Despite Chinese New Year I will refrain from trying to call the markets based on Chinese horoscopes.
However, with the new belief taking hold of Washington, I will concede that there is more than one way of seeing the world and of dealing with the problems. It’s no secret that I am not a fan of the Donald but what he is bringing to the party is a sort of Cartesian principle of systematic doubt. He forces us to question our own orthodoxy and as uncomfortable as it might be we have to dig deep to ascertain whether what we are doing is out of actual conviction or simply to placate others.
I am not talking of whether building a wall along the entire length of the US border with Mexico is a good idea or not but I do have to agree with Mexico’s President Enrique Pena Nieto. He points out that imposing a mooted 20% import duty on Mexican goods to fund the construction of the wall means it will end up being paid for by the American consumer and not, as Trump had so definitively promised by Mexico. Holy guacamole!
The entire debate is as much tragic as it is comical and although it is not a laughing matter it is very hard to take seriously. Whether it is budgeted to cost US$14bn as the Trump camp would have it or US$40bn as others have estimated is beside the point; it’s hard to see Congress appropriating funds to get the project started without some concrete pay-back schedule attached to the proposal. Mind you, we can laugh. Falling secondary trading volumes with the concomitant revenue streams are still facing ever increasing compliance and control costs. Talk about killing the goose that lays the golden eggs.
Swiss cheese
This morning’s release of UBS’s Q4 results will give hope to shareholders as much as it will scare trading floors. Pre-tax profits rose to SFr848m, up from SFr234m a year ago. The key is of course the aggressive shift away from a reliance of trading revenues and a focus on earning fees from clients, both from trade execution and from management fees in the wealth management business, as well as reduced costs. But these fees must be treated with great caution. Management fees are charged on the nominal amount under management. If the stock market rises by 5%, then the fees on all equity holdings also rise by 5%. With the chronic unattractiveness of yields, holdings in equities are unusually high and the impact of rising markets therefore impacts earnings disproportionately. In other words, earnings will rise without a single new client being signed or a single now dollar being placed under management.
Thus the results of pure play wealth managers tend to flatter to deceive in times of rising markets – “trading” profits are also linked to the level of the markets as commissions are usually based on a percentage of the ticket value and not on a fixed price per transaction – while they get absolutely hammered if markets go the other way. Wealth management has no way of hedging itself against falling prices for financial assets. The post-election rally in global equity markets will have bailed out the lacklustre revenues of many a struggling wealth manager and although UBS has humbly retreated from its position as a mover and shaker in international banking and the structured asset market, it has, in so doing, exposed itself to different risks. The balance sheet might be more stable but the P&L has become far more linked to the fate of others over which the bank has no influence at all. Not that Sergio Ermotti would ever admit that.
What the bank did say, though, was that “higher interest rates in the US and improved investor confidence there should help offset the impact of negative central bank rates in Switzerland and the euro region”. Sounds clever and might please the retail holder of UBS stock but to be perfectly frank, I haven’t a clue what that statement is supposed to tell us. Maybe I’ll find out if it through a Chinese horoscope, one with a big red rooster on the front.
Car sharing
UBS is the first of the big European banks to report and the rest will follow in short order. The entire sector is in restructuring mode as they try to get their heads round Basle III, and Basel IV is already lurking in the background. Banking is not the place to be and tens of thousands of highly trained staff at Deutsche Bank who will see no bonuses this year – less than 10% of staff have been awarded long-dated retention inducements – will be wondering what went wrong when they read that Ford’s 56,000 hourly workers will receive profit shares of an average of US$9,000 a head and even Fiat Chrysler is paying out an average of US$5,000.
Meanwhile, Theresa” Kitten Heel” May is in the US buttering up the Republicans with reminders of our common past before she faces the Donald himself today. There will follow a “love-in” press briefing that will say little and mean even less. May is doing her best to plot a straight course while flying through a hurricane. Trump is trying to make believe that he can control the hurricane.
Alas, it is that time of the week again and all that remains is for me is to wish you and yours a happy and peaceful weekend. It’s cold and miserable and I’ll be staying at home and sorting out the study before beginning the arduous annual process of gathering papers for the lurking income tax return. At the same time, while looking through the pension statement, that other annual process can begin of wondering why returns are so miserable and how much better they would have been had the portfolio managers listened to and executed just a few of the investment recommendations one had put in front of them. The end of January is a great time for being depressed so why would anybody be mad enough to give up alcohol for the month as well? Mine’s a whisky. Cheers!