Confirming once again that economic sentiment always follows markets, earlier today the International Monetary Fund published its latest semi-annual World Economic Outlook report in which it put an end to its recent gloom (in keeping with the meltup in global stock markets), and raised its outlook for the world economy in 2023, estimating that risks have eased in recent months after the US averted a default and authorities have postponed a banking crisis.

“The recent resolution of the US debt ceiling standoff and, earlier this year, strong action by authorities to contain turbulence in US and Swiss banking, reduced the immediate risks of financial sector turmoil,” the IMF said. “This moderated adverse risks to the outlook.”

Global GDP will grow 3% in 2023, the IMF said in its world Outlook report released Tuesday. While that’s still a slowdown from 3.5% growth last year, it’s faster than its 2.8% projection in Apri; for 2024 the IMF sees the global economy stagnating, indicating the risk of a global recession has faded at least according to the IMF, which however is always wrong, so if anything the IMF’s “cautious optimism” is cause of worry.

Drilling down into the report we find:

• IMF expects the US to grow 1.8% this year, a 0.2% increase from April, before slowing to 1% in 2024.
• China is seen growing 5.2% this year, unchanged from its prior projection. However, it warned that the nation’s recovery following the post-pandemic reopening at the beginning of this year is slowing, in part due to softness in the real estate industry that’s hurting investment, as well as weak foreign demand and rising youth unemployment.
• Curiously, Saudi Arabia is expected to suffer the biggest growth slowdown, as GDP growth tumbles from 8.7% in 2022 to just 1.9%, a 1.2% cut from the last forecast, reflecting a drop in the price of oil and oil-output cuts announced in April and June
• UK GDP forecast was boosted by 0.7% to a 0.4% expansion, on better-than-expected consumption, falling energy prices, lower post-Brexit concerns and a resilient financial sector
• Russia GDP also increased by 0.8% point to 1.5% growth, reflecting a strong first half of the year among retail trade, construction and industrial production, driven by fiscal stimulus
• Brazil GDP was upgraded 1.2% points to a 2.1% expansion after a surge in agricultural output early in the year, which also helped lift activity in services
• Germany is the only country projected to be in recession in 2023 when its GDP contracts 0.3%, compared with a prior forecast for a 0.1% drop, on weak manufacturing output and an economic contraction in the first quarter

Yet despite the modestly more optimistic global view, the IMF warned that prospects for growth look weak compared with the 3.8% average during the two decades prior to the Covid-19 pandemic and that “the balance of risks to global growth remains tilted to the downside.”

According to the DC-based fund, higher interest rates, which are helping to tame inflation, will weigh on activity, something we already saw in the record drop in European loan demand.

Additional shocks like an intensifying of the war in Ukraine and “climate disasters” could spur even more central-bank tightening. Indicatively, compared to the IMF, Bloomberg Economics’ outlook is more subdued: its base case is for global GDP growth of 2.8% in 2023, dipping to 2.7% in 2024 – down from 3.3% in 2022 and below the pre-pandemic trend of 3.4%.

The IMF also cited continued risks to financial stability driven by i) higher rates, ii) a slower-than-expected recovery in China, iii) debt distress in emerging economies and iv) threats to trade from geoeconomic fragmentation, which has accelerated due to the Ukraine war and the growing cold war between Washington and Beijing.

Even as tighter monetary policy takes a bit out of growth, the priority in most economies remains achieving sustained disinflation, the IMF said, adding that central banks should stay focused on restoring price stability and strengthening financial supervision and risk monitoring. That’s expected to play out this week, when both the Fed and ECB are set to raise interest rates further.

As a result, the IMF sees inflation slowing to 6.8% this year, compared with a 7% forecast in April, and down from 8.7% in 2022. At the same time, the fund also raised its projection for cost-of-living increases in 2024 by 0.3% point to 5.2%, saying that it expects core prices, which exclude food and energy, to cool more gradually than before.

Advanced economies are driving the slowdown in global growth from last year’s 3.5%, the IMF noted, particularly as weaker manufacturing offsets services. Meanwhile, activity in developing and emerging economies is seen stable this year and next, it said.

In an interview with the Financial Times, IMF chief economist Pierre-Olivier Gourinchas said the economic outlook had improved since the multilateral lender last published its projections in April amid a bout of banking sector stress.

“Things are moving in the right direction,” he said, adding there was now less danger of global growth slipping to 2% or below, since the most acute financial risks had abated (again: the IMF – like the Fed – is always wrong in its forecasts so this should be reason for great concern).

Besides inflation, the IMF cautioned that debt distress across developing economies remains a top concern despite emerging countries on the whole remaining “resilient” to financial market volatility

Another  fear is that, despite sharp falls in headline rates, strong labor markets and potent consumer demand will make inflation hard to fully root out. That will mean central banks will have to keep tightening their monetary policy screws.

Gourinchas anticipated little reprieve from rate-setters even as the era of “outsized hikes” comes to a close. “We are nearing the peak of the hiking cycle, but we’re not quite there yet,” he said. “We’re going to see central banks holding where they are until they are confident enough that the economy is on the right track.”

If central banks keep interest rates higher for longer than investors currently expect, “you might have at some point the market realising that [its expectations of borrowing costs are] a bit misaligned”, Gourinchas said.

At the moment markets expect central banks such as the Fed to begin cutting rates around the turn of this year. If those bets prove incorrect, “that would lead to some repricing and then you could get a chain of events that creates some volatility”.

New video from January 6, 2021 suggests that Capitol Police Officer Aquilino Gonnell ‘has lied about his injuries’ sustained on that day, journalist Julie Kelly notes on Twitter.

Gonnell notably retired last December, citing the ‘trauma’ of the riot in his resignation letter.

“It is with immense sadness that I announce my formal separation from the Department effective December 17, 2022 to continue to focus on healing, both physically and mentally, from injuries I sustained in the line of duty on January 6, 2021,” he wrote, adding “After speaking with my orthopedic doctor, my mental health providers, and my family, I think it’s in my best interest to take time off away from the daily reminders that keep re-triggering my trauma.”

Kelly suggests Gonnell is vastly exaggerating (lying about) his physical injuries (emphasis ours);

New J6 video contradicts Gonell’s claims that protesters inflicted head, shoulder, hand, and foot injuries so egregious that he required surgery and medical leave. (Not to mention “mental health” trauma.)

In a victim impact statement made in court in May, Gonell told the judge that he was “bleeding from both hands, [had] a maimed foot, hit on the head, sprayed with pepper and bear spray, beaten, punched, pushed, pulled, and assaulted by many other rioters as they try to gain entrance.”

Here he is for several minutes near the body of Rosanne Boyland at around 4:50 on Jan 6, after the protest and violence ended. His hands show no sign of injury. Nor does his shoulder, as he takes off gear.

His feet seem fine--he is seen kicking items out of the area. And his head, which had been protected by a riot helmet, shows no sign of injury, either.

Not only did Gonell lie to Congress and federal judges in “victim impact” statements, he has repeatedly lied during media interviews and on social media about his experience.

Watch:

BREAKING VIDEO: For 2 1/2 years, Capitol Police officer Aquilino Gonell has lied about injuries he sustained on Jan 6.

He has testified under oath and in federal court proceedings that he suffered near-death injuries.

New J6 video contradicts Gonell’s claims that protesters… pic.twitter.com/UvQvhES1h5

— Julie Kelly 🇺🇸 (@julie_kelly2) July 24, 2023

Kelly continues;

Part of Gonell’s sworn testimony to J6 committee in July 2021. “This is how I’m going to die.”

Gonell also lied about trying to save Rosanne Boyland.

There is no video of him attempting to resuscitate her at any point. Further, video of Rosanne’s lifeless body at 4:27 does not… pic.twitter.com/qNOJKvqnPg

— Julie Kelly 🇺🇸 (@julie_kelly2) July 24, 2023

After Republicans won the House and threatened numerous investigations including into Jan 6, Ofc Gonell retired. He again lied about what happened: pic.twitter.com/zK4ETIwPzf

— Julie Kelly 🇺🇸 (@julie_kelly2) July 24, 2023

Sociopathic liar

— Julie Kelly 🇺🇸 (@julie_kelly2) July 24, 2023

Now we know why they treated the Boyland family so horrifically.

ICYMI

😠https://t.co/rSbw3TsKfx

— Golden Advice 🇺🇲🇺🇲🇺🇲 (@RichardStiller4) July 24, 2023

He’s lucky that he’s a Democrat otherwise he would be in prison for lying under oath

— 🤐The Silenced Majority 🤐 (@DsCorrupt) July 25, 2023

Authored by David Stockman via The Brownstone Institute,

Here is a large caliber smoking gun. The BEA series for real personal income less transfer payments is a pretty serviceable proxy for private market output before the impact of Washington stimmies and distortions caused by transfer payments and government borrowing. After all, earned income – wages, salaries, bonuses, profits, interest and dividends – is the payment to factors of production for output and therefore its reciprocal.

The long-term trend is slouching definitively southward. Since the pre-lockdown peak in February 2020, in fact, the growth rate has slowed to just 17 percent 0f its pre-2000 average.

Per Annum Growth of Real Personal Income Less Transfer Payments:

• Feb. 1960 to Feb 2000: +3.62 percent;

• Feb. 2000 to Feb. 2020: +2.08 percent;

• Feb. 2020 to May 2023: +0.61 percent.

It doesn’t take a lot of cogitation to explain this dismal trend. The US economy is freighted down with debt and it is also short of labor, riddled with non-productive speculation and financial engineering and starved for productive investment. Taken together, those malign forces were more than enough to slow the underlying growth of the US economy to a crawl.

To be sure, the government reports slightly higher real GDP growth than the tepid 0.61 percent figure displayed above. During the equivalent 3.25 year period between Q4 2019 and Q1 2023, in fact, the per annum growth of real GDP posted at 1.61 percent. That’s still nothing to write home about, but it is considerably better than the pittance of gain private producers have produced and earned since the pre-Covid peak.

The difference, of course, is owing to the wonders of GDP accounting. That is, huge transfer payments from producers to non-producers and massive Federal spending and borrowing and its monetization at the Fed’s printing presses do give rise to additional GDP in an accounting sense and for the time being.

Alas, heavily taxing producers today and threatening even more future taxation to service the ballooning public debt isn’t a source of sustainable growth. It simply steals economic resources from the future.

For avoidance of doubt, consider the chart below. It shows that between Q4 2019 and Q1 2023 the public debt (blue line) increased by $8.26 trillion—a figure equal to 1.70X the $4.82 trillion gain in nominal GDP (brown line).

Needless to say, you don’t need a slide rule or even an abacus to project where that would lead. After just 12 years at these rates of growth the public debt would be $100 billion compared to just $52 billion of GDP—even as debt service exploded.

Indeed, we can’t see how the weighted average cost of debt could be held to even 6 percent under a scenario in which the Fed’s printing presses remain on idle because the inflationary cat is now out of the bag. That is to say, at the rate of public debt growth during the past 3.25 years, interest on the public debt would likely reach $6 trillion per annum over the next decade or so—a figure roughly equal to the total level of current Federal outlays.

In short, long before 12 years had elapsed, the system would go tilt. Even the tepid growth of real GDP recorded since the 4th quarter of 2019 cannot possibly support a Federal debt that is literally exploding higher at a compounding rate of gain.

Change In Public Debt Versus GDP, Q4 2019 to Q1 2023

Undoubtedly, the usual suspects or apologists for Washington’s fiscal disaster will counsel not to worry—the Fed will print the money, if need be.

We’d say not so fast. The Fed has printed its way into a hellacious corner. During the same 3.25 year period in which the public debt exploded by $8.26 trillion, the Fed’s balance sheet soared by $4.45 trillion. That means more than 55 percent of those massive gains in the public debt were monetized by the central bank.

Needless to say, the Fed is now, finally, on a balance sheet shrinkage campaign—$95 billion per month—that still has miles and miles to go. Despite Wall Street’s desperate hopes, there simply won’t be a Pivot to money printing for years to come, even as the US economy sinks into a prolonged stagflation.

And that means, in turn, that the $2-$3 trillion annual deficits now baked into the cake through the end of this decade will perforce need to be financed in the bond pits, not at the printing press. Accordingly, the weighted average yield on the Federal debt is heading relentlessly higher because the law of supply and demand has not been repealed.

Balance Sheet Of The Federal Reserve, Q4 2019 to Q1 2023

For want of doubt, here is the current run rate of the true inflation core as measured by the 16 percent trimmed mean CPI. Inflation is still running at 5 percent, meaning that the Fed will be in no position to resume its bond buying campaign anytime soon.

Y/Y Change In 16% Trimmed Mean CPI, 2012 to 2023

Then again, if the estimated $25 trillion of new government deficits over the coming decade are not financed at the central bank printing press, they will need to be absorbed out of the private savings pool.

Net National Savings As A Percent Of National Income, 1948 to 2023

We’d say good luck with that. Household and corporate savings have withered and government entities have already absorbed what’s left. The only way to clear the markets, therefore, is via soaring yields and crowding out of private investment, and with a vengeance at that.

*  *  *

Reposted from the author’s private service

Authored by Chris Menahan via Information Liberation,

Donald Trump voters view racism against whites as a bigger problem than racism against blacks, according to a new YouGov poll.

From Yahoo News, “Poll: Trump voters say racism against white Americans is a bigger problem than racism against Black Americans”:

The survey of 1,638 U.S. adults, which was conducted from July 13-17, shows that among 2020 Trump voters, 62% say that racism against Black Americans is a problem today — while 73% say that racism against white Americans is a problem.

Asked how much of a problem racism currently is, just 19% of Trump voters describe racism against Black Americans as a “big problem.” Twice as many (37%) say racism against white Americans is a big problem.

Trump voters and self-identified Republicans — overlapping but not identical cohorts — are the only demographic groups identified by Yahoo News and YouGov who are more likely to say racism against white Americans is a problem than to say the same about racism against Black Americans. A majority (51%) of white Americans, for instance, think racism against people who look like them is a problem — but overall, far more white Americans (72%) say racism against Black Americans is a problem.

The poll found 77% of those who prefer Trump for 2024 view racism against whites as a problem. Among independents, 49% said racism against whites was a problem vs 43% who said it was not.

How are Republicans going to address these concerns? The overwhelming majority of elected Republicans are completely silent on the issue and are only willing to criticize vague concepts like “wokeness” and “critical race theory.”

For his part, Trump managed to stack the Supreme Court and gut affirmative action. In part as a result of that ruling, a Trump-appointed district judge in Tennessee struck down the Department of Agriculture and Small Business Administration’s race-based contracting schemes favoring minority-owned businesses.

American consumers’ confidence was expected to extend its recent rebound in this morning’s Conference Board survey and it did – bigly!

The Conference Board’s Consumer Confidence headline print jumped to 109.7 from 102.5 (far above its 104 exp) – the highest since July 2021. Under the hood, both the Present situation (rose to 160.0 from 155.3 in June) and Expectations index (rose to 88.3 from revised 80 in June) jumped with Present situation at its highest since the COVID lockdowns…

Source: Bloomberg

Despite rising interest rates, consumers are more upbeat, likely reflecting lower inflation and a tight labor market. Although consumers are less convinced of a recession ahead, we still anticipate one likely before year-end.

“Consumer confidence rose in July 2023 to its highest level since July 2021, reflecting pops in both current conditions and expectations,” said Dana Peterson, Chief Economist at The Conference Board.

“Headline confidence appears to have broken out of the sideways trend that prevailed for much of the last year. Greater confidence was evident across all age groups, and among both consumers earning incomes less than $50,000 and those making more than $100,000.”

Meanwhile, June’s results show consumer inflation expectations over the next 12 months dropped to 5.70% – its lowest since Oct 2020…

Source: Bloomberg

The Conference Board’s measure of labor market tightness eased slightly more last month (more jobs plentiful vs hard-to-get)…

Source: Bloomberg

When asked about current family financial conditions (a measure not included in calculating the Present Situation Index), the share of respondents citing a ‘good’ situation rose, and those citing ‘bad’ conditions fell, signaling still-healthy family finances. This might reflect softening inflation and continued income support from employment.

However, “The proportion of consumers saying recession is “somewhat” or “very likely” to occur ticked up in July, contrary to the Expectations Index spiking this month above the threshold of 80. Still, recession expectations remained below their recent peak, suggesting fears of a recession have eased relative to earlier this year.

In its quarterly survey of 158 big banks, the European Central Bank (ECB) said that demand for loans from businesses over the last three months fell at the fastest pace on record (the time series began in 2003) and banks tightened their credit standard to consumers over the last three months.

Via The ECB:

The decline was again substantially stronger than expected by banks in the previous quarter. The net decrease in loan demand was the strongest since the start of the survey in 2003 for SMEs (net percentage of -40%, see Chart 7), while the net decrease in demand for loans to large firms (net percentage of -34%) remained slightly more limited than during the global financial crisis. In addition, the net decrease in demand was the strongest over the history of the survey for long-term loans (-46%), while demand for short-term loans decreased to a lesser extent (-22%) but still close to the historical low of the global financial crisis.

Rising interest rates and declining fixed investment remained the main drivers of the net decrease in loan demand (see Chart 6). Lower financing needs for M&A activity (included in “other financing needs”), available internal funding with improved corporate profits, and, to a smaller extent, debt securities issuance (included in “use of alternative finance”) contributed to firms’ reduced loan demand. There was also a small dampening impact on loan demand from inventories and working capital.

For both SMEs and large firms, the general level of interest rates and firms’ financing needs for fixed investment were the main drivers of reduced loan demand (see Chart 7).

While the percentage of banks reporting tighter credit standards was smaller than in the previous quarter, it remained above the survey’s historical average and came on top of already substantial tightening, the central bank said.

Demand for mortgages also dropped sharply, though not as much as the “very large” decrease in the previous two quarters, but a further moderate drop is likely during the third quarter, the ECB added.

Banks said that their stock of non-performing loans (NPL) also pushed them to tighten credit standards.

While NPL ratios have not changed substantially, banks’ perception of refinancing and repayment risk increased, the ECB added.

Banks expect to continue tightening credit standards this quarter.

With both credit standards tightening and demand for loans weakening, investment activity is set to weaken further – theoretically helping The ECB’s efforts to tamp down sticky inflation (but certainly not helping any hopes of any economic renaissance in the region).

And Germany’s IFO data did nothing to help, confirming yesterday’s ugly PMIs. The expectations component gives a reliable lead on German growth, and points to re-weakening of the economy after the technical recession in 4Q22 and 1Q23.

While this news is unlikely to impact this week’s decision to hike rates, we are already seeing the odds of a September ECB hike falling dramatically this week (following PMIs, IFO and now the lending survey)…

Finally, we ask, will we see the same loan-demand-crash in The Fed’s SLOOS data (due imminently) which, we note with anxious anticipation, The Fed will have seen before tomorrow’s FOMC statement. A look at the ‘actual’ reported loan volumes reported by banks shows the last few weeks have seen ‘normal’ variations (some might argue smaller levels than pre-SVB), but certainly no collapse…

But, given The Fed’s warning issued to banks who appear to not be reporting their uninsured deposits correctly, who’s to say they are reporting their loan data correctly?

The FDIC hit out at some US banks for incorrectly reporting the amount of their uninsured deposits, after dozens of lenders restated their figures downward earlier this year. The regulator said banks were wrong to exclude deposits that were collateralized by pledged assets. The level of uninsured deposits at banks came into focus after the collapse of SVB and Signature Bank.

When there’s no consequences, what does it really matter? As long as the end-result provides ammo for the Biden administration’s claims that ‘everything is awesome’ – ‘most jobs created ever’ – and so on – then who is going to argue?

But, what if? What if SLOOS shows a massive credit tightening (from the demand side) like in Europe? Will that be the final straaw to get us back to all-time highs in stocks because The Fed may have to lift its boot from the neck of the real economy.

Authored by Lance Roberts via RealInvestmentAdvice.com,

No matter what happens, financially or economically, there is always a high number of companies regularly beating Wall Street estimates. Are Wall Street analysts that poor at predicting future corporate earnings, or is there something else potentially going on? Furthermore, what does that mean for investors using those estimates in making investment decisions?

As noted in “Trojan Horses,” analysts are always wrong, and by a large degree.

“This is why we call it ‘Millennial Earnings Season.’ Wall Street continuously lowers estimates as the reporting period approaches so ‘everyone gets a trophy.’” 

The chart shows the estimated changes for the second quarter of 2023 from February 2022.

“An easy way to see this is the number of companies beating estimates each quarter, regardless of economic and financial conditions. Since 2000, roughly 70% of companies regularly beat estimates by 5%. Again, that number would be lower if analysts were held to their original estimates.”

As shown, for companies to win the “beat the estimate game,” they need the bar lowered far enough to ensure they can clear it. If not for these downward revisions in analysts’ estimates, the majority of companies would miss, rather than beat, estimates. Such would obviously weigh on stock price performance which directly impacts executive compensation due to the now standard practice of using stock options.

Read that last sentence again.

Inherent Conflict Of Interest

There is an inherent conflict between Wall Street, corporate executives, and individual investors. As stated, there are billions at stake for executives and Wall Street, and the “beat the Wall Street estimate” game is critical in keeping corporate stock prices elevated. Unfortunately, this leads to a wide variety of gimmicks to boost bottom-line profitability, which is not necessarily in the best interest of long-term profitability or shareholders.

In a study by Lawrence Brown, Andrew Call, Michael Clement, and Nathan Sharp, it is clear that Wall Street analysts are clearly not that interested in your financial well-being. The study surveyed analysts from the major Wall Street firms to try and understand what went on behind closed doors when research reports were being put together.

In an interview with the researchers, John Reeves and Llan Moscovitz wrote:

“Countless studies have shown that the forecasts and stock recommendations of sell-side analysts are of questionable value to investors. As it turns out, Wall Street sell-side analysts aren’t primarily interested in making accurate stock picks and earnings forecasts. Despite the attention lavished on their forecasts and recommendations, predictive accuracy just isn’t their main job.”

The chart below is from the survey conducted by the researchers, which shows the main factors that play into analysts’ compensation. It is clear that what analysts are “paid” to do is quite different from what retail investors “think” they do.

“Sharp and Call told us that ordinary investors, who may be relying on analysts’ stock recommendations to make decisions, need to know that accuracy in these areas is ‘not a priority.’

‘The part to me that’s shocking about the industry is that I came into the industry thinking [success] would be based on how well my stock picks do. But a lot of it ends up being ‘What are your broker votes?’

A ‘broker vote’ is an internal process whereby clients of the sell-side analysts’ firms assess the value of their research and decide which firms’ services they wish to buy. This process is crucial to analysts because good broker votes result in revenue for their firm. One analyst noted that broker votes ‘directly impact my compensation and directly impact the compensation of my firm.’”

The question becomes, “If the retail client is not the firm’s focus, then who is?” The survey table below clearly answers that question.

Not surprisingly, you are at the bottom of the list. The incestuous relationship between companies, institutional clients, and Wall Street is the root cause of the ongoing problems within the financial system. It is a closed loop portrayed as a fair and functional system; however, in reality, it has become a “money grab” that has corrupted the system and the regulatory agencies that are supposed to oversee it.

4 Tools To Win The “Beat The Estimate Game”

However, the analysts are only one-half of the equation. The other half comes from corporations.

Since 2009, the reported earnings per share of corporations has increased by an astounding 544%. Such is the sharpest post-recession increase in history. However, reported sales per share, which is what happens at the top line of the income statement, has only risen by a marginal 104%.

In order for profitability to surge, corporations have resorted to four primary tools:

• Wage growth suppression,

• Productivity increases,

• Labor reduction via offshoring; and,

• Stock buybacks.

The problem is that these tools create a mirage of corporate profitability. None of these tools increase revenue growth which comes from economic activity. A good way to visualize the issue is the two charts below, which compare corporate profitability to the number of workers and wages.

It is worth noting that when the profits-to-wages ratio starts spiking higher, it historically aligns with economic recessions. Not surprisingly, during recessionary periods, corporations act to protect profitability. They do this by reducing wages and the labor force (the highest costs to any business.) Those cost-cutting measures are supplemented by share buybacks to increase earnings per share for reporting purposes.

The problem with this, of course, is that stock buybacks create only the illusion of profitability. If a company earns $0.90 per share and has one million shares outstanding – reducing those shares to 900,000 will increase earnings per share to $1.00. No additional revenue was created, and no more product was sold; it is simply “accounting magic.” 

Such activities do not spur economic growth or generate real wealth for shareholders. However, they boost asset prices to increase executive compensation.

Such is why the “wealth gap” between workers and executives has soared since the financial crisis.

If You Can’t Make It. Fake It?

While Wall Street hopes for an improvement in earnings, there may be more to the story. Many companies have offset earnings growth with cost-cutting measures. The problem with cost cutting, wage suppression, labor hoarding, and stock buybacks, along with a myriad of accounting gimmicks, is that there is a finite limit to their effectiveness.

More importantly, Wall Street knows this already, and it should not be surprising that companies manipulate bottom-line earnings. By utilizing “cookie-jar” reserves, heavy use of accruals, and other accounting instruments, they can either flatter or depress, earnings.

“The tricks are well-known: A difficult quarter can be made easier by releasing reserves set aside for a rainy day or recognizing revenues before sales are made, while a good quarter is often the time to hide a big “restructuring charge” that would otherwise stand out like a sore thumb.

What is more surprising though is CFOs’ belief that these practices leave a significant mark on companies’ reported profits and losses. When asked about the magnitude of the earnings misrepresentation, the study’s respondents said it was around 10% of earnings per share.“

As I stated at the beginning, the reason that companies do this is simple: stock-based compensation. Today, more than ever, many corporate executives have a large percentage of their compensation tied to company stock performance. A “miss” of Wall Street expectations can lead to a large penalty in the company’s stock price. It is unsurprising that 93% of the respondents pointed to “influence on stock price” and “outside pressure” as reasons for manipulating figures.

Note: For fundamental investors this manipulation of earnings skews valuation analysis particularly with respect to P/E’s, EV/EBITDA, PEG, etc. Revenues, which are harder to adjust, may provide truer measures of valuation such as P/SALES and EV/SALES.

(Read “Why EBITDA Is BS.)

Conclusion

So, as we delve into the Q2 earnings season, we must remain aware of what is real and what isn’t.

To win the “Beat The Estimate Game,” focus on the quality, rather than the quantity, of earnings. As was pointed out previously by the WSJ:

“First and foremost, investors should keep an eye on cash flow: Strong earnings when cash flow deteriorates may be a sign of trouble. The advantage of this approach is that, unlike some of the other warning signs, it is easily measurable, arming the investors and analysts who do their homework with strong ammunition against management.

Secondly, stark deviations from the earnings recorded by the company’s peers should also set off alarm bells, as should weird jumps or falls in reserves.

The other potential problem areas are more subjective and more difficult to detect. When, for example, the chief financial officers urge stakeholders to be wary of ‘too smooth or too consistent’ profits or ‘frequent changes in accounting policies,’ they are asking them to look at variables that don’t necessarily point at earnings (mis)management.”

As the quarterly ritual of earnings season proceeds, we would do well to remember the words of the then-chairman of the Securities and Exchange Commission, Arthur Levitt, in a 1998 speech entitled “The Numbers Game.”

“While the temptations are great, and the pressures strong, illusions in numbers are only that—ephemeral, and ultimately self-destructive.”

Couldn’t have said it better myself.

The Pentagon has announced a new major incident involving Russia over the skies of Syria, after a string of hostile close encounters between Russian fighter jets and US drones which were ostensibly conducting ‘counter-ISIS’ missions.

The military says a US MQ-9 Reaper drone was damaged after being intercepted and harassed by an Su-35 fighter, during which time the Russian warplane released flares close to the American drone.

Only unveiled Tuesday, which included release of video of the incident, the encounter happened Sunday, presumably over or near eastern Syria, where Washington has for years maintained a troop presence, and has occupied Syria’s oil and gas fields.

US officials say a Russian and Iranian campaign is in full swing towards pressuring the US to retreat from the region and halt its military operations. Russian intercepts of US drones have now occurred several times over the last months, with the US each time condemning “unsafe” and “irresponsible”, threatening maneuvers.

Concerning the new incident, “The U.S. drone managed to limp back to its base in the region but its propeller was damaged, according to U.S. officials who issued photos and video of the encounter,” writes The Wall Street Journal. The military statement described the drone as “severely damaged”—which is a significant first in Syria.

“One of the Russian flares struck the U.S. MQ-9, severely damaging its propeller,” Lt. Gen. Alexus Grynkewich, the top U.S. Air Force commander in the region, said. “Fortunately, the MQ-9 crew was able to maintain flight and safely recover the aircraft to its home base.”

WATCH:

⚡️The US Air Force Central Command reports that on July 23, in the skies over Syria, a Russian Su-35S fighter aircraft performed “unsafe maneuvers” near an MQ-9 Reaper reconnaissance and strike UAV. pic.twitter.com/sgo7mfXXJu

— War Monitor (@WarMonitors) July 25, 2023

But Moscow has issued a counternarrative, saying that it is actually reckless US aircraft nearly colliding with Russian jets, which have a right to be in Syrian skies at the invitation of the Assad government.

Early this month the Pentagon said there were three Russian intercept incidents of US drones during three consecutive days. It appears a Russian pressure campaign which has ratcheted particularly since Moscow’s invasion of Ukraine last year.

These ‘harassment’ episodes over Syria appear very similar to the March 14, 2023 event closer to Russia which resulted in an American MQ-9 Reaper drone crashing into the Black Sea. A Russian Su-27 fighter jet had intercepted and damaged the drone, at one point dumping fuel on it in mid-air flight. The drone then had to be crash landed in the waters below, and was lost.

In Syria, the US administration has justified any and all US military actions as based on “countering ISIS” – even though the Islamic State has long been driven underground and was defeated. Russia and Syria have charged that the US really just wants to steal Syria’s oil and gas resources, as part of the continued economic war against Damascus.

Al-Monitor report: Russia🇷🇺 and Iran🇮🇷 are coordinating their forces to pressure the United States to withdraw its occupation troops from Syria🇸🇾, where US troops are occupying the one-third of Syria which contains 80% of Syria’s oil and most of the nation’s wheat production. pic.twitter.com/hOmRs1ntV7

— Going Underground (@GUnderground_TV) July 16, 2023

The Pentagon has also lately been reemphasizing this counter-ISIS mission: “We urge Russian forces in Syria to cease this reckless behavior and adhere to the standards of behavior expected of a professional air force so we can resume our focus on the enduring defeat of ISIS,” it said.

But Damascus, Moscow, and Tehran have pointed out that ISIS grew out of and was fueled by the NATO-Gulf regime change efforts to oust Assad, which started in 2011 and 2012, destroying much of Syria and resulting in mass killings. Meanwhile, millions of Syrians of all political orientations are still starving and suffering under US-led sanctions, with severe electricity and fuel shortages to boot.

Authored by Patricia Devlin via The Epoch Times,

Albanian organised crime gangs (OCG) are now dominating the UK’s cocaine supply networks, with small boat arrivals contributing to the gangs’ growing networks, a former police chief has said.

Tony Saggers, who headed up the National Crime Agency’s (NCA) Drugs Threat and Intelligence department, said Albanian gangsters have been able to gain considerable control in Britain’s booming drugs trade by slashing their own wholesale profits to undercut rivals.

Their “non-greed” approach—which differs greatly from British OCGs—has led to the foreign gangsters becoming the “preferred supplier” in the UK, Mr. Saggers told The Epoch Times.

The insight into the gangs’ growing influence comes just days after the government revealed authorities had seized record hauls of the Class A drug last year.

The Harm to Hope report—part of the UK’s new ten-year drug strategy—said 19 tonnes of cocaine had been seized by authorities in 2022—the highest number for a single year on record.

The figures come just months after the United Nations (UN) warned Albanian criminals are exerting “excessive” control of the UK’s drug trade—with the ability to ship in huge illicit consignments of cocaine via southeast England seaports.

The UN’s Office on Drugs and Crime  (UNODC) said in its 2023 report (pdf) that migration from Albania has allowed gangs to set up in key cities across Europe and take over trafficking networks.

“They rely on a vast network of associates among the Albanian diaspora abroad and often work in conjunction with Italian criminal groups,’ it said.

The UNODC added, “The important destination of the United Kingdom, where Albanian-speaking groups have also been assessed to exert considerable control across the drug market, is also supplied to a large extent via ‘roll-on, roll-off’ freight reaching ports in the south-east of the United Kingdom from nearby European ports.”

‘Non-Greed’ Approach

“Albanian organised crime adopts a different approach to controlling drug markets, than I have generally experienced from their British counterparts,” Mr Saggers told The Epoch Times.

“In the early days of growing cocaine trafficking dominance, they were highly competitive, driving wholesale prices down and prioritising unadulterated quality, value for money and reliable delivery.

“They systematically reduced wholesale prices in the wider market by settling for lesser profit margins per kilogram.”

The threat, risk and harm consultant, who spent more than 30 years fighting crime in the UK, said the gangs increased competitiveness by moving “upstream” to dominate in The Netherlands and then on to Latin America, where they are now able to buy in bulk for far cheaper, expanding their profit margins.

“By importing direct to the UK, or even via continent-Europe, they greatly increased their revenue while continuing to keep kilogram prices low,” he explained

“By adopting this non-greed focused approach they became the preferred supplier for UK-based OCGs.”

However, the record-breaking levels of cocaine seizures in the UK may not be directly linked to Albanian gangs’ influence on the British drug trade.

Mr. Saggers said that although a growing cocaine market has led to greater volumes imported to the UK, the record numbers are most likely down to “law enforcement focus and resources” following the disruption of the encrypted EncroChat platform.

“In the past three years, we have seen the impact of the disruption of the encrypted EncroChat platform and many additional arrests resulting directly from these revelations.

“This has inevitably pushed up seizure figures, although we should not underestimate the impact of the NCA and Border Force working upstream with international partners—intercepting high volume consignments destined for Europe and the UK.”

Trafficked for Crime

The UK justice system is seeing an increasing number of Albanian migrants appear before the courts on drug-related charges.

In 2023 alone, at least a dozen migrants from the Balkans region have been jailed across the UK over their involvement in British-based cannabis farms.

Some claimed to have been trafficked to the UK and forced to work in the grow houses to pay off debts to smugglers who helped them gain illegal entry to Britain, mostly by small boats.

In March, lawyers for 19-year-old Besmir Sula—a baker from Albania—told Maidstone Crown Court how he had paid £4,000 to traffickers to smuggle him into the UK by small boat before being forced to work in a cannabis grow house.

According to the Times of London, Mr. Sula had been intercepted by British authorities on arrival in October last year, before being moved to a Home Office-funded hotel for immigrants.

He was contacted by the man in his home village from whom he had borrowed the money for his boat trip and was told he had to pay off the debt, the newspaper reported.

The teenager was then picked up from the hotel and driven to a building between Cranbrook and Hawkhurst in Kent and was effectively “sealed” inside to act as a gardener for 500 plants.

He had been there for about two months when police discovered the operation on December 29.

Mr. Sula pleaded guilty to producing cannabis and was jailed for 15 months.

His barrister, John FitzGerald, said his client had been a victim of “organised gangs who exploit people into believing our streets are paved with gold”.

Small boats pass in front of the container ship ‘Xin Lian Yun Gang’ of China COSCO Shipping Corporation as it is unloaded at the Tollerort Container Terminal owned by HHLA, in the harbour of Hamburg, northern Germany on October 26, 2022. (AXEL HEIMKEN/AFP via Getty Images)

Small Boats Surge

”The Albanian criminal business model relies upon a ready and fluid UK-based workforce—with quite an insular approach to commonly only using Albanian nationals on the ground,” said. Mr Saggers

“When arrests are made or individuals are exposed by policing, they need to be replaced.

“It is likely that some of those arriving in Britain via the small boats across the Channel are intended or destined for the drug distribution network or as workers in cannabis intensive grow sites.”

In May, The Epoch Times revealed how the number of Albanian migrants locked up in British jails had almost doubled in four years.

According to Ministry of Justice (MoJ) figures, almost 1,400 Albanian foreign nationals are currently in custody in England and Wales—compared to just over 800 in 2019.

Those from the Balkans now make up the biggest number of all foreign inmates in the UK’s soaring prison population, and fall just second to the biggest overall nationality—British prisoners.

The figures were revealed just days after the government announced it was sending 200 jailed Albanian prisoners home to serve the rest of their sentence—amid concerns that UK prisons are nearing capacity.

Offenders handed terms of four years or more will return to their native country to serve the remainder, MoJ said.

The arrangement will also see Britain provide support to Albania to help modernise its own prison system, according to the department.

It is one of a number of measures the government is taking to reduce the number of foreign national offenders in prison, as well as tackling the small boats crisis.

Last year, a record 12,301 Albanians reached the UK on small boats, representing a quarter of the total of 45,755.

In June, the Home Office launched a social media campaign in Albania in a bid to deter those making the dangerous Channel journey after traffickers advertised their services on apps such as TikTok.

Leading human rights lawyer Danny Bayraktarova told MPs last month how she is increasingly representing Albanian children trafficked into the UK for crime purposes snared by similar social media ads.

Ms. Bayraktarova told the Home Affairs Select Committee that Albanian teenagers make up a large proportion of her caseload with many being criminally exploited by “highly organised” international people-smuggling gangs.

The solicitor said that the grip of the trafficking gangsters is so tight—they are easily able to threaten and intimidate their families back home in Albania if they refuse to cooperate.

Wildfires have been raging across Rhodes, a popular Greek tourist island in the Mediterranean, for nearly a week, causing the evacuation of 19,000 people from their homes and resorts over the weekend. Another wildfire is spreading across the island of Corfu, forcing officials to declare emergencies. This all comes as Europe bakes in scorching temperatures as the Northern Hemisphere summer season nears a peak. 

“For the next few weeks, we must be on constant alert. We are at war, we will rebuild what we lost, we will compensate those who were hurt,” Greek Prime Minister Kyriakos Mitsotakis told lawmakers in parliament on Monday.

Mitsotakis said, “The climate crisis is already here. It will manifest itself everywhere in the Mediterranean with greater disasters.”

The catastrophic fires in #Rhodes are clearly visible from space here, as #MTGI1 observed their resulting large smoke plumes on Saturday.
Please note: this is preliminary commissioning data. pic.twitter.com/fY9aJAiWUq

— EUMETSAT (@eumetsat) July 24, 2023

Perhaps someone should remind Mitsotakis that the “climate crisis” is possibly the combination of an El Nino year and peaking Northern Hemisphere summer that tends to bring above-average temperatures. 

Ioannis Artopios, a Greek fire service spokesman, stated that about 19,000 locals and tourists, many of whom are Britons — were evacuated from the islands over the weekend. 
British Foreign Office Minister Andrew Mitchell said around 10,000 Britons had been evacuated from the island of Rhodes. 

“The fires look terrifying in the darkness,” Paul Kalburgi, a British playwright and screenwriter, told NYTimes, who was on vacation on Rhodes during the inferno. 

All these people with pics and videos of people cry arsing to jet2 about the fires in Rhodes and then there’s my mate with the scousest reaction pic.twitter.com/kVYvPatDO5

— ً (@LittleBlendOne) July 24, 2023

greece rhodes island living hell in fire
🔥🔥🔥🔥🔥🔥🔥🔥🔥🔥 pic.twitter.com/MF1LDyutvP

— Vega (@Vega12991453) July 24, 2023

Stop blaming the climate change!
The wildfires in Rhodes and Corfu are caused by people intentionally or unintentionally. Ask anyone in Greece.
A single cigarette on dry grass and you have fire. Helped by the wind and you have the scenes below. pic.twitter.com/q4Snw1XSXM

— Tony (@TonyL_01) July 24, 2023

Government spokesman Pavlos Marinakis described the evacuation effort as the largest in the country’s history caused by a wildfire. 

Fires in Greece are the worst in two decades. 

Greece is one of many countries with high fire risk.

Our #EFFIS🔥 Fire Danger Forecast for 24 July

🟤Very Extreme Danger in:
➡The #Madrid, #CastillaLaMancha & #Andalucía regions, in #Spain🇪🇸
➡️#Sardegna & #Sicilia islands and in other areas of Central & Southern #Italy🇮🇹
➡️Southern #Greece🇬🇷
➡️#Cyprus🇨🇾https://t.co/2PjdHyXOpI pic.twitter.com/aJB0NpnytI

— Copernicus EMS (@CopernicusEMS) July 24, 2023

Some have said the fires were possibly started by “arsonists.” 

This fire was caused by arsonists. LOL And the temps in Greece are fairly normal for summer. They might be slightly higher due to El Nino which happens every few years. Stop falling for climate hoaxes they are an excuse to tax the Middle Class and transfer wealth. pic.twitter.com/3gMbPVgHEW

— JustAnother Person (@SymbioticEgo) July 24, 2023

Arson seems to be quite common in Greece

2007 – arsonist suspected in Fire attacks, Greece

2018 – Greek fires: Arson suspected in deadly Mati

2021 – 14 year old arrested for setting 9 wildfires in Greece

2022 – 9 arrested for Greek fires

2023 – Greek Firefighters say Arson

— Gregory Simon (@5thavenueartist) July 23, 2023

LISTEN plank… the Rhodes fire were arson.
I am Italian and this was normal in Italy they set fires so they got planning permission to build, then Italy changed the law.
For this reason Italy has the largest air force to fight fires. How fires have caused by cigarettes and BBQ pic.twitter.com/P4DuzpFcei

— Walker Henry Smith (@WalkerHenrySmi1) July 24, 2023

And if we look at Bloomberg weather data, average temperatures in Athens are somewhat in line with a 30-year trend this year despite the surge in July. 

The corporate press has conveniently blamed the hot weather on ‘climate change’ while lecturing plebs on how they need to reduce their carbon emissions but omit reporting on billionaires flying around on private jets and sailing on mega yachts. Maybe climate change warriors who continue to sound the alarm about the world’s imminent demise should realize it’s just summer in the Northern Hemisphere, and El Nino shifts jets streams that warm the planet.