Drew Faust, Harvard’s 28th president, will step down on June 30, 2018. Faust is
an acclaimed author and historian of the Civil War and the American
South, and the first woman to lead the University. I was at Harvard when
she became President amidst the backdrop of the turmoil created by her
predecessor Larry Summers. Her quiet and steadfast leadership style
settled an administration in turmoil and focused all resources on the
success of Harvard’s legacy — the students.
I recently came across this incredible video. In it, Thomas Linzey and Mari Margil make an argument for democracy over the corporate state with regard to local agricultural rights.
There are those that believe this to be frivolous debate, however,
I
believe we have entered a state of crisis. Consumers are starting to make the connection between political
action and purchase decisions. Investors are too. The corporate state does not know
what to do. All it knows is that candy is scarce and margins are
not what they used to be.
The Mentality of the Corporate State
The corporate state has the mentality of a powerful, fat, two year-old with a mind that could match any modern day legal genius. The legal genius loves candy and is near death, but is too young to listen to reason. Death would be a sad end for such an impressive creature and yet we must do something about its lack of morality if it is to survive. We must give it an education; teach it right from wrong. As investors and consumers, we need to figure out a way to push the corporate state into the next phase of development before it sacrifices our democracy for another piece of candy.
Thomas Lizeny and Mari Margil, along with the Community Environmental Legal Defense Fund (CELD) are attempting to use the law as a way to implement a development program on the corporate state at the local level. While I love what they are doing, I believe it will be ineffective from a legal perspective. No law is going to stop the two year old legal genius from getting to the candy.
It seems logical that the only way to stop a legal structure is with
the law, but the corporation is actually very strong legally --
emboldened, as Linzey and Margil state above, by the constitution that
appears to be working perfectly. In this vein, and in the vein of
Achilles heel finding, the law may not
be the best way to change the corporate state. Indeed, it is unlikely that the Achilles heel
of a legal structure is the language of the legal structure.
The bad news is that as much as Linzey and Margil try to affect change via the Community Environmental Legal Defense Fund (CELD), it is doubtful that they will ever be able to outmaneuver the law. The good news is that the consumer holds all rights to the only thing the corporate state craves, profitability.
What does this mean from a sustainability perspective? It means if the corporation is concerned about the investor, and the investor is concerned with profit, then the consumer is all powerful. If the consumer is only interested in companies that respect local nature rights, then that's what the corporate state must produce. It is up to the consumer to provide the incentive structure for the corporation.
Best Strategy Moving Forward
The main issue for those of us trying to put some reigns on the corporate state (for its own good I might add) is coming up with the best strategy. We need to create a new incentive structure for the corporate state, one that is incentivized by the health and well being of a democracy. I believe the best strategy is not legal, but consumer driven. In particular, it is based in knowledge and community education.
Ironically, the CELD may be able to affect more change through its ability to educate than in its ability to beat the corporate state with the law. It will be, as Margil alludes to in the retelling of an Ethiopian saying, the corporation that does not see how the water it swims in is changing -- waters that are not swayed by law, but consumer demand. The more the CELD spreads the word, the more educated and knowledgeable the consumer will be and the more the waters will change. Each battle lost by the CELD will lead to the winning of the war.
Next Post: Can the Corporate Citizen Be Charged Like An Ordinary Citizen
What's hard to understand is that corporations, while legally considered a person, are not. The corporation is driven by profit and profit alone. In my next post I will explore a few ways to change the incentive structure including the comparison of corporate and citizen rights. If corporations are people, they should receive all the advantages and disadvantages of citizenship.
Perhaps the best way to get the corporation to argue against citizenship is to start treating it like one.
In
the lecture above, Noam Chomsky discusses the state of human relations
and our existence within an international and historical context.
The
most interesting aspect of the lecture is the discussion of the
corporate state and its ownership of over 50% of the world's assets.
Since corporations own more than the collective state, perhaps it can
also be said that the world has a new king.
Kings and Corporations
Our historical record
tells us that kings and their nobility once ruled the world. The king
had unlimited power. The nobility helped the king to carry-out his/her
mission of gaining greater power. This has been an effective
power-grabbing model over the centuries and we continue to use the same
model today, but in a slightly different way. Instead of kings we have
investors. Instead of nobility, we have corporations.
Why Is This Important
To impact change we must
know who is truly in power. This isn't a referendum on the corporate
state. It isn't bad or good. It is an
acknowledgement of the emergence of a new power. The
top 12 companies in the world by market share are the owners of the new
corporate state.
The corporate
state has no official geography and its constitution is a compilation of
trade deals. Each corporation is a noble and at the head of all nobles
sits the king. The king, in this case, is the investor and the religion
of the investor is profitability.
In many ways, the
relationship between investor and profitability is a beneficial one.
Profitability, and the solutions that drive profitability, provide direct
access to the king. Even more powerful is the realization that
profitability is driven by 'the people' buying the product.
Though
there are many loopholes in this new form of government, profitability
is more reliable than the whims of the king. Whatever you believe, we have a
stable system for progressive change, but it is
important to pull the right lever; it is important to know the role of profitability in our new kingdom.
The Top 12 Corporate Nobles of the Corporate State
Top 12 Companies by Market-cap as of 1/2/2017:
Company Name
Industry
Prior Close
Mkt Cap
AAPL
Apple Inc.
Communications Equipment
116.73
622.4 B
MSFT
Microsoft Corporation
Software & Programming
62.90
489.0 B
XOM
Exxon Mobil Corporation
Oil & Gas Operations
90.35
374.6 B
AMZN
Amazon.com, Inc.
Retail (Catalog & Mail Order)
765.15
363.5 B
JNJ
Johnson & Johnson
Biotechnology & Drugs
115.49
314.1 B
JPM
JPMorgan Chase & Co.
Investment Services
85.89
307.3 B
GE
General Electric Company
Aerospace & Defense
31.71
280.5 B
NSRGY
Nestle SA (ADR)
Beverages (Nonalcoholic)
71.395
277.0 B
WFC
Wells Fargo & Co
Regional Banks
54.84
275.4 B
FB
Facebook Inc
Computer Services
116.35
272.3 B
T
AT&T Inc.
Communications Services
42.66
261.9 B
GOOGL
Alphabet Inc
Computer Services
802.88
237.7 B
These 12 companies own a great deal of
wealth in the world and the owners of the corporate state have full
control over it. When the price of stock in these companies falls, it
impacts the entire economy, which means the owners of the corporate
state are the investors.
The good and bad news is that
investors are almost entirely concerned with profitability. In this way,
profitability can be a double-edged sword as investors often decide to
choose short-term profitability over long-term firm viability. In other
words, the going concern of the firms above is not a large concern for
the average investor with the ability to get in and out of stock
positions at the click of a mouse. What investors will grow to count on,
however, is the impact of consumer demand on earnings and stock price.
The irony is that as we enter into a new era of a corporate state, never
before in history will the consumer have more power.
How Can Investors Profit From The Coming Trend
Investors
reward profitability, so those companies that are able to stay in touch
with consumer demand will be the rulers of the new corporate state.
This may sound grim to some, but it gives hope that the world can change
if the investor does. Even more
interesting is the connection between investor and consumer. It is the
investor that can decide to move funds to smarter, more agile pockets.
For example, I advise my clients to move away from business models
driven by store count and price comparison like Wal-Mart and Dollar
General, to business models driven by speed and agility, like
Amazon.
Yesterday the FOMC provided a statement about the fed funds rate. The decision: No change.
Janet Yellen gave remarks and answered questions regarding the FOMC's decision to hold rates at this lower bound. Yellen fielded several hard questions from the audience, like "Do you think the Fed overstepped it's bounds in the AIG bailout?" and "Are you aware that housing prices and rents are squeezing the average consumer?" Yellen answered the questions head on, except for a question regarding whether or not the IMF had any business making recommendations about the US Federal Reserve. This question and the subsequent answer were lost.
The main takeaway, the clear message that Yellen was trying to relay, was that any decision to move rates would be "data driven", which is to say that the Fed will base its decision on the data and nothing else. It is a marvel how the Fed can say this and then say that rates will most likely go up before the end of the year. The disconnect is that Q1 data was bad, but the FOMC insists it's transitory, so we'll see.
Perhaps the most interesting part of the presentation was the dot plot below. It's from a survey of FOMC participants on the timing and amount of rate action over the next 2 years and it's the pace or the trajectory that's fascinating, which is to say that by the end of 2017 the plot shows a fed funds rate hovering around 3-4%, which means at least 3.25 - 4.25 for the IOER. Yellen was surprised by the pace as well and alluded to it in her speech. Whatever the case, if rates do rise at this level banks will have field day.
One interesting note is that the effective fed funds rate is creeping up on its own -- hitting .14% yesterday
after hovering around .12% since the beginning of the year.investment kit from Regal Assets.
Waiting on the FOMC to release a Statement about the fed funds rate hike at 2pm today. In the minutes from the last meeting, the Committee alluded to providing more information in the Statement regarding rate hike timing so this could be a very interesting read. The fed funds rate,
which has been hovering around .12% - .13% for the past 6 months,
popped up to .14% yesterday confirming that banks are easing on lending even without a rate hike.
The Federal Reserve Board, FDIC, and OCC finalized revisions to regulatory capital rules adopted in July 2013. The rules apply to bank holding companies with at least $250 billion in total assets and will go into effect on October 1, 2015.
The FDIC approved a proposed rule on risk-based
assessments for banks with less than $10 billion in total assets. "In particular, the proposal would base assessments on a model estimating
the probability of failure using data from the financial crisis and
prior years," said FDIC Chairman Martin J. Gruenberg at an FDIC Board Meeting. "These contemplated improvements would allow assessments to
better differentiate riskier banks from safer banks, and allocate the
costs of maintaining a strong Deposit Insurance Fund accordingly," he said. It is important to note that the rule appears to be "revenue neutral", but it will add a premium to small banks with riskier profiles which will increase the cost of capital.
The Department of Commerce released the New Residential Construction report for May 2015. Building permits for private owned subdivisions were up 25% over last year, and 2.6% for single family approvals. Housing starts are up over 5% and housing completions are up over 14%. New Residential Construction data for June will be released on Friday, July 17.
The supplemental survey to the June Empire State Manufacturing Survey and Business Leaders Survey was published yesterday and focused on recruitment and retention of workers. ~44% of those surveyed in the service sector and ~34% in the manufacturing sector said that their firms planned on increasing headcount. Only 11% and 13% of manufacturers and service firms reported that they planned on reducing employment.
The SEC announced charges against Ohio-based Equity Trust Company which allowed Ephren Taylor and Randy Poulson to push a Ponzi scheme on more than 100 investors. “We allege that Equity Trust failed to protect the interests of its
customers when it acted as more than a passive custodian,” said Andrew
J. Ceresney, Director of the SEC’s Division of Enforcement. “When
custodians like Equity Trust are aware of red flags suggesting an
ongoing fraud, they must take action to try to prevent it.” A public hearing will be scheduled before a law judge.
Did the Fed act beyond it's legal authority when it bailed out #AIG?
Maurice R. Greenberg, the former chief executive of the American
International Group, argues just that in a class-action lawsuit against
the government in which he demanded $40 billion -- Starr International
Company, Inc. v. the United States. At first the lawsuit was deemed
ridiculous but then it started gaining traction. On Monday, the judge
finally made a ruling which agreed that the Fed had overstepped its
legal authority, but also said shareholders were better off having had
the bailout and so no amount was awarded. This is what the Fed had to
say in response:
The Federal Reserve strongly believes that its actions in the AIG rescue
during the height of the financial crisis in 2008 were legal, proper
and effective. The court's decision today in Starr International
Company, Inc. v. the United States recognizes that AIG's shareholders
are not entitled to compensation for that decision, and that the Federal
Reserve's extension of credit to AIG prevented losses to millions of
policyholders, small businesses, and American workers who would have
been harmed by AIG's collapse during the financial crisis. The terms of
the credit were appropriately tough to protect taxpayers from the risks
the rescue loan presented when it was made.
Still, the verdict may set an interesting precedent for those that
believe the Fed has gained too much power over the past 5 years with Dodd-Frank and voting power over the IOER.
Source: Federal Reserve June 2015 Empire State Manufacturing Survey
The Fed released the Industrial Production and Capacity Utilization index (G.17), a measure of capacity utilization for manufacturing, mining, electric and gas utilities. The industrial sector accounts for a large part of national output over the course
of the business cycle so G.17 is used as a way to forecast structural changes. Industrial production decreased 0.2 percent in May after falling 0.5 percent in April. I'm confident this trend will reverse soon due to improved labor conditions. The NY Fed released the June 2015 Empire State Manufacturing Surveywhich showed declining business condition in New York. The index fell five points to -2.0.
The SEC charged Helmut Anscheringer, a Swiss trader, with trading on insider information ahead of Apple's (Nasdaq: APPL) decision to purchase AuthenTec Inc. Anscheringer purchased stock and
call options in AuthenTec Inc. after hearing that Apple wanted to buy the
company. A few days after Anscheringer purchased the options and stock, the purchase was announced; Apple would buy AuthenTec Inc. for $355 million in cash which caused
the stock price to jump almost 60 percent. Anscheringer made more
than $1.8 million on the transaction. He has agreed to pay $2.8 million to settle charges.
The SEC issued an investment alert for seniors. More and more
seniors are the target of investment fraud. This alert provides five red
flags for seniors when making an investment decision. If you are a
senior, or if you care for one, please read this alert.
http://www.sec.gov/oiea/investor-alerts-bulletins/ia_5redflags.html
The Office of Financial Research published a brief titled More Transparency Needed For Bank Capital Relief Trades. The brief suggests that banks are meeting regulatory capital rules by transferring credit risk to third parties. The paper uses data collected from 18 banks that purchased $38 billion in credit protection. The authors also attempt to estimate the impact of these third party transactions on a banks’ risk-based
capital ratios. While this may represent a hole in regulatory policy, its impact is negligible due to the level of capitalization/liquidity in the market.
Source: Federal Reserve, Z.1 Release
The Federal Reserve published a statistical release update for Z.1: Financial Accounts of the United States Flow of Funds, Balance Sheets, and Integrated Macroeconomic Accounts. As shown to your right, it provides an update on household net worth and non-financial debt at the business, state, and federal level. On an annual basis, the statistic hasn't been lower than 3% for at least the past 10 years, however, Q1 of 2015 showed total growth in debt as 2.8% due primarily to a large drop in federal government spending, which is partially offset by the large increase in the growth of debt at the state and local government level.
The BEA said that GDP increased in 48 states in 2014. The data was made available today and shows that professional, scientific, and technical services were the leading contributors. Real GDP grew 2.2% for the entire US in 2014, and 1.9% in 2013. The fastest growing region was the Southwest region at 4.3% due to contributions from mining in Oklahoma and Texas. Per capital GDP ranged from a low of $35,551 in Mississippi to $66,160 in Alaska. Starting in September the BEA will release quarterly GDP by state. Tables 1–4 within the release provides greater detail. You can also visit the BEA's Web site at www.bea.gov.
The SEC Charged Nicholas Lattanzio, a phony hedge fund manager in New Jersey, with attempting to defraud small businesses with the Black Diamond Capital Appreciation Fund. According to the press release he defrauded small businesses out of $4 million and used funds to "purchase a million-dollar home in Montclair, N.J., a
$124,000 luxury car, and $100,000 worth of merchandise from Tiffany
& Co. He also paid off more than $760,000 in credit card debt,
withdrew approximately $570,000 in cash or checks written to himself and
his girlfriend, paid more than $30,000 to a yacht broker, and funded
his children’s private school tuition and his membership at an exclusive
golf club." To read more about this store click here.
The SEC charged Michael J. Fefferman, senior director of information technology at Ardea
Biosciences Inc, and his brother-in-law Chad E. Wiegand with insider trading. Ardea Biosciences was eventually sold to AstraZeneca PLC (NYSE: AZN). Wiegand, a stockbroker,
purchased Ardea and tipped fellow stockbroker Akis C. Eracleous off about the deal. The alleged insider trading ring amassed $530K in illegal profits. “As a corporate insider, Fefferman breached his duty to Ardea’s
shareholders by tipping confidential information about significant
corporate events before they were announced,” said Sharon B. Binger,
Director of the SEC’s Philadelphia Regional Office. All three have settled with the SEC. The SEC also charged the following people with various unrelated forms of securities and/or wire fraud:
Frederic Elm f/k/a Frederic Elmaleh, 45 resides in Fort Lauderdale, Florida. AKA, Elm Tree Investment Advisors, LLC, 45, Ponzi-like payments. Sanctions have been ordered.
Robert H. Medhus is a 67 year old resident of Jamestown, North Dakota - 13 counts of securities fraud, sentenced to serve ten years of incarceration.
DeVon J. Carlson, age 55 is a resident of Shawnee, Kansas, two counts of securities fraud, sentenced to serve 32 months of incarceration and ordered to pay restitution in the amount of $231,078.
Brian J. Schuster, age 41, is a resident of Ashland, Nebraska, four counts of securities fraud, sentenced to serve between 80 months and 16 years of incarceration.
Jason Matthew Pennington age 43, is a resident of El Reno, Oklahoma, charged with wire fraud, sentenced to serve 42 months of incarceration.
Rebecca L. Engle, age 61, is a resident of Green Valley, Arizona, Engle pled no contest to two counts of securities fraud, sentenced to serve between three and six years of incarceration.
The ELIV Group, LLC and Scott Valente, Valente is 57 years old and is a resident of East Greenbush, New York, fraudulently lured approximately eighty individual investors, sanctions have been imposed.
Clinton D. Fraley, age 38 is a resident of Cañon City, Colorado, one count of securities fraud in violation, sentenced to serve 12 years of incarceration and ordered to pay restitution in the amount of $617,710.
Liberty Street Economics, the research leg of the NY Federal Reserve published an article titled Is Cheaper Oil Good News or Bad News for U.S. Economy?The authors use correlations of oil price changes with different variables to show that the fall in oil prices is due primary to increased global supply. They also speculate that the effect of the supply shock is expansionary, but will have a "relatively modest stimulative impact on
economic activity, which will peak around mid-2015." According to the post, the effects
of the price decrease should fall off by early 2016.
The results of the May Survey of Consumer Expectations show that one-year ahead inflation expectations rose to 3.0%. Median household income increased slightly, with more significant increases for
lower income households. Household income growth expectations also increased
slightly to 2.9%.
