Scandal

Brexit – Jonathan Pie does it again

Whether you’re a Remainer or Leaver, Jonathan Pie explains in his trademark profanity-laced way why the Brexit deal of UK PM Theresa May is such a dud. What is the point of having a referendum which garners the highest ever voter turn out only to throw it back in the faces of both sides? In what world would a collective constituency want their parliamentarians to vote for a deal that makes everyone worse off? Why did May fold to every EU demand? She should have channeled the leader across the pond as to how to negotiate with Brussels.

Last week the Bank of England (BoE) ditched its independence charter to aid-and-abet the PM by producing a document stating a “No Deal” Brexit would hit UK economic growth by 8%.  What a joke. Would the EU seriously try to stitch up the economy of the second largest car market for German auto makers? It is preposterous in the extreme. Obama threatened in 2016 that the 5th largest economy would be at the back the queue when it came to trade deals. Trump would happily move it to the front. Canada and Australia too…can the BoE honestly come up with credible reasons why the ROW would spurn the UK in unison to get to an 8% slump?

Why only now has the BoE discovered this potential economic apocalypse? After all, the scare stories leading into the referendum about how the UK would plunge into the abyss should “Leave” succeed have simply not manifested. None of it. Why believe it now when its forecasts have been so off reservation? After all it did not advise the HM Treasury not to dump all of its gold at the very bottom.

Yet the Brits aren’t so stupid to see the deal being offered is the only one going. They have heard Minister for European Parliament (MEP) Guy Verhofstadt demand that member states hand over more sovereign powers to the EU. They saw EC President Juncker stagger blind drunk across a NATO stage BEFORE the dinner. There was little doubt in their minds when they checked the ballot square as to what was at stake. A No Deal Brexit is the one that should be pursued. The EU has so many disaffected member states that it is the one that needs to play nice with the UK, not the other way around.

 

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Take this chart, which shows the level of apathy member states have to show up and vote at European Parliamentary elections. Were the Brits so gung-ho to stay in the EU, why have only one-third of Brits ever shown up to express their love and affection for federalism? Is it any surprise that Italy, Spain, France & Greece have shown similar disdain over time as the EU fails to deliver for them? Surely the trend since 1979 has shown the underlying mood of member state constituents about how they value EU membership.

Perhaps Verhofstadt put the Brexit discussion into perspective (from 6:20) – after member states ratified the May plan in 38 minutes (a sure sign it is a great deal for the EU) – when he stated the hope that in the not too distant future, “a new generation of British…decide to come back into the great political European family

Tells us all we need to know. This week will show beyond a doubt about whether the island nation will have the very democracy it has shed so much blood to defend will be protected.

As Baroness Margaret Thatcher said of Europe,

 “During my lifetime most of the problems the world has faced have come, in one fashion or other, from mainland Europe, and the solutions from outside it.”

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!

 

 

Save James

As Tasmania looks to remove gender from birth certificates, take note of a 6yo boy named James who is facing chemical castration when he hits 8yo in America.

The father claims his son has always identified as a boy when with him and has testimony from others that proves his stance. He always chooses to dress as a boy when with his father.

Yet his mother has dressed him as a girl since the age of 3, calls him Luna, enrolled him as a girl at his local school and takes him to social transitioning therapy which the courts are requiring his father to pay. The bills will be extended to transgender surgery and sterilization drugs when he is of age.

The mother is seeking to remove custody from the father – who challenges her assertion – for child abuse in her divorce proceedings.

Walt Heyer, author of Trans Life Survivors and former transgender female, warned a misdiagnosis could ruin the boy’s life. Heyer claims he was secretly cross-dressed by this grandmother as a young boy. He went on to say

The diagnosis is critical, because labeling a child with gender dysphoria can trigger a series of physical and mental consequences for the child and has legal ramifications in the ongoing custody case. Get it wrong and the boy’s life is irrevocably harmed…[and] hinges purely on the diagnosis of gender dysphoria by a therapist who wraps herself in rainbow colors, affirms the diagnosis of gender dysphoria, and dismisses evidence to the contrary,”

Putting an acrimonious divorce to one side, should courts be determining the life of a 6yo kid based on a therapist’s diagnosis? Has the therapist got decades of scientifically backed research and proof to back her assertions? Or is this a case of confirmation bias? If we think about it, a therapist’s repeat business thrives more from confirmation than rejection of gender dysphoria. This is also a question of ethics.

Coming out as transgender is one thing. If the child reaches an age when they are biologically fully formed and can decide for themselves then they should be free to choose. There is no question everyone should have equal rights under the law but allowing parents the right to chemically castrate kids at age 8 before they can possibly understand the ramifications of those actions is criminal.

There is no 100% guarantee every child won’t switch back to identifying as their birth gender, but once the hormone sterilization begins the child has been permanently damaged. What will James’ mother say if she is wrong about him? “Mommy’s sorry”? Legally she bears no risk.

Let’s pray the right thing happens for James’ sake.

Obama solves climate change conundrum

https://youtu.be/fNrSEH4WVBw

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Obama has cut the Gordian Knot on climate change. Who knew?

“…the reason we don’t [invest in climate change policies] is because we are still confused, blind, shrouded with hate, anger, racism – mommy issues…”

Call me a sceptic, but even if I believe that 97% of scientists were correct on climate change, I should be more intrigued why the 3% don’t agree. Could I be missing something? After all 97% of economists believed it was a new paradigm right before the GFC almost sent us back to the financial Stone Age.

Perhaps Mr Obama should check the following study from Professor Valentina Zharkova. It might not be racism.

She explains and confirms why a “Super” Grand Solar Minimum is upon us:

Principia Scientific wrote,

Professor  Zharkova gave a presentation of her Climate and the Solar Magnetic Field hypothesis at the Global Warming Policy Foundation in October, 2018. Even if you believe the IPCC’s worst case scenario, Zharkova’s analysis blows any ‘warming’ out of the water.

Lee Wheelbarger sums it up: even if the IPCC’s worst case scenarios are seen, that’s only a 1.5 watts per square meter increase. Zharkova’s analysis shows a 8 watts per square meter decrease in total solar irradiance (TSI) to the planet.

The information she unveiled should shake/wake you up. Zharkova was one of the few that correctly predicted solar cycle 24 would be weaker than cycle 23 – only 2 out of 150 models predicted this. Her models have run at a 93% accuracy and her findings suggest a SuperGrand Solar Minimum is on the cards beginning 2020 and running for 350-400 years.

The last time we had a little ice age only two magnetic fields of the sun went out of phase. This time, all four magnetic fields are going out of phase. 
Would you ignore the 1 in 75 contrarian view whose model has predicted accurately or the 74 in 75 that have missed? It’s probably just racists with mommy issues that’s to blame…After all if Obama says it’s true, it must be right. Right?

Crypto schmypto

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CM is not a fan of crypto currencies. Apart from the fact they are solely backed by greed (when you buy a share or bar of gold you get ownership of  a physical asset in return) there are too many of the damn things. We have approximately 190 fiat currencies in circulation. Of that only a handful trade. US$, GBP, euro, yen, A$, C$ and RMB. After that liquidity goes out the window. Try getting a good rate from the Travelex currency window on Malaysian ringit. If you invest in illiquid coins the same nasty spreads will ruin any thirst for making a fortune

With crypto currencies, there are over 2,000 variants. Bitcoin is the bellwether. It has a net worth of $94 billion. Only a handful of others trade. Many should have realised that when the Japanese started to get all excited over the craze the gig was up. Japanese variety show comedians were responsible for the promotion almost 12 months ago when Bitcoin was at all time highs. Some companies like Rakuten were offering to pay staff  in crypto in lieu of cash salaries.  Now Bitcoin is languishing at 20% of that value.

Take a look at some of the products being invented to become crypto. LivingOffset is a classic case in point. It used Wikipedia as a source for justifying the validity of its findings in its prospectus.  That settles it then. Who wouldn’t buy an asset backed by Wikipedia research?!?

From LivingOffset – “Global concern about climate change is growing rapidly. Five out of every 10 people now consider climate change to be a serious problem. In Chile and Peru the number is over 75%. Interestingly, 69% of Americans are concerned about global warming [if you believe Huff Post], despite their government’s position. There is no doubt demand for our offering is there, and like Airbnb, we can provide the means and the mechanism for easy participation. In just a few minutes ordinary people can start to make a real and meaningful difference.

In January 2017, IPSOS held a global poll asking what each country’s major problem was and climate change didn’t feature a mention.

Apart from the completely bogus stats on ‘69% of Americans being concerned by global warming, SUV sales remain a solid staple in the US. In fact the most popular car in America is the Ford F-150 pick-up truck where customers rank ‘fuel economy’ #28 in terms of reasons they buy it.

Here was the promise at prospectus time around March 2018. The launch was delayed on the basis there was a need to make it more global in appeal. It supposedly launches this month.

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Below lists how some of the other crypto currencies performed overnight. This is before heavy handed legislation has come down to regulate the industry. If you look at a crypto kiosk in Shinbashi, Tokyo you’ll likely see a Rolls-Royce parked out front, presumably owned by someone in the Yakuza. As far as money laundering goes, crypto’s are brilliant.

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In an event, crypto currencies are most at the mercy of cyber fraud. Don’t buy the bomb proof guarantees of blockchain. If state agencies want to destroy these markets, they can do it on a whim. Then again there is little need to do so given the numerous events of hackers breaking into crypto exchanges and costing them huge liabilities l. Coincheck in Japan lost $500mn in one day due to a breach.

In short, crypto is little better than betting on a roulette table. If the benchmark crypto is hemorrhaging like this, why put faith in the illiquid stuff being any better? Fiat currencies may not be good stores of value but there are far more sensible places to protect wealth than parking it in products which are underwritten by nothing more than greed.  If you like a flutter by all means throw some loose change into crypto.

CalPERS unfunded pension deficit approaches $1 trillion. Who is counting?

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California Public Employee Retirement System (CalPERS) lost around 2% of its funds in 2015/16. The fund assumed an aggressive 7.5% return. Dr. Joe Nation of Stanford Institute for Economic Policy Research thinks unfunded liabilities have surged to $150bn from $93bn in the last two years. He suggested the use of a more realistic 4% rate of return last year. At that rate, CalPERS had a market based unfunded liability of $412bn (or the equivalent of 2 years’ worth of California state revenue). At present Nation now thinks the number is just shy of $1 trillion using a 3.25% discount rate. He expects that the 2017 data for CalPERS will be out in a week or so which should give some interesting perspective as to how much deeper the pension hole is for Californian public servants.

N.B. California collects $232bn in state taxes annually in a $2.3 trillion economy (around the size of Italy).