APRA’s letter to superannuation funds in June this year laid bare a concealed and often ignored risk being taken by some fund managers. Funds that are meant to be invested in low risk, highly liquid securities are being invested in medium and high risk securities with limited liquidity. Here’s the... Show More
Seth Klarman’s 20 lessons from the financial crisis. Jim Grant’s 10 lessons on markets. 15 bullish investment assumptions you should be questioning. It’s time to switch from sexy to boring investments. Howard Marks warns on private debt and the aggressive lending environment. Goldman Sachs’s bull and bear indicator is at... Show More
Global trade is slowing, commodity prices are falling and global liquidity is drying up, pointing to weak GDP growth ahead. S&P 500 earnings growth estimates are well above normal and closing in on the tech bubble peak. The longest bull run ever continues with stretched valuations. Stocks in more indices... Show More
“That which has been is that which will be, and that which has been done is that which will be done. So there is nothing new under the sun.” Ecclesiastes 1:9. Show More
Leveraged loans increasingly have no subordinated debt below them, pushing up the likelihood of principal loss. Private equity is looking very late cycle with the growth in sponsor to sponsor and fund to fund transactions concerning. S&P 500 profit margins are at a record high led by the real estate... Show More
The feedback I often get from readers of my articles is that I must be an investment bear. That’s understandable given my last two articles were “The Dirty Dozen Sectors of Global Debt” and “The Coming High Yield Downturn will be Big, Long and Ugly”. However, the performance of Narrow... Show More
US CLO issuance is at record pace but credit quality is slipping. US high yield bond covenants are at their worst since records began in 2011, even B and CCC rated bond covenants are weak, but in Europe high yield bond buyers are starting to push back on terms. US... Show More
When considering where the global credit cycle is at, it’s often easy to form a view based on a handful of recent articles, statistics and anecdotes. The most memorable of these tend to be either very positive or negative otherwise they wouldn’t be published or would be quickly forgotten. A... Show More
The US high yield market has grown larger and riskier since the financial crisis. Issuers of debt have the whip hand as buyers compete to gain an allocation in the face of surging demand from CLOs and retail funds. Companies are emboldened to seek ever weaker covenants and are taking... Show More
Italian bonds gapped lower as bond dealers wouldn’t bid on them. Moody’s puts Italy on review for downgrade, it could fall below investment grade. Italian political parties considered asking the ECB for €250 billion of debt forgiveness. The Italian government bond sell-off is spilling over into the country’s financial and... Show More
Wells Fargo copped a $1 billion fine for selling dodgy insurance and is keeping bad company in subprime lending. Barclay’s CEO got off with just a fine for trying to unmask a whistleblower. CBA charges fees to customers for over a decade after they died. Deutsche Bank paid $35 billion... Show More
You know it’s late in the credit cycle when credit investors give away their key protections in return for just a little more yield. This acquiesce comes in different forms, including higher levels of leverage, longer dated debt, subordinated debt and weakened or eliminated covenants commonly referred to as “covenant... Show More
The revelations last week at the Banking Royal Commission illustrate the economic principle that people respond to incentives. Charlie Munger long ago summed this up with “show me the incentive and I will show you the outcome”. The rewards for ripping off customers are substantial, the probability of being caught... Show More
The elephant in the room for Australia’s Federal Parliament has finally been called out. Australia’s rapid population growth is arguably as important an issue as balancing the budget and the environment. Yet almost no one has dared to mention it since Kevin Rudd talked of a “big Australia” in 2009.... Show More
The increasing gap between US dollar Libor and overnight index swaps (OIS) this year is garnering much attention as it was one of the earliest signs of problems in 2007. Libor is a compilation of the interest rates that major global banks charge when lending to their peers. The OIS... Show More
Some investors are asking if global growth is too strong yet State Street sees global investor confidence soaring. There are signs of economic stress in the US, as well as global leading indicators pointing to a negative outlook. Show More
With the increase in the American overnight rate and long term bond yields questions are starting to be asked about whether the federal government debt load is sustainable. As interest rates increase, so does the interest bill. Neither major political party seems to care, they have taken turns at making... Show More
Economic data is generally solid, one example being the very robust December and January readings for the Cass freight index. Bottom up earnings per share for the S&P 500 is forecast at $157.57 for 2018 with a record level of upward revisions in first month and half of 2018. If... Show More
In the wake of the VIX spike and bust up of roughly a dozen inverse volatility products this month, there’s been plenty of people criticising short volatility strategies. Harvard has been singled out as it was one of the largest holders of XIV, an exchange traded note that has been... Show More
Goldman Sachs sees investor risk appetite at the highest level since the series began in 1991, whilst Bank of America and TD Ameritrade see investor cash levels at record low levels. Investors struggle to imagine a decline occurring as calls are expensive and puts are cheap. The long arguments for... Show More
Thanks Michael - you are right, this isn't a new issue. Complexity is a killer with cash investments. I think this issue is popping up again as super funds are increasingly taking management of cash and vanilla debt in-house, perhaps without the expertise that is assumed.
A good summary of the economic and financial outlook Scott
Hi Mr T. Last cycle Aussie hybrids say their prices drop 30-40%, peak to trough, so that should be a starting assumption for buyers today of what can happen. In Europe several banks have zeroed their hybrids so there is certainly precedent for this to happen. Difficult to say whether that will happen here in the future, but easy to say that there is better value elsewhere in the Aussie debt markets. Some of the new issue Aussie high yield bonds are turnaround stories that need to "grow into" their debt loads. It is inevitable that some will not perform. Some Aussie infrastructure debt is about as risky as it was before the crisis, and there was a good batch of defaults last time from Babcocks, Allco, toll roads and others. Be wary of assets dependent upon Chinese demand for commodities, whether that be mines, mining services or ports.
Thank for reading and commenting Emanuel. We are just starting to see a weakening of the long held position that student loans remain after bankruptcy. See this WSJ article for instance. https://www.wsj.com/articles/judges-wouldnt-consider-forgiving-crippling-student-loans-until-now-1528974001 Student loans are typically wiped after 20-25 years of qualifying payments. One way or another, US taxpayers are going to see a lot of this "asset" go uncollected.
Hi Ross, in the second last paragraph I've written what I'm doing for my clients which could be a 5-10% allocation across a diversified portfolio.
Thanks James. Europe, Asia and Emerging Markets have all seen a decline in lending standards since 2009. Cov lite lending in Europe is not far behind the US. In Asia, many markets remain overbanked and China continues to be on a borrowing and malinvestment binge. Venezuela, Argentina and Turkey are EMs in tricky situations.
Thanks Ron, it is late stage for credit globally and a time to be careful with all asset classes. If credit markets do suffer a downturn, highly leveraged equities will follow soon after. Centro, Allco, Babcock and Brown, Rams are some examples from last time.
Thank you all for the comments. I share the sentiment that politicians are not acting in the interests of all Australians and are not spending our taxes efficiently.