Skip to main content

Me Dr Doom? No so much but I am a realist

The problem with Hollywood's view of Wall Street and of finance in general is that everyone seem to expect the massive cliff hanger with a visual and satisfying denouement.  Reality is rarely that way.

Over the past three years I have made three big prognostications:
  1. Greece would soon be out of the Euro (so far I am wrong)
  2. That European banks are in real trouble (see more below)
  3. That UK would vote to exit -- and why there are some justification (I was right, but the reason why people voted to leave had more to do with xenophobia and parochialism)
Lets get back to item 2 on my list.  I said that European banks were in trouble, that they were grossly undercapitalized and that they needed to change things.  Since then, the big ones (DB, SocGen etc etc) have reduced lending (why do you think there is a stagnation in Europe) and increased capital to meet their risk capital obligations.  So what happened? Over the past 30 months DB has seen its share price go from around  Euro50 to about Euro 12 as of yesterday's close.  However, during the 2008/2016 period, DB has increased its off balance sheet risk dramatically -- look at the massive derivatives book -- which according to DB is well hedge.  

The reality is that DB has taken some massive capital hits over the past 24 months, racking some impressive losses over the period. According to BIS it still is within the threshold of acceptable, but then these are the same guys who said that a bank Belgian, Dexia, was fine; the same morning Dexia was declared insolvency... so treat BIS bank rating with a massive grain of salt (I would in fact suggest a large chunk of cristal salt). 

Back to my initial point, the real world banking collapse is more like a Monty Python sketch then a Hollywood action movie, pieces are slow to move and their direction seems pre-ordained, almost like a tragedy.  What is happening in the PIGS could/was foretold years ago.  The massive pressures on the Southern European economies reflected itself in business failures -- banks were left holding the bag.  No amount of capital (we are talking north of 15% of assets being unrecoverable) would save these institution.  (12/7:  I should add that the Southern European banks failed to boost their capital between 2008/2014 hoping that a recovery would save them...)

Like Nero, the ECB is watching Europe's southern banks burn, not realizing that it will affect the backbone of Europe's Northern banks establishment.  Watch DB and SocGen suddenly receive state aid once the chips start falling (BTW no one knows what are the contagion risks here).  

So two years ago, I said Europe's banks were in grave danger since then the stock price of the biggest bank has fallen by nearly 80% (SocGen is off by only 50%), in the south price drops has been catastrophic; Banco de Monte de Paschi that was trading around Euro 6.0 in 2014 now trades at Euro 0.27 giving the bank a market capitalisation of Euro 5 billion.  It is hard to see how that bank, with nearly Euro 170 billion in assets -- and nearly Euro 25 billion in bad debt (15% of assets) can fix its problem via new issuance, and according to the ECB a bad bank scenario is off.

I was right, being the owner of a European bank over the past 24 months has been a disaster.  Now how does this translate into the real world?  The answer is Lehman Brothers -- we just don't know. The problems of MdP could bleed into some of Germany's Landesbanks -- who have trades with; SocGen and DB.  That is what we call contagion.  For Italians the consequences are even more severe, because the death of these banks will shut down the country's payment system -- money is maybe at the heart of all evil, but it's still the "lubricant in the system".

So my prediction if you were an investor were right, for the bleed through to the rest of the financial system -- it will take time, and it will happen.  One thing for sure, the ECB will have to take care of Europe's banking system -- very soon!








Comments

Popular posts from this blog

Trucker shortage? No a plan to allow driverless rigs

There are still articles on how America is running out of truckers -- and that its a huge problem, except its not a problem, if it was a problem salaries would rise to so that demand would clear. Trucking is one of those industry where the vast majority of participants are owner/operators and therefore free agents.

Salaries and cost are extremely well know, "industry" complains that there are not enough truckers, yet wages continue to fall... Therefore there are still too many truckers around, for if there was a shortage of supply prices would rise, and they don't.

What there is though is something different; there is a push to allow automatic rigs to "operate across the US", so to encourage the various authorities to allow self driving rigs you talk shortage and hope that politicians decided that "Well if people don't want to work, lets get robots to do the work" or words to that effect.

This has nothing to do with shortage of drivers, but every…

Every punter says oil prices are on the rise: Oil hits $48/bbl -- lowest since September 2016

What the hell?

How could this be, punters, advisors, investment bankers all agreed commodity prices  in general and oil prices in particular are on the rise...its a brave new era for producers and exporters -- finally the world is back and demand is going through the roof, except not so much!

What happened?  Well energy is complicated, the world operates in a balance -- 30 days of physical reserves is about all we've got (seriously) this is a just in time business.  So the long term trend always gets hit by short term variations.

Global production over the past 12 months has risen by somewhat less than 1.5% per annum.  As the world market changes production becomes less energy intensive (maybe), but the reality is that the world is growing more slowly -- America Q4 GDP growth was around 1.9% (annualized) Europe is going nowhere fast (the GDP growth in Germany is overshadowed by the lack of growth in France, Italy, Spain (lets say 27 Euro members generated a total GDP growth of 1.2…

Paying for research

This morning I was reading that CLSA -- since 2013 proudly owned by CITIC -- was shutting down its American equity research department -- 90 people will be affected!

Now the value of a lot of research is limited, that is not to say that all research is bad. In fact, I remember that GS's Asia Aerospace research was considered the bible for the sector.  Granted, there was little you could do with the research since the "buy" was for Chinese airlines...that were state owned.  Still it was a vey valuable tool in understanding the local dynamics.  It seems that the US has introduced new legislation that forces brokers to "sell" their research services!  Figures of $10,000 an hour have been mentioned...

Now, research can be sold many times; if GS has 5000/6000 clients they may sell the same research 300x or 400x (I exaggerate) but this is the key -- Those who buy the research are, I presume, prohibited from giving it away or selling it, at the same time the same rese…