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Thursday, November 21, 2019

Mailvox: Apple and the debt bomb

Forget the good of society and the interests of the employees. The giant corporations aren't even acting in the interests of their shareholders anymore, if this emailer is to be believed.

I work for a company that was involved in [REDACTED]. It struck me as strange that a company with the cash pile that Apple has - just over $100bn in their last earnings release - would be issuing debt to raise even more cash, so I looked a little deeper and the below may be something relevant to your blog given some of your recent posts on financialisation...

When Steve Jobs died in 2011 Apple didn't have a single penny of debt, which was unique among Silicon Valley's tech giants. That lasted not a full 2 years after his death because in April 2013 Apple conducted the largest non-bank bond issuance in history, raising $17bn in debt (as an aside, Goldman Sachs led the bond issue). The justification for this would likely seem counter-intuitive to those outside finance: Jobs' successor Tim Cook was supposedly under pressure from investors to return some of its cash to shareholders, which meant a program of buying back shares and paying out higher dividends. However, a large portion of Apple's then $200bn cash pile was held outside the US and if repatriated would face a 35% tax charge, so it made 'financial sense' to keep the cash abroad and raise debt in the US at interest rates of c.3% instead to fund this gigantic shareholder return program. Paying out a 3% charge on cash instead of 35% sounds good, right? Apple certainly thought so, as they continued to issue debt over the next few years.

As we know, Trump's signature piece of legislation so far is his tax cuts bill. It slashed the rate of corporation tax payable on foreign-held cash reserves when repatriated. Interestingly, Apple duly began repatriating some of its cash held abroad in 2017. So presumably it then stopped raising more debt? Nope. Throughout 2017 and 2018 Apple issued more and more debt to fund payouts to its equity investors. This brings me back to this month's 'Green Bond' issue - the largest of its kind in Europe. Putting aside the virtue signalling aspect of issuing a 'Green' bond (the idea is that it's used to fund initiatives designed to reduce Apple's carbon footprint), it appears that Apple has become addicted to debt. In short, just 8 years on from Steve Jobs' death when they were entirely debt-free, Apple now owes around $106bn in debt and pays out around $3.5bn annually in interest payments alone.

There is literally no business case for Apple to be taking on such debt. It is simply sucking cash out of the company. It does not need to raise cash to invest in R&D, hire new staff or expand its business. If you read through the FT, Forbes etc., the best explanations are that "debt right now is cheap, so they may as well raise cash this way to pay shareholders". Apple themselves state the reason for issuing debt is for "corporate reasons" according to their Italian CFO, i.e. nothing related to creating productive value for the firm. They now hold slightly more debt than cash - a remarkable turnaround for a company that was once debt-free and held over $200bn in cash at its peak. Even more alarmingly, Apple has issued releases saying that they intend to become a "cash neutral" company, i.e. it will pay out any excess cash to shareholders and debt holders, and given Apple's ever-increasing debt pile it therefore looks as though the lenders will be milking the firm for years to come. The debt vampires have well and truly sunk their teeth into Apple.

There are plenty of arguments one can make on this, but one wonders whether any of this would have happened if Steve Jobs was still alive and running the company.

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75 Comments:

Blogger Mandos November 21, 2019 8:45 PM  

Nop. No agenda here.

Just regular, healthy corporate operations, don't pay attention. This is fine.

Blogger Meanoldbasterd November 21, 2019 8:52 PM  

Ha ha ha ha ha! What morons!

Blogger Gulo Gulo November 21, 2019 8:55 PM  

It makes one think that maybe these companies have become nothing short of money laundering entities for the shadow government that appears to be operating behind the scenes . Sort of like how the Mob works only on steroids.

Blogger Theproductofafineeduction November 21, 2019 9:06 PM  

I've seen this with commercial RE properties as well, ownership pays themselves dividends with debt making interest only payments and then refinance when the balloon payment comes due.

Given the financial environment of the last few decades it makes perfect sense, the growth of the rents and the subsequent book value of the property far outstrip the rate of debt growth....until it doesn't.

Blogger JovianStorm November 21, 2019 9:09 PM  

With any luck the parasites will kill the host and we'll be free from Apple eventually.

Blogger Johnny November 21, 2019 9:38 PM  

I think most big companies have a Chief Financial Officer, and he is apt to be the second most important person in the company. He is the one who takes care of this stuff.

There are a lot of different reasons for running debt finance. Debt can be expensed because interest is an expense, but dividends are not an expense, or are not treated as such. That encourages debt finances.

And these stock buybacks are another tax avoidance scheme. The stockholder, hopefully, gets enriched because his share of the company goes up in size, and he doesn't have to pay a tax on the dividend the money could otherwise be used for.

I think the whole buyout thing has chilled out, but it can happen that an equity funded company with valuable assets gets bought out. The new owner can pay more by leveraging the existing company with debt after he takes it over. It happens. Too careful with the money and the boss loses control of the company.

Not that I think the above stuff is good, but it is the way things are setup. The legal framework encourages companies to carry as much debt as the think they safely can. Most companies do it.



Blogger Rex Leroy King November 21, 2019 9:55 PM  

Reverse the figure and ground:

What isn't money laundering these days?

Blogger kurt9 November 21, 2019 10:08 PM  

Apple acquired a fair amount of debt in the 90's when John Scully ran it. It had about a billion in debt when Jobs returned in '97. Job's very first act as CEO upon his return was to pay off that debt. Whatever you think about Jobs as CEO, one thing he was impeccable about was his cash management. He simply did not believe in debt if it could be avoided.

Blogger kurt9 November 21, 2019 10:08 PM  

I wonder what the deal is with Microsoft, which was also famous for avoiding debt in the days of Bill Gates.

Blogger bodenlose Schweinerei November 21, 2019 10:30 PM  

"debt right now is cheap, so they may as well raise cash this way to pay shareholders"

The Smartest Guys In The Room™ have a normalcy bias that would shock the most naively optimistic child: "Even I know there won't always be candy!"

Blogger Johnny November 21, 2019 10:42 PM  

I don't understand the details of it well enough to do a point by point, but around fifty plus years ago somebody figured out that debt free companies were vulnerable to being bought out with a hostile takeover. Gordon Gecko and his "greed is good" quote was from that era.

Harley Davidson in Milwaukee was bought out by the management in a sneaky way. The quality of the motorcycles lagged, the management purchased the company with heavy duty borrowing, and got a heavily in debt company. Next Harley produced a large number of new models, visual stuff, and the company prospered.

Something like that happened to a paper mill near me. Yea old soundly funded paper mill went to a hugely in debt company with a new manager. Actually, a lot of the same old management team, that now owned a heavily in debt firm.

Companies like Microsoft and Apple can do whatever they want to do owing to their market strength. Nothing special companies that run on the edge are largely locked into significnt debt funding because it can be used to optomize shareholder return.

Blogger Jack Amok November 21, 2019 10:45 PM  

Isn't this what the Mob calls a "bust-out?"

Anyway, yes, finance is a money laundering scheme. Corporate management takes on Fed Funny Money debt, uses it to pay themselves cash (and their fedgov co-conspirators), which they use to buy real assets.

It's just looting the economy.

Blogger map November 21, 2019 11:06 PM  

Actually, this is the correct decision on Apple's part. The key point to understand is that GAAP is designed primarily to benefit creditors. Yes, the entire accounting system exists for creditors to determine the ability of a company to pay its debt. The takeaway here is that any movement away from cash accumulation, let's say converting cash to machinery, is severely penalized on the balance sheet.

I learned this while working on an accounting exercise. I was manipulating a large spreadsheet which combined journalized entries, t-accounts and a preliminary balance sheet. The journalized entries had accumulated a balance of around $500,000, but, when put into the preliminary balance sheet, total came out to $400,000. I had somehow "lost" $100,000 and I could not figure out how. It turns out that problem was contained in the shift between asset classes. This particular company took $100,000 in cash and bought a machine. The act of doing so resulted in cash assets dropping by $100,000 while machine assets increased by $100,000. That additional $100,000 in cash assets showed up in the t-account and was the source of the "loss" in the preliminary balance sheet.

Had the company borrowed $100,000 to buy the machine, then the balance sheet does not record such a loss.

It took me an hour to figure out what went wrong.

See, the basic accounting relationship is ASSETS = Liabilities + Shareholder Equity. Notice, that for every $1 in debt you accumulate, you gain $1 in assets. But, if you shift between assets, say, cash to machinery, then the system has to record that reduction in cash.

Side note, "credit" and "debit" does not mean gain or loss. It means left or right. Debit is on the left and credit is on the right. Under assets, all increases go under "debit" and all decreases go under "credit." For liabilities and shareholder equity, it is the opposite: increases are credits and decreases are debits.

So, if I invest $100,000 in cash in the company, cash assets are debited $100,000 in cash. Shareholder Equity is credited $100,000. The equation balances out. If I then spend $100,000 on a machine, I have a ($100,000) credit to cash assets and a $100,000 debit to machinery. SE is unchanged. The problem is, that ($100,000) is floating around the accounting system and has to e accounted for. Thus, you end up with $100,000 loss on the balance sheet. To avoid this problem, you always borrow.

The theory behind that I pieced together, is that cash is extraordinarily valuable...because it is what creditors will want to seize. Any reduction in cash balances, conversion of cash assets to other assets, is penalized.

Blogger Johnny November 21, 2019 11:34 PM  

@13 map

I don't get what it is you are saying. Isn't it the case that both cash and equipment value turn up on the left hand side of the balance sheet. As a result spending cash on a durable valued at its purchase price would leave the gross sum on both sides of the balance sheet the same. No? Less cash, more equipment and the same owners equity and debt?

Had the company borrowed, more debt on the right side, more equipment on the left, both sum balances up by the amount of the purchase.

Blogger wreckage November 21, 2019 11:48 PM  

@13, generally speaking, running your business to better fit accounting conventions is a bit like convergence: it seems like a free kick at first, but rapidly results in disaster. At least, that's the scuttlebut at the small business level (say 2-5+ million) I had some experience in. The thing is, the $100,000 loss you mention is ultimately illusory. The cost of finance is not, although it can be fairly trivial, and the risk, above all the risk, is the kind of thing that can be very suddenly lethal.

Generally though, using debt instead of cash is tax-advantaged, because the cost of finance is an expense and can be spread out nice and predictably to optimise various numbers in various ways. Again, running a business into risk in order to avoid taxes which are by definition paid on profits is a move that can be useful in small doses and utterly lethal in larger doses or when meeting a Black Swan on the road.

Blogger Silly but True November 21, 2019 11:59 PM  

The first rule of making money is not losing money.

Seems simple enough unless you're Apple.

Blogger Keith November 22, 2019 12:10 AM  

Interesting. I always thought Apple was going to use the overseas cash to do some corporate inversions and buy up some other tech companies and HQ them in Ireland. I guess that not only won't happen but also can't happen any more.

Blogger Jack Amok November 22, 2019 12:17 AM  

Actually, this is the correct decision on Apple's part.

No it's not. Maybe according to GAAP, but fuck GAAP. It's part of the rigged game, designed to make it easier for parasites to pocket wealth produced by the productive classes.

I mean, yes, I understand you're describing what is advantaged vs what is punished by "the rules," but please for the sake of the English language, find some other phrase to describe this besides "the correct thing to do."

Blogger Keith November 22, 2019 1:01 AM  

>To avoid this problem, you always borrow. The theory behind that I pieced together...

A better theory:

The rules--which are made as complex as necessary in order to obscure the "on purposeness" of what is going on--were engineered to lead to "always borrow" as the correct game theory strategy for the system.

Blogger The Pitchfork Rebel November 22, 2019 1:18 AM  

@13

You have absolutely no idea how much bookkeeping ignorance you've displayed here. Not accounting, but bookkeeping. You made a simple omission and think you've discovered something about GAAP. The rest of your post is one error after another. You don't know what the hell your talking about. and Capital structure is on the right hand of the balance sheet so your asset machinations (left side) don't have anything to do with each other. Either get a CPA or take a basic community college course before you waste everybody's time again.

@14 @19.

This has nothing to do with GAAP, and everything to do with the tax code.

Every sophomore finance class tells the students that dividends are not deductible as a business expense, but interest payments to debt holders are deductible. They then tell them that because of that deductibility the net after tax cost is (1-the marginal tax rate) times the interest expense. When the corporate tax rate was 35% (at the federal level) that meant ever dollar paid was only going to reduce the bottom line by 65 cents.

Then said students are told that for many people, they are looking for returns, and they don't care whether they are called dividends or interest. Many actually prefer debt because the payments have elements of contractual obligation and priority in bankruptcy. Then they are told that raising capital through stock is essentially putting new owners at the table (even though they don't really have much control of directors or officers, thanks to corporate law) issuing debt raises money without diluting control.

There is absolutely no good reason to have debt be deductible by corporations, especially if dividends are not deductible. The ordinary standards for whether an expense is deductible includes necessity. There's no necessity to issue debt to produce product, as Apple's prior condition shows.

We've largely eliminated the deductibility for debt (outside of mortgage interest, but God help us if they kill that without killing the deductibility of corporate interest)

It's almost like somebody wants there to be debt issued by corporations.


Blogger map November 22, 2019 1:23 AM  

Johnny wrote:@13 map

I don't get what it is you are saying. Isn't it the case that both cash and equipment value turn up on the left hand side of the balance sheet. As a result spending cash on a durable valued at its purchase price would leave the gross sum on both sides of the balance sheet the same. No? Less cash, more equipment and the same owners equity and debt?

Had the company borrowed, more debt on the right side, more equipment on the left, both sum balances up by the amount of the purchase.


Yes, the shareholder equity does not change. Notice that increases in liabilities and assets will always net to zero when you solve the equation for shareholder equity.

But, remember, shareholder equity is an amorphous concept. A piece of equipment bought for $100,000 is not worth $100,000 upon liquidation. You can't turn around and sell it for you paid for it. It may only sell for $80,000. The "value" of the machine is only what it produces until it depreciates to zero, essentially the cash is "invested" in a wasting asset.

Accounting does account for this, because creditors are going to value the actual cash you have sitting in the bank over whatever else you do in case you get liquidated.

It is a very bizarre and eye-opening result but, since the accounting example I used was created by an accounting professor, I will defer to the expertise for certain.

The key takeaway is that you never sacrifice cash positions to either accumulate assets or pay off debt. Sure, it is better to have cash and no debt, but it is not better to sacrifice cash to get rid of debt. It is not better to sacrifice cash to even accumulate assets.

Consider: which would you rater have: $1 million in cash and $1 million in debt that you make payments on at, say, 3% a year OR $10,000 in cash and zero debt? In the latter case, your net worth is higher, but are you really better off? Do you have the same resource capacity?

Accounting captures that.

Blogger The Pitchfork Rebel November 22, 2019 1:26 AM  

Post Script:

I have encountered some opinions over the years that failing to issue debt to raise some of the capital for a corporation is willfully failing to minimize expenses and could be thought of as a fiduciary breach. I don't know if that has ever been tested in court, but I'm sure it's icing on the cake of the other reasons.

Interestly, the reduction in the corporate tax rate will reduce the difference between the nominal and after tax cost of interest and the temptation to lever companies.

It seems like businessman President understands something career parasite imbeciles like Sanders and Warren do not.

Blogger The Pitchfork Rebel November 22, 2019 1:33 AM  

This comment has been removed by the author.

Blogger The Pitchfork Rebel November 22, 2019 1:36 AM  

@13 @22

"But, remember, shareholder equity is an amorphous concept. A piece of equipment bought for $100,000 is not worth $100,000 upon liquidation."

That's why we operate on the "going concern" principle, not the "liquidation" principle-the only places the liquidation concept is used is very limited-such as under condtions when dissolution is imminent and in Statutory Accounting Principles (SAP) which are required by state insurance regulators.

Just. Stop.

Blogger map November 22, 2019 1:40 AM  

The Pitchfork Rebel wrote:I have encountered some opinions over the years that failing to issue debt to raise some of the capital for a corporation is willfully failing to minimize expenses and could be thought of as a fiduciary breach. I don't know if that has ever been tested in court, but I'm sure it's icing on the cake of the other reasons.

Interestly, the reduction in the corporate tax rate will reduce the difference between the nominal and after tax cost of interest and the temptation to lever companies.

It seems like businessman President understands something career parasite imbeciles like Sanders and Warren do not.



Yes, companies have to be optimally leveraged so as to maximize cash and cash-flow.

Yes, you can deduct taxes against interest rates. A 35% corporate tax will reduce a 3% nominal rate to a real rate of 1.95% (.65*.03).

Blogger The Pitchfork Rebel November 22, 2019 1:41 AM  

@26

Gamma.

Blogger map November 22, 2019 1:42 AM  

The Pitchfork Rebel wrote:@13 @22

"But, remember, shareholder equity is an amorphous concept. A piece of equipment bought for $100,000 is not worth $100,000 upon liquidation."

That's why we operate on the "going concern" principle, not the "liquidation" principle-the only places the liquidation concept is used is very limited-such as under condtions when dissolution is imminent and in Statutory Accounting Principles (SAP) which are required by state insurance regulators.

Just. Stop.


Oh...absolutely. My point is that accounting, because of its focus on creditors, is only the beginning of financial analysis. Finance dispenses with a lot of accounting thinking when it attempts to estimate cash flows from projects and investments.

Blogger map November 22, 2019 1:43 AM  

map wrote:The Pitchfork Rebel wrote:@13 @22

"But, remember, shareholder equity is an amorphous concept. A piece of equipment bought for $100,000 is not worth $100,000 upon liquidation."

That's why we operate on the "going concern" principle, not the "liquidation" principle-the only places the liquidation concept is used is very limited-such as under condtions when dissolution is imminent and in Statutory Accounting Principles (SAP) which are required by state insurance regulators.

Just. Stop.


Oh...absolutely. My point is that accounting, because of its focus on creditors, is only the beginning of financial analysis. Finance dispenses with a lot of accounting thinking when it attempts to estimate cash flows from projects and investments.


That is why there is a big debate over non-GAAP measures entering financial statements.

Blogger Harambe November 22, 2019 3:13 AM  

If I borrow money to pay my creditors, it's bad. If Apple does it, it's totes smart. Because there are extra steps.

Blogger SciVo November 22, 2019 3:13 AM  

Who is taking advantage of whom, debtor or lender? My best guess is both and neither, the insiders of both taking advantage of the outsiders of both (principle-agent problem).

Because I think that the creditors are also getting screwed here, putting up billions of dollars that if they really need it back, will not be forthcoming.

Blogger Azure Amaranthine November 22, 2019 5:24 AM  

"It makes one think that maybe these companies have become nothing short of money laundering entities for the shadow government that appears to be operating behind the scenes ."

Some. Others are fake companies built by fake money to present popularity and success, thereby running a bandwagon fallacy over everyone they can and fabricating a facade of free flow of information.

"Everyone who matters is doing X, and all the experts say Y, and we've always been at war with terror and hate."

Blogger bramley November 22, 2019 5:29 AM  

Down they go...

Good riddance.

Blogger bramley November 22, 2019 5:32 AM  

The word Titanic springs to mind.

Blogger Azure Amaranthine November 22, 2019 5:42 AM  

"Anyway, yes, finance is a money laundering scheme. Corporate management takes on Fed Funny Money debt, uses it to pay themselves cash (and their fedgov co-conspirators), which they use to buy real assets."

The vain heart of debt beats, reciprocating the lifeless blood that is fake money. Harness the beat of the heart to suck real things empty. Expansion, contraction. Boom, recession. Frack apart the people with the pressure and turbulence of this anti-thing called debt, forcing out the real life in the real blood toward extraction.

Magic complete, goal attained: Something drawn from nothing through the medium of human sacrifice.

Blogger peacefulposter November 22, 2019 8:00 AM  

Greta says buy Green bonds or we will all die!

Blogger dc.sunsets November 22, 2019 8:14 AM  

@ MAP
Consider: which would you rater have: $1 million in cash and $1 million in debt that you make payments on at, say, 3% a year OR $10,000 in cash and zero debt? In the latter case, your net worth is higher, but are you really better off? Do you have the same resource capacity?

Accounting captures that.


A-hah. I finally understand. This is all about Lenin's famous dictum, Who/Whom.

The former can be robbed of cash via private gun or public court, but the latter is the one who can do the robbing (via default & bankruptcy.)

Blogger Johnny November 22, 2019 8:24 AM  

The most common form of money laundering is that somebody has ill gotten gains and they need to show it as income, or money that they already had. That is, obscure the source of the money.

All done in country, no foreign exchange stuff, and I believe one common method is to start or purchase a small business, lets say a pizza delivery service, and then show a bunch of non existent profit in that business. As the business is the small deal, the laundering the big deal, if it all gets discovered the business folds, or put under new management if it survives. Meanwhile the crook leaves with whatever cash they still hold, very likely most of it.

I could always happen that a large and valuable company gets used for some money laundering by an employee of criminal intent. But there is no chance at all that the top management would get involved in true, illegal money laundering in the core company because it would be putting a valuable asset at risk needlessly.

They might, by the way, cheat on the books to show more profits or to put off bankruptcy, but that would not be showing funds from somewhere else on the books of the company. That is, not money laundering as normally understood.

Blogger dc.sunsets November 22, 2019 8:28 AM  

This Voxmail underpins a question I wrestle with lately.

When the Fed creates (or facilitates the creation of) credit from nowhere, which is loaned into monetary existence, it basically reduces the value of capital everywhere.

What is something worth if it is available in unlimited quantities? ZERO. Capitalism (which is nothing but private ownership and management of the means of production, AKA private property) depends on rewarding capital formation...i.e., husbanding resources.

The Debt Bull Market of 1981 to (at least) 2019 made capital formation superfluous. Where I live, businesses come and go fast. An example is a full service car wash set on about an acre. Purpose-built, the capital cannot be re-deployed to a non-car-wash use. This means someone is going to take a near-total loss on at least half a million investment.

Who will take the loss? Almost certainly the owner invested some skin in the game, and that's wiped out, but as certain is that there was a bank loan involved. Imagine for a moment that the Fed was directly involved, with no middleman bank to buffer. Could the Fed create the ability to buy the land and erect the building, and when it failed and the loan was defaulted-upon, simply press the delete key on a computer and go on as if nothing had ever happened?

All consumption is in real time. Say's Law (a logical axiom) dictates that. The exponential surge in consumption occurring these last 38 years indicates that something is being consumed at a fantastic rate, especially when unlimited credit availability inevitably funded (and funds) declining marginal value enterprises. Surely by now the marginal value is net zero (or negative.) Yet something is being consumed.

I suggest it's capital...REAL capital, akin to building factories that produce broken furniture and inert batteries on land that can never be reclaimed without spending MORE than the original costs of building the factories.

Each year this goes on makes us all collectively poorer. Those facilitating it may get richer, but they're metaphorically burning down a valuable factory in order to cover up their looting of the coins from the vending machines in the employee cafeteria.

By the time this ends, our great-grandchildren will still abhor the notion of a "public corporation" when they're 90 years old.

Blogger Johnny November 22, 2019 8:47 AM  

>>What is something worth if it is available in unlimited quantities? ZERO...

Could the Fed create the ability to buy the land and erect the building, and when it failed and the loan was defaulted-upon, simply press the delete key on a computer and go on as if nothing had ever happened?...

It does come pretty close to that. Banks make house loans. The loans get secularized, that is, bundled and sold to investors or big banks somewhere while also picking up a guarantee of repayment from Fannie Mae or Freddie Mack, federal agencies. Next the new homeowner skips out on payments. It is not just pushing a button and causing the debt to go away because that would wreck the financial system. What does happen is they "push a button" and the dept gets covered by taxpayers or piled on the outstanding federal debt.

If you make the debt just go away, nobody pays, you end up like Venezuela, a currency in a debt spiral of hyperinflation. Oh, it happens, but we are not doing just now. Give it a little time?;^)

Blogger Azure Amaranthine November 22, 2019 8:48 AM  

"The exponential surge in consumption occurring these last 38 years indicates that something is being consumed at a fantastic rate"

Lowest common denominator labor capability. High trust cooperative ability. Moral fidelity. Infrastructure. The commons. Social heritage. Personal roots. The ability to even survive when it all collapses.

All of the better life that parents used to be building for their children? Every element of that.

Blogger Johnny November 22, 2019 8:49 AM  

@39 That is, securitized not secularized in the above.

Blogger Blume November 22, 2019 9:00 AM  

Then accounting is dumb because the first man has no power he is a slave to his debt. If he didn't invest wisely and make 30,000 grand a year in profit he is screwed. The second man is free. If he blows it on cocaine and strippers he will just be poor. And won't be some ones slave.

Blogger Johnny November 22, 2019 9:09 AM  

As in other areas, affirmative action rears its ugly head in finance. The government requires banks, informally I think (??), to race norm bank loans on things like housing. Because some race dominated ghetto groups lack good credit worthiness, the race norming locks banks into making house loans that they know are going to have excessive defaults. In bank terminology, they end up with a crappy loan portfolio that is very likely to lose money in the future. And what the hell, as the bank is already locked into having a crappy loan portfolio, why not make more money in the short run by making more crappy loans, things like borrowing money to people who are already overly debt extended?

Any kind of economic dip and the banks weak loan portfolio blows up and the bank is headed for bankruptcy. And so in steps the government and it bails the bank out for doing what the government encouraged in the first place. The political class points fingers of blame at the bankers, the banks stay around because they can't be allowed to fail, and the politicians get reelected because the bankers are to blame, sort of. And the beat goes on.

Blogger dc.sunsets November 22, 2019 9:40 AM  

@39 Johnny
It does come pretty close to that. Banks make house loans. The loans get secularized, that is, bundled and sold to investors or big banks somewhere while also picking up a guarantee of repayment from Fannie Mae or Freddie Mack, federal agencies. Next the new homeowner skips out on payments. It is not just pushing a button and causing the debt to go away because that would wreck the financial system. What does happen is they "push a button" and the dept gets covered by taxpayers or piled on the outstanding federal debt.

If you make the debt just go away, nobody pays, you end up like Venezuela, a currency in a debt spiral of hyperinflation. Oh, it happens, but we are not doing just now. Give it a little time?;^)


I'm aware of all that, but I think you're mistaken. In your example, someone still explicitly takes the loss (even if it simply accrues to the National MasterCard.) I will aver that when (not if, when) the National Debt is repudiated, it will effectively BE just hitting the delete key...

...except, holders of Government Bonds will STILL take the loss in a debt jubilee.

Also, you cannot get a runaway inflation with a credit-dominated monetary system because the existence of the resulting debt IS NOT PHYSICAL. What is a $1M T-bond worth today? Almost $1M. What if the market's consensus (and unless the Fed undertakes to OWN 100% of the market, the Fed cannot replace the market's valuation metric) is that what was today worth $1M is tomorrow worth $970K?

Someone (bondholders) just watched $30K of their "money" evaporate. Say the Fed tries to goose credit even harder, but because the 1981- (so far) 2019 bull market for debt is OVER, the value of EXISTING debt (which is a veritable GALAXY of IOU's) declines by the same PERCENTAGE.

The Fed could create a nominal $1B and the value of outstanding debt could drop by $20T. This is what WILL happen when the 38-years-and-counting bull market ENDS.

The Fed is painted into a corner (or its owners plan to foreclose on all the collateral and attempt to literally own the world.) Inflating "our" way out of this 38 year (and counting) credit INFLATION is impossible.

All roads lead to a debt collapse (via price collapse or jubilee) and an unprecedented collapse in the supply of money...also known as a debt-collapse deflation. But the conditions for this to occur have existed for over 24 years, yet here we are.

No one knows the future.

Blogger dc.sunsets November 22, 2019 9:57 AM  

@40, yes, the "soft" capital you describe was squandered.

But "hard" capital, too was all-but-literally burned these past decades.

This is the Age of Vice. A populace besotted by self-satisfaction and complacency is easy to dupe into collective self-destruction via the promise of self-actualization, pleasure, etc.

The economics, legal and accounting professions all colluded to give The People what they desired, artful, industrial-scale RATIONALIZATIONS for incredibly (and predictably) self-destructive actions.

This is a variant of Gresham's Law; Bad Ideas have chased out Good Ideas (in part because the consequences of adopting the former were diffused, delayed or disguised...mostly delayed.) Bad Ideas have spread worldwide like a Black Plague crossed with a metastatic carcinoma.

We could blame the rats that carried the fleas, but it was our fellowmen whose innate weaknesses made them choose to be vulnerable.

Blogger swiftfoxmark2 November 22, 2019 10:01 AM  

And when deflation really starts to show itself in the market, where will Apple be?

Blogger Stilicho November 22, 2019 10:08 AM  

"Lowest common denominator labor capability. High trust cooperative ability. Moral fidelity. Infrastructure. The commons. Social heritage. Personal roots. The ability to even survive when it all collapses."

All elements of social/cultural capital. It is how Japan has weathered its long recession: burning its (admittedly large) supply of cultural capital to keep the Japanese buying postal bonds, etc.

We don't have japanese levels of cultural capital, but we do have the dominant currency (cream of the crap). No one knows how long we can continue our present course, but we all know that it will end ugly.

Blogger SciVo November 22, 2019 11:14 AM  

Each year this goes on makes us all collectively poorer. Those facilitating it may get richer, but they're metaphorically burning down a valuable factory in order to cover up their looting of the coins from the vending machines in the employee cafeteria.

It was this sort of insight that made me a fan of mishedlo (Mike Shedlock) back in the day, and Vox Day now. It is appalling how rare it is for economic commentators to simply see the terrain and describe it in contrast to the map.

Blogger Stilicho November 22, 2019 12:07 PM  

Mish was ok for the most part. Then he decided his mission was to ban all firearms. Dead to me.

Blogger Lex Orandi, Lex Credendi November 22, 2019 12:18 PM  

I have a bit of a different view as someone who has followed this company since before Jobs came back. Under Steve Jobs Apple began to stock pile overseas cash profits in order to not pay the the high repatriation taxes on them. However, the amount of money that Apple was hoarding was making the average dragon look bad. At its peak Apple had nearly $250 billion dollars in foreign subsidiaries. Apple was unique in that it accounted for the amount of $$$ that they would have to pay in taxes under the tax code at the time, and had that set off to the side.

This massive amount of cash was not being accurately reflected in their stock price. So they began to take out loans in 2014 in order to return money to the shareholders via stock buy backs and dividends. The interest rates on the loans were actually lower than the effective dividend rate that they were paying (approximately 2% at the time). So by taking out the loan and buying back shares, Apple was actually reducing the amount out cash it was paying out net between dividends and interest than it would have paid in dividends alone. This has allowed Apple to raise their dividends by an average of 10% per year.

With the Trump tax breaks Apple has been able to repatriate the overseas cash. However, one has to imagine that Apple didn't just have a bank of Hong Kong account with a $250,000,000,000 balance in it. They likely had advanced financial investments that are going to take many years to unwind. This is why Apple says it is trying to get down to a near cash zero just means that its positive assets are equal to its liabilities. Given Apple's current ability to print cash, and dislike for major acquisitions that is not unreasonable stance to make.

The latest borrowing might just be paying off older loans with cheaper loans. Apple got some of this debt as cheap as 0%. That's right people are giving their money to Apple for years just so that the same amount can be given back to them at the end.

Link

So while I think Tim Cook was an effective COO and a horrible CEO, he is efficient in what he does (just dull and gay). I'm only hoping that with the departure of Ives that Apple will stop hampering function with form.

Blogger SciVo November 22, 2019 12:42 PM  

Stilicho wrote:Mish was ok for the most part. Then he decided his mission was to ban all firearms. Dead to me.

Look, it's really simple:
1. Inner-city blacks kill each other with pistols.
2. You're racist.
3. Therefore, we must take away the rifles from country whites.

Lex Orandi, Lex Credendi wrote:This is why Apple says it is trying to get down to a near cash zero just means that its positive assets are equal to its liabilities. Given Apple's current ability to print cash, and dislike for major acquisitions that is not unreasonable stance to make.

You are a crazy person. They had positive net. And now you'd be happy with zero net, at best? Into whose pockets do you think the difference went?

Blogger Johnny November 22, 2019 12:47 PM  

@44 dc.sunsets

We don't disagree as much as you might think. I regard the system as unsound in the long run, mainly because we are in a long term cycle of debt accumulation. And it is global. But as long as it sustains, it sustains. And for now the debt will always turn up on somebodies account.

When they "push a button," as you put it, things will get real lively and not in a good way. The big issue will be who picks up the blame on a political level.

Blogger SciVo November 22, 2019 12:53 PM  

The trend is your friend until it ends, as they say.

Everything goes on forever until it doesn't.

And when the tide goes out, then you find out who's been swimming naked.

Blogger Lex Orandi, Lex Credendi November 22, 2019 1:00 PM  

SciVo wrote:You are a crazy person. They had positive net. And now you'd be happy with zero net, at best? Into whose pockets do you think the difference went?

The difference went into the pockets of the shareholders.

What does one do with $250 Billion Dollars when your stock is trading at a P/E of 10? Well you buy the most under priced investment you can to benefit your share holders. In Apple's case that was itself.

It has gone from over 6.5 billion share to just about 4.5 billion share outstanding. This means that for the share holders who have held through the buybacks, they own 44% more of the company than they did before.

Now do I think that a net 0 is a good idea no. However, Apple had a net income of over $55 Billion last year, and I believe a net of $90 Billion still in the bank as of last quarter. At its current income/buyback level it will take apple until about 2022 to reach net zero. However now that the stock has appreciated from the P/E of 10ish to now about 20ish, the justification for large stock buybacks as the best use of Apple's money has greatly deteriorated.

What would you do if your company was making $55 Billion a year? And that is after spending $16 Billion on R&D. There comes a time it is just better to give the money back to the share holders and let them use it as they will. Isn't that what a corporation is supposed to do? Make money for its owners? Given the capital gains tax rate is lower than the dividend rate, the company is returning the money to its shareholders in the most efficient manner.

Blogger SciVo November 22, 2019 1:01 PM  

Credit for the last to Warren Buffett, or maybe Charlie Munger. I forget.

Blogger SciVo November 22, 2019 1:07 PM  

Lex Orandi, Lex Credendi wrote:Given the capital gains tax rate is lower than the dividend rate, the company is returning the money to its shareholders in the most efficient manner.

Oh come on. That is a transparent excuse for the insiders transferring money to themselves in the most efficient way possible, much like stealing a $150,000 street light and selling it for $1500 of scrap. Destroying value and privatizing the profits.

No one is buying what you're selling, except for your fence. So stop touting.

Blogger Lex Orandi, Lex Credendi November 22, 2019 1:21 PM  

SciVo wrote:Oh come on. That is a transparent excuse for the insiders transferring money to themselves in the most efficient way possible, much like stealing a $150,000 street light and selling it for $1500 of scrap. Destroying value and privatizing the profits.

No one is buying what you're selling, except for your fence. So stop touting.


You don't own stocks do you?

So Apple could have said that we are going to have a one time special dividend of $50 a share and so some guy who owns a 1000 shares of Apple would make $50,000 and would pay half of it to the government in taxes. However, if Apple buys back share and the stock price goes up by $50 then when the guy sells his stock and makes $50,000 on his 1,000 shares, instead of paying $25,000 in taxes he only pay $12,500 in taxes because capital gains are only taxed at 50%.

Small time investors like dividends because they can take the money and use it for their day to day expenses. Large investors like share appreciation, because they don't need the day to day money and don't want to pay as much in taxes.

Going from memory, Apple does about 25% dividends and 75% buyback.

You may not like Apple, but they play far less financial trickery than the other tech companies. The rules are the rules, and they play by them for the best outcome for their shareholders. And that is a lot of people as Apple has a relatively low percentage of its shares held by corporations.

Blogger Johnny November 22, 2019 1:33 PM  

A few years ago Bill Gates and Warren Buffet got together and started a charity worth fifty billion dollars. Or so I thought. Somebody corrected me and said it was a hundred billion. So I don't know, maybe it was only fifty thousand million dollars, or could be a hundred thousand million dollars.

The neat thing about all this value is that it was accumulated while paying almost no income tax on the net accumulation. Because it is usually possible to take something in a company that increases its value and treat it as an expense, it is quite likely that neither one of them ever paid much corporate income tax. But then when you sell the stock of your now more valuable company, you have to show the value increase as capital gains. Unless you do like Buffet and Gates and start a charity and get the charitable deduction. By shifting it over to a charity, they both avoided paying tax when they took the money out of the company by selling the stock.

So they get to accumulate a hundred thousand million dollars of value while never paying a lot of income tax on any of it. Neat the way corporate finance works. Right?

Blogger dc.sunsets November 22, 2019 1:57 PM  

@49 Mish was ok for the most part. Then he decided his mission was to ban all firearms. Dead to me.
Irrationality in any sphere calls into question all spheres. I, too, decided his views were no longer relevant to me given his face-plant on private gun ownership.

@50 However, one has to imagine that Apple didn't just have a bank of Hong Kong account with a $250,000,000,000 balance in it. They likely had advanced financial investments that are going to take many years to unwind.
All cash balances are debt, but as I understand it, almost all the "cash" on corporate balance sheets is explicitly the debt of other corporations, often in the same industry. How's this not a pyramid?

@52 We don't disagree as much as you might think. I regard the system as unsound in the long run, mainly because we are in a long term cycle of debt accumulation. And it is global. But as long as it sustains, it sustains. And for now the debt will always turn up on somebodies account.

I go a bit further, seeing the "long term cycle of debt accumulation" occurred with two other factors, (1) fiat money and (2) a bull market for debt. Rising prices for debt (an intangible asset) in an era without a consistent benchmark for money (AKA a fiat system) led to the Greatest Credit Issuing Orgy in recorded history. It warped the prices of assets higher, it warped economies to favor the industries most favored by debt-based spending (think "medical, medical-insurance, Medicare/Medicaid Pharma" cartel) and it all occurred because of Prechter's socionomic theory of pricing models for intangible assets.

As price rises, quantity demanded rises, too. It's a positive feedback loop, and everyone knows that governing any system via positive feedback yields wild overspeeds followed by breakdowns. This isn't just "unsustainable," it's absolute insanity^10.

Wealth cannot be created by the act of borrowing, yet this is exactly how economists tell us our system works. Borrow $10, spend it and the economy gets $10 to bounce around while the bondholder gets $10 on the balance sheet as an asset. $20 (or more, if the velocity of money is positive) in wealth. Why, it's a perpetual motion machine! Voila!

And what does the bondholder do with his newly minted $20 IOU? He uses it to collateralize more purchases of debt (i.e., debt fuels debt.)

The amount of debt "out there" is far, far, far beyond the mind of a man to grasp. But as you note, when you're in a bull market it is "ungratifying" to attempt to answer the question, "how high is up?"

Graph the DJIA from 1928 forward. As rich as we all feel since 2009's low, the Dow is up only about 320%. To compare, from 1941 to 1966 it rose 874% and from 1974 to 2000 it rose 1181%.

I have no idea if we're near THE top, or if it's a decade away. But for the moment, people clearly think that stocks (and bonds) only rise in price, and setbacks are literally 100% buying opportunities. All the required precursors for a shattering drop, 95-98%, are present [(1) is a buildup of poorly-collateralized debt and (2) is recent experience teaching people to NEVER sell.] Will one occur? (Shrug.) It all depends on the bull market for debt. This was where Prechter got it egregiously wrong, as I see it.

It's all about debt.

Blogger dc.sunsets November 22, 2019 2:02 PM  

@57 However, if Apple buys back share and the stock price goes up by $50 then when the guy sells his stock and makes $50,000 on his 1,000 shares, instead of paying $25,000 in taxes he only pay $12,500 in taxes because capital gains are only taxed at 50%.
IIRC it's pretty well-established that corporations tend to buy back stock near tops, such that the relationship to buy-back and raising the price is, if anything, inverse.

A lot of what we're told about this stuff is trivially easy to debunk. My favorite is, "Today stocks fell as money moved out of stocks and into bonds." The market cap of a firm goes up and down based on the activity of only those shareholders who are actively trading. As far as bank balances go, Abe's $100 to buy a share of IBM goes right back into the banking system when Bill sells it to him, so ZERO net movement of money.

In theory, if Widgets-R-Us has a billion shares outstanding at $100/sh and two people trade a single share for $101, their action increased the market cap by a BILLION DOLLARS.

How many people grasp this?

Blogger mrpinks November 22, 2019 4:53 PM  

Regardless of all the accounting principles demonstrated here, it has left me confused. When the collapse comes, you will sell everything. Thats all.

Blogger map November 22, 2019 6:24 PM  

The Pitchfork Rebel wrote:You have absolutely no idea how much bookkeeping ignorance you've displayed here. Not accounting, but bookkeeping. You made a simple omission and think you've discovered something about GAAP. The rest of your post is one error after another. You don't know what the hell your talking about. and Capital structure is on the right hand of the balance sheet so your asset machinations (left side) don't have anything to do with each other.

I don't know what you are referring to here. The basic accounting relationship is ASSETS = LIABILITIES + SHAREHOLDER EQUITY. You assets will increase as you accumulate debt but, shareholder equity will still remain zero.

Again, I did take an accounting class...at a major university. The accounting exercises were built off a spreadsheet that combined journalizing entries, t-accounts and a preliminary balance sheet. Working through the problem set revealed this interesting feature of accounting. Make of it what you will...it sounds counter-intuitive but...take that up with accounting.

Blogger map November 22, 2019 6:38 PM  

wreckage wrote:I had some experience in. The thing is, the $100,000 loss you mention is ultimately illusory. The cost of finance is not, although it can be fairly trivial, and the risk, above all the risk, is the kind of thing that can be very suddenly lethal.

Debt is not a problem as long as you are accumulating cash in the process. If you have $100,000 and you buy a machine for $100,000, then your cash assets go to zero and you have now converted your valuable asset (cash) to a depreciating asset (machine). You will never be able to sell that machine for what you paid for it.

But if you borrow $100,000, then your cash position increases above your base by $100,000, which you then use to buy the machine that generates income...amd accumulates cash. Meanwhile, your initial $100,000 in cash does not change.

ALWAYS BE ACCUMULATING CASH...THAT IS THE BUSINESS RULE.

Blogger map November 22, 2019 6:45 PM  

Johnny wrote:As in other areas, affirmative action rears its ugly head in finance. The government requires banks, informally I think (??), to race norm bank loans on things like housing. Because some race dominated ghetto groups lack good credit worthiness, the race norming locks banks into making house loans that they know are going to have excessive defaults. In bank terminology, they end up with a crappy loan portfolio that is very likely to lose money in the future.

This argument needs to die. The housing market collpased in 2007-2008 because the Fed collapsed that market by raising the Federal funds rate until the economy collapsed.

Basically, the FED forced ARM's to double in price. The prime rate went to 8.5% and the mortgage rates went to 11.5%. This is why the housing market collapsed...because of the Fed...not because of the CRA or low interest rates.

In fact, the housing market was correctly priced.

Blogger bramley November 22, 2019 9:21 PM  

How money works in the modern world:

I give you money

I sit here for a while

You give me money back plus more. Why? Because i gave you money.


How is this a good thing? Whether you're a podunk boomer 'investor' buying small-fry shares in a company you think is sound, or the creepy people backing the Fed. Or Apple borrowing to pay off their investors to balance the tables into some accountant's wet-dream.

I got a job i hated to save money to buy the Apple laptop i'm writing this on. I saved enough and bought the laptop and quit the terrible job. I owe money to nobody for my laptop, and could throw it in a bin tomorrow and not be liable for a penny. What it truly cost me was time, which not a single person will ever be able to lend me more of at any price.

Blogger Azure Amaranthine November 22, 2019 9:26 PM  

"But "hard" capital, too was all-but-literally burned these past decades."

Material, infrastructure and the common properties.

The material is debased where it isn't gone entirely, the infrastructure is crumbling and many of the people capable of rebuilding it no longer exist, and the common properties are sold off to foreigners, or collected into trusts for elites.

"Soft" is all of the facets driving human ability to acquire, create, and maintain these things.

Blogger Azure Amaranthine November 22, 2019 9:27 PM  

"We could blame the rats that carried the fleas, but it was our fellowmen whose innate weaknesses made them choose to be vulnerable."

And we can blame ourselves for not shepherding and controlling our fellowmen where they were unable to control themselves.

Blogger Azure Amaranthine November 22, 2019 9:43 PM  

"don't know what you are referring to here. The basic accounting relationship is ASSETS = LIABILITIES + SHAREHOLDER EQUITY. You assets will increase as you accumulate debt but, shareholder equity will still remain zero."

And you can't read the perverse incentives and dishonest, sophistic terminology in that description?

They'll call them assets, I'll call them revengeable leverage on someone else's pocketbook. Ratified. As. Zero. Even zero is if they didn't have attached interest rates or guaranteed higher buyback on the IOUs.

Your assets don't fucking increase as you accumulate debt. They "apparently" do to people willing to lie to themselves, yet actually and obviously do not.

Calling liabilities assets may be accounting 101, but it's fundamentally dishonest accounting 101.

Blogger Azure Amaranthine November 22, 2019 9:44 PM  

"In fact, the housing market was correctly priced."

Both extremes are fabricated.

Blogger map November 23, 2019 1:55 AM  

Azure Amaranthine wrote:"In fact, the housing market was correctly priced."

Both extremes are fabricated.


It's based on the gold price. In 1968, gold was $35/oz and the median price of a home was $25,000. Bu 2005, gold was $350/oz and the median price of a house was $250,000. The price of housing was tracking the gold place and gold was measuring the level of inflation in the economy.

But, housing was correctly priced.

Blogger Azure Amaranthine November 23, 2019 3:55 AM  

You must be looking at homes in very different places than I am, city dweller.

Blogger JamesB.BKK November 23, 2019 9:55 AM  

Strip mining. There will not be reclamation.

Blogger KPKinSunnyPhiladelphia November 23, 2019 10:22 AM  

@lex orandi is absolutely spot on in his analysis.

I've owned Apple stock for a long time. In 2009 when the market crashed I bought more.

Why?

Even under Tim Cook it is a cash generating machine. And all of its financial maneuvers are designed to create value for the shareholders, apart from the income it generates by developing product.

The guys that are running the treasury operation there are very shrewd.

My advice to all of you? If the market crashes -- and at some point, probably in the next 4-10 years a 25% drop will occur and Apple will get hammered -- the scrape what money you have together and buy.

Blogger Snidely Whiplash November 23, 2019 1:12 PM  

KPKinSunnyPhiladelphia wrote:My advice to all of you? If the market crashes -- and at some point, probably in the next 4-10 years a 25% drop will occur and Apple will get hammered -- the scrape what money you have together and buy.
Because base conditions never change, trends always continue, and Apple will never go to zero.

Blogger Some Guy November 28, 2019 10:44 PM  

Cabal needs money. Badly.

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