Time alone — oh, time will tell
You think you are in heaven, but you living in hell
— ‘Time Will Tell,’ Bob Marley
Where are we? Heaven or Hell?
Bermuda feels like Heaven. The sea is a bright, vivid blue, with clear water in coves and harbours. The sky is a lighter blue, with wispy clouds here and there.
The weather here seems to be much like that of Florida or the Carolina coast, but moderated by the surrounding ocean. Not so hot. Not so cold.
But the Florida coast is flat…In order to have any view at all, you either have to be right on the water or up in a high-rise. And even then, the Atlantic beach is like a ribbon running straight down the shore, with a line of houses and apartment buildings hard up against it.
Here in Bermuda, the beaches are flanked by rocks and cliffs, with rose-coloured sand…gentle hills…islands…bays…and inlets. And there are views from almost everywhere…out over the harbours, the lighthouse, and the sparkling seas.
Heaven hypothesis
The heaven hypothesis was spreading all over Wall Street and Washington yesterday, too.
Wall Street commentators were out in force explaining why last week’s sell-off was a buying opportunity. ‘Buy the dip,’ they said. And investors did as they were urged to do. The Dow popped up more than 500 points.
In Washington, too, people believe we live in a kind of Eden, with ultra-low joblessness…ever-rising stock prices…and an economy guided by the greatest financial geniuses who ever lived — Donald J Trump and his right-hand man at the Treasury, Steven Mnuchin.
The Donald’s genius is on display every day. Explaining Sears’ bankruptcy, for example, he hit the nail squarely on the head…that is, the head of his own Treasury secretary:
‘Sears has been dying for many years. It’s been obviously improperly run for many years and it’s a shame.’
Yes, it was Mnuchin and his college pal, Eddie Lampert, who ran Sears into the ground. Mnuchin was on the board from 2005 until late 2016, when he took his current job.
But that doesn’t mean they did anything improper…or dumb.
They’re smart guys. They must have realised that the old retailer was doomed.
Warren Buffett thought so 10 years ago. Buffett had some experience with retail as an owner of the old Hochschild Kohn’s department store in Baltimore, where we used to shop as a child. Once a retailer starts going down, he said, it’s almost impossible to stop it.
And Sears couldn’t compete with the likes of Walmart, Home Depot, and Target…to say nothing of Amazon.
Naturally, the two hustlers didn’t want to put money into a dying business. They wanted to get money out — as much as possible — before the old girl went down.
Then, they would leave the husk to the retail public…and lenders.
Rather than invest in new ways of doing business, for example, Sears took its earnings and distributed it to shareholders and managers — in the form of stock buybacks.
From our colleague, and budget chief for the Reagan administration, David Stockman:
‘Thus, during the seven-year span of 2006-2012 [Sears] spent $6 billion on stock buybacks — even though the company generated only $1.8 billion of operating free cash flow during the same period.’
‘In fact, during the last three years of that period (2010-2012), it actually generated cumulative free cash flow of negative $1.7 billion, but still kept repurchasing stock to the tune of $1.2 billion by borrowing.’
This worked like magic in the early stages. The stock went to $126 in 2007. Obviously, that was Heaven…and the best time to get out.
Hellish 43 cents
But Sears is a big company…and there was a lot of value to be sucked out. Brands could be sold — Kenmore and Craftsman — and retail space could be salvaged. Sears even sold billions’ worth of real estate once occupied by its stores. Some of the derelict buildings were converted into trendy apartments.
Eddie Lampert and Steve Mnuchin kept stripping off the copper flashing and recycling the hardwood floors for the next 11 years. (Mnuchin resigned from the board when he became Secretary of the Treasury.)
Now, the company is little more than a derelict shell, and its stock trades at a hellish 43 cents.
Here at the Diary, we assume Lampert and Mnuchin did the best they could. We doubt we could have done better.
But our job is to connect the dots. And you’d have to be blind not to see the connection between Sears’ demise and the Fed’s EZ-money policies.
When you can borrow money for less than the inflation rate…it won’t take sharp minds long to figure out how to get the money and put it into their own pockets.
In business, you borrow against the company…and pay out in the form of special dividends, bonuses, mergers and acquisitions, fees, stock buybacks…and other assorted hocus-pocus.
Bloomberg looked at the 50 biggest corporate acquisitions over the last five years:
‘The vast majority of the 50 deals — valued at $1.9 trillion collectively — were financed with debt.
‘This M&A-fueled leveraging of corporate balance sheets contributed to a surge in debt rated in the bottom investment-grade tier and now represents almost half of the outstanding market, Bloomberg Barclays index data show.’
It also contributed to big paydays for the insiders, who watched their stocks go up two-and-a-half times faster than GDP over the last 30 years.
Government, too, got in on the action, using tax cuts and spending increases to do the same trick. Reuters is on the case:
‘The US federal government closed the 2018 fiscal year $779 billion in the red as tax cuts hit revenues and the government paid more to service a growing national debt, according to Treasury Department data released on Monday.
‘The deficit for the fiscal year — or the 12 months through September — was the largest since 2012. […]
‘The deficit in the 12 months through September was $113 billion — or 17 percent — bigger than in the same period a year earlier.’
Let’s see, you borrow money…and you spend it. We see how that worked out for Sears.
But how will it turn out for the rest of corporate America…and the nation itself?
We wait to find out.
Regards,
Bill Bonner