Thursday, October 9, 2008

The Bronte Capital thesis breaks down

This blog has an over-arching thesis – which is that current account deficit countries are going to have bad banking systems – but current account surplus countries are going to be sort-of-OK.

This post was outlined in the second substantive post on this blog in which I said:

America is a land with little in deposits and considerable lending. There are similar lands – such as Spain, the UK, Australia, New Zealand and Iceland.

But I was pretty happy with the banks in current account surplus countries – although their profitability was limited.

Well – the facts on the ground look much uglier than that.

Sure the failure in Germany (Hypo Real Estate) was largely caused by its dumb Irish subsidiary (Depfa).  And the banks in Iceland and the UK have essentially imploded – as have several in the US.

But my problem is that the banks in current account surplus countries are behaving very badly.  The relatively well run Chiba bank in Japan has halved.  Ditto DNB Nor – in oil rich current account surplus Norway.  

This is significant and signifies either irrational panic or the thesis being wrong.

Thoughts please.


Anonymous said...

That DnB NOR could go pear shaped sounds ridiculous. It's pretty much clean of toxic paper, has a very healthy home market, good management and is 34% owned by a Norwegian state awash in cash.

The only fundamental clouds would perhaps be the Norwegian economy seriously tanking (which it isn't) and the Baltics going over the edge (which they probably are, but DnB NOR is anyway far less exposed than some Swedish names that spring to mind.)

TBH i think their stock plummeting is mostly down to norwegian investors rekindling memories of the bank crisis in the early nineties, when DnB went to zero along with the rest. Oh, and perhaps also the fact that Oslo - where DnB NOR is the only largecap bank - has been one of a select few places on the planet where shorting financials has remained legal in the past few weeks (a ban comes into effect tomorrow).

Aaron Krowne said...

It looks like virtually all of them imported the bad practices from the "Anglosphere".

I was a "decoupling" fan for a while, but then I nuanced my position by expecting the financial turmoil to spread everywhere, but with current account surplus countries to "recover" faster and not slip as far because of the "cushion" the surpluses provide.

This, however, is not likely to pan out unless they start investing their dollar reserves domestically. Thus far they have stuck to the imbalanced capital-flowing-uphill (to the US) system.

But as far as financial economies, it basically became one big world. This will continue to stay the same, unless widespread capital controls or a gold standard are implemented.

Anonymous said...

disclaimer first: i am a newbee to finance/economics.
but here is my comment anyways:
Increasingly financial institutions all over the world are inter-linked. The banks in surplus countries probably have lot of toxic stuff from deficit countries. And the whole globalization and electronically inter-linked markets/banks etc make it tightly coupled and not decoupled.

Risk is spread all over the world. Surplus or Deficit, will probably help the country but not individual/private banks/institutions.

Anonymous said...

Do you have a view on any of the Canadian banks, or the sector as a whole.

We have largely avoided the major right downs, and because of mortgage laws, low gearing, and the generally more conservative nature of banking in the country the banks seem in decent shape (relatively).

That being said, there remain the issues of exposure to the US, what will likely at best be a global recession, and whatever the next landmine(s) happen(s) to be.

I would be curious about your opinions on your Commonwealth neighbour to the North.


scott said...

there was a working paper published at not too long ago. The word 'bonanza' was in the title. you might be interested in reading it.

Morten said...

DNB Nor was lending to Lehman just before they went bust, are locked in legal disputes over lending to the now infamous arctic cities losing money on Citibank, have been very aggressivly lending to Norwegian 'subprime' housing, and are expected to suffer from the downturn in Norwegian housing.

elartistamadridista said...

So far, spanish banks are doing more or less ok, despite being a perfect example of a country with CA deficit.
The only difference with other countries is that we were not interested in buying US garbage since we were making our own. Our garbage may be rotten but is just plain old stuff, not CDOs ,CLOs, etc..

julien garran said...

my basic thinking on why banks in surplus countries are dangerous is that the central bank must accumulate assets (loans) to offset liabilities (dollar reserves). So when there are lots of reserves, there are likewise lots of loans. Almost by definition these loans are cheap. Sure, a bunch went to the US - causing the housing bubble - but a whole lot stayed in country. So a reserve boom equates to a lending boom, and firms compete to get returns on capital down to the cost of capital - which is around zero. It's why the chinese housing market now looks like the US housing market in 2006. Then the US curent account deficit shrinks, and global banks deleverage - leading to a fall in reserves. All of a sudden the central bank can't issue new cheap loans, the cost of capital rises, and the emerging market banks customers go bust. And that's why building reserves never works as a solution to a potential market crisis.

Anonymous said...

if every single currency the world over is backed by nothing but competitive currency devaluations, how can any country expect to escape?

what if say, everyone who uses inches or centimeters has to deal with a measurement that fluctuated up and down by a few ticks on a daily basis?

what is the difference for businesses who have to do the same with every given currencies value that fluctuates on a daily basis?

competitive currency devaluations.

at least currency traders like it.

General disclaimer

The content contained in this blog represents the opinions of Mr. Hempton. Mr. Hempton may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Hempton's recommendations. The commentary in this blog in no way constitutes a solicitation of business or investment advice. In fact, it should not be relied upon in making investment decisions, ever. It is intended solely for the entertainment of the reader, and the author.  In particular this blog is not directed for investment purposes at US Persons.