Wednesday, September 28, 2022

Three Men Charged in Stock Scam Involving $100 Million Deli; Why Is the Pound Getting Pounded?; How Europe Stumbled Into an Energy Catastrophe; Speeding Up Your Daily Walk Could Have Big Benefits

By Whitney Tilson

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1) In my June 4, 2021 e-mail, I wrote:

I've long advocated for the U.S. Securities and Exchange Commission ("SEC") to ban all Chinese companies from listing on U.S. exchanges due to widespread fraud over the past decade, which continues to this day.

For example, remember the New Jersey sandwich shop, Hometown International (HWIN), that Greenlight Capital's David Einhorn wrote about in April? This in-depth story in this weekend's New York Times Magazine reveals ties to Hong Kong and Macao, both of which are controlled by China: The Mystery of the $113 Million Deli.

Closing the loop in this story, here's the latest: Three Men Charged in Stock Scam Involving $100 Million Deli. Excerpt:

A deli in southern New Jersey was the vessel for an elaborate fraud scheme involving three men who managed to inflate the company's stock-market value to $100 million, according to federal prosecutors and regulators.

The story of how Hometown International's stock achieved such a lofty valuation was a mystery that played out in public last year. "The pastrami must be amazing," hedge-fund manager David Einhorn wrote in a note to investors, before citing the stock as an example of how "the market is fractured and possibly in the process of breaking completely."

All the attention drew the interest of federal criminal authorities, who on Monday charged the three men with securities fraud, wire fraud and money laundering. The Securities and Exchange Commission separately sued them over civil securities-fraud allegations.

Here's CNBC with more on this sordid story: Feds sought to jail father charged in $100 million New Jersey deli scam with Hong Kong-based son at large.

I hope regulators show similar initiative in going after Ryan Cohen for the pump and dump of Bed Bath & Beyond (BBBY) shares...

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2) Having just spent a long weekend in London, I've been following events there more closely than usual – none more so than the pound sterling plunging to an all-time low versus the dollar. Here's New York Times columnist Paul Krugman's insightful analysis of what's going on: Why Is the Pound Getting Pounded? Excerpt:

So why the sudden run on the pound? One answer I liked came from the City of London economist Dario Perkins, who declared that the problem with the budget wasn't that it was inflationary but that it was "moronic," and that an economy run by morons has to pay a risk premium.

But while I like the idea of a "moron" premium, there may also be a more concrete concern. I've been in correspondence with other City of London economists, and they have expressed doubts about whether the bank will actually be willing to tighten enough to offset the inflationary impact of Trussonomics.

These doubts were reinforced on Monday, when the bank disappointed investors hoping for an emergency rate hike to stabilize the pound, limiting itself instead to a rather vague statement that it "would not hesitate" to raise rates if necessary to limit inflation.

Yet I don't see any reason to believe that Britain's central bank has lost its political independence, or that it will allow itself to be bullied into avoiding rate hikes by a government that apparently believes in the zombie idea that tax cuts will pay for themselves.

There may, however, be a Britain-specific reason the Bank of England might be hesitant to raise rates sufficiently to contain inflation.

The more I look at current events in Britain, the more I find myself harking back not to 1976 but to the other sterling crisis of 1992. At the time, while the euro didn't yet exist, many European nations, Britain included, were part of a system intended to keep the relative value of their currencies stable – a so-called exchange rate mechanism. In 1992-3, however, the European E.R.M. came under severe pressure from speculators, most famously George Soros, who began betting that many of Europe's economies would give up on their targets and allow their currencies to fall against the Deutsche mark.

Defending against this speculative onslaught would have required sharply raising interest rates for an extended period. And in the end, several countries, Britain included, proved unwilling to do that. Why?

Part of the answer was that Britain was suffering from high unemployment at the time, and feared that rate hikes would deepen its slump. But there was another, perhaps even more pressing, concern. For a variety of reasons British homeowners, unlike their U.S. counterparts, tend to have either floating rate mortgages, whose interest rates vary with the market, or mortgages that will come due and need to be refinanced within a few years.

In 1992, this meant that defending the pound with higher interest rates would quickly translate into direct financial pain for millions. And after a few weeks of defiant rhetoric, policymakers caved to the pressure and let the pound fall.

I have no direct evidence that similar considerations are weighing on the Bank of England now. But it seems likely.

It's still too soon to write Britain off; it's a rich country with a lot of freedom to maneuver. On the other hand, if British monetary policy really is constrained in this way, going all in for zombie fiscal policy is even more irresponsible than it would be otherwise. And you do have to wonder how long Truss will last, given this huge unforced policy error.

Former Treasury Secretary Lawrence Summers tweeted some additional commentary. Excerpt:

I was very pessimistic about the consequences of utterly irresponsible U.K. policy on Friday. But, I did not expect markets to get so bad so fast.

A strong tendency for long rates to go up as the currency goes down is a hallmark of situations where credibility has been lost...

The first step in regaining credibility is not saying incredible things. I was surprised when the new chancellor spoke over the weekend of the need for even more tax cuts. I cannot see how the BOE, knowing the government's plans, decided to move so timidly...

The magnitude of Britain's trade current account deficit underscores the seriousness of its challenges. My guess is that pound will find its way below parity with both the dollar and euro.

I would not be amazed if British short rates more than triple in the next two years and reach levels above 7%...

Financial crisis in Britain will affect London's viability as a global financial center so there is the risk of a vicious cycle where volatility hurts the fundamentals, which in turn raises volatility.

A currency crisis in a reserve currency could well have global consequences. I am surprised that we have heard nothing from the IMF.

After Summers tweeted this, the IMF did indeed speak out this morning: IMF urges UK to 'reevaluate' tax cuts on inflation concerns.

In addition, the Bank of England is acting to stabilize the situation: Bank of England to Buy Bonds in Bid to Stop Spread of Crisis.

3) Speaking of Europe, this is an insightful interview of the writers behind an excellent blog I subscribe to, Doomberg: How Europe Stumbled Into an Energy Catastrophe. Excerpt:

Doomberg's writers, who come from the world of commodities and heavy industry, deliver deeply informed, often withering analysis that focuses largely on energy policy, their area of expertise. Befitting the site's name, they often take a darker (or perhaps just more realistic) view than many mainstream sources.

Doomberg has been particularly bearish – and prescient – about the unfolding energy crisis in Europe, warning for months that the decision by European leaders to cut off Vladimir Putin from their markets after his invasion of Ukraine risked causing an economic crisis.

I spoke via Zoom with one of the Doomberg writers (as represented by that green chicken) about how Russia's oil industry has thrived despite sanctions, where Europe's energy squeeze is headed, and why his site is, despite appearances, fundamentally optimistic.

4) Here's some good advice in this NYT article: Speeding Up Your Daily Walk Could Have Big Benefits. Excerpt:

Brisk walkers had a 35% lower risk of dying, a 25% lower chance of developing heart disease or cancer, and a 30% lower risk of developing dementia, compared with those whose average pace was slower.

To put these numbers into perspective, a person whose total daily steps include 2,400 to 3,000 that are brisk walking could see a sharp reduction in the risk for developing heart disease, cancer, and dementia, even without taking many additional steps beyond the total daily number.

"It doesn't have to be a consecutive 30-minute session," said Matthew Ahmadi, a research fellow at the University of Sydney and one of the authors of the studies. "It can just be in brief bursts here and there throughout your day."

But the important thing is to aim for walking a little faster than your normal pace. When it comes to the differences between brisk walking and jogging, there wasn't enough data to determine if one was better than another, and both resulted in better overall health outcomes than did a slower average pace. Still, a 2013 study followed 49,005 runners and walkers and suggested that brisk walking or jogging similar distances offer similar heart health benefits, though walking a mile takes longer.

Best regards,


P.S. I welcome your feedback at [email protected].

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Empire Financial Research

Whitney Tilson

Empire Financial Research founder and CEO Whitney Tilson is the editor of the Empire Investment Report, a monthly investment advisory that focuses on cheap, high-quality stock ideas.

Whitney graduated with honors from Harvard University and Harvard Business School, where he earned an MBA and was named a Baker Scholar. Whitney spent nearly 20 years on Wall Street, during which time he founded and ran Kase Capital Management, growing assets under management from $1 million at inception to a peak of $200 million.

Once dubbed "The Prophet" by CNBC, Whitney predicted the dot-com crash, the housing bust, the 2009 stock bottom, and more. Now, he's sharing his secrets and strategies with followers of his latest endeavor, Empire Financial Research.

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