## On Narnia and the lead up to Jackson Hole…##

By August 21, 2017ASX, Banks, Bonds, Investing, Macro

As I’ve mentioned so many times before, my dislike of reporting season is immeasurable. It’s a choppy time to be in the markets and a steady hand is needed at all times. How many times have we heard this story?

Company A seems to report well but it doesn’t meet analyst consensus so it is brutally sold off. People pile in to the sell off just to be wrong again as it gets bought on broker realignment of numbers. It’s a common tale of knife-catching and finger-burning. Or worse: take profits on Company B on analysis that the price has extended to a point that it can’t match in its upcoming report only to see them shoot the lights out and rally another 10%. We’ve all been there and there’s no shame in admitting we’ve all done it.
For mine, I prefer to sideline it, wait for dust to settle and make my mind up on direction. Working overnight on European & US markets is hard enough without succumbing to the panic of local reporting season.
Telstra cut its dividend last week and we saw the market brutalise it with efficient savagery. Contrast that with ANZ who last year cut theirs and was rewarded by the market handsomely. Apples and Oranges but interesting to note.
The clanger at the moment is CBA. Globally, it is the 43rd biggest bank in terms of assets, 11th by market cap and first for closet skeletons. We were remarking after the AUSTRAC news dropped that there would be more bad news. The closet containing said skeletons is potentially so big it’s more like Narnia back there. Push through the AUSTRAC allegations, past Storm Financial, past the rogue Financial Planners and CommInsure and there’s a whole ice-covered world back there and a little guy with hooves worried about a Royal Commission.

Mr Tumnus is seeking legal advice…

Replay of our Global Macro Fund’s August Webinar

CBA Chairwoman Catherine Livingstone is by all reports the best equipped to head up the Board and the bank during this time. We foresee a period, however, of “bring out your dead” as every possible scandal is aired out like dirty laundry. If you’re going to take out the trash, take out ALL the trash. News on Friday that AUSTRAC apparently have found six transactions that may have financed terrorism. That’s bad. Really bad. Now ASIC is involved as well because CBA may have also breached its requirements of continuous disclosure to the market and probably some requirements on its Financial Services Licence.
Anecdotally speaking, in my experience when ASIC are involved it’s more like a conversation to find the truth and take appropriate measures of remediation. Questions, answers, more questions, more answers, monetary fine and enforceable undertaking. Thanks for helping. Usually ASIC start an investigation because they’ve heard something or a company has self-reported and they want to find out more.
When AUSTRAC say they have something it’s because they have something.
I hope this is not the case but CBA may very well be toast and we’re happy to watch from the sidelines to see just how much else can come out of this.

It could be worse. This guy is not only the head of CBA IT but he also settles on an $8m Sydney property in a few weeks and won’t be getting a bonus.

In other news the biggest macro event in the short term is the Jackson Hole symposium at the end of the week. All eyes will be on the two heads of the largest Central Banks. We’ll be focused on the comments of ECB President Mario Draghi and we have a sneaky feeling that “the best Central Banker in the world” (according to regular contributor David Pain) will say something regarding the easing of European monetary stimulus.
Draghi has already said recently that reflationary pressures have returned to Europe so he’s won that battle. Now it’s a matter of when, how and how quickly they ease off their influence.
The ECB’s bond-buying program is set to reach ~2.3 trillion Euros by the end of the year and we agree that Europe is strong enough to not need this stimulus. However Draghi has a few rocks & hard places. The first is that while inflation is back on the agenda it’s a little below the ECB target of 2%. It’s currently sitting at 1.3% and most fingers point to a strengthening Euro to blame for this, having rallied almost 12% this year, affecting exports and the usual things a strengthening currency affects. For example German exports dropped sharply in June and Germany is…well…Germany. That’s not great.
If there’s more formal talk of winding back the bond buying program the Euro will rally further, exports will get more expensive, inflation stays low and it’s potentially back to square one. Et cetera, et cetera.
Currency is an issue. Welcome to A-Grade.

Sometimes “A-Grade” involves getting glitter thrown at you….

 

Another rock and/or hard place is the communication of the unwinding message. Remember the “Taper Tantrum” caused by “the worst Central Banker in the world ever” Ben Bernanke (according to regular contributor James Whelan) when he started talking about the reduction of QE in the US and caused a brain explosion in global markets.
Draghi, thankfully, is not Bernanke.
We’re quietly confident that the European economy has enough legs to sustain the reduction in stimulus and that the best person to quietly usher his own central bank to the long awaited sidelines is “Super” Mario Draghi.
He speaks in Germany on Wednesday and in Wyoming on Friday which is two weeks before his own Governing Council meets to discuss monetary policy on the 7th September. Note that Mario has a really good track record of setting expectations low and beating them broadly.
The challenge of talking up the winding down of stimulus whilst talking down the Euro whilst talking up inflation is something we trust he should be able to handle.
But bringing this back to reporting season and to the CBA scandal there’s no reason to second guess this. Europe has beaten back deflation and the Euro is strong. Deal with it.
The best way to deal with it is to own European stocks, in Euros, that benefit from a reduction in Central Bank fiddling of bond prices.

As usual at this time of year. All eyes on Jackson Hole….

All the best,

James Whelan & the Global Macro Fund

Level 30 Australia Square, 264 George Street, Sydney NSW 2000
+1300 220 360  |  gmf@vfsgroup.com.au  | www.vfsgroup.com.au

Replay of our Global Macro Fund’s August Webinar


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