X Factor

7 Feb

The one global geo-political constant you could count on up until around 2000 was that there was a general move towards the  political center. In country after country, and even countries where democracy was not predominant such as China, we saw a basic softening of hard left and hard right ideologies towards some level of general compromise. However, in the aftermath of a global financial system that was pushed to the brink, ostensibly with very little long term after affects for those that both precipitated and facilitated the ensuing bailout, the center no longer exists.  The situation as it stands now appears to be a complete polarization of the electorate in all of the G7 countries and seemingly everywhere else that holds “free” elections. While the battle between haves and have nots is nothing new, this new battle seems to be solely driven by punitive and retributive measures. If the election of The Donald is symbolic of a permanent shift in the electorate (as we suspect it is) then the battleground will look much different going forward with the associated investment implications therein.  In short, don’t discount the ground swell of support that is occurring for socialist and “socialist lite” type movements in this country and elsewhere. The reason for concern is that the “kick the can” issues such as the Federal deficit and entitlement spending become much more problematic with a torch carrying electorate. I have attached a link to a speech that famed investor Seth Klarman gave at Harvard in which he address the pitfalls of capitalism, seems really timely given some of the discussions lately about corporate governance, etc..


Performance Art

24 Jan

I stand simply astonished at the most recent talk regarding the run off in the Federal Reserves Balance sheet, ostensibly chapter one in the cessation of the decade long monetary science experiment known as QE. What is most amazing is that the talk generally assumes that there is some path forward for Central Bankers to follow, some historical north star that might guide them in this multi-trillion dollar diet program. What seems apparent to almost no one, is that there is no precedent for QT, primarily because there have been almost no historical examples of QE (Japan is an obvious example, but instead really represents a situation of almost perennial QE). There has never been in the history of Central Banking a situation whereby a Central Bank has attempted to offload private and public assets(of this magnitude) in a measured, communicated way. The Fed undertaking can’t be called science because science assumes some direct cause and effect, it can’t be called art because that would imply that there is some nuanced behavior on the part of Central Bankers that can be shifted based on real time economic variables. Perhaps, we can term the balance sheet experiment performance art. In performance art there are lots of movements most of which don’t make sense, you never know where things are going to go next, and generally even though you are praying for it to end, the ending is both unexpected and unexplainable.


17 Jan

Warren Buffett famously looks for businesses that possess what he terms economic moats; barriers to entry that often involve long term established brand loyalty. His philosophy has shifted somewhat in later years, but the concept of moats has long been the aspiration of high margin businesses, particularly tech. However, this concept has been challenged recently, particularly as it relates to the businesses that Mr. Buffett currently owns; namely high profile, well established brands such as Coca Cola, Disney, etc.. An article in the FT however, astutely points out that it’s “not that someone works out how to cross the moat…. Its that the castle becomes irrelevant”. This really struck me in that it seems like there are so many “castles” that are becoming irrelevant: retail, dining, transport, etc.. In fact, technology and big data are combining to lay siege to a number of industries previously protected by anti-competitive constraints like never before.  These tensions will  have major implications for relative valuations and ultimately for the economic survival of established players versus upstart competition.

Couch Surf Count

15 Jan

With the aging of the millennials, it will be curious to see whether it will be necessary to adjust the economic indicators to better capture the shift in consumption patterns. As it becomes less and less attractive to a good number of that millennial class to actually own a car, home, etc.., do the tried and true statistics designed to capture real economic activity become less meaningful. One might assume that it is a stretch to assume that historical norms of marriage, household and family formation will shift dramatically but it does not seem like too much of a stretch to assume that how these up and coming millennials work, play, eat, and buy will differ widely from their parents and grandparents. Statistics such as housing starts, new car sales, same store sales may be inadequate to capture the real growth in an economy that is experiencing radical shifts in consumer behavior.

Battle Of The Geo’s

1 Jan

A few years ago, I wrote about the futility of making year end predictions. My point was that given the non-linear nature of markets, it was completely meaningless to try and predict what might happen with any degree of certainty. As we leave 2018( a year in which Donald Trump sits in the White House, Britain is making plans to throw off the “shackles” of Europe, and trade barriers are being re-erected all over the globe) such prognostications seem even more pointless. So,  having said that here we go: our prediction for the oil market in 2019 will be that price will depend on who wins the battle of the geo’s: Geo-politics, Geology and Geography. More specifically, the battle in 2019 will pit the technologically driven U.S. shale production, with its inherent geographic dislocations,  against the geo-politically driven OPEC/Large Non-OPEC producers. We suspect that the markets will test the mettle of the shale producers in 2019, particularly given some of the punitive differentials. However, the geo-political hotspots involving the usual suspects of Iran, Venezuela, Syria, and others will undoubtedly provide support for what might be a steeper fall in price. It is our feeling that the steep decline in price during the late fall was originally driven by Iranian waivers but was then exacerbated by dynamic hedging taking place over the 4th quarter. Imbedded in this price decline was an increasing amount of rhetoric about falling global demand despite a lack of any supporting evidence thereof. Prediction: The market tests the U.S. shale cost structure early in the year, but real geo-political concerns combined with a stable demand picture brings prices back into their mid 2018 ranges. 

Jay Make Me Pure But Not Yet

20 Dec

You know you’re approaching max panic mode when the selloff in equity markets reaches the NYT  Sunday style section. It absolutely is fascinating to watch the level of panic bordering on almost disgust. After an unceasing rise in the value of virtually every financial asset over the last 10 years, the general public (and professional money manager community) is aghast that in the midst of a relatively strong economy, real interest rates should normalize. I am now watching some commentary on Bloomberg TV discussing whether the rout in high yield will continue (there has not been a single high yield bond issued in December) and the general consensus among the panel is that the Fed is not paying enough attention to the “signals” that the market is giving them.I may be wrong, but the cause and effect used to go the other way, of course this was before the markets took the Fed stewardship of their health( no matter the level or excess) as a god given right. The basic misunderstanding is that markets do not equal the economy and in a post QE world this point is lost on most if not all market players.

Forewarned is Forearmed

19 Dec

We all know the epic line uttered by Jack Nicholson in the movie  A Few Good Men, when asked to be more forthright he screams ” You can’t handle the truth”.  One might apply this same line when discussing the action in the Global Equity Markets of late. Credit markets have been tipping their hands to stocks for months, particularly the yield curve which has continued to flatten in the face of relatively strong growth. What the markets have also known about, and seem to have ignored, is the run off in the Feds balance sheet, YTD in the amount of a not insignificant $600bln. Combine this run off with the tax cut and the resultant budgetary gap and you have a credit squeeze on your hands. That new $1trillion in budgetary shortfall borrowing needs would normally have been benign in the good old days of QE, but in this new world, borrowing at the Federal level is real borrowing and constitutes competition for lending/investing. In short, the credit pool is getting tighter, irrespective of what the Fed does with the Fed Funds rate, so when you hear that the Fed is raising rates keep in mind that this statement is only partially true, The Donald lent a hand too through his unfunded and unwarranted tax cuts. The moral of this story is this however: When liquidity is rising as in 2008-2013, Capital Markets appreciate, when liquidity is falling as it is now, Capital Markets struggle.