Corporate Governance

Those selfish evil banks?

As is the case with nearly every rate cut, the media stirs up the fact that most of the major Aussie banks haven’t passed on the full 0.25% rate cut. As one can see from the RBA chart above, net interest margins are at the lowest level in 20 years. The banks, as much money as they might be making, are doing it very tough. What people often overlook is the fact that Aussie banks are 40% funded by the wholesale markets, meaning they need the benevolence of foreign and domestic institutions to buy their paper to lend. With a softening Aussie dollar that puts added pressure on funding margins.

Banks

We’ve written about this in previous dispatches. Aussie banks are in a far more precarious situation than we are often told. Global banks have already felt it. We are getting to the stage where we follow them into the morass.

As much as bashing banks has become a sport after the Royal Commission, bullying them into cutting rates by the full extent is actually making their position even weaker. The last thing Australia needs, on top of the ridiculous regulation set to follow the RC, is to force them to operate to the rule of the mob. Personal responsibility is what governments should be drumming home, not saddling the banks with more hoops. If people don’t like their bank that lent them millions for a home loan, switch banks! It is your choice.

#CancelWhitePeople Sarah Jeong dumped by NYT

What irony that The NY Times finally came to the conclusion what the majority knew about potty mouthed Sarah Jeong, albeit 12 months too late. The picture above shows a selection of tweets before she was hired by NYT. Despite that, NYT defended her hire.

CM wrote back in August 2018,

“Was Jeong not aware that 8 of the 12 board of editors are currently white? Not that the board’s racial identity should have any bearing on disgraceful bigotry displayed by her.

The only point at stake here is whether The NY Times will defend and maintain consistent standards it would certainly hold if a white editor raged on about people of other colour. This isn’t a rally or #boycott (please no more boycotts) to get Jeong sacked. On the contrary. In free market thinking the question is whether The NY Times exercises rational judgement and sees that from a commercial perspective defending the indefensible might not be good for growing the business or encouraging a shrinking pool of paying advertisers to rent more space?

After the election of Trump, the newspaper changed its slogan to “The truth is more important now than ever.” For someone to espouse such bitter hatred so candidly in social media forums which have a half life of infinity, her truths are for all to see. The truth in The NY Times’ slogan is also on display.

How could The NY Times possibly hope to uphold the highest levels of ethics and moral high ground by defending her? In her press blurb the paper is effusive with praise citing, “Sarah has guided readers through the digital world with verve and erudition, staying ahead of every turn on the vast beat that is the internet.“ It is also quite telling that Twitter didn’t think she broke the very standards that would see conservative voices banned for far less offensive tweets.

CM wonders what the Harvard Law School has to say about its deeply talented alumni who served as Editor of the Journal of Law and Gender? Perhaps she just missed the ethics classes because she was too busy battling to make sure the correct pronouns were used in the articles on identity politics.”

Now the NYT has terminated her contract. Undoubtedly her contribution was as empty as her Twitter bile. She will now be a contributor, a rather large downgrade from being on the editorial board. She tweeted about the NYT paying attention to subscriber numbers, something the paper might have considered at the start.

Maybe her impact was one which didn’t ring the turnstiles at NYT. It is likely the same reason why The Guardian begs for charity instead of coming to terms with the fact that the content maybe the problem.

Note NYT is offering Aussies an 80% off subscription deal for a year.

RACGP alarmism should be driving the AMA not climate

AMA.pngThe Royal Australian College of General Practitioners logo

Now it all makes sense. The Australian Medical Association’s (AMA) latest push on climate change doesn’t appear to be about saving the planet but looking to safeguard its own survival. AMA’s main rival association, the Royal Australian College of General Practitioners (RACGP) seems to be on the right prescription medication as far as membership growth and revenue goes. 

The AMA’s climate push seems to be a concerted effort to lock in future revenues by appealing to students. AMA ‘Associate Medical Student Members‘ have ballooned in the last two years from 8,664 to 15,311 to offset the (pardon the pun) flatline in regular members which have hovered a shade under 30,000 members since 2016. Previous AMA annual reports (AR) make no mention of hard membership numbers. The 2015 AR made reference to 30,000+ members which suggest it wasn’t 31,000+. Students, who now represent over 1/3rd of members, can join for free. Undoubtedly the strategy lies in the hope those students roll over to become fully paid members when they start to practice.

Last year, Dr Bill Coote, former Secretary-General of the AMA (1992-98) wrote in Medical Republic,

In 1962, more than 95% of doctors belonged to the AMA. By 1987 it was 50%. AHPRA reports that in 2016 there were 107,179 registered medical practitioners. The 2016 AMA annual report notes a membership of 29,425. That is 27% of doctors.

Since 2012, AMA annual membership collections have shown relatively anaemic growth from around $11m in 2012 to $12.4m in 2018 from its 29,659 full paying members. Revenues have shown similarly slow growth. Revenues (ex any asset sales) have grown from $20.29m in 2012 to $22.35m in 2018. 10% growth over 6 years.

What of the RACGP?

The RACGP has 35,385 full members and 5,493 student members. Moreover, the group collected $34.6m in membership fees in 2018, near as makes no difference three times the AMA.

Isn’t this just a classic case of customers appreciating what they pay for? Will those AMA student members work out – when forced to shell out hard dollars on membership – as they embark on their medical career that the RACGP is the go-to organisation? Any manner of conference cocktail parties will undoubtedly whisper the realities of membership benefits of both organisations. Surely the more seasoned doctors will make their preferences known. After all, students are more likely to pin their formative years to guru practitioners in the profession rather than lean on the musings of an association that provides cheaper hire car tariffs and frequent flyer club perks.

Revenues for the RACGP have more than doubled from $38.6m in 2012 to $83.1m in 2018.

Maybe Dr. Coote has found the problem when he wrote, ”

AMA members’ fees fund the Medical Journal of Australia. The MJA is uniquely positioned to promote serious commentary on the policy, regulatory and economic changes reshaping Australian medical practice, but now seems to prioritise the interests of academic doctors...The decline in AMA membership penetration from 95% to 50% to 27% of doctors is a significant historical trend.  A US management guru once suggested, organisations are at risk if they respond to a changing environment by redoubling their efforts to do things the way they have always done them…Let’s hope the AMA does not become the Kodak of Australian medical history.”

Climate change might seem to be a woke avenue to do things differently at the AMA, but surely it stands to learn a lot more by studying why the RACGP is surgically keeping it in the ICU rather than pursue fields it has no expertise in an attempt to revive itself. If the AMA board pursues such amputated strategies it is bound to find itself running out of bandages before its members realise that cauterizing membership cash flow is the only viable long term option.

SBS impartiality & Amanda McKenzie’s colossal clumsiness

Image may contain: 1 person, text

Good to see the SBS has made sure it has an impartial position on topics such as climate change remains steadfastly in line with its charter. It not only avoided enlargening the font in bold of certain choice words spoken by Climate Council CEO Amanda McKenzie but it also refrained from putting a picture of the broadcaster’s ultimate boss holding a lump of coal. The irony is that the Climate Council guru’s facts were, unfortunately, wrong.

PM Scott Morrison’s facts were by and large correct. Never mind that they disagreed with McKenzie’s narrative. Good to see that SBS followed up with a rigorous line of questioning to get her to point out exactly where the PM was out of line. Sadly, that was a bridge too far for the alarmist journalists.

Presumably “colossal bullshit” should have been evidence enough. The Climate Council did release a statement but instead of countering fact, it just produced its own interpretation of what it wanted to hear, rather than point out where Morrison had blatantly told porky pies.

For instance the Climate Council stated:

Morrison statement: “Australia is responsible for just 1.3 per cent of global emissions. Australia is doing our bit on climate change and we reject any suggestion to the contrary.”

Fact-check: Australia is the 17th largest polluter in the world, bigger than 175 countries.  We are the third-largest exporter of fossil fuels in the world. 

CM: It is irrelevant. Australia’s GHG as measured by the IPCC, IEA and Eurostat are 1.3% of human-made CO2. It is the truth from sources that align with the Climate Council. It only shows that the previous 16 countries absolutely dwarf us by comparison. China is 29.3% on its own.

Furthermore to make statements that our coal exports should be counted in our emissions number is the same argument as saying that every imported passenger car, transport truck and commercial jet should have emissions docked against America, Japan, Korea and the EU.  That would be consistent

Morrison statement: “And our Great Barrier Reef remains one of the world’s most pristine areas of natural beauty. Feel free to visit it. Our reef is vibrant and resilient and protected under the world’s most comprehensive reef management plan.”

Fact-check: In 2016 and 2017, the Great Barrier Reef was severely damaged through back-to-back bleaching events which killed half of all corals on the planet’s largest living structure. Australia’s current goal, if followed by other countries, would sign the death warrant of the Great Barrier Reef. 

CM: Maybe she should speak to Professor Peter Ridd and question why the James Cook University faculty lost (although still not completely settled due to an appeal) all aspects of the unfair dismissal case against it for Ridd’s refusal to buckle to the cabal’s orthodoxy. The reef is not dying. It is thriving. So much so that Greenpeace needed to use a picture of bleached coral in The Philippines to distort the truth because the GBR presented no such photographic opportunities.

Morrison statement: “Our latest estimates show both emissions per person and the emissions intensity of the economy are at their lowest levels in 29 years.”

Fact-check:  Australia has the highest emissions per capita in the developed world. It is true that Australia’s emissions per capita have fallen more than most countries [is that colossal bullshit?], but this is from an extraordinarily high baseline [so what?] and has largely been driven by rapid population growth. Even with this drop, we still have the highest per capita emissions in the developed world. Our emissions per capita are higher than Saudi Arabia, a country not known for its action on climate change. Ultimately, our international targets are not based on per capita emissions. 

CM: Australia’s CO2 emissions per unit of GDP since 1990 have fallen 33.9%. Wrong Amanda, Canada has higher emissions per capita at 16.85 vs our 16.45. Unless under Justin Trudeau Canada has lost developed nation status which is highly possible! Saudi Arabia is 19.39. So, in fact, your comments are incorrect.

We could go on. So if Amanda McKenzie wants to throw the PM under the bus with profanity it helps if she actually provided accurate figures.

Perhaps the most colossal bullshit to come from McKenzie was this,

Over the winter we saw bushfires burning across Australia while the Amazon rainforest and the Arctic were on fire. A major new report shows that suburbs in Sydney, Perth and Melbourne could experience serious sea level disasters every year on our current trajectory.

It would appear that the Australian seaside property prices aren’t at (excuse the pun) fire-sale prices and that the bushfires in the Amazon, Australia and the Arctic are not related to climate change. The truth is that the acreage lost to bushfires have fallen 24% over the last 18 years. Unless NASA is lying.  Maybe the Climate Council has been channelling the Sierra Club CEO Aaron Mair?

 

More public pension roadkill ahead

CM has been writing about the public pensions crisis in the US for years. This chart only serves to highlight that the problem doesn’t seem to be getting any better. It seems in Illinois, 200 of the 650 public pension funds out there have more beneficiaries than active workers contributing to the fund. By 2021 this is expected to be half of all public pension funds in Illinois.

ZeroHedge noted,

The value of all future pension promises to be paid out to public safety workers totalled just $320 million in 2005. By 2017, that number had jumped to nearly $600 million. That’s a jump of over 80% or more than three times the pace of inflation.

It’s the main reason why taxpayer contributions can’t keep up with pension costs. Pols are doing nothing to control the growth of promises to be paid, sticking taxpayers with ever-increasing costs and ratcheting up the likelihood the pension plans will fail…

… In 1987, municipalities owed a total of $2.6 billion in benefits earned to active and retired public safety workers across the state. Today, that number has jumped to more than $23 billion. That’s a jump of nearly nine times.”

Don’t forget what the Illinois Police Dept did several years back. IN June 2017 CM wrote,

“Sadly the Illinois Police Pension is rapidly approaching the point of being unable to service its pension members and a taxpayer bailout looks unlikely given the State of Illinois’ mulling bankruptcy. Local Government Information Services (LGIS) wroteAt the end of 2020, LGIS estimates that the Policemen’s Annuity and Benefit Fund of Chicago will have less than $150 million in assets to pay $928 million promised to 14,133 retirees the following year…Fund assets will fall from $3.2 billion at the end of 2015 to $1.4 billion at the end of 2018, $751 million at the end of 2019, and $143 million at the end of 2020, according to LGIS…LGIS analyzed 12 years of the fund’s mandated financial filings with the Illinois Department of Insurance (DOI), which regulates public pension funds. It found that– without taxpayer subsidies and the ability to use active employee contributions to pay current retirees, a practice that is illegal in the private sector– the fund would have already run completely dry, in 2015…The Chicago police pension fund held $3.2 billion in assets in 2003. It shelled out $3.8 billion more in benefits to retired police officers than it generated in investment returns between 2003 and 2015…Over that span, the fund paid out $6.9 billion and earned $3.0 billion, paying an additional $134 million in fees to investment managers.”

What have the police been doing? Retiring early and cashing in their pensions to avoid the inevitable.

The problem for Illinois is that a taxpayer-funded bailout is all but impossible. The State of Illinois ranked worst in the Fed study on unfunded liabilities.  The unfunded pension liability is around 24% of state GDP. In 2000 the unfunded gap to state revenue was 30% and in 2013 was 124% in 2013. Chicago City Wire adds that the police fund isn’t the only one in trouble.

“Chicago’s Teachers Union Pension Fund is $10.1 billion in debt. Its two municipal worker funds owe $11.2 billion and its fire department fund owes $3.5 billion…All will require taxpayer bailouts if they are going to pay retirees going into the next decade…Put in perspective, the City of Chicago’s property tax levy was $1.36 billion in 2017…Paying for retirees “as we go,” which will prove the only option once funds run dry, will require almost quadrupling city property tax bills…Last year, it would have required more than $4 billion in revenue– including $1 billion for City of Chicago workers, $1.5 billion for teachers, and $1.5 billion for retired police officers and firefighters.”

This problem is going to get catastrophically worse with the state of bloated asset markets with puny returns. Looking at how it has been handled in the past Detroit, Michigan gives some flavour. It declared bankruptcy around this time three years ago. Its pension and healthcare obligations total north of US$10bn or 4x its annual budget. Accumulated deficits are 7x larger than collections. Dr. Wayne Winegarden of George Mason University wrote that in 2011 half of those occupying the city’s 305,000 properties didn’t pay tax. Almost 80,000 were unoccupied meaning no revenue in the door. Over the three years post the GFC Detroit’s population plunged from 1.8mn to 700,000 putting even more pressure on the shrinking tax base.

In order for states and local municipalities to overcome such gaps, they must reorganise the terms. It could be a simple task of telling retiree John Smith that his $75,000 annuity promised decades ago is now $25,000 as the alternative could be even worse if the terms are not accepted. Think of all the consumption knock-on effects of this. I doubt many Americans will accept that hands down, leading to class actions and even more turmoil.

Did CM mention gold?

Joe Nation’s Pension Tracker is a really good website to look at the actuarial setting of pensions against the marked-to-market unfunded liabilities. Have a stiff drink handy before you open up.

The Grim Repo

What a surprise to see markets show little reaction to the negative repo (repurchase agreements) market in the past week. So much nonchalance and complacency remain in financial markets. It is as if there is this false belief that the authorities can keep the ship afloat with magical modern monetary theory. Not a chance. The tipping points in the financial markets are quantum levels bigger than any that Sir David Attenborough could conjure up in his wildest pessimistic dreams. If we want to cut carbon emissions, the coming economic slump will take care of that.

On average there are $1 trillion of overnight repo transactions every day, collateralised with US Treasuries. Yet many missed that the repo market seized up late last week. Medium-term repos surged from the normal band of around 2.00~2.25% to around 5.25% on Monday. Some repo rates hit 10% on Tuesday.

Essentially what this said was that a bank must have seen that it was worth borrowing at an 8% premium overnight in return for pledging ‘risk-free’ US Treasuries at 2%. In any event, it allowed that particular bank to survive for another day. Banks use the repo market to fund the loans they issue and finance trades that are executed. It is like an institutional pawn shop.

Looking at it another way, why weren’t other banks willing to lend and take an 8% risk-free trade? A look at the global bank’s share price action would suggest that these bedrock financial institutions that grease the wheels of the economy are not in good shape. We just pretend they are. We look at the short term performance but ignore the deterioration in underlying balance sheets. The Aussie banks are future crash test dummies given the huge leverage to mortgages. As CM has been saying for years, the Big 4 risk whole or part nationalisation.

This recent repo action is reminiscent of that before the GFC. The Fed stepped in with $75bn liquidity per day to stabilise markets by bringing rates into the target range. The question is whether the repo action is a short-term aberration or the start of a longer-term quasi QE programme which turns into a full-blown QE programme.

The easiest way to look at the repo market action is to say the private markets are struggling to be self-funding, requiring central bank intervention. Bank of America believes the Fed may have to buy upwards of $400bn of securities to back the repo market this year alone.  This is another canary in the coal mine.

CM wrote a long piece back in July 2016 titled, “Dire Straits for Central Bankers.” In that report, we described how the velocity of money in the system was continuing to drift. As of now, central banks have printed the equivalent of $140 trillion since 2008 but have only managed to eke out $20 trillion in GDP growth. That is $7 of debt only generates $1 of GDP equivalent.

This is the problem. Companies are struggling to grow. US aggregate after-tax profits have gone sideways since 2012. We have been lulled into a false sense of security by virtue of aggressive share buyback programs that flatter EPS, despite the anaemic trend.

Despite the asset bubbles in stocks, bonds and property, pension funds, especially public sector retirement schemes, are at risk of insolvency given the unrealistic return assumptions and nose bleed levels of unfunded liabilities in the trillions.

Also worthy of note is the daily turnover of the gold derivatives market which has hit $280bn in recent months, or 850x daily mine production. This will put a lot more pressure on the gold physical market and also to those ETFs that have promissory notes against gold, as opposed to having it properly allocated.

We live in a world of $300 trillion of debt, $1.5 quadrillion in derivatives – until this is expunged and we start again, the global economy will struggle. That will also require the “asset” values to be similarly wiped out. Equity markets will plunge 90-95% relative to gold. That suggests a 1929 style great depression. The debt bubble is too big. Central banks have lost control.

Buy Gold.

F’king hell mate

Follow the data, people. Apologies for the amount of climate change related posts of late. It is the climate alarmist silly season. The video above shows how easy it is to manipulate mindsets. Good to see that our PM Scott Morrison was thinking about smart drive-thrus. After all, as we showed, kids love McDonald’s ahead of climate strikes so merging technologies and fast food should connect the next generation. Uber should be looking to develop their rideshare app to go via fast-food chains. ScoMo has his finger on the pulse.

Atlassian billionaire Mike Cannon-Brookes doesn’t agree although he did reveal what an expensive Bellevue Hill private boy school education does for teaching how to respect the highest public office in Australia. ScoMo was dead right not to attend a summit where the organizers deliberately banned those from coal-related nations from speaking whilst demanding their cash. No need to join a summit where most of the attendees are from nations with high levels of corruption and have a sole purpose to cash in on the guilt of weak-willed western nations.

Maybe MC-B should reflect on what the UN summit does to cause children to meltdown thanks to irresponsible adults feeding them with unfounded scaremongering. That is where the anger should have been placed in that room. Who needs to show up? Then again behaving like children is a bit of a theme at climate summits. Profanity too.

Being a successful software developer doesn’t always extend to being an axe in other fields. CM also made reference to why MC-B should be supporting the Minerals Council of Austalia as so much of his business actually relies on it.