Friday, March 19, 2021

This week's interesting finds

Greensill-owned bank declared insolvent, causing losses for small German towns 

Local governments deposited money at Greenshill Bank to escape negative interest rates at their usual banks. 

A German court on Tuesday declared that a small bank tied to a collapsed U.K. finance company was insolvent, triggering losses for dozens of small German towns. 

Around Germany, at least 12 towns with a combined €200 million, equivalent to about $238 million, in deposits are in the same situation. Individual depositors are covered by insurance. 

Among them is Mengen, a tiny municipality in southwestern Germany. Like most towns that put money into the bank, Mengen was trying to avoid the small losses that come with negative interest rates.

Mengen’s mayor, Stefan Bubeck, said the town wasn’t trying to get a high interest rate, just avoid the negative rates. The town “didn’t want our deposit to decrease,” he said. Mr. Bubeck fears most of the money invested will be lost. “We are shocked.” 

The bank offered a 0.6% interest rate, compared with a minus-0.5% rate offered by other regional lenders the town used. 

Other towns have said they shifted reserves to Greensill for even lower rates to avoid the guaranteed losses of negative rates. 

Howard Marks: 2020 in Review and Positioning for 2021 

Most investors felt that the beginning of 2020 was a time of clarity: the economy and the stock market were both expected to continue advancing. While everyone knew they wouldn’t do so forever, nothing seemed poised to make them stop. And then came the strongest exogenous shock we’ve ever seen – the novel coronavirus – proving once again that we never know what’s going to happen (and that even though we can’t predict, we should prepare). Today’s environment, in contrast, seems to be characterized by a lack of clarity. Experts are expressing highly divergent opinions regarding the outlook for U.S. markets, with strong arguments both bullish and bearish. 

The biggest risk of all is the possibility of rising interest rates. Rates have declined quite steadily for the last 40 years. This has been a huge tailwind for investors, since a declining-rate environment lowers the demanded returns on assets, making for higher asset prices. The linkage between falling interest rates and rising asset valuations is a good part of the reason why P/E ratios on stocks are above average and bond yields are the lowest we’ve ever seen (which is the same as saying bond prices are the highest).

But the downtrend in rates is over (if we can believe the Fed’s assurance that it won’t take nominal rates into negative territory). Thus, while interest rates can rise from here – implying higher demanded returns on everything and thus lower asset prices – they can’t decline. This creates a negatively asymmetrical proposition. 

So today’s high asset prices may be justified at today’s interest rates, but that’s clearly a source of vulnerability if rates were to rise. (Note that today’s 1.40% yield on the 10-year Treasury note is up from 0.52% at the low in August 2020 and from 0.93% in just the last seven weeks.) 

Samsung and TSMC dominating semi conductor & capital expenditure cycle  

IC insights provides semiconductor industry capital spending forecasts by company for 2021 and the latest global forecast for spending through 2025. What may appear most shocking, given that Intel was one of the two largest spenders every year until 2015, is that Intel has failed to keep pace with the spending ambitions and technology advances of Samsung and TSMC. Intel spent about HALF of what Samsung spent on capex in 2020. The sheer magnitude of Samsung’s spending over the 2017-2020 time period is unprecedented in the history of the semiconductor industry. At $93.2 billion, this amount was more than double the $44.7 billion spent by all the indigenous China semiconductor suppliers combined over this same timeframe. 

With no other companies presently able to match these huge spending sums, Samsung and TSMC will likely put even more distance between themselves and their competition this year with regard to advanced IC (Integrated Circuits) manufacturing technology. 

Without extremely quick and decisive action by other IC producers or governments, “Samsung and TSMC are well on their way to world domination of leading edge IC process technology the cornerstone of all of the advanced consumer, business, and military electronic systems of the future”.

Tesla has a sudden UK Dilemma 

Today, the UK abruptly changed its EV incentive program to reduce the grant towards a new EV from £3,500 to £2,500 STARTING TODAY (March 19, 2021). The key part is that the price cap for eligibility will drop from £50,000 to £35,000 meaning the Model 3 which starts at £40,000 will no longer be eligible for the grant. In the government press release, they comment that the number of EVs under the cap of £35,000 has increased by +50% since 2019 as more cheaper models have come to market and they note that half the EVs on the market are indeed under £35,000. The change reportedly came abruptly and automakers were only informed today. Guess which BEV is under £35k? The Volkswagen ID.3. But also of note the Hyundai Kona, the MG ZS EV, the Peugeot e-208, the Corsa E, the Nissan Leaf, the BMW i3, the electric Mini, the Skoda Enyaq, the upcoming Mercedes EQA, … the list goes on. The UK was Tesla's third most important market after the US and China last year selling close to 24,000 units. 

This is all a very familiar story to us as it’s exactly what happened in the Netherlands in 2019-2020 as the incentive program phased out. The Dutch were also the 3rd largest market for Tesla in 2019 selling some 31,000 units that year but then it all changed. Ever since, the demand from our Dutch friends has waned off selling a mere 8,600 cars in 2020, down some -72%. So Tesla UK has a face-off: either drop the price of the Model 3 under £35k which will inevitably hurt margins, something it did in China when the incentives dropped or hope consumers still think Tesla Model 3 is a superior vehicle and is worth the extra premium without the grant. But no doubt volume would drop. 

Source: Mirabaud Group

Expectations and returns

Some lessons to chew on

Stories matter more than anything, but be wary of them for that reason. Stories persuade and influence like nothing else, we are all storytellers even if we haven’t realized it yet. 

Groupthink and conformity drive far too much behavior. They are everywhere. We are wired to social conformity – it’s what kept us alive for millenia on the savannah. Being thrown out of a group was literally death for our ancestors. So we do everything we can – without even knowing it – to preserve group harmony and often the status quo.

Bias is both real and hard to spot. The way we think, act, speak – so much of it is pre-determined by the configurations of our brains and the specific world we’ve been raised into. Lesson (1) is that this is true, lesson (2) is that it so much of it is beneath the surface and hard to recognize especially in ourselves. Once you realize this, psychology becomes one of the most valuable fields to understand so much of what goes on.