Just own the damn robots.

If you spend any time watching CNBC, you know who “Downtown Josh Brown” is. He is a thoughtful analyst on the markets and someone I consider a friend. He writes a blog called The Reformed Broker that I think can properly be characterized as irreverent.

His latest letter is an Outside the Box way of thinking about the current bull market. I’m not sure whether he is offering this tongue in cheek or not, but he is speaking to the same thing that I’ve been talking about for quite some time: the growing gap between the Protected and the Unprotected. It’s about the angst of the middle class and all those who feel that the future is changing too fast and in ways that are hurtful to them personally. And frankly, many of the protected class recognize that they are increasingly vulnerable, too. For instance, it is clear that various aspects of legal work and medicine will be automated within the next few years. It’s not just self-driving cars that are threatening Jobs.

I’m taking a morning flight back to Dallas from San Francisco, where I have spent the last two days immersed in all matters biotech and antiaging. The Buck Institute is at the center of the antiaging efforts, and they assembled a tour de force lineup of scientists to discuss the latest in research to not only turn back the clock on our aging bodies but also to figure out ways to heal the diseases of aging. Being around such creative and entrepreneurially driven people has been exhilarating.

And then I got to top it off with dinner with Mike West of BioTime, where we discussed his spinoff of AgeX. Mike is on the verge of actually doing something called induced tissue regeneration, which has a whole host of amazing implications. Curing diseases, replacing damaged body parts, and yes, even reversing the effects of old age.

I think I got Mike West close to swearing a blood oath to go with Patrick Cox and me to the Cleveland Clinic and run through Dr. Mike Roizen’s executive health program. Mike West is one of those doctors who doesn’t take care of himself or do the checkups that he would tell everybody else to do, and I think Patrick and I are just going to have to pick him up and march him over to Cleveland to make sure everything is okay. From my point of view, the work that he is doing and its potential for success make him the most important man in the world. And I’ve gotten him to agree to come to my conference along with Aubrey Du Grey, the antiaging maven, and Eric Verdin, the head of the Buck Institute. Patrick Cox will moderate that panel, and it should be absolutely fascinating.

And speaking of panels, I have finalized one session that I want to do on Bitcoin and other cryptocurrencies. Three experts (two extraordinarily successful hedge fund managers and George Gilder, who is of course writing another book on the whole subject), and I have my favorite skeptic in mind to moderate the panel. As the song goes, “There’s something happening here, and what it is ain’t exactly clear.” This year’s conference is shaping up nicely. I know, we’ve been reminding you to reserve the dates March 6-9 next year for San Diego, but you really do want to be in the room. It is going to be our most exciting conference yet.

And now it is time to hit the send button. Emails to answer; papers, books, and essays to read; and somewhere here I’ve got to start thinking about this week’s letter. Retirement? I don’t need no stinking retirement. You have a great week.

Your planning to live a long time analyst,

John Mauldin, Editor

Just own the damn robots.

By Joshua Brown

…five ranks of ten machines each, swept their tools in unison across steel bars, kicked out finished shafts onto continuous belts…

Paul unlocked the box containing the tape recording that controlled them all. The tape was a small loop that fed continuously between magnetic pickups. On it were recorded the movements of a master machinist turning out a shaft for a fractional horsepower motor. He’d been in on the making of the tape, the master from which this one had been made.

He had been sent to one of the machine shops to make the recording. The foreman had pointed out the best man – what was his name? – and, joking with the puzzled machinist, had been hooked up to the recording apparatus. Hertz! That had been the machinist’s name – Rudy Hertz, an old timer, who had been about ready to retire.

And here, now, this little loop in the box before Paul, here was Rudy as Rudy had been to his machine that afternoon – Rudy, the turner-on of power, the setter of speeds, the controller of the cutting tool. This was the essence of Rudy as far as his machine was concerned.

Now, by switching in lathes on a master panel and feeding them signals from the tape, Paul could make the essence of Rudy Hertz produce one, ten, a hundred, or a thousand of the shafts.

There’s something insidious going on in the psyche of investors that deserves a lot of the credit for today’s bull market, and almost no one is talking about it. But I will.

The first American retirement system – available only for gun fighters – a colonist in Massachusetts picks up his arms and goes off to defend his settlement against the Indians. They chop off his arm, rendering him unable to participate in the only form of labor that existed in those days (manual). He can’t build shelters anymore, raise animals or till the soil. So the colony takes up a collection, in the form of taxes, which enables the wounded fighter to retire and continue to support himself and his family.

You know who collected these taxes from the colonists? Usually the guy himself. True story.

The concept of retirement evolved from there. For most of the 1800’s, you basically worked on a farm til you died. Retirement took place in a graveyard. Until 1875, when the American Express railroad company established the first private pension fund in America, followed by many other companies shortly after. It was no big deal, given that the average person wasn’t expected to make it long past their 50th birthday. The US government created a public version of this – the Social Security system – in the 1930’s when it became apparent that not everyone was going to have a job long enough (or secure enough) to earn these pensions.

And then that went on into the 1970’s, whereupon the personalization of retirement funding began, with 401(k)’s and IRA’s and the like. Pensions became replaced with investment accounts owned and managed by each worker, which is where we are now. So the concept of retirement as we know it is essentially just fifty years old. It’s what the majority of investors have been doing in the markets in the first place – deferring spending today so that they’d be able to have enough money to spend later on.

But something else is going on right now. There is a sense of desperation underlying the way in which we’re investing.


Why won’t people panic!?!

Trump! Kim-Jong-Un! Nukes! Border walls! Race riots! Trade agreement demolition! Impeachment proceedings! Sell, goddamn you!

But they won’t sell. Stocks make new highs, volatility completely disappears. Every week a fresh reason to freak out. No reaction from the investor class whatsoever, other than in short, sharp bursts that dissipate within hours.


Well, if you think Donald Trump’s mentally ill outbursts on Twitter should be scaring investors, then perhaps you failed to consider the possibility that there is something even scarier out there.

A 45 year old married father of two with a mortgage and a pair of college educations to fund. The remote yet persistent threat of a nuclear war is not what keeps him up at night. In fact, he might almost see it as a relief should it come. He is a bundle of raw nerves, and each day brings even more dread and foreboding than the day before. What’s frying his nerves and impinging on his amygdala all day long is something far scarier, after all. He, like everyone else, is afraid that he doesn’t have a future.

He is petrified by the idea that the skills he’s managed to build throughout the course of his life are already obsolete.


In Kurt Vonnegut’s 1952 novel, Player Piano, we are introduced to a future in which only engineers and managers have gainful employment and meaningful lives. If you’re not one of the engineers and managers, then you’re in the army of nameless people fixing roads and bridges. You live in Homestead, far from the machines that do everything, and are treated throughout your life like a helpless baby. The world no longer has a use for you. Anything you can do a machine can do better, and you are reminded of this all day, every day by society and the single omnipotent industrial corporation that oversees it all.

He wrote this 65 years ago. It couldn’t have been more apropos to what we’re witnessing now than if had he written it this morning, right down to the nostalgia-selling demagogue who seizes the opportunity to foment rebellion amongst the displaced and disgruntled. When millions of people start seeing their purpose begin to erode and their dignity being stolen from them, the idea that there’s nothing left to lose starts to creep in.

In the book, the result is a violent rebellion against the machines. In the real world, we’ve resigned ourselves to investing in them instead.

We could be in the midst of the first fear-based investment bubble in American history, with the masses buying in not out of avarice, but from a mentality of abject terror. Robots, software and automation, owned by Capital, are notching new victories over Labor at an ever accelerating rate. It’s gone parabolic in recent years – every industry, every region of the country, and all over the world. It’s thrilling to be a part of if you’re an owner of the robots, the software and the automation. If you’re a part of the capital side of that equation.

If you’re on the other side, however – the losing side – it’s a horror movie in slow motion.

The only way out? Invest in your own destruction. In this context, the FANG stocks are not a gimmick or a fad, they’re a f***ing life raft. Market commentators rhetorically ask aloud what multiple should investors pay to own the technology giants. That’s the wrong question when people feel like they’re drowning.

What multiple would you pay to survive? Grab a raft. 

Here’s the “Robotics and Automation ETF” over the last two years:

There’s panic in this chart. A much more sustained kind of panic than can be sown by the pronouncements of Trump or the bellicosity of North Korea.


There’s a great joke about an automated car plant in Japan, where the machines work in the dark (no need for light, they don’t have eyes) and there are only two living things authorized to be on the factory floor – a man and a dog.

What’s the man there for?

His job is to feed the dog.

What’s the dog for?

The dog keeps the man from touching any of the machines.

Matt Levine at Bloomberg View has an interesting way of thinking about Bridgewater, a gigantic hedge fund overseeing almost $200 billion in assets:

If you had to describe in two words what Bridgewater’s 1,500 employees do, “not investing” would be a pretty good fit. They have a computer to do the investing! Bridgewater runs on algorithms, and famously few of its employees have much visibility into how the algorithms actually work. They instead spend their time marketing the firm, doing investor relations, and — crucially — evaluating and critiquing one another. I once explained my theory of Bridgewater: “One stylized model for thinking about Bridgewater is that it is run by the computer with absolute logic and efficiency; in this model, the computer’s main problem is keeping the 1,500 human employees busy so that they don’t interfere with its perfect rationality.”

This heuristic – a room full of geniuses playing mind games with each other while computers keep the profits rolling in – is definitely silly, but Vonnegut would have loved it. And it works really well symbolically, even if it’s a distortion. You don’t get a better educated, more highly pedigreed workforce than the folks at Bridgewater. So the image of them looking for ways to fill their days – even though untrue – could only increase the dread of people working in firms further down in the Knowledge Economy food chain.


“Specialize” the displaced workers are being told. “Up your eduction and increase your skills! Move to a different city! Find a niche where technology can’t replace you! Learn to code!” They’re trying, but this doesn’t seem to be a long-term solution. We’re in an age where we’re being told AI is about to start writing its own software. Machines are going to be trying legal cases and diagnosing illnesses, writing songs and architecting buildings, giving financial advice and driving our vehicles. Every day more articles about this or that breakthrough. There are no limits, there are no protections. It’s bordering on lawlessness.

No one is immune. Not even the creatives. Netflix users have spent 500 million hours watching Adam Sandler content, so it isn’t far-fetched to imagine its programming algorithm devising an art house film starring Sandler. Why do we need producers? Why is a monster like Harvey Weinstein even necessary in a near future where software determines what we want to watch and automagically gives us more of it? What would be Weinstein’s role in that, besides grabbing people and running up massive legal and travel bills for the studio?

People have never felt more ill at ease about their own reason for existing. This is manifesting itself in the trillions of dollars being thrown at Facebook, Google, Uber, Nvidia, Apple, Amazon, Alibaba. Yes, these companies create jobs, but they are different jobs that the people being displaced mostly can’t get. When 10,000 sweater-folding department store workers are laid off in fifty different cities on a Friday, it’s not like they can all relocate to Seattle and begin building mobile user interfaces for Amazon the next Monday morning.


Professor Scott Galloway, an expert on the technology giants that now dominate every facet of the economy and our lives:

Uber only has a few thousand employees, and they’re very technically literate. Uber has figured out a way to isolate the lords (4,000 employees) from the serfs (2 million drivers), who average $7.75/hour, so its 4,000 employees can carve up $70 billion vs 2 million on an hourly wage. So, Uber has said to the global workforce, in hushed but clear tones: “Thanks, and f*** you.”

Michael Batnick frames this as the price of progress, which is becoming a full blown crisis. We have no answers for this yet. He is hopeful that we come up with some. It’s happening a lot faster than we can adjust to it, even if it’s all eventually for our benefit (and what sort of capitalist would be caught dead arguing otherwise?).

The anarchists in Vonnegut’s book have paid the price of progress. They worry about their sons committing suicide when their IQ test results sort them out for a lifetime of roadwork rather than an invitation into the upper echelon of managers and engineers. They write a letter explaining the destruction they’re about to unleash as payback for all of the “progress” that’s been inflicted on them…

I deny that there is any natural or divine law requiring that machines, efficiency, and organization should forever increase in scope, power, and complexity. I see these now, rather, as the result of a dangerous lack of law. The time has come to stop the lawlessness.

Without regard for the wishes of men, any machines or techniques or forms of organization that can economically replace men do replace men. Replacement is not necessarily bad, but to do it without regard for the wishes of men is lawlessness.

Without regard for the changes in human life patterns that may result, new machines, new forms of organization, new ways of increasing efficiency, are constantly being introduced. To do this without regard for the effects on life patterns is lawlessness.

Men, by their nature, seemingly, cannot be happy unless engaged in enterprises that make them feel useful. They must, therefore, be returned to participation in such enterprises.


The disruptor’s credo, say it with me: Your profit margin is my opportunity. Put another way: Your profitable small business is basically a market failure. But only for now, because we’ve got investors, motherf***er. 

Friend of a friend owns a small chain of grocery stores in New Jersey. A few years ago, when Amazon got into groceries, he changed his mind about investing in the growth of his own business. He started buying Amazon shares with his investment capital instead. He saw what happened to Circuit City and Tower Records, Borders and Barnes & Noble. So he bought some Amazon and then he bought some more.

This wasn’t retirement investing. This was something else. What should we call it? Disruption Insurance? 

I don’t know. Anyway, long story short, Amazon is up over a thousand percent over the last ten years, and <jersey accent>he don’t need the stores no more.</jersey accent>


Of the people actively looking for jobs right now, 96% of them are currently employed, as of the latest labor report. This, of course, excludes tens of millions of working age folks who have stopped looking, are working off the books or who have otherwise just given up. A great deal of them come from industries or vocations that no longer exist. This is not a new phenomenon, it’s been going on since the beginning of time.

What is undeniable, however, is that the pace of this process has increased to breakneck speed. It also seems to be perennially advantaging those for whom advantage has already accrued. Winners keep winning. A momentum strategy, but for people. You would expect the folks on Wall Street to be celebrating all time record highs for asset prices. It’s the opposite – it’s making them miserable. Head counts and fund closures are this bull market’s accoutrements, not lavish parties and cocaine. It’s never been like this before.

For the last fifty years, we’ve invested for retirement. For the last two or three years, we might be investing for a whole other reason. What price is too high to pay for a company’s stock if the company spends every waking minute trying to replace you?

So what else is left to do? Just own the damn robots.

Running Europe

The spotlight shifts from Germany to France

A dynamic Emmanuel Macron and a diminished Angela Merkel point to a new order in Europe

WHO leads Europe? At the start of this year, the answer was obvious. Angela Merkel was trundling unstoppably towards a fourth election win, while Britain was out, Italy down and stagnating France gripped by the fear that Marine Le Pen might become the Gallic Donald Trump.

This week, it all looks very different. Mrs Merkel won her election on September 24th, but with such a reduced tally of votes and seats that she is a diminished figure. Germany faces months of tricky three-way coalition talks. Some 6m voters backed a xenophobic right-wing party, many of them in protest at Mrs Merkel’s refugee policies. Having had no seats, Alternative for Germany, a disruptive and polarising force, is now the Bundestag’s third largest party.

Yet west of the Rhine, with a parliament dominated by his own new-minted and devoted party, France’s President Emmanuel Macron is bursting with ambition (see our special report in this issue). This week he used a speech about the European Union to stake his claim to the limelight.

Whether Mr Macron can restore France to centre-stage in the EU after a decade in the chorus depends not just on his plans for Europe, but also on his success at home, reforming a country long seen as unreformable.

Angela’s leading man

Start with Europe. This week’s speech was brimming over with ideas, including a shared military budget and an agency for “radical innovation”, as well as the desire to strengthen the euro zone. At one level, Mr Macron’s bid for the role of intellectual innovator in Europe fits a long French tradition. Moreover, elements of his speech—a new carbon-tax on the EU’s frontiers, a proposal to tax foreign tech firms where they make money rather than where they are registered, a crusade against “social dumping” with harmonised corporate tax rates—were in keeping with long-standing French attempts to stop member states competing “disloyally” against each other.

Yet Mr Macron has a more subtle and radical goal than old-style dirigisme; as if to prove it, he agreed this week that Alstom, which makes high-speed trains, could drift from state influence by merging with its private-sector German rival. His aim is to see off populism by striking a balance between providing job security for citizens, on the one hand, and encouraging them to embrace innovation, which many fear will cost them their jobs, on the other (see Charlemagne).

In his speech Mr Macron also made the case for digital disruption and the completion of the digital single market.

Euro-zone reform would make Europe less vulnerable to the next financial crisis.

The merit of these ideas depends on whether they lead to a more enterprising, open and confident Europe or to a protectionist fortress. But they may not be tried out at all unless Mr Macron can make a success of his policies at home. For, if France remains a threat to the EU’s economic stability rather than a source of its strength, its president can never be more than a bit player next to Germany’s chancellor.

Mr Macron’s domestic policy might seem to have made a poor start. He has grabbed headlines thanks to the size of his make-up bill, the collapse of his popularity and the whiff of arrogance about his “Jupiterian” approach to power. Predictably, the grouchy French are already contesting the legitimacy of the plans they elected Mr Macron to carry out. Reform in France, it seems, follows a pattern. The street objects; the government backs down; immobilisme sets in.

Yet take a closer look, and Mr Macron may be about to break the pattern. Something extraordinary, if little-noticed, took place this summer. While most of the French were on the beach, Mr Macron negotiated and agreed with unions a far-reaching, liberalising labour reform which he signed into law on September 22nd—all with minimal fuss. Neither France’s militant unions, nor its fiery far left, have so far drawn the mass support they had hoped for onto the streets. Fully 59% of the French say that they back labour reform. More protests will follow. Harder battles, over pensions, taxation, public spending and education, lie ahead. Mr Macron needs to keep his nerve, but, astonishingly, he has already passed his first big test.

In many ways, the 39-year-old Mr Macron is not yet well understood. Behind the haughty exterior, a leader is emerging who seems to be at once brave, disciplined and thoughtful. Brave, because labour reforms, as Germany and Spain know, take time to translate into job creation, and usually hand political rewards to the successors of those who do the thankless work of getting them through. Disciplined, because he laid out clearly before his election what he planned to do, and has stuck to his word. The unions were fully consulted, and two of the three biggest accepted the reform. Compare that with his predecessor, François Hollande, who tried reform by stealth and encountered only accusations of bad faith. Last, thoughtful: Mr Macron does not approach policy as an à la carte menu. He has grasped how digital technology is dislocating the world of work. His governing philosophy is to adapt France’s outdated system of rules and protections accordingly.


Over the past few years, an enfeebled France has been a chronically weak partner for Germany, pushing Mrs Merkel into a solo role that she neither sought nor relished. If he is to change that dynamic, Mr Macron needs to move swiftly to match his labour law with an overhaul of France’s inefficient training budget, increase the number of apprenticeships and renovate the state’s sleepy employment services. He also needs to explain with a less contemptuous tone why his plans for tax cuts, including to France’s wealth tax and corporate tax, are not designed simply to benefit business and the better-off. In Europe he needs to reassure the northern, more open economies that he is not trying to put up walls.

Of course, Mr Macron’s first steps in the spotlight may falter. The odds on any leader reforming France are never high. He will struggle to convince Germany to embrace his vision of euro-zone reform. But, if this year has shown anything, it is that it is a mistake to bet against the formidable Mr Macron.

Germany´s Weimar Ghosts

Harold James

PRINCETON – Germany’s election result presents an odd paradox. Chancellor Angela Merkel’s Christian Democratic Union is unquestionably the strongest party, and a new government without it is unthinkable. But both the CDU and its previous coalition partner, the Social Democrats (SPD), did poorly. Many SPD leaders’ initial reaction to their party’s 20.4% showing (down from 25.7% in 2013) has been to embrace a stint in the opposition.       

That response – a flight from power – was characteristic of politics in interwar Germany’s short-lived democratic experiment, the Weimar Republic. Since the beginning of the Federal Republic, in 1949, one question has always haunted German politics: Could the Weimar experience be repeated, with the radical right triumphing again? Now that an extremist party, the Alternative für Deutschland (AfD), has won seats in the Bundestag for the first time since World War II, the question has stepped out of the shadows.
There are some obvious Weimar parallels. In Weimar, even in the relatively stable years of the mid- and late 1920s, before the onset of the Great Depression, parties were punished by voters when they participated in government, and rewarded when they styled themselves as alternative or protest parties. Between 1924 and 1928, the moderate right was in a coalition government, and then suffered massively; after 1928, the SPD was similarly punished for joining a coalition.
Then came the depression, and the same mechanism applied even more forcefully: it was political suicide to support the government – or, as the increasingly radical opposition called it, the system. The result was a flight from responsibility, with voters punishing the politicians who remained ever more severely.
If there is room for optimism about the German election result, it lies in the outcome’s closeness to the European norm. The AfD vote, at 13%, is almost the same share that the populist Geert Wilders won in the Netherlands in April, in an election that was widely seen as a defeat for radical populism. It is clear that an overwhelming majority of Germans do not support the AfD, whose fortunes could soon fade, owing to a probable split in its leadership.
In fact, it is hard to see a basis for the AfD’s continued growth. In many industrialized countries, elections are often treated as a simple reflection of the state of the economy. And this is especially true in Germany. Voters in the home of the postwar Wirtschaftswunder (economic miracle) are proud that they have the eurozone’s strongest economy, which is prospering. Employment is at record levels. Visitors to Munich’s Oktoberfest come in greater numbers, drink more, and eat more, but are less violent and commit fewer crimes. Even the eurozone as a whole is in a surprisingly strong recovery.
But governments are like people: after a long time in one position, they run out of ideas. At the end of 2016, Merkel looked tired, and a new SPD leader, Martin Schulz, benefited from a short-lived burst of support in opinion polls. But when it turned out that Schulz had no new ideas, either, enthusiasm gave way to disenchantment.
The government coalition’s poor showing seems to be a clear reflection of widespread frustration with leaders who have nothing new to offer. And the election result will make a new coalition difficult to form. The most plausible – in fact the only – real alternative to a CDU-SPD grand coalition would be a larger grouping involving both the liberal Free Democrats (FDP) and the Greens (a so-called Jamaica coalition, because the parties’ colors are those of the Jamaican flag).
It is often said that Merkel would have liked a CDU-Green coalition alone, as she has moved very close to the Greens’ agenda in many areas since announcing a rapid exit from nuclear energy after Japan’s 2011 Fukushima disaster. But a Jamaica coalition will be difficult to negotiate, because the FDP is much more conservative on many economic issues, especially fiscal transfers to the rest of the eurozone.
But a Jamaica coalition is not out of the question – and it could mean new policies for Germany.
Whereas the FDP’s political profile is much closer to classic market liberalism, over the past ten years the Greens have become more receptive to market mechanisms as the best way of realizing their environmental agenda.
A new coalition is a way of showing how a new start in German politics could operate. And that new start would extend to Europe, with , in particular, based on acceptance of a greater role not only for the market, but also for reformed European institutions that monitor and supervise market processes. There are many areas – security issues, military cooperation, tackling the immediate needs of refugees – where a common European effort is needed.
Germany cannot break out of the Weimar trap by thinking solely in German terms. The answer to political uncertainty is to stabilize the European and international systems. That was the final lesson of Weimar politics: it was when the international order had disintegrated that the gains from domestic cooperation looked meager and the cost of radical rhetoric dropped.
Only a stable Europe can keep the ghosts of the past at bay.

Friday GE Fiasco Exposes A Fluff Fueled Market

by: Orange Peel Investments


- GE stock is aggressively bid back up on Friday after an ugly earnings report.

- This is a microcosm of how the overall market thinks right now and that might not be a great thing.

- We explain our reasoning.
We have been saying over and over for the last year or two that this market has been fueled by pure euphoria and that many staple stocks are simply going to find a bid, no matter what, because every dip looks like a bargain to this market, regardless of the company's underlying financials and what the narrative of the story may be. No better example of this was on Friday of this week when General Electric (GE) put forth an earnings report that greatly disappointed the street, slashed full year guidance and missed on most expectations that analysts and investors had put forth for the company.
(Source: Bloomberg)

Although this article isn't about General Electric per se, here is a quick look at what the company had to say about the numbers it reported on Friday. Bloomberg reported,
General Electric Co.’s new boss promised “sweeping change” as he delivered a brutal assessment of the 125-year-old manufacturer. 
Results for the latest quarter are “completely unacceptable,” Chief Executive Officer John Flannery told investors on Friday as he slashed the profit forecast and pledged to unload $20 billion of GE businesses. “We need to make some major changes with urgency and a depth of purpose.” 
Flannery, who took over Jeffrey Immelt’s longtime post less than three months ago, is plotting a dramatic overhaul at the maker of jet engines and ultrasound machines.  
Already, he has welcomed a representative of activist investor Trian Fund Management to GE’s board and announced major management changes. He’s seeking deeper cost cuts and investors are bracing to see if GE cuts its dividend for only the second time since the Great Depression. 
“Everything is on the table,” Flannery said on a conference call to discuss quarterly earnings. “Things will not stay the same at GE.”
As you can see, it was certainly an unceremonious earnings release for the company and the market let the company know this. In early trading, GE shares were down as much is 7% at one point. Almost all of the headlines across the board on major news networks and in publications included General Electric's disappointing results.

But what do disappointing results even mean to this market nowadays? In the case of GE on Friday, apparently nothing. The report, which caught many by surprise, was already "old news" by the end of the day. As you can see from the chart below, the market came in and bid up GE stock all the way back to where it closed the past session and then even nudged it green slightly before the close.
Chart GE Price data by YCharts
If this is not sure fire proof that 10 years of a bull market have conditioned anyone and everyone to just buy the dips without asking, we don’t know what is.
One might be able to deflect some of the blame to the fact that Dow futures were already up about 100 points overnight on news that the Senate had passed the budget that the president needs in order to put his tax cuts through. Because of this, market sentiment was generally strong heading into the day on Friday, even though these tax cuts continued to already be priced in many times over.

But the market ignoring something like a company slashing its earnings guidance by about 35% is simply stunning to us. Shock Exchange
pointed out in their article on Friday morning,
GE slashed its earnings outlook for the rest of 2017. Adjusted earnings are expected to be $1.05 to $1.10 per share, down from a previous range of $1.60 to $1.70. The mid-point of its new earnings estimate ($1.08) is lower by about 35% compared to the previous mid-point. The fact that it lowered its full-year outlook could imply that Q3 was not an anomaly.
By keeping the company priced at the same price as it closed at the day prior, this 35% instantly becomes pure multiple expansion for the company. What types of companies deserve multiple expansion? Those that are growing organically and those whose growth is accelerating. This is the best case scenario for why a company would see its multiple expand.
Additionally, if a company is showing significant margin improvement in one or all segments, the market may determine that its multiple could be worthy of expanding.
However, this is simply not the case when it comes to GE. In fact, the opposite is happening. The company‘s financials are deteriorating and looking less and less attractive to us on a fundamental basis. This is the scenario where we believe multiple compression is far more appropriate than multiple expansion.

GE is still now trading over 20 times what it is expected to earn this year and remains relatively aggressively priced for a company that has just missed its earnings mark in a big way, we believe.

But this article isn’t really that much about GE, it is about GE being a symptom of an overall market attitude that we believe is toxic and will eventually produce more harm than good. The market doesn’t seem to carefully assess multiples anymore. It doesn’t seem to really ever think twice when it comes to buying a dip in any type of "staple" stock. If you are Warren Buffett, and are planning on holding for 40 years, this might not be such terrible scenario. However, we know that this certainly isn’t the outlook of all market participants and definitely not 100% of the market participants that would be needed to engineer a reversal in shares like General Electric that we saw on Friday.
One scenario we can envision, based on Friday's buying, is that perhaps an activist investor used the volume spike and price fall to leg into a position. We will know if this is the case over the coming days.

But regardless, the market, in general, is getting less and less critical. As the euphoria of this bull market continues to pick up steam, we believe that investors are demanding less transparency and less financial performance from the stocks that they own. We simply believe that market participants are more inclined to just throw good money after bad because the market has done nothing but go up for nearly 10 years and, at this point, nobody can really fathom anything different.

Junior analysts on Wall Street today were probably in about 6th grade when the 2008 recession happened. Newcomers to Wall Street and investing literally don't know any better.
Chart ^SPX data by YCharts
After all, the last few major dips in the market, resulting from the Chinese stock market crashing and the presidential election, were both bought aggressively. What are investors to think when they see an event like Brexit drop stocks down substantially before they are bid all the way back up and then tack on an additional gains?
The market has been carefully conditioning investors over these last 10 years to simply go in and buy at any given chance at any given time, regardless of situations and circumstances, we believe. This exuberance comes as a result of Fed policy which has pushed for, and encouraged, low interest rates, slamming the market with cheap capital so that individuals and companies can lever up in order to either buy stock for themselves or buy back their company’s stock. Asset prices continue to rise and the bubble just gets bigger.

Could you imagine what the attitude would be in 2008 if General Electric had cut its earnings outlook by 35%? The stock would be down that 35%, probably plus an additional 5% or 10% based on the perception of the company's outlook. Sentiment matters and market psychology matters. Right now, our market psychology is throwing most caution to the wind, we believe.
General Electric was a great example of that on Friday. We think it makes an alarming overall commentary about the market and we think it reaffirms our long-held believe that we are getting close to reaching peak euphoria, a point that may eventually foreshadow a much-needed pull back or recession.

lunes, octubre 23, 2017



Fight Spain Can’t Win

By Jacob L. Shapiro

The autonomous Spanish community of Catalonia plans to hold an independence referendum on Oct. 1. The Spanish government intends to prevent that referendum from taking place ­– by any means necessary. Ironically, Spain’s crackdown, while predictable, exacerbates the very threat Spain is trying to subdue. Whether or not Madrid’s heavy-handed approach prevents a declaration of independence, in the long term it will only push more Catalans toward the conclusion that their future lies not with Spain but with themselves. Spain, the European Union’s fourth-largest economy, sits on the verge of a major political crisis that it has no way of solving.
Nations Within Nations

This standoff is only the latest expression of an issue between Madrid and Barcelona that is almost a millennium old: the Catalan people’s desire to rule themselves. Present-day Catalonia has a culture, language and history that is unique and all its own. It has preserved this identity despite losing multiple wars for self-rule, and despite periods of intense suppression. Catalonia’s desire for independence played a major role in the 1936-39 Spanish Civil War, another conflict in which Catalonia ended up on the losing side. Francisco Franco’s rule and repression of Catalonia after the war did nothing to dim Catalonia’s identity, or for that matter any of the identities of the various nations that today make up the Kingdom of Spain.

Franco died in 1975, ending 36 years of military dictatorship. Three years later, Spain adopted its current constitution by a popular referendum in which over 91 percent of voters cast their ballots for ratification. But that constitution did nothing to solve Spain’s fundamental problem: Though it claims to be a unified nation, Spain is made up of several different nations, of which Catalonia is just one. Section 2 of the Spanish Constitution’s Preliminary Title says, “The Constitution is based on the indissoluble unity of the Spanish Nation, the common and indivisible homeland of all Spaniards; it recognizes and guarantees the right to self-government of the nationalities and regions of which it is composed and the solidarity among them all.”

Students gather as they demonstrate against the position of the Spanish government to ban the self-determination referendum of Catalonia during a university students strike on Sept. 28, 2017, in Barcelona, Spain. DAN KITWOOD/Getty Images

This is, of course, a contradiction. First it says Spain is one unified nation. Then it says it’s the responsibility of that one unified nation to preserve the right to self-government of the various nations that comprise it. Nations are not composed of other nations. The concept of the nation is that a group of people share a history, language or principles in common, and that these unique attributes make them different from all other groups of people. The great political organizing principle of our time is that unique groups of people should govern themselves. Spain is, in effect, trying to take a group of nations and create one nation out of them.

With that in mind, Catalonia’s referendum is an existential threat to Spain as we know it. Consider that today, Spain is divided into 19 autonomous regions. Catalonia is one of the most autonomous – it is one of the few regions to have its own police force, for example. If Catalonia were to leave Spain, not only would roughly 20 percent of Spain’s gross domestic product disappear overnight, but it would also raise the possibility that other autonomous regions might be interested in national self-determination too.

It is little wonder, then, that the Spanish government, unable to halt the referendum through political means, has in recent weeks responded with force. It has arrested Catalan politicians, put Catalonia’s 17,000-strong Mossos d’Esquadra police force under the control of the Spanish Interior Ministry, dispatched additional Spanish police to Catalonia, and carried out police raids to seize ballots and other referendum materials. Spain’s president declared that his forces would do “all that is necessary” to prevent the vote from taking place.

From Madrid’s perspective, it had little choice in how it could respond. It doesn’t matter that more polls indicate a slight preference among Catalans to remain part of Spain rather than to leave. More polls indicated a slight preference for “remain” over “leave” in Brexit too. The polls are too close for Madrid’s comfort, and Spain won’t leave its future to chance.

It’s a lose-lose situation. Letting the referendum proceed could spell the slow and painful dissolution of Spain as we know it, but cracking down only strengthens the argument for Catalan independence. In fact, though the polls have indicated that the referendum is a toss-up, they’ve been unambiguous about one thing: Many Catalans who are against independence also believe that the choice is ultimately theirs, not Madrid’s, to make.

At a certain point, the referendum will stop being just an internal Spanish issue and will become a European one. Indeed, prominent voices within Spain have already sought Brussels’ help. In a Sept. 28 op-ed for The Guardian, Barcelona Mayor Ada Colau wrote that although she personally opposed independence, the Spanish government had gone too far. She therefore appealed to the European Commission to intervene and mediate between the Spanish and Catalan governments so that the two sides could come to a “negotiated and democratic solution.” Catalonia is not the only would-be new nation-state in Europe, and from Scotland to Kosovo, eyes are trained on Brussels, awaiting its response. When it looked like Scotland might try to leave the United Kingdom after Brexit, the EU ignored the issue. It will be much harder for Brussels to look the other way if Catalonia votes for independence or if Spain cracks down even harder than it already has in the lead-up or aftermath of the referendum.

A spokesman for the Catalan government on Sept. 25 described the Spanish government’s most recent attempts to block the referendum as being no different from the ways in which authoritarian regimes in China and North Korea govern their respective countries. That is an exaggeration – Catalan ministers aren’t being executed by anti-aircraft batteries or facing a Great Proletarian Cultural Revolution. But the Spanish government is undeniably using force to prevent the referendum, and whether Oct. 1 or sometime later, there is probably more violence to come. That is because from Madrid’s perspective, the nobility and legitimacy of the Spanish nation is under attack from hulking giants. The trouble for Madrid is that it is not under attack from giants. It is tilting at Catalans. And it isn’t a fight Madrid can win.

Poland Challenges the European Identity

By George Friedman


I am writing this from a hotel room in Warsaw, surrounded by memorials to Frederic Chopin, the great Polish composer and champion of self-determination for the Polish people. This is a particularly appropriate time to be here, since Poland is locked in a battle with the European Union over the question of Polish national self-determination – more than two centuries after Chopin was born.

The issue comes down to this: Poland elected a government that pledged to change the direction in which the country was moving. The new government was of the right. It opposed the policies and institutional stance of the previous, left-of-center government. The previous government had embedded its followers in various institutions, such as the courts and national radio, as governments tend to do. The new government saw itself as facing a hostile judiciary and state-owned media. And so it sought to change the management of the state-owned media and “reform” (in its terms) the judiciary.

When it tried to change personnel in both institutions, the opposition charged that these actions violated the constitution, that the government had overstepped its bounds and that it was trying to repress critics. The government countered that the opposition was trying to thwart the new government from ruling. It had been elected by a substantial majority, and it had clearly expressed its policies during the elections.

Politics as Usual

So far this is politics as usual. Examples of it abound. In the United States in the 20th century, President Franklin D. Roosevelt, facing a Supreme Court of entrenched conservatives, tried to expand the court’s size and pack it with his own supporters. He lost. In Britain in the decades after World War II, the state-owned BBC had a monopoly on broadcasting and had been staffed by Labour governments. Conservative governments accused it of being hostile to them, and attempts to change the staff were met with accusations of censorship.

These sorts of arguments are endemic to democracies with government bureaucracies. The public mood changes but the bureaucracies’ ideology remains intact. A battle ensues. Competing factions all point to dire consequences if their views don’t prevail, but a viable if not altogether acceptable solution is normally found.

What makes the Polish situation different is the threatened intervention by the European Union bureaucracy and the vocal hostility of Germany to the new government’s policies. This includes threats to suspend Poland from participation in some EU functions and various hostile claims about the Polish government.

This not only raises the stakes but also goes to the heart of liberal democracy. At the core of liberal democracy is the right of national self-determination. Self-determination, according to theorists of liberal democracy like Locke and Montesquieu, involves some sort of democratic process, a concept with a wide variety of institutional structures, all of which have at their core some sort of electoral process. There is no question that Poland’s current government was elected in a legitimate vote, and in that sense, it represents the determination of the people. The implicit claim made by its opponents is that in implementing this mandate the government violated the Polish Constitution. I am reminded of Andrew Jackson’s response to a Supreme Court ruling with which he disagreed, when he suggested that the court should have to enforce its own ruling because his government wouldn’t. Jackson undoubtedly violated the essence of the U.S. Constitution, but the republic survived.


Given that Poland’s government emerged as an act of self-determination, and given that the actions it has undertaken are not unprecedented in the annals of liberal democracy, it is strange that the EU and Germany should be so aggressive in raising an alarm over Poland. There are a number of reasons. First, the EU has a core ideology. One part of it is a commitment to free trade. The other is a commitment to a social order that is primarily secular, that seeks to overcome national distinctions and that is intolerant of intolerance. By this I mean that it embraces the doctrine that the state must not only permit variances in private life but be prepared to enshrine them in a legal system of compulsory tolerance. The combination of a commitment to free trade and a commitment to private choices being enshrined as part of public policy inevitably finds certain varieties of liberal democracy unacceptable. Nationalist exclusivity, erosion of secularism by religiosity and a reluctance to turn private freedom into something explicitly celebrated by the state are rejected.

Polish President Andrzej Duda attends a press conference to announce his projects of judicial reforms after he blocked controversial parliamentary judicial reforms on July, in Warsaw, Poland, on Sept. 25, 2017. WOJTEK RADWANSKI/AFP/Getty Images

The Polish government’s misfeasance is not really about courts or broadcasting. Rather, it is about Poland deviating from the EU’s ideology. The Polish government has opposed unlimited immigration into Poland by Muslims, arguing that it would change the country’s national character. In other words, Poland has elevated national distinctions to a level unacceptable to the European Union. It insists that there is a Polish nation and that others with differing values cannot become part of it.

There is the additional question of secularism. Poland is a Catholic country, not only in the sense that many practice that religion but in the deeper sense that Polish history is bound up with Catholicism. This is true for all of Europe (adding in Orthodox and Protestantism), but for Poland this bond is far fresher. The destruction of communism in Poland, and to a great extent in Eastern Europe in general, was deeply dependent on the Polish Catholic Church, which encouraged and protected the resistance movement against communism and against the German occupation that preceded it.

When Catholicism was seen as an anti-totalitarian movement, the Europeans celebrated it. When it was discovered that the Catholic Church was not just a nongovernmental organization demanding human rights but was also truly Catholic – a religion – Europeans cooled to it. When the Catholic Church, always deeply embedded in Polish political life, pursued positions on private life unacceptable to the EU’s ideology and was entwined with the new government, the hostility jelled.
Benefits of Membership

The Polish government represents a fundamental challenge to the EU. The EU promoted an ideology in which national distinctions were to subside and be replaced by a European ideology. Since 2008, resistance to the priority of Europeanism over national identity has increased. This is what motivated the Brexit. Poland and some other Eastern European countries have been particularly unwilling to abandon their national identities. In Poland’s case, this national identity was tied to public religiosity – a religion unwilling to be confined to the private sphere and unwilling to accept the EU’s views on the state’s affirmation of a variety of behaviors.

The EU’s ideology became more problematic after 2008 as the economic benefits of membership declined. The EU has sought to protect its moral and social principles in the face of this decline. The Polish government directly challenges this ideology. If the idea of Europeanism weakens and the idea of the nation rises, while Europe fails to return to its pre-2008 prosperity, then the moral principles binding the EU will wither.

There is a reason Eastern Europe – Poland and Hungary, in particular – are championing this. Poland was sovereign for about 20 years during recent centuries. It lost its sovereignty to Germany and Russia. Losing it again to the EU, whose economic promise is in question and which demands the right to judge and guide Poland’s internal life, seems like a bad deal. Eastern Europe has struggled for its sovereignty for a long time. Sovereignty means not bending your knee to a greater power.

But for the EU, Poland and Hungary are mortal challenges. They have defined being European in a certain way. Poland and Hungary are reclaiming their right to their own national identity. The spread of the idea of national identity over EU values leaves the EU as an economic relationship, an elective affinity based on what the EU brings to the table. The EU is configured to judge its members. If the Polish (and British) disease spreads, the members will be judging the EU.