Poverty

Down and out in Davos

Davos is likely to be unlike any gone before it. Lucky for the globalist elitists who like to rug up in mink collar lined Moncler down jackets, Trump won’t be there to verbal them over their blatant double standards. Ironically the fact he isn’t going is more evidence of their inability to self reflect rather than the other way around. Trump is hardly an eloquent mouthpiece at the best of times but his words and stance around nationalism resonate far wider than the €200 Chateau Briande chewing wealthy will be prepared to admit at Davos.

France. As the Gilets Jaune (Yellow Vest) movement rolls into week 9, where has the media been reporting it? Macron would normally attend the Davos mob as “the poster child” but he can’t because of the domestic situation. Should he show up to hug his globalist chums, the chaos at home would exacerbate. This is no small matter for the proponents of world government. We shouldn’t forget Marine LePen is polling higher than Macron. Nor should we overlook the fact she won 35% of the 2nd round vote, twice the level ever seen in the anti-EU Front National’s history.

Germany isn’t much better. Although Frau Merkel will be in Davos. Despite stepping down from the rotting carcass her policies have turned her party into, she’ll be fawned over at the matriarch. Deutschland, the paragon of the EU’s economic chest beating, saw industrial production plunge 4.7% in November, its worst showing since the GFC. The fastest rising party in Germany, the anti-immigrant AfD, whose chairman was bashed to within an inch of his life, plans to be far more open about jettisoning the EU going forward. Yet more anti-globalist forces at the gate.

Italy has felt the wrath of EU meddling in ratifying its latest budget. Despite 60% of the country voting in eurosceptic parties last year, the EU is still pushing its weight around via the ECB. Italians are far from pleased with Brussels. Many of her banks in the south are carrying nose bleed territory bad debts which make them technically insolvent. Italians want out.

Hungary, Poland and the Czech Republic have openly rejected globalism and any shaming from the Bullies from Brussels has only led to bigger majorities handed to them by their citizens.

Austrian Chancellor Sebastian Kurz has made it clear that illegal immigration is not for them, no matter how much UN global compacts or EU directives want to encourage it. Why else would he appoint a member of the anti-immigrant FPO as the minister for that portfolio?

PM Rutte of The Netherlands lost seats in the last election, mainly to Geert Wilders’ anti immigrant PVV. The socialist parties were all but annihilated.

UK PM Theresa May is looking on shaky ground to pass her version of Brexit through the Commons. Even Jaguar’s woes in China are supposedly the fault of Brexit. Even the iconic brand’s UK sales are up 76% since 2013. Surely it’s macroeconomic headwinds not leaving the EU that is driving this. Despite all the scare stories from the BoE, the people aren’t buying it. The UK has its highest ever petition signed to get parliament to vote for “No Deal”. So much for the expert’s advice!?

There is a groundswell movement the establishment continues to ignore. Famous economists giving fire side chats to out of touch journalists don’t convince the people who aren’t living these utopian dreams espoused from Davos.

Davos seems a bit like an Oscars gathering. The audience they are appealing to are increasingly looking the other way and tuning out. It matters not whether some believe we need to show more compassion and embrace global cooperation. The people in charge of selling it could not muck up the messaging and execution of said plans if they had a mandate to do so.

Davos 2019 may well see its proclamations become little more than rearranging deck chairs on the Titanic. We’ve been so overdue an economic correction and the little bigoted people increasingly trying to protect their own interests are already telling us they’re knee deep in recession already. At the same time they’re sick of their leaders legislating against them for supposed intolerance.

Maybe France is the globalist canary in the coal mine. Macron’s police force is already being asked to step it up a notch against the protestors. He need be wary of the police switching sides which would be a cataclysmic blow for globalism. Bring it on.

Write Ocasio-Cortez off at your peril

Alexandria Ocasio-Cortez might be the New Democrat piñata for a band of Republican supporters but beware. While it is true she is weak on facts, how economics works and a whole other range of political topics, she has 1.9mn followers on Twitter, more than Nany Pelosi. If she gets the right sort of campaign team behind her she could become a serious threat to the GOP and incumbent Democrats alike.

She didn’t really have any dollars to fight her nomination on the NY Dem ticket but she booted the 14 year incumbent Joe Crowley and won the 2018 mid term with 80% of the vote. Hardly something achieved by a complete fool, wouldn’t you say?

Think about it. She’s a millennial. She’s deeply socialist, pro climate change and all the pet causes of her generation. The latest shrill surrounding her dancing while at college is frankly pathetic. Who cares?

CM was critical of those who bashed Republicans over a lack of intelligence. It was a key part of why people refrained from openly supporting Trump in the lead up to the 2016 election. The polls and mainstream media all pointed to a Clinton coronation and were rudely shocked when the opposite happened. The ballot box is all that matters. The irony of Paddy Power paying out those who bet on a Clinton win. That’s how badly so many got it wrong. They completely missed the mood.

Pelosi and Feinstein are 78 and 85 years old respectively. Ocasio-Cortez is not even 30. We can already see the incumbent Democrats become uncomfortable as the younger generation wants to take the party hard left. Ocasio-Cortez’s pulling power is evident. Media attention is never far away.

Don’t forget she turned on Senator Kirsten Gillibrand after her resounding  nomination win saying, “Unsurprising, but disappointing that @SenGillibrand didn’t even bother to talk to nor consider me before endorsing…You‘d think a progressive leader would at least be interested in how a no-corporate money Bronx Latina triggered the 1st NY-14 primary in 14 years on prog issues. 

Republican supporters who troll her Twitter feeds only enhance her bidding. They lift her profile and if anything only cause more millennials to rush to her defence. Her retweets are up there with Trump who has 30x more followers. Don’t dismiss it. Trump’s rise to POTUS came from Democrats and mainstream media coverage that reported on pointless trivialities so far removed from what voters were screaming for.

If AO-C gets a good team behind her she will be a force to be reckoned with. As is so often the case with people so easily dismissed is that she becomes a sleeper. She can only improve how to come across more intelligently. She ticks plenty of identity boxes in a world that seems to place greater emphasis on diversity and inclusion.

She maybe new to the game but it will be interesting how the incumbent Democrats deal with her. Will they try to suppress her or mold her into a dynamo? Her storming of Pelosi’s office alongside environmental activists suggests that maybe the old guard Democrats try to keep a lid on her but sadly they lack time and adaption to new age technology on their side which Ocasio-Cortez has in spades.

Write her off at your peril.

What do the Yellow Vests want? Frexit is one demand

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Here is the Gilets Jaunes’ (yellow vests) List of Demands. Note Frexit is one of them! CM wholeheartedly agrees on the stance on education and barring lobby groups from political circles. Note the demands with respect to banning migratory flows of those who cannot integrate with French values. Where have we heard this before?

President Macron should hope he has an invisible cloak in his wardrobe. So much for more globalism. Yet another sign of a European member state demanding nationalist interests be put before federal EU rule.

Will the mainstream media objectively report on the growing number of nations wanting to put themselves first? Or will they spin the story that the demands from nations like France are somehow different to that of the abhorrent views held by the monster in the Oval Office?

Economy/Work

  • A constitutional cap on taxes – at 25%
  • Increase of 40% in the basic pension and social welfare
  • Increase hiring in public sector to re-establish public services
  • Massive construction projects to house 5 million homeless, and severe penalties for mayors/prefectures that leave people on the streets
  • Break up the ‘too-big-to-fail’ banks, re-separate regular banking from investment banking
  • Cancel debts accrued through usurious rates of interest

Politics

  • Constitutional amendments to protect the people’s interests, including binding referenda
  • The barring of lobby groups and vested interests from political decision-making
  • Frexit: Leave the EU to regain our economic, monetary and political sovereignty (In other words, respect the 2005 referendum result, when France voted against the EU Constitution Treaty, which was then renamed the Lisbon Treaty, and the French people ignored)
  • Clampdown on tax evasion by the ultra-rich
  • The immediate cessation of privatization, and the re-nationalization of public goods like motorways, airports, rail, etc
  • Remove all ideology from the ministry of education, ending all destructive education techniques
  • Quadruple the budget for law and order and put time-limits on judicial procedures. Make access to the justice system available for all
  • Break up media monopolies and end their interference in politics. Make media accessible to citizens and guarantee a plurality of opinions. End editorial propaganda
  • Guarantee citizens’ liberty by including in the constitution a complete prohibition on state interference in their decisions concerning education, health and family matters

Health/Environment

  • No more ‘planned obsolescence’ – Mandate guarantee from producers that their products will last 10 years, and that spare parts will be available during that period
  • Ban plastic bottles and other polluting packaging
  • Weaken the influence of big pharma on health in general and hospitals in particular
  • Ban on GMO crops, carcinogenic pesticides, endocrine disruptors and monocrops
  • Re-industrialize France (thereby reducing imports and thus pollution)

Foreign Affairs

  • End France’s participation in foreign wars of aggression, and exit from NATO
  • Cease pillaging and interfering – politically and militarily – in ‘Francafrique’, which keeps Africa poor. Immediately repatriate all French soldiers. Establish relations with African states on an equal peer-to-peer basis
  • Prevent migratory flows that cannot be accommodated or integrated, given the profound civilizational crisis we are experiencing
  • Scrupulously respect international law and the treaties we have signed.

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

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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.

COP24 – checking cash, corruption and cars

It should come as no surprise that the COP24 summit is a time to put the money where the mouth is. Look at the numbers of the delegates from Africa to stake their claim of the wealth redistribution. Guinea has sent the biggest delegation of 406 people. In 2016 the country received over $10.7mn in climate grants. DR Congo’s 237 delegates garnered $45 mn in aid for climate mitigation projects according to the OECD. The Ivory Coast received $114 million in 2016 for environmental aid. Indonesia got $250 million in climate related aid in the same year.  Poland can be forgiven being the host nation to be 3rd place. It receives zip, much like the US and Australia. The COP summits are nothing more than networking events to collect cash from virtue signaling Western governments.

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Putting that in context of the representation amongst all delegates to their representative population, Guinea is at 15.5x. America at 0.1x. Guinea is 86 people lighter than in 2017. The Ivory Coast had halved its delegates on the previous summit.

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One has to question how efficiently these millions given away get to be spent on the intent. Take a look at Transparency International’s global 2017 corruption index. 180 is the worst. 1 is the best. Note the correlation of delegates attending COP24 to those countries with a higher prevalence of corruption?

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There is a touch of irony that the transport recommendations to/from Katowice airport made by the UNFCCC are all diesel vehicles. Not an EV in sight. Surely there was an opportunity to team up with an EV maker to co–sponsor the event? Did the 7,331 observers going to the summit pick up on this? Why didn’t they take advantage of the virtual attendance technology that was available? Better to be there and enjoy the banquets and political graft.

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Live free and negotiate

Complacency kills – the ticking time bomb for Aussie banks

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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.

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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.

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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

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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.

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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.

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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.

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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.

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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!

 

 

How many canaries in the coalmine do we need?

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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