Media Worth Consuming – October 2018

Jonathan Rochford

Narrow Road Capital

Rising interest rates, higher oil prices and a stronger dollar are a recipe for lower US earnings. Margin pressures are starting to show up in US industrials. 83% of US IPOs in 2018 are unprofitable companies, higher than the level in the tech bubble. US investors are at their lowest percentage in cash holdings in 25 years. One global recession predictor is flashing red.

 

Equity cheques are falling and leverage is rising yet LBO returns are falling as private equity firms raise record amounts of fresh capital. CLO equity returns are down to as low as 9%. The debt issued on Blackstone’s latest PE deal has “the worst high yield covenants I’ve ever seen”. European high yield bonds pay more and are lower risk than their US equivalents. Fitch is seeing more low quality securitisation transactions over-rated by other agencies.

 

There’s more evidence for smaller investment managers outperforming larger ones, including Berkshire Hathaway’s notably small investment team. Hedge funds have done far better at marketing than investing. AustralianSuper gives itself the right to lock up investors in its property allocation. Goldman Sach’s “just” fund invests in dubious stocks. With 23% of assets in “equity related” securities, Bill Gross isn’t running a bond fund. Howard Marks is looking forward to the opportunities from China’s building distressed debt problem. The 7 deadly sins of portfolio management.

 

FICO scores are set to receive a boost in a revamp that includes points for positive balances in bank accounts. US subprime borrowers are getting no money down mortgages starting at 4.50% fixed rates. The idea that women invest more conservatively than men might be a myth.

 

A Bundesbank economist has suggested that all Italians are forced to buy their government bonds, to help focus the minds of voters on the consequences of reckless budgets. Wealthy Italians are sending their money to Switzerland to avoid a Greek style capital lock-up. Greek banks slump after the ECB calls for them to raise more capital and clear their non-performing loans. Turkish banks have raised subordinated capital in a murky fashion. Japanese banks are getting stuck with bonds from failed underwriting agreements.

 

Paul Volcker: stop worrying about deflation, worry instead about asset price inflation. The ECB has issued a bubble warning, on the bubble it created! Low interest rates have boosted the proportion of zombie companies and driven companies to add leverage, lowering the average corporate credit rating. There’s evidence that fiscal and monetary stimulus is associated with slower recovery from recessions. After 124 months of negative real interest rates in the US, the easy money period has finally ended. The BOJ has substantially pulled back on quantitative easing this year. Central banks are low on ammunition for the next crisis. Strong banks didn’t need a TARP bailout, the right lesson is to make banks stronger now.

 

Iran’s Supreme Court hands down death sentences to two traders for illegal currency trading. The finance professor who exposed rigged markets in cryptocurrencies and VIX. For six years JP Morgan failed to disclose that a regulator had barred it from opening more bank branches. US banks are regularly using public employment records to defame former brokers.

 

Chinese investors riot when developers reduce property prices below what they paid as the overconfidence of Chinese investors is starting to fall apart. China’s dotcom bubble is remarkably similar to America’s of 20 years ago and it dominates the list of megabanks, just like Japan did in the 1980’s. China’s economic model of disposable infrastructure and investments is unsustainably expensive. China’s ICBC is bailing out insolvent private firms and the country is building a bailout fund for underwater margin loans. Chinese private firms are seeing their avenues for debt funding being closed off. S&P sees titanic risks from China’s local government debt.

 

Politics & Culture

The Trump administration is doing a great job on deregulation. If Trump wanted to attack China on trade he’d sign the TPP. US customs is terrorising Americans without regard to their constitutional rights. America’s intervention in Afghanistan has reached 17 years, $2 trillion and 1,100 allied soldiers killed. The Obama administration bullied banks to cut off services to businesses it didn’t like and deliberately submitted false affidavits to deceive a judge over Hillary Clinton’s email server. Elizabeth Warren exposed her own false American Indian claims. The FBI illegally fired a whistleblower who exposed procurement issues in 2012 and has refused to reinstate him or respond to senate questions about his case.

 

Putin’s enemies keep ending up dead in strange circumstances. Hong Kong refuses to renew a visa for a journalist who hosted a speech by an independence activist. China is increasingly pushing back against private businesses, the very thing that has made it wealthy. Mike Pence’s speech has given China a much needed wake-up call. The European Court of Human Rights rules that speaking the truth isn’t an acceptable defence if someone might be offended. Pakistan’s Supreme Court is considering whether to enforce a death sentence over a cup of water. The Australian High Court has allowed the tax office to renege on an accepted settlement offer with a taxpayer.

 

Why is there an obsession with gender balance in STEM but not in mining, fishing, trucking and garbage collection? Transgender activists have a problem with facts and those who point them out. The growing alternatives to Facebook and Twitter now that they are banning non-mainstream opinions. This hilarious 4chan meme has led to twitter bans for those who dare utter its name. Sweden is holding an amnesty for grenades after a surge in attacks using explosives.

 

Economics & Work

When it comes to taxes and transfers in America, the top quintile pays and the bottom three quintiles receive including the top 3% of income earners paying 51% of income taxes. 5 myths about income inequality debunked. Piketty is wrong – the poor are reaping much of the gains from economic growth. Seattle’s minimum wage increase helped those with the most secure employment and hurt those without jobs.

 

The lack of productivity growth might be part of the reason wages aren’t growing faster. Corporate tax breaks are an unnecessary windfall for businesses paid by taxpayers. The basics of modern monetary theory, which encourages governments to run larger deficits. Sweden isn’t a socialist success, it’s a capitalist and free market success (documentary). Socialism’s failure in Venezuela has its citizens turning to capitalism to survive.

 

The work of Nobel Memorial Prize for economics winners Nordhaus and Romer. Hayek was a shock winner of the Nobel prize, but he deserved it far more than many other winners.

 

Miscellaneous

How China used a tiny chip to infiltrate American companies. A police officer’s story of starting a Nazi bikie gang in a sting operation. Robbers in Belgium were arrested when they returned after the store owner told them to come back later. Lie detector tests have a dubious record but some employers keep using them to screen potential employees. The fake Saudi prince who defrauded people of millions on a 30 year crime spree.

 

Some of Japan’s cherry blossoms have bloomed in Autumn this year. The upfront pollution in creating electric cars means they take over a decade to pollute less than an efficient conventional car. A UN report points to huge growth in nuclear power being needed to reduce global warming. The insane physics of an airbag. Subsidizing fast food has made America obese. Mountain goats are going crazy for human urine. 3 academics had their hilarious satirical articles published in academic journals, proving their point.


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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