Friday, August 19, 2016

Deus Ex Machina (aka Dem)

 
Deus Ex Machina (aka Dem)


Nul ne peut servir deux maîtres. Car, ou il haïra l'un, et aimera l'autre; ou il s'attachera à l'un, et méprisera l'autre. Vous ne pouvez servir Dieu et Mamon.  - Matthieu 6:24

By J.M. Hamilton  8-20-2016

Paris, France - Greetings from the City of Light, the City of Enlightenment.  Paris is gorgeous, singular in its wonder, decadence, and depravity.  The city’s beauty is only exceeded by the women who live and visit here.  Her streets are teaming with youth and life, and a noticeable number of men and women carrying machine guns; the latter to be expected, in light of recent terrorist events, and accepted and appreciated by the former.

Around Paris’ every corner seemingly exists a monument, icon, or castle:  Arc de Triomphe, the Hotel de Invalides, and the Tuileries Palace, et al.  Around every corner a stunning work of art, in the flesh.   

And of course, the most jaw dropping monument of all:  Versailles.  Versailles symbolizes a Rococo age, where a disengaged, oblivious, and debauched elite facilitated a revolution that shocked European monarchies and ushered forth a democratic age.  As a student of economics, power, and politics I am often amazed at how often history repeats itself.   Several generations may come and go between history’s great events, sleep covers our eyes, and tombs enclose indispensible women & men – who might lead us away from the folly the human race often repeats ad nauseam.

It’s worth remembering then the women of Paris (yes – the women), who massed and invaded a rococo Versailles, and dragged Louis the XVI and Marie Antoinette from their gilded cage.

Versailles has many lessons… perhaps applicable, here and now, in real time.  To wit, some of the direct causes of the French revolution:

The French kingdom was overextended financially as a result of two wars: the Seven Years War and the American Revolutionary War (both wars fought – largely – against French rival the British).

As a result of these wars, and the excessive living of the nobles and the royal family (see Versailles), the French kingdom was bankrupt.

As a result of the debt and the debt service load, the royal family piled on the taxes, which were carried by the proletariat and the merchant classes.  The nobles, the clergy, and the royal family were, conveniently, exempt from paying taxes.

The Justice system was two-tiered.  A system was in place for the elite, and for everyone else – there was no adjudication means.

Louis XVI' reign saw the rise of a new economic system called laissez faire, whereby the sale of wheat and bread – a French staple - were deregulated.  As a result, merchants and speculators hoarded wheat, and sold into areas where there was a crop failure for the highest prices.  This created shortages and famine.  Prior to laissez faire, the French kings were known for intervening in the wheat marketplace to protect subjects from predatory behavior.

Culturally, the proletariat - French citizens and soldiers -were exposed to new ideas of  “equality” and “freedom.”  Some of these ideas were picked up or learned fighting in America’s revolutionary war.  Reason and enlightenment said the King and the Church were no longer infallible.

Laissez faire, an oblivious elite, and a highly unfair tax system pushed the lowest rung of French society up against the wall.  With the proletariat’s very survival at stake, the aforementioned events launched a perfect storm, whereby the aristocracy and the monarchy were ultimately purged.

Does any of this sound familiar?

The times are not entirely dissimilar to events leading up to the French revolution.  In short, the U.S. political elite – co-opted and owned by the financial aristocracy – have become entirely desensitized to the needs of the 99%.  Our courts are two- tiered and a train wreck.  Laissez faire economics has enjoyed an unprecedented run, whereby free trade agreements have exported the 99%’ jobs, daily bread, and the tax base offshore.  Laissez faire also led to the banking deregulation that crushed the world economy.  Two nation building exercises/wars have bankrupted the U.S. government (along w/ a Wall Street bank bailout); and since a purchased U.S. government will not raise taxes on the wealthy, austerity has been enforced, resulting in cuts to education, social services, and welfare for those most in need.  The remains of the middle class and upper middle class pay at tax rates considerably higher than our true rulers, the billionaire class and multinational corporations (aka the aristocracy). 

The U.S. government for a brief shining moment, post WWII, used to look out for the proletariat, but now politicians mainly look out for themselves and the aforementioned aristocracy.



Entre one Madam Hillary Clinton, who despite many self-inflicted political wounds, appears – as of this writing – to be destined for the White House.  What exactly she’ll accomplish as the first woman POTUS remains to be seen, as she will likely be under investigation for the next four years.

Madam Hillary, despite her many glaring deficiencies, has declared herself to be something of a deus ex machina.  That it to say, HRC is: a “progressive who likes to get things done;” a friend of billionaires & the Wall Street banking cartel; a War Hawk; a friend of the proletariat, and a mass incarceration queen.  She’s also a philanthropist, whose foundation is presently being probed by the IRS.  Madam Clinton has supported free trade agreements that have gutted the American middle class, and yet, she’s now, allegedly, against such agreements – at least in their present form, currently.

Hillary and her husband have told so many lies about her email server, that the Washington Post has in a matter of weeks awarded Madam and Slick four and three Pinocchios, respectively.

In short, Madam Clinton is all things to all people, but above all – if we are to be believe our current POTUS – she is an extraordinary politician with unprecedented capabilities.

And therein lies the problem.  Now, perhaps more than ever, we need a President who can tell the elite, the special interests, and the rich, who have robbed this country blind, where exactly to get off.  The U.S. doesn’t need a fantasy literary device; the nation does not need a deus ex machina.  If Hillary is a servant to all special interests, her Presidency, if elected, is doomed to failure.  Given the state of the nation, HRC just might take the nation with her.

HRC does not appear to get it… her aristo sponsors & the U.S. political establishments, like the Royals & aristocracy of pre-revolutionary France, have run the United States into the ground.  Therefore, if Madam is to be an effective President – and start cleaning up the mess neocon-men, Wall Street, and the billionaire class have wreaked upon the nation – she’s going to have to start by telling some very privileged nobility something they haven’t heard in a very long time, if ever:  “NO.”

An interesting side note, the French revolutionaries who took out the monarchy were somewhat distrustful of democracy, so they formed a republic and a great terror ensued.  After a period of years, and with the State of France’s affairs in great disorder (much of that disorder inherited from a highly corrupt monarchy), a strongman and a military leader came to power.

That dictator, later the Empereur des Francais, was Napoleon Bonaparte.

 
Brave French police & soldiers outside Notre Dame de Paris, Mid-August 2016

Copyright JM Hamilton Publishing 2016

Sunday, August 7, 2016

McKinsey




McKinsey


Our strategy is basically the education I had through McKinsey.

-       Former Valeant Pharmaceutical, CEO, Michael Pearson, Financial Times.

Short-term capital will beget short-term management through a natural chain of incentives and influence.

-       McKinsey & Company, Managing Director, Dominic Barton, Financial Times


By J.M. Hamilton (8-7-16)


You can’t make this stuff up.

On the heels of writing my last piece on the U.S. Chamber of Commerce, and how it acts against the interests of ordinary Americans on a daily basis, the Washington Post came out with a story, Thursday, showing how the Chamber is suing the Obama Administration for attempting to put the brakes on tax inversions.  Tax inversions are where multinational corporations enjoy all the advantages of U.S. citizenship (the rule of law; the best democracy money can buy; and a military that is at war w/ the world to protect global trade routes), without paying for it.  No, said multinational, in this case Pfizer, rips off the American consumer and taxpayer daily (the U.S. is the only Western democracy that does not cap drug prices), and enjoys patent protections enforced by U.S. courts and free trade agreements (in essence a monopoly), and then has the audacity to bitch about paying taxes.

The Chamber and its éminence grise, Mr. Donohue, loves to fall back on the tired old argument that the U.S. has the highest corporate tax rate in the world, and therefore, Pfizer is entitled to dodge taxes, via foreign inversion.  But the Chamber, conveniently, fails to mention that for the uber wealthy, and the corporate tax code in particular, is loaded w/ enough loopholes to sink the ship of state.  Pfizer of course, pays at a tax rate nowhere close to 35%, but Pfizer sure likes to make monopolistic profits in this country, and does so daily. 

One could easily argue that the Chamber’s actions are Anti-American and unpatriotic. Once again, the Chamber is lobbying’s super villain, that is to say, an evil rapacious machine – making arguments – that its corporate contributors and members wouldn’t dare make, for fear of offending the American public and stockholders.

If the Chamber is lobbying’s bête noire, than McKinsey & Company is the consulting world’s equivalent.  McKinsey & Company is based in New York City, and its global consulting empire, as recently as 2014, was said to generate $8.3 billion in revenue.  McKinsey is privately held by 1,400 partners, and employs 17,000 workers worldwide.  Additionally, it is the wheelhouse for 9,000 consultants, many of them MBAs or persons possessing graduate degrees, if not doctorates.  It not only counsels the Fortune 500, but many of its consultants end up running the companies they advise.  C-Suites and boardrooms are littered w/ former McKinsey associates and executives.  And just because an associate or partner leaves for greener pastures doesn’t mean those McKinsey ties are severed.  As revealed earlier this year in the Financial Times, McKinsey also operates a $9.5 billon dollar hedge fund for its employees and partners, that helps insure continued loyalty, and partnership, even after an employee leaves.

To give one some idea of McKinsey’s clout and power, a recent Forbes article, quoting from the book The Firm, observed:

 “A few years ago, more than 70 past and present CEOs of Fortune 500 companies were McKinsey alumni, and in 2011 more than 150 McKinsey alumni were running companies with more than $1 billion in annual sales.”

So with all this consulting going on, and consolidation in industry after industry into cartels and monopolies, isn’t there a conflict of interest?   Many observers and writers say that the McKinsey business model produces an inherent conflict of interest.  One of McKinsey’s key offerings is industry benchmarking, or “best practices,” where a company can see what industry peers are up to.  Conveniently omitted are competitor names, but if there are only three or four players left in a given industry it’s not hard to figure out, thanks to McKinsey, who is employing said “best practices.”  

Hmmm... sounds like collusion defined, via an intermediary.

There’s more… McKinsey is the master consultant of financial engineering practices that have devastated many advanced economies.  Need to cut staff to boost the bottom line, bring McKinsey in for a study.  Consultation on M&A and industry consolidation, and the resulting “synergy,” McKinsey is there to hold a multinational’s hand.  If one was nefarious, and looking for the Xanadu of insider information – in industry after industry – McKinsey affords an ocean of data and information.

Perhaps that’s why so many McKinsey alumni have landed in hot water, or have flirted with disaster.  McKinsey’s consultants and partners are consummate insiders, possessing information that would allow them, or friends, to make a killing in any number of markets: stock, bonds, commodities, futures, derivatives, and swaps.  

Rajat Gupta is perhaps one of the more infamous McKinsey alums, brought down by insider trading.  Information Mr. Gupta picked up, by sitting on the board of Goldman Sachs, was shared with a hedge fund operator.  Mr. Jeff Skilling learned a thing or two from McKinsey, before moving on to help cook the books at Enron (accounting gymnastics were employed that brought that company to ruin).  Tidjane Thiam, who presently runs Credit Suisse, has suffered some risk management problems as of late, and Credit Suisse has reported close to a billion dollars in losses in late 2015 and early 2016.  Looks like some Suisse trading positions went south, in some illiquid markets.  Before running Credit Suisse – you guessed it – Mr. Thiam was a McKinsey employee.  To be sure, not all McKinsey alums have come to a bad end.  Mr. Sundar Pichai and Ms. Sheryl Sandberg, of Google and Facebook fame, respectively, appear to have done very well.

However, if there is one person who epitomizes the McKinsey ethos, and what that ethos has done to the American & advanced economies, it is former Valeant Pharmaceutical CEO, Michael Pearson.  In news reports, we learned that Mr. Pearson surrounded himself w/ friends from McKinsey, when he took over Valeant Pharmaceutical.  Then he did a tax inversion deal - the Chamber and Mr. Donohue are presently raving about - to dodge paying U.S. taxes.  But what Mr. Pearson did next is right out of the McKinsey playbook:  he loaded up Valeant with a debt tsunami; acquired drug company after drug company (often at or near market peaks); a la Enron, he was alleged to have cooked the books, with some shady accounting and drug wholesalers; Mr. Pearson stripped the labor force of Valeant and its acquisitions; gutted R&D; and jacked up the price of medicine in a manner that Jeffrey Shkreli could appreciate.

If this seems all too familiar to many Americans, it’s not only because what Mr. Pearson did epitomizes the McKinsey way, but it is also the business model for an entire industry, otherwise known as private equity.  Hedge funds too, love the McKinsey model, and more than a handful of hedge funds took a severe beating when Valeant’s stock tanked.  But fear not…. Mr. Pearson – who once was a paper billionaire – enjoyed a nice severance package, while Valeant’s stockholders are said to be taking epileptic medicine to calm their seizures.

All this information (shared for the price of a consulting contract), all this industry consolidation, the incestuous board room & C suite relations, the cult like embrace of McKinsey’s current and former consultants and partners… and the $9.5 billion dollar hedge fund McKinsey operates (amazingly, has only lost money once in 25 years), w/ all appropriate firewalls and protections against impropriety (we are solemnly assured)… If there ever was a company that personifies all the economic problems America faces today, it, likely, could be summed up in one word: McKinsey.

Conflict of interest magnified exponentially, and a cadre of elite insiders rigging the game for themselves and a select few: McKinsey & Company?





And now, wait for it… Here comes the punch line…. There appears to be some remorse.   

Per a recent Bloomberg piece, McKinsey – in light of Brexit, and the American electorate’s near rabid response to anything smacking of an establishment politician  - is having a quiet reflective moment.  With both U.S. political parties rebelling against free trade, embracing Glass Steagall, and rejecting globalization and the resulting U.S. pink slips - the consultant firm was such a strong advocate for - McKinsey appears to have turned the corner.  To be sure, McKinsey, per a recent write up assures us, the organization still finds value in offshoring, immigration, trade, and so forth, but these things must be done with more “sophistication.”  Lest advanced economies and Western democracies blow up like a city block with a gas leak, as McKinsey’s Senior Partner, Richard Dobbs, recently put it.


I guess crushing the labor force, and with it aggregate demand, in a consumer driven economy, isn’t particularly brilliant, especially in the long run.


Copyright JM Hamilton Publishing 2016