Cash is trash, equity is beautiful.

Banking crisis? Yes, but the banking sector is very solid and after the mistakes made with Credit Suisse politicians are moving to support it.

Suddenly rising interest rates? Yes, but the raising cycle is finished or almost finished.

Inflation high? Yes, but supported by the last phase of the cycle, the blessed one of rising wages.

 Stock index valuations not particularly low? Yes, but today, after a decade of a bull market in growth stocks, the indexes are awash with these rightly more expensive stocks, which then inevitably raise the average price. But you must avoid looking at the averages. Value stocks have never been more attractive.

Recession? Yes, possible, particularly in the very short term after this banking crisis. But it will be short-lived if it does arrive. It will mark the end of rate hikes. Deglobalization and energy transition will sustain the economy for several years. The numbers to be invested here are mind-boggling. A new era is opening up after twenty years of stagnation and destruction of the manufacturing fabric in the West.

Sell in May and go away? Probably not this year. We would wait for the flood of dividends that will come in May and June and, more importantly, the closure between valuations and inflation that usually starts to happen when rates stop rising. Stocks are assets that absorb inflation and protect us from it, with a certain time gap. But then the catch up is violent. See the 1950s or the 1980sfor example.

In short, it will take some patience, but we would not risk losing our seat on the equity train and would take advantage of this unexpected entry point to put more cash to work in equities. Possibly value and well diversified. Meanwhile inflation is fast eroding the value of cash.

Cash is not king. Cash is trash.

UBS

Ork sculptures at Bernd Greisinger’s Tolkien Museum in Jenins – Switzerland

Credit Suisse is dead. Long live Credit Suisse!

Credit Suisse is gone, devoured by UBS. The demise of the most prestigious Swiss bank brings sorrow, not only to the poor shareholders (and we were among them), but also to the small but prestigious European nation. This cannibalistic show has been sold purely as a bailout but a bailout it is not.

Once upon a time, there was Switzerland’s most prestigious bank, Schweizerische Kreditanstalt, aka the “Institute of Credit Suisse.” It ran happily on the grassy meadows of the cantons, helping the development of its country’s railway infrastructure and the growth of the business fabric. Over time, thanks in part to Switzerland’s – let’s say banking “reserved and neutral” policy – it could attract deposits from all over the world and grew enormously. Unlike its half-sister UBS it was not declared insolvent during the great financial crisis of 2008 and did not have to be bailed out (stocks and bonds) by the Swiss state. It grew a lot and like all big banks where there are some few thousand individuals deciding the fate of large sums, some scandals occurred (here, just for equanimity some UBS scandals: notes 17 full-report-ubs-group-ag-and-ubs-ag-consolidated-2022-en.pdf. , UBS: Corporate Rap Sheet | Corporate Research Project (corp-research.org)).

A lot has been said about “tuna bonds,” bonds issued in… Mozambique, to help develop the tuna industry. Although it all took place on the “well-regulated” African continent some bribes were paid. There has been talk of the stalking related to the “poaching” of a big CS poppy by UBS to check compliance with contractual clauses. There was much talk about the managements related to bonds issued by Greensill, a company that fell into disgrace but whose endorsement politicians and opinion leaders in the UK and Australia disputed for years. They talked about the much money lost by Credit Suisse from the Archegos bankruptcy of which CS was prime broker like all the other big investment banks. CS lost much more than the others, and for that it had to make a painful capital increase that, together with the annual profit, covered the loss. An unfortunate event but far from a scandal. CS then had to fire the prestigious Horta-Hosorio, former CEO of Lloyds Bank, who had just been hired as Chair, because of his non-compliance with Covid rules. Again, hard to see any negatives here. If anything, the opposite. Axel Lehmann was then hired in his place, by someone who was certainly not superstitious…

Over the past five years, CS’s goal was to gradually reduce size and risk and move toward a business model closer to Julius Baer, which trades at 3x tangible net worth, rather than UBS, which before the acquisition traded at 1x. Credit Suisse at the start of the year traded at a fraction of what UBS traded at. To confirm the strategy, we point out that Credit Suisse reduced assets by almost 40 percent from 2020 to 2022, from about CHF 819 billion to CHF 515 billion. When big asset reductions happen, it’s normal for profits to fall, at least initially, and for some extraordinary costs to be recorded.

In the past two years it’s been touching how several newspapers and websites have looked after CS. The Inside Paradeplatz blog and the FT have been among those at the forefront of this initiative, to mention the most prestigious. Every day an article. In some case a light negative insight and, in another, a saber-rattling a frontal attack on the bank’s stability. This even though the bank was apparently a solid global financial institution. However, family offices, funds and rich people who read daily negative press about the institution where they store their cash, may have been asking themselves questions. A frontal press attack, devoid of substance, occurred in October, right during the company’s black period. This led to an initial bank run that culminated in a capital increase that, on paper, was not needed. Arab investors increased their positions, and the bank decided to accelerate its transition to a low-risk reality.

However, the press did not let up. Even the auditor’s recent recommendation to strengthen the company’s account controls, not unusual for an auditor, was presented almost as an effort to falsify the accounts, although the accounts were in no way corrected. Patrick Jenkins, deputy editor of the FT, came out with an aggressive article on Feb. 23 (Six numbers that show why Credit Suisse has little leeway | Financial Times (ft.com))[1] in which he inexplicably painted every item related to this bank in black. The U.S. banking crisis then came unexpectedly, unfortunately infecting the industry in Europe and hitting the most talked-about player (certainly not the weakest).

What is a state supposed to do when a player that is solid on all the metrics by which regulators measure banks turns out, in the context of a global financial crisis, to be the subject of noise culminating in a bank run? Probably stand behind the institution with all its power, setting a precedent for the speculators. Certainly not what the Swiss State did. It is possible that regulators and politicians were skillfully directed during this panic phase by the predatory instinct of UBS management, and they created a disaster.

The bottom line is that no matter how sound a bank is, if it is the victim of a bank run it must be shut down and shareholders and AT1 bondholders could lose everything or almost everything. So, what metrics can an equity or a bond manager evaluate a bank with? How much capital and liquidity must a bank have in such an environment? And thus, when can this ever pay back the cost of capital? Alternatively, to protect against bank runs, the regulations must be changed, and the deposits completely protected. But how does the banking system or even the state guarantee all the deposits? Another alternative is that liquidity must be hugely increased (CS had a top liquidity ratio, above 150%, four days before its fall) but then lending will have to be much lower, with huge repercussions on the money multiplier and thus on the economy. In short, the Swiss authorities’ mess will have to involve new regulations and guarantees. In the meantime, we advise banks to spend lots of money on their IR function, buy lots of adverts in newspapers, invest in freemasonry and political lobbying, keep the best journalists close and constantly well informed. In short, make sure to have some form of control on the news flow that could lead to a ban run, to the benefit of everyone, from investors to depositors and consumers. Credit Suisse did very poorly on this side.

In all this, what did UBS managers do? Cunningly pushed politicians and regulators to give them CS at a negative value of CHF 14 billion (it paid 3 billion CHF in shares for 57 billion CHF of tangible equity, let alone the goodwill), probably waving the sword of Damocles over the fall of the system and thereby fulfilling their mandate to create shareholders value (in this case the shareholders’ value created has been epic!). While UBS management and current shareholders of UBS benefit a great deal from this, in the long run it will bring it some negatives too. UBS will remain in the imagination of the educated Swiss as a global bank that used its strength to weaken the country it represents, the country that saved it in 2008 from certain death, leaving shareholders and bondholders standing. It is a courtesy that UBS has been careful not to reciprocate today. UBS’s current top management, not Swiss unlike those at CS, will happily retire in a few years. Here’s to Switzerland and the Swiss finding their own path to erasing this ignominious page in their history and limiting the long-term damage from the hasty decisions made a week ago.

In the meantime, we advise everyone who has lost money with CS to stick to UBS, a stock that can easily double thanks to the gifts of Swiss politicians. UBS is a company that was given CHF 54 billion in tangible capital, almost equal to the tangible capital it had before the takeover. Along with the capital they were given a strong profit-generating businesses and a huge franchise. The wealth management divisions of UBS and CS are strongly synergistic. CS’s Swiss commercial banking division is a jewel that, sold or combined with UBS’s division, can lead to huge gains or synergies.

A well-known investment bank calculates the value of synergies between the two realities at CHF 60 billion (CHF 8 billion annually capitalized). So, we are talking, in a far-from-blue-sky scenario, a gift of about CHF 114 billion, CHF 54 billion from the tangible equity given away and CHF 60 billion of the capitalized value of synergies. This is almost twice the current value of the company. To add insult to injury, the company is covered by the state for CS book losses in excess of five billion CHF and has a liquidity line of 100 BILLION CHF guaranteed by the central bank. Besides, it’s remained the only big Swiss (Swiss?) bank and must be defended to the death. It cannot be torn down.

In conclusion, if you lost money on CS, stocks, or bonds, hold your nose, and go where CS and your money are now, which is on UBS equity. To get it back!

Credit Suisse is dead.

Long live Credit Suisse!!

“There is no more champagne for everyone…”

I went to the wine shop a couple of days ago to buy a bottle of red. I noticed that on the champagne shelf, instead of the usual 75 cl bottles of Roederer there were awkwardly stacked 33cc boxes of the same product. I have always found a 33cc bottle of champagne a difficult creature to read, particularly when boxed. I took the liberty of asking the manager for enlightenment about the change in strategy. He looked at me and sighed. An expression of sadness and resignation overshadowed his face. Then, he lowered his gaze and explains. They are not delivering orders to him. It seems, he continued, that “THERE IS NO MORE CHAMPAGNE FOR EVERYONE…”

Mali famine 2022. Queueing up for food

In a world still full of adults and children who cannot access adequate nutrition, the phrase sounds like blasphemy or perfect for a line in a comic show. However, the reality is this, there is not enough champagne compared to the demand. Champagne supply is about 330 million bottles a year, demand is now slightly higher. The last time this happened, in 2006, champagne stock prices multiplied by a factor of three. In fact, if demand is higher than supply, the producers? tend to direct stocks to areas where prices are higher and then, gradually increase prices in the other areas. Considering the operating and financial leverage of these stocks, a 10 percent increase in the average selling price can more than double profits. However, so far, the sector has moved little. This is perhaps out of fear that what happened in 2007 will happen again: in the face of increased demand, the champagne appellation area was expanded, thus increasing supply. The great financial crisis and subsequent recession did the rest, causing the sector to lose between 60 and 80 percent. Moreover, today we start from the bottom, in fact these stocks trade well below tangible assets, a level never seen before, despite the catalysts we now see. It represents a fascinating risk/benefit profile…

[1] Six numbers that show why Credit Suisse has little leeway | Financial Times (ft.com)