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I Pledge Allegiance…

26 Nov

The polarization of global capital flows and global trade, a phenomenon unseen in the past 30 years,  threatens to upset traditional mores about strict capital allocation and portfolio construction. As capital controls become more commonplace, a situation readily encouraged by the “race to debase”, the incentive to place ones wealth outside the battle lines becomes more pronounced. The question becomes: what asset or asset classes exist a safe distance from this war zone? We believe that the answer to that question will not be so obvious and that relying on historical precedents will not prove much help, however in a general sense those asset or asset classes that are not derived from some current or future sovereign promise to pay most likely is a starting point. As you know we have long been advocates of hard assets as a way to avoid “battle fatigue”, but as I just mentioned, the way forward should not be navigated with an eye towards the past.

Wake Me Up When Tomorrow Comes

19 Nov

In another long line of relative valuation metrics, the market capitalization of Apple Corp. has surpassed the entire market capitalization of the domestic energy industry, including behemoths Exxon and Chevron. applevsenergy The disconnect between the two reminds us of the late 90’s when tech was the only game in town and old school firms, which coincidentally provided the power for said technology, was said to be headed for the trash heap.Todays relative valuation gulf is driven primarily by a belief that the de-carbonization of the global economy is already at hand. Armed with an ESG checklist and a media bias that already has written the obituary for the carbon economy, todays stewards of investment capital are institutionally hamstrung when it comes to pursuing opportunities in the energy sector. The graph above is indicative of the institutional penalty box in which energy finds itself today.  However, investment opportunities are most attractive when a large selection of the investment community finds them most “un-investable”.

All Hat No Cattle

13 Nov

This good old Texas slight could be used to address most of the U.S. Energy industry, particularly as it relates to returns to shareholders. Non-conventional oil and gas in production  in the U.S. has no doubt proven to be a game changer in terms of global petro-dynamics, having implications for everything from Middle Eastern geo-political dominance to shifting margins across a wide disparate of industries. The advent of shale production has undoubtedly cemented the U.S. as the global swing producer, a spot heretofore held by the Saudis, unfortunately for domestic producers, that shift has coincided with a shift towards de-carbonization within the energy sector.  These two competing dynamics are taking place against the backdrop of a slowing global economy and its concurrent slowing in global energy usage. The result of  all of the aforementioned is that the debt- fueled- growth that has exploded across the entire domestic energy complex has ended in a resounding slump, driven primarily by a lack of sustainable profitability as measured by cash flows. Capital Markets, neither debt nor equity, are willing to continue to finance the” growth- for -growths sake” mentality that has driven the unsustainable ramp in production that has occurred since 2016.


11 Nov

I’ve been reading the biography of Edison recently and the sheer volume and expanse of his creativity and innovation is almost unbelievable. He is credited with over 1093 patents in his lifetime and with the creation of over 100 companies. What struck me however was that he was not only focused on the creative and generative process, but that every “invention” had to be practical and have some economic feasibility. There would be no WeWorks coming out of Menlo Park.  It got me thinking about disruption, and the scope and scale of disruption as it exists today versus Edisons day. You can be sure that there were outstanding ideas and inventions that permeated the labs in that New Jersey suburb, but yet never saw the light of day because they weren’t feasible, feasibility as defined by profitability. Contrast this with WeWork, which was neither innovative nor profitable, however in the absence of both was  still able to amass substantial investment dollars, that is until the brick wall that always ends such schemes:Financing.  Describing the selection of growth over profits WeWork management stated back in the heydays of early March “We can very much, if we chose to, moderate our growth and become profitable,” Artie Minson, WeWork’s president, said in a telephone interview. “But it’s a time for us to continue to accelerate.”

Plumbing Problems?

29 Oct

The disruption in the repo market in the U.S. has generally been dismissed as simply a mechanical problem driven by a regulatory environment which ring fences reserves rather than letting them flow to market driven liquidity events such as what we are seeing currently. What has not been discussed is that the start of such issues began to surface as Treasury borrowing needs started to amplify given that we will have close to a $1Trillion deficit to fund, without the Fed as a partner we might add. Such issues did not surface over the last 10 years as the Fed was a willing participant in the public debt -for  private growth tradeoff that we have so mindlessly embraced. Rest assured that there will be more plumbing problems to come, particularly as capital controls and currency wars virtually ensure more unintended consequences.

We Are The World

28 Oct

By now you are aware of the latest unicorn to fall on its own alicorn (look it up!): WeWork. WeWork was the private- equity- funded landlord whose various levels of incremental financing placed a pre-IPO valuation of $45 Billion. Unfortunately for the management of WeWork and its sponsors, the details behind this business model in preliminary prospectuses showed that building out and sub-leasing commercial office space isn’t as revolutionary, or profitable, as  was portrayed.  In short order, the IPO was scrapped and the existing business was looking compromised as a cash crunch began to emerge with the lack of any near term infusion of capital. Fast forward several weeks later and the original capital source is looking to take the company private at a valuation of  less than $8 Billion. Much like in the 2000’s era, you began to get talk about the “lost” $37 Billion, as if the spreadsheet valuations placed on this company represented actual dollars.  That $37 Billion was lost only in the sense that the actual business was viewed through the lens of reality and not through the distorted prism-like view afforded many via Central Bank policies. Discounting cash flows (assuming there are any) at minuscule or even negative, rates of interest not only cause distortions like WeWork, they encourage them, so look to see  more WeWorks in the future as reality and fantasy come together in a not so happy ending.

Pennies From Heaven

22 Oct

As the Presidential race unfolds and the slate of Democratic candidates is winnowed down to a mere 10 or 12, it becomes less clear what the potential outcome of the election might mean for capital markets, particularly given that electing the Donald did not provide any clear cut winners that one might have surmised at the time. As we can see from the last 3 years, The Donald is ostensibly for the following: low taxes, low interest rates, low dollar, and low to no regulation. Democrats  (who so aptly put by David Brooks of the NYT, seem to act as if they are all running for president of Brooklyn) are for: higher taxes on the wealthy (wealthy to be determined), strong green initiatives including onerous regulations on energy across the board, and a multitude of changes to health care depending on the day and which candidate you are speaking with at the time. At its very core, its one side playing defense with the other side trying to coalesce enough to play offense. Republicans would have you believe that its about protecting what’s ours via tariffs and targeted tax legislation, Democrats would have you believe that its time to take back what is collectively “ours” through punitive tax laws and re-regulation of industries which are deemed environmentally unsound. While my intent is not to get into a discussion of the relative value of each party position, what is clear is that as the economy weakens further, the efficacy of monetary policy will prove to be less and less outwardly effective at staunching the decline, leading both parties to support (read demand) new monetary policies  which stand outside the realm of pure interest rate manipulation i.e. direct payments to individuals. Think cash for clunkers but on a grander scale.