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I happened to be reading two things at once last week that in combination led to some disturbing thoughts.

The first was Joseph A. Tainter’s The Collapse of Complex Societies, which looks at the fall of various ancient empires, from the early civilizations ofHarappa and Mohenjo-Daro, to the Roman Empire and the Maya. Tainter’s theory, to simplify things quite a bit, is that as societies grow they become more complex, slapping on layer after layer of institutions, regulations and customs to deal with challenges (and, I suspect, to facilitate the ruling classes’ extracting resources from the ruled).

Over time, these layers grow more and more rigid and take more and more of the society’s resources. It’s hard to change them because every layer of complexity represents some group’s livelihood or claim on power. Eventually, the society is devoting almost all its resources to maintaining these institutions and has very little reserve left to deal with the unexpected. The result is that challenges that it would have weathered easily in the past are now sufficient to bring it to an end.

In essence, Tainter’s theory is a more general version of Jonathan Rauch’sDemosclerosis: The Silent Killer of American Government, which is about how special interests have parasitized the United States governmental apparatus, turning much of its resources to their own benefit and doing their best to prevent change.

The other thing I was reading was a piece by Richard Fernandez on ”the surprising weakness of invincible institutions.” Fernandez notes that all sorts of big institutions are currently failing: Illinois is being bankrupted by public pension debt, and its own state constitution prohibits any attempt to get out of paying it. His worries sound a lot like Tainter’s.

Nor is Illinois the only place being bankrupted this way. Puerto Rico is on the verge offinancial collapse too. Its political class has been borrowing and spending for decades, and it has finally reached the point at which it can’t go on. (As Herb Stein famously said, “If something cannot go on forever, it will stop.”) Yet Puerto Ricans, such as the territory’s congressional representative Pedro Pierluisi, still resist a federal financial control board as part of a bailout because that might limit the politicians’ gravy train. Likewise, Venezuela, “a country floating on oil with a climate where anything grows,” as Fernandez describes it, is so broke it appears unable even to pay the people who print its money.

Because political leaders’ chief concern is their own power and position, they’re willing to do almost anything to stave off a collapse, except reduce their own power and position. Kicking the can down the road usually just makes the problem worse in the end, but politicians would rather do that than make any sacrifice up front.

Of course, collapse isn’t, as Tainter notes, always so bad. When the Western Roman Empire collapsed, ordinary people were often better off because they were freed from the empire’s oppressive taxes and regulations (like the rules that sons of soldiers, civil servants and workers in government factories, among others, must enter the trades of their fathers). Many people in the provinces welcomed the barbarians. The new governments were actually better at what governments are for, as Tainter writes: “The smaller Germanic kingdoms that succeeded Roman rule in the West were more successful at resisting foreign incursions (e.g., Huns and Arabs). … The economic prosperity of North Africa actually rose under the Vandals, but declined again under Justinian’s reconquest when Imperial taxes were reimposed.” Likewise, Venezuelans will probably be better off when they eventually get a new government. They could hardly be worse.

Our society isn’t likely to face a collapse like Rome’s — as Tainter notes, everything now is global. But institutions within it are still at risk from politicians’ tendency to skim off benefits for themselves and their cronies while putting the price off into the future. One advantage that democracies have over empires is that they can reset things with an election, tossing out one band of special interests in favor of a new and different band, which at least keeps things mixed up.

But as you vote, remember that the more resources you put under the control of the political class, the more likely it is that things will eventually go bad. Politicians seldom look past the next election, and they’re willing to sacrifice pretty much anything to hang on. And that “pretty much anything” includes you.

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Donald Trump entered into general-election mode Tuesday night, seeking a pivot to unite the Republican Party against a common foe as it declared him its presumptive nominee.

“We’re going after Hillary Clinton,” Trump said during a victory speech at Trump Tower in New York.

“She will not be a great president. She will not be a good president. She will be a poor” president, he said of the Democratic frontrunner, his likely opponent in the general election.

After winning the Indiana primary and delivering Ted Cruz a knockout punch out of the Republican race, Trump and the party he is now set to lead prepared for the road ahead.

Republican National Committee Chairman Reince Priebus called him the “presumptive nominee” and called for party unity on Tuesday.

“@realDonaldTrump will be presumptive @GOP nominee, we all need to unite and focus on defeating @HillaryClinton,” he tweeted shortly after Cruz announced he was leaving the race.

In a nod to the anti-Trump movement that branded itself as “#NeverTrump,” Priebus added a hashtag: “#NeverClinton.”

For his part, Trump dropped the insults trademark to his campaign, congratulating Cruz on a race well run and calling him a “hell of a competitor.” And he keyed in on Clinton in the victory speech from Trump Tower in New York. He

“We’re going to win big, and it’s going to be America first,” Trump said.

“This country, which is very, very divided in so many different ways is going to become one beautiful and loving country,” he later added.

Trump now needs fewer than 200 delegates to secure the nomination ahead of the July convention after securing all of the 57 delegates up for grabs in Indiana. John Kasich, the Ohio governor, is the lone remaining candidate facing Trump in the Republican race, but he is currently running fourth in the delegate count.

Clinton’s campaign has already taken notice of Trump’s now-imminent grasp on the Republican nomination.

John Podesta, Clinton’s campaign chair, delivered the campaign’s first direct general-election shot at Trump. Podesta said Trump isn’t prepared to keep the country safe and improve conditions for middle America.

“Throughout this campaign, Donald Trump has demonstrated that he’s too divisive and lacks the temperament to lead our nation and the free world,” Podesta wrote in a statement. “With so much at stake, Donald Trump is simply too big of a risk.”

“While Donald Trump seeks to bully and divide Americans, Hillary Clinton will unite us to create an economy that works for everyone,” he later wrote.

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Missed the $5 jump higher. Sold some Options against the position.

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I will add a position in VRX. Beaten down, hated, maybe it comes back.

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Countries usually don’t knowingly commit economic suicide, but in Britain, millions seem ready to give it a try. On June 23, the United Kingdom will vote to decide whether to quit the European Union, the 28-nation economic bloc with a population of 508 million and a gross domestic product of almost $17 trillion. Let’s not be coy: Leaving the E.U. would be an act of national insanity.

It would weaken the U.K. economy, one of Europe’s strongest. The E.U. absorbs 44 percent of Britain’s exports; these might suffer because trade barriers, now virtually nonexistent between the U.K. and other E.U. members, would probably rise. Meanwhile, Britain would become less attractive as a production platform for the rest of Europe, so that new foreign direct investment in the U.K. – now $1.5 trillion – would fall.
Also threatened would be London’s status as Europe’s major financial center, home (for example) to 78 percent of E.U. foreign exchange trading. With the U.K. out of the E.U., some banking activities might move to Frankfurt or other cities. This would be a big blow.

Losses could be considerable. A study from the Organization for Economic Cooperation and Development (OECD), after making assumptions about U.K. trade and investment, concluded that “Brexit” – shorthand for Britain’s “exit” from the E.U. – could “shave off” $3,200 from average British household income by 2020. No one really knows, but other studies reach similar conclusions.

Indeed, the adverse effects may be undercounted, argues OECD SecretaryGeneral Angel Gurría. Noting that U.K. economic growth in the first quarter of 2016 was the slowest since 2012, he says that uncertainty over Britain’s future is already causing businesses to delay hiring and investment decisions.

What would Britain get from all this? Good question.

There are three main complaints against the E.U., says Nile Gardiner, who was an aide to British Prime Minister Margaret Thatcher and now works at the conservative Heritage Foundation.

First, the outpouring of regulations from Brussels – the seat of the E.U. – has compromised Britain’s sovereignty. On some issues, the European Court of Justice can overrule British courts.

Second, the E.U.’s liberal migration rules may expose Britain to terrorists or overburden its welfare system. (Once people become E.U. citizens, they are allowed to live or work anywhere in the bloc.)

Finally, the E.U. imposes costs on Britain – an annual contribution to the E.U. budget plus the costs of regulations.

The E.U. certainly isn’t immune to criticism. It is often an elitist institution that has centralized too much power in Brussels for a continent characterized by huge differences of national history and culture. It has also committed massive errors, the adoption of the euro probably being the largest. (One currency didn’t work well for all countries. Britain wisely decided not to join.)

Still, most complaints seem exaggerated. The U.K.’s net annual contribution to the E.U. budget is about 0.5 percent of Britain’s GDP. That’s hardly crushing. Some E.U. regulations may be overkill, but Britain’s labor and product markets are among the least regulated of advanced countries.

As for immigrants, studies “show that these workers pay more in taxes than they receive in benefits,” says Frances Burwell of the Atlantic Council. “They’ve come to work.”

What this debate is really about is Britain’s place in the world and its self-identity. Britain has long been of Europe but also apart from it. The British Empire was once the world’s largest. To be simply another member of a continental confederation, albeit an important member, offends this heritage. The nostalgic yearning is understandable, but it is not a policy.

Ironically, leaving the E.U. would confirm the U.K.’s reduced status. The U.K. would have to renegotiate its trading agreements with the E.U. and dozens of other countries. A deal with the E.U. is essential. For the U.K., the best outcome would be to retain much of its preferential access, which – as a practical matter – would mean continuing contributions to the E.U. budget and abiding by most E.U. regulations. The status quo would survive, except that the U.K. would have no influence over E.U. policies. Anything less than this would have the E.U. putting its own members at a competitive disadvantage.

Viewed this way, Brexit is an absurdity. But it is a potentially destructive absurdity. It creates more uncertainty in a world awash in uncertainty. This would weaken an already sputtering global economy by giving firms and consumers another reason to pull back on spending.

It would be better for the U.K. to stay in the E.U. It would also be better for the E.U., because Britain provides political and intellectual balance. Finally, it would be better for the United States, which doesn’t need a major ally – Britain – to go delusional.

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The blowup of Halliburton-Baker Hughes will reverberate beyond the energy patch. The promised merger of two of the world’s top oil-services companies is the latest mega-deal foiled by regulatory pressure this year, after Pfizer’s $160 billion bid for Allergan. Baker Hughes pockets a $3.5 billion payment for its efforts, at Halliburton owners’ expense. Punishing Halliburton’s boss and board would yield a more enduring lesson in M&A hubris.

Investors were already pricing in failure for the deal, valued at $35 billion when it was agreed in November 2014. Baker Hughes shares finished last week trading 26 percent below Halliburton’s cash-and-shares offer. Even the thwarted acquirer’s shares held up despite the colossal break fee, reflecting the market’s anticipation of failure all along.

That doesn’t mean there shouldn’t be a reckoning. Baker Hughes boss Martin Craighead ought to emerge unscathed. The saga wasted management time, but playing hard-to-get when Halliburton came courting has proven wise. Baker Hughes plans to buy back stock and pay down debt, thanks to negotiating the largest cash break fee ever. That will go some way towards numbing the pain of the $980 million net loss the company suffered in the first quarter as the slump in oil-drilling activity worsened.

Halliburton Chairman and CEO David Lesar, on the other hand, emerges a loser for his poor reading of the antitrust zeitgeist. The promise of $2 billion of annual cost savings might have made the huge break fee seem worth the risk at the time. Yet having agreed to pay away most of the present value of those savings to Baker Hughes shareholders to clinch the deal, he is now handing over cash worth more than the next three years of Halliburton’s expected net profit to a leading competitor.

Lesar already forwent his 2015 bonus because of Halliburton’s poor financial performance. Another zero this year might start to restore some lost credibility – and might make other empire-building CEOs think twice before getting caught up in merger mania. Stricter sanctions, including a rethink of Lesar’s job, would more effectively reinforce the point.

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Trading at $16.38, have a covered call sell/buy to close order at $16.42

 

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