Trade

Bitcoin now on prime time Japanese variety TV

492468E9-F50E-439B-8479-54B2117C3071.jpeg

The picture above is of Tetsuro Degawa, a Japanese comedian who does his best to show himself to have little intelligence. On prime time TV tonite he was talking about Bitcoin. The sign to the right partially says “can you understand Bitcoin in 5 minutes?” 

Japanese TV audiences generally gasp at new information so Bitcoin was a subject of great interest. Still one wonders if Degawa is presenting on the crypto currency that we’re one stage away from the taxi driver giving tips.

Today, Bitcoin is trading over $15,000 up another 13% today alone. Apparently Warren Buffett has disclosed Berkshire Hathaway has bought some too.

In 20 years in financial markets I cannot work out how something backed by nothing other than greed in a market that is not regulated and highly vulnerable to cyber terrorism continues to sucker more people in.

Tulip mania may be removed as the bubble yardstick before long. As one of my experienced private wealth managers likes to say, “I have difficulty fathoming the “no euphoria this time” view.”

Yemen – Saleh’s death is the dangerous slice in the Iran & Saudi sandwich

A96F227B-6D4F-4BF1-B531-E63057A1FE99.jpeg

Even before the Arab Spring, CM (in a previous life) wrote that Yemen was a trouble spot. It’s former President Ali Abdullah Saleh (Sunni) has died of natural causes – he was assassinated in a spate of tribal violence in the capital Sana’a yesterday. No stranger to being an oppressive tyrant during his rule, after being ousted in the Arab Spring he was in recent years working with the Houthi tribe (Shi’ite) to regain power before switching back to a US backed Saudi-friendly deal maker. He proved that power is more important than religious sect. However the Houthi weren’t prepared to suffer a turncoat who betrayed them so Saleh was duly dealt with.

Why is Saleh’s death important? What it now does is give Saudi Arabia more will to take more decisive action against the Iran backed Houthi. It is no surprise that Saudi Arabia has cleaned house with the arrests of  royal family members to tighten the inner circle. It smells like the early stages of broader tit-for-tat skirmishes before all out conflict ensues. Yemen is often argued as a proxy war between the two.

While many are distracted by the US Embassy to Jerusalem as an unnecessary ‘in-the-face” action, it is a very firm line in the sand to where the US cards already lie. No big surprises. For now most Gulf States want Israel on their side to help them defend against and ultimately defeat Iran.

D308E9D7-E0B4-4546-A341-A98939271394

At the narrow Bab al-Mandeb Strait separating Yemen and Djibouti/Eritrea, cargo ships make their way up the Red Sea to the Suez Canal, could become a major choke point. This year multiple US, Saudi and Emirati warships have been attacked by Houthi rebel forces. In January 2017 a  Saudi al-Madinah frigate was sunk in the strait. An Emirati HSV-2 swift naval craft was also put out of action in late 2015.

01A2C85F-C3AE-483F-9900-E7EB5764F689

Safe access to the strait is crucial at present because of Egypt’s reliance on imported LNG to maintain stable electricity supply. One LNG tanker heads to Egypt each weeknight through the canal. Just under 10% of global trade goes through it as well. Any blockage or restricted access would force ships to sail the long way around the Horn of Africa adding another 40% to the journey. This would have significant impacts on shipping and trade. Markets aren’t factoring anything at this stage.

The problem with naval conflict is that Yemen is backed by Iran which in turn is one of Russia’s best clients. Iran possesses the SS-N-22 Sunburn missile which is a supersonic anti-ship missile which even the US has no answer for. In recent years this has been upgraded to the Super Sunburn (P-270) which is even more lethal. It is a ramjet which travels at Mach-3 meaning if fired inside a 100km range then the target is likely to be toast (video here). It can be launched from a ship, submarine or land.

3DA09AB4-C3B0-46A6-827E-F2DB7682F290.jpeg

Iran could blame a whole host of tribes (Sunni or Shia) sick of being under the jackboot of effective Saudi control/influence for an attack.

On December 2, Israeli jets bombed an Iranian military weapons base in Syria. Israel has warned Iran it won’t tolerate any military presence on Syrian soil. We shouldn’t forget that China has also deployed its special forces to Syria to help Assad. Clearly the Chinese see a good opportunity to clean up some of the spoils in the region. China is always happy to help out nations that are under sanction. It adds more mess into the geopolitical sphere.

While the GCC has stepped up its air attacks on Yemen post the death of Saleh, he was the only one that has been able to unite the country. Indeed it is possible that the secession of the south becomes an issue. At the time of reunification of North and South Yemen in 1990 many in the south felt their northern neighbors were pillaging too much of their oil reserve wealth. Even their private land was appropriated and spread among the Sana’a elite. Now that Saleh has gone, and Yemen fragmented again, we may see old scores settled. The Southern Movement (loyal to exiled President Hadi) in Yemen wants to take back what was stolen from them. So Saleh’s death may open a vacuum of more instability.

Iran would relish the opportunity of a fractured Yemen to further build its influence. Bab al-Mandeb may become a flashpoint to fight the proxy war. It is extremely messy, creates proper disruption and pushes Saudi Arabia and Iran closer to conflict.

Which ever way you cut it, diplomacy in the Middle East (what little there is) looks set to worsen. In a sense we are dealing with two large clients of Russia (Iran) and America (SA). Now China is siding with Russian interests by using it as a test run of its military muscle. China isn’t committing anything major but it wants to be at the negotiating table when it all goes pear shaped.

It smells very similar to the lead up to the Arab Spring. More turmoil and complacent markets which are not quite absorbing the realities of “local problems” spreading to another neighborhood. Sure we’ve seen many leaders overthrown in Libya, Tunisia, Egypt and so on in the last uprising but the pressure on Saudi is mounting hence the recent crackdown internally.

The other dark horse is Erdogan in Turkey. He is facing a corruption probe over money laundering to help Iran evade sanctions and he seems keen to externalise his problems so he can shut down the local threat. He is threatening to cut off ties with Israel if the US relocates the embassy but for a man with clear ambitions to revive the Ottoman Empire that fell less than 100 years ago that is a mere formality in the future.

The flashpoint remains Yemen. It has the perfect storm of a pawn in a global game of chess. While it whiffs of local tribes seeking revenge there are too many willing to help them achieve their aims which only plays to the broader ructions throughout the rest of the Middle East. Last week Houthi rebels launched a missile attack against the UAE nuclear power plant under construction. Power corrupts. Absolute power corrupts absolutely

Kobe ‘Steal’ – will the market referee wave a red card at what looks a lot like insider trading?

6B872830-46AE-448A-977C-D953E4BEEF66.jpeg

If the referee caught Kobe Steel’s (5406) rugby team up to such foul play it is likely that players would be red carded. While unconfirmed speculation at the moment, it would appear that since September 21st Kobe Steel shares came under heavy selling pressure in what a seasoned market punter might suspect looks like insider trading via aggressive short selling. 7 straight negative candle sticks. Kobe Steel spilled the ball on its data manipulation on October 8th.

This would not be the first time that a broker conspired with a fund to short sell a stock ahead of a negative release on insider information where several weeks later news broke and sent the shares collapsing. This is the current action of Kobe Steel shares.

3913F6FB-F096-4E8A-BBD6-5CA21DB375B2.jpeg

So excluding borrowing costs or any leverage, if one had managed to short sell Kobe Steel at 1350 (on Sep 21) and brought back at today’s prices a quick fire 53% return would be gained.

The important question is whether the regulator will investigate any potential foul play when looking at the video replay. I will be asking this question directly to the Financial Services Agency (FSA) as I have been invited the regulator to give a speech on ways to improve Japanese corporate governance in a few weeks time.

This won’t be just a beat up of Japan’s corporate governance as foreign corporates have made countless scandals post the introduction of Sarbanes Oxley in 2002.  However it will aim to be a realistic overview of tolerating what seems to be endless preventable insider trading scams with paltry penalties of $500 and a slap on the wrists with a feather duster.

Until serious punishments for flagrant market manipulation are thrust front and centre in front of bewildered and annoyed (foreign) investors, the cynicism will remain that Japan is not a safe place to invest. Remember insider trading is effectively fraud. Perhaps your pension fund owns Kobe Steel in a global portfolio meaning that some shady investor has stolen your retirement to feather his or her nest.

Perhaps I should thank Kobe Steel for getting dirty in the ruck area to help the final presentation draft.

7C59A579-E1A8-42A6-8A44-07DF955D5B01.jpeg

Norwegians want a referendum on leaving the EEA & warn Brits not to become like them

IMG_0623

It seems more in Norway are wanting to have a referendum on the European Economic Area Access (EEA). The claims is that their costs have risen 10-fold since signing the EEA 25-years ago. Norway, while not a member of the EU, still pays around £650 million to Brussels to fund the EEA administration and other EU research projects. Two recent opinion polls conducted by Sentio reveals there is a strong majority wanting to have a say on the EEA agreement: 47% are in favour of a referendum on Norway leaving the EEA, with only 20% rejecting such a referendum. 70% of Norwegians do not want to enter the EU and the Labour Party has recently removed it as a policy platform.

Norwegian businesses had duty free access on all exports to the EU before the EEA was signed and this FTA would still apply if the EEA agreement were terminated. Ironically Norway used to export more to the EU as a percentage of total before the EEA than after it meaning that the supposed benefits of the club have not led to bigger trading opportunities within the block.

So to Brexit – Norwegian Prime Minister, Erna Solberg of the Conservative Party, sounded a warning before the UK referendum about following a Norway style deal, stating that “you’ll hate it…that type of connection is going to be difficult for Britain, because then Brussels will decide without the Brits being able to participate in the decision-making.”

Brexit – why the EU shouldn’t treat the UK like a hostage with a ransom note

52

Isn’t it ironic that the Bullies of Brussels are already throwing random numbers for Britain to pay to leave the EU. GBP 52bn billion based on thin air. Isn’t the UK a shareholder in all of the assets, buildings and infrastructure in the EU having invested over GBP 200bn net during its membership? Shouldn’t the EU have to buy out the UK’s stake in the project? The EU is now dictating the UK can’t discuss potential trade deals with other countries while the exit process is ongoing. Are they mad? They are now saying that Gibraltar gives Spain the right to veto any trade deal with the UK. The UK is being treated like a hostage with a ransom note being sent to the Queen.

Doesn’t the EU realise that Marine Le Pen is way above what the mainstream polls are predicting? 24% of French youth see her as a viable candidate who promises real change vs decades of failure with mainstream parties. Youth unemployment is over 25% in France and many view increased risks of more terrorism are other reasons to support her France First views.

Brussels still fails to get that IT is the problem. It should be showing humility and self reflection not ramping up the vitriol.

Flake News

IMG_0312.PNG

Fake news, very fake news or in many cases it is just flake news. Flake news? The lack of context and perspective and trying to draw parallels with irrelevance. Take this piece from Robert Reich taking a trademark swipe at Trump rationalizing it with a very poor understanding of the industry he seeks to convince his audience he is an expert in:

“I just watched Trump give a speech at South Carolina’s Boeing facility where the new 787 “Dreamliner” is being unveiled. Trump said it was “built right here” in South Carolina, and that “our goal as a nation must be to rely less on imports and more on products made here in the U.S.A.” He also called for “a very substantial penalty to be paid when they fire their people and move to another country, make the product, and think that they are going to sell it back.” And said he’ll lower taxes and get rid of regulations that send our jobs to those other countries. “We want products made by our workers in our factories stamped by those four magnificent words, ‘Made in the U.S.A.'”

All fantasy. In fact, almost a third of Boeing’s Dreamliner comes from abroad — from countries with high taxes and high regulations, good wages, strong unions, excellent schools including technical education, and universally-available health care.

1.The Italian firm Alenia Aeronautica makes the center fuselage.

2. French firm Messier-Dowty makes the aircraft’s landing-gear system.

3. German firm Diehl Luftfahrt Elektronik supplies the main cabin lighting.

4. Swedish firm Saab Aerostructures manufactures the access doors.

5. Japanese company Jamco makes parts for the lavatories, flight deck interiors and galleys.

6. French firm Thales makes its electrical power conversion system.

7. Thales selected GS Yuasa, a Japanese firm, in 2005 to supply it with the system’s lithium-ion batteries.

Oh, and the first delivery of the Dreamliner is scheduled to take place next year – to Singapore Airlines. Currently there are 149 orders for it from worldwide customers including British Airways and Air France.

In other words, contrary to Trump, the Boeing Dreamliner is made all over the world and will be sold all over the world.

His “America First” economics is total demagoguery. We get a first-class workforce by investing in their education, training, infrastructure, and healthcare — not xenophobic grandstanding.

What do you think?

Well Mr Reich. Here is what I think.

The Boeing 787 Dreamliner has been one of the biggest program failures in the company’s history. While a technical marvel it was three years late, largely exposed by Boeing’s disintermediated supply chain, a break with decades of practice.

Aircraft production is a precise business. It requires that all parts arrive on time and to achieve that all suppliers must be on board. The 3-month delay of a $1 plastic fastener can mean a plane can’t be fully completed let alone delivered. So multi million dollar wing set production gets impacted. So do landing gears, engines and stabilizers. Everything is affected. Boeing’s delays sent many suppliers into financial distress. In some cases it was so bad Boeing had to step in to buy out suppliers (e.g. Spirit) to prevent further delays and cost overruns.

The second big flaw in Mr Reich’s article is that Boeing is a multi-nation aircraft for a reason. It is what is known as risk and revenue sharing partnerships (RRSPs). Companies bid to be on the project and pay a part share in it. It is an investment. They are shareholders to all intents and purposes. Companies like Mitsubishi Heavy and Kawasaki Heavy bought a stake in the project. Boeing was the project manager and designer. In short international companies bought themselves a ticket to be on the 787 with the hope if it was a success they’d be higher up the technology curve when 777 or 737-Max went to similar production materials and processes.

Boeing enthusiastically embraced this outsourcing, both locally and internationally, as a way of lowering costs and accelerating development. The approach was intended to cut the 787’s development time by 30% and with it, development cost from $10 to $6 billion. Estimates show that cost ended up being $20bn and 3 years late and is expected to break even in its 10th year. It is far from the success it was meant to be.

Another thing with aircraft suppliers is their scarcity. Aircraft manufacture comes at huge fixed costs and low lot volume. Around 120 Dreamliners are made a year and the reason the supply chain is like it is makes perfect sense. Suppliers need guarantees to ensure production levels meet their financial objectives. Parts certification is a tricky business.

Boeing needs to be sure suppliers meet certification requirements. If people think pharmaceutical companies going through the FDA process to sell a new drug is a nightmare, they should try to get a new aircraft past FAA regulations. While a drug might have minor side effects like drowsiness, a plane has to fly safely every time in almost any condition. Therefore the quality, durability and safety aspects for a plane that flies for up to 40 years is second to none. There are no short cuts.

The Boeing 787 was also made with all new production processes and materials not used before on this scale. The wings were carbon fibre composite. Mitsubishi Heavy not only agreed to be a RRSP but was willing to invest to meet Boeing’s production goals. Toray, the maker of the composite material was seen as the most reliable and stable supplier. These were cold hard facts and when building a new aircraft, airline customers want to minimize risk. Boeing needs to guarantee risk minimization and made rational decisions based on that. Had those suppliers been all in the USA you can be assured US suppliers would have been picked. Sadly many have lost competitiveness. An unknown fact is that Lockheed Martin called in Toyota to help it finesse its production processes for its disastrous F-35 programme.

So while Reich points to the ‘social’ qualities (education, healthcare, strong unions and good wages) of what goes to make an airliner they are generalizations to say the least. Japanese unions are far from strong and definitely not militant. Mitsubishi Heavy wing workers would be paid the same as their elevator assembly brothers across the hall. They wouldn’t necessarily be on high wages. I would imagine that many of Boeing’s designers have Ivy League or similar pedigrees. Assemblers would also possess serious qualifications.

In any event the point Trump was making was the same jawboning at election time. Make America First and keep jobs at home. Ideally he would be saying to Boeing that following Airbus’ example of assembling a portion of A320s in China is not his wish. In fact Boeing now has a joint venture with a Chinese entity that installs interiors and paint exteriors on 737 airliners. Is he a criminal for requesting companies stay at home?

Yes Mr Reich, President Trump is not perfect but he is doing his level best to turn around the fortunes of a country sold out by the establishment over many decades. Indeed if he cuts corporate taxes and incentivizes companies to stay at home because of a rational reason to do so that will be key. Instead of sticking it to him Mr Reich, try look beyond your prejudice to see why 64mn Americans put him in charge of their future. He may well fail but voters took that risk when they put him in office. They care not for the petty issues you raise in your articles.

This article seeks to take pot shots without assessing the full facts of an industry. What you wrote wasn’t fake news but flake news.

Trump sends message by Carrier pigeon

img_0031

Well, well, well. Isn’t interesting to see a President-elect make solid progress with US corporations before he has even got his feet under the desk. For all the negative press, Trump is at the very least sending strong messages to these corporations to look after the home team or face consequences. For major multinationals like Ford and Carrier (part of United Technologies) to quickly about face on their expansion plans shows he is no light weight unlike his soon to be predecessor.

As I have argued for a long time, the quality of jobs in the US has been declining dramatically over the last 8 years. The ratio of full time jobs has continued to slide. The number of people with two or more jobs has never been higher. The election result by and large wasn’t about racist #whitelash but people fearing for future job security. We can argue that Obama drove the unemployment rate down, but multiple jobs also skew the true figure. We should ask ourselves where President Obama was in tying to cut red tape for corporates? Listen to the National Federation of Independent Business (NFIB) and 80% of respondents to the largest body for small businesses (which are 50% of total employment) said Obamacare and unnecessary regulations were the biggest inhibitors of growth. As a small business myself, I can assure you small businesses are self-regulating. We can’t afford frivilous activity.

The haters can complain all they want about the repercussions of burning flags but when it comes down to encouraging corporates to tow the new ‘hard’ line they should be at the very least issuing congratulation not censure. One of the key reasons Trump won was down to promising to keep jobs at home.

To think that years of preparation and planning to move production to Mexico gets overturned in a flash sends a very powerful message that companies are not prepared to call his bluff. Of course one can argue saving 1,000 jobs is pretty tiny in the grand scheme of things, but it sends a large shot across the bows of other like minded corporates – “Don’t play with fire. You’ll get burnt.”

Of course the wider implications confirm the idea that globalization is firmly off the agenda. As an interesting aside, I attended a conference yesterday where a member of the BoJ presented the idea that the slowdown in global trade was also in part because of a large shift by Chinese companies producing more intermediate products at home, shown by the larger impact on SE Asian countries trade stats. So before many spit venom at Trump’s plans to twist the arms of corporates to prevent exporting jobs, note China is actively pursuing the same policy. Of course Japan repatriated a lot of production when the yen weakened. Of course US companies will have to look at ways to improve productivity.

Perhaps more than keeping jobs at home, I am most interested in seeing the rapid turnaround in ‘consumer confidence’ and other leading indicators which should give a better idea as to how sentiment is shifting on the back of a coming Trump Administration. More than Carrier, Ford, currency, I am guessing that these indicators will overshoot to the upside, surprising a market that is still giving Trump zero credit. As I have always said about Trump – the market offers little promise about him – which means that any positive surprised will have a much larger than  normal positive impact.