Being Mindful : Finance
Blowing bubbles, new banking crisis, and market trends.
By Simon R. Burney.
06th October 17.
Since the last major financial crisis, there have been continued warnings, scare mongering, and theories about the economy and its impending implosion. Many pundits hawking on about bursting bubbles and pending financial take downs. As a responsible business community, should we take note or are these just further tactics and distractions?
A STRATEGIC POINT OF VIEW
There are always market smoke and mirrors, with strategic players using fear in messaging to sell us alternatives. In marketing it is very well understood that FUD (Fear, Uncertainty, Doubt) tactics are a major influencer in selling a product or ideas. So one has to always step backwards and begin to review the market predictions and warnings from a bird’s eye perspective. With all strategy, a clearer picture can be developed by following the advantages, and figuring out the gains and losses from certain tactics. Basically take care of where that information comes from.
Any good finance director and CFO should be aware of these tactics to a point, having keen strategic x-ray vision, mindful of the real economic indicators, the influencers, and ability to assess the risks to alert their business in advance of economic quakes. But there are still too many surprises which opens up more cans of worms, some natural, many designed, and sometimes just because people did a bad job using poorly designed systems, something spiralled out of control, or by institutions or businesses simply not being dynamic enough to step change when needed. Again there are always good indicators to alert us.
We all understand that economy is actually one of the best modern tools in warfare, and is very clear politics influences economy and vice versa, used on both micro and macro platforms, either through competitive business, major corporations, or big government. This again leads us right back to strategy and a fine example would be oil pricing. However economic tactics is for another article, so what are the current trends right now that I’m currently mindful of?
BLOWING BUBBLES
Bubbles; a term made popular in 2007 onwards, became an accessible click word the general public and media could get behind and equally abuse. Meaning that something has inflated, isolated, and seemingly unsustainable with a trajectory of destruction. We became familiar with Banking Bubbles, Housing Bubbles, and seemingly for a period, everyone was blowing bubbles of some kind. I’m currently interested in the Bonds Bubble.
WHY BONDS BUBBLE?
Bonds are basically a guarantee in which a corporation or government has to settle a debt/owed value on or before a specific period. Specifically I’m looking at Sovereign Bonds, using UK and US as a prime example in which national governments have been issuing debt bonds for centuries in local and foreign reserve currencies such as the U.S. Dollar, the British Pound, and EURO. Bonds are currently trading at historically multimillion highs, and the inverse of this bubble is that Interest rates are at historic lows.
JUNK, DEBT, & INTERESTING RATES.
Over the last ten years specifically, the Central Banks have been trying to keep their brethren banks afloat whom have been teetering on the edge of insolvency since the last crisis. They do this by buying the junk off their balance sheets. The brethren banks have been accumulating nasty assets whom then sell on to the central banks where they are being stored for them which the Federal Reserve for example is currently holding approximately $4.5 Trillion worth of junk or “assets” to also help keep rates low in which recently Janet Yellen the chair of the Federal Reserve informed that they now must unwind these assets by selling them on, which in turn will also push back up the interest rates. Mark Carney the Governor of the Bank of England, also suggests that it’s time to increase interest rates within the next year.
Overall global debt is cumulating fast, currently estimated in exceeding sixty five trillion dollars. However with the coming increase of interest rates, the moment they adjust, the toxic debt value will increase overnight tipping the current hanging on banks towards bankruptcy. This act would be a kill switch for many, including 6 current major European big banks, Deutsche Bank, HSBC, Credit Suisse, Santander, Barclays, and RBS.
HANGER ON BANKS?
Since a financial banking bubble burst in 2007/8 with clear warning signs in advance, many banks and financial institutions spiralled into bankruptcy, most famously, Lehman Brothers and Northern Rock. Many more came within a breath, such as Royal Bank of Scotland, HBOS, Bradford & Bingley, Merrill Lynch, Freddie Mac, Fannie Mae, AIG, Hypo, Fortis, and Alliance & Leicester. These were saved by public money and interventions with some questionable moral financial transactions. Many are still on the verge of insolvency, and currently sustained by the low interest rates and some financial flexibility.
INTERESTING
With interests rates at historic lows and the Bank of England sustaining 0.25% rate, the predictions are that they will begin to slowly rise, potentially hitting 3% in a three year period with a drive to 5% in five years, over inflation. This means there is an outlook to increase interest rates by 1% per year moving forward. Back in the volatile nineteen eighties interest his as high as 15%, but had been trending downwards over the last two decades to approximately 5% before the financial crisis. So there is a keen eye to restore rates soon to the pre-crisis era.
Being a supply and demand market, the interest rate levels are a factor of the supply and demand of credit, being an increase in the demand for credit will raise the rates, whilst a decrease will effect thusly. When an increase in the supply of credit will reduce rates, a decrease in the supply of credit will increase the rates. There are many triggers and influencers, the mechanics of economics with the weights and balances helping move the machinery. Whichever direction the pistons move, someone makes a gain, or a loss accordingly and naturally, however there are those set to gain from rising interest rates, even at the risk of causing a bond and banking problem.
A HAPPY ENDING?
The scenario’s are that the hanger on banks may become insolvent, and this will cause a major economic problem. Some believe it’s time for these failing banks to go, but the repercussions will devastate the fragile banking systems, and ultimately businesses and people alike. Some warn this could be the greatest financial disaster of all time, but if we look at the history of the markets, there are bursting bubbles every decade since it began. As if the markets continue to expand and retract fast like an old steam engine. Does this mean we are actually in control of this engine or are we just feeding it until we run out of track? We have also seen in this last decade people losing jobs and mortgages, companies and banks collapsing as well as countries themselves hitting bankruptcy with great pressure put on various currencies. US, Europe and the Eurozone is a prime example.
The inevitable scenario is that governments will continue to bail out the banks using public funds to ensure their survival. This is most likely but will mean that the hanger on banks will be broken up. The good assets sold on with the bad assets being paid for by the public pocket. There is rightly strong opposition to this but it does ensure slight stability. With almost every nation on this planet in debt, this again is an unsustainable direction and one that quantitative easing will not sustain, and I’m not a fan of quantitative easing at all. Furthermore we then find ourselves with fewer banks, less competition and ensuring the few own the many, plus a major increase in debt.
LEVERAGE BUY OUT TREND
A trend we observe in the US market is the privatisation of the elusive stock markets in the form of leveraged buy-outs, again leveraging more debt as collateral. This is an aggressive and predatory method allowing companies and institutions to purchase other businesses using a significant amount of borrowed money to meet the actual cost of acquisition. The assets being used as collateral for loans, as well as the assets of the acquired company. This is to allow businesses to make large acquisitions without committing a lot of actual capital. This is made easier with low interest rates, and we are now seeing a few big players taking control of the board.
This is a double edged sword. On one side it will offer forms of stability, but on the other side a greater controlling monopoly and less players on the board. This also means less power of negotiation and flexibility to regulate and challenge. It is also believed that currently 1% control 83% of the public markets. This is a concern.
RECOMMEND THOSE EGGS
What can we do? If any of us knew the answer, we’d rule the world. I don’t have the big answers and like you am researching the data, but will make some simple suggestions. It is prudent to take on board warnings and continue to investigate the signals coming from the institutions themselves, whilst keeping an eye on the influencers and commentators whom have no gains to make, such as trying to sell through fear an alternative investment that they may indirectly profit from. So like all fake news, we have to have a smart filter. But don’t believe all institutions have your best interests at heart. Remain savvy.
Don’t put all your eggs in one basket. This and other obvious clichés come into play. I still see businesses keeping all their cash and trade in one place. This obviously helps strike certain deals, helps your finance departments keep life simple and the security concerns as well as systems ease and access. But is making life easier the best thing to do, or is it a lazy risk? It depends on the business activity and values in play. Cash management and good treasury is pivotal.
I have witnessed Finance Directors wanting rightly an easy life. Small team with a large volume activity, haven’t the time to spend with multiple access or authorisations in different systems. This is the greatest issue determining the banking activity and investment from business. I suggest to spread the cash to a point. Do your own risk management. Currently there is leverage to negotiate with banks, so take that opportunity, and you quite often discover efficiencies in your own processes and team, there may be some offsets to be made.
Some businesses are bound to banks because of the services they offer as well as other loans and investments. This is fair enough, but does not stop you setting up other types of investment accounts beyond to spread the load where possible.
Invest less in the hanger on banks. This is obvious but the institutions will never tell you to do that in order to protect that bank. But this is obvious risk management. Don’t believe in too big to fail, or unsinkable. There are smaller strong banks in various territories that are looking for investment, and will attempt to develop systems and technology to your needs. This may be a longer journey, but potentially less volatile during a crisis, but ensure they can handle a crisis, and again, use several baskets for those eggs.
I know that some CFO’s have relationships with big banks, and especially with the hanger on banks. There is still a lot of back scratching in the old boys network, and corporate business even onboarding from those banks whom in turn switch their treasury to the same institutions they have a relationship with. This has both advantages and disadvantages, and is not always at the heart of the company interest. It is shocking to suggest that a trusted new CFO would risk the business interests for their own gain, but it does happen, and even subconsciously. That CFO would continue to be invited to those golf weekends, award ceremonies, and luxury business excursions. Therefore I would suggest board members and executives test certain bank and cash strategies using an independent exterior risk assessor, and as a CFO myself, I would welcome an independent review and not be seduced by material, the same as a Finance Director welcomes annual audits. It’s basic risk management and transparency.
Finally, think again about Crypro Currencies. There are a lot of scare stories from the establishment about these, and we should rightly observe the warnings, however remember that the institutions linked to the established currencies are there to protect them, and this is where you see that good old FUD method in play. Look deeper into electronic currency such as Bitcoin, and weigh the risks and benefits. There is some enlightening evidence that there are interesting benefits. This will be a whole other article and investigation, but keep this in mind and look deeper.
WHY & WHO?
I was inspired to write this article after a current assignment asked me if I believed in the latest financial warnings and if I could offer any suggestions from birds eye trends. This is currently the latest hot topics as I see it as we cruise towards the end of this year, and will continue to monitor as things develop. Stay savvy, spread some eggs, and keep asking the experts for advice, and I also welcome comment, feedback, and good advice.
SOME REFERENCE MATERIAL.
I.M.F.
Reuters
Business Insider
The Economist
Financial Times
BOE & FedR
Maxkeiser.com
Investopedia
Various other financial forums.