Wall Street Casino: Collapse of Valeant.

Valeant Pharmaceuticals’ share price has plummeted over the past six months. Once a Wall Street bull, the company is now the very definition of a popped balloon:

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This is incredible. How on earth does a large firm, supposedly staffed with seasoned corporate leaders, advisors, and investment experts, undergo such an insane bust? Why weren’t all the Wall Street analysts warning people to escape Valeant while they still had the chance?

In hindsight, it is obvious to everyone why this has occurred.  As David Stockman has explained, Valeant is a poster child of the post-2008 Wall Street bubble. Their meteoric rise in the markets was not due to profit generated through satisfying consumers – i.e. developing and selling pharmaceuticals – but through mergers, acquisitions, and increasing debt.

Throughout the 8-year tenure of CEO Michael Pearson, Valeant spent over $40 billion on nearly 150 acquisitions. But there was no rhyme or reason to this. There was no overarching customer-focused strategy. This was instead what I call “The Blob” strategy: subsuming business acquisitions while plodding forward aimlessly. There was cost-cutting: slashes of personnel, R&D, and costs of doing business. But these things are not the foundation on which a healthy business enterprise is built. This is merely the icing of the cake; the cake itself is the serving of consumers.

Furthermore, Valeant became notorious for acquiring the rights to already-existing drugs and raising their prices to obscene levels – sometimes rising by over %500 within a single day. Once again, this is “The Blob” strategy at work. A healthy business is not hanging it’s hat on price increases. A healthy business is looking for ways to satisfy increasing numbers of customers in different ways while slashing prices or keeping them stable. This should’ve been a red flag.

How did they fuel the Blob? The company has an enormous level of debt. In 2009, their total debt was $400 million. At the start of 2016, Valeant’s total debt burden was a staggering $31 billion. The company took the opportunity of Federal Reserve-encouraged low interest rates to drink deep from the Wall Street trough of easy money.

Overall, Valeant is a basket case. Only in the boom phase of a Federal Reserve-induced bubble can this strategy seem to work. It is a timeless tale: even in spite of numerous negative indicators – the debt, the endless acquisition of unrelated enterprises, the lack of a coherent strategy – speculative investors bought their tickets and piled onto the Valeant train. The smart investors were scalping their tickets to other suckers at the station. Then the train derailed off a cliff.

This is indicative of a wider problem. David Stockman has said that Valeant was merely one of the many idiot gamblers in the casino that Wall Street has now become. Thanks to the Federal Reserve and years of low interest rates with easy money through Quantitative Easing, concepts such as price discovery and corporate efficiency are being thrown out of the window. This has moved Wall Street stocks away from stability and rational expectations to fervent speculation and hope in the “Greater Fool” – that some other speculative idiot will always be there to buy your stock for more than you paid.

FEDERAL RESERVE POLICY

The Federal Reserve stopped pumping new money into the system two years ago. Quantitative Easing has ended. What happened to Valeant is only the tip of the iceberg. Wall Street is going to get worse as the bubble begins to collapse. What will the Federal Reserve do at that time? Refuse to resume QE, which will play a role in heralding the next massive recession to sweep the United States? Or will they resume QE and pump new money into the system, which would be an admission of failure on their part and only push off the day of reckoning into the future? Meanwhile, the bubble will only get worse. Damned if they do, damned if they don’t.

Keep it simple, stupid. The Ph.D.-holding economists at the Federal Reserve are not the expert drivers of the supposed machine that is the Economy. The economy is not a machine with levers and buttons for creating predictable results. The economy is a collection of individuals pursuing individual goals. We are not levers to be pulled and buttons to pressed. Our reactions cannot be predicted like the reaction of a button or lever. Rather, the wise economists at the Federal Reserve are meddling losers who encourage rotten financial practices and screw it up for the rest of us. They do not help us; they merely get in the way.

We can do without these guys. End the Fed.

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