Media Worth Consuming – September 2019

Jonathan Rochford

Narrow Road Capital

FedEx shares slumped after it cut its earnings outlook citing global economic weakness. The global credit impulse points to better growth in the first half of 2020 after a tough second half of 2019. The car industry is dragging global trade and industrial production into a contraction. Global demand for diamonds is collapsing. S&P 500 earnings are well above US corporate profits, just like they were before the Tech Wreck. US small cap earnings per share estimates have gone negative. US IPOs in 2019 are more unprofitable than ever.

Europe’s biggest economies voted against further ECB monetary stimulus. Austria is calling for the ECB to lower its inflation target. Denmark is passing on negative interest rates to retail depositors. The ECB is going to pay some banks a higher rate on their deposits than on the loans it gives them. Four reasons for the ECB to raise interest rates. The ECB will soon breach its existing issuer concentration limits under the new QE scheme, but it is telling European nations to start running deficits so it can buy their bonds. As central banks keep cutting rates, macro-prudential tools become ever more important.

Despite Keynesian stimulus being associated with slower long term growth, central banks and governments keep trying it. Larry Summers sees cutting rates as counterproductive in dealing with secular stagnation. The ECB will do more harm than good by taking stimulatory actions with its problem too much stimulus not a lack of it. The ECB is targeting a lower exchange rate and risks America fighting back with trade sanctions.

The US government has $125 trillion in unfunded liabilities. The US budget deficit is even bigger this year, but higher spending not tax cuts are to blame. Illinois recorded a $47 billion deficit after it included an accounting adjustment for healthcare liabilities it had been hiding for years. Cities in Illinois are having their revenues garnished for pension plan payments. Canadian provincial debt has been growing rapidly and is heading for trouble.

Deutsche Bank is being investigated for buying back its own subordinated securities without regulatory approval. JP Morgan’s precious metals trading desk is charged with systemically manipulating markets over eight years. American credit card issuers are facing litigation over interest rates higher than allowed in state based usury laws. A former KPMG partner has been sentenced to one year in jail for stealing information from the audit regulator. Amazon’s relentless pressure for cheap and quick delivery is killing Americans.

Moviepass is shutting down after subscribers to its all you can watch movie service watched too many movies. The demise of Blue Apron is a lesson for other unicorns without an economic moat. Overstock has crushed short sellers by issuing a dividend in cryptocurrency. Silicon Valley blasted a venture capital investor for daring to call out a failed venture as a bad idea. What happens to the US real estate market if WeWork files for bankruptcy? Banks are getting worried about a $500 million credit line they provided to WeWork’s CEO. Softbank’s CEO has 38% of his shares used as collateral by 19 different banks.

A lot of things must go right for high yield debt to deliver decent returns from here. Mitsubishi has lost $320 million on oil trades made by a rogue trader. Reliance Capital has been downgraded to default after payments to its debentures were delayed. Moody’s has downgraded Ford to Ba1. Santander checks the income of only 3% of its subprime auto loan borrowers. American banks are adjusting their credit criteria as they have run out of creditworthy consumers to lend to.

The small recent outperformance of value stocks might be the start of a turnaround, with value as cheap as it has ever been. The argument that value investing died long ago due to changes in book value accounting. Mining stocks are trading at their cheapest valuation in a century.

Michael Burry sees similarities between today’s index funds and 2007’s subprime CDOs, but there are reasons not to worry about index funds. The average American IPO slightly outperforms the market but the median IPO substantially underperforms. 11 myths about Australian franking credits.

Memorable quotes from the late T Boone Pickens. How David Swensen made Yale rich. An even-handed review of Jim Grant and his newsletter. Hedge fund Autonomy Capital lost $1 billion in a month on Argentinian investments. The ongoing argument about whether subscription credit lines are excessively inflating IRRs on private equity investments. Hedge fund strategies are more correlated than ever. The basics of the explosive growth in private credit. Even the Federal Reserve is warning about illiquid assets being held in open ended funds.

The blow-up at Japan’s Shimane Bank points to the eventual outcome of taking more risk to offset negative interest rates. Even at close to zero interest rates Japan’s rural businesses won’t borrow because they have little demand for their goods and services. Japan has virtually no high yield bond market as Japanese banks are desperate to lend.

With twin deficits, China now needs international investment and is cracking down on foreign currency transfers. China has eased its bank reserve ratios again. Has China’s enormous growth in bank assets been a massive helicopter money experiment? Bank of Jinzhou will stop paying dividends on its preference shares (Coco’s/hybrids). For the first time, a Chinese local government finance vehicle has skipped a call date. China’s private bonds are defaulting at record pace. A HNA owned airport has defaulted on its bonds.

Argentina’s opposition blames the IMF for the financial mess. An Argentinian explains why her country keeps defaulting. Argentina’s provinces have $15 billion of debt that might follow the national debt into bankruptcy. The recently imposed currency controls discourage commerce, making a significant downturn likely. The country’s bond investors are looking to get around capital controls via the “blue-chip swap”. Argentina’s default has exposed the gaping logic gap in MMT.

Reckless consumer lending in South Africa has seen 40% of borrowers default. Zimbabwe hiked interest rates to 70% in a failed attempt to stop hyperinflation. Greece is offering its banks $10 billion in guarantees to offload bad debts.

Politics & Culture

Trump’s IT team trolls “President” Hillary Clinton with webpage error “you are looking for something that doesn’t exist”. Hillary Clinton’s campaign rallies lead to a greater increase in hate crimes than Trump’s. A woman has dropped her lawsuit claiming Trump forcibly kissed after video footage of the incident emerged that refuted her allegations. Trump has poor legal prospects if he tries to sack Jerome Powell. The Democrat Presidential debates have been silent on America’s inability to afford free stuff. In 1987, Bernie Sanders admitted that Medicare for all “would bankrupt the nation”. Democrat socialists love to point to Sweden as an example, but its socialism included eugenics. The forgotten dangers in demanding that politicians “do something”.

YouTube has gone on another purge of alternative and right wing publishers. YouTube let Infowars open its channel again, then shut it down 17 hours later. A US Government department has ordered Google to live to up to its claims of having an open and tolerant culture. Twitter has suspended four major Cuban news networks without giving a reason. The New York Times claims it made an “editorial error” in publishing accusations against Brett Kavanaugh that the alleged victim doesn’t remember happening.

A boat carrying a team making a documentary about global warming became trapped in arctic ice. Yale scientists got upset about a cartoon casting doubt on climate science, so they made a video that accidentally proved the points the carton was making. NBC asked viewers to “confess” their climate change shortcomings and many have taken great pride in doing it. A survey found that Canadians are all for taking action on climate change, unless it costs them and another survey found that the majority of people in the US, Australia, China, France and Germany don’t believe that humans are mainly responsible for climate change. An experiment with genetically modified mosquitoes in Brazil failed to reduce their numbers in the long term and may have resulted in mosquitoes becoming resistant to insecticides.

Tony Blair’s think tank is more concerned with shutting down criticism of terrorists than stopping terrorists. Britons of all political persuasions are increasingly telling their politicians to respect the Brexit vote and get the Britain out of the EU. Illinois’s incoming Supreme Court Justice is married to a man facing 14 counts of corruption. After 20 years in Afghanistan, the US would be better off walking away. Ontario legalised marijuana and lost $42 million selling it.

A Turkish opposition politician is facing almost ten years in prison for insulting the President. China has expelled a Wall Street Journal reporter for writing about President Xi’s cousin. The Chinese government has forced churches to replace the Ten Commandments with communist propaganda. China has pledged $500 million to the Solomon Islands to get it to drop diplomatic ties with Taiwan. Israel has denied accusations it has been spying on Whitehouse communications.

California has banned schools from suspending disruptive kids. Female students in the UK were blocked from attending class because they refused to wear pants instead of skirts as part of gender neutral uniform changes. Boston’s straight pride parade actually happened, with Milo Yiannopoulos acting as grand marshal. The University of North Carolina offered a workshop on white privilege to its 30,000 students and only nine showed up, and none were there to genuinely learn. The latest version of monopoly promotes sexism.

Economics & Work

Blame governments and bureaucracy for expensive homes, as California seems determined to make more citizens homeless. Government regulations often bring surprising and negative unintended consequences. Kansas and Missouri have agreed to stop competing for business relocations using subsidies and taxpayer funds. Oregon hiked its minimum wages, businesses responded with automation, now Oregon is considering limiting self-service checkouts.

The people that are missed when calculating unemployment figures. How the poorest Americans are better off than the average citizen in the vast majority of countries. Economists need to stop focussing on consumer consumption and start focussing on production and productivity. Zimbabwe is another lesson showing that production comes before consumption.


Is it really a can of baked beans if it only contains one bean? A brief history of the very tasty fried chicken sandwich. Chess is a surprisingly good way to lose weight. Adults are using Ikea stores for mammoth games of hide and seek. A New Zealand man brought an “emotional support clown” to the meeting where he was made redundant. This year’s winners of ignoble prizes are suitably weird.

Very old people are often lying about their age. Two British pensioners financed their cruises by smuggling cocaine. Whilst the Porsche Taycan was setting lap records at the Nurburgring, a broken down Tesla Model S was getting towed off the course. It’s not just the kids of today, we are all spoiled. Researchers blame a “lack of economically attractive men” for the declining marriage rate.

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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