Thursday, November 9, 2017

Europe and America -- a trend?

Empires tend to fail when the centers of power become self-absorbed in political struggles while the prosperity and security of the imperial lands decline. 
(E. Gibbson)
In Europe, things are getting interesting.  Theresa May’s government showed her true collar when a letter (email?) was made public in which Boris Johnson, her Secretary of State indicated how the UK could initiate a “hard exit” instead of a negotiated exit – that everyone in the UK expects.  Germany is less and less amused, it has figured out that (a) it would be a sucker’s bet, (b) that the UK leaving Europe is generally a bad idea -- therefore to be discouraged, and (c) that the UK is giving ideas to the Italians and Catalans.

Britain's government is in disarray, each minister seems to have his own agenda as the prime minister faces rebels on all sides because she committed the cardinal sin of losing her majority and her authority.  Her lack of courage and inability to face up to the popular verdict (and resign for such a botched job) speaks loudly of the Tories moral bankruptcy.  Unfortunately, Labour is just as craven with a crazy leader who says that the answer is socialism (it was such a success in the 1970s...), who failed to support Europe last year (because at heart he's as much of an anti-European as is Theresa May), and has proven to be an even worse potential leader than Theresa May is an actual one.

The story gets more complicated with Catalonia and Italy getting in the game too.  That's what's got the German so worried, because if the UK, Italy, and Catalonia all rebel then the future of a united Europe is in jeopardy!  The ham fisted why in which the Spanish government dealt with the Catalonia referendum means that Madrid has lost the high ground -- to say that the Catalonians don't have a mandate because of poor turnout (when the Spanish police actively discouraged Catalonians from voting even resorting to violence, lost them all moral authority).  They may win because so far Catalonia is not (a) ready to take arms (peaceful exits are rare), and (b) virtually nobody is supporting their move for independence (excluding my very own -- Parti Quebecois -- another bunch of morons), mainly because no one can figure out what that would mean in the context of a federated Europe.

In America you get a sense that those participating are seeking, in plain sight, to maximize their personal benefits -- just yesterday the IRS had no problem allowing the deduction of pen and papers for companies but didn't want this to remain for teachers that were buying school supplies for their’s mean, it’s cheap and it reeks of a corporatist view of the world where companies are “more equal” than individuals in the eye of the IRS.  Another, it was revealed this morning that the wealth of just three Americans is equal to that of the bottom 175 million -- and that the guys on top are still complaining of the unfairness of the whole thing.

Empire, are borne grow and die, nothing in the world makes them permanent, despite our best wishes.  Already we see the lack of dynamism, the desire to protect specific interests -- against the common good, the willingness to take away from the mass to give to the richest segment of society, a group that has benefited the most from the economic expansion of the past 30 years. Years ago, the vision of the world was that America would dominate for the foreseeable future, an open and generous economy.  No more, today enhanced security, additional questioning of those visiting, the closed border, higher walls, are the new reality of an intellectually incurious America (80% of Americans believe in angels -- 30% believe in UFOs), yet they don't believe in climate change despite the plain to see evidence, and that 99 out a 100 scientist agree that climate change is man-made.

At first, I thought that all these Americans were racists, it's not the case.  They view their world as a finite pie, and that any new participants will reduce their portion.  I saw that years ago among my American socialist friends, who were against economic development -- because they viewed the pie as being finite in size.  I expect intolerance vis-a-vis other religions (it's starting with the Muslims bit it will escalate to others) are looking for excuse to exclude others -- skin color was first, but already you are seeing a lot of "[insert name here]" comments (the "[]"brackets is used when talking about a Jewish person on the net -- I wish I was joking but I've seen it a number of times now).  Excluding others is the vision of the end of empire -- you view the world through a panicked lenses and where the resources are dwindling.

The rise of China is not a coincidence, it’s the next empire that is slowly building up.  You just visit China these days to see a vibrant mercantilist economy that has hyper-competitive battles for the heart, soul, and pocketbook of the Chinese consumer.  China doesn't have to look to America anymore, it can do things itself and export its own concept of Empire.

By the way, I don't blame Trump for this.  He's just the natural progression from Reagan, to Bush to Bush Jr and now to Trump.  Let's not forget that the other "7 dwarfs" running for the GOP nomination were pale copies of Trump, but that they didn't disagree with Trump. I don't think that the Democrats covered themselves in glory with Hillary, but don't forget that here opponent was Sanders -- an Independent until two weeks before running for the Democratic nomination.  Who comes from America's most "white" state of all that represents probably the less diverse segment of America.  These are the people who ran for the highest office -- a sad indictment of America

Such is life

Tuesday, November 7, 2017

Currency -- Euro, Mexican Peso, CAD and US dollar

Where do we start, two weeks ago the Euro was trading at 1.19 its now at 1.15 -- not a huge move but it's directional -- that means that the market thinks that the Euro has further to fall against the US dollar.  The question is always the same how far will it go!  More than 4 years ago I was certain that the Euro was on one-way road to sub 1 US dollar rate -- the reason was that while the US economy was not hitting on all cylinders it was doing OK, whereas Europe was in real trouble.  I still am convinced that the European experiment cannot continue the way it's going, either it breaks apart or further integration will occur.

The fate of Italy, Greece, Portugal, and Spain hang in the balance.  There are no real tools for correction in Europe -- in a sense, Europe needs what all good unions require a method of creating transfer payment between the rich and poor regions.  In Europe, the opposite has occurred.  The Germans, who basically entered the Euro with an undervalued currency took Europe over -- the long game!  While the south Europe entered with overvalued currencies, created instant wealth -- but destroyed their industrial base, moreover it allowed governments to delay institutional reforms.  Only two countries took aggressive action after 2010 – when the wheels came off: Portugal and Spain and this resulted in massive social and economic dislocation.  Luckily for these two countries their brightest and most entrepreneurial were able to find jobs, but often not in their own country. 

Southern Europe is a bed of underutilized labor, fragile economies with massive imbalances that cannot be corrected (there is simply no mechanism).  The tragedy of Europe is that its politicians took the easy road – growing their members rather than improving integration and balancing mechanism.  This policy error should have yielded a much weaker currency.  What I had not taken into consideration is the human element in the form of the ECB, that "bought" the market by printing money (aka Quantitative easing).  The impact was to lower the price of risk -- since the ECB was the buyer of last resort, it flattened the yield curve -- and made everything look good.

Therefore my F/X prediction radar is terrible -- I got the Euro wrong.  I got the CAD right, but that currency is less about Canada and its conservative monetary policy than about the price of natural resources -- when king copper and oil prices rise (as they have over the past few weeks) then the CAD goes up.  No magic, no great thinking -- the CAD is a great proxy for natural resources -- end of story.

The US dollar is more interesting, some would say that the recent North Korean saber rattling is all about China, maybe, I still think it’s mostly about North Korea and Trump looking for a war to boost his popularity (it worked for Bush).  For now, the dollar remains the world's reserve currency two reasons its relatively safe, there are lots of dollar and dollar-denominated assets and its very liquid (less than it was a few years ago, but still). However, as of a month ago certain oil price contracts are priced in Yuan.  Comentators are not appreciating the importance of this shift:  Nearly 1/3 of all middle eastern oil ends up in China…

Another currency of interest is the Mexican Peso (third most traded currency after the USD and the Euro) because it beats to another drum:  The Peso represents three specific aspects of the world's financial order:  (1) The peso is the currency of Mexico and it is the US's third largest trading partner after China and Canada, (2) The peso is a proxy for investing in Latin America and (3) the peso is the currency of Mexico and is very very liquid.

As a pure play between Mexico and the US the NAFTA issues are getting very serious indeed.  There is a “feeling” that the Americans are looking for a way to get out of NAFTA and will do this at the most convenient time -- just after the Mexican election in June 2018 -- they're not entirely stupid they don't want to make the Mexican election about Anti-America.

In summary:

(1)  On the Euro -- I have no idea where that currency is going.  Domestic factors in Germany are critical, but the action of the Italians are equally important, as are the current negotiations with Britain for its exit from the European Union.  So good luck with having a view on the Euro!

(2) The CAD is easy -- tell me where the world economy is going -- and I will tell you where the CAD is going.  Years ago, one of Canada's largest pension fund stopped investing in China, because the correlation between Canada's economic growth and the growth of China were high -- reducing the value of diversification (a topic for another day)

(3)  The US dollar is almost certain to rise against a basket of international currencies -- trade war (or actual war) tend to be good at creating uncertainty, and a reserve currency always goes up during uncertainty.  However, the rise of the Yuan cannot be underestimated.

(4)  The Mexican Peso has only one road ahead -- devaluation, orderly over time, but it remains that Mexico's higher inflation, will by definition lead to a lower Peso...As a proxy for LatAm, and the view that the Americans will be more insular for the next 4 years (short of a war) then we can expect a weaker peso.

(5)  Yen, Yuan, etc etc.  The Yen used to be an important currency, but consider little international trade is conducted in that currency -- most sovereign debt is held by the country -- in general, there is little appetite.  As for the Yuan, the situation is far more interesting.  Right now, there are serious currency control on the Yuan -- until these go away, there is little scope for the currency to trade more aggressively.  But now you can price oil in Yan, and the country is one of the largest importer of oil…especially from the Middle East.  The impact there can be massive.  Only time will tell.

Overall, we live in interesting times -- which it turns out is a Chinese curse!

Impact: Italy and Saudi Arabia


First off, a new study shows that banks are unpopular in Italy -- swear to God someone decided that this was an important metric -- in a country where banks are continually being rescued by the central government.  Apparently, their popularity level is at 16% -- I suspect that banks are not very popular elsewhere either!

Anyway, what is really interesting is the capital flight from Italy -- you see I don't like my bank at all, its services are expensive and when you really need there, they are not interested in working with you...but I know they are good at what they do and secure (Hurray for Canadian Banks).  What's going on in Italy is different; its capital flight to the tune of Euro 432 billion per annum (or at least for the past 12 months).  The problem is that the most popular political party right now is the Five Star Movement -- that is rabidly anti Europe (yes even after seeing what's happening in the UK -- which is not part of the Euro).  They want out too!

That's the real reason the cash is on its way out, you don't trust the banks, you don't trust the government so you export your assets -- and if you are smart you massively mortgage your local assets so that if they are seized by the government -- its the government money you are taking (because virtually all banks in Italy are destined to be owned by the government -- due to their very very high NPL balances).  If you want an additional Fu$k You!  I've seen it before -- when you think you are going to be expropriated you mortgage everything to the max -- cut CAPEX and wait and see; watch Italy over the coming months (I bet you that CAPEX will drop dramatically).

Saudi Arabia

As for Saudi Arabia -- the war in Yemen was always a massively expensive error, unprompted (maybe the support of the Americans), and unwinable this quagmire has made of mess of the massively complex governing of Saudi Arabia.  A few weeks ago the listing/sale of Aramco was put on hold indefinitely, previously an anti-corruption council was set up, and last week multiple arrest of serval "untouchables" occurred -- one prince went down in a gun battle!

Very much like the GOP, the House of Saud has its own infinitely complicated internal political battles and balances -- to say that the current leaders have upset the apple cart would be a massive understatement.  One thing for sure -- its far from over.

The implication is serious for oil prices (because I don't care so much about the life and prison time of Saudi price -- who are apparently imprisoned in the Ritz Carlton.  Saudi Arabia has always played a balancing act, increasing and decreasing the supply of oil to insure that price stability would occur.  until a few days ago I would bet on a war with North Korea (seems that Trump is backing down from that fight), so that odds are the oil prices going further up is somewhat lower -- it was at $49/51 just a few weeks ago and its now trading at $57 down from $59 -- that's my friends is a 20% price rise in just a few weeks -- that's not nothing!


These are two (ok maybe three massive political issues) that will have an impact on prices -- of money and goods -- lets be honest who noticed that gasoline prices had risen from $49 to $50 in 15 days...not me!

The implication of Italians taking their cash out of Italy, of the breakdown of government in Saudi Arabia -- and the likely unwinding of the Korean situation will force players to change their game.  Trump will refocus on domestic agenda -- and you can bet that NAFTA is back on line.  My friends and acquaintances involved in the conversations with the Americans are all saying that America is playing a very strange game -- as if they are looking to loose the conversation (maybe in order to win a kill for NAFTA), my friends (both in Canada and Mexico) are saying the same thing, that the American demands are unreasonable -- in Canada, the Americans want full access to government procurement RFPs while providing no quid pro quo -- barring Canadian companies from bidding on American Government projects.

The surprise is that the Americans agreed to prolong the talks by six months -- delaying the final showdown -- most believe that this is a political ploy to bring the whole thing closer to the 2018 mid term elections.  But again the cost if killing NAFTA would be fealty far worse in the fly-over counties of middle America -- that have voted for Trump.  Already Iowa is feeling the pain with Mexico now looking elsewhere for its grain (did that this summer -- not participating in the 2017 June grain auction) when in the past Mexico was 20% of total volume -- the impact on price was deeply felt, but then Iowa's politicians have been notably anti-Mexican of late, so the reaction can be understood.

I've said it before, America that was a bastion of freedom is now seen as mean and bitchy.  You don't seek to do business with people like that, unless you have no choice, because they will always try to screw you

Wednesday, November 1, 2017

The changing face of finance: Fintechs

Soooo, you want a loan?

Usually this ends up being a short conversation with those seeking to finance their dreams.  There are good reasons for this; flawed business plan, no real thought of cash flow or even worse -- seeing a new business as "just a thing to do".

However, for the thousands of false dreams there are the real MacCoys, the fully thought out business plan seeking financing.  Until recently, many of these ideas went unfunded -- some had a real objective of profits, others didn't -- but funding was difficult.  The first alternative platform of any significance was Kickstarter, and it produces some "winner" and some rather amazing funding projects.

After 25 years as an investment banker, I can tell that most prospectus are a formula, sure there's some hard work by really really smart bankers but as the saying goes: "Garbage in garbage out"  maybe not the most elegant saying but what it lacks in elegance it more than makes up in its truth.  How many time did I see great models "polluted" by the client's unrealistic assumptions (e.g.  That the unprecedented growth of the past 3 months will persist for the next decade).  Sometimes, the prospectus doesn't reflect the real value of a business:  Google's Adsense that didn't even exist as a revenue stream when they IPOed.

What the whole "Fintech madness" is about is changing the fundamental business model of finance; starting with inventory financing, all the way to fund raising.  The fundamental problem in all cases is that the business is complex and reflects a substantial portion of risk assessment.  As an example a number of start ups were created to replace the "lumbering" receivable financing business -- the problem is that businesses are in constant flux, and that a change in the business model can have huge impact on the quality of receivables.  Understanding these variance is expensive --it takes skills and foot leather!

Clearly certain aspect of the finance world are overdue for a change.  The reality is that in most OECD country you rarely visit your bank branch, even getting a mortgage or other financial products can be  executed via the internet.  The same holds for F/X transactions that can be far more efficiently concluded with new non-legacy systems.

OECD economies:  Further disintermediation from the legacy players -- car loans, mortgages peer to peer loans are all seeing massive restructuring.  The biggest shift will be automation (I just don't want to use AI) of process.  Already trading rooms are depopulation and back and middle office are near the end of the economic life.  Soon accounting will be a thing of the past, and simple legal requirements too.  However, these changes are cosmetic and do not fundamentally change the system (as far as the users are concerned).

Other areas will do much better -- by skipping the legacy players entirely:

Emerging Economies: Where Fintech will shine the most is in emerging economies -- that suffer from very primitive financial systems.  Already using telephones as the basis of payments between people is a massive change providing basic financial services to area that had zero access to financial services -- or only access to usurious systems.  Here Fintech can bypass the Western financial models entirely.  Jumping directly, with no legacy costs, to the next level of financial services. 

Blockchains:  The new "big word"  but in reality what it means is that it is possible to create financial platforms that are secure and easy to access for many participants.  Fraud risk (via intermediary) is greatly reduced.  Centralized blockchain platforms will help facilitate this by affording firms a consistent technology infrastructure to underpin their solutions. This will make incorporating solutions with one another easier and enhance working together across sectors.

Monday, October 30, 2017

Asset price inflation

So when I bought my first iPhone in 2009 for about $500 I thought it was a lot of cash for a phone.  Now the new iPhone X is coming out in a few days and it will cost just about $1,300 -- under the system in which assets are calculated there has been no "inflation" in the cost of an iPhone because the telephone is so much more powerful... Its just that there's a problem with that analysis (i understand how it started)  in fact, your phone doesn't do anything more than the first version (slight exaggeration).  But overall you check your emails, you make your programs such as WhatsApp and Skype were introduced, but that's just a different way of communicating.  In fact the only real benefit is that images are better, its got a faster processor, which is all good, but to say that the value added is worth an increase in the price of the phone of nearly $800...I find that hard to stomach.  The whole value adjustment (bigger screens for your TV) started in the 1960 when technological breakthrough were introduced -- the best know are radial tires, that increased the life of your tires by nearly 4x -- from 10,000 miles to 50,000 miles.  

The biggest lie has been in the cost of housing, because what is used in the inflation figures is not the prices of houses, no its the cost of housing -- which more often than not uses rental prices as a proxy.  The impact is that house prices in Canada have been on a rocket ship for nearly 20 years

The worst are Vancouver and Toronto which saw, respectively a 2.5x and a 2.0 time increase of the house price (Edmonton and Calgary peaked in 2008).  So in Vancouver house prices rose by 5.14% per annum for 17 years, and 4.16% in Toronto.  Housing is the single largest expense (after vehicles) for most Canadians (lodging represents about 1/3 of a typical family expense) and car prices also have remained "unchanged" because of technological improvement (yet a car is a car, it consumes the same amount of fuel and last about 10 years...).  In 2000 the average car price was around $21,000 today its near $32,000 -- so about 2.5% per annum.  Granted that's only slightly over the inflation level but everybody gets the picture -- (and don't get me started on gas prices).  What is remarkable is that real inflation has in fact been far higher than the "advertised rate" Today taking the inflation rate over the past 17 years (well 16 years and 11 months) we get an annal inflation rate of 1.99%.

Housing is 30% of family expense
Vehicle is 15% of family expenses
Food is 30% of family expenses

Food inflation has been low -- first because in Canada most of it is imported, and globalization has had a major impact on food prices -- so that's one area where its been "good"  -- by good I mean food inflation (ok maybe not in the past two years) has been low.  Price of imported goods have risen, so has replacement (apples for strawberries).  So food price have been a net contributor to the reduction in inflation.

Looking at non-housing related assets (shares and bonds) there too the values have risen to almost unprecedented levels.  Almost all stock pickers now believe that the market (in particular North America) are "well valued"  which means that there's little upside potential.  The reality is that companies are generating unprecedented levels of profitability  -- much higher than in the past, usually because of massive increase in the productivity -- most of these benefits have been paid to management or the owners (shareholders).  It may not be that important but it explains what's going on.  Hearing Trump talk about making America Great again, the reality is that asset owners have never had it better.

So up here in Canada, where as asset prices have risen dramatically wages have been stagnant for nearly 40 years.  In 1976, average wage was $11 per hour, after Canada's CPI inflation index that would represent $24.14 per hour -- which is $3.00 lower than the average wage in 2017... Taking in consideration "replacement and improvements"  Canadian workers ability to purchase assets remains largely unchanged, while the cost of housing has gone up by more than double in Toronto and 150% in Vancouver.

The average Canadian is poorer than he was, because true inflation (that doesn't take in consideration "technological improvements" ) has outpaced their wage earnings.  That feeling of being poorer, its real, when you consider that an iPhone X will cost you $1,300 and sure it does some stuff that you could not do in the past, but not that much -- especially if you consider that the iPhone's price has grown by 14.5% per annum.

Wednesday, October 18, 2017

Bombardier: The law of unintended consequence Part 5,000...

So a few weeks ago the American government, at the behest of Boeing Aircraft decided that Bombardier was a worthwhile target, filling a complaint that led to the imposition of 300% tariff on Bombardier  C- Series aircraft.

Now for a start you've got to understand the tariff thing, the initial complaint was drafted by Boeing with a very clear intent -- to kill a non-competitor.  Not entirely clear what their idea was, it maybe that Boeing is thinking of getting in bed with Embraer and getting rid of the Canadian would be a good deal for them...I just don't know. You see Boeing complained that Bombardier was using unfair advantage in the 90 to 150 seat category of aircraft (this is important).  You see the C-Series aircraft is a 125 seat aircraft (trust me its a big big difference) and therefore is not competing with ANY Boeing aircraft product.  The smallest Boeing aircraft (737NG) is 150 seats (and its a pig).

So the complaint will eventually (this is the key here) be thrown out by the authorities (it could take years -- but the damage would be done).  And so a non-competitor would be eliminated (that operates in a segment that Boeing hates!  It inherited the MD-90 a REAL competitor in the C Serie segment and discontinued the type as soon as it could).

So now we have Bombardier that is pissed, we have the UK government that is pissed (they make the wings (I think) in Northern Ireland -- huge job issue in the region, and the Canadian government is pissed too -- just as Trump is trying to strong arm the Mexicans and Canadians to make NAFTA the all American song.

A few days ago, Airbus announced that it was acquiring a majority stake in the C Series from Bombardier (Quebec government 20% and Bombardier 30%), and that the aircraft would be partly build in the US.

The result (Unintended consequence):

  • Boeing's biggest competitor (for no money) just "fuc&ed" Boeing's plan to replace the 737NG
  • The C Serie will be marketed and supported by Airbus in Asia and Africa -- killing the prospect of a Chinese 125 seat aircraft (they will instead focus on the B737 segment...I kid you not)
  • Bombardier was in real trouble -- gave up a chunk of the profit for certainty if increased sales..its got to be a winner
  • Trump & NAFTA are in trouble and have created additional difficulty with the only Prime Minister that actually likes trump (Theresa May the PM of the United Kingdom)
This is a massive massive loss for Boeing and Trump's administration.  The duty will fall of quickly (now that final assembly will be in the USA), the members of congress are certain to push for that -- even if they are GOP members they are after all politicians.  Boeing created an enemy out of Canada -- for while a good chunk of Canada dislikes Bombardier -- the slap in the face is just another proof that the Americans are two faced Basta... [you know the word].

Trump's administration's first 10 months in power have an overwhelming message -- destruction is our only tool, we will use it in all sauces.  Boeing just killed the demand for its products in Canada and the UK (possibly too for Europe -- they can see where these guys are going).  There has not been a single positive note in the American administration since January, every move every comment is either negative or destructive (or both).  Trump the consummate "deal maker" (He he "wrote" a book with that title..its go to be true) is unable to get anything done despite his party controlling Congress -- probably the first President in America's history who controls both chambers and is completely unable to achieve any legislative success.

For the first time, in a very long time, America is not know as open and smart, but mean and bitchy.  

Cinton: Shadow President?

I mean, its been almost a year, Hillary Clinton lost the election to Donald Trump, and yet she's in the news all the time.  She gets the kind of free publicity that did so much good for Trump. There's even a senate investigation committee, that started yesterday and is in full swing, if you consider that the Russia Senate investigation committee has been at it for nearly 9 months with virtually nothing accomplished:

One is about a sitting Presdient!
The other is about a private citizen!

Guess which one is being followed with the more zeal...

It starts with Fox News asking almost every day: What would Hilary do, in Trump's place -- when the real question is what would Mike Pence do in Trump's place!  Anyway that's what the constitution says, and Clinton is not in any succession plan to the White House.

Very strange, the GOP won but is acting like a loser.  Its hard to fantom what's up with that.  The only thing I can come up with is that the GOP is having real issue with Trump, and by using Clinton almost every day they are saying "look how much worse it could be"

Of course the on-going saga of Clinton and Comey -- that latter almost certainly cost the former the election, is a Republican nominee (yep) and is still seen as a collaborator (use the word with purpose) of the Clinton White House.  Now there's a possibility of nefarious payment in 2009 to the Clintons.  I shit you not.  This is what the Senate is doing these days, ancient political witch hunts -- I guess it beats doing real work.

Anyway, enough with the rant