Regulation

Fail

Interesting article on Bloomberg discussing the obvious outcome of Sweden’s plan to get more EVs on the grid. As most hair-brained climate alarmist governments have a desire to outdo each other on the virtue signaling scale it often leads to poorly thought out decisions which end up costing tax payers a fortune.

Bloomberg’s Jesper Starn wrote,

Demand for electricity in Stockholm and other cities is outgrowing capacity in local grids, forcing new charging networks to compete with other projects from housing to subway lines to get hooked up.”

We’ve been here so many times before. Take Germany in bio-fuels.

The German authorities went big for bio-fuels in 2008 forcing gas stands to install E-10 pumps to cut CO2. However as many as 3 million cars at the time weren’t equipped to run on it and as a result consumers abandoned it leaving many gas stands with shortages of the petrol and gluts of E-10 which left the petrol companies liable to huge fines (around $630mn) for not hitting government targets.

Claude Termes, a member of European Parliament from the Green Party in Luxembourg said in 2008 that “legally mandated biofuels were a dead end…the sooner It disappears, the better…my preference is zero…policymakers cannot close their eyes in front of the facts. The European Parliament is increasingly skeptical of biofuels.” Even ADAC told German drivers to avoid using E10 when traveling in other parts of continental Europe.

Spain perhaps provides the strongest evidence of poorly planned subsidy execution. In 2004 the Spanish government wanted to get 1GW of solar under its feed in tariff over 4 years. Instead it got 4GW in 1 year meaning its budget exploded 16x and it had €120bn in tax liabilities over the course of the promise. In the end, the government reneged on the promises it made because it couldn’t afford it. So much for the assurance of government run programs.

Not to mention the overproduction that has often been created by subsidies. When the subsidies are withdrawn, we see fierce cost cutting which buries prices and sends many producers to the wall which was the experience of the last cycle. Take a look at India’s once largest wind power producer Suzlon. At the peak $425 a share. Now $4.35. 90% up in smoke.

To think Bill Shorten wanted 50% EVs by 2030. Clearly Australian voters disagreed.

If governments can’t sustainably raise living wages without regulation, cheaper energy prices act like a tax cut so sticking with coal, gas and nuclear make far more sense than the life experience of sharp price increases thanks to green madness.

Here is betting Sweden doubles down on green madness to remain “woke”

Mercedes – “grant us tech neutrality“

As CM has argued for over two years – let the industry have full technological freedom (point 13, page 15) to hit government vehicle emissions targets. Mercedes Benz is requesting the same as they have no plans to phase out diesel or petrol by 2039 because “no one knows which drivetrain mix will best serve our customers in 20 years”. The free market is a funny thing – it works well.

How many renewables companies were sent to the wall thanks to generous subsidies that brought overproduction to a market the government couldn’t afford to sustain?

Before we rush to bash the bankers!

Bankers have worked hard to stay one rung above lawyers. Yet is anyone surprised? Before we embark on a “bash the banker” tirade, at what point do we cast aspersions on the regulators? If you leave a child unattended with a box of matches don’t be surprised if the house burns down.

None of this is new. Before the housing crisis engulfed America, a group of certified home appraisers raised the alarm in 2003 by signing a petition to present to Congress. They claimed many unqualified assessors were in cahoots with mortgage brokers to jack up property appraisals because of the higher fees that were attracted. What was done by the authorities? The square root of jack. So the $750,000 mortgage taken out was actually against a $500,000 property. $250,000 in negative equity before the new home owner moved in. Regulators could have clamped down but didn’t.

Charging dead people fees is of course a bit much and gouging advisory fees without actually offering service is poor form. However at what point does the customer bear some responsibility to accepting the status quo? Getting access to lower cost providers is/was always there but the opportunity costs were such that many just sucked it up. It wasn’t enough to devote time to when the half yearly check up came around.

CM was one of the ones that questioned the big bank superannuation advisor’s usury fees. So poor was the explanation that after minimal effort, a new advisor was found with fees cut in half and investment flexibility rising exponentially. We shouldn’t have been hanging out for a Royal Commission to whump the banks.

Indeed, should any laws have been broken then the perpetrators deserve to have the book thrown at them. If boards willingly accepted that certain divisions were deliberately acting in unethical ways then they deserve to be accountable.

Corporate governance is not helped by hiring a majority of independent directors. The US experience has shown that to be a failure. It is all about corporate culture. If boards have not been setting the highest standards why should we be surprised if the underlings follow suit. We only need look at the debacle that was Cricket Australia or the recent shenanigans at the ABC to see examples of a poorly run board leading to a culture beneath that ends up seeing staff “cheat” or making decisions that flagrantly contravene the charter.

Do we jail bankers for 25 years? Depending on the extent of actually “breaking the law” that maybe a deterrent. WorldCom CEO Bernie Ebbers was sentenced to 25 years based on nine counts of conspiracy, securities fraud and false regulatory filings to the tune of $11bn. Enron’s former CEO Jeffrey Skilling was convicted on 35 counts of fraud, insider trading and other crimes related to Enron and sentenced to 24 years prison and fined $45 million. Madoff 150 years, Stanford 110 years jail. This has not necessarily stopped corporate crime but it should throw a flag in the minds of those considering it. If the consequences are too soft then clearly the risks profile diminishes for the perpetrator.

Look at the advent of whistleblower laws in America. The SEC now encourages whistle-blowing by offering sizable monetary awards (10 to 30% of the monetary sanctions collected). Successful enforcement actions as a result of whistle- blowing has led to awards as high as US$30,000,000. As a result the SEC has seen a 10 fold increase in claims over the last few years. Would boards be more inclined to act ethically if whistleblowers were granted protections?

Plenty of ways to improve what has transpired but what the Royal Commission should make painfully clear is that consumers need to wise up and become more savvy about how they make choices. We can’t forever complain and wait for governments to rescue us when it is them in the first place not acting responsibly to ensure good behaviour.

The free market should be the first to benefit from filling this clear void. Tying up banks in more red tape and onerous regulation isn’t the way forward. All it will do is drive costs for compliance higher which will ultimately hit the consumer. The larger the institution, the easier such regulations will benefit their ability to squeeze the little guy!

Making the punishments for bad behaviour enforceable and putting the onus on boards to act ethically will make all winners.

Failing to grasp capitalism

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Good to see that the alarmists have moved the “saving the planet” argument to repairing 5yo washing machines. 35 years ago, repairing a VHS deck was worth the money. A new deck would set one back multiples of the repair. Can one honestly say they would bother repairing a 5yo deck when the replacement is likely to be near as makes no difference the same, if not cheaper than the repair?

Did the BBC think to measure that a brand new washing machine might consume a quarter of the electricity and half the water of a 5yo one? Over 100s or washes it would pay for its own environmental footprint many times over.

Perhaps the regulators trying to gather momentum behind this ‘grand’ proposal  might let the free market determine whether people would bother to repair a broken appliance based on cost. If they felt compelled to revive a 5yo for the cost of a replacement then so be it. Chances are, like flat screen TVs, capitalism will have brought the cost of a like for like new LED 4K to a quarter of what it cost 5 years ago.

Perhaps Brussels can establish an entire building dedicated to subsidized repair jobs. Spend billions in infrastructure to cater to a question no one is asking

The EU regulators are trying to force manufacturers to make appliances last longer. If a consumer wants to buy a cheap Chinese made fridge and run the risk of it dying too soon, why stop them? If another shopper thinks paying 3x for a fancy Made in Japan fridge on the basis it might last longer, why not let them choose?

Going by the EU directive surely car makers should offer 20 year warranties. Although doesn’t it contradict the push to eradicate fossil fuel sales by 2040. Doesn’t forcing child slave labour in Africa to mine the cobalt to go in batteries propose deeper ethical questions?

Ultimately market forces can quickly determine whether repair is feasible. No need to mandate makers to build equipment that consumers aren’t demanding.

Rest assured people! The EU once launched multi year study on whether water rehydrated or not. Instead of accepting it, the EU introduced laws which prosecuted companies that claimed its water products did! Go figure? It’s journalism like this that makes one think they’re all eating Tide pods.

Coincheck wreck

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Perhaps that was Coincheck’s greatest problem. Bragging rights to being the leading crypto exchange in Asia only made it (pardon the pun) a richer target. 58 billion yen ($560mn) was stolen. While bitcoin trading wasn’t halted many other cryptos were, exposing their fatal weakness. CM has been writing constantly that “hacking” was the biggest threat. Regulators will have to step in at some stage and the global trading element of crypto creates all the nasties of global policing against tax evasion and money laundering.

Coincheck claims it will compensate users of the exchange but at the same time is asking for financial support. The question is how the reactive forces within the Financial Services Agency will cope with protecting investors? Seems like cart before the horse.

Why should investors that willingly traded on an unregulated site be compensated?

Usually a mutually exclusive headline in WaPo

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Surprising to see such an opinion piece in WaPo. Usually mutually exclusive subject matter with such a title. Admittedly the author said she had incredibly low expectations.

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.