Occupy Wall Street is not the 99%

For once, I don’t know where to start.

The Occupy Wall Street Protests started off as a simple hashtag on twitter that was re-tweeted a few times before it reached its currently popular status as 1 in every 500 hashtags on twitter. That hashtag has materialized to show the power of social media; affecting people from all over the world and unfortunately has been a costly hashtag due to the amount of money spent on policing the protests and repairing the physical damage caused by them. Rome can attest to this, but Greece the protests would have occurred no matter what as the Unions are angry at the new austerity package to be passed. However, we have to ask one fundamental question:

What exactly is the OWS movement protesting?

Corporate Greed. Excessive Debt. Risk. Joblessness. Corporate Lobbyists.

Maybe more?

The problem with protesting this is first, protesting will do nothing. All it will do is create a populist field for the politicians to pander to, and populism is one of the most dangerous attacks democracy has faced in its history. Eventually winter will come, and less people will want to occupy Wall Street, Bay Street, or other financial centers in the Western World. The die-hards will remain, but eventually dissipate as interest dies. Like all events, news becomes old quick.

So we know this movement will die eventually like they all do, as this movement is different from the Tea Party in the sense it has no real leadership and no fundamental quantifiable demands. Fox News will show you interviews of some of the protestors to most likely ridicule them, as their demands are often very vague and ridiculously thought out. I’ll address a few:

First, bringing jobs back to America with manufacturing is not happening. We have a globalized world, and with that come multinational corporations who are self-interested. They will look for the best deal.  This cannot be reversed, the flow of information has never been quicker along with the free trade agreements and the slow abolition of tariffs. Also “99%”, your cheap clothes and cheap gadgets, your $400 laptops you tweet on along with your $30 Wal-Mart shoes, how do you think they were made? If you want your old jobs back along with the union salaries, your cost of living will skyrocket. Sorry “99%”, your old jobs are not coming back.

Next,the debt crisis. A few years back I told a few friends that to get through hell, you actually had to go through it, not simply stare at the abyss. Everyone remembers the debt crisis years ago that caused governments to bail out banks and even the legendary GM (which the government actually made money investing in). Corporate bailouts are small part of this debt crisis, but I will summarize the debt crisis quickly. Remember years ago when Clinton passed the laws to create Freddie Mac and Fannie Mae? Those were inspired by the mandate to help everyone afford a home, even those people who could not afford one. These firms were anti-competitive to the industry, forcing many banks to offer mortgages with less (or more commonly no) money down. Credit was flowing. However, homes were also overvalued as the real estate industry exploded with new buyers (more supply greater demand). Eventually this bubble burst – like it should. However, those mortgages were tied up in funds that were rated by agencies such as Standard and Poors as AAA when they were not. The reason for the rating was the creators of the funds had put junk mortgages tied with the good ones balancing it all out. The banks then insured themselves with Credit Default Swaps, which essentially created a domino effect in the industry.

Then the dominos fell. People lost jobs. Bear Stearns and Lehman Brothers were gone and Washington Mutual is still in bankruptcy litigation. Sorry OWS, but the government hardly helped all the corporate big wigs out.

Also, what inspired these events? The people wanted everyone to have a home, social movements pushed for it. Thus, Clinton made it so. Then when the domino’s fell (because everyone cannot own a home – the principle behind this thought is absurd), people demanded the government protect their jobs. The government did so by issuing bailouts, without some of these bailouts we would have been in a lot more trouble.

In the end, the protestors have to remember that the “99%” did not live in their own means, spent credit they did not have, and that’s what escalated the situation. Don’t believe me? Look up credit card and personal debt statistics. This financial crisis was a function of the people.

Why are we here today? Again, the “99%” wanted pensions. They wanted Medicare and social programs. They wanted social insurance and the rest. They wanted Obamacare. In Europe, French air controllers receive 60 days of paid vacation annually (something like that, I’d like to be proven wrong). More social reform has happened in the last two decades than ever before in history. Why? Because the “99%” wanted it, and voted in the politicians who made it happen.

However, social programs cost money. A lot of money. Throw in large government bureaucracies and it costs more money due to the inefficiencies that exist in these structures. Due to this, governments had to borrow, and borrow they did to keep their citizens happy. Yes, the “99%” mortgaged our future.

So now, banks who loan the deposits they receive from the average Joe so they can make money and inflate the money supply (basic multiplier effect – Econ 101) to the countries, are now facing risk of no payment. The Western governments simply cannot continue to pay what is projected to be in a decade 30% of budgets as interest fees. If Western governments default, it’s a chain reaction. Banks go bankrupt, and deposits are in flux along with the “99%”’s credit cards used to buy those wonderful cardboard signs. Yes, “99%”, read how the banking system works before attacking it. Money is not created out of thin air.

So, we have to come to a conclusion. That is, we have created our own mess. Governments are a function of the people in democracy. Corporations are a function of profit, and that ambition and drive is what creates jobs.

However, two key parts of the protests are corporate greed and lobbyists. First, you will never stop corporate greed just like OWS will never stop the hooligans in masks breaking glass. Why? It’s as simple to say that there are bad people in all organizations. The Muslims have al-Qaeda. The Catholics have Pedophile priests. The government has members who take bribes. It’s going to happen.

Lobbyists? Well, this I tend to agree with. Lobbyists do not allow government to look at issues from an unbiased standpoint, which is something that is missing in Western culture’s decision making today. On the flip side, who do you think funds the million dollar campaigns? Obama’s campaign was projected to cost a billion bucks; that money comes from somewhere. I certainly see why the politicians do it, and I see why the corporations do it. However, the relationship is wrong in principle. How to stop it? Protesting won’t work. Demanding an end to political gongshows (have you seen the Rick Perry ads? Looks like a movie trailer) that have been staged over the last decade would be nice, as these gongshows cost quite a bit. How will we end this? Education of the “99%”. Don’t just vote for the elephant or the donkey, red or blue. Do your research into the candidates, and stay informed. Stay away from populism, and maybe if we all look in the mirror and decide to inform ourselves instead of riding waves of ill thought slogans and loud mouthed speakers.

Readers may be wondering why I placed “99%” in quotation marks. That’s because OWS is not the 99% of the world. OWS is not representative of the global citizens who make informed choices on a daily basis. OWS is a group of people who have nothing better to do than complain about a situation they don’t understand, and place blame on the easiest target. Western countries have gotten themselves into a mess, and the only way to get through it is to take personal responsibility, tighten our belts, and cut a few of the nice perks we’ve had over the last few years.

To get through hell, you actually have to go through it.

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Spending Borrowed Money

Ontario politics is a mess. With a large structural deficit, an ailing economy, all the Leader's seem to have hot-boxed their campaign buses and come up with their platforms during one long session.

Tim Hudak's PC party wants to give more money to welfare people, spend 6 billion on Healthcare, spend 35 billion on infrastructure to "cure the economy" (didn't Obama try this and fail?), spend 2 bill on education,  cut taxes, take out smart meters and then balance the budget with magic economy beans. McGuinty's Liberals want to somehow create a personalized ontario cancer risk profile (here's your profile: everything causes cancer), and creates a childhood obesity council while curing the economy with magic start-up biz beans, and spend billions on education. The NDP openly has no ideas except to become protectionist and cure transportation by making it law that cars must stay a regulated distance from bikes - because more people will then use bikes right?

All the parties want to spend money we don't have, increase the deficit, but at the same time balance the budget.

Meanwhile, the Green Party's solution for Health care is to "focus on preventing illness through healthier communities and lifestyles", freeze and cap tuition payments, lower taxes, create a plan to balance the budget by 2015, and create a better farming/food strategy. Although their green energy policy is far off, and their platform the most vague, they seem to be the lesser of the evils.

When the Green party has the best platform, you know Ontario politics has gone haywire.

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The Greek Debt Crisis

Greek.Debt.Crisis.

Those words have been repeated a lot over the past 2 years, and more so in the last few weeks signifying Greek debt is still not in order. One may wonder why a Greek debt crisis can cause a financial tidal wave of problems that could result in a global pandemic - that could affect an individual . Maybe even Zeus will have trouble paying the bills on his expensive thunderbolts he likes to throw.

Let's start with the basics. A government issues debt notes to be able to pay off their expenses. Expenses include the roads you drive on from maintenance or construction to payment of union wages. Notice I did not include an adjective behind "wages" to show my disgust at how high they are - I am trying to be objective. From the European Commission, government debt can be broken up into four sectors - Central Government, State Government, Local Government and Social Security Funds. Most European countries have the central government holding the largest portion of debt.  Debt holders can be broken up into non financial corporations, financial corporations, average households or non profits serving these households, and the rest of the world. Types of debt include currency/deposits, securities (usually being bonds), and loans.  The most common instrument used in Greece for financing is bonds.

So, let's apply all this knowledge into a micro example. We will use the American dollar as the exemplified currency, the fictitious city of Bocock, and the financial corporation of Eugene and Jungle. Bob and Suzy decide to place money into a mutual fund for their retirement.  So, they go to the offices of Eugene and Jungle where they consult with an advisor named Sophia. Sophia advises them that they can invest in a fund that has a 5% return each year, and is very low risk. Suzy and Bob love the idea of no risk, so place their entire life savings of $50 000 in, which results in a $2500 return each year. Sophia then decides to loan the $50 000 to Bocock through bonds, at a rate of 20% return each yeah.  However, Bocock develops social problems and over spends on them, resulting in a default and are unable to not only pay their interest obligation, but also the original $50 000. Since Bob and Suzy were the only clients of Eugene and Jungle, Sophia cannot use other capital to repay their money - and Eugene and Jungle goes bankrupt. Bob and Suzy lose their nest egg, and now must resort to rioting at G20 conventions to express their anger, and food stamps which costs the central government extra money.

The example is overtly simplified, but it's easy to see the chain reaction. Now, let us consider the nation of Greece. The financial crisis and fear of Greek default have spiked Greek Bond Interest rates to nearly 40% in extreme cases, meaning for every annual dollar borrowed, the Greeks pay 40 cents in interest. This kind of interest rate is completely ridiculous, and even if the interest rate dropped to 25%, the nation would have a hard time paying the returns. Lets looks at some statistics. In 2009 Greek budget deficit was 12.7% of GDP and overall debt 113% of GDP.  For 2010, Greece GDP was EUR 230 Billion, with inflation around 4.7% climbing past 5% as most models indicated. Unemployment rates have soared to around 17%, while the OECD announced a more conservative estimate of 14.3%. Currently, the Greek debt to GDP is an astonishing 145% or so, which shows a rather large increase from 2009.

How did these numbers come about? Ridiculous spending caused by an antiquated government showing no fiscal restraint, cheap lending brought about by the Euro, and fancy accounting by Goldman Sachs. Wait, did I say Goldman Sachs helped cause this? Yes, I did. Basically Greek debt managers created cross currency swaps which the government in which the government debt in yen and dollars was swapped for euro debt, and was exchanged later.  Basically, Greece would issue a bond for a million dollars, and the swap allowed Greece to get 1.1 million worth of Euros right away, but had to pay as many euros back plus interest. Noticed I said dollars before in the bond issue.  Officially, Greece borrowed only a million, but actually they borrowed 1.1m. Italy has been doing the same thing, and Germany did something similar and most other nations probably have done it as well. Financial schemes such as this have skewed statistics. This is why regulators and policy makers were unaware of the reality of the debt crisis, and why headlines read constantly "Crisis worse than thought".

So now what? Well Greece has passed austerity packages. What are they? Cuts in spending and tax increases. Cuts in spending mean large union cuts, no union pensions, no union benefits, and in some cases no union jobs. Are people happy about this? Not exactly, that's why we have nice pictures of police throwing tear gas at angry mobs. Will it work? Probably not. With the fear around the market and rising Greek interest rates, it is probably impossible for Greece to pay back their loans with interest payments being the largest portion of government expenditures. Also, with additional taxation and an underdeveloped private sector - it is doubtful Greece has the resources to improve their GDP to pay off their debts.

So Greece, like Bocock,  defaults.

Now what?

Well like the example, the investors of Greece now lose their investment. Countries like Germany who have heavily invested in Greece to keep it from falling, institutions like the ECB which is rumoured to be using leveraged funds to lend Greece money, and financial corporations like many banks in France who have taken the risk of investing in Greece due to the reward of high interest rates - all stand to lose a lot of money. What happens when they lose a lot of money? Well, Germany hikes taxes to make up for the loss causing Adolf to get angry because he has less money to spend on hobbies such as spreading Nazi paraphernalia (it was a joke ok?). The ECB which collects money from member Euro states has to collect more money, so all Euro nations raise taxes to pay for the Central Bank's loss.  Jacques can't buy as wine and cheese anymore because Societie Generale lost a ton of his money from investing it in Greek bonds. 

That's it? Nope. Something called contagion, or fear beings to spread globally. Fear in the high debt to GDP ratios of other G20 countries especially the United States which freezes up credit supplies. Basically, lending by banks contributes to a phenomena known as the money multiplier effect - artificially inflating spending power. With less credit, businesses are less flexible and have to cut down. Market interest rates increase due to credit being difficult to find (less supply  = higher price) and consumers are less inclined to buy houses with higher payments on mortgages or cars with higher interest rates.

And that my friends is what this crisis is about.

The question you should be asking is how to make money on this. Well, find a broker that allows you to short. I recommend shorting any French bank specifically Societie Generale (on the Pink Sheets would be tough to find a contract there). Find financial institutions that are exposed to Greek debt - I believe Goldman Sachs, and Citi would be decent shorts. Remember, this is all short term - they'll be a bottom eventually. Forex traders should take comfort in selling Euros and buying the American dollar, as the dollar should increase simply because the American's state is less terrible then Europe's - at least temporarily.

Macro Advice? Ask David Cameron and the Brits. They know how to cut partisanship and make cuts. That's the model that must be followed.  

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Summary and Outlook on US Debt Crisis

The US is 14.5 trillion in debt in terms of national debt. The increases in spending because of bills passed like No Child Left Behind, Obamacare, and rising Social Security along with an expensive military to maintain are the drivers behind the increasing deficit. Basically, if the US doesn't cut any spending, the deficit will increase annually therefore the national debt continues to go skyward. That's the background.

There is a constitutional law that limits the amount of borrowing the US can do. Reagan increased it all the time, Clinton, Bush etc...Usually it passes like clockwork and no one really notices it. However, this time the Republicans wanted cuts. Which is fair, as they cannot afford the expensive programs they've been instituting. However, at the same time the Democrats wanted to increase taxes, which again is fair as the US has one of the lowest tax rates in the Western world.

John Boehner is the speaker for the Republicans and has been negotiating a deal with Obama. Obama has been fighting for tax increases and compromising with spending cuts. Boehner, due to the idiocy of populist politics and the rantings of the tea party, has declined to agree to any tax increases. The tea party is the main reason for this, a group of uneducated people who still think America's main threat is Obama being a closet Muslim. The risks of not getting a deal done is Moody's will downgrade the American debt from their precious AAA Rating causing turbulence in the markets, rising interest rates, and just general panic. The biggest fear though is of default, which would render America's currency less valuable in comparison to many of the other top currencies. Default is the worst fear, but it most likely will not happen.

Currently, Boehner has negotiated a deal that reveals Obama to be pretty spineless, as the deal that is expected to be announced is 2.1 trillion in spending cuts (good but not enough), a nonpartisan Budget committee to find more ways to slice the deficit down (good idea - should of happened years ago) and a two step plan for increasing the debt again when it has to be done which will involve more negotiated cuts. There will be no tax increases, which is very unfortunate as the US simply needs more tax revenue to pay their bills.

I realize I am biased against Obama but I am frustrated at him not standing up and getting some tax increases, 2.1 trillion in spending cuts isn't even enough (over 10 years). With straight line, that's 210 billion per year, which in terms of America's budget isn't good enough. Right now, if the deficit spending continues, interest payments will become America's largest annual expenditure (above military and Social Security).
Nobody doubts the tea party's effectiveness, they have succeeded n pushing the entire American spectrum to the right. Were they right? Hell no.

American tax revenue right now is around 14% of GDP. Right now, the rich contribute about 18% of total tax revenue, down from 30% around a (decade?) ago - I forget the timeline. This is the lowest percentage of tax revenue from GDP since the 1950s. Contrary to what most people think, Americans spend a ton of money on healthcare - I think it's above 15% of GDP and more than any of the wealthy nations. They have the largest military, which isn't cheap. In the last decade, they've engaged in 2 large wars. Obamacare adds to the cost, and really the legislation does nothing except give big pharmaceuticals more money. No Child Left Behind was shown as one of the most idiotic pieces of legislation by around 70 teachers (?) or something like that being caught in lifting average test scores so they would get higher salaries. And that bill cost a ton of money. Social Security costs far too much, and a lot of this is actually universal in the Western world. Part of the reason is the retirement age must be lifted. The 65 years old thing was based on old living expectancy (I think 67 at the time) - now I think most Western countries are around 75 - 80.

American government is too big, sure and they're spending like there's no tomorrow. But, taxation is actually at its lowest in a long time. And that ladies and gentleman is why were are in this mess. Republicans appease voters by lowering taxes while the Dems grab votes by offering social services. How can one continue to spend more money when you're not bringing in more? The answer is you cannot.

The Tea Party has a good central idea of government needs to be lessened - I agree. I agree that stimulus is never the answer and Keynesian economics don't work when you only practice in bad times. However, the riots and the idea of DON'T RAISE TAXES is something the Tea party is most known for and has Republicans catering them by refusing to raise taxes. Taxes NEED to be raised. They are just too low right now in the US. And taxes will be raised, it's only a matter of time before the government is forced too.

This is all of the top of my head, so look up the stats if needed - I'm pretty sure they're all close. If you want to know how to make money from this, short the American dollar and short any US Bank. Historically, when there have been low taxes on the rich there has been a quick boom followed by recovery. And we will enter the recovery stage sooner or later.

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Fictitious Forests

Remember Enron? How they had a whole bunch of intermediary companies to take on their debt? Or how they made transactions with them? Or the fact that some were named after Star Wars characters? (Ok, that was actually pretty funny).

Well, we may have another Enron, except these guys don't trade energy. They trade forests.

TRE or Sino Forest Corp has fallen from $22 a share to recently closing just above $6 a share in a matter of days. This is due to the work of Muddy Waters, a Honk Kong firm devoted to exposing Chinese fraudulent companies, but shorting them before doing so. May as well profit from it. The report from Muddy Water's is 39 pages, the appendices are much longer. I think the most interesting part is the role of Ernst and Young, Sino's auditor. Currently, five former EY members sit on the SINO board of directors.

Basically, the report states that Sino uses financing it receives to buy forests and sell them to subsidiary companies that are closely related to them, not quite arm's length - but close. Documents and financial statements show part of the paper trail. An example of this is that Zhangzhou Lu Sheng Forestry Development Company Limited was incorporated nine months before Sino entered into a billion dollar contract with it. The startup capital for Zhangzhou Lu Sheng Forestry Development Company Limited was $78,000. With that type of capital, it is unlikely that a company that size could deal with a billion dollar contract. Speaking of the contract, it was only seven pages long. One would think that a contract dictating how one billion dollars would be allocated would be filled with pages of legal jargon.

Adding to this,  Jiangxi Zhonggan Industrial Development Company Lt was incorporated five months before Sino entered into a 700 million dollar address.  Zhangzhou Lu Sheng at least had a small office, the registered address for Jiangxi Zhonggan was an empty field. At least shows the picture from the Muddy report. Quite a few transactions occurred between Sino and Jiangxi Zhonggan, but none of them were forestry related.

These are just two of the subsidiaries. Another interesting part of the report states the laws in China for foreign capital. It must be processed by the Commerce Ministry before use and this is recorded. Since 1994, Sino has brought in $1.214 billion to be used in the company (and much lower than the $3 billion it has actually raised). The operating cash flow since this time is much lower. However, this measurement could be construed as Sino's main business is buying and selling forests. This is stated by the Poyry report:


Unlike most forest owners and managers, Sino-Forest actively trades in forests.  Each year the company both sells and buys forests, and accordingly the composition of the forest estate changes much more than for a business that is simply managing and harvesting a more static resource.


Jakko Poyr has been writing valuation reports on Sino, which Muddy Water's reports that these reports are based on falsified data.


The link to the report is right here:
http://www.muddywatersresearch.com/wp-content/uploads/2011/06/MW_TRE_060211.pdf

Looking at the financials, this company has grown disproportionately to any other public company. Meaning, the economic storm never affected them whatsoever. Growth just kept on rolling on. Operating profit increased from 204m in 2006, to 1.4 billion in 2010. This increase was from 204m in 2006, to 241m in 2007, to 788m in 2008 (the year the crash occurred), to 1 billion in 2009 and finally 1.4b in 2010. Looking at this alone, something seems suspicious. But growth is not criminal.

It is interesting to see there has been no cash flow from sale of property/plant/equipment in the cash flow section, yet extreme purchases in long term investments. The report from Muddy's clearly states the short term period that land remains in TRE's hands, so shouldn't this be in short term?

This is just my first thoughts from glancing at the financials. I would have to go through the SEDAR, calculate ratios for a real analysis, something that I would have done had I put money into this stock. However, I am just writing about this as this could be one of the largest scandals in a long time.

However, their is a defense. Mr. Quinn, an RBC analyst says:

“Over the last five years, I have visited Sino's Chinese forest operations on four separate occasions for about a week per visit,” Mr. Quinn noted. “I have seen Sino purchased trees and planted trees, manufacturing operations, other operations that purchase Sino's logs, Sino's nursery operations and tree-improvement project. I have been in numerous meetings with government forestry bureau representatives and Sino's operational staff.”

This was in reaction to BMO Nesbitt Burns' nothing that the company did not provide proof of tree ownership at its last meeting.

Sino has countered by providing an open database of ownership documents and bank documents proving the validity of the company. English translations should appear tomorrow (June 7) morning. The key information in the database is the package containing purchase agreements to buy land in the Yunnan province of China, specifically questioned by the Muddy report.

So is this a buy? Or sell?

Depends whom you ask. Personally, I'll watch - let the situation unfold. I may day-trade it a bit - but that's it. Morning gap downs are not fun to wake up to.

EDIT: Rosen Law Firm has launched an investigation on behalf of investors (http://www.financialpost.com/markets/news/Rosen+Firm+Announces+Investigation+Securities+Claims+Against+Sino/4894504/story.html)

Any information contact:


If you purchased Sino-Forest stock between March 31, 2009 and January 31, 2011, please visit the website at http://rosenlegal.com for more information. You may also contact Phillip Kim, Esq. or Jonathan Horne, Esq. of The Rosen Law Firm toll free at 866-767-3653 or via e-mail at pkim@rosenlegal.com or jhorne@rosenlegal.com.

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Socioeconomics

I strongly feel that socioeconomics should be further developed as a field of study. Perhaps it can be called socionomics or something else. The name doesn't matter, the definition does. Basically, social economics (in case no one got the fact I combined two words together) is the study of human interaction in social situations. No, it is different from sociology because I firmly believe human behavior completely changes when one relates to their external environment, and therefore a new set of rules, patterns emerge. These new algorithms can be not be defined by one set formula, but different patterns relating to how an individual is characterized by.

Most commonly, this study can be exemplified in the bar/club scene. One will notice through simple observation the different characteristics shown. Males will often be split 60/30/5/5. 60% of the male population will feel too socially awkward to approach a female, and thus will hang around the perimeters of the establishment. Sometimes, one of them will get "lucky" if a female drags them onto the floor, but this is usually rare occurrence. 30% of the males will arrive with a female escort(s) and will most likely hang out with their group. However, some of these males have the propensity to explore the existences beyond their circle, but often nothing will occur. The last 10% of the male population are the clever, and the handsome. The 5% are clever, charmers who can engage anyone (either gender) in conversation and usually come across as whatever characteristic they are emphasizing. Often they will approach a target with a set strategy and conversation topic in mind. It's not that it is planned, rather it happens naturally to them. On the opposite side of the spectrum is the 5% that are commonly known as "jocks". They are too unintelligent to realize the social consequences of their actions, and therefore have liberated themselves from imprisoning barriers. Sure, this segment will strike out a lot as they will often come across terribly, but will most likely succeed in a bar scene simply because of probability of numbers. It truly is a numbers game.

On the female side, there are two main types without divulging in further study. Mainly, girls herd together in groups and engage in protective stances to ensure that none of their members are left alone available for pouncing. Sure, this is a harsh way of putting things, but homo sapiens are members of the animal kingdom and do possess certain relational characteristics. There are certain more adventurous girls who possess certain male characteristics and can occasionally be mistaken in their more aggressive intentions.

This has been a short analysis of human decisions in a typical bar environment. More scientific research could add value to this field, as I think it is a worthy field of study that should be given academic consideration. Understanding the difference of behavior between intimate and social situations could provide valuable insight into human cognitive function.

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