Flaring Weakness

10 Mar

OPEC +’s  decision to walk away from any volumetric cuts in response to a steep coronavirus-driven decline in demand did not necessarily come out of left field in spite of what you might read in the days ahead. The seemingly unrestrained production coming from U.S. non-traditional shale has long been a source of frustration for other producers who have stood by and watched the U.S. take precious market share. While they may have been comfortable piggybacking on the production discipline of others, the  irony of the  recent flaring controversy could not have been lost on the global oil players, particularly the Russians. Picture this: An OPEC meeting discussing the need for cuts in production butting up against a report last week describing the flaring of gas in the U.S. as seemingly out of control, literally restraint versus  the un-restrained. Well, in light of this weeks events, the problems of restraint seem to have been solved.

White Space

21 Feb

Was listening to someone describe how the quality of literature and the written arts used to be better primarily due to the fact that, prior to the introduction of the personal computer, everything had to be typed on a typewriter. The manual labor involved in such an undertaking simply left more white space on the page  than had one been using a PC. That white space was a definitive statement that what was on the page deserved to be there, if not only for the work involved with whiteout or correction tape. The contrast now is that we live in a world with no white space, technology (for good or bad) allows for no uninterrupted narrative, all “information” all the time 24/7. In the absence of white space, story fills the page, right or wrong, true or false, the vacuum gets filled. The result is Tesla, Virgin Galactic (SPCE), Beyond Meat, Wework,etc.. The aforementioned are all filler and no substance, they represent a need on the part of the investing public to fill in the blanks of actual fact based fundamental analysis with story. In fact, story stocks resemble reality TV, the exact antithesis of white space, all drama, no backstory or context and the glorification of immediate gratification through a rising stock price.

Price Majure

13 Feb

We knew that the details attached to the phase I deal signed in January didn’t hold up to even the flimsiest of scrutiny, primarily due to a not insignificant little clause thrown into the agreement: as market conditions warrant. With the outbreak of the coronavirus, welcome to the Phase I backdoor. If truth be told however, this agreement was all about face- saving to begin with and the proof is best shown in the price action pre and post-signing. If you look at what was touted as the major beneficiary of the deal: agriculture (particularly soybeans) you can see that the market itself held little faith that China would ever come through with purchases of the size promised, particularly with a huge crop coming from Brazil and a severely weak Brazilian Real.sg2020021359733 Market conditions, in the eyes of the Chinese, is synonymous with cheaper elsewhere and one can rest assured that the price deterioration produced by the slowdown in global supply chains will virtually ensure that this weak agreement produces almost no new net gains in trade.

Friends Without Benefits

13 Feb

Now that Brexit is a fait accompli , meaning The U.K. is leaving the E.U.  at some time, with some rules and will pay some of its EU related debts, at some future determined time. In short, Brexit is an agreement to break up with your girlfriend but that the party doing the breaking up is finally realizing that this actually has real consequences. Michael Gove has” told businesses that export to Europe they need
to prepare for “significant change” with “inevitable” border checks for
“almost everybody” who exports to the EU from next year.” Lest there be any confusion amongst those that would suggest that there will be an imposition of soft borders only starting in 2021, Gove stated

“The only way in which you could avoid those customs procedures and regulatory
checks would be if you were to align with EU law and if you were to align with
EU law we would be undermining the basis on which the prime minister secured
the mandate at the general election to affirm our departure,”

So, the messy divorce continues with the only details to be ironed out are child support, maintenance, visitation rights, etc., in short everything.


Make Delusion Great(er) Again

5 Feb

The new decade has proven quite the breeding grounds for new and different events that threaten the bounds of credulity. Having just witnessed the SOTU last evening, one delusion that has been perpetuated over and over again, only to be ultimately reconciled,  with falling (usually steeply) prices is the delusion that the economy and the capital markets are one and the same. The Donald loves to perpetuate this delusion as it is simplistic and can easily be explained to him in pictures and crawls at the bottom of Fox News. The plain facts are that capital markets and economic fundamentals can diverge, and often do so for extended periods of time. We are going through such a time, but how could this not be the case, we have just encountered phenomena never, ever experienced in the history of advanced economies namely:  coordinated and planned central banking, planned and manipulated interest rates globally irrespective of normalized growth and the  institutional acceptance of moral hazard. Simply reflect on this one statistic when you think that things are going so swimmingly with the real economy : Since 2007 Global Debt has gone up by $128Trillion while Global GDP has gone up by only $27 Trillion.  To put this in more simplistic terms, it has taken almost a five fold increase in leverage ( and thus systemic risk) to generate one  incremental dollar of global economic growth.


27 Jan

The crowd at Davos this year seems to have fallen in love with another social platform: ESG. (Ignoring the obvious criticism of a group that on the one hand pounds the table for climate change while leaving the conference on over 300 private jets) While we  admittedly have come late to the party on gauging the impact that ESG has had on investment behavior, what we don’t buy into is the fact that hype and loosely written pacts and agreements lead to faster and greater acceptance on the part of a society that has to live with and pay for these changes. Whether it is conflict minerals or the unacceptable use of plastics across a number of consumer markets, or a basic anti-carbon sentiment, the tide is clearly turning against allegedly the most “egregious” of sectors: the commodity/natural resources space. However, as with most trend shifts, there is a initial groundswell of support as the trend takes hold. However there is also much confusion about: how will it affect the consumer, who will ultimately pay for it, what is the governments role in monitoring its use, substitutability of use among non-controversial inputs/elements. The turning point within the seismic shifts that  we are talking about involve an immense amount of noise as industry, governments, special interest groups, media, and social media all conspire to create a distorted time line for acceptance of the new normal. We’ve already seen this with investment flows co-opting  the time frames for certain “eco-metals” like lithium and cobalt, and for companies like Tesla and others. What investors have to understand is that these anticipatory capital flows simply  create an entire new cycle of pre-adoptive over-investment. It is this over-investment  that ends up distorting the real fundamentals for some assets and asset classes,  and obscuring the possibly still attractive fundamentals for the others considered off limits by either the court of public opinion or select investment committees.


The Art Of The Trade War

20 Jan

Sun Tzo in the  Art of War states “Appear weak when you are strong, and strong when you are weak”, the first phase of the trade deal just signed might indicate that the Chinese are more closely adhering to confucian game theory than the U.S.. Despite all of the plaudits heaped on this agreement, what we have seen so far  leads us to believe that it was hardly worth all the localized pain that was inflicted on both sides. When you hear (and you will from this administration) that the U.S. was the clear winner due to the billions in  new commodity purchases by the Chinese, be very clear that 1) There are no actual volumes spelled out in the agreement 2) Purchases can be altered due to “market conditions”,  the market conditions being that they can buy them cheaper somewhere  (and they will). It’s no coincidence that phase II( if it ever comes) will come after the election as the Chinese will not be so willing to compromise on real issues like AI and intellectual property.

De-Dollarization Pt. 1

20 Jan

We always thought that the decline in the dollar would come as a result of flows, of a fundamental growing realization that the Ponzi scheme that is being orchestrated by The Fed  on global creditors has come to an end. However, it would seem the old specter of geo-politics and sanctions may have usurped fundamentals as the driving force behind a growing de-dollarization.  ING Bank states that” 62% of Russia’s goods and services exports to have been settled in dollars in 2019, down from 80% in 2013. Its trade with China was almost all in dollars in 2013; now less than half is. Trade with India, much of it in the sanctions-sensitive defence sector, shifted from almost all dollars to almost all roubles over that period. One reason for this shift, say Russian officials, is that it speeds trade up, since dollar payments can be delayed for weeks as financial intermediaries run sanctions checks.”  We used to think that everyone wanted to hold dollars because it facilitated trade and commerce, however given our USA-centric attitude perhaps this shift is becoming more pronounced than one might think.

Surprise Surprise

17 Jan

What I remember most about the GFC (great financial crisis) of 2008/2009 was the amount of sheer surprise regarding who held what, where and for what reason.  Money market funds were holding highly risky paper for the slightest pickup in yields, Banks were holding the riskiest, most arcane vehicles for seemingly no real pickup in risk-adjusted return, the list was almost endless and every day seemed to carry a new revelation. It got me thinking about what new surprises will greet us someday, notice we are saying will, not might, timing being the only variable in this discussion.  In a general sense,  some of the biggest surprises will come where there is a mis-match between perceived liquidity and actual liquidity. The obvious culprit that comes to mind in this regard are the ETF/ETN’s. In 2008/2009 there was an absolute dearth of pricing amongst large portions of the corporate bond market, and this was with the major banks as active participants. Banks are no longer allowed to play in this space, so good luck with two way trade flow among certain ETF’s such as the large High Yield ETF’s when they are hit with selling. The risk is for a feedback loop to start occurring with a liquidity event which could occur in any part of the ETF universe. Selling begets selling which in turn will spill over into seemingly unrelated parts of the Capital Markets.

Be Careful What You Wish For

15 Jan

While listening to a roundtable discussion on negative interest rates and their consequences for real economic growth, I was staggered by the actual statistics in countries employing such tactics. Japan, which has seen negative interest rates off and on since the mid 80’s has seen its banking index fall 85% during this time period. Europe, since employing negative rates post financial crisis, has seen its banking index fall 90% over the ensuing time period. So, when you hear talk of negative rates coming to these shores, be aware that these rates place the entire banking system at risk. Someone needs to remind The Donald that negative rates of interest are not a prize, in fact quite the opposite as they encourage confiscatory practices by Banks which effectively breaks down the entire credit mechanism.