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 students...it’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

Italy

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!

Conclusions:

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 calls...new 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


Tuesday, October 10, 2017

The market: Priced for perfection

The capital market are by definition optimistic in their outlook, until reality or a crisis or just fear take over, since as in 1927, 1987, 2001 and 2008 (there were others...but these are either recent or well known), the market is looking expensive.  The most well know index for valuation of the market is the CAPE which stands for cyclically adjusted price earning ratio;  It stands today only second (in level) to that of 1927 and 2000)


First the market has been uneven for a long time; the majority of the S&P500 has generated pedestrian returns for investors -- aside from Tech the market has done little to impress  Five companies account for fully 30% of the market's rise over the past 3 years.  So is the market in a bubble?  I don't know anymore because ALL asset classes have seen massive increase in value (reduction in yield).  From housing, to bonds to equity -- everything is up.  In fact, since January 1, the market is up nearly 14% -- no bad for a economy that has seen GDP growth of 2.4%, and interest rates of 2% on 10 year Treasury bonds (its a bit higher now at 2.3% now)


Some of my younger friends are keen to get into the property ladder with the expectation that they will make good returns over years.  Using these property income to meet their loan repayment obligations and overhead costs -- building equity in their assets over years and years.  There are many assumptions here:

  • That their property will rise in value
  • That their rental income will match their outflow needs
  • What is forgotten is when an apartment is empty or the tenant doesn't pay
  • what about taxes!  They are going up all the time, at level that far exceed inflation
  • Maintenance costs can be high
And the number for Canada are scary, bellow is a video using US housing prices (pre-2008) Canada is far far worse than the US...



Back to our potatoes -- the market is clearly not cheap, but it could still go up for a little while.  What is scary is that all asset classes seem to be going the same way.  There is a historical high saving ratio (from the baby boomers) and a lack of investment opportunity in the OECD, which depresses interest rates.

Interest rate (real) are at or near zero -- the search for yield has even allowed Argentina to issue a 100 year bond...at attractive pricing.  That's from a country that has defaulted 6 times in the past 110 years.

So the conclusion is complex, yes yields are low because there is such demand for investment opportunities.  Can it go on?  yes, Canadian real estate is less clear since the economy is slowing, but interest rates have nowhere to go (they are close to zero as we speak) so there will be no real stimulation.  Government spending is helping push up GDP but there is a limit to what can be achieved.  It remains that a market trading at these levels baggs the question of what can happen?  Because, all asset classes have gone up!  There is no room for safety (US gov't bonds maybe).  All boats have been lifted over the last few years.  

Buyers beware!  

Tuesday, October 3, 2017

Tax cuts: The know nothing Rule!

So Trump & friends have finally delivered on their tax cut promise, as expected the bulk of tax cuts go to the richest 1%, but then again they do pay the bulk of all taxes -- yes they do!  However, for a gang (looking at you Paul Ryan) who were so anti deficit just a year ago the new tax cuts are unfunded with promised reduction in tax loopholes.

Lying liars:  Trump & his advisor say that most of the tax cuts are going to the middle class.  Fact, 50% of all tax cuts will go to the 1%.

Loopholes:  Certain (unspecified) tax breaks will be removed.  Since its corporation that benefits from these tax cuts (and their advisors) it is unlikely that the White House will have a smooth sailing on that one.  The other big shift was to remove the deduction for state taxes (after all its not income if you've paid it to the state government!).  That would do two things (a) screw the blue states (e.g. California, NY, Connecticut and New jersey) and (b) it would not harm the base in states that have low or zero local income taxes.  Two small problems (a) the Treasury Secretary has already indicated that this is "negociable" and (b) "own goal" who do you think pays these high taxes (mostly rich republicans that live in Democrat controlled states).  So what Uncle Sam give in one hand it takes back in the other...think of all those NYC bankers who one day get a 15% reduction in income tax, but now 100% of their income is federally taxable (not 50% as in the past)...Its lovely to get $150,000 windfall but not so much fun when the Feds take $200,000 away.

The other deduction:  Well already Trump has allowed not accelerated deprecation, but year 1 deprecation of assets -- that will create a bump in GDP that will be depressed thereafter (just in time for the 2018 mid term election -- because companies that can deduct 100% of their capex will see profits rise...)

Finally, and this is the problem, the biggest deductions (tax abatements) are all to the middle class (powerless); especially child benefits and companies (very very rich lobbying efforts) so I would guess that the biggest deduction that will take a hit will be the mortgage interest payment relief...Since interest rates are low now it will not hurt too much, but as they go back up.  Real increase in revenues.

In the end, I don't see companies allowing their deducton.  So that the game the GOP has been playing with Obama that deficit matters is now clearly no longer the case.  Increase in the deficit is good when its the GOP that does it!

Big surprise

Thursday, September 28, 2017

Could American populism turn into authoritarian rule

A few months ago, a poll showed that most Republicans though it was a good idea to delay the next presidential election until the electoral rolls were cleaned up and the "millions of fake voters" were purged.  A recent study by Oxford professor equate a substantial level of support by Republican state ("Red States") for autocratic rule -- in a sense, it's an extension of the vision of an orderly society (very homogenous that is often found in the Republican states -- either because most resident are white or via social and economic segregation  -- what percentage of white Texans live in gated community?).

Listening to Trump's "fight" with the NFL -- where the whole flag thing is a 2009 tradition -- and a tradition adopted by the NFL only once they got paid by the US government (seriously, the US government paid the NFL so that players would stand at attention during the signing of the national anthem).  Joking aside -- its only a tradition when its lasted more than a decade -- we're not even close.

However, that's not the point -- the reality is that Trump is fighting a war that he's winning; he's winning because the other side (whoever they may be) are engaging him.  What a cultural warrior wants is reaction:  In the 1960s,Abbie Hoffman didn't need to win, he just needed for the establishment to start asking question and doubting itself!  That was the win.  However, there is a cost from the Today Show that asked a super fan of Will & Grace (an American TV show about two gay guys) if his love for the show had made him gay -- no joking its ok on America's prime time TV (not cable) to say/think that being gay is socially driven -- and therefore could, notionally, be "engineered out".  That's now an OK conversation.

The same way that questioning the right of (black) millionaires to protest police brutality against their race!  Trump said it a few weeks ago, Police brutality is ok...considering he was talking in Alabama -- at a GOP rally his audience understood the reference.  As on cop said to a stopped driver recently "We only shoot black people"

Now, Trump like all populists is looking for the love, he's found it in identity politics and its paid off in spade!  Most amusing was Nascar that said that any driver that "protests the national anthem will be fired" was complete bullshit -- Nascar is all about southern pride and the wide use of confederate flags at these events -- and the 99.9999% audience being white, talks more about publicity than any real threat by the drivers or pit crew to do or say anything.  In Argentina, populism easily switched to autocratic police state -- a very very easy process.  Even more so today with the militarization of the local (and even college) police force.


  • Via cable TV that the strength of the populist message is growing -- the use of either false or out of context comments is driven by a thirst for advertising dollars -- the real winners here (Sara Palin and many others) was their ability to transform a bigoted message into cash dollars.  However, to the average red state voter, who craves conformity the idea of postponing election (until these unwanted usurpers can be removed from the electoral rolls) is a good idea.
  • That the police can enforce aggressive tactics and intimidation of all non-white population is really a feature and not a bug of their thirst for autocratic rule.  the police has been militarize since 2001, and often out in force when demonstration occur that engaged the status quo! 
  • On Monday the US government announced that it would monitor all internet activity for foreign residents.  The objective is obviously to stop crime and terrorist activity, but can be used for other means.  
  • Many new judges that have been nominated hold far right views


Watch out America -- your democratic institutions (including your constitution) can easily be transformed into something else.  The hegemony of the US liberal system my be coming to an end, unless Americans begin to care about their system of checks and balances.



Thursday, September 21, 2017

ETFs: Dicing mouse turds

The above expression is from Mauldin Economics about the ridiculousness of some ETFs fees. When I started my career many moons ago (like 25 years ago) brokerage fee were substantial, granted virtually no trading was electronic (Don't want to exaggerate either) but the reality is that until the "Big Bang" of 2007 brokerage cost were a substantial numbers.

To this day there remain closet indexers (Vanguard, Jarulosky & many many others) that will charge clients more than 1% in annual management fee, they will not on the other hand charge for each transaction.  The idea was that it would reduce churn (the number of time your broker sells shares from your portfolio to generate commission), but with fees becoming so low the cost of churn is also falling on ordinary (non-ETF) share transactions.  So the question investors have to ask is why bother with fixed commission since even if there is churn in your portfolio the costs are minimum.  Anyway, we are getting away from the real conversation.  ETFs are the pointy shiny bit of the market, its where all the trading is electronic -- machine driven trading occurs (and it has for years...).  Because ETFs are rule based investments -- there are no allocation discussion, limited hedging -- you are simply buying the underlying shares of the ETF.

The race to the bottom in the ETF segment (Exchange Tradable Funds) is the perfect example, with some ETF fee being as low as 0.04% -- so on $10,000 purchase your brokerage fee is $4.00 -- that's not a lot, in fact the firm issuing that ETF is probably losing money.

The issue for investors becomes what are you getting for your money?  That's the hard part, because liquidity and volatility redemption and new issuance are the name of the game; sure you like it when your ETF is trading near PAR (the value of the underlying shares), but what happens if it goes above PAR (don't laugh it happens -- especially for SPROT's Gold ETF), or trades at a discount...

You see dear investor the problem is always the same, when things are good, all these instruments are neat and tidy, when the "solids" hit the fan its much more complicated.

Anyway Mauldin's point is that with the ridiculously low fees that are now on offer from virtually all ETFs its harder for investors to choose because the low hanging fruits comparison are gone!


Have a good weekend

Wednesday, September 20, 2017

Earthquake in Mexico City

Lots of friends in Mexico City have had an "exiting" time of late.  Two weeks ago, a small earthquake woke everyone up in a hurry.  The city installed precursor sirens that give the population a few minutes of warning.  Yesterday it was far more brutal and several hundred residents lost their lives yesterday.

The overall comments, 32 years day for day after the massive 1985 quake, was the feeling of community.  Most of my friend rushed to the donation centres to give blood, food and clothing for those who have lost everything -- or who cannot go home until their building has been fully inspected.

Mexico City is a very big city, at times dangerous, but at the end the Mexican are a people of heart.

God be with you in these trying times

Toys R Us

Well its official, Toys R Us declared bankruptcy yesterday -- the market was taken by surprised (no not really) the market lost its shirt (no even close, its a private company).  You see Toys is a private company owned by KKR and some other private companies.

I've not been in a Toys R us for many years.  Last time I was there it made Walmart look exiting.  The cost cutting made it a place you didn't want to go, it was depressing, and more importantly, its key demographic were people who were already shopping at Walmart -- which it turns out has a rather nice toy section.  No joke, no help, but no joke it has a good but limited selection for the discerning uncle/godfather!

Don't get me wrong, none of these stores are appealing, in fact, they are the very opposite.  However, if you objective is to make the purchase as plain and painful as possible then Toys R Us is the place for you.

Owners, such as KKR, are specialist in downsizing re-structuring and making things more cost effective (look at K-mart and Sears).  My point is that if the products are the same price as everywhere else (looking at you Amazon) then what's the point of feeling the pain -- and shopping at Toys?

There is no effective sales force in a Toys R Us (there was nobody on the floor last time I visited a Toys R Us -- However, there were three security guards...so there's that!), As an uncle/godfather etc buying a toy for a 5 year old or 9 year old boy is difficult.  Toys R Us didn't simplify the process at all! Personally, I would rather go on Amazon, use some test website about age/gender appropriate toys and simply order what looks good.  I cannot think of a single reason to drive to a Toys R Us.

In the end, the only group that will lose out in Toys R Us are the "sales associates" which don't exist and the cashier who with part time minimum wage jobs have very low expectation.  I am rather confident that KKR raided the pension fund -- or at the very least didn't contribute a penny to the pension fund for years (this is not a KKR thing -- they are not worse then any corporate owners these days -- thinking of you ACE).

Toys R Us which was founded in 1957 (yep) died when its name no longer represented what it was -- Toys R Us implied that they knew toys -- not that they just stocked toys (Walmart and Amazon).

On the other hand this is only Toys' first bankruptcy --  more to come



Wednesday, September 13, 2017

Explaining market prices -- the new solution

You know a market is overheated when traders/brokers are looking for new metrics to justify the stratospheric prices of stocks, in the '00 it was "clicks" remember those -- its like saying "we lose money on every sale, but will make it up on volume!"  Anyway, some brokers that I can of respect have decided that the standard p/e is no longer a good measure (considering we are at historical highs -- or very near there) and where companies profitability is also a historical high levels -- these things have a way of returning to the mean!

However, if your job is to sell the market, then you find GAAP adjusted models, or using future statements as good metrics.  There are a number of ways to show that the market is not yet fully valued.

However, as a prudential investor the rule has to hold -- if it looks expensive it probably is expensive; better to leave some money on the table than being steamrolled out of the market.


Electric cars everywhere!!!

Ok so Germany, France and China have all announced the end of the internal combustion engine.  Needless to say that the American twitter's sphere has been agoog about that change, once again missing the point:

What are you going to do with an electric car in Florida?-- the answer is the same as a gasoline one -- not be able to use it when it runs out of juice...  The usual issues, there are not enough charging station, or that the electricity comes from coal/nuclear etc etc.  Again missing the point!

Because the same people who are against the introduction of electric cars would have (did) voice the same issue with the internal combustion engine...look how wrong they were.

Part of the problem is that people's view of the world is static, they cannot conceive that the wold will change, and now they don't remember not having a computer in their shirt pocket...

The Europeans know that the electric grid is at an inflection point as is battery technology, and factor of massive investments and a need to look at a real problem.  Imagine what the average American will say to self driving electric cars...its a plot by the devil himself!

It is amazing to think that China cancelled the construction of over 130 coal fired power station, not because they don't have coal, just that solar and wind power are now more efficient and more reliable and generate far less pollution (even though its not zero).

Imagine when the average American figures out that a standard electric car is good for 1,000,000 miles (several have reached the 300,000 miles milestone with little battery deterioration).  That instead of owning a car, you own a "time share" fleet of cars...

Communism I tell you its communism.

Ok end of rant






Wednesday, September 6, 2017

Bank of Canada raises rates!

Colour me pink, I wrote a few days ago that there are no barriers to central banks tightening considering the total absence of inflation (wages) where as asset prices are into the stratosphere.  Well this morning the bank of Canada raised rates by 0.25% --

BOC statement reveals that according to [Steven] Poloz [Governor of the BoC], "removal of some of the considerable monetary policy stimulus in place is warranted" given stronger than expected economic performance while adding that "future monetary policy decisions are not predetermined" and will be guided by economic data and financial-market developments as they "inform the outlook for inflation."

The short term impact is that the Canadian dollar rose by 3c within a few minutes of the announcement.  The market was of the view that the CAD was a one way sure bet towards weakness. I still think that the trend is weakness (for the CAD) it could be that they are just the first to move (not unheard).  German elections are in two weeks -- maybe the ECB will wait until after the election -- but the trend is up, the question now is the FEDS and the ECB when will they move?





Tuesday, September 5, 2017

100, 500 year flooding (which actually occurs just about every three years)

There's been a lot of information from the US government about the floods that have afflicted Houston.  To give you a sense of proportion -- the weight of the water in Houston, lower land levels by 2cm...so it was a lot of water.

The 100 and 500 benchmarks are used to illustrate a point that in any one year there is a 1% and a 0.2% probability that there will be a certain specified flooding level.  It doesn't mean that it will not happen every other year (which is the case now).

The model making these prediction makes no assumption about how often this will happen, but how often in a year this will happen (1% chance).  Of course all this stuff is based on assumption -- that can be wrong.

If the weather patterns change -- then the assumptions on the amount of rain by each storm has to be revised.  The problem is that the "right" has been using these 100 years and 500 years as a reason to do nothing -- while at the same time stoping any analysis as to climate change.

Ignorant hypocrite using data incorrectly

Trump's tax trial balloon -- cutting taxes to the middle class for the 1% and corporation!

The idea that the administration will cut 401k deductions and cut the ability of tax payer to exclude , as income, the taxes they have paid to the states, are almost certainly complete B.S.  This would be tantamount to raising the taxes on the middle class to give to the 1% and to corporation -- this would kill the GOP's 2020 prospect -- dead!

The removal of deduction for state income taxes is clearly a little "Fu#k You" to all the democrats states -- its not the red states that will suffer from that since state taxes tend to be lower -- although the red states are by far the biggest beneficiary of the largess of the Federal government...something to remember!  It would be tantamount to a declaration of war with NY, California, Washington, New Jersey and Connecticut (to name but a few).

Taxing the 401k at the source (rather than when people retire) is impractical, it could become a huge windfall for those who've already retired (yeah I get it -- if you are 70 you are more likely to be for Trump).  It would kill the whole pension industry (Fidelity may have something to say about that).

This all smells of a trial ballon, and a rather desperate one at that since I also mentioned that once you remove entitlement programs, Veteran's affaire and the military -- you are left with only about 12% of government expenditures -- its hard to give a multi-trilllion tax cut on that basis!

There is no doubt that the US government system is broken, the amount received by the Federal government do not match its outlays the Federal government shortfall is about 10/12% of all outlays -- which is a lot (France for example has had a maximum deficit of 6% -- during the worse of the crisis.  Granted the European don't count the IOU from their pension liabilities).

Still the cut to the 401k (which income is eventually taxes by the way) and to the deduction of state taxes are dick moves...


Rather fitting really

Wednesday, August 30, 2017

Crystal ball time; will I get it wrong...again!

First let me be very honest, by crystal ball has been remarkably out of wack.

  1. I got Greece wrong -- I don't know what the ECB had on Greek leaders but it was enough to get them to back down from leaving the Euro/ECB.  The consequences for the country and its citizen has been dire!  
    1. Unemployment is still very high, 
    2. retiree are still suffering from massive cuts to their pensions.  
    3. The system has broken down
    4. Thankfully young Greeks with some language skills have been able to leave the country
  2. Brexit:  Although I though there was some very good reasons for Britain to leave Europe the reason's my compatriots decided to leave were for jingoistic reasons
    1. Sterling has so far done rather well
    2. The economy has not collapsed -- its even growing again
  3. The Euro:  She strength of the Euro; now around 119 to the greenback is unsettling insofar that it shows a greater confidence in Europe, than in America -- who's currency has been rather weak -- against everything except the Canadian dollar.  I didn't see that coming
  4. European banks:  I really though that the European banks were near the precipice -- maybe the really were which is why the ECB bought back all the stupid loans they did to Greece, Portugal, Spain at PAR...removing the need for European banks to take provisions against these loans (that they could not afford).
What I did get right:
  1. Certain banks did suffer from near economic collapse, bank shares have, in some cases, lost nearly 50% of their value over the past 4 years (SocGen and DB)
  2. Italian banks remain Europe's weak link -- rumours are that the best Italian banks are sitting on NPL of 10% of book (the S&L crisis in the US banks' average NPL was less than 5%), and some such as MPS had around 25% of all loans being NPL  This could be important because of the ECB's debt forgiveness limits (for Italy 120% of its entire Euro 20 billion debt forgiveness has been absorbed the the failure of one bank (MPS)
What's next?

First off I think that the central bank (with the FEDS as their leader) have now figured out that wage inflation is a non event, the only reason not to tighten and to remove liquidity is if the economy tanks -- the Q2/2017 number for the US came out this morning, and GDP growth is around 3% (on an annualized rate).  This give Janet and her friends the perfect reason to normalize interest rates -- I would expect one or two tightening pushes before the end of the year (assuming the the US Congress can figure out a way to approve the debt ceiling and budget).  Following the Houston hurricane damages GS puts the risk of a Federal government shut down at 20% down from 40% before that hurricane.

Implication is that US dollar weakness will reverse and the USD will gain ground against the Euro -- I suspect additional weakness in the CAD.

I cannot see how Trump can repair the rift he has created with Congress (both chambers) the real test will be the debt ceiling (in a few days now - the US government runs out of margin around the 12/15 of September).  However, I just don't see the GOP allowing FEMA to shut down (the same for police force overtime etc etc.)

I expect the Chinese economy to keep on shrinking its investment growth (Monday the Chinese government announced the merger of two Chinese power companies -- as a way to reduce overcapacity).  The government wants a smooth transition (as much as possible) and will do everything in its power not to have a collapse.  Therefore I expect Chinese GDP growth to continue to grow into lower single digit 4/5% instead of 6/7%.  

LatAm remains on its own course, removing Brazil from the equation (which I grant is not realistic) GDP growth in the whole continent will be in the 3/4% per annum -- which is low considering population growth in the region.  Mexico, stands closer to a figure of 2/3% real growth.  

However, all these marginal economies (sorry guys) are totally dependent on US growth.  The S&P 500 sits around 2450 is still pricing "near perfection" that Trump's agenda -- cutting taxes on the rich and corporation to 15% is possible -- considering the failure to reform Medicare/Medicaid and the ACA (aka cutting medical access to all and sundry) as the only viable way of cutting entitlement expenses (which account for 88% of the Federal government's expenses).  There's not much room to cut things -- the only other way is to lie about future GDP growth.   legislatively, Trump's agenda is DOA and little will occur over the next 12 months -- since the market is priced for perfection, there will be a long overdue correction (minimum 10% maybe even a 15% market correction).

Finally, one if my favorite is the overvalued Canadian housing market -- forget Vancouver and Toronto (who are BTW feeling the pinch now) all other major Canadian metropolitan centres (with the possible exception of Halifax) are facing very high prices (when measured against prevalent wages).  I expect a correction in the Canadian housing market -- at the very least a 10-15% down trend for 12/24 months.   

Again, events to conspire to prove me wrong, we assume no massive externalities here, no war with North Korea, Venezuela or Iran (Yep Trump is for military intervention in all three places), so these things could ruin everybody's party.  If Italy sense that Brexit is not so bad, they may decide to follow.  Who knows