Saturday, April 14, 2018
Friday, April 13, 2018
Report of DOJ Inspector General:
McCabe Lied
McCabe lied to the FBI Director, FBI investigators, and OIG investigators.
On this day in 1861,
On April 13, 1861, Ft. Sumter fell to the Confederate Army after a 30 hour shelling that produced no fatalities other than a Confederate horse felled by an errant Union cannon shot.
The first shot of the Civil War was fired by secessionist and slaveholder Edmund Ruffin. The first shot by Union forces was fired by Captain Abner Doubleday of baseball fame.
Although there were no human fatalities during the battle, a Union soldier was killed when his gun exploded in his hands as he attempted to fire the 47th shot in the 100-gun salute allowed the Union army by the Confederates before the Union army abandoned the fort.
Ruffin survived the war but killed himself while draped in the Confederate flag after Lee’s surrender because he did not want to live under “Yankee" rule.
FORT SUMTER FALLS - CIVIL WAR BEGINS
On April 13, 1861, Ft. Sumter fell to the Confederate Army after a 30 hour shelling that produced no fatalities other than a Confederate horse felled by an errant Union cannon shot.
The first shot of the Civil War was fired by secessionist and slaveholder Edmund Ruffin. The first shot by Union forces was fired by Captain Abner Doubleday of baseball fame.
Although there were no human fatalities during the battle, a Union soldier was killed when his gun exploded in his hands as he attempted to fire the 47th shot in the 100-gun salute allowed the Union army by the Confederates before the Union army abandoned the fort.
Ruffin survived the war but killed himself while draped in the Confederate flag after Lee’s surrender because he did not want to live under “Yankee" rule.
Wednesday, April 11, 2018
Grant's Almost Daily
DO DEFICITS MATTER?
Attention, deficit disorder
That recently-dormant beast called inflation is stirring. This morning, the Consumer Price Index for March showed a 2.4% year-over-year uptick in the headline component, with “core” CPI (that’s without food and energy) also jumping by a sturdy 2.1% year-over-year, the highest in over a year for both readings. That follows yesterday’s figures from the Labor Department reporting that the Producer Price Index jumped by 3.0% year-over-year in March. Strip out food and energy, and the 2.7% year-over-year reading was the hottest since 2011.
The private sector corroborates the government’s statistical findings. Yesterday, the National Federation of Independent Business released its Small Business Optimism Index for March, finding that a “net 25 percent plan price hikes (up 1 point), the highest reading since 2008.” The Federation cites upward pressure on wages as a catalyst: “With reports of increased compensation running high, there is more pressure to pass these costs on in higher selling prices, although tax cuts and growing operating profits alleviate some of this pressure.”
Those inflationary sightings arrive in tandem with fiscal prognostications that could be described as grim. On Monday, the Congressional Budget Office released its updated Budget and Economic Outlook: 2018-2028. The CBO now estimates that the annual budget deficit will exceed $1 trillion in 2020, two years earlier than the agency’s June 2017 forecast. Over the next 10 years, the CBO now anticipates a cumulative $12.4 trillion shortfall, that’s up 23% from last June’s estimate and represents 4.9% of expected GDP (compared to 2017’s shortfall of 3.5% of GDP). Federal debt held by the public, which footed to $14.7 trillion as of Dec. 31, 2017, is expected to virtually double to $28.7 trillion in 2028.
Does the uptick in measured inflation and the fast-deteriorating fiscal picture portend a higher interest rate regime? Not necessarily, we can infer from the work of Paul Schmelzing, history professor of Harvard University and visiting scholar at the Bank of England. Schmelzing conducted an analysis of the sovereign bond market going back to the 13th century, specifically utilizing the so-called risk free rate cobbled together from the world’s most credit-worthy borrower in each era. As documented in the Nov. 17, 2017 edition of Grant’s, Schmelzing “concludes that fiscal deficits don’t matter, at least not in the setting of bond yields [and] that the average real rate of interest since the year 1311 stands at 4.78%.”
That proposition, with the near-millennium of statistical weight which underlies it, will be put to the test. Uncle Sam is set to borrow 4.2% of GDP next year according to the CBO, the most since the end of World War II in 1945, after adjusting net issuance for the Fed’s “QT” Treasury sales (the Bernanke era would have seen greater growth in public debt relative to GDP were it not for the Fed’s asset purchases). Meanwhile, the economic backdrop remains benign. The current expansion in output stands at 106 months and counting and, as of April, is tied for second longest since 1854 when such records were first kept.
The Feb. 9 Grant’s featured an analysis of the United States’ fiscal foibles, and drew a psychological contrast between the bond market’s current complacency in the face of a torrent of new debt and the conditions which prevailed in the prior bear market of 1946-1981.
“Markets make opinions,” said the departed Richard Russell. In a bear market, new supply is perceived to be bearish, or at least not bullish (another tautology freighted with trading wisdom). Supply is thought to be bearish not, perhaps, because the supply is greater than the demand for bonds at prevailing yields and prices (though that is certainly true), but because the very thought of fixed-income securities has become repellant. That attitude, and its opposite, are years in gestation. “The bond crop never fails” was how disgusted fixed-income investors expressed their free flowing hatred (or love-hatred, as the opportunities for reinvestment of coupon income were forever improving) of an asset class that had disappointed so many for so long. From which it would follow that the Cheney/Reagan deficit doctrine [they don’t matter] is due for cyclical revision.
For the bond market, what’s old is new again.
On this day in 1951,
TRUMAN FIRES MACARTHUR
On this day in 1951, Democrat President Harry Truman fired Gen. Douglas MacArthur and set off a public outcry.
MacArthur had saved South Korea from the North’s attempted invasion through a series of brilliant military tactics and then attacked North Korea to wipe out the communist regime. Truman was concerned the Chinese would join the fight on behalf of North Korea but MacArthur assured Truman this would not happen. Shortly afterward, 100,000s of thousands of Chinese troops entered North Korea, joined the fight against the U.S., and drove the American forces back into South Korea. MacArthur asked for permission to bomb China and invade it using Nationalist Chinese troops. Truman refused MacArthur’s request and instead fired him saying he wanted to keep the Korean conflict a “limited war.”
MacArthur returned home to a hero’s welcome and gave his famous speech to Congress in which he said, “Old soldiers never die, they just fade away.”
Douglas MacArthur was the son of Arthur MacArthur, who won the Medal of Honor at the age of 19 for his bravery during the Battle of Missionary Ridge outside Chattanooga when young Arthur charged to the summit at a critical phase in the battle, planted the regimental flag, and shouted “On, Wisconsin!”.
Monday, April 9, 2018
Grant's Almost Daily Interest Rate Observer
This was one for the record books. Bethany Knight of Riverside Risk Advisors LLC told Bloomberg that: “To my knowledge, I would agree that $8 billion is the largest margin loan ever.” Bloomberg notes that the loan helps SoftBank move closer to an initial public offering of its domestic telecom business Softbank Corp., which had already been utilized as collateral for prior loans. “A successful IPO – possible only after the division proves its independence by canceling debt guarantees – could help the parent raise capital and relieve some of its debt burden.”
On March 9, SoftBank launched a debt exchange offer, presenting its creditors the opportunity to swap existing bonds for new notes due in 2028 for a 100 basis point consent fee. Covenant Review, an independent credit research firm, observed that this was no act of corporate generosity. Holders of existing notes are protected by a covenant stating that if SoftBank loses its investment grade status its telecom subsidiary, Softbank Corp., will guarantee the debt. That protection is set to be eliminated.
So when investors purchased the Existing Notes, they knew that at worst either the Existing Notes would be rated investment grade or the Softbank Corp. guarantee would remain in place. If the Proposed Amendments are successful, then holders would have swapped that protection for the consent fee – and the Existing Notes could well be left with neither an investment grade rating nor a continuing guarantee from Softbank Corp. (or any other subsidiaries for that matter).
Longtime observers of SoftBank’s charismatic and brilliant CEO Masayoshi Son (who is often compared to Warren Buffett) could hardly have been surprised by this latest bold corporate maneuver. Son, who weathered a 99% loss in Softbank shares following the bursting of the late-1990’s tech bubble, has taken full advantage of the easy money and tech-happy market conditions which have pervaded in the post-2009 era. Softbank shares have advanced by 442% over the past nine years in yen terms (20.7% annualized) outpacing the Nikkei’s 142% gain (11% annualized) over that period.
That impressive rebound, burnished by timely investments in Yahoo! Japan, and the aforementioned Alibaba, has coincided with a flurry of deals, some under the umbrella of SoftBank’s buyout arm, the $100 billion Vision Fund. Last February, SoftBank bought the Fortress Investment Group for $3.3 billion, a hefty 38.6% premium. On Aug. 24, the fund paid $4.4 billion for a minority stake in private concern WeWork Companies, Inc. (founded in 2010 and now the second largest private office tenant in Manhattan). Softbank has also made substantial investments in ride-sharing unicorns Uber Technologies, Inc. and its Chinese peer, Didi Chuxing Technology Co. (which is preparing to commence operations in Mexico, according to Caixin, directly challenging its fellow SoftBank portfolio company).
Masa Son’s spendthrift ways haven’t always gone over so smoothly in the company C-suite. On Feb. 26, the Wall Street Journal shed light on the friction between Son and SoftBank directors who don’t always share his deal-making enthusiasm.
Shigenobu Nagamori says he objected when Mr. Son told his board in 2016 that he wanted to pay $32 billion from Arm Holdings PLC. The U.K. chip-design firm was worth a 10th of that, Mr. Nagamori, then a Softbank outside director, says he told Mr. Son. Mr. Son paid it anyway.
To strike quickly, [Son] sometimes commits to investments before getting approval from his fund’s investment committee, some of these people say. And he often spars with his executives and board members over his proposals until they are convinced or acquiesce.
“I’ve opposed almost all of Mr. Son’s proposed investments,” says SoftBank director Tadashi Yanai, president of Fast Retailing Co., operator of Uniqlo clothing stores. Instead of acting like a speculative investor, he says, Mr. Son should focus on “real business.”
A month later, the Journal reported that the dynamics among SoftBank insiders have escalated beyond straightforward strategy disagreements. Specifically intriguing was the mysterious origins of a shareholder campaign to discredit a pair of senior executives at the company, including one (Nikesh Arora), whom the WSJ described as a one-time heir apparent to Son.
At the time, SoftBank couldn’t figure out who was behind the campaign, which the company said was based on false allegations of impropriety and which a board member later called “sabotage.” Both men denied wrongdoing and said they were victims.
People with knowledge of the matter said Alessandro Benedetti, an Italian private-equity investor, was a central figure in that campaign. They said he told associates he was working, in part, for the benefits of a SoftBank insider.
Excessive leverage and value-destructive deals, not palace intrigue, was the crux of a Dec. 15, 2017 bearish assessment of Softbank found in the pages of Grant’s. Total debt reached $154 billion as of Dec. 31, 2017 on a consolidated basis, up from $42 billion on Dec. 31, 2013. Son’s 2013 purchase of U.S. telecom operator Sprint Corp. (SoftBank paid $22 billion for an 83% stake. Sprint’s current market cap is less than $21 billion) is one potential source of trouble, an interruption of Alibaba’s charmed existence is another. The conclusion drawn by Grant’s was evident in the piece’s headline, “Epitome of the cycle:”
Mix the CEO’s exuberance with cheap debt, high leverage and record asset values. Add the excitement of today’s startling advances in robotics and artificial intelligence. Combine with the karmic report that [Saudi Crown Prince Mohammad bin Salman], the Vision Fund’s No. 1 limited partner, is also the rumored buyer of that $450 million road-show da Vinci. Totting them all up, what do you have? Perhaps a corporation destined to read about itself on page one of The New York Times – and not in a flattering way.
Trouble Ahead for Soft Bank?
This bull-market avatar is doubling down: Japan’s SoftBank Group Corp. (9984 on the Tokyo Exchange and SFTBY on the U.S. Pink Sheets) announced on Friday that it has secured an $8 billion margin loan from a consortium of investment banks backed by its stake in China’s Alibaba Group Holding, Inc. (BABA on the NYSE).This was one for the record books. Bethany Knight of Riverside Risk Advisors LLC told Bloomberg that: “To my knowledge, I would agree that $8 billion is the largest margin loan ever.” Bloomberg notes that the loan helps SoftBank move closer to an initial public offering of its domestic telecom business Softbank Corp., which had already been utilized as collateral for prior loans. “A successful IPO – possible only after the division proves its independence by canceling debt guarantees – could help the parent raise capital and relieve some of its debt burden.”
On March 9, SoftBank launched a debt exchange offer, presenting its creditors the opportunity to swap existing bonds for new notes due in 2028 for a 100 basis point consent fee. Covenant Review, an independent credit research firm, observed that this was no act of corporate generosity. Holders of existing notes are protected by a covenant stating that if SoftBank loses its investment grade status its telecom subsidiary, Softbank Corp., will guarantee the debt. That protection is set to be eliminated.
So when investors purchased the Existing Notes, they knew that at worst either the Existing Notes would be rated investment grade or the Softbank Corp. guarantee would remain in place. If the Proposed Amendments are successful, then holders would have swapped that protection for the consent fee – and the Existing Notes could well be left with neither an investment grade rating nor a continuing guarantee from Softbank Corp. (or any other subsidiaries for that matter).
Longtime observers of SoftBank’s charismatic and brilliant CEO Masayoshi Son (who is often compared to Warren Buffett) could hardly have been surprised by this latest bold corporate maneuver. Son, who weathered a 99% loss in Softbank shares following the bursting of the late-1990’s tech bubble, has taken full advantage of the easy money and tech-happy market conditions which have pervaded in the post-2009 era. Softbank shares have advanced by 442% over the past nine years in yen terms (20.7% annualized) outpacing the Nikkei’s 142% gain (11% annualized) over that period.
That impressive rebound, burnished by timely investments in Yahoo! Japan, and the aforementioned Alibaba, has coincided with a flurry of deals, some under the umbrella of SoftBank’s buyout arm, the $100 billion Vision Fund. Last February, SoftBank bought the Fortress Investment Group for $3.3 billion, a hefty 38.6% premium. On Aug. 24, the fund paid $4.4 billion for a minority stake in private concern WeWork Companies, Inc. (founded in 2010 and now the second largest private office tenant in Manhattan). Softbank has also made substantial investments in ride-sharing unicorns Uber Technologies, Inc. and its Chinese peer, Didi Chuxing Technology Co. (which is preparing to commence operations in Mexico, according to Caixin, directly challenging its fellow SoftBank portfolio company).
Masa Son’s spendthrift ways haven’t always gone over so smoothly in the company C-suite. On Feb. 26, the Wall Street Journal shed light on the friction between Son and SoftBank directors who don’t always share his deal-making enthusiasm.
Shigenobu Nagamori says he objected when Mr. Son told his board in 2016 that he wanted to pay $32 billion from Arm Holdings PLC. The U.K. chip-design firm was worth a 10th of that, Mr. Nagamori, then a Softbank outside director, says he told Mr. Son. Mr. Son paid it anyway.
To strike quickly, [Son] sometimes commits to investments before getting approval from his fund’s investment committee, some of these people say. And he often spars with his executives and board members over his proposals until they are convinced or acquiesce.
“I’ve opposed almost all of Mr. Son’s proposed investments,” says SoftBank director Tadashi Yanai, president of Fast Retailing Co., operator of Uniqlo clothing stores. Instead of acting like a speculative investor, he says, Mr. Son should focus on “real business.”
A month later, the Journal reported that the dynamics among SoftBank insiders have escalated beyond straightforward strategy disagreements. Specifically intriguing was the mysterious origins of a shareholder campaign to discredit a pair of senior executives at the company, including one (Nikesh Arora), whom the WSJ described as a one-time heir apparent to Son.
At the time, SoftBank couldn’t figure out who was behind the campaign, which the company said was based on false allegations of impropriety and which a board member later called “sabotage.” Both men denied wrongdoing and said they were victims.
People with knowledge of the matter said Alessandro Benedetti, an Italian private-equity investor, was a central figure in that campaign. They said he told associates he was working, in part, for the benefits of a SoftBank insider.
Excessive leverage and value-destructive deals, not palace intrigue, was the crux of a Dec. 15, 2017 bearish assessment of Softbank found in the pages of Grant’s. Total debt reached $154 billion as of Dec. 31, 2017 on a consolidated basis, up from $42 billion on Dec. 31, 2013. Son’s 2013 purchase of U.S. telecom operator Sprint Corp. (SoftBank paid $22 billion for an 83% stake. Sprint’s current market cap is less than $21 billion) is one potential source of trouble, an interruption of Alibaba’s charmed existence is another. The conclusion drawn by Grant’s was evident in the piece’s headline, “Epitome of the cycle:”
Mix the CEO’s exuberance with cheap debt, high leverage and record asset values. Add the excitement of today’s startling advances in robotics and artificial intelligence. Combine with the karmic report that [Saudi Crown Prince Mohammad bin Salman], the Vision Fund’s No. 1 limited partner, is also the rumored buyer of that $450 million road-show da Vinci. Totting them all up, what do you have? Perhaps a corporation destined to read about itself on page one of The New York Times – and not in a flattering way.
My 4th favorite economist
Gary Shilling: Why Trump has the Upper Hand with China and Why China will not Dump Treasuries
Gary Shilling: Why Trump has the Upper Hand with China and Why China will not Dump Treasuries
On this day in 1865,
LEE SURRENDERS
Civil War Begins and Ends at Homes of Wilmer McLean
McLean Appomattox Home Looted By Union Soldiers
On this day in 1865, Confederate General Robert E. Lee surrendered his Army of Northern Virginia to Union General Ulysses S. Grant after getting trapped in Appomattox Valley. The Confederate armies had been on the defensive for several weeks and Lee was trying to join forces with the Army of Tennessee, led by Joseph Eggleston Johnston, the great grandfather of one of my neighbors. While the surrender terms offered by Grant were generous, Lee said in 1870 he would not have surrendered, but would have preferred to be killed, if he had known how the post-Grant Radical Republicans would treat the South during Reconstruction.
While Lee’s surrender brought an effective end to the Civil War, other Confederate generals fought on, including Confederate General Johnston, who surrendered a few weeks later, coincidentally, the same day Lincoln was assassinated.
In a little known coincidence, Lee’s surrender occurred in the living room of Wilmer McLean, who had converted Appomattox Courthouse into his new home. Years before McLean had left his original home because the first battle of the Civil War had been fought in his front yard along the banks of Bull Run. After the surrender, Union soldiers took almost all of the furniture and other artifacts from McLean’s home to save as mementoes. McLean commissioned the print above in what turned out to be a failed attempt to recover his losses.
Sunday, April 8, 2018
On this day in 1943,
On this day in 1943, Lutheran pastor and theologian Dietrich Boenhoeffer was hanged by the Nazis, only a month before the end of WWII. Boenhoeffer had opposed Hitler from the time of his ascension to power and, unlike many pastors, had opposed the Nazis’ effort to take over the church. Although he could have avoided his fate by continuing his visits to either England or America, Boenhoeffer believed he had to return to Germany in order to play a role in the rehabilitation of the church after the war. A few years after his return, Bonhoeffer was convicted of being party to a conspiracy to kill Hitler. Although an eyewitness says Boenhoeffer died bravely and quickly, others familiar with Nazi executions of those convicted of treason say it is likely Boenhoeffer was hanged, revived, hanged, and revived over a long period of time to prolong the agony of his death.
Nazis Hang Lutheran Theologian Dietrich Boenhoeffer For Treason
On this day in 1943, Lutheran pastor and theologian Dietrich Boenhoeffer was hanged by the Nazis, only a month before the end of WWII. Boenhoeffer had opposed Hitler from the time of his ascension to power and, unlike many pastors, had opposed the Nazis’ effort to take over the church. Although he could have avoided his fate by continuing his visits to either England or America, Boenhoeffer believed he had to return to Germany in order to play a role in the rehabilitation of the church after the war. A few years after his return, Bonhoeffer was convicted of being party to a conspiracy to kill Hitler. Although an eyewitness says Boenhoeffer died bravely and quickly, others familiar with Nazi executions of those convicted of treason say it is likely Boenhoeffer was hanged, revived, hanged, and revived over a long period of time to prolong the agony of his death.
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