Markets, economics and politics - the need to know wrap: February

Jonathan Rochford

Narrow Road Capital

A monthly wrap-up of interesting and informative media on finance, economics, politics and society that you might have missed.

Citibank’s market sentiment indicator has gone off the chart euphoric. The S&P 500 CAPE ratio is as high as 1929 and 1998, which points to poor future returns but doesn’t guarantee that this bull run is over. After separate bubbles in junk bonds, tech stocks and housing in previous decades, we now have all three together. Jesse Felder’s long list of crazy things going on in stock markets. The best reason to be bearish is that there is no reason to be bearish.

High yield funds are ringing up companies and begging them to issue more debt. Year to date US CCC rated debt issuance is double the pace of its highest ever year. US high yield bonds now average less than 4%, the lowest ever all-in yield. US commercial real estate has years of bad loan workouts ahead. US state and local governments are using murky lease-back bond issues to fund their pension obligations; lenders risk losing their shirts in a bankruptcy. Distressed debt fund Greylock Capital has filed for bankruptcy. KKR’s lending business in India has taken massive losses with more than half of its loans thought to be at risk of default. An unwind of popular trades and a poor seven year treasury auction combined to create the late month treasury sell-off.

Microlending is out of control in China with all the top 20 apps offering loans to users. A Chinese solar power producer that recently defaulted on a $500 million bond was able to sell $117 million in new shares. China sets a new record for debt issued in a month. Chinese offshore bonds have seen a wave of defaults in the year to date. Chinese conglomerate HNA is chasing $10 billion in misused funds.

In health care, elderly residents die sooner in nursing homes run by private equity firms. Some American hospitals are refusing to bill health insurers and are chasing patients for debts as they can charge the patients more than the insurer. 

Deutsche Bank eked out a profit in 2020, it’s first since 2014. Commerzbank announced plans to lay-off 25% of its staff. Citibank lost its court case over the $500 million fat finger transfer. Renaissance’s public hedge fund has been hit with $5 billion of redemptions after posting awful returns but its employee-only fund has delivered spectacular returns. ARK Invest has attracted so many new investors it is running out of stocks to invest in. A $1.8 billion volatility fund has halted redemptions after the CIO was found to be altering asset prices. A cryptocurrency hedge fund turned out to be a Ponzi scheme that stole $100m from investors. Dogecoin is a $6.9 billion joke. The Lucid Motors SPAC deal shows how overpriced some SPACs have become. The CEO of Norway’s sovereign wealth fund likened ESG assets to tech stocks in 2000.

Politics and Culture

Google is in court for tracking users when it says they don’t. Spy pixels in emails are pervasive. China used an American motherboard manufacturer to hack into government and corporate systems. China is jailing Twitter users, even though most Chinese can’t see what they’ve said. For a short time, some Chinese citizens experienced free speech via the Clubhouse app.

China has banned BBC World News after Britain banned a Chinese TV network. Democrats are trying to shutdown cable news channels that criticise them. Limiting free speech makes it much easier for governments to lie to their citizens. Coca Cola’s diversity training instructed employees to “try to be less white”. BLM protests have resulted in a surge in the murder rate, perversely resulting in more black lives being lost than before. The Biden administration has given colleges a green light to discriminate based on race by dropping existing lawsuits.

Joe Biden criticised Trump for putting “kids in cages”, now he’s doing it as well. He also promised to fire his staff on the spot if they disrespected others but then defended a press secretary who threatened and abused a journalist before the staffer eventually resigned. When it comes to policy, Biden’s presidency looks similar to Trump’s so far. Also like Trump, Biden gave some bizarre answers at a Town Hall discussion.

American municipalities are repossessing homes for tiny tax bills and keeping all of the sales proceeds. A Trump rule that forced hospitals to disclose their charges has shown enormous discrepancies based on hospitals guessing how much insurers could bear. The Lincoln Project was supposed to highlight Trump’s many flaws, but it has been hit with accusations of covering up sexual harassment and donations being pilfered. Did Democrats intentionally tank Trump’s impeachment by pushing a case long on emotion and short on evidence, including false and doctored evidence? Trump’s defence team focused on examples of Democrats challenging election results and inciting violence.

The FDA’s actions have killed more Americans than it has saved. McKinsey’s $574m opioid settlement is a wake-up call for consultants advising clients on dodgy deeds. Cartoons are a good way to make fun of politicians when they think they can fool voters. California’s labour secretary, who oversaw billions in payments to fraudsters, has been promoted to a role working for the Biden administration. The US Supreme Court will be asked to determine whether states can levy income taxes on employees who don’t live or work in their states.

Economics and Work

New Zealand replaced socialist economic policies with economic freedom and its economy has prospered ever since.

After socialism destroyed Venezuela, the government is handing control of confiscated companies to private investors on profit-sharing arrangements. Countries with high levels of inflation show that currency devaluation doesn’t make countries more competitive. Low inflation is normal, the higher rates of inflation in the last century are abnormal. If the Fed allows inflation to rise if will be extremely painful to get it back down.

Excessive fiscal and monetary stimulus is a white swan risk. Central bank intervention has led to a boom in high yield debt issuance in Sweden. Thomas Piketty has called for the ECB to cancel the bonds it bought with printed money. The ECB sent out a valentine’s day tweet about its easy monetary policies and was mercilessly mocked in return.

After adding the $1.9 trillion stimulus package, the US has by far provided the most fiscal stimulus relative to GDP. Biden’s borrow and spend binge has economists divided on whether it is appropriate or too much, and what the long term consequences will be. Why are stimulus payments being sent to people who don’t need them? Lockdowns caused most of the economic damage from COVID-19, not the fear of the virus.

Amazon is forcing warehouse staff to attend anti-union meetings and then makes them work longer to cover the lost productivity. It is supporting an increase to the minimum wage in the US, a change that would increase its competitive advantage over small businesses.

Poverty is a problem worth fixing, but inequality isn’t a problem. Government spending on R&D is more useful than many other forms of government spending, but it generally fails to deliver a sufficient return to justify it. Wealth taxes scare away wealth, income/sales tax revenue, jobs and investment but Elizabeth Warren still wants America to have one. After Trump’s tax cuts, the top 1% paid a record high 40.1% of all US income taxes, well more than the 28.6% paid by the bottom 90%.

Miscellaneous

Tesla made more on its Bitcoin bet in a month than it makes in a year selling cars, but its purchase of Bitcoin has destroyed its environmental credentials. Why are people paying massive sums for freely available NBA footage on NBA Top Shot? Restaurants are finding ways to get around the usurious fees charged by DoorDash and Uber Eats. How one woman destroyed the reputations of dozens of people with false allegations that only stopped when she was sent to jail. The Nobel peace prize has become a joke, having long departed from its founding principles. Locals are calling Jamaica’s marijuana shortage “a cultural embarrassment”.

A switch to electric cars could cut US energy needs by 16%. Battery powered cars are about five years away from cost parity with conventional cars. In the midst of a cold snap, Germany’s solar and wind power production fell to almost zero. What Texas got wrong in its cold snap power collapse. Retail electricity customers in Texas on price plans linked to wholesale prices have seen their bills for week equal to a normal year. US natural gas prices spiked higher than GameStop during the cold snap. How the warmer weather at the poles can cause cold snaps far away. The depletion of the ozone layer has turned around after a crackdown on CFC production in China. Bill Gates has many plans to reduce climate change but admits he has “one of the highest greenhouse gas footprints of anyone on the planet”.

The US is tracking towards herd immunity (70% of the population) in April. Data from Scotland shows substantial drop-offs in hospitalisations after Covid vaccines, with the Oxford-AstraZeneca shot more effective than Pfizer. Britain’s fast vaccine rollout has highlighted the flaws of Europe’s bureaucracy. A Texas doctor was fired and charged with stealing for administering a vaccine rather than throwing it out, but a court emphatically dismissed the charge. Massachusetts’s vaccination website was a mess, so a lady on maternity leave built a website that made key information easy to find. A Q&A on the reactions to Covid vaccines.

The longer it lasts, the more likely it is that variations of Covid will always be with us. The claims that Covid escaped from a lab are making a comeback after the head of the WHO said that “all hypotheses remain open and require further study”. How a Chick-fil-A manager fixed a Covid testing traffic jam. Thank capitalism for developing the Covid vaccines. Florida has had fewer restrictions than New York and California, but also fewer hospitalisations from Covid.

Scientists have used spinach to detect explosives. A study of Denmark’s DNA database found that crime dropped by 42% when a criminal’s DNA was recorded. Fruit picking robots are on their way. Why there’s a global semi-conductor shortage. The best story almost always beats the first or most correct story. The myth that “going viral” will make your life better. Shopping malls added theme parks to boost visitors, now they are killing them. A Singaporean lecturer muted himself for almost all of his two hour lecture. The village where sick and dying kids go for a week to have joy instead of suffering.

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This article has been prepared for educational purposes and is in no way meant to be a substitute for professional and tailored financial advice. It contains information derived and sourced from a broad list of third parties and has been prepared on the basis that this third party information is accurate. This article expresses the views of the author at a point in time, and such views may change in the future with no obligation on Narrow Road Capital or the author to publicly update these views. Narrow Road Capital advises on and invests in a wide range of securities, including securities linked to the performance of various companies and financial institutions.

Jonathan Rochford
Portfolio Manager
Narrow Road Capital

Narrow Road Capital is a credit manager with a track record of higher returns and lower fees on Australian credit investments. Clients include institutions, not for profits and family offices.

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