Copula

How Corporate Zombies Are Threatening The Eurozone Economy

The recovery in Eurozone growth has become part of the synchronized global growth narrative that most investors are relying on to deliver further gains in equities as we head into 2018. However, the “Zombification” of a chunk of the Eurozone’s corporate sector is not only a major unaddressed structural problem, but it’s getting worse, especially in…you guessed it…Italy and Spain. According to the WSJ.

The Bank for International Settlements, the Basel-based central bank for central banks, defines a zombie as any firm which is at least 10 years old, publicly traded and has interest expenses that exceed the company’s earnings before interest and taxes. Other organizations use different criteria. About 10% of the companies in six eurozone countries, including France, Germany, Italy and Spain are zombies, according to the central bank’s latest data. The percentage is up sharply from 5.5% in 2007. In Italy and Spain, the percentage of zombie companies has tripled since 2007, the Organization for Economic Cooperation and Development estimated in January. Italy’s zombies employed about 10% of all workers and gobbled up nearly 20% of all the capital invested in 2013, the latest year for which figures are available.

The WSJ explains how the ECB’s negative interest rate policy and corporate bond buying are keeping a chunk of the corporate sector, especially in southern Europe on life support. In some cases, even the life support of low rates and debt restructuring is not preventing further deterioration in their metrics. These are the true “Zombie” companies who will probably never come back from being “undead”, i.e. technically dead but still animate. Belatedly, there is some realization of the risks.

Economists and central bankers say zombies undercut prices charged by healthier competitors, create artificial barriers to entry and prevent the flushing out of weak companies and bad loans that typically happens after downturns. Now that the European economy is in growth mode, those zombies and their related debt problems could become a drag on the entire continent.

 

“The zombification of the corporate sector and banks (is) a risk for future living standards,” Klaas Knot, a European Central Bank governor and the head of the Dutch central bank, said in an interview.

 

In some ways, zombie firms are an unintended side effect of years of easy money from the ECB, which rolled out aggressive stimulus policies, including negative interest rates, to support lending and growth. Those policies have been sharply criticized in some richer eurozone countries for making it easier for banks to keep struggling corporate borrowers alive.

Talking of realizing the risk, as usual, the Bundesbank is acting as Mario Draghi silent conscience.

The ECB said in late October it would extend its giant bond-buying program through next September, likely pushing back the date of any interest-rate increase until at least 2019. A small group of central-bank officials opposed the decision, including Jens Weidmann, president of Germany’s Bundesbank. In a speech in September, Mr. Weidmann cited an academic study that concluded a bond-buying program by the ECB in 2012 had helped stabilize banks in southern Europe and boost lending but resulted in more loans to weak companies by the same banks. There was no positive impact on employment or investment, the study found.

The WSJ focuses on two industries with structural challenges, namely retail and shipping, and begins with a company which is an archetypal Zombie, Stefanel.

Italian clothing maker and retailer Stefanel SpA became famous for its knitted coats and cardigans. Many economists, investors and bankers know Stefanel as something starkly different: a zombie company. It has posted an annual loss for nine of the last 10 years and restructured its bank debt at least six times, including several grace periods when Stefanel only had to pay interest on what it owed. After booming during Italy’s post-World War II expansion, Stefanel and its lumbering factories were overwhelmed by Spanish fast-fashion giant Zara and then battered by the economic slowdown that hit Italy in 2008. Stefanel is still alive but staggering. So are hundreds of other chronically unprofitable, highly indebted companies being kept afloat with new infusions from lenders and shareholders, especially in Southern Europe.

 

As the WSJ goes on to highlight, even the radical corporate and debt restructuring of Stefanel has only reduced its debt by 12%.

Banks restructured Stefanel’s debt even when the apparel maker’s financial problems worsened. The banks continued to collect interest, and some of the loans were repaid, but their decisions not to wipe the debt off their balance sheets meant the banks had less money for healthy firms. Stefanel’s lenders included Banca Monte dei Paschi di Siena, where bad loans peaked at nearly $58 billion in 2016. The Italian government took over the bank earlier this year.

The bank and Stefanel declined to comment. As part of a new restructuring plan, two distressed-debt funds will get a 71% stake in Stefanel by year-end for about $13 million. Giuseppe Stefanel, the founder’s son and company’s largest shareholder, will wind up with a stake of about 16%, down from his previous 56%. Banks owed $125 million by Stefanel will see that decline to about $110 million. Banks demanded that Mr. Stefanel give up control and step down as chief executive as a precondition for approving the turnaround plan, according to a person familiar with the matter. Mr. Stefanel will remain non-executive chairman and “have no control whatsoever,” the person said. Mr. Stefanel declined to comment.

We fear that this is unlikely to be enough to see Stefanel through the next downturn. But it’s not just southern Europe, German banks have been the largest lenders to the struggling shipping industry, where Zombie companies abound. Moody’s estimated that the five biggest German lenders to the shipping industry had roughly $26 billion of distressed shipping loans at the end of last year. This is a ratio of 37% compared with total shipping loans and was up from 28% the year before.

The relationship between Nordeutsche Vermoegen and HSH Nordbank is the example the WSJ cites to show how are keeping companies alive, barely. From the WSJ.

“Some of these zombie companies are getting financed at (interest rates of) 2% because banks are trying to throw good money after bad,” said Basil Karatzas, a shipping-industry consultant in New York…German shipping company Norddeutsche Vermoegen Holding GmbH & Co. KG suffered total losses of $1.1 billion from 2010 to 2015. Its debt quadrupled to more than $2 billion, or almost nine times revenue, from 2007 to 2010. The companthe “Zombification” of a chunk of the Eurozone’s corporate sector is not only a major unaddressed structural problem, but it’s getting worsey hasn’t reported annual results for 2016. In 2016, Norddeutsche Vermoegen got a half-billion euros in debt relief from HSH Nordbank, a German bank that was until recently the world’s largest lender to the shipping industry. According to the shipping company’s financial statements, Norddeutsche Vermoegen made a profit due to “loan forgiveness by the bank.” Norddeutsche Vermoegen and HSH Nordbank declined to comment.

The gravity of the situation has warranted greater scrutiny by the ECB as the article explains. Back in May, the ECB announced on-site inspection for banks with exposure to distressed shipping debt. In a speech earlier this month, Draghi acknowledged the bad debt problem, while lamenting that many banks lack the ability to absorb losses.

“We all know the damage that persistently high levels of NPLs can do to banks’ health and credit growth. And though NPL levels have been coming down for significant institutions – from around 7.5 per cent in early 2015 to 5.5 per cent now – the problem is not yet solved. “Many banks still lack the ability to absorb large losses, as their ratio of bad loans to capital and provisions remains high,” he said.

The ECB faces a Catch-22, pressing banks to address the problem more aggressively not only threatens the banks but the provision of credit to the broader economy. The WSJ highlights the Morgan Stanley view that a resolution in Italy, for example, will last a decade.

Italian banks have set aside half of the value of their $407 billion in gross problem loans at the end of 2016, according to the country’s central bank. That means the banks would be hit with billions of euros in additional losses if they sell the loans. Many lenders would rather hold on to the shaky loans and hope for the best. The ECB proposed last month requiring banks to set aside more cash to cover newly classified bad loans. The proposal was criticized by senior Italian officials, including former Prime Minister Matteo Renzi.

 

“If they pass new rules, credit to small businesses will be impossible,” he wrote on Twitter. Some banks in Italy have begun to tackle the problem, including by announcing plans to sell billions of dollars of bad loans within three years. Analysts at Morgan Stanley estimate it will take the country’s banks 10 years to reach the European average for nonperforming loans.

This impressive piece of journalism ends on a thought-provoking note from Portugal which perfectly describes the endless suffering of the corporate “undead” in structurally challenged industries.

In Portugal, a program set up in 2012 by the government as part of the country’s bailout aimed to help heavily indebted companies reach agreements with creditors, avoid insolvency and free up money to invest and grow. In practice, the revitalization program can discourage banks from pulling the plug on battered companies, said Antonio Samagaio, an accounting professor at ISEG-Lisbon School of Economics and Management. The reason: The program allows lenders to take fewer write-downs because debt that isn’t forgiven still is considered performing for accounting purposes. Lisgráfica Impressão e Artes Gráficas SA, one of Portugal’s largest printers, entered the program in early 2013. Banks forgave 65% of the company’s debt and agreed to extend repayments. That helped Lisgráfica to keep most of its workers on the job. Now, though, Lisgráfica is having trouble making its debt payments. The company’s revenue has been hurt by the advertising decline at newspaper and magazine clients. Lisgráfica’s losses are widening.

Of course, at the heart of these structural problems are the failure by central banks too, firstly not create an artificial sense of prosperity via credit bubbles, but secondly, to accept some shorter-term pain for longer-term free-market gain. As Schumpeter asserted “The process of creative destruction is the essential fact about capitalism”, but this isn’t capitalism.  

Fed Hints During Next Recession It Will Roll Out Income Targeting, NIRP  

In a moment of rare insight, two weeks ago in response to a question “Why is establishment media romanticizing communism? Authoritarianism, poverty, starvation, secret police, murder, mass incarceration? WTF?”, we said that this was simply a “prelude to central bank funded universal income”, or in other words, Fed-funded and guaranteed cash for everyone.

On Thursday afternoon, in a stark warning of what’s to come, San Francisco Fed President John Williams confirmed our suspicions when he said that to fight the next recession, global central bankers will be forced to come up with a whole new toolkit of “solutions”, as simply cutting interest rates won’t well, cut it anymore, and in addition to more QE and forward guidance – both of which were used widely in the last recession – the Fed may have to use negative interest rates, as well as untried tools including so-called price-level targeting or nominal-income targeting.

The bolded is a tacit admission that as a result of the aging workforce and the dramatic slack which still remains in the labor force, the US central bank will have to take drastic steps to preserve social order and cohesion.

According to Williams’, Reuters reports, central bankers should take this moment of “relative economic calm” to rethink their approach to monetary policy. Others have echoed Williams’ implicit admission that as a result of 9 years of Fed attempts to stimulate the economy – yet merely ending up with the biggest asset bubble in history – the US finds itself in a dead economic end, such as Chicago Fed Bank President Charles Evans, who recently urged a strategy review at the Fed, but Williams’ call for a worldwide review is considerably more ambitious.

Among Williams’ other suggestions include not only negative interest rates but also raising the inflation target – to 3%, 4% or more, in an attempt to crush debt by making life unbearable for the majority of the population – as it considers new monetary policy frameworks. Still, even the most dovish Fed lunatic has to admit that such strategies would have costs, including those that diverge greatly from the Fed’s current approach. Or maybe not: “price-level targeting, he said, is advantageous because it fits “relatively easily” into the current framework.”

Considering that for the better part of a decade the Fed prescribed lower rates and ZIRP as the cure to the moribund US economy, only to flip and then propose higher rates as the solution to all problems, it is not surprising that even the most insane proposals are currently being contemplated because they fit “relatively easily” into the current framework.

Additionally, confirming that the Fed has learned nothing at all, during a Q&A in San Francisco, Williams said that “negative interest rates need to be on the list” of potential tools the Fed could use in a severe recession. He also said that QE remains more effective in terms of cost-benefit, but “would not exclude that as an option if the circumstances warranted it.”

“If all of us get stuck at the lower bound” then “policy spillovers are far more negative,” Williams said of global economic interconnectedness. “I’m not pushing for” some “United Nations of policy.”

And, touching on our post from mid-September, in which we pointed out that the BOC was preparing to revising its mandate, Williams also said that “the Fed and all central banks should have Canada-like practice of revisiting inflation target every 5 years.”

Meanwhile, the idea of Fed targeting, or funding, “income” is hardly new: back in July, Deutsche Bank was the first institution to admit that the Fed has created “universal basic income for the rich”:

The accommodation and QE have acted as a free insurance policy for the owners of risk, which, given the demographics of stock market participation, in effect has functioned as universal basic income for the rich. It is not difficult to see how disruptive unwind of stimulus could become. Clearly, in this context risk has become a binding constraint.

It is only “symmetric” that everyone else should also benefit from the Fed’s monetary generosity during the next recession.

* * *

Finally, for those curious what will really happen after the next “great liquidity crisis”, JPM’s Marko Kolanovic laid out a comprehensive checklist one month ago. It predicted not only price targeting (i.e., stocks), but also negative income taxes, progressive corporate taxes, new taxes on tech companies, and, of course, hyperinflation. Here is the excerpt.

What will governments and central banks do in the scenario of a great liquidity crisis? If the standard rate cutting and bond purchases don’t suffice, central banks may more explicitly target asset prices (e.g., equities). This may be controversial in light of the potential impact of central bank actions in driving inequality between asset owners and labor. Other ‘out of the box’ solutions could include a negative income tax (one can call this ‘QE for labor’), progressive corporate tax, universal income and others. To address growing pressure on labor from AI, new taxes or settlements may be levied on Technology companies (for instance, they may be required to pick up the social tab for labor destruction brought by artificial intelligence, in an analogy to industrial companies addressing environmental impacts). While we think unlikely, a tail risk could be a backlash against central banks that prompts significant changes in the monetary system. In many possible outcomes, inflation is likely to pick up.

 

The next crisis is also likely to result in social tensions similar to those witnessed 50 years ago in 1968. In 1968, TV and investigative journalism provided a generation of baby boomers access to unfiltered information on social developments such as Vietnam and other proxy wars, Civil rights movements, income inequality, etc. Similar to 1968, the internet today (social media, leaked documents, etc.) provides millennials with unrestricted access to information on a surprisingly similar range of issues. In addition to information, the internet provides a platform for various social groups to become more self-aware, united and organized. Groups span various social dimensions based on differences in income/wealth, race, generation, political party affiliations, and independent stripes ranging from alt-left to alt-right movements. In fact, many recent developments such as the US presidential election, Brexit, independence movements in Europe, etc., already illustrate social tensions that are likely to be amplified in the next financial crisis. How did markets evolve in the aftermath of 1968? Monetary systems were completely revamped (Bretton Woods), inflation rapidly increased, and equities produced zero returns for a decade. The decade ended with a famously wrong Businessweek article ‘the death of equities’ in 1979.

Kolanovic’s warning may have sounded whimsical one month ago. Now, in light of Williams’ words, it appears that it may serve as a blueprint for what comes next.

Congress Discloses Complete Number, Amount Of Harassment Settlements In Past 20 Years

 While it’s not surprising that 2007 – the year when spirits were high, housing prices had just hit a record and the financial bubble was about to burst but not yet- was a “swinging one” on the Hill, with a whopping 25 sexual harassment settlements, the most in the past 20 years, we wonder what happened in 2002 when only 10 settlements led to a near-record $4 million in awards. This question was prompted by the first-ever release of Congressional harassment records, unveiled yesterday for the first time by the Congressional Office of Compliance.

Below is the breakdown of settlement number by year since 1997…

… and the amount quietly paid out in settlement awards:

To be sure, the controversial and sensitive issue of Congressional harassments has taken center stage this week, with female lawmakers making fresh allegations of sexual harassment against unnamed members who are currently in office, and the unveiling of a new bill on Wednesday to change how sexual harassment complaints are reported and resolved. On Thursday, a former Playboy playmate shared her story of being groped and kissed without her consent by Sen. Al Franken in 2006.

And until yesterday, there was little specific data to help illuminate just how pervasive sexual harassment is on Capitol Hill, but finally, one figure has emerged: the total that the Office of Compliance, the office that handles harassment complaints, has paid to victims. On Thursday, the Office of Compliance released additional information indicating that it has paid victims more than $17 million since its creation in the 1990s. That includes all settlements, not just related to sexual harassment, but also discrimination and other cases.

According to CNN, an OOC spokeswoman said the office was releasing the extra data “due to the interest in the awards and settlement figures.” The OOC has come under fire in recent days for what lawmakers and Hill aides alike say are its antiquated policies that do not adequately protect victims who file complaints. CNN also learned that during the current Congress, no settlement payment approval requests have been made to the congressional committee charged with approving them.

Here’s what we know about that money:

When was this money paid out?

According to a report from the Office of Compliance, more than $17 million has been paid out in settlements over a period of 20 years — 1997 to 2017.

How many settlements have there been?

According to the OOC data released Thursday, there have been 264 settlements. On Wednesday, Rep. Jackie Speier, the California Democrat who unveiled a bill to reform the OOC, announced at a news conference Wednesday that there had been 260 settlements

Where did the settlement money come from?

Taxpayers. Once a settlement is reached, the money is not paid out of an individual lawmaker’s office but rather comes out of a special fund set up to handle this within the US Treasury — meaning taxpayers are footing the bill. The fund was set up by the Congressional Accountability Act, the 1995 law that created the Office of Compliance.

How many of the settlements were sexual harassment-related?

It’s not clear. Speier told CNN’s Wolf Blitzer on Wednesday that the 260 settlements represent those related to all kinds of complaints, including sexual harassment as well as racial, religious or disability-related discrimination complaints. The OOC has not made public the breakdown of the settlements, and Speier says she’s pursuing other avenues to find out the total.

In its latest disclosure, the OOC said that statistics on payments are “not further broken down into specific claims because settlements may involve cases that allege violations of more than one of the 13 statutes incorporated by the (Congressional Accountability Act).”

Who knows about the settlements and payments?

After a settlement is reached, a payment must be approved by the chairman and ranking member of the House administration committee, an aide to Chairman Gregg Harper, a Mississippi Republican, told CNN.
The aide also said that “since becoming chair of the committee, Chairman Harper has not received any settlement requests.” Harper became chairman of the panel at the beginning of this year. It’s not clear how many other lawmakers — if any — in addition to the House administration committee’s top two members are privy to details about the settlements and payments.

A source in House Speaker Paul Ryan‘s office told CNN that Ryan is not made aware of the details of harassment settlements. That source also said that the top Democrat and Republican on the House administration committee review proposed settlements and both must approve the payments. Similarly, a source in Minority Leader Nancy Pelosi‘s office told CNN that Pelosi also is not made aware of those details and that they are confined to the parties of the settlement and the leaders of the administration committee. “Leader Pelosi has expressed support for the efforts of Rep. Speier who is working on multiple bills to reform the secretive and woefully inadequate process,” the source added.

When asked about Ryan’s knowledge of any sexual harassment settlements, a spokesperson for Ryan’s office noted that the committee is conducting a full review of workplace harassment and discrimination.
What do these settlements tell us about the scope of the sexual harassment problem on Capitol Hill?

It is unclear how much of the $17 million is money paid to sexual harassment cases because of the Office of Compliance’s complex reporting process. However, even knowing that dollar figure doesn’t quantify the problem: a source within the Office of Compliance tells CNN that between 40 and 50% of harassment claims settle after mediation — an early stage in the multi-tiered reporting process.

And the number of settlements reached may not be indicative of how widespread sexual harassment is, as many victims chose not to proceed with OOC’s process for handling complaints. Tracy Manzer, a spokeswoman for Speier, told CNN last week 80% of people who have come to their office with stories of sexual misconduct in the last few weeks have chosen not to report the incidents to the OOC.

* * *

Now if only we could find out just what happened in 2002 to make that year such an outlier in terms of settlement awards… although we have the feeling the Bill Clinton may somehow be involved.

Harald Malmgram: Global Market Commentary

HaraldMalmgren November 2017 by fjaten on Scribd

Bombshell Report Confirms US Coalition Struck A Deal With ISIS

At a moment of widespread acknowledgment that the short-lived Islamic State is no longer a reality, and as ISIS is about to be defeated by the Syrian Army in its last urban holdout of Abu Kamal City in eastern Syria, the US is signaling an open-ended military presence in Syria.On Monday Defense Secretary Jim Mattis told reporters at the Pentagon that the US is preparing for a long-term military commitment in Syria to fight ISIS “as long as they want to fight.”

Mattis indicated that even should ISIS lose all of its territory there would still be a dangerous insurgency that could morph into an “ISIS 2.0” which he said the US would seek to prevent. “The enemy hasn’t declared that they’re done with the area yet, so we’ll keep fighting as long as they want to fight,” Mattis said. “We’re not just going to walk away right now before the Geneva process has traction.”


Mattis was referring to the stalled peace talks in Geneva which some analysts have described as a complete failure (especially as the Geneva process unrealistically stipulates the departure of Assad), as the future of Syria has of late been increasingly decided militarily on the battlefield, with the Syrian government now controlling the vast majority of the country’s most populated centers.

Ironically just as some degree of stability and normalcy has returned to many parts of the county now under government control, Mattis coupled the idea of a permanent US military presence with the goal of allowing Syrians to return to their homes. He said, “You keep broadening them. Try to (demilitarize) one area then (demilitarize) another and just keep it going, try to do the things that will allow people to return to their homes.”

Meanwhile, Turkey once again reiterated that the US has 13 bases in Syria, though the US-backed Syrian YPG has previously indicated seven US military bases in northern Syria. The Pentagon, however, would not confirm base locations or numbers – though only a year-and-a-half ago the American public was being assured that there would be “no boots on the ground” due to mission creep in Syria.

During the last year of the Obama administration, State Department spokesman John Kirby was called out multiple times by reporters for tell obvious and blatant lies concerning “boots on the ground” in Syria.

Remember this? “We are not going to be involved in a large scale combat mission on the ground in Syria. That is what the president [Obama] has long said.”

Last summer, in a move that angered the US administration, Turkish state media leaked the locations of no less than ten small-scale American military bases in northern Syria alone (revelations of US bases in southern Syria began surfacing as well). As another recent Pentagon press conference further acknowledged, these bases – though likely special forces forward operating bases – require a broad network of US personnel operating in various logistical roles inside Syria and likely now includes thousands of US troops deployed on the ground, instead of the Pentagon’s official (and highly dubious) “approximately 500 troops in Syria” number.

What makes even the timing of Mattis’ declaration of an open ended military commitment in to supposedly fight ISIS is that it came the same day that the BBC confirmed that the US and its Kurdish SDF proxy (Syrian Democratic Forces) cut a deal with ISIS which allowed for the evacuation of possibly thousands of ISIS members and their families from Raqqa.

According to yesterday’s bombshell BBC report:

The BBC has uncovered details of a secret deal that let hundreds of Islamic State fighters and their families escape from Raqqa, under the gaze of the US and British-led coalition and Kurdish-led forces who control the city. A convoy included some of IS’s most notorious members and – despite reassurances – dozens of foreign fighters. Some of those have spread out across Syria, even making it as far as Turkey.

Though it’s always good when the mainstream media belatedly gives confirmation to stories that actually broke months prior, the BBC was very late to the story. ISIS terrorists being given free passage by coalition forces to leave Raqqa was a story which we and other outlets began to report last June, and which Moon of Alabama and Al-Masdar News exposed in detail a full month prior to the BBC report.

And astoundingly, even foreign fighters who had long vowed to carry out attacks in Europe and elsewhere were part of the deal brokered under the sponsorship of the US coalition in Syria. According to the BBC report:

Disillusioned, weary of the constant fighting and fearing for his life, Abu Basir decided to leave for the safety of Idlib. He now lives in the city. He was part of an almost exclusively French group within IS, and before he left some of his fellow fighters were given a new mission.

 

“There are some French brothers from our group who left for France to carry out attacks in what would be called a ‘day of reckoning.’”

 

Much is hidden beneath the rubble of Raqqa and the lies around this deal might easily have stayed buried there too. The numbers leaving were much higher than local tribal elders admitted. At first the coalition refused to admit the extent of the deal.

So it appears that the US allowed ISIS terrorists to freely leave areas under coalition control, according to no less than the BBC, while at the same time attempting to make the case before the public that a permanent Pentagon presence is needed in case of ISIS’ return. But it’s a familiar pattern by now: yesterday’s proxies become today’s terrorists, which return to being proxies again, all as part of justifying permanent US military presence on another nation’s sovereign territory.

America’s Syrian adventure went from public declarations of “we’re staying out” to “just some logistical aid to rebels” to “okay, some mere light arms to fight the evil dictator” to “well, a few anti-tank missiles wouldn’t hurt” to “we gotta bomb the new super-bad terror group that emerged!” to “ah but no boots on the ground!” to “alright kinetic strikes as a deterrent” to “but special forces aren’t really boots on the ground per se, right?” to yesterday’s Mattis declaration of an open-ended commitment. And on and on it goes.

The Truth About Wall Street Analysis

Authored by Lance Roberts via RealInvestmentAdvice.com,

Turn on financial television or pick up a financially related magazine or newspaper and you will hear, or read, about what an analyst from some major Wall Street brokerage has to say about the markets or a particular company. For the average person, and for most financial advisors, this information as taken as “fact” and is used as a basis for portfolio investment decisions.

But why wouldn’t you?

After all, Carl Gugasian of Dewey, Cheatham & Howe just rated Bianchi Corp. a “Strong Buy.” That rating is surely something that you can “take to the bank”, right?

Maybe not.

For many years, I have been counseling individuals to disregard mainstream analysts, Wall Street recommendations, and even MorningStar ratings, due to the inherent conflict of interest between the firms and their particular clientèle. Here is the point:

  • YOU, are NOT Wall Street’s client.
  • YOU are the CONSUMER of the products sold FOR Wall Street’s clients.

Major brokerage firms are big business. I mean REALLY big business. As in $1.5 Trillion a year in revenue big. The table below shows the annual revenue of 32 of the largest financial firms in the S&P 500.

(The combined revenue of the 32 largest firms last year was in excess of $1 Trillion with the revenue of the 97 financial firms in the S&P 500 bringing in $1.5 Trillion.)

As such, like all businesses, these companies are driven by the needs of increasing corporate profitability on an annual basis regardless of market conditions.

This is where the conflict of interest arises.

When it comes to Wall Street profitability the most lucrative transactions are not coming from servicing “Mom and Pop” retail clients trying to work their way towards retirement. Wall Street is not “invested” along with you, but rather “use you” to make income.

This is why “buy and hold” investment strategies are so widely promoted. As long as your dollars are invested the mutual funds, stocks, ETF’s, etc, brokerage firms collect fees regardless of what happens in the market. These strategies are certainly in their best interest – they are not necessarily in yours.

But those retail management fees are simply a sideline to the really big money.

Wall Street’s real clients are multi-million, and billion, dollar investment banking transactions, such as public offerings, mergers, acquisitions and bond offerings which generate hundreds of millions to billions of dollars in fees for Wall Street each year.

In order for a firm to “win” that business, Wall Street firms must cater to those prospective clients. In this respect, it is extremely difficult for the firm to gain investment banking business from a company they have a “sell” rating on. This is why “hold” is so widely used rather than “sell” as it does not disparage the end client. To see how prevalent the use of the “hold” rating is I have compiled a chart of 4625 stocks ranked by the number of “Buy”, “Hold” or “Sell.”

See the problem here. There are just 2.8% of all stocks with a “sell” rating.

Do you actually believe that out of 4625 stocks only 124 should be “sold?”

You shouldn’t.  But for Wall Street, a “sell” rating is simply not good for business.

The conflict doesn’t end just at Wall Street’s pocketbook. Companies depend on their stock prices rising as it is a huge part of executive compensation packages.

Corporations apply pressure on Wall Street firms, and their analysts, to ensure positive research reports on their companies with the threat that they will take their business to another “friendlier” firm.  This is also why up to 40% of corporate earnings reports are “fudged” to produce better outcomes.

Earnings Magic Exposed, an article written by Michael Lebowitz last year, provides details on the games played on Wall Street when it comes to forecasting corporate earnings. He summarized the article as follows:

Consider the ploy that companies and Wall Street are using to fool the investing public.

  • First, they grossly overestimate earnings for the upcoming year. By overestimating earnings, they tout financial ratios based upon inaccurate expected earnings and sell investors on a bright future. How many times have analysts claimed that forward looking price to earnings ratios are constructive for price gains? How “constructive” would they be if the expectations were reconciled to reality and lowered by 75%?
  • Second, they progressively lower expectations prior to the earnings release so that financial results are effectively underestimated. The same analysts that peddled double digit earnings growth a year earlier somehow can now claim that earnings are better than they expected.

If actual earnings varied somewhat randomly from above expectations to below expectations, we would likely fault the analysts and corporations with being poor forecasters. But when such one-directional forecasting errors routinely and consistently occur, it is more than bad forecasting. At best one can accuse Wall Street analysts and the companies that feed them information of incompetence. At worst this is another pure and simple case of institutions gaming the system through a fraud designed to prop up stock prices.  Take your pick, but in either case, it is advisable to ignore the spin that accompanies earnings releases and apply the rigor of doing your own analysis to get at the veracity of corporate earnings.

Wall Street Needs You To Sell Product To

When Wall Street wants to do a stock offering for a new company they have to sell that stock to someone in order to provide their client, a company, with the funds they need. The Wall Street firm also makes a very nice commission from the transaction.

Generally, these publicly offered shares are sold to the firm’s biggest clients such as hedge funds, mutual funds, and other institutional clients. But where do those firms get their money? From you.

Whether it is the money you invested in your mutual funds, 401k plan, pension fund or insurance annuity – at the bottom of the money grabbing frenzy is you. Much like a pyramid scheme – all the players above you are making their money…from you.

In a study by Lawrence Brown, Andrew Call, Michael Clement and Nathan Sharp it is clear that Wall Street analysts are clearly not that interested in you. The study surveyed analysts from the major Wall Street firms to try and understand what went on behind closed doors when research reports were being put together. In an interview with the researchers John Reeves and Llan Moscovitz wrote:

“Countless studies have shown that the forecasts and stock recommendations of sell-side analysts are of questionable value to investors. As it turns out, Wall Street sell-side analysts aren’t primarily interested in making accurate stock picks and earnings forecasts. Despite the attention lavished on their forecasts and recommendations, predictive accuracy just isn’t their main job.”

The chart below is from the survey conducted by the researchers which shows the main factors that play into analysts compensation.  It is quite clear that what analysts are “paid” to do is quite different than what retail investors “think” they do.

“Sharp and Call told us that ordinary investors, who may be relying on analysts’ stock recommendations to make decisions, need to know that accuracy in these areas is ‘not a priority.’ One analyst told the researchers:

 

‘The part to me that’s shocking about the industry is that I came into the industry thinking [success] would be based on how well my stock picks do. But a lot of it ends up being “What are your broker votes?”‘

 

A ‘broker vote’ is an internal process whereby clients of the sell-side analysts’ firms assess the value of their research and decide which firms’ services they wish to buy. This process is crucial to analysts because good broker votes result in revenue for their firm. One analyst noted that broker votes ‘directly impact my compensation and directly impact the compensation of my firm.’”

The question really becomes then “If the retail client is not the focus of the firm then who is?”  The survey table below clearly answers that question.

Not surprisingly you are at the bottom of the list. The incestuous relationship between companies, institutional clients, and Wall Street is the root cause of the ongoing problems within the financial system.  It is a closed loop that is portrayed to be a fair and functional system; however, in reality, it has become a “money grab” that has corrupted not only the system but the regulatory agencies that are supposed to oversee it.

Why You Need Independence

So, where can you go to get “real investment advice” and a true consideration of the value of YOUR money?

Thankfully, starting at the turn of the century, the rise of independent, fee-only, financial advisors, private investment analysts, research and rating firms began to infiltrate the system. 

Here is an example of the difference.

As an independent money manager, I use valuation analysis to determine what equities should be bought, sold or held in client’s portfolios. While there are many measures of valuation, two of my favorites are Price to Sales and the Piotroski f-score among others. I took the same 4625 stocks as above and ranked them by these two measures.

See the difference. Not surprisingly, there are far fewer “buy” rated, and far more “sell” rated, companies than what is suggested by Wall Street analysts.

Here is something even more alarming.

Just after the “dot.com” bust, I wrote a valuation article quoting Scott McNeely, who was the CEO of Sun Microsystems at the time. At its peak the stock was trading at 10x its sales. (Price-to-Sales ratio) In a Bloomberg interview Scott made the following point.

“At 10 times revenues, to give you a 10-year payback, I have to pay you 100% of revenues for 10 straight years in dividends. That assumes I can get that by my shareholders. That assumes I have zero cost of goods sold, which is very hard for a computer company. That assumes zero expenses, which is really hard with 39,000 employees.That assumes I pay no taxes, which is very hard. And that assumes you pay no taxes on your dividends, which is kind of illegal. And that assumes with zero R&D for the next 10 years, I can maintain the current revenue run rate. Now, having done that, would any of you like to buy my stock at $64? Do you realize how ridiculous those basic assumptions are? You don’t need any transparency. You don’t need any footnotes. What were you thinking?

How many of the following “Buy” rated companies do you currently own that are currently carrying price-to-sales valuations in excess of 10x?

 

The next time someone tells you that you can’t “risk manage” your portfolio and just have to “ride things out,” just remember, you don’t.

 

HuffPo Yanks Article On Russiagate Hysteria By Award Winning Journalist Joe Lauria – So Here It Is

 Award-winning journalist and UN correspondent of 25 years, Joe Lauria, penned an outstanding article on the origins of “Russiagate” which he published to the liberal Huffington Post this week.

24 hours later, HuffPo yanked the article – leaving a dead link and a sad message in its place.

Perhaps the insights offered in the article didn’t quite conform to HuffPo’s approved narratives, or maybe it has something to do with Lauria’s new book “How I Lost By Hillary Clinton,” with a forward written by Julian Assange.

Considering Joe Lauria’s tenure as the Wall St. Journal’s UN correspondent of nearly seven years, as well as the Boston Globe’s for six – covering just about every major world crisis over the past quarter-century, his unique perspective on the matter merits a read.

Reproduced below for your edification:

The Democratic Money Behind Russia-gate

As Russia-gate continues to buffet the Trump administration, we now know that the “scandal” started with Democrats funding the original dubious allegations of Russian interference, notes Joe Lauria.

By Joe Lauria

The two sources that originated the allegations claiming that Russia meddled in the 2016 election — without providing convincing evidence — were both paid for by the Democratic National Committee, and in one instance also by the Clinton campaign: the Steele dossier and the CrowdStrike analysis of the DNC servers. Think about that for a minute.

We have long known that the DNC did not allow the FBI to examine its computer server for clues about who may have hacked it – or even if it was hacked – and instead turned to CrowdStrike, a private company co-founded by a virulently anti-Putin Russian. Within a day, CrowdStrike blamed Russia on dubious evidence.

And, it has now been disclosed that the Clinton campaign and the DNC paid for opposition research memos written by former British MI6 intelligence agent Christopher Steele using hearsay accusations from anonymous Russian sources to claim that the Russian government was blackmailing and bribing Donald Trump in a scheme that presupposed that Russian President Vladimir Putin foresaw Trump’s presidency years ago when no one else did.

Since then, the U.S. intelligence community has struggled to corroborate Steele’s allegations, but those suspicions still colored the thinking of President Obama’s intelligence chiefs who, according to Director of National Intelligence James Clapper, “hand-picked” the analysts who produced the Jan. 6 “assessment” claiming that Russia interfered in the U.S. election.

In other words, possibly all of the Russia-gate allegations, which have been taken on faith by Democratic partisans and members of the anti-Trump Resistance, trace back to claims paid for or generated by Democrats.

If for a moment one could remove the sometimes justified hatred that many people feel toward Trump, it would be impossible to avoid the impression that the scandal may have been cooked up by the DNC and the Clinton camp in league with Obama’s intelligence chiefs to serve political and geopolitical aims.

Absent new evidence based on forensic or documentary proof, we could be looking at a partisan concoction devised in the midst of a bitter general election campaign, a manufactured “scandal” that also has fueled a dangerous New Cold War against Russia; a case of a dirty political “oppo” serving American ruling interests in reestablishing the dominance over Russia that they enjoyed in the 1990s, as well as feeding the voracious budgetary appetite of the Military-Industrial Complex.

Though lacking independent evidence of the core Russia-gate allegations, the “scandal” continues to expand into wild exaggerations about the impact of a tiny number of social media pages suspected of having links to Russia but that apparently carried very few specific campaign messages. (Some pages reportedly were devoted to photos of puppies.)

‘Cash for Trash’

Based on what is now known, Wall Street buccaneer Paul Singer paid for GPS Fusion, a Washington-based research firm, to do opposition research on Trump during the Republican primaries, but dropped the effort in May 2016 when it became clear Trump would be the GOP nominee. GPS Fusion has strongly denied that it hired Steele for this work or that the research had anything to do with Russia.

Then, in April 2016 the DNC and the Clinton campaign paid its Washington lawyer Marc Elias to hire Fusion GPS to unearth dirt connecting Trump to Russia. This was three months before the DNC blamed Russia for hacking its computers and supposedly giving its stolen emails to WikiLeaks to help Trump win the election.

“The Clinton campaign and the Democratic National Committee retained Fusion GPS to research any possible connections between Mr. Trump, his businesses, his campaign team and Russia, court filings revealed this week,” The New York Times reported on Friday night.

So, linking Trump to Moscow as a way to bring Russia into the election story was the Democrats’ aim from the start.

Fusion GPS then hired ex-MI6 intelligence agent Steele, it says for the first time, to dig up that dirt in Russia for the Democrats. Steele produced classic opposition research, not an intelligence assessment or conclusion, although it was written in a style and formatted to look like one.

It’s important to realize that Steele was no longer working for an official intelligence agency, which would have imposed strict standards on his work and possibly disciplined him for injecting false information into the government’s decision-making. Instead, he was working for a political party and a presidential candidate looking for dirt that would hurt their opponent, what the Clintons used to call “cash for trash” when they were the targets.

Had Steele been doing legitimate intelligence work for his government, he would have taken a far different approach. Intelligence professionals are not supposed to just give their bosses what their bosses want to hear. So, Steele would have verified his information. And it would have gone through a process of further verification by other intelligence analysts in his and perhaps other intelligence agencies. For instance, in the U.S., a National Intelligence Estimate requires vetting by all 17 intelligence agencies and incorporates dissenting opinions.

Instead Steele was producing a piece of purely political research and had different motivations. The first might well have been money, as he was being paid specifically for this project, not as part of his work on a government salary presumably serving all of society. Secondly, to continue being paid for each subsequent memo that he produced he would have been incentivized to please his clients or at least give them enough so they would come back for more.

Dubious Stuff

Opposition research is about getting dirt to be used in a mud-slinging political campaign, in which wild charges against candidates are the norm. This “oppo” is full of unvetted rumor and innuendo with enough facts mixed in to make it seem credible. There was so much dubious stuff in Steele’s memos that the FBI was unable to confirm its most salacious allegations and apparently refuted several key points.

Perhaps more significantly, the corporate news media, which was largely partial to Clinton, did not report the fantastic allegations after people close to the Clinton campaign began circulating the lurid stories before the election with the hope that the material would pop up in the news. To their credit, established media outlets recognized this as ammunition against a political opponent, not a serious document.

Despite this circumspection, the Steele dossier was shared with the FBI at some point in the summer of 2016 and apparently became the basis for the FBI to seek Foreign Intelligence Surveillance Act warrants against members of Trump’s campaign. More alarmingly, it may have formed the basis for much of the Jan. 6 intelligence “assessment” by those “hand-picked” analysts from three U.S. intelligence agencies – the CIA, the FBI and the NSA – not all 17 agencies that Hillary Clinton continues to insist were involved. (Obama’s intelligence chiefs, DNI Clapper and CIA Director John Brennan, publicly admitted that only three agencies took part and The New York Times printed a correction saying so.)

If in fact the Steele memos were a primary basis for the Russia collusion allegations against Trump, then there may be no credible evidence at all. It could be that because the three agencies knew the dossier was dodgy that there was no substantive proof in the Jan. 6 “assessment.” Even so, a summary of the Steele allegations were included in a secret appendix that then-FBI Director James Comey described to then-President-elect Trump just two weeks before his inauguration.

Five days later, after the fact of Comey’s briefing was leaked to the press, the Steele dossier was published in fullby the sensationalist website BuzzFeed behind the excuse that the allegations’ inclusion in the classified annex of a U.S. intelligence report justified the dossier’s publication regardless of doubts about its accuracy.

Russian Fingerprints

The other source of blame about Russian meddling came from the private company CrowdStrike because the DNC blocked the FBI from examining its server after a suspected hack. Within a day, CrowdStrike claimed to find Russian “fingerprints” in the metadata of a DNC opposition research document, which had been revealed by an Internet site called DCLeaks, showing Cyrillic letters and the name of the first Soviet intelligence chief. That supposedly implicated Russia.

CrowdStrike also claimed that the alleged Russian intelligence operation was extremely sophisticated and skilled in concealing its external penetration of the server. But CrowdStrike’s conclusion about Russian “fingerprints” resulted from clues that would have been left behind by extremely sloppy hackers or inserted intentionally to implicate the Russians.

CrowdStrike’s credibility was further undermined when Voice of America reported on March 23, 2017, that the same software the company says it used to blame Russia for the hack wrongly concluded that Moscow also had hacked Ukrainian government howitzers on the battlefield in eastern Ukraine.

“An influential British think tank and Ukraine’s military are disputing a report that the U.S. cyber-security firm CrowdStrike has used to buttress its claims of Russian hacking in the presidential election,” VOA reported. Dimitri Alperovitch, a CrowdStrike co-founder, is also a senior fellow at the anti-Russian Atlantic Council think tank in Washington.

More speculation about the alleged election hack was raised with WikiLeaks’ Vault 7 release, which revealed that the CIA is not beyond covering up its own hacks by leaving clues implicating others. Plus, there’s the fact that WikiLeaks founder Julian Assange has declared again and again that WikiLeaks did not get the Democratic emails from the Russians. Buttressing Assange’s denials of a Russian role, WikiLeaks associate Craig Murray, a former British ambassador to Uzbekistan, said he met a person connected to the leak during a trip to Washington last year.

And, William Binney, maybe the best mathematician to ever work at the National Security Agency, and former CIA analyst Ray McGovern have published a technical analysis of one set of Democratic email metadata showing that a transatlantic “hack” would have been impossible and that the evidence points to a likely leak by a disgruntled Democratic insider. Binney has further stated that if it were a “hack,” the NSA would have been able to detect it and make the evidence known.

Fueling Neo-McCarthyism

Despite these doubts, which the U.S. mainstream media has largely ignored, Russia-gate has grown into something much more than an election story. It has unleashed a neo-McCarthyite attack on Americans who are accused of being dupes of Russia if they dare question the evidence of the Kremlin’s guilt.

Just weeks after last November’s election, The Washington Post published a front-page story touting a blacklist from an anonymous group, called PropOrNot, that alleged that 200 news sites, including Consortiumnews.com and other leading independent news sources, were either willful Russian propagandists or “useful idiots.”

Last week, a new list emerged with the names of over 2,000 people, mostly Westerners, who have appeared on RT, the Russian government-financed English-language news channel. The list was part of a report entitled, “The Kremlin’s Platform for ‘Useful Idiots’ in the West,” put out by an outfit called European Values, with a long list of European funders.

Included on the list of “useful idiots” absurdly are CIA-friendly Washington Post columnist David Ignatius; David Brock, Hillary Clinton’s opposition research chief; and U.N. Secretary General Antonio Guterres.

The report stated: “Many people in Europe and the US, including politicians and other persons of influence, continue to exhibit troubling naïveté about RT’s political agenda, buying into the network’s marketing ploy that it is simply an outlet for independent voices marginalised by the mainstream Western press. These ‘useful idiots’ remain oblivious to RT’s intentions and boost its legitimacy by granting interviews on its shows and newscasts.”

The intent of these lists is clear: to shut down dissenting voices who question Western foreign policy and who are usually excluded from Western corporate media. RT is often willing to provide a platform for a wider range of viewpoints, both from the left and right. American ruling interests fend off critical viewpoints by first suppressing them in corporate media and now condemning them as propaganda when they emerge on RT.

Geopolitical Risks

More ominously, the anti-Russia mania has increased chances of direct conflict between the two nuclear superpowers. The Russia-bashing rhetoric not only served the Clinton campaign, though ultimately to ill effect, but it has pushed a longstanding U.S.-led geopolitical agenda to regain control over Russia, an advantage that the U.S. enjoyed during the Yeltsin years in the 1990s.

After the collapse of the Soviet Union in 1991, Wall Street rushed in behind Boris Yeltsin and Russian oligarchs to asset strip virtually the entire country, impoverishing the population. Amid widespread accounts of this grotesque corruption, Washington intervened in Russian politics to help get Yeltsin re-elected in 1996. The political rise of Vladimir Putin after Yeltsin resigned on New Year’s Eve 1999 reversed this course, restoring Russian sovereignty over its economy and politics.

That inflamed Hillary Clinton and other American hawks whose desire was to install another Yeltsin-like figure and resume U.S. exploitation of Russia’s vast natural and financial resources. To advance that cause, U.S. presidents have supported the eastward expansion of NATO and have deployed 30,000 troops on Russia’s border.

In 2014, the Obama administration helped orchestrate a coup that toppled the elected government of Ukraine and installed a fiercely anti-Russian regime. The U.S. also undertook the risky policy of aiding jihadists to overthrow a secular Russian ally in Syria. The consequences have brought the world closer to nuclear annihilation than at any time since the Cuban missile crisis in 1962.

In this context, the Democratic Party-led Russia-gate offensive was intended not only to explain away Clinton’s defeat but to stop Trump — possibly via impeachment or by inflicting severe political damage — because he had talked, insincerely it is turning out, about detente with Russia. That did not fit in well with the plan at all.

Joe Lauria is a veteran foreign-affairs journalist. He has written for the Boston Globe, the Sunday Times of London and the Wall Street Journal among other newspapers. He is the author of How I Lost By Hillary Clinton published by OR Books in June 2017. He can be reached at joelauria@gmail.com and followed on Twitter at @unjoe.

Crypto Chaos As Bitcoin Drops $800 From Spike Highs

Having surged higher to almost tagged $7900 on the heels of news that the SegWit2x ‘hard fork’ would be suspended, Bitcoin has now crashed back to $7100.. before surging back to $7400…

Another name for a Tulip is……..

The USD price of Bitcoin just exploded higher – near $7900 – on heavy volume as CoinDesk reports The organizers of a controversial bitcoin scaling proposal are suspending an attempt to increase the block size by way of a software upgrade. Bitcoin is up over 10% today, now up over 650% YTD:

Real Motive Behind Saudi Purge Emerges: $800 Billion In Confiscated Assets

From the very beginning, there was something off about Sunday’s unprecedented countercoup purge unleashed by Mohammad bin Salman on alleged political enemies, including some of Saudi Arabia’s richest and most powerful royals and government officials: it was just too brazen to be a simple “power consolidation” move; in fact most commentators were shocked by the sheer audacity, with one question outstanding: why take such a huge gamble? After all, there was little chatter of an imminent coup threat against either the senile Saudi King or the crown prince, MBS, and a crackdown of such proportions would only boost animosity against the current ruling royals further.

Things gradually started to make sense when it emerged that some $33 billion in oligarch net worth was “at risk” among just the 4 wealthiest arrested Saudis, which included the media-friendly prince Alwaleed.

One day later, a Reuters source reported that in a just as dramatic expansion of the original crackdown, bank accounts of over 1,200 individuals had been frozen, a number which was growing by the minute. Commenting on this land cash grab, we rhetorically asked “So when could the confiscatory process end? As we jokingly suggested yesterday, the ruling Saudi royal family has realized that not only can it crush any potential dissent by arresting dozens of potential coup-plotters, it can also replenish the country’s foreign reserves, which in the past 3 years have declined by over $250 billion, by confiscating some or all of their generous wealth, which is in the tens if not hundreds of billions. If MbS continues going down the list, he just may recoup a substantial enough amount to what it makes a difference on the sovereign account.”

Then an article overnight from the WSJ confirmed that fundamentally, the purge may be nothing more than a forced extortion scheme, as the Saudi government – already suffering from soaring budget deficits, sliding oil revenues and plunging reserves – was “aiming to confiscate cash and other assets worth as much as $800 billion in its broadening crackdown on alleged corruption among the kingdom’s elite.

As  reported yesterday, the WSJ writes that the country’s central bank, the Saudi Arabian Monetary Authority, said late Tuesday that it has frozen the bank accounts of “persons of interest” and said the move is “in response to the Attorney General’s request pending the legal cases against them.” But what is more notable, is that while we first suggested – jokingly – on Monday that the ulterior Saudi motive would be to simply “nationalize” the net worth of some of Saudi Arabia’s wealthiest individuals, now the WSJ confirms that this is precisely the case, and what’s more notable is that the amount in question is absolutely staggering: nearly 2x Saudi Arabia’s total foreign reserves!

As the WSJ alleges, “the crackdown could also help replenish state coffers. The government has said that assets accumulated through corruption will become state property, and people familiar with the matter say the government estimates the value of assets it can reclaim at up to 3 trillion Saudi riyals, or $800 billion.”

While much of that money remains abroad – and invested in various assets from bonds to stocks to precious metals and real estate – which will complicate efforts to reclaim it, even a portion of that amount would help shore up Saudi Arabia’s finances.

A prolonged period of low oil prices forced the government to borrow money on the international bond market and to draw extensively from the country’s foreign reserves, which dropped from $730 billion at their peak in 2014 to $487.6 billion in August, the latest available government data.

Confirming our speculation was advisory firm Eurasia Group, which in a note said that the crown prince “needs cash to fund the government’s investment plans” adding that “It was becoming increasingly clear that additional revenue is needed to improve the economy’s performance. The government will also strike deals with businessmen and royals to avoid arrest, but only as part of a greater commitment to the local economy.”

Of course, there is a major danger that such a draconian cash grab would result in a violent blowback by everyone who has funds parked in the Kingdom. To assuage fears, Saudi Arabia’s minister of commerce, Majid al Qasabi, on Tuesday sought to reassure the private sector that the corruption investigation wouldn’t interfere with normal business operations. The procedures and investigations undertaken by the anti-corruption agency won’t affect ongoing business or projects, he said. Furthermore, the Saudi central bank said that individual accounts had been frozen, not corporate accounts. “It is business as usual for both banks and corporates,” the central bank said.

However, this is problematic: first, not only is the list of names of detained and “frozen” accounts growing by the day…

The government earlier this week vowed that it would arrest more people as part of the corruption investigation, which began around three years ago. As a precautionary measure, authorities have banned a large number of people from traveling outside the country, among them hundreds of royals and people connected to those arrested, according to people familiar with the matter. The government hasn’t officially named the people who were detained.

… but the mere shock of a move that would be more appropriate for the 1950s USSR has prompted crushed any faith and confidence the international community may have had in Saudi governance and business practices.

The biggest irony would be if from this flagrant attempt to shore up the Kingdom’s deteriorating finances, a domestic and international bank run emerged, with locals and foreign individuals and companies quietly, or not so quietly, pulling their assets and capital from confiscation ground zero, in the process precipitating the very economic collapse that the move was meant to avoid.

Judging by the market reaction, which has sent Riyal forward tumbling on rising bets of either a recession, or devaluation, or both, this unorthodox attempt to inject up to $800 billion in assets into the struggling local economy, could soon backfire spectacularly.

Meanwhile, for those still confused about the current political scene in Saudi Arabia, here is an infographic courtesy of the WSJ which explains “Who Has Been Promoted, Who Has Been Detained in Saudi Arabia