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Commentary on The Capital Markets
2017-02-23 09:25 by Karl Denninger
in Editorial , 335 references
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There were some "proclamations" made by various "reporters" that "many arrests" (30 was a popular number) were "imminent" and would be made "within a week" after Sessions was confirmed -- on "Pizzagate."

Well, it's been well more than a week, and the only 900lb Gorilla in the room was Flynn's "resignation" (really a firing, as far as I can tell.)  Yes, there have been a handful of raids on various people allegedly abusing kids -- including an "international adoption agency" -- but the number of high level (e.g. political or corporate leadership) individuals accused, apprehended or charged numbers, as far as I can tell thus far, zero.

May I remind readers that the one thing that could really change Washington DC -- and improve life for the average America -- was a restoration of the Rule of Law.

Specifically, in the area of anti-trust (medical care) where the cost would fall by as much as 90% in a day, making "health insurance" unnecessary for anything except true catastrophes.

In addition getting the blackmail-and-bribery crap out of DC, even if only a bit, would be a big step forward too.  You don't really think those "lobbyists" are all just "politely asking" for favors, do you?  After all, lobbyists usually can't even vote in the district or state in question!

But no, it hasn't happened.  None of it.  There's been zero on the medical scams out of Trump, particularly where he can act without Congress and in fact Congress can't stop him: Enforcement of 15 USC Chapter 1 against the entire medical, drug and health insurance industry.  And don't give me this crap about how it's "not possible" because the States have filed suits.

As for "pizzagate", which a few "pundits" (some of whom make their money selling their views) said would have arrests inbound this last week..... where are they?  Hell, Sandusky's adopted son just got accused of diddling kids, but in DC?  Zippo.

That's the easy stuff folks.  The hard stuff is where they try to kill you or your family when you take it on.  Like, for example, the likely truth behind $1,200 "toilet seats" and $500 "hammers" within the DOD procurement process.

What we have seen is that various government departments and agencies leak like a sieve whenever something they don't like might be on the table.  And that leads to a very inconvenient question: Exactly how far off is "accidentally not looking" when you're supposed to when we have hard proof that there are active "leaks" all over the government?

Traitors are traitors; you don't have to do the dastardly deed, you just have to not pay attention at a particular time.  There are plenty of evil bastards who will take care of the rest and leaking embarrassing material is more both dangerous in that you might get caught and requires far more effort than not looking when you should be.

Is there any particular reason to believe any of the crap in this country will ever get addressed -- especially the really ugly and dangerous stuff -- when not even the basic economic actions that require no new laws and in fact are simply directing people to enforce existing statutes are once again intentionally ignored and in fact the scams are cheered on by people like Rand Paul in the Senate?


Yes, the directives out of ICE and the change in our nation's posture when it comes to criminal illegal aliens (most of whom violate not just the law coming here but they also victimize individuals and society generally through identity theft and similar crimes - and those violations are nearly-universal) are positive -- and I certainly hope they continue.

But the problem with cheering on such changes is that they're 5% of the problem and while objectively good are not enough to matter.  Even if Trump goes after the pedo games hard it's not enough to matter. The pushing of "electoral reform" is a joke and in fact I'd argue it's an intentionally false dog-whistle that will force the expenditure of political capital on a useless goalall it would do is change how resources are allocated by candidates in elections.

The 80% of the problem is found in our medical monopoly scams which render the cost of medical care five to ten times as expensive as it would be absent same and the fact that at the growth rates seen over the last 30 years both the private sector and government will detonate within the next four to five years.  Even worse the Republicans have filed bills to "change" Obamacare in ways that will make some of these schemes explicitly legal where plain reading of federal law makes clear they currently are not, guaranteeing you will be screwed rather than helped.

Trump has demonstrated exactly no intent to change anything in this regard -- and that's a fact.

It's unfortunate too because in just a few short years our time is going to run out as a nation in this regard.

The opportunity was there for Trump to be one of our greatest Presidents.

He's squandering it and instead spending his political capital on "red meat" that, while good and proper is in fact simply tinkering around the edges and soon, if he does not act in this regard, the opportunity to avoid this preventable disaster will be irretrievably lost.

I hate being right, but the fact is that absent massive shifts in focus and tone within mere days to a few weeks the jury is in.  The stock market certainly says so: It's up massively, and a big part of where those 'profits' come from are H1b visa holders displacing Americans (does anyone actually believe JP Morgan can't get Americans to do these jobs?), Apple, Facebook and Google doing the same, or, for that matter, Disney.  Why are health related firms, like the IBB (biotech index) not cratering under the premise that 90% of their revenue will disappear when they can't bilk consumers any more?

You know the truth folks and it takes 30 seconds to figure it out -- the market is skyrocketing because companies, and "investors", believe you are going to get screwed longer, harder and more-frequently.

Unless you're a delusional idiot any hope of real change and real improvement for Americans and their lives being heralded by Trump is over.

Enjoy (or protest) the red meat; in terms of outcome it will have exactly as much impact on your life as a dog whistle, and if you're following it then you deserve the outcome when the food promised by said dog whistle is laced with cyanide.

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A few minutes ago President Trump said deficits are out of control.

He's right, of course.

In point of fact the real deficit increase was $1.4 trillion last year.  How do we know this?  Because debt to the penny (an official Treasury site) tells us exactly how much the federal government has "borrowed."

I put "borrowed" in quotes for a reason: Banks, including the Fed, do not actually lend out deposits that were previously made.  Instead what they do is push a button, credit your account and cover the reserve requirement when the money is spent and someone else deposits it.

As such borrowing by the federal government, which is not backed by collateral that has already been made and is removed from the market until said loan is repaid, always and immediately creates monetary inflation.

You cannot control where this shows up in prices but that it does and always will is a mathematical fact.

Last year GDP was operating at about an $18.7 trillion in the third quarter (when the total deficit increase was totaled as well; Sept 30 2016.)  This means that approximately 7.5% monetary inflation occurred last fiscal year.

How much was the stock market up during that time?   From 1951 -> 2168 (S&P 500), approximately, or roughly 11.1%.

Or was it?

No, it was actually up 11.1 - 7.5% in real terms or 3.6%.

What happens if the deficit goes to zero.  Then the market at best grows at about 1/4 of the rate it was before.

This, of course, assumes the stock market got an average benefit from that inflation.  In point of fact it probably got a much larger than average benefit.  Why do we know this?  Because corporate profits have not been accelerating materially and the market is now trading at crazy price:sales ratios -- which have only been seen before in the near term before serious corrections or even crashes.

So again -- what do you expect to happen if the fuel that has driven the market up disappears?

You might want to start thinking about that.

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2017-02-20 06:00 by Karl Denninger
in Health Reform , 721 references
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It seems some of the state AGs might be reading my postings.......

But now generic drug executives can expect to face tougher legal repercussions, as evidenced by two federal court lawsuits filed late last year—one in November brought by Eatontown, N.J.-based Heritage Pharmaceuticals Inc. against two of its former executives, Jeffrey Glazer and Jason Malek, using the Racketeer Influenced and Corrupt Organizations Act (RICO), and one in December that 20 states have filed against six companies, including Heritage, after a major antitrust investigation by the state of Connecticut.

Racketeering and Anti-Trust eh?  Gee, that's a good start.

Now go after the hospitals and diagnostic centers and you'll really make progress.

Let me give you a hint: It takes 30 seconds to find a bill from a hospital that has a 90% discount for a certain "insurance."

There's extortion ("buy this insurance or be bankrupted if you need our services") and incidentally an illegally-tied sale (anti-trust again) -- and probably Racketeering there too, since the hospitals are all doing basically the same thing and if you can find a couple of people who are "in on it", well....

This crap has been illegal for over 100 years and yet nobody has been willing to bring charges and suits.

Until now, and at the state level. 


Do it and you get your face on Mt. Rushmore.
Don't do it and you have a failed presidency.

(Yes, I'm aware of the short term economic impact from doing it -- and it won't be pretty.  However, that won't last long, and the intermediate impact will be growth rates we haven't seen since right after WWII.)

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2017-02-18 06:00 by Karl Denninger
in Editorial , 2080 references
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I'm roaming right now, and what I see is, well, disturbing.

Man came from ape, right?  Sort of, anyway -- whether you think God did it or Darwin was responsible, the path is mostly the same.  We argue agency, not outcome.

But what the hell has happened to people in the last 50ish years?

People of WalMart is supposed to be a spoof.  It's not.

People I knew who I haven't seen in 20, 30 years -- my God what happened to you?

I find old pictures, and gaze at them.  We all get older, we get some lines to our faces, our hair is more-gray, and similar.  But gee, is that it?  No.  And both you and I know it.  And that's just the physical side of things.

We have a divided nation.  Half wants to kill the other half.  More than a few actually mean it; it's not a metaphor, it's a desire.

"Let it go"?  You can't be serious.

If the change comes slowly among those you hang out with you don't really recognize it.  If you walk into a scene you haven't been in for the last 20 years and see the change "all at once".... well....

"I need a drink -- or six -- now" was my initial thought.

The next thought?  Sell everything, buy some land away from all this crap, put up a block house, get some chickens and goats and **** it all.


What the hell has this nation turned into?  It may have happened more or less slowly, but it's happened.  Yes, there are normal people left.  But how many?  In big cities, where the population is centered?  Good luck.

You may know that there's a "dystopian" video floating around out there that basically says that the big cities turning into literal hell is not fiction, but inevitable.  It's a government video.  I would poo-poo it except.... I'm seeing it right now.

Oh my.

Prayer is not only inadequate, it's idiotic at this stage.

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2017-02-16 05:00 by Karl Denninger
in Technology , 351 references
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There is a common - and wrong - premise that "first mover" is an advantage.

Of course it is at the outset.

But it only continues to be if you continue to be the first mover -- that is, you always have "the outset."

As soon as anything you do becomes a commodity then "first mover" = first loser.

The reason is simple: You are the first one to buy the hardware and service necessary to do X and you get stuck with it on a depreciation schedule where the new entrants a year or two -- or five -- later get to buy the next few generations down the road which are more-efficient and far cheaper.

Thus on your "COGS" line -- cost of goods (services) sold -- you get murdered.

Witness Verizon.  Verizon was first mover to deploy LTE.  Unfortunately that means they got stuck with a bunch of older LTE gear that could not cleanly integrate with newer advanced services and was more expensive than the next versions that followed.

Verizon had a major market advantage -- for a while -- as a result.  AT&T went second trying to catch them.  T-Mobile came along after the first-generation gear was obsolete, put in second and third generation gear and is now murdering them with a lower cost structure and thus the ability to offer lower prices.

Who's winning?  T-Mobile.

That's not because Legere is a genius.  He's a brazen *******.  But by not being first he got the cost advantage as the market moved toward a commodity offering and now he's tattooing Verizon and, to a lesser extent, AT&T.

Sure, Verizon has coverage in more places than T-Mobile but that advantage is dwindling fast. They're now getting close to AT&T's coverage, and more-importantly in most cases they're both faster and cheaper.

A couple of years ago T-Mobile's coverage was vastly inferior and they had a lot of EDGE or even GPRS service -- woefully slow.  Now most of their network is LTE capable and it typically outperforms -- frequently by 2x and sometimes by 10x -- the speed of either AT&T or Verizon.

How can they do that and offer "unlimited" service for $70/month when nobody else can and does?

Simple: They weren't first and aren't stuck with depreciation on older-generation gear.

Now here's Amazon's problem: Their AWS service is largely comprised of older, "first mover" equipment.

Yes, they are deploying newer.  But that older stuff will be on their balance sheet and in their data centers for years under IRS depreciation schedules and they have to recover the cost of it.  The newer entrants do not have to do this since they were not first.  They installed hardware that is faster, costs less and consumes far less power (which you pay for twice in a data center -- first for the power, then again to remove the heat via your A/C bill.)

Don't underestimate the power and efficiency issue.  It's very, very real, as is the cost issue. A number of years ago a previous-generation Xeon processor in the primary server here cost many hundreds of dollars each -- just for the chip.  Now?  I can get pulls of a chip a generation further down that is both faster and has the built-in AES instruction set for $15.  Yes, I did, of course - around two years ago.

Today I could buy a replacement system board for a few hundred dollars that would consume less than half the power of the one that's in the case now and is much faster!  But that new board needs new RAM, which makes the cost even higher.

And this is where the problem lies for the existing installed base: It's prohibitively expensive to toss all that older stuff in the trash -- it still works and the capital cost of tossing and replacing it is large.  While MACRS rules have helped (reducing what was a 7 year depreciation schedule to 5) five years is a damned eternity in the computer world and the power and performance structure of newer units is likely to leave you disadvantaged to the tune of 400% by the time five years runs!

In point of fact I had quite a go-around with the accountants in the time of MCSNet that for a lot of gear that we owned we should be able to basically expense it since it had a useful operational lifetime that typically failed to span even two tax years. They told me I'd go to jail attempting that with the IRS......

This means that AWS has a natural disadvantage in cost structure that they cannot evade.  Witness places like Digital Ocean that offers virtual servers for $5/month.  Yes, really.  My secondary DNS has been over there for more than a year.  The storage is all SSD.  The prices are, well, insanely cheap.  Instances are easily spun up and torn down and can be as standard as you'd like.

Why is that service there instead of on AWS?  Because I couldn't approach Digital Ocean's pricing on AWS.

Folks, this isn't magic, and Bezos isn't immune to it.  Neither is Microsoft or IBM.  It's fact and it's a huge problem with any service that gets turned into a commodity.

Does it make any sense for firms that are "riding the cloud wave" to be getting the sort of valuations they are under this fact?  Hell no.  That reality inexorably turns into margin compression and when it does the alleged "value" in these offerings that the market is "pricing in" turn into a big pile of flaming dog****.

Don't be there when it happens.

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