Wry & Dry

The sky is falling. NMPSS. Brexit turncoats.

The sky is falling

Readers may have noticed a seeming intersection of bad news this week.  

Cartoon the sky is falling

A host of soggy manufacturing data suggests the global economy is slowing.

The EU has poured scorn on Borisconi's Brexit Deal.  More fool they.   

Stock markets got the jitters.  But an over-valued market will always correct, for whatever reason.  Readers are long-term investors.

Go-On-Impeach-Me-Trump has raised the impeachment stakes by deepening his attacks on Joe Biden, the whistleblower, the Democrats, the media, [insert your offended group here].

Hong Kong has invoked a 1922 emergency ordinance last used in 1967 to ban face masks at public gatherings. Really?

Tonight's US jobs data is expected to be a shocker.

And

Scotland banned the smacking of children. 

NMPSS

Readers would have watched the highlights of China's 70th Anniversary Parade.  It was as expected, with all the magnificence of a Cecil B DeMille production [1]:

1.  a deification (of Emperor Xi Jinping);

2.  a cast of robotic men and women of equal height, weight and shape; each stern of face and clear of eye; all moving in mechanical unison;

Cartoon one of these days these boots...

and

3.  a (slow) chariot race of the latest Made In China military kit.

And watching closely on a Made In China television from his throne room in Washington was I-Wanna-Parade-Trump.  He loves a parade.  Readers will remember how he purred when French President M Macron arranged a parade for him down the Avenue des Champs-Élysées.  

Wry & Dry's man person in the White House reported exclusively that I-Wanna-Parade-Trump now has Not My Parade Stress Syndrome (NMPSS).  NMPSS is a well researched affliction that hitherto has affected only African tinpot dictators, Russian Tsars (including Tsar Vlad) and Chinese despots (including Emperor Xi Jinping).  NMPSS has sadly come to the White House.    

If, as reported, I-Wanna-Parade-Trump has NMPSS then Readers should expect either a fawning nation or just himself to arrange a parade as never seen before, of Olympian adjectives: Citius, Altius, Fortius [2].

To which Wry & Dry would add: Pravus [3].

NMPSS has no known cure.  And even removal from office doesn't cure the affliction.  

[1] The most commercially successful producer-director in film history, famous for epics such as the Ten Commandments and Cleopatra.
[2] Latin for Faster, Higher, Stronger.
[3] Perverse

Scoring the Parade

Wry & Dry assembled a panel of judges to assess the Parade.  Scoring was out of 10 for each of two categories used in synchronised swimming [4].  Synchronised swimming was used as the Wry & Dry benchmark because if a swimmer makes a mistake, she drowns and, in the spirit of synchronisation, the rest of the team must also drown. 

This was also the case with the Parade.  Readers will know that if a Parader made a mistake, in the spirit of Mao Zedong, not only would he/she be shot, but so also would the rest of the Parader's team.  And the Parader's family.

Wry & Dry's judges scored the Parade as follows:

Artistic impression (choreography, music interpretation, presentation): 0+0+5 = 5

Technical merit (execution, synchronisation, difficulty): 10+10+4 = 24  

The total of 29/60 is a fail.

Readers would want to know that Wry & Dry has passed the results directly to the Parade Master, with additional suggestions for the 80th Anniversary Parade.  

And that not one Parader was shot.

[4]  Scoring in synchronised swimming is actually complex.  And of interest only to those who partake.  Or who have an undue interest in the arcane.    

Interest rates not on hold 

Readers will have noticed that the Chief Teller of the Reserve Bank decided on Tuesday to lower its target interest rate to 0.75% from 1%. 

The Chief Teller says that it is all about (a) lowering the unemployment rate (choke, the unemployment rate is 5.3%: no need for panic) and (b) increasing inflation, an objective Wry & Dry has never understood.

Wry & Dry doesn't buy this.  There must be something else going on.  Consider these:

Firstly, lower interest rates, or whatever morsel the banks pass on (see more, below), at these levels are not going to encourage investment enough for more jobs to be created. 

Secondly, what is the Chief Teller going to do when there is a serious economic slowdown - there's not much room to aggressively lower rates, as in the past.

Thirdly, it tips more easy money into an already over-geared community.

Cartoon rba releasing to the wild

So what is going on?

Wry & Dry sees the action as a pre-emptive strike against a slowing world economy, to drive a weaker Australian dollar.  This enhances export competitiveness.  Inflation is low, so there is no need to worry about the cost of imports - other than the price of oil.

Or is there something else?

Unclear on the concept

Readers will be aware that a massive iceberg was 'calved' from the Antarctic ice-shelf last week.  Variously described as big as Sydney, Belgium or X Olympic swimming pools, where X is a large number, the news brought out the usual comments from the loonie Greens.  That is, that the new iceberg, when melted, would cause the sea levels to rise.

Cartoon sea level rising

A number of folk took to talkback radio and to Letters to the Editor to state that an iceblock in a full glass of water will not cause the water to spill over as it melts.  This is a variation on Archimedes Principle [5].  Hence the melting iceberg will not cause the sea level to rise.

Err, no. Fresh water, of which icebergs are made, is less dense than salty seawater. So while the amount of sea water displaced by the iceberg is equal to its weight, the melted fresh water will take up a slightly larger volume than the displaced saltwater. This results in a small increase in the water level.  This time, the loonie Greens are correct.  But not by much.

If all of the icebergs and floating ice bobbing in all of the oceans were to melt, the sea level would rise by between 4 and 6 centimetres.

[5] That a man running naked through the streets of Syracuse in around 250 BC yelling "Eureka" is probably onto something.   

cartoon archimides

Low hanging fruit

October is a good month for deserved bank bashing. The others are January, February, March, April, May, June, July, August, September and November.

And so Wry & Dry once again draws Readers' attention to the greediness of the banks.  

Readers will know that the banks failed to 'pass on in full' to borrowers the effect of the rate cut.  And not for the first time.  The banks cried that they must protect depositers and their profit margins.  And over the last couple of days the media communications departments of the banks (second only to Qantas for effectiveness) have been out pedaling the message.

Cartoon trust the banks

And Readers will have noticed how there are carefully crafted messages to each sector:

To tabloids: it's about concern for the needy... maintaining a strong, fully franked dividend for pensioner shareholders.

To broadsheets: it's about nationalism: "strong, stable and profitable banks are critical to a growing economy..."

To government: it's about reducing unemployment: "...which is creating jobs..."

To millennials: it's about home ownership: "...which helps Australians buy their own homes."

To analysts: it's about finding other banks that are more profitable: "Australian banks are not as profitable as US banks."  

The reality is that Australian banks are amongst the most profitable in the world.  The resulting average return on equity is 13%, some 12% above the risk-free rate (government bond rate).  This is extraordinary.  Especially for an industry in which the government offers an explicit guarantee to depositers (up to $250,000 per depositor per bank) and an implicit guarantee to lenders.

Wry & Dry is all for profitable banks.  But this level of profitability is way above what it should be for the level of investment risk.  

And even the RBA agrees with Wry & Dry.  “Australian banks remain very profitable, with return on equity well above their cost of equity and high by international standards,” the Reserve Bank said in its 72-page Financial Stability Review released today.

Consider a key driver of bank profitability: the margin between cost of funds and return on funds. The below chart shows the margin over the RBA cash rate (on which banks base their deposit rates and deposits make up some 70% of banks' cost of funds) of the average of banks' owner-occupied residential discount mortgage rate.  As readers can see, just over a decade ago, the margin was 1.7%.  Today it is approaching 3.5%. 

Chart greedy banks2

Home owners are to banks what superannuation is to governments: low hanging fruit.  

Brexit turncoats

Readers will recall that, whilst given the thumbs down by the voting mob, the policies that the Australian Labor Party took to the mob at the last election were virtually unchanged over three years. 

Wry & Dry was moved to see how consistent its UK equivalent was on that almost unnoticed issue: Brexit.

2017  UK Labour promised a hard i.e. No Deal Brexit.

2018  UK Labour promised not to hold a second referendum, but voted against a Deal.

2019  UK Labour promised a second referendum, but voted against a No Deal.  And for a Deal.  

Confused?  So is the average Pom.  Labour is polling at about 25%, with Leader Jezza Corbyn having the lowest net approval rating of any UK opposition leader in history: minus 60% (source: Ipsos MORI).  

Focusing on the unimportant

From April, it costs an average of 30,000 roubles ($700) to insult Tsar Vlad.  The government decreed that it was an administrative offence to insult the government on the internet.  Already 45 cases have been decided, of which 26 were for insulting the Tsar.

This is a fabulous innovation, a new way raise money.  It's voluntary taxation.  And I-Need-The-Money-Trump should consider it as a way to impressively reduce the budget deficit of the Yoo-Ess-Ay.  Especially as he is going to have to spend vaaaast amounts to re-boot an economy groaning under the weight of trade-war-driven economic slowdown.

Barely a nano-second passes without some in the Yoo-Ess-Ay insulting the President on the internet.  Facebook might be used as a test-bed.

Think of the dosh rolling in to the general coffers fill.

Don't mention the...

Readers know that Germany is the economic powerhouse of Europe.  But even powerhouses have their blackouts.  Wry & Dry was caught by the below chart from the Economist:

Chart Germany PMI

For Readers whose eyesight is failing, the chart shows that manufacturing in Germany is in a spot of bother.  Actually, that is an understatement.  The September data showed the sharpest decline in manufacturing activity since 2009.

The main culprit is the car industry, which, with the attendant supply chain, probably accounts for 75% of the slowdown.  But the lurking effect of trade ill-winds, as it were, are yet to be felt.  And the death hand of Brexit, Deal or No Deal looms. 

But German unemployment is a delightful 3%, back to pre-GFC levels.  However, Readers know that unemployment is what is known in the jargon as a 'lagging indicator'.

Germany is big enough and ugly enough to look after itself.  And it was early in September that Wry & Dry quilled a piece on the problems of Germany not putting its hands in its deep pockets (it has a budget surplus, negative government interest rates) to push a bit of dosh into the economy. 

However, Germany will turn a Sergeant Schultz deaf ear to cries of 'stimulate'.  Much to the chagrin of nearby countries, which rely on Germany's engine. 

It's tough at the top 

Global accounting firm KPMG has told hundreds of its UK employees to hand in their work mobile phones as part of a cost-saving drive. 

This is disastrous.  Think of the mental disintegration of millennial employees at having to actually pay for their own mobile phones.  Is this the unkindest cut of all? [6]

[6]  Probably not.  Mum and Dad charging for board would be a force nine on the Millennialicter scale. 

Is the IPO party over? 

Readers will have read in Wry & Dry last week about the train wreck called WeWork.  WeWork is a real estate company (mutton) dressed up as a technology stock (lamb) that was going to float/ list/ IPO on the New York Stock Exchange (market). The public scrutiny caused its off-market valuation to drop 75% and the CEO getting the DCM.

Well, now entertainment and talent agency Endeavor has become the latest to abandon its IPO, just hours before it was scheduled to price and list on the NYSE last week.  A rocky debut (minus 11%) from fitness company Peloton earlier on Thursday shook sentiment.  This follows SmileDirectClub, which started trading publicly earlier in September, falling 28% on its debut.  Uber stock is down 30% since its IPO, and Lyft's down 40%.

What's going on?

Firstly, pressure from venture capital funds driving the IPOs to earn their 2% management fee plus performance fees before someone rings a bell (to say that the market has peaked).

Secondly, investors now consider that it is useful for a company to actually make a profit before they will invest.  Rather than just promising to make a profit.

Thirdly, maybe someone is about to ring a bell. 

Is venture capital over?

Getting back to WeWork, Readers will know that Masayoshi Son of Softbank, a Japanese venture capital investment company, invested $11 billion into WeWork.

But Readers will know that many investments turn out to be duds.  Sometimes you lose some of your money.  Sometimes you lose all of it.  And then sometimes you make it in spades [7], as it were. 

SoftBank’s Son once invested $20 million into a fledgling Chinese e-commerce company called Alibaba. That stake is worth around $100 billion today.  

[7]   Better still, no trumps.

Snippets from all over 

1.  Trade war widens to the Atlantic

The World Trade Organisation has given the U.S. the go-ahead to impose tariffs on as much as $7.5 billion worth of European exports annually - in retaliation for illegal government aid to Airbus.  

Wry & Dry comments:  The Trump administration is wasting no time in levying them: 25% levies on French wine, Italian cheese and single-malt Scotch whisky.  And Airbus aircraft made in the EU, which face a 10% duty.  Oops: U.S. airlines like Delta have billions of dollars of orders with Airbus. 

2.  US manufacturing heading south

US factory activity contracted for the second successive month in September and hit a 10-year low. 

Wry & Dry comments:  The stock market fell sharply.  Expect I-Want-My-Mortgage-Rate-To-Go-Down-Trump to demand the FED drop interest rates even more.  

3.  Facebook

Cracks are showing up in Facebook's Libra payments coalition, with Visa, MasterCard and other backers rethinking the project as officials in the U.S. and Europe raise the spectre of regulatory scrutiny.

Wry & Dry comments:  It seemed like a good idea at the time.     

4.  Japan's full employment

Unemployment in Japan remained at 2.2% in August, the lowest since 1992.  

Wry & Dry comments:  The average job tenure in Japan is 12.1 years, amongst the world's highest.  The OECD average is 10.1 years.  

5. Mainlanders shun Hong Kong 

Chinese tour groups to Hong Kong plunge 86% for Golden Week (the first week of October is China's national holiday break during which millions head out on vacation), usually one of the busiest periods for Hong Kong’s tourism and retail industry.

Wry & Dry comments:  And it's unlikely they attended the 70th Anniversary parade in Tienanmen Square, as attendance was by invitation only.

And, to soothe your troubled mind ...

Miscellany 

Last words ...

"We all know what to do, we just don’t know how to get re-elected after we’ve done it.”

 -  Jean-Claude Juncker, the outgoing president of the European Commission, with an observation about Europe’s political leaders and tackling structural reform.

Which might equally apply to Australian politicians.  Or, indeed, those from anywhere.

A lightly salted absurdity ...

Deepak, Wry & Dry's Uber driver ... 

... sent a text message, saying that he was still on vacation.  He didn't watch the AFL final, but said he drove down to the horse races at Doomben, and won what he said was a 'motza', backing a nag named Desert Man.  He said it paid $11 for the win.  

Cheers.  

Anthony 

 

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