Royal Bank of Scotland to investors: 'Sell everything'

Thanks for this. The thing I don't like about pieces like that are that they are populist politics and people's value judgments about how the world should be. .. trying to sell themselves as economic analysis.

Globalisation, trade, etc. in and of itself is not a "good" or a "bad" thing. In the aggregate -- if trade is free and currency exchange rates are relatively fixed -- the more unencumbered the trade, the more efficient the global economy is. That's just cause and effect. The basket of stuff in the entire world, or the global economy, grows largest in that kind of open world.

The reason that populists can point to globalisation as a "bad" thing and rile up people who feel disaffected, is because of the starting point they are working from. Of course, some political theorists (and partisans) from the most DEVELOPED nations in the world -- which benefited for centuries from mercantilist structures that they put in place to benefit themselves -- find it disconcerting when they no longer can do that. And that is exactly where we are.

What made America (but you can say this about the other developed nations) rich in the first place was saving and investment. It is what fuels business, which fuels economic growth. But last century, we went from a nation of savers and investors to a nation of consumers. And the more we consumed, the more we wanted. As the saving and investment (deferring consumption) declined, but our wants increased. ... two things happened: We turned elsewhere to get the stuff we wanted cheaper. ... and we went more and more into debt to fuel our consumption.

For their part, other parts of the world were eager to take dollars in return for the cheap goods they produced for us. Especially after the Bretton Woods conference in the early 1970s sped up the decline that this kind of behavior was going to bring about. The side consequence of it was that the dollar was given reserve currency status in the global scheme they came up with, meaning that emerging countries needed and wanted to hold dollars as reserves. It's an artificial environment in which our credit worthiness and ability to pay back our debts matters less because our debt was made special. And we loved it. It allowed us to buy shit we couldn't afford based on what we were actually producing to be able to afford it.

With no eye toward how we were sowing the seeds of our own destruction, we were happy to export those dollars for cheap goods from elsewhere. And we have lived that way for decades. Little in savings. Plenty of debt. Lots of consumption. Getting fat and happy at first, because at the beginning of the glide path down, the displacements it caused us weren't as large. They were easier to ignore. More people could live beyond what the country actually produced to actually earn all of the consumption -- but the debt levels increased and we slowly bled the value of dollar to inflate away that debt as much as possible (but make it harder and harder for the people on the bottom rungs to survive here as the fewer dollars they could earn were worth less).

The longer you go on with your economy spiraling downward (because you are not saving and investing as much), the more the debt becomes a problem for people who no longer have jobs that pay much and find everything costing more. ... and you end up with a bigger and bigger underclass of people who can't afford all the shit that Americans have gotten used to having living the fantasy. By the time it becomes a problem. ... yeah, you get the populism that rears its head when things get bad enough. And you get the blame game -- THEY stole our jobs!

The flip side is that Asian, Latin American, etc. countries that supplied all the cell phones and building materials and big screen tvs, etc. have seen their standards of living grow. Which shouldn't really surprise people here.

Economics isn't about "good" or "bad" or whatever populist bullshit people like Paul Krugman (in that story) want to come up with to try to hand pick the winners and losers they want (for whatever reasons they have). Economics is fundamentally about scarcity; humans having unlimited wants in a world of limited resources. When you go a very long period of time in which a largely mercantilist world allows some places to get richer and richer by accumulating huge balances of trade, while other places in the world stagnate, or worse, get plundered by the richer places. ... guess what happens when that world order changes? You're left with unlimited wants, limited resources and the whole world (instead of just part of it) better able to try to satisfy those wants.

 

I just saw this clip of Jim Grant on Friday, covering a bit of what I have posted.

 

Um, no.

I am not "rooting" against Netflix (or anything else).

The fact that you post things like that sums up you on this thread.

Here is what I know about Netflix (probably more than you, and I don't own the stock): I know that it has negative free cash flow. It burned through $608 million last quarter, following $254 million in the previous quarter. So its burn rate is accelerating. The stock trades at a P/E ratio of something like 375 based on current earnings. That a is dot-com levels of overpriced. The "rationale" for the pop in price after its earnings report was the subscriber growth. But the market is valuing each member at $711. ... when each member brings in about $110 in revenue per year. But that doesn't matter, as insane as it is, because fundamentals aren't driving this stock, obviously.

The reason that Netflix can burn through cash the way it is, is that it is heavily indebted and can borrow endlessly. It has borrowed close to $5 billion, including $1 billion plus a month or two ago. That relates to my ACTUAL posts about what is driving equity valuations in this artificial environment, that you couldn't respond to intelligently if I sat you down with Benjamin Graham to help you.

Price discovery has been driven out of the credit markets due to central banks muscling them around for the last decade. ... and we are in the throes of a speculative mania because risk gets distorted when credit markets can't price it anymore. It was what led to the collapse in 2008, and it is what we have set up again -- except at much higher debt levels.

All of that is true no matter how high Netflix stocks go while a bubble blows. And if you (you personally) bought the stock without understanding its valuation and its debt levels and that staggering cash burn rate, you are putting money at risk without understanding what you own.

When a credit crisis and a nasty deleveraging restores sanity, I guess we'll see if the hot money that has driven Netflix stock up on momentum, sticks around asthe company is sitting on billions of dollars of debt that it is struggling to service and a valuation that only makes sense in a credit-induced bubble. Maybe it will. I actually hope so for your sake, if you still own it. I can see messing around with something like that as a trade -- a momentum-based trade. Unfortunately, though, the way this always plays out is a lot of people who had no understanding of what they were buying getting caught holding the bag. It grinds higher. ... and it's an elevator ride down when the silliness ends.

But congrats on making money owning the stock. I mean that more sincerely than you'll realize. First, I don't wish financial losses on anyone. And second, I am not "rooting" against Netflix (or anything else), even though that is your nursery school understanding of what I post. I couldn't be more agnostic about it than I am. When I point out factually the debt and a distorted valuation, it isn't about what I WANT as you ridiculously think. I certainly get pissed at the stupidity of rate manipulation that makes Netflix's silly valuation possible. Because it hurts us all -- way more than you understand. Netflix is nothing compared to the ghost companies acting as an anchor on our economy (as people struggle), existing on debt, artificially low rates and central planning authorities that have created an environment in which capital is getting so misallocated that it means survival of the UNfittest in many cases.