Consultant, Renewable Energy Retrofits
Contributor's Links: Roger's Green Power Platform

Consultant focused on the economics and finance of renewable energy retrofits, currently deeply involved in the debate around Herbalife and the MLM industry. Author, translator, Dutch citizen, living in Bronx, NY, BA Economics '93, summa cum laude, Fairfield University, CT.

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E Herbalife: Yes, Alice, There Is A Santa Claus
On the economic forces that drive the Herbalife situation, because they will inform regulators on the nature of the business model, which inevitably is a pyramid.
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The Herbalife Compensation Puzzle
3 years ago

Well, congratulations, John. It seems you missed your calling as an MLM-distributor. You certainly have mastered the art of explaining why your MLM is not a pyramid scheme, which is what they all must do to get around the law. However getting around the law is the business for lawyers, and MLM lawyers enjoy the most steady earnings of anybody in the pile, because all MLM must try to foil pyramid prosecutions in one way or another...

Regulators in America has become completely wrapped around the axle by the absurdity known as the Amway '79 ruling, which is the legal progenitor of the explosive growth of MLM that started in the 80's and 90's, and at the foundation of the original design of the Herbalife plan. In spite of all the noise however, MLM is still an insignificant portion of American retail sales, because it is wearing itself out. It is not a business, it is at best a hobby, as the Small Business Administration knows, because it will not lend to SBA distributorships. Another clear case of the left hand not knowing what the right hand is doing, but eventually these government agencies might talk to one another.

The pyramid issue is economically very easy: If the plan provides maximal earnings for recruiting, not selling, people will recruit, not sell, and the only way to maintain the appearance of sales is by conscripted consumption. People are simply buying their paychecks. But since the product is over-priced, and 99.5% or better lose money on there distributorship, this means that 99.%% of consumers are over paying for the product, and that in turn explains the nearly 100% churn rate in the customer base. Of all the weak links in MLM, the pyramid sales aspect is the most convoluted because of some judicial errors, such as the Amway '79 case, which is however full of holes, eventually likely to be overturned.

The other weak areas are that the extremely restrictive distributor agreements that are common in MLM, such as the 120-page or so Herbalife agreement, make a mockery of the 'independence' of the 'independent' distributors, and some day the labor department may wake up and start to take exception. Along with this, the IRS treats MLM-distributorships as businesses, but my odds are better playing the colors in roulette, which gives me 50/50 odds. Gambling however is treated as a hobby not a business, and deductions are allowed only up to the level of any earnings. Since the odds are far worse in MLM it would seem to be only a matter of time before deductions of business losses in MLM are disallowed. At that point, you can then also no longer call it a 'business opportunity,' for it is a hobby, and any company promoting it as a business opportunity would be promoting tax-evasion.

The country of Bahrain has just outlawed MLM completely, including the renting of facilities to MLM events. It is likely other countries may follow the example, for the understanding that MLM is a criminal racket and not a business is growing around the world, and several countries are looking into the issue. No one can predict what will take down MLM in the end, but we are likely closer to the end then to the beginning of this bizarre legal aberration, which was only enabled by lawyers who failed economics 101. Eventually however, the law will have to address reality, lest, the US wants to become Albania.

In this article: HLF
Everything You Were Taught About Risk Is Wrong
3 years ago

Right.... it's time to look at investing like navigation... maps are used to plot a course, but continuous adjustments to the real environment are made. When the map is mistaken for reality, you get LTCM, or some such. Being honest with yourself can seem painful, until you seriously consider the alternative...

Are Risk Factors In Individual Stocks Starting To Matter Again?
4 years ago

Right on. However, the issue with Herbalife may be a little more complex for there is a unique situation going on even today with a failure of American regulators to enforce the laws, and even to issue confusing and contradictory guidelines. To this day websites of SEC, FTC, and several state AGs make a distinction between a "legitimate MLM" and a pyramid scheme. Thus regulators have created and maintained the confusion that allows the fraud to continue. Legally things are relatively clear, when the money is made from recruiting not sales, it is a pyramid scheme, and in that light all MLMs are simply pyramid schemes dressed up to create the impression of being real businesses. Presently there are some signs of new interest at SEC (formation of a new task force to combat pyramid schemes), and FTC a forum disussion about how Fraud Affects Every Community, and they are taking the show on the road... in short the abuses of the industry may finally have risen to the level that a sorting out of fuzzy policies of the past may start to take shape. The deterioration at HLF, along with issues at other MLMs, Avon, Usana, NuSkin, and Vemma (banned in Italy for being a pyramid scheme), are all economic /financial indicators that the time to take pyramid scheme regulatory risk for all MLMs seriously has come.

In this article: HLF, IBM, AMZN
Housing - Outside Of Prices, Not Much Recovery
4 years ago

Amen. It is actually even worse than is suggested here. The systems seems to prefer relaxing underwriting standards, but instead there is an imperative that could support asset values, as I've suggested here: seekingalpha.com/.../2545175-fhfa-single-security-structure-and-the-future-of-fannie-and-freddie

Energy is in the process of becoming the single most important vector of real estate valuation, and we have not even begun to deal with that fact, but the energy hogs of the past are becoming the slums of tomorrow, and that trend will accelerate, even with the current breather of low oil prices, which will temporarily mask the crisis.

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