These are great times for financial assets — and by implication for finance companies that make and sell them, right?
Alas, no. Just the opposite. Each part of the FIRE (finance, insurance, real estate) economy is imploding as “modern” finance hits the wall.
Interest rates, for instance, have fallen for three decades…
Stock prices are at record levels…
And real estate is revisiting its recent bubble.
In this kind of paper paradise it’s no surprise that banks and their cousins have grown fat, happy and arrogant. And with the above trends now ending, it’s also no surprise that business models premised on their continuance are failing. Everyone by now knows the Deutsche Bank story of bloated costs, horrendous derivatives exposure and debilitating criminal penalties. But lots of other finance companies are staring into the same abyss. Some notable examples:
(Telegraph) – Commerzbank, the second-biggest bank in Germany, has suspended its dividend and revealed more than 9,000 job losses as it tries to shore up its business in the face of ultra-low interest rates and sagging client activity.
The bank said its decision to cut almost one in five of its employees worldwide and merge two of its largest businesses will result in a €700m write-off and a loss for this quarter.
The bank’s Mittelstand division, seen as the engine room of Germany’s mid-sized corporate economy, will be combined with its corporate branch, while investment activity will be scaled back.
Commerzbank also warned that “ongoing weakness in the shipping markets” would push up its loan loss provisions in the coming months. The bank decided four years ago to exit the ship financing business but still has about €8bn on its books.
“We simply don’t earn enough money to lead the bank sustainably and successfully into the future. And this situation will get worse if we don’t do something about it,” chief executive Martin Zielke said in a draft note to employees, according to Reuters.
The bank will cease dividend payments “for the time being”, prompting analysts at RBC Capital Markets to scrap their forecasts for payments until at least 2018.
The reorganization will result in more central management and may generate billions of euros in savings, the paper said. Raymond Vermeulen, a spokesman for the Amsterdam-based bank, declined to comment on the report. The bank employs about 52,000 people, according to its website.
Harvard is the largest university endowment, with $35.7 billion in assets. Harvard president Drew Faust said the “disappointing” investment return would “constrain our budgets,’’ according to the Harvard Crimson. Harvard Management Co. is seeking a new chief executive after the departure this summer of Stephen Blyth after a short, year-and-a-half stint. The endowment manager is under pressure to boost performance; Blyth had said it needed to produce at least a 5 percent return annually to meet its obligations to Harvard’s annual operating budget.
With the Federal Reserve deciding to hold interest rates steady at its meeting Wednesday, the funds will continue to be squeezed by rock-bottom payouts on fixed-income securities just as stocks fall overseas and post only modest U.S. gains. As a result, pensions in Illinois, Missouri and Hawaii this year have moved to roll back the assumed rate of return on their investments, joining the dozens that have taken that step over the past two years.
“There’s little light at the end of the tunnel as far as pension funding is concerned,” said Vikram Rai, head of municipal-bond strategy at Citigroup Inc. in New York. “I expect funded ratios will drop further. It’ll require increased pension contributions on the part of the states and local government, but most state and local governments don’t have the ability to do so.”
If every part of the financial sector hits the wall simultaneously, the resulting crisis will overwhelm the ability of governments and central banks to keep the game going. Their last, desperate policy experiment will involve coordinated currency devaluations to make debts less onerous. When this fails because everyone responds by borrowing even more — thus making the total debt burden more rather than less onerous – a big part of the FIRE economy will die a noisy death.
This will be a disaster if you work on Wall Street, rely on a public sector pension and/or own a bunch of bank stocks. It will be hard but survivable if your wealth is in real rather than financial assets. Gold, as always, is the safe haven.