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Roger Barris

Roger Barris

is an American who has lived in Europe for over 20 years, now based in the UK. Although basically retired now, he previously had senior positions at Goldman Sachs, Deutsche Bank, Merrill Lynch and his own firm, initially in structured finance and latterly in principal and fiduciary investing, focussing on real estate. He has a BA in Economics from Bowdoin College (summa cum laude) and an MBA in Finance from the University of Michigan (highest honors).

Articles by Roger Barris

Side Notes, January 14 – Red Flags Over Goldman Sachs

January 14, 2017
Side Notes, January 14 – Red Flags Over Goldman Sachs

Red Flags Over Goldman Sachs
Just to prove that I am an even-handed insulter, here is a rant about my former employer, Goldman Sachs. The scandal at 1MDB, the Malaysian sovereign wealth fund from which it appears that billions were stolen by politicians all the way up to the Prime Minister, continues to unfold.
 
The main players in the 1MDB scandal. Irony alert: apparently money siphoned off from 1MDB was used to inter alia finance Martin Scorcese’s movie “The Wolf of Wall Street”, in which Leonardo di Caprio plays a major boiler room operator/ hustler who makes a fortune by defrauding his clients. When the WSJ contacted the people involved in 1MDB, all of them strenuously denied wrongdoing, with the exception of the only currently imprisoned one, who “declined to comment”. The money is gone, but it seems nobody took it. It is so to speak a Malaysian luxury miracle, proudly aided and abetted by those doing God’s work on the other side of the Pacific pond – click to enlarge.
 

At last count, law enforcement officials in seven countries are investigating the scandal, with the unsurprising exception of the officials whose boss did the stealing.  As the slogan of the Malaysian Tourism Board puts it: “Malaysia, truly Asia.”
Here’s a prediction: Goldman Sachs is going to bleed for this one.  There were more red flags fluttering over these deals than in a May Day parade.

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Where’s the Outrage?

January 12, 2017
Where’s the Outrage?

Blind to Crony Socialism
Whenever a failed CEO is fired with a cushy payoff, the outrage is swift and voluminous.  The liberal press usually misrepresents this as a hypocritical “jobs for the boys” program within the capitalist class.  In reality, the payoffs are almost always contractual obligations, often for deferred compensation, that the companies vigorously try to avoid.  Believe me.  I’ve been on both sides of this kind of dispute (except, of course, for the “failed” bit).
 
People are usually struck by the seeming injustice of CEOs running companies into the ground and then getting paid obscene amounts in the form of “golden parachute” type good-bye presents. Often there is no other way to get rid of a bad CEO though –  if his or her employment contract guarantees a large termination benefit, the company may have little choice in the matter. As a rule, private shareholders are bearing the cost of such transactions, and they are in this position voluntarily (after all, they could sell their shares or vote against generous CEO payment packages at shareholder meetings). We realize of course that in the age of crony socialism, one usually has to judge such things carefully on a case by case basis. Still, it is a far cry from the misuse of taxpayer funds, which are appropriated by coercion and offer those bearing the costs no opportunity to “opt out”.

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What Could Possibly Go Wrong?

June 10, 2016

A Convocation Of Gamblers
The Wall Street Journal and BloombergView have just run articles on the shadow banking system in China.  This has put me in a nostalgic mood. About 35 years ago when I was living in Japan, I made a side trip to Hong Kong.
 
Asia’s Sin City, Macau
Photo credit: Nattee Chalermtiragool
 

I took the hydrofoil to Macau one afternoon and the same service back early the next morning.  On the morning trip, I am sure that I saw many of the same faces that I saw the day before.
They had been gambling all night and were now heading back, blurry eyed and hungover, to their desks in Hong Kong’s financial district.
My fellow travelers now sit atop the world’s second biggest economy and a steaming pile of debt.  What could possibly go wrong?
 
Lord, Make Me Financially Prudent…But Not Yet!
The WSJ article is the more detailed one.  It describes the market for wealth management products (“WMP,” which is ominously and accurately close to the acronym for weapons of mass destruction).  These are products sold to Chinese “investors” – remember the boat back from Macao – by Chinese banks.
 
Monthly WMP issuance – some observers were worried about this three or four years ago already. In the meantime the WMP business has ballooned to an incredible size – click to enlarge.

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China Innovates: A New Way to Lie with Numbers

March 30, 2016

An Unexpected Improvement…
The Wall Street Journal has just run an article about the latest data manipulation coming out of China. China is experiencing strong currency outflows. This is a combination of “hot money” from outside China, which came into the country to bet on an appreciating currency (the yuan) and is now retreating, and domestic money that is looking for a foreign home now that the Chinese bubble is appearing less and less sustainable.
 
China’s foreign exchange reserves –  a reversal of fortunes – click to enlarge.
 

In a reversal of the process that I described here, this is causing China to spend huge amounts of its foreign exchange holdings to prop up the yuan.  This is the exact opposite of what China had been doing, which was to accumulate foreign exchange reserves as it depressed the yuan.  China is holding up the value of the yuan now because, although it ultimately wants to see the currency fall, it is worried that a sharp decrease will cause a self-fulfilling and destabilizing flight.
Investors have therefore been watching the monthly reports of China’s foreign exchange holdings with interest to gauge the amount of capital flight and the ability of the Chinese government to support the currency.  The numbers have not been comforting: foreign exchange holdings dropped from a peak of almost $4 trillion in March 2014 to $3.

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The Lego Movie Economy

March 19, 2016

A Lack of “V”
After the February jobs report, President Obama said “America’s pretty darn great right now.”  He then went on to disparage the “doomsday rhetoric” of the Republicans, which he said was pure “fantasy.
I think that there is a good chance that this will enter the Hall of Fame of miss-timed statements, right up there with this jewel from Ben Bernanke in March 2007:  “At this juncture, however, the impact on the broader economy and financial markets of the problems in the sub-prime market seems likely to be contained.”
 
If you look hard enough, you’ll find it…
 

It is about time for an update on the US economy.  It will be a bit pointillist, but I will try to give some backing.
My basic view of the US economy is the following:  We have never had a proper recovery from the global financial crisis (“GFC”).   Although GDP is above its peak prior to the GFC, the rebound has been very muted, particularly given the sharpness of the fall, which has historically produced a “v-shaped” rebound.  There has been no “v” in this reco-ery.
The jobs growth, although seemingly impressive in terms of the headline unemployment rate, has remained un-validated in a whole variety of ways.  The labor force participation rate, which normally would increase in the face of improved job prospects, has remained very low in a way that cannot be fully explained by demographics.

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To Be or Not to Be: The UK Referendum

February 23, 2016

Cameron’s EU Gamble
The big news over the weekend in the United Kingdom (UK) is that, after having secured some kind of deal from his European Union (EU) partners, Prime Minister David Cameron has called for an “in-out” referendum on EU membership to be held on June 23.  The betting has to be on the UK staying in, but shit happens.
 
… and sometimes, it not only happens, but comes in a sandwich.
 

First, a little bit of history.  The referendum fulfills a campaign promise that Cameron made in the 2015 general election.  Although he may come to regret it, the purpose was to put an end to Conservative Party squabbling over the EU, at least until after the vote.  It was also a response to the slow advance of the United Kingdom Independence Party, which was polling stronger and had actually succeeded in poaching two Conservative Members of Parliament (MP).
The pledge had two parts.  The first was for Cameron to trek to Brussels to try to change the EU rules or at least to negotiate more “outs” (exemptions) for the UK.  The second was to submit the revised terms to the UK public.  In a tangentially related matter, Cameron also announced that this would be his last parliament as the leader of the Conservative Party, firing a starting gun in the race for his succession.  He may also regret this announcement for reasons that I will explain below.

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ISIS – the Case for Non-Intervention

January 5, 2016

Happy Armchair Warriors
The recent terrorist attacks in Paris and San Bernardino, California, have thrown the debate about ISIS into overdrive, particularly among the presidential candidates.  Several strands have emerged from these discussions, but I think that their taxonomy is not often clearly laid out.  I would therefore like to try to do this.
 
IS military parade in Mosul
Photo credit: Raqqa Media Center / AP
 

I think that there are three inter-related strands to the discussion, which I summarize below:
 

Military action against ISIS in Syria and Iraq
Protecting the border (including the related issue of profiling)
Data privacy

 
Today, I would like to discuss the case for military action against ISIS.
The argument here is that, in order for the world to defend itself against terrorism, ISIS must be defeated in its homeland.  ISIS must be denied territory.  This position is supported by, among the major Republican candidates, Jeb Bush, Marco Rubio and Chris Christie.
Less clear are the positions of Donald Trump and Ted Cruz, who are both reluctant to engage in further foreign interventions, but who also make belligerent noises about ISIS.  The only candidate who is consistently and unambiguously against military escalation is Rand Paul.

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The Statist Mindset

December 17, 2015

The Key Logical Fallacy of Statism
I just read an article in Bloomberg View yesterday by Cass Sunstein, who is a law professor at Harvard.  It was a roundup of a number of books published last year on “behavioral economics”.  For those who don’t know it, behavioral economics typically focuses on the biases and systematic errors in human behavior.
 
Surely everyone has heard an argument along these lines before: socialism would really work if only it were done right! For starters, it would need to be administered by a host of angels, so what you see above should be considered the ideal communist bureaucrats.
Image via pixgood.com
 

In his review of the book Phishing for Phools by George Akerloff and Robert Shiller, Sunstein concludes that one of the major contributions of the authors “is to show that if we care about people’s well-being, the invisible hand (i.e., free markets) is often the problem, not the solution.”
 
Cass Sunstein, a committed, and as we believe, truly dangerous statist, who would likely have felt right at home in Stalin’s politburo. We have discussed this crypto-communist weirdo previously in these pages (see The Taming of Deluded Conspiracy Theorists) and so has incidentally Dr. Machan (see Rights and Government).

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More Silly-Con Valley

December 16, 2015

Privatizing Profits and Socializing Losses, Tech Bubble Style
The Wall Street Journal had an article this past week entitled “Tech’s Hometown Bank.”  This has convinced me that Silicon Valley has replaced Wall Street as the new epicentre of financial malfeasance and conflict of interest.
 
Image credit: Toshiba
 

The article is about the Silicon Valley Bank (“SVB”).  The business model of SVB is to make loans to tech start-up companies which very often have negative cash flow, limited (if any) tangible assets and are financially dependent on successive rounds of fickle venture capital funding.  In other words, these are entities that have absolutely no debt capacity and which should be entirely equity financed.
 
Tech start-up valuations keep climbing into the stratosphere, thanks to the Fed’s EZ money. So there is money in them thar hills! Very tempting, so how van we get at it using other people’s money? Silicon Valley has the answer.
 
SVB funds these loans overwhelmingly with borrowed money, almost all deposits benefiting from FDIC insurance[1].  The bank reported a ratio of tangible equity to assets of 6.4% at the end of 2014 (see page 51 of these financial statements).
What could explain this seeming madness?  The answer is simple: in addition to charging interest on the loans, SVB takes warrants [2] in its high-tech borrowers.

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More on Trump

December 9, 2015

Antidote to Political Correctness?
[If you read the title of this post quickly, you will note the slight play on words.]
[Ed note: after Bill Bonner’s recent tongue-in-cheek “Greatest President of all Time” comment, here is Roger again with a more serious assessment. In case you’re wondering, this was written shortly before the recent altercation over Trump’s proposal to ban Muslims from entering the US altogether, so it contains no references to this event. It offers more general observations anyway, on which specific recent events have no bearing]
 
The Donald
Cartoon by Damien Glez
 

My post on Trump has generated a lot of comment, so I think that it is worthwhile to spend a little more time on this subject.
I have frequently written about the “law of unintended consequences,” particularly as it is consistently demonstrated by the Left. It turns out that the rise of Trump is another great example.  The comment that I am most often receiving from Trump supporters is that, despite all of his manifest failings, he at least is willing to “tell it like it is.”  And it isn’t just me who has noticed this.  A recent article in The Economist cites exactly the same factor to explain the “strange loyalty” that Trump generates.
I am convinced that this is another thing for which we can thank the political correctness movement.

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Trump

December 7, 2015

Defying Gravity
Donald Trump’s poll numbers continue to defy gravity.  This requires greater scrutiny.  A sacrifice is needed: actually listening to one of Trump’s speeches.  And your intrepid correspondent has done this, all 95 minutes of the one he gave in Iowa on November 12th, which can be found here. If anything, it was worse than I feared.
 
Defying gravity – Donald Trump continues to lead the polls
Cartoon by Ron Rogers
 

The first thing to understand is that a Donald Trump stump speech is not what we expect from the genre.  It is basically Donald Trump telling a bunch of… Donald Trump stories, the dominant theme of which is what a brilliant and successful, and nice, person Donald Trump is.  And just in case you fail to pick up on this, he provides helpful clues such as:
 

“You don’t have to be a total genius, even though I am”
“I am really competent”
“I am actually a very nice person”
“I know more about ISIS than the generals do”
“Basically, my life has been about victories”
“I’m a world class businessman”
“I will be the greatest jobs president that God ever created… I will be even better at the military than the jobs… I will be a great unifier”

 
And all of this comes in a speech where a tough-talking Lindsey Graham is derided because, according to Trump, the truly tough guys don’t need to advertise it.

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Overreaching Government “Enables” Culture Warriors

November 18, 2015

Dispensing More “Free Stuff”
I  have just finished reading an opinion entitled “A Birth-Control Morality Play Comes to Supreme Court” by Megan McArdle, the lonely voice of libertarianism over at Bloomberg View.
The thrust of the article is to use philosophical hypotheticals to explain the violent reaction of some religious groups to the seemingly minor certifications required to escape the contraception mandate in the Affordable Care Act.  But the article makes another point, albeit in an oblique manner, which is more important.   In the “culture wars,” an overreaching government often fires the first shot.
 
Cradle-to-grave nannying by the State has certain small drawbacks, but you’ll get used to them, serf.
 

As McArdle says “My own intuition is that the Obama administration chose this fight….For one thing, contraception is an inexpensive routine purchase that is exactly the sort of thing that insurance shouldn’t cover (for the same reason your car insurance doesn’t cover routine service: you’d just end up pre-paying the service in the form of higher insurance premiums.)”  Here, McArdle is making the same point and in fact using the same example – great minds thinking alike, and all that – I used in my 2012 blog entitled “Contraceptive ‘Coverage.

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Patently Absurd

November 11, 2015

IP and Patents – Regulatory Capture at its Finest
It is presidential campaign season and we are getting a lot of incoming promises, particularly from the Democratic side, about how the government is going to make our lives better.  This makes it an opportune moment to report on some recent examples of how the government fulfills promises.
The first one comes from a Wall Street Journal article entitled “GoPro Faces Suit For Camera Design.”  The article describes a patent infringement lawsuit that has recently been launched by C&A Marketing, which owns the Polaroid brand, against GoPro, the manufacturer of video cameras used to capture everything from extreme sports in New Zealand to extreme insurance fraud in Russia and China.
 
Go Pro’s latest camera-on-a-stick, the cute “Hero4”, has come to the attention of a patent troll
Photo credit: GoPro
 

Polaroid, as you remember, is the trade name of the once-popular instant cameras that produced low quality still photos of subjects that were best not shared with the pimply adolescents at your local Fotomat.

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Republican Debate in Boulder

November 4, 2015

Hoping for a Magic Pill
Through the modern miracle of the “record” button on my TV remote control, which I have finally learned to use, I have watched the recent Republican debate.  Here are my thoughts on the candidates and the issues raised.
 
Republican candidates lined up at CNBC debate
Photo credit: Mark J. Terrill / Keystone
 

It is clear that Mike Huckabee has decided that he is going to be the candidate of the American Association of Retired Persons, the lobby for the aged in America.  Someone has failed to tell him that this is no longer a winning strategy, particularly during presidential election years when even the young and spry make it to the voting booths.  Huckabee claimed that any reduction in the Social Security and Medicare benefits “earned” by existing participants would be immoral; he equated this to the fraud for which Bernie Madoff is currently sitting in prison.
Although Huckabee was right to point out the fundamentally fraudulent nature of the government’s promise in these pay-as-you-go programs, he seemed to say that the only moral solution to the Ponzi scheme is to continue it.  At least for a little while longer.

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“Tax Expenditures” Are Not “Free Stuff”

October 29, 2015

Economically Ignorant and Offensive Nonsense
Bloomberg View has just published an article by Paula Dwyer entitled “Everything in This Column is Free Stuff.”  A better title would have been “Everything in This Column is Economically Ignorant and Offensive Nonsense.”
The column attempts to draw an equivalence between the Democratic  Party’s granting of “free stuff” (government benefits for housing, health care, education, food, etc.) and the Republican Party’s granting of tax breaks.  The column basically accuses the Republicans of hypocrisy for criticizing the Democrats for pandering to their constituencies with “free stuff,” while the Republicans allegedly do the same with tax breaks of even greater magnitude than the cost of the freebies.
 
Where all the “free stuff” comes from…
Cartoon by Luis Afonso
 

The column shows a table with the largest “tax expenditures,” which is Orwellian Newspeak for taxes not collected due to a particular feature of the tax code.  The table is entitled “Tax Expenditure Greatest Hits – Most popular free stuff in the tax code” and it lists things like reduced tax rates on capital gain and dividends (about $95 billion), deductibility of state and local taxes ($83 billion), home mortgage interest deductibility ($74 billion) and deductibility of charitable contributions ($47 billion).

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Tesla – Exploiting Cognitive Deficiencies

October 26, 2015

Good Car, Overvalued Stock
I occasionally like to short[1] stocks for fun and profit.  One of my recent shorts is Tesla[2],  the maker of electric vehicles (“EV”) and energy storage systems.  This one gives me particular pleasure because it is a great opportunity to take some money off the politically correct (“PC”) crowd precisely because of their cognitive deficiencies.  Let me explain.
 
Tesla’s model S. A nice car, if a little expensive (we mainly regard it as a plaything for people with too much money, which is not meant to detract from its undoubted “cool” factor). Lately doubts about its reliability have been raised, and in spite of the car being heavily subsidized (see also caption under the Model X picture further below), Tesla still loses $4,000 on every Model S it sells. Last quarter, the company burned $360 million in cash.
 

I have nothing against the Tesla car.  Although I have never owned or even driven one, by nearly all accounts it is a pretty good machine (although clearly with some build-quality issues and probably some long-term reliability ones, too).  Tesla has almost single-handedly revived electric automobiles[3] and brought some useful practices to the automotive field from the technology sector, such as over-the-air software updates.
The Tesla car is also the darling of the chattering classes, particularly the West Coast variety.

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Big Ideas From the Democratic Debate … NOT!

October 20, 2015

Displays of Economic Ignorance
Watching the Democratic debate from last week, it is pretty clear that one of the central “big ideas” of the party for 2016 will be raising the minimum wage. The Democrats obviously think that this will make good politics, proving once again that they are on the side of the little guy, unlike those plutocrats in the Republican Party. They will not be dissuaded by the mere fact that this is a bad idea.
Although endorsed by all, let’s pick on Hillary Clinton as its representative proponent. Simply because it is fun.
 
Democratic presidential hopeful Hillary Clinton, lately of misplaced email fame. In this picture she is likely indicating how much she knows about economics.
Photo credit:  Bill McCay / WireImage
 

An enormous amount of ink has been spilled on this subject. I have no intention of going through the statistics from all the conflicting studies, or dragging my innocent readers through them. The Economist magazine, in recent opinion pieces entitled “A reckless wager – A global movement to much higher minimum wages is dangerous” and “Destination unknown – Large increases in the minimum wage could have severe long-term effects” does a passably balanced and complete job of summarizing these results. So, let’s stick to these.

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The Model Minority

October 16, 2015

Ivy League: Perfect Scores not Good Enough for the “Wrong Race”
The Economist has run a lengthy article about Asian-Americans.  It begins with a description of Michael Wang, who had a perfect score in his college entrance (ACT) exams, who was ranked second academically out of 1,002 students at his high school, who was part of a chorus that performed at Barack Obama’s inauguration, who came in third place in a national piano championship, who was in the top 150 in a national mathematics competition, and who was in several national debating-competition finals.  Michael was rejected by six out of the seven Ivy League schools to which he applied.  Like many other members of this “model minority,” he is no longer willing to take this quietly.
 
Michael Wang: too Asian and too perfect for the Ivy League schools. This is a typical example of modern-day socialism’s drive to allegedly “equalize opportunity”, a heading under which the incentive to make an effort to actually accomplish something in life is slowly but surely deadened among those showing the best abilities. Over time, it leads to decay in the population’s morals and intelligence, until you end up with a nation best compared to a ship of fools.
Photo via sohu.

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Should We “Bring Back the Unions”?

October 15, 2015

The Most Expensive Jobs Program Ever
It is sometimes suggested that one of the cures for wage stagnation and growing inequality is to bring back the unions.  Here are some reminders from Europe of exactly what that would mean.
Jeremy Corbyn, the new leader of the UK’s Labor Party, is committed to nuclear disarmament.  He therefore wanted to discuss the renewal of the Trident nuclear submarine program, which carries the ballistic missiles that comprise the UK’s nuclear deterrent, at the recent Labor Party conference.
 
Corbyn and the Trident, by Steve Bell. The no was just for show…we’ve got union jobs to protect!
 

And which, incidentally, is projected to cost £20 billion.  However, he was overruled by the public sector unions that supported his recent election.  Their reason?  I quote from Len McCluskey, the leader of the largest of these unions:
 
“Everyone would love the whole world to get rid of nuclear weapons – we understand the moral arguments and cost arguments in these days of austerity.  However, the most important thing for us is to protect jobs.  In the absence of any credible alternative to protect jobs and high skills, we will vote against any anti-Trident resolution.”
 
There you have it, folks.  This is the type of far-sighted and non-parochial thinking that people like Jeremy Corbyn, Hilary Clinton and Bernie Sanders want to empower.

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Access (Should Be) Denied

October 14, 2015

Dispensing Information to the Well-Connected
The Wall Street Journal has recently run a lengthy, front-page article entitled “How Some Investors Get Special Access to Companies.”  This is the type of article that should make the blood boil.
The article describes private meetings between large investors and the management of publicly traded companies.  Although the content of these meetings are regulated by the SEC under a “Fair Disclosure” regulation (Regulation FD), it is very clear that they are anything but fair to the investors who don’t participate.  In theory, under Regulation FD, companies are not allowed to disclose privately any “information that might be reasonably expected to affect the price of a stock or bond.”  In practice, they clearly do.
 
Image credit: fmh
 

The article gives a number of quotes that indicate the benefit that investors derive from these meetings: “You can pick up clues if you are looking people in the eyes” and “(meetings) can have value even if management isn’t saying anything new, because investors can gauge their tone and confidence level.”  It also cites academic research that shows that investors with access are able to generate higher returns.  Finally, there is the greatest proof of all: Greenwich Associates, an investment advisory firm, estimates that investors pay about $1.

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