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A #TALE OF TWO CITIES - #ECONOMICS AND #SCIENCE COLLIDE

  SURREAL ECONOMICS OR CONCRETE SCIENCE? Original Post It  was the best of times, it was the worst of times, it was the age of wisdom, it wa...

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Sunday, January 22, 2023

FINANCIAL #HOAX: #CRYPTO #COLLAPSE CONTINUES WITH NO END IN SIGHT

 REMEMBER FIRST FINANCIAL INSIGHTS WARNED EVERYONE ABOUT THESE HOAXES FIVE YEARS AGO


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THE BIGGER FOOL THEORY END GAME UNFOLDS

The Crypto Dominoes Are Still Falling

The bankruptcy of Genesis shows the need for regulators to have teeth.


After the highs of 2021, cryptocurrency crashed to the ground in 2022. One by one, multiple large crypto firms toppled, dragging many minor firms down along with them in a small-scale replay of the 2008 financial crisis. It’s a collapse that has taken out fortunes, or supposed fortunes, worldwide—and it isn’t over yet.

BUFFET'S WISDOM WAS RIGHT


TerraUSD, a “stablecoin” token used in place of real dollars, which had reached a supposed value of $18 billion, collapsed in May. Its failure took out crypto hedge fund Three Arrows Capital (3AC) in June. Lending platforms Celsius and Voyager followed in July. FTX, one of the largest crypto exchanges, fell in November. Its founder and two top executives have been charged with fraud.

All of these firms relied on a modern-day form of check kiting to make themselves appear solvent when they were not. Only instead of writing checks between different accounts to temporarily inflate them with non-existent funds, they were making loans to each other and counting each loan as an asset. FTX was both borrowing from and lending money to crypto lender BlockFi, which also went bust. In his bankruptcy documents detailing how Celsius became insolvent, CEO Alex Mashinsky doesn’t clearly spell out who the loans are to or from.

NOBEL PRIZE ECONOMIST CONFIRMS BITCOIN WORTHLESS


The cryptocurrency lobby attempts to confuse users and regulators with claims that “technology” makes everything different. This is false. Crypto tokens have all been new forms of existing financial instruments used in the service of old shenanigans—whether it’s money laundering, overleveraged trading, asset inflation with nonfungible tokens (NFTs), or pump-and-dumps, using decentralized finance tokens as penny stocks.

By Amy Castor, an independent reporter who has been covering cryptocurrency and blockchain since 2016. 

     

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     BLOCKCHAIN AND CRYPTOCURRENCY ARE THE BIGGEST SCAMS IN HISTORY



Tuesday, January 17, 2023

WHAT #COMPANIES DO TO #PERFORM WELL IN A #RECESSION

 

The companies that had the best shareholder return in the previous recessions did these three key things



IS ANY BUSINESS RECESSION-PROOF???



Orianna Rosa Royle


While a recession may be shallower (albeit longer) than previously predicted, businesses will still be eyeing up cost-saving measures going into 2023.

In a bid to save costs and weather the economic headwinds, many firms across the board are even resorting to large-scale layoffs.

Amazon is letting go more than 18,000 staff around the world this month and job cuts at Goldman Sachs which will impact around 6.5% of its workforce, began last week.

They mark the largest layoffs in Amazon’s history and at Goldman Sachs’ since the financial crisis.

Yet there is good data to show that there is more to surviving a recession than cuts - and actually now might be the time to grab market share and reinvest into the business.

McKinsey studied around 1,200 public companies in the U.S. and Europe during the Great Recession (2007–11) and the peak of the coronavirus pandemic (2020–21) and found that the companies that had the best shareholder return during this period were the ones that did three things: improved margins, decreased their financial leverage, and timed it all perfectly before the economy hit rock bottom.

Lesson one: Improve margins as economies tilt into recession

McKinsey’s research shows that across sectors, leaders who worked to improve their margins or grow their revenue early on during a recession experienced better total shareholder return through the economic cycle than their peers. Essentially, boosting margins allows companies to squirrel away more capital.

“Strong margins help a company ease through macro headwinds; many companies achieve margin strength by improving operating efficiency through upskilling and digital innovation that increases frontline productivity,” the report says.

The key is that improving margins early produced bigger gains in performance than early-cycle revenue growth did. Meanwhile, businesses that led in revenue growth but lagged behind peers on EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) margin performance didn’t come out of either recession on top.

The study maintains that this means leaders must look to both long-term growth opportunities, as well as short-term “timely jolts”.

Lesson two: Optionality in the balance sheet is key

History has shown that businesses that do the little things to grow retained earnings, improve working capital, and lower their debt burden outperform those that don’t.

Optionality in the balance sheet—a combination of growth in retained earnings and improvement in working capital, on one hand, and a decrease in financial leverage, on the other—is particularly helpful going into and coming out of a period of constrained credit.

This was less important during the last economic downturn in 2020 when interest rates were low. However, building optionality during the 2007-2008 financial crash - when interest rates were comparably high to today - was key to success.

Likewise, companies refinancing their debt face considerably higher expenses than they did in the past, due to rising interest rates. They must decrease their financial leverage and reinvest in new opportunities to drive growth and productivity, or “pursue accretive M&A as the economy begins to rebound” to outperform competitors.

“Companies with deep and flexible balance sheets not only have better protection against the risks of economic slowdown but also have reserve funds to pursue the valuable growth opportunities that the recovery phase of a recession brings,” the report adds.

Lesson three: Timing and balance are key

Companies must take a balanced approach to growth, margin improvements, and balance sheet optionality.

Interestingly, businesses that were in the top 20 to 40% on all three dimensions outperformed those that excelled on only one dimension and fell into the bottom 60% on others. So a balanced performance across all three delivered better returns than an outstanding performance on one factor alone.

But most importantly, they acted proactively rather than reactively.

Companies that got their ducks in a row before the economy hit rock bottom were able to use the strength of their balance sheets to invest in the business, such as by acquiring new businesses or staff members.

Indeed industries that are cash-rich or have longer investment horizons are better positioned to do this. But overall, the strategy of increasing growth and margin levers in advance, rather than making last-minute drastic cuts, has been proven to work across every sector.

As McKinsey says in its report: “It’s clear that moving early in the recovery cycle brings outsize rewards.”

ORACLE OF OMAHA

BUFFET'S THOUGHTS ON THE 2023 RECESSION





This story was originally featured on Fortune.com


A #TALE OF TWO CITIES - #ECONOMICS AND #SCIENCE COLLIDE

 SURREAL ECONOMICS OR CONCRETE SCIENCE?



It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way—in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.

Charles Dickens
A Tale of Two Cities

It is fascinating to note that the profound symbolism contained in what many believe to be the greatest novel ever written can be metaphorically applied to the human condition today. The great question facing humanity centers on how to measure its state, progress, and the remaining possible extent of human activities.  Are we wisely using the planet's resources and how long can these resources last and thereby human activities be sustained? To answer these questions we need metrics and numbers to know how we're doing and to see where we're going; for how long.

CITY ONE - SURREAL ECONOMICS

Over time the two cities have evolved to provide the metrics to answer these questions. The first city we refer to as the Theories of Surreal Economics. Its primary metric is global GDP and as we can see from the chart below human progress and achievements have been utterly astounding over the past 300 years, and by the way, so has population growth. What could be better?





GLOBAL POPULATION GROWTH





CITY TWO - CONCRETE SCIENCE

Well, the second city we refer to as the Truths of Concrete Science as they use a different set of metrics that present an opposing view of the human condition and the physical state of the planet's resources and what is required to sustain human activities. The key metrics thus work to measure the overall physical climate, resources, and ecology.  In other words, the real wealth of the planet and, not the abstract surreal version used by the first city.

Here are some charts that show how we're doing using these concrete metrics.

First, here is a recent report from our contact and friend Dr. James Hansen, a world-renowned climate scientist who was the first to testify before the US congress in 1988 and warn the lawmakers about the impending warming of the planet. The chart presented in Table 1  below is deeply disturbing - as it forms a graphical hockey stick similar to the GDP and Population charts above. 

This means that there is a high correlation and good chance of causality between GDP/Population growth and global warming. Extending these variables forwards means that we are heading to ever higher temperatures unless immediate actions are taken to either mitigate or somehow reverse this terrible trend. 

But climate is not the only concern of the second city. The next is resource consumption and how long before these critical resources are practically exhausted for global economic purposes.  Some researchers have targeted the exhaustion date at 2050 based on the current known planetary supplies. We can see from the hockey stick chart below - that just our consumption of critical energy sources over the past 200-plus years also strongly correlates with charts for GDP/Population growth.





These exponential growths in human activity, population, and global warming also adversely affect the other plants and creatures living on the planet which all work together to form the ecology and thereby provide a survivable habitat for humanity. There is also always the possibility that should any small critical link in the ecology be broken, then the whole system could crash into an abyss where unknown, unknowns would prevail.  

The hockey stick chart below again shows a correlation that infers increased human activity, GDP, and population growth results in species' extinctions increasing in tandem. We know that they can survive without us - but, can we survive without them?






CONCLUSION:

So there you have it - two different cities with the two views and realities that they assert. One says don't worry everything is fine - be happy. The other says we are rapidly heading into the abyss where we face the unknown, unknowns of dire consequences. It is truly amazing that what Charles Dickens historically wrote in 1859, can also apply symbolically to our world today - however, the biggest difference today is - we are simply running out of time to get it right.  

And so it is:

'we had everything before us, we had nothing before us, we were all going direct to Heaven, we were all going direct the other way—in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.' 
- Charles Dickens




Global Temperature in 2022

FULL ONLINE REPORT

12 January 2023
James Hansen, Makiko Sato, and Reto Ruedy
Global surface temperature in 2022 was +1.16°C (2.1°F) in the GISS (Goddard Institute for Space Studies) analysis[1],[2],[3] relative to 1880-1920, tied for 5th warmest year in the instrumental record. The current La Nina cool phase of the El Nino/La Nina cycle – which dominates year-to-year global temperature fluctuation – had maximum annual cooling effect in 2022 (Fig. 1). Nevertheless, 2022 was ~0.04°C warmer than 2021, likely because of the unprecedented planetary energy imbalance (more energy coming in than going out). The already long La Nina is unlikely to continue, tropical neutral conditions are expected by Northern Hemisphere spring, with continued warming as the year progresses. Thus, 2023 should be notably warmer than 2022 and global temperature in 2024 is likely to reach +1.4-1.5°C, as our first Faustian payment of approximately +0.15°C is due.
Table 1. Rank of 10 warmest years in the instrumental record, based on GISS temperature analysis.
 


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Monday, January 2, 2023

THE #FUTURE #OUTLOOKS - KEY AREAS OF #CONCERN AND #RISK

 


Economic and Markets 2023 Outlook



WARNING 

What Worked for the Past Decades Will Not For The Next



WHAT'S COMING - GLOBAL RECESSION? DEPRESSION? COLLAPSE? 

The era of easy money is over.

Russia’s invasion of Ukraine on February 24, 2022 immediately reversed a decades-long push for globalization as NATO pushed its pledged boundaries.

Rampant inflation proved more structural than transitory as record stimulus led to inflation. This is now causing global central banks to pursue aggressive interest rate increases to tighten monetary policy as they attempt to reign in runaway prices. Good luck.

You can’t sell a NFT picture of an ape or a rock for $1M anymore.

Crypto seemed to learn nothing from the Lehman collapse, while Sam Bankerman-Fried (FTX) seems to have learned everything from the late Bernie Madoff.

Buffett took Woods out to the…Woodshed.

Value investing is cool again, and consensus looks to play defense in the first half of 2023.


WHERE IS BUFFET INVESTING?



In the months ahead our BLOG POSTS are going to walk through what we think are the most important concerns for 2023 and beyond:

  • Cash Flow Matters Not Earnings Multiples


  • Defensive vs. Cyclical Growth Asset Classes

  • Energy, Materials, Minerals, Arable Land and 

  • Other Key Resource Declines

  • Beware of Crypto Currency and Blockchain Scams or the “Next New AI Thing”

  • Collapsing National Economies and Currencies Events 


Nature Bats Last - Climate, 2050 Limits to Growth, Extreme Overpopulation Exponentials - Foreshadow End Times?

The New Arena

For sure, it’s now all about rates and what their knock-on effects are. In 2022, the impact that rates had was most heavily felt in financial markets.

For equities (e.g. NASDAQ, et al) - it was the effect of a total multiple collapse amongst the growth names that saw the unprofitable tech basket wipe 60-90% off their values. Taking a basket of high-growth software companies, they started the year off trading at an average of 35x EV/Revenue and now trade at 7x. That is a massive collapse of confidence in growth.

In the fixed-income market - over the last decade, we were in an environment of “There is No Alternative”  and now we are in a market where “There are Many Alternatives”.  As rates increased, bond prices got crushed to the point where they put up the second worst year ever on record, (you have to go back to the Great Depression to get #1)

However, you can now find yield everywhere across credit and bond markets instead of having to fish into the nefarious barrel of the red-hot alternatives of scam and criminal markets. As more capital crowds around fixed income markets, lighter volume in equities and crypto hoaxes will cause higher volatility making for a bumpy ride this year.

Of course, rates do not exist in a vacuum and are a global central bank tool used to navigate exogenous factors, but it helps us frame how the reactive policies dictate our investment profiles and keeping in mind that above all else: 

Nature Bats Last and thus humanity cannot defeat the physical outcomes of Exponential Mathematics.

Cash Flow Matters

A lot of ETF and factor people will proclaim that this was the year of value investing and that value investing is back. What they’re really trying to say is that operating margins and cash flow matter, and we couldn’t agree more.


Or else...




2023 BRINGS MOTHER OF ALL COLLAPSES



Believe, Act, Learn

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