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Petrocapita July 26, 2012 Briefing - The Retreat of Financialisation

Petrocapita July 26, 2012 Briefing - The Retreat of Financialisation

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Published by Capita1
So with that context in mind, I believe it is putting it mildly indeed to say that we have arrived at a point where the vast majority of financial institutions are simply regulatory oligopolies with asset-harvesting business models more concerned with fees and proprietary speculative activities than with providing any useful services to savers and retail investors.
So with that context in mind, I believe it is putting it mildly indeed to say that we have arrived at a point where the vast majority of financial institutions are simply regulatory oligopolies with asset-harvesting business models more concerned with fees and proprietary speculative activities than with providing any useful services to savers and retail investors.

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Published by: Capita1 on Jul 28, 2012
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07/28/2012

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Petrocapita UpdateJuly 26, 2012
 
1
THE RETREAT OF FINANCIALISATION
Let me start by saying that I do not adhere to the mistakenbelie that banking is intrinsically “bad’. Banking andfnance serve a productive purpose in the economy byintermediating savings and investments. However I believethat what passes or much o modern banking, or moreaccurately post 1971 banking with its dysunctional centralbank/private bank nexus and its anti-competitive naturecourtesy o regulatory barriers to entry, is not productiveand is actually acting as an impediment to the underlyingeconomy by destroying vast amounts o real capital - akabailouts.So with that context in mind, I believe it is putting it mildlyindeed to say that we have arrived at a point where thevast majority o fnancial institutions are simply regulatoryoligopolies with asset-harvesting business models moreconcerned with ees and proprietary speculative activitiesthan with providing any useul services to savers and retailinvestors.  The mainstream fnancial sector has indoctrinated an entiregeneration to buy and hold because it suits their businessmodel that is asset-driven rather than perormance-driven.Large fnancial frms have an intrinsic institutional bias to bebullish on everything - they have no incentive to tell you notto invest in something as they will usually be operating a undin that area. Hence such sophistry as being
“underweight”
 unattractive asset classes rather than encouraging outrightselling. Ultimately they have little investment insight otherthan everything will go up in the long-run. O course in thelong-run it has been quipped that we are all dead. To addinsult to injury they seldom outperorm their benchmarksover long periods and charge management ees or what iseectively closet indexing.
Petrocapita Update
 
2
Petrocapita Update (continued)
Once again, I am not a knee-jerk critic o the fnancialsector but I do believe that it has become too large.Corporate profts attributable to the US fnance sectorwere eectively stable rom the 1950s to the early1980s rom 5% to 15%, then as the growth in themoney supply turned sharply higher on a sustainedbasis in the 1980s they peaked at 40% in the early2000s and still remain around 30% - substantiallyhigher than long term averages.On an asset basis the numbers tell a similar story. The20 largest banks in the US have combined assets o approximately 90% o GDP. The fve largest banks -JPMorgan Chase, Bank o America, Citigroup, WellsFargo, and Goldman Sachs - have combined assetso approximately 60% o GDP. These numbers areroughly 3 times what they were in the 1990s. Given the fnance sector’s intimate relationship withgovernment and central banks it is not surprising thatit grows aster than the underlying economy. Newlyprinted money ows into and through the fnancesector acting as a wholesale subsidy that drivescorporate profts, compensation and speculation.Despite widespread belie to the contrary,government intervention into broad swathes o thefnancial sector to support “too big to ail” banksor, more accurately, to prevent capital destroyingbusiness activity rom being eliminated to the benefto the entire economy is not a positive or uturegrowth. When it is unded via expansionary monetarypolicy it seems to me that at best it is laying thegroundwork or stagation. There is an economic truism that whatever yousubsidize you get more o - hence by subsidizingailure we are ensuring bigger ailures in the utureand worst o all penalizing well-run businesses. Thefrms that were prudently managed leading up to thecrisis should have benefted rom the demise o theirpoorly-run competitors - in a ree economy capitalwould have owed to the proftable businesses ratherthan the loss making ones. The act that this didn’thappen creates a perverse
“if you can’t beat’em, join’em”
mentality with respect to risky and imprudentbusiness practices.Lets be clear on one thing, the primary purpose o low interest rates is not to save the economy, it isto save the banks and allow them to continue allthis risky, bonus-generating behavior. Low interestrates are simply a case o robbing Peter to pay Paulas capital is being
“strip-mined”
rom savers via lowinterest rates and in eect
“donated”
to the fnancialsector. I would argue that the enormous size o thefnancial sector coupled with its current insolvency,which the constant bail-outs are attempting todisguise, will be a drag on growth or years unlesslosses are allowed to take place via ree marketmechanisms.Perhaps another interesting indicator o thefnancialisation o western economies is the ratio o the Commodities Research Bureau Index versus theS&P 500. The long-term average is around 1.5 times.Simplistically, this ratio indicates how much S&P 500stock you can buy with a fxed basket o commodities– a rough indicator o the growth o fnancial assets inrelation to real assets so to speak:During the commodity bull market o the 1970s,the ratio was consistently higher than 2 times orover 10 years - it peaked at around 4 times.The ratio is currently at around 0.2 times - arbelow the 1.5 times long-term average andar below the 4 times peak seen in the last

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