23 November 2019
In the wake of the GFC, and again after the June 2016 Brexit referendum, many fund managers left the City of London for European shores, in search of lower tax rates and less regulation, not to mention the fear that Brexit would cut them off from their clients’ money. But most of the English fund managers who flocked to Switzerland have long since departed. The fund managers were unable to adapt to Swiss cultural norms, or they deemed Switzerland too “boring”, or for many other non-substantive reasons in a long litany of typical English whinges. The “boring” moniker is one viewed with much mirth and amusement by the Swiss, given that no fewer than 5 (five) Swiss cities rank in Europe’s Top 10 cities for cocaine consumption. (In case you are curious, Barcelona tops the European league tables for consumption of “devil’s dust”… [read more]
22 November 2019
The banking sector has underperformed the Australian market since 2015, and the results for the year to 30 September 2019 suggests that another year or two of underperformance is still to come.
The latest results were dismal. Cash profits fell by 7.8% ($2.9bn) year-on-year. Revenue growth was minimal to negative as the big banks lost market share to their newer and more agile competitors. Banks’ cost to income ratio rose by 313 basis points on average, ranging between +200bp and +540bp. Net interest margins (the spread between banks’ lending rates and their cost of funds) narrowed for all banks, dropping as low as 1.94% for the first time. Customer remediation charges hit $4.6bn for the year, making a total of $8.0bn to date… [read more]
5 November 2019
In February this year, we outlined the risks of a financial crisis in China. (Published as one of our Geld Zug commentary articles: https://arminiuscapital.com.au/preparing-for-the-china-crisis/). One of the triggers for a financial crisis was a rash of problems among China’s small banks. This trigger may be taking shape right now. Another small bank suffered a run last week, making it the fourth small bank to get into trouble since May… [read more]
4 October 2019
The biggest drivers of GDP growth in Australia are “houses and holes”, i.e. residential construction and resource exports. Residential construction is driven by factors internal to the Australian economy, whereas resource exports depend on the growth of the major global economies, particularly China.
House prices and housing starts have been falling since early 2018, but there are recent signs that they are bottoming out. Optimists believe that the Reserve Bank’s two interest rate cuts plus changes in the banks’ prudential requirements will stimulate demand, prompting a recovery in 2020. We are more pessimistic: although house prices are cheaper now than they were two years ago, they are not cheap compared to household incomes, especially when real wages remain flat and many households are already carrying high levels of consumer debt… [read more]
1 October 2019
The financial world was shaken by three seismic tremors during September 2019, but most people only noticed one of them.
The First Seismic Tremor
The one that everyone noticed was the drone attack on Saudi Arabia’s oil processing plant at Abqaiq on 14 September. The Yemen-based rebels who claimed responsibility have launched more than one hundred drone attacks in the last two years, on Saudi oil facilities such as oilfields, pipelines, and pumping stations, as well as military bases, airports, and other infrastructure… [read more]
12 August 2019
The Commonwealth Bank of Australia (“CBA”) is Australia’s largest bank at $140.6 billion, and the most expensive of the Big Four, in terms of P/E, dividend yield, and price to book ratio. As such, its disappointing result for the year ended 30 June 2019 does not augur well for the other three big banks (who all have September year ends)… [read more]
6 August 2019
With all the news about the Trump Administration’s trade disputes with China, Japan, Canada, Mexico, and the EU, the ordinary investor probably hasn’t noticed one trade war which doesn’t involve the US but could have serious consequences in East Asia. On 2 August 2019 the Japanese government removed South Korea from a “whitelist” of 27 countries which have blanket approval to buy certain sensitive Japanese exports. The whitelist exempts the specified countries from having to get individual approvals for the purchase of hundreds of commercially sensitive materials – for example, materials which have military as well as civilian uses… [read more]
24 July 2019
Countless tech visionaries have talked about the potential for “disrupting” the banking industry. Some have even started companies which competed with traditional banks. (Despite his words, Gates himself never did so.) To date, none of these companies has had much impact on the incumbent banks, who have done a far better job of disruption by shooting themselves in the foot. (Honourable mention to Deutsche Bank, which since the GFC has managed to lose over 95% of shareholder value.) This is not to say that banking is immune from tech-based challengers, just that – so far – none of the challengers has succeeded… [read more]
22 July 2019
Last month, with a great fanfare and many pious platitudes, Facebook announced its proposed global cryptocurrency, Libra. We, along with many others, expressed doubt that Libra would meet the regulatory standards which are mandatory in developed countries, particularly the anti money laundering and “know your client” rules. (See FACEBOOK’S LIBRA: STAR SIGN OR TAMPON? 28 June 2019)… [read more]
28 June 2019
- Libra is planned to be a global cryptocurrency suitable for international transfers. Its value will be stable because it is based on a Reserve of high quality assets.
- There are many unanswered questions about Libra’s regulatory status, particularly about its compliance with anti money laundering rules. It will not be accepted in developed countries until it satisfies each country’s regulator.
- Libra can productively target remittances, which are an important segment of the global money transfer market. Remittances from rich countries to middle income and poor countries totalled USD $529 billion in 2018.
- The impact on Western banks will be modest until Libra changes its business model.
19 June 2019
It is natural to assume that a country’s share market performance is driven by its economic performance, and therefore that a country with high GDP growth will generate high equity returns. Unfortunately, completely the opposite is true. For most countries over most periods, equity returns are negatively correlated with economic growth. How could this happen?
We have known for four decades that share markets are much more volatile than they ought to be if their price movements were driven by changes in economic and business fundamentals alone. Robert Shiller pointed out in 1981 that, based on price and dividend data since 1871, share price volatility was more than five times the level you would expect if prices responded only to new information about future dividends or real interest rates. This conclusion suggested that more than 80% of share price movements were mere noise, unrelated to fundamental information. Or, as Paul Samuelson joked, “The share market has predicted nine of the last five recessions.”… [read more]
21 May 2019
As we watch the US and China heading enthusiastically into a full-scale trade war, it is worth taking a step back from President Trump’s daily squabbles via the Twittersphere with the rest of Planet Earth, and focusing on the policy areas where the Republicans and the Democrats do already agree.
Infrastructure is one of the obvious areas. Both parties agree that the USA needs to spend more on maintaining its existing roads, bridges, canals, tunnels, pipelines, etc., as well as building new ones. The American Society of Civil Engineers produces a four-yearly report card on the nation’s infrastructure, covering roads, bridges, aviation, ports, schools, public transport, drinking water, waste water, and solid waste management. The 2017 report card graded most categories as D or D+, with an overall rating of D+, i.e. “Fail”… [read more]
12 May 2019
Since the GFC, the world’s central banks have got into the habit of publishing regular Financial Stability Reports (FSR). These documents are intended to function as an early warning system, by monitoring financial markets in order to identify risks as they appear and grow, so that the regulators can take action before the crisis actually occurs – unlike in the GFC… [read more]
8 March 2019
China’s equivalent of Parliament meets in Beijing every year for a few days in March. This august body, officially called the National People’s Congress, always passes every item of legislation put in front of it by the Communist Party leadership… [read more]
22 February 2019
After a decade of pointing out that China was not heading for a financial crisis, we have changed our minds. Recent trends suggest that problems are building in China’s corporate bonds, small banks, and consumer loans. We think that a crisis is likely in the next two years… [read more]