Gravitas Spark CrowdFunding

Tag: Wall Street

  • The Euphoric Wisdom Of Crowds

    The Euphoric Wisdom Of Crowds

    I laughed a lot at a very sad funeral this week. Emotions, eh. I’m hopeful this weird juxta-positioning of emotions is a kind of human coping strategy, rather than a sociopathic tell. Then again, the mourning crowd laughed at the brilliant life narration too. Back at my desk, a flurry of headlines hitting the screen prompted a further emotional conflict. Surging extreme weather events globally, Europe battered by tariff tyranny, Gaza starved and Ukrainian cities terrorised by Russian bombardment are hardly sources of optimism for the progress of our species. And, yet……I’m picking up a very euphoric vibe from the financial markets. Strangely for this publication, I’m not that interested in retro-fitting the euphoria with some financial rationale along the lines of falling cost of money(rates), corporate earnings, tech innovation or economic cycles. The sheer phenomenon of financial euphoria is worth highlighting first. Then we can do some thinking, all of us.  Now for the euphoria…..

    The “wisdom of crowds” leans on the idea that large groups of people (markets) are collectively more likely to be correct than individual experts. What is particularly striking about current financial market behaviours is that there is a wide variety of “crowds” ignoring the gloom-filled headlines and seeing a better future out there. However, that optimism is not exactly a new phenomenon. Note that financial markets typically enjoy positive returns in seven out of every ten years. In other words, it pays off to be relatively optimistic. However, in this piece we are looking at something more, evidence of euphoric excess. Let’s try a few of these crowds for starters…..

     

    *The crypto crowd: Bitcoin is hitting record highs of $118,000 while the entire crypto ecosystem has now surpassed $4 trillion in value.

    *The IT crowd: If one uses pre-2018 sector classifications, then technology stocks’ weighting in the S&P 500 is above 45%. That’s way higher than the dotcom bubble of 2000.

    *The ‘Magnificent 7’ crowd: There’s now, not one, but two Big Tech companies with market values in excess of $4 trillion. For context (and wobbly comparison), the $8 trillion combination of Microsoft and Nvidia alone would rank 3rd globally as a single country GDP.  

    *The meme-stock crowd: In 2021 it was Gamestop and the Robinhood day-traders. Now, it’s Kohl,’s (retail) Krispy Kreme(donuts) OpenDoor (estate agent) and American Eagle with Sydney Sweeney dominating social media, chat rooms and…. Wall Street trading volumes.

    *The AI/Cloud crowd: Earlier in the year Microsoft CEO, Satya Nadella, in a Davos interview stated he “was good for $80 billion of investment in 2025” in AI/Cloud infrastructure. Scratch that. This week he said the number will be $120 billion. Google said $85 billion (up from $75 billion) as Big Tech companies look like they will do a giddy AI spend of close to $400 billion in 2025.

    *The M&A crowd: Research data from Pitchbook shows robust merger and acquisition (M&A) activity in Q2, marking the third consecutive quarter for deal value to hit about $1 trillion across roughly 12,000 transactions. It’s not just tech showing confidence. Railway giants Norfolk Southern and Union Pacific are doing an $85 billion merger to create the first transcontinental railway line in US history.

    *The retail crowd: Barclays research points to retail investors as the “primary driver” of the recent stock market rally. In the past month alone, retail investors poured $50 billion into US stocks and now account for up to 20% of daily trading volume on Wall Street. That’s double the levels seen before the pandemic.

    *The VC crowd: The challenged venture capital (VC) world has been looking for a genuine positive pulse-take via an IPO exit. As I write, Greylock Partners, Sequoia and Index Venture will be the VCs doing cartwheels tonight after the largest VC-backed tech IPO in years, Figma, tripled in value within hours of its NYSE debut to almost $50 billion. Or… will they be wondering how they got the selling (IPO) price so wrong?

    It is entirely possible many of the above trends are rooted in fundamental investment theses but suggestions of dangerous  “euphoria” can be found in aggregate valuations of US stocks. The average price/sales valuation multiple (per Bloomberg) for US stocks is a punchy 3.3x. Furthermore, Warren Buffett’s favoured sanity check of comparing the market value(cap) of all publicly traded US companies with total US GDP currently stands at 212%. As a risk guide, Warren is usually uneasy when that number is over 100%. My own two personal favourites in the euphoria beauty parade are more esoteric but tell their own stories.

    First, it is no secret Facebook/Meta and others in the AI “arms race” are desperately looking for AI talent. However, the numbers are starting to look bonkers. According to Wired magazine, at least one prospective employee was offered a 3-year billion dollar salary package to join Meta. Others were offered hundreds of millions (rumoured to be Mira Murati’s Thinking Machines Lab team) but here’s the best bit…. the prospective hires turned down the offers!! Now, here’s a few other proposals that were turned down as recently as November 2022.

    If that date sounds familiar, you might have been vowing to stay away from markets at the time as stocks hit bear market lows spooked by rising global interest rates. Online car retailer, Carvana, was “on sale” that day after its share price had collapsed by almost 99% from its highs the previous year. Nobody wanted to touch it. As of today, it’s up more than 10,000% since then. Fear and greed, emotions eh. Oh, and Meta’s share price on that day after a rough year for the Zuck was $88.91 per share. It’s up almost 800% since then but here’s the best bit….in barely one trading session after its excellent quarterly results this week, Meta’s share price jumped by about $88.91 per share. That number sound familiar?

    No more teasing. The key point is that confidence is surging in public markets. The quieter, less public private markets have struggled to generate similar headlines. Yes, there are pockets of excess. However, it would be foolish to ignore the ‘wisdom’ of the public market crowds. Ultimately, higher trading activity levels, record capex investment, big M&A deals and higher valuations will feed into private markets and smaller companies. Indeed, you might have to get used to the giddy headlines for a bit longer. Goldman Sachs have done a bit of historical analysis and concluded that spikes in speculative trading actually precede abnormally high returns on a one-year time horizon. Don’t stay too long at the beach….the YOLO crowd might be on to something.

     

                                      N.H.  RIP

     

     

  • Time To Think Different

    Time To Think Different

    I must confess I was very jealous. My son met Mike Bloomberg on his visit to Dublin this week, not me. Bloomberg and his eponymous data/media company have always fascinated me as a former customer, and as a financial markets observer. The Bloomberg business is still the gold standard for data analytics, trading communications and news for circa 350,000 financial market professionals who each pay $27,000 per year for the service. The company has been around since 1982 and it has made Bloomberg the owner incredibly wealthy. Uniquely so, perhaps, because it was done in private. If you check the ranks of the wealthiest people on the planet the top 10 features the usual names like Musk, Arnault, Gates, Zuckerberg, Ballmer and Ellison. However, all those names are attached to publicly listed companies which underpin their wealth. Bloomberg is still a private company, and still 88% owned by its founder.

    Think about a SaaS-type business doing circa $12 billion of revenues a year and 88% of the profits (probably 30% + margins) accruing to one person…..since 1982. Officially, Forbes Magazine ranks Mike Bloomberg in 18th place on the world’s richest list with a $105 billion fortune. I’m guessing it’s WAY more than that. But, the bigger reveal is how a private company was able to create wealth over decades without a fluctuating public share price and short-term institutional shareholders demanding it respond to dotcom revolutions, search engines, mobile internet, big data, cloud-based SaaS, credit crises and AI. Privacy gave Bloomberg time and strategic room to act in a different way to the Wall Street ‘crowd’ and its emotional baggage. Indeed, there were a few other reminders this week of how the “crowd” can miss important truths when analysis is dominated by a volatile public share price and human emotions. Remember Cisco?

    If you invested in Cisco this month 25 years ago you would have caught its peak dotcom bubble valuation before boom turned to bust. This week is the first time in 25 years you could sell those Cisco shares at a profit. Ouch. Patience and time is not just the preserve of investors in private illiquid assets. In fact, lack of liquidity can be an investor’s friend when markets are volatile. Fast forward to today and think about how many people sold stocks and bought oil on the weekend news that the US had bombed Iran’s hidden nuclear facilities. Well, the oil price is 15% off its peak price through the Iran-Israel conflict period (or “12 Day War” as named by the bomber-in-chief and Nobel Peace Prize wannabe) and actually below the trading price before hostilities even began. Oh, and the Nasdaq 100 just hit an all-time-high yesterday. For the faint-hearted, that’s a 36% gain for the largest tech stocks over two months of toddler tariffs, broken bromances, Gaza abandonment, WW3 fears, a Russian drone drubbing of its airforce and Love Island shocks. Rather than dodging a “risk-off” bullet, investors have been rewarded for not selling with strong stock market performances this week. It might not sound rational but there’s a very powerful lesson about the importance of “staying in the market”. For investors in publicly listed assets, there is an option every minute to sell and exit the market. But, there’s a cost.

    A piece of research from JP Morgan, studying the returns of the S&P 500 between 2002 and 2022, shows annualized performance(returns) of 9.4%. That’s pretty good. But…..if you missed the 10 best days your return would almost halve to 5.21%. More strikingly, 7 of those 10 best days happened within two weeks of the 10 WORST days. So, if you opt out during the bad periods of volatility you tend to lose out on the big bounces which have a huge impact on longer term performance. The uncomfortable truth is that the best days and worst days tend to occur within weeks of each other. Further angst for many, is that human emotions take over and investors flee for the exits after market turbulence. However, for investors in private assets that emotional self-destruct button is not available given there is no natural daily exit option. There is also another public market reality which leads to misleading comparisons with private asset investing.

    The accepted wisdom or orthodoxy in finance is that investing in early-stage companies has a high failure rate. The text books would suggest that failure rate is in the 70-90% range. That rightly implies that the vast majority of returns for investors in a portfolio of early-stage risky investments is delivered by a small number of investments. However, what is not mentioned in those texts or in plenty of fund investor information sheets is that portfolios of publicly listed companies have a similar story. A study conducted by Professor Hendrik Bessembinder at the Arizona State University Business School shows that just 4% of companies in the US stock markets have accounted for all of the wealth gains since 1926. Amazingly, the average cumulative return of the 29,078 common stocks listed since 1926 was a hefty 23,000% but….the median stock in that time experienced a cumulative return of NEGATIVE 7.4%. Given that’s a median number, that means more than half of all stocks have experienced negative returns. Fund manager, Bailie Gifford, has done further research on this data to identify the key performance drivers of the small number of genuine wealth creating companies. Interestingly, R&D investment was a critical driver. Now, let’s think private and different.

    Clearly, public and private markets are not so different. It’s better to be in the market ALL the time and only a small number of companies in a portfolio deliver the majority of returns. However, in order to capture that opportunity one needs to build a portfolio. It also looks like R&D is important to create a big enough competitive advantage to grow rapidly. We don’t know how much money Bloomberg invested in its famous desktop terminal over the years to effectively “own” the market but we do know he didn’t have to report profit numbers like Cisco to the market on a quarterly basis. So, if we think differently, how can we act differently?

    Well, you don’t need a Bloomberg terminal to tell you that high net worth investors are increasingly investing in private assets. Global giant private equity house, Blackstone, this week stated their belief that “Europe is in a unique position to capture more investment”. Blackstone themselves are going to invest $500 billion in Europe over the next decade. The other data point worth considering is that JP Morgan reckon the mass affluent investor market has just 2% of their portfolios allocated to alternative/private investments. So, this is not a dotcom/Cisco rush into peak investment cycles. There is real early opportunity in private assets and Spark Private can actually help kick start a portfolio very quickly. This summer Spark Private investors will be able to invest in a selection of up to seven R&D-rich medtechs, a few SaaS/software high-growth options, an exciting AI play and some really interesting infrastructure franchises.

    We now know the phrase “timing is everything” doesn’t work when trading public markets. However, we also know if you’re not in, and you’re not diversified, you can’t win. So, think different and think private. Now is an excellent time to combine private opportunity with portfolio-building deal flow.

    ** For further information on Ostoform, SymPhysis Medical, Social Voice, Digital Gait Labs, Tympany Medical, Liltoda, Array Patch or Quadrant Scientific contact us on www.sparkprivate.com

     

  • Watch Out For The New Stable Empire Build

    Watch Out For The New Stable Empire Build

    Stability wouldn’t be the word of the week. Middle East war, Indian air crash tragedy, horrific school shooting in Graz, the US Marine Corp deployed in Los Angeles and the death of America’s Mozart, Brian Wilson. But… the ground-breaking Beach Boy might also SMILE**. Tortured by mental health challenges for most of his life, his genius is rightly being recognised at a rather weird moment. Thousands of miles away from the Californian beaches which inspired a true genius, a delusional “stable genius” is marking his birthday with a military parade in Washington. The irony indeed of a wannabe emperor, without clothes or genius. However, the sharper minds out there have been busy building another type of empire….Here’s a few timely illustrations.

    Stripe kicked off the week with the $1 billion acquisition of Privy. This is Stripe’s second billion dollar acquisition in less than six months (Bridge $1.1 billion in February) in the area of stablecoins. As a quick refresher, stablecoins are digital currencies (crypto) built on blockchain technology whose value are fixed to the value of a recognized liquid security or currency. In the vast majority of cases the “stable” part of a stablecoin is the world’s chosen reserve currency, the US dollar. This means that these stablecoins can be instantly exchanged for US dollars, in most cases, at a 1:1 ratio (FX rate). However, I only use the “FX rate” terminology to assist understanding because stablecoins operate differently, and have one massive potential advantage over typical foreign exchange (FX) rates. They cut out all the intermediaries’ costs and “toll takers” that drive us all to distraction at airports when it feels like a robbery rather than a financial service has taken place. This digital capacity to cut out costs and deliver ‘frictionless’ currency services has been identified by Stripe as an enormous opportunity to “grow the GDP of the internet”, namely e-commerce. Two deals in 6 months demonstrate that strategic appetite.

    Stripe, as a global leader payments platform, bought Bridge specifically as a platform for payments in stablecoins. Bridge provides the payments infrastructure for financial services companies to issue stablecoin-linked Visa cards. So, that covers the payments bit but Stripe has moved further into stablecoin infrastructure with its Privy acquisition. As Stripe CEO, Patrick Collison put it, “Money has to reside somewhere, and Privy builds the world’s best programmable vaults. Alongside our other stablecoin work, we’re looking forward to enabling a new generation of global, internet-native financial services.” In relatively simple terms, Stripe has acquired the ability to handle stablecoin payments AND the digital wallets (vaults) needed to store those digital currencies. Note, this is not some futuristic ‘bet’. This is a very current service. Indeed, Mastercard reckon one third of Latin American consumers have already used stablecoins for purchases. And, it’s not just “Main Street” embracing stablecoins. Wall Street is buzzing this week.

    The IPO of Circle on the NYSE was 25x over-subscribed before it even began trading last week. Circle is the issuer of probably the safest and most transparent stablecoins, USDC, which is pegged 1:1 with the US dollar. By the end of its first week of trading, Circle’s share price had rocketed 378% above the IPO price to reach a valuation of $32 billion. Clearly, Wall Street’s frenzied embrace of digital currencies, wallets, payments etc could spell trouble for the traditional custodians of currency storage and movement, the banks. They are moving too.

    French banking giant, Societe Generale, announced this week plans to launch a publicly tradable dollar-backed stablecoin. Societe Generale is the first major bank to enter the stablecoin market and has named its new digital currency “USD CoinVertible”. Meanwhile, in the US, Congress is poised to pass legislation to create a regulatory framework for stablecoins. Bank of America could launch a stablecoin, its CEO said earlier this year, and some other large banks are also considering issuing a joint stablecoin. The banks won’t be alone.

    The world’s two biggest retailers, Amazon and Walmart, are looking into issuing their own stablecoins for US customers to use at checkout instead of credit or debit cards, the Wall Street Journal reported yesterday. The WSJ article suggested other big companies, including Expedia and some airlines, are also considering the move. The motive is simple and relates to my earlier explainer. Costs. Stablecoins are hugely attractive digital innovations to process payments quickly and potentially save corporations billions of dollars in swipe fees that they pay every year to credit card companies, banks, and fintech startups like Toast and Square. Businesses forked out over $172 billion in US transaction fees in 2023, a near 50% increase from before the pandemic, as more customers went contactless. Even Washington is taking notice, and is moving legislation with, again, a teeny weeny bit of irony….

    The US Congress is due to vote on a bill known as the GENIUS Act (the other crypto legislation due is the STABLE Act, I kid you not)  which would give private companies a blueprint for issuing their own stablecoins. That vote could be as soon as Monday, and rely on a body politic flushed with the narcissistic joy of watching a military parade on the streets of Washington DC – an exercise once the autocratic preserve of the Kremlin, Beijing or Pyongyang. It’s a strange new world, but there is still real genius and opportunity out there.  Watch that stablecoin empire build….

     

    **Brian Wilson and the Beach Boys began recording their album, Smile, in 1966. Brian was convinced it would be his masterpiece. Struggles with mental health intervened, and delayed the release of the album until almost 40 years later. TIME magazine described its ultimate arrival as “rapturously received” and ranked it as one of the ten best comeback albums of all time.

     

     

     

  • Three Winning Hidden Trends

    Three Winning Hidden Trends

    I was tempted. The “buddy breakup” in Washington between the Taco Toddler and the Ketamine Kid is fabulous writing material. But, no. The real risk these days is being distracted by America’s slide towards lawless autocracy and missing something bigger. Eighty one years ago on a June 5th morning President Roosevelt brought good news to the American people and its allies. Rome had been liberated by Allied troops – “The first of the Axis capitals is now in our hands.” Little did Roosevelt’s audience know that later that day paratroopers would be dropped into northern France ahead of 7,000 ships landing on the D-Day beaches of Normandy on June 6th. Fast forward to that anniversary today, and there are winning opportunities again being potentially obscured by Washington broadcasts. Indeed, it’s possible you may have missed some striking data updates to three huge investment trends this week. Let’s dive in.

    Last month at its annual Stripe Sessions conference, CEO Patrick Collison identified the “gale-force tailwinds” of AI and stablecoins. The first tailwind trend won’t be a surprise to any readers of our AI article last week but it was intriguing to hear Collison say, “Stablecoins are the underdog everyone’s sleeping on.”  He also had an interesting take on the macro “noise” and uncertainty prevalent in today’s business world – “when new technologies collide with a turbulent economy, the technology tends to win”. That seems a prescient call this week when we briefly touch on AI and reflect on its chip champion, Nvidia, revealing its latest quarterly results. Despite tariff disruption of its China business, Nvidia beat Wall Street analyst expectations and regained its status as the world’s most valuable company. Thanks to a 50% surge is its share price over the last 8 weeks, Jensen Huang’s chip behemoth is worth $3.4 trillion. The latest data point on stablecoins was also quite eye-catching.

    Not long ago Circle Internet Group was saved by the US government when Washington guaranteed deposits at the collapsing Silicon Valley Bank(SVB). Circle as an issuer of dollar-backed stablecoins was the top dollar depositor customer at SVB. However, this week the newsflow was way more optimistic as Circle waited to IPO on the New York Stock Exchange. Reports suggested investor interest was massive and the listing was 25x over-subscribed. Not surprisingly, with more buyers than sellers, Circle’s share price surged 168% on its first day of trading to a valuation just shy of $17 billion. It’s difficult not to conclude that stablecoins have “arrived” and investors are excited by Collison’s own description of stablecoins’ “real world utility in regular business”. In fact Stripe confirmed stablecoin issuance has increased by 39% year-on-year while “demand for borderless financial services go through the roof….at a growth rate which eclipses anything we’ve seen before in Stripe”. Ok, that’s two winning trends. The last one won’t surprise but the numbers might.

    Private equity (PE) and its billionaire leaders could be doubting their love-in with the Taco Toddler but they are not the only PE-related cohort in doubting mode. PE investors are quietly wondering how private equity houses are going to deploy the $1.2 trillion of ‘dry powder’ which is currently sitting on the side-lines and hurting overall return on investment (ROI) figures. A quarter of that massive total has been available for the last 4 years (Source: Bain &Co). However, there is no doubting our mantra “the future is private” when you consider private equity now controls a record 29,000 companies worth more than $3.6 trillion.  But, there are cyclical challenges. Higher interest rates, reduced IPO activity and M&A paralysis (execs can’t Taco trade those deals) don’t help valuations or exits so it’s worth noting global PE fundraising has declined for 5 straight quarters. Global PE raises in Q1 were down 33% per Pitchbook/Bloomberg reports but that cycle might be about to shift. The Wall Street Journal this week reported that the software-focused PE giant, Thoma Bravo, has just raised a staggering $34.4 billion which is the biggest funding round since the start of 2024.

    As a final thought, one must be mindful that as investment funds become bigger and bigger their opportunity pool shrinks due to size and liquidity constraints. On the other hand, as the ECB cuts interest rates, Ireland GDP growth hits almost 10%, German equities touch all-time highs and Trumpolini begs President Xi for a trade détente, it is arguably a particularly good time for investors to think small, and think private. So, if you want to build a private asset portfolio quickly, Spark Private can certainly help with a very exciting summer EIIS** pipeline of PhD-packed medtech innovations, real-time AI applications, 3-year infrastructure exits and super-growth software stories. Do not be distracted. Check out www.sparkprivate.com  and, as my old boss used to say, “They ain’t door numbers, they move !!”.

    ** EIIS tax rebates of 35-50% on your 2025 personal income tax.

     

  • You’re Watching The Wrong Dictator Reality Show..

    You’re Watching The Wrong Dictator Reality Show..

    It deserves an expletive. It’s exhausting. Magic water spigots turned on in Northern California, summary dismissal of Inspectors General watchdogs and sending uninvited military planes into the airspace of your closest Latin American ally. Of course, it could be worse as an ally – you could just be asked over an introductory phone call to give up over 95% of your sovereign territory. Perhaps, there will be a Eurovision-style poll run by Fox News to decide the future of Denmark and Greenland. I can almost see it now… say hello to the voting panel in Belgrade, or Moldova…. or Transnistria. More expletives. But, no. This week we were given a trillion dollar reminder that we are watching the wrong dictator reality show.

    The trillion dollar damage to tech stock valuations inflicted by China’s unveiling of a super-cheap AI large language model, DeepSeek (with similar performance powers to ChatGPT, Gemini etc) was indeed a “wake up call” for US Big Tech according to President Trump. However, at the same time, the geopolitical machinations of China are veering into reality show territory. Thanks to the erosion of truth in the world there’s no need for James Bond-style subterfuge. Instead, it can be as brazen as hell. Chinese ships have been damaging undersea cables around Taiwan in recent months but this week marked the third severing of an undersea cable in three months…. in the Baltic Sea. The fibre-optic cable in the latest incident connected Sweden and Latvia but this time involved a China-owned ship in the sabotage operation. It would seem that Russia, as China’s “mineral colony”, has invited China to assist in infrastructure “grey-zone” conflict. Indeed, China has its own domestic reasons to ratchet up the geopolitical temperatures of distraction.

    The latest economic activity data from China is looking pretty grim. January manufacturing activity actually contracted which won’t put the cheer into the upcoming New Year celebrations for 1.4 billion Chinese. This manufacturing slowdown has surprised many given recent monetary stimulus initiatives by the Beijing regime. However, we can expect further stimulus measures given Chinese government debt/GDP ratios are closer to 60% compared to US and European governments labouring under debt burdens over the 100% mark already. This monetary firepower will have knock-on effects across international markets and global economic growth. But… there is a strategic price to be paid by the rest of the world. And, it’s not just the obvious trade deficits. DeepSeek is more likely to be a temporary shock and, despite the hysterical headlines, the emergence of a better engineered cheaper way to harness computing power is a net benefit to all, including broader equity markets. However, DeepSeek highlights the growing excellence of China across multiple technologies.

    According to a 2024 study by the Australian Strategic policy Institute (ASPI), China now dominates the US in 57 of 64 critical technologies, up from just three in 2007. The US, which led in 60 sectors in 2007, now leads in just seven. Rankings by the ASPI were based on cumulative innovative and high-impact research and patents. ASPI credits President Xi Jinping’s ‘Made in China 2025’ plan for the infusion of “massive direct state funding for R&D in key technology,” stating that existing strategic investments turned into a plan to achieve technological “supremacy”. The areas where China excels include…

     

    • advanced integrated circuit design and fabrication
    • high-specification machining processes
    • advanced aircraft engines
    • drones, swarming and collaborative robots
    • electric batteries
    • photovoltaics
    • advanced radiofrequency communication

     

    Oh, and did we mention nuclear fusion? Of course, you might have missed this if you’d been watching the fantasy Greenland invasion on the other show. In the past week, Chinese scientists broke the nuclear fusion record for sustained plasma at over 100 million degrees by maintaining a mix of electrons and ions in a fluid state for more than 1,000 seconds. As a reminder, nuclear fusion replicates the sun’s energy, offering limitless, carbon-free energy.

    So, if you were a White House strategist you might want to curtail China’s technology advances. And, this is where things have taken a very strange turn. The Trump campaign has made lots of noise about China with tariffs being the chosen commercial weapon to rebalance US trade deficits with the Middle Kingdom. Fast forward to today and tariffs were, instead, the chosen weapon to bully Colombia. But… the US actually has a trade surplus with Colombia. More strange has been the Trump reverse-ferret on TikTok which he’d now like to see continue operating in the US (rather than enforce the ban upheld by the Supreme Court) with a US investor partner like Elon Musk or Larry Ellison. That all make sense? Now, for the really weird stuff.

    Remember when Taiwan was supposed to be protected by its US ally from the increasing threat of China? Well, while we’ve all been distracted on DeepSeek news, there were some fairly seismic developments in US-Taiwan trade relations. Check out this headline about the two ‘allies’….

     

    Trump’s 100% tariff threat on Taiwan chips raises cost, supply chain fears  –  Business Insider

     

    So much for the tough talk on China. Beijing must be thrilled and President Xi will be encouraged to keep up the ‘grey zone’ infrastructure sabotage in the Baltic Sea and Straits of Taiwan. Meanwhile, the new US Defense Secretary , Pete Hegseth, fresh off the Fox & Friends chat sofa, has got to work defending the nation. First priorities….. revoking former chair of the Joint Chiefs of Staff, General Mark Milley’s security detail, removing all portraits of the general in the Pentagon and pursuing his demotion.

    Anyone get the feeling the wrong ‘enemy’ is being pursued…..?

     

  • Trump Words Scare But Bonds Are The Real Bully Boys

    Trump Words Scare But Bonds Are The Real Bully Boys

    The flashbacks are coming on strong. Who thought myself and Donald Trump would be ratified for new office in the same week? Not me. Anyway, enough about me… said the Donald never. Seriously, do we really have another four years of these whining streams of consciousness, aka press conferences. As Los Angeles burns and Gaza starves, the world is still digesting The Accused’s quasi-declaration of war on Panama, Mexico, Canada and…… Denmark. Clearly, the Orange Toddler is emboldened, as Putin’s number one fan boy, to threaten the invasion of both Panama and Greenland for “national security” reasons. One could be dismissive of these attention-seeking words of intimidation but this feels different, and probably Putin derived. Hamlet this is not, but Act I of this tragedy was Ukraine. Who knows what Act II could be in a new world order of misinformation, security over-reach and sovereign destruction?  Taiwan would top most risk lists. However, Estonia or Finland might disagree, as the Baltic plays host to “infra-destructure” warfare. I might disagree too. There’s a bigger bully boy out there and possibly a reason for hope.

    We have written many times before about the perils of depending on “other people’s money”. In most cases, the most catastrophic financial implosions have involved high levels of debt or leverage. However, in certain cases catastrophe has been avoided. The phrase “my word is my bond” speaks to credibility but I’m thinking of a more threatening type of bond today. Recall the famous words of Clinton White House strategist, James Carville….

     

    “I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a .400 baseball hitter. But now I would want to come back as the bond market. You can intimidate everybody.”

     

    Liz Truss might attest to that intimidatory power. Her lettuce-life UK premiership was ended by the UK government debt markets (Gilts) going into freefall after her mini-budget ignored all rational advance warnings and almost blew up the UK pension fund system. The Bank of England saved pension funds with a swift monetary/funding intervention but there was no saving Chancellor Kwasi Kwarteng or his delusional prime minister. Fast forward to 2025, and bond markets for me are the big start-of-year story. And, it’s not looking good for the UK….again. In fact, things have deteriorated since the Truss budget debacle. It appears that an election pitch along the lines of “the other lot are awful, vote for us” is failing to convince the all-powerful debt markets that the new government of Sir Keir Starmer has any credible grip on the economy. Try these bond market data points for starters…

     

    UK government long-term borrowing costs – priced in the 30-year Gilt/bond markets) – are at their highest levels since…. 1998.

     

    UK government medium-term borrowing costs – priced in the 10-year Gilt markets – are at their highest since 2008.

     

    In real terms, this means that the UK government is going to spend more on interest costs than on national education this year. Meanwhile, the politics of the country is consumed by “grooming gang” criminality which has been widely known about since at least 2015 (Jay Report). Oh, and UK Treasury Minister, Darren Jones, has just soothed House of Commons members’ fears saying “it is normal for the price of gilts to fluctuate”. Fluctuate? I can think of other “F” words being used on City financial trading floors right now. However, the ‘reality bite’ of bond markets might not be confined to the UK.

    The US government has been racking up monster debts too – just the $34 trillion at the last count. So, for those believing Trump is either going to buy Greenland for trillions of dollars or spend similar amounts on military invasions of US allies (I know, genius stuff), there’s a tiny bond detail which merits some attention. At this week’s US government monthly auction of 10-year bonds/debt instruments traders pushed the yields/costs to be paid by the US government to an 18-year high of 4.68%. It might not look like a particularly big cost but this is the foundation of all pricing in the US house mortgage and car finance markets. So, if the bond markets are threatening mortgage or car financing costs to rise to levels not seen in almost two decades, then be assured that the bond bully boy will trump the fantasy words of Agent Orange. This is an example of debt markets warning about spending inflation and unsustainable government budget deficits. But, there’s another type of warning which the bond markets can deliver.

    Ultra-low interest rates(bond yields) can also point to multi-year stagnation caused by a national (including government) debt crisis. Japan is the classic multi-decade example of minimal GDP growth or inflation and super-low interest rates. But, there’s a new contender for zombie debt stagnation: China. The Middle Kingdom’s $11 trillion government debt market is sending some very strong signals. The gap in costs/yields between the US and Chinese government bond markets is the highest in history. Chinese 10-year bonds are yielding just 1.6%, but the bigger story is in the long-term 30-year bond markets. Japanese 30-year bond yields are now higher than China’s which starkly signals a “Japanification” of the Chinese economy. The credibility of China’s economy is at stake but critically that of President Xi too. Interestingly, Xi’s new nickname on the Chinese internet is “the elementary school student”. Of course, an invasion of Taiwan could distract the Chinese population but there’s also a real possibility bond markets could signal Xi being toppled from power.

    As a final thought and one recently raised by David McWilliams in an excellent podcast there could also be a reality check around the tariff threats of the incoming Trump administration. Maybe it’s not quite as bad as invading your allies, but imposing tariffs on your biggest trading partners could prompt a painful bond bite-back. McWilliams makes the very good point that the Chinese and Japanese own/hold trillions of US government bonds. If these trading counterparties sell them as part of a bigger trade tariff war then US government interest costs and US consumer finance costs will painfully spike. US government interest costs already exceed $1 trillion annually which, if it were a standalone government department, would actually outspend the US Defense Department’s annual budget. My money is on financial pragmatism watering down most of the actual tariff outcomes. In fact, another part of the financial world is hinting at Trump threats not quite happening in a different market. Despite the threats to roll back cleantech and renewable initiatives of the Biden administration, it would seem the markets are not quite convinced. Indeed the latest data from Wall Street might surprise; apparently the share price performances of clean energy stocks and fossil fuel  stocks are in a statistical dead heat since Election Day (Source: Callaway Climate Insights).

    Perhaps there’s a new lesson soon to be learned in geopolitics….

    Your words are only as strong as your bonds.

     

  • Silver Linings For Finishing 2nd Almost Everywhere…

    Silver Linings For Finishing 2nd Almost Everywhere…

    I blame the Irish. Should have seen it coming. Poor immigrants once upon a time, the changed perspectives were there for all to see. A couple of Kellys, a Mulvaney, a Spicer, a McMahon and a McGahn, all key lieutenants in the Trump 1.0 cabinet of 2017, championed Muslim bans, Mexican walls and family separations. I’m being flippant and skipping through a few decades of political evolution here but political integration of immigrant communities is a good thing. Take it as a genuine US presidential election positive. Of course, there will be plenty of Democratic Party navel-gazing and gnashing of teeth in the days and years ahead, but finishing second for the first time in 20 years (last popular vote loss was 2004) will focus minds on the stunning shift of ethnic minority voters to an anti-immigrant Trump ticket.

    Things looked bad for the Harris campaign very early on Tuesday evening. Hispanic-heavy Miami-Dade County in Florida had given Hilary Clinton a 30 point winning margin in 2016. On election day, Trump obliterated that by 40 points to secure a 10 point winning margin. There were other shockers – Star County (Texas and 97% Hispanic), Suffolk County (New York) and my personal favourite, Anson County in North Carolina. Republicans have won this 45% black county only once before since…. 1870. Wowzers. The purpose of this article is not to follow most post-mortem commentary and examine where the Democrat messaging didn’t connect but rather to highlight some potentially positive developments. If anything, the change in the mix of the Republican vote is more interesting. Try the dilution of white voting power.  The ‘dilution’ phrasing might surprise readers’ perceptions of what constitutes the Republican party base vote, but the scores are in:

     

    *Trump won less of the white vote this year (55%) than 2020 or 2016. And…

     

    *Harris (43%) did better with the white vote than Hilary Clinton or Joe Biden.

     

    *Hispanic men voted for Trump 54% vs 44% for Harris.

     

    The always excellent Noah Smith in his newsletter recalled a former Irish Republican, Ronald Reagan, saying that Latinos would eventually become Republicans. The social negatives attached to that shift are for another day but Smith highlights an even more important point for a polarised US society:

     

    “This largely destroys the narrative that non-white immigration will demographically drown White Americans under a tide of imported minority votes….. At some point, Republicans are going to realize this, and hopefully become less anxious about America’s racial future. Hopefully they will also realize that any attempt to make voting harder actually hurts them in the future, because the impact would fall disproportionately on their own base”.

     

    Oooooh Tucker Carlson might not like that narrative challenge to the “Great Replacement Theory”. But, there’s also another positive attached to this stunning shift in voting patterns. Harris lost so emphatically and so early that there was no dispute over electoral process. In fact, Trump improved his vote in 90% of all counties in the USA, and that includes Guam flipping to red. For those who hoped for decency, that feels like finishing 2nd just about everywhere. Many wanted democracy to prevail. It did, but with the anticipation that the “right” side probably had to win for a smooth transition, right? That caveat is for another day’s discussion too.

    Also, while we are on the topic of ‘right’, another stunner for me was that the white evangelical vote was 22% of the total vote and they voted 81-17 for Trump. Other voters who make up the remaining 78% of the electorate voted overwhelmingly for Harris by a 19 point margin (58-39). So, without white evangelicals Harris would have won the election by 20 points!  Let’s hope God is right……

    Meanwhile, for the socially agnostic financial markets, uncertainty is a wealth destroyer, paralyses decisions and kills investment activity. So, not surprisingly, there have been a few financial wins in the early days after the election. We’d highlight the following:

     

    *Banking and asset management stocks like Goldman Sachs, Blackstone, Blackrock, JP Morgan and Apollo all flew up by 10% or more.

     

    *The S&P 500 had its best day in 2 years and best ever post-election bump (+2.5%).

     

    *Elon Musk’s Tesla jumped 15%

     

    *Bitcoin’s price rise by 9% to $75,000.

     

    The Musk win is probably a struggle for some but the EV revolution is climate critical and hopefully keeps Trump tangentially on board with decarbonisation of the economy. Intriguingly, the presence of Musk as chief Trump mascot could bring a slightly contrary positive. There are some, including me, not comfortable with the billionaire “broligarchs” brazenly pushing their own commercial agendas. However, it would be a mistake to conclude that it is only the Republican party engaging billionaire promoters. The Democrats had their own, possibly glitzier line up of billionaires, influencers and celebs. And, the big strategic mistake would be to react to a Jaws-like electoral savaging by suggesting “we need a bigger boat” or better billionaires. That boat has sailed. The positive lesson from this would be to “listen” and start exerting proactive power.

    One of the critical shifts in voting patterns was urban voting. Democrats still won the big cities but the winning margins were embarrassingly small compared to double-digit history. Urban voters in the likes of New Jersey, New York, Chicago, San Francisco and Detroit have witnessed a disgraceful decline in the condition of their cities. And, other urban voters have noticed. Where Democrats have governing power, they need to deliver better city living. Security, mental healthcare, housing, crime and infrastructure are very real challenges experienced, in particular, by the lower middle and working classes. Investment and solutions to these challenges will improve urban lives and win votes.

    Commentators recently described the US voter base as one now split evenly across three cohorts: i) white college-educated, ii) white non-college educated and iii) everybody non-white. Currently, the Republican party is connecting more effectively and adding voters with two of those three. The Democratic Party should be surprised and concerned about the only one with which they are growing/connecting. The good news is that the key driver of political power in today’s America is not ideology or race. The winning factor is DELIVERY, perceived or promised. Clearly, social growth and stability are important for a nation but there’s a price for everything. In this instance, the price (inflation) – and a perception of social agenda prioritisation – was too high. Just ask Latinos, now known as “Latinx” in Democratic Party literature.

    For investors, less financial regulation, lower technology oversight(AI) and more deals (M&A, IPOs) all promise more exits and further investment cycles. All good news, until it’s not. Note, only 15 years ago the world paid a shattering economic price for deregulation of financial credit markets. Go back another two decades, and here’s a final thought for the autocracy delivery (over democracy) fans out there celebrating technology and commercial freedom…….

    The last global authoritarian empire to implode was tipped into collapse by lies and a catastrophic failure of technology .

     

    “Every lie we tell incurs a debt to the truth. Sooner or later, that debt is paid”

     

    – Valery Legasov, chief of the Chernobyl disaster investigative commission.

  • Four Huge Trends For Your Private Portfolio

    Four Huge Trends For Your Private Portfolio

    I scared a few people last week. Apologies. Then again, you could be a public servant or journalist in the US today and be referred to as “the enemy within” by the bookie’s favourite for the Oval Office. Or, how about being a lifetime Tory party member faced with the extremist choice of “KemiKaze” Badenoch or “Honest Bob” Jenrick as your next leader? Better still, put yourself in the shoes of the Tory tactical masterminds who ‘traded’ leadership votes and eliminated their own likely winning candidate, Jimmy “Dimly” Cleverly. Breathe, just breathe slowly. We can’t promise an end any time soon to populist buffoonery but in the real world big changes are afoot. Four developments, in particular, caught the eye this week and highlighted future opportunities for those building new businesses or investment portfolios.

     

    Electricity: If $150 billion of hurricane damage in Florida doesn’t focus climate crisis minds I’m not sure what will. Indeed, there is an encouraging reality check beginning to filter into financial discussions. Just this week the Washington Post ran a story about the cost of extreme weather exerting further strain on an already challenged Federal government’s fiscal position($35 trillion debt). Of course, moving away from fossil fuels to electricity is already set to be the greatest financial shift ever experienced by the global economy – $275 trillion to be invested in the transition by 2050(Source: McKinsey). So, the following statistics really hit home. They are sourced from the International Energy Agency (IEA) and flag the recent growth of electricity use being twice as fast as the growth of energy demand. However, the future is about to turbo charge that relationship. Between now and 2035 electricity usage will outpace energy demand growth by a factor of 6x. Yep, that’s electric vehicles (EVs), AI chips, data centres all doing their future thing. Another way of looking at this shift is that this 6x electricity acceleration equates to the entire energy demands of Japan (4th biggest GDP in world) being added EACH year to global electricity usage.

     

    Banking: In the old days it was banks that provided loans, or credit. Now, every second ‘growth’ headline in investment markets is referencing “private credit”. So, what is it? It is quite simply lending by private pools of capital(not banks), usually sitting within large investment firms. The original “Barbarians at the Gate” were private equity firms who used debt to buy out big companies. Today you might read about Blackstone buying software Smartsheet for $8 bilion. Back in 1988 it was KKR buying RJR Nabisco for $25 billion. Historically, the debt part of the ‘leveraged’ buy-out came from banks. Now the Barbarians (private equity) want to do the banking (debt) too. In the last 12 months there have been 14 different partnerships announced between banks and private credit(debt) firms. Most recently, Citibank announced a partnership with private equity/credit giant, Apollo Global. Amazingly, this relationship turns banking orthodoxy on its head – Citibank’s investment bank will source the deals and Apollo will provide the money/debt. Bankers turned deal makers, deal makers turned bankers. Wowzers. Note, if the Barbarians are now keen to provide debt funding to companies, then they must see opportunity and excellent returns. Current estimates of the size of the market indicate private lending assets (AUM) currently at $1.5 trillion growing to $2.7 trillion by 2027 (Source: Prequin).

     

    Life Sciences: Despite the anti-elite denial of science prevalent in the social media and political spheres, the incredible speed-to-discovery of vaccines seen during Covid-19 is set to continue. However, with a little AI twist. Arguably, AI won its first Nobel Prize in recent days. From The Japan Times….

     

    “The recent awarding of the Nobel Prize in chemistry is an incredible vote of confidence in the potential for artificial intelligence to transform the way medicines are invented by using AI to illuminate and manipulate proteins, life’s most basic building blocks. The Royal Swedish Academy of Sciences honoured University of Washington professor David Baker and two scientists from Google DeepMind, CEO Demis Hassabis and senior research scientist John Jumper.”

     

    Yep, AI machine-learning cracked the code to predicting protein structures with Google scientists right in the middle of it all. Meanwhile the Nobel Prize for Physics went to the “Godfathers of AI”, Geoffrey Hinton and John Hopfield, who developed the tools which power the neural networks underpinning today’s AI boom. Now, think about the Nobel tradition of rewarding decades of research and recognition. Then think about chemistry protein discovery work barely 2 years old and not one, but two, Nobel prizes. Simply astonishing.

    Nuclear Power: It’s not just gold hitting all-time highs. Uranium mining stocks are flying too. Let’s face it, the news flow in nuclear power has been hard to miss. Japan has just re-started a 47 year old nuclear reactor at the Takahama nuclear power station. Amazon is pumping $500 million into nuclear capabilities, and Google has entered an interesting deal with Califormia start-up, Kairos Power. Google has committed to buying nuclear power generated by multiple small modular reactors(SMRs) built by Kairos. And, one for the nuclear history buffs – the infamous Three Mile Island nuclear power station will be restarted in a $1.6 billion deal struck between Microsoft and the energy utility, Constellation. Again, AI is the power demand trigger for these moves. And, mining stocks sitting on uranium reserves might just be the wrong price (low) if a Big Tech AI race goes nuclear on many levels.

    So, there’s four thoughts or trends which are very much part of our future. You might spot AI as the common factor across a lot of these developments but that’s possibly not the only private opportunity. There seems to be some enormous shifts happening in traditional sectors like infrastructure, materials, banking, power and chemistry. The good news is that there are lots of private companies plugged into these transition sectors right now and many will need funding (debt or equity) in the years to come. If that sounds like a private portfolio-building strategy then you’d be right. It’s time to take a private dip. Even better, we might be able to help you very soon…..

     

     

  • M&A Deals Showing Us New Opportunities

    M&A Deals Showing Us New Opportunities

    Global leadership is on my mind. Not the extreme stuff. If you can’t avoid the headlines on the excruciating UK Conservative party leadership battle between “Honest Bob” Jenrick and “Jimmy Dimly” Cleverly, I can assure you it’s well worth the effort. Instead, I’m just back from the IMI National Leadership conference and one of the key speaker messages in our uncertain geopolitical world was to watch ‘personalities’ closely. And, believe them. So, rather than jump into geopolitics, this advice can also be applied to business and financial markets too. The return of large merger and acquisition activity (M&A) is a reliable ‘tell’ of executive confidence. These big deals are the real “believe them” leadership actions, not the quarterly analyst conference call types where management commentary is invariably upbeat, and the analysis even worse. So, with excellent timing a number of M&A developments are catching the eye….

     

    Banking: We mentioned in recent weeks an interesting standoff between Unicredito and the German establishment after the Italian bank swooped in to take a 9% stake in Commerzbank. Let’s just say the biggest Commerzbank shareholder, the German government, were not happy. So, imagine the scenes in Berlin’s political corridors last week when Unicredito used derivative instruments to up their beneficial interest in Commerzbank to 21% and overtake the government’s 12% stake as the biggest shareholder in Commerzbank. This is highly unusual cross-border aggressive M&A tactics and suggests high levels of Italian banking confidence. Indeed, another Italian bank, Intesa, in recent days briefly became the most valuable bank in the eurozone. Not long ago the Italian banking system was in a mess as the world’s oldest bank, Monte dei Paschi di Siena, entered near-collapse restructuring in 2022.

     

    Software: All the tech glory has been in hardware in 2024, and software has been feeling the pain. Valuations in SaaS have slipped, pipelines have sputtered and AI has become a deflationary impetus in the coding ecosystem. Uncertainty has bred deal paralysis. So, the sector would have been hugely relieved to see a big private equity buy-out of Smartsheet by Blackstone and Vista for a chunky $8.4 billion, and a 41% premium to its recent share price average. We will return to the significance of private equity doing buy-outs of large public listed companies, but for now let’s focus on high-risk sector consolidation where management teams are already under pressure…

     

    Hardware: Yes, AI has been a winner for chip manufacturing superstars like Nvidia and Broadcom. However, as with all sudden technology shifts, there can be disruption to established players. Intel is a good example of model disruption. The share price is off 50% and the company has adopted a split company strategy across manufacturing(foundry) and chip design(product). As the sole US player with sufficient process/manufacturing technology, Intel has a future but possibly with a partner…..or predator. Apollo Global have been mentioned in the media as private equity financing partners, but recent reports suggest California’s Qualcomm have approached Intel in pursuit of a friendly takeover. That combination would be a $300 billion (+) chip monster supported by US government policy (US Chips & Science Act) and would cause a seismic shake up in the semiconductor manufacturing ecosystem.

     

    Mining: The software sector might feel unloved over the past 18 months, but spare a thought for the mining sector. And, I’m not talking crypto. No, the basic materials critical to our decarbonised electrified future are supplied by a global mining industry which has been starved of investment capital for….. 15 years. That is about to change. Supra-sovereign legislation like the Critical Raw Materials Act (EU) are a siren sound to the frightening mis-match between our cleantech future and the metals needed to meet climate crisis targets. So, watch the ‘leader signals’ as gold and silver prices hit all time highs, and then check out the deal activity. AngloGold is buying Centamin for $2.5 billion while BHP and Lundin are jointly closing a $4 billion purchase of Canadian copper play, Filo. Also, there’s an interesting $2.8 billion green equipment partnership deal between Australian giant, Fortescue, and Swiss construction player, Liebherr. We’d better start believing……in our planetary survival.

     

    UK: Our final M&A development is not a sector specific observation but highlights another unloved area of the investment world. The UK has been in the international investment ‘naughty corner’ thanks to its own historic lack of investment in domestic assets….and a world-first voluntary trade-reduction deal which nobody wants to talk about anymore. So, it was intriguing to read a recent piece of research from stockbroker, Peel Hunt, on UK deal activity. Apparently, there are currently a remarkable 19 ongoing bids for UK companies in the FTSE 350 index. Not all will happen, as Rightmove, Currys and Anglo American have demonstrated. But, the imminent take private deals for the Royal Mail and Hargreaves Lansdowne are a serious ‘tell’. Britain is in play.

     

    The deal environment is definitely picking up. Early private equity research data from Pitchbook shows deal count in Q3 was up 8% and deal value up 20% compared to last year. Also, helpfully, the story on the exit side of things is progressing too – global private equity exits are up 13% in value and 3% in deal count. Now, consider that private equity houses have circa $4 trillion of unspent investment capital (“dry powder”) to deploy and things could get rather interesting in unloved parts of the market. Finally, keep an eye on the Middle East for more than conflagration reasons. Oil prices might be falling but investment in the region is rocketing. The recent FT Mining Summit 2024 featured a whopper statistic that 20% of the world’s cranes are located in just one country…. Saudi Arabia. Oh, and Abu Dhabi’s national oil company just bought Bayer’s plastics spin-off for $16 billion. Yep, plastics. If market personalities are telling you they are beginning to love the unloved, believe them.

     

     

  • Check Out Two Big Wins For Banks And EIIS Investors

    Check Out Two Big Wins For Banks And EIIS Investors

    Ok, I was wrong. I really thought that rising interest rates to over 5% over the last four years would cause greater stress in bank loan books. Yes, commercial real estate loans are causing angst in the global financial system but thanks to private equity, pension funds and family offices it’s not just the banks on the hook this time. Clearly, the rise of private investment vehicles in financial markets has helped to de-risk the banking system. Of course, the investor muscle memory of the 2008-2009 credit crisis has had a double impact too. First, consumer protective regulation has forced banks to build huge capital buffers (reserves). Second, bank customers through a combination of lack of finance education, risk aversion and behavioural inertia have added to those buffers. European bank customers in particular have left trillions of euros of cash in the bank earning almost no interest because they have not sought out specific interest-earning deposit or money market accounts. Ireland, with almost €150 billion euro sitting in accounts earning miniscule interest, is the worst European offender.  Here are the numbers:

     

    • Across the EU banking system there is €16 trillion of customer cash sitting in bank accounts.

     

    • 54% of that cash earns on average 0.13% in low-interest overnight accounts. Implicit in that number is that 46% of customer cash is in longer-term deposit accounts. In other words, almost half of European bank customers commit cash to ‘term deposit accounts’ which, in exchange for waiving access to the cash over defined time periods, pay depositors average rates of 2.65%.

     

    • Ireland has a VERY different mix of customer behaviours. Just 12% of customer cash earns income in term accounts. A whopping 88% of Irish cash sits in overnight accounts, earning almost nothing.

     

    Clearly, this is a win, if not a scandal, for Irish banks. On the other hand, the European banking system is in pretty good shape, steering capital away from higher returns but also higher risk. As an illustration of the European bank risk culture, I was staggered to see that US banking giant, JP Morgan, has a market value of $540 billion which exceeds the combined value of Europe’s top 10 banks. So, Europe’s banks are doing ‘ok’ but not exactly chasing higher returns for their shareholders which translates into underwhelming valuations. However, if you thought this was a hit piece on banks you’d be wrong. The other eye-popping data point I discovered this week was that in the critical world of customer experience (CX) – now a main priority for 80% of companies per Gartner – banks in seven major economies outside Ireland now top the CX league tables. That just wasn’t on my 2024 bingo card. In fact, that banking ‘bingo card’ is putting together a very interesting string of numbers….

     

    • US and global stock markets are hitting all-time highs again after August wobbles. Yes, the US tech sector has been the star sector of the last 12 months (+42%) but you might be surprised to see US Banks in second spot with a 29% return.

     

    • Euro area banks handed out €71 billion in loans for house purchases by consumers in July, the highest level since August 2022.

     

    • Italy’s Unicredito bank is signalling increased executive confidence with a shock swoop for a 9% stake in Germany’s Commerzbank. The Italians have asked permission of the German government to pursue merger discussions. Wow. Cross-border M&A featuring major European banks has not been seen for years.

     

    • Europe’s financial markets are increasingly pricing in climate-related risks. ECB reports that eurozone banks were charging companies in the top 25% of carbon emitters monthly interest rates 14 basis points higher on average than those in the lowest 25%

     

    • You may not have heard of Tether but it is a fintech platform specialising in trading digital currencies which track/tether to traditional major currencies using blockchain. These asset-backed digital instruments are known as stablecoins. Tether has 350 million stablecoin users globally and, incredibly, has generated more profit ($12 billion) than the world’s biggest asset manager, Blackrock, and its $10 trillion portfolio since early 2023.

     

    • Perhaps it’s no big surprise that Revolut is reportedly about to launch a stablecoin for its 45 million customers, of which 2 million reside in Ireland.

     

    One of the other big messages in the CX world these days is that brands suffer without innovation. Keeping the status quo is really going backwards. We have written before about the massive data/AI opportunity for banks and the ultimate platform play: payments. Trillions of dollar wealth has accrued to innovators in the social media and cloud computing platforms. Now, it could be the turn of payments to deliver trillion dollar opportunities. While we write of opportunities might we suggest another?

     

    As tax-return season kicks in, private investors should note that EIIS tax-friendly opportunities just became more lucrative. Thanks to changes in last year’s Finance Bill, many investments in early-stage companies currently attract 50% income tax rebate opportunities for Irish investors. Now, think about all that cash sitting in bank accounts with inflation of say 3.5% eroding its purchasing power. Here is a quick illustration of wealth destruction:

     

    • Keep €20,000 in overnight deposit as usual.
    • Hold for 10 years while asset prices inflate by 3.5% per annum.
    • Spend the €20,000 after 10 years but get only ‘value’ of €14,000 due to asset inflation/purchase power erosion.

     

    Or….. try this EIIS investment strategy.

     

    • Invest €20,000 in portfolio of 7-8 early stage companies.
    • Receive €10,000 back in income tax rebates.
    • In 10 year’s time, if your €20,000 investment has returned just €4,000, you have beaten the bank.
    • That €4,000 hurdle requires just one of your investments to double in value while all the others go to zero.

     

    Gotta be worth thinking about. Certainly, if you’re sitting on cash which will lose 30% of its purchasing value over the next 10 years. Better still, move some money into term deposit accounts and look for 3% long-term rates. Then think about using EIIS to offset the taxes on that deposit income. In the “real” world of tax savings that 3% interest earnings (offset with EIIS rebates) on your deposit equates to a 6% gross return typically promised on other types of assets, like a property or multi-asset wealth portfolio. Definitely worth a chat with your accountant.

     

    Finally, from a Spark perspective, we can promise our investors a very interesting pipeline of up to 8 EIIS deals spread across SaaS software, biopharma, medtech, ESG/sustainability and AI before Santa arrives and the EIIS window closes for 2024. And, if we were in Santa letter-writing mood we’d be tempted to ask government and banks to join the dots and incentivise specific support for small early-stage businesses via bank deposit accounts. Showing my age here, anyone remember SSIA’s of the early naughties? Answers on a post card to Apple or the Department of Finance with a recent €14 billion windfall/capital infusion to kick things off….