Media Worth Consuming – September 2021

Jonathan Rochford

Narrow Road Capital

Top 5 Articles

The tweet that sums up investing in 2021.

As a result of the eviction moratorium, some American landlords are demanding 6 months of rent upfront.

Facebook is being compared to “Big Tobacco” for hiding the harm it does.

Democrat politicians in the US keep ordering their citizens to wear masks whilst they attend events where the rich and powerful don’t wear masks but the workers serving them do.

Two New Zealand gang members were arrested for trying to deliver KFC to people suffering under a strict lockdown.

Chart of the month

The above chart from Wolfstreet.com is helpful in explaining just how crazy central bank actions have been. The chart shows that the Federal Reserve is borrowing $1.28 trillion from banks and money market funds via reverse repurchase agreements and paying them 0.05% interest. The fact that so much money is receiving such a measly return when US CPI is over 5% demonstrates the profound injustice of central banks setting interest rates so low. What economists politely call financial repression, the common man would call theft, where governments steal from their citizens through deeply negative real interest rates.

One of the arguments often made on why interest rates are so low, is that there is a global glut of savings. This ignores the obvious fact that central banks set the key overnight interest rates, with the rest of the market adding a risk premium on top of that. If The Federal Reserve lifted the repurchase rate to 2%, we would instantly see the rest of the short term lending market lift in parallel.

For longer term lending rates, quantitative easing has had an enormous impact. Rather than markets being flooded with government bonds to fund massive budget deficits, central banks have artificially reduced the amount of bonds available for purchase. This leaves investors scrambling for assets, inflating asset prices now but reducing the prospective returns. Central banks have pulled forward investment returns, hoping that this creates a short term wealth effect where consumer spending is pulled forward.

Those familiar with the wealth effect know that what it gives, it will eventually take away. Inflated asset prices, business investment and consumer spending eventually correct, usually through sharp downturns. As this doesn’t happen immediately, central banks have fooled themselves into thinking it won’t ever happen. By continuing to cut interest rates and increase quantitative easing, the drunk can avoid sobering up causing more damage to themselves and others. The obvious impacts include the predominance of speculation over sound investing, low productivity growth, wasteful government spending (hello MMT) and increasing wealth inequality.

Here’s the long list of the most interesting and under the radar articles I came across this month.

Finance

Investors have lost their fear in this bull market and are extrapolating unsustainably strong operating growth into equity prices. The S&P 500 is kind of like a 36 year zero coupon bond. US CLO sales hit a ten year high in August and US high yield bonds are having a record year for issuance. Inventory levels are at record lows for American retailers.

Belize’s debt restructuring includes buying back bonds at 55% of face value and spending $23 million on marine conservation. Buenos Aires used collective action clauses to coerce bondholders into taking a substantial haircut. Credit Suisse is charging investors in its Greensill funds $145 million per year to try to get their money back.

41% of Australians are lying on their home loan applications, seeking to borrow more to keep up with rapidly rising property prices. Germany’s Ministry of Finance was raided by prosecutors over allegations of failing to investigate money laundering. The mastermind of a $126 million printer toner fraud scheme has been jailed for 4 years. The bizarre story of a how a Softbank semi-conductor company had its Chinese joint venture go rogue.

Some Australian fund managers are closing their funds to new retail clients as regulatory changes are making the process too costly and cumbersome. An AQR hedge fund has seen its assets drop from $12 billion to $1.5 billion over four years as investors exit after years of poor performance.

The Chinese government’s greatest concern with Evergrande is that its failure could lead to social instability if the property sector unravels. How many other companies in China are as bad as Evergrande? China has been extending and pretending for 15 years, Evergrande is likely to continue that trend. How a restructuring of Evergrande could play out. Evergrande’s assets are primarily unfinished projects and land in second and third tier cities, making its prospects for generating a decent recovery rate highly uncertain. Analysts are predicting a 75% haircut for bondholders.

Evergrande has stopped making payments on employee loans, which were made to the company after it threatened to withhold salaries and bonuses from employees who wouldn’t lend. Six executives are facing penalties for withdrawing their money ahead of other investors. On the 13th anniversary of the Lehman Brothers collapse, Evergrande told its banks it couldn’t pay interest on its debts. Evergrande is so short of cash it is paying suppliers with unfinished apartments. Shares in Chinese property developer Sinic Holdings fell 87% in an afternoon with speculation over margin calls and an imminent debt maturity.

The argument that Ethereum will supersede Bitcoin. Bloomberg, Reuters and CNBC were caught out by a fake press release that Walmart was going to start accepting Litecoin. Three months ago a picture of the Dogecoin dog sold for $4 million, now shares representing 20% ownership of the picture have sold for $45 million.

Politics & Culture

The Taliban offered the Biden Administration control of Kabul to allow for an orderly exit but the US Government instead chose to control just the airport. The Obama administration repeatedly lied about Edward Snowden, with a new book by one its senior officials blatantly admitting their dishonesty. San Francisco is trialling a “cash for criminals” program that pays former inmates a monthly stipend if they don’t commit crimes. The American Civil Liberties Union claimed that vaccine mandates are a victory for civil liberties.

Lithuania is showing the rest of the world how to push back against bullying from the Chinese government. Despite bullying Australia with trade restrictions, China is lobbying Australia to let it join the TPP trade block. The Chinese government is undertaking a purge of negative commentary on its economy and financial markets. China’s massive fishing fleet keeps getting busted fishing illegally on the other side of the world. China’s recent changes in economic policies will make it far more difficult to catch up to the US. Hong Kong police raided the museum that commemorates the Tiananmen Square massacre.

Google and Apple deleted an app created by allies of jailed Russian opposition leader Alexei Navalny after pressure from the Russian government. Google has launched employee training that promotes racism and division.

Women now comprise a record 59.5% of American college students. Based on that statistic alone, America’s future elite would be mostly women but the path to the top is far more complicated. It’s also bad news for women who want to marry a man with education equal to theirs. The US is taking steps to force young women to register for the draft. A scooter factory in India is aiming for all of its 10,000 staff to be women. $48 gets you a box of food that supposedly helps dismantle white supremacy.

Economics & Work

The top 1% of Americans earn 21% of personal income and pay 40% of all Federal income taxes. Wealthy Americans are using life insurance policies to get around Biden’s proposed tax increases. Rent controls have created a nine year waitlist for rental properties in Sweden.

A shortage of bus drivers due to vaccine mandates and declining unemployment has led to some US states calling in the National Guard to get kids to school. Most economists have failed the profession by ignoring the evidence on the costs of lockdown. The IMF should be abolished as it lends money to countries with poor economic policies.

Four common and elementary myths about capitalism. A Dave Chappelle comedy routine explains why free trade works. If cigarette taxes discourage smoking, do income taxes discourage work? Increased welfare payments leave more people trapped by the welfare cliff. Independent work has spiked in the US this year, with independent workers saying they are happier with their arrangements then traditional employees.

Central banks are finally tapping the brakes on money printing. The Bank of Japan has cutback its QE program to close to zero. Producers of consumer goods and their suppliers are seeing inflation levels far higher than CPI.

Miscellaneous

Europe’s reliance on wind power leads to extreme volatility in prices when the wind isn’t blowing, leaving coal and gas to fill the gap. An Australian company now holds the record for the most efficient solar panels after replacing the silver componentry with much cheaper copper parts. A record breaking superconducting magnet is another step on the long path to fusion power. Michelin is looking to reinvent the wheel with airless car tyres now being road tested. The $150 million machine that keeps Moore’s Law alive.

The story of a Philadelphia pizza shop that helps former inmates get a job, find a home and stay free. For no more than $10 a month Taco Bell will let you have one taco per day for a month. KFC has been testing vegan nuggets in US stores. Whilst North Korea is suffering a famine, Kim Jong Un has dropped at least 20 kilograms. Low cost microdrip irrigation can revolutionise farming in dry areas by improving crop yields whilst using less water.

A luxury Brooklyn house made out of shipping containers sold for $5 million. How global regulations and a lack of insurance killed off the attempt to have a cruise ship as a permanent home for libertarians. The unexpected and unwanted outcomes from mandating airbags and child safety seats.

A swathe of mainstream media outlets repeated an obvious hoax about people overdosing on a “horse drug” in an attempt to fight off Covid. The US is struggling to vaccinate people who have already had Covid, with debate over how much additional protection vaccination provides against reinfection. The UK has abandoned its vaccine passport program as deaths and hospitalisations remain below previous levels. Residents in locked down buildings in NSW are subject to daily alcohol limits. Two American talk show hosts were pulled mid-show after positive Covid tests.

Why are people paying hundreds of thousands of dollars for low quality CryptoPunks images? Portland has opened the “Ned Flanders Crossing”, honouring the creator of the Simpsons who lives in the city. 40 finalists from the funniest animal photos of the year competition. A New Zealand preschool uses a hen in a high visibility jacket to encourage safe driving in its parking area.

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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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