Last week's deadline for - and subsequent introduction of - the tit for tat trade tariffs on $34 billion of goods between the US and China seem to have come and gone without the end of the economic world as we've come to know it, but to be fair it is probably much too early to tell how this will play out. It may only be 0.1% of their respective GDP's, but the fact that the so-called "Chimerica Trade" is estimated to approach 40% of the global total puts it into perspective.

Meanwhile The Donald has moved on to Europe, using his "stable genius" negotiation approach to resolve NATO's funding future, before hopping across the English Channel to give some (we imagine unwelcomed) advice to Theresa May, while adding that he "gets along with her nicely" and thinks she's "a nice person".

At this point in time we haven't heard her response - on or off the record - and we're also not sure if Donald has yet worked out why he feels unwelcome in the "London he used to love".

Meanwhile back at home the Hayne Royal Commission has advised it will shortly be turning its attention to superannuation funds which must fill the 30 or so lucky directors due to take the stand come August 6^th with trepidation. Hayne will be looking at such uncomfortable aspects as "acting in the best interest of members, not unions, employer groups or shareholders", and has requested they provide papers of board meetings and sub-committees stretching back five years.

Leading up to this, Commissioner Hayne will no doubt be getting to know the Productivity Commission's 570 page report on the $2.6 trillion superannuation sector, which itself was pretty scathing, but with his added powers and the glare of the lights on the witness box, there should be more headlines in store.

Not, however, too many surprises!  The "for profit" sector funds consistently underperform,  and lest the "industry funds" think they're going to be getting off lightly, there will no doubt be all sorts of uncomfortable questions around cosy deals with unions, a lack of appropriate knowledge and expertise at board level, not to mention their ongoing refusal to appoint independent directors. We wonder why?

It is inconvenient timing therefore that an unfair dismissal case against Australian Super, alleging conflicts of interest and cosy related-party deals, is currently making the news. Or the report we saw recently that estimated that with lower fees the $2.6 trillion currently in super would be worth closer to $3.4 trillion.

No wonder the SMSF sector is so popular, even if some funds with lower balances are uneconomic. At least their trustees get to make their own decisions, and pay for their own mistakes.

Trying to predict the eventual outcome of the looming trade war between the US and China is about as difficult as trying to predict Donald Trump's next policy announcement. However, a reasonable prediction would be that neither side enjoys losing face, and therefore is unlikely to back down at the first hurdle.

For those that have missed it at 2 PM today America is due to slap a 25% duty on $34 billion worth of Chinese imports, ranging from machinery to electronic parts. As night follows day Tit is liable to follow Tat, meaning that China will immediately respond with equivalent tariffs focused on American farm goods.

While $34 billion seems a fair chunk to Hedge Clippings, they only represent about 0.1% of GDP for both the Titter (the US) and the Tatter (China). However the real risk lies in the Donald's approach to negotiation, and we would imagine China's approach to backing down. Assuming both parties perform as expected by most pundits, as opposed to how each hopes the other will react, it seems pretty likely that tensions, the damage to each country's economy, will increase.

However the US economy is in a very different place to China's, with a strong stock market, improving growth, and bond rates that in spite of dire predictions, and inevitable Fed tightening, seems not to have upset the apple cart (yet). Growth in the second quarter of the year is likely to exceed 3.5% annually, and unemployment is falling. Apart from the trade war, the major risk seems to be that there will in fact be an eventual outbreak of inflation, currently just above the FED's target of 2%.

Conversely, in China the equity market has fallen 20%, and the authorities are grappling to control credit. Over the past 20 years, having become the world's factory and having exported deflation as a result, a nasty trade war with the US could be the trigger to signal the end of the miracle.

Meanwhile, we assume the economy of all other countries, including Australia, caught in the crossfire will be considered collateral damage, although depending on who sides with whom, and who can negotiate what, will depend on the eventual outcome.

David Murray's problems with ASIC go back a long way, but more recently he's upped the ante even further as he attempts to justify Vertical Integration within the financial services industry, and AMP in particular.

It is worth remembering that Murray (who prior to his soon to be current gig as AMP's chairman) had only ever worked at CBA. He was both the architect, engineer and implementer of their vertical integration model, taking the likes of Colonial, Aussie Home Loans, and Count Financial into the bank in his quest to gain a greater share of the customer's wallet. In a classic case of "if you can't beat 'em, buy, buy, and buy more of 'em" he added financial planning, accountancy, and mortgage broking to the product suite, while Colonial's investment platform created the perfect distribution model.

Except it wasn't perfect, as clients of Storm Financial and others have experienced, and as the Hayne Royal Commission has recently exposed. Leading the charge to take market share, and make profits at any cost, often leaves the client's best interest coming a long way third - if it features at all - in the process. As a result, CBA's incoming CEO Matt Comyn has wasted little time in announcing the demerger of "wealth" from "banking" and undoing much of Murray's work at CBA in the process.

Murray's previous run in with ASIC included him comparing the regulator to Hitler's Nazis, for which he was forced to apologise. Last week, just as he prepares to take the reins at AMP, he engaged in a little more ASIC bashing claiming the regulator had lost its way under Greg Medcraft, and wasn't focussed on its main job.

Meanwhile, ASIC is going after AMP's financial planning arm through the courts, so we'd like to be a fly on the wall when the regulator's new chairman James Shipton and David Murray first sit down for a quiet chat and a cup of tea. Just try typing David Murray and ASIC into Google to get a flavour of how the conversation might run.

In many ways, Murray, whose reputation and knowledge of the financial services is undoubted, makes him a perfect choice to head up the organisation which has managed to trash its reputation and decimated the ranks of its board and senior management. 

In others he's probably the worst. The world has changed and vertical integration is on the nose, in decline. Not only has the AMP got to change, but Murray's got to learn a new game at the same time.

AMP's problem is that without vertical integration it has an uncertain future as it struggles to distribute its frequently uncompetitive products through a tied sales force. ASIC will be watching with interest.

The government was understandably excited to get their personal income tax legislation through the Senate yesterday, but the fact that it came down to such a knife edge decision is of concern. It remains to be seen whether they will now be able to get the proposed company tax changes through the Senate next week, but with the second highest company tax rate amongst OECD countries, how can Australia compete on the world stage unless they do?

Australia needs to be competitive, and needs a competitive taxation system to be able to do so. Not only is it not competitive, it remains excessively complex, with a GST rate way below most other countries, and only levied on half the economy. It reinforces RBA Governor Phillip Lowe's comments a week ago that the Australian population had no stomach for tax reform.

It was interesting to see the governor of the RBA weigh into the debate, noting that the personal income tax cuts were only the "first step" in the right direction, saying that they were merely incremental, and falling short of "that kind of first-order tax reform that will make a fundamental difference" to productivity growth.

Hedge Clippings believes that the Australian population has, in general, plenty of stomach for tax reform, but the combination of a political process which results in both parties automatically opposing the other's policy, political expediency which encourages negativity (not to mention happily lying in the process), and the inability of either party to successfully prosecute a policy change, leave the Australian population with an overly complex and uncompetitive taxation system.

If the RBA Governor was prepared to speak up, maybe it is time for both the population and the politicians to listen. What is disappointing is that previous governments have had their chance, but didn't have the stomach for tax reform. Ken Henry's 2010 review of the taxation system (excluding the GST which he wasn't allowed to include in the final report) proposed 9 broad themes (still applicable today) covering 138 recommendations, of which the then government implemented only three.

So full marks to the current government for progress to date, but there's an awfully long way to go yet. As the Chinese proverb states, "A journey of a thousand miles begins with a single step."

A short week - and an argument for being short the banks, or avoiding ETF's.

It's been a pretty busy week for one with only four working days - in most of Australia at least. Quite how we have a system where the same event - the Queen's Birthday - is celebrated on three different Mondays in either June, September or October depending on which state you're in, is bizarre.  It's no wonder we have a complex tax system if the same bureaucrats and politicians came up with dates for public holidays…

Firstly Trump, who no one thought would make it to the White House in the first place, achieved what many thought was a diplomatic impossibility by shaking hands with Kim Jong-Un and inking the bones of an agreement that none of his more diplomatic predecessors had even dreamed of.

Then Jerome Powell and the US Fed upped US rates by 25 bps, and the markets … did nothing. The RBA, and then the ECB, kept rates on hold, with the latter announcing the end of QE will take place in December. More of the same…

Fresh from Singapore, Trump is tonight scheduled to announce tariffs on $50 billion of Chinese products, which will inevitably lead to an upping of the trade war with both retaliation and rhetoric from China's President Xi Jinping. Watch that space with care.

Meanwhile at home we gave some focus to the banking sector (again) but this time on the big 4 banks' share price declines over the past 12 months, which caused Hedge Clippings to reflect on one of the great flaws in the passive investing approach of ETF's.

Consider this: Over the past 12 months the share price of each of the big four banks has fallen around 20%, whilst Telstra has fallen almost double that.  These five stocks make up just under 30% of the market cap of the ASX200, which in spite of this Famous Five's 12 month performance, has managed to rise approximately 5%.

Any investor in an ASX200 ETF, or even worse in an ASX Top20 ETF, hase, for better or worse (in fact for worse!) had their returns dramatically curtailed as a result. Simply accepting whatever the market as a whole throws at you and justifying the decision on the basis of low fees makes little sense to us.

While we accept that the opposite can occur as well, boutique or concentrated funds which can avoid - or select - individual stocks, sectors or markets by using their skill and experience on a discretionary basis are worth finding and if appropriate, investing in. Certainly some will perform better than others, and not all of them will perform in unison. Whilst possibly biased, we would argue that a diversified portfolio of well researched boutique managers will provide a better return, with lower volatility and risk than the overall market, and its ETF equivalent.

Towards the end of each week we seek inspiration (that's probably a slight exaggeration - maybe "ponder" describes it better) for the subject matter of the weekly Hedge Clippings email. It is a sad reflection on the current state of financial markets that for the past couple of months we have become somewhat predictable, as the antics of bankers and other sectors of the financial services industry have dominated the commentary.

The list has been extensive, headlined by AMP, plus NAB, CBA in multiple guises, and the overall vertical integration structure of product distribution and sales masquerading as independent advice. The boardroom ranks of AMP in particular have been thinned out significantly as reputations have fallen by the wayside, and the damage has either been reputational, or borne by shareholders.

This week has seen the significant extra bite of criminal charges being laid against senior banking executives, including one chairman, at the top end of town amongst Citi, Deutsche, and ANZ over an underwriting shortfall. The problem with financial penalties, even those as large as the $700 million levied on CBA by AUSTRAC's for breaching AML regulations, is that generally speaking it is the shareholders who pay the price. Even then, unless the dividend is cut as a result, there is little pain in investors' hip pockets at the end of the day. That's all changed and the message will have been sent loud and clear not only in this case but to all boardrooms.

Some readers may have noticed that Hedge Clippings has joined none other than the Treasurer, Scott Morrison, in previously suggesting that the potential for an enforced "holiday" would be the ultimate deterrent for serious corporate wrongdoing in the banking sector. Without wishing to prejudice the outcome of this particular case, it will be a serious wake-up call to all executives and directors who elect to sail close to the wind based on "normal practice".

Passing on a hefty fine to shareholders is one thing. Taking the risk of getting one's reputation pinged by the regulator even - but the thought of packing one's toothbrush and being introduced to a new diet (and room-mate) will undoubtedly sharpen some directors' sense of priority - and self-perseveration.

In 1756 at the start of the seven years' war the British executed Admiral Byng for "failure to do his utmost" to avoid defeat at the hands of the French fleet in the Mediterranean. When a French Admiral was asked why, and if this was not a little harsh, he responded it was "pour encourager les autres" - to encourage the others.

Whatever the outcome of the upcoming court case over ANZ Bank's underwriting shortfall, there's no doubt the message has been sent to "discourager les autres".

This week the Australian Government's Productivity Commission released its draft report assessing the "efficiency and competitiveness of Australia's superannuation system". Predictably the report found that the system was actually "not so super", and reading through the 571 pages of the full report, Hedge Clippings decided that (purely for expediency as you would understand) the overview, just 65 pages long, was likely to be more our speed.

Taking expediency even further, it was judged that the best way to look at even the draft report was to skip to page 56 under the heading "OVERALL ASSESSMENT". Expediency aside, we would have to say both versions were excellent, and it was almost impossible to fault either the logic, findings or recommendations contained therein.

First and foremost in the recommendations was the removal of "unintended multiple accounts (and the duplicate insurance that goes with them), which the commission estimated would save members collectively about $2.6 billion a year. In addition, if members in underperforming MySuper accounts had instead been moved to the median of the top 10 performing MySuper products, they would collectively have gained an additional $1.3 billion a year".

That's nearly $4 billion a year, probably on behalf of the lowest value accounts, and therefore on behalf of the neediest in the community, which could collectively be added to their retirement benefits. Multiplying that by a 40-year working life makes a mouth-watering $160 billion.

Not surprisingly the Productivity Commission came to the conclusion that "the superannuation system has not kept pace with the needs of members".

What was an outstanding and forward thinking concept introduced by Paul Keating way back in 1983, (allegedly with much input from Garry Weaven, the founding executive chair of industry fund services in the early nineties, and who still wields significant influence in the industry superannuation sector) not only has the system not kept pace with the needs of members, successive governments haven't been able to help themselves and have complicated it disastrously.

Without running through all the findings and recommendations, (again in the interest of expediency), the Productivity Commission's draft report also covered fees (higher than those in other OECD countries), transparency (poor), disclosure (sub-par), performance (mixed, with underperformers particularly prevalent in the retail sector), competition (inadequate),  policy (changes required), default fund selections (unhealthy), erosion of member balances (no comment required), and governance (stronger rules needed).  

We could go on, but that would prevent readers having the enjoyment of thumbing through either report themselves. However, one recommendation, which copped some flak from the industry fund sector, (unreasonably, but given self-interest, not surprisingly), was the call for 30% of each industry fund's board to be made up of independent directors.

The industry funds' position would seem undefendable, apart from the difficulty of finding sufficient appropriately qualified independent candidates. After all, if it is appropriate for the board of an ASX listed company, the majority of which are smaller and have fewer shareholders than industry funds have members, to have 30% independent directors, why not industry super funds?

What's good for the goose, should be good for the gander.

Over the past couple of months Hedge Clippings has been overwhelmed by revelations of gross misconduct evident at a number of levels of banks and AMP in the areas of financial planning and advice. The Hayne Royal Commission became a cross between reality TV, a soap opera, and a big end of town version of Judge Judy.

This week's episode, focusing on banks lending to small businesses, and their subsequent treatment of the borrower and their unfortunate guarantors when the proverbial hits the fan, has been dull by comparison.  It has been no less shocking, but dull, probably because there haven't been too many surprises. Banks only lend when the borrower can provide adequate security, and when it's time to pay the piper, it's the lender that calls the tune.

There's an inherent conflict here. Small business borrowers constantly complain that it's hard to get a business loan, even with the security of a home as collateral, often owned by some unfortunate relative. Banks argue that they aren't there for the benefit of the borrower, and have been driving hard bargains when things turn turtle since Shylock was a boy. Hence the term "getting their pound of flesh."

The issue is to what lengths should a bank go to in getting a guarantee, and how, or from whom in the first place. Once again it is in the area of what is "acceptable conduct" from a supposedly reputable business that the banks appear to have failed the test. No one disputes the banks' basic business obligation to take appropriate measures to protect the money they lend, but it comes down to what is considered appropriate.

Once again the pressure to perform, particularly to meet sales and lending targets, leads to unfortunate outcomes where the bank is rarely the loser at the end of the day. Until the government of the day announces a Royal Commission…

The AMP saga continues.

The latest casualty was the resignation of AMP's Chief Risk Officer, which is probably understandable given the revelations of the past month or so, although his comments on LinkedIn were, let's say, "unconventional".

Geoff Wilson from Wilson Asset Management, one of the most experienced fund managers around, publicly questioned whether AMP was a buy at any price, given not only the internal and governance problems that the company is facing, but with a business model out of step with the times, and a business sector that is guaranteed to have unknown regulatory changes imposed on it in the future.

Added to anecdotal evidence of AMP advisors moving out, in line with an industry trend from "big end" to "boutique" this week Macquarie Bank is reportedly moving up the wealth management food chain to focus on HNW investors - a further indication that financial advice for "mums dad's" is not an attractive place to be going forward.

Given ASIC's hard line on advisor commissions, and particularly training commissions, that's probably as true for the adviser as it is for the recipient of the "advice". Whether it is the place to be or not, it is an issue for the retail investor who needs and deserves proper financial advice.

Hedge Clippings looks forward to the dismantling of the vertical integration, tied distribution, and producer heavy Approved Products List model to the day when investment products stand on their merits, not product sales dressed up as advice. However, in spite of the headlines, and the fundamentals behind them, it is worth remembering it is the minority of advisors who are the problem, aided and abetted by the industry structure and poor corporate governance that allowed them to operate that way.

The danger of the Hayne Royal Commission will come from the risk of an over-reaction from politicians, and subsequently regulators, and thus to corporate compliance departments, to the extent that the end consumer will go without the genuine advice that they need. Next week the Commission moves its focus to the small business sector - away from the small investor being delivered products they don't need or want, to small business that need the products, but all too often can't get them!

Meanwhile, APRA is starting to put pressure on industry superannuation funds and their selection of board members without the requisite financial acumen, or rather non-selection of board members from outside the industry with appropriate experience. We don't know whether this will come under the gaze of the Hayne Royal Commission, but if not it should do. With their control of so many trillions of dollars of small investors' retirement funds, the governance, skills and experience required should be no different to a public company board.

Finally onto global markets. So far the S&P500 seems to be defying the 10 year bond market yield, now trading at a tad under 3.1%.

So far ... but watch this space.

In spite of the weakness in the financial and banking sector which dominates the ASX Top 20, and to a slightly lesser extent the ASX200, the Australian market has finally made up some ground over the past few days and is now in positive territory calendar YTD. To the end of April the ASX200 was still slightly in the red on a total return or accumulation basis (-0.11%) and only showing a return of 5.46% over 12 months.

Against this the FundMonitors.com index of actively managed investing in Australia and NZ have returned 12.08%. Across all strategies 89.97% of funds have provided positive returns, ranging from -17% to +73% with 57.58% of funds outperforming the ASX200.

We thought we'd throw that in before moving on to AMP...

Hedge Clippings remains sceptical about AMP on nearly every count. This is not only based on their past failings as revealed by the Royal Commission, but also on their response in the ensuing crisis, plus market and client perception, and evidence of investors' outflows as a result.

Last Friday AMP responded to the Royal Commission with what sounded suspiciously like a denial of wrongdoing, in spite of the fact that they had been found to have charged clients fees for services not performed, and then lied to ASIC (including at board level) on no less than 20 occasions.

In spite of losing the chief executive, chairman, three directors, and their chief legal counsel, (who we suspect was thrown under the proverbial bus) the tone of AMP's response was one of, if not denial, refusal to accept responsibility.

And yet to quote from the interim chairman's report to the AGM yesterday:

"I begin by reiterating and reaffirming our unreserved apology. We are truly sorry.

The issues highlighted in our advice business are unacceptable.

We let you down.

We have let our customers down.

And we have let the wider community down."

A little further on the blame was attributed to "a small number of individuals in our advice business who made the decision not to follow policy."

And "the situation was compounded through a series of communications that misrepresented the issue to - and therefore serve to mislead - our regulator on several occasions."

"On both counts the behaviour was absolutely unacceptable."

He then tried to claim that the board had accepted accountability, with some 50% of the board having left, or leaving.

The reality is that the previous chairman and CEO only departed when it became completely obvious that their positions were untenable, and the additional board members only resigned when it was clear they would not make it through the AGM. Hardly synonymous with "leaving of their own accord or willingly".

(The acting chairman also regretted having lost all female directors through the process, but the reality is that ALL directors should be appointed based on ability and experience, by what is between their ears, irrespective of gender. Hedge Clippings might be wise to keep out of that argument!)

But now they have the great white hope, David Murray, as the incoming Chairman.

David Murray is undoubtedly qualified and experienced in financial services. He was CEO of the Commonwealth Bank for 13 years from 1992 to 2005, and was the classic career banker having started as a teller, and rising through the ranks based on his undoubted ability.

However the problem is that Murray believes in the same vertically integrated structure which has not only caused such problems in the banking sector, but is also quite likely to come under pressure as the Royal Commission continues its hearings before making its findings and recommendations known early next year.

At CBA David Murray oversaw the acquisition and integration of Colonial, Count, and Aussie Home Loans, all of which have come under fire in various ways, as has the whole vertical integration structure where sales were repackaged as advice.

The danger for AMP will be that Murray still believes in that model and structure, and that his experience almost aligns itself to his DNA.

Murray has a couple of other problems apart from having to find quality directors with the experience and ability to take on the challenge, let alone instilling the change throughout the organisation.

One of them is his relationship with ASIC, where we would imagine that AMP needs to do some serious fence mending, having in 2016 likened ASIC's approach of trying to enforce corporate culture on boards to that of Adolf Hitler.

At least the 2014 Financial System Inquiry, chaired also by Murray, recommended significantly increased powers for ASIC, even though his later comments suggested that boards should not be held liable for a breach of culture.

The reality is that at AMP it has been that the culture, including at board level, as well as the structure of the business, that has been the problem, and it remains to be seen if Murray, in spite of his outstanding credentials and experience, will be able to, or is the best person to lead it into the future.