Tuesday, October 25, 2011

Karl ALMOST Gets It

Mr. Denninger uses NetFlix to make a point that he ultimately misses, stating:

There are three lessons embedded in this chart.

The first is that exponential (compound) growth does not last forever.

The second is that when (not if) the party ends, the usual path is straight down, while the climb up was (by comparison) rather sedate.

And the third is that you can make it much worse by doing stupid things.

Netflix was a prime example of all three in action . The firm sold the market on the premise of "everlasting growth." That premise forgot the fact that they had created the "brand" on the back of a skeptical industry that underpriced their services - and that these "teaser rates" for content access would end. There was no way for Netflix to win on this, as they'd either fail outright or the content cost ramp would nail them if they were "successful." These risks were disclosed and nobody paid attention to them.
The emphasized sentence illustrates my point.  ALL share prices on the secondary equity markets inherently assume "everlasting growth."  That is because free cash flow models using net present valuation techniques start with today's free cash flow, assume annual growth over 3-5 years at a one rate, and then assume a terminal value which is based on lower, but now perpetual, annual growth rate into the future.  

What Karl is really complaining about with NFLX is the slope of the increase stock price, which is based as much or more on the P/E multiple applied to the assumed level of perpetual growth as on the premise of "everlasting growth," which is common to all companies sold on the secondary equity markets.

Again, I wish Karl luck with his book.  As often as I disagree with the man, he is a genuinely good guy who, like Jesse and Charles Hugh Smith among the A-list financial bloggers, should always be taken seriously ESPECIALLY when you disagree with them.  People with their size audiences who continue to speak unvarnished truth are to be respected.

Sunday, October 23, 2011

Placeholder: "-Isms" and Power

I've been taking a haphazard journey through time in an effort to understand better the human condition.  As a result of this journey, I have become convinced that we are on the verge of an event like the so-called "Glorious Revolution" of 1688. 

My journey thus far has only taken me to the formation of the modern Roman Catholic Church and the feudalism that arose in its wake.  The way I see it, the Glorious Revolution marked the end of feudalism and the beginning of capitalism.  The primary difference between the two power structures is that feudalism relied upon the social institution of the Roman Catholic Church to dictate the economy, while capitalism set up secular social institutions to dictate the economy.  Capitalism was on the verge of failure beginning in the mid 18th century, and Marx offered an alternative power structure in communism.  The problem with all the "-isms" is that they always benefit the same people, i.e., the oligarchy that is already in control.  The value of capitalism, and its cousin communism, is that they both make it harder to hold the true rulers accountable.

In any event, the people of the world are awakening to two facts: (1) the promise of the neoliberal form capitalism is false, and (2) we have passed the point of no return for capitalism, as we are at Peak Everything.

My great hope is that, this time, the break from the past will not wind up with the current rulers on top, as has always been the case in the past. 

When You Question Your Understanding of the Present, You Need to Double-Check Your Understanding of the Past

Karl Denninger.  The man is a dynamo. 

I just wish he were as right about the world as he thinks he is.  Unfortunately, he's not.  Why?  Because he refuses to question what he thinks he already knows.

Two examples.

First, there's this post of his, which is dogmatically modern "libertarian" chic.  Watch the video he links to, and ask whether there can be any distinction between the "oligarchy" which the video claims to abhor and the "republic" which the video claims to exalt over all other forms of government.  It seems to me that a republic in which only men (not women) who own property (not all citizens) and who are not themselves property (i.e., slaves) serves only the oligarchy.  Seriously, how obvious is that?  Just take the time to past the rhetoric and at the actual facts.  (And the claim in the video that everybody else "lies" about how to describe the left-right continuum is utter nonsense; you can't legitimately argue that your new definition of accepted terms makes somebody else a liar.)

Second, look at this post, which complains about the frauds he recognizes while demonstrating the fraud he fails to see.  What Karl doesn't get is that, according to his definition, all stock market transactions are also Ponzi schemes, and by trading, he aids and abets those schemes.  As I've said before, analysts set stock price targets based on free cash flow models that assume perpetual growth, which, as Karl rightly points out, is not possible in the real world.  Nevertheless, like a good modern "libertarian," Karl has blinders on when it comes to "private" behavior (as opposed to the behavior of the government).

Karl is too old to change, so I'll just focus on enjoying him for the person he is, which is a genuine, well-meaning dude.  I wish him much luck on the upcoming release of his book.

Wednesday, October 5, 2011

Tea Party Communists

Recently, I was reading David Graeber's Debt: the First 5,000 Years, and it struck me that a large part of the Tea Party belief system is communist in nature.

This is most apparent in their nativist attitudes and anti-illegal immigrant fervor.  Basically, they argue that illegal immigrants are "stealing" American jobs.  But how is that possible when the businesses that are giving illegal immigrants jobs are privately owned?  How can Tea Partiers believe that the jobs located in America and provided by private business owners belong to America at large?  The fact is those jobs don't belong to Americans but to anybody the business owner chooses.  (Note: there are no similar complaints about "American" jobs that get sent to China.)

Tea Partiers have also been known to whine about "wanting their country back," but their claims to the country as a whole don't extend beyond what they themselves own, at least under their view of capitalism and free markets.  What the Tea Party is really arguing is that society OWES them something, which means they're really closet communists.

Tuesday, October 4, 2011

Paul Craig Roberts on the Death of America

Paul Craig Roberts says what needs to be said about the unlawful execution of a U.S. citizen by his government: The Day America Died.

To be clear, the execution of American citizens without Due Process is something that the U.S. government had engaged in numerous times in its checkered past.  What makes this murder different is, as PCR says, "never prior to President Obama has a President asserted the power to murder citizens." 

Think about it: even Dubya didn't go that far, and he was despised by Obama supporters. 

What shocked me-- and it shouldn't have-- is "liberals" like Bill Maher and Salman Rushdie were all for murdering Awlaki when people like them had problems with something far less serious-- indefinite detention of foreign citizens-- when Dubya was doing it.

Let's face it, Americans of all political stripes have entered an era that history will judge as one when Americans only "Thought They Were Free."

This is what the American flavor of fascism looks like.