Today's Top 10 is guest post from Simon Botherway who is a company director, investment consultant and investor. Simon was co-founder and chairman of Brook Asset Management. Brook was bought by Macquarie Bank.
Simon is also a former member of the Securities Commission and chaired the Financial Markets Authority Establishment Board. He is currently the chairman of Serko Limited, a technology company that recently listed in the NZX.
As always, we welcome your additions in the comments below or via email to firstname.lastname@example.org. And if you're interested in contributing the occasional Top 10 yourself, contact email@example.com.
In this my inaugural Top 10, I have identified articles that I consider to be of particular relevance in two areas of particular thematic interest to me.
The first of the themes relates to the ongoing global policy responses to the global financial crisis (GFC) not only in terms of macro-prudential regulatory policies, but also those initiatives designed to both stimulate growth and inflation.
There is in my view no prospect of a sustained central bank tightening cycle on the horizon.
Let’s first deal with the banking sector.
1. Regulatory oversight reforms are primarily focussed on systemically important institutions and are designed to prevent a recurrence of the GFC. In the US, the Dodd-Frank legislation (the effect of which famously escaped even its sponsor Christopher Dodd) requires banks to produce a ‘living will’ which provides a quick and pre-determined means of unwinding failed institutions.
However the living wills as submitted by the banks were rejected in uncharacteristically severe terms by the Fed and FDIC which raises the very distinct possibility of banks being forcibly broken up.
2. The frustration and impatience with the private sector on the part of the regulators is partly driven by their largely valid perception that they’ve had to do all the heavy-lifting in terms of addressing the macro issues whilst banks have fought a rear-guard action against reforms.
At the very least, the banking sector is on its way back to the future. It will once again become a low-growth, low risk, capital intensive, utility-like industry as risk-taking is substantially curtailed, regulatory capital requirements rise whilst compliance and regulatory costs increase.
These themes were nicely encapsulated in reports of HSBC’s result and associated commentary. I was somewhat bemused by the Chairman’s warning over the dangers of ‘risk aversion’ in the wake of industry-wide scandals. The regulator might see that statement as somewhat ironic.
3. The Economist reports that asset managers, who have so far escaped the regulatory net, may become the next target of regulatory attention:
Many commentators are arguing that the Fed is now in a tightening cycle and one article I read anticipated a ‘normalised’ Fed Funds rate of 4% within a relatively short period of time. This in my view is nonsense. The analogous deleveragings in the 20th century (US in the 30’s and the UK post WWII) required negative real interest rates for an extraordinarily long period of time. The following articles (4-7) and my commentary deal with actual official policy.
4. Pro-growth and inflationary policies have enabled both the public and private sector to first service and then eventually reduce the enormous debt pile so carelessly amassed during the great credit expansion. Such policies reflect global policy-makers having almost universally chosen a reflationary deleveraging path over a deflation/default process (think depression).
However the US, Japan and the European Union have all either chosen, stumbled across or been forced into disparate policy mechanisms despite sharing a fair degree of consensus on what they’re aiming to achieve. Japan’s deflationary slump is the model that both the US and the EU are desperate to avoid.
The IMF recently expressed some satisfaction with Japan’s resolve to drive inflation higher.
5. Whereas former Soros adviser turned Japanese politician Takeshi Fujimaki considers that, like Europe, Japan needs negative interest rates.
6. The Fed’s choice of liberal doses of monetary expansion and debt monetisation have been comparatively successful in terms of driving down unemployment and stimulating growth. Although the ‘paint the country green’ quantitative easing program has been further curtailed, the Fed has nonetheless given itself considerable leeway to maintain interest rates at exceptionally low levels despite its apparent success in the pursuit of lower unemployment. This FT article presents a neat summary of the nuanced messaging.
I get the feeling that, despite the dissenter in her midst, Janet Yellen feels intuitively that the global situation is such that there’s no hurry to tighten and risk a re-rerun of the mistake of 1937 – a premature tightening cycle that plunged the economy back into recession.
7. The Fed is of course the envy of the ECB which has been hobbled in its money-printing ambitions by the bloc’s northern countries (whose wealth is matched only by their recalcitrance).
The ECB has been forced to rely on its LTRO program and more latterly negative interest rates to do the job. This approach has been far less effective than the Fed’s.
The parlous state of several large EU member economies and finances is such that it has very significant geo-political implications.
The EU’s dilemma and associated vulnerability is nicely summed up by the inimitable Ambrose Evans-Pritchard in an article now some 2 weeks old but nonetheless highly relevant given the reported massing of Russian troops on the Ukrainian border. Evans-Pritchard is surely one of the most informed and informative commentators on the free side of a pay-wall.
In my view there is no prospect of the EU tightening monetary policy for many many years to come.
The second of the themes I’m interested is the rapidly evolving field of technology, the internet and cloud-hosted software services.
8. The effect of the all-pervasive internet and its potential for international surveillance, espionage and indeed sabotage has resulted in significant tension between China and the US.
The US has indicted five members of the Chinese military allegedly for hacking and stealing valuable information.
China has swiftly countered with their own allegations as Bloomberg reports.
9. Meanwhile the US seems to be somewhat ambivalent and sloth-like in terms of addressing the threat to their own home-grown incumbent technology giants as the threat of NSA spying drives potential customers to alternative jurisdictions.
This represents a considerable threat to the US tech sector and an unbelievable opportunity for those who can provide secure networks beyond the reach of the US spy agencies.
10. Finally a quick comment on the rapidly evolving field of payment and associated technology standards.
The probable adoption of a universal NFC standard across smart device manufacturers has significant implications for the payment and banking industry and may result in today’s banking and payment platform giants being substantially disintermediated. This article from pymnts.com speculates that Apple will build NFC capability into the new iPhone 6.
Apple has a number of patents in this field but not all of them.