Tuesday, 25 September 2018

Death of some salesmen

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  • Peters 475px June 2014

Liquidity won’t be helped by cutting out small brokers and institutions

I should be opening this morning with a few lines on the attempts to merge Dow Chemical with DuPont – I deliberately say “attempt” as the anti-trust hurdles of such a trade remain high – or the way copper, at US$4,582/tonne on the LME is now trading close to its five-year low but still 50% above its 10-year low of US$2,767, but I have an off-market rant to get off my chest first.

Yesterday we received a call from a bank, one which I would happily term a systemically major financial institution, in order to be told by the salesman there that our line had been pulled as we had been slated as too small a counterparty for them.

We, SwissInvest, have been doing business in the London bond markets for going on a quarter of a century and were members of ICMA, the International Capital Markets Association (formerly the AIBD, the Association of International Bond Dealers) while whoever took the decision to nix us a client was most likely still in short trousers and thought a bond came in an Aston Martin with a license to kill.

I can’t altogether blame the bank’s box-tickers though. The burden of due diligence in the realms of KYC (Know Your Client) and anti-money laundering procedures has reached a level that the banks simply cannot afford to make available the resources required to satisfy the creators of the many little boxes at the regulating authorities.

A healthy market is one with as many participants as possible in order to create the liquidity and the transparency of which everybody in a position of responsibility keeps banging on about.

For well over 20 years we have, along with our peers, helped to generate demand and liquidity both in the middle-market space among a cohort of institutional investors who are in many cases too small to be efficiently and profitably covered directly by the big houses but which are just as much a part of the market as the Pimcos and Blackrocks.

I would even go one step further. For all my sins I sit on the asset allocation committee of a London investment manager where I act as a specialist adviser on matters fixed income. I have for some time been plugging the idea that money should be moved away from the mega funds, the muscle-bound oafs of the credit markets.

Why, I have asked, would one want to have one’s money tied up in a fund which will not be able to move quickly in a crisis?

Reams were written a year or so back about the liquidity mismatch, the need for fund managers to offer more liquidity to their retail investors than they themselves can draw from the Street, but like all these subjects, they glow brightly for a week or so and then fade again.

By cutting out the small firms with the time, the desire and the cost-base to work the angles, the market becomes a poorer and therefore riskier place.

It is not the small and odd-lot sizes we trade in which pose the problems – the proliferation of electronic trading platforms has long ago taken care of that – but the regulatory cliff of endless and repeated due diligence. Despite being a regulated entity populated by regulated individuals, we find ourselves being asked to submit copies of our passports to some of the banks we deal with. Is it going to be urine and sperm samples next?

I could and should go on but I’m sure you’ve got my point.

By the way, I did come across one chap yesterday who had had the same phone call but from a different institution. He happened to know one of the boss-men; one phone call and the line was re-established. It’s not what you know. It’s not who you know. It’s what you know about whom!

On to Time magazine and its Man of the Year who is this year again and for only the fourth time in the publication’s history a Person of the Year or, to be less politically correct, a Woman of the Year. It is of course Angela “Mutti” Merkel.

The three great achievements she is being credited with and which saw her beat Donald Trump, Vladimir Putin and Abu Bakr Al-Baghdadi to the accolade are her saving the eurozone from breaking up over the debt crisis in general and Greece in particular, her engagement with the Russians through the Ukraine stand-off and of course the open-arm policy with respect to migrants and refugees.

I yesterday reported the registration of the 1,000,000th of those in Germany, year to-date.

Although I feel I should congratulate Mutti, I think the award should go to the 80 million-odd German taxpayers (thanks to VAT, every citizen is a taxpayer) who funded the first and who will be funding the third whether they like it or not and to the ECB, the aggressive monetary policy of which has downed the euro that has fuelled Germany’s staggering economic performance which has in turn generated the jobs and the fiscal revenues that ultimately enabled Mutti to play Lady Bountiful.

Well, I guess it is more usual for the centre forwards and not the goalkeepers to win the man of the match award.

Finally, well done VISA Inc. The credit card provider yesterday showed the world how to borrow US$16 billion at 5yrs, 7yrs, 10yrs, 20yrs and 30yrs against a subscription book well north of US$50 billion and at spreads ranging from 30bp over Treasuries for the short bond to 132bp for the long bond. Now go home, look at the interest you get charged on your credit card – I’ll assume you to be a decent risk – and then ask yourself whether the stock which trades at a P/E of 36 times is that rich, after all?

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