Juggling Dynamite

The clip below offers some incredibly rare, candid commentary on the massive capital risks presently embedded in long always products and marketers. I am not generally a fan of Carl Icahn, but what he says in public here about BlackRock in front of CEO Larry Fink is exactly right and unusually frank in a business full of industry gladhanders who usually stick together.

Fink’s response is vapid mouthing because he has no viable arguments to refute the criticisms. He can only offer empty sentences. Fink’s whole business model is to get people to buy in at every price, everyday in every way. But he is typical of finance types. Like all ETF, fund cos, and conventional asset allocators, BlackRock sells different colors of risk ‘jelly beans’, which they package in many different flashy wrappings. But when, like today, jelly beans are all heinously over-valued, offering us the same jelly beans wrapped in different packages and brands, offers no value, diversity or capital protection.

Passive fund cos and managers like BlackRock and Fink (Warren Buffett too) have grown in wealth and prestige on the back of animal spirits fueled by the Fed’s QE programs over the past 5 years. They have been simply riding the wave and calling it genius. When the wave recedes again and capital crashes, they will claim it was not their fault. Seeing the CNBC anchor assert that Icahn’s criticisms are ‘not fair’, is predictable. BlackRock is a huge CNBC sponsor and Fink is one of their regular, much over-lauded and promoted guests.

Here is a direct video link.

From 1978 to 2014, executive compensation at American firms increased 997%, compared with 10.9% for the average worker compensation. This is not about some people working harder than others, or critics being envious of high earners. This is about a system of corporate welfare and cronyism designed to extract obscene riches for the few at the expense of everyone and everything else.  Not surprisingly, it is finance executives that account for 58% of the expansion of income for the top 1% and 67% of the increase in income for the top 0.1% from 1979 to 2005.  Bankers continue to make off like bandits as the rest of the world grows insolvent.  See: Skyrocketing CEO pay bad for the economy.

“The current trend in how CEOs are paid, particularly with stock options, creates a range of economic problems. Several studies show that equity-heavy pay, because it makes executives very wealthy very quickly, distorts CEOs’ incentives, inducing them to take on too much risk. Instead of bearing this risk themselves, they shift it onto the rest of society, as we saw during the financial crisis. This model also encourages executives to behave fraudulently, as in the backdating scandals of a decade ago, and lessens their motivation to invest in their businesses. In addition, according to economist William Lazonick, in order to issue stock options to top executives while avoiding the dilution of their stock, corporations often divert funds to stock buybacks rather than spending on research and development, capital investment, increased wages, or new hiring. To top it all off, these pay packages cost taxpayers billions of dollars due to the performance pay tax loophole instituted by President Clinton.”

The Dodd-Frank bill introduced steps to report and reign in executive pay. Thus far the finance-captured SEC, led by Mary-Jo White, former top Wall Street defense attorney (who’s husband is still working as a highly sought after Wall Street defense attorney) has not surprisingly failed to deliver as mandated on executive pay.  Since White is no doubt headed back to represent those same firms after she leaves the SEC, one can understand her reticence to offend finance execs now.

Illuminating article from Ben Rabidoux in the Globe today, pointing out that the pace of home construction in Canada is far surpassing the growth of the workforce.  New housing starts are currently building more than 2 new homes for every working-age person in the population. This is higher than the 1.5 new homes rate built at the peak of the 1989 price bubble.  See:  Canada’s housing boom has no demographic legs to stand on.

Housing starts in June hit their highest level in 10 months at just under 203,000 on a seasonally adjusted basis. That level of construction means we’re currently building over two new houses for every person we’re adding to the working-age population.

To frame why that’s potentially problematic, consider the chart [shown in the article here in interactive form], which shows housing starts as a multiple of the number of people added to the working-age population. You’ll note that in the late 1980s, we were building 1.5 new homes for every person added to this group. It’s clear in hindsight that there was significant overbuilding during that time period, particularly in Ontario where house prices subsequently fell 25 per cent between 1989 and 1993 as supply overwhelmed demand. And that drop occurred in spite of the Bank of Canada cutting the overnight rate by 1,000 basis points (10 per cent) over that time frame, which helped put a floor under prices.

The current level of housing construction in Canada is absolutely unprecedented relative to underlying demographic trends.

Add in all the baby boomers that are planning to cash out of their high end homes over the next 5 years, amid mortgage rates that have no where to go but up, and Canadian realty prices look more unsustainable by the day.