This includes recommending that the bank raise short-term interest rates 1 percent at the June 28 meeting and subsequent meeting to arrive at a rate of 8.5 percent with the expectation that long-term rates would not exceed 6.75 percent following such an increase, thereby increasing the inversion of the yield curve. For 18 months Parish & Company advocated disclosing this scheme as a form of monetary policy but this has not occurred. Such an inversion will leave long-term rates at reasonable levels and thereby sustain real economic growth and infrastructure development. These rates would not, however, be an incentive for the current explosion of corporate debt designed to institute share buybacks.
The goal would be to combat the press campaign conducted by the investment industry that has convinced most investors, whether 18 or 82, that interest denominated investments are a bad choice. These investment companies earn significantly higher management fees on equities and this is the key reason why investors have been given this logic. By pursuing this inverted yield approach the Federal Reserve should be able to stabilize the markets within 6 months and then within one year target a short-term rate of 4.5 percent.
The issue facing the Federal Reserve Bank now is not real inflation but rather how to make non callable fixed income rates a viable investment choice to stabilize the financial markets. What we are witnessing is false inflation ignited by a watered stock scheme utilizing photo copy machines to print stock for wages and acquisitions, thereby generating massive tax deductions yet not having to reflect such costs on the financial statements. Equity investment is pouring out of the broader market into a few companies that use these watered stock practices initiated by Microsoft due to a corruption of the scorecard for success in our free market system. This scheme is also putting the pension system at risk.
The SEC is fighting a noble battle to restore integrity yet it can not success without the Federal Reserve making non callable fixed income rates a viable choice for investors, in particular senior citizens. Current projects at the SEC including variable annuity abuses, promissory note fraud, inappropriate stock touting and fee gouging. These abuses have all been triggered by an interest rate policy the scheme has made dysfunctional. The scheme is now so successful that Microsoft and Cisco Systems no longer pay federal income tax, as reported in a front page story in the New York Times on June 13, 2000.
This scheme is now also grossly distorting the Employment Cost Index (ECI) in addition to key unemployment and productivity statistics. These distortions will be apparent in late July, as the Federal Reserve realizes. Aggressive disclosure 6 months ago might have been able to prevent such an interest increase yet the level of distortion now imbedded in the financial markets is too great. Failure to institute such a policy could ignite a collapse in the financial markets within 6 months and severely harm the underlying economy for reasons that follow.
Microsoft and Cisco Systems Have Erected a Pyramid Scheme Based Upon Watered Stock
Together Microsoft and Cisco Systems, including options granted, have more than 14 billion shares outstanding, even though combined gross revenues are less than $50 billion. Their combined market values at their recent peaks represented more than 70 percent of the entire annual federal budget of $1.8 trillion. The general public has no idea that both companies are incurring significant losses and only by accounting illusions are they able to post large profits. This is causing a capital transfer from assets valued based upon actual results to the equivalent of a pyramid scheme that is destabilizing the market.
Mutual funds have now revolutionized the banking system just as the Internet has transformed commerce and the Federal Reserve needs to respond more to macro trends in these funds created by this situation, one of which is an overall lack of incentive to choose fixed income alternatives.
In the late 1920's the Federal Reserve similarly posted modest and consistent interest rate increases yet did not consider the rampant watered stock fraud occurring in the equity markets. These increases only served to fuel the fraud, destabilizing the underlying strengths of the economy and resulted in the Great Depression.
The Most Important Leading Inflation Indicator In The New Economy Is Wages and Benefits, Not Raw Materials.
Wage and benefit inflation is now captured by the employment cost index or ECI, a key indicator for the Federal Reserve Bank. The ECI is compiled by the Bureau of Economic Analysis from surveys provided to a large sample of companies that file unemployment insurance or UI reports. Even though the UI reports generally include stock option wages, which are ordinary income to employees that appear on their W-2's, the UI report is only used to select the firms to send a survey or 790 report. The wage data on the UI report is not used. Rather, employers fill out this 790 survey form which generally does not include stock option wages. What this means is that wage inflation statistics used by the Federal Reserve grossly understate wage inflation through a reporting anomaly.
This introduces a gross inefficiency into the financial markets, in particular an artificial incentive to invest in equities on a comparative basis due to the underreporting of wage inflation. The average person has a feel for prices and they know that inflation is much higher than reported by the government but they still can't explain why. They are falling behind economically and this one factor itself could indeed be a major contributor to the "day trader" phenomehah. In my practice I see people from physicians struggling with the impact of managed care to teachers locked into wage increases based upon inaccurate government cost of living statistics that have become day traders. Their goal is clearly to "catch up" to the impact of inflation but in this case I would call it false inflation.
The irony is that this is false inflation because it is generated by a breakdown in accounting rules that have inflated equity values in a narrow sector of the economy, what one could call the pyramid.
Many of these same firms also provide a 401K match in company stock which is similarly printed on the equivalent of a photo copy machine. These benefits are given equal weight to those employers who make a cash matching contribution to the 401K. Parish & Company does not have complete data but it does seem clear that offering a 401K match exclusively in company stock is a significant related distortion yet to be addressed. This is penalizing private employers and public firms that make a more honest cash matching contribution to these plans. It has also triggered the wave of conversions to "cash balance" pension plans.
The Actual Unemployment Rate Has Dropped To Sharply Less Than 3.5 Percent But This Drop Is Disguised By The Widely Criticized Pooling Technique for Acquisitions
A key technique used to erect its pyramid, in particular by Cisco Systems, is use of the pooling method for acquisitions. Pooling involves the issuance of common stock via a photo copy machine to pay for acquisitions and wage costs, knowing full well that most of this cost will not have to be reflected in the financial statements. This grossly overstates net income, fuels interest in the stock price, expands the money supply and triggers false inflation as these assets ultimately compete with other cash and debt assets for housing, education and other resources, in particular services.
A largely unseen related consequence to pooling is the roll-up merger phenomena in which large layoffs are occurring in traditional businesses that struggle to compete with Microsoft and Cisco Systems for capital in the equity markets. A roll-up is where one company is merged into a larger company in order to cut costs and compete more effectively for interest in their stock. Generally, significant layoffs occur in the traditional economy after these roll up mergers and it is these numbers which are distorting the unemployment index. Many mergers do make sense and this roll-up phenomena is a massive distortion that is also igniting false inflation due to a growing absence of effective competition in many key industries.
Several roll-up mergers outside of technology with values in excess of $100 billion would not have occurred except for pooling. One need only scan the press releases for these companies subsequent to the roll up to see announcements for large layoffs and benefit reductions. The conversion to cash balance pension plans is another effect of the scheme. The irony here is that these workers are being dismissed not due to improved efficiency of size associated with the new economy but rather as a means to manipulate the stock price upward and compete with Microsoft and Cisco Systems.
The Current Explosion of Financial Abuses Involving Variable Annuities, Day Trading, Inappropriate Touting of Stocks and Accounting Fraud Have Their Roots In The Microsoft Cisco Systems Watered Stock Scheme
By corrupting the financial markets scorecard, Microsoft and Cisco Systems have introduced more volatility into traditional companies as these assets plummet when earning expectations are not met and in many cases what was previously their investment equity value pulled into the financial pyramid. This volatility translates into more revenue for brokerage firms and they now have marketing campaigns highlighting how to profit from such volatility.
Many mutual fund companies, in particular Fidelity Investments, Janus, AXA, Barclays and State Street, are heavily concentrating their portfolios in these stocks and extracting large management fees in addition to benefiting from the spreads on larger trading volumes. While the Savings and Loans gave away free toasters for deposits in the 1970's, Fidelity is giving away cash when you open a new account for active traders.
Another area of abuse are the high fees involving variable annuities. In order to justify these high fees, fund companies are now taking progressively more risk to justify the high fees. More specifically, they are investing in the pyramid.
Regarding stock touting, rather than focus on internet forums, one need only type in www.newsweek.com to see the problem. Here we have a venerable publication in an MSNBC vice. Note the url address at the top of the page while viewing this. By allowing this watered stock fraud Microsoft is able to build powerful media assets and crush its competition, one news organization at a time. On June 13th the New York Times did a front page top left corner story highlighting that neither Microsoft nor Cisco Systems now pay any federal income tax and more than one week later this has gone completely unreported in the general media.
The point is that for the Federal Reserve and SEC to function properly, the media must do its part. Just as in the Savings and Loan debacle, the media is clearly failing. They fail because their model for business based upon providing news and summarizing financial results accordingly has been destroyed by a bad policy from the Federal Reserve.
Productivity Improvements Need More Scrutiny
Dramatic productivity improvements are possible and occurring in certain sectors yet the pyramid's distortion is disguising a general overall lack of productivity after factoring in uncompensated overtime hours and quality measures. Somehow a minor quality issue like a missing stitch on a shoe label in a traditional business can result in a defective shoe whereas Microsoft and Cisco can trigger massive disruptions without incurring any recorded financial cost. Quality is assumed to be variable with their products.
Lack of Privacy Protections Is Also Producing a Growing Unrecorded Productivity Related Cost
Many Internet users now incur more expense using traditional means due to the Microsoft business model predicated on the sale of privacy, now largely emulated by other technology firms. In the banking business detailed computer records are maintained regarding who accessed key files, such as password files, and inappropriately accessing such files can be a cause for immediate termination. Although this would be easy for most technology firms to implement, in a low cost fashion including outside audit reviews, these firms are instead focused on how to provide key user information to advertisers. This includes the direct marketing of pharmaceuticals to children on the Internet as technology firms sell this data to large drug manufacturers, a good example being Microsoft and its relationship as WebMD's largest shareholder.
Tax Receipt Data Is Further Distorting Recent Economic Statistics Due to The Pyramid Tax Impact
Most investors were shocked at their recent tax bills and this obviously contributed to a slowdown in purchase activity in April and May. It has also generated new tax policies in many states with the expectation that income tax receipts from stock option wages will allow significant reductions in other taxes. Most curious to me, and completely unreported in the press is that Microsoft and Cisco Systems competitors and other technology firms have largely created the budget surplus as employees are taxed on stock option wages, even if the company has no profits. Amazon.com alone has paid more than $300 million in federal income tax, via its employees exercising options, even though the company has yet to earn a profit.
Parish & Company has made several offers to provide an overview of this situation to the Federal Reserve Bank during the last 18 months yet nothing has been possible thus far. These efforts will continue.
An extended study regarding Microsoft financial practices, much of which is applicable to Cisco Systems, is available at http://www.billparish.com/msftfraudfacts.html. The report explains how Microsoft is pilfering the retirement system just as Charles Keating plundered the Savings and Loan System.
Bill Parish, President of Parish & Company, has been quoted extensively in a variety of major news publications, as well as The Tech Review, a Canadian investment journal, Bild, the largest paper in Germany, The Fleet Street Letter, a prestigious investment publication, The Spotlight, a conservative newspaper and free market advocate and The Independent, a major British newspaper. He has been interviewed by the New York Times, Infoworld, ZD Net, Wall Street Journal, Newsweek and USA Today in addition to appearing on ABC news and various radio stations including KUIK in Portland, KIRO in Seattle and Aspen Public Radio in Colorado.
Mr. Parish is a Registered Investment Advisor and former CPA providing fee based investment management services in addition to assisting companies structure their 401k plans to meet their fiduciary obligations and provide top quality well diversified investment choices at the lowest cost. Please consider hiring Bill to be a permanent member of your 401K committee and thereby utilize the services of a top investment professional in order to clearly communicate your commitment to managing your employeesÂ’ 401K plan or what can now be called there "Mutual Savings Bank."