Regulation

Repossession by remote

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A growing number of car loans in the US are being pushed further down the repayment line as much as 84 months. In the new car market the percentage of 73-84-month loans is 33.8%, triple the level of 2009. Even 10% of 2010 model year bangers are being bought on 84 month term loans. The US ended 2016 with c.$1.2 trillion in outstanding auto loan debt, up 9%YoY and 13% above the pre-crisis peak in 2005.

Why is this happening? Mortgage regulations tightened after 2008 to prevent financial lenders from writing predatory loans, especially sub prime. Auto lending attracts far less scrutiny. Hence the following table looks like it does with respect to outstanding accounts on loans

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Sub Prime auto loans, at all time records, make up 25% of the total. Devices installed in cars let collection agencies repossess vehicles by remote when the borrower falls behind on repayment. This lowers risk and allows these long dated loan products to thrive. Average subprime auto loans carry 10% p.a. interest rates. More than 6 million American consumers are at least 90 days late on their car loan repayments, according to the Federal Reserve Bank of New York.

While it is true that $1.2 trillion auto loan book pales into insignificance versus the $10 trillion in mortgage debt at the time of the GFC, a slowdown in auto sales (happening now) isn’t helpful. The auto industry directly and indirectly employs c. 10% of the workforce and slowing new and used car sales will just put more pressure on prices further lifting the risk of repossessions

It is worth reminding ourselves the following.

Last month the Fed published its 2016 update on household financial wellbeing. To sum up:

“44%. This is actually an improvement on the 2015 survey that said 47% of Americans can’t raise $400 in an emergency without selling something. The consistency is the frightening part. The survey in 2013 showed 50% were under the $400 pressure line. Of the group that could not raise the cash, 45% said they would go further in debt and use a credit card to pay It off over time. while 25% would borrow from friends or family, 27% would forgo the emergency while the balance would turn to selling items or using a payday loan to get by. The report also noted just under a quarter of adults are not able to pay all of their current month’s bills in full while 25% reported skipping medical treatments due to the high cost in the prior year. Additionally, 28% of adults who haven’t retired yet reported to being largely unprepared, indicating no retirement savings or pension whatsoever. Welcome to a gigantic problem ahead. Not to mention the massive unfunded liabilities in the public pension system which in certain cases has seen staff retire early so they can get a lump sum before it folds.”

If only this perpetual debt cycle could be stopped via remote. Someone else’s problem one would suggest.

Are the Aussie major banks as greedy as made out?

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One would imagine that Turnbull and Morrison would consult the Treasury or the Reserve Bank of Australia (RBA) to get a feel for the true state of bank greediness. Of course as a political point scorer it is an easy one because Aussie mortgage debt stress is so high and any relief that absolves their own accountability is a plus. Turnbull doesn’t worry about reality and given his supposed business acumen saw no need to consult the banks. Just Mug them in a back alley. Then wonder why they say in response to the proposed tax slug why employees, customers and shareholders will suffer in some way or another. Any conservative government knows that nearly all financial institutions operate for shareholders over customers. In a round about way customers can always choose to switch institutions if they find a better deal. Market forces keep some level of competition but the above chart shows that the return to shareholders for the evil major banks is at 24 yr lows. Profitability is well off the highs. So shareholders aren’t getting the spoils they are accused of. Of course low interest rate environments place extra pressure on net interest margins and they too are hovering at post GFC lows. Never mind. When trying to arrest disastrous polling Turnbull will happily put himself ahead of country. Even if it means dynamiting the tracks of the one sector that greases the wheels of the economy.

Bon chance! Macron aims to hollow out The City (of London)

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According to the French Consulate in London, there are around 400,000 French nationals living in Great Britain. ONS reports that there are 157,000 Brits living in France. A fair assessment would be because the working opportunities in the UK are more abundant than those in France. Indeed London is the 6th largest French city. Bigger than Nantes, Bordeaux or Strasbourg. London has always been the financial hub of Europe and Macron is promising to shift that to Paris. There are plenty of reasons why that won’t happen.

First, the latest survey on financial sector relevance puts London at #1. Financial sector relevance really revolves around one crucial thing – liquidity and sensible regulation that isn’t overly onerous.

President-elect Macron is discussing the idea of stealing up to 20,000 brains from London into Paris. The surest fire way to ensure that won’t happen is that the UK can easily nip this in the bud. If the EU looks to slap certain financial restrictions on banks that don’t comply then they’ll happily conduct business in places where they can. Macron should know that ‘liquidity attracts liquidity’. Put in roadblocks that inhibit it and capital will seek freer climes to operate in. UK can cover that put option simply and easily. Nothing tickles a banker’s appetite more than the ability to operate in a less restrictive environment. There is no reason a multinational company listed in Frankfurt would try to raise capital in Europe if the UK was half the cost. Goldman Sachs employs some of the best legal brains to get around any problem.

Money is more global than ever. Singapore is a good example of that. More and more robots are trading currencies, equities and commodities. ETFs abound. The financial services industry is shrinking in absolute number of employed. By way of example the number of registered securities professionals in Japan has more than halved in a decade.  So Macron can make all the half-baked knee jerk promises he likes but social media has a way of making everyone remember when it suits least.

I’m betting on Britain. National currency, national central bank and soon to be fully flexible policy setting. Speaking of currencies. Did you know that none of the bridges depicted on euro notes actually exist? They decided against on the basis that certain nations might get rubbed the wrong way if say Germany was on the 500 euro note and Rome was on the 5 euro note…that ought to tell us something.

Bon chance mon ami!

Why don’t firms hire staff like they’d choose a heart surgeon?

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How many times have I heard over my career senior management talk incessantly about the need for new blood yet when it comes to doing anything about it with regards to new hires 99% of the time  the safe cookie cutter is favoured over the left field choice. It is ever more so the truth in the post GFC world. Managers seem afraid to take calculated risks because the left-field candidate may jeopardize their own positions if he/she fails.

As an example managers in finance often fall foul of hiring exclusively within the industry. The level of inferiority complex can be so overwhelming that they fawn at the idea a Goldman Sachs employee will work for them for some ridiculous sum. Invariably they forget that Goldman hires duds too and usually those that get cast off are in that bucket. If you are properly good, there is no incentive to leave Goldman as the salaries, opportunities and product capabilities are too wonderful vs peers.

Yet many financial firms set upon trying to change the firm into a wannabe Goldman Sachs. They forget that their clients can already deal with Goldman directly should they feel the urge. Why on earth would they choose to deal with a wannabe copy? Surely each firm has a unique selling property that is of value to clients. Why not invest and promote that rather than overlook the talent within. Who honestly values flattery? Besides, there are so many cautionary tales with hiring ex-bulge bracket employees who are so used to being spoon fed every possible product line that they struggle immensely when they are required to actually put elbow grease into the job. It is uncanny.

Some firms occasionally hire from outside the industry with huge success. Instead of financial analysts pontificating about a stock, someone who has worked within the industry has a far better feel for cycles, internal decision processes and strategy that formulates under different points in the cycle. Clients glean that value. They couldn’t care less about the stock target or valuation metrics because that ultimately is the investor’s job. Besides the history of brokers behind the curve is etched in stone. Unique context and perspective trumps commoditization every time.

Some financial (and other) professionals have such checkered histories that one wonders how on earth they get rehired. If companies viewed their hiring decisions as akin to selecting a heart surgeon for a life threatening operation, many of these people would never make the cut (no pun intended) given the body count from previous poor execution. Yet many firms continue to put quacks in their ‘surgeries’ with expected disastrous results. Generally hiring managers run interference on these bad choices to cover their own mistakes.

Many HR surveys (including Harvard) show that bad hires end up costing way more than the salary when the cost of onboarding is included. Not only do companies potentially have to foot the cost of a headhunter (25-30% of salary is a standard fee) , what follows is poorer output, the potential for incumbent employees to become disgruntled at the new hire’s lack of ability and most worryingly an increase in dissatisfied customers. If they land a toxic employee that can damage team productivity to such an extent the best performers will seek challenges elsewhere.

So in a world that is getting harder and harder to succeed in, on what basis does conventional thinking bring anything to the table but more of the same? What does hiring a competitor do other than bring similar tactics? In fact, the more telling question is if they were knocking the lights out their success would permeate within their current employer. Unseating happy employees requires dynamite way over and above what they can probably afford.  What hirers often forget is the extent to which internal human capital plays a part. How awful does one’s human capital creation have to be to consider jumping ship?

That is where the left field choice comes into its own when hiring. A person genuinely looking for career change may well be doing it because they’ve tired of several decades of the same industry. They’ll likely come full of fresh ideas, out of the box solutions and lessons from a completely different background with the passion of a new graduate.

Many companies fail to adapt because the stupid questions don’t get asked by the incumbent staff for fear of ridicule. Yet someone eager to learn may ask the most basic of questions and ask “does it work?” One company I consult had a new boss join from HQ and he questioned why staff had meetings on such trivial matters? One staff member said “we’ve been doing it for 15 years!” When the boss said “does it work?” all replied ‘not really”. Yet they offered little in the way of proposals to change what was broken.

In a sense I see many businesses that operate in status quo mode where change if ever happens on a trivial or traumatic basis not through consistent due diligence and proactive leadership.

Think of it like asking an elderly person “if you had one more day to live what would you do?” “Well I’d play golf, take my wife to an expensive dinner and drive a Ferrari” If you asked Athenia”why don’t you do it now” the response would be “well I’m not dead yet!”

Look at the successful businesses around the world today and invariably the corporate culture is likely to be open and flexible. Bosses are prepared to hire people more qualified than them because they want to learn. Show me a company where inferior staff are hired to protect a manager and I’ll show you a dud business.

Which then goes back to the most important ingredient in a tech savvy smartphone world. Analog relationships. Look at the latest recruitment sites which ask candidates to fill in fields where a computer will sift through algorithms to screen. These systems remove the most important skill in selecting good candidates – gut feel. A good recruiter can understand a client’s needs far better than a computer. Besides if a computer is searching for terms fixated on what you’ve done and not what you want to do it will screen you out every time. What a wasted opportunity!

Human nature is uncanny. Risk taking is inevitable but instead of most people becoming  victims of change only a mere few will end up being agents of it and there will be no second guessing who dares wins! So instead of screening for the textbook definition of identity based diversity how about focus on diversity of thought!

 

The 5 election issues seen by the Komeito include mobile phone charge spots

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The Komeito was out in force today trying to see what things were bothering potential voters. The Komeito asked the following 5 questions to passers by and requested them to place stickers against only one. Such is the level of data collection even kids were asked to put stickers. Feeling out future voters? Hardly. Smacked of garbage in, garbage out data collection.

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1: Cut politicians salaries 20%

2: Minimum wage hike to 1000 yen/hour

3. Free high school and a cut in waiting lists for nurseries

4. Easier access to cancer screens and health tests

5. Establishment of more mobile phone charging stations

On point 1. Cutting salaries has a nice ring to it. Most senior politicians in Japan earn around $250,000. Cutting salaries would likely drive up  other means of squeezing the corporate teat. One wonders if salaries were higher that more savvy people run for office as the opportunity cost is lowered

Point 2. The Japanese minimum wage is paltry  823yen/hr in 2017 up from 796 yen in 2016. The bigger concern for the Labour market is the long term trend to part time/contract and casual workers as a percentage of the workforce. Raising the minimum wage won’t solve for much. People can’t feel confident in their future if they’re aren’t secure in the job market. Even in Europe the problem is the same.

Point 3. The Abe government already has plans to build 800,000 extra daycare places by 2019. The problem isn’t in the number of schools but getting enough qualified Day-carers. Abe has raised the subsidies to secure more carers.

point 4: much of the health checks for cancer are run at the local level.

Point 5: if their 5th question is talking of mobile phone charging points the platform is running  out of steam. Why not discuss deficit reduction, taxation or ways to revitalize small business. Is it any wonder the LDP won’t fear Komeito’s powerful platform. #makekomeitogreatagain ?

 

Why the broking industry doesn’t get it and the regulator gets it even less

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I’ve had the opportunity to speak to numerous brokers in recent weeks and the sad fact remains much of the strategy is stuck in yesteryear. The idea that hiring more analysts and promoting a full deck colour brochure of their supposed ‘depth’ to clients is somehow more important than the content they can actually provide in a dumbed down compliance constrained world. The game has changed. The regulator has even less understanding than the brokers when it comes to understanding client needs. The buy-side investment community is also becoming highly resource constrained. To have to waste countless hours on admin to set a price on increasingly valueless research does them no favours.

Don’t be fooled by Smart Karma or Research Pool or any other 3rd party research aggregator. It is the same dumbed-down research bundled into a convenient pricing structure. I’ve looked into the economics and unless a research provider has a huge following the returns on contributing to these third party platforms is next to worthless. The more mouths to feed, the less return. On top of that the platform has no real control over what goes into it. It is a convenience store but in that vein, the nutritional value remains relatively low.

The simplest form of strategy is to set up ‘Special Forces’ type research teams. These teams don’t write rated research but charge on a ‘per mission’ basis. Take GLG. They have no broking license but carry out bespoke requests. Why aren’t brokers following this model? It is insane to hire more in sales, research and trading when the regulator is squeezing the traditional proposition to zero.

Two questions:

Did regulators actually ask smaller scale institutional  investors what they needed before they imposed rules which will dramatically increase their cost of doing business, the very opposite of the goal the regulator thinks its rules will create?

Are the traders of risk willing to take any risk to fill a gaping hole the very people they proclaim they serve are crying for?

What I see is more of the same. The bunker mentality. Conforming to outdated models to keep their inflated salaries alive for as long as possible pandering to internal politics to survive. Badgering clients to fill in irrelevant polls which serve no purpose but the promise of magical commission dollars in the future to their out of touch bosses at HQ. Some brokers even publish “the best of research” weeklies as a sort of self-appraised quality control mechanism to push on clients. Let’s think about that. If all research was properly screened before being published there would be no need to tell clients that this is the tiny fraction of research that isn’t (supposed) rubbish. It is actually confirming client’s worst fears – sell-side brokers aren’t listening  (as usual).

The gig is up. Regulators are even more clueless. Instead of trying to provide a marketplace where smaller boutiques can survive they drive the cost of compliance to such a degree that in many cases the teams of internal watchdogs swamps the investment decision makers. That’s right! The hottest ticket in finance is in compliance. A headhunter told me the network of compliance officers is so tight across firms there is almost a deliberate ‘insider’ matrix among them which encourages them all to switch firms to keep driving up their ‘collective’ remuneration. The people in charge of preventing scams are in fact the biggest operator of insider trading!

We’ve countless examples of how inept regulators are. Bernie Maddoff the biggest of them all. Despite multiple investigations and the clearest set of breaches presented to them they failed to uncover a $65bn fraud. Many regulators by background are lawyers meaning they are full of theory but devoid of real world practice. Regulators would be better off hiring convicted traders to hunt down fraud and illegal behaviour. As it stands they are as clueless as ever thinking more biting regulations will help the market. Wrong. Free it up but raise the penalties for actual wrong doing. I’ve never met an investor who doesn’t want to keep a useful broker alive. That’s why the payment skew is like it is. It isn’t just about Michelin 3-star meals and strip clubs. All the regulator has done is make an uncomplicated system almost unworkable. Although if brokers woke up to the fact that providing ‘special forces’ that clients directly requested and paid for they’d fill a gap which the regultor would have no answer to and make the iTunes research fintech companies obsolete overnight.

MiFID 2 will be the crowning glory of regulatory failure. MiFID 3 will be here before we know it as evidence of the catastrophic bungle it’s predecessor already is before it is in effect. Then again it is an EU directive – that ought to have told us something.

Trump’s tax returns – the biggest danger

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MSNBC’s Rachel Maddow claims to have President Trump’s tax returns. Apart from the legality of such leaks, the question remains whether he’s done anything illegal. If he’s used every legal loophole to his advantage to AVOID taxes then good on him. If he’s abused the sysyem and EVADED taxes then that is a problem and the law should be applied appropriately. The question is what level of detail has Maddow got? A couple of pages of his ‘1040’ or his entire filings? I would imagine his tax filings are complex enough littered with tax loss carry forwards, write-offs, deductions and so on.

The risk is binary.

If he is only shown to have avoided tax then it will be a non issue and the Democrats will bury themselves deeper in the politics of envy. Voters didn’t care much for the original leak during the election campaign.

If Trump is charged with tax fraud and impeached be careful what you wish for. The amount of market chatter I hear from the same pundits who said he had no chance of winning the White House are the ones believing his tax cuts aren’t yet priced in.  That was priced in a while back but such are global markets clinging to any hope things don’t fall apart that deposing the one person that is fueling it will cause massive risk on.

For all of the hero status Maddow expects to garner she may end up doing the greatest disservice. That doesn’t condone illegal activity rather exposing what happens when the inevitable Chinese whisper problems rear up because we’re all US tax code experts.