Central banks seem not able to tell their magic porridge pot to stop

Sir, Robert Armstrong, Oliver Ralph, and Eric Platt make a reference to the fairy tale of the magic porridge pot writing “Every working day, $100m rolls into Berkshire — cash from its subsidiaries, dividends from its shares, interest from its treasuries. Something must be done with it all. The porridge is starting to overrun the house.” “‘I have more fun than any 88-year-old in the world’” Life&Arts, April 27.

And the magic porridge pot fairy tale ends this way on Wikipedia: “At last when only one single house remained, the child came home and just said, "Stop, little pot," and it stopped and gave up cooking, and whosoever wished to return to the town had to eat their way back”

Sir, the excessive stimuli injected by means of QEs, fiscal deficits, ultra low interest rates and incestuous debt credit relations, like the 0% risk weighting of the sovereign that provides credit subsidies to who provides banks with deposit guarantees, or loans to houses increasing the price of houses allowing still more loans to houses, against very little capital… all of that is the porridge of our time.

And it’s clear central bankers everywhere, have no idea of how to tell their pot to stop.

Will we be able to eat our way back? Not without sweating it out a lot at the gym. You see too much porridge, meaning too much carbs, and too little proteins, meaning too little risk taking, produces an obese not muscular economy. 

@PerKurowski

If not in US dollar notes under Warren Buffet’s mattress, what is Berkshire Hathaway’s “$104bn cash pile invested in?

Sir, you conclude that “Regulators and governments would do well to study whether the huge increase in repurchases has damaged business growth and capital formation” “Record share buybacks should be raising alarms” November 8.

Of course they should but let us be very clear, since that has been going on for quite some time so, if they have not done it yet, then shame on them.

For instance in July 2014 Camilla Hall, in “Bankers warn over rising US business lending” wrote, “Charles Peabody, a bank analyst at Portales Partners in New York, has warned that while it is hard to extrapolate what is driving commercial and industrial lending, if it is to fund acquisitions or share buybacks it may not indicate a strengthening economy. “It is loan growth, just not sustainable,” he said.” 

And therein Hall also wrote, “A banking lending executive at a large regional lender said ‘Traditionally banks have been very cautious of that’.”Of course, you and I know Sir that banker should not be throwing the first stone, since bankers too have morphed, thanks to the risk weighted capital requirements, from being savvy loan officers into being financial engineers dedicated to minimizing the capital their bank is required to hold.

Also, in 2017, when discussing IMF’s Global Financial Stability Report, John Plender wrote: “Low yields, compressed spreads, abundant financing and the relatively high cost of equity capital, it observes, have encouraged a build-up of financial balance sheet leverage as corporations have bought back equity and raised debt levels…Rising debt has been accompanied by worsening credit quality and elevated default risk.”

But what really caught my attention today was your reference to Berkshire Hathaway’s “$104bn cash pile [it holds] keeping its powder mostly dry for future deals — if, say, the market correction continues.”

How do you keep that powder dry? Since most probably it is not in dollar notes under Warren Buffet’s mattress, what is it invested in? We know that in accounting terms “Cash” includes a lot of investments, but in the real life, “Cash” does not always turn out to be real cash. In Venezuela you could now fill a whole mattress with high denomination bolivar notes, and still not be able to buy yourself a coffee with it. 

In a world in which regulators have assigned a 0% risk weight to for instance the already $22tn and fast growing US debt, which, if nothing changes, would doom that safe-haven to become very dangerous, is not Cash just another speculative investment?

@PerKurowski

No matter how much influence Warren Buffett might have, his is nothing when compared to bank regulators'

Sir, Robin Harding writes: “Mr Buffett is brilliant at buying into monopoly profits, but he does not start companies or gamble on new ideas. America is full of entrepreneurs who do. Celebrate that kind of business. It is the kind America needs”, “How Buffett broke American capitalism” September 13.

And Harding also argues “however much you admire Buffett, his influence has a dark side because the beating heart of Buffettism, is to avoid competition and minimise capital investment in the real economy”

But what do bank regulators do? They tell banks that if they lend to or invest in what is perceived as safe, they need little capital, Basel II even allowed banks to leverage 62.5 times with what corporate asset carried an AAA rating.

And they tell banks that if they lend to or invest in what is perceived as risky, like to “risky” entrepreneurs who “start companies or gamble on new ideas” then they need more capital which means lesser possibilities of high risk adjusted returns on equity, which means banks will not lend to these.

If that is not “minimizing capital investment in the real economy”, what is?

Frankly when compared to the destructive influence current bank regulators have on the real economy, whatever bad influence Warren Buffett might have is inconsequential.

And at least Warren Buffett makes profits, while current bank regulators just make everything worse. That since they completely ignore those ex ante perceived safe pose much more ex post dangers to banks than those perceived risky.

@PerKurowski

Current bank swimwear does not stop some to be caught swimming naked when the tide goes out, just the contrary.

Sir, Mohamed El-Erian ends his discussion of “the challenge facing those looking to generate high risk-adjusted returns.”, citing Warren Buffett’s observation that “only when the tide goes out do you discover who’s been swimming naked”. “How the great bull run can have a constructive end” May 23.

We already know a couple of those who will be caught swimming naked.

Sovereigns building up debt assisted by QEs, low interest rates and regulations that forces public debt down the throat of banks and insurance companies.

Corporations, because of low interests rates taking on high levels debt in order pay dividends and buy back shares.

Millennials and those following them believing there is something real out there that will take care of their older days.

Students who took on debt based on illusions about finding a good full-time job, those that are disappearing by the second.

How has all this happened? Regulators said “We have risk-weighted the oceans so there are no more tides.”… and the whole world believed their mumbo-jumbo.

But on the contrary, the risk weighted capital requirements for banks which distorted the allocation of bank credit to the real economy, helps only to guarantee that the tides will be stronger and more destructive than ever.

I swear, bad-luck weighted capital requirements for banks would take care much better of the real dangers, namely the unexpected.

PS. Here are some interesting questions to ask regulators, but only for those who would dare to hear the answers.

@PerKurowski

Perceived credit risk is all about expected losses, while bank capital should be a buffer against unexpected losses.

Sir, John Kay writes that Warren Buffet, “In a revealing moment, when asked about the absence of conventional due diligence in his acquisition process; acknowledged that Berkshire had made bad acquisitions, but never one that could have been avoided by the kind of information that due diligence might have revealed.” “The Buffett model is widely worshipped but little copied” May 4.

Translate the above into bank regulations and it would mean: Banks could always lose but not because of the information a credit analysis might have revealed… much more dangerous than the expected, is the unexpected.

And that Sir is one of the many reasons why I believe current regulators are worse than fools. They defined the capital banks should be required to have, in order to confront unexpected losses, based on expected perceived credit risks. 

Please don’t tell me you think that is smart. In fact, the safer something is perceived, the greater is its potential to deliver huge unexpected losses. In fact, from this perspective, the safer something is perceived, the larger should the capital requirements for a bank be.

By the way let me make it clear that I am arguing this only to make a point, and I am not now suggesting we should distort the allocation of bank credit to the real economy in the other direction, favoring the risky.

Sir, if we are to distort, let us at least, as a minimum minimorum, do so with a purpose. For instance make the capital requirements for banks based on job creation and earth sustainability ratings.

PS. Here are plenty of reasons for why I believe the bank regulators in the Basel Committee are complete idiots… or something worse 

@PerKurowski ©

The regulators, by helping bankers have their wet dreams come true, worsened our young’s future perspectives.

Sir, Martin Sandbu writes: “The giants of the US asset management industry have held secret meetings since August to discuss how to push company executives to make more long-term decisions. Participants included veteran investor Warren Buffett, JPMorgan CEO Jamie Dimon, and leaders from Blackrock, Fidelity and other major managed fund providers.”, “From boardroom to Shangri-La”, February 20.

And Sandbu refers to: “Negative externality” is the economist’s term for the harm a company’s activities cause to the world around it… lobbying for government rules that privilege one sector over others may, in the longer term, make the rest of the economy less efficient. Indeed and there are no better examples of that that current bank regulations.

Mark Twain is rumored to have said: “A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain.”

And with their risk weighted capital requirements of banks, the current regulators added “A banker is a fellow authorized to leverage equity immensely much more when lending out his umbrella when the sun is shining, than when it seems it looks like it could rain.”

And with that banks have now realized their wet dreams of earning much higher risk adjusted returns on equity when lending to the safe than when lending to the risky, like SMEs and entrepreneurs; and with that banks no longer finance the risky future, they only refinance the safer past.

And all for nothing since major crises are never ever the result of excessive exposures to something ex ante perceived as risky, always of something ex ante perceived as safe but that ex post turned out to be risky.

Sandbu also refers to that Yngve Slyngstad, the head of Norges Bank Investment Management stated that “Norway’s sovereign wealth fund demands that boards pay particular attention to climate change, water management and child labour”

Though I generally believe it arrogant and dangerous to intervene in the markets, if Mr Slyngstad really wanted to help, he should then better support purpose weighted capital requirements for banks. Those would allow for higher risk adjusted returns on bank equity when financing something society finds has special merits… like water management and creating jobs for our young ones.

@PerKurowski ©

Stop bank regulators from pre-acting on ex ante perceived credit risks, and make them think more of all ex post dangers.

Sir, John Kay refers to a chapter in an upcoming book of his titled “The bias to action”; and to that “the bias to immediacy and action is as pervasive in politics as in finance” in order to remind Warren Buffett holds that “The trick is, when there’s nothing to do, do nothing”, “Wisdom for politicians from the Sage of Omaha” January 14.

Well, since John Kay’s book is about finance, I do hope that it includes some reflection on the dangers of even faster trigger action, let’s call it preemptive action bias, and which affected the minds of bank regulators to such an extent, they confused ex ante perceived risks with ex post occurred dangers.

I would say it is impossible to think of assets that banks perceived as “risky” when placed on their balance sheets, which have caused a major bank crisis. But nonetheless, regulators found it prudent to require banks to hold more equity against what is ex ante perceived as risky that against what is ex ante perceived as safe.

Could we please get us some regulators who understand that we need banks to allocate credit correctly to the real economy much more than we need them to avoid taking ex ante perceived credit risks… and could we please get us some regulators who try to focus on what could be all the important ex post risks, and not react solely to the ex ante perceptions of risks.

If not the dollar, then no other fiat currency either

Most of the world´s concern with the dollar is in fact not with the dollar itself but more of the “if not the dollar then what?” type, since, if looking at the forest and not the trees, makes it clear that no country´s fiat money stands a chance to survive a dollar failure. That is how globalized we have become… that is why some non US are even toying with the notion of supporting a tea party, no matter how doubly distant they feel from some of those partying there … no matter they serve corn on the cob instead of cucumber sandwiches… and others buy gold.

Let us suppose the US officially presented to the world the possibility of a 40% haircut on its debt. Would that be the same as an Argentinean haircut? No way José, since the day after the US would again find unwilling willing takers of US debt, and at quite low rates, because it would think that the day after the US imposed some debt ceiling that really became a real roof.

China, India? Good luck Warren Buffett, but we do not have all that much money to afford the luxury of trying.

In truth, if we would still use fiat money, then the Dollar II would still be better positioned than all other.