Wednesday, July 27, 2016

DB: Things are getting serious

Well a few days ago I wrote how some of Europe's core bank could eventually face problems because of Southern Europe's bank massive bad loan holdings.  Turns out Deutsche Bank's problem are not only related to Southern bank's possible failure, but to its core activities.

DB stands in a very strange place, it ressembles Mellon bank rather than Citibank, both institutions were considered "money center banks" in the early 1980s.  However, Citi had a massive retail network, Mellon bank, had Pittsburgh -- by then the dying centre of what would eventually become known as the rust belt!  For most foreigners the surprise when visiting Germany is the incredible number of retail banks -- there are hundreds across the country.  The result of this large number of independent banks is that no financial institution controls much of  the domestic deposit base.  DB's accounts for 3.5% of Germany's total deposit base (they get another 4% from Postbank -- but they are selling that).  Compare that to Canada where the six largest institutions account fo nearly 90% of all retail deposits. 

Profits for 2015/16 were off by 98% -- and there was not a single cause, weakness in the retail banking, weakness in IB weakness in debt capital market (I know IB is part of that).  Overall weakness everywhere -- DB is the most European of all European banks, because its home base is not really the centre of its economic activities -- that is London's job. The overall weakness of Europe impacts it the most -- it doesn't have a home base to provide secured income. Therefore, we should expect weak results from the other players -- after all Citibank's recent quarterly results were not great, in fact, they were only perceived as being good, because the bank had indicated to analysts that their performance would be even worse!  Call DB the canary in the coal mine.

This is very worrying; I am not a fan of DB, although some very good friends work there, but together with Caterpillar, it represents one of the best barometers of Europe's economic health.  The verdict is not very good; Caterpillar announced terrible results a few weeks back -- yellow equipment is often at the source of economic growth (building things) where demand for trucks, diggers and other assorted equipment falls (off a cliff in this case) these are worrying signs for GDP growth.

I've been predicting economic collapse for years!  eventually, I will be right...seriously, I see the worse in people and in markets -- not an unusual trait for a worker in the financial industry.  In reality had I invested in stocks and bonds over the past 8 years (stocks in particular) I would have done great! Actually, virtually all asset class did well over the past 8 years -- the only exception is Private Equity and hedge fund that in general did poorly.  Credit expansion lifts all boats and hedging can become nearly impossible.  Over the past 8 years interest rates have continued their downward spiral -- even in some cases going negative (Germany 50y bond and Switzerland 30y bond).  Buying the S&P500 on the day of Barack Obama's inauguration on January 20th, 2009 at 826 you would have made a gain of 262%, off your initial investment -- excluding dividend (about 1.5% p.a.).  For investors the past 8 years have been a golden age of return  with a 12.8% IRR over the period.  Clear sign that the GOP talked complete trash for 8 years.  BTW if you invested in the S&P500 as a Canadian... well the CAD went from 1.07 to 0.7 over the past few years... That would have made the investment even better (somewhere in the 24% range).

The US market is now looking very "topish" (its near its all time high -- last week) both in total and relatively -- the market p/e stands at 25x -- which is high (the average is 15x, the mean 14x), and interest rates are not to blame here (there were very long periods in the 50s and 60s where interest rates were very low).  The reason for the weariness is the quality of earnings and how the high prices have been achieved.  First, above and bellow the line games are reached a new level (e.g. losses are extraordinary and profits are ordinary income), companies have incentivised their CEO teams to aim for higher stock prices -- so stock buybacks have been the name of the game for several years now, which makes sense, because if stock generate 12% return and debt -- with deductible interests is costing 4/5% the choice is so obvious it's to make you cry. 

Europe, well DB is a good argument that things in Europe are degenerating; Brexit, Turkey, further terrorist attempts (and unfortunate successes) will put the breaks to Europe.  Again it my be my own views, but Greece is still not fixed, the situation for Italian banks is still getting worse with no will or capital to address the situation.  There is no doubt that Britain will slow, already places like Luxemburg are pushing to replace the city (its not a terrible place).  In fact, Europe is stagnant and has been for years -- unemployment (especially youth) is damaging the long term economic growth prospect.  The power of entrenched rights is killing innovation, as the stake holders protect their turf with the accord of their political leaders.

Ok, I will channel my "investment advisor mantra":  All is well, things will turn out fine, invest invest invest!


Note:  No position on DB or CAT.












Tuesday, July 26, 2016

Again: Self driving cars

This is my third commentary about self driving cars, see here and here for my previous write-ups. Since then there has been several autopilot accidents, and at least one death (the driver).  Now the issues are interesting, insofar as the driver who died (and had been a well known early adopter of Tesla autopilot feature) was killed because the software could not recognize what it saw (the side of a truck).  The single most important need for generation 4 or level 4 autonomous driving (where there is no need for an operator) is that the computer needs to recognize what it sees.  

Five years ago, the hardware needed to understand the real world was almost a super computer, today its a chip!  NVIDIA created a $200 chip that is actually better at recognizing the real world than humans are able to do, a major shift in the ability of machines to recognize the real world -- and adapt.

An article by Chris Dixon here says about the same thing I wrote a few months ago.  I think where is argument is the strongest is autonomous driving for long distance trucking.  Two reasons:  (a) it is incredibly borring task that requires very little mental agility (but a lot of concentration), (b) there is a real shortage of drivers -- its long hours and meagre pay are not incentives in an economy where unemployment is low (around 5%).   The drivers that will remain will be better paid, because they will do more difficult drives that the autodrive system cannot perform well.  Where in fact, humans are the necessary ingredient.

As for the rest of the article, I though that Dixon was a bit pie in the sky.  First off, those who do not drive automatic cars will still need parking for years.  Granted congestion will drop, and if the bulk of these autodrive cars are electric then there should be a huge impact on city pollution. 

What are the missing ingredients for utopia; in no particular order we have: 
  • (a) legislation -- but I suspect it will be a competition from city and states to be "the first", with certain car centric states being the last, 
  • (b) level 4 autodrive vehicles; we are still a few years away from that; currently only about 1 million miles have been driven by autonomous vehicles, while this may seem like a lot, its not,
  • (c) infrastructure  is still far from adequate; there are far too few charging stations in urban environment to allow this "great leap forward" to occur.   In addition the implication for electricity demand is enormous and largely unaddressed
In fact, 90% of what is needed to make this reality happen is still missing...so the early adopters love the the technology, and it works better than advertised (remember google glasses, anyone?).  Of course there have been some real problems, and also so BS, from people who still don't understand how much information is available to Tesla after an accident...in one case the guy basically lied he was driving the car manually, but tried to blame the autopilot feature...dumbass!





Monday, July 25, 2016

Anti everything why Globalisation is suddenly Public Enemy #1

When Cameron (ex-UK prime minister) announced the date for a referendum on the exit of Britain from the European Union, most assumed that the likelihood of success (including the prime minister) was less than 30% -- not insignificant but also not terribly likely.  What won the Brixit was a mixture of economic lies (there will be not cost -- probably savings) and xenophobia.  The movement away from world integration has over the past 10 years gained a lot of strength.  

Most "anti foreigners" don't actually know foreigners.  I come from Canada, and there was a small village near the city of Montreal that actually passed an anti-sharia law ordinance.  This made the national press (I think it was actually picked up by a number of foreign newspapers as well).  What was amazing, and was discovered several weeks later -- there was not a single muslim living in that village -- not ONE.  The people had a fear about something they had never faced.  Equally, some of the most remote towns and villages in the province of Quebec -- who had virtually no contact with anglophones were the most virulent  supporter of Quebec's nationalist party.  They see no english, they heard no english, english was not part of their daily, weekly or annual consciousness.  Still they were for the independence from the rest of "Anglo" Canada.

London, that has seen the biggest influx of foreigners, and yet voted at 75% to stay within the European Community. 

England and Canada are not the only ones, Austria (lovely country same about the people) and even the Netherlands (lovely people shame about the traffic jams) have seen a resurgence of nationalism -- and this is not to discuss France's ever popular National Front.  Like all things, globalism suffers from the pendulum effect, but it also suffers from the benefits being diffused and the cost being specific. Love the new Iphone or the new flat TV, don't like the smell from the kitchen next door, and they were funny cloths, and they speak of funny language and they are not white!

The recent disaster that is Syria and the mass exodus of a persecuted people -- largely because of a European war was waged there, and not that well or with much conviction.  The real risk of the Syrian refugees is that they are smarter and better educated -- these are people who decided that the risk of departure was worth it, because for most, they had the necessary skills.  Germany has seen its fare share of scandals of late -- suppression of police report for sexual aggression at New Years party or public pool behavior that is unacceptable...There is always a good reason why ALL foreigners should be excluded from the behavior of a few cretins.

Still the trend is there, there is a backlash against openness.  The US that have accepted less then 10,000 refugees are an excellent example of fear over fact, but that's where America is right now.  Fear of foreigners (when in reality most terrorist acts in the US have been home grown and of the "right wing" variety), a desire for a safer time, when everything was good.  BTW this time never existed, except maybe on TV.

Anyway, for liberals times are difficult,  I think my side failed in many respects:  First, the "losers" those who saw their livelihood disappear so that some guy in China would have a job, these people have not been compensated.  We regularly compensate capital for its loses, labor not so much.  Not listening, not addressing their real (and sometimes imagined) grievances is a grave mistake because it opens the door to people like Donald Trump.  Yes he is a demagog and does lay a line of BS about a mile thick, but it remains that a large segment of America's population have seen no benefits and a great deal of losses from globalisation.  

Globalisation has helped in reducing aggression; there is no doubt that Europe's 60 year of peace was bought via globalisation.  That case has not been well made -- or if it has it has been solely at the academic level.  Between the late 19th century and the middle of the 20th century, Europe saw a number of wars and conflicts (civil wars).  The wealth created in China has brought that country closer, sure its game in the South China seas are troublesome, they played rough and lost -- there will be a solution, for although the South China sea is an important sea passage, so is the sea passage in the middle east -- 100% of China's oil security is assured by America's 6th fleet.  There is far more that units China and America than separates them!  Globalisation has insured that the players are aware of these facts, and act accordingly.

I firmly believe that the case for globalisation will be made, the next 24 months will be telling.  I suspect that Britain will face substantial costs from exiting the Eurozone, that the new deal will cost nearly as much as the old deal, and that in exchange Britain will have less say and less power --even over immigration.  That could be the turning point, showing the real benefits of the European Union, of freeer trader barriers and legal migration.  We shall see.
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Monday July 25th -- Summer doldrums & squaring the market with politics

The markets are set to open, and we can expect a flat day!  That was true 20 years ago, when the market was traded by people -- and people go on holidays.  Today, the vast majority of trading is done by machines, and machines don't take holidays (well they do take a break when they update the algos).

Big news this weekend, Trump got a bump!  He is now ahead of Clinton in the national polls -- how such a man achieves this is beyond understanding.  Did America hear his toxic message full of falsehood?  I suspect not, I suspect they don't really care because unlike the market politics goes to sleep during the summer months.  Starting today is the Democrats' turn to do their dog and pony show.  The press is agog as to whether it will be a clusterfuck as the GOP's sad affaire was last week, or if it will be borring as hell.  My guess is borring.  The Bernie supporters will vent their spleen for a day (maybe less) and will unit behind Clinton.

Several years ago, I met with a childhood friend who was a proud supporter of Ralph Nader.  I kindly suggested that its guys like him that handed the election to G.W. Bush, instead of the Democrats.  He didn't agree (although the maths supported my assertion) he sincerely believed that his vote of protest was important and that he made a difference in the election -- I said I totally agreed, you made sure that Bush would be elected!  Needless to say that we have not spoken much since.  It is a sickness of the left, to support lost causes, and its entirely possible that like my childhood friend several on the left will feel betrayed because their guy lost, and will therefore not vote, since the only vote that counts is the one for your candidate.  Granted I am hoping that many Republican will do the same in November -- because if you cannot stand your party's candidate, why bother to vote at all!

While I was writing these first few sentences the market opened and its down a bit, but then its kind of a given.  The algos will play with the market and see if they can create a market direction (up or down is of little importance),   The truth is that after last week the markets wants down -- its been an amazing month for the market -- the S&P500 is up more than 8% in 30 days -- that's powerful upswing; which makes Trump's statement of last week a bit difficult to square with the market enthusiasm... anyway, we are at the end of July, most big pension funds are on holidays -- the bosses are anyway, and there are few instruction that boil down to:  Don't fuck-up our positions.  That means that the real money (aka investors) is being ultra conservative.  Only big signals will trigger movements.  Which is a pain for the algo crowd that needs volatility.

It is entirely possible that Clinton will provide that excitement.  After all several thousands in the GOP want her jailed (for some imaginary crime) or even better hung or shot by a firing squad.

In the mean time, a 8% bump in the S&P500 is a signal to consolidate...on the other hand YoY its only a 4% rise in the market (granted a new all time high), so do as you wish, 'cause I got nothing!


Friday, July 22, 2016

Day 4: Grandpa the Fox lover just finished his 75 minutes rant!

Now, I am no fan of party conventions, they are, as a whole, borring as hell.  In the case of the GOP not borring but sure close to hell.  Never mind the "faux-pas" of the the Trump family, who cares they are not running for office, but the overall tone was just short of a crazed informercial with Trump branded goods (didn't know he made wine or steaks!), but still the list of speakers was less then inspiring.  I don't know where Trump found these "winners" but my best guess is in an elevator just before the convention.  The most incredible was the vet who wanted Clinton to be shot for "Killing people in Benghazi"  or Carson on said that Clinton associated with the Devil (you know Satan, the fallen angel etc etc).  What to say about Cruz, he at least is consistent -- I still don't understand what the hell he was doing on stage on day 3 of that "clusterfuck".  

Until that point it was simple incompetence, and that's OK, you expect a convention, that is run on a shoe string budget to have a large number of errors and self inflicted wounds, although this was something else; from "lifting the words" from the First lady's own 2008 convention speech was careless, but that saying that Michelle Obama has not invented the english language to refute the plagiarism that was self-evident -- well that's just stupid.  The re-tweeting of far-right tweets by Trump (not once but dozen's of times) speaks of a darker candidate, and his acceptance speech of last night is just further proof.

There is no doubt that everything is not well in America, there is no doubt that globalisation has hurt the lower middle class disproportionately, there is no doubt that this segment of the electorate has turned to Fox and some of the crazier elements of talk radio as their sole source of information, and that as far as they are concerned they are about to be found guilty under Sharia Law, killed by Muslim extremists or assaulted by some transgender gay killer (clown...).  They dream of a better time, where lynching were Friday and Saturday night fun times, where N... & spicks pollacks and catholics knew their place.  The real America (according to these nuts) live in almost 100% white communities.

All this before Trump started his speech -- nice podium by the way!  75 minutes of "controlled" and scripted rage -- in those 75 minutes virtually all the tenets of the American conservative ideology were overturned -- Foreign treaties are to be abandoned (Putin must be happy) Nato to the scrap heap, trade deals, NAFTA, foreigners and build a wall to keep them out, and kick those out who are already there.  This was an evening of "mean Grandpa" unhinged, dark and resentful.  It was a speech to the insiders and not to America at large.  Unless you are a lower middle class ex-steel worker (white and a guy), virtually nothing in Trump speech has anything for you.

The reality that is America is a safer place, with fewer police being killed than at any time in the last 30 years.  Where unemployment is low by historical standards (at 5%) and were inflation is subdued. This is the same party to said that under Obama hyperinflation, contraction and unemployment would govern the country -- where Obamacare would kill people and jobs and would make healthcare costs spiral out of control.  None of these things happened.

Instead, over the past 8 years, the GOP and its friends have invented crisis where none really existed. Benghazi, sure it was a failure -- but lets look at the real reason -- (a) shit happens, (b) Congress has for years refused to increase appropriation for embassy security.  The most important is that "a" shit happens.  This incredibly dark speech spoke to the fears and desires of the most rabid segment of the GOP, the far-right was given a VIP media presence.  Xenophobia and parochialism were the order of the day.  There is no doubt that not one penny was spent to test Trump speech  -- because the only people it made happy are the people who probably think that Cruz, Rubio and their 14 friends were RINO and too far to the left.    

These are Trump's people, so what was that speech?  Who was it for -- one thing for sure, the GOP establishment will vote their conscience -- they will vote for Clinton.  However, for the GOP the damage is already done.  David Frum that was basically expelled from the GOP orthodoxy almost 8 years, must be very sad, for although all he presaged turned out to be true -- it leaves the party of Lincoln in a terrible mess -- only a massive loss (we are talking 10/15 points) will provide the GOP with a chance to reform, but right now, the GOP stands only a few points behind the democrats!

Still something tells me that the Democrats will run a very borring, middle of the road, America is the greatest country convention -- thank God, because the last 4 days will live on in infamy.

Monday, July 18, 2016

And now for something completely different: CHINA

This is what the China Daily wrote about the debt problem:

People’s Daily article published yesterday showed that China’s leadership is trying to make a grand shift in the nation’s economic policies in a bid to say goodbye to debt ­fuelled growth. In a sign of distaste for the credit-pumped growth in the past couple of months, the Communist Party mouthpiece cited an unidentified “authoritative” figure as saying that boosting growth by increasing leverage was like “growing a tree in the air” and that a high leverage ratio could lead to a financial crisis

The Economist of May 7 wrote (in a massive reversal of past position):
China will not be an exception to that rule. Problem loans have doubled in two years and, officially, are already 5.5% of banks’ total lending. The reality is grimmer. Roughly two-fifths of new debt is swallowed by interest on existing loans; in 2014, 16% of the 1,000 biggest Chinese firms owed more in interest than they earned before tax. China requires more and more credit to generate less and less growth: it now takes nearly four yuan of new borrowing to generate one yuan of additional GDP, up from just over one yuan of credit before the financial crisis. With the government’s connivance, debt levels can probably keep climbing for a while, perhaps even for a few more years. But not for ever.
China is already the world's second largest economy, its debt capital markets are still largely closed, so that any "reorganisation" of its debt will be an internal problem...except China is still a big economy, and its unlikely that the shift will happen easily and without serious consequences.  What has killed Chinese governments in the past (we are talking of over 1,000 years of history) is popular unrest.  

The problem for china is not the flow but the stock of debt, I think that China's SOE have been avoiding the truth for so long that when "proper audit" is done it will be obvious that a large part of economic activity has absolute net negative contribution to the economy, and that, in fact, its not reducing the size of the companies (especially SOE) but shutting them down entirely.  This will produce a cascading effect on suppliers -- that will cause tremendous hardship across the economy and to areas that have nothing or little to do with the current imbalance.  

The risk therefore is multiplied by the worsening operating conditions, because once you are in the red and are surviving on the largesses of your lenders, you don't care anymore!  Joking aside, Japan has been hurting for nearly 30 years -- since the end of the economic growth model in December 1989.  It tried to soften the blow and "control" the correction.

So the economy that is its nearest rival (Japan), presents with a blueprint that it should not follow, the question is now that China knows the extent of the problem what will they do?

Enquiring minds want to know!



Double standards -- The right and the left (or is it sexist)

Soooo Mike Pence is the guy -- Trump has selected his VP, and he's a real conservative, anti gay anti minority anti democrat and anti women (or at least as far as their body is concerned).  Turns out that Mike Pence was for the war on Iraq -- of course it is well known that Clinton was for the war in Iraq, which according to the Donald is a reason she is unfit to be president.

Turns out for Mike Pence (who took the same position) its not a problem, he is allowed to make a mistake -- Clinton not so much.  BTW if you think these were things said at separate events or separate days, you would be wrong, it was not only the same interview -- it was the same sentence; "Pence is allowed to make a mistake, Clinton is not".  Why its OK for Pence and not for Clinton -- no one thought to ask, because the Donald says about anything and its taken as gospel.

Still, according to some GOP members (state senators) Clinton she be hung for her crime (of putting her email on her server), while as for the GOP's sex scandales...well they asked and were granted forgiveness by God, so its all good.

Spent Saturday evening with Americans, it was interesting:  Three were republicans (Texas boys) and two were democrats (NYC, but really long term expats).  The GOP boys support (grudgingly) Donald Trump "because he's less of a crook than Hilary!"  of course when I pointed out (as a Canadian) that he had an impressive number of business failures and lawsuits for non-payment of debts...well I got a "its the liberal media crock" -- when I showed them the number of outstanding lawsuits against trump (granted it was a leftwing source -- but it all came from legal registry of two weeks ago) there was a bit of quiet.  These were guys (white median age 60) from Texas who are all millionaires but feel that they got a raw deal.  As for the Democrats they too were slightly delusional; to say that the lower middle class didn't get a raw deal over the past 40 years is to really not want to know the facts.

What is remarkable about all these, seemingly, smart people is how little information they had, how "uncurious" there were about their own country -- they see a news story they don't question the source or the statement.  I think it has to do with America's education system that spoon feeds its students.  They are not trained to be curious, to doubt information that is provided to them from various agenda driven sources.  In reality when you are worth $20 million dollars -- you didn't get a raw deal -- by any stretch of the imagination.  40 years ago I noticed this when at the LSE, American students would almost never check their information against other sources.  If its written in an article it must be true.  There is no sense that the winner writes history.  The issue with FOX news is not that they lie (although at times...) but that they choose their facts and ignore the information that clashes with their beliefs in a way that ensures that they are saying their truth.

Voter fraud -- a real issue unless you ask how many cases of voter fraud in any one election -- As en example in Ohio (where Mike Pence comes from) there are has been something like 15 or 20 instance of voter fraud, in the last 15 years.  That means that something like 2 to 3 votes per election were fraudulent.  Not really likely to change the result.  So if you are FOX news you say:  Voter fraud is a problem in America (sure its a problem but a tiny tiny one).  

One of my favorite example, Obama's wife walking around with a sleeveless dress (how shameful), now it appears that Trumps' current wife was an underwear model...so sleeveless dresses maybe not such an issue after all?

As the Economist stated yesterday; Trump at 30% likelihood of winning is at the same level of Brexit winning!  This man is clearly unfit to be president, but it could happen.  This man thinks little of women (who bleed) and seems to have a think for women with big breast, and that they should show off their bodies.  He clearly has little patience for brown and other  -- he's a fan of winners, and in his book winners are all 40/60 year old white guys... 











Thursday, July 14, 2016

Boris Johson -- New British foreign minister

Its one or the other:  You broke it, now you fix it! or we made a deal where you would withdraw as contender for the Prime Minister's job in exchange for a "substantial position" in the new government!

There is also that its absolutely the best place to put BJ, I mean the entire planet (I hear there are a few on Mars too that are not too keen on the man).  His job is certain to be a massive headache for him and his new team.

In other news; Trump's polling is improving, and he is even ahead of Clinton in Florida -- Trumps' chance of winning in November just rose from 23% to nearly 30%...

Aside from that the world is quiet, S&P500 just hit a new record -- don't know why, republicans are still screaming recession recession (but then they've been saying that since 2008, so it carries less weight now).






Thursday, July 7, 2016

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!








Tuesday, July 5, 2016

That giant sucking sounds: European banks are in real trouble

First, the Italian banks are in a real pickle; Monte de Pachi (notionally the world's oldest bank) is in such dire staits that even the market is now reacting.  European bank stock prices are limit down almost every day for the following reasons:


  • 34% of all Greek loans are bad or non-performing 
  • Ireland 19% 
  • 17% of all Italian loans are non-performing or bad
  • Portugal 12%. 

And we haven’t seen the next serious financial crisis yet. The story of Italian, Greek, Portuguese and Spanish banks is frightening, but not entirely unexpected considering the economic pressure that these economies are facing. In Italy, 17% of banks’ loans are sour. Putting that figure in perspective that is nearly 10 times the level in the U.S. bad loans in the 2008-09 financial crisis, where the system wide bad loans was around 5%.

The Italian government created a bad bank with Euro 4.5 billion in capital, but its trying to purchase nearly Euro 360 billion in bad loans from Italian banks.  That pig will not fly.  The sclerosis that is Europe means that this crisis has been ongoing for months.  On one side there is the ECB and Germany that say:  no state help to the banking sector, and on the other side you have the ECB and Germany that say:  Italian government has to clean up that mess! (yeah I did this on purpose)

Things get more complicated, for while the PIGS's banks are in deep trouble, their northern neighbours are still undercapitalizes.  DB's stock prices is entirely due to the very very high leverage and the requirements that it raise more money (or cut lending -- or a combination of the two).  The 2008 crisis was very hard for all banks, even those who had done nothing wrong:  Its called contagion.

Meanwhile in Switzerland:

On the other side, we've got Switzerland (God they must be happy they never wanted into the Euro club) as of last week their 50 year bond interest rate drop to -2.27bps -- Yes folks if you lend money to the Swiss government the interest rate will be -0.0027% per annum -- a real bargain.  

A real indication how serious things are; big money doesn't care about yield they just don't want to lose their principal (that's how you make money in the long run).  It's also a currency play, as soon as interest rates revert to positive, the Swiss Franc will go trough the roof.

The fat lady is not yet signing, but she's certainly doing her voice exercises!

Friday, July 1, 2016

Brexit: Its been a week....

Even a week is not enough to understand the impact that Beixit will have on the economy of that country.  As for the word at large:


S&P +3.3% - best week since Oct 2014 Bullard Bounce
"Most Shorted" stocks =10.1% in last 4 days - biggest squeeze since May 2009
Financials +3% - best week in 3 months
30Y Treasury yield to record low - best week in 3 months
Silver +11.25% - best week since Aug 2013
Gold up 5 weeks in a row
Oil +3.2% - best week in six weeks
Copper +5.5% - best week in 3 months

So not so bad really.  The market overreacted to a news that has still not defined what will happen next.  One thing for sure the power play in the UK is interesting -- both the Tories and Labour are looking for new leaders.  The French and German have made Europe's position very clear.  You got your referendum -- now invoke section 50 of the EU treaty, and let the games begin.

What is certain is that it will not be a lot of fun to be in the UK financial service.  Banks were already cutting back -- the decision to cut in Berlin (no not there) Paris (no not there either) or the UK (that's the place) will be accelerated.  Its not so much Brexit, but its a good excuse to get out of paying a bunch of M&A bankers (and everyone else) because fewer deals will be had -- uncertainty will create havoc with company's valuation.

Europe knows that the UK is out, and although a referendum is non-binding (look at the Dutch) the UK's tradition run deeper (which is kind of funny since its traditional bigots that got the UK out of Europe), even if the vast majority of parliamentarian are against Brexit, the people have spoken -- and their voices cannot be ignored.  

The fundamental issue (its also true for the US) is that there is something rotten in the Kingdom!  The reality is that the population is concerned.  The pace of change, new technologies and the failure of the social net are all things that need to be address.  Capitalism has run the world for the past 30 years -- taking care of the winner but leaving all others holding the bag!  

The signals are there, and the likes of Boris and Donald have been very good at channeling these tendencies.  The body politic should pay attention...