization Act, which had been inserted into an 11,000-page spending bill at the last minute, with almost no debate on the floor of the Senate. Banks were now free to trade default swaps with impunity.
But the story didn’t end there. AIG, a major purveyor of default swaps, approached the New York State Insurance Department in 2000 and asked whether default swaps would be regulated as insurance. At the time, the office was run by one Neil Levin, a former Goldman vice president, who decided against regulating the swaps. Now freed to underwrite as many housing-based securities and buy as much credit-default protection as it wanted, Goldman went berserk with lending lust. By the peak of the housing boom in 2006, Goldman was underwriting $76.5 billion worth of mortgage-backed securities — a third of which were sub-prime — much of it to institutional investors like pensions and insurance companies. And in these massive issues of real estate were vast swamps of crap.
Take one $494 million issue that year, GSAMP Trust 2006S3. Many of the mortgages belonged to second-mortgage borrowers, and the average equity they had in their homes was 0.71 percent. Moreover, 58 percent of the loans included little or no documentation — no names of the borrowers, no addresses of the homes, just zip codes. Yet both of the major ratings agencies, Moody’s and Standard & Poor’s, rated 93 percent of the issue as investment grade. Moody’s projected that less than 10 percent of the loans would default. In reality, 18 percent of the mortgages were in default within 18 months.
Not that Goldman was personally at any risk. The bank might be taking all these hideous, completely irresponsible mortgages from beneath-gangster-status firms like Countrywide and selling them off to municipalities and pensioners — old people, for God’s sake — pretending the whole time that it wasn’t grade D horseshit. But even as it was doing so, it was taking short positions in the same market, in essence betting against the same crap it was selling. Even worse, Goldman bragged about it in public. “The mortgage sector continues to be challenged,” David Viniar, the bank’s chief financial officer, boasted in 2007. “As a result, we took significant markdowns on our long inventory positions … However, our risk bias in that market was to be short, and that net short position was profitable.” In other words, the mortgages it was selling were for chumps. The real money was in betting against those same mortgages.
“That’s how audacious these assholes are,” says one hedge fund manager. “At least with other banks, you could say that they were just dumb — they believed what they were selling, and it blew them up. Goldman knew what it was doing.”
I ask the manager how it could be that selling something to customers that you’re actually betting against — particularly when you know more about the weaknesses of those products than the customer — doesn’t amount to securities fraud.
“It’s exactly securities fraud,” he says. “It’s the heart of securities fraud.”
Eventually, lots of aggrieved investors agreed. In a virtual repeat of the Internet IPO craze, Goldman was hit with a wave of lawsuits after the collapse of the housing bubble, many of which accused the bank of withholding pertinent information about the quality of the mortgages it issued. New York state regulators are suing Goldman and 25 other underwriters for selling bundles of crappy Countrywide mortgages to city and state pension funds, which lost as much as $100 million in the investments. Massachusetts also investigated Goldman for similar misdeeds, acting on behalf of 714 mortgage holders who got stuck holding predatory loans. But once again, Goldman got off virtually scot-free, staving off prosecution by agreeing to pay a paltry $60 million — about what the bank’s CDO division made in a day and a half during the real estate boom.
The effects of the housing bubble are well known — it led more or less directly to the collapse of Bear Stearns, Lehman Brothers and AIG, whose toxic portfolio of credit swaps was in significant part composed of the insurance that banks like Goldman bought against their own housing portfolios. In fact, at least $13 billion of the taxpayer money given to AIG in the bailout ultimately went to Goldman, meaning that the bank made out on the housing bubble twice: It fucked the investors who bought their horseshit CDOs by betting against its own crappy product, then it turned around and fucked the taxpayer by making him pay off those same bets.
And once again, while the world was crashing down all around the bank, Goldman made sure it was doing just fine in the compensation department. In 2006, the firm’s payroll jumped to $16.5 billion — an average of $622,000 per employee. As a Goldman spokesman explained, “We work very hard here.”
But the best was yet to come. While the collapse of the housing bubble sent most of the financial world fleeing for the exits, or to jail, Goldman boldly doubled down — and almost single-handedly created yet another bubble, one the world still barely knows the firm had anything to do with.
BUBBLE #4 $4 a Gallon
By the beginning of 2008, the financial world was in turmoil. Wall Street had spent the past two and a half decades producing one scandal after another, which didn’t leave much to sell that wasn’t tainted. The terms junk bond, IPO, sub-prime mortgage and other once-hot financial fare were now firmly associated in the public’s mind with scams; the terms credit swaps and CDOs were about to join them. The credit markets were in crisis, and the mantra that had sustained the fantasy economy throughout the Bush years — the notion that housing prices never go down — was now a fully exploded myth, leaving the Street clamoring for a new bullshit paradigm to sling.
Where to go? With the public reluctant to put money in anything that felt like a paper investment, the Street quietly moved the casino to the physical-commodities market — stuff you could touch: corn, coffee, cocoa, wheat and, above all, energy commodities, especially oil. In conjunction with a decline in the dollar, the credit crunch and the housing crash caused a “flight to commodities.” Oil futures in particular skyrocketed, as the price of a single barrel went from around $60 in the middle of 2007 to a high of $147 in the summer of 2008.
That summer, as the presidential campaign heated up, the accepted explanation for why gasoline had hit $4.11 a gallon was that there was a problem with the world oil supply. In a classic example of how Republicans and Democrats respond to crises by engaging in fierce exchanges of moronic irrelevancies, John McCain insisted that ending the moratorium on offshore drilling would be “very helpful in the short term,” while Barack Obama in typical liberal-arts yuppie style argued that federal investment in hybrid cars was the way out.
But it was all a lie. While the global supply of oil will eventually dry up, the short-term flow has actually been increasing. In the six months before prices spiked, according to the U.S. Energy Information Administration, the world oil supply rose from 85.24 million barrels a day to 85.72 million. Over the same period, world oil demand dropped from 86.82 million barrels a day to 86.07 million. Not only was the short-term supply of oil rising, the demand for it was falling — which, in classic economic terms, should have brought prices at the pump down.
So what caused the huge spike in oil prices? Take a wild guess. Obviously Goldman had help — there were other players in the physical commodities market — but the root cause had almost everything to do with the behavior of a few powerful actors determined to turn the once-solid market into a speculative casino. Goldman did it by persuading pension funds and other large institutional investors to invest in oil futures — agreeing to buy oil at a certain price on a fixed date. The push transformed oil from a physical commodity, rigidly subject to supply and demand, into something to bet on, like a stock. Between 2003 and 2008, the amount of speculative money in commodities grew from $13 billion to $317 billion, an increase of 2,300 percent. By 2008, a barrel of oil was traded 27 times, on average, before it was actually delivered and consumed.
As is so often the case, there had been a Depression-era law in place designed specifically to prevent this sort of thing. The commodities market was designed in large part to help farmers: A grower concerned about future price drops could enter into a contract to sell his corn at a certain price for delivery later on, which made him worry less about building up stores of his crop. When no one was buying corn, the farmer could sell to a middleman known as a “traditional speculator,” who would store the grain and sell it later, when demand returned. That way, someone was always there to buy from the farmer, even when the market temporarily had no need for his crops.
In 1936, however, Congress recognized that there should never be more speculators in the market than real producers and consumers. If that happened, prices would be affected by something other than supply and demand, and price manipulations would ensue. A new law empowered the Commodity Futures Trading Commission — the very same body that would later try and fail to regulate credit swaps — to place limits on speculative trades in commodities. As a result of the CFTC’s oversight, peace and harmony reigned in the commodities markets for more than 50 years.
All that changed in 1991 when, unbeknownst to almost everyone in the world, a Goldman-owned commodities-trading subsidiary called J. Aron wrote to the CFTC and made an unusual argument. Farmers with big stores of corn, Goldman argued, weren’t the only ones who needed to hedge their risk against future price drops — Wall Street dealers who made big bets on oil prices also needed to hedge their risk, because, well, they stood to lose a lot too.
This was complete and utter crap — the 1936 law, remember, was specifically designed to maintain distinctions between people who were buying and selling real tangible stuff and people who were trading in paper alone. But the CFTC, amazingly, bought Goldman’s argument. It issued the bank a free pass, called the “Bona Fide Hedging” exemption, allowing Goldman’s subsidiary to call itself a physical hedger and escape virtually all limits placed on speculators. In the years that followed, the commission would quietly issue 14 similar exemptions to other companies.
Now Goldman and other banks were free to drive more investors into the commodities markets, enabling speculators to place increasingly big bets. That 1991 letter from Goldman more or less directly led to the oil bubble in 2008, when the number of speculators in the market — driven there by fear of the falling dollar and the housing crash — finally overwhelmed the real physical suppliers and consumers. By 2008, at least three quarters of the activity on the commodity exchanges was speculative, according to a congressional staffer who studied the numbers — and that’s likely a conservative estimate. By the middle of last summer, despite rising supply and a drop in demand, we were paying $4 a gallon every time we pulled up to the pump.
What is even more amazing is that the letter to Goldman, along with most of the other trading exemptions, was handed out more or less in secret. “I was the head of the division of trading and markets, and Brooksley Born was the chair of the CFTC,” says Greenberger, “and neither of us knew this letter was out there.” In fact, the letters only came to light by accident. Last year, a staffer for the House Energy and Commerce Committee just happened to be at a briefing when officials from the CFTC made an offhand reference to the exemptions.
“I had been invited to a briefing the commission was holding on energy,” the staffer recounts. “And suddenly in the middle of it, they start saying, ‘Yeah, we’ve been issuing these letters for years now.’ I raised my hand and said, ‘Really? You issued a letter? Can I see it?’ And they were like, ‘Duh, duh.’ So we went back and forth, and finally they said, ‘We have to clear it with Goldman Sachs.’ I’m like, ‘What do you mean, you have to clear it with Goldman Sachs?'”
The CFTC cited a rule that prohibited it from releasing any information about a company’s current position in the market. But the staffer’s request was about a letter that had been issued 17 years earlier. It no longer had anything to do with Goldman’s current position. What’s more, Section 7 of the 1936 commodities law gives Congress the right to any information it wants from the commission. Still, in a classic example of how complete Goldman’s capture of government is, the CFTC waited until it got clearance from the bank before it turned the letter over.
Armed with the semi-secret government exemption, Goldman had become the chief designer of a giant commodities betting parlor. Its Goldman Sachs Commodities Index — which tracks the prices of 24 major commodities but is overwhelmingly weighted toward oil — became the place where pension funds and insurance companies and other institutional investors could make massive long-term bets on commodity prices. Which was all well and good, except for a couple of things. One was that index speculators are mostly “long only” bettors, who seldom if ever take short positions — meaning they only bet on prices to rise. While this kind of behavior is good for a stock market, it’s terrible for commodities, because it continually forces prices upward. “If index speculators took short positions as well as long ones, you’d see them pushing prices both up and down,” says Michael Masters, a hedge fund manager who has helped expose the role of investment banks in the manipulation of oil prices. “But they only push prices in one direction: up.”
Complicating matters even further was the fact that Goldman itself was cheerleading with all its might for an increase in oil prices. In the beginning of 2008, Arjun Murti, a Goldman analyst, hailed as an “oracle of oil” by The New York Times, predicted a “super spike” in oil prices, forecasting a rise to $200 a barrel. At the time Goldman was heavily invested in oil through its commodities trading subsidiary, J. Aron; it also owned a stake in a major oil refinery in Kansas, where it warehoused the crude it bought and sold. Even though the supply of oil was keeping pace with demand, Murti continually warned of disruptions to the world oil supply, going so far as to broadcast the fact that he owned two hybrid cars. High prices, the bank insisted, were somehow the fault of the piggish American consumer; in 2005, Goldman analysts insisted that we wouldn’t know when oil prices would fall until we knew “when American consumers will stop buying gas-guzzling sport utility vehicles and instead seek fuel-efficient alternatives.”
But it wasn’t the consumption of real oil that was driving up prices — it was the trade in paper oil. By the summer of 2008, in fact, commodities speculators had bought and stockpiled enough oil futures to fill 1.1 billion barrels of crude, which meant that speculators owned more future oil on paper than there was real, physical oil stored in all of the country’s commercial storage tanks and the Strategic Petroleum Reserve combined. It was a repeat of both the Internet craze and the housing bubble, when Wall Street jacked up present-day profits by selling suckers shares of a fictional fantasy future of endlessly rising prices.
In what was by now a painfully familiar pattern, the oil-commodities melon hit the pavement hard in the summer of 2008, causing a massive loss of wealth; crude prices plunged from $147 to $33. Once again the big losers were ordinary people. The pensioners whose funds invested in this crap got massacred: CalPERS, the California Public Employees’ Retirement System, had $1.1 billion in commodities when the crash came. And the damage didn’t just come from oil. Soaring food prices driven by the commodities bubble led to catastrophes across the planet, forcing an estimated 100 million people into hunger and sparking food riots throughout the Third World.
Now oil prices are rising again: They shot up 20 percent in the month of May and have nearly doubled so far this year. Once again, the problem is not supply or demand. “The highest supply of oil in the last 20 years is now,” says Rep. Bart Stupak, a Democrat from Michigan who serves on the House energy committee. “Demand is at a 10-year low. And yet prices are up.”
Asked why politicians continue to harp on things like drilling or hybrid cars, when supply and demand have nothing to do with the high prices, Stupak shakes his head. “I think they just don’t understand the problem very well,” he says. “You can’t explain it in 30 seconds, so politicians ignore it.”
BUBBLE #5 Rigging the Bailout
After the oil bubble collapsed last fall, there was no new bubble to keep things humming — this time, the money seems to be really gone, like worldwide-depression gone. So the financial safari has moved elsewhere, and the big game in the hunt has become the only remaining pool of dumb, unguarded capital left to feed upon: taxpayer money. Here, in the biggest bailout in history, is where Goldman Sachs really started to flex its muscle.
It began in September of last year, when then-Treasury secretary Paulson made a momentous series of decisions. Although he had already engineered a rescue of Bear Stearns a few months before and helped bail out quasi-private lenders Fannie Mae and Freddie Mac, Paulson elected to let Lehman Brothers — one of Goldman’s last real competitors — collapse without intervention. (“Goldman’s superhero status was left intact,” says market analyst Eric Salzman, “and an investment banking competitor, Lehman, goes away.”) The very next day, Paulson green-lighted a massive, $85 billion bailout of AIG, which promptly turned around and repaid $13 billion it owed to Goldman. Thanks to the rescue effort, the bank ended up getting paid in full for its bad bets: By contrast, retired auto workers awaiting the Chrysler bailout will be lucky to receive 50 cents for every dollar they are owed.
Immediately after the AIG bailout, Paulson announced his federal bailout for the financial industry, a $700 billion plan called the Troubled Asset Relief Program, and put a heretofore unknown 35-year-old Goldman banker named Neel Kashkari in charge of administering the funds. In order to qualify for bailout monies, Goldman announced that it would convert from an investment bank to a bank holding company, a move that allows it access not only to $10 billion in TARP funds, but to a whole galaxy of less conspicuous, publicly backed funding — most notably, lending from the discount window of the Federal Reserve. By the end of March, the Fed will have lent or guaranteed at least $8.7 trillion under a series of new bailout programs — and thanks to an obscure law allowing the Fed to block most congressional audits, both the amounts and the recipients of the monies remain almost entirely secret.
Converting to a bank-holding company has other benefits as well: Goldman’s primary supervisor is now the New York Fed, whose chairman at the time of its announcement was Stephen Friedman, a former co-chairman of Goldman Sachs. Friedman was technically in violation of Federal Reserve policy by remaining on the board of Goldman even as he was supposedly regulating the bank; in order to rectify the problem, he applied for, and got, a conflict of interest waiver from the government. Friedman was also supposed to divest himself of his Goldman stock after Goldman became a bank holding company, but thanks to the waiver, he was allowed to go out and buy 52,000 additional shares in his old bank, leaving him $3 million richer. Friedman stepped down in May, but the man now in charge of supervising Goldman — New York Fed president William Dudley — is yet another former Goldmanite.
The collective message of all this — the AIG bailout, the swift approval for its bank holding conversion, the TARP funds — is that when it comes to Goldman Sachs, there isn’t a free market at all. The government might let other players on the market die, but it simply will not allow Goldman to fail under any circumstances. Its edge in the market has suddenly become an open declaration of supreme privilege. “In the past it was an implicit advantage,” says Simon Johnson, an economics professor at MIT and former official at the International Monetary Fund, who compares the bailout to the crony capitalism he has seen in Third World countries. “Now it’s more of an explicit advantage.”
Once the bailouts were in place, Goldman went right back to business as usual, dreaming up impossibly convoluted schemes to pick the American carcass clean of its loose capital. One of its first moves in the post-bailout era was to quietly push forward the calendar it uses to report its earnings, essentially wiping December 2008 — with its $1.3 billion in pretax losses — off the books. At the same time, the bank announced a highly suspicious $1.8 billion profit for the first quarter of 2009 — which apparently included a large chunk of money funneled to it by taxpayers via the AIG bailout. “They cooked those first quarter results six ways from Sunday,” says one hedge fund manager. “They hid the losses in the orphan month and called the bailout money profit.”
Two more numbers stand out from that stunning first-quarter turnaround. The bank paid out an astonishing $4.7 billion in bonuses and compensation in the first three months of this year, an 18 percent increase over the first quarter of 2008. It also raised $5 billion by issuing new shares almost immediately after releasing its first quarter results. Taken together, the numbers show that Goldman essentially borrowed a $5 billion salary payout for its executives in the middle of the global economic crisis it helped cause, using half-baked accounting to reel in investors, just months after receiving billions in a taxpayer bailout.
Even more amazing, Goldman did it all right before the government announced the results of its new “stress test” for banks seeking to repay TARP money — suggesting that Goldman knew exactly what was coming. The government was trying to carefully orchestrate the repayments in an effort to prevent further trouble at banks that couldn’t pay back the money right away. But Goldman blew off those concerns, brazenly flaunting its insider status. “They seemed to know everything that they needed to do before the stress test came out, unlike everyone else, who had to wait until after,” says Michael Hecht, a managing director of JMP Securities. “The government came out and said, ‘To pay back TARP, you have to issue debt of at least five years that is not insured by FDIC — which Goldman Sachs had already done, a week or two before.”
And here’s the real punch line. After playing an intimate role in four historic bubble catastrophes, after helping $5 trillion in wealth disappear from the NASDAQ, after pawning off thousands of toxic mortgages on pensioners and cities, after helping to drive the price of gas up to $4 a gallon and to push 100 million people around the world into hunger, after securing tens of billions of taxpayer dollars through a series of bailouts overseen by its former CEO, what did Goldman Sachs give back to the people of the United States in 2008?
Fourteen million dollars.
That is what the firm paid in taxes in 2008, an effective tax rate of exactly one, read it, one percent. The bank paid out $10 billion in compensation and benefits that same year and made a profit of more than $2 billion — yet it paid the Treasury less than a third of what it forked over to CEO Lloyd Blankfein, who made $42.9 million last year.
How is this possible? According to Goldman’s annual report, the low taxes are due in large part to changes in the bank’s “geographic earnings mix.” In other words, the bank moved its money around so that most of its earnings took place in foreign countries with low tax rates. Thanks to our completely fucked corporate tax system, companies like Goldman can ship their revenues offshore and defer taxes on those revenues indefinitely, even while they claim deductions upfront on that same untaxed income. This is why any corporation with an at least occasionally sober accountant can usually find a way to zero out its taxes. A GAO report, in fact, found that between 1998 and 2005, roughly two-thirds of all corporations operating in the U.S. paid no taxes at all.
This should be a pitchfork-level outrage — but somehow, when Goldman released its post-bailout tax profile, hardly anyone said a word. One of the few to remark on the obscenity was Rep. Lloyd Doggett, a Democrat from Texas who serves on the House Ways and Means Committee. “With the right hand out begging for bailout money,” he said, “the left is hiding it offshore.”
BUBBLE #6 Global Warming
Fast-forward to today. It’s early June in Washington, D.C. Barack Obama, a popular young politician whose leading private campaign donor was an investment bank called Goldman Sachs — its employees paid some $981,000 to his campaign — sits in the White House. Having seamlessly navigated the political minefield of the bailout era, Goldman is once again back to its old business, scouting out loopholes in a new government-created market with the aid of a new set of alumni occupying key government jobs.
Gone are Hank Paulson and Neel Kashkari; in their place are Treasury chief of staff Mark Patterson and CFTC chief Gary Gensler, both former Goldmanites. (Gensler was the firm’s co-head of finance.) And instead of credit derivatives or oil futures or mortgage-backed CDOs, the new game in town, the next bubble, is in carbon credits — a booming trillion dollar market that barely even exists yet, but will if the Democratic Party that it gave $4,452,585 to in the last election manages to push into existence a groundbreaking new commodities bubble, disguised as an “environmental plan,” called cap-and-trade.
The new carbon credit market is a virtual repeat of the commodities-market casino that’s been kind to Goldman, except it has one delicious new wrinkle: If the plan goes forward as expected, the rise in prices will be government-mandated. Goldman won’t even have to rig the game. It will be rigged in advance.
Here’s how it works: If the bill passes, there will be limits for coal plants, utilities, natural-gas distributors and numerous other industries on the amount of carbon emissions (a.k.a. greenhouse gases) they can produce per year. If the companies go over their allotment, they will be able to buy “allocations” or credits from other companies that have managed to produce fewer emissions. President Obama conservatively estimates that about $646 billion worth of carbon credits will be auctioned in the first seven years; one of his top economic aides speculates that the real number might be twice or even three times that amount.
The feature of this plan that has special appeal to speculators is that the “cap” on carbon will be continually lowered by the government, which means that carbon credits will become more and more scarce with each passing year. Which means that this is a brand new commodities market where the main commodity to be traded is guaranteed to rise in price over time. The volume of this new market will be upwards of a trillion dollars annually; for comparison’s sake, the annual combined revenues of all electricity suppliers in the U.S. total $320 billion.
Goldman wants this bill. The plan is (1) to get in on the ground floor of paradigm-shifting legislation, (2) make sure that they’re the profit-making slice of that paradigm and (3) make sure the slice is a big slice. Goldman started pushing hard for cap-and-trade long ago, but things really ramped up last year when the firm spent $3.5 million to lobby climate issues. (One of their lobbyists at the time was none other than Patterson, now Treasury chief of staff.) Back in 2005, when Hank Paulson was chief of Goldman, he personally helped author the bank’s environmental policy, a document that contains some surprising elements for a firm that in all other areas has been consistently opposed to any sort of government regulation. Paulson’s report argued that “voluntary action alone cannot solve the climate change problem.” A few years later, the bank’s carbon chief, Ken Newcombe, insisted that cap-and-trade alone won’t be enough to fix the climate problem and called for further public investments in research and development. Which is convenient, considering that Goldman made early investments in wind power (it bought a subsidiary called Horizon Wind Energy), renewable diesel (it is an investor in a firm called Changing World Technologies) and solar power (it partnered with BP Solar), exactly the kind of deals that will prosper if the government forces energy producers to use cleaner energy. As Paulson said at the time, “We’re not making those investments to lose money.”
The bank owns a 10 percent stake in the Chicago Climate Exchange, where the carbon credits will be traded. Moreover, Goldman owns a minority stake in Blue Source LLC, a Utah-based firm that sells carbon credits of the type that will be in great demand if the bill passes. Nobel Prize winner Al Gore, who is intimately involved with the planning of cap-and-trade, started up a company called Generation Investment Management with three former bigwigs from Goldman Sachs Asset Management, David Blood, Mark Ferguson and Peter Harris. Their business? Investing in carbon offsets. There’s also a $500 million Green Growth Fund set up by a Goldmanite to invest in green-tech … the list goes on and on. Goldman is ahead of the headlines again, just waiting for someone to make it rain in the right spot. Will this market be bigger than the energy futures market?
“Oh, it’ll dwarf it,” says a former staffer on the House energy committee.
Well, you might say, who cares? If cap-and-trade succeeds, won’t we all be saved from the catastrophe of global warming? Maybe — but cap-and-trade, as envisioned by Goldman, is really just a carbon tax structured so that private interests collect the revenues. Instead of simply imposing a fixed government levy on carbon pollution and forcing unclean energy producers to pay for the mess they make, cap-and-trade will allow a small tribe of greedy-as-hell Wall Street swine to turn yet another commodities market into a private tax collection scheme. This is worse than the bailout: It allows the bank to seize taxpayer money before it’s even collected.
“If it’s going to be a tax, I would prefer that Washington set the tax and collect it,” says Michael Masters, the hedge fund director who spoke out against oil futures speculation. “But we’re saying that Wall Street can set the tax, and Wall Street can collect the tax. That’s the last thing in the world I want. It’s just asinine.”
Cap-and-trade is going to happen. Or, if it doesn’t, something like it will. The moral is the same as for all the other bubbles that Goldman helped create, from 1929 to 2009. In almost every case, the very same bank that behaved recklessly for years, weighing down the system with toxic loans and predatory debt, and accomplishing nothing but massive bonuses for a few bosses, has been rewarded with mountains of virtually free money and government guarantees — while the actual victims in this mess, ordinary taxpayers, are the ones paying for it.
It’s not always easy to accept the reality of what we now routinely allow these people to get away with; there’s a kind of collective denial that kicks in when a country goes through what America has gone through lately, when a people lose as much prestige and status as we have in the past few years. You can’t really register the fact that you’re no longer a citizen of a thriving first-world democracy, that you’re no longer above getting robbed in broad daylight, because like an amputee, you can still sort of feel things that are no longer there.
But this is it. This is the world we live in now. And in this world, some of us have to play by the rules, while others get a note from the principal excusing them from homework till the end of time, plus 10 billion free dollars in a paper bag to buy lunch. It’s a gangster state, running on gangster economics, and even prices can’t be trusted anymore; there are hidden taxes in every buck you pay. And maybe we can’t stop it, but we should at least know where it’s all going.
This article originally appeared in the July 9-23, 2009 of Rolling Stone.
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>>> No One Wants to Short Stocks on the Cusp of a Potential Breakout
By Sarah Ponczek
October 17, 2019
Short interest on an S&P 500 ETF has fallen to a one-year low
Progress on Brexit, U.S.-China trade has bolstered equities
https://www.bloomberg.com/news/articles/2019-10-17/no-one-wants-to-short-stocks-on-the-cusp-of-a-potential-breakout?srnd=premium
With U.S. stocks making another run at all-time highs, short sellers are stepping aside.
Bets against the SPDR S&P 500 ETF Trust as a percentage of shares outstanding fell to just 2.55% this week, the lowest level in a year, according to data from IHS Markit Ltd. U.S. equities are less than 1% away from a record, and rose 0.6% as of 9:48 a.m. in New York on Thursday.
Short interest on SPY falls to the lowest in a year
Stocks have climbed as evidence mounts that two of the largest market overhangs -- a U.S.-China trade war and Brexit -- could be resolved. President Trump said over the weekend that the first phase of a trade deal could be signed soon, and a new Brexit framework was announced Thursday. While economic data has been contradictory, any signs of a stabilization in growth could pave the way for a rally into year-end.
“Cyclicals have room to move higher relative to defensives in 4Q,” Evercore ISI’s Dennis Debusschere, the firm’s head of portfolio strategy, wrote in a note to clients Wednesday. “A strong equity market showing in 4Q is more dependent on investors discounting lower odds of a recession rather than a material increase in expectations for economic growth.”
But investors may be taking too much comfort from talk of a trade deal between the U.S. and China, according to Morgan Stanley’s Mike Wilson, who warned earlier this week that the next few months could resemble last year’s sell-off.
Stocks plunged 14% in the fourth quarter of 2018, with the bulk of that decline coming after short positions on the SPY exchange-traded fund slumped.
Cash has also flowed into leveraged products that bet on higher equity volatility. The VelocityShares Daily 2x VIX Short Term ETN added $110 million earlier this week, the biggest one-day inflow since March.
“We fully expect Friday to mark the near-term highs and the next few weeks/month to resemble what we saw last December,” Wilson wrote in a note.
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>>> Fidelity Is Latest to Cut Online Trading Commissions to Zero
Wall Street’s digitization has reset many of the fundamental costs of investing
Beginning early Thursday, Fidelity stopped charging individual investors commissions on online trades of U.S. stocks, exchange-traded funds and options trades
Wall Street Journal
By Justin Baer
Oct. 10, 2019
https://www.wsj.com/articles/fidelity-is-latest-to-cut-online-trading-commissions-to-zero-11570680060
Fidelity Investments eliminated trading commissions on its online brokerage, matching a step some of its biggest rivals unveiled last week.
Beginning early Thursday, Fidelity stopped charging individual investors commissions on online trades of U.S. stocks, exchange-traded funds and options trades. For investment advisers, commissions will be cut to zero on Nov. 4. Fidelity’s online brokerage has 21.8 million accounts.
Before Thursday’s move, Fidelity charged $4.95 for online stock trades.
Wall Street’s digitization has reset many of the fundamental costs of investing, from commissions to the fees paid on mutual funds, and lifted investors’ expectations for their brokers, advisers and money managers. Firms like Fidelity and Charles Schwab Corp., which earlier eliminated trading commissions, have been racing to lure more customers with lower-cost products and services. Some of those price wars have ended with fees at or close to zero.
Schwab said last week it would scrap commissions to trade stocks, ETFs and options online. While TD Ameritrade Holding Corp. and E*Trade Financial Corp. quickly followed suit, Fidelity didn’t. And even after the firm matched that offering, Fidelity executives have sought to play down its significance.
“We prioritized where we could provide the most value to investors,” Kathleen Murphy, president of Fidelity’s personal-investing business, said in an interview. “It’s much more important to have industry-leading practices on cash and trade execution.”
Fidelity has long argued that the firm trades stocks more efficiently than many of its peers, saving money for clients.
Two months ago, Fidelity unveiled plans to divert clients’ cash into higher-yielding money-market funds, arguing the step provided a sharp contrast to their competitors’ practice of paying out ultralow rates on cash.
More than 500 ETFs already have traded commission-free on Fidelity’s platform, including several hundred managed by BlackRock Inc. “We continue to have a great relationship with BlackRock as well as the other ETF sponsors currently participating in our commission-free ETF platform,” a Fidelity spokeswoman said.
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The trade talks sounded hopeful today, so maybe sanity will prevail this time. If so then stocks should benefit, and bonds and gold sell off. The bond market has looked overbought for some time.
But with 'drama queen' Don, you can't really relax until the deal is actually signed, and then you hope he doesn't have a late night tweet storm that undoes the whole thing.
Fwiw, I'll be using the following chart as a reality principle going forward. This chart speaks volumes, and what it mainly says is that gold and real assets should be at the core of one's long term strategy -
>>> Everything Is Private Equity Now
Spurred by cheap loans and investors desperate to boost returns, buyout firms roam every corner of the corporate world.
Bloomberg News
October 3, 2019
https://www.bloomberg.com/news/features/2019-10-03/how-private-equity-works-and-took-over-everything
Private equity managers won the financial crisis. A decade since the world economy almost came apart, big banks are more heavily regulated and scrutinized. Hedge funds, which live on the volatility central banks have worked so hard to quash, have mostly lost their flair. But the firms once known as leveraged buyout shops are thriving. Almost everything that’s happened since 2008 has tilted in their favor.
Low interest rates to finance deals? Check. A friendly political climate? Check. A long line of clients? Check.
The PE industry, which runs funds that can invest outside public markets, has trillions of dollars in assets under management. In a world where bonds are paying next to nothing—and some have negative yields—many big investors are desperate for the higher returns PE managers seem to be able to squeeze from the markets.
The business has made billionaires out of many of its founders. Funds have snapped up businesses from pet stores to doctors’ practices to newspapers. PE firms may also be deep into real estate, loans to businesses, and startup investments—but the heart of their craft is using debt to acquire companies and sell them later.
In the best cases, PE managers can nurture failing or underperforming companies and set them up for faster growth, creating outsize returns for investors that include pension funds and universities. But having once operated on the comfortable margins of Wall Street, private equity is now facing tougher questions from politicians, regulators, and activists. One of PE’s superpowers is that it’s hard for outsiders to see and understand the industry, so we set out to shed light on some of the ways it’s changing finance and the economy itself. —Jason Kelly
The Magic Formula Is Leverage ... and Fees
PE invests in a range of different assets, but the core of the business is the leveraged buyout
The basic idea is a little like house flipping: Take over a company that’s relatively cheap and spruce it up to make it more attractive to other buyers so you can sell it at a profit in a few years. The target might be a struggling public company or a small private business that can be combined—or “rolled up”—with others in the same industry.
1. A few things make PE different from other kinds of investing. First is the leverage. Acquisitions are typically financed with a lot of debt that ends up being owed by the acquired company. That means the PE firm and its investors can put in a comparatively small amount of cash, magnifying gains if they sell at a profit.
2. Second, it’s a hands-on investment. PE firms overhaul how a business is managed. Over the years, firms say they’ve shifted from brute-force cost-cutting and layoffs to McKinsey-style operational consulting and reorganization, with the aim of leaving companies better off than they found them. “When you grow businesses, you typically need more people,” said Blackstone Group Inc.’s Stephen Schwarzman at the Bloomberg Global Business Forum in September. Still, the business model has put PE at the forefront of the financialization of the economy—any business it touches is under pressure to realize value for far-flung investors. Quickly.
3. Finally, the fees are huge. Conventional money managers are lucky if they can get investors to pay them 1% of their assets a year. The traditional PE structure is “2 and 20”—a 2% annual fee, plus 20% of profits above a certain level. The 20 part, known as carried interest, is especially lucrative because it gets favorable tax treatment. —J.K.
The Returns Are Spectacular. But There Are Catches
For investors the draw of private equity is simple: Over the 25 years ended in March, PE funds returned more than 13% annualized, compared with about 9% for an equivalent investment in the S&P 500, according to an index created by investment firm Cambridge Associates LLC. Private equity fans say the funds can find value you can’t get in public markets, in part because private managers have more leeway to overhaul undervalued companies. “You cannot make transformational changes in a public company today,” said Neuberger Berman Group LLC managing director Tony Tutrone in a recent interview on Bloomberg TV. Big institutional investors such as pensions and university endowments also see a diversification benefit: PE funds don’t move in lockstep with broader markets.
But some say investors need to be more skeptical. “We have seen a number of proposals from private equity funds where the returns are really not calculated in a manner that I would regard as honest,” said billionaire investor Warren Buffett at Berkshire Hathaway Inc.’s annual meeting earlier this year. There are three main concerns.
• The value of private investments is hard to measure
Because private company shares aren’t being constantly bought and sold, you can’t look up their price by typing in a stock ticker. So private funds have some flexibility in valuing their holdings. Andrea Auerbach, Cambridge’s head of global private investments, says a measure that PE firms often use to assess a company’s performance—earnings before interest, taxes, depreciation, and amortization, or Ebitda—is often overstated using various adjustments. “It’s not an honest number anymore,” she says. Ultimately, though, there’s a limit to how much these valuations can inflate a PE fund’s returns. When the fund sells the investment, its true value is exactly whatever buyers are willing to pay.
Another concern is that the lack of trading in private investments may mask a fund’s volatility, giving the appearance of smoother returns over time and the illusion that illiquid assets are less risky, according to a 2019 report by asset manager AQR Capital Management, which runs funds that compete with private equity.
• Returns can be gamed
Private equity funds don’t immediately take all the money their clients have committed. Instead, they wait until they find an attractive investment. The internal rate of return is calculated from the time the investor money comes in. The shorter the period the investor capital is put to work, the higher the annualized rate of return. That opens up a chance to juice the figures. Funds can borrow money to make the initial investment and ask for the clients’ money a bit later, making it look as if they produced profits at a faster rate. “Over the last several years, more private equity funds have pursued this as a way to ensure their returns keep up with the Joneses,” Auerbach says. The American Investment Council, the trade group for PE, says short-term borrowing allows fund managers to react quickly to opportunities and sophisticated investors to use a variety of measures besides internal rate of return to evaluate PE performance.
There are now 8,000-plus PE-backed companies, almost double the number of their publicly listed counterparts
• The best returns might be in the rearview mirror
Two decades ago an investor could pick a private equity fund at random and have a better than 75% chance of beating the stock market, according to a report by financial data company PitchBook. Since 2006 those odds have dropped to worse than a coin flip. “Not only are fewer managers beating the market but their level of outperformance has shrunk, too,” the report says.
One likely reason will be familiar to investors in mutual funds and hedge funds. When strategies succeed, more people pile in—and it gets harder and harder to find the kinds of bargains that fueled the early gains. There are now 8,000-plus PE-backed companies, almost double the number of their publicly listed counterparts. The PE playbook informs activist hedge funds and has been mimicked by pensions and sovereign funds. Some of PE’s secret sauce has been shared liberally in business school seminars and management books.
A deeper problem could be that the first generation of buyout managers wrung out the easiest profits. PE thinking pervades the corporate suite—few chief executive officers are now sitting around waiting for PE managers to tell them to sell underperforming divisions and cut costs. Auerbach says there are still good PE managers out there and all these changes have “forced evolution and innovation.” But it’s possible that a cosmic alignment of lax corporate management, cheap debt, and desperate-for-yield pensions created a moment that won’t be repeated soon. —Hema Parmar and Jason Kelly
What Happens to a Company When PE Buys It?
If your company finds itself part of a PE portfolio, what should you expect? Research has shown that companies acquired through leveraged buyouts (LBOs) are more likely to depress worker wages and cut investments, not to mention have a higher risk of bankruptcy. Private equity owners benefit through fees and dividends, critics say, while the company is left to grapple with often debilitating debt.
Kristi Van Beckum worked as an assistant manager for Shopko Stores Inc. in Wisconsin when the chain of rural department stores was bought by PE firm Sun Capital Partners Inc. in a 2005 LBO. “When they took over, our payroll got drastically cut, our retirement plan got cut, and we saw a lot of turnover among executives,” she says.
One of Sun Capital’s first moves as owner was to monetize Shopko’s most valuable asset, its real estate, by selling it for about $800 million and leasing back the space to its stores. That generated a short-term windfall but added to Shopko’s long-term rent costs. “A lot of stores that were once profitable started to show lower profits because they had to start paying rent,” Van Beckum says.
In 2019, Shopko said it could no longer service its debt and filed for bankruptcy, ultimately shuttering all of its more than 360 stores. Van Beckum was asked to stay on as a manager during her store’s liquidation and was promised severance and a closing bonus in return, she says. Weeks later, she received an email telling her that her severance claim wouldn’t be paid. Sun Capital has said money has been contributed to the bankruptcy plan that can pay such claims.
Private equity and hedge funds gained control of more than 80 retailers in the past decade, according to a July report by a group of progressive organizations including Americans for Financial Reform and United for Respect. And PE-owned merchants account for most of the biggest recent retail bankruptcies, including those of Gymboree, Payless, and Shopko in the past year alone. Those bankruptcies wiped out 1.3 million jobs—including positions at retailers and related jobs, such as at vendors—according to the report, which estimates that “Wall Street firms have destroyed eight times as many retail jobs as they have created in the past decade.”
Whether LBOs perform poorly because of debt, business strategy, or competition from Amazon.com Inc., research shows they fare worse than their public counterparts. A July paper by Brian Ayash and Mahdi Rastad of California Polytechnic State University examined almost 500 companies taken private from 1980 to 2006. It followed both the LBOs and a similar number of companies that stayed public for a period of 10 years. They found about 20% of the PE-owned companies filed for bankruptcy—10 times the rate of those that stayed public. Pile on debt, and employees lose, Ayash says. “The community loses. The government loses because it has to support the employees.” Who wins? “The funds do.”
Research by Eileen Appelbaum, co-director of the Center for Economic and Policy Research, says the problem isn’t leverage per se but too much of it. She points to guidance issued by the Federal Deposit Insurance Corp. in 2013 saying debt levels of more than six times earnings before interest, taxes, depreciation, and amortization, or Ebitda, “raises concerns for most industries.” If that’s the case, plenty of upheaval lies ahead. A 2018 McKinsey report shows that multiples for median private equity Ebitda ticked up to more than 10 in 2017, from 9.2 the previous year.
Of course, by the time private equity acquires some of these companies, they’re already in deep trouble. Defenders say PE fills a crucial role in the market. The firms have the resources and expertise to turn companies around and an incentive to invest in them to make sure there’s a healthy gain when they sell or take them public, says Derek Pitts, head of restructuring at investment bank PJ Solomon. “You have to make investments to grow a smaller company,” he says, and some require the kind of check that only a major PE shop can write. Being shielded from the quarter-by-quarter glare of public reporting requirements may allow PE companies to experiment and focus on more than short-term results.
The retail industry was long a prime target for buyouts because of its reliable cash flow and the value of the real estate it owned. But the sector is no longer as suited to PE ownership amid ever-changing customer whims and the massive upheaval brought by Amazon, says Perry Mandarino, head of restructuring and co-head of investment banking at B. Riley FBR. “Private equity has successfully preserved companies across a number of sectors,” he says, “but the disruption in retail has proven difficult for even some of the most savvy investors to navigate. High leverage, especially in this difficult environment, can be fatal.”
The most notable recent example of that is Toys “R” Us Inc. When the children’s toy retailer filed for bankruptcy in 2017, it was paying almost $500 million a year to service the debt from its 2005 takeover by Bain Capital LP, Vornado Realty Trust, and Kohlberg Kravis Roberts & Co. After it was liquidated in March following poor holiday season sales, its owners became the target of protests by laid-off workers, as well as scrutiny from investors and criticism from elected officials. Senator Elizabeth Warren (D-Mass.) introduced a bill in July that would limit payouts private equity owners could receive from troubled companies.
That kind of impact isn’t unique to retail, says Heather Slavkin Corzo, senior fellow at Americans for Financial Reform and director of capital market policies at the union federation AFL-CIO. “The massive growth of private equity over the past decade means that this industry’s influence, economic and political, has mushroomed,” she says. “It’s hardly an exaggeration to say that we are all stakeholders in private equity these days, one way or another.” —Lauren Coleman-Lochner and Eliza Ronalds-Hannon
A Crushing Tide of Megadeals
Around 2007, private equity buyouts of more than $2 billion got so numerous that we can hardly fit them all. The financial crisis interrupted the flow, but only temporarily.
PE Snapped Up Houses After the Real Estate Crisis
Renting out houses used to be a relatively small-time business. Now rentals are what Wall Street calls an asset class—another investment like stocks or timberland, with tenants’ monthly checks showing up as yield in someone’s portfolio. About 1 million people may now live in homes owned by large landlords. This tectonic shift can be traced to the U.S. housing crisis.
Private equity companies including Blackstone Group Inc. had the money to gorge on foreclosed houses in the years after the crash and quickly applied their model to a whole new business. They used economies of scale, cost-cutting, and leverage to maximize profits on undervalued assets. The key was to create a standardized way to manage single-family homes, scattered from Atlanta to Las Vegas, almost as efficiently as apartment buildings. PE-backed landlords set up centralized 24/7 customer service centers and automated systems for rent collection and maintenance calls.
Blackstone-backed rental company Invitation Homes Inc. eventually went public, then merged with a landlord seeded by Starwood Capital Group and Colony Capital Inc. to create the U.S.’s largest single-family rental company, with more than 80,000 units. Invitation Homes owns less than 1% of the single-family rental stock, says Ken Caplan, Blackstone’s global co-head of real estate. “But it has raised the bar for professional service for the industry,” he says.
The aims of the landlords and the needs of their tenants often diverge, says Leilani Farha, the United Nations’ special rapporteur on the right to housing. Steady rent increases that make investors happy come out of tenants’ paychecks, straining household finances and making it harder to save for a down payment. Meanwhile, PE-backed companies’ sprawling portfolios of rental properties may limit the availability of entry-level houses that could be occupied by homeowners. Institutional landlords were 66% more likely than other operators to file eviction notices, according to Georgia Institute of Technology professor Elora Raymond, whose 2016 study of Fulton County, Ga., court records was published by the Federal Reserve Bank of Atlanta. Invitation Homes was less likely to file notices than its largest peers, according to the paper. A company spokesman says it works with tenants to avoid eviction and that its high renewal rates indicate customer satisfaction.
From Wall Street’s point of view, the model has worked beautifully. Invitation Homes has convinced stock market investors that it can manage operating costs. It also bought shrewdly, swallowing up starter homes in good school districts, anticipating that tight credit and anemic construction rates would push the U.S. toward what one industry analyst dubbed a rentership society. Sure enough, U.S. homeownership is near its lowest point in more than 50 years, allowing Invitation Homes to raise rents by more than 5%, on average, when tenants renew leases.
“The single-family rental companies have a perfect recipe,” says John Pawlowski, an analyst at Green Street Advisors LLC. “It’s a combination of solid economic growth in these Sun Belt markets and very few options out there on the ownership front.” Shares of Invitation Homes have gained almost 50% since the start of 2019. Blackstone has sold more than $4 billion in shares of it this year. Its remaining stake is worth about $1.7 billion. —Prashant Gopal and Patrick Clark
It Might Be Making Inequality Worse
In July, Democratic presidential candidate Elizabeth Warren of Massachusetts likened the private equity industry to vampires. She struck a nerve: Even among Wall Street companies, PE stands out as a symbol of inequality in the U.S. “There’s this concentration of extreme wealth, and private equity is a huge part of that story,” says Charlie Eaton, an assistant professor of sociology at the University of California at Merced.
Income gains for the top 1% in the U.S. have been rising at a faster clip than for lower groups since 1980. Since that time, PE managers have steadily taken up a larger share of the highest income groups, including the richest 400 people, according to several research papers from the University of Chicago’s Steven Kaplan and Stanford’s Joshua Rauh. There are more private equity managers who make at least $100 million annually than investment bankers, top financial executives, and professional athletes combined, they found. The very structure of PE firms is particularly profitable for managers at the top; not only do they earn annual management fees, but they also get a cut of any profits.
Beyond that, PE may contribute to inequality in several ways. First, it offers investors higher returns than those available in public stocks and bonds markets. Yet, to enjoy those returns, it helps to already be rich. Private equity funds are open solely to “qualified” (read: high-net-worth) individual investors and to institutions such as endowments. Only some workers get indirect exposure via pension funds.
Second, PE puts pressure on the lower end of the wealth divide. Companies can be broken up, merged, or generally restructured to increase efficiency and productivity, which inevitably means job cuts. The result is that PE accelerates job polarization, or the growth of jobs at the highest and lowest skill and wage level while the middle erodes, according to research from economists Martin Olsson and Joacim Tag.
More private equity managers make at least $100 million a year than top financial executives, investment bankers, and professional athletes combined
The imperative to make highly leveraged deals pay off may also encourage more predatory business practices. A study co-authored by UC Merced’s Eaton, for example, found that buyouts of private colleges lead to higher tuition, student debt, and law enforcement action for fraud, as well as lower graduation rates, loan-repayment rates, and graduate earnings. But the deals did increase profits.
Supporters of PE firms argue that they’re creating value. A 2011 research paper shows that overall job dislocation over time isn’t so bad. After a leveraged buyout, companies lost, on net, less than 1% of total positions, because layoffs are largely balanced by new hires, with the effects concentrated in retail and service sectors, according to the paper, co-authored by the University of Chicago’s Steven Davis. He and others argue that private equity owners can turn underperforming companies into thriving businesses that attract jobs, return more money to shareholders, and bolster new technology.
Critics and advocates of PE generally agree on at least one thing: When people are hurt by deals that turn companies upside down, there should be systems in place to assist them. “You don’t want to stand in the way of economic innovation,” says Gregory Brown, a finance professor at UNC Kenan-Flagler Business School. “But you would hope that people who get run over are helped.” —Katia Dmitrieva
Barbarians at the Gate Become the New Establishment
1970s
The U.S. Department of Labor relaxes regulations to allow pension funds to hold riskier investments. This opens up a new pool of money for buyout artists. Cousins Henry Kravis and George Roberts leave Bear Stearns with their mentor Jerome Kohlberg to form Kohlberg Kravis Roberts & Co.
1980s
L.A. financier Michael Milken (above, second from left) turns junk bonds into a hot investment, which makes getting leverage easier. Former Lehman Brothers partners Pete Peterson and Stephen Schwarzman found Blackstone Group. KKR takes control of RJR Nabisco in a stunning $24 billion deal.
1990s
Milken goes to jail for securities violations, and his firm, Drexel Burnham Lambert, collapses. But takeover artists are finding more tools for financing deals, as banker Jimmy Lee (pictured, third from left) popularizes leveraged loans at what’s now JPMorgan Chase & Co.
2000s
Pensions for California state employees and Middle East sovereign funds pour money into record-setting funds that routinely surpass $15 billion apiece. Big deals of the era include Dollar General Corp. and Hilton Hotels. Several private equity firms themselves go public.
2010s
After the financial crisis, Blackstone, Ares Capital, and Apollo Global expand their private credit businesses, providing financing to companies no longer served by big banks. Veteran PE executive Mitt Romney is the 2012 Republican presidential nominee. —J.K.
It Could Be Blowing Up a Debt Bubble
Private equity couldn’t exist without debt. It’s the jet fuel that makes a corporate acquisition so lucrative for a turnaround investor. The more debt you can raise against a target company, the less cash you need to pay for it, and the higher your return on that cash once you sell.
Ultralow interest rates have made this fuel especially potent and easy to obtain. The market for leveraged loans—industry jargon for loans made to companies with less-than-stellar credit—has doubled in the past decade. Almost 40% of all such loans outstanding are to companies controlled by private equity, according to data from Dealogic.
Some leveraged loans are arranged by banks. But there’s also been a boom in private lenders, who may be willing to provide financing when banks or public debt markets won’t. All the while, bond and loan investors desperate for yield have accepted higher risks. As buyout titans have chased bigger and riskier deals, their target companies have been left with more fragile balance sheets, which gives management less room for error. This could set the stage for a rude awakening during the next recession.
“We’re seeing scary levels of leverage,” says Dan Zwirn, chief investment officer of alternative asset manager Arena Investors. “Private equity sponsors are all slamming against each other to get deals done.” Loans to companies with especially high debt loads now exceed peaks in 2007 and 2014, according to the U.S. Federal Reserve. And companies owned by private equity typically carry a higher debt load relative to their earnings and offer less transparency on their financial position than other corporate borrowers.
Debt usually comes with rules, embedded deep in loan and bond documents, that help lenders protect their investment. For example, they might restrict dividend distributions or asset sales. The strictness of such protections has been on a steady decline over the past few years, with PE-backed companies typically offering weaker safeguards compared with borrowers that aren’t backed by private equity, according to scores developed by Covenant Review, a research firm that analyzes debt documents. “Investor protections used to be written on cocktail napkins a year ago,” says John McClain, a portfolio manager at Diamond Hill Capital Management who invests in junk bonds. “Now they’re scribbled in crayon on toilet paper.”
Buyout firms have also come under fire for massaging financial projections presented to investors when new debt is sold to make earnings look bigger and a company’s debt load more manageable.
PE firms can use some of the companies they own as virtual ATMs—having the company borrow money to pay its owner special dividends. That allows the funds to recover their investment sooner than they typically would through a sale or an initial public offering. Sycamore Partners LLC, known for its aggressive bets in the retail industry and related run-ins with creditors, has already recovered about 80% of the money it put down to acquire Staples Inc. in 2017 through dividends mostly funded by debt. Carlyle Group, Hellman & Friedman, and Silver Lake have also saddled their portfolio companies with new debt to extract dividends this year. Representatives for the four private equity firms declined to comment.
Little bubbles have already started to pop, giving debt investors a glimpse of how quickly things can deteriorate. Bonds issued last year to finance Kohlberg Kravis Roberts & Co.’s deal to take private Envision Healthcare, a hospital staffing company, have already lost almost half their face value after initiatives in Washington to stop surprise medical bills spooked investors. (A representative for KKR declined to comment.) The debt of some other private equity-owned companies, including the largest Pizza Hut franchisee in the world and a phone recycling company, has also fallen in market value in recent months. “When you have people desperate for yield, buying lower-rated, poor-quality debt, the question is what’s going to make this stuff blow out,” says Zwirn. “And it will.” —Davide Scigliuzzo, Kelsey Butler, and Sally Bakewell
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Summarizing the remaining 'toolkit' available for dealing with a recession or financial crisis -
1) Interest Rates - (status - limited) - US has 2% available to get to ZIRP, then would have to go into NIRP. Europe, Japan are already near ZIRP or in NIRP.
2) QE - (status - limited) - Fed balance sheet is currently $4 tril, they could go to 6 tril, with upper limit at 8, 10, or ?
3) Deficit Spending - (status - limited) - current annual budget deficit is already $1 tril or more
4) Tax Cuts - (status - limited) - was already done last year
5) Helicopter Money - a variation on #3, where money is handed out to the population directly
6) Dollar Devaluation - to boost exports, but other countries quickly follow suit, so any benefit is fleeting (currency war)
7) Tariffs - other countries quickly retaliate, global trade is reduced (trade war)
8) Devalue dollar vrs gold - (1933)
9) Shooting War
10) SDR/Special Drawing Rights (IMF bailout of the world) - all roads ultimately lead here
>>> Capital gains tax reform may be coming. Here's what Republicans and Democrats want
USA TODAY
by Russ Wiles, Arizona Republic
September 22, 2019
https://finance.yahoo.com/news/capital-gains-tax-reform-may-143510152.html
Capital gains were largely unaffected by federal income-tax reform a couple of years ago, but recent rumblings suggest they could be put into play sooner or later.
Capital gains are the profits that people earn on stocks, bonds, housing and other types of investments. In essence, if you sell an asset for more than you paid, you have a gain, although the tax treatment is a bit more complicated than that.
Proposals from members of the two main political parties could make things more complex and politicized.
Some Republicans would like to see capital gains indexed to inflation, which would mean people pay taxes on a smaller portion of their gains. Some Democrats want to see wealthy investors pay higher tax rates on capital gains, and sooner.
Reaching a political consensus on an issue as contentious as capital gains seems unlikely. But these and other proposals could figure prominently as the presidential campaigns gear up in the months ahead.
Capital-gains taxes have a clear political undertone, as rich people own more investments that are subject to them.
"Like the estate tax, this is often viewed as a tax on the wealthy," said Mark Luscombe, a principal analyst at researcher Wolters Kluwer. "It tends to incite tax-warfare disputes between the two parties."
Capital gains apply on stocks, housing and other assets, and profits from these investments are taxed at lower rates than salary income. Capital-gain rates range from 0% for low-income individuals to 20% for higher earners with taxable income above $434,550 (singles) or $488,850 (married couples). But most people pay 15%.
Holding periods matter
The above description doesn't tell the whole story.
The current rates of 0%, 15% and 20% apply only to long-term gains, on investments owned for at least one year and a day. If you held a stock, bond or other asset for less than that, any profit would be taxed as ordinary income like wages, at higher rates.
All this can get tricky, especially if you have a lot of investments. Thankfully, brokerages and other investment companies typically will crunch the numbers for you.
If your losses exceed your gains, you have a capital loss. You can deduct up to $3,000 in losses in any year against ordinary income, with the ability to carry forward unused amounts. This is why investment advisers talk so much about tax-loss "harvesting" near year-end, especially with stocks. The idea is to sell your losers to lock in deductible losses and hang onto your winners to delay those taxes to future years.
Given that regular income is taxed at higher rates, capital gains are a bargain — and a big one. Americans reported $600 billion of gains subject to the lower long-term rates in 2016, the most recent year for which the Internal Revenue Service has released data. That's in addition to $200 billion in "qualified" dividends also taxed at capital-gain rates.
What Republicans want to do
Ideas being discussed by politicians could reshape capital-gain policies considerably. Many Republicans like the idea of linking capital-gain taxes to inflation so that investors could lower their tax.
Here's how that would work: Suppose you invested $5,000 in the stock market at the end of 2000 and that stake is now worth $8,000. Under current law, your would owe tax on the $3,000 difference, noted the Tax Foundation in a recent analysis. But because $5,000 back then really is the equivalent of about $7,200 today, owing to inflation, the adjusted gain would be closer to $800.
That would be your taxable gain under proposals such as H.R. 6444, advanced last year by Rep. Devin Nunes, R-Calif.
On balance, a proposal such as this could cut into federal tax collections by lowering the amount of capital gains subject to tax. However, it also might unlock additional revenue through increased selling as investors — no longer sitting on such large paper gains — might be more ready to cash out.
Tim Steffen, director of advanced planning at wealth-management firm Baird, said inflation indexing would make capital-gain calculations more complex. After a possible initial spike in government tax collections, he thinks this type of change would lead to lower federal revenue over time.
Some Republicans want President Trump to try pushing through the inflation-indexing idea without awaiting action by Congress.
Democrats seek to scrap lower rates
Democrats have their own proposals that would undercut the tax-sheltering benefits of capital gains. A plan by Sen. Ron Wyden, D-Ore., who heads the Senate Finance Committee, would tax gains the same as ordinary income for the wealthiest Americans and require them to pay taxes on unrealized gains each year.
This idea also could be complex, partly because it could be difficult to value unrealized gains prior to sale. "How do you apply it to a piece of artwork, a building or privately held stock?" Steffen asked.
Wyden’s proposal would apply to fewer than 1% of the richest Americans. It also would exempt gains from the sale of primary homes and investments held in 401(k)-style accounts. The plan could free up more tax revenue if wealthy investors had to pay taxes on accrued taxes each year.
Under current law, capital-gain taxes aren't due until you sell an investment. In fact, people still holding assets at death can avoid taxes entirely, as the accrued tax liability gets wiped out through what's known as a "step up" or increase in the "basis" or untaxed value of an investment.
In other words, when someone dies and leaves property to a beneficiary, an asset's basis gets increased to its current market worth, which eliminates any lingering capital-gain liability.
Another plan, championed by Democratic presidential candidate Joe Biden, would increase the top rate on long-term gains to 39.6% for people earning at least $1 million annually. It also would end the basis step-up tax break for these individuals.
Other rates apply to other assets
Capital-gain reform, assuming it were to pass, might not pertain to all assets, some of which already operate under different rules. For example, artwork, coins and other collectibles currently are taxed at a top 28% capital-gain rate.
"These are often viewed as nonproductive assets that don't grow the economy and create jobs," said Luscombe, explaining why the tax on collectibles is higher.
Owner-occupied housing is another exception. A large chunk of housing gains can be excluded from taxation — up to $250,000 for single homeowners and $500,000 for married couples.
In addition, the one-year capital-gain holding period for other assets doesn't apply to owner-occupied housing. Rather, you need to have owned the property, and occupied it, for at least two of the five years before you eventually sell. The flip side to this favorable treatment on homes is that you can't deduct a loss.
The homeowner provisions, like capital-gain rates in general, weren't affected by tax reform in late 2017. But they too might be up for discussion in the unlikely event that overall capital-gain rules get a face-lift.
<<<
Far from being a reduction in the central bank's role (as posited in that previous article), this new paradigm actually amounts to a big expansion of central bank power -- from merely controlling monetary policy (interest rates and money supply) to grabbing control of fiscal policy as well (spending and taxes). In effect, control of fiscal policy will be taken away from the elected Congress, and put into the hands of the Fed/central bank.
The way our system has been operating, the elected Congress controls spending and taxes (fiscal policy), and the independent (privately owned) Fed controls short term interest rates and thus the money supply (monetary policy).
What is being proposed is a merger of monetary and fiscal policy, with both under control of the central bank. This is exactly what the European Union mavens have proposed for Europe following the Greek crisis -- the need for the ECB/European Central Bank to have control over the budgets and tax policies of member countries. It's a huge power grab by the ECB banksters. Not only have countries lost their independent currencies, next they will lose all control over how they are taxed and where the money is spent.
Like the US Federal Reserve, the European ECB is cartel of privately owned banks. But unlike the US, the European Commission members are appointed, not elected by the people. Rule by the EU is rule by unelected bureaucrats. The US still has an elected Congress, but they will increasingly be stripped of power. Americans will pay a tax rate dictated by the central bank, and the budget for how the money is spent will similarly be dictated by the central bank.
Once this stage of the power grab is in place and operating, the next step will be goodbye US dollar system, hello SDR. But by merging monetary and fiscal policies under the central bank, perhaps the day of reckoning (SDR) can be postponed? We know they eventually want the SDR, but they may want to maintain the dollar system for now, and this may be a stalling tactic to hold the dollar system together for some additional years.
>>> A Long-Despised and Risky Economic Doctrine Is Now a Hot Idea
Bloomberg
By Enda Curran and Ben Holland
September 22, 2019
https://www.bloomberg.com/news/articles/2019-09-22/a-long-despised-and-risky-economic-doctrine-is-now-a-hot-idea?srnd=premium
Next slump may see new central bank tools -- but less autonomy
Helicopter money on horizon as Dalio, Fischer draw up plans
It’s like a design competition. Hardly anyone thinks central banks can fix a stalling world economy with their current tools. So some of the biggest names in finance are trying to invent new ones.
The proposals so far -- including recent entries by billionaire Ray Dalio and monetary policy maven Stanley Fischer -- have one thing in common: They foresee the once all-powerful central bankers taking a more junior role, and collaborating with governments.
That type of stimulus used to be taboo, in part because it risks eroding the independence from politics that monetary policy makers prize -- and President Donald Trump is already threatening. History is littered with cautionary tales in which blurring the lines between central bank and Treasury coffers led to runaway inflation.
But right now, deflation is the big threat. An emerging consensus says the next downturn may need to be fought with direct and permanent injections of cash –- often called “helicopter money’’ -– and that central banks can’t deliver it alone.
‘Pushing on a String’
The monetary policy makers can encourage private actors to spend or invest, by making it cheaper to borrow. By historical standards, though, interest rates are near rock-bottom already and the credit cards of households and businesses are pretty maxed out. In the low-rates era, it’s mostly been governments doing the borrowing.
What’s resurfacing is “the old idea of monetary policy sometimes pushing on a string,’’ Lawrence Summers, a former U.S. Treasury secretary and now Harvard University professor, told Bloomberg Television recently. “We’ve got to think much harder, for economic stabilization, about mechanisms that involve spurring demand directly.’’
Summers Warns of a Central Bank 'Black Hole' for Policy
Former U.S. Treasury Secretary Larry Summers explains the idea of "black hole monetary economics."
That’s code for involving fiscal policy. Via their budgets, governments don’t have to push the string –- they can open the taps, spending directly into the economy or boosting the purchasing power of consumers or companies by cutting taxes.
The new thinking says central banks can get in on this act too –- an idea, known in the jargon as fiscal-monetary cooperation, that economists are now trying to flesh out. It could solve problems, and maybe create some new ones, on both sides.
Read more on Bloomberg:
Central Banks Cry for Budget Help, But Only Some Are Getting It
Central Banks Launch Growth Mission With Arsenals Questioned
All Brakes and No Engine, Central Banks Seek New Inflation Ideas
Central Bankers Are Sick of Rescuing the World Economy Alone
Economics Reinvents Itself Every Few Decades. It’s Happening Now
Governments have been criticized -- often by those overseeing monetary policy -- for being slow to deliver fiscal support, which typically needs approval by hundreds of lawmakers who may worry about adding to national debts. Central banks can act faster.
The banks would get their hands on some powerful new instruments. But they’d likely have to accept that independence from politicians –- jealously guarded, especially in the age of Trump’s frequent attacks on the Federal Reserve and its chairman Jerome Powell -– has limits.
Where to draw those boundaries is the preoccupation of a recent paper published by BlackRock Inc. and co-written by Fischer, the Fed’s former vice-chair. It argues that monetary stimulus has run out of road as a way to boost economies, while fiscal policy hasn’t been “pulling its weight.’’
Out of Space
Central banks have no room to cut rates like they did in the last slump
One solution is to combine them –- for example, by letting central banks create money to finance government budget deficits. The challenge, say the BlackRock authors, is to encase such “historically unusual’’ measures in explicit rules -- so that central bankers retain their independence, and can apply the brakes if government spending gets out of control.
Their proposal involves an emergency fiscal fund that central banks could activate when inflation is dangerously below-target and there’s no room to cut rates. The money-tap would shut off automatically once prices are back on track.
‘A New Realm’
The details differ, but plenty of others have reached similar conclusions about what central bankers could do next -– provided they have government authorization.
“When you have the next downturn, QE isn’t going to be as effective, interest rates aren’t going to be effective,’’ Dalio, founder of Bridgewater Associates LP, the world’s biggest hedge fund, told Bloomberg TV.
“Then you need fiscal policies and debt monetization,’’ he said. “We’re going to enter a new realm.’’
Ray Dalio, the billionaire founder of Bridgewater Associates, says he sees a 25% chance of recession in 2019 and 2020
Modern Monetary Theory, a school that says government spending and taxes are better tools to steer the economy than interest rates, has also been gaining support. MMT is relaxed about monetary financing of budget deficits, and doesn’t see it as much different from selling bonds.
Read More: What You Need to Know About Modern Monetary Theory
Along with the lack of monetary ammunition, one reason behind the big rethink may be deepening inequality, especially after 2008’s financial crisis.
As central banks shifted from setting rates to seemingly propping up financial assets, they became more vulnerable to the charges that their policies helped the rich most, and went beyond their remits.
A new book by financial commentator Frances Coppola, titled “The Case For People’s Quantitative Easing,” calls for newly minted central-bank money to be funneled straight into the bank accounts of households or small businesses. That kind of stimulus will deliver more growth and better distribution, she argues -- as well as addressing challenges like ageing populations and automation.
Helicopter Money: A Reading List -
Paul McCulley on how he learned to stop worrying
Dalio on how the future may look a bit like MMT
Blanchard/Summers on why it’s time to rethink
Some MMT economists respond to their critics
Jordi Gali on effects of money-backed fiscal stimulus
Thomas Palley on why independence is a ‘rigged debate>
‘Certainly Higher’
Another driver of change is that the doctrine of central-bank independence was forged in an era of surging prices. But rich countries now face the opposite problem: deflationary forces. At one point this year, more than $17 trillion of debt -- mostly in Europe and Japan -- was yielding less than zero.
Italian economist Guido Tabellini says that backdrop has forced him to change his views. A professor of economics at Bocconi University, Tabellini co-wrote a paper on central bank independence in the 1990s, when the European Central Bank was being created.
“The benefit of monetary-fiscal policy coordination is certainly higher now,’’ he said, and there’s a case for easing the curbs on financing government debt -- which can be done without sacrificing central-bank independence.
What Bloomberg’s Economists Say...
Click here to read a proposal by Jamie Rush, chief European economist for Bloomberg Economics, for fiscal-monetary coordination in the U.K.
“Helicopter money is not a free lunch,” Rush writes. “But it might still be the best value meal going when the next crisis hits.”
“Exactly how the money gets into the helicopter is likely to be less important than how it is dropped. But, if there are benefits to explicit monetary financing of deficits they are likely to stem from policy coordination.”
It’s not as if there’s been no cooperation in the past decade.
After the 2008 crash, central banks routinely worked with governments. Sometimes they pushed against the boundaries of their mandates –- like when the ECB’s Mario Draghi put a central-bank backstop behind government debt, by promising to do “whatever it takes’’ to save the euro.
Collaborate -- Or Fight?
But if the post-crisis environment has strengthened the theoretical case for working together, in practice it’s often led to unusually fraught relations between politicians and technocrats.
Trump’s onslaught against Powell, and Bank of England chief Mark Carney’s disagreements with pro-Brexit politicians like Prime Minister Boris Johnson, are just two examples.
It’s in Japan that collaboration has been taken furthest.
The Bank of Japan has been a key player in Prime Minister Shinzo Abe’s plan to reflate the economy with a mix of monetary stimulus and fiscal spending. It now holds 43% of the national debt, which is the world’s largest.
‘Like It or Not...’
In theory, that debt hasn’t been monetized. In reality, most analysts think it has, and the sky hasn’t fallen in.
“The market does not expect the government of Japan to ever be able to repay this debt,’’ Bank of America-Merrill Lynch strategist Athanasios Vamvakidis wrote in a July report. “The BOJ may as well make it explicit.’’
Japan was the first country to cut interest rates to zero, and the first to try quantitative easing. Given its close working relations with the government, the BOJ may provide a blueprint for the latest ideas about central banking too
“Central bank independence increasingly looks like a brief historical episode that peaked around the turn of the century,’’ said Joachim Fels, global economic adviser at Pacific Investment Management Co. “Like it or not, get used to the new normal of dependent central banks.’’
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>>> The Big Short’s Michael Burry Explains Why Index Funds Are Like Subprime CDOs
Bloomberg
Reed Stevenson
September 4, 2019
https://finance.yahoo.com/news/big-short-michael-burry-explains-104146627.html
(Bloomberg) -- For an investor whose story was featured in a best-selling book and an Oscar-winning movie, Michael Burry has kept a surprisingly low profile in recent years.
But it turns out the hero of “The Big Short” has plenty to say about everything from central banks fueling distortions in credit markets to opportunities in small-cap value stocks and the “bubble” in passive investing.
One of his most provocative views from a lengthy email interview with Bloomberg News on Tuesday: The recent flood of money into index funds has parallels with the pre-2008 bubble in collateralized debt obligations, the complex securities that almost destroyed the global financial system.
Burry, who made a fortune betting against CDOs before the crisis, said index fund inflows are now distorting prices for stocks and bonds in much the same way that CDO purchases did for subprime mortgages more than a decade ago. The flows will reverse at some point, he said, and “it will be ugly” when they do.
“Like most bubbles, the longer it goes on, the worse the crash will be,” said Burry, who oversees about $340 million at Scion Asset Management in Cupertino, California. One reason he likes small-cap value stocks: they tend to be under-represented in passive funds.
Here’s what else Burry had to say about indexing, liquidity, Japan and more. Comments have been lightly edited and condensed.
Index Funds and Price Discovery
“Central banks and Basel III have more or less removed price discovery from the credit markets, meaning risk does not have an accurate pricing mechanism in interest rates anymore. And now passive investing has removed price discovery from the equity markets. The simple theses and the models that get people into sectors, factors, indexes, or ETFs and mutual funds mimicking those strategies -- these do not require the security-level analysis that is required for true price discovery.
“This is very much like the bubble in synthetic asset-backed CDOs before the Great Financial Crisis in that price-setting in that market was not done by fundamental security-level analysis, but by massive capital flows based on Nobel-approved models of risk that proved to be untrue.”
Liquidity Risk
“The dirty secret of passive index funds -- whether open-end, closed-end, or ETF -- is the distribution of daily dollar value traded among the securities within the indexes they mimic.
“In the Russell 2000 Index, for instance, the vast majority of stocks are lower volume, lower value-traded stocks. Today I counted 1,049 stocks that traded less than $5 million in value during the day. That is over half, and almost half of those -- 456 stocks -- traded less than $1 million during the day. Yet through indexation and passive investing, hundreds of billions are linked to stocks like this. The S&P 500 is no different -- the index contains the world’s largest stocks, but still, 266 stocks -- over half -- traded under $150 million today. That sounds like a lot, but trillions of dollars in assets globally are indexed to these stocks. The theater keeps getting more crowded, but the exit door is the same as it always was. All this gets worse as you get into even less liquid equity and bond markets globally.”
It Won’t End Well
“This structured asset play is the same story again and again -- so easy to sell, such a self-fulfilling prophecy as the technical machinery kicks in. All those money managers market lower fees for indexed, passive products, but they are not fools -- they make up for it in scale.”
“Potentially making it worse will be the impossibility of unwinding the derivatives and naked buy/sell strategies used to help so many of these funds pseudo-match flows and prices each and every day. This fundamental concept is the same one that resulted in the market meltdowns in 2008. However, I just don’t know what the timeline will be. Like most bubbles, the longer it goes on, the worse the crash will be.”
Bank of Japan Cushion
“Ironically, the Japanese central bank owning so much of the largest ETFs in Japan means that during a global panic that revokes existing dogma, the largest stocks in those indexes might be relatively protected versus the U.S., Europe and other parts of Asia that do not have any similar stabilizing force inside their ETFs and passively managed funds.”
Undervalued Japan Small-Caps
“It is not hard in Japan to find simple extreme undervaluation -- low earnings multiple, or low free cash flow multiple. In many cases, the company might have significant cash or stock holdings that make up a lot of the stock price.”
Read more: Michael Burry Discloses Investments in Five Japanese Companies
“There is a lot of value in the small-cap space within technology and technology components. I’m a big believer in the continued growth of remote and virtual technologies. The global retracement in semiconductor, display, and related industries has hurt the shares of related smaller Japanese companies tremendously. I expect companies like Tazmo and Nippon Pillar Packing, another holding of mine, to rebound with a high beta to the sector as the inventory of tech components is finished off and growth resumes.”
Cash Hoarding in Japan
“The government would surely like to see these companies mobilize their zombie cash and other caches of trapped capital. About half of all Japanese companies under $1 billion in market cap trade at less than tangible book value, and the median enterprise value to sales ratio for these companies is less than 50%. There is tremendous opportunity here for re-rating if companies would take governance more seriously.”
“Far too many companies are sitting on massive piles of cash and shareholdings. And these holdings are higher, relative to market cap, than any other market on Earth.”
Shareholder Activism
“I would rather not be active, and in fact, I am only getting active again in response to the widespread deep value that has arisen with the sell-off in Asian equities the last couple of years. My intention is always to improve the share rating by helping management see the benefits of improved capital allocation. I am not attempting to influence the operations of the business.”
Betting on a Water Shortage
“I sold out of those investments a few years back. There is a lot of demand for those assets these days. I am 100% focused on stock-picking.”
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>>> World's First 30-Year Bond With Zero Coupon Flops in Germany
Bloomberg
By John Ainger
August 21, 2019
https://www.bloomberg.com/news/articles/2019-08-21/germany-sees-anemic-demand-for-30-year-bond-sale-at-zero-coupon?srnd=premium
Nation sells 824 million euros versus 2 billion euro target
‘It is technically a failed auction,” says Danske’s Sorensen
Germany Sees Anemic Demand for First 30-Year Bond at Zero Coupon
The world’s first 30-year bond offering a zero coupon struggled to find buyers, signaling that negative yields across Europe may finally be taking their toll on investor demand.
Germany failed to meet its 2-billion-euro target ($2.2 billion) for the auction of notes maturing in 2050, selling only 824 million euros. It’s another sign that the global bond rally may be coming to a halt now that more than $16 trillion of securities around the world have negative yields.
German 30-year bond yields have plunged into negative territory
“This shows that there is less demand for 30-year bonds at negative yields,” said Marco Meijer, a senior fixed-income strategist at BNP Paribas SA. Still, Meijer doesn’t “see yields rising a lot in Europe.”
The whole of Germany’s yield curve is now below zero -- the first major market exhibiting such a trait -- meaning the government is effectively being paid to borrow out to 30 years. That’s a reflection of dwindling expectations for inflation and growth over the coming years, while the European Central Bank is widely forecast to introduce a new wave of monetary stimulus next month.
The sale comes as Germany is priming the pumps for extra spending should an economic crisis hit. While the nation is confined to strict laws on running a fiscal deficit, Finance Minister Olaf Scholz suggested Germany could muster 50 billion euros ($55 billion) should a recession hit. The economy contracted in the second quarter.
German 30-year yields rose three basis points to -0.12% as of 1:20 p.m. in London. Those on 10-year securities climbed two basis points to -0.67%.
The auction was at a record-low average yield of -0.11%, while the Bundesbank retained nearly two-thirds of the debt on offer. The real subscription rate -- a gauge of demand that accounts for retentions by the Bundesbank -- fell to 0.43 times against 0.86 times at the previous sale of similar maturity bonds on July 17.
Commerzbank AG had expected demand to come from life insurers and macro investors before the sale, despite the yield curve flattening in recent weeks. Long-dated German bonds are still attractive for U.S. investors, when hedged for currency swings, offering around a 2.6% yield, relative to around 2% on a 30-year Treasury.
“It is technically a failed auction,” said Jens Peter Sorensen, chief analyst at Danske Bank AS. “I am not all worried about this -- as investors can always just buy in the future and do not need to participate in auctions.”
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Name | Symbol | % Assets |
---|---|---|
Exxon Mobil Corp | XOM | 10.44% |
Chevron Corp | CVX | 9.43% |
Freeport-McMoRan Inc | FCX | 6.61% |
Archer-Daniels Midland Co | ADM | 6.25% |
Corteva Inc | CTVA | 5.73% |
Newmont Corp | NEM | 5.13% |
EOG Resources Inc | EOG | 5.03% |
ConocoPhillips | COP | 4.86% |
Nutrien Ltd | NTR.TO | 4.49% |
Barrick Gold Corp | ABX.TO | 4.19% |
Name | Symbol | % Assets |
---|---|---|
Exxon Mobil Corp | XOM | 4.71% |
Chevron Corp | CVX | 4.47% |
BHP Group Ltd | BHP.AX | 4.41% |
Tyson Foods Inc Class A | TSN | 4.35% |
Nutrien Ltd | NTR.TO | 3.90% |
Rio Tinto PLC | RIO.L | 3.46% |
Archer-Daniels Midland Co | ADM | 3.23% |
Total SA | FP.PA | 2.65% |
BP PLC | BP..L | 2.50% |
Royal Dutch Shell PLC Class A | RDSA.L | 2.50% |
Name | Symbol | % Assets |
---|---|---|
Svenska Cellulosa AB B | SCA B | 8.21% |
Rayonier Inc | RYN | 8.08% |
Weyerhaeuser Co | WY | 7.83% |
PotlatchDeltic Corp | PCH | 7.80% |
West Fraser Timber Co.Ltd | WFT.TO | 5.60% |
Klabin SA Unit | KLBN11.SA | 4.85% |
Suzano SA | SUZB3.SA | 4.37% |
Smurfit Kappa Group PLC | SK3.DE | 4.18% |
Oji Holdings Corp | 3861 | 4.09% |
WestRock Co A | WRK | 4.08% |
Name | Symbol | % Assets |
---|---|---|
Amcor PLC Ordinary Shares | AMCR.L | 5.49% |
Avery Dennison Corp | AVY | 5.13% |
Weyerhaeuser Co | WY | 5.09% |
WestRock Co A | WRK | 4.97% |
Mondi PLC | MNDI.L | 4.96% |
UPM-Kymmene Oyj | UPM | 4.85% |
International Paper Co | IP | 4.62% |
Packaging Corp of America | PKG | 4.37% |
Smurfit Kappa Group PLC | SK3.DE | 3.93% |
Stora Enso Oyj Class R | STERV | 3.81% |
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