🔔 Frauds & Destruction

Have you noticed more fraud lately?

I certainly have...

It's literally everywhere (and I'm trying to figure out if that's good or bad...)

Now I'm not saying that fraud is good: no-one thinks that except the fraudsters...

It's the discovery of the fraud I'm focused on...

Why?

Excellent question!

The answer... Creative Destruction 💥👇

The opening up of new markets, foreign or domestic, and the organizational development from the craft shop to such concerns as U.S. Steel illustrate the same process of industrial mutation—if I may use that biological term—that incessantly revolutionizes the economic structure from within, incessantly destroying the old one, incessantly creating a new one.

This process of Creative Destruction is the essential fact about capitalism.

Make sense?

If not, try this.

Visualise the economy as a forest, then start on the right and work clockwise 👇

As metaphors for the economic cycle go, it doesn't get much better...

New growth continually competes with established woodland for the same nutrients & resources...

Without the creative destruction that fire brings, new growth cannot flourish...

In an economic sense, companies that exist purely to survive/service debt (zombies) are utilising resources that could be destined for more productive endeavours instead...

Merely keeping the patient alive with low interest rates is not the path to a healthy economy...

 The @ecb cannot afford to be hawkish because of ZOMBIES 🧟‍♂️

The leverage of the Euro Stoxx 600 is at its highest since early 2000. Any increase in these companies' cost of funding could translate into a series of defaults.@SaxoStrats @saxobank pic.twitter.com/iLtGeoRNNQ— Althea Spinozzi (@Altheaspinozzi) April 21, 2021 

If we take the Covid pandemic as the fire that should have cleared our economic forest, governments & central banks wrapped the larger trees in fireproof materials with their actions...

Is this merely prolonging the inevitable...?

We haven't seen the typical economic destruction we would expect, and many companies have been able to restructure rather than go bankrupt...

Nearly 62% of U.S. corporate bankruptcy filings in 2020 sought reorganizations, the highest rate for any year going back to at least 2010, according to S&P Global Market Intelligence data.

Companies were less likely to liquidate in 2020, a departure from 2019 and 2018 when corporate liquidations outpaced reorganizations in bankruptcy filings.

As of March 30, the share of filings seeking restructuring is larger in 2021 than in 2020.

This is why the frauds have my attention...

Booms and busts are a common feature of market economies.

Almost as common is the belief that a boom encourages and conceals financial fraud and misrepresentation by firms, which are then revealed by the ensuing bust. - From this 2007 'Booms, Busts & Frauds' paper

Onto the juicy frauds...

If you've ever met a salesman, you know why they should never become risk managers: and these are the consequences 👇

Then there's the Greensill saga (summed up perfectly by this headline)

More stories coming out from Wirecard (going to make a fantastic film)

FT

In the crypto space, Elon's pumping Dogecoin to the moon, people are being offered cash to shill sh*tcoins to their followers, and a Turkish Crypto exchange CEO has apparently disappeared with $2 billion 👇

Perhaps to Thailand...

 Thodex's founder is rumored to have run off to Thailand with $2 billion of investors' money.#Thodex #Turkey #cryptocurrency pic.twitter.com/vLUXk9qE1M— CN Wire (@Sino_Market) April 22, 2021 

Then we look at China again...

It's this type of corruption & fraud that has led to the authorities clamping down with tighter regulations and a forced deleveraging...

China was long overdue, especially in their banking system...

But how much fraud is hiding in the west...?

And if these frauds continue to surface, what does that do for confidence in the system?

We saw what it meant in 2007, the credit machine ground to a halt...

The Fed stepped in to save the day, just as they did last year...

But what could they actually do if trust in the system was undermined on a wider scale?

Hwang's exposure was as much as $100 billion and his leverage ratio may have hit as high as 20x in some trades...

How many Hwang skeletons are in the financial systems' closet?