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The Hutch Report

Your financial illiteracy is good for banks

By | Education, Finance

One of the fallacies of education is that if somebody has a list of impressive academic achievements, they are highly knowledgeable and intelligent. Yet knowledge does not equate to intelligence. Knowledge is the collection of skills and information a person has acquired through education and experience. Intelligence is the ability to apply that knowledge. Equally, just because someone lacks knowledge of a particular subject doesn’t mean they can’t apply their intelligence to help solve problems.

The chasm that exists between knowledge and intelligence is no clearer than in the field of personal finance, as Americans face a record $13 trillion in debt. Although the current Covid pandemic did take many by surprise, a recent article in Time magazine highlights: 

“While some face new challenges resulting from loss of income or uncertainty for the future, for many the current economic crisis only exacerbates already present stressors related to monthly bill payments, consumer debt balances, lack of emergency savings, or even just putting food on the table.”

Basic math skills is a requirement for all public schooling, yet the ability to use standard addition, subtraction, multiplication and division to solve problems seems to be lost when it comes to dealing with money. Colleges may make students take biology, history, and other classes as general education requirements, but learning anything about saving, investing, and how financial markets work is purely an option.

In a previous article (Are you educated?) we highlighted the current weaknesses in the education system and the need to rethink methods and curruculum that may be more suited and effective in today’s fast changing world. It maybe important to now ask, “Should financial literacy be an educational requirement?”

You would think the answer would be a resounding “yes” but this is not the case. There are a large number of businesses that thrive on keeping the population financially illiterate. In their book: Simple: Conquering the Crisis of Complexity, Irene Etzkorn and Alan Siegel point out that “banks, credit card companies, insurers and other types of businesses find ways to make money from the fine print nobody can read or understand,” and that “lawyers have inundated us with mind-numbing disclaimers, disclosures, terms, instructions, amendments and amendments to amendments” to “avoid lawsuits or other potential problems.”

Every time a bank’s client uses their debit card, write a check or withdraw funds, the balance in their bank account goes down. According to the Center for Responsible Lending, “Banks collected more than $11.68 billion in 2019 through abusive overdraft practices that drain consumers’ checking accounts.” 

Not understanding personal finance means that most clients don’t understand the fees they are charged, how credit card interest charges accumulate, how to construct or stick to a budget, and so many more facets of basic money management. Some are lacking in knowledge, some in intelligence and those that lack in both are a windfall for financial institutions.  In finance, as in healthcare, when people don’t know what they are paying, service providers have no real incentive to lower costs.

The financial industry has made it a practice to make sure that investing is very complicated. They have a tendency and flair for developing the most complex names possible (even the guys selling these products are not entirely sure of what they mean), examples such as collateralised mortgage obligations, leveraged index funds, credit default swaps, or synthetic CDOs. As Mark Hanna put it in The Wolf of Wall Street, “The name of the game: moving the money from your client’s pocket to your pocket.”

Boris Vallée, a PhD in Finance from HEC Paris, points out that, “The fact that banks use persuasion techniques, by giving products magical names such as ‘Unicorn’ or ‘Elixir’ in an environment where we should be thinking rationally is illustrative of their targeted strategy.”

Banks are a business and expect to make profits but there is a good argument to show that they have taken this way too far. They don’t call them “predatory banks” for nothing. 

The growing wealth inequality gap and the increasing level of personal debt may have some ringing the alarm bells to make some changes. 

A new report from the Council for Economic Education found that the number of states that require a high school student to take a personal finance course — either a standalone class or integrated into other coursework — in order to graduate has risen to 21.

According to a 2019 report by Montana State University researchers Carly Urban and Christiana Stoddard, financial education decreases the likelihood of holding credit card balances, and the education reduces higher-cost private loan amounts for borrowers. 

This bodes well for future generations, however, what is the solution for the current portion of the population that left school years ago, financially illiterate and mired in debt? That is not immediately clear as household debt surged in 2019, marking the biggest annual increase since just before the financial crisis, according to the New York Federal Reserve. 

The Hutch Report

Are you educated?

By | Education

Today’s general consensus seems to be that the current western education system is broken. The argument is basically that the system used to work, but now it doesn’t. 

This frustration towards the current mechanics of the system does not only come from disgruntled parents and uninterested students, it also comes from some very intellectual and successful personalities. Physicist Michio Kaku believes that today’s system of education, where exams are based on grades and memorisation, is crushing curiosity. American astrophysicist, cosmologist, and planetary scientist Neil deGrasse Tyson thinks that in order to achieve the highest grades, students will simply choose what is easy. He says that today’s education structure rewards high GPAs, in a world that rewards tenacity. Entrepreneur Elon Musk feels that the fact that curriculums are forced on students is an issue. Teachers don’t explain to students why they are being taught a certain subject. He believes that rather than just learning math, taking a problem and using math to solve it is a much more engaging prospect. The list of reasons is long and getting longer each year. To add some clarity, it may be worth first asking the question, “What does it mean to be educated?”

The latin word “educare” is the etymological root of the modern word ‘education and it means “to bring up, rear, train, raise, support”. Educare is related with “ducere,”which means, “to lead, conduct, guide”. To be educated means to be “guided” or “brought up” or “trained” by other persons. Education is the act of another person, the trainer, the educator, the guide, while the educated is the receiver of the training and guidance.

So being educated or well educated simply implies that you have been guided or trained and does not really indicate the level of knowledge someone has attained. You can be well educated but very knowledgeable. Equally, you could be extremely knowledgeable but not very well educated. Throughout history, we have seen a number of examples. The Wright Brothers never finished high school yet became knowledgeable enough about aerodynamics to invent the airplane. Steve Jobs completed only one year of college yet is now recognised as one of the pioneers of the computer revolution. Thomas Edison spent 3 months in high school yet went on to invent the light bulb, the motion picture camera, telephone, phonograph, and has over 1,000 patents to his name. 

Where was our current education system adopted from?

It is believed that our current education system was derived from the Prussian factory-style schools that caught on across the West as the spread of industrialisation created a need for compliant, literate factory workers. Industrialists led the charge to adopt universal education in the US, UK, and elsewhere in Europe. Factory owners were among the biggest champions for the Elementary Education Act 1870, which made education universally available in England. 

Times have changed. More and more factory workers are being replaced by robots. A nalysis firm Oxford Economics found the more repetitive the job, the greater the risk of its being wiped out. Industrial robots offer manufacturers greater consistency and better quality when performing repetitive tasks. This means they are able to produce high quality products with little variation and greater consistency than their human counterparts. Up to 20 million manufacturing jobs around the world could be replaced by robots by 2030, according to Oxford Economics. However, jobs which require more compassion, creativity or social intelligence are more likely to continue to be carried out by humans “for decades to come.” Our education system should be reflecting this. 

It should be understood that collectively, a well educated population brings economic wealth, social prosperity, and political stability to a nation. More importantly, the role of education is inevitable in producing a new generation capable of solving the real problems in our society. 

What can be done?

The current education system does not necessarily have to be dismantled, just re-configured. We need to rethink the curriculum and decide what is necessary to be taught. At what point do mathematical equations become useless to a student that chooses to enter psychology studies?   We should also start to rethink our methods, as methods of teaching play a large role in shaping the education system. Memorisation has not worked. Memorisation stops the student from thinking critically about the topic, and that is not actual learning.

Are exams and grades really the best incentives? We need to replace the current system of judging our intelligence by a traditional grading system and start looking for ways to nurture creativity, activism, originality and critical thought. The current grading system sees failure as an end and something to avoid at all costs, yet we learn from our failures. The great physicist Richard Feynman saw failure as a beginning and an important part of the learning process. 

The Hutch Report

Richard Feynman Lecture

Not everybody learns at the same rhythm or has the same aptitude for every skill set. The system should therefore be adjusted to accomodate this. New technologies and initiatives such as Coursera, the Khan Academy, Udemy, Code Academy or Pluralsight are all attempting to provide alternatives. They simplify access to educational resources, improve many aspects of the learning experience, and allow students to learn at their own pace. As a caveat, new technologies are also responsible for making students lazy and not think for themselves. Easy access to technology has made it easier for students to cheat and can negatively impact learning when applied to the old system. 

Although the system has evolved, there are still many aspects of it that remain and many criticisms. Philosopher, mathematician, and Nobel laureate Bertrand Russell was educated at Cambridge and led a rather academic life. However, he believed that schools emphasised obedience and duty at the expense of free-thinking and spiritually enriched students. Russell was a defender of teachers who were truly sensitive to their students, and of an education system that asserted education as a gateway to knowledge, not to a particular income or status. Albert Einstein was quoted as saying, “The only thing that interferes with my learning is my education.” Indian yogi and author Sadhguru states that today’s education system is telling you to serve others when education and the search for knowledge should be there to serve an individual’s life. 

So, are you educated? If you are, you may want to reflect on how much of your knowledge base is serving you well in life and to not forget that knowledge is something you acquire throughout your life, not just once you leave school.

The Narratives That Drive Bubbles

By | Economics, Psychology

Tesla recently cut the price of its sport utility vehicle Model Y by $3,000, just four months after its launch, in an effort to maintain sales momentum during the COVID-19 pandemic. This reduction follows price cuts in May on Tesla’s Model 3, Model X and Model S.

Tesla has seen its value skyrocket in recent quarters, rising from a 52-week low share price of $211 to a high of $1,794.99 made on July 13, 2020. That figure, however, is low in the eyes of some. According to a recent report by Piper Sandler, they cite two key factors for their new Tesla price target of $2,322: The company’s edge in manufacturing and resulting unit volume, and the “possibility” that software will allow the company to “eventually” generate operating margins in the mid-20s, currently at 4.7%!

When valuations are so removed from the fundamental value of assets they are considered in a bubble. The hysteria and destruction created by asset bubbles should be something that people have come to be familiar with. In the past twenty years we have experienced the large boom bust bubble of the dot com era and then again in 2008 with the subprime mortgage crisis.

There are many possible causes of these bubbles such as; moral hazard, herding, greater fool theory, extrapolation, or liquidity, but once they expand they are driven by narratives because it is the narrative that infects and influences investors. Economist Robert Shiller once said that the stories investors tell themselves drive their investment thesis, which drives their reason for putting money to work in an economy. They are usually not making rational, cool-headed decisions based upon careful and cautious fundamental analysis. 

The larger theme narratives that seem to be prevailing and driving markets are the Federal Reserve, US/China relations and trade, the pandemic (with its alternating themes of lockdown and vaccines), and the coming US elections. You would think just one of those narratives to be highly influential but you get the full force of the four.

Sometimes a sector is a narrative. Think cannabis stocks or tech stocks in the 1990s — one of the most inflated and irrational bubbles the market has ever seen. Companies with no profits and high expenses were going public. Of course, the bubble burst spectacularly in 2000. The poster child of the promise of growth was, an online pet food and pet care product retailer. The company lasted about a year. The more product it sold, the more money it lost. We could equate that with today’s gig economy and stock sector. Do you know any stocks like this? (cough – UBER)

There are also individual stock narratives that are just as powerful. Fitbit jumped out to an early lead in the wearable fitness market, an area that many experts believe would see explosive growth in coming years. However, Fitbit’s share price dropped from its IPO price of $20 back in 2015, to shares that now trade at around $6.8. 

Like Fitbit, GoPro is another example of how the narrative drives a company’s stocks to heights that don’t reflect reality.  GoPro’s IPO priced at $24 back in 2014. Today, shares trade at around $4.83.

Sometimes, investors don’t even take the time to develop the full narrative. In 2016, Pokemon GO conquered the world and sent Nintendo’s stock surging. Their stock price rose by over 50 percent, gaining over a billion dollars a day. It totaled over $10 billion in less than a week. There was one problem, Nintendo didn’t actually make Pokemon GO. 

Once the Nintendo spokesperson publicly reminded everyone that the game is made by a different company, the stock price plummeted by more than 30 percent. This “discovery” could have been revealed by a simple Google search or a play-through of the first two seconds of the game. 

When valuations don’t make sense it is the narrative that drives the stock. Everyone loves a story that they can believe in. The fundamental problem with story stocks is their prices are typically bid up by investors who have gone ga-ga over the story. As a result, they often trade much higher than they should relative to their profits, given the financial fundamentals of these companies.

In 1999, Howard Marks of Oaktree Capital Management, wrote in his piece “” that “tech stocks had benefited in 1999 from a boom of colossal proportions. They exhibited all of the elements of a market bubble, with an attractive story providing the foundation for a gravity-defying escalation of prices far beyond reason, and for manic behavior on the part of investors.” He urged readers to view the tech stocks skeptically, but also acknowledged that it’s possible for overpriced assets to remain so for a long time. However, at the time he said that he certainly had no idea that the excesses he saw in the market would be remedied as quickly as they did. He also  added that “analysts added little insight in terms of either fundamentals or valuation.”  

In 2019 Tesla sold 367,500 units. In comparison, Toyota sold 10.7 million units. Tesla now has a greater market value than Toyota. Fundamentals or Narrative driven? You be the judge. 

The Hutch Report

The Great Divide Between Cause and Effect

By | Economics, Psychology

Cause and effect is the principle of causality, establishing one event or action as the direct result of another or where the cause is partly responsible for the effect, and the effect is partly dependent on the cause. 

We often look towards correlations in order to identify and resolve cause and effect relationships and there are so many. Is obesity (the effect) directly related to the consumption of fast food (the cause)? Or is obesity related to the fact that people with limited disposable income can only afford to eat at fast food establishments? Or is obesity the result of poor education that leads to poor paying jobs that result in limited disposable income which provokes people to choose affordable fast food outlets?

There is a further complication in that, “Correlation does not imply causation.” Just because two trends seem to fluctuate in tandem, doesn’t prove that they are meaningfully related to one another. As an example we can look at the correlation between the per capita consumption of chicken to total US crude oil imports.  

The Hutch ReportCorrelation is something which we think, when we have limited information at our disposal. So the less the information we have the more we are forced to observe correlations. Similarly the more information we have the more transparent things will become and the more we will be able to see the actual casual relationships. 

As humans, we generate and evaluate explanations in a very spontaneous manner. In fact, to do so is fundamental to our sense of understanding. We don’t like uncertainty and ambiguity. From an early age we respond to issues of uncertainty by spontaneously generating plausible explanations. In our rush for an explanation, we tend to produce fewer hypotheses and search less thoroughly for information. We are more likely to form judgments out of first impressions and fail to account enough for situational variables. This happens very often amongst economists and “may” explain why they are so often wrong in their conclusions. 

As an example, central banks believed that accommodative monetary policies would encourage banks to extend credit to borrowers. Available information regarding lending decisions pre- and post- negative interest rate policy (NIRP), however, indicates that banks did not increase their marginal propensity to lend. Instead, the suppression of rates on behalf of the central banks narrowed banks’ net interest margins and thereby discouraged credit expansion. Loan growth in Europe and Japan has remained weak and, despite the significant rally in global equity markets, bank stocks did not fare better after the arrival of NIRP. This example in itself is vastly over simplified as there are a number of issues that may have played a part in coming to this conclusion. 

So if this is really the case where we, as individuals, tend to jump to conclusions, spontaneously generate plausible explanations or find correlations where there are none, how can we be certain that our leaders, bankers, managers, the media etc, are not doing the same thing?

The general public is provided little to no insight into the detailed thought processes that go into many governmental decisions. How do we know our officials have considered all the angles and come to the best decision possible? All we are given is their decision and a political sound bite designed to provide the appearance of an explanation. We buy into these explanations because they provide us with a sense of certainty. 

If we look towards current events, we see that we are now experiencing an unprecedented level of income inequality in the country but what is the cause of this effect? It forces us to go back into a vicious cycle of thought where we once again are prone to jump to conclusions, explanations with limited information etc. 

To better understand the complexity of these issues you can try coming to your own conclusion with the use of the Five Whys technique. The five whys is an iterative interrogative technique used to explore the cause-and-effect relationships underlying a particular problem. As an example we have taken the recent riots and just brainstormed through the exercise. This doesn’t mean to say we have come to the proper conclusion or have exhausted all the whys, but you can see how finding causality can quickly become a complex issue. 

Effect: Riots

Why? – People are frustrated and are lashing out

Why? – They lack opportunities, equal opportunities and income / they are drowning in debt / injustice

Why? – Available jobs pay low salaries / expenses are increasing / fewer job opportunities / people living beyond their means / inequalities within the justice system

Why? – Increased productivity through technology has led to layoffs / poor levels of education

Why? – Management compensation is linked to increased shareholder value / Decrease costs and increase profits anyway possible / broken education system

If anything, this should persuade you to look deeper into our current state of affairs, question everything you hear and not to assume the explanations that you are being fed are anymore accurate than what you could conclude on your own. The divide between cause and effect is greater than you can imagine. 

The Hutch Report

Where does the stock market and economy meet?

By | Economics, Markets, Psychology

This idea of buying and selling stock in a company was originated by the Dutch in 1602. As the practice spread to other countries the volume of shares increased.  At this point the need for an organized marketplace to exchange these shares became necessary. The modern concept of a stock market took hold in England where traders would meet at a London coffeehouse.  In 1773, the traders took over the coffee house and changed its name to the “stock exchange.” The first exchange, the London Stock Exchange, was thereby founded. The idea made its way to the American colonies with an exchange started in Philadelphia in 1790 and eventually the New York Stock Exchange in 1817. 

The term Stock is used to symbolize an investor’s ownership in a company. Upon purchase of the stock the investor theoretically owns a percentage of everything the company owns or owes. The company’s profitability, or lack thereof, determines whether its stock is traded at a higher or lower price. The practice began as many pioneer merchants wanted to start huge businesses. This required substantial amounts of capital. It was an amount of capital that no single merchant could raise alone. Therefore, groups of investors pooled their savings and became business partners and co-owners with individual shares in their businesses to form joint-stock companies.

Psychological effects

The US economy’s GDP is primarily driven by spending (70%) and investment (18%). The stock market affects gross domestic product primarily by influencing financial conditions and consumer confidence. This confidence spills over into increased spending, which can lead to major purchases, such as homes and automobiles and thereby increase the GDP.  So, when the value of stocks are increasing there tends to be a great deal of optimism surrounding the economy and the prospects of various stocks. In comparison, when the value of stocks are falling, it can have a negative effect on sentiment at which point investors rush to sell stocks to prevent losses on their investments. Those losses typically lead to a pullback in consumer spending, especially if there’s also the fear of a recession (two quarters of negative growth). When GDP rises, corporate earnings increase, which makes it bullish for stocks. The inverse occurs when GDP falls, leading to less spending by businesses and consumers, which drives the markets lower. At least that is the theory. 

Todays reality

Looking at the extraordinary events of today, the stock market looks increasingly divorced from economic reality. The United States is on the brink of the worst economic collapse since the Hoover administration. Corporate profits have crumbled. To date more than 1.8 million Americans have contracted the coronavirus, and hundreds are dying each day. Add to that the death of an unarmed man at the hands of a police officer which has led to daily and nightly protests, widespread anger and looting in cities across the country. You would think that would be enough to destroy consumer confidence. 

However, stocks keep climbing. The coronavirus crisis has cost some 36.5 million American jobs in two months with experts warning that figures could peak above the Great Depression in 1933, yet Nasdaq is less than 1% from its all time highs set back in February and the S&P 500 is down a mere 9 percent from its all time highs.

Economists who have studied the performance of stock markets over time say there’s relatively little evidence that economic growth matters to the outcome of the market at all. According to Ed Wolff, an economist at New York University who studies the net worth of American families, “Stock ownership among the middle class is pretty minimal.” He stated that “The fluctuations in the stock market don’t have much effect on the net worth of middle-class families.” A relatively small number of wealthy families own the vast majority of the shares controlled by U.S. households. According to an analysis by Wolff the most recent data from the Federal Reserve shows that the wealthiest top 10 percent of American households own about 84 percent of the value of all household stock ownership. The top 1 percent controlled 40 percent of household stock holdings.

Ok, this may be true but it still doesn’t take into account the psychological impact of the consumer previously presented. Even if US households own very little stock, the effects of the events we are currently experiencing are putting the brakes on consumer spending. This is already leading to a large number of insolvent businesses. This has a profound impact on GDP and will eventually impact the stock market. Or will it?

Much of the effect of the rising stock market has been explained as the effect of the money printing by the Fed. The theory is the Fed prints money, drives down interest rates which push investment into riskier assets thereby driving up the stock market. There is also the moral hazard effect whereby investors take on additional risk because they believe that no matter what happens the Fed will bailout the markets. 

The Federal Reserve President, Jerome Powell recently explained that in a liquidity crisis, otherwise healthy firms collapse because they can’t access credit. The Fed can resolve such a crisis because it can print and lend unlimited amounts of money. However, in a solvency crisis, companies can’t survive no matter how much they can borrow: they need more revenue. The Fed can’t solve that.

FEBRUARY 12: Federal Reserve chairman Jerome Powell testifies before the Senate Banking, Housing and Urban Affairs Committee on the “Semiannual Monetary Policy Report”
on Wednesday, Feb. 12, 2020. (Photo by Caroline Brehmanl)

So, despite its critical role in the economy, the stock market is not the “same” as the economy. The stock market is driven by the emotions of investors. They can exhibit irrational exuberance which normally occurs during an asset bubble and the peak of the business cycle. Equally we have seen that consumer optimism or lack thereof can impact spending, which makes up 70% of GDP, and also has an effect on stock market performance. So what we essentially have is a situation where investor exuberance is battling underlying deteriorating fundamentals. So far investor exuberance is winning, up until they take Jerome Powell’s words of caution that the Fed has no solution for business insolvency. So the stock market is not the economy but it is influenced by the economy. 

Musical chairs

John Maynard Keynes probably explained it best. According to Keynes, the stock market is not simply an efficient way to raise capital and advance living standards, but can be likened to a casino or game of chance. “For it is, so to speak, a game of Snap, of Old Maid, of Musical Chairs–a pastime in which he is victor who says Snap neither too soon nor too late, who passes the Old Maid to his neighbour before the game is over, who secures a chair for himself when the music stops.”

The Ticking Trust Bomb

By | Economics, Psychology

Of all the principle forces that hold our world together the one that acts as the glue of society is called trust. Trust is what keeps relationships in tact by allowing people to live together, work together, feel safe and belong to a group. Trust in our leaders allows organizations and communities to flourish, while the absence of trust can cause fragmentation, conflict and war.

Confidence is the feeling or belief that one can have trust in or rely on someone or something. When trust deteriorates so does confidence, and it is more prevalent in our functioning society than people realise.

Think about the simple act of driving a car. The reason why we even get in one at all is because we have a high level of confidence that the car driving towards us on the same road, at 100km an hour, will not suddenly cross over into our lane and cause a deadly head on collision. 

Think of airplane travel. Everytime we decide to fly we have confidence in the ability of the pilot to get us from point A to point B safetly. Yet on 24 March 2015 the passengers of a Germanwings aircraft were deceived. The Airbus A320-211, crashed 100 km (62 mi; 54 nmi) north-west of Nice in the French Alps. All 144 passengers and six crew members were killed. It was Germanwings’ first fatal crash in the 18-year history of the company. The investigation determined that the crash was caused deliberately by the co-pilot, Andreas Lubitz, who had previously been treated for suicidal tendencies and declared “unfit to work” by his doctor. Lubitz kept this information from his employer and instead reported for duty. Shortly after reaching cruise altitude and while the captain was out of the cockpit, he locked the cockpit door and initiated a controlled descent that continued until the aircraft impacted a mountainside.

Following the incident, Lufthansa and Germanwings said that the crash has not had an impact on booking numbers and many analysts expected only a brief short-term hit and then demand to recover quickly. 

So as catastrophic as this event was, it did not deter millions of passengers from taking a flight that same day or any other following day. So this prompts the question, “How much deception and mistrust does a person have to endure before they lose confidence in that something or someone?” 

We find ourselves in a situation where trust seems to be deteriorating on a number of levels. There is lack of trust in the government, news organizations, international organizations, science, banks, business leaders, health organizations and the list goes on. In fact, seeding distrust among the masses has proven to be an effective weapon against others. But we can’t identify the tipping point.

The financial crisis of 2008 battered the level of trust of the population in their financial system. That loss of confidence created a run on many banks and spawned “Occupy Wall Street.” Eventually the leaders managed to regain a certain amount of trust for the financial system to start working again. The anger dissipated and the Occupy Wall Street movement disappeared. However, confidence in the system was weakened and that distrust and skepticism in our leaders to do what is in the best interest of the population still remains today. 

Seeing bankrupt company leaders receive enormous bonuses, or watch the Federal Reserve state how strong the economy is while justifying printing trillions of dollars to support it are contradictions that are not going unnoticed. In fact, it just slowly adds to the current level of distrust in these institutions.

According to Edelman’s Trust Barometer, 66% of those surveyed do not have confidence that, “Our current leaders will be able to successfully address our country’s challenges.” 

The Hutch ReportWe began by saying that trust and confidence are essentially what keeps our society glued together. What we don’t know is how much confidence and trust has to be lost before society becomes unglued. That lack of information makes the potential for disaster that much greater. 

I was speaking with a fund manager recently about the current actions of the Federal Reserve, bankers and our leaders in general.  I asked him what worried him most. He told me his biggest fear was the next potential crisis which promises to be the greatest crisis of all…..a crisis of confidence. 

The Hutch Report

Boeing Brand Battered

By | Marketing

The Boeing saga is an excellent example of the essence of branding and marketing. Marketing is not simply coming up with clever ways for somebody to buy your product. It is much more than that. Marketing is about value and values. 

Within the sphere of marketing is branding. The history of branding dates back more than 4,000 years. The term is derived from the old Norse word “brandr” or “to burn”.  During times of moving cattle or selling livestock, cattle were branded, or marked with a branding iron, in order to identify their owners. 

In 1901, James Walter Thompson published a book called “The Thompson Blue and Red Books of Advertising. In it he explained the concept of trademark advertising, or an early definition of what became branding. 

Brand management was developed further around the 1950s, when companies such as Proctor and Gamble began to tell stories in their ads. It became more than just a logo or trademark. Companies began to create strategic personalities. Customers who never gave much thought to what kind of soap they were using suddenly became very brand conscious. 

Companies such as Nike and Apple pushed the idea of brand even further by asking “Who is Apple, who is Nike and what do we stand for?” It suddenly became more about values and core values. Apple did this with a bang when they presented their 1984 commercial. 

Today, companies communicate these core values in order to demonstrate social responsibility and emotional connections with their customers that in turn drive loyalty. Well-known marketing thinker Seth Godin expresses the idea by saying that, “People like us do things like this.”

Developing a brand is not an easy objective. Consumer perceptions about a company are based on experience, stories and memories. The company’s ability to deliver on its promises that represent its values is what creates trust and builds loyalty amongst its customers. 

In 2000, Boeing engaged Vivaldi to develop a unifying vision, brand identity and positioning strategy for the company that would help it move beyond the perception that it was a US-based airplane manufacturer and position it as a global aerospace company.

Vivaldi stated, “The leadership team recognised how a strong brand could improve sales, government relations, recruiting, employee retention and partner negotiations, and hence decided to invest in the strategic positioning of the Boeing brand for the future.”

This was done with much success as Boeing regained economic strength as a company and once again built up a loyal following.

On their website under vision statement they list their enduring values:

At Boeing, we are committed to a set of core values that not only define who we are, but also serve as guideposts to help us become the company we would like to be. And we aspire to live these values every day.


We take the high road by practicing the highest ethical standards and honouring our commitments.

We take personal responsibility for our own actions.


We strive for first-time quality and continuous improvement in all that we do to meet or exceed the standards of excellence stakeholders expect of us.


We value human life and well-being above all else and take action accordingly. We are personally accountable for our own safety and collectively responsible for the safety of our teammates and workplaces, our products and services, and the customers who depend on them. When it comes to safety, there are no competing priorities.

Diversity & Inclusion 

We value the skills, strengths and perspectives of our diverse team. We foster a collaborative workplace that engages all employees in finding solutions for our customers that advance our common business objectives.

Trust & Respect 

We act with integrity, consistency, and honesty in all that we do. We value a culture of openness and inclusion in which everyone is treated fairly and where everyone has an opportunity to contribute.

Corporate Citizenship 

We are a responsible partner, neighbour and citizen to the diverse communities and customers we serve. We promote the health and wellbeing of Boeing people, their families and our communities. We protect the environment. We volunteer and financially support education and other worthy causes.

Stakeholder Success 

By operating profitably and with integrity, we provide customers with best-value innovation and a competitive edge in their own markets; enable employees to work in a safe, ethical environment, with a highly attractive and competitive mix of pay and benefits, and the ability to further share in the company’s success; reward investors with increasing shareholder value; conduct business lawfully and ethically with our suppliers; and help to strengthen communities around the world.

In addition to these core values, Boeing also presents a list of behaviours with which they conduct themselves:

Boeing Behaviors

  • Lead with courage and passion
  • Make customer priorities our own
  • Invest in our team and empower each other
  • Win with speed, agility and scale
  • Collaborate with candor and honesty
  • Reach higher, embrace change and learn from failure
  • Deliver results with excellence – Live the Enduring Values

On October 29, 2018, Lion Air Flight 610, a 737 MAX 8, on a flight from Jakarta, Indonesia to Pangkal Pinang, Indonesia, crashed into the sea 13 minutes after takeoff. The crash killed all  189 aboard. It was the deadliest air accident involving all variants of the Boeing 737 and also the first accident involving the Boeing 737 MAX. On March 10, 2019, Ethiopian Airlines Flight 302, a 737 MAX 8, on a flight from Addis Ababa, Ethiopia to Nairobi, Kenya, crashed 6 minutes after takeoff, killing all 157 people aboard. The plane was only 4 months old at the time of the accident. 

In response, numerous aviation authorities around the world grounded the 737 MAX, and many airlines followed suit on a voluntary basis. On March 13, 2019, the FAA became the last authority to ground the aircraft, reversing its previous stance that the MAX was safe to fly. In the following months of investigation Boeing said it had no idea that a new automated system in the 737 Max jet, which played a role in two fatal crashes, was unsafe, until transcripts revealed that a senior Boeing Co. pilot raised concerns about a 737 MAX flight-control system three years previous. The company didn’t alert federal regulators until 2019, months after two deadly crashes involving the same system, according to the Federal Aviation Administration. The report essentially indicated that Boeing’s own employees lied and concealed the truth. 

As the company’s stock crashed and shareholder value evaporated the company was under tremendous pressure from Wall Street to just get the planes produced and not open the door to further pilot training.

Lawmakers, regulators and pilots responded with swift condemnation. “This is the smoking gun,” Representative Peter DeFazio, Democrat of Oregon, said in an interview. “This is no longer just a regulatory failure and a culture failure. It’s starting to look like criminal misconduct.”

CEO Dennis A. Muilenburg, nonetheless repeatedly made overly optimistic projections about how quickly the plane would be allowed to fly again in the face of all the current turmoil about the company. Trump called Mr. Muilenburg to discuss Boeing’s problems and the chief executive assured the president that a production shutdown would only be temporary, even though he was far from having a secure handle on the situation. 

As the company struggled to manage the worst crisis in the manufacturing giant’s 103-year history, Boeing said on Dec. 23 that it had fired its chief executive, Dennis A. Muilenburg, who was unable to stabilize the company. He walks away with an estimated $30-$40 million package and another supplementary executive pension worth $11 million according to statements. 

If you compare the previous few years of Boeing’s deliberate actions to their list of core values and behaviours it is clear that they have disregarded many of them. A brand is an intagible and can’t be valued in financial terms (those that try are working with purely subjective figures). However, a tarnished brand represents a loss of trust and is replaced with new negative perceptions and expectations. This translates to customers going elsewhere, which in turn translates to investors loss of confidence and liquidation of stock. Only time will tell how much true damage has been done. 

Companies have to start realising that values are not independent of their actions. They are not just feel good statements to keep others occupied while they concentrate on their principle objectives of maximising shareholder enrichment. Brand loyalty takes a long time to develop and a very short time to be destroyed, as Boeing has just learned. 

Do Profits Matter?

By | Finance, Startups

This question is starting to be asked once again. In this recent NYT article, “A Hard Lesson in Silicon Valley: Profits Matter” they write, 

“Start-up investors are warning of a reckoning after the stumbles of some high-profile “unicorns.” Now turning a profit is in.”

Apparently high profile VC Fred Wilson at Union Square Ventures has begun to sound the alarm in a recent blog post titled “The Great Public Market Reckoning”. In it he argues that “the narrative that had driven start-up hype and valuations for the last decade was now falling apart.” One in which he was of course a part of. 

The article goes on to say,

“For the last decade, young tech companies were fuelled by a wave of venture capital-funded excess, which encouraged fast growth above all else. But now some investors and start-ups are beginning to rethink that mantra and instead invoke turning a profit and generating “positive unit economics” as their new priorities.”

But why do profits suddenly matter again? Well profits always matter when the enthusiasm and the thirst of investor greed suddenly begins to turn to caution. This change is once again being driven by the fact that the high-profile “unicorns” (the start-ups that were valued at $1 billion and above in the private markets) are not attracting the investor interest just as they reach the stock market. 

The truth is, in the long run profits always matter. If you are an early stage investor, or even a later stage investor in a money losing startup, your principle concern is your exit. Sure, your investment on paper may have increased exponentially as the valuations of these startups have hit dizzying levels, but in order to get paid you need to either attract additional financing through the private market or unload all your shares to the public market in the form of an IPO. 

At some point the valuations get to stupid levels, as we recently saw with WeWork. The investment community has begun to, once again, wake up to what is really valuable. A company with no profits, is not sustainable, and a company that is not sustainable eventually see their value drop to zero, as we are currently witnessing with WeWork. 

The Hutch ReportWeWork had been hoping to raise as much as $4 billion from its stock market IPO. In addition to the roughly $13 billion it has already raised from private investors. Another $6 billion in loans from big banks such as JP Morgan was predicated on the completion of a successful float. In preparation for the IPO WeWork was being valued at a ridiculous sum of $47 billion. WeWork formally withdrew the prospectus for its initial public offering, capping a botched fundraising effort that cost the top executive his job.

As we previously stated that if you have no access to the public market then you need to attract new loans or investments from the private market. Getting new financing is now critical for WeWork. The company lost $690 million in the first six months. Even with $2.5 billion in cash as of June 30 at the current burn rate, the company could run out of money by mid-2020, according to analysts. 

But haven’t we heard this all before? Yes, we have. We saw this clearly during the 1999 boom bust period of the internet. In fact, it is almost a carbon copy.

In a May 19, 1999, Wall Street Journal article entitled “Companies Chose to Rethink A Quaint Concept: Profits,” they asked the same question, “Profits matter. Or do they?” In it they write;

“James Borkowski always thought so, until he started listening to venture capitalists. “The attitude is almost antiprofit,” marvels Mr. Borkowski, executive vice president of Industrial Microwave Systems Inc. He says that his two-year-old company originally planned to become profitable in the year 2000. “But our financial advisers told us not to be profitable too quickly,” he says. So the company is projecting losses until 2001.”

“In this marketplace,” Mr. Borkowski says, “the more money you lose, the more valuable you are.”

Sound familiar? During the dot com crash, many online shopping companies, such as, Webvan, eToys and, eventually failed and shut down. 

Webvan went public in late 1999 on little more than hope. The stock doubled on its first day and the company quickly earned a $6 billion valuation, even though it had less than $5 million in revenue and cost over $27 to fulfill an order. The company flamed out quickly; going bankrupt in 2001. eToys and likewise failed swiftly. debuted on February 9 of 2000 and declared bankruptcy less than 300 days later. eToys took a bit longer to fail, going public in May of 1999 and declaring bankruptcy at the end of February in 2001.

Although the valuations are small in comparison to today, these were high profile examples of the time, of greed gone amok. 

So why did the Venture Capital world and corporate bankers not learn an lessons from this era? Well, actually they have been well aware of the lessons. They just made a conscious decision to disregard them and ride the wave while greed was still vibrant. 

Fred Wilson remembers the 1999 bust vividly. He knows first hand what it feels like when there is a fire and everybody is running for the exits at the same time. He apparently did learn some lessons as this time he prefers to be the one at the exit sounding the alarm.

The Hutch Report

The Game of Financial Market Predictions

By | Finance, Psychology

As humans have evolved, the ability to predict events days, months or years into the future has never been relevant to survival. Rather, our DNA has been equipped with the fight or flight response. It is our quick ability to react to the event once it has happened that keeps us safe. 

Speaking on a panel at the 2018 NeuroLeadership Summit, social cognitive neuroscientist Kevin Ochsner said, “Our brains evolved to manage the needs of the now and of the not-too-distant future—your immediate environment, and short-term goals for food, water, shelter, and child-rearing.”

Although the world has evolved, humans still carry the same neural architecture as our early ancestors, which means that our brains are still inept at predicting future events. The closest we get is our ability at using sensory data to foresee events in the immediate future, as in microseconds. This enables us to predict the trajectory of a fast-moving baseball which enables us to catch it. 

In his fascinating documentary series, “The Brain”, Stanford Neuroscientist Dr. David Eagleman explains how in practice predictability is impossible. He demonstrates this by dropping a single ping pong ball into a container of one hundred and fifty ping pong balls. It is possible to correctly identify where the ball will land but as it sets off a chain reaction of movement with the other balls the situation becomes more complex. He states, “Any error in the initial prediction, no matter how small, becomes magnified as balls collide and bounce off the sides and trigger other balls. Soon it becomes completely impossible to make any kind of prediction about how the balls will end up. The balls have no choice in the direction they move. They have no freedom to do it differently, and yet the system is completely impossible to predict.”

A human’s thoughts, feelings and decisions emerge from the innumerable interactions in the brain. In comparison to the activity of one hundred and fifty ping pong balls, the brain has billions of times more interaction every second and never stops during a lifetime. In addition, each individual’s brain is embedded in a world of other people’s brains. Dr. Eagleman goes on to say, “the neurons of every human on the planet fire, interact and influence each other creating a system of unimaginable complexity. This means that even though brains follow predictable rules, in practice, it will always be impossible to know exactly where any of us are going.”

Nassim Taleb developed a line of argument throughout his previous books, Fooled by Randomness, The Black Swan and Antifragile,  that the defining characteristic of future change is that it is impossible, and pointless, to try to predict it. Instead,  he argues, it is essential to make peace with uncertainty, randomness and volatility. Those who do not — who insist not only on trying to predict the future, but also on somehow trying to manage it — he disparagingly calls “fragilistas.”  

So if predictions are impossible, what makes such a large number of financial professionals believe they have the ability to identify, as in Dr. Eagleman’s demonstration, the correct outcome of the millions of interactions that are set off from the chain reaction of one event? 

The human brain values certainty in a very similar manner to how it values food, sex, and social connection. Certainty offers a perceived control over the environment that is in itself inherently rewarding, the brain treats uncertainty, and the inability to predict the future, as a source of deep discomfort.

This is essentially why viewers continue to tune into their favorite financial tv personalities, in the hopes that they will describe the future and give them a greater sense of certainty. The main certainty on behalf of the financial tv personalities is that regardless of their faulty predictions, they are protected by a number of disclaimers at the end of the show that viewers tend to disregard.

The Financial Times looked at the number of countries that the IMF expected to be in recession for every year since 1991 and compared it with the number of economies that turned out to have actually contracted. Over the last 27 years, the IMF predicted every October that an average of five economies will contract the following year. In practice, an average of 26 have contracted. The difficulty in getting forecasts right is not unique to the IMF. “All macroeconomic forecasters are poor at predicting downturns,” David Turner, head of the economics department at the OECD told the Financial Times.

The past is littered with a multitude of failed predictions over the years made by economists, financial analysts, TV financial personalities, or the Federal Reserve. 

Who can forget on March 11, 2008, Mad Money host Jim Cramer told a viewer who wrote into his show, “Bear Stearns was fine!” right before the stock absolutely collapsed. The stock was trading at $62 per share. Just 5 days later, the firm was picked up by JPMorgan Chase for $2 per share. Yet, Jim Cramer is still on CNBC shelling out predictions daily to a mass of viewers eager for some kind of certainty.  

In the past, there have been correct predictions. Although with no real timing accuracy, they can be considered a lucky guess, since none have been able to replicate the predictions that made them famous.

Elaine Garzarelli became a start with her prediction of the 1987 crash. Since then, her record was mixed. For instance, on July 23, 1996, she told clients that US stocks could fall 15% to 20% from peaks reached earlier that summer. The Dow Jones industrial average closed that day at 5,346.55, and had risen 45% by Nov 1997.

Elaine Garzarelli

Meredith Whitney catapulted to fame after her prescient October 2007 report on Citigroup Inc. and put this previously unknown analyst on the cover of Fortune magazine. Following shortly after her ascent to prediction stardom, she predicted an “as yet unrealised” meltdown in municipal bonds in a 2010 interview on “60 Minutes.” A short-lived hedge fund followed, but the fund lost money and closed in 2015 amid a legal dispute with its anchor investor.

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Meredith Whitney

Paul Tudor Jones also called the 1987 crash, yet last year predicted that the US 10-year Treasury yield would rise to a “conservative” 3.75 percent by the end of 2018. The result? It closed the year at 2.43 percent and has since dropped to 1.73 percent. However, the ability to make predictions should not be confused with one’s ability to react and trade off of events. It is the trading ability of PTJ, his ability to react to situations, and trade accordingly that has made him wealthy.

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Paul Tudor Jones 1987

Bob Johansen, author of Leaders Make the Future: Ten New Leadership Skills for an Uncertain World, states that the first step is to strive not for certainty, but for clarity. Given that the future is inherently unpredictable, we can never be certain about what the future will bring. 

If we really had the ability to forecast future events, there would be no such thing as an unforeseen crisis!

The Hutch Report

In a Negative Rate World, Cash is King

By | Economics

If you don’t understand how negative interest rates work yet then you should probably learn quickly.  The stock markets are, once again, close to an all time high and the economy is (depending on who you talk to) booming. However, the Federal Reserve has been signalling there could be the possibility of a rate cut, or in fact a few of them. But with yields already historically low, the Fed does not have much room to manoeuvre (before they hit zero), especially if they find themselves having to battle another recession. 

As we saw during the last crisis of 2008, many central banks reduced policy interest rates to zero to boost growth (It is interesting to read, some 9 years later, Ben Bernanke’s Washington Post Op-Ed on why the Fed did what they did). Since then, we have seen many of them take it a step further and implement a “negative” interest rate policy. 

The amount of negative-yielding government bonds outstanding through 2049 has risen by 20% this year alone. In fact, there is now more than $11 trillion in negative-yielding debt, which means that roughly 30% of developed countries’ sovereign debt yields less than zero. Roughly 6.7 Trillion of the total currently comes from Japan and 3.8 Trillion comes from Europe. Another 800 billion is credit related. 

So what exactly is a negative rate? Think of when you open up a deposit or savings account at your bank, the bank offers you interest for keeping your money with them. Over the years, this interest accumulates and your bank account grows. It is the fee the bank pays you for the opportunity to use your money (see Who Owns the Money in your Bank Account: Hint, it is not you). Equally, you can also purchase government bonds (you lend the government money) which in return will pay you interest over the life of the bond. In the case of negative interest rates, instead of receiving money on deposits, depositors must pay the bank a fee for the luxury of keeping their money there on deposit. That’s right, you deposit money in your bank account and the bank not only uses your money but they take a portion of it for themselves. 

The main reason central banks implement such a policy is to drive investors out of safe assets into risky assets with the intention of crowding out investors to try and jump start the economy. Results of low rates are a weaker currency which helps exporters of that country’s goods, which in turn helps power the economy. Switzerland was the first government to charge a negative interest rate. It implemented this policy between 1972 and 1978. The reason they adopted this strategy was to help stabilize the economy and to prevent its currency from rising too much from foreign investors buying its currency.

But why would anybody want to purchase bonds with a negative yield? As the Financial Times pointed out, “The idea of investing in bonds where you are guaranteed to lose money — if you hold them to maturity — has always seemed paradoxical. But it begins to make sense in a world where you are sure to lose even more money if you stick the cash in a bank.” Notice they said, “if you hold them to maturity”. If you purchase a negative yielding bond with the outlook that rates will continue to get even more negative, then the holder’s of the bonds can walk away with a gain as the price of the bond increases as yields continue to decrease. 

The Hutch ReportIn turn, why would you want to keep your money in a bank that not only does not promise you a return, they charge you a fee to keep your money there? The truth is you probably would not. When a central bank has a negative interest rate, it means that commercial banks have to pay a fee whenever they deposit money into the central bank’s reserves. The commercial bank then makes the decision to pass on those negative rates to the clients of the bank.

If they do not pass on these rates, the negative interest rates therefore result in a direct decline in interest margins for the bank, and result in a decrease in profitability. Competition between the banks and the option for clients to hold liquidity in cash do not allow for the negative interest rates to be passed on to individual clients. The bank essentially takes the hit. In addition, they know that there is a good chance that customers would flee in large numbers to the nearest bank offering a positive rate of return. So you would imagine that banks would never do it. Wrong!

When the SNB first initiated their negative rate policy, it didn’t take long before banks chose to pass the charge onto their customers. The Alternative Bank was the first Swiss retail bank to implement negative interest rates. It charged negative interest of 0.125% on up to 100,000 Swiss francs held in a private account and 0.75% for amounts in excess of 100,000 francs. PostFinance, the Swiss postal bank, was the second retail bank to implement a negative interest rate. The negative 1% annual interest rate applied to customers who hold more than 1 million francs of savings in PostFinance accounts. The Zürcher Kantonalbank (ZKB) introduced a  negative 0.75% annual interest rate for specific high-net-worth customers.

In 2017, UBS introduced fees on big euro deposits held by private clients at the Swiss bank. The move was in response to negative interest rates levied by the European Central Bank on cash deposits.

The IMF Blog pointed out that, “One option to break through the zero lower bound would be to phase out cash.” They go on to say that by doing so, “Central banks would have much more flexibility in policy as they could easily reduce the rate from 2 percent to negative 4 percent to counter a severe recession. The interest rate cut would automatically transmit to bank deposits, loans, and bonds.” Without cash, depositors would have to pay the negative interest rate to keep their money with the bank, making consumption and investment more attractive. This would jolt lending, boost demand, and stimulate the economy.

When cash is available, as is the case in many countries, cutting rates significantly into negative territory becomes much more difficult. Instead of paying negative interest, one can simply hold cash at zero interest. Cash is a free option on zero interest, and acts as an interest rate floor. 

The Hutch ReportIf negative interest rates are to become a long term reality whereby the banks are free to charge customers as they wish, cash will have to be removed from society. As long as cash still circulates in society, banks are at a disadvantage and will risk a run on the bank should they attempt to charge depositors negative rates. However, beware, because negative rates, first designed as a short-term jolt, have now become an addiction.

The Hutch Report