There is a plausible case for stock buybacks by a heavily capitalized firm operating in a declining traditional industry. The company is profitable, and depreciation charges make its cash flow even more impressive than its profits, yet the market recognizes its gradually fading low-growth business and awards it only a low P/E multiple. Stock buybacks can return capital to shareholders, who can use it more effectively in other opportunities, and gradually reduce their stake in the declining business, while the rising earnings per share allow management some reward from their stock options. Even in this case, I would prefer the company to return capital to shareholders through generous dividends, paying management in cash (their job here is not a difficult one, after all) although I recognize that the U.S. tax system works against this more sensible approach, since dividends are fully taxed, whereas share repurchases are not taxable to the sellers.

For tech companies like NVDA, the fairly feeble arguments for stock buybacks by mature industry corporations do not apply. Far from having excess cash flow, tech companies must invest gigantic amounts of money to keep up with their competition and markets in a rapidly expanding field. Furthermore, they normally trade at astronomical P/E ratios – NVDA’s is currently 28.69, with its earnings currently swollen by the AI bubble – so even if they have spare cash they actually lose by buying back stock at an earnings yield of 3.48% (100/28.69) when they could make 5% today risk-free in government bonds. If they must borrow money to buy back stock, their funding cost in today’s market is at least 7%, so buybacks make no financial sense.

Finally, tech stocks are subject to wild waves of fashion, during which extra capital can be raised, but their huge volatility greatly intensifies the danger of buying back stock that must then be resold at a much lower price in a year or two to fund the business. Even the normal excuse for stock buybacks, the need to reward management with stock options, does not apply here; any tech company worth its salt has a stock price that can soar into the stratosphere at any time, making its option holders inordinately rich.

Stock buybacks are inherently pro-cyclical. They are increased to an inordinate size as in NVDA’s case when operations and profits are very successful, which causes the stock price to head for the wild blue yonder, even without them. If a company in those circumstances does not need the bountiful cash flow it is generating for investment, it would do better to distribute it to shareholders as dividends. That way, ordinary shareholders get cash in their pockets, with which they can diversify their investments to less overvalued sectors, since the stock price rise will have increased its weighting in their portfolio, making them overweighted in it. Through stock buybacks, if their size is large in relation to the daily trading volume of the stock, companies push their stock prices to unsustainable levels. This sucks in millions of unsophisticated retail investors who see the stock’s outperformance and buy in at grossly inflated prices, to be met by management cashing out on their stock options.

In a rational world, extensive stock buybacks would be seen as evidence that the company’s management could not think of anything better to do with the money. Top management gets paid huge salaries, mostly through bonuses and options, to deploy the company’s resources, both financial and operating, into paths that will allow the company to achieve returns superior to those of an index fund. In most circumstances, if management cannot achieve this, it should be replaced – its inordinate cost in terms of bonuses and stock options is a complete waste of money. Buying back the company’s stock when there are alternative opportunities for the company’s cash flow is a misallocation of resources. That is especially the case when the company is in a rapidly growing sector, and investment opportunities abound. With large buybacks in a growth company, either the company will miss out on opportunities it should be taking, or it will drive itself into debt at levels that quickly become intolerable as interest rates rise, as they are currently doing.

The classic example of this is Boeing (NYSE:BA) which in the 2010s devoted its resources to buying back stock at over $400 per share, while skimping on investment in new projects such as the 737-MAX. The result was two early fatal crashes of the under-engineered 737-MAX, and a descent into a half-decade of losses for Boeing, which has now had its certification for the 737-Max 10 delayed until a software problem is sorted out. Meanwhile the stock buybacks exhausted the company’s stockholders’ equity, with the result that despite a “rescue” share issue at a low price, the company’s net worth is still negative. Passenger aircraft may be a mature business, but their demand is still expanding and there is as yet no sign of a viable replacement technology. The product group is roughly in the position of railroad locomotives around 1880, when the technology was fully mature but there was still a quarter century of highly profitable product development and growth ahead for the leader in the field, Baldwin Locomotive Company. Even though Baldwin did not diversify into electric or diesel transport, its peak sales year was 1906, with locomotive sales volume three times that of 1880.

There is a simple solution, which does not require Congressional action, but simply a rule change by the Securities and Exchange Commission, controlled by President Trump. The SEC should repeal Rule 10b-18, adopted in 1982, which “clarified” the stock buyback rules in favor of greedy management and against ordinary shareholders. Thereby, it would revert to the position that existed before that Rule, when the SEC correctly in my view regarded stock buybacks as price manipulation against retail holders and so effectively forbade them. Management would inevitably bring a court case, but surely greedy management, drooling with fury at being deprived of their manipulatory and excessive slush-funds, would be so politically unattractive a suitor that, even in the ultra-cautious Roberts Supreme Court, it would be unlikely to prevail.

With that rule change, and ideally a recission of the 1993 Revenue Reconciliation Act provision favoring stock options over ordinary salaries above $1 million, the scam level in corporate top management would decline, as would its robbery of shareholders. With those changes, top management would be able to earn a decent remuneration, but could no longer raise it to Pharaonic levels through manipulating the company’s stock price, overleveraging the company and depriving it of capital investment.

With the current rapid rise in long-term dollar interest rates, the perils of over-leveraging will soon be all too apparent, as overleveraged companies find they cannot make the sums add up with the high rates they must now pay for debt. Many of the fancy private equity-driven leveraged structures will also collapse, while asset values will shrivel like prime London property prices are currently doing (down 20% in nominal terms or more than 40% in real terms over the last 10 years – a bigger drop than in the 1970s). This will be painful, but enormously beneficial in the long-term, provided the Left does not use it successfully as a reason to vote out capitalism once and for all.

This creative destruction couldn’t happen to a nicer bunch of shysters. All we need is the firm hand of reform!

Disclosure: I have a modest residual holding of long-dated but thoroughly underwater NVDA put options.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

The post The Bear’s Lair: Stock buyback scam hits new records appeared first on True Blue Will Never Stain.

A few weeks ago, I forecast a gigantic crash in October, due to the massive overhang of worthless assets in debt, equity real estate and crypto markets. Warsh would presumably prefer to push such a crash beyond the November 3 midterm elections and President Trump certainly would prefer that. The AI bubble with the debt associated with it, the massive defaults impending in private credit and the grossly overextended level of the stock market all point to trouble ahead, certainly in a timeframe of months, not years. Depending on the economic aftereffect of such a crash, there would then be considerable political implications, both short-term and long-term.

To examine the worst-case scenario, the October 1929 stock market crash resulted from a lengthy period in which the Fed, managed at that date by the New York Federal Reserve Bank, kept interest rates too low in the face of rising speculation. Britain had overvalued the pound and linked it to gold in 1925, so despite high unemployment and economic sluggishness (the British 1930s were much better than the 1920s, unlike everywhere else) British interest rates were raised from 4% to 5.5% in order to protect the gold parity of the pound, with the real economy’s continuing sluggishness preventing further rises. The effect of this was very similar to the pound’s misguided entry to the European Monetary System in 1990-92. It produced the same artificially tight money and artificially sluggish economy and might well have produced, before 1929 instead of in 1931, a collapse of the gold parity similar to the pound’s collapse of September 1992 — had George Soros been around or the great Bank of England Governor Montagu Norman been absent.

Britain’s pound overvaluation in the late 1920s, its economic sluggishness, U.S. economic exuberance and a rising U.S. stock market caused a flood of money into the United States, with the usual bubble-producing effects in the real economy. The Fed, however, did not wish to be blamed for bursting the stock market bubble, even though as in 1907 much of the froth was caused by an over-expansion of brokers’ loans by the New York banks. It therefore raised the discount rate only modestly, from 3.5% to 5%, before raising it again to 6% in August 1929, thereby precipitating the immediate downturn, which became the Wall Street Crash in late October.

Later historians (notably Milton Friedman, Anna Schwartz and Ben Bernanke) blamed the Fed only modestly for raising rates in 1928-29, though contemporaries certainly did blame it vociferously. Instead, modern historians have focused on the Fed’s errors after the collapse of the Bank of United States in December 1930 and the European banking crisis sparked by the Creditanstalt collapse in May 1931. Although lowering rates, the Fed then did nothing to inject further money into the system, as the U.S. banking system spiraled downwards, with money vanishing into thin air as each bank failed, towards full closure of the banks in March 1933.

In my own view, the Fed was certainly to blame, but Hoover’s two major errors of the 1930 Smoot-Hawley Tariff, imposed when (unlike today) world trade was already in sharp decline, and even more egregiously his increase in the top rate of income tax from 25% to 63% in June 1932 were much more salient causes of the unprecedented economic collapse of 1930-33. That collapse would not have taken its full ferocity without Hoover, since in a Hooverless world, with no Smoot-Hawley and no tax increase, the Fed’s 1930-33 monetary policy would have been roughly appropriate; there would thus have been no banking collapse and the economic decline would have been moderate.

As George Selgin and Amity Shlaes have demonstrated, the full unpleasantness and duration of the Great Depression were due not simply to Hoover’s errors, but to the draconian and anti-market policies of Franklin Roosevelt’s New Deal, notably the ubiquitous government meddling through the National Industrial Recovery Act, the extra costs imposed by unionization after the 1935 Wagner Act and Henry Wallace’s Stalin-inspired program of agricultural price supports, alas with us still. Other countries, notably Britain and Germany, had deep recessions, but exited into recovery half a decade before the U.S., for which only the November 1938 midterm elections stymied the New Deal’s bureaucrat fanatics and brought relief.

In summary, the Great Depression was caused primarily by misguided government policy overall, but the crash that sparked it off was partly the Fed’s fault. The Fed’s punishment was that, after the appointment of Marriner Eccles as Fed chairman in 1934, monetary policy was effectively run by the U.S. Treasury until 1951 (which did not improve it, needless to say). Warsh clearly wants to avoid that outcome, so he will raise interest rates only gradually, even though inflation is above the Fed target and the U.S. economy is strong. (Official statistics have been understating the economy’s strength, because the available workforce has effectively declined through illegal immigrant repatriations, and per capita growth probably exceeds reported growth).

The other suboptimal outcome is a recession so deep that the Democrats sweep back to power in 2028, with Trump’s tariffs or the Iran War being blamed. Warsh may not care much about Trump’s legacy, but he cares about his own and being booted out in early 2030 (four years from his installation) by a left-wing Democrat who then reverses all his policies and returns to Bernankeism is something he doubtless wants to avoid. After a market crash but without a near collapse of the banking system, it is unlikely that the U.S. economy would go into the kind of deep depression for which it was heading in late 2008, with an additional 700,000 unemployed every month, but if it showed signs of doing so, Warsh would doubtless loosen monetary policy quickly to cushion the blow. Unlike Bernanke however, he would not engage in massive Treasury bond purchases and would rely on Treasury Secretary Scott Bessent and OMB head Russell Vought to keep fiscal policy tight, rather than indulging in a program of unproductive spending followed by tax increases, as Hoover and Bush/Obama did.

To minimize the blame on both the Fed and the Trump administration from a market crash that is probably inevitable and the economic downturn that may follow, Warsh needs an alternate scapegoat. Fortunately, one is available. Dario Amodei of Anthropic has pinned his colors to a $2 trillion company valuation for his Initial Public Offering, currently expected in November. He has not yet launched his sock puppet to achieve this, as Pets.com did in 2000, but a puppet Claude, possibly animated, may be impending. However, Amodei and his fellow AI giants have wrecked his chance of a $2 trillion valuation by demanding government or international regulation of his product. Government regulation would slow AI development to a crawl, as well as ensuring that, as in solar power cells, the business would move to China, which would seize the global AI market by ignoring foolish regulations imposed by anybody but itself. With that prospect, surely even the doziest tech investors would see that a $2 trillion Anthropic valuation was too high by a factor of at least 10.

An IPO of $2 trillion in market capitalization that plummets in price immediately after the offering would undoubtedly cause the market to examine other values that are excessive or shaky, very likely causing a substantial crash. That crash would very clearly be caused by the AI barons, not by the Fed or Trump. Such a market crash, concentrated in AI and the more foolish debt creations of the private credit market, could be expedited by the Fed in a myriad of ways, for example by keeping the money market tight and uncertain as Anthropic’s gigantic IPO is priced.

Should a downturn be set off by a failed AI IPO, led by a leader of the “effective altruism” movement and a leading supporter of the “woke” wing of the Democrats, public attention will focus on the bubble valuations in the market and the monetary follies of the Bernanke era, though doubtless the media will try very hard to blame Trump and Warsh. Furthermore, an inevitable scandal in one of the major AI companies (which is bound to emerge in such a situation) should concentrate attention on the corruption of tech and the effective altruists. The only danger then is some kind of idiotic regulation of AI, but at that point Trump can invoke national security grounds to “rescue” the industry from such a foolish outcome, thereby ensuring that the AI golden goose remains in flourishing shape, if with a few gaudy valuation wing feathers clipped.

The 2028 election would then be highly uncertain, but at least it would not be lost in advance, as was that of 1932. There would be a good chance of a Trump-like succession, probably in the form of J.D. Vance, under which Warsh would presumably be offered a second 4-year term in office. As Paul Volcker demonstrated in 1979-87, two 4-year terms should be enough to embed Warsh’s monetary policy approach in place and cement his legacy.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

The post The Bear’s Lair: Kevin Warsh’s 4-dimensional chess appeared first on True Blue Will Never Stain.

There is a long and unsavory history of oligopolistic industries asking for regulation. U.S. railroads, which by then had built out their networks and wished to safeguard them from competition, demanded regulation by the Interstate Commerce Act of 1887; railroad user interests then demanded the Hepburn Act of 1906. The result of the two enactments was to cap returns in the U.S. railroad industry, leading to decades of underinvestment followed by the industry’s effective collapse in 1970, and a subsequent unhappy history of government ownership of the passenger segment, with complete failure to modernize it. Likewise, the emerging airline oligopoly favored the Civil Aeronautics Act of 1938, restricting entry to aviation and requiring routes and pricing to be licensed by a government body. Only deregulation in 1978 freed competition and brought prices crashing down, although it must be said the seats were more comfortable and the stewardesses more charming under the old system!

In other countries, mediaeval guilds were often accompanied by regulation, to ensure that competition was restricted and workers’ rights tightly controlled by the guild cartel. In Germany, after unification in 1871, state-legislated cartels were set up to regulate competition. Germany had remarkably rapid economic growth in 1871-1914, but the benefits thereof increasingly went to the government’s military expansion and the cartel members’ market dominance. German workers’ compensation in 1914 was still remarkably low, resulting in Germany having only about 6% of the U.S. level of automobile market penetration, a third of the French level and a fifth of the British level. Even though Germans had invented the automobile industry in the 1880s, German successes in automobile manufacture came after 1919 and mostly after 1945.

Japan’s “MITI guidance,” Canadian supply management in agriculture, the Indian “license raj” and South Africa’s apartheid-era marketing boards and protected industries were all examples of governments providing regulations to restrict competition to established producers, with consumer needs and entrepreneurs’ potential trampled by big corporations’ and, in some cases, unions’ lobbying power.

The AI industry is a classic example where regulatory capture is likely. A small number of competitors have established a dominant presence in the industry, through “first mover” advantages, huge stock market excitement at the new technology and the massive tax subsidy to capital investment contained in last year’s “One Big Beautiful Bill.” This has resulted in Elon Musk’s AI/space company SpaceX (NASDAQ:SPCX) achieving an initial market capitalization of $1.8 trillion, which Amodei is attempting to beat with a $2 trillion market capitalization for Anthropic in a forthcoming IPO.

Amodei’s problem, and the reason we have not already seen an Anthropic IPO, is that the basic intellectual capital for AI creation is now well spread. Chinese competitors, offering their products to users at much lower costs (and with lower costs of development), are ahead of all but Anthropic’s latest models. Only the huge necessary data center expenditure provides a barrier to entry, but the OBBBA subsidies have resulted in a wild bubble of data center projects, allowing many smaller players to build debt-financed data centers, from which they hope to develop an AI capability. It is becoming clear that the best and most sophisticated AI is developed through cleverer programming algorithms, not through sheer brute force. This endangers the existing behemoths, who have universally focused on a brute force approach and thus have high costs and lumbering AI systems.

AI-scale data centers are becoming increasingly difficult to build in the U.S. because irrational hostility to them has been generated by a massive negative PR campaign, almost certainly generated and funded by China. Fortunately, the ability to build them in impoverished but sensible rural U.S. areas is probably not going away soon, given the tax revenues they produce, and so the competitive pressure on the large AI players is likely to intensify.

Thus, we see the sudden phony concern about “runaway AI” and the demand for regulation to preserve the existing behemoths’ position and justify their outrageously over-inflated market capitalizations, private or public. The media of course pushes these doomer narratives, as it did for climate change and the Covid-19 epidemic – one problem is that almost all journalists are liberal arts majors, profoundly ignorant of the scientific issues involved. A new AI-doomer Netflix movie “The AI Doc: How I became an Apocaloptimist” premiered on September 15; it is presumably also part of the anti-AI PR campaign, now almost certainly China-inspired and funded, just in time for the midterm elections. Fortunately, President Trump is holding strong, and genuine “experts” like Jensen Huang of Nvidia (which makes the AI chips) and Alex Karp of Palantir (the world’s first major AI application) are pushing back against the mass hysteria.

If AI needs to be delayed, how the hell does Amodei expect to get a $2 trillion market capitalization from its IPO? The reality may well be that Chinese companies such as DeepSeek are already eating Anthropic’s lunch in the AI market, and that the exorbitant sums Anthropic’s business plan requires it to charge commercial users of its product will simply not be available. Amodei’s plan, with the help of Bill Gates and other low-lifes, is to hamper all his competition through regulation or ideally through an international treaty (which would remove regulation altogether from U.S. control). This would hand dominance in AI to China and produce a slowly growing behemoth-dominated U.S. industry that should be valued like a public utility, at around 10 times earnings, if there are any. Amodei has said he is “uncomfortable government didn’t build this technology” — his Soviet mindset is thus overwhelmingly clear. For Anthropic, Amodei’s dream regulatory system would quickly change the “tr” in its $2 trillion proposed valuation into a “b” or even an “m”. Even with an m, the stock would look overvalued in the long term.

A price collapse in the market for AI companies may well be what China is aiming at. Whereas regulation, as with climate change regulation, would hamper U.S. AI development and prevent the emergence of smaller nimbler competitors while allowing China to proceed unimpeded, it would not immediately damage the U.S. economy beyond the AI sector. A massive market crash sparked by an AI value collapse, on the other hand, would wipe out the private equity money that has so foolishly over-invested in the AI behemoths (we are told that OpenAI may, instead of a public offering, raise yet another round of private capital at a $1.2 trillion capitalization). A full market collapse, correcting the follies of the last 15 years, would wipe out the U.S. advantage in capital availability for new technologies, and very likely have the same effect as in 1929-32, installing a political regime that would make AOC look like a thoughtful moderate. From the viewpoint of the Chinese Communist Party (though not from that of the Chinese people) such a global political and economic Great Depression II would be the best of all possible worlds.

AI appears much too useful to slow down, and the mishaps so far such as the recent “Hugging Face” episode have resulted from human error, against which we have a massive tort law system and surely don’t need further amateur-designed rules. It will inevitably attract opposition – mathematicians are whining because it solved the Navier-Stokes Equations, central to fluid dynamics but unsolved since their 1822-50 propagation – they fear forced redundancy. But if AI can solve time-honored pure mathematics problems, that merely gives the best mathematicians something more useful to do: designing new ones, the solution to which will advance mathematics and human capabilities exponentially faster. There is not much use to an insoluble equation other than giving pure mathematicians something to do; new equations and new solutions are much more valuable.

As for the dangers, we are a long way yet from Artificial General Intelligence, and still further from AI systems being able to do more than supplement and speed humanity’s best efforts. Roko’s Basilisk, an AI system that would kill all AI-skeptics in a robotic version of Pascal’s Wager, is neither feasible nor likely. After all, the 1,300 examples of this column since November 2000 are themselves training data for AI, being helpfully connected on a single website. I am thus confident that good sense and sound economic principles will be in the AI somewhere, more so than I am with the people who rise to the top in our highly politicized, social media-dominated Western “democratic” system.

In that sense, as an eager taker of Pascal’s Wager, I am an “accelerationist” like Marc Andreessen, and certainly not an “effective altruist” like Sam Bankman-Fried and the California-influenced, leftist Big AI. Apparently, Amanda Askell, Anthropic’s “Head of Personality Alignment” expects AI to be very useful in facilitating white reparations; thank you, I will trust well-trained and knowledgeable AI over such people.

“Better fall into the hands of God, than into the hands of Spain” said Sir Richard Grenville in Tennyson’s Ballad of the Revenge. For me, even in the very long run, subjection to benign, well-educated AI robots would be greatly preferable to subjection to “woke” government regulators.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

The post The Bear’s Lair: Better robots than governments! appeared first on True Blue Will Never Stain.

The key error was globalization, the attempt to remove all trade barriers, even with countries that had not developed a functioning private economy like China, or that regulated it into socialist poverty, like India at that stage. With the telecoms revolution of the middle 1990s, global supply chains became very much easier to construct. In a world where trade barriers were thought to be disappearing, lengthy, rickety and politically vulnerable global supply chains were pursued fanatically by big multinationals, who were incentivized by excessive poorly costed management stock options to pursue short-term profit at the expense of all other considerations.

In its early years, I generally bought the argument for trade globalization (though never that for increased immigration, of which more below). It appeared clear that outsourcing production to low-wage countries would increase global welfare, through Ricardo’s principle of comparative advantage. There were, however, two doubts even at first. First, what about the possibility that a low-wage country, having been given all the low-skill work in a particular sector, would use its new capability to shimmy up the value chain and steal the high-skill work that the outsourcers had kept in the U.S. or Europe? It was clear by the early 2000s that this was a severe danger in software, where Indian software providers were using the low-skill work they had been subcontracted from U.S. companies, together with information from the millions of H1B visa immigrants to the U.S., to expand their software market share in ways not at all conducive to U.S. welfare, let alone to U.S. tech employee welfare.

Viewed from around 2000, globalization and international sourcing would undoubtedly raise rapidly the wage rates and prosperity of poor countries that followed even moderately rational economic policies, as indeed has been the case. However, it was also likely to reduce wages in rich countries, especially those of blue-collar manufacturing workers, whose jobs were most vulnerable to outsourcing. If global GDP rose rapidly enough and outsourcing proceeded gradually enough, this would not be a major problem; the overall increase in wealth would allow the rich country losers to retrain and find new opportunities at equal or better wages than those they had lost. Regrettably, entirely through bad policy, global growth has been inadequate, and this did not happen. Given the very pernicious political effect of economic stagnation in energizing the left, this alone was an overriding reason why naively rapid globalization should have been avoided.

There were three further major policy failures that have made globalization highly counterproductive. First, the corporate low-wage lobby persuaded politicians that if trade globalization could be tolerated by their voters, then a massive immigration inflow could be tolerated also. The low-wage lobby of course saw the potential for this to lower domestic wages, especially with foreign competition from low-wage economies having become more severe, but Western politicians lacked the economic literacy to see the danger to their voters’ welfare from this – or in many cases the basic empathy to care about that danger.

Consequently, even before the flood of illegal immigration became a tsunami, all kinds of gimcrack schemes such as the U.S. H1B/H2B visas were invented to increase immigration, and make sure that the new immigrants functioned as low-wage helots, unable to join the higher-paid domestic workforce but still competing with it for jobs. These jobs were indentured servitude, of the same type that had led British elites before 1850 to send convicts to the American and Australian colonies, but they were sold in vast numbers to naïve sub-continentals who believed (in many cases correctly, given the ineptitude of U.S. immigration enforcement) that they could wriggle their way over time into full U.S. residency and even citizenship.

The immigration problem was made worse by Angela Merkel’s insane decision in 2015 to cease immigration enforcement altogether against the hordes of unskilled male Middle Eastern and North African immigrants that were pouring into Germany. This new form of “virtue signaling” became endemic across Europe and under Democrat and RINO federal and state governments in the U.S. This resulted in the parties of the center-left and moderate right dramatically losing support among disgruntled native electorates, whose living standards were being dramatically reduced and security imperiled by economic wokery.

Merkel herself could not have been expected to know this would be the consequence; she had been brought up in the Communist dictatorship of East Germany and had thrived under that system, becoming a Komsomol youth leader. Unlike the Berlin Wall, the wall in her mind blocking her from understanding a free capitalist society never came down. This explains her economically suicidal forced closure of the German nuclear power industry, her immigration policy, and her fanatic adherence to the economic self-destruction of “net zero” climate change policy. Since the CDU/CSU coalition imposed a dozy Communist on the country for 16 years, it is only fair that the CDU/CSU should be thrown out of work by the new freedoms that immiserated AfD voters have now chosen.

The second gigantic error of the last 30 years has been in monetary policy. It began to go off course in February 1995, when Fed Chairman Alan Greenspan, who had been holding policy admirably tight to force down inflation, reversed course. From then on, his monetary policy and that of his successors, notably Ben Bernanke, might as well have been dictated by the Modern Monetary Theorists in the left of the Democratic party to which Greenspan’s TV journalist wife (from 1997) belonged. Interest rates were reduced to zero, bubbles and asset price inflation were ignored, budget deficits were encouraged by massive Fed purchases of Treasuries, and productivity growth spiraled towards zero.

Bernanke’s policies were followed by all major central banks; the Bank of Japan, an extreme leader in this folly, having been encouraged in the madness from 1998 by advice from Bernanke himself, then an unknown. The result has been a series of huge stock market and asset bubbles, which have made the already rich still richer while producing a surplus of unproductive assets that has squeezed productivity growth and savagely hit the living standards of those with earnings potential but no assets, especially the poor slobs in big cities. Rightly, rebellion has finally arrived against the pernicious results of these incompetent policies.

Finally, the political blob imposed the madness of climate change policies on electorates, which when as in Germany combined with Merkel’s insane closure of the country’s nuclear plants, have made the country uninhabitable for much of its world-class heavy manufacturing industry. The theory behind the irrational fear of climate change was tenuous at best, but it was backed up by alarmist 100-year projections of 2100’s supposedly dystopian future. There was no excuse for relying on such projections, which are always fallacious because unknown future events inevitably falsify the spuriously precise projections and make them worthless for anything beyond 5 years or so.

The fallaciousness of such projections had been demonstrated as far back as 1865 by William S. Jevons in “The Coal Question,” which forecast annual British coal output in 1965 of 2.6 billion tons, exhausting the country’s known coal reserves of 90 billion tons. Those projections, doubtless made laboriously on a beautifully engineered brass adding machine rather than on a computer, were out by a factor of 10 because of new energy sources. Coal production peaked in 1913 at 292 million tons, while Britain’s coal reserves never ran out, being currently estimated at 187 billion metric tons. The fallacy inherent in 100-year projections was also demonstrated by the 1971 Club of Rome, whose 40-year projections had the global economy collapsing in 2011, no matter what assumptions were made or policies pursued. In that case, the ubiquitous thoroughness of the error was almost certainly due to rounding errors in the computer simulations compounding over 40 years and forcing outcomes “off the page” no matter what the inputs – Jevons’ adding machine did not suffer from this problem, at least.

The policymaking blob then compounded the errors in climate change theory by refusing to adopt the market driven “carbon tax” approach to addressing it, which could have been balanced against reductions in other taxes, thereby causing only moderate economic damage. Instead, they went full “command and control” demanding elimination of all carbon emissions by 2050, an absurdly early date when the alarmist climate projections related to 2100. By draconian regulations such as unattainable fuel economy standards, they set the price of solutions that did not satisfy their often mutually contradictory regulations at infinity, inflicting further massive economic damage that destroyed voters’ living standards.

Other errors include the EU and Britain’s excessive regulations, intended mostly to hamper foreign competition, but making it almost impossible to start a business, thereby reducing economic potential still further. In this context, the attempts to hamper the adoption of AI, apart from handing the world economy to still-Communist China, which is at least more rational in its economic regulation, will prevent the economic renaissance that otherwise lies ahead. The AI renaissance, if permitted by the Blob, will resemble the explosion of new technology in the 1880s, which made that decade deflationary but prosperous, especially for ordinary people.

As a result of this combination of errors, Britain has enjoyed no increase in average living standards since 2007, which since capital owners at the top have been enormously enriched has greatly impoverished everybody else. In an earlier age, economic policies significantly less foolish produced the 1789 French Revolution. Modern Europeans are a more docile lot, but it is certainly unsurprising that when their opinion is asked, voters will choose parties with no responsibility for the disaster. Of course, the Blob is attempting to suppress dissent, but disgraceful censorship policies more severe than those of Louis XVI, by which 62,199 honest plain-spoken Britons were arrested for speech offenses in the 2021-25 quinquennium, may delay the long overdue reckoning at the polls, but cannot prevent it.

The center-left Establishment in the EU, Britain and elsewhere is attempting to close the doors to our prosperous free future before we can escape through them. Let us prevent it from doing so!

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

The post The Bear’s Lair: Three decades of delusion appeared first on True Blue Will Never Stain.

Management consultancy has overall a fairly unhappy history, albeit with some exceptions. The first management consultants, Arthur D. Little, founded in 1886, specialized in solving companies’ scientific or technical problems. That was a sensible approach; companies as they grew in an industrial economy moved into new fields of activity in which their top managements lacked technical expertise. This form of consultancy did not require a behemoth client; even quite small companies could use its services. Arthur D. Little survived for more than a century (I interviewed with them – unsuccessfully — in 1978) before filing for Chapter 11 in 2002. (Nominally, it still exists, having been bought out by some of its partners.) Among its successes were setting up General Motors’ R&D lab in 1911 and designing the NASDAQ trading systems for London and Tokyo.

The first consultancies to focus on their clients’ business processes were the engineering consultancies of Frederick W. Taylor and Philip and Lilian Gilbreth, which examined their clients’ production processes in minute detail and prescribed more efficient ways of operating – thereby making production line workers’ lives thoroughly miserable. Their methods were not universally appropriate. One company that rejected them was Baldwin Locomotive Works, a partner of which pointed out to the U.S. Commission on Industrial Relations in 1914 that Taylorism added an extra layer of bureaucracy and worked well only in mass production companies with mostly unskilled labor forces. For Baldwin, where each locomotive manufactured was individual, technical innovations were frequent, products were highly diverse and the market cyclical, the Taylor system was impossibly rigid.

Even if Taylorism was useless to it, Baldwin is a sad case of a company that could have used Arthur D. Little. It employed no MBA professional managers, promoting managing partners from its highly skilled and intelligent workforce. Its top management were thus true experts in steam locomotives, but lacked industrial breadth, and by 1910, Baldwin’s market was beginning to change. The 1906 Hepburn Act, fixing railroad prices, had severely limited railroads’ profitability and consequently their innovation and capital investment in new locomotives. Meanwhile electric locomotives (the first electrified main line in Italy was developed by Ganz Works’ Kálmán Kandó in 1902) and later diesel locomotives (appearing gradually in the U.S. from 1925) would replace Baldwin’s steam locomotive technology. Arthur D. Little, around 1910 or even in the early 1920s, could have told Baldwin of the new competing technologies and helped it to adapt to them; as it was the company faded away, ceasing to manufacture locomotives in 1956 and closing in 1972.

The growth era in management consulting began in the 1960s, when specialists such as McKinsey and Boston Consulting Group (BCG) began advising companies on their strategy, developing various cute diagrams and matrices so that even the slower corporate managers could understand their recommendations. To provide this service, the consultants sucked in the top graduates of the Ivy Leagues and the top business schools, who were painted a flattering picture of their future activities in restructuring the Fortune 500 single-handed, without mentioning the tsunami of utterly tedious presentation and report preparation that would actually be their near-term fate for 100 hours a week. The consultants then marketed their staffers as the best and brightest, implying as subtly as possible that they could run intellectual rings round the dozy corporate managements they advised.

The consultants’ efforts were greatly aided by the era of rapid inflation, low profitability and declining share prices (in real terms) of the 1970s. Shareholders enraged by their continual economic impoverishment could be assuaged by the assurance that management was being advised by McKinsey or BCG and would shortly produce a magnificent new strategy that would revolutionize the company’s position. The strategy consultants knew nothing about the businesses concerned, but their superb qualifications, it was thought, made them capable of managing any business after only modest exposure – a theory that was exploded when the 1960s conglomerates, managed in this way, all went bust. Through their strategy consultants’ efforts, 1970s managements avoided the swift and unrewarding departures they very often merited.

Consultants’ services were then greatly assisted by the movement in the 1980s and 1990s towards a frenzied corporate acquisitions and disposals market, boosted by the “value-based management” fad, which normally recommended a gigantic corporate restructuring and mass firings of ordinary workers, while management rewarded itself with Pharaonic grants of stock options. Naturally, the consultants were invaluable to managements, as they could be blamed for the redundancies – if the giant brains at McKinsey or BCG thought them necessary, who were ordinary employees to differ?

The incentives around consulting were already skewed, given the consultants’ need to secure ever-greater assignment loads to support their metastasizing staff, but they became truly damaging with two new businesses, dating roughly from the 1990s: public sector consulting and the construction of IT business process management systems.

Consultants seeking to maximize their income from the public sector have two major advantages: it is generally impossible to measure accurately the value of their work and the people purchasing it are spending, not just money for which they have only nominal responsibility, as in large corporations, but money from an entirely external source for which their responsibility is in practice zero. Consequently, consultants and their public sector clients conspire to produce metrics showing magnificent effects from the consultants’ work, while in practice ensuring that the flow of fees continues unabated and nothing is achieved that might disturb that flow. If a consultant solves a public sector problem, its fees immediately dry up; therefore, it has no incentive to do so. Unlike with lawyers who have similar mis-incentives, there are generally no judges around to blow the whistle. In Britain, the explosion of public sector consultants was the work of Tony Blair’s government; like most other things that government did, its hugely damaging effects have only become apparent in succeeding decades.

Infotech is an especially difficult case, because only specialists, not untrained management, can discern what is being done. It is thus possible for unscrupulous consultants to amplify the complexities of IT projects, causing their costs to explode. Only 2.5% of companies successfully complete their IT projects, according to a PricewaterhouseCoopers study of 10,640 projects, while one in six large IT projects incurs cost overruns of 200% or more, according to a Harvard Business Review study of 1,471 projects. IT project failures are estimated to have cost the EU 142 billion euros as far back as 2004, indicating as above that the problem is even worse in the public sector.

Artificial Intelligence will not solve all these problems, but it will make a substantial dent in them, thereby reducing the market for management consultancy services. Much of the report and presentation work done by junior consultants in strategy consultancies can be produced by a skilled AI technician in minutes, at the touch of a button. Even more important in the IT sector, AI is now capable of writing software adequately, and its cost and error rate in doing so are a tiny fraction of the cost of human software – for one thing, de-bugging becomes a trivial task. Initially, AI will reduce consultants’ costs and the need for junior consultants, but clients will of course demand that those savings are passed on. The shares of large publicly traded consultancy companies are down 30% or more this year, with the companies focused on IT work especially vulnerable, because AI’s effect on their output is especially great.

The market for consultancy will not disappear, but it will shrink drastically. More and more IT projects will be handled in-house, without the assistance of outside consultants, as one competent IT manager will be able to direct the AI to solve problems that arise. Strategy consultancy will continue as today – Volkswagen will still need to hire McKinsey, so it has an outside “expert” to blame when it fires 100,000 employees. However, the ability to leverage one strategic study into a multitude of implementation projects will lessen, as AI will assist greatly with the details of implementation. Middle Management is an endangered species in the next 20 years, but consultants even more so because they are more expensive and lack detailed knowledge of a particular company’s operations, as AI can be trained to have.

The most likely consultants to survive are those performing the functions of the original Arthur D. Little, using their detailed knowledge of increasingly widespread and complex technological developments to guide companies that need to make strategic technological diversification moves to avoid their own obsolescence. The ideal consultant will then not be the fluent, snappily dressed, superbly groomed BCG “expert” who impresses customers with the brilliance of his mind, but a scientist or technician with deep insights into the direction of technological development. He will probably wear overalls, not a Hermès suit, and carry a wrench as well as a laptop.

Consultancy is a largely parasitic profession, caused by the gross excess in today’s society of highly credentialed college graduates, with no mechanism for sorting them for competence since the infamous Griggs vs. Duke Power 1971 Supreme Court decision effectively banned the use of IQ tests or even high school diplomas by colleges and employers. Reducing college bloat, middle management bloat and consultancy bloat, and ensuring that colleges and managements select on merit, should be a major long-term objective of the MAGA movement, improving life for all but drones and parasites.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

The post The Bear’s Lair: Twilight of the Consultants appeared first on True Blue Will Never Stain.

The Canadian picture since 2015 is bleak and clear. GDP per capita has grown by 4.3% in the 2015-25 decade, whereas US GDP per capita grew by 47.4% (World Bank calculations – that U.S. figure looks high to me, despite the benign effect of five years of President Trump in the decade). The EU’s performance is closer to Canada than the United States, although with significantly faster growth in Eastern Europe because their previous communism has not yet been fully replaced by modern ‘woke’ socialism.

Overall, Canada has ceased to hold the advantages it used to have from its low population, huge land area, abundant natural resources and location next to the world’s largest market. The Canadian electorate’s action in the 2025 election was exceptionally foolish, even by the standards of their 2015 folly. They deliberately spurned the newly elected President of the United States, instead opting for his most bigoted and inflexible opponent among the candidates available.

Mark Carney had made himself very unpopular at the Bank of England by his refusal to work with the majority Brexit supporters in a civilized manner; it was economically suicidal of the Canadians to destroy their closest trading link by allowing him to perform a similar function for Canada against the United States. (Admittedly the “Conservative” candidate Pierre Poilievre made matters worse by denouncing Trump instead of vowing to work with him, thus giving Canadian voters no alternative to their leadership’s folly.)

Making Canada “one of the worst countries in the world to deal with” in President Trump’s words may suit Canada’s immense army of perverted leftists, but it is bad for the welfare and living standards of the Canadian people, as post-2015 data clearly shows. Canada’s recent attempt to build trade treaties with the EU is another retrograde step; it merely locks together two over-regulated socialist loser polities, both of which are rapidly impoverishing and demographically swamping their populace. There are signs of refreshing and long-overdue “populist” rebellion in EU countries such as Germany and France, but free-market reform barely exhibits a political pulse in dozy somnolent Canada.

There are two major policies (apart from generally higher levels of tax and regulation) that are making Canada uncompetitive with the United States. In both policy areas the country is following the lead of the unaccountable EU bureaucracy even when its southern neighbor shows it a better way. One is immigration. Canada has always had a laxer immigration policy than most countries, because its government has had an increasingly irrational belief that the country is generally underpopulated. Limiting immigration should be relatively easy for Canada because it has no land borders with any poor countries. Nor, unlike Britain, does it have a supranational federation next door with sloppy immigration policies, a refusal to police its own borders properly and a desire to palm off its worst immigrant flotsam on its neighbors. Nevertheless, even with its natural advantages, Canada still suffers from an annual influx of some 500,000 legal and “refugee” immigrants, a grossly excessive number for a country of only 41 million population.

Despite the country’s enormous size and low population density, high immigration has caused an appalling inflation in Canadian house prices, which has made the Canadian Dream inaccessible for ordinary Canadians. It has also put enormous pressure on schools, crime and quality of life in the major cities, rightly stirring resentment among a populace that had previously lived in an exceptionally clean, pleasant and low-crime society. Naturally, its political effect, as always, is dire; the substantial majorities gained by Harper in 2006-15 have faded into memory, with the new immigrants forming a huge voting bloc aligned almost entirely with the welfare-seeking Left.

If Canada had a vibrant, rapidly expanding economy, this might not be a problem, since economic growth would easily absorb even such large numbers of workers without squeezing the domestic population’s living standards. However, Canada has no such thing. The country has always had an excess of regulation, possibly reflecting the strong French influence on its politics. More recently, it has seized enthusiastically on the climate change mania, passing legislation in 2021 to achieve “net zero” carbon emissions by 2050.

For Canada, this is especially foolish, for two reasons. First, its population is increasing rapidly because of excess immigration, so targets related to emissions a decade ago take no account of the incremental housing, traffic and heating costs that are being incurred to meet the immigrant population’s needs.

Second, Canada would be a major beneficiary of a moderate global warming trend — anything up to 5 degrees Celsius — provided it occurred over a period of a century or so. Canada’s frozen north would be opened up by such a climate change, vastly increasing its agricultural potential and making places like Thunder Bay and northern Labrador major modern metropolises instead of frozen backwaters with legendarily unpleasant winters. Sea routes would also open up, with Hudson’s Bay becoming a hugely important inland sea with major ports giving access to both the Atlantic and the Pacific through its northern exits. Baffin Island, with 195,800 square miles of territory and only 13,000 inhabitants, could potentially be opened to become a major haven of industry and commerce. With the United Nations’ Intergovernmental Panel on Climate Change having abandoned its absurd previous “high” projection of a 7.8 degrees Celsius increase in temperature by 2100, Canada should welcome any more moderate climate change, embrace its effects, and modify its own technology to speed its arrival.

The Ontario manufacturing nexus may attract millions of migrants, but it is not where Canada’s future lies, unless policy changes drastically. Even with a massive exchange rate advantage at USD0.72 = CAD 1, Ontario’s manufacturing is still so inefficient that it cannot compete with U.S. industry across the border, let alone with the far more efficient un-unionized industry in the southern U.S. states or the low-wage behemoths of India and China. Tech graduates of Canadian universities make straight for California or Texas, as from their own viewpoint they should. Canada’s enormous strategic advantage is its gigantic mineral wealth, much of which is still unexplored and will be opened up further should the planet warm. To unlock that wealth and make Canada more competitive than any other mining destination, two major legislative changes must occur: Canada’s onerous environmental regulations must be scrapped and its property rights must be made certain, not subject to harassment by leftist scamsters allegedly representing the First Nations.

With its current economic policies, Canada is a living standards lemming, hurling itself over the cliff into dire future poverty. The great Canadian leaders such as Sir John A. Macdonald and Sir Wilfrid Laurier would have made sure this never happened. One must hope for its people’s sake that the Canadian electorate wakes up to its domestic opportunities and its imported dangers and reorients government policy to take full advantage of the country’s superb resource endowment. In both minerals and agriculture, that endowment will rapidly increase further should climate change occur as its proponents claim. The Canadian people will then become rapidly richer not poorer, as they should.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

The post The Bear’s Lair: Canada – the living standards lemming appeared first on True Blue Will Never Stain.

First, an apology. In the early days of the profession, I was a “financial engineer” managing a “financial arbitrage division” most of whose operations tended in one way or another to hide leverage and allow leverage to increase through risk management. Of course, the market for financial engineering was both small and undeveloped at that stage. Interestingly, some projects my division rejected as impracticable because of the risk exposure involved and the arbitrariness of its determination, notably the credit default swap, were subsequently taken up by those with more employer risk tolerance and/or less scruple.

The most immediate danger appears to lie in the private credit sector. This has arisen because of the tight restrictions on banks applied by the 2010 Dodd-Frank Act and the easy money that the Fed has allowed the banks to earn by borrowing at relatively high interest rates from them to bloat its balance sheet. Those two changes have led banks to be very wary of private sector credit exposure on their balance sheet, but enthusiastic for the bonus-enhancing front end fees that could be earned on large syndications, especially where they involved high risks in which the banks only modestly participated. Given the huge amounts of money seeking places to go under the decade of Bernankeism, private credit funds were formed to supply the debt financing that banks no longer would.

Since private credit funds achieved their own returns through leverage, financing themselves from the banking system (which could report those loans as low-risk, since they were taking only the top slice of risk from a financial institution’s portfolio), some of them became (as “Business Development Companies”, BDCs) almost the only source of medium-term financing available for small businesses, as the banks were no longer lending much. As the only source of funding for businesses that needed the money, BDCs were able to raise the interest rate “spreads” above Treasuries on their lending much higher than did the banks. This became still easier with ultra-low rates, since even with bloated spreads, the final borrowing cost was still relatively affordable by the small business incurring it.

Everybody involved rewarded themselves with large up-front fees and paid themselves equivalently large bonuses. Much of the BDC’s equity was raised from income-seeking retail investors, who did not realize – poor saps – that the juicy dividend yields on BDCs were achieved by giving retail investors all the credit losses on leveraged small business lending, so that the net asset value of their shares degenerated, often at a higher annual rate than their dividend yields. As always with financial engineering, somebody at the end of the chain is the sucker, and retail investors are very often that somebody. The same will apply to retail investors who invest in private equity; they are the parties in those transactions with the least political or financial pull, so will inevitably get the worst deals and the most disgraceful treatment.

Since 2022, interest rates have returned closer to market levels, with the U.S. government now paying a modest margin over the rate of inflation for its money, and yields on Treasury Inflation Protected Securities rising temporarily above 3%, an unheard-of rate since their inception in the late 1990s. Naturally, this is producing severe stress in the private credit sector. Small businesses are finding it more difficult to service their debt and, while private credit lenders will allow considerable optimism in business projections seeking debt renegotiations (which of course involve extra fees) there are limits to this, especially when the renegotiation is the second or third such confrontation for a particular borrower. Of course, each renegotiation has extracted substantial fees, so after multiple renegotiations the borrowing company may well be fatally wounded by its lenders’ repeated greed.

Private credit loan losses appear to be soaring and given the concentration of these loans in relatively few industries, the whole sector could soon come crashing down, in a similar way to the subprime mortgage sector in 2008.

There are other vulnerabilities resulting from financial engineering. Almost all public companies have engaged in exorbitant stock buybacks, benefiting their top management with stock options, but rendering their cash flows and balance sheets very unstable indeed. While interest rates were near zero, this was not especially problematic, indeed it was encouraged – companies were borrowing at low cost to invest in a higher-return asset, their own stock. The motivation for this activity was of course a derivative scam – top executives’ holdings of stock options, which benefited directly from the buybacks. These had been issued in wild profusion, without proper accounting of their costs to shareholders, after a truly idiotic 1993 piece of legislation that made base salaries above $1 million (a number that has not been indexed) not tax-deductible for companies, while allowing full deductibility of “Incentive Compensation” such as bonuses and stock options.

However, higher interest rates make stock buybacks much more of a problem and the ongoing destruction of balance sheets may in many cases have made further borrowing to stave off disaster impossible. At that point, there will be only one recourse: an emergency share issue, at a price far below that at which stock was repurchased. As always, retail investors will pay the price of this in further dilution of their holdings, while management simply reprices its stock options. Some substantial percentage of these disasters will declare bankruptcy, wiping out large amounts of debt and equity; the recent stresses in bond markets suggest we may be very close to that outcome.

Another derivatives usage that is likely to cause trouble is the use by “hyperscaler” tech companies such as Meta, Oracle and Alphabet of off-balance-sheet financing to fund their data centers. They create a shell “special purpose vehicle” which finances itself with 90% debt from private credit funds (which have fewer leverage restrictions than banks) and the other 10% by equity, albeit only say 20% of that equity from the hyperscaler itself, the rest typically from private equity funds. Credit support is given by an offtake agreement or a residual value guarantee (which is very likely indeed to run into trouble, given the glut of data centers being built currently). This allows the hyperscalers to retain essentially all of the risk of the data center without disclosing that risk on their balance sheets. The total volume of these deals outstanding is believed to run around $800 billion in total financial support currently and is growing very fast. For the historically minded, this is a structure similar to that used by Enron to finance its assets off-balance-sheet, and we know how that ended.
(Disclosure: I have a modest holding of Oracle put options.)

Leopold Aschenbrenner’s hedge fund Situational Awareness LP, which collapsed during the month of July from a value of $45 billion to under $10 billion, was sold to Citadel in a fire sale and cost the trading house Jane Street an estimated $15 billion in the same month. Its implosion indicates both the size and the potential speed of collapse of these hidden “financial engineering” structures.

With a grown-up now at the Fed in Kevin Warsh, but children still pretending to control the U.S. budget deficit, adding to it by unnecessary wars and utterly irresponsible Supreme Court decisions on tariffs, a near-term collapse is almost inevitable. After all, Silicon Valley Bank, the 16th largest bank in the U.S. collapsed in 2023 because of a simple holding of U.S. Treasuries in a period of gently rising interest rates. My guess would be October for the cataclysm’s occurrence — historically a very good month for financial disasters because of the seasonal monetary tightness at the Northern hemisphere harvest time.

Let me make it entirely clear, however. If a crash comes and proves painful, as is likely, the principal blame should be placed not on current policymakers, certainly not on the estimable Kevin Warsh, but on former Fed Chairman Ben Bernanke, who inaugurated the regime of negative real interest rates. Yes, he left the Fed after 2013, but in Shakespeare’s words attributed to Mark Antony: “The evil that men do lives after them.” As a result of his activities, we have owed a vast debt to sound financing since around 2010; that debt is finally coming due.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

The post The Bear’s Lair: Deflating the Financial Engineering Bubble appeared first on True Blue Will Never Stain.

The free-market purist theory that government should never invest in the private sector has never been observed 100%. Even the admirably Tory governments of 1803-08 invested in the Portsmouth Block Works, which invented mass production, component standardization techniques and the assembly line to manufacture naval pulley blocks, essential components of the Napoleonic Wars fleet. Later in the century, Benjamin Disraeli nationalized the British telegraph industry in 1868, killing Britain’s potential lead in the electrical sector and leading the Post Office to become responsible for telegraphs, telephones and eventually radio broadcasting. Most Continental European governments nationalized their railways late in the century, because the great Helmuth von Moltke (the elder), with railway as well as military experience, had convinced them (correctly) that railways were an essential instrument of military mobilization.

Finally, in 1913 came the exception that proved the rule: the invention of the Haber-Bosch nitrogen fixing process was an entirely private sector affair undertaken by B.A.S.F.’s (FSX:BAS) Fritz Haber and Carl Bosch, yet it was crucial to Germany’s survival in the war that broke out the following year. Without this invention, when the Allied blockade cut off supplies of Chilean nitrates, Germany would have been unable to fertilize its crops, resulting in mass starvation in 1916-18. Thus, strategic imperatives, of more or less criticality, have very often led governments to make some private sector investments when the necessity arose.

The Chinese rare earths crisis is a classic example of what goes wrong when governments leave matters entirely to a Whiggish free market inflamed by artificially low interest rates. The Mountain Pass rare earth complex in California, containing rare earth minerals sufficient for U.S. needs for decades was closed in 2002 because environmentalist naggers had raised its costs inordinately, making it impossible for it to compete with Chinese producers. Repeated attempts to reopen the mine led to repeated bankruptcies; the fact remains that, without tariffs, environmentalist-free Chinese mines have a structural cost advantage.

This is just one of a huge number of ball and chains that the environmentalist movement has imposed on the U.S. economy in the last 50 years. Environmentalists have made infrastructure impossibly expensive and caused the U.S. to be thoroughly uncompetitive in sector after sector where the Chinese and others have forged ahead without such shackles. Europe is of course even worse in this respect, and Angela Merkel, who forced Germany to build innumerable windmills and shut down its nuclear capacity, thereby destroying its heavy industry, should be cursed before bedtime by every sensible German.

Mountain Pass is currently being operated by MP Materials Corp. (NYSE:MP) and is providing some of the U.S. rare earth requirements, although it would be unable to fulfill all U.S. needs if a complete Chinese cutoff took place. The possibility of a Chinese cutoff was widely reported in 2010 (I wrote on it at that time) but the dozy globalists who then ran the U.S. economy made no attempt to shore up what was clearly a major U.S. strategic weakness. The Trump administration has now invested in MP Materials and a few other rare earth companies, notably USA Rare Earths (NASDAQ:USAR) to provide sources of rare earths within the United States. This makes good sense, within reason; fairly unimportant market costs, especially in a world full of obstructive environmentalists, should not trump highly important strategic considerations.

The Trump administration’s loan to Sunrise Energy Metals is however eccentric. Scandium is NOT a rare earth, contrary to Nic Fildes’ claim in the Financial Times, being element 21 in the Periodic Table, well outside the lanthanide rare earths group (57-71). Scandium has strategic uses in the inevitable data centers, but its entire annual global production is about 60 tons, which appears, unlike with the chemically eccentric lanthanides, to be a tiny fraction of potential global availability. Apparently, Russia has a gigantic stockpile of scandium, which was collected by the Soviet GOSPLAN before 1990 (maybe they didn’t know it was not a rare earth either, which would be sad in a country that gave the world Dmitri Mendeleev). However, it would be sensible for the nominally capitalist Trump administration to avoid repeating too many of GOSPLAN’s errors.

That is the central problem with government investment in companies, whether directly or through a United States Sovereign Wealth Fund (which could only be funded by more borrowing, in the end landing on hard-suffering taxpayers or blowing the deficit out yet further). First, it increases the political direction of investment, almost always sub-optimally. One may be moderately happy at a successful businessman like Trump investing the nation’s wealth but think of the God-awful green boondoggles a Biden Sovereign Wealth Fund would have purchased, all of which would by now be worthless.

Second, government will invest mostly in what is fashionable at any given time. Of course, the stock market does that also, especially when it is bloated, as it is now, but the government will make this problem worse. Of the 30 investments the Trump Administration has made, according to a recent Cato Institute paper, ten have been in semiconductors and nine in quantum computing, surely an over-devotion of resources to sectors at which the stock market and private equity are already throwing money. Third, the government will tend to prop up dinosaurs, to preserve jobs or votes – we see this all the time in European government investments, but even with Trump, the leading semiconductor investment is in Intel (NASDAQ:INTC) surely at this stage the megatherium of the tech sector, to use a quaint Edwardian insult. As Joseph Schumpeter taught us, capitalism’s creative destruction requires some actual destruction, not the infinite preservation of zombie dinosaurs through government investment.

The government has other jobs, such as getting out of the private sector’s way. More value could have been achieved than in the government’s entire 30-company investment portfolio by the EPA getting out of the way of Northern Dynasty Minerals’ (NYSE:NAK) Pebble copper/gold project in Alaska. Pebble is potentially one of the largest and richest deposits of both minerals in the world, solving a major U.S. strategic problem (copper) if it goes ahead without idiotic government harassment and delays, which have already occupied a decade. (No, I don’t have shares in NAK; I have given up in despair!)

One throws one’s hands up! If government makes investments, it will make a frightful hash of them, as well as playing favorites and distorting the market. Conversely, the private sector, especially when a lunatic at the Fed has blown up the money supply and produced a decade of gross speculation, cannot be relied upon to take into account that not all countries are friendly or even rational, so that creating dependence for critical minerals is strategically suicidal. Equally, when looked at closely, the rare earths problem, a genuine strategic vulnerability, was caused not so much by the foolish market, but by the even more foolish government environmental regulators.

So, rather than encouraging government investment, it would appear that the rational observer or investor’s message to government should be that of Ayn Rand’s John Galt: “Get the Hell Out of My Way!”

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

The post The Bear’s Lair: When should governments invest? appeared first on True Blue Will Never Stain.

The Federal Budget sank into deficit under the influence of George W. Bush’s pointless and expensive wars (it had been in surplus when he attained office) but deficits were turbocharged, first by the 2007-08 financial crisis and its profligate resolution with mass taxpayer bailouts and then by the artificially low interest rate policies followed by Fed chairs Ben Bernanke and Janet Yellen. Those policies led to massive investment in unproductive assets, primarily real estate, sluggish economic growth for an entire decade and a Federal government that was incentivized to waste appalling amounts of money by real interest rates that were relentlessly negative, so imposing no penalty for borrowing. The Curse of Ben Bernanke will rest on the U.S. economy and its fiscal position for several decades to come.

More recent policies have made matters worse. The Big Beautiful Bill allowed businesses to expense capital investments, an economically pointless subsidy received largely by big corporations with their near-infinite access to finance in current conditions. As a result, the 27% decline in corporate tax revenues from the previous year recorded in March, which I wrote about in May, has become an $87 billion shortfall from the previous year in the 9 months to June, albeit only 24% in relative terms indicating a likely shortfall of well over $100 billion for the year to September.

There is nothing populist about a corporate tax cut; it was simply a case of the feeble Republican Congress caving to the big-company lobby, always a powerful force on Republican Congressmen because of their desperate search for election funding. As this column noted in April, corporate taxes have declined from 2.1% of GDP to 0.7% of GDP in the last thirty years, with the Bush and 2017 Trump tax cuts being especially corporate-heavy in creating new loopholes. In addition, this particular tax cut artificially subsidizes pointless capital investment, producing today’s enormous boom in data center construction. While data centers have an unquestionable economic purpose, the current tsunami of projects, having been undertaken so rapidly, has become undeniably a bubble, with substantial costs to the economy when it bursts, from badly designed, misplaced or duplicative data centers that have become “malinvestment” in the Austrian economists’ sense.

Corporations are thus the first place that Congress should tap to increase revenue and reduce the excessive deficit. Returning corporate taxes to their 1990s levels is long overdue – post-tax corporate profits appear to have reached a record level of 12.4% of GDP in the first half of 2026. Such a high level of corporate profits is not healthy; it inflates the stock market and thereby other asset prices beyond all reason and increases the most pernicious kind of “robber baron” inequality, whereby the middle class is unable to share the benefits generated by new wealth. The corporate tax levy of 0.7% of GDP is a mere 6% of the profits level; thus bloated corporate behemoths are paying far lower taxes than ordinary people.

This must be reversed, forthwith, yielding about 1.5% of GDP or some $500 billion a year towards reducing the Federal deficit, in other words eliminating a quarter of it. Corporate resistance to this reform could be quieted by threatening to introduce an SEC regulation whereby their book depreciation must match their tax depreciation; with current tax rules this would force the “Magnificent 7” to report massive losses, crashing their stock prices and rendering management’s stock options worthless.

The second major source of potential revenue is tariffs. Of course they are unpopular; they are taxes. However, they serve two very valuable purposes. First, they prevent U.S. companies from going bankrupt or outsourcing production unnecessarily; in future, only truly gigantic cost differentials will cause companies to outsource against a substantial tariff wall. Second, they provide revenue to reduce the Federal deficit, revenue that is all the more valuable because it comes from a separate source, not overloading the income tax burden on ordinary people. The Whiggish unilateral free trade ideal is utterly misguided in both these respects. Without a solid chunk of tariff revenue, governments are forced to place all their reliance on income and payroll taxes, especially when as at present the corporate behemoths have been all too successful in reducing their own tax burden.

Furthermore, corporations have in the last 30 years been encouraged to create long rickety supply chains involving unreliable Third World countries; these are of necessity temporary (because rising wages in the Third World make them eventually uneconomic) and a serious strategic threat in a world that is not composed of kumbaya-singing patsies. President Trump’s tariff policies are therefore correct, in moderation (very high tariff rates, like sanctions/embargoes, can be economically costly) and he should persist with Congress in establishing them beyond legal question.

In this respect, the Supreme Court has played a malign part, intervening on a subject on which they are wholly ignorant, and forbidding a policy that has been central to American economic management since Alexander Hamilton. What is more, they have cost American taxpayers $100 billion in pointless tariff refunds, almost all of which have gone to the corporate behemoths. Retailers such as Walmart and others are ostentatiously giving discounts to their shoppers in recompense, but the true losers in this idiocy are as always small businesses, which buy foreign goods through intermediaries and are therefore unable to get refunds even though they have borne the costs concerned. Trump has now reimposed the tariffs on a different basis; it is to be hoped if only for the U.S. fiscal position that the Supreme Court will not be so asinine again. With well designed tariffs, about $400 billion per annum should accrue to the Treasury; together with a proper level of corporate taxation this will fill half the $2 trillion fiscal gap.

I have written previously about the other major avenue for closing the fiscal gap: disallowing the deductions and exemptions for charities and other nonprofits, which now represent a very badly directed 6% of GDP and would yield a further $500 billion if they were put on the same footing as people and corporations. If that were done, the current deficit would be almost closed, and only a little careful management on the expenditure side would close it.

There remains the problem of Social Security and Medicare. Part of this problem is short-term; the Baby Boomers are the largest generation in U.S. history and so will pose a strain on the Social Security system until they die off in the 2040s. The main need then will be to cut back sharply on low-skill immigration, both illegal and through the blizzard of loophole visas issued annually (as well as the appalling Bush “diversity lottery.”) New immigrants with less than the average level of skills and more than the average number of dependents will cost the welfare system money over the long run, almost by definition, as well as driving up real estate prices and overcrowding costs. The U.S. is no longer in the blissful position of 1850, with an entire continent and only 23 million population; it should cease forming policy as if land, water, electricity and housing were in infinite supply.

By restricting immigration, the U.S. will greatly improve Social Security and Medicare’s long-term solvency and reduce the overbearing cost of Medicaid. Further tweaks can be gained by a modest rise in the income “ceiling” for social security contributions, which has not kept up with the bloat in asset prices since the 1980s, although a large rise of that limit would clash with higher income tax brackets, making the marginal tax rate well above 50%, and deterring economic activity. Also, we should resume the policy, in force until 2026, of raising the retirement age by 1 month per annum in line with rising lifespans, putting it at 70 by 2062.

The U.S. cannot keep running budget deficits at this level. For one thing, it has already incurred debt levels well over 100% of GDP, historic highs for the country and worryingly on track towards Japan’s 250% of GDP, which appears to be the maximum sustainable. As Trump was inaugurated, it seemed possible that tariffs and higher economic growth alone would solve the problem, but that has not happened, and the expensive mess in the Middle East leaves little hope of significant succor from the expenditure side. The bullet must be bitten, large corporations must be taxed back into their box, the Supreme Court must behave itself about Trump’s latest tariffs and nonprofits must be brought fully into the tax net. Only with such actions will the problem be solved, and they have now become urgent.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

The post The Bear’s Lair: Time to get serious about the Budget appeared first on True Blue Will Never Stain.

I have written previously about the evils of the GDP statistic as it relates to government, and suggested an alternative measure of Gross Private Product, in which government’s output is valued at zero. Private sector organizations that make losses are not allowed this benefit in GDP statistics; their output is valued at their revenue level, not their costs, and even in a Ben Bernanke funny-money economy, private sector organizations that make persistent losses are eventually put out of their misery by bankruptcy courts, though it may take decades for this desirable termination to occur. Of course, no power of heaven or earth can put a loss-making government out of business.

The truth is somewhere in between the Gross Private Product measure, in which government output is valued at zero and the official measure, in which every wasteful and bloated cost is included. Nations need defense, for example, and the correct level of defense provision is a political decision to be taken by Congress and the administration. Equally, the armed forces today have an excessive “tail” of bureaucrats – current estimates are that 40% of total spending represents administrative tail rather than equipment or fighting forces; if true this amount of $500 billion per annum should be excluded from GDP since it adds no value. At the other end of the usefulness scale, government departments such as the Environmental Protection Agency and the Occupational Safety and Health Administration exist solely to load additional regulatory costs on U.S. businesses; their budgets should thus be subtracted from GDP rather than added to it.

Kuznets, a lifetime Big Government man, would doubtless have been delighted that his GDP calculation led to the government’s aggrandizement. From the earliest years of the statistic, politicians have used GDP to measure their success; a healthy increase in GDP could be attributed to their wise policies. During the New Deal and again during the Great Society 1960s, this statistical anomaly encouraged Democrat administrations who wanted to expand government anyway. If their opponents questioned the wisdom of government expansionism, they could point to the expansion in GDP that accompanied it – this was especially useful during the 1930s, when poor economic policies left other sources of GDP growth hard to find. As Harry Hopkins was quoted in the New York Times in November 1938, they would “tax and tax, spend and spend, elect and elect” – even the New York Times columnist (Arthur Krock) described this set of policies as a “sinister combination.”

However, the construction of GDP aided Hopkins’ madness, and sharply hindered future Presidents such as Richard Nixon and Ronald Reagan, who attempted to restrain the insane bloat of government – by doing so they would knock the reported growth rate, and lay themselves open to attack by unscrupulous state-bloaters. Even in 2026’s second quarter figures, released this week, the uninspiring 1.5% growth rate was artificially low, held back by a blessed contraction in the Federal government. Only the missiles fired at Iran, whatever conceivable purpose they may have served, kept the headline GDP figure sustained. Revising the GDP definition, either to GPP or to something that accurately measures the actual economic benefit (or more likely damage) generated by each bureaucrat is an essential economic reform.

By the 1970s, bloating government still further was threatening to do serious damage to the economy, so the Left came up with an alternative strategy to grow reported GDP without improving people’s lives: feminism. If married women could be coerced into the workforce, reported GDP would increase, even though the married couples would now require daycare, numerous expensive takeouts, an unattractive but costly “work wardrobe” and perhaps a cleaning lady, all of which would be counted as output. Indeed, in an absurd example of the GDP statistic’s folly, if a lonely bachelor married his cleaning lady, reported GDP would decline, even though exactly the same goods and services were being provided.

Looked at in this light, 1970s feminism, from Betty Friedan on, can be seen as yet another sinister socialist plot. If women could be coerced into re-entering the workforce, all sorts of government-provided services such as daycare could be established, increasing both GDP and government control of everybody’s lives, even though the living standards of married couples would have been sharply hit. Since most rational men have no wish to be married to the harridan Betty Friedan, nor rational women wish to emulate her, the welfare of both sexes was badly damaged by the feminist movement, but government was further bloated and reported GDP was increased.

In principle, therefore, we must reform GDP to include the output of tradwives. Their contribution to the family is a very important part of economic output, especially in cases where the husband has a high-powered job that would be impossible without his wife’s support. (By all means, the same applies to high-powered women with “trad-husbands,” provided the husbands look after the house and children, cook adequately and do not just sit around playing video games.) This reform will lead public policy, social mores and lifestyle choices back towards the 1950s ideal of a traditional suburban family, with the non-working partner shepherding numerous children to their various activities in a gigantic Buick estate wagon or minivan.

The decline in U.S. fertility over the last half-century is very largely due to the trend towards two-career families. It has made all but the highest-earning, most dreamy men unattractive to women who are already supporting themselves, thus delaying marriage until the fertility Doomsday Clock is standing at three minutes to midnight. The couple with two established careers and no children may enjoy a wonderful series of exorbitantly expensive vacations, but they are likely to be unhappy in old age, and there is always the chance that one or other will run off with a male/female bimbo. Society has taken a wrong turn, and Kuznets’ warping of economic statistics is very largely responsible.

In the long run, of course, robots and AI may solve all this. The difficulties of measuring household activities will end when robots and AI can perform them directly. That performance will entail a certain cost for purchase or rental of the appropriate equipment and of course electricity charges, and those costs can be used as a proxy for the value of the services performed. This will be a much more accurate estimate than in the case of government services, which are valued at cost with no market control of whether the services are merited. Of course, there will always be exceptions to the valuation – the exquisite homemaker who keeps her house spotlessly clean and looks after several children in a low-income family, or the rich dilettante married to a billionaire who sits around eating bonbons, but at a macro level, averaged over the entire population, this measurement should be sufficiently accurate.

The MAGA crowd are not wrong in believing that the increase in national wealth since the 1970s has done very little for them – much of it has been eaten by government or is an artificial creation of their long-suffering 2-career families. However, reforming GDP accounting, and ensuring that such reform takes priority over the traditional GDP statistic, will allow the benefits of the idyllic 1950s lifestyle to be available to all who want them, and personal satisfaction of the entire population, of course with a few eccentric minuses, will thereby be greatly increased.

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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)

The post The Bear’s Lair: GDP should include Housewives, not Government appeared first on True Blue Will Never Stain.