db 140weekender

Macro

    We need to talk about Kevin - In a recent speech Kevin Warsh bemoaned the current “uniformity of opinion” among policymakers, describing it as reminiscent of the pre-crisis days. Never mind that he never dissented in five years at the Fed - is he right? There was just one dissent among the 272 votes cast in two dozen FOMC meetings in three years up to June 2006 - a 50-year low in dissensions. And that solitary dissent was in favour of easier policy, even though the actual funds rate trailed the Taylor rule estimate by over 200 basis points on average. Likewise today, the funds rate is again more than 200 basis points lower than suggested by the Taylor rule. But the FOMC is less acquiescent now. Chair Yellen’s tenure has seen over seven per cent of votes cast as dissenting - higher than all but two of her predecessors.

    Strategy

    Vix lows - Historical comparisons were wheeled out on Monday as volatility dropped to levels last seen 23 years ago. Sure, the Vix chart read nine point-something in December 1993 and now, but the comparison is frivolous. First, the S&P 500, whose volatility the Vix measures, has changed its profile with technology companies increasing from five per cent in 1993 to one-quarter today. Second, technical changes were made to the calculation methodology two years ago. Under the old method, Vix would have been 0.8 index points higher this week. Finally, there is now a proliferation of exchange traded products providing levered exposure to the Vix. Indeed, the Vix itself is twice as volatile today as 25 years ago. This makes the recent moves less impressive. The 1993 low was a 2.5 sigma event. A true comparison requires the Vix today falling below seven.

    Stocks

    Snap - Even though a 25 per cent plunge this week merely returned Snap’s shares to their IPO price, investors have worked themselves into a tizz over quarterly user numbers and ‘monetisation’. Recall, however, that four months after going public Facebook lost half its value on similar concerns. In Snap’s defence, it was three years younger than Facebook upon listing and already has a robust advertising model. Indeed, two-fifths of Snapchat users admit watching most ads in full while only one-tenth would stop using the app if they could not skip them. True, sustainable revenues are another thing. But rise above the intricacies of business models and note Snap tripled its staff numbers in the past year. America’s five most valuable technology companies have an average 93 per cent correlation between their five-year revenues and employee count, three-fifths higher than the market.

    Finance

    Challenger banks - If Australia’s four ‘pillar’ banks are worried about competition after the government imposed a six basis point levy on their liabilities this week, they can look to Britain’s experience. The UK’s largest six lenders account for 70 per cent of the mortgage market, similar to Australia’s big four. The former raise wholesale funding at spreads of 150 basis points, half that of local challenger banks. As a result, Britain’s bank levy of 8.5 to 17 basis points doesn’t close the gap. Furthermore, any up-start advantage is eroded by two things. First, challenger banks rely more on deposits than wholesale funding compared with the majors. Second, large banks are adept at reducing their balance sheet to minimise the levy. Indeed, the UK government’s revenue from the levy has missed its target by an average of one-fifth in each of the past five years.

    Digestif

    Oil about EV - This week BMW said it would deploy 1,000 electric vehicles in Hamburg, India wants to lower taxes on them while Canadians fret that battery powered cars will destroy the Alberta oil sands industry. But it is not falling gasoline demand from electric vehicles that oil investors should worry about - not yet anyway - it is efficiency improvements to internal combustion engines. Assuming electric cars jump from one per cent of global sales today to about a third in 15 years, the 100m electric cars added annually by then lowers oil consumption by 1.3m barrels a day, according to DB analysis. In comparison, maintaining the current one per cent rate of engine efficiency gains would moderate demand by 3m barrels a day. And both combined it is not until the early 2030s that overall car consumption of gasoline even starts to fall.