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The Symmetry of the Q

20 Aug

If you’ve watched one of the recent Trump rallies you may have noticed the prevalence of some in the audience carrying signs and slogans referencing “Q”. If you’re not aware(and I wish I wasn’t), Q is a term short for Qanon, best described as an interactive conspiracy driven community in which the actions of the deep state are explored and revealed. In short, real tin hat stuff for the technologically “savvy” crowd. However, the latest comments from  President Trump may provide fodder for the Q crowd, as he has been loudly complaining that the Fed is actively working against his pro- growth agenda.  Imagine, we  may now have Q VS. QE, or Q Vs. UnQE. While the Donald prefers to look to the Stock Market as his favorite bellwether of future prosperity, we prefer the yield curve and the flatness of said curve does not foreshadow good times ahead. As growth slows, we predict that the Presidential tweets will become more pointed and critical of the Fed, maybe “Jerry the Jerk”, or “Job Killing Jerry”.

Barriers To Exit

14 Aug

I had the unfortunate experience of visiting a K-Mart recently and it got me thinking about the concept of “barriers to exit”,  and not simply because I could not wait to exit the store which should be used as a field trip to show what the communist era Russian shopping experience must have felt like. I first ran across the term barriers to exit, during a conference call with a South African Platinum producer, in which the very laws of supply and demand were suspended as the company director described a situation where the sub-cash cost platinum price was not adequate to close production as the social cost (barriers to exit) were deemed too high. Keep in mind, that the company we are talking about is not a quasi-governmental concern such as Codelco, but a publicly held firm with stockholders and ostensibly a profit motive. While it is easy to understand the reticence to cut production  (and staff) in a country with 28% unemployment, one wonders if the thought process of said platinum producer and Eddie Lampert are simpatico: Stay alive, even in the face of massive losses. However, staying alive to fight another day is only a working plan to the extent that it is facilitated by the capital markets willingness to accept the asymmetric risk offered by such plans. The Platinum Industry and Sears Holdings have enjoyed the benefits of such asymmetry, however one wonders that as reality bites, the term barriers to exit will be utilized to describe the options available to bondholders.

Exit Brexit

23 Jul

The slow movement towards dis-unification of the EU has recently hit a number of snags, with a shakeup in Prime Minister May’s government as well as some questions regarding Irish border issues. The attached NY Times article however highlights the massive impediments that will be reimposed as the free flow of goods within the U.K. and the European continent cease(in less than one years time). Articles like this point out that it was highly likely that the only thing that Brexit voters wanted held up at the border was people, and that the long-term sclerotic effects on the U.K. economy were at best minimized, and at worst, not even considered. Those bashing the “globalists” in this country would be well served to take notice, as tariffs (both hard and soft) may prove not only to not be the panacea they promise, but in fact may prove to make the situation infinitely worse.


Displaced and Mis-priced

18 Jul

Not a day goes by without being inundated with talk of  the electrification of the transportation sector; namely cars, buses, ships, etc..  The speed of such transformation, if you believe the hype (and we don’t) is happening at such a breakneck pace that carbon based energy will be as extinct as its own DNA. While we obviously have no insight as to the actual arc and velocity of change in the electric vehicle space, it is important to note that such anticipatory hype often produces opportunities in those sectors presumptively deemed extinct. We see value in the PGM sector as traditional catalyst metals will still be required, particularly as most growth in EV will be in hybrids. We also see growth in sources of traditional power generation; coal being one in particular, nuclear being the other.  While we are not convinced of the speed of the transformation of the drive train, we do believe it will happen and when it does the need for additional power generation will be paramount.Contrary to what the NY Times might have you believe, wind farms and solar will not be sufficient to get the job done.

Donald Driver

13 Jul

Packer Fans calm down, we’re not referring to the all time leader in Green Bay Packer yards receiving, but rather to the other Donald and what drives him, namely the Stock Market. Much like Clinton’s unhealthy obsession with the Bond Market, Trump seems to view the Equity Markets as his daily barometer of policy efficacy. This shouldn’t surprise us as both are highly irrational and short -term focused. While Clinton’s fixation on the Bond Market was primarily driven by budgetary deficits hawks (there used to be those), Trump looks at the daily gyrations in prices as justification for policies not driven by any sound fundamental underpinnings, but rather by the empty campaign promises of an avowed populist. The problem lies in the fact that companies make capital decisions based on their best guess of what the future may look like 5, 10, 15 years hence, and a scattershot policy agenda involving not only trade, but immigration, health care and a host of other third rail issues, is only a deterrent to the domestic capital investment requisite for sustainable long-term growth. While an Obama Presidency did leave us with a legacy of bureaucratic overkill, the current disrupter-in-chief has left us with an environment of permanent upheaval, an environment not conducive to either rising prosperity or equity markets.

Trump Island

29 Jun

Clearly The Donald  never read John Donne, author of the famous poem, No Man is an Island, which partially reads:

No man is an island,
Entire of itself,
Every man is a piece of the continent,
A part of the main.
If a clod be washed away by the sea,
Europe is the less.

Donne is speaking of the collective “Europe” of course, but one has to wonder whether the losses initiated by the populist movements across Europe and the U.S. will cost us more than our collective souls. Harley Davidson, BMW, and others have made decisions to re-shore production in more advantageous locations directly as a result of populist driven legislation both here and in Europe. Therefore, the unintended consequences of serving the few while ignoring the many begins. Trade wars are not easily won, and much like real wars they involve collateral damage; jobs, currency devaluation, and inflation,  are only a few that come to mind as potential consequences of the short-sighted, voter pandering attitudes.




House Rules

28 Jun

In the global casino that is modern day capital markets, the U.S. has always acted as if it is the house. As you may or may not know, the house always has the edge in the various games of chance, the only difference being is the degree of edge. In its sports books, for example, the house really has no edge thus sports betting tends to be a loss leader for the slots business in which the house has a commanding edge. The ultimate edge for the U.S. in global capital markets historically has been the dollar. As the worlds reserve currency, and not coincidentally the deepest market for foreign trade and investment, the U.S.(dollar) stands as the arbiter of global capital flows. However, unlike the standard casino/patron relationship, the U.S. and its trading counterparts relationship is highly co-dependent. While it may be true that the major trading partners of the U.S. need the depth and stability of the worlds largest trading partner, the U.S. also needs captive buyers for the trillions of excess dollars generated through its cumulative fiscal excess. While it may seem reasonable to rail on trade imbalances, trade surpluses are virtually impossible with excessive and consistent fiscal imbalances (of the un-monetized variety).  The current administration runs the risk of underestimating this co-dependency, and in doing so puts the whole global economy in jeopardy.