After decimating the bricks and mortar retailers, could Amazon create the next wave of disruption in the asset management industry? Much is being talked about the global trade war after the Trump administration recently slapped sweeping tariffs on steel and aluminum imports. Could it adversely affect the global trade system? The 500 euro note is a goner as euro zone attempts to turn into a cashless society. With cash still the king, will the euro zone succeed in its War on Cash?
All of these to engage your grey cells this weekend.
I reiterate that this is only a sampling of some of the best content I read through the week, with a dash of my own thoughts. Until next week…
How Amazon Can Blow Up Asset Management
If you buy physical and digital products from Amazon, would you consider buying financial products as well? 70 per cent of US households trust Amazon enough to be Prime members. In all probability, an even greater portion of households owning mutual funds are Prime members. If Amazon added asset management funds and services what might happen to the asset management industry, where 35 per cent operating margins are the norm?
Chinese tech companies have already ventured into this industry. Alibaba, which is a Chinese incarnation of Amazon + eBay + Paypal + Mastercard + UPS +… Fidelity amassed $92 billion in its first year alone and has now become the world’s largest money market fund with $235 billion in assets under management in 2017. At first conceived as a holding place for excess funds held by Alibaba customers at Alipay (similar to Paypal), the fund exploded in popularity by combining an incongruously high yield with NAV principal stability. Alibaba has expanded its product line to include funds managed by other asset managers. Tencent, another Chinese internet behemoth, has also entered the asset management domain. Could Amazon embark on a similar venture?
Perhaps, Amazon could have a virtual stable of in-house portfolio managers, all over the world, managing trillions of dollars, at minimal cost to end investors. Amazon would be indifferent to the debates between active vs. passive, open end fund vs. ETF, domestic vs. international as long the product is bought from them. The biggest beneficiary of an Amazon entry into fund management will be retail investors. Many investors understand that they’re not informed investors, but also don’t care to spend much time learning. For them, trust is paramount, and Amazon has it in spades.
Asset management companies, already under pressure to lower fees and enhance their digital services, will experience even more stress. If you thought the overbuilt status of bricks and mortar retailing provided the kindling to the Amazon explosion in retail, the abundance of asset managers (especially active asset managers) provides the uranium for an apocalypse that could be much worse. Read More
Here We Go
The Trump administration recently announced trade tariffs of 25 per cent on steel and 10 per cent on aluminum. Countries near and far almost immediately announced plans for counter-tariffs on American goods. Many, most notably the American president himself, are now openly talking about a global trade war. Competently prosecuting trade wars requires speed to undercut competitors’ positions faster than they can undercut yours, and that speed requires negotiating skill and coordination. Trump may love his executive orders, but to date, he has yet to demonstrate a capacity or interest in using the levers of state in an efficient way.
Trade wars – just like real wars – require allies. Most of those allies are at home, but of course some of them are of the more traditional sort: foreign nations. If you want to target China, the weak points are electronics and finance – not steel and aluminum. But don’t forget to coordinate with the Koreans and Taiwanese who are exposed to Chinese supply chains. If you want to target Europe, you hit Southern European agriculture and German manufactured exports. But you do not levy tariffs against the Europeans in isolation – you make friends of France and Poland and Sweden, leveraging the fact that the European Union is not a single political entity. That way you can pry apart the entire EU negotiating position. In any case, it would probably be wise to not pick fights with Eastern Hemispheric powers as well as NAFTA partners simultaneously. After all, the Americans’ North American trade portfolio is nearly as big as everything else put together.
If you target Mexico, you must go after automotive… but that also means shoring up Texans who are enmeshed into the cross-border supply chains. Otherwise your own political coalition fractures. And don’t forget to deflect Canada so you don’t have a 2-on-1 situation against you within NAFTA. An “easy” trade war is eminently doable, but without doing the homework or laying the groundwork, the result is a free-for-all of sanctions and countersanctions with should-be allies rapidly degrading into didn’t-have-to-be enemies. The global system is so fragile and counter-intuitive and out-of-date that it was a waste of time to guess what specific action might cause it all to crash apart. An American-initiated trade war is perhaps one of the ways to destroy it most quickly and thoroughly. And so, here we are. Read More
Cash Refuses to Die, But the €500-Note Is a Goner
This is happening all over Spain. The €500 banknote has lost much of its allure compared to twelve years ago, when the country was home to a staggering 26 per cent of all the €500 notes that circulated in the Eurozone, then a 17-country currency bloc. In January, the total value of all €500 euro banknotes in circulation in Spain was just €19 billion — the lowest level since 2003 and down from €33 billion in May 2016. That was just before the ECB decided to stop producing €500 banknotes as of the end of 2018. Much of the money was being used in the thriving real estate sector, which is one of the main sources of black money as well as a popular conduit for laundering the proceeds of crime.
However, dealing with it now is more trouble than it’s worth as most consumers associate it with criminal activities, such as corruption, drug trafficking, or the financing of terrorism. The decline is being compensated with the increase in €50 banknotes and the circulation in January was 4.8% higher than a year ago. In the last couple of years, Spanish banks have pulled out all the stops to promote cashless payments, but to little avail.
As in Germany and Italy, cash is still very much king at the point of sale in Spain, accounting for 71 per cent of all retail transactions in 2016 — compared to 74 per cent in 2011. Demand for cash in Germany last year rose 7 per cent — almost twice its nominal growth rate — to €635 billion. In other European countries such as the UK, the Netherlands, Poland and Sweden, the decline in cash usage has been far more dramatic. Spain could see further limits on cash usage as part of proposed EU-wide cash restrictions. However, sprouts of resistance are rising against the establishment’s escalating war on physical cash, not only from the public but also some senior central bankers.
In February, a Bundesbank survey confirmed that attempts to turn the Eurozone into a cashless society would meet fierce resistance from Germans, with 88% against electronic means of payment. The Bundesbank is the Eurozone’s prime source of cash, accounting for about 60% of the currency area’s bank notes, and one of the world’s biggest issuers of notes and coins and the business continues to boom at its money printing division.
In a delicious irony, any further attempts to undermine the role of physical money in the Eurozone could end up massively backfiring, by harming the euro’s position as a global cash hoard. While the €500 bill’s days may be numbered, even in its erstwhile haven of Spain, the outcome of the War on Cash in the Eurozone is far from settled, especially given the extent of divisions that currently exist on the matter between senior members of the region’s political and monetary authorities. READ MORE