For years I’ve written about efforts underway by Russia, China, and other US adversaries to implement alternatives to the US dollar payment system.
Today, the dollar represents 60% of global reserves, 80% of global payments, and almost 100% of global energy purchases.
That kind of dollar dominance has aggravated friends and foes alike since the 1960s.
Lately, the annoyance is even worse because the US has weaponised the US dollar to pursue geopolitical goals over and above financial goals.
The list of countries suffering under US financial sanctions is long and getting longer. Among the most prominent targets are Russia (due to Crimea and Ukraine), China (due to the trade wars), Iran (due to its uranium enrichment program and support for terrorism), North Korea (due to its ballistic missile program), and many others including Syria and Venezuela.
What all of these sanctions targets have in common is that the US restricts access to US dollar payments channels…
Russia begins to dodge the US dollar
In the case of Iran, the sanctions go even further to include the denial of access to SWIFT, the international payments system, which includes euros, yen, sterling, and other reserve currencies in its facilities.
While most of the targeted countries have been working on alternatives (including a possible gold-backed cryptocurrency to be jointly launched by China and Russia), actual implementation has been slow in coming.
That may all be about to change.
Russia and Iran have announced a new payments channel that avoids both SWIFT and the US payments system.
The new system involves secure financial message traffic between the two participants, with possible expansion to include Turkey and others in the near future.
This still begs the question as to which currency will be used, since Iran is mostly denied access to dollars.
But payments could include the Russian ruble, or gold that could be converted to US dollars through the Russian banking system and held for the account of Iran in veiled custodial accounts.
This is a modest step, but it is a beginning with far more pointed attacks on dollar hegemony yet to come.
Escaping US intervention
I only recently explained to subscribers how the new secure payments channel between Russia and Iran works.
This channel does not use US dollars and allows Russia to sell weapons to Iran and for Iran to hide reserves in Russia, free of US sanctions and US interdiction.
Now, Russia has unveiled an even more ambitious payments system.
This new system will provide services similar to SWIFT (the Society for Worldwide Interbank Financial Telecommunication), which is the leading bank message traffic facility in the world today for funds transfers.
In recent years, SWIFT has become politicised. Iran was banned from using SWIFT from 2012 to 2016. Certain Iranian banks were banned from SWIFT again in 2018.
Russia has never been banned from SWIFT, but the mere possibility gives Russia a large incentive to create an alternative payments system not subject to US control. With this announcement, Russia is getting closer to that goal.
The new Russian system may quickly be expanded to include China, India, Iran, Turkey, and eventually other nations.
What all of these countries have in common is that they have been subject directly or indirectly to US financial sanctions and risk account freezes and confiscations.
It is difficult to escape these sanctions while using large established networks like SWIFT.
Building an alternative from the ground up using local currencies such as the ruble or yuan, or new cryptocurrencies, is the best way to work around US sanctions. Russia is the leader in developing these new technologies and systems.
It may not be long before the participants in the Russian system trade oil, weapons, infrastructure, agricultural produce, and electronics among themselves without using dollars at all.
In time, the US dollar may be just another local currency like the Mexican pesos or Turkish lira.
King Dollar reigns…for now
The demise of the US dollar isn’t going to happen overnight. Changes to dominant currencies take years to evolve. Russia is taking steps to minimise using the SWIFT payment system.
Until then, we can expect more strength from the US dollar.
Today it is near an all-time high based on certain indices.
(The all-time high using the Fed’s broad trade-weighted index was in 1985, and prompted then Secretary of the Treasury James Baker to convene the meeting that resulted in the Plaza Accord to weaken the US dollar.)
Conventional wisdom is that a strong dollar hurts US exports and export-related jobs.
A strong US dollar also imports deflation (you get more for your dollar) at a time when the Fed wants inflation.
There’s some truth in both of these observations and they form the bases for forecasts of a weaker dollar.
Trump wants a weaker US dollar, US farmers want a weaker US dollar, and big US exporters like Boeing want a weaker US dollar….
Stronger US dollar props up Europe
Wall Street analysts have been predicting a weaker US dollar for over a year (and they’ve been wrong in their forecasts). So what’s the problem?
The problem is that a weaker dollar means a stronger euro.
The two currencies can’t both depreciate against each other at the same time. It’s a mathematical impossibility.
(Both can depreciate against gold at the same time, but that’s another story.)
The US may need an economic boost (the Atlanta Fed forecasts third-quarter growth at an annualised rate of 1.7%, even weaker than the weak average growth of the past 10 years), but Europe needs it more.
In effect, the US is bearing the costs of a stronger dollar in order to prop up Europe.
The Hill news site recently offered an excellent overview of the situation (although I disagree with the writer’s forecast for a weaker dollar):
‘A strong currency has been official U.S. policy for three decades. The benefits of being the de facto global currency are well known. Trump’s Treasury secretary reaffirmed the strong dollar policy.
‘But Trump is transaction-oriented, not beholden to taboos he believes do not serve his interests. He has been consistent in his criticism of how undervalued he considers the euro to be and was quick to target China as a currency manipulator on the recent drop in the renminbi.
‘The Fed’s policy prescription is plain: Cut rates enough to steepen the yield curve. Borrowing conditions might not move much but the effect on the dollar could be significant. It is an epic historical anomaly that almost all the world’s major countries’ sovereign debt trades with a yield below the US over-night risk free rate — a rate profile clearly helping to prop up the US dollar.’1
The US may want a weaker dollar, but we won’t pursue that policy because Europe needs a weak euro to avoid an economic collapse (Germany and the UK are headed for recessions and growth in Italy is zero).
The only way the US will pursue a weak US dollar policy is if the US is in a recession.
That’s a circumstance in which Europe might need help, but the US needs it more.
There is no recession on the horizon right now.
Therefore, you should expect King Dollar to continue its reign despite the weak US dollar forecasts.
All the best,
Strategist, The Daily Reckoning Australia1 ‘https://thehill.com/opinion/finance/464240-will-us-dollar-devaluation-be-trumps-next-sudden-move<&rs
The post Currencies Die with a Whimper Not a Bang: The US Dollar Won’t Crumble Overnight appeared first on Daily Reckoning Australia.
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The former Liberal leader takes aim at an “entrenched anti-climate sentiment” in the Coalition, telling a gathering of farmers that regenerative agriculture can offset a high amount of future emissions.
Posted: by ABC.net.au
Owners of the world’s largest lithium mine predict production can top 2 million tonnes if expansion projects get the green light from shareholders.
Posted: by ABC.net.au
Space advocates spruik the human benefits but critics say it costs far too much. Ever since the moon landing, space has been seen as a “giant leap” for humankind, but is it in the wrong direction?
Posted: by ABC.net.au
Nickel mining has been in the doldrums for years, but the ambition of global electric car makers has led to its value soaring in 2019.
Posted: by ABC.net.au
The death of the use dollar is looming…
That’s a dramatic phrase, isn’t it?
While that may get your attention, it’s important to realise that the demise of the US dollar won’t happen overnight.
Currencies don’t work like that.
Rather, when I use those phrases, it’s about warning you to prepare for a monumental shift.
King Dollar has reigned since the aftermath of the Second World War…
…yet the dominance of the greenback will probably endure for another decade or two.
Nonetheless, there are small events in the background that are slowly eroding that power.
As Jim explains in his recent article here, Russia is taking steps to end their reliance on the US dollar payments system…but the US dollar isn’t going to crumble overnight.
In fact in the short term, we can expect the US dollar to get stronger as a way to support other economies…
And investors that catch onto trends early, put themselves in a position to protect their wealth.
Until next time,
Editor, The Daily Reckoning Australia
Posted: by Daily Reckoning Australia
As people flock to Uluru in their thousands to make the ascent while they still can, tour operators are finding new ways for people to enjoy the area after the climb is closed for good next weekend.
Posted: by ABC.net.au
It’s remarkable how similar delusion is around the world.
In Melbourne, Extinction Rebellion protesters stopped trams. Here in London, they disrupted the tube. ‘Next they’ll be chaining themselves to bicycles,’ said one radio personality.
My pregnant wife had to change her travel plans to get to work. Before we left home, I showed her a video of one of the protesters getting chased along the roof of a train by an angry commuter.
Eventually, the commuter caught up and the protester got tackled off the top of the train. Angry commuters waiting below didn’t even wait for him to hit the ground before landing their first kicks.
Now all of this might seem a bit misguided. But financial markets make even less sense to me.
So let’s combine the two!
What do you get when you combine the environmental movement with financial markets?
A bubble, I suspect. And I even have official confirmation, for those of you who follow Austrian economics.
No, not economics in Austria. Barely anyone follows that. I’m talking about the Austrian School of Economics.
The Austrian definition of an investment bubble comes down to monetary policy, not fear, greed or animal spirits.
The money that inflates a bubble must come from somewhere, and Austrians point to central banks. The only place money can come from nothing — the impetus for a bubble.
Two years ago, at the Paris ‘One Planet Summit’, eight central banks and financial market supervisors established The Central Banks and Supervisors Network for Greening the Financial System (NGFS). They’re committed to all sorts of environmental policies.
But if you’ve got central bankers moving money around in the economy, you get bubbles. By definition, according to Austrian economic theory.
The question, for investors, is whether the green bubble, or ‘grubble’ as I call it, is beginning or ending already.
We had a debate about it in the office. Some reckon the grubble has barely started. But I’m not so sure.
Electric car sales seem to fall apart in nations that abandon generous government benefits — down 41% in three years in Ireland and 60.5% in the first quarter of 2017 in Denmark. They should be rising.
The environmental damage done by solar and wind power is increasingly well understood, no matter how indirect it may be. Mining the resources needed for solar power panels is remarkably similar to mining the coal that powers electric cars…
Misguided policies like the UK diesel subsidy are failing on a regular basis. The expansion of Germany’s wind capacity fell 80% so far this year, Der Spiegel reports. ‘The crisis in the German wind industry spices up’ is the literal translation.
The overall transition in Germany, known as the Energiewende, which means Energy Turn, was exposed as a debacle by auditors. It largely failed and the government ‘risks losing control’ of the initiatives.
This green bubble just doesn’t look, or should I say smell, like the bubbles of the past.
How many companies have surged into the ASX200 on the back of their revolutionary green tech?
How many unicorns are renewable energy companies?
If the transition to a green economy is driven by investment from the likes of diesel fraudsters Volkswagen and oil company BP, is it even real? Can we even believe it when it happens?
My power company can’t even identify which meter is connected to my flat. Can the government deliver an Energiewende in Australia? The Snowy Hydro 2.0 Project suggests not. The director of the Victorian Energy Policy Centre, Bruce Mountain, told 7.30 this:
‘Here is a project that is likely to cost five times more than the then prime minister [Malcolm Turnbull] said it would, and whose capability is nowhere near what has been claimed of it.
‘This is a project that we can confidently forecast will be a drain on the public purse and whose service in the transition to a cleaner energy future can be met far more cheaply from other sources.’
Actually, that does sound like the failed Energiewende…
The story is much the same for the NBN. Throwing money at something doesn’t guarantee results.
And yet, perhaps the lack of any real booms so far means the bubbles are yet to come.
It’s not like the bubbles of the past were based on rational analysis or expectations. Nor results. They were based on monetary floods and low interest rates. On the price of investments, not their business performance. Which is why Austrians point to central banks as their source.
Excessively low interest rates affect debt-based asset prices mostly. That means property and companies that finance themselves with debt, not real growth or revenue. That’s why we get tech bubbles and housing bubbles when the central bankers get busy with the printing press.
Given central bankers are focusing on turning the economy green, perhaps green tech is the next bubble then. Companies that aren’t viable, but for future dreams and the debt that keeps them alive in the meantime. In other words, green companies certainly qualify for a bubble, as Austrians see it.
My question for you today is simple. If the grubble is yet to get underway, do you want to know about it? Do you want to profit from a bubble?
Or does punting on nothing but hot air and central bank manipulation make you nervous?
Let me know at firstname.lastname@example.org.
And google ‘Solyndra’ before you do.
Investing in bubbles can be a good idea, if you stick to your exit strategy. So, if you’re going to make a move to profit from the grubble, you should also give a thought to when you should sell out.
Which prick pops the grubble?
When will green tech companies be dragged under like the Extinction Rebellion protesters who got a kicking on the London tube this morning?
For those of you uncomfortable with bubble investing, don’t forget how the sub-prime debacle hit the rest of the stock market too. You may be giving up on the part of the stock market that actually booms, before getting dragged down when it busts…
Until next time,
For The Daily Reckoning Australia
The post Which Prick Pops the Grubble? – Investing in Bubbles appeared first on Daily Reckoning Australia.
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Ooooooeeeeee did I ruffle some feathers last week.
I too, was caught up in the traffic as protesters blocked the streets with their arms locked in plastic tubes…and their butts glued to the ground.
Nonetheless, when I finally made it into the office, I decided to write about how the day’s protest — rightly or wrongly — was celebration of Australia’s freedoms…something that’s becoming rarer.
And boy did I pick a loaded topic…
Aren’t the protesters just making it worse?
My thoughts on climate change — as I wrote last week — don’t matter.
I was hoping to convey that Australians have the right to engage in non-violent civil disobedience without fear of persecution from the government.
The second point I was trying to make, is that public sentiment about a protest can go a long way to turn a bunch of activists into a cause or a movement.
If 100 or so activists can get the public to support or believe them, it becomes a movement that may genuinely challenge the government.
If they can’t win over public support, then they’re just a bunch of nutbags with their butts glued to the road, slowing you down for work.
The thing I discovered when I was reading the many, many emails I received, is that we are deeply divided on separating the right to protest from what they were protesting about.
Few people saw it as a reason to celebrate democratic freedoms.
They were mostly just pissed off their day was interrupted.
I can’t help but wonder too, if that’s because how the climate change subject has been pushed onto people…
Hysteria from both sides
At no point has science and the public had a chance to have an informed, rational discussion on climate change and how countries should approach the matter.
From early on, climate change has been a UN agenda thrust onto people with ‘their’ solution for how the world should handle it.
The global solution proposed by the UN is generally increased taxation for well-developed economies (pretty much everyone in the West)…and exemptions for the largest polluters like China and India. Emerging markets barely get a look in.
Not only that, the UN angle has continued to push only one side of the conversation.
That is, increased taxation and individuals taking responsibility for their actions for the good of the planet. Which has a dangerous global socialist bent to it.
Essentially the climate change conversation has been an imposed UN view without leaving room for genuine debate.
It’s no wonder there has been an incredible backlash to the subject when the ‘solution’ is more taxes to pollies and reducing a country’s ability to make decisions for their own economy.
And if you even point this out, you get whacked with the label ‘climate change denier’ and then you’re howled down by almost every latte-sipping greenie with the latest iPhone…
All this is resulting in, is a shouting match between two opposing sides.
One group of people scream they found web holes that confirm climate change data is fake.
Then you’ve got the other side screaming the Earth will be dead by Christmas.
Leaving the rest of us caught in the middle — you know, as we leave our poorly insulated houses and high energy consuming heating and cooling devices, following maps on mobile phones that require extensive resources from the Earth, all while driving to work in our petrol-guzzling cars — wondering which side is more deranged.
The hysteria around the topic and the utter white noise coming from both sides has eroded the ability to have a genuine discussion about the issues.
Threaten increased taxation and coercion of global governments, and damn right libertarians are going to fire up.
Threaten that we’re all going to die in a month and disrupt six million trying to get work, and damn right people are going to denounce the protests.
The actions, slogans, and chest-beating aren’t getting anyone anywhere…and it’s leaving the rest of us damn angry.
Over to you — warts and all
Like all good he said, she said stories, I suspect the truth is somewhere in the middle.
So to wrap up today’s Daily Reckoning Australia, I thought I’d share some of the feedback I received last week.
Some people pointed out that protesters aren’t above the law.
And this is true.
Everyone that was physically removed by police has likely been charged, given a fine, and will get a special visit to the Magistrates’ Court in the next two months.
Remember the right to protest only means that you are free to express your views without persecution from the government for holding those views.
Activism does not put you above the law.
Other readers pointed out the utter irony of the climate protesters blocking traffic and causing people to be stuck in their cars for three times as long…
Some people argued they don’t want to be preached to by kids on Centrelink benefits…
Some people understood that we have the right to protest regardless of whether the public support it…
A couple pointed out that I’ve clearly lost touch with the mainstream if I support the movement.
And to that, I’d like to say thank you…I’d hate to ever be considered mainstream.
But at no point did I ever suggest I supported anything other than the right to protest.
Nonetheless, the emails I’ve been reading go to show how everyone is sick at being shouted out from the sidelines.
The issue is divisive and the tactics aren’t helping…they’re making it worse.
Always remember, the actions of protesters — and the associated media commentary — will sway public sentiment.
That’s a how activists shift a protest to a movement.
If you can’t win over the public, then you’ll never be able to challenge the government’s authority…
The recent protests seemed to do nothing more than fire up a bunch of Aussies…and in the process they may have damaged the public’s view of them.
In saying that, I hope they’ve managed to pick all the glue off their skin.
Now it’s over to you. Here’s what your fellow Daily Reckoning Australia readers had to say.
Please note I’ve removed all names, however all other feedback text appears exactly as it was received.
‘GOOD FOR YOU SHAE
‘These politicians seem to forget that we do have freedoms. Perhaps they
have forgotten the many wars
that Australians have died at.
‘These days they want to restrict our economic, medical freedoms as well.
What else do they want to steal from the people?
‘Their goal is TOTAL CONTROL. This is not a democratic society but a
If I was in a position I would be there physically too.’
‘Thank you for your article ??? Telling the Government to Stick It!??? I agree entirely with your sentiments.
‘I am 75 years of age and have never known a time in my short history to experience such divisiveness in our society on all fronts (climate change, humanitarian issues, economic and political ) and then to introduce draconian laws to bludgeon our voice into silence is just one bridge too far.
‘The protesters have my total support in their right to protest and telling ???them??? to stick it.
‘Proud Australian against excessive authoritarian governments of all persuasion.’
‘Thank you. An important piece! I was only this morning thinking of the irony and
hypocrisy of Tim “they will steal your super” Wilson. He recently flitted into Hong Kong to say “ain’t it great to protest”. What a glimpse of newsworthy solidarity. I am sure the protesters were rapt.
‘Meanwhile back at the farm our awesome Government(s) is speedily shutting it down in what can only be described as dumb police state overreach.
‘Oh well back to gathering more gold…….’
‘I am sorry to say that after having read the below simpering and pandering comments that essentially condone behaviour that is completely contrary to normal day to day societal behaviour by a handful of morons, I can no longer accept receiving messages from this author.
‘Anyone who can find themselves capable of condoning that sort of major disruptive behaviour for a totally bankrupt and specious form of virtue signalling that is for the most spurious of causes has a real problem in my view and is completely out of touch and step with mainstream views.’
‘I respectfully disagree.
‘The protesters have the right to protest. No argument about that.
‘But they do not have the right to inconvenience other people simply going about their daily lives.The point is that these 100 or so group are hell bent on disrupting our lives, in my humble opinion, to do nothing more than give themselves notoriety among their peers. They are part of the outrage society who are hell bent on forcing their ill conceived views on others.
‘If they are serious, let them protest regularly, peacefully in a park somewhere and try to convince the rest of us that they have something useful to say.
‘Otherwise they should wake up to themselves.
‘You would not be so smug in your support of this group who disrespect of the rest of us going about our lives peacefully if you were on your way to hospital, or you missed an urgent meeting that eventually cost you a job opportunity- or any other important matter.
‘Life is tough enough.
‘Convict them of a crime , so they have a criminal record.
‘Let???s see if they are still that keen on their cause that they are prepared to have a criminal record in support of their views.
‘I???ll bet they are not.’
‘You have got to be kidding. You have lost me. You are lucky to be able to arrive at work any time you like but others are supposed to be there on time. You may think it is OK if someone misses their plane trip to the UK because of the road to the airport being blocked but it is not your money that they have to fork out for another ticket. How about an ambulance that is held up bringing a dying road accident victim to the hospital and it gets there too late and the patient dies. You seem to be a self-entitled person looking down on the rabble below without any concern for their welfare. Pleas do not send me any more emails.’
‘Have you considered the fact that these people were protesting about
climate change and the release of carbon dioxide into the atmosphere yet
the holding up of multiple cars idling in multiple locations simply ensured
much more carbon went into the atmosphere!
‘I cannot therefore agree with your comments and although I support your
right to utter them, I
do not have to agree with them and therefore I will be cancelling my
subscriptions to Agora.’
‘Just read your article, and do get your point. Ironically just seen tv report where guy videotaping the protest was led away by police because he was identified as a critic if the ??? climate change alarmists and dubbed in by them. Not so proud of those aussies mate.
‘On a lighter note though, the protesting seems to be reaping dividends, we are experiencing record low temperatures for this period, hopefully they will come back during a heatwave. All the best’
‘Please understand that in Queensland we have laws that allow people to protest and
voice their opinion. Extinction Rebellion refuse to comply with those laws.
‘Consequently on a survey today 94% of the people surveyed are of the opinion that Extinction Rebellion by their actions are damaging the cause for Climate Change!!!!!!!!!!!!!!!!
‘The populace are also of the opinion that by causing so many people to spend so
much time in their vehicle on the way to work they are in fact worsening the climate
‘We ( working taxpayers) also don’t like being told by the protestors that they are “professional activists” on centrelink benefits.’
‘Hi Shae, yes that is one of the problems, give the Government a good half reason and they will stifle our freedoms, just like with the “war on terror”. But also the protesters also make it easy for them to do so, nobody has a problem with people protesting, but when it goes on and on day after day and week after week it’s just too much.
‘This is not a protest where people make their point and gather outside parliament house etc, these people are determined to keep disrupting our cities until they get their own way. Even if the protest was based on facts it would be bad enough, but as anybody who can be bothered to look up the facts knows, that what they are claiming is just bullshit. Also I don’t think the government is going to stop our right to protest, they just want to make sure a bunch of thickheads can still protest but not chain themselves together to stop traffic etc.’
‘I like Shae. Most of the time she is a good read. This about prot= esters, their part of democratic rights and the aim of the government to co= ntrol us, is a very ordinary writing. I do not mind anybody protesting abou= t anything, but am I suposed to assist a protester to clime on my back so s= -he can be more clearly seen, or his/her yelling can be heard further?
‘If a protester has the right to protest, because his/her democratic ri= ghts allow for it, could I not claim the same right and demand the freedom = from these people, not to impede, inconvenience and prevent me ge= tting to my chosen destination?
‘How much effort does Shae think these protesting individuals have put = towards ‘saving the Planet’? I am honestly affraid that most of the= m do not think of those on the farms, when they turn their taps ‘on’=;. Or show up on the Clean Australia Day. Have we not too much of the Lefti= es who do not understand, or are not willing to, how to bring bread and bac= on onthe table but claim that only they can devide it fairly. Give me a br= ake!’
‘Hi Shea, I don???t know if you read these emails, but , I disagree with
your comments about those grubs who go about disrupting innocent people???s
lives ,, I agree with you that there is a place for peaceful protest and I
for one will defend that ,
but what these GRUBS are doing is down right WRONG , it is socialistic left
TERRORISM , ,
‘I do love and appreciate you work, but I differ on this one , kind regards’
‘Hi Shae, you’ve touched a nerve with
some of your statements today ,
As an older Aussie I’m angered at how governments
and authorities tread softly softly and
make excuses for The behaviour of minority groups
demonstrating and having no regard for the general public
trying to Get to work, to doctors to appointments to airports
etc, no their inconsiderate actions don’t
affect me as I’m retired but it makes my blood boil when I think of commuters being
held to ransom by these Idiots who don’t
stop to think they could cause the death of someone being transported by ambulance that has to detour to get to
‘The Police , Fire services etc are already in short supply and
could be doing more useful things than
Wasting hours tip toeing around these lunatics.
‘Everyone has the right to demonstrate and be able to speak
without being vilified, they should not have the right to disrupt
people going about their daily business ,
‘Life for most people is difficult enough with out these disruptions
‘If you want to demonstrate or march do it
In a park and probably at the weekend , they aren???t interested
in this because they go unnoticed
‘Unchecked these demonstrations will only
get more daring and less caring
‘The slap on the wrist punishment for people who disrupt a community
Is a joke.
‘Sorry Shae , had to vent my spleen, few things annoy me but
inconsiderate people do.
‘I think I’ll go to the club for lunch and have a beer!!’
I don’t want to join the climate change noise hole.
That’s not the purpose of the Daily Reckoning Australia.
Nonetheless, we abhor the idea of increased taxation and global socialist leaning political agendas that would drive more dollars into the hands of our pollies…but no matter what, we always support the right for people to challenge government authority.
From there, it’s up to the public to support or denounce the activists…and as you can see, people are quickly making up their own mind on the validity of last week’s protesters.
Thanks to everyone for writing in.
Have a fantastic weekend!
Until next time,
Editor, The Daily Reckoning Australia
The post Which Side of the Climate Change Debate is More Deranged? appeared first on Daily Reckoning Australia.
Posted: by Daily Reckoning Australia
Twice now, it was meant to be the biggest initial public offering (IPO) for the Australian market…
…and twice now it’s been pulled.
Last night the news alert came through: Latitude Financial had their public listing cancelled.
Which is odd…because at lunchtime yesterday they were announcing loudly that the company listing was ‘oversubscribed’.
Did they mislead us?
Was it a case of no one was interested…have Aussies run out of interest in IPOs?
I mean you don’t risk spending a few million to get all dressed up for the ball and then not go.
And the public humiliation that comes with having a company float pulled twice.
Buying the lending machine
Let’s go back a few years to make sense of all this.
If you’ve ever walked through a Harvey Norman Holdings Ltd [ASX:HVN] store, you’ve probably seen all those ‘50 months interest free’ signs.
Well, the finance machine that offers those loans was GE Money. That was until 2015, when GE Money was broken up, and 50% of its book went to Wesfarmers.
And the other 50% was sold to a bunch of investment banks: Varde Partners, Deutsche Bank and KKR. Netting the trio about $8.2 billion for the consumer lending business.1
I have no doubt the purchase was never for keeps.
Investment banks don’t move into consumer lending business for the long term. From the get go, it would’ve always been about streamlining the business…and creating a public listing.
And the newly named Latitude Financial looked like it was on the right track.
It kept its exclusive lending contract with Harvey Norman. It came up with clever ads to encourage people to borrow. Alec Baldwin appeared out of nowhere on our TV screens in 2016, with clever phrases to entice us to use Latitude Financial.
It worked too.
Latitude Financial did grow. Myer Card, Go and 28 Degrees all signed up to white label Latitude Financial products.2
The financier was all set to IPO in March last year. The biggest one for 2018 it was called.
But in the middle of the royal commission, it was pulled. The company felt that perhaps publicly listing a finance company as banks and lenders were being dragged over hot coals was not going to fare well.3
So, the Latitude Finance listing was shelved for this year…
Debutante never got to the ball
Then, this year was the year Australia would see Latitude Financial debut.
Without the shadow of the Banking Royal Commission, surely there’d be more interest for the company.
Quite frankly, on paper Latitude was looking the goods.
In the four years since the investment banks took over, their costs were reduced and profits increased.
Then since 2016, the number of accounts jumped from 1.8 million to 2.6 million, against a loan book of around $7.6 billion. Plus a tidy net profit of $248 million in 2018. 4
It wasn’t so much a turnaround story…Latitude was always profitable…it was more that the trio of owners showed promise in growing the business…
Surely, 2019 was the year the consumer loan company could get out of the investment bankers’ hands.
And our favourite debutant got all dressed up for the ball again.
Then the IPO started to wobble.
First, the market capitalisation of the company kept diving…
From $5 billion, to $4 billion…to settling on a $3 billion market capitalisation just last week.
Then the initial share price — suggested price was $2–2.25 — fell to the lower range of $2 last week.
Come Tuesday morning, the IPO price fell again to $1.78…
Then by 10pm that night, the news was through. The Latitude Financial float was pulled for the second time.
How did the IPO of the year end up getting shelved again?
Was it a case of IPO fatigue from Aussies?
Probably not, suggests this chart:
Investor interest in ASX capital raisings
Source: Australian Financial Review
Capital raisings are maybe a little subdued, but investor interest in new listings hasn’t fallen off a cliff…
Is it a case of déjà vu? Investors remember the last two times big name floats disappointed the market? Like Dick Smith and Myer Holdings…
Maybe investors are little more hardened now, and we are wary of private companies ‘dressing up’ a business and then putting it up for sale on the ASX.
Or just maybe, the trio investment bankers behind Latitude Financial misread investor sentiment.
The Latitude loan book is entirely built on consumers buying ever-increasing amounts of debt to continue to grow. And perhaps the lack of shareholder interest means we just aren’t ready to buy back into the debt equals growth story.
Until next time,
Editor, The Daily Reckoning Australia
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