Is ‘Go Woke, Go Broke’ an Investment Opportunity? |
Saturday, 24 June 2023 — South Melbourne  | By Nickolai Hubble | Editor, The Daily Reckoning Australia |
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[8 min read] Quick summary: Woke ideology is starting to hurt the profits of companies and undermine economies. The question now is whether all of this is an investment trend. Should you buy companies that go anti-woke and sell those that go woke? |
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Dear Reader, Am I getting old and fuddy-duddy? Has becoming a father changed me? Or has the world changed a little since I was a child? And by changed, I mean going mad over the woke phenomenon which has infected all parts of society, from investment to school children. The latest furore in the woke wars is all about children identifying as animals and inanimate objects while at school. The UK media has discovered a plague of such behaviour, much to nobody’s surprise. Apparently, teachers are required to support such identity dysphoria by reinforcing it. Children are meowing in response to questions from their teachers. And anyone who points out the emperor has no fur is in deep trouble. Those of you who are worried about woke teachers playing the Pied Piper of Hamelin have got it all wrong. Of course, the children don’t really think they’re aardvarks or a Moon, as some of them claim. They are just having fun at our expense. And their ability to do so is probably a sign of intelligence and innovation. There is no better way to teach critical thinking than forcing the absurd onto someone. Those who wake up and take advantage of this should be celebrated for forcing the issue. If it takes children to shake us out of our woke delusions, so be it. That’s what happened in The Emperor’s New Clothes, after all… Another facet of the woke phenomenon I’ve noticed is in nursery rhymes themselves. They’d already been cleaned up since the Brothers Grimm, much to Germans’ disappointment. Nobody gets eaten alive anymore. But things are getting a bit ridiculous, with the woke version of Humpty Dumpty featuring Humpty Dumpty getting caught in a baseball mitten by a teddy bear instead of breaking into parts. Jill’s brother Jack faces an equally melodramatic fate. I spent a good half an hour looking for ‘original nursery rhymes’ and ‘traditional nursery rhymes’ on Spotify, YouTube, and elsewhere at 5:00am one morning. I only got more irritable than I already was over the complete lack of violence. Not that my one-year-old needed more of it after kicking me in the head for the previous five hours. Edging a little closer to financial markets, we have Anheuser-Busch, which tried to harness the woke movement to sell beer. Who would’ve thought this would backfire…? The old ‘go woke, go broke’ rule struck, with Bud Light sales crashing badly — down 30% at one point. Ironically enough, the response was described as a ‘wake-up call’ by an Anheuser-Busch executive. A wake-up call for the woke…? What is this? Are we living in the film Inception, with layers of dreams upon dreams to hide objective reality? In similar strife to Anheuser-Busch, we have Disney, although you might at least expect that company to be woke. And woke they are, with all sorts of cultural appropriation efforts to promote the image of diversity. Which has resulted in poor financial performance and a series of cinematic bombs. But the woke mob’s most important campaign is climate change. And they’ve been busy. The UK Government is looking to ration the sales of petrol and diesel cars, before banning them in 2030. The effort to drive more electric vehicle sales has become an effort to prevent other cars from being sold at all — a hint of where all this is going. If they really go through with this, I’ll be flying to London to buy every car I can get my hands on. Can you imagine what’ll happen to used-car prices over the next few years? But even in the arena of climate change, the woke are going broke. The media has cottoned on to how dodgy the carbon offsets market is too. Not to mention what gets labelled as green energy. Being accused of greenwashing and similar practices have forced the woke into the corporate boardroom closet, with companies keeping offset programs hidden to avoid accountability. Companies are adjusting for a future where the climate crusade gets oiled down too. BHP Group’s [ASX:BHP] plan for net zero will see it increase emissions in the short term. Woodside Energy Group [ASX:WDS] is investing billions into future oil production. As I see it, companies are punting on net zero being abandoned before their commitments to net zero must be acted on, because we all know it’s just not plausible. In short, if we transition out of fossil fuels at the rate anticipated by politicians, we won’t have enough energy full stop. That’s what the Australian Energy Market Operator and the CEO of NSW grid operator Transgrid are warning about. To some, this is, of course, the solution itself. If green energy can’t live up to our needs, we need to cut energy consumption, meaning our standard of living. The CEO of the UK’s power grid is suggesting that UK homes should get ready for intermittent energy in the future. Whether the world’s power providers are failing to plan or planning to fail, or both, you need to be ready for what woke means for your quality of life. While the woke tells you that your EV will one day be a battery for the electricity grid, I suspect you’ll be running your car’s diesel engine to keep the lights on and the fridge running instead. Unless, of course, we transition right back to those fossil fuels to keep the grid up and running… Enough examples of the ‘go woke go broke’ backlash. The question is whether all of this is an investment trend. Should you buy companies that go anti-woke and sell those that go woke? Someone is buying all those high-emissions divestments of companies trying to go green, after all… Investing in ‘sin’ stocks is a long-established practice. Alcohol and tobacco stocks are famously high performers since their vilification. Perhaps oil, coal, and gas stocks will be the standout performers of the decade, not just 2022. Investors considering such an opportunity have another obvious place to look. It’s not like much of the world is caught up in woke ideology, it’s just the West. If it’s going to cause trouble, just invest in the places that aren’t playing along. Japan is top of that list. Their obsessions with conformity are the opposite extreme of our diversity at all extremes. My children will need letters explaining why their hair isn’t black if they go to school where their mum did. I’d love to know how a Japanese teacher would deal with a child in the UK who reportedly identifies as a dinosaur. But, given that Japanese parents routinely send their four-year-olds to the grocery store down the road, across the river, and a few stations along on the tram, I’m not so sure I’d endorse their way of doing things either. In the end, going woke is about being able to afford it. Children in the West can afford to pretend to be a cat for a few weeks. The West can afford renewable energy projects and the whopping power prices that follow. But much of the world cannot afford such things in their attempt to get off the poverty line. This will prevent them from trying. If you believe in ‘go woke, go broke’, invest in the stock markets of nations that’ll ignore the madness.
Regards, Nickolai Hubble, Editor, The Daily Reckoning Australia Weekend Advertisement: Geologist shoots weird video in bush He’s a 15-year mining veteran… And he just hired a film crew, headed out to the bush…to share an unusual message about the resource markets. Is he on to something? Or is he losing it? Check out the footage HERE — then decide. |
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Welcome to the Global Financial Crisis of 2023 (Part Four) |
 | By Jim Rickards | Editor, The Daily Reckoning Australia |
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Dear Reader,
The new banking crisis is by no means limited to the California tech world.
The financial contagion that began with the failure of SVB was never going to be contained to the US. Just as the meltdown virus had jumped from the crypto world to mainstream banking with the failure of Silvergate Bank, the meltdown quickly spread from the US to the international banking system.
The first major overseas victim (but not the last) was Credit Suisse. This bank was founded in 1856 and was one of the two biggest banks in Switzerland (along with UBS).
After long struggles with loan losses, customer frauds, and poor risk management, Credit Suisse received a bridge loan of 50 billion Swiss francs (about US$54 billion) from the Swiss National Bank (SNB) on 16 March 2023 to provide liquidity while other measures were considered.
Finally, on Sunday 19 March, SNB announced a shotgun wedding between UBS and Credit Suisse. UBS acquired Credit Suisse for only 1% of its peak share price. Shareholders of Credit Suisse were largely wiped out but did receive a US$3 billion sliver of proceeds from UBS.
The financial damage of the Credit Suisse failure ran far deeper than stockholder losses, which, after all, are expected in a failure of this type. A certain kind of bank capital called AT1 was also wiped out. These consisted largely of so-called ‘CoCo’ bonds, short for contingent convertible.
CoCos do get bailed in
CoCo bonds are high-yield debt that is automatically converted into equity when a bank is in distress. That might be an acceptable outcome when the bank survives. But when the bank fails, the CoCos get wiped out along with the rest of the equity.
CoCo bondholders in Credit Suisse lost US$17 billion, but mark-to-market losses in the larger world of AT1 credits were more than US$275 billion as investors lost confidence in the entire asset class.
The biggest losers in the Credit Suisse CoCo wipeout were PIMCO (US$870 million) and Invesco (US$370 billion). Losses on the Credit Suisse CoCos were a hybrid of a bail-in approach (because taxpayer money was not involved) and a bailout approach (because shareholders were not wiped out completely before the CoCos were crushed).
This mixed bail-in/bailout result just adds to the confusion about what happens when the next bank fails. The ripple effects of the huge losses and uncertain outcomes are still spreading through the international banking system.
The crypto connection
SVB is itself the victim of financial contagion in addition to being the source of more contagion. SVB can be thought of as the result of an ongoing contagion from Silvergate Bank. Of course, these matters are complex, but here’s a high-level perspective…
This meltdown arguably began with Bitcoin [BTC] in November 2021 when it proceeded to crash by 70% by November 2022. That caused what crypto cultists called the Crypto Winter, and it triggered a cascade of failures in crypto land. These failures included Three Arrows (a crypto hedge fund), Genesis (a crypto exchange and custodian), FTX (another crypto exchange and custodian), and Alameda (a crypto hedge fund associated with FTX).
As these failures cascaded, the issue I weighed was whether the crypto contagion would spill over into mainstream banking. If the financial virus remained in crypto land, it could cause a lot of damage but not a full-scale financial panic. If the virus spreads into mainstream financial channels, things could get a lot worse.
On 8 March, we got the answer to that question. Silvergate Bank announced it was filing for bankruptcy protection. Silvergate Bank was the bridge that carried the virus from crypto land to the mainstream banks. Silvergate Bank was a mainstream bank with FDIC insurance and bank regulation. But it was also knee-deep in crypto transactions, including crypto loans and funds on deposit with failing crypto exchanges.
Silvergate Bank closed its doors and announced an ‘orderly liquidation’. Now the crypto contagion had spread to conventional banking. SVB was Silvergate Bank’s first victim in the mainstream banking system.
Even worse is that the so-called crypto ‘stablecoin’ kept large cash balances in SVB. Those balances were seen to be at risk, so the stablecoins started melting down.
Unstablecoins
A stablecoin is a cryptocurrency that claims to maintain a constant value of US$1 per coin. The sponsors do this by taking proceeds from buyers, issuing the coins, and investing the proceeds in bank deposits, US Treasury bills, or other high-quality cash equivalents. The two most popular stablecoins are Tether and USDC.
Stablecoins are a US$200 billion market and the backbone of the entire crypto world. About 70% of bitcoin purchasers buy Tether first and then buy bitcoin with Tether. If bitcoin holders want to bail out, they have to sell Tether for bitcoin and then redeem the bitcoin. The bitcoin crash becomes a Tether crash. That’s contagion in action.
The difficulties begin with the fact that stablecoin issuers have never been transparent about where they actually invest their dollar sales proceeds. There have been no audited financial statements or detailed disclosures.
One partial disclosure from Tether showed that almost half of the dollar assets were in ‘commercial paper’ (an unsecured corporate IOU) with no detail about the name or quality of the commercial paper issuer. This leaves open the possibility that the issuer could be affiliated with the sponsor or even that billions of dollars of funds may have been improperly diverted.
Now those stablecoin concerns have become more acute. USDC had more than US$3 billion of its cash reserves on deposit with SVB. That money was at risk. By Saturday, 11 May, USDC was trading around 85 US cents. That’s an extreme meltdown considering the token is promised to always be worth US$1.
The potential is not only that these stablecoins meltdown, but that they take bitcoin with it because of a mad dash for the exit to dollar liquidity. Exchanges, hedge funds, and crypto banks will fail alongside the coins themselves.
There has not been a bank failure of the magnitude of SVB since 2008. There has never been a crypto-crisis side-by-side with a banking crisis. Regulators don’t know what they’re doing. They’re fighting the last war about depositor bailouts without realising they are actually fighting a new war of tech-firm failures and crypto-panic.
Regards,
Jim Rickards, Strategist, The Daily Reckoning Australia
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