Private Placement Risk Commentary
The Mafia and Mattresses; The Basis for Heightened Conflict (Aug 2022)
"The Mafia has a term for warring between different families and that is “Going to the Mattresses”, presumably because when battle is underway, the soldiers might be needed at any time and therefore place on hold their normal family lives..."
Taking Measure of the Major Risks, Probabilities and Possible Impact (July 2022)
"It is incumbent upon risk managers to be knowledgeable of the major risk factors, the drivers of those risks, the likely outcomes, and probabilities. We review these factors on a semi-annual basis to provide at a high level, some of the challenges and possible impact..."
Unintended Consequences (be careful what you wish for) (July 2022)
"Hubris - exaggerated pride or self-confidence. English picked up both the concept of hubris and the term for that particular brand of cockiness from the ancient Greeks, who considered hubris a dangerous character flaw capable of provoking the wrath of the gods. In classical Greek tragedy, hubris was often a fatal shortcoming that brought about the fall of the tragic hero..."
A Quick Turn of Events/ Hope on the Horizon, Dunkin vs. Starbucks, and Ukraine (June 2022)
"As of 18 months ago, economists were praying for a pick-up in inflation and some relief to facilitate the end of Quantitative Easing and the huge overhang of negative interest rates. Today, most economists are praying that inflation moderates below 5% and that there are no more 75 basis point increases by the FED..."
Breaking Inflation, Moving Currencies, and Ukraine Next Steps (June 2022)
"We aim to provide our readers with an intellectual framework for evaluating the major factors driving the institutional investment market. The report seeks to address complex issues but in an understanding manner. Lastly, we will only issue a report if we have something cogent to write..."
Withering Hand, Forced Default, Go Big or Don’t Go, and the Three R’s (June 2022)
"Adam Smith, a Scottish economist, provided the philosophical foundation for Western Democracies via his well-accepted treatise, The Wealth of Nations which introduced the concept of the Invisible Hand . In short, the concept is that greater society benefitted from each individual’s and entity’s pursuing their own interests (provided they pursue those interests in a lawful manner)..."
War of Attrition, China Check, ESG Agita, and The New Norm (May 2022)
"Russia and the West are in a desperate fight in Ukraine, a war which can best be described as a one-half proxy war. Typically, wars progress in a manner whereby both sides add resources in an effort to gain the upper hand, although this one is different in several respects. One is that Russia is going to great lengths to avoid defaulting on its sovereign debt, despite the fact that much of this debt is held by the West..."
Proxy War & Putin’s Perspective, Inflation & the “S” Word, and Risks, “Off Ramps” & Improved Conditions (May 2022)
"While it is often difficult to view events from the perspective of an adversary, as sophisticated investors and professional risk managers know, accurate thinking is critical. The challenges of the day are numerous, but for many, at the top of the list is the Ukrainian War, inflation, and economic conditions which in many ways are all related. This latest installment aims to provide a greater understanding of some of these issues, and hopefully..."
Massive Miscalculations, Putin's Pain, Inflation Inflections, Yield Curve Musings (April 2022)
"Like an airline crash, the outbreak of war often is the result of a series of failures, mistakes, or miscalculations. Western Europe is undergoing a massive reset in policy whereby the structure in a few years is likely to look completely different than it does currently. Mistake 1; Maintaining Balance - Paraphrasing the advice of Henry Kissinger, neither Russia nor China should be a better friend to each other than they are to us..."
Required Reading: Dashed Hopes, Unexpected Consequences, China Lockdown & Inflation Imbroglio (April 2022)
"Like people’s lives, fundamental country policies are built on basic assumptions, or, for many, aspirations. When those assumptions are proven wrong, pain and suffering can be expected. The “Required Reading” label is used only on those cases where we believe items included are of particular importance to risk professionals and institutional investors..."
Dangerous, Rapid Changes; Corporate recast, Putin peril, Kim consternation, and Inflation infliction (March 2022)
"The world has rapidly changed over the past couple of quarters, presenting massive challenges for professional risk managers and investors. This latest installment addresses just a few of those changes..."
Uninformed, Unlikely, and Unrealistic; What's Next (March 2022)
"The need for accurate, timely information is especially acute during troubling times, and the rapidly developing situation in Ukraine fits the bill. In this installment we will discuss the dichotomy between words and actions and probable outcomes, including the recovery. The following are words of a major political figure: “He thought he could..."
False Assumptions (February 2022)
"Over time, the military action in Ukraine is likely to be viewed as a major preventable blow which was rooted in some convenient, but false assumptions. The impact on the markets is less than certain. The irony is that at the heart of the crisis is an item which many have proclaimed to be irrelevant in the modern world, and that is petro carbons in the form of petroleum and natural gas and facilitating market..."
Festering Wounds and Threats from Bread, Tea, and Onions (February 2022)
"Inflation has bedeviled countries for ages and has the potential for bringing down governments. While each of these items appear to be rather pedestrian, they have accomplished what armies could not. The rising price of bread precipitated the French Revolution, inflation via taxes on tea helped bring about the Colonial Revolution, and finally the price of the food staple of onions in India brought..."
Thinking the Unthinkable, Speaking the Unspeakable (February 2022)
"A key role of risk professionals is a timely, cogent analysis of those matters which are almost painful to consider, and yet can be make or break issues. This installment addresses a few of them. Iran – Despite the best efforts of the Western nations, there is little doubt that Iran is creeping towards nuclear capability. The ramifications of this development are enormous: is Israel (and the U.S.) prepared for a dirty bomb in Tel Aviv or Jerusalem? What about Paris, London, or New York?..."
Required Reading - Risk Checklist (January 2022)
"It is the time of year when anyone serious about risk mitigation reviews the various threats to operations and where possible, evaluates means of offsetting risks. Inflation – By most traditional measures (CPI and PPI), inflation is running in excess of 7% annually. While the normalized level might be a bit less, it is clear that “transitory” is a misnomer. Comment: The dilemma facing the market is that the normal process for quelling inflation is likely to cause turmoil in the market..."
Hotel California; Taming the Inflation Beast (January 2022)
"Like drug addiction or the lyrics in the Hotel California, inflation is easy to enter, but difficult to leave: “They gathered for the feast, They stab it with their steely knives, But they just can't kill the beast, You can check-out any time you like, But you can never leave” Lyrics from Hotel California by the Eagles. Perhaps a starting point for a discussion on inflation is a determination of the underlying causes. In simplistic terms, inflation is caused by a rise in the demand for goods and services..."
Intransigent Inflation (Be careful about your holiday wishes) (December 2021)
"The below quote from the WSJ describes a country which spiraled into misery courtesy of galloping inflation: “Hyperinflation set off this most recent and precipitous descent. Beginning in __, unbridled government spending, uncontrolled monetary expansion and a collapse in tax revenues led prices to rise out of control." Is it Weimer Germany, Turkey, Venezuela, Asia in the late 1990’s, the US in the 1970s..."
Pax, Pax, and Pox - Regimes, Currencies, and Machiavelli (December 2021)
"Institutional investors and risk managers are tasked with assessing major risks (and opportunities) and steering their organizations through uncertain times. Springing forward from our last installment (Punch Bowls, Parties, and Perdition) our current installment aims to address some macro issues that are likely to weigh on the markets for some time and require sound thinking to properly evaluate and more importantly, properly respond..."
Punch Bowls, Parties, and Perdition (November 2021)
"While few think about it, the prices we pay for goods and services are a reflection of the overall currency levels. When those currency levels are inflated, a natural outcome is that the prices of goods and services similarly increase. The key from a risk perspective, is not only accurately assessing the current situation and the underlying drivers, but also analyzing the likely persistence, and developing a cogent response..."
Housing Prices, Tulip Mania, and Taming the Mortgage Monster (November 2021)
"Housing occupies a unique place on the financial spectrum; on the one hand, it is a massive store of wealth for most families, and on the other hand, it has been at the heart of the two recent major financial crises (i.e., the late 1980s and early 1990s Savings and Loan Crisis and the 2008 Credit Crisis) and a supporting role in most other financial crises. This installment attempts to shed some light on the symptoms for identifying crises hopefully well before most of the market does..."
The Conestoga Conundrum and the New Killer (October 2021)
"With the successful launch of Bitcoin ETFs comes an underappreciated threat to the current financial system. As of 200 years ago, THE premier way for transporting people and goods from the East coast to the Midwest was via the Conestoga wagon, a well-built, well-regarded, tested staple for the arduous trip. The wagon was considered to be the only choice for those attempting the journey and as a result, many thousands were built..."
A Rapidly Developing Crisis (October 2021)
"The Markets can provide a cruel retort to the best intentions and best laid plans, again reminding us of the limits of our power. With a focus on the ills of global warming, there was general consensus that we should move away from fossil fuels in favor of more sustainable sources of power. Respond we did, with major institutions jettisoning their energy holdings, banks refusing to lend, and governments restricting permits for the development of additional carbon-based resources..."
China: A Significant Sea Change (October 2021)
"Deteriorating conditions in China are likely to have broad implications. Problems: We have been watching events unfold in China and have become increasingly concerned. The most recent installments have been failure by another developer, Fantasia Holdings Group Co., to repay a $205.7 million bond which has reignited fears of widespread defaults among Chinese developers..."
Tyranny of TINA and China: A Sea Change (September 2021)
"TINA is an abbreviation of “There is No Alternative”, meaning that despite the distortions caused by the Quantitative Easing (QE) of central banks, institutional investors are basically forced to bend their investment guidelines in an attempt to achieve reasonable returns..."
Elephants in the Room, Rabbits in the Hat, & Thinking the Unthinkable (September 2021)
"With the rise in inflation, the natural course is to expect a rise in overall interest rates. However, with an increase in sovereign debt over the past decade, an increase in rates in some cases is not just painful, but unbearable..."
Broken Dreams (August 2021)
"Western countries pride themselves as having a superior way of life and believe over time, others will understand and accept that it is in their interest to join the developed world to share in the prosperity. There have been many manifestations of this notion (hubris is probably more fitting) and most of them have not ended well..."
Culture Wars and The New Asia (August 2021)
"For those individuals who grew up during the Great Depression (i.e., many of our parents or grandparents), the underlying assumption in many actions was one of self-sufficiency. If one could not afford something, one did not buy it. Debt other than a manageable mortgage on one’s home was to be avoided and living within one’s means was imperative..."
Human Hubris & the Wall of Worry (August 2021)
"Despite the apparent success of the economic recovery since the emergence of COVID19, some skepticism is probably in order. Courtesy of the 2008 credit crisis, the developed countries’ central banks have been granted immense power to intervene in the markets and intervene they have..."
Massive Disconnect (July 2021)
"All around us are indications of rising inflation: labor shortages, material price increases, and delayed product deliveries. A tangible indication is the housing market, which has seen steady price increases across the board. Regarding overall inflationary expectations, the Federal Reserve Bank of St. Louis via its FRED service provides a summary of inflation expectations..."
Structural Changes (June 2021)
"The maxim regarding a frog’s not recognizing the danger from the slow heating of water (until the frog is cooked) has broader applicability. Conditions are changing but it is difficult to recognize that change and probably even more difficult to react and benefit from the changes. For better or worse, the markets are driven now by forces not experienced other than to a far lesser extent, during global wars..."
Changing Assumptions (May 2021)
"There is little that has not changed over the past 90 days such that many market participants are only beginning to grasp the breadth and depth of the changes. On an optimistic note, it appears the brunt of the recent COVID19 infections are behind us (at least domestically) and that most of the economy is beginning to open-up... "
Inflection Point (April 2021)
"The market is on the verge of a major inflection point; the uncertainty is which way is it heading. Over the past few weeks, the equity market has been fairly volatile despite no real change in the macro fundamental outlook. The U.S. Fed has remained dovish, and the US stimulus was released as planned..."
War Stories Series: “All about Timing” (March 2021)
"The markets have been and remain volatile such that opportunities arose for locking in a competitive funding rate. HBS-trained Denise Peters (name changed to protect the innocent), CFO, Treasurer, and manager of the firm’s bottom line, had wanted to raise a slug of capital to replace some high-priced, covenant heavy debt which was a constant headache for her over-worked (and under-paid) treasury department...."
Egan-Jones CLO* Summary Report
Egan-Jones CLO* Summary Report
"Weathering the storm – despite the turmoil in the economy, CLO credit quality to date has held steady as can be seen below. Egan-Jones provides an overview of the CLO market to facilitate comparisons over time and among various CLOs..."
Climate Change/ ESG Scores
"Corporations exist in the broader context of a society and like other citizens of a society are expected to act in a responsible manner to hopefully benefit both the corporate entity and society. Unfortunately, sometimes this relationship breaks down such that the corporation appears to benefit while society losses..."
A Solution to Investing in an ESG-Centric World
"Environmental, Social and Governance, or ESG, used to be a niche investment strategy – but no more. Investor demand for ESG-related products has proliferated and forced all financial firms, whether investors or issuers, to focus on how they can address the changing requirements imposed on them..."
Methodology and Proxy Voting Requirements for ESG Investors
"For institutional investors with an ESG focus, it is increasingly obvious that (i) a cogent approach to ESG is needed (with a documented methodology and supporting materials) along with (ii) proxy voting supporting that approach (See “SEC Announces Enforcement Task Force Focused on Climate and ESG Issues”)..."
Proxy Voting - A New Direction
"BlackRock’s giving index fund holders the ability to vote shares as they see fit is a massive change – for the better. Larry Fink did not become the CEO of the world’s largest asset manager without exercising some intelligence. His recent move to allow holders of Index funds to votes shares represents a significant shift in the traditional way of conducting business, and one which was inevitable given the prevalence of indexation, and the high concentration within the index industry. Per the Wall Street Journal..."
Regulators Begin to Tip their Hand with New Concerns for Registered Investment Advisers
"As administrations have changed, so has their outlook on proxy voting and the associated rules and regulations. Many of the proposed rules from last year are now suspended and may never be implemented – at least in their current form. On the other hand, issues like ESG and the actual voting of proxies have become much more of a front-burner issue..."
Why So Many Institutional Investors Outsource Proxy Voting
"If you are an institutional investor, you have probably thought about it, indeed there is a very good chance you are already outsourcing proxy voting. Either way it’s worth looking at the cost and benefits of why outsourcing makes so much sense for this key compliance issue as well as how much you should expect to pay and how much time you can save by doing it..."
Why Paid Proxy Firm Consulting with Issuers is a Very Bad Thing
"You have heard it for years, certain proxy firms, except for Egan-Jones, have an unforgivable conflict of interest: they get paid to consult with the very firms they rate and recommend votes on. Sometimes called “pay for pay” instead of “pay to play,” many have assumed that this issue is well controlled—why else would it be allowed to persist if it were really a problem? Let us explain, in our expert opinion why we believe it to be a very big problem..."
CEO Compensation was a Joke Before Covid-19, Now It is Just Obnoxious
"In an era of sacrifice, risk, and despair for many employees, one group of employees has yet again defied the norm, often with significant increases in actual compensation and wealth during the COVID-19 pandemic and resulting economic and societal turmoil. Who are these lucky ducks— top executives and most especially CEOs at America’s big public companies..."
Tesla's Elon Musk - Yet another Example of why to Play Nice with Investors
"With the price of oil on the rise, major auto companies like Ford essentially dropping out of the auto market you would think that the world would be Tesla’s [TSLA] oyster. Despite all these opportunities to begin the hard work of making the short sellers pay and pay dearly Elon Musk apparently decided to do the opposite and give them more ammunition by refusing to answer some analyst questions..."