Fraud

Lies, more lies and statistics

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So the global trends in motorcycles apply in Australia too. Older riders make up a larger proportion of motorcycle license holders. 50% are aged over 50 according to the NSW Centre for Road Safety. Having said that the total number of licensed riders in NSW rose 44% to 600,633 in the last decade. Motorcycle registrations have jumped from 108,656 to 218,055 in the last decade.

As is often the case, the government in its infinite wisdom hasn’t a clue about statistics. The NSW Roads Ministry has said fatal accidents are up 54% and 80% for those over 50yo. However registrations are up 100%.

According to its own stats in 2016 there were 375 fatalities on NSW roads. Bikers were 63, down from 67 the previous year. So if we back calculate to a decade ago to the 54% jump they claim there were 40 deaths on bikes. Not great but for 110,000 extra registrations there was a fall in the ratio of deaths per 100,000 riders. 54% gives them the right to call for more speed cameras and regulations which don’t help

In 2004 as part of a statistics course for a masters degree our team investigated speeding and the inaccuracy of government reporting. When the double demerits scheme was introduced fatalities went up. When 40km/h school zones were introduced fatalities went up. Speed doesn’t kill  living in fear of your speedo which causes you to look ahead less often does

While not suggesting trying to cut road fatalities is a bad thing the government should be more honest with the stats. The biggest issue for motorcycle crashes is the speed limit itself. Given the police hand out fines for minor speed infractions bikers are forced to ride in car blind spots massively ramping their risks of being hit by a mobile phone gazing driver. All the arguments for too much horsepower etc is also rubbish given the amazing advancements in safety aids on bikes.

Canadian mortgage fraud – Laurentian Abyss(m)al

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Laid up in bed this week with the flu I watched The Hunt for Red October where Sean Connery plays a Russian sub commander with a thick Scottish accent. To rendezvous with the CIA to complete the defection they head to the deep waters of the Laurentian Abyssal, ironically the name of the Canadian bank which has seen the proverbial torpedo hit the propellor.

It seems that Laurentian Bank in Canada has been caught over mortgage fraud, the second lender to do so. Canada’s property prices have trebled since 2000, seeing but a minor blip during GFC. Zerohedge noted,

An audit “identified documentation issues and client misrepresentations” with some mortgages…Laurentian said it will repurchase about C$89 million ($70 million) of those mortgages in the first quarter, or 4.9 percent of such loans sold to the firm….It will buy back an additional C$91 million of mortgages “inadvertently” sold to the firm, also in the first quarter.

The total value of the loans made to the 3rd party was around $1.16bn. Of course the CEO of Laurentian Bank is brushing aside the scale of it.

As we know Home Capital Group, Canada’s largest mortgage lender was busted for mortgage fraud and required a $1.5bn bailout facilitated by the 321,000 Healthcare of Ontario Pension Plan (HOOPP) members. Not to worry those emergency loans are backed by the mortgages!! Naturally “safe as houses”

Perhaps in the immortal words of Red October Captain Ramius, “be careful what you shoot at in here…things inside here don’t react well to bullets

Or perhaps in the words of Canadian born Inspector Frank Drebbin, “nothing to see here!”

Insider trading as a politician is ok?

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Watching a session of Canadian Parliament yesterday, the opposition Conservative party asked for a simple ‘yes’ or ‘no’ answer to a question to Trudeau’s Finance Minister Bill Morneau on whether he sold $10m in shares in Morneau-Shepell a week before a new capital gains tax on securities was introduced in parliament. The accusation was that Morneau made $500,000 by insider trading in full knowledge of the tax change that was to be introduced. Morneau spent the entire 20 minutes talking of how his party is defending the middle class with tax cuts. If he was not the person that sold, how easy to openly admit so. So far he’s said nothing.

Insider trading is a punishable offense in the private sector. Yet are politicIans free to make half a million by trading ahead of the event? How can Morneau not resign? Even worse was  Speaker of the House Greg Regan was asking why the question from Paul Pollievre was relevant in question time? Are you kidding me?

Clearly ethics training for Trudeau’s cabinet seems far more pertinent than reintegration of returning ISIS tourists. Then again we shouldn’t forget that Trudeau was actually involved in the appointment of the Ethics Commissioner (without consulting the opposition) indeed at a time when his own ethics had been openly called into question.

The “bigger” point about the FANG sell off

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While the press is waxing lyrical about the unprecedented loss caused by a sell off in FANGs (Facebook, Amazon, Netflix & Google) we should note that it overlooks one factor. Before getting to that, to start with the sell off in gross dollar terms it is unsurprising given the already highly inflated value of the base stocks. So if A $500bn market cap Facebook loses 4% it is equivalent to $20bn. On one day FB lost a Fiat Chrysler. It’s math. Let’s not forget that Bitcoin is now worth $165bn but let’s not let that bubble spoil the party.

The problem that faces financial markets is the advent of ETFs. While stupefyingly simple to understand as an investor it is that same simplicity that breeds complacency. ETFs are simple products that enable investors to pay much lower fund management fees to buy easy to understand baskets- whether coal, gold, oil or FANGs. There are 106 ETF products that own Facebook as a Top 15 holding with that averaging between 5% and 10% of the entire fund.

Yet on the way up things are rosy. It is what happens on the downside that has yet to be fully tested. Around two years ago, CM wrote a report which warned of the risk of ETFs on the downside, especially levered ETFs (i.e. you buy a 2x levered FANG fund which means if FANG stocks go up 5% you theoretically get 2x the return for any given move up or down.

However in times of uncertainty (i.e. heightened risk) the options markets that price risk move magnitudes on the downside vs the upside. Meaning for an ETF to replicate what it proclaims on the brochure becomes much more difficult meaning the fund may under or overshoot the promises. Also in certain markets (e.g. US & Japan) where stocks on the exchange have limit up/down rules on the physical stock, should a market crash ensue, the ETF prices on the theoretical values of stocks that may not have opened for trading. What that means is that the ETF may reflect a market that is 10-15% below where it actually eventually opens. Meaning poor ETF buyers get gouged. However the computer algorithms in the ETF end up chasing, not leading the market which in and of itself creates more panic selling further reducing market confidence. Where a market might have traditionally fallen  3% on a given piece of bad news, ETFs tend to react in ways that might cause a market to retreat 6%. Indeed market volatility is amplified by ETFs.

At the moment market behavior is exceedingly complacent about risk. Before GFC highly complex products like CDOs and CDSs were the rage. 99% had next to no clue how they operated but they found their way into the local government investment portfolios of even small country towns in Australia.

ETFs on the other hand are strikingly simple to grasp but that also means we pay far less attention to the risk that goes with them. That is the bigger worry. People complacently thinking their portfolios are safe as houses may wake up one morning wondering why some flash crash has caused Joe and Joanne Public’s retirement nest egg to get decimated.

 

Crime in Japan – Yakuza, the Police and other crime

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CM – Crime in Japan – Yakuza Police Other Crime

Once again, due to numerous requests see the above link for the full report and the summary below.

In our Crime in Japan series parts 1 & 2  we covered the jump in crime resulting from seniors breaking into prison and the rapid breakdown in the nuclear family leading to a surge in domestic violence and child abuse. In this report we cast our focus on the resources of the police and whether the change in crime is impacting their ability to hunt down Yakuza (gangsters), thwart drug use and possession, prevent murder and stop the leap in financial crime where insurance fraud alone is up 2,000% in 6 years and suspicious transactions breaking new records.

The Japanese National Police Agency (JNPA) has been the victim of budget cutbacks. Some 80% of the ¥3.2 trillion budget is spoken for by staff salaries. There are approximately 295,000 staff (including administration) but actual officer numbers have remained relatively stagnant at around 258,000. With an aging police force, retirees are putting pressure on hiring new recruits. Japan does have a low level of crime on a global basis and 197 police per 100,000 citizens reflects that.

Japan has budgeted approximately ¥232 billion to run its jails in 2016. The cost of incarceration runs to around ¥3.8mn per inmate which is around double what one could get through the welfare system. The theft of a ¥500 sandwich could lead to a ¥8mn tax bill to provide for a 2 year sentence. Courts are dealing out harsher sentences however drug related offences generally range inside 2 years behind bars. Many Japanese have been in the media crossfire for repeated drug offences and the courts have had no choice but to incarcerate them when ‘good behaviour’ probation periods have failed. Prison capacity has grown 50% in the last decade to meet the coming crime wave.

Drugs in Japan are an interesting topic. Meth was originally synthesised from ephedrine in 1893 by a Japanese chemist Dr. Nagayoshi Nagai. 26 years later, a pharmacologist by the name of Akira Ogata managed to turn it into crystalline form i.e. crystal meth.

When World War II got under way Japanese soldiers (especially kamikaze pilots) were given crystal meth (branded Hiropon) which not only kept them ‘wired’ but reduced hunger. As the war ended, Japan was left with excess supplies of Hiropon. Food supplies were few and returning soldiers added to the shortage. However little was known of the side effects and the government had an epidemic on its hands in the late 1940s. Luckily there is a solution being developed by the Japanese biotech company MediciNova (4875) which is in late stage trials in the US with a formula that weans drug users from their addiction.

One of the surprising statistics has been the trend in gangster (Yakuza) incarceration in Japan. While police have seen a surge in consultations (aka complaints) surrounding gangster activity, arrest rates have fallen by 30%. Is it because the police are so tied down by the surge in stalking, domestic violence, child abuse and larcenous geriatrics?

People with mental disabilities committing crime are also rising sharply, up 62% in the last decade. Apart from schizophrenia or medically diagnosed mental health issues, addiction to alcohol or substance abuse can also get an offender classified as mentally disable if they break the law.

Financial crime is becoming far more prevalent. From petty scams to sophisticated insurance and bank fraud, such offences are surging. Reported fraud related to bank transfers has doubled between 2010 and 2014 to 13,400 cases with the amount of money transacted surging 5-fold to ¥56.5bn.

Murder rates in Japan have remained relatively mute. The homicide rate in 2014 was 938 down from 1362 in 2006. As a ratio, Japan has 0.7 murders for 100,000 people versus 91 for Honduras (the highest) or 4.7 in the US. However Japan has not been immune to home grown massacres.

Foreigners as a percentage of crime in Japan continues its long downward march. Much of the crime is related to petty theft and visa overstays. Chinese, Vietnamese and Brazilians make up 60% of foreigner arrests in Japan. Foreigners as a percentage of inmates has also dropped sharply from 8% of the prison population to 5.5%. Chinese, Brazilians and Iranians make up half of gaijin inmates.

The incidence of crime continues to rise in Japan. As discussed in our previous reports we can see that crime rates (e.g. shoplifting, theft, child abuse, domestic violence, assault, stalking etc.), while small on a global scale, are rising at such a speed it seems to be taxing a police force struggling with worsening manpower issues. It would seem to make sense that despite growing reports of suspicious activity by organised crime, arrest rates are falling. Furthermore retiring demographics in the police force suggest that ‘street knowledge’ gained through decades of leads (e.g. informants) may not so easily be transferred to the new recruits. Throw financial fraud increasingly perpetrated by cyber criminals on top, perhaps the Police need to invest in sophisticated systems rather than just hire more cops on the beat? The face of crime has changed.

 

LinkedIn – artificially impolite

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One has to query the real embedded value of LinkedIn. Apart from having complete strangers endorse one for skills never used or studied, the latest craze is to give users automated one button generic answers to allow one to tell a potential client, colleague, recruiter or stranger that they care. In a strange way, LinkedIn’s true value added is knowing among one’s list of acquaintances who actually thinks to authentically write salutations to one who is indeed experiencing a birthday or work anniversary. That would show reality rather than the 90% who think a “kudos to you” could register anymore than “why am I doing any business with such a lazy, thoughtless and insincere two dimensional nobody?” That’s right most people just blink at your profile and move on.

Has anyone thought that Daniel may have been given a battlefield commission? Maybe he manages upwards well but his colleagues can’t stand him? Perhaps he is merely the result of luck in terms of market timing which has zero to do with individual ability? Whose to say Daniel didn’t knife 20 colleagues to get to that position? The options are endless. Why doesn’t LinkedIn at the very least offer some negative responses? Even Facebook does it now.

People continue to drone on about how digital and AI is transforming the way we conduct business. Indeed it is. The value of individual  connections, sincerity, trust and personal service is being cast off for algorithms which have absolutely zero chance of refining human nature which on balance is different for everyone almost everyday. Human instinct can detect subtle changes – “Steve seems happy today” or “Penelope looks a bit down today” – then again perhaps those people who’ve agreed to have an embedded company chip in their body will allow companies to tailor good or bad news depending on their biorhythm delivered by microchip?!

We all know what the value of good service is. Go to any restaurant that gives a special touch and you’ll go again and again. Or maybe the special dinner date of the future will give each party the right algorithmic responses to a romantic night out. Then why bother going out at all. You can dine from the same take out menu all from the comfort of your own home while wooing your special one over a synched video screen.

So to all those that look at LinkedIn pay attention to those that will spend the time to link you and those who will merely blink you. Which brings me to this piece on recruitment

Ultra High Net Worth Individuals (by country)

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In an ever growing world of haves vs have nots, Elliman has released an interesting update on the statues of global wealth and where it is likely to head over the next decade. It suggests North America has 73,100 UNHWIs at an average of $100mn each or $7.31 trillion. To put that in perspective 73,100 North Americans have as much wealth as Japan & France’s annual output combined. Over the next decade they expect 22,700 to join the ranks.

Europe has 49,650 UHNWI also at the magical $100mn mark (presumably the cut off for UHNWI or the equivalent of Japan.

Asia is growing like mad with $4.84 trillion split up by 46,000 or $105mn average. In a decade there are forecast to be 88,000 UHNWIs in Asia.

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I am not sure what the World Bank was smoking when coming up with the coming forecasts I’ve rthe next decade but the figures smel fishy.  Then it all comes down to this chart.

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1) Political uncertainty? Everywhere you look – Trump, Brexit, Catalonia, Australia, France, Germany, Austria, Czech Republic, The Netherlands, Hungary, Poland etc etc

2) Potential fall in asset values – looks a very high chance of that. Current asset bubbles are almost everywhere – bonds, equities, real estate etc

3) Rising taxes – maybe not the US or Canada (if you follow the scrutiny over Finance Minister Morneau), but elsewhere taxes and or costs of living for the masses are rising

4) Capital controls – China, India etc

5) Rising interest rates – well the US tax cuts should by rights send interest rates creeping higher. A recent report showed 57% of Aussies couldn’t afford an extra $100/month in mortgage – a given if banks are forced to raise lending rates due to higher funding costs (40% is wholesale finance – the mere fact the US is raising rates will only knock on to Aus and other markets).

Surely asset prices at record levels and all of the other risk factors seemingly bumping into one another…

So while UHNWIs probably weather almost any storm, perhaps it is worth reminding ourselves that the $100mn threshold might get lowered to $50m. It reminds me of a global mega cap PM who just before GFC had resplendent on his header “nothing under $50bn market cap”. Post GFC that became $25bn then eventually $14bn…at which point I suggested he change the header entirely.

I had an amusing discourse on LinkedIn about crypto currencies. The opposing view was that this is a new paradigm (just like before GFC) and it would continue to rise ( I assume he owns bit coins). He suggested it was like a promissory note in an electronic form so has a long history dating back millennia. I suggested that gold needs to be dug out of the ground – there is no other way. Crypto has huge risk factors because it is ultimately mined in cyber space. State actors or hackers can ruin a crypto overnight. There have already been hacking incidents that undermine the safety factor. It does’t take a conspiracy theory to conjure that up. To which he then argued if it all goes pear shaped, bitcoin was a more flexible currency. Even food would be better than gold. To which I suggested that a border guard who is offering passage is probably already being fed and given food is a perishable item that gold would probably buy a ticket to freedom more readily as human nature can adapt hunger far more easily in the fight for survival. I haven’t heard his response yet.

In closing isn’t it ironic that Bitcoin is now split into two. The oxymornically named Bitcoin Gold is set to be mined by more people with less powerful machines, therefore decentralizing the network further and opening it up to a wider user base. Presumably less powerful machines means fewer safeguards too although it will be sold as impervious to outsiders. Of course the idea is to widen the adoption rate to broaden appeal. Everyone I know who owns Bitcoin can never admit to its short comings. Whenever anything feels to be good to be true, it generally is. Crypto has all the hallmarks of a fiat currency if I am not mistaken? While central banks can print furiously, they will never compete with a hacker who can digitally create units out of thin air. Fool’s Gold perhaps? I’ll stick to the real stuff. I’ll take 5,000 years of history over 10 years any day of the week.