Benchmarks

UN hit with yet another scandal

Kết quả hình ảnh cho Michel Sidibé

Independent experts have concluded that UN AIDS Executive Director, Michel Sidibé,  has been responsible for creating a toxic environment that promoted “favoritism, preferment and ethical blindness.” Sidibé accepted no reponsibility for any sexual harassment, bullying or abuse of power that occured under his watch.

The investigation started after Sidibé’s deputy was accused of  forcibly kissing, groping and trying to drag a colleague into his Bangkok hotel room in 2015.

In a survey of the 670 staff members at the UN agency conducted by the independent investigators, 18 admitted they had experienced some form of sexual harassment in the previous year and a further 201 said they were on the wrong end of workplace abuse.

One staff member went on the record saying, “U.N.AIDS is like a predators’ prey ground…You have access to all sorts of people, especially the vulnerable: You can use promises of jobs, contracts and all sorts of opportunities and abuse your power to get whatever you want, especially in terms of sexual favors. I have seen senior colleagues dating local young interns or using U.N.AIDS resources to access sex workers.

UN Secretary General Antonio Guterres, who made it clear he had a zero tolerance policy with regards to sexual harassment when he took office,  has refused to fire him. Despite his term ending in January 2020, Sidibé has offered to quit in June 2019 in order to ensure a stable transition period! In what world does a person outed for turning a blind eye to such a poisonous culture get to leave on his own terms? Sacred cows.

Sidibe admitted in an email after the investigation was published, “not all of our staff, in all their diversity, are experiencing the inclusive work culture to which we aspire.” Choice words.

Why do governments continue to fund the UN when it shows time and time again that it operates without any form of governance or ethical code? Remember it wasn’t that long ago that certain people at the UN thought former Zimbabwean dictator Robert Mugabe would make a sensible ambassador for the World Health Organization (WHO). Why would any country seriously want to sign over sovereign powers to the UN with respect to the compact on migration? The UN isn’t fit to run anything of substance.

Why after all the scandals with the IPCC do people put faith in their ability to manage climate change summits? The Delinquent Teenager, written by Canadian investigative journalist Donna Laframboise chronicles how the IPCC participants are picked by governments, not for their scientific knowledge and expertise, but for their political connections and for “diversity.” You can read some of the ridiculous selection processes for lead authors here.

Note the UN promised to streamline. As CM noted 15 months ago,

“The latest U.N. regular budget, while superficially smaller than the previous budget, made no fundamental programmatic or structural adjustments—e.g., reducing permanent staff, freezing or reducing salaries and other benefits, and permanently eliminating a significant number of mandates, programs, or other activities—that would lower the baseline for future U.N. budget negotiations. Despite the Secretary-General’s proposal to eliminate 44 permanent posts, the 2012–2013 budget actually increased the number of permanent posts by more than a score compared with the previous budget. The failure to arrest growth in U.N. employment, salaries, and benefits is especially problematic because personnel costs account for 74% of U.N. spending according to the U.N.’s Advisory Committee on Administrative and Budgetary Questions (ACABQ). Without a significant reduction in the number of permanent U.N. posts or a significant reduction in staff compensation and related costs, real and lasting reductions in the U.N. regular budget will remain out of reach.”

The Katowice Kindergarten

Thunberg.png

While Swedish 15-yo Greta Thunberg deserves absolutely no criticism for presenting in front of a COP24 audience for something she has been made to believe, the deliberate use of children to behave as political pawns is disgraceful, although hardly surprising from a body which has such dreadful ethics. Climate alarmism hit new lows when UN Secretary General Guterres and a collection of hand picked delegates fawned over Thunberg’s catchphrases like she was smarter than all of those there. Honestly if kids are so smart, why bother with pursuing tertiary education? Although the mainstream media might have had a point about the children being more mature than the adults.

Childishness seems to be a recurring theme at the COP24 summit. Whether it is the chanting and laughter brigades deployed to disrupt forums on coal or the “Fossil of the Day Awards” where the host brazenly shames representatives who don’t conform to the realpolitik of the climate alarmists, it is juvenile. There are even fossil fuel derived signs and a T-Rex suited sidekick to add to the childish antics of slagging off the Polish hosts for promoting clean coal.

There was touch of irony when the masked compere in a skeleton tuxedo lambasted Australia for having the hide to use its $100s of millions of carbon credits it earned from the Kyoto Protocol. So flimsy is the framework behind these self-coined “historic” agreements, that countries can get a bashing for adhering to the clauses agreed by the same body hosting the summit. Take that!

When will these stooges work out that shaming those that hold alternative views won’t win over the hearts and minds of those they haven’t convinced?  Why can’t they debate with reasoned arguments, facts and courteous common sense rather than tease those that disagree with them in the sandpit? Surely if the supposedly flaky arguments presented by skeptics are allowed to be heard without interruption, they’ll dig their own grave when asked to back up their own untruths? It is that simple. Ahh but to the cultural Marxists, there are no voices to be heard other than their own. A bit like the marching Maoist Chinese girls in The Last Emperor.

Let us be frank. The UN could not give two hoots for this girl other than what she can do to resurrect the fortunes of a conference that is dying in relevance. Think about it. In Copenhagen, 40,000 climate pilgrims showed up to COP-21. This was the summit where Al Gore mysteriously disappeared when it was shown his hockey stick prophecies were utter tripe. Katowice COP24 has managed 22,000 delegates and 7,331 observers. At least we can say there are far fewer hypocrites at this function shooting to maintain frequent flyer status.

COP summits are little more than a cash grab which is pretty obvious when looking at the delegates present. 42% of those at COP24 are from Africa lining up to receive millions in funding from guilt ridden Western nations. There is a reason why Guinea sent 409 delegates and Australia 30, even though the latter has twice the population of the former.

Although is there another reason why the political class is not listening to the kids? Thunberg is probably unaware many leaders of European nations have no progeny.

France’s Emmanuel Macron – no kids.
Germany’s Angela Merkel – no kids
UK PM Theresa May – no kids.
The Netherlands PM Mark Rutte – no kids.
Former Italian PM Paolo Gentiloni – no kids.
Swedish PM Kjell Stefan Löfven- no biological kids.
Luxembourg PM Xavier Bettel – no kids.
Austrian Chancellor Sebastian Kurz – no kids (although he’s only 32)
Scotland’s Nicola Sturgeon – no kids.
EC President Jean-Claude Juncker – no kids.
Incidentally Japan’s PM Abe also has no children.

CM is a fervent supporter of children learning and becoming passionate about certain topics, on the proviso that teaching faculties are prepared to debate both sides of the story in earnest and allow critical evaluation. As evidenced by the 15,000 strong school student led climate strikes across Australia, the Department of Education & Training should be fast tracking spirit levels to schools around the country to ensure there is balance in the classroom.

Poverty, poverty on the wall, the French aren’t even the worst of all

PovEU

Why are we surprised at the yellow vest uprising across France? Poverty/risk of social exclusion across Europe has continued to spiral upwards since the Global Financial Crisis (GFC). There were 78mn living below the poverty line in 2007. At last count, Eurostat notes that number was 118mn  (23.5% of the European population). In the Europe 2020 strategy, the plan is to reduce that by 20 million.  37.5mn (7.5%) are living in severe material deprivation (SMD) , up from 32mn in 2007.

The SMD rate represents the proportion of people who cannot afford at least four of the nine following items:

  • having arrears on mortgage or rent payments, utility bills, hire purchase installments or other loan payments;
  • being able to afford one week’s annual holiday away from home;
  • being able to afford a meal with meat, chicken, fish (or vegetarian equivalent) every second day;
  • being able to face unexpected financial expenses;
  • being able to buy a telephone (including mobile phone);
  • being able to buy a colour television;
  • being able to buy a washing machine;
  • being able to buy a car;
  • being able to afford heating to keep the house warm.

The French are merely venting what is happening across the EU. The EU could argue that at 18% poverty, the French should be happy compared to other nation states. Europeans aren’t racist to want a halt to mass economic migration when they are the ones financially struggling as it is. Making economic or compassionate arguments aren’t resonating as they feel the problems first hand.

Is it a surprise that the UK, at 22.2% poverty, wanted out of the EU project to take back sovereign control? Project Fear might be forecasting Armageddon for a No Deal Brexit but being inside the EU has hardly helped lift Brits from under a rock. Why would anyone wish to push for a worse deal that turns the UK into a colony?

Why is anyone surprised that there has been a sustainable shift toward populist political parties across Europe? Austria, Italy, The Netherlands, Poland, Hungary, Sweden, Germany…the list goes on. Even France should not forget that Front National’s Marine LePen got 35% of the vote, twice the level ever achieved. Is is a shock to see her polling above Macron?

The success and growth of EU-skeptic parties across Europe will only get bigger. The mob is unhappy. Macron may have won on a wave of euphoria as a fresh face but he has failed to deliver. He may have suspended the fuel tax hikes, but the people are still on the street in greater numbers. He has merely stirred the hornet’s nest. Perhaps UK PM Theresa May should take a look at the table above and realise that her deal will only cause the UK to rise up. At the moment sanity prevails, and when it comes in the shape of Jeremy Corbyn that is perhaps a sign in itself.

Complacency kills – the ticking time bomb for Aussie banks

クリックすると新しいウィンドウで開きます

In the late 1980s at the peak of the property bubble, the Imperial Palace in Tokyo was worth the equivalent to the entire state of California. Greater Tokyo was worth more than the whole United States. The Japanese used to joke that they had bought up so much of Hawaii that it had effectively become the 48th prefecture of Japan. Japanese nationwide property prices quadrupled in the space of a decade. At the height of the frenzy, Japanese real estate related lending comprised around 41.2% (A$2.5 trillion) of all loans outstanding. N.B. Australian bank mortgage loan books have swelled to 63% (A$1.7 trillion) of total loans.

REpx.png

Sensing the bubble was getting out of control, the Bank of Japan went into a tightening rate cycle (from 2.5% to 6%) to contain it. Unfortunately it led to an implosion in asset markets, most notably housing. From the peak in 1991/2 prices over the next two decades fell 75-80%. Banks were decimated.

In the following two decades, 181 Japanese banks, trust banks and credit unions went bust and the rest were either injected with public funds, forced into mergers or nationalized. The unravelling of asset prices was swift and sudden but the process to deal with it took decades because banks were reluctant to repossess properties for fear of having to mark the other properties (assets) on their balance sheets to current market values. Paying mere fractions of the loan were enough to justify not calling the debt bad. If banks were forced to reflect the truth of their financial health rather than use accounting trickery to keep the loans valued at the inflated levels the loans were made against they would quickly become insolvent. By the end of the crisis, disposal of non-performing loans (NPLs) among all financial institutions exceeded 90 trillion yen (A$1.1 trillion), or 17% of Japanese GDP at the time.

The lessons are no less disturbing for Australia. Don’t be surprised to hear the authorities and local banks champion stress tests as validity that we are safe from any conceivable external shock. The November 2018 Reserve Bank of Australia minutes revealed that the next rate move is likely up but the board is happy to sit on its hands because housing is slowing even at 1.5% cash rates.

With US rates heading higher, our banks are already facing higher funding costs because of our reliance on overseas wholesale markets to fund mortgage lending. Japanese banks have 90%+ funding from domestic deposits. Australia is around 60-70%. Our banks need to go shopping in global markets to get access to capital. Conditions for that can change on a dime. External shocks can see funding costs hit nose bleed levels which are passed onto consumers. When you see the press get into a frenzy over banks passing on more than the rate rises doled out by the RBA, they aren’t just being greedy – a large part is absorbing these higher wholesale funding costs.

What about America? Who could forget former Goldman Sachs CEO and US Treasury Secretary Hank Paulson tell us how robust US financial institutions were right before plugging $700 billion to rescue the crumbling system? US banks such as Wells Fargo, Citi and Bank of America (BoA) have been reducing mortgage exposure relative to total loans outstanding. Yet each received $10s of billions in TARP (bail out funds) courtesy of the US taxpayer.

By 2009 the Global Financial Crisis (GFC) had turned over 16% of Bank of America’s residential mortgage portfolio into either NPLs, mortgage payments over 90-day in arrears or impaired (largely from the shonky lending practices of Countrywide (which BoA bought in 2008). Countrywide’s $2.5bn acquisition price turned out to cost BoA shareholders a further $50bn by the end of the clean-up. Who is counting?

Oh no, but Australia is different. Residential property prices in Australia have had a far steadier rise over a longer period – a 5-fold jump over 25 years – meaning our local banks should be less vulnerable to external shocks. There is an element of truth to that, although it breeds complacency.

Property loans in Australia as at September 2018 total A$1.653 trillion. 82% of those loans are made by the Big 4 banks. Interest only loans are around $500 billion of that. As a percentage of total loans outstanding in Australia, mortgages make up 65%. The next is daylight, followed by Norway at around 40%. US banks have cut overall property exposures and Japanese banks are now in the early teens. Post GFC, US banks have ratcheted back mortgage exposure. They have diversified their earnings through investment banking and other areas. You can see this below.

REEx

The advent of interest only loans has helped pushed property prices higher. NAB notes in its latest filing that 29% of its mortgage loan book is in interest-only form. The RBA expects $120 billion of interest only loans resetting to principal & interest (P&I) each year to 2020 which will hike monthly mortgage repayments to jump 30-40%. If investors were up to the gills in interest only mortgage repayments, adding one third to the bill will not be helpful. This is before we have even faced a bump in wholesale finance rates due to market instability. Look at the way that GE – once the world’s largest company in 2000 – is being trashed by the credit markets as they seek to reprice the risk attached to the $111bn in debt after a credit downgrade. This is a canary in the coalmine issue.

We also need to consider what constitutes a bubble in property. Sensibly, affordability makes the strongest argument. At the height of the bubble, the average central Tokyo property value was around 18.2x income. Broadening this out to greater Tokyo metropolitan area this was around 15x. This figure today is around 5x. Making arguments that ever higher levels of migration will keep property buoyant is not a sound argument as affordability affects them too.

Back in 2007, Sydney house prices were 8x income. In 2017 Demographia stated average housing (excluding apartment) prices are in the 13-14x range. The Australian Bureau of Statistics notes that 80% of people live in houses and 20% on apartments. Only Hong Kong at 19x beats Sydney for dizzy property prices.

In 2018, Australia’s GDP is likely to be around A$1.75 trillion. Our total lending by the banks is approximately $2.64 trillion which is 150% of GDP. At the height of the Japanese bubble, total bank lending as a whole only reached 106%. Mortgages alone in Australia are near as makes no difference 100% of GDP.

Balance sheets are but snapshots in time. If we look at our current bank exposure to mortgages, it is easy for analysts to paint rosy pictures. Banks’ shareholder equity has quadrupled in the past 16 years. Prosperity and record bank profits should give us comfort. Or should it? We need to understand that the underlying tenets of the Australian economy are completely different to that of a decade ago.

At the time of Global Financial Crisis (GFC) Australia’s economy was lucky to get away broadly unscathed. We carried no national government debt and were able to use a $50 billion surplus to prime the economy through that period of turmoil. Many countries were not so lucky. Our fiscal stewardship leading up to the crisis allowed economic growth to remain in positive territory soon after. Now we have $600 billion debt and charging the national credit card with all of the promises so aggressively that we should expect $1 trillion of debt in the not too distant future.

Australian banks are highly leveraged to the mortgage market. It should come as no surprise. In Westpac’s full year 2018 balance sheet, the company claims around A$710 billion in assets as “loans”. Of that amount, according to the latest APRA data, A$411 billion of lending is ‘real estate’ related. Total equity for the bank is A$64.6 billion. So equity as a percentage of property loans is just shy of 16%. If Australia had a nationwide property collapse (we have not had one for three decades) then it is possible that the banks would face significant headwinds.

What that basically says is if Westpac suffered a 16% decline in the value of its entire property loan book then it would at least on paper appear in negative equity, or liabilities would be larger than assets. Recall in 2009 that BoA had over 16% of its residential loan portfolio which went bad. It can happen. CommBank is at a similar level. ANZ and NAB are in the 20% range before such a hypothetical situation would be triggered. See the chart below. Note how the US banks stung by the GFC have bolstered balance sheets

RESHREL.png

Of course the scenario of a housing collapse would imply that a growing number of borrowers would have to find themselves under mortgage stress and default on payments. It also depends on the portfolio of the properties and when those loans were written. If the majority of loans were made 10 years ago at 40% lower theoretical prices than today then there is lower risk to solvency for the bank if it foreclosed and dumped the property.

Although if we look at the growth in loans since 2009, the Australian banks have been making hay while the sun shines. As it stands, the likes of Westpac and CommBank each have extended mortgage loans to Aussies to nearly as much as BoA has to Americans. That said the American banks, so stung by the GFC, have become far more prudent in managing their affairs.

REGrowth.png

It goes without saying that keeping one’s job is helpful in paying the mortgage. If you were a two income family and one of you lost your job, it is likely that dining out, taking fancy overseas holidays, buying new cars (which have been awful this year) and so on will go on the backburner. Should those actions swell to a wider number of mortgage holders, the economic slowdown will exacerbate in a downward spiral. Even your local coffee store may be forced to close because $4 is just cash you and others might not be able to spend. Boarded up High Streets were everywhere in America and Europe post GFC.

UnempvHPI.png

The following chart shows the negative correlation between housing prices and unemployment rates. US unemployment doubled to 10% when Lehman collapsed. Housing prices took heavy hits as defaults jumped. It is not rocket science.

AusUnempHPI.png

On the other hand, Australia’s unemployment curve remained below 6% for around two decades. Even with GFC, jobless numbers never got out of hand. Our housing prices only suffered a mild dip.

We can argue that a sub-prime style mortgage crisis is highly unlikely. But it does not rule the risk out completely. To have that, mortgage holders would need to be in arrears on monthly payments, their houses would need to be in negative equity and banks would be required to take asset devaluations.

An ME Bank survey in Australia found only 46% of households were able to save each month. Just 32 per cent could raise $3000 in an emergency and 50 per cent aren’t confident of meeting their obligations if unemployed for three months.

According to Digital Finance Analytics, “there are around 650,000 households in Australia experiencing some form of mortgage stress. If rates were to rise 150 basis points the number of Australians in mortgage stress would rise to approximately 930,000 and if rates rose 300 basis points the number would rise to 1.1 million – or more than a third of all mortgages. A 300 basis point rise would take the cash rate to 4.5 per cent, still lower than the 4.75 per cent for most of 2011.”

Do you know how many homes NAB has under repossession on its books at the latest filing? Around 277. Yes, Two hundred and seventy seven. Out of 100,000s. Recall BoA had 16% of its loan portfolio go bang in 2008?

If we think about it logically, examining the ratio of total assets to shareholder equity (i.e. leverage), the Aussie banks maintain higher levels than the US banks listed below did in 2008. Were total asset values to suddenly drop 7% or more ceteris paribus, Aussie banks would slide into a negative equity position and require injection.

TASE.png

Human nature is conditioned to panic when crisis hits. Sadly many of our middle management class have never experienced recession. They are in for a rude shock. As for depositors note that you should be focused on the return “of” your money, not the return “on” it.

As Mark Twain once said, “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so!

 

 

When the supervisor can’t follow the rules

Japan Exchange Group’s (owner of the Tokyo Stock Exchange) CEO Akira Kiyota has agreed to take a 30% pay cut for 3 months after admitting he’d broken internal rules on prohibited investment.

Surely as the supervisor of one of the largest stock exchanges in the world there would be sufficient systems in place to prevent such embarrassing events. A bit hypocritical to come down hard on listed corporates when the headmaster can’t follow his own rules.

As a former stockbroker, it was a sackable offense to make stock and bond investments without sign off from compliance and a manager to mitigate any risk of insider trading. It is a bit rich to suggest the JPX boss wasn’t aware of his internal rules and had he any doubt whatsoever it would have been an easy discussion had with the relevant department.

Corporate governance in Japan remains woefully inadequate. The JPX board has approved the ¥20mn (US$180k) profit made by the CEO on the initial ¥150mn (US$1.3mn) investment be given to the Japanese Red Cross. Will that be pre or post any capital gains tax? Why isn’t the board calling for him to resign? Why isn’t Kiyota resigning on principle to save the organization’s stained reputation as the vanguard of best practice?

Then again we should not be surprised. It took months for the JPX to remove/suspend Toshiba from the best in class corporate governance index (JPX Nikkei 400) after its accounting scandal became outed and there has been no investigation of Kobe Steel when blatant insider trading was visible to a novice. It leaked information about its fraudulent product specifications to customers three weeks before announcing to the market. All the tell-tale signs of heavy short selling positions on many multiples of average daily volume traded on the day of informing clients was evident. Yet nothing was even suspected, investigated or referred to the regulator.

Then take a look at the saga of Nissan. Documents have revealed former CEO Carlos Ghosn supposedly washed his multi-million dollar personal investment losses through the company as well as using Nissan money to buy several private properties in his name. That would still require the board to be willfully blind to sign off on such big ticket items or point to woeful internal controls. What governance structures could be in place when there is no board accountability over Ghosn’s actions? Being bullied by a dominant CEO is no excuse. The board should have tendered their resignations en masse.

Indeed there have been countless corporate governance lapses overseas – Parmalat, GSK, Stanford, Enron, Tyco etc- but in Japan there is little or no punishment for most executives who break laws (internal or external). Throwing the book at Ghosn will be an exception. Most C-level managers in Japan escape with little more than wounded pride.

Cutting salary for misdemeanors is woeful governance too. The biggest way to force compliance is to threaten a Japanese boss’ company car privileges. The highest status for a CEO is to be whisked around in a personal Toyota Century. Stripping it would literally force corporate leaders to do the walk of shame.

Double Standard

After 20 years in Japan, there is a wish buried deep down that the locals consult foreigners when dabbling with the use of English to prevent misinterpretations, especially at a corporate level. The company, Double Standard has recently been promoted to the 1st Section of the Tokyo Stock Exchange.

Double Standard Inc. principally provides business improvement and supportservices based on the big data technology.  Let’s hope it doesn’t live up to the namesake when dealing with customers.

Japan’s Sun City once highlighted to foreigners back in 2008 that it was ‘puking property inventories’ in its English press release after it ran into financial difficulties after Lehman Brothers collapsed.

The ultimate irony of the misfortunate name of Double Standard is it accurately assesses the way the authorities continue to apply the law with respect to corporate malfeasance.

How many canaries in the coalmine do we need?

SAAR.png

CM has said for ages that President Trump risks being hoisted by his own petard if he continues to attribute the stock market to his leadership. It works both ways. Stock markets are suffering. Suck it up.

GM has announced it is pulling the plug on over 14,000 US workers (8,000 white collar, 3,300 blue-collar workers in Canada and another 2,600 in the US) and potentially closing  5 plants. Is this a surprise? The chart above shows the % year over year change of US car sales. It has been stepping down clearly since GFC. In September this year GM’s sales slumped 19% in before falling 5.5% in October. The brutal storm activity is unlikely to help November either.

This quote will live to haunt in the coming downturn – CEO Mary Barra said the company doesn’t predict an economic downturn any time soon and is making the cuts “to get in front of it while the company is strong and while the economy is strong,

50% of US corporations have a credit rating of BBB or less. We are at the sharp end of massive government sector recapitalization crowding out and companies with dodgy balance sheets (that have levered up to conduct massive buybacks to flatter EPS masking anemic earnings growth) won’t be given the same tight interest rate margin spreads come the next refinancing. Await the implosion.

Rising interest rates don’t help and credit markets wait like vultures over the likes of GE which is having a reality check over its $115bn of debt, negative equity and troubled restructuring. Credit rating downgrade have booted it from some funds so the stock is in the cross hairs. If it had any sense it would file for Chapter 11 to buy breathing space.

If you want to put some perspective on it, GE’s market cap in 2000 was $592bn and now is $65.8bn. Tesla is now worth $56bn.

GM is yet another canary in the coalmine