When They Go Lo

14 Oct

The bond ‘spread_ strikes fear and shrugs on Italian streets | Financial Times

A fascinating article in the FT discussing the average Italian citizens awareness of the German/Italian government spread (lo spread).  It is almost unbelievable that the man or woman on the typical Italian street is so cognizant of the state of Governmental finances. Granted, I’m sure that this knowledge probably doesn’t translate into more legal income declaration, but nonetheless one has to give them some credit for at least giving a passing thought to such things. This got us thinking about  how the U.S. is truly blessed in such affairs. As both the worlds largest creditor and the holder of the worlds most active currency of reserve, thoughts of relative borrowing rates, or even absolute borrowing rates, do not cross the mind of the average U.S. citizen. It wasn’t that long ago that the mis-informed, mis-aligned, and misanthropic Tea Partiers were calling for the heads of those spendthrift Democrats. Today, those same budgetary zealots have replaced their fiscal zealotry with concerns about illegal immigration and the deep state. Fiscal issues don’t seem to be a concern with either party as borrowing needs have risen 70% YOY,  so when The Donald talks about rising rates, he should take his usual self-induced bow there also.



5 Oct

The recent shortage of takeaway capacity in the Permian Basin has led to a surfeit of proposed new pipeline capacity coming onboard all throughout 2019. One industry insider has even suggested that the region will become “overpiped” after the most recent conversions and build-outs become reality. We suggest that this term could be best used to describe the entire global financial system as it stands today.  If you indulge our plumbing metaphor further, the problems in any given sector of the financial market are a direct result of the mis-pricing of risk, or too much capital flow given the existing needs. Think housing pre-crisis, a phenomenal amount of piping (credit and credit structures) were built  solely to feed liquidity to a market that was clearly not financially  able to support it. The clogging and backing up of  said dubious piping led to a backing up into the entire global financial system, and you know the rest. This overpiping is seen in the retail landscape as well. Liquidity continues to flow into traditional retailers and traditional retail real estate despite all evidence that the old paradigm of shopping has changed dramatically. That marginal strip mall probably doesn’t need to get built, but as long as credit is available, expect to continue to see new currency exchanges and vape shops. As with all plumbing however, the system breaks down when either clogs occur or a pipe bursts, such occurrences often the result of a sudden re-pricing of risk.

Swan Sounds

27 Sep

The blowout in a niche portion of the Nordic power market, the scale of which threatened to decimate the entire NASDAQ Electric Power Clearing House, brought back the old black swan discussion. If you remember “black swans” were events statistically ranked as almost unfathomable. The cataclysmic days of 2008, if nothing else, showed us that the thin parts of tail risk were a lot fatter than most of us might have believed. Structures, regulations and market attitudes were essentially aligned around (prior to 2008) the concept that funding markets, essentially the lifeblood to the global financial system, were infallible. The single flutter of a butterfly wing in the form of a missed mortgage payment (or many missed mortgage payments) was enough to bring the entire global financial system to the brink. The 10 year anniversary of that look into the abyss has shown us once again that memories are short and the tails are looking pretty thin, as they often do at such inflection points. Black swan events, by their very definition, are unpredictable however the cast of potential characters is rampant: cyber attack, pension crisis, sovereign debt crisis….

One Bad Day, Someday

18 Sep

I just read the most understated/truth- telling/awesome quote ever. The quote was from an employee of Tyson Foods when describing the ethical treatment of the animals under their control prior to their eventual conversion into product. The director stated” We want to try and assure that the animal only has one bad day under our care”. One Bad Day… I just love that.Putting aside the karmic repercussions, providing that every animal is fat, happy and delusional until the day of reckoning is probably something to be lauded. This got me thinking  however about some of the recent comments by former Fed Chairwoman Janet Yellen who commented on the fact that Fed policy should take into account the duration of the downturn, even as the economy is starting to turn up, in other words lower for much, much longer than anyone would consider prudent. This type of “radical” thinking fits perfectly with the recent embrace of some economic theory  which further repudiates the negative effects of deficits on the real economy. You know the polemic: “Deficits don’t matter because we own the printing press”, however this new school of thought (promoted by a Bernie Sanders campaign consultant: Shocker) believes that deficits are really just government spending, and that the focus of that government spend is what determines the growth arc. Lower rates for eternity and unchecked government spending, all in the service of ensuring that the U. S. Economy only has one bad day.

High Sticking

12 Sep

I’m not sure if I am the only one that did not know this or not, but the obituary of Black Hawk legend Stan Mikita pointed out that he was one of the first players to pioneer the  use of a curved hockey stick. I guess I’ve got hockey sticks on the brain as I have been looking into developments in the U.S. oil shale proppant  business. As you may or may not know, oil fracking requires a tremendous amount of both water and sand, and that the amount of sand utilized at the well head has grown exponentially just over the past few years. Not surprisingly, the amount of newly financed sand production has grown as well, leading to a surplus and downward shift in sand prices. In looking at this industry, it got me thinking about how quickly  this new production was financed, most likely as a result of a  demand chart courtesy of Mr. Mikita. In fact, one can be sure that this same chart has been used of late to encourage new projects in cobalt, lithium, marijuana dispensaries, (fill in the blank) … The problem with financing the hockey stick is that inevitably one of two things occurs: substitution and or demand destruction. Beware the hockey Stick!

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.