Wry & Dry

Fire & fury doesn't mean Sell! Dog ate homework. Counting votes.

Fire & Fury does not mean "Sell"

When Wry & Dry first heard the term Fire & Fury he thought it was the name of a new hot spicy Mexican restaurant in a dodgy part of Melbourne.

Err, no.  Apparently, Tsar Trump has been exchanging rude words across the sand pit with his North Korean counterpart, Kim Jung-un.  And his words "fire and fury" have caused some concern in world markets.  

North Korea housing

The Australian Financial Review this morning breathlessly announced that the spat 'sent world stock-markets plunging'.

Well, sort of.  The S&P500, the broad-based measure of US stocks, was down only 1.5% last night.  And Japan's major index, the Nikkei, was down 2% in early trading today.   The ASX200 was down 1.5%.  Not quite plunging.

But Readers would expect W&D, a student of history, to advise how markets reacted to previous 'geopolitical' incidents.  And Readers will be aware that sustained and prolonged declines in the stock market have always been related to valuations (i.e. high P/E as, in the Tech-Wreck) and leverage (of investors and/ or companies, as in the GFC) directly associated with financial markets.  And, have almost never been related to geopolitical conflict.

So comparisons can be misleading.  Nonetheless, duty-bound, W&D advises:

Pearl Harbour - 1941

For example, the Japanese attack on Pearl Harbour, which ushered in America's entry in the Second World War, caused the US market to decline by 5% over a few days.  The market then recovered - for a short time.  The issue was that the US market was in a secular bear market dating back to the depths of the Great Recession.   However, from May 1942 onward, the US stock-market rallied through and past the end of the war.

Cuban Missile Crisis - 1962

This was the closest the world has come to a nuclear war.  The market fell by 7% in four days.  But then recovered strongly, and within a month was 10% higher. 

New York Terrorist Attacks - 2001

Stocks fell by 8% after the markets re-opened (they were closed for four days).  And proceeded to decline by 15%.  But within a month had recovered all of their lost value.

The message?

History shows that there is no point in panicking and selling out and trying to get back in when the market is cheaper.  Or leaping into so-called defensive assets such as gold.

That is not to say that the unpredictable or undesirable may not happen.  And, of course, an over-valued market will always correct.  

But it is by far the best course of action to stay on the course on which you have decided.

First Samuel clients' share portfolios have over 20% cash (not because of fear of a bear market or North Asia conflict, but because inexpensive stocks are hard to find) and are very well diversified.

My dog ate my homework  

A few weeks ago, W&D reminded Readers of the Warney Defence ("my mum gave me the pills", but not to be confused with the 'Joe-The-Cameraman Defence').

Well, Commonwealth Bank Chief Teller, Ian Narev, has brought back the glory days of excuses.  His defence of the CBA in the Austrac scandal was that, "it was a single coding error that caused the 53,700 errors and so we failed just once," reminded W&D of that classic-but-always-failed defence from schooldays: 'the dog ate my homework.'

And, truth be known, Austrac's case against CBA is only partly made up of the 53,700 unreported cash transactions.  Mr Narev has not provided any responses to the other serious Austrac allegations of failures in its monitoring of suspicious accounts and transactions, as required by law, even after being warned by both the regulator and the police.  

The negligence gets farcical.  How about it taking Malaysian criminal Kha Weng Foong just 47 minutes to load $130,000 into CBA machines in Sydney suburbs of Paddington and Surry Hills.  And into three accounts set up in fake names with fake driver's licences.  The funds were then efficiently transferred by the CBA to accounts in Hong Kong.  This criminal syndicate washed $20.6m through CBA machines.  Sure this happened before the 'single coding error' was fixed in 2015.  But even after it was fixed, in January this year $320,000 was deposited by a Chinese national on a visitor's visa in 29 cash deposits in CBA machines over three days.  The bank reported the transactions to Austrac in March.  Perhaps a little after the required 10 days.

CBA bank robbers

Oh, dear, Mr Narev.     

Good grief, when will bank CEOs learn to fess up and say, without qualification, "Oops, I/ we stuffed up.  Sorry.  Here's my head on a platter."

Nuh.  It's (a) denial (Friday); (b) massive background briefings to friendly journalists (Sunday); (c) sympathetic pieces in important newspapers (Monday); (d) limited fiscal punishment (Tuesday); and (e) 'good citizen' full page ads in newspapers (Thursday).

The CBA Chief Teller received over $12m in compensation last year, for running what is essentially a massive building society, with a few other businesses hanging off the side.  Spare me protestations, Readers, this is not difficult.  There is so much regulatory and compliance control in place that APRA and ASIC do most of the work.  CBA's massive profit reflects:

  1. its implied government guarantee;
  2. massive loan growth because of the RBA's low-interest rate policy; and
  3. APRA's direction that a bank can have only 6% shareholders equity.  

W&D's memory is fading, but he somehow recalls earlier CBA disasters for which not one executive was held accountable: Comminsure, Storm Financial and CBA Financial Planning.   

But this will not go away.  CBA may negotiate with Austrac.  But there's the long arm of the US regulatory authorities that will wind its way across the Pacific.  And W&D would consider that each of ASIC and APRA are, as W&D writes, preparing the scaffold.

How to count 15,700,000 postal votes

Readers may recall that last year the Australian Bureau of Statistics was, as usual, engaged to undertake a census of the Australian people.  And it was a fiasco.   

Notwithstanding this track record, the ABS has been engaged by the government to undertake a 'plebiscite'.   And to count some 15.7 million postal votes relating to some or other touchy subject. 

ABS

W&D senses problems here.  Leaving aside the delicate problem of AustPost delivering 15.7 million ballot papers and then returning them to be counted within the allotted time, how are the fine folk at the ABS going to actually count 15.7 million postal votes?

And W&D has the solution.  Apparently, Commonwealth Bank has these amazing counting machines...

Most fatuous headline of the week goes to...

...the UK Telegraph:

"Two habitable planets hailed as 'optimal targets for interstellar colonisation' detected just 12 light years away"

Just 12 light years away.  Sooo close.

But wait, there's more:

"British-led astronomers speculate that the system might be a potential candidate for future interstellar colonisation."

Lead researcher Dr Fabo Feng, from the University of Hertfordshire, said: "We're getting tantalisingly close to observing the correct limits required for detecting Earth-like planets."

Hmm.  Let W&D do the maths, here.  A spaceship travelling at the speed of light (299,792 kilometres per second) would take 12 years to get there.  But, of course, a spaceship isn't able to travel at the speed of light; the fastest possible, apparently, would be 16 kps.   That means a journey of 899,376 years.

But W&D is not daunted by the thought.  This could be the next Brexit.  Pack all the Brits (plus Tony Abbott) into a spacecraft and... Oh, never mind. 

If you own a yacht you have only two happy days:

The day you buy it.  And the day you sell it.

Well, that's what a sea-salt once told W&D.  He was speaking of serious yachts.  That is, boats that don't have sails, but are called yachts because it sounds better to say, " I own a 20-metre yacht," than to say, " I own a 20-metre boat."  A boat might be a barge.

Where is this going?  Readers will remember the formerly well-upholstered Clive Palmer, entrepreneur-cum-politician.  It seems that Mr Palmer purchased a 30m yacht, Maximus, for $5.5m in 2009.  But he needs some dosh, apparently.  And quickly, as some creditors want their money, quickly.  W&D is not sure how many kilometres are now on Maximus' clock, but suspects about the same as in 2009.  And hence a sale price of close to $5m might be possible.

Err, no.

The last offer at auction was $3m.  But Mr Palmer wants $4m.

W&D is sure that Mr Palmer was very happy the day he purchased Maximus.  And will be even moreso on the day it is sold.  W&D is sure that, on Maximus' sale, his creditors will have their vengeance.  In this life [1].

Russia: demographics is destiny.  And the destiny ain't lookin' good

Readers will be familiar with the fact that Russia's population is declining.  And this isn't good for the economy.  Or for the next generation who have to support an increasing number of elderly.  Overlay an economy already in decline because of economic sanctions (Crimea, Eastern Ukraine) and a low oil price and, hey, Moskva, we gotta problem. 

The below chart is a glimpse of the problem:

Russia population

As Readers can see, the number of people in Russia of working age is declining rapidly.

But that is just the start of the problem.   The bigger problem is that the number of ethnic Russians is declining rapidly, whereas the number of Muslims (principally from Central Asian countries) and ethnic Chinese is actually growing.  The long-term threat here is to the territorial integrity of Russia.  It is entirely possible that Russia will reverse the integration that occurred in the 19th century when ethnic Russians effectively colonised what became the non-Russian Soviet Republics.  And disintegrate.

And...

And in this world of troubles, Miscellany will soothe your troubled mind.     

[1]  "My name is Maximus Decimus Meridius, commander of the Armies of the North, General of the Felix Legions, loyal servant to the true emperor, Marcus Aurelius. Father to a murdered son, husband to a murdered wife. And I will have my vengeance, in this life or the next."  Maximus (played by Russell Crowe) in Gladiator.