Month: June 2017

Try being an agent of change not a victim of it

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It is hard to feel sympathy for these news organizations that forget the golden rules of commerce – if you stop adding value your audience will consume elsewhere, Someone told me the other week that NYT subscriptions had soared. If indeed that was the case then why is the paper looking to junk half its editorial staff? Running the idea that free media is hurting advertising revenues and that shame on the paper for having to make rational business decisions. Free media might be part of the equation but had the NY Times stopped congratulating its self appraised excellence in bus shelters and billboards  realized that its journalism was the problem perhaps they might be expanding the kind of readership its advertisers would pay up for. Has the NYT not realized that the exposure of media outlets like CNN droning endlessly on about Russia-gate being a total fabrication for ratings is why trust in mainstream media is lower that the President?

The actions of the NY Times staff smacks of the same stupidity of the Sydney Morning Herald which has had to take two massive rounds of lay-offs inside a year because the product isn’t reaching. The SMH staff took a vote to strike at their evil overlords who put profit ahead of people. Welcome to the free market. When one journalist at the SMH became a scab (because he admitted the problem) he was vilified by his fellow workers. Biased in and biased out. Think of Channel 10 in Australia which is now under administration. Could it be the product that is not reaching? Could it be a lack of creativity or diversity in content (as opposed to diversity of background).

The NY Times does deserve credit though for trying to introduce balance to its columns with the introduction of a ‘climate sceptic’ (Bret Stevens) whose first article created such ructions that social media lit up like a Christmas tree – calling for his sacking and how the NY Times betrayed its loyal readers. Instead of praising the NY Times for trying to bring balance and diversity of thought into the mix, the group thinkers could only try to shut him down. It is exactly that type of reaction that will precipitate the demise of the paper. To be honest, when you read articles, journals, books or watch TV don’t you wish to learn other perspectives. Or do you want to listen to the same noise reverberating inside your own echo chamber?

It is natural to feel fear in the face of difficult times but staging protests only has the reverse effect. It is doubtful that management relishes having to retrench so many. However these people should live in the knowledge that management’s failure to turn around this wayward ship will result in their bosses’ necks. Instead of solutions, proposals and most importantly recognition of a failing product, they’ve chosen to be victims not agents.  Ironically at the moment NYT’s shareholders are behind management with the stock price up 50% YTD.

From Sesame to Elm Street

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ETF markets continue to surge in popularity. With low fees and basic packaging of the ETF product even Big Bird can understand what The Count is going on about. No wonder investors are snapping up these products faster than the Cookie Monster. However there is something chilling about the ETF market. In the lead up to and eventual crash of Lehmans et al CDOs, CDSs and other synthetic products were seen as the root of all evil. They were so complex that even Fields Medal winners in mathematics couldn’t make head nor tail of them. The ETF became the opposite – being too simplistic – and with that the product has brought huge complacency. To that end Sesame Street could well switch to Elm Street.

Today assets invested in ETF/Ps comprise over $3 trillion globally. Put simply the new funds flowing into ETFs vs. traditional mutual funds is at a 100:1 ratio and in terms of AUM is on par with total hedge fund assets which have been in existence for 3 times as long.

However ETFs, despite increasing levels of sophistication, have brought about higher levels of market volatility. Studies have shown that a one standard deviation move of S&P500 ETF ownership carries 21% excess intraday volatility. Regulators are also realising that limit up/down rules are exacerbating risk pricing and are seeking to revise as early as October 2015. In less liquid markets excess volatility has proved to be 54% higher with ETFs than the actual underlying indices. A full report can be seen here.

With the continuation of asset bubbles in a TINA (there is no alternative) world, ETFs in my view will lead to massive disappointments down the line. Their downfall could well invite the revival of the research driven fund manager model again as robots show they’re not as infallible as first thought in managing the volatility. Don’t forget humans designed the algorithms.

There is also the added risk of whether some ETFs actually hold the physical of the indices or commodities they mimic. A gold ETF is a wonderfully good way to store wealth without resorting to one’s own bank vault but how many ETF owners have inspected the subterranean cage that supposedly holds the physical the ETF is backed by? Has it been lent out? Does it own a fraction of stated holdings? It could be any other commodity too. Of course the ETF providers bang on about the safety of the products but how many times have we gasped when fraud reared it’s ugly head right in front of us. Bernie Maddoff ring any bells?

Given the implied volatility on the downside we need to bear in mind the actions of central banks. The Bank of Japan (BoJ) is the proud owner of 60% of the ¥20 trillion+ domestic ETF market. While the BoJ says it isn’t finished expanding its world’s largest central bank balance sheet (now 100% of GDP), the US Fed is looking to reduce its balance sheet by over 40% in order to normalize. While one can applaud some level of common sense pervading sadly the consequences of defusing the timer on the bomb they created at a period when the US economy is showing signs of recession will only be an overhang on asset markets. Should the US market be put through the grinder, global markets will follow.

It is one thing for the Fed to be prudent. It is another for it to be trying to cover its tracks through higher interest rates in a market that looks optically pretty but hides serious life threatening illnesses. The Fed isn’t ahead of the curve at all. It is so far behind the 8-ball that its actions are more likely to accelerate rather than alleviate a crisis. Point to low unemployment or household asset appreciation as reasons to talk of a robust economy but things couldn’t be further from the truth. Wage growth is not the stuff of dreams and the faltering signs in auto, consumer and residential markets should give reason for concern.

Since GFC we have witnessed the worst global economic revival in history. The weakest growth despite record pump priming and balance sheet expansion. Money velocity is continually falling and the day Greenspan dispensed with M3 reporting one knew that things were bad and “nothing to see here” was the order of the day.

Record levels of debt (just shy of $220 trillion or 300% of GDP when adding private, corporate and government), slow growth, paltry interest rates and coordinated asset buying have not done anything other than blown more air into a bubble that should have been burst. GFC didn’t hit the reset button. Central banks just hit print to avoid the pain. We’ve doubled up on stupidity, forgot the idea of prudent and sensible growth through savings and just partied on. Ask any of your friends in finance what they “really” think and I can assure you that after a few drinks they’ll tell you they’re waiting for the exit trade. They know Armageddon is coming but just don’t know when

Whether we like it or not, the reset button will be hit. I often argue people should not worry about the return ON their money but the return OF it. Global markets can’t be bailed out again with massive cash infusion. That has been a recipe for disaster, only widening the gap between haves and have nots. Debt must be allowed to go bad, banks must be allowed to go bust and free markets must be freed from the shackles of state sponsored manipulation to set prices. It will be ugly but more of the same can kicking won’t work.

ETFs are a sign of the times. They represent the slapdash approach to life these days. Time saving apps if you will. However nothing beats hard nosed analysis to understand what awaits us. Poor old Big Bird will be the canary in the coal mine and Sesame Street will be renamed Elm Street as the Kruger’s move in to give us nightmares Janet Yellen assures us aren’t possible.

Perhaps that is the ultimate question. As you go to work each day do you honestly feel that things are peachy as the management town hall meetings would have you believe? Are your friends or colleagues all bulled up about the future? Perhaps that is easier to answer than an ETF.

Yellen’s Fedtime stories

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US Fed Chair Janet Yellen uttered perhaps some of the most bizarre words to come out of a central banker. So much so that Alan Greenspan’s “I know you think you understand what you thought I said but I’m not sure you realize that what you heard is not what I meant.” seems almost comprehensible by comparison. Yellen told an audience that she believes we won’t see another severe financial crisis in our lifetimes. Either Ms Yellen is not long for the world or denial is running deep within her veins. One of her own FOMC board members (James Bullard) wrote a piece on why the Fed needs to trim its balance sheet from $4.47tn to around $2.5 trillion) so they can prepare for the next horror that awaits.  Even Minnesota Fed Reserve Bank President Neel Kashkari said the likelihood of another financial crisis is 2/3rds. We have a world with debt up to its eyeballs and global interest rate policies that have only led to the slowest post slowdown growth in history. The signs of a global slowdown are becoming ever more obvious even in the US. Slowing auto sales and rising delinquencies are but one signal. The imminent collapse of so many public pension funds another.

Had she not seen the European Commission’s decision to let Italy spend up to 17 billion euros to clean up the mess left by two failed banks? The news is not only another whack for Italian taxpayers but a setback for the euro zone’s banking union, and a backflip for the EU’s stance on non-standard bailouts. The Italian government wound down Banca Popolare di Vicenza and Veneto Banca, two regional lenders struggling under the weight of non-performing loans which averages 20% across the nation and up to 50% in the south. Intesa Sanpaolo bought the banks’ good assets for one euro, and was promised another 4.8 billion euros in state aid to deal with restructuring costs and bolster its capital ratio. Italy’s taxpayers get to keep the bad loans, which could end up costing them another 12 billion euros. Even the Single Resolution Board — whose purpose is to take the politically difficult decision of whether to close a bank out of the hands of governments — chose not to intervene.

Last year four Italian banks were rescued and it seems that since Lehman collapsed in 2008 non performing loans (NPLs) have soared from 6% to almost 20%. Monte Dei Paschi De Siena, a bank steeped in 540 years of history has 31% NPLs and its shares are 99.9% below the peak in 2007. Even Portugal and Spain have lower levels of NPLs. The IMF suggested that in southern parts of Italy NPLs for corporates is closer to 50%!

Italy is the 3rd largest economy in Europe and 30% of corporate debt is held by SMEs who can’t even make enough money to repay the interest. The banks have been slow to write off loans on the basis it will eat up the banks’ dwindling capital. It feels so zombie lending a la Japan in the early 1990s but on an even worse scale.

Not to worry, the Italian Treasury tells us the ECB will buy this toxic stuff! But wait, the ECB is not allowed to buy ‘at risk’ stuff. So it will bundle all this near as makes no difference defaulted garbage (think CDO) in a bag and stamp it with a bogus credit rating such that the ECB can buy it. In full knowledge that most of the debt will never be repaid, the ECB still violates its own rules which state clearly that any debt they buy ‘cannot be in dispute’.

The Bank of Japan has no plans to cut back on the world’s largest central bank balance sheet. It continues to Hoover up 60% of new ETF issues at such an alarming pace it is the largest shareholder of over 100 corporates. Then there is the suggestion of buying all $10 trillion of outstanding JGBs and convert them into zero-rate (+miniscule annual service fee) perpetuals.

Australia’s banks are now the most loaded with mortgage debt globally at 60% of the total loan book.  Second is daylight and third Norway at 40%. Private sector debt to GDP is 185%. We have a government who can’t tighten its belt basing its budget on rosy scenarios that will be improbable. Aussie banks have been slapped with a new tax and with the backdrop of a rising US rate environment, the 40% wholesale funded Aussie banks will be forced to accept higher cost of funds. That will be passed straight onto consumers that are already being crushed under the weight of mortgages. One bank survey by ME Bank in Australia said that 1/3rd would struggle to pay a month’s mortgage if they lost their jobs.

Had Ms Yellen forgot to read the St Louis Fed’s survey which revealed that 45% of Americans can’t raise $400 in an emergency without selling something? USA Today reported that 7 out of 10 Americans have less than $1,000 in savings to their name.

“Last year, GoBankingRates surveyed more than 5,000 Americans only to uncover that 62% of them had less than $1,000 in savings. Last month GoBankingRates again posed the question to Americans of how much they had in their savings account, only this time it asked 7,052 people. The result? Nearly seven in 10 Americans (69%) had less than $1,000 in their savings account…Breaking the survey data down a bit further, we find that 34% of Americans don’t have a dime in their savings account, while another 35% have less than $1,000. Of the remaining survey-takers, 11% have between $1,000 and $4,999, 4% have between $5,000 and $9,999, and 15% have more than $10,000.”

So Chair Yellen, we are not sure what dreamland you are living but to suggest that we won’t see another financial crisis in our lifetime almost guarantees it will happen. The Titanic was thought unsinkable until history proved otherwise. Money velocity is not rising and every dollar printed is having less and less impact. I thought it nigh on impossible to surpass the stupidity of Greenspan but alas you have managed it.

Record setting pensioner

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You have to hand it to Valentino ‘The Doctor’ Rossi, the 38-yo pensioner scrapping it with kids almost half his age. I’m an unashamed fan as I have been since 1996 when he was in the 125cc class. He managed to win the Dutch GP in Assen today in a typical strategic race, weighing up and wearing down his competition. 9-time world champ, 115 wins and the only rider to win races across a 20-year career. It is no wonder he’s paid €20mn per annum given the fact he hasn’t lost his edge. Sure he isn’t winning with the ease of his youth but he’s still majorly competitive. He is still in the hunt for a 10th championship. Forza Vale

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The Wallabies literally need to “pull their socks up”

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The problem with the Wallabies rugby team is obvious. Look at the picture above. Where is the discipline? At the start of a match you’d hope that  the players had real pride representing their nation. To be in view of an entire nation. To wear the green and gold with purpose. 3 players have their socks down around their ankles. Trivial? Perhaps but these players don’t share discipline and that is driven by the head coach Michael Chelka. If I was a coach I would expect the players to show the uniform more respect and would see such sloppiness as an unacceptable standard. Let’s see how the NZ All Blacks present themselves as a team. Yes they look like a team. Performing the haka is all about precision and teamwork.

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Perhaps we need look at the 1991 World Cup side

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and 1999

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Two teams that won thanks to their discipline from head to toe.

Why Chelka hasn’t been dumped is beyond me.  Look at how Eddie Jones transformed England after the 2015 World Cup. After watching Japan play Ireland a TV show interviewed players to discuss life under Eddie Jones as a Japanese representative. Two players said he was very strict when it came to alcohol and food. No booze and no fried foods. If he spotted a fried thing on their  plate he’d give them the death stare

All the Wallabies look like now is a collection of prima donnas with self entitlement as a prerequisite. Perhaps the ARU should hire Bobby Knight to install discipline!?

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The Red Pill vindicated in the land of the Rising Sun

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For all the drama surrounding the Red Pill movie and the idea that men can be victims, former LDP politician Mayuko Toyoda made the case for defenseless males. She totally lost the plot at her driver/secretary hurling expletives and insults at his baldness and physically attacking him. Japan has had consecutive episodes of politicians making fools of themselves- is there any wonder the population has lost faith in the ability to operate government. Here are a few reminders.

Nakagawa at the G8. After years of failed policy to weaken the yen his drunk press interview sunk the yen more rapidly than any rational policy before it.

Nonomura hearing over falsified travel claims. He burst into tears at his presser.

Then again we shouldn’t overlook the pathetic level politicians hit on a regular basis overseas-

Aussie PM Turnbull on Trump

Justin Trudeau’s cardboard cut outs of himself

Trump love in with his cabinet who all betrothed their adoration for him

Is this what great leaders are made of?

Edward Scissorbrains

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Johnny Depp joins the list of out of touch celebrities to suggest harm to the sitting president. Instead of accepting a democratic voting process he openly suggests assassination by an actor has happened in the past ( John Wilkes-Booth assassinated Lincoln). Is the word of an alleged wife-beating drunkard who ignored quarantine law to smuggle his dogs into Australia because he thought the rules didn’t apply to him (their video apology was so pathetic) worth listening to? The Secret Service should honestly take actors who threaten the president’s murder (jokingly or otherwise) into custody for thorough interrogation. Hollywood celebrities aren’t above the law. Hypocrites who were sadly ignored again in the recent Georgia election. Nobody cares what celebrities  think! Never a more out of touch bunch.