Naughty bankers, Trump's trade tirade, Company tax, and Shorten's retiree tax grab.

The banking industry was in the headlines again this week for all the wrong reasons as the Banking Royal Commission continued to unearth totally unacceptable, and we would imagine, criminal lending behaviour. A report quoting UBS analyst Jonathan Mott estimated that one third of all mortgages ("Liar Loans") written in the past year were based to some degree on borrowers' false or misleading income or expenditure data. There's an eerie sense of déjà vu of pre GFC US housing lending here. If anyone's looking for a catalyst for a property crunch, imagine if those loan applications were re-submitted based on the real numbers?

Over in the US the Federal Reserve increased interest rates by 25 bps to 1.75%, taking rates above the RBA cash rate in the process. As pointed out by Jamieson Coote's Charlie Jamieson, the last time this occurred the A$ was at US$.50 cents! As this was possibly the most widely anticipated move we can remember, the market didn't seem to miss a beat, but that didn't last as Trump's latest tariff salvo against the Chinese took its toll overnight.  

At the beginning of the year we warned that there were likely to be two big risks to markets this year - rising interest rates, and political "left of field" events.

Both seem to be playing out, although the interest rate theme has been well flagged and therefore there's no surprise in that - although there will come the time when the "Tipping Point" arrives - i.e. when the risk/return balance moves investors out of equities to other less volatile asset classes.

Politics is of course very left field in the Donald Trump/Vladimir Putin era, although it's fair to say that as both are becoming predictable, it's a case of expect the unexpected - or just more of the same. In both cases there's an old rule we recall from physics classes - "for every action there's an equal and opposite reaction". However in the political environment the reaction is not always rational, equal, or predicable. There's no way the Chinese are going to let Trump's tariff announcement simply slide by un-noticed, but what they'll do is yet to be seen.

From investors' perspective therefore volatility and risk come to the fore. Hedge and Absolute Return funds - depending on their strategy, style and the manager's skill - will help protect the downside to varying degrees, for instance those funds with high cash parameters, or the ability to protect against overall market risk using short index futures, or long put options.

Tax - one way or another - was also front and centre in the news this week. In the US The Donald is cutting company tax, while in Australia Malcolm Turnbull is hoping to. Overall, Hedge Clipping's view has always been that the Australian Taxation System - if not broken - is seriously in danger of breaking under the weight of complexity and legislation. As this link shows, Australia's tax act has increased over the past 100 years from just 22 pages to over 5,000 and rising, but that, as they say, is history.

Politicians of all persuasions like to have their say, but none have made any real effort to act to simplify the system. The Henry Tax Review, released in 2010, made 138 specific recommendations, almost none of which were adopted by the government of the day, or since - except the failed Resources Super Profit Tax. Henry's review was also hamstrung as that great political elephant in the room, the GST, was explicitly excluded from the terms of reference. As a result the great taxation debacle, and all its complexity, continues seemingly ad infinitum. 

Memo to politicians of all persuasions: An increasing number of the electorate are desperate for a simplification and overhaul of the taxation system (including superannuation). The Country and the economy need it. Leadership is required!

Combining the topics of political leadership and taxation is never easy. However, last week, the opposition leader Bill Shorten got into a fiddling tax act mess, announcing a planned change to the treatment of franking credits - or more specifically a plan to ditch franking credit cash rebates for tax payers with low taxable incomes. He certainly hit a raw nerve on all sides of the electoral spectrum. In last week-end's Financial Review his proposal received no less than 8 full pages of comment or editorial, and in the days since it seems everyone has jumped on the bandwagon, with most of them jumping on Bill.

As such it would be remiss of Hedge Clippings not to join the throng, but we had difficulty in coming up with a new angle. As a result, and being a Friday, here's a different view (with hyperlinks for those of our overseas readers unfamiliar with the local vernacular):
 

Wee Willie Short-One was looking for a plan,

to soak the rich and famous and so help the common man;

With an election 'round the corner, it's a chance he couldn't miss,

He tried it with his Mediscare, it might just work with this:
 

"I know!" he says to Albo, (who's breathing down his neck),

"What about the pensioners, they're fair game - what the heck!

Best of all I'm sure they're Libs, so wouldn't vote for us,

We'll call it taxing millionaires, that'll not cause so much fuss."
 

No matter that they worked for years to put some funds away,

or started up a super fund just for that rainy day.

"Look at all the franking credits they're getting back in cash -

They'll whinge a bit, poor old folk, but few teeth left to gnash."

"But best of all OUR super's safe, indexed and inflation free,

Fifteen percent and guaranteed, it won't hurt you and me.

If it works I'll get a pension, gold pass, driver and a car,

But only if I make PM - if I can only get that far..."

But Willie's got his facts wrong, as pollies often do,

Didn't understand the people his franking tax will screw,

There's lots of labour voters who he forgot to note,

Have also put some shares away - and bloody hell! they'll vote!

For those amongst you who might not recognise the rhythm or the rhyme, check out (and apologies to) William Miller's Wee Willie Winkie. Or for a less politically correct musical connection, Benny Hill's all time number one classic from 1971, Ernie - the fastest milkman in the West.

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Australian Fund Monitors

ATTACHED FILESAFM Fund Review - February 2018 (pdf format)

BENNELONG KARDINIA ABSOLUTE RETURN FUND

Attached is our most recently updated Fund Review. You are also able to view the Fund's Profile.

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Australian Fund Monitors

ATTACHED FILESAFM Fund Review - February 2018 (pdf format)

Banking revelations surprise even the most cynical, but on reflection, no surprises.

The Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry hit the headlines this week with mis-deeds and malpractice in the banking sector front and centre. Even those who expected that Australia's banks would probably not emerge from Court Room 4A in Melbourne's William Street smelling like roses, might not have suspected the levels of graft, seriously poor practices, corporate governance and criminality that were revealed.

In particular lending for Australia's residential property market, which makes up such a large proportion of each bank's loan book, came under scrutiny, with executives from NAB and Commonwealth, and their respective distribution and mortgage broking arms, uncomfortably sharing the limelight.

It seems inevitable that if you hire a sales team, place them on significant commissions and incentives, (including both upfront and the trailing variety) and then set aggressive sales targets, selling into a market desperate to buy your product, you are going to end up with only one result - or more correctly one result, many thousands of times over.

To what extent part of this was either part cause, or effect, or a bit of both of the residential property boom is unknown. Maybe it's just a part of it, but given the record of the culture in the US mortgage broking and loan origination leading up to the GFC, surely Aussie banks' senior management must have seen it coming?

We suspect they did, but hey! Preventing, or stopping it would have been what is known in some parts of the industry as "commercially naive". Hence the old "sweep it under the carpet if possible" strategy.

That doesn't directly correlate with the fund management sector, but we'd be surprised if at some stage the Commission doesn't turn its attention to the banks' vertical integration in funds management and distribution, with banks wearing three hats (albeit frequently under different brands) as product issuers, (i.e. fund managers) gateways, (platforms) and distribution (financial planning groups).

While there are issues and potential for conflict abounding in the managed fund sector, they're likely to pale into insignificance compared with this week's revelations.

On a totally different note Stephen Hawking, one of the greatest minds of the last 100 years possibly longer, passed away this week, amazingly on March 14^th, Albert Einstein's birthday, which also happens to be Pi Day (Pi = 3.14 ) and just one day before the Ides of March.

What was so impressive about Hawking was not only his ability under such difficulty, and his sheer determination to not let that inhibit him, but above all his sense of humour, as summed up by one of his better-known quotations, "Life would be tragic if it weren't funny".