Automation is taking place at warp speed, displacing employees from all walks of life.
According to a recent report, the U.S. financial industry will depose of 200,000 workers in the next decade because of automating efficiencies.
Yes, humans are going the way of the dodo bird and banking will effectively become algorithms working for a handful of executives and engineers.
The x-factor in this equation is the $150 billion annually that banks spend on technological development in-house which is higher than any other industry.
Welcome to the world of lower cost, shedding wage bills, and boosting performance rates.
We forget to realize that employee compensation eats up 50% of bank expenses.
The 200,000 job trimmings would result in 10% of the U.S. banking sector getting axed.
The hyped-up “golden age of banking” should deliver extraordinary savings and premium services to the customer at no extra cost.
This iteration of mobile and online banking has delivered functionality that no generation of customers has ever seen.
The most gutted part of banking jobs will naturally occur in the call centers because they are the low-hanging fruit for automated chatbots.
A few years ago, chatbots were suboptimal, even spewing out arbitrary profanity, but they have slowly crawled up in performance metrics to the point where some customers are unaware that they are communicating with an artificially engineered algorithm.
The wholesale integration of automating the back-office staff isn’t the end of it, the front office will experience a 30% drop in numbers sullying the predated ideology that front office staff are irreplaceable heavy hitters.
The front-office staff has already felt the brunt of downsizing with purges carried out from 2022 representing a twelfth year of continuous decline.
Front-office traders and brokers are being replaced by software engineers as banks follow the wider trend of every company transitioning into a tech company.
The infusion of artificial intelligence will lower mortgage processing costs by 30% and the accumulation of hordes of data will advance the marketing effort into a smart, multi-pronged, hybrid cloud-based, and hyper-targeted strategy.
The last two human bank hiring waves are a distant memory.
The most recent spike came in the 7 years after the dot com crash of 2001 until the sub-prime crisis of 2008 adding around half a million jobs on top of the 1.5 million that existed then.
After the subsidies wear off from the pandemic, I do believe that the banking sector will quietly put in the call to trim even more.
The longest and most dramatic rise in human bankers was from 1935 to 1985, a 50-year boom that delivered over 1.2 million bankers to the U.S. workforce.
This type of human hiring will likely never be seen again in the U.S. financial industry.
Recomposing banks through automation is crucial to surviving as fintech companies like PayPal (PYPL) and Square (SQ) are chomping at the bit and even tech companies like Amazon (AMZN) and Apple (AAPL) have started tinkering with new financial products.
And if you thought that this phenomenon was limited to the U.S., think again, Europe is by far the biggest culprit by already laying off 63,036 employees in 2019, more than 10x higher than the number of U.S. financial job losses and that has continued in 2021 and 2022.
In a sign of the times, the European outlook has turned demonstrably negative with Deutsche Bank announcing layoffs of 40,000 employees through 2023 as it scales down its investment banking business.
Don’t tell your kid to get into banking, because they will most likely be feeding on scraps at that point.
THE LAST STAGE OF HUMAN-FACING BANK SERVICES IS NOW!
https://www.madhedgefundtrader.com/wp-content/uploads/2022/07/traditional-banking-e1658521100406.png276450Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-07-22 14:02:242022-07-29 01:03:27Automation and Banking
Below please find subscribers’ Q&A for the April 20 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Silicon Valley.
Q: Should I take profits on the ProShares UltraShort 20+ Year Treasury ETF (TBT), or will it go lower?
A: Well, you’ve just made a 45% profit in 4 months; no one ever gets fired for taking a profit. And yes, it will go lower, but I think we’re due for a 5 -10% rally in the (TBT) and we’re seeing some of that today.
Q: Do you think the bottom is in now for the S&P 500 Index (SPX)?
A: No, I think the 50 basis point rate hikes will put the fear of God into the market and prompt another round of profit-taking in stocks. So will another ramp up or expansion in the Ukraine War, and so could another spike in Covid cases. And interest rates are getting high enough, with a ten-year US Treasury (TLT) at 2.95% and junk at 6.00% that they will start to bleed off money from stocks.
So there are plenty of risks in this market that I don’t need to chase thousand point rallies that fail the following week.
Q: What would cause a rally in the iShares 20 Plus Year Treasury Bond ETF (TLT)?
A: Everyone in the world is short, for a start. And secondly, we’ve had a $36 point drop in the market in 4 ½ months—that is absolutely screaming for a short-covering rally. It would be typical of the market to get everybody in the world short one thing, and then ramp it right back up. You can bet hedge funds are just gunning for that trade. So those are two big reasons. Another big reason is getting a slowdown in the economy. Fear of interest rate rises and yield curve inversions are certainly going to scare people into thinking that.
Q: Where to buy Tesla (TSLA)?
A: We had a $1,200 all-time high at the end of last year, then sold off to $700—that was your ideal entry point, on that one day when the market was down $1,000 and they were throwing out Tesla stock like there was no tomorrow. We have since rallied back to the 1100s, so I'd say at this point, anything you could get under just above the $200-day moving average at $900 would be a gift because the sales are happening and they’re making tons of money. They’re so far ahead of the rest of the world on EV technology that no one will ever be able to catch up. A lot of the biggest companies like Ford (F) and (GM) are still unable to mass produce electric cars, even though they’re all talking about these wonderful models they're bringing out in 2024 and 2025. So, I think Tesla is just so far ahead in the market that no one will catch them. And the stock will have to reflect that by trading at a higher premium.
Q: I Bought the ProShares UltraShort 20+ Year Treasury ETF (TBT) at your advice at $14, it’s now at 425. Time to take the money and run?
A: Yes, so that you’re in position to rebuy the (TBT) at $22, or even $20.
Q: I bought some bank LEAPS such as Bank of America (BAC), JP Morgan (JPM), and Morgan Stanley (MS) just before earnings; they’re doing well so far.
A: That will definitely be one of my target sectors on any recovery; because the only reason the stock market recovers is because recession fears have been put away, and the only reason the banks have been going down is because of recession fears. Certainly, the yield curve inversion has been helping them lot, as are absolute higher interest rates. So yes, zero in on the banks, I’m holding back waiting for better entry points, but for those who are aggressive, there’s no problem with scaling in here.
Q: If Putin uses a tactical nuclear weapon in the Ukraine, what would be the outcome?
A: Well, I don't think he will, because you don’t want to use nukes on your neighbors because the wind tends to blow the radiation back into your own country. It also depends on when he does this; if Ukraine joins NATO, joins the EC, and NATO troops enter Ukraine, and then they use tactical nukes, France and England also have their own nuclear weapons. So, attacking a nuclear foe and risking bringing in the US, who could wipe out the whole country in minutes, would not be a good idea.
Q: Would you get into Chinese stocks here?
A: Not really; China seems to have changed its business model permanently by abandoning capitalism. The Mad Hedge Technology Letter is currently running a short position in Alibaba (BABA) which has proved highly successful. Although these things are stupidly cheap, they could get cheaper before they turn around. Also, there’s the threat of delisting on the stock exchanges facing them in a year or two, and the trade tensions which continue with China. China doesn’t seem friendly anymore or is interested in capitalism. You don't want to own stocks anywhere in that situation. And by the way, Russia has also banned all foreign stock listings. China could do the same—not good if you’re an owner of those stocks.
Q: How would you play Twitter (TWTR) now?
A: I think it’s a screaming short, myself. If the board doesn’t accept Elon’s offer, which seems to be the case with their poison pill adoption, there are no other buyers of Twitter; and Elon has already said he’s not going to pay up. So you take Elon Musk’s shareholding out of the picture, and you’re looking at about a 30% drop.
Q: Many of the biggest Covid beneficiaries are near or below their March 2020 lows, such as PayPal (PYPL), Shopify (SHOP), DocuSign (DOCU), Zoom (ZM), Peloton (PTON), Netflix (NFLX), etc. Are these buys soon or are there other new names joining them?
A: I think this will continue to be a laggard sector. I think any recovery will be led by big tech, and once big tech peaks out after a 6-month run, then you may get the smaller ones catching up—especially if they're still down 80% or 90%. So that’s a no-touch for me; too many better fish to fry.
Q: Do you think inflation is transitory or are we headed toward double digits over the long term?
A: The transitory argument got thrown out the window the day Russia invaded Ukraine; they are one of the world’s largest producers of both energy and wheat. So that definitely set those markets on fire and really could end up adding an extra 5% in our inflation numbers before we peak out. I think we will see the highs sometime this year, could be as low as 4% by the end of this year. But we may have a double-digit print before we top out, and that could be next month. So, if you’re looking for another reason for stocks to sell out, that would be a good one.
Q: If the EU could limit oil purchases from Russia, then the war would be over in a month since Russia has no borrowing power or reserves.
A: The problem is whether they actually could limit oil purchases, which they can’t do immediately. If you could limit them in a year or cut them down by like 80%, we could come up with the other 20%, that is possible. Then, the war would end and Russia would starve; but Russia may starve anyway. Even with all the rubles in the world, they can’t buy anything overseas. Basically, Russia makes nothing, they only sell commodities and use those proceeds to buy consumer goods from abroad, which have all been completely cut off. They’re in for an economic disaster no matter what happens, and they have no way of avoiding it.
Q: What are your thoughts on supply chain problems?
A: I actually think they’re getting better; I watch the number of ships at anchor in San Francisco Bay, and it’s actually down by about half over the last 3 months. People are slowly starting to get things that they ordered nine months ago, used car prices are starting to roll over…so yes, it’s going to be a very slow process. It took one week to shut down the global economy, it’ll take three years to get it fully reopened. And of course, that’s extended by the Ukraine War. Plus, as long as there are supply chain problems and huge prices being paid for parts and labor, you’re not going to have a recession, it’s impossible.
Q: What’s your outlook on tech stocks?
A: I see them bottoming in the current quarter, and then going on to new all-time highs in the second half.
Q: What about covered calls?
A: It’s a really good idea, allowing you to get long a stock here, and reduce your average cost every month by writing calls against your position until they eventually get called away. Not too long ago, I wrote a piece on covered calls, so I could rerun that again to get people familiar with the concept.
Q: If Warren Buffet retires, what happens to Berkshire Hathaway (BRKB) stock?
A: It drops about 5% one day, then goes on to new highs. The concept of a 90-year-old passing away in his sleep one night is not exactly revolutionary or new. Replacements for Buffet have been lined up for so long that now the replacements are retiring. I think that’s pretty much baked in the price.
Q: Any plans to update the long-term portfolio?
A: Yes it’s on my list.
Q: Too late to buy Freeport McMoRan (FCX)?
A: Yes I’m afraid so. We’ve had a near double since September when it started moving. However, I would hold it if you already own it and add on any substantial selloff. Freeport McMoRan announced fabulous earnings today, and the stock promptly sold off 9%. It was a classic “buy the rumor, sell the news” type move. This is despite the fact that the United States Copper Fund ETF (CPER), in which (FCX) is a major holding, is up on the day. Please remember that I told you earlier that each Tesla needs 200 pounds of copper, that Tesla sales could double to 2 million this year, and that they could sell 4 million if they could make them. It sounds like a bullish argument of me, of which (FCX) is the world’s largest producer.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com , go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last 12 years are there in all their glory.
Good Luck and Stay Healthy
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Bitcoin has many doubters, something so novel usually does.
Most Baby boomers who have made it big really have no incentive to get rich again, that’s why many aren’t even inclined to listen to its Bitcoin’s pitch.
To most of the boomer success stories, their financial overperformance was underpinned by the US dollar.
The US dollar isn’t your father’s US dollars.
The destruction of purchasing power has roiled the US dollar and now it has become a target to topple.
Clues are there from Russia desiring to settle energy contracts in Russian Rubles.
Saudi Arabia is in talks to do deals with China in the Chinese yuan.
Unsurprisingly, it’s almost natural that successful Americans born during the peak of the US dollar stick to that as a secret sauce.
For the younger generations, the case is a lot more muddled as billionaire PayPal (PYPL) co-founder Peter Thiel shared his list of enemies stopping bitcoin from rising 100x Thursday while speaking at the Bitcoin 2022 conference in Miami, Florida.
The enemies are “a list of people who I think are stopping bitcoin,” he said. “There’s a lot of them, they tend to have nameless faceless bureaucrat perspectives, which is of course one of the ways they hide.” Thiel continued:
We are going to try to expose them and realize that this is sort of what we have to fight for bitcoin to go up 10x, 100x from here.
“The central banks are going bankrupt. We are at the end of the fiat money regime,” he said.
The first person on the list was Berkshire Hathaway (BRK-B) CEO, Warren Buffett. Thiel put up a picture of Buffett with two of his most famous quotes about bitcoin: “rat poison” and “I don’t own any and I never will.”
It’s fascinating to watch from afar, a war of great minds, and Peter Thiel and Warren Buffett are two heavyweights.
Thiel has had the propensity to behave riskier with his bets which is normal for early-stage tech investors.
He co-founded PayPal, was an early investor in Facebook, and has numerous connections to influential politicians.
Thiel wasn’t talking to the existing Bitcoin base which many are diehards.
He was talking to the incremental investor sitting on the fence.
I understand it’s a leap of faith to jump into a digital currency that produces no cash flow or income.
It’s hard to do mental gymnastics.
Thiel most likely came across as too zealous, painting the dilemma as a binary choice between Bitcoin or fiat currency.
The truth is that both of these can succeed in the future for two entirely different reasons.
They also attract different types of investors which is the beauty of investing.
The next picture he put up was of Blackrock (BLK) CEO Larry Fink, who has been quoted saying Bitcoin is an “index of money laundering” and who also presides over $9 trillion of managed money.
Ostensibly appearing as if this is a binary choice placing the biggest beneficiaries of the fiat monetary system in this generation is more of a dramatic effect if anything else.
The truth is that Blackrock’s Fink is starting to change his tune about Bitcoin and his firm Blackrock is looking into how they can make money for the clients using not only equity funds.
Many of these guys on Thiel’s list have fiduciary responsibilities to their shareholders and throwing $9 trillion at Bitcoin would violate any sort of risk control.
Instead of alienating institutional money, Thiel has chosen an undiplomatic way to call out the corporate money that hasn’t bought into Bitcoin like retail investors.
Bitcoin has stayed very much in the limelight in 2022 and it’s clear that as a $2 trillion industry, it’s not going away.
Ultimately, Bitcoin’s price action has been somewhat disappointing since its surge to $65,000 last year, but that doesn’t mean it is a failure.
Consolidating and digesting a giant gap up is natural.
The technical support at $38,000 has held up nicely, and Thiel’s call to action to take it back to $65,000 won’t move the needle in one day but alerts many billionaires that if they miss this ride up, it might be the biggest missed opportunity of a lifetime.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-04-12 15:02:082022-04-12 16:02:02Peter Thiel Sticks It To The Institutions
Below please find subscribers’ Q&A for the February 2 Mad Hedge Fund Trader Global Strategy Webinar broadcast from Incline Village, Nevada.
Q: Thoughts on Palantir Technologies Inc. (PLTR)?
A: Well, we got out of this last summer at $28 because the CEO said he didn’t care what the share price does, and when you say that, the market tends to trash your stock. But Palantir is also in a whole sector of small, non-money-making, expensive stocks that have just been absolutely slaughtered. And of course, PayPal (PYPL) takes the prize for that today, down 25% and 60% from the top. So, we’re giving up on that whole sector until proven otherwise. Until then, these things will just keep getting cheaper.
Q: Given the weakness in January, do you think we still have to wait until the second half of the year for a viable bottom?
A: Definitely, maybe. If things are going to happen, they are going to happen fast; we got the January selloff, but that’s nowhere near a major selloff of 20%. And the fact is, the economy is still great so that’s why this is a correction, not a bear market. At some point, you want to buy into this, but definitely not yet; I think we take another run at the lows again sometime this month. We just have to let all the shorts come out and take their profits so they can reestablish again.
Q: Why are bank stocks struggling?
A: A lot of the interest rate rises that we’re getting now were already discounted last year—banks had a great year last year—so they were front running that move, which is finally happening. To get more moves out of banks, you’re going to have to get more interest rate rises, which we will get eventually. We still like the banks long term, we still like financials of every description, but they are taking a break, especially on the “sell everything” index days. A lot of the recent selling was index selling—banks have a heavy weighting in the index, about 15%. So, they will go down, but they will also be the ones that come back the fastest. We’re seeing that in some of the financials already, like Berkshire Hathaway (BRKB) and Morgan Stanley (MS) which are both close to all-time highs now.
Q: What about the situation with Russia and Ukraine?
A: It’s all for show. This is a situation where both the US and Russia need a war, or threat of a war, because the leaders of both countries have flagging popularity. Wars solve those problems—that’s why we have so many of them by the United States. We’ve been at war essentially for most of the last 40 years, ever since Ronald Reagan came in.
Q: I didn’t exit my big tech positions before the crash, should I just hang onto them at this point?
A: The big ones—yes. The Apples (AAPL), the Googles (GOOGL), the Amazons (AMZN) —they’re only going to drop about 20% at the most, maybe 25%, and then they’ll go to new highs, probably before the end of the year. If you’re good enough to get out and get back in again on a 20% move, go for it. But most people can’t do that unless they’re glued to their screens all day long. So, if you have stock, keep the stock; if you have options, get out of the options, because there the time decay will wipe you out before a turnaround can happen. This is not an options environment, unless you’re playing on the short side in the front month, which is what we’re doing.
Q: When you send out the trade alerts, I have a hard time getting them executed. How do you advise?
A: Move the strike price, go out in maturity, and you can get our prices at slightly higher risk. Or, just leave it and, quite often, people’s limit orders get done at the end of the day when the algorithms have to dump their positions at the close because they’re not allowed to carry overnight positions. Also, even if you get half of my trade alerts, you’re doing pretty good—we’re running at a 23% rate in 6 weeks, or 200% annualized. And remember, when I send out a trade alert, you’re not the only one trying to get in there, so you can even go onto a similar security. If I recommend Alphabet (GOOGL), consider going over to Microsoft (MSFT), because they all tend to move together as a group.
Q: I am sitting on a 16% profit in the ProShares Ultra Technology (ROM), which you recommended. Should I take the money and run, and get back in at a lower price?
A: Yes, this is just a short covering rally in a longer-term correction, and you make the money on the volume. You win games by hitting lots of signals, not hanging on to a few home runs where people usually strike out.
Q: You said inflation will be short lived, so why would there be 9 interest rates after the initial 4?
A: It’s going to take us 8 interest rates just to get us back to the long-term average interest rate. Remember the last 2% is totally artificial and only happened because there was a financial crisis 13 years ago. So, to normalize rates you really need to get overnight rates back up to about 3.0%. And that means 12 interest rate hikes. If you don’t do that, you risk inflation going from controllable to uncontrollable, and that is the death of the Fed. So, that’s why I expect a lot more interest rate rises.
Q: Will the tension between Russia and the Ukraine affect the market?
A: No, it hasn’t so far and I don’t expect it to. Although, it’s hard to imagine going through all of this and not seeing a shot fired. When that one shot gets fired, then maybe you get a down-500-point day, which it then makes back the next day.
Q: Anything to do with Alphabet (GOOGL) announcing its 20 to one split?
A: No, it’s too late. We had a trade alert out on a Google 20 call spread which we actually took profits on this morning. So, nice win for the Mad Hedge Technology Letter there. There’s nothing to do with these splits, it’s not like they’re going to un-announce it, this isn’t a risk-arbitrage situation where there’s always an antitrust risk hovering over the deal that may crash it. This is pretty much a done deal and doesn’t even happen until July 1. People think bringing the share price from $3,000 down to $150 makes it available for a lot more potential retail buyers, which it does. It also makes call spreads on the options a lot cheaper too. When we put out these alerts, we can only do one or two contracts, even tying up $10,000—divide that by 20 and all of a sudden your cheapest Google call spread cost $500 instead of $10,000.
Q: Can you speak about the liquidity on your strikes? Sometimes we’re trading against strikes that have no open interest.
A: Whenever you put in an order for one strike, even if there’s nothing outstanding on that strike, algorithms will arbitrage against that strike—where your order is—against all the other strikes on the whole options chain. So, don’t worry if you have limited open interest or no open interest on our trade alerts. They will get done, and it may get done by some algorithm or some market maker taking more of another strike, that’s how these things get done. It’s all thanks to the magic of computers.
Q: Do you have thoughts about Freeport-McMoRan (FCX)? I have some profitable LEAP positions open.
A: It’ll go higher, keep them. And I like the whole commodity space, which means iron ore (BHP), copper, steel (X), etc.
Q: Would you trade Barclays iPath Series B S&P 500 VIX Short-Term Futures ETN (VXX) at this point?
A: No, because we’re dead in the middle of the recent range. That’s a horrible place to enter—you only enter (VXX) on extremes on the upsides and the downside.
Q: What should I do about Airbnb (ABNB) at this price? They’ve been profitable for 2-3 years, with revenues rising.
A: I think Airbnb is one of the best run companies in the world, and I expect their earnings to keep growing like crazy, especially once we get out of the pandemic. I am also a very frequent Airbnb user, having stayed in Airbnb’s in at least 10 countries, so I’m a big fan of them. The stock just got dragged down by the small tech bust but it will come back. This is a “throwing the baby out with the bathwater” situation.
Q: Are there any good LEAPS candidates now?
A: I’m not doing any LEAPS until we reach the final cataclysmic selloff of the correction. Otherwise, the time value will run against you enormously; I’d rather wait for better prices.
Q: Do you see a cataclysmic selloff?
A: Yes, I do. Maybe in a few more weeks, and maybe next week if we get a really hot 8%+ inflation rate—that would really kill the market.
Q: What will tell you if inflation is ending or slowing labor?
A: Labor is 70% of the inflation calculation. So, when these huge pay awards slow down, that's when inflation slows down. By the way, a lot of pay increases that are happening now are catch-up from the last 40 years of no pay increases for American workers in real inflation adjusted terms. So, a lot of this is catch-up—once that’s done, you can forget about inflation. Also, the long-term pressure of technology on prices is downwards, so allow that to reignite deflation, and that will be your bigger issue over the long term.
Q: What should I do about Editas Medicine Inc (EDIT) or CRSPR Therapeutics AG (CRSP)?
A: Don’t touch the sector, it’s out of favor. Let this thing die a slow death. When they come up with profitable products, that’s when the sector recovers. So far, everything they have works in labs but there are no mass-produced Crispr products, they’re trying for mass production on sickle cell anemia and a couple of other things, but still very early days in CRSPR technology.
Q: When will this recording be posted?
A: In two hours, it will be posted on the website. Go to “My Account” and you’ll find the last 13 years of recorded webinars.
Q: What do you mean by “stand aside from Foreign Exchange”?
A: The volatility in the foreign exchange market is just so low compared to equities and bonds, it’s not worth trading right now. When you can trade everything in the world—foreign exchange is at the bottom of the list. If I see a good entry point, I’ll do a trade; but do I trade Tesla (TSLA) with a volatility of 100%, or foreign exchange with a volatility of 5%? Those are the choices.
Q: Should I do any short plays in oil (USO)?
A: Generally, you don’t want to short any commodity unless you're a professional; I say that having been short beef futures when Mad Cow Disease hit in 2003 and you had three limit-up days in a row in the futures market. That happens in the commodity areas—liquidity is so poor compared to stocks and bonds that if you get caught in one of these one-way moves, you can’t get out. So that is the risk; and I’ve known people who have gone bust trading oil both long and short, so this is for professionals only. With stocks you get vastly more data and information than you do in the commodity markets where industry insiders have a much bigger advantage.
To watch a replay of this webinar with all the charts, bells, whistles, and classic rock music, just log in to www.madhedgefundtrader.com, go to MY ACCOUNT, click on GLOBAL TRADING DISPATCH, then WEBINARS, and all the webinars from the last ten years are there in all their glory.
Good Luck and Stay Healthy!
John Thomas
CEO & Publisher
The Diary of a Mad Hedge Fund Trader
Visa and Mastercard’s card networks are a relic of the past, not in terms of reach or footprint, but the technology of it.
This will cost their stock price and we are already seeing it play out in the market.
The canary in the coal mine was fintech players Square (SQ) and PayPal (PYPL) whose share prices were pummeled at the back end of last year.
PYPL is down 40% from its 2021 peak and SQ experienced a similar 42% drop.
This fierce competition and the crowded marketplace have investors paying less of a premium than ever before.
In a tightening rate environment, it’s clear the wolves are out for more flesh and the contagion will spread to those further up the food chain.
Fintech business models aren’t as robust or foundational as the bulwarks of MA and V, but questions must be asked if small businesses aren’t willing to pay an extra 2% on sales for outdated technology.
The fintech space has moved a long way in a short amount of time causing investors to be concerned about secular growth sustainability.
Among them are concerns that consumers are shifting to debit, away from higher-margin credit cards.
Consumers are also using more alternative payment methods that may bypass the card networks, including “buy now pay later” services offered by companies like Klarna, Afterpay (AFTPY), and Affirm (AFRM).
Visa has also come under pressure from a recent announcement by Amazon.com (AMZN) that next year it will stop accepting Visa-branded credit cards issued in the United Kingdom and this could be the beginning of a narrowing of Visas’ moat that could trigger a domino effect in other rich western countries.
The bulls would say that the stocks could undergo a reversal if the Omicron variant is not as bad as initially thought creating a tsunami of consumer spending massaging the bottom line for Visa and Mastercard.
But it’s looking more like V and MA are the victims of tightening travel restrictions around the globe and elevated positive cases that are immobilizing consumers.
The big card networks rely heavily on revenues related to cross-border travel as consumers and businesses use their cards for airfare, Airbnb’s, and Ubers, as well as duty-free gifts in foreign countries.
Multiples may need to come down if the Omicron variant puts the shackles on travel as countries reimpose bans or quarantine rules.
Investors had been counting on a recovery in cross-border travel to boost revenues for the card networks. This is definitely a kick in the nuts after initially seeing momentum as countries in general trended to loosening restrictions.
International transactions brought in $1.9 billion, or 21%, of Visa’s $8.9 billion in revenues for the 2021 fourth quarter.
The segment is highly profitable due to steep transaction and foreign-exchange fees. Cross-border margins come in around 69%, contributing significantly to Visa’s overall earnings per share.
The Christmas season has been confronted by a bevy of new restrictions as many places consider other measures to curb the spread of the Omicron variant.
Ultimately, even if MA and V can get positive reinforcement from increased short-term travel which seems unlikely, alternative business models are breathing down their neck as the technology of money has advanced.
The “buy now, pay later” phenomenon, although risky, is a rapid gut punch to the incumbents.
Then consider there is speculative technology like Bitcoin out there that bypasses these dinosaur networks altogether.
I believe 2022 is the year that MA and V get exposed as a luxury in a frugal world where small businesses can’t afford to give away 2% of revenue.
There’s too much money being invested into the technology of money for small businesses to reach for MA and V’s network.
Even open banking and digital networks can really dent the traditional payment networks.
Basically, I believe these companies have hit the high-water mark, and the likes of Zelle and Venmo will start to put pressure on these high fees.
Places like China don’t even use them by bypassing them through digital wallets like Wechat pay and Alipay.
Pie shrinkage and revenue decelerate — I believe this is one of the seminal trends we will see in fintech in 2022.
https://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.png00Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2022-01-07 15:02:322022-01-15 18:50:05The Death of Visa and Mastercard
Automation is taking place at warp speed displacing employees from all walks of life.
According to a recent report, the U.S. financial industry will depose of 200,000 workers in the next decade because of automating efficiencies.
Yes, humans are going the way of the dodo bird and banking will effectively become algorithms working for a handful of executives and engineers.
The x-factor in this equation is the direct capital of $150 billion annually that banks spend on technological development in-house which is higher than any other industry.
Welcome to the world of lower cost, shedding wage bills, and boosting performance rates.
We forget to realize that employee compensation eats up 50% of bank expenses.
The 200,000 job trimmings would result in 10% of the U.S. bank jobs getting axed.
The hyped-up “golden age of banking” should deliver extraordinary savings and premium services to the customer at no extra cost.
This iteration of mobile and online banking has delivered functionality that no generation of customers has ever seen.
The most gutted part of banking jobs will naturally occur in the call centers because they are the low-hanging fruit for the automated chatbots.
A few years ago, chatbots were suboptimal, even spewing out arbitrary profanity, but they have slowly crawled up in performance metrics to the point where some customers are unaware they are communicating with an artificially engineered algorithm.
The wholesale integration of automating the back-office staff isn’t the end of it, the front office will experience a 30% drop in numbers sullying the predated ideology that front office staff are irreplaceable heavy hitters.
Front-office staff has already felt the brunt of downsizing with purges carried out from 2018 representing an eighth year of continuous decline.
Front-office traders and brokers are being replaced by software engineers as banks follow the wider trend of every company transitioning into a tech company.
The infusion of artificial intelligence will lower mortgage processing costs by 30% and the accumulation of hordes of data will advance the marketing effort into a smart, multi-pronged, hybrid cloud-based and hyper-targeted strategy.
The last two human bank hiring waves are a distant memory.
The most recent spike came in the 7 years after the dot com crash of 2001 until the sub-prime crisis of 2008 adding around half a million jobs on top of the 1.5 million that existed then.
After the subsidies wear off from the pandemic, I do believe that the banking sector will quietly put in the call to trim even more.
The longest and most dramatic rise in human bankers was from 1935 to 1985, a 50-year boom that delivered over 1.2 million bankers to the U.S. workforce.
This type of human hiring will likely never be seen again in the U.S. financial industry.
Recomposing banks through automation is crucial to surviving as fintech companies like PayPal and Square are chomping at the bit and even tech companies like Amazon and Apple have started tinkering with new financial products.
And if you thought that this phenomenon was limited to the U.S., think again, Europe is by far the biggest culprit by already laying off 63,036 employees in 2019, more than 10x higher the number of U.S. financial job losses and that has continued in 2020 and 2021.
In a sign of the times, the European outlook has turned demonstrably negative with Deutsche Bank announcing layoffs of 40,000 employees through 2023 as it scales down its investment banking business.
Germany banks are also passing on the burden of negative interest rates to their clients.
A recent survey by Deutsche Bundesbank shows that 58% of banks are charging all savers negative interest rates while others only target wealthy and corporate clients.
If the U.S. dips into negatives rates in the future, expect the same nasty effect on job force cuts that Europe has experienced.
Either way, don’t tell your kid to get into banking, because they will most likely be feeding on scraps at that point.
THE LAST STAGE OF HUMAN-FACING BANK SERVICES IS NOW!
https://www.madhedgefundtrader.com/wp-content/uploads/2021/07/jul21.png574936Mad Hedge Fund Traderhttps://madhedgefundtrader.com/wp-content/uploads/2019/05/cropped-mad-hedge-logo-transparent-192x192_f9578834168ba24df3eb53916a12c882.pngMad Hedge Fund Trader2021-12-29 14:02:382022-01-03 12:09:16Automation and Banking
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