Media Worth Consuming – November 2019

Jonathan Rochford

Narrow Road Capital

Freight volumes continue to point to miserly global economic growth ahead. Global business sentiment is at its lowest since the financial crisis. US margin debt has dropped but stocks are at a record high. Australian insolvency firms are seeing higher demand for their services.

The Vatican Bank has been raided by police and kicked out of the global network for financial intelligence. The FBI warned Bank of America that it was about to lend money to a company engaged in widespread fraud, the bank went ahead anyway and the borrower is now bankrupt. 13 bankers have been hit with jail terms for helping Monte Dei Paschi hide losses. A professor who wrote the book on money laundering has been charged with it. Investment banks are engaging in bait and switch behaviours on bond marketing.

The CLO whale has gotten indigestion, sending prices down. The graph that shows what it takes to break a US CLO. An example of how business development companies are the wild west of private debt. US CCC bond spreads are back above 10%. American BB bonds trade at a very small yield premium to BBB bonds. The very high level of B- rated debt today could make for a greater corporate default wave than seen in the financial crisis.

JP Morgan’s $2 billion loan to WeWork was 100% cash collateralised. Japanese banks are pushing back against Softbank’s request to borrow more to fund its WeWork bailout. One third of American auto trade-ins have outstanding loans that are rolled into negative equity on the subsequent loan.

Lebanon’s debt yielding over 100% points to default being almost inevitable. Lebanese banks are seeing riots and citizens armed with guns demanding their money as withdrawal limits are imposed. Turkey is pushing its banks to lend more at the same time they are dealing with a spike in non-performing loans. Argentina might want to give different recovery rates to different bonds, but it would be legally tricky to do so. There’s $15 billion of Asian high yield bonds maturing next year with current yields of at least 15%.

Bonds defaults are rapidly rising in China, but they’re being covered up. China is fudging the statistics on SME lending growth. China’s corporate credit spreads are starting to reflect credit risk, but spreads on government entities remain unchanged. The $89 billion Harbin Bank has received a government bailout. China’s top two universities have debt trading at or near distressed prices. There’s a growing list of Chinese skyscrapers that have halted construction when half built. China’s government has ordered almost all peer to peer lenders to cease writing new business and exit the industry.

China’s local governments have guaranteed $842 billion of private sector debt and are facing a wall of debt maturities in 2020. Local governments are also buying shares of and non-performing loans from small banks to prop them up. The Chinese city of Ruzhou begged healthcare workers for loans so it could build a new hospital. A Hong Kong stock dropped 98% after MSCI reversed a decision to add it to an index.

Small private equity funds deliver better returns but many capital allocators can’t be bothered doing the work and only invest in large funds. Private equity managers make their best investments early in a fund’s life and their worst investments when they are raising capital for the next fund. US non-core real estate strategies are underperforming with high fees a key reason. Most US debt managers underperformed their benchmarks in the year to June 30.

The call centre doing the grunt work of initial prospecting for asset managers. A summary of the book about Renaissance Technology, the greatest hedge fund in the world. Those who exit first in a run on a fund do best. Over the last decade value stocks have delivered in line with their historical return, but growth stocks have grown well above their historical return. Meal delivery companies don’t scale well, expect them to have to hike prices dramatically to survive. Uber continues to lose money, especially on food deliveries.

Politics & Culture

The Trump Administration is planning to force price disclosure onto the healthcare industry but vested interests will fight hard to stop it. Democratic Presidential candidates have great plans to spend more but no plans to deal with the already large debt and deficit. America’s most racist city could be Oak Park Illinois. Washington State legislators wanted to bring in racist hiring policies, but the citizens voted them down. Two Ivy League colleges are dropping admission tests claiming that tests are racist. Some Japanese corporates have banned women but not men from wearing glasses to work.

The Washington Post calls the dead Islamic State leader “an austere religious scholar” in an obituary, largely ignoring his history of torture, executions and rape. CBS fired an employee who allegedly exposed the company’s suppression of evidence of Jeffrey Epstein’s crimes. New Jersey has issued Uber with a $650 million tax bill after workers were wrongly classified as contractors rather than employees. A list of major brands that have grovelled to China after triggering its offense mongers. Chick-fil-A has capitulated to the small but noisy mob.

Connecticut’s law against ridicule direct violates the right to free speech. Google’s management is cracking down on employee dissent by narrowing the all hands meetings and allegedly retaliating against employee dissention. YouTube is giving itself the right to shutdown “commercially unprofitable content” as a backdoor way to close down opinions it doesn’t like. A New York county has passed legislation that punishes behaviour that merely annoys first responders with up to a year in jail.

Denver police refuse to act against vagrants trespassing and defecating in public but are happy to fine a business owner for not cleaning up their mess. San Francisco police don’t act against public defecation but arrested a man for eating a sandwich. New York City is paying homeless people to move out of the state. Baltimore is subsidising Lyft rides for residents to go to the supermarket.

Economics & Work

America has given up on free markets with industry concentration making goods and services much more expensive. Microsoft’s Japan office saw a 40% increase in sales per employee after moving to a 4 day week and introducing productivity initiatives. Modest CEOs are good at outperforming expectations. Basic economics shows that marketers are wasting millions on online advertising, but they don’t stop when they are shown the evidence.

Wealth taxes (excluding property tax) have never worked, but politicians keep proposing them. New York’s rent controls will reduce the quality and supply of housing, as well as reducing property tax. On average, Americans paid more in taxes than they spent on food, clothing and healthcare combined. Five European countries have effective top marginal tax rates over 70%. The fall of the Berlin Wall was in large part due to the bankruptcy of the USSR. The war on terror has cost the US government $6.4 trillion, which is around one-third of its debt.

Central banks have injected so much liquidity into stock markets it is impossible to withdraw it without causing a market crash. Pensioners in the Netherlands are facing payment cuts with negative interest rates copping the blame. Germany’s banks struggle to make a profit and remain solvent, negative interest rates make it much worse. As bad as it is so far, the damage from negative interest rates is only just starting. The US government deficit is MMT in all but name. The Federal Reserve is now effectively buying debt directly from the US Treasury. A 2015 study from the BIS found that goods and services deflation isn’t a problem, but debt and asset price deflation following bubbles is.


Amazon is happy to sell fake, illegal and dangerous products on its website and deny all responsibility. Airbnb is happy to let scammers use their system to rip off their customers. Tesla smashed the “shatterproof” glass on its new pickup as part of the vehicle launch. An electricity company threatened a consumer with debt collection processes after she failed to pay the $0.00 owing. An Instagram account is mocking scammers who claim to be rich but aren’t.

11,000 scientists have signed a declaration that there is a climate change emergency and the earth needs to reduce its population. 500 scientists have signed a declaration that calls for reasoned debate on climate change and stating that “there is no climate emergency”. Air based protein is the next stage of food technology. The history of veganism and why some people hate vegans.

Deep sleep helps clear away the toxins that lead to Alzheimer’s. Alcohol breath testing devices are unreliable with American courts regularly throwing out drunk driving cases. A study of loan sharks in Singapore found that they rarely cause physical damage to their clients as it would harm their prospects of getting repaid.

5 errors successful people often make. Tips from financial advisors on how to avoid or manage difficult clients. A study of tipping by Uber users found that men tip more and women drivers receive more. It’s not just a hippo shaped bathtub, it’s a piece of art that sold for $4.3 million. An American high school football coach was suspended after his team “won by too much”. Rock band Rage Against the Machine is reuniting to rage for the machine.

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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