A Lesson from the Twilight Zone

If you are anything like me, various episodes of the Twilight Zone, in addition to entering pop culture, provide food for thought. No, the episode where William Shatner overacts is not the one I have in mind. Shatner is even a parody of himself, but at least he embraces it!

The episode I have in mind is focused on a mild-mannered accountant. As is typical in such stories he is not happy. He receives a mysterious letter from a psychic who claims to be able to predict the outcome of The Big Fight. The psychic was right. Our hero receives another letter with another prediction, again correct. By the third letter the psychic explains his problem: he can not profit directly from his power, so he asks that he receive a portion of any winnings the accountant receives. 

The man is hooked, places a small bet, and wins. As a result of the psychic's next letter, he embezzles a large sum from his employer and makes stock market investments.  In the next-to-final scene, our hero is sitting on his yacht in a smoking jacket, drinking an adult beverage. He won!

The final scene has his coworkers discussing the psychic fraud they had read about. The "psychic" sent out thousands of letters, half of which predicted one outcome of the original boxing match, and the other half the opposite prediction. The conman would then write more letters, but only to those to whom he had made the correct "prediction." The con man knew that if he wrote a large enough number of initial letters, and kept writing to those to whom he had been correct,  the pool of correct predictions would also be large. This would give him people on whom to pull his psychic scam.

This relates to two different sub-themes here at the Prophecy Podcast.

Would-be prophets in the religious world might actually be able to string together a number of successful predictions, just by chance. Since there are a surprising number of such prognosticators, some of them are bound to be right. Of course the "prophet" will combine the technique of vagueness with not mentioning their prophetic failures. Thus a prophet is born.

Would-be economic advisers in the financial world might actually be able to string together a number of successful predictions, just by chance. Since there are a surprising number of such prognosticators, some of them are bound to be right. Of course they will combine the technique of vagueness with not mentioning their predictive failures. Thus a economic guru is born.

Do I need to name names? I think each of us can think of some examples. Sometimes the con is not even that sophisticated. Thus we have the joke about the economic adviser who predicted 5 of the last 3 recessions. 

People also forget about the colossal bonehead mistakes that these "prophets" make. One particular adviser I read over 20 years ago--who out of politeness shall remain nameless--was constantly predicting that the dotcom mania of the late 90's was just that--a mania. He was right. But I guess he got tired of the money that those who ignored his advice received. Right at the top of the mania, he urged his newsletter subscribers to buy Internet stocks. This was one of the worst calls in modern times. He had to resign. But guess what--a decade later he is back as editor of the same newsletter. (Note that I am not saying one can not have a financial advisor.) 

Do not be fooled by the magical thinking of religious or economic gurus. They don't know any more than you do--probably less.

 

Corporate Profits

In his blog, Mish Shedlock quotes from the Wall Street Journal. If you want to read the whole article you can subscribe or google the title, click on the link, and read it for free. This works for all wsj articles. 

Quarterly profits and revenue at big American companies are poised to decline for the first time since the recession, as some industrial firms warn of a pullback in spending.

From railroads to manufacturers to energy producers, businesses say they are facing a protracted slowdown in production, sales and employment that will spill into next year. Some of them say they are already experiencing a downturn. 

“The industrial environment’s in a recession. I don’t care what anybody says,” Daniel Florness, chief financial officer of Fastenal Co. , told investors and analysts earlier this month. A third of the top 100 customers for Fastenal’s nuts, bolts and other factory and construction supplies have cut their spending by more than 10% and nearly a fifth by more than 25%, Mr. Florness said.

Caterpillar Inc. last week reduced its profit forecast, citing weak demand for its heavy equipment, and 3M Co. , whose products range from kitchen sponges to adhesives used in automobiles, said it would lay off 1,500 employees, or 1.7% of its total, as sales growth sagged for a wide range of wares.

The weakness is overshadowing pockets of growth in sectors such as aerospace and technology.

Profit and revenue are falling in tandem for the first time in six years, with a third of S&P 500 companies reporting so far. Analysts expect the index’s companies to book a 2.8% decline in per-share earnings from last year’s third quarter, according to Thomson Reuters.

Sales are on pace to fall 4%—the third straight quarterly decline. The last time sales and profits fell in the same quarter was in the third period of 2009.

Wal-Mart recently warned its sales this year are likely to be flat, down from projection of as much as 2% growth, and cut its earnings forecast for next year as it raises wages. The retailer blamed the strong dollar for the weakening sales growth.

And truckload carriers have warned that they aren’t witnessing the usual uptick in retailer demand as the holiday season approaches, thanks to stubbornly high inventories, said Alex Vecchio, a transportation analyst at Morgan Stanley. “Transportation companies are typically a leading indicator, and our data is not good,”Mr. Vecchio said.

I read Mish regularly and find his views interesting, and he thinks corporate profits are headed down. I think so too, but that is not the focus of this post. Nor is the focus illegal misstating or manipulation of income. Instead I want to focus on legal manipulation of income. Since corporate officers salaries are usually based on making a set profit number, there is high incentive to use both legal and illegal techniques to increase profits. My view is that the last crisis was exaggerated in depth by these practices. 

One way this is done is to borrow money to buy back shares in the company. Since interest rates are low right now this results in a increase in profits. The total profits might remain the same, but those same profits are spread over fewer shares. For example a hypothetical corporation might have a profit of 100 with ten shareholders. Each shareholder gets 10. The corporation borrows enough money to buy one share. Maybe the new profit is 97 after interest, but this profit will now be spread over 9 shares so instead of a 10 profit for the each share, it will 97/9 or a profit of 10.78. A company that does this consistently is one you want in your portfolio. This is an increase of almost 8%. The corporation's health is less, but the share price would go up. A corporation can either go the traditional route and actually increase profits, or load up the corporation with debt, buy back shares and in some cases get a nice salary bump for its officers.  Do you care to guess what many corporations are doing? Have you ever wondered why all the Radio Shacks are closing? While there are other factors involved as well, Radio Shack has been a "poster boy" for this risky practice. 

Can you trust corporate profit numbers? Mostly you can, but you need to understand that there are ways, legal and illegal, to manipulate profit. 

Is this Prophetic For Today's vote in Greece?

Karl Denninger Interview

Click here for the interview. 

Hyperinflation?

While I am a fan of Kotlifoff's work on the understated liabilities of the U.S. Government, hyperinflation seems unlikely. For that matter, severe deflation seems unlikely as well. 

I think that we will have a crisis. These kind of things happen every 8 years or so. The last one was in 2008. The one before that was 2000. Before that is was 1992, although that one was rather mild. This type of crisis seems to be getting worse. So if the pattern continues, we should expect another crisis in 2016.

Personally I think it will be in 2017, as the election in 2016 will delay things.

 

I think President Clinton will overreact and makes things worse so, putting on my Amazing Kreskin hat, I predict deflation in 2017 followed by inflation similar to the seventies.