Does Bernanke Read Blogs?

I learned in a recent Mish blogpost that Ben Bernanke denied that people were taking advantage of the carry trade with record low US government debt yields in a recent letter to the US Congress:

To the charge reduced interest income to savers from quantitative easing is a “tax” on savers, Bernanke responded that it’s in everyone’s interest, both savers and borrowers, to have an economy performing at highest level of capacity.

He also said financial institutions aren’t executing carry trades on U.S. Treasurys, when they use short-term repo transactions to fund investments in longer-dated Treasury notes and bonds. Bernanke says this activity reflects the funding of inventories by securities dealers as part of their market-making activities and not an attempt to exploit differences between short- and long-term rates.

It’s curious that Bernanke covered this particular topic because it was only recently that David Stockman complained about it explicitly in an interview with Doug Casey:

This market isn’t real. The two percent on the ten-year, the ninety basis points on the five-year, thirty basis points on a one-year – those are medicated, pegged rates created by the Fed and which fast-money traders trade against as long as they are confident the Fed can keep the whole market rigged. Nobody in their right mind wants to own the ten-year bond at a two percent interest rate. But they’re doing it because they can borrow overnight money for free, ten basis points, put it on repo, collect 190 basis points a spread, and laugh all the way to the bank. And they will keep laughing all the way to the bank on Wall Street until they lose confidence in the Fed’s ability to keep the yield curve pegged where it is today. If the bond ever starts falling in price, they unwind the carry trade. They unwind the repo, because then you can’t collect 190 basis points.

Does this mean Bernanke reads blogs and follows Doug Casey?

I got excited at first when I noticed this apparent connection. But then I realized it’s more likely he was responding to particular inquiries from Congresscritters, not necessarily the vox populi itself. Congresscritters and their staff do have their ear to the ground and occasionally turn annoying phone calls, emails and fax inquiries at their office into cases for Congressional investigation. I hear some staffers also read ZeroHedge and I’m sure the interview came up there.

This is probably a good example of the charge that politicians are nothing more than social weathervanes– they aren’t intellectuals and they don’t lead the debate in society, they merely follow it and, when they think it’ll earn them some goodwill, they stick their finger into people’s eyes according to which eyes and how deeply they believe “the people” want them to gouge.

That’s not to say they govern according to the people’s will. Standing on your soapbox and shouting is a bit different from actively trying to manage the economy according to your perception of a mass of other people’s wishes. To the extent that what the politicians do to society overlaps with what certain interest groups actually desire and “vote for”, the coincidence is explained by nothing more than the fact that this is how politicians pay people off to remain in power. The rest of the time, they’re firmly entrenched in the elitist conspiracy and power politics of rulership which has its own agenda, set of rules and schedule of procedures.

In conclusion, Bernanke probably doesn’t read blogs. He probably doesn’t have much time in between manipulating interest rates and having his dome waxed and beard trimmed. After all, the central planner of the free world’s got to look illustrious.

Review – The King Of Oil

The King of Oil: The Secret Lives of Marc Rich

by Daniel Ammann, published 2010

The Story of Marc Rich

The popular telling of the myth of the crimes of Marc Rich almost perfectly captures the modern American zeitgeist– a businessman, the most evil and exploitative kind of villain that can plague a nation of honest and earnest people, sought to earn a profit via oil trades with the enemy (post-Revolution Iran) during a time of national crisis and embargo (the embarrassingly stupid hostage situation in Tehran circa 1979), evaded his tax obligations and then had the sheer nerve (or perhaps deep well of pure, black hatred within his heart) to refuse to stand trial for his crimes by fleeing to neutral Switzerland, using his enormous, illegally-acquired and not to mention positively unsightly personal wealth to buy himself immunity — and eventually a full pardon — from a criminal justice system to which lesser mortals must pay heed.

But if we peer a little closer (and trust the retelling of Rich’s story in Daniel Ammann’s biographic to be honest and accurate), we begin to see Marc Rich in an entirely different light– if not immediately heroic, then certainly victimized by a benighted American public and tormented by a vengeful “limited” government with ulterior motives. Yes, in this new light, Marc Rich casts long shadows, and standing hunched over in the shadows we see the plotting, manipulative forms of then-US Attorney Rudy Giuliani and then-US Federal prosecutor Sandy Weinberg, as representatives of themselves but also as representatives of the disaster of unbridled ego, political pragmatism and the twisted logic of the State that has nowadays become so popular.

The man’s accomplishments are legend and long-form: single-handedly creating the world market for spot-price oil; circumventing blockades, trade barriers and hare-brained foreign policy situations to move commodities from the conflict-ridden pieces of earth where they lay, wasted, into the hands of producers all over the world who value them most; organizing a billion-dollar-a-year commodity trading company with his partner Pincus Green, whose reach spanned the globe; and evading the vagabonds and plunderers calling themselves the US federal government and the US Marshal Service for over a decade.

And the man’s crime? Libertarians, steady yourselves– doing business in certain places and in a certain fashion without the express permission of the United States federal government to do so. In other words, Marc Rich was guilty of minding his own business.

Enemy of the State

That’s the reality of Marc Rich’s crimes, but that was not the story fed to journalists by U.S. attorney Rudy Giuliani on September 19th, 1983. On that day, the public learned of Rich’s “fifty-one counts of fraud, racketeering” and “tax evasion” (pg. 116). “It was ‘the largest tax evasion indictment ever,’ Giuliani said.”

The defendants engaged in this scheme as a part of a pattern of racketeering activity in which they concealed in excess of $100 million in taxable income of the defendant Marc Rich International, most of which income was illegally generated through the defendants’ violations of federal energy laws and regulations. This scheme, and pattern of racketeering activity, enabled the defendant Marc Rich International to evade taxes in excess of $48 million in United States taxes for the 1980 and 1981 tax years.

Giuliani, however, held back the most serious charge until the end of the press conference.

The most serious charge:

Marc Rich + Co. AG [Rich’s Swiss trading corporation and mother-company to MRI] ‘entered into contracts with the National Iranian Oil Company (NIOC) to purchase Iranian crude and fuel oil.’ ….Trading with the enemy– the gravest of accusations” (pg. 117)

This is how Marc Rich’s crimes became famous, and Marc Rich himself infamous. Prior to these allegations, Rich had been a quiet genius, an unknown billionaire. For a man who would later become the detested scoundrel of a nation who had, until that time, been quite familiar with its many antiheroes (Billy the Kid, Al Capone, Charles Manson), the initial reaction of Sandy Weinberg to allegations against Marc Rich was telling.

“Marc who?” Weinberg asked. “I’ve never heard of a Marc Rich.” (105)

Yet, this “accidental discovery” (117) of Weinberg and Giuliani’s (trading with the enemy) would provide the political impetus to eventually charge Rich and partner Pincus Green with the nation’s toughest “RICO” (Racketeer Influenced and Corrupt Organizations Act) laws, the “prosecutor’s equivalent of nuclear weaponry” (122). For a man whose entire indictment contained not one crime of actual fraud or extortion, the traditional definition of racketeering, it’s hard to imagine how racketeering charges could be justified. Actually, it’s hard to imagine how any charges could be justified because, remember, Rich’s crimes were not against actual, existing individuals but rather against the positive corporate mandates of the United States federal government and its immense regulatory and tax bureaucracies.

True crimes

The real racket being run was that of the US tax authorities, the real crime Rich — a literal world citizen with passports issued by Spain, Switzerland and Israel and whose main business was incorporated in Switzerland — was guilty of was not paying his protection money and furthermore being so bold as to trade with a rival gang in Iran.

And this is really the most instructive moral of the many morals of the Marc Rich saga. Forget the struggle of fleeing Europe’s Holocaust and losing everything in the process. Forget the hard work and determination of an immigrant family that allowed them to overcome language barriers and their immediate poverty to ultimately realize an ‘American Dream’ of their own. Forget the sheer talent and raw force of will necessary to forge a world commodities empire and create an entirely new way to trade oil, a new market that directly challenged the oligopoly of the Seven Sisters oil cartel.

No, Marc Rich’s story is significant and telling because it reveals the true nature of government in practice, and especially government as practiced in America, where it is nothing but politics and egos that decides men’s fates, and not some phony, childish striving for the “common good.” It shows us that government is fundamentally anti-competitive, anti-business and anti-individual.

Political vendetta embodied

The crusade against Marc Rich was over the top and beyond any reasonable idea of the pursuit of justice in a free country. With rampant politicization of the process and the prosecution and defense alike, its use of the most formidable federal charges possible (RICO) and the wanton collateral damage caused to Rich’s company, employees, trading partners and even world markets, it was akin to an all-out totalitarian war.

“It was phenomenal,” Sandy Weinberg told me with glee. “We tied up all U.S. assets, including 20th Century Fox. We shut ’em down completely. We shut the company down for a year. They couldn’t operate in the U.S. It cost them dearly. I assume it cost them probably a billion dollars.” (123)

Ask yourself, what is this prosecutor gloating over? What is he gloating over besides his own pride in his personal power to destroy a man’s business, business partners and reputation? What is he thrilling over but the loss of value, to many millions of people the world over, that the “billion dollars” in lost revenue represents? Rich was never charged with a crime that represented stealing from others or extorting his trading partners… all money he made, he made on the basis of voluntary, wealth-producing transactions from the viewpoint of his trading partners.

This is the stark reality of government, that it destroys wealth. That it tears society down. That it hobbles trade. And all for what? For the egos of ambitious politicians. Who benefited from Marc Rich’s downfall? Not the people of the United States, and not the people of the rest of the world. But for Giuliani, it was “another feather in his cap” (123).

“U.S. Attorney Giuliani knew that the case would serve as a springboard for his political career– a career that would lead him to become the mayor of New York and later to make an unsuccessful bid for the U.S. presidency. One could go so far as to say that Giuliani’s political and very public career actually began with this case. As history has shown, the fact that the case escalated rapidly before virtually exploding as a media event was not exactly to Giuliani’s disadvantage. In all likelihood, this escalation was even desired.” (142)

Ultimately, Marc Rich ran afoul of the political process. He sought to trade around arbitrary regulations and restrictions on oil exchange established by the political Department of Energy. He maintained multiple passports and was not beholden to the ever-changing nationalistic political winds of any land or time period. He exploited tax loopholes to avoid paying as much protection money as he could, protection fees which are, again, established arbitrarily and politically by the respective governments involved on he basis of what is expedient, not what is right or necessary. And finally, he traded with unpopular foreign regimes without respect for outstanding bans and embargoes and did so without the nauseating moral hypocrisy of the politician who makes claim that he is transacting with rights-violators for the Greater Good.

The moral: the individual stands alone

No, Marc Rich only traded for profit, nothing more, nothing less, and a value that is truly non-partial and non-political.

What’s The Yield On Saudi Prince Alwaleed’s “Strategic” Twitter Investment?

Saudi Prince Alwaleed bin Talal has made a $300M “strategic” investment in Twitter, according to Bloomberg.com:

Alwaleed, who leads the 2011 Arab Rich List, and his investment company agreed to buy a “strategic stake” in Twitter, Kingdom Holding said today. A strategic holding means more than 3 percent, Ahmed Halawani, a Kingdom Holding director, said in an interview. That would give the San Francisco-based company a valuation exceeding $10 billion.

Alwaleed is described by Bloomberg as a businessman and an investor. But Alwaleed is a politician, not a businessman– he is a member of the Saudi royal family, and his capital and wealth are continually generated by the Saudi royal family’s political control over Saudi oil fields. Similarly, Alwaleed is an “investor” in businesses like Citi and Twitter in the same sense that the CIA “invested” in Google and Facebook– for information and for control, not for economic or financial profit.

If this is a challenging view to accept, let’s consider just this recent purchase of his Twitter stake from insiders. According to the article, an industry research group recently cut their forecast for Twitter’s 2011 ad revenue from $150M to $139.5M. What kind of value multiplier did Alwaleed “invest” in if he paid $300M for more than 3% of the company which is now valued at over $10B?

Let’s give Alwaleed the benefit of the doubt and say that Twitter’s 2011 ad revenue comes in at $150M. Let’s further assume that Twitter is a highly profitable company and 30% of their revenues drop down to the bottom line and become net profit. That’s $45M of net profit in 2011.

At a $10B market cap, Alwaleed’s investment was made at 66.6x Price-to-Revenues and 222.2x Price-to-Earnings. I should hope I don’t need to do the math for you to show what kind of growth expectations you have to factor into those ratios for them to make sense.

Now, ask yourself, have you ever heard of the “Best Investor In the Universe”, Warren Buffett, investing in companies at these kinds of multiples? Ask yourself, what kind of margin of safety does Alwaleed have here when paying so much for so little. Ask yourself, is it a credible idea that Alwaleed is truly a successful businessman and investor who has managed to grow his personal fortune to $19.6B (according to Wikipedia) since 1979 by investing at such high multiples?

Alwaleed “is a savvy investor and the hot thing in the IT world is social networking,” said Nabil Farhat, a partner at Abu Dhabi-based Al Fajer Securities.

Historically, how do even “savvy investors” fare investing in the latest “hot thing”?

As hinted at earlier, there is a more reasonable explanation for why Alwaleed invested in Twitter, why he has invested in Citi and News Corp., and why he invests in almost anything– Alwaleed is part of a political front and he makes investments as part of a political agenda. Politics is not an economically efficient system, it cares not for scarcity and cost in the economic sense of productive effort and opportunity cost. Political systems get their revenues from coercion, and they use economic resources as but another means to their arbitrary political ends.

Why did Alwaleed invest in Twitter? Because Twitter played an embarrassing role in the recent “Arab Spring” of revolutionary fervor across the Middle East this year and Alwaleed and his sponsors want to be in a position which allows them the knowledge and influence of the insider, of control. This is what is meant by the savvy Mr. Alwaleed’s “strategic” investment in a not-so-profitable social media favorite.

Why did Alwaleed invest in Citi? Because Citi is a centerpiece to the financial chicanery involving the global drug trade controlled by the CIA, the power-politics of world political intrigue and espionage and the dangerous, corrupt game of arms dealing and the financing of imperial military adventurism.

Why did Alwaleed invest in News Corp.? To control the news!

Let us not confuse legitimate businessmen and investors with political operatives and speculators any longer!