Press Conference

I'm so busy at work today I truly can post nothing.  In lieu of my typical post, just enjoy President Trump's latest press conference.  I don't see what the big deal is at this point; the President seems to have set up a modus operandi where he says the first thing that comes to mind and you just can't take his words at face value at all.  However, many of my friends and colleagues are totally outraged and aghast.  Maybe you too will be shocked, rather than bored.

Here's the press conference.

And if you don't have the spare time for that, here's Politico's coverage of it.

Have a very nice strike tomorrow!

Fed and Dollar Update

Janet Yellen, Chair of the Federal Reserve, testified before the Senate Banking Committee yesterday.  I offer my commentary on the NYT article linked-to above for your edification.  Emphases added mine throughout:

Senator Sherrod Brown of Ohio, the ranking Democrat on the committee, asked Ms. Yellen whether regulation had reduced the risk of financial crises.

“I believe the financial system is much more resilient than it was,” she said.

Are businesses unable to get loans? No, Ms. Yellen responded.

Are banks unable to compete with foreign rivals? No, she said.

Are consumers better protected against predation? Yes, she said.

OK.  So the current Fed Chair is on the record saying that Dodd-Frank and other regulatory innovations of the Obama era have made the financial system more resilient ("able to withstand or recover quickly from difficult conditions"), that businesses are not hampered in their ability to raise money, that banks are not at a disadvantage vis-a-vis their foreign rivals, and that consumers are better protected than they were.

Janet Yellen is a Democrat, but she is more hawkish and conservative than her Republican predecessor, Ben Bernanke, who oversaw the Fed during the introduction of most of these regulations, and approved of them.

We have a clear choice here: believe the Fed Chair or believe the average Republican politician, who argues that business cannot get access to credit and that regulations have gone too far.  Not always in life do we get such a clear choice of whose story to believe.  

Onwards:

Ms. Yellen was invited to Capitol Hill to deliver a biannual report on monetary policy to the Senate Banking Committee. And she found time to tell the committee that the Fed remained pleased with the performance of the economy and expected to continue raising its benchmark interest rate, although she dodged questions about the timing.

The Fed thinks, in contrast again to the predominant Republican belief (as well as the belief of many Democrats), that the economy is doing just fine.

The unemployment rate was little changed over the last year, standing at 4.8 percent in January, even as the economy added an average of 190,000 jobs a month during the second half of 2016, and an additional 227,000 jobs last month. That indicates people are returning to the work force. Inflation also showed signs of rising to a healthier level. Prices increased by 1.6 percent during 2016, a percentage point more than in the previous year, although that is still below the Fed’s preferred 2 percent annual pace.

Ms. Yellen demurred when asked directly whether the Fed planned to raise rates at its next policy-making meeting, in March. But she reiterated the Fed’s December prediction of three increases in 2017, raising the Fed’s benchmark rate from its current range, 0.5 percent to 0.75 percent, to a range of 1.25 percent to 1.5 percent.

So inflation is below the Fed's own target, but the Fed is still planning on raising rates. 

If that sounds stupid or contradictory, that's because it is.  The Fed may be staffed with intelligent people, but intelligent people can engage in fetishistic wishful thinking just like everyone else, and there is no bigger fetishist in the modern age than the Inflation Hawk.   

People hear the word "inflation" and lose their minds.  That sounds like Weimar Germany! Or Zimbabwe! Or the Carter era!  That's what a "weak" dollar will do to you!  We need a strong dollar!  Can't let the dollar have insufficient strength!

Actually, the stronger the dollar, the more difficult it is to engage in economic activity.  The more difficult it is to hire people.  To give them raises.  The less sense it makes for consumers to spend the money they've got, circulating it in the economy, allowing businesses to grow.

The Fed is misguided when it comes to the issue of interest rate hikes.  Interest rate hikes are premature.  Let those people who are finally rejoining the labor market after years of sitting at home, saying, "What's the point?" do so.  Let inflation hit 2%.  2% inflation is not going to lead to bread lines.  2% inflation is, if anything, a hair conservative.

In this regard, the Trump administration - rhetorically, if not in substance yet - has the right point of view.  We need more inflation; we need more economic activity.

Of course, there is the matter of what Trump says versus what he knows.  We know that President Trump recently called freshly-fired national security advisor Michael Flynn to ask whether or not a strong or weak dollar is "good".  This is deeply troubling.  

The Trump administration also still hasn't rolled out its infrastructure plan.  We have little to no idea what this plan will actually look like.  This is injecting a lot of uncertainty into markets, into the Fed's prognostications, into the lives of everyone who wants to know what the plan is.

If Trump does go big on infrastructure, however, Janet Yellen may be stepping up to the plate to put the kibosh on any inflation that might ensue:

Changes in fiscal policy have the potential to scramble the Fed’s economic outlook. Mr. Trump has repeatedly called for measures to stimulate economic growth, like tax cuts and infrastructure spending. Ms. Yellen and other Fed officials have suggested that the central bank would seek to offset such measures by raising interest rates more quickly because the Fed judges the economy to be growing at roughly the maximum sustainable pace already. But she reiterated that before acting, the Fed would see what Congress may do.

Do you think the economy is growing at the maximum sustainable pace?  I suppose if it grew at this pace for several years on end America might be Made Great Again, but I'm not convinced.  I could see the pace speeding up a hair, and based on this last election, I think a lot of my fellow Americans are with me.

Still, Fed's gonna Fed, and I'm not convinced that if Donald Trump were to fire to Janet Yellen and replace her with a new Fed Chair that his appointee would be any less hawkish than Yellen.  Inflation Hawk-ery is in the Fed's very blood.  (If you want to dip your toes in Fed history, I cannot recommend this long, but brisky-written and extremely gripping book highly enough.)

Onwards:

Gary Cohn, the president’s chief economic adviser and a former Goldman Sachs executive, said this month that bank lending had been constrained by changes requiring banks to raise a larger share of funds from investors rather than lenders. Such funding protects a bank in the event of losses, because it need not be repaid.

Mr. Cohn described this regulation incorrectly, saying banks were required to “hoard” capital. In fact, capital is a kind of funding; it is not held or hoarded.

Under questioning by Senator Elizabeth Warren, Democrat of Massachusetts, Ms. Yellen defended the importance of capital standards and corrected Mr. Cohn.

“It’s not a requirement that they stick it in a safe and it can’t be used,” she said.

Ok, this is, again, very troubling.  Maybe President Trump doesn't understand how the dollar works, but surely his chief economic adviser should understand how capital requirements work?!? I understand that, and I'm a legal secretary for a living.  Holy cow.

For those who, like Mr. Cohn, do not understand how capital requirements work: in a nutshell, capital requirements are the amount of money a bank must keep in reserve to conduct business.  They can totally "use" this money.  They just can't be so over-leveraged that, when many parties at once decide to cash in their chips (as in a market crisis) they are unable to pay back their creditors.  It's not rocket science, and the increase in capital requirements during the Obama years is, in fact, one of the most substantive accomplishments of the Obama years.

Anyways, because Donald Trump is saying "FULL SPEED AHEAD!" and the Fed Chair is saying "Now now, nice and easy," the dollar market is filled with uncertainty.

However, the dollar is steadily creeping upwards, rising for the 12th day in a row which, actually, breaks a historic record.  Why is the dollar behaving this way?

In a nutshell, the Fed has been saying for a good while now that a rate hike is coming.  Yellen won't say when, which I'm sure irritates many, but the Fed is a known factor and if they say a rate hike is coming, it's likely coming.  A rate hike leads, other factors aside, to a stronger currency.

The Trump administration, by contrast, says an infrastructure plan is in the works, but what is it?  It's been a month now and everyone - Republicans, Democrats, you name it - have no clue what it's going to look like.  Will it be $1 trillion over ten years?  Will it be a quarter of that size?  Will it even happen at all?

Therefore if you're in the dollar market it makes sense to listen to the dependable Fed and put the words of the chaotic Presidential administration in the backseat.

Momentive, Boeing, Oil and the Estate Tax

One of our readers asked me to speak about some tax issues, and today I'll be taking a look at the estate tax in particular.  But first, a few miscellaneous items:

The Momentive strike may be coming to some resolution.  It looks like the union won't be getting its ass handed to it as badly as the company had hoped, but it sure doesn't look like a bed of roses for the Momentive workers.  A $2,000 bonus and a cumulative 4% salary increase over two years is guaranteed by the settlement, but the same settlement also includes cuts in health and life insurance benefits, cuts in vacation accruals, and the guaranteed year-long use of non-union workers in the Building 71 facility specifically. Twenty-seven workers fired during the strike may or may not get their jobs back through an appeals process.

Upstate Dem political leaders are leaning heavily on the union to ratify the settlement and declare it a victory.  If it is a victory, I'm not sure it's a rousing one.

In other union news, South Carolina Boeing employees are voting tomorrow on whether or not to unionize.  They face considerable hostility from their employer, who is doing its best to depict union organizers as a hostile outside force trying to "get between" the workers and their bosses:

Still, the campaign faces considerable obstacles. A local business group tied to the South Carolina Manufacturers Alliance, of which Boeing is a member, has been running advertisements on local television, including one depicting a thuggish casino boss urging people to roll dice at a craps table. The message is that the union wants workers to gamble away what they already have.

Boeing implies that a vote to unionize would mean inserting the union into the relationship between workers and managers, something the union says is false. Organizers say that union stewards would be available when workers felt they had been mistreated, but that otherwise workers would be left to interact with managers as they saw fit.

It will be interesting to see how, if at all, the President weighs in on the Boeing vote (and whether or not the Boeing vote succeeds - far from a given due to the cultural hostility to unions prevalent in South Carolina).

In other economic news, OPEC is cutting its oil production, in conjunction with Russia, and they seem to be sticking to their guns.  Gas prices at at the pump are already up 7% since the oil cuts were announced.  For those who fear a return to high gas prices, the United States, Canada and Brazil may come to the rescue by pumping out oil of their own.  I would not stay up at night in fear of higher gas prices, but I could always be wrong.

Janet Yellen is testifying before Congress today - I'll try to do a full report tomorrow.

Now! On to the estate tax.

Here are ten facts you should know about the estate tax, by the Center on Budget and Policy Priorities, an organization founded by a former Carter administration official, so in other words, they are filthy communists.  Nonetheless their analysis is not bad.

The key point is bear in mind is: the first $5.4 million dollars of a given estate is exempt from the estate tax.  So the worst case scenario, if you are the child of loaded parents, Ma and Pa can at least leave you $5.4 million.  That's not chump change.

You hear a lot from the GOP about the urgency of repealing the estate tax, which is odd, given than less than two-tenths of one percent of all estates will pay any estate tax.  In other words, the estate state is simply not an issue at all for most Americans.  Those estates that are taxed generally pay about one-sixth of their value in taxes.  And then, of course, there are loopholes:

For example, some estates use grantor retained annuity trusts (GRATs) to pass along considerable assets tax-free.  The estate owner puts money into a trust designed to repay the estate the initial amount plus interest at a rate set by the Treasury, typically over two years.  If the investment — typically stock — rises in value any more than the Treasury rate, the gain goes to an heir tax-free.  If the investment doesn’t rise in value, the full amount still goes back to the estate.  Such techniques have been described as a “heads I win, tails we tie” bet.

The estate tax only generates around $27.5 billion per year, about 1% of all federal revenue.  So eliminating the estate tax would not cause budget income to run dry.

However, claims advanced by proponents of estate tax repeal that it would lead to increased capital investment are in all likelihood quite wrong, and here's why (emphases added mine):

The reason is simple:  while repealing the estate tax might lead some people to save more, it also would lead the government to borrow more to offset the lost revenue.  Government borrowing “soaks up” capital that would otherwise be available for investment in the economy.  In the case of estate-tax repeal, the added government borrowing would more than outweigh any added private saving, leaving the economy no better off and quite possibly worse off.

Regarding the above: the premise that government borrowing "soaks up" or "crowds out" investment is really only feasible when there's strong economic growth, low unemployment, and the private sector is firing on all cylinders, which it most certainly is not doing quite yet.  With that said, the idea that large estate holders freed of the estate tax will go invest their saved capital, as opposed to just stashing it in this or that bank, is wishful thinking that does not stand up scrutiny.  (As I have to say far more often: this is a complex issue that deserves its own blog post).

Estate tax repeal would generate quite the windfall for Donald Trump and his cabinet, several of whom are billionaires.

What about the concept that lowering the threshold for the estate tax would destroy the family farm, a claim that often circulates when discussion estate tax repeal?  It appears to be total rubbish with no basis in reality.

I am having an awfully hard time finding estimates of what would happen if the estate tax exemption threshhold was lowered below $5.4 billion.  That's kind of depressing, as it suggests that such a possibility is so politically verboten that no analysis has been done.

It's worth pointing out that as of 2014, six of the ten wealthiest Americans had inherited, not earned, their wealth (this includes famed villains of the left the Koch brothers, as well as the Waltons of Walmart).  According to Forbes, the number of self-made millionaires is on the rise and the number of millionaires who inherited their wealth is on the decline over the course of the last 30 years.

That sounds like an American success story to me, and I'm not sure why we should want to help reverse that trend by repealing a tax that levels the playing field (well, if you count inheriting 5.4 million bucks "level") at least somewhat.

Strikes

First, for those who missed it: here's my little "Idiot's Guide to" private equity and also to the leveraged buyout.  Now, onwards.

There will be a be a general strike this Friday, February 17.

How will it go?  I would be lying if I told you I knew.

If the strike were being held in Europe, I'd wager a guess: the general strike would go very well.  This short Washington Post article on general strikes in Europe is worth reading in its entirety, but here are my key takeaways:

• Strikingly, the number and success rate of general strikes in Europe is up since the 1980s.
• When these strikes are narrowly focused around union issues, they have not done as well.  When they are organized around the defense of social programs - the European equivalent of Medicaid and Social Security - they are generally at least somewhat successful in wringing concessions from the governments at hand.
• File under "well, duh," but: when general strikes are held closer to elections, the strikes are more successful, and have a larger impact on the election at hand.
• Governments that experienced fewer strikes were more likely to be thunderstruck when a strike occurred.  In other words, "strike fatigue" can set in.

But this strike will not be taking place in Europe - it will be taking place in the US of A.  And this is a country where, in large part, we have forgotten how to strike.

Once strikes fall off in the Reagan era, they never come back in full force.  And, funny thing, just take a look at the median income in this country over the same period:

 

How about them apples.  GDP has roughly doubled, and the real earnings of full time workers has gone nowhere.

Let me once again quote Doug Henwood:

It’s wonderful to hear people talking lately about a general strike and a women’s strike. It would also be good to see some of the old-fashioned kind too. Employers hate them, because they disrupt production, raise wages, cut into profits, and remind them of the potential power of labor.

...

Jane McAlevey, the ace labor organizer and author of Raising Expectations (And Raising Hell)…says that her mentor, Jerry Brown of 1199 New England, used to say that workers should strike at least once every two years just to remind them of their power. Those were the days.

No matter who tells you this Friday will be a failure: strike.  Even if it is only to flex your muscles.

Are you happy with your salary?  Are you happy that GDP has doubled while the income of the middle class has stayed flat? 

Strike.

Private Equity and the Leveraged Buyout, pt. 2

The other day I took a stab at giving you a little primer on private equity.  Today I'm going to try to shed on private equity's most famed tool, the leveraged buyout.

Not every leveraged buyout (or "LBO") is a hostile takeover.  There are plenty of instances of a target company being the willing "victim" of an LBO.  With that said, LBOs frequently are predatory in nature and feared for that very reason.

First, let's talk "leverage".  The leverage refers to the amount of debt taken on by the entity doing the buying out.  When a private equity firm announces an LBO of this or that company, most of the money in the buyout attempt does not come from the private equity firm itself - it is borrowed.  Often the private equity firm will put up 10% of the total equity, while borrowing 90% of the funds needed for the buyout.  This amount of leverage means that the debts are usually not "investment-grade" - they are "junk bonds" (a term that, I think, speaks for itself, but basically - highly risky debt).

The upside of this arrangement is that the private equity firm stands to make a hefty profit for a minimal investment.  The downside of the arrangement is all that debt, which is not necessarily easy to repay and - here's the critical point - will be repaid by the acquired company, not by the company doing the acquiring!

That's right: a successful LBO attempt raises a ton of debt and that debt is not taken on by the private equity firm - it is taken on by the targeted company.  Furthermore, in an LBO the assets of the targeted company are used as collateral for the debt incurred.  (For a refresher on the meaning of "collateral", from Investopedia: "Collateral is a property or other asset that a borrower offers as a way for a lender to secure the loan. If the borrower stops making the promised loan payments, the lender can seize the collateral to recoup its losses."  In other words, should the targeted company be unable to pay down this LBO debt, it is the assets - machinery, you name it - of the targeted company that will be sold off to attempt to meet these debt obligations.)

So the LBO that is not mutually agreed to by all parties is intensely predatory, because the "victim" is on the hook for all the debt incurred by the "predator". 

Now - quite often the private equity firm or other entity doing the buying out will re-shape the targeted company in a way that improves that company's profitability, allowing it to repay all the incurred debt and turn a profit!  However, that is often not the case.  Frequently the private equity firm, after making its changes to the bought-out company (which often involve "spinning off" inefficient branches of the target company and firing the employees who work in these branches) will attempt to sell off the company before all the debt from the LBO has been repaid.  Sometimes new shares will be sold to the public, in an attempt to raise cash to retire the LBO debt.  This is called a reverse LBO, and if that sounds a little bit like taking someone to the hospital after you've jumped them and beaten the hell out of them, that's because it's not a terrible analogy.

Target companies typically have a low share price but high cash flow.  You've got to have high cash flow if you want to pay back all that debt!  That's why many LBO targets have historically been older, not very "sexy," but stable companies.  The classic example is the 1989 takeover of RJR Nabisco by KKR.  Old manufacturing firms are prime targets.

If your sole concern is that companies be renovated and improved from a profitability perspective, older workers in particular be damned, the LBO seems an appealing tool - vicious, but rational.  And indeed, if LBOs generally resulted in leaner, meaner and more competitive target companies (once sold for a profit, which is the end game of the LBO), then you'd have to say you had a capitalistic success story on your hands.  However, many LBOs simply leave companies with too much debt to cope.  While the private equity firms or other businesses tend to sell their stake for a profit, they often leave target companies underwater, drowning in debt.  Ergo, once again, the predatory reputation of the LBO.

Whether or not the target company makes it out the other side in fighting shape or burdened with debt, the likelihood of mass layoffs during the process is quite high.  You can't afford to pay a huge staff while servicing all that debt, after all.  Whether you care if these workers live or die depends in part on your view of the free market, I suppose.  It is not rational to retain unprofitable workers when you're coping with debt repayments.

TOO LONG; DIDN'T READ SUMMARY

Not all private equity firms are and not every LBO attempt is vampiric or predatory.  However, the reputation of the LBO as a predatory process that leaves ruin in its wake (mass layoffs and companies choking to death on debt) is not undeserved.  The 1980s were the heyday of the LBO but its practitioners are still with us, and they are chummy-chummy with the President, so private equity bears watching.

Let me close by quoting Doug Henwood's Wall St., a book I urge you all to read and a bit of a Bible of mine (and available for free as a PDF!), on the 1980s LBO craze, words which are still quite pertinent today.  Emphases added mine:

Deals became more overpriced and riskier at the same time the commitments of managers and financiers to the deals were weakening. High up-front fees encourage irresponsible deal making — book the deal now, the hell with long-term prospects. Tighter repayment schedules meant that asset sales — selling off pieces of a company — rather than improvements in profitability were central to the financing strategy — the very definition of Minsky’s Ponzi financial structure. The inferior performance of the public junk bond market suggests that bank lenders are better judges of credit than are mutual fund managers and other portfolio jugglers.

The whole picture of bigger, dumber deals as the buyout binge matured is a severe blow to notions of efficient markets; the whole affair with leverage looks in retrospect like one of the great financial bubbles of all time. But it was a bubble with a flossy intellectual pedigree, deep support from the government (both the elected one and the Federal Reserve) and financial establishment, and with damaging consequences to the real U.S. economy. None of the perpetrators — investment bankers, finance academics, or central bankers — have suffered any blow to their prestige. And none of the governance issues ... have been solved; we know now that the LBO association hasn’t become the new model of business organization, but shareholders are still conniving to get a bigger share of corporate cash flow.

Don't snooze on private equity.

Private Equity and the Leveraged Buyout, pt. 1

One of Donald Trump's advisors is Steven Schwarzman of Blackstone, a private equity powerhouse.  Since he has the President's ear, and since private equity enjoys a considerable amount of political power while attracting a considerable amount of political criticism generally, I thought it would be valuable to take a look at what private equity is and some of what private equity does.

Private equity has, by and large, not been good to Rust Belt workers, i.e., the White Working Class, i.e., a big chunk of the folks who want to Make America Great Again, although it has been good for some Rust Belt companies from a bottom-line perspective.  Private equity has it's merits, but generally those merits do not include boosting manufacturing union-labor employment.

Let me take a stab at breaking private equity down for you.

What's "special" about private equity is encapsulated in the first word of its name.  Investors in a publicly traded company exercise considerable decision-making power through the board of directors of that company.  Investors in a private equity firm do not have that much decision-making ability, if any.  They put their money into the company, and the men or women running the company get to make all the decisions involving that money.

As you might imagine, this gives private equity firms the advantage of being able to move decisively and swiftly, and the disadvantage of not being able to be held in check, should they decide to make bad decisions with their investors' money.

The most common sort of action undertaken by private equity is to take over a company, make changes to that company (geared towards profitability), and sell the company off quickly.  As such, private equity companies generally do not acquire other companies with the goal of running them - just "flipping" them, if you will.

The profit margins on this quick turnaround are much higher than the long-term profit margins that accrue to a company that buys the target company with the intention of holding on it and integrating it into the buying company's core business.  From the Harvard Business Review (emphases added mine):

The benefits of buying to sell in such situations are plain—though, again, often overlooked. Consider an acquisition that quickly increases in value—generating an annual investor return of, say, 25% a year for the first three years—but subsequently earns a more modest if still healthy return of, say, 12% a year. A private equity firm that, following a buy-to-sell strategy, sells it after three years will garner a 25% annual return. A diversified public company that achieves identical operational performance with the acquired business—but, as is typical, has bought it as a long-term investment—will earn a return that gets closer to 12% the longer it owns the business. For the public company, holding on to the business once the value-creating changes have been made dilutes the final return.

So if you want to get rich quick, private equity may be the way to go, as opposed to a traditional publicly traded company investment.  (That said, see disclaimers below.)

Quick turnaround isn't the only way in which private equity outstrips the traditional publicly traded company.  In the United States, private equity funds do not pay taxes on capital gains, whereas publicly traded companies do.

I'd love for some finance guru to explain to me why that is the case.  I'm an open-minded guy, and perhaps there's a very good reason!  Or, perhaps, that tax advantage is wholly unfair and it simply hasn't been addressed by legislation because there is a lot of money at stake, and who wants to ruin a good time for those wealthy enough to invest in private equity, am I right?

Anyways: once a private equity firm has taken over a target company, the least profitable parts of the target company are frequently, though not always, given the axe (in jargonese, "spun off"), increasing the profitability of the target company, at which point the private equity firm sells off the target company, turning a profit.  I'll get to the specifics of how that works tomorrow.  For now, let's just point out that this is a big part of the reason people have come to fear and hate private equity.  If the target company's inefficiencies happen to a be, for instance, an antiquated way of manufacturing industrial goods, then increasing the profitability of the target company may necessitate firing the workers doing the manufacturing, "spinning off" the division that employs these workers.

Private equity has a rep for generating unemployment.  That's not necessarily fair.  Private equity takeovers don't typically lead to net unemployment - they lead to "job polarization", which is a nice way of saying older workers with outdated skillsets get the axe, while newer employees are hired in different positions.  These newer employees are typically non-unionized, and thus, less well compensated vis-a-vis salary and benefits than the older, shitcanned workers. These personnel moves might be economically necessary for the company doing the firing and hiring, but there's no denying that certain people lose their jobs and don't get them back in this sort of "flipping" operation.

Therefore, it is perhaps odd that Donald Trump's supporters have turned to Donald Trump in particular, given his chumminess with Stephen Schwarzman et al., to restore manufacturing jobs in this country.

Before we move on to the specifics of the leveraged buyout, by which private equity does its work, let's summarize private equity from the point of view of the investor: it is risky, but it is also quick and more profitable in general than investing in a traditional, publicly traded company.  Or thus it is frequently said.  How do reputation and reality square?

The emergence of public companies competing with private equity in the market to buy, transform, and sell businesses could benefit investors substantially. Private equity funds are illiquid and are risky because of their high use of debt; furthermore, once investors have turned their money over to the fund, they have no say in how it’s managed. In compensation for these terms, investors should expect a high rate of return. However, though some private equity firms have achieved excellent returns for their investors, over the long term the average net return fund investors have made on U.S. buyouts is about the same as the overall return for the stock market.

...

Private equity fund managers, meanwhile, have earned extremely attractive rewards, with little up-front investment. As compensation for taking the initiative in raising money, managing investments, and marketing their benefits, they have structured agreements so that a large portion of the gross returns—around 30%, after adding management and other fees—flows to them. And that figure doesn’t take into account any returns made on their personal investments in the funds they manage. Public companies pursuing a buy-to-sell strategy, which are traded daily on the stock market and answerable to stockholders, might provide a better deal for investors.

This post is a bit long already, and I haven't even gotten to the most commonly criticized tool of private equity - the leveraged buyout.  I think it best to pause here and come back to the LBO tomorrow.  Let me just conclude by saying this for now: 

There isn't necessarily anything intrinsically wrong or bad about private equity - well, unless you think making a quick buck is wrong or bad - but there isn't much to suggest that private equity is all that helpful in terms of restoring the middle class to its once-comfortable lot, and there is plenty of evidence that private equity can be quite bad for those people who may be, from a finance and economics perspective, "inefficient," i.e., the old-school, unionized, working class.

More tomorrow!

Leaks and Potpourri

There are some amazing leaks coming out of the White House, for those who enjoy those sorts of things.

The thing about leaks from anonymous sources is: who can say for sure they're legit?  That's above my paygrade.  I present them here strictly for entertainment purposes, without any claim that they are for real.  If they are for real, though, sheesh.  We won't know for some time if they're real or not.  I do think they're funny, though.  Funny and potentially extremely disturbing.

Leak #1: apparently President Trump authorized the raid in Yemen that resulted in the death of a Navy SEAL along with numerous Yemeni civilians and the loss of a $75 million helicopter after being told the raid could be a "game changer" and than the Obama administration was not "bold enough" to have launched it.

Al Qaeda leader Qassim al-Rimi was not captured in the raid, and the Trump administration denied that capturing him was the point of the raid.  But if capturing al-Rimi was not the point of the raid, what was the point of the raid?  If it was simply to show that the President is "bolder" than Barack Obama, then that's rather troubling.

This is the part that upsets me the most (aside from the Yemeni civilians being killed. I know we're not supposed to care about non-American civilians for some reason, but I can't help but think that those people are human beings too):

A former SEAL Team 6 member told the New York Times that commandos knew the mission was compromised and that they “were screwed from the beginning.”

(emphasis added mine)

Well, anyways, things go wrong in targeted military operations and this too will pass.  So let's move on to Leak #2.

Leak #2: Apparently Donald Trump doesn't know whether a strong dollar or a weak dollar is "good," and decided to ask his national security advisor to clear that issue up for him.  Emphases added mine:

President Donald Trump was confused about the dollar: Was it a strong one that’s good for the economy? Or a weak one?

So he made a call ― except not to any of the business leaders Trump brought into his administration or even to an old friend from his days in real estate. Instead, he called his national security adviser, retired Lt. Gen. Mike Flynn, according to two sources familiar with Flynn’s accounts of the incident.

Flynn has a long record in counterintelligence but not in macroeconomics. And he told Trump he didn’t know, that it wasn’t his area of expertise, that, perhaps, Trump should ask an economist instead.

Trump was not thrilled with that response ― but that may have been a function of the time of day. Trump had placed the call at 3 a.m., according to one of Flynn’s retellings ― although neither the White House nor Flynn’s office responded to requests for confirmation about that detail.

Why didn't the President call me?  I could clearly explain the advantages and disadvantages of a strong and a weak dollar to him.  I'd be happy to!  I want things to work out for the working class and America to be Made Great Again.  I'd take that call at 3:00 a.m.!  Give me a ring, Donald!

Maybe these leaks are slander pure and simple.  I certainly hope they are, because if the President who's planning on rolling out a big infrastructure plan to save manufacturing jobs in this country doesn't understand whether a strong or weak dollar is the "good" one, we're in trouble.

Now, some random items:

• Dean Baker has a good short piece on severance pay, and how it can be mandated by the states to deter mass layoffs.  I really hope you folks are checking your Dean Baker daily!

• Here's a frightening analysis of that Goldman Sachs report from yesterday.  I take this article with a proverbial helping of salt.  A trade war could work out for American workers by lowering the trade deficit, which has cost us millions of jobs.  Still, I have to admit that waltzing into a trade war doesn't sound like a walk in the park to me, especially if it were to lead to a real war.

• China is winning the battle for Africa's infrastructure market.  Africa is a continent on the rise, which can be hard to mentally adjust to if you were raised, as I was, with nearly exclusive images of warfare and starvation plaguing the entire continent.

Lastly for today, and not news/Trump administration related: the new Legend of Zelda game just looks so damn awesome.  I'm going to have my first child soon.  I won't have time to play this, will I? Sigh.