A Value Investing Blog

Posted on 06 Jul 2016 by Steve Johnson

Brexit Sends the World into a Tizz

Brexit Sends the World into a Tizz

This article is an extract taken from the upcoming Forager June 2016 Quarterly Report.

Three times in the past 12 months financial markets have been in a tizz. We went close to a bear market in August 2015, officially entered one in February of this year and then saw frantic currency and equity selloffs after the Brits voted to leave the European Union in the final week of June.

The first two of those were buying opportunities. There didn’t seem to be a lot of rational logic behind some of the selling, and we were able to pick up businesses like Alphabet and South32 at very attractive prices.

It may yet become irrational, but so far the response to the latter, Brexit, has been orderly and appropriate. This is not jumping at shadows. Brexit has the potential to have a very serious impact on the wider UK economy and many of the companies operating within it.

Irrespective of your view on the politics (I have some sympathy for a country wanting less political interference from a supra-national body), the economics of Brexit range between not great and bad.

Continue reading “Brexit Sends the World into a Tizz”

Posted on 26 Jun 2016 by Steve Johnson

Brexit has a Message for All of Us

Brexit has a Message for All of Us



As fund managers it is our job to prepare for everything but Friday’s events were a shock to me. Whilst preparing for the possibility that Britain would vote to leave the European Union, my gut feel was that it wouldn’t happen. A lot of people would threaten to leave, sure. They’ll tell a pollster they have had enough of technocrats ruining their lives, but faced with the economic uncertainty of departure I thought they would stick with the status quo on polling day.

Continue reading “Brexit has a Message for All of Us”

Posted on 14 Dec 2015 by Gareth Brown

The Donald Trump Effect

The Donald Trump Effect

Politics doesn’t belong on this blog. But the 2016 US election decides who will be perhaps the most influential kingpin in global politics—so it’s loosely investing related. And I have a quick point to make that won’t fit into a tweet.

I hope Donald Trump doesn’t become president. He is nuts. But what has been most interesting about the Trump tsunami is how much we misjudged his chances of success. And we’ve done that because we underestimated how wide his base of support is. Continue reading “The Donald Trump Effect”

Posted on 20 Nov 2013 by Forager

And the next Fed chairman is…

By Gareth Brown in our one-man Vienna office

It’s a strange job, this chairman of the Federal Reserve gig. Some people (including most of the media and some in political power) seem to think of the chairman as the maestro of the entire global economy.

To those of us who know the real story—that the economy actually is, left to its own devices, a bottom up, complex adaptive system—the idea of a captain tweaking the controls is either laughable (in its impotency) or maddening (in the damage being caused).

Personally, I’d prefer to see the whole role made redundant, or at least savagely demoted. And I’d like to see the chair and much of the entire board wrestled back from the academics that have dominated it for around 25 years. That other great experiment in top down, planned economics, the Soviet Union, lasted about 70 years. So respite might take a while yet.

I was very happy when Larry Summers dropped out of the race for next chairman, mainly because I wouldn’t trust him to run my son’s $500 government-guaranteed bank account. But Janet Yellen might be no better, and may be worse. Yellen’s view of savers is scary indeed.

But life is too short to stress over things unchangeable. Let’s instead have some fun with it. Given the role of selecting the next Fed chair, who would you pick? Assume that political connections, plausibility nor desire for the job are requirements. You’ve got a pool of 7.125 billion potential candidates. Who would you give the job?

Assuming we must have a Fed chairman manipulating the price of money in the first place, then I think their most important role is to identify bubbles and lean into the wind. At the very least, they should not be inflating bubbles deliberately to achieve some short term economic and political goals.

So for me, the choice is an easy one—Jeremy Grantham of GMO LLC must be among the best in the bubble-hunting business. He spotted every bubble that Greenspan and Bernanke missed, and he won’t miss any of the ones that Yellen is likely to miss.

If you don’t read Grantham’s quarterlies, head to the GMO website and sign up (it’s free).

Do you have a better candidate?

Posted on 10 Jan 2012 by Forager

You Can't Legislate Morality

So Philipp Hildebrand has quit. Not that he did anything wrong, of course. Hildebrand said "I came to the conclusion that it’s not possible for me to deliver a definite proof that my wife requested the currency transaction without my knowledge. Unfortunately, mistakes were made around this transaction.”

The only problem is that he can’t prove he didn’t do anything wrong! The Swiss National Bank released a series of emails between Hidlebrand and his banker. Here’s the Bank Sarasin guy’s email on 16 August:

I also remember your saying in our yesterday’s conversation that if Kashya [Hildebrand's wife] wants to increase the USD exposure then it is fine with you.

The SNB’s own investigation concluded that Hildebrand didn’t break any of the central bank’s internal rules or policies. They must be some pretty loose rules. In any case, it’s not the rules that are the problem. Too many participants in the finance industry see it as one giant game of Monopoly. The rules are there, and your aim is to maximise your profit within those rules, irrespective of the consequences. Then they wonder why the general public hates them when the whole system comes crashing down.

The Economist’s Shumpeter says the SNB’s code of ethics needs an update. That won’t make much difference. Instead of trying to rein in employees with 100-page codes of ethics, the finance industry should  try employing ethical people to begin with. You can't legislate morality.

Postscript: Here's the SNB press release, including the relevant emails. He was also buying Roche and Nestle, presumably without the same foresight.


Posted on 09 Jan 2012 by Forager

Do As I Say, Not As I Do

I shouldn't be shocked. But seriously, is this Philipp Hildebrand stuff for real? I had to read this little snippet out of The Economist twice:

The Swiss National Bank published its internal regulations on staff transactions to try to dampen allegations swirling in the Swiss media that Philipp Hildebrand, the central bank's president, and his wife acted wrongly by buying dollars prior to the SNB setting a ceiling for the Swiss franc last year. The SNB also published the results of an investigation into the trades, which found that the transactions did not breach SNB rules [my emphasis].

It turns out that because Hildebrand's wife did the trade, two days before the SNB started intervening to push the Swiss franc down, and Hildebrand didn't know about it, he's done nothing wrong. The investigation didn't say anything about whether his wife knew about the imminent intervention.

What hope is there that investment bankers will behave themselves when the public servants are front running, insider trading and using exactly the same legalistic, unethical arguments to justify their behaviour? It makes me sick.

Posted on 13 May 2011 by Forager

Dear Julia, Exec Pay Has Nothing to Do With You

Dear Miss Gillard,

I read in this morning’s paper that the Greens are proposing a cap of $2m on executive pay. No doubt you think this is a silly idea. And it is. There has never been a surer way to end up with our best and brightest leaving Australian shores. But it is no sillier than the rest of your hare­-brained schemes on remuneration.

We don’t need a vote on remuneration reports. We don’t need a ‘two strikes’ policy and we most certainly don’t need a cap on executive remuneration. In fact, we don’t need you to do anything. We already have all the legislation we need.

You might not realise this but, if we don’t like the remuneration policy our board has set, we can sack them any time we feel like it. All we need is shareholders representing 5% of the company’s shares to call a meeting and put it to the vote. Within two months of calling the meeting, we can have in place a new board and a new remuneration policy.

That’s a much lower threshold than we need to jump to force a meeting under your proposed two strikes policy.

Don’t get me wrong, we haven’t been using our power as much as we should. Some of our executives have been paid millions of dollars for destroying billions in shareholder wealth. Many of the contracts in place are overly generous and provide all the wrong incentives (see Transurban’s $6m toll collector). But that’s our problem, not yours. We already have all the tools we need to do something about it.

Kind regards,

Mr Stockmarket Investor

Posted on 24 Jan 2011 by Forager

Higgledy-Piggledy Flood Relief Needs Centralisation

Higgledy-Piggledy Flood Relief Needs Centralisation

Between the Premier’s Flood Appeal, The Salvation Army Flood Appeal, Channel Nine’s Flood Relief Appeal and countless other corporate and not-for-profit initiatives, I am confused as to where to send my money. Where does it all end up? Which organisations need how much money?

There seems little doubt that, given the higgledy-piggledy nature of the process so far, some are going to end up with too much money and some not enough. No doubt making a direct contribution makes us feel good. Many of us, like me, unaffected by the crisis, want to feel like we’re doing something to help and it’s inspiring to see what we’re capable of when the situation calls for it. But we’re not Haiti. We’re not Aceh. And we’re not Pakistan.

Our country is rich. Our government has one of the strongest balance sheets in the developed world and enough capacity to fund the reconstruction and emergency relief many times over. Why do we need to raise money through dozens of disparate organisations?

Privately-funded charitable organisations have their place. People can use their own private funds to further a cause they care strongly about, without forcing everyone else to do the same. But a disaster on this scale is something that needs an equivalent response and a commensurate amount of funding.

Why doesn’t the government simply centralise the whole process and allocate money out to those organisations that need it, thereby contributing on all of our behalves? If needs be, put the GST up by 1% for a couple of years to pay for it. Who would complain about that?

PS. The photo is the view of my parents' farm from the balcony. The river, usually behind that thick line of trees you can see in the distance, had been dry for the past decade.

Posted on 08 Dec 2010 by Forager

Latest Wikileaks Saga Leaves Me Cold

For some time I’ve felt somewhat sympathetic towards Wikileaks founder Julian Assange. Far too many decisions which should be discussed in the public arena are, instead, concluded behind closed doors. Here in Australia you only need to witness the government deals on the NBN and a resources tax (see Is Marius Kloppers Bigger Than The PM?). Telstra shareholders will get to vote on whether they like the $11bn price tag for their legacy assets. Australian voters get no say in the matter.

For Assange’s latest stunt, however, I have no sympathy whatsoever. He has defended publishing thousands of confidential cables between US diplomats and their foreign counterparts as the pursuit of ‘freedom of speech’. Really?

I thought freedom of speech was about the right to express your own opinion. There is a big difference between that and the right to steal someone else’s privately held opinion and make it public. If Assange really believes in freedom of speech as he defines it, how about releasing every email he has ever sent, letter he has ever written and phone call he has ever made?

And then there was this little exchange as part of an online debate on The best question posed to Assange was this from a former British diplomat:


I am a former British diplomat. In the course of my former duties I helped to coordinate multilateral action against a brutal regime in the Balkans, impose sanctions on a renegade state threatening ethnic cleansing, and negotiate a debt relief programme for an impoverished nation. None of this would have been possible without the security and secrecy of diplomatic correspondence, and the protection of that correspondence from publication under the laws of the UK and many other liberal and democratic states. An embassy which cannot securely offer advice or pass messages back to London is an embassy which cannot operate. Diplomacy cannot operate without discretion and the protection of sources. This applies to the UK and the UN as much as the US.

In publishing this massive volume of correspondence, Wikileaks is not highlighting specific cases of wrongdoing but undermining the entire process of diplomacy. If you can publish US cables then you can publish UK telegrams and UN emails.

My question to you is: why should we not hold you personally responsible when next an international crisis goes unresolved because diplomats cannot function?”

And his answer:

“If you trim the vast editorial letter to the singular question actually asked, I would be happy to give it my attention.”

Seemed a pretty straight forward question to me.

Posted on 01 Nov 2010 by Forager

Mortgage Obsession Bad For Business

Mortgage Obsession Bad For Business

The latest in a painful series of ‘determined to be different’ advertisements claims Commonwealth Bank has ‘more satisfied customers than any other Australian Bank’. Given they have the most customers by a large margin, this is probably true. No doubt they also have more dissatisfied customers than any other Australian bank (Telstra will probably start using the same line on us soon).

Most of the messages we hear from the banks are like this. Drivel. On mortgages, though, they have a point. Home loan rates should rise by more than any increase in the Reserve Bank’s official rate.

The banks’ funding margins have been increasing and they will continue to do so for a few years yet. Three years ago they could obtain funding for as little 10-20 basis points over the benchmark rate (a basis point is 0.01%). Today the same money costs 80-100 basis points. As the old, cheap funding rolls off and is replaced by new, expensive funding, the average cost of funds continues to rise.

Mortgage rates are, to make the understatement of the year, politically sensitive. Any bank that raises mortgage rates by more than the official change in rates is going to get bashed from all sides of politics. The banks have been very reluctant to be on the receiving end of such a public relations disaster, so have not recovered all of the increase in funding costs. They are making less on mortgages now than they were before the crisis.

Fear not if you are bank shareholder. The overall net interest margins for Australia’s big four have risen since the onset of the crisis. That’s possible because the lower margins on mortgages have been offset by charging through the nose for any loan that isn’t a home loan.

Small to medium businesses are paying margins 300-400 basis higher than they were before the crisis, compared with 25-40 basis points extra for homeowners.

This is a bad outcome for the overall economy. Resources are being diverted from productive business assets to unproductive housing and the banks, by charging below market rates on home loans, are making it almost impossible for anyone else to compete. All because of an unhealthy political obsession with mortgages.

The Australian banking sector is not competitive enough. It’s a cosy oligopoly where the profits made far exceed a reasonable return on capital. Contrary to popular opinion, Australia’s homeowners are the one group of borrowers that aren’t paying the price.

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