Commentary on Political Economy

Saturday 31 October 2020



IV. “Man is the measure of all things,” – Protagoras.

It is not closed systems that lead to totalitarian praxis; it is rather totalitarian praxis that engenders closed systems. The human ability to measure the world ab-solutely – that is to say, without subordination to any legal rule or moral goal, in complete abstraction from the experiential content of the measurement, of its application – allows that fatal combination of convention and hypothesis – the Weberian exakte Kalkulation – that leads to totalitarian stagnation and paralysis. (We shall tackle this degeneration of Weber’s conception of Zweck-rationalitat [purposive rationality] shortly.) The combination of convention and hypothesis is unique in the history of humanity and the history of social theory. It can be traced, as we have seen, to the extrapolation of Euclidean mathematical axioms to social relations operated first by Thomas Hobbes at the very beginning of the whirlwind rise of the capitalist bourgeoisie in Europe. The convention of logico-mathematics, in its absolute con-ventionality – because of its irresistible “meeting of the minds” that, in reality, requires no explicit agreement because it is a tautology – is entirely democratic in that it is accessible to, and can be utilized by, every human being. – So much so that, as we also pointed out, it was used by Hobbes’s Renaissance contemporaries, Mercier and Grotius, as admonishments to absolutist monarchs that even their earthly and divine powers were subject to it; indeed, God himself could not avoid the truth of logico-mathematical deduction.

Yet, if this logico-mathematical tool can be applied to real objects, to the human social and natural environment, then we find that the application of this convention to our life-world turns into a hypothesis that can make our operari in this world predictable and therefore repeatable almost indefinitely – to such an extent that this hypothesis is no longer a reflection of a reality that stands independent of, and even opposed to, our perceptions, but one that in fact, through our very actions (Latin, facere, to do, to act), is a  reified product of our intentions and actions. The hypothesis becomes therefore a project on the world, a “framing” of reality, a reification of our objectification.

The seemingly democratic universality of logico-mathematical conventions, when combined with the purposive project of the hypothesis turns into a dramatically powerful, fearsome thoughtless technique that can lead to serious and potentially seriously harmful consequences for individuals and societies alike. Apply with care, the warning should sound. Yet, this is not the case where bourgeois economic analysis is concerned. Here, the hypothesis implicit in the bourgeois project is indeed to reify human social relations of production as if they were the outcome of a clash between human free-dom understood as unlimited possessive individualism where the wants and needs of individuals are constrained and bounded only by the conflicting egoistic needs and wants of other atomic individuals on one side and by the physical limits imposed by the natural environment – by the scarcity of natural resources – on the other side. It is thus that bourgeois theory opposes human freedom understood as egoistic free-dom to the necessity of the Other, understood as the constraints of nature and society. Hence, freedom is seen not in its political dimension, as the opposite of coercion, and therefore as “reconcilable”, but rather in a reified physical sense as eternally ineluctable necessity. In other words, not only is society interpreted as an obstacle to human volition, but nature itself is transfigured into an enemy of individual acquisitiveness and possession – as if the environment were not an extension of human being but rather its greatest opponent, - a realm to be conquered, an enemy to be defeated, a foe to be vanquished.

When we examine the salient features of equilibrium analysis as a hypothesis, then as a project, we notice that the only interactions it considers are the exchanges of goods between individuals in a purely formal manner because only relative prices are concerned, and therefore the exchanges are seen in their purity, without production of the goods, as pure exchanges per se, as pure relations between individuals inter se. Because equilibrium analysis as a system of simultaneous equations can fix only the relative ratios of exchange of already produced goods already owned by its atomic egoistic agents – which is why they are called “endowments” -, it excludes axiomatically both the material interest that the market agents compete over, and then also leaves out the material process of production that leads to the procurement of this interest, and therefore is an essential part of that interest – for these two reasons, its confinement to exchange per se (leaving out the nature of the interest) and individual relations inter se (leaving out the material process of production), equilibrium analysis becomes totalitarian in that it excludes all material metabolism or change in social relations of production as well as of exchange, and consequently excludes all transformation of the economic system and all freedom on the part of human beings to shape new forms of social interaction, new “economic systems”. There is no change in the ex-change examined by equilibrium analysis!

Equilibrium analysis is a “closed system” also and perhaps above all in this specific sense: by abstracting from the metabolic process of production, from the complex interaction of human needs between human beings (going beyond exchange per se) and its metabolization through their interaction with the environment (going beyond human relations inter se), equilibrium analysis reifies the social relations of production into insubstantial formal exchanges that have no material basis whatsoever, that exclude our interaction with the environment, with the nature of which humans are a part. This is the extreme subjectivism – indeed, a solipsism! – akin to the Protagorean stance whereby “man is the [egoistic] measure of all things” which isolates humans as selfish dominators and abusers of their environment, of their life-world - of both nature and its human component, society. (In Fichtean terms, this is the annihilation of nature [cf. Jacobi’s letter to Fichte where the word was used first].) As Adorno put it,

Nature, with which men have had to struggle in history, is disdainfully pushed aside… Thus, history becomes transformed into a second nature, as blind, closed, and fateful as any vegetable life…If this is ignored, if the world is treated as a pure manifestation of the pure essence of man, freedom becomes lost in the exclusively human character of history. Freedom develops only through the resistance of the existent; if freedom is posited as absolute and the human spirit is raised to a governing principle, that principle itself falls prey to the merely existent. (T. Adorno, Prisms, p.68)


It is “the transformation of history into a second nature” that induces the misconception of freedom as the opposite of necessity rather than coercion. Hence, there are several reasons why orthodox economics prefers the Schemata (formal modeling) of equilibrium analysis to the market process of Austrian economics or even macroeconomic approaches such as Keynesianism, let alone the more radical theories of Marxian critique . The first and foremost is that formal analysis, by concentrating on relative prices and therefore exchange over production, hides the real political antagonism of capitalist social relations of production, between dead labour (wages) and living labour. The second is that the mathematical equivalence of market prices with individual preferences (or utility) creates the impression of precision and predictability, and therefore of “objectivity”, which in turn reflects the ostensible political “neutrality” of the Schemata, their faithful impartial reflection of “social reality” and, above all, the adherence of the “market system” to a convergence of interests (a “spontaneous order”) between its participants that maximizes their individual and collective wealth and ensures both commutative and distributive justice. Ultimately, the third reason, by ensuring the just consensus of market agents, these Schemata supposedly also guarantee the endurance of the rule of law and of democratic institutions –  the automatic and axiomatic rules of the self-regulating market - precisely so long as these do not disturb or interfere with the operation of the market mechanism and ultimately upset “market equilibrium”. Thus, the equilibrium is not just economic – in terms of wealth – but is also political in terms of maintaining justice and preserving freedom. This osmotic homologation of the Political and the Economic is behind the original designation of economic theory as Political Economy.


The conditions of equilibrium, of economic society understood as a totality, as a whole, are so antithetical to the egoistic interests of the particular agents that an exogenous Guarantor must be excogitated - not to reconcile these interests, which is logically impossible, but rather to enforce them dictatorially! There can be no real convergence of interests in equilibrium: consequently, its totality is a “closed totality” in which the whole – the equilibrium – is a pure set of simultaneous mathematical equations and for that reason alone it cannot reconcile the interests of its component particulars or individual agents, except forcefully, through an external intervention, through compulsion. But this dictatorial enforcement must also penetrate every aspect of social reproduction because, as we showed earlier, the Dictator or Sovereign or deus absconditus  or deus mortalis or auctioneer enforcing the rules must ensure, first, that he is fully informed about both the endowments possessed by the individual agents as well as their utility schedules or preferences; second, that there is no collusion between agents to obtain momentary inter-equilibrium advantages (perfect competition); and third, that the egoistic agents actually proceed with the exchanges at the relative prices determined by the closed system at the end of the tatonnement or “groping” process to determine the final relative prices of exchanged goods.


But in reality, in the historical sphere of human social relations, any legitimate and harmonious totality can be realized not through totalitarian dictatorship, but rather  if and only if it comprehends (contains and understands) and fulfils (satisfies and quells) the needs of the particulars or individuals it represents. To invoke Adorno once more,

If, as Hegel argues, the whole is what is true, then it is so only if the force of the whole is absorbed into the knowledge of the particular…[S]ocieties based on domination have in fact always crystallized into closed totalities which allow no freedom for anything individual; totality is their logical form, (ibid., p.61).


Closed systems “allow no freedom for anything individual” in the sense that they preclude and expunge any and all human spontaneity and innovation. But above all, closed systems do not provide a means of reconciling the initially divergent interests of its individual agents precisely these egoistic interests are axiomatically irreconcilable and do not allow for any specific human inter-est (inter homines esse), for any commonality of being among humans. Indeed, it is the axiomatic exclusion of innovation that prevents any escape from the false prison of possessive individualism intrinsic to equilibrium analysis in economics. As we demonstrated earlier, equilibrium analysis is totalitarian also in the sense that only exchanges of existing goods are considered; consequently, there is no logical room for the production of new goods which would transform the very nature of the social relations between the market agents in a qualitative sense.


The absence of dynamic change or development, of transformation and transcrescence, of metabolism – this absence requires that the sole sign of “movement” in equilibrium analysis as a closed system, as a Statik, as an unchanging static system, can be attributed only to a constant “circular flow” – a Schumpeterian “Kreislauf” – that preserves the Statik equilibrium of the system whilst at the same time allowing for its steady-state “renewal”. Nonetheless, the circularity of this flow ensures that it remains a Statik lacking any Dynamik – as Schumpeter proved conclusively. We would go further and replace Schumpeter’s term “Dynamik” with metabolism because the term “dynamic” was later used or abused by the likes of Harrod (Toward A Dynamic Economics) and Robinson (The Accumulation of Capital) with the application of dis-equilibrium analysis applied to “long-term” factors in contrast to John Hicks’s adaptation of short-term disequilibrium in Value and Capital. Of course, it was this explicit devastating critique of Walrasian equilibrium that provided the stimulus for Schumpeter’s entire “theory of economic development” or Ent-wicklung (trans-crescence) with its cognate concepts of Dynamik as against Statik, of creative destruction and innovation. The same can be said of the attempts by the rest of the Austrian School to introduce market process as a type of inter-temporal equilibrium that seeks to remove the asphyxiating totalitarianism intrinsic to closed-system economic analysis. The fact that the Austrian School was ultimately reluctant to dispense with the notion of equilibrium altogether, as we shall see, points to an inability intrinsic to its theoretical conception of economic activity.



Tribune: «Plaidoyer pour une véritable loi contre l’islamisme»

FIGAROVOX/TRIBUNE - Julien Aubert et Valérie Boyer ainsi que les cosignataires de cette tribune prônent de nouvelles mesures dans la lutte contre l'islamisme, dont une simplification des explusions sous 24 heures dans certains cas ou encore la limitation des prêches en arabe.

La police qui bloque l'accès à l’Église Notre-Dame de Nice où un attentat a eu lieu hier.
La police qui bloque l'accès à l’Église Notre-Dame de Nice où un attentat a eu lieu hier. VALERY HACHE/AFP

Les auteurs de cette tribune sont Valérie Boyer, sénateur des Bouches-du-Rhône et Julien Aubert, député de Vaucluse.

Monsieur le Ministre,

Les assassinats sauvages à la basilique Notre-Dame de Nice ainsi que celui du professeur de l’Éducation nationale, Samuel Paty, s’ajoutent à la longue liste des provocations, menaces et attentats commis sur le sol Français par des islamistes depuis la tuerie de Toulouse en 2012, et qui n’ont pas débouché, hélas, sur une prise de conscience de l’État.

Cet acte terroriste n’est plus le seul fait d’une organisation ennemie qui piloterait des agents sur notre territoire. Il est la résultante d’une radicalisation sur le sol français d’une minorité, un djihadisme de faible intensité qui naît de l’hybridation entre les idées obscurantistes d’imams étrangers, des mercenaires du djihad qu’on laisse entrer sur le territoire et des français, souvent jeunes, radicalisés notamment par les réseaux sociaux. L’assassinat de Samuel Paty n’a pu se produire que parce qu’un terreau favorable a accueilli le projet du «réfugié» tchétchène Abdullahk A. Des parents d’élèves qui ont brandi le drapeau de l’islamophobie, étaient aussi en contact avec des fichés S et des anciens djihadistes. Des collégiens ont renseigné le meurtrier: Youssouf C sur l’identité de M. Paty. Deux majeurs - Naïm B. et Azim E. - l’ont conduit sur le lieu de l’attaque et lui ont acheté le couteau.

Abdullahk n’est pas un loup solitaire: il est le bras armé d’une meute qui s’est acharnée à détruire l’honneur d’un homme, puis son existence même. Face à cela, nous devons, avec le texte qui sera prochainement discuté au Parlement, fixer les règles sur trois sujets distincts: l’islam comme religion ou culte, l’islam comme norme culturelle et enfin l’islamisme terroriste.

À cet effet, les annonces que vous ou le Président avez pu faire dans la presse apparaissent d’une ambition limitée. Rappelez-vous qu’en 2016, vous aviez coécrit avec Henri Guaino un plaidoyer pour un islam français. Dans cet opuscule, on trouvait déjà l’idée que l’école, et non pas l’instruction, deviendrait obligatoire afin de lutter contre l’instruction à domicile. On y trouvait aussi des propositions beaucoup plus ambitieuses que vous semblez avoir oubliées: l’interdiction de tout financement étranger pour les cultes, la fin des conventions internationales qui lient la France aux pays pourvoyeurs d’imams détachés (Algérie, Maroc, Turquie), l’interdiction du voile dans l’espace public et les signes religieux dans les universités publiques: nous, nous souhaitons, nous voulons un islam tête nue. «La République se vit à visage découvert».

Il conviendrait de limiter le recours à la langue arabe, y compris dans les prêches et y imposer le français, ce qui va exactement à l’inverse de ce que vous proposez

Nous ne pouvons vous encourager qu’à aller au bout de vos idées, et vous proposons d’y adjoindre une que nous vous soumettons: l’extension du délit d’entrave à la liberté d’enseigner, de se soigner, ou même à la neutralité des services publics. Il conviendrait également de renforcer la législation contre les maires finançant l’islam illégalement (contournement de la loi 1905) et celle sur l’abattage Hallal.

Cette régulation du culte doit cependant être accompagnée d’une politique de «préférence culturelle» pour défendre notre héritage civilisationnel et une république mono-culturelle. Il conviendrait de limiter le recours à la langue arabe, y compris dans les prêches et y imposer le français, ce qui va exactement à l’inverse de ce que vous proposez. L’école n’est pas là pour renvoyer les enfants à leurs origines. C’est au secondaire que l’ouverture culturelle peut se faire, à condition que le primaire ait joué son rôle en formant des enfants fiers de leur langue, de leur histoire et de leur culture. Il faudrait aussi limiter l’accès à la double nationalité et encourager ceux qui prennent la nationalité française à se doter d’un second ou troisième prénom issu de notre culture pour favoriser leur intégration.

Néanmoins, les mots ont un sens: l’assassinat de Samuel Paty n’est pas un problème de laïcité, ni même de séparatisme. C’est un problème de sûreté de l’État et il ne doit pas être confondu avec celui de la religion. Nous devons anéantir l’islamisme avant qu’il nous détruise.

Cela veut dire effectivement se donner les moyens pour reconquérir les territoires perdus et délaissés à l’islamisme avec la fermeture de mosquées et l’interdiction de prêches, mais aussi de manière plus systématique interdire les manifestations et les vecteurs idéologiques (parti politiques islamistes, partis étrangers, mouvements indigénistes, associations communautaristes, surveillance des écoles). L’islam de France doit dépénaliser l’apostasie et le blasphème et exiger l’égalité entre les hommes et les femmes.

Si l’immigration ne fait pas l’islamisme, elle y contribue

De plus, si l’immigration ne fait pas l’islamisme, elle y contribue. Une procédure de suivi spéciale doit être mise en place, dans un premier temps, pour tous les pays à risque, c’est-à-dire ceux dont des ressortissants se sont faits connaître pour des crimes et délits punis de plus de 5 ans d’emprisonnement. Outre un contrôle renforcé des demandes de visa et cartes de séjour, les autorités municipales devraient pouvoir assurer le contrôle des attestations d’accueil, en coordination avec la DGSI. Les élus locaux, notamment les présidents de Département, Métropole, Région et les Maires, doivent être informés de la présence d’individus radicalisés sur leur territoire.

Nous proposons que sur la carte de séjour ou d’asile, soit indiquée la prééminence de la loi française, la signature valant reconnaissance. En cas de trouble, l’expulsion doit être facilitée, applicable sous 24h. N’oublions pas que notre famille politique a produit plus d’une dizaine de rapports et plus de quinze propositions, toutes rejetées avec mépris. Vous prônez l’unité nationale, entendez-nous.

Enfin, on le sait, l’islamisme se sert de notre droit commun, qu’il utilise pour prospérer. Nous devons modifier la Constitution. Il est aussi temps d’exclure toute compétence de la CEDH pour les affaires liées au terrorisme et de créer une cour de sureté antiterroriste avec juges militaires et magistrat judiciaire, en considérant les terroristes comme des soldats étrangers, mercenaires ou espions. La réclusion à perpétuité dans une prison qui reste à construire est la seule option possible, et ne nous cachons pas derrière l’épouvantail de Guantanamo: ce n’est pas le principe d’une prison de haute-sécurité qui a été en cause, c’est le fait qu’on puisse y torturer des prisonniers.

Les fleurs et les bougies n’ont jamais permis de gagner la guerre, il faut agir. Pour reprendre les mots de Simone Weil, n’oublions jamais que la France peut retrouver «au fond de son malheur une inspiration conforme à son génie».

Friday 30 October 2020



A disturbing new signal from the CDS market

Recoveries for credits with CDS auctions have been ‘alarmingly low’ this year, as seen with Neiman Marcus department stores © Richard Levine/Alamy

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Back in 2008, investors and journalists obsessively tracked the price of credit default swaps, derivatives contracts that investors use to insure themselves against default.

As the financial crisis unfolded, CDS prices were a financial canary in the coal mine. When it became more expensive to insure a bank bond against default, that signalled severe trouble at the bank. Thankfully, this ghoulish game has ceased: most banks are so much better capitalised that their CDS prices are now boringly stable.

But a new CDS signal is emerging that is worth noting. Not because the trend itself has systemic implications, but because of what it suggests about what is happening to ailing companies.

The issue revolves around what creditors can expect to recoup in bankruptcies. Most CDS contracts stipulate that financiers need to know what a company’s cheapest available bond will be worth at the point the company defaults. That’s because CDS contracts make investors whole by paying them the bond’s original face value minus its market value. When a company goes bust, financiers hold an auction to determine the market price, and the resulting prices offer one guide to what creditors think the company’s remaining assets are worth.

Over the past decade, the average CDS auction prices have moved in a band between 10 and 60 cents on the dollar, but have generally been between 30 and 40 cents. However the nine US auctions conducted in the year to August produced an average price of just 9 cents — and just 2.4 cents if you look at the worst four: Chesapeake, California Resources, Neiman Marcus Group, and McClatchy. “Recoveries for credits with CDS auctions have been alarmingly low,” Brad Rogoff writes in a Barclays note. 

The micro-level explanation for this drop is a change in capital structures. A decade ago, it was hard for distressed companies to raise emergency funding, such as “debtor in possession” loans, when they hit the wall. But this year, such capital “has been readily available for most companies that have sought it,” Mr Rogoff notes. 

This has enabled troubled companies to stagger on for longer, as so-called corporate zombies. And because loans take priority over bonds in a bankruptcy, the practice has also weakened bondholders’ claims, sparking fights in some bankruptcies, including US mattress maker SertaSimmons and California-based beachwear group Boardriders.

Bondholders’ claims have been further undermined by debt exchanges and stealthy asset transfers, including one known as the “J-Crew trap door”. Named after the recently bankrupted US retailer, it refers to a manoeuvre pulled off by the company’s private equity owners in 2016 in which they transferred intellectual property rights across to new lenders, out of the reach of the original creditors. Similar tactics have emerged at other troubled groups such as Travelport.

These trends are just a symptom — not the main cause — of the real reason for low recovery rates: ultra cheap money. The reason DIP financing is so plentiful, as is highly leveraged finance before a company hits a wall, is that asset managers have jumped into the lending business to increase their returns in a low interest rate world. And the reason that distressed companies have been able to engage in games like the J-Crew trapdoor is that creditors have stopped imposing tough covenants that might prevent this. 

Indeed, four-fifths of US loans issued last year were “covenant-lite”, that is they had little or no control over borrower behaviour, up from one-fifth at the start of the decade. That is because investors are so desperate to chase returns in a zero-rate world that they no longer dare to impose covenants. 

Indeed, the hunt for returns is so frenzied that junk bond yields have plunged from 12 per cent in March to below 6 per cent. Cheap money, in other words, is enabling some zombie companies to stagger on, even as creditor value shrivels — until they collapse.

That is why it pays to take note of those low CDS recovery rates. The sample size is so small that it is hard to predict how widespread the problem might be. But investors and policymakers should ask tough questions about corporate zombies — and whether it is wise to let them all keep staggering on with the crutch of cheap money.

Investors also need to insist on tough conditions when they provide loans to risky companies. That is doubly so given the IMF warning last week about the threats of sky-high US corporate leverage — and the risks of a new economic downturn as the Covid-19 pandemic flares up again. 



Seek attacker's 10 red flags


Short sellers don't always get it right when they attack businesses for allegedly misleading shareholders. But more often than not they find tell-tale signs of hidden problems.

Just days before Blue Orca Capital's Soren Aandahl launched a short-selling attack against online jobs platform Seek, he shared with Chanticleer 10 of his favourite signs of impending corporate trouble.

Many of these red flags have been used to predict fraudulent activity or deception of investors. It should be noted Aandahl's campaign against Seek is not covered in this column because the company is yet to issue an ASX response.

Blue Orca founder Soren Aandahl says he never ceases to be amazed at the ingenuity of accountants. ABC

High profits – poor cash flows: Companies reporting impressive profits, as a general rule, should report equally impressive cash inflows. Watch out if they don’t. Despite growing revenues and reporting 70 per cent-plus profit margins, Rolta India never reported positive free cash flows. It went bankrupt, and its profits proved to be a mirage.

Ballooning receivables: Investors should also watch for rising account receivables, typically measured as DSOs (day sales outstanding). Ballooning receivables indicate that a company is not collecting cash for its sales, which can call into question the authenticity of its revenues and profits. For example, Blue Sky Alternative’s receivables rose to 129 per cent of revenues, an early clue that the asset manager was inflating the value of its unrealised investments.

Inventory turnover: Investors should also pay attention to inventory movement, looking for changes in accounting treatment from year to year or for strange outliers. We first noticed China Metal Recycling, one of the largest and most brazen frauds in Hong Kong history, in part because it claimed to be turning over its scrap metal inventory five to six times faster than its closest competitors.

Non-cash gains: We are always sceptical of companies that achieve earnings targets with the help of one-time, non-cash gains. Often, such non-cash gains are not derived from the superior performance of a healthy business, but from accounting trickery. Sandalwood plantation owner Quintis used this trick, with non-cash gains accounting for 77 per cent to 238 per cent of net profits.

Performance too good to be true: As an investor, Blue Sky claimed to have achieved a 15 per cent internal rate of return (IRR) net of fees since inception, making it one of the best asset managers in the world. Blue Sky’s track record of purported success was based not on the market but on their internal valuation of their own investments. Under scrutiny, this track record fell apart.

Serial capital raising: We always look for companies that continually rely on the capital markets to function. Serial capital raising has become fashionable lately, but investors should remain especially sceptical of companies which claim to generate high paper profits, yet constantly raise debt or issue equity to operate their business.

Is China really so constipated? As investors, we always try and ask simple, stupid questions to sanity-check a company’s claims. For example, Hong Kong-listed China Lumena claimed to sell so much homeopathic laxative that every man, woman and child in China over the age of 14 would have to be taking a dose every two weeks. We asked ourselves, "could China really be so constipated?" Of course not. Lumena was just making up the numbers.

CFO turnover: Investors should beware when CFOs leave frequently or abruptly, especially if such departures take place around the annual audit. L&L Energy, one of our Chinese reverse takeover offer (UTO) shorts, had five CFOs in three years. When one CFO candidate refused, the CEO simply forged her signature.

There are no trees: One of the most famous frauds of the Chinese RTO years was Sino-Forest. Muddy Waters found that Sino-Forest was lying about the amount of timber acreage under its control. It is hard for many investors to deploy investigators or conduct on-site due diligence in far flung regions, but simple asset checks can sometimes reveal the most brazen of schemes.

Serial Acquisitions (part I): Roll-ups should be treated with scepticism. Companies engaging in serial acquisitions give management teams discretion to use accounting tricks to massage earnings. Valeant was a classic example, seducing investors with the appearance of growth which was achieved through debt-fuelled acquisitions. The debt binge comes with a cost, and acquisitions create a unique opportunity for unscrupulous managers to play accounting games.

Serial acquisitions (part II): Sometimes, companies use acquisitions to steal money from shareholders, by secretly buying businesses or assets from undisclosed related parties (usually themselves). One Hong Kong-listed company spent hundreds of millions acquiring empty shell businesses from entities secretly connected to insiders. We discovered that this shadowy network was connected to groups affiliated with male prostitution and brothels in China.



Singapore Unemployment Rises to 16-Year High

Singapore’s overall unemployment rate in the third quarter rose to 3.6%, the highest since 2004, reflecting the sustained challenges to its economy from the coronavirus pandemic.

A median 3.7% was forecast in a Bloomberg survey before the data Friday from the Ministry of Manpower.

Singapore unemployment rate highest since 2004

The Monetary Authority of Singapore said earlier this week that the city-state’s recovery will likely be “gradual and uneven” and that the labor market is expected to “only expand gradually” next year. The central bank sees the economy contracting by 5% to 7% this year.

Singapore has deployed about S$100 billion ($73 billion) in fiscal stimulus, including wage subsidies and rent relief, as well as longer-term efforts to digitize business and retrain retrenched workers. Policy makers have signaled that they plan further fiscal support in the upcoming budget, to be released early next year.

Thursday 29 October 2020



Islamist killers work on West’s weaknesses

Despite the beheading in France last week of history teacher Samuel Paty many in the West remain too weak to name that enemy. The enemy is Islamist extremism. And, like Australians, the French must never accept this evil. Australian soldiers resting eternally on French soil did not sacrifice their lives to end one tyranny only to have another replace it. To recast a Winston Churchill phrase, the malice of the wicked must not be reinforced by the weakness of the woke.

The Islamist global insurgency has been turning our system against us for some time. Following defeats in Iraq, Syria and Afghanistan, a physical caliphate is no longer needed. And the weakness of the West is fertile ground. There have even been protests in Paris supporting those on trial for their connection to the slaughter of the Charlie Hebdo staff. They are also linked to an attack on a Jewish shop, killing four people. The 2015 Charlie Hebdo massacre was a call to arms and set off a terrorist killing spree across Europe and Britain. Yet many of those who spoke against Islamist violence were labelled Islamophobic.

The clever al-Qa’ida strategist Abu Musab al-Suri (real name Mustafa Setmariam Nasar) who in 2005 was arrested in Quetta, Pakistan, wrote a 1600-page book, The Call for Global Islamic Resistance. Demonstrating his appreciation of the West’s weaknesses, al-Suri described a changed strategy that is now playing out playing out on our streets. Al-Suri may not know their names, but his disciples swim in the warm waters of the West until such a moment that they become activated. It is a decentralised network in which every participant’s centre of gravity is metaphysical. They are not given instructions, but they know them.

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We are the enemy. Their footsoldiers in this undeclared war are out to eliminate the “grey zone” within Western society where no one can remain neutral. Al-Qa’ida and ISIS understand that the moral asymmetric weakness of the West’s democratic principles allows them to drive Muslims and non­-Muslims into polarising positions. And they identified and cultivated a sympathetic voice among Western institutions, media, academia and civil society. That’s what good insurgents do.

Now big-man global Muslim leaders such as Turkey’s President Recep Tayyip Erdogan and Pakistan Prime Minister Imran Khan reinforce the idea that the teacher’s beheading is the will of Allah. Instead of distancing their faith from this heinous crime, they feed the minds of those who hate us by their vitriol against French President Emmanuel Macron. Erdogan insists Macron is deranged and calls for a boycott of French products. Macron’s crime was to defend France’s national motto, Liberté, Egalité, Fraternité. Incidentally, it strikes one as odd that if you hate a country and its principles so much, why live there? No refuge was offered by either Erdogan or Khan.

When the great 12th-century military commander Saladin threatened war against the Ismaili sect, the Assassins, their leader, Hassan-i-Sabbah, replied with one of the best rebuttals in military history. Sabbah explained: “We have read the gist and details of your letter and taken note of its threats against us with words and deeds, and by God it is astonishing to find a fly buzzing in an elephant’s ear and a gnat biting statues . . . you know the outward aspect of our affairs and the quality of our men, what they can accomplish in an instant and how they seek the intimacy of death. We suggest you prepare means for disaster and don a garment against catastrophe, for I will defeat you from within your own ranks and take vengeance against you at your own place and you will be as one who encompasses his own destruction.” Today’s Islamist strategy is the same. They know Hassan-i-Sabbah was on to something. Killing one individual by someone living among us, using nothing more than a knife, has deep psychological and mobilising effects on sympathisers and opponents. The tactic is so cheap to deploy, so simple to implement, and almost impossible to detect. And deadly attacks replicate through self-sacrifice. When one dies it inspires other like-minded extremists.

Our freedoms, laws and human rights are being exploited to attack us. Then those freedoms are used to defend the same terrorists. It is what US military strategist William Lind describes as fourth-generational warfare. If only we acquiesced to their nonviolent demands, the terrorism would stop. France, the epitome of freedom and liberty, is the antithesis of this psychopathic movement.

Today’s Islamists are applying lessons from Sun Tzu’s The Art of War. As Sun advised, seize that which your adversary holds dear or values most highly, then they will conform to your desires. In the case of Islamic extremists, their nonviolent sympathisers can jump on board, further spreading the infiltrator’s narrative, shutting down dissension from within. Instead, Macron should be supported. Whether in Australia or France, there must never be a social contract with barbarians.

Andrew Hastie, as chairman of parliament’s intelligence and security committee, has explained that our terrorist threat level remains at “probable”. This means a significant number of individuals retain the intent and capability to attack us. This year 11 convicted terrorists will be released from prison into the Australian community. Think yourself lucky we are not in the UK where it is estimated 40,000 people are on MI5’s potential terrorist list, with 3000 identified as a direct threat. The task of monitoring them all requires being lucky always.

The Islamist extremist global insurgency has unfinished business. Given our military history and cultural ties, an attack on France is an attack on our own.



Wednesday 28 October 2020



I am in Taipei. Because this is the front line of the fight against the totalitarian party-state fascism of the Chinese Communist Party that is without doubt the biggest threat to freedom that humanity has ever faced. Taiwan is the homeland of all lovers of freedom and dignity. This is my homeland.

Record 200 Days With No Local Cases Makes Taiwan Envy of World

  • As Covid-19 infections surge elsewhere, Taiwan contains spread
  • Island relies on strict border control, contact tracing, masks
Taiwan residents are acutely aware of disease-fighting habits like hand-washing and mask wearing.
Taiwan residents are acutely aware of disease-fighting habits like hand-washing and mask wearing. Bloomberg

While many countries around the world are hitting new highs in coronavirus cases, Taiwan has achieved a different kind of record -- 200 days without a locally transmitted case.

Taiwan holds the world’s best virus record by far and reached the new landmark on Thursday, even as the pathogen explodes anew in Europe and the U.S. Taiwan’s last local case came on April 12; there has been no second wave.

What did this island with 23 million people do right? It has had 550 confirmed cases, with only seven deaths. Experts say closing borders early and tightly regulating travel have gone a long way toward fighting the virus. Other factors include rigorous contact tracing, technology-enforced quarantine and universal mask wearing. Further, Taiwan’s deadly experience with SARS has scared people into compliance.

Taiwan Data Set to Show If Island’s Economy Escaped Contraction
People eat behind perspex partitions at a food stall in Taipei, Taiwan earlier in July. Photographer: I-Hwa Cheng/Bloomberg

“Taiwan is the only major country that has so far been able to keep community transmission of Covid eliminated,” said Peter Collignon, an infectious disease physician and professor at the Australian National University Medical School. Taiwan “probably had the best result around the world,” he said, and it’s “even more impressive” for an economy with a population about the same size as Australia’s, with many people living close to one another in apartments.

Curve of Taiwan's confirmed cases remains flat compared with Australia's

Taiwan will be among the few economies to grow this year, with the government in August forecasting that the gross domestic product will expand 1.56% in 2020.

Still, Taiwan isn’t out of the woods yet as it recorded 20 imported cases in the past two weeks, mostly from Southeast Asian countries like the Philippines and Indonesia. And others that fought the virus well initially, like Singapore and Japan, then had spikes in cases.

Taiwan Data Set to Show If Island’s Economy Escaped Contraction
A municipal worker sprays sanitizer into a woman’s hands at the entrance to the Ningxia Night Market. Photographer: I-Hwa Cheng/Bloomberg

What countries with surging infections can take away from Taiwan’s experience is that nothing works without contact tracing those who have tested positive and then quarantining them, said Chen Chien-jen, Taiwan’s former vice president and an epidemiologist, in an interview.

Also, as it’s not easy to make people stay in quarantine, Taiwan has taken steps to provide meal and grocery delivery and even some friendly contact via Line Bot, a robot that texts and chats. There is also punishment -- those who break quarantine face fines of up to NT$1million ($35,000).

Here is how Taiwan has achieved its milestone:

Border Control

Taiwan shut down to all non-residents shortly after the pandemic broke out in January and has kept tight control over its borders since.

“Taiwan’s continual success is due to strict enforcement of border control,” says Jason Wang, director of Stanford University’s Center for Policy, Outcomes and Prevention. That includes symptom-based surveillance before travelers board flights and digital fence tracking via cellular signals to ensure their compliance with a 14-day quarantine, he said.

Masks, Distribution

Protective Mask Production At Taiwan Comfort Champ Manufacturing Co. As Taiwan Prepares for the Next Pandemic
Employees pack finished protective masks at a factory in Taoyuan, Taiwan, earlier in June. Photographer: I-Hwa Cheng/Bloomberg

The decision to stockpile and have central distribution of face masks played a key role in Taiwan’s success. The government early in the pandemic stockpiled all domestically produced face masks and banned export. Within four months, companies increased production from 2 million to 20 million units a day, enabling the island to ration masks to residents on a regular basis.

Contact Tracing, Quarantine

Taiwan has world-class contact tracing -- on average, linking 20 to 30 contacts to each confirmed case. In extreme situations, such as that of a worker at a Taipei City hostess club who contracted the virus, the government tracked down as many as 150 contacts. Then, all contacts must undergo a 14-day home quarantine, even if they test negative.

So far, about 340,000 people have been under home quarantine, with fewer than 1,000 fined for breaking it. That means 99.7% have complied, according to Chen. “We sacrificed 14 days of 340,000 people in exchange for normal lives for 23 million people,” Chen said.

SARS Experience

A member of Taiwan’s army disinfects a street in Taipei in 2003. Photographer: Patrick Lin/AFP via Getty Images

The painful lessons of past epidemics paved the way of Taiwan’s success in fighting Covid. It began building an emergency-response network for containing infectious diseases after its experience with SARS in 2003, when hundreds became ill and at least 73 died, for the world’s third-highest infection rate. Taiwan later experienced pandemics like bird flu and influenza H1N1. As a result, its residents are acutely aware of disease-fighting habits like hand-washing and mask wearing.


China’s Central Bank 

Needs a Greater 


Fickle and lacking vision and independence, 

the People’s Bank of China has encouraged 

risky corporate behavior and helped to make 

China one of the world’s most indebted nations.

Potemkin policy village?
Potemkin policy village? Photographer:  Qilai Shen/Bloomberg via Getty Images

Last spring, as China struggled with the economic impact of the coronavirus, venture capital funding dried up and tech workers lost their jobs — and start-ups in the tech hub of Shenzhen went apartment-hunting. In March, residential home prices there rose at the fastest pace in three years. Entrepreneurs were taking out property-backed small business loans, which were subsidized by Beijing’s stimulus packages, to buy more property.

“What was up with that?,” you might ask.

The fact is, real estate has long held a special space in China Inc.’s heart. Of the more than 4,000 listed non-financial companies in mainland China, more than 40% hold property as investments, even though their business operations have nothing to do with the sector, according to data compiled by Bloomberg Opinion. In the U.S., for instance, less than 2% of listed companies do that.

But in China, owning these assets is essential to corporate survival. Having real estate has become the best hedge against the whipsawing policies of the People’s Bank of China, which lacks both the independence and longer-term vision of the U.S. Federal Reserve and other developed market central banks. Hostage to political considerations, the PBOC has responded to the global financial tumult of the last two decades by engineering fast and frequent credit booms followed by painful periods of tightening as regulators fretted over rising debt.

Confronted by this toxic credit cycle, Chinese companies have learned the hard way that financial security is not a given. They borrow as soon as the PBOC gets into easing mode, even if they have no imminent need for the money. Unsure when banks might reverse their leniency, companies are reluctant to make long-term productive investments. Instead, they invest their borrowed cash in risky financial products and real estate. Even by the central bank’s own admission, China’s big banks have turned into “pawn shops,” willing to lend only to large businesses with solid physical assets. When the PBOC tightens again, the only way for private enterprises to borrow is with real estate as collateral.

The central bank’s reactive tendencies have not only altered corporate behavior, inhibiting the ability of companies to plan ahead, encouraging short-term speculation and inflating asset bubbles. They have also built breeder reactors of debt like China Evergrande Group, the world’s most indebted real estate company, and helped to turn China at large into one of the world’s most indebted nations, with outstanding loans at around three times its gross domestic product.

Consider the PBOC’s behavior during this ill-starred year. Even as Covid-19 ravaged the economy, the PBOC wavered. First the bank injected too much cash into money markets and then it sucked the cash back out. The behavior of China’s government bond market is an indication of that: As developed-market bond yields dance around negative territory, China’s risk-free rate has experienced a strange, V-shaped rebound.

This seeming anomaly with the rest of the world is the unfortunate outcome of a battle waged this April with corporate interest rate arbitragers. Rather than paying salaries or shoring up working capital, large companies were taking the cheap loans made possible by the PBOC and putting their proceeds into lucrative wealth management products, the central bank observed. Much to the PBOC’s dismay, its initial easing generated more corporate debt and little real economic activity.

Starting in June, the central bank decided to do more “targeted easing,” draining money via open-market operations while beefing up programs that offer complex special lending to small businesses. Although this move stamped out the arbitrage play, it also caused China’s recent bond rout. Credit is getting tight again.


China has long been trying to shrink the debt pile of real estate developers. But all Beijing has achieved is an industry clever with cash management and unrepentant on leverage. Between late 2017 and 2019 — the PBOC’s latest tightening phase — developers were starting new real estate projects at a consistently faster pace than their project completions.

Cash Churn

During China's 2018 and 2019 credit tightening phases, developers were starting residential projects much faster than they were completing them

Source: Bloomberg

Developers were likely trying to speed up their cash turnover, according to Macquarie Group Ltd.’s economist Larry Hu. Seeing a long credit winter, companies wanted to cut their land bank exposure, start building and pre-sell properties as fast as possible. Then they would take their time to finish the construction phase and deliver the final product.

This financial engineering caused something of a social uproar this year. Troubled luxury villa developer Tahoe Group, the first large residential developer to default on a bond in five years, is facing pressure from hundreds of pre-sale customers who fear it might never complete projects in Beijing and Shanghai. Customers have sunk millions into deposits, but construction was halted for months. Local governments were brought in to mediate.

In mid-August, China tried something new again, proposing a “three red lines” approach to major developers. Those exceeding all three leverage metrics monitored by regulators are forbidden from borrowing more.

This rule change put China Evergrande Group into a tailspin. Together with reports that the company had written a letter to the Guangdong government warning of a potential cash crunch, it sent Evergrande’s bonds tumbling in late September. Evergrande, which has 2.3 trillion yuan ($337 billion) in assets, is a prime example of how risk-seeking and aggressive some developers have become. As of June, the company held 835.5 billion yuan in borrowings, with a whopping 47% due within a year. It had only 141 billion yuan of cash. Now China’s top policymakers are debating whether and how to intervene in the company’s travails.


Much of the blame for this state of affairs can be laid at the feet of China’s central bank, beginning with its lack of transparency. In most countries, companies can pick up monetary policy signals by observing central bank decisions at scheduled policy meeting dates and the run-up to them. In China, there’s no such schedule to follow. Benchmark policy rates are adjusted whenever the PBOC deems it appropriate.

In most countries, central banks strive not just for transparency, but also for the credibility that comes with consistency and discipline — qualities that the PBOC has also struggled to display. In the last two years, setting up new lending facilities and launching new benchmark rates have become the PBOC’s go-to strategies whenever it feels monetary policies are not working. Since assuming office in March 2018, Governor Yi Gang has established a new interest rate corridor to manage money markets, a new benchmark rate for bank loans, a series of targeted lending facilities to incentivize banks to lend to small businesses, and even swap programs to help banks issue perpetual bonds to shore up their capital.

In December 2018, Yi formally confirmed that the funding cost for banks — rather than the entire financial system — was what he cared about most. The key money market rate would be the seven-day repo rate for transactions that only involve banks and are backed by government and policy bank bonds; the PBOC would manage liquidity in such a way as to keep the rate within a corridor, the governor said1

Under this strategy, however, the funding cost for other financial institutions, such as brokers and trust companies, could shoot above the ceiling in times of distress. That happened on multiple occasions, including the year-end liquidity squeeze in 2018, in May 2019 after the central bank’s first lender takeover in decades, and most recently this January, a week before the Covid-19 lockdown in Wuhan.

Unable to withstand the complaints and pressures this policy generated, the PBOC reversed its earlier stance this year, flooding the repo market with cash, even though the funding cost for banks remained well within its interest rate corridor. For much of April and May, so much money was sitting around that financial institutions were able to lend to each other more cheaply than the PBOC’s own open-market operations. With borrowing costs so low, financial companies were happy to leverage up and offer high-yielding financial products. The interest rate arbitrage we witnessed in April was ultimately engineered, and later unwound, by the PBOC.

Where the Wild Things Are

Thanks to an ineffective interest rate corridor, the cost of money market funding in China can fluctuate beyond the levels sought by the central bank.

Source: Bloomberg

Striking a self-congratulatory note in a white paper dated Aug. 31, the PBOC said it was ahead of many global peers in establishing inter-bank “risk-free rates.” It also encouraged investors to use the seven-day repo rate as the new reference rate in setting prices of floating-rate debt and interest-rate swap products. But how many want to swap into something this volatile and unpredictable? The PBOC’s failure to stick to its interest rate corridor regime, which it formalized less than two years ago, has undermined its own policymaking.


Ultimately, this fickle-mindedness comes down to the central bank’s lack of independence. It is an open question in China whether “yang ma,” or Big Mama, as the central bank is dubbed, or President Xi is effectively in charge of monetary policy.

Although there is no panacea for the central bank’s woes, there are things it can do. Improving transparency, for instance, would be relatively easy: The PBOC can set up pre-scheduled quarterly briefings just as the Federal Reserve does, priming and preparing markets. Social media also helps. Just over a year ago, the central bank opened a public WeChat account to make real-time announcements, dispel rampant market rumors and publish policy papers.

Achieving consistency, though, is harder. The PBOC is not a top policy body in China’s sprawling government. Governor Yi is not even on the 25-member Politburo, which meets quarterly to set China’s leading economic agenda.

The central bank is merely on the same ministry level as China’s equivalent of the Securities & Exchange Commission. Furthermore, Governor Yi reports to too many people, as the organization chart provided by Bloomberg Economics shows.

relates to China’s Central Bank Needs a Greater Helmsman

On the administrative level, along with the Ministry of Finance, the PBOC reports to the State Council. But at the spiritual, or the Communist Party level, it also needs to please a top economic policy body headed by President Xi Jinping. U.S. financial markets may have the “Powell put,” named after Fed Chair Jerome Powell, but there can never be a so-called “Yi put.” China only has a Xi put.

Changing the PBOC’s reporting lines is a gargantuan task (and perhaps even an unrealistic one). However, one solution is to bring the sitting governor into the Politburo fold, allowing the central bank to inform top-level economic decisions with its expertise and observations. Foreigners, who are buying Chinese government bonds at record pace, look up to the governor as the top monetary authority. Sending a signal that Yi commands a key role could instill confidence at a time when China needs outside capital and is pushing market reforms.

Much as in Parenting 101, authority, consistency and good habits matter in central banking. As many a child-rearing book will tell you, if a parent vacillates, she is more likely to end up with insecure and needy offspring. In China’s top-down world, frequent credit flip-flops driven by the political needs of the moment have done just that to the real economy: Beijing’s “Big Mama” has raised a group of hoarders and arbitragers wondering what she will do next and constantly on the hunt for quick money.