`Have you guessed the riddle yet?' the Hatter said, turning to
Alice again.
`No, I give it up,' Alice replied: `what's the answer?'
`I haven't the slightest idea,' said the Hatter.
`Nor I,' said the March Hare.
-Alice's Adventures in Wonderland
Ch. XII A Mad Tea Party
The part of Alice will be played by FT Alphaville's Izabella Kaminska
Chapter One
The capital spending crisis, miner edition
An interesting column from Clyde Russell at Reuters (H/T John Kemp) pointing out the key problems facing miners today. They can’t get sufficient returns on capital invested, so should they even bother trying?...
...It would be interesting to see what would happen if BHP and Rio, and other firms in the same boat such as Anglo American, decided to cut back on capital spending while simultaneously returning more of the cash they are generating to shareholders....MORE
Chapter Two
We told you negative rates were a big dealSo, the miners are faced with currently uneconomic projects or returnng cash to shareholders, something no CEO worth his self-aggrandizing salt would even consider.
Okay. It’s true. We’ve become slightly obsessed with negative yields at FT Alphaville. Especially with regards to what they signify for the financial industry.
Though, for a long time we’ve felt very much alone with this obsession. Weirdly enough, nobody else has seemed too bothered about it. (Note, we even had to go to the ECB directly to ask Draghi what he thought about it.)
Indeed, much of the industry still seems to think negative yields may be transitional.
We, however, are not so sure about that. In fact, we don’t understand why analysts aren’t factoring in deflation scenarios when assessing real interest returns more frequently, since doing so might even show that negative yields aren’t as bad an investment as you think. (In fact we’d love to see under what sort of deflation scenario today’s negative yields might even look like a good investment.)...MORE
What to do? Find an industry with even worse economics than yours.
Chapter Three
The terminal disease afflicting bankingIf you want to show a profit on a project that pencils out to -1% ROI, all you need do is get your cost of capital to -1 1/2%.
...We’d like to argue that faced with certain death, banks have adapted. Moved on. Reapplied themselves. Done everything they can to squeeze a little extra life from the system.
We’re talking about developments that touch almost every modern commercial and investment bank — from the growth of shadow banking, to the fragmentation of markets and build up of dark inventory. Algorithmic trading and securitisation to ETFs and Libor manipulation. Rehypothecation, to dealing with the threat of corporate cash-piles.
With hindsight, all of these developments may have been signs of an industry in crisis. Signals of pariah banking and desperation.
But it’s incorrect to blame the banks outright. It’s natural, after all, for anyone facing certain death to try to save themselves. To protect against extinction....MUCH MORE
How do you do that?
Welcome to the world of gold leasing.
More to come.
