Cycles As we said in Snapshots in July last year, we think about cycles of macroeconomic activity, corporate earnings and default rates. At the time, we said, “it is striking how the corporate default experience during the recession of 2008 was smaller than the corporate default experience during the recession of 2001. The 2008 recession […]Read More
Pre-Christmas Sales in the Credit Markets The same approach needs to be taken with the credit markets which are closing at the year’s lows across the board. We think there is fundamental value at these levels (as measured by the default adjusted risky credit spread). However, we are mindful that defaults have been unusually low […]Read More
It is an example of why we believe globalisation and multiculturalism is a long-term cyclical trend which is here to stay even if it is interrupted by shorter cycles of nationalism and protectionism. Black Friday Sales One could be forgiven for wondering if the credit markets have been participating in the Black Friday sales. Bonds […]Read More
Spend Spend Spend! Following the US mid-term elections, it is clear the fiscal agenda on both sides of the House is also to “spend spend spend”. The Democrats want to do this with a large infrastructure-spending bill and Trump wants to do this with tax cuts for the middle classes. It is currently not clear how […]Read More
The broader markets are also suffering and have turned into a “sea of red” with almost all the major equity markets now down on the year. This is a remarkable reversal from the picture just a few months ago. Credit spreads have been following suit and some credit indices are approaching two- year highs. JOMO and the […]Read More
Yields On a more immediate note, we note that US 10 year treasury yields have pushed convincingly through 3% and the world’s global bond markets have followed suit. A number of factors are at play in the US which is still by far the world’s largest government bond market. These include the end of QE, […]Read More
We have been fascinated with waves and cycles in economics and politics (and even in physics and geography) ever since. We find that thinking about longer-term waves and cycles is an excellent way of grounding yourself in what can feel like chaos on a daily basis. ESG and Capitalism 2.0 We also think that we […]Read More
Cause and Effect and Mary Jane To be clear, we are not surprised by the sell-off, just the magnitude of it. In February this year, we wrote “When the world’s central bankers embarked on QE they said that central bank purchases would work through the “portfolio balance channel”. Ex-Fed chair, Bernanke, explicitly described it as pushing […]Read More
Speciality Finance Speaking of movies, we were pleased to close our first media receivables financing trade last night. The production and distribution of media is a growing business because of the arrival of streaming giants such as Netflix and Amazon who have huge appetites for content. It is also a capital-intensive business. Media is a subset […]Read More
Dancin’ in September It has been a weak year for the credit markets with negative returns across most sectors (with the exception of loans and parts of the ABS market). As regular readers know, we took a cautious stance to the broad market in Q4 of last year when the Fed started to reduce its […]Read More
2008 and 2001 Speaking of yearly comparisons, we were trawling through default tables for corporates recently. It is striking how the corporate default experience during the recession of 2008 was smaller than the corporate default experience during the recession of 2001. The 2008 recession was caused by a collapse in house prices. This rippled into sub-prime […]Read More
Junk Rated Sterling Assets The plan has cost May the support of two hard Brexit cabinet ministers. Commentators are suggesting that Theresa May is in a weakened position with the EU and her party with this proposal. We are not so sure and remember the late Muhammed Ali’s famous rope-a-dope tactic against George Foreman. The […]Read More
Weak markets At our weekly Multi Asset Credit meeting, our teams of portfolio managers and analysts also noted price weakness spreading across the credit market. This was initially seen in bank capital and investment grade and high yield corporates but has now spread to leveraged loans, CLOs and securitised products. As we have been saying for […]Read More
High Street Blues The UK high street is suffering from a different kind of fever, which has profoundly affected the casual dining and retail sectors. The causes are well known: the lowest GDP growth in five years, higher business rates, stubbornly high inflation, uncertainty around Brexit and the structural move to online shopping. Many household […]Read More
Conte also gave his maiden speech in parliament. Rhetoric about Europe was toned down, tax cuts pushed out to subsequent years and the criteria for receiving universal basic income tightened. However, the market remains nervous with Italian yields hovering near their highs. The nervousness is compounded by the backdrop of tightening global liquidity which we […]Read More
Ciao Conte The word ’fangry’ has not made it in yet but it would be a suitable description for the rhetoric from the populist coalition government in Italy when they were denied their first choice of Eurosceptic Finance Minister. Nevertheless they have succeeded in forming a government. The clearest strategy from the new government is […]Read More
GIGO Snapshots recalls some of the credit pricing models that were used prior to the last crisis. They were built by quants who were clever PhDs and engineers and came from precision industries such as aeronautics. They knew how to build 400,000 kilo metal airframes that could fly through thin air but their financial models […]Read More
Normalisation This business cycle has been characterised by the capital markets allowing new technology companies, such as Tesla, to burn through large amounts of cash as they try to grow into their forecasted business models. As monetary policy normalises, the cost of capital is rising and we expect the bridging of capital to these potentially […]Read More
Toothpaste and Correlation We mentioned in Snapshots in January that synthetic CDO market volumes are increasing again. We recently looked at the implied correlation risk in equity index tranches which is still at elevated levels post the financial crisis. Correlation across tranches has often been described as toothpaste in a tube that gets pushed around […]Read More
Direct Lending It is hard not to think there is some blind faith evident in the direct lending market. Direct lending is a topic that seems to come up in nearly every client meeting we have. Huge amounts of capital are being raised in this sector. The reason is obvious. New Basel regulations mean that […]Read More
Trade spats The US and Chinese officials have been displaying bowls of confidence in their escalating trade dispute. They each want to impose tariffs on $50bn of trade. This is small relative to the size of global trade (defined as the sum of imports and exports) at $29.3trillion, US trade at $5.2trillion or Chinese trade […]Read More
Structural reforms Last week’s Italian elections have resulted in a hung parliament as the public voted for populist parties. There has been a rise in Italian sovereign risk premium but it has remained very well contained. It is clear the broad political thrust in Europe is towards tighter immigration and looser fiscal policies. If this remains […]Read More
Global Connections Trade and the economy are also part of a globally connected system. President Trump wants to regulate some of these connections and has imposed a 25% tariff on US steel imports and a 10% tariff on US aluminium imports. This has led to warnings of tariff retaliation from the EU and China. The corporate sector […]Read More
The State We Are In The rules of Go are relatively simple even if the permutations of each move branch into the centillions (that’s very large!). The markets are even more complex. At Cairn Capital, we have a proprietary technology system called Nexus that we have been developing since 2004. It is very rich in […]Read More
Causality This week the market has been focusing on the spike in volatility and the unwind of retail funds that have been selling volatility. We warned on these products and the triggers that could lead them to unwind in Snapshots in August last year (Inverse VIX and Accelerators). However, this has diverted the attention of investors […]Read More
Telecoms Unfortunately, Alexa does not provide credit research yet so we still have to do our own. It always helps to start looking where large volumes of debt creation has or is taking place. The current credit cycle has seen some aggressive debt funded M&A by the telecom industry as it tries to dominate in […]Read More
The Six Foot Tall Man Speaking of six feet, one of our favourite quotes in 2017 was: “Never forget the six-foot-tall man who drowned crossing the stream that was five feet deep on average.”* A good example of this was a pool of Buy To Let mortgages that we analysed recently. It advertised an average (mean) […]Read More
Quantitative Tightening This is particularly important because of the rapid pace of interest rate normalisation in short maturities. US Libor rates are at 9 year highs. China Libor rates are edging towards decade highs. Euro Libor rates however, are at decade lows. These coincide with the relative actions of the central banks. The Fed is in the third […]Read More
Greed and fear The tone of all the MiFID II compliant research flooding our inbox is overwhelmingly positive. The MiFID free blog-sphere paints a similar picture. Global growth at 3.7% is the highest in seven years and is widely expected to continue. We said that 2017 was the end of ultra-loose monetary policies. That leaves […]Read More
Clean Capitalism This is because renewables are becoming a major force in the world energy markets – a theme we first mentioned in Snapshots on 2 June 2017. A report by the UN Environment Programme states “new renewable sources (…) accounted for 55.3% of all the gigawatts of new power generation added worldwide last […]Read More
Snapshots has been saying for some time that 2017 will mark the end of ultra-loose central bank monetary policy. This has coincided with jitters around some highly leveraged corporate entities. Steinhoff Interest rates have not moved enough to cause broad interest coverage issues and the capital markets remain very open for refinancing. However, the market is […]Read More
A history of ledgers The distributed ledger technology behind Bitcoin is certainly very interesting. However, ledgers are not new. According to Wikipedia, the first records of ledgers come from Babylonian stylus and clay slabs dating back to 2600BC. Since then we have had the invention of the double-entry bookkeeping system by Italian merchants in the 1300s, the creation […]Read More
We talked about grandad who came to Newcastle in the 1950s as a Commonwealth immigrant and registered as a peddler. This involved selling household goods out of a suitcase on credit. The credit aspect was appealing because collections meant an opportunity for him to sell more goods. Losses given default were 100% and so it […]Read More
Confirmation Bias We are reading Michael Lewis’s latest book the “The Undoing Project” which is about the Nobel Prize winning behavioural economists Tversky and Kahneman. The book has made us question if a degree of confirmation bias is setting into this market. It has continued to rally with very low volatility despite increasing warnings of […]Read More
Their hit single “If You Tolerate This Your Children Will Be Next” and the song’s line “If I can shoot rabbits/I can shoot fascists” come from the Spanish Civil War that Welsh volunteers surprisingly fought in. We highlight this only to illustrate how deeply emotive politics is. As investors we do not get involved in […]Read More
Little Blighty On The Down* Central Banks are rolling back Quantitative Easing and their associated liquidity programmes. One such programme, the Bank of England Term Funding Scheme, is expiring in February next year. It currently stands at £75bn and has provided UK banks with cheap term funding to make consumer and business loans. Some commentators have […]Read More
The original 1990 series of House of Cards was set around a Conservative Party leadership challenge and is said to have drawn inspiration from Macbeth and Richard III. For TV buffs it is a must see. My turn on the policy joy-stick The pendulum is swinging from central bankers and monetary policy to government and […]Read More
Inflation and Slack That is just an anecdote which in itself has no meaning but we note that some economists are calling the recent disinflation transitory, particularly in the US where a large component was caused by a wireless price war. Oil prices are also starting to pick up again (albeit from low levels). With oil supply […]Read More
Behavioural Finance Good Judgment is a commercial spin out of a project that was funded by the US Intelligence Department after the forecasting failures of 9/11 and Iraq’s Weapons of Mass Destruction. The project was a big statistically measurable success and formed the basis of Phil Tetlock’s excellent book “Superforecasting: The Art and Science of […]Read More
Written records show hurricane impacts in the Caribbean going back to 1600s. They are unfortunately a part of human history. They used to savage trading ships, fishing vessels, homes, plantations and cause many deaths. The good news is that people and economies always bounced back. Current damage assessments show the economic impact of Irma for […]Read More
Netflix and the HY bond market Speaking of which, we read with interest that Netflix increased its cash burn from $1.7bn last year to $2.5bn this year on rising content costs. The content is really great, which is what you would expect for a company that has produced 4 of the 10 most expensive TV series […]Read More
Fire and Fury The recent market rally stopped in its tracks and reversed quite sharply this week. The reversal coincided with Tuesday’s comments by President Trump on further aggression from North Korea being met with “Fire and Fury”. Also, Disney ended its distribution deal with Netflix which caused a pause in the perpetual business model […]Read More
Zero balance transfers and stoozing We have mentioned UK consumer leverage as an idiosyncratic concern in the current credit cycle. One practice that demands scrutiny is EIR (Effective Interest Rate) modelling of credit card balances that are transferred at 0% for up to 49 months. Banks assume an average balance, maturity and EIR for the […]Read More
Central Bank Shuffle Despite the recent fall in inflation prints we believe the focus of the major central banks is still on policy normalisation. The broad direction of travel is the same for the FED, the BoE, the BoC and the PBoC. This is quite possibly being coordinated to prevent destabilising FX moves. We describe […]Read More
Back to the markets and Snapshots is analysing credit opportunities as the markets pause ahead of an August summer lull. We have been saying for some time that opportunities in liquid credit are sparse away from bank capital. Structured credit still presents good risk adjusted value and we are excited about a new asset class […]Read More
Co-ordinated unwinding This is because global yields are still reeling from the aftershocks of last week’s central bank messaging. This is now feeding into the equity markets and credit spreads. The obvious risk here is that Mx Market (yes that is a deliberate gender neutral prefix) over-reacts and over-discounts what ze (another gender neutral prefix) […]Read More
The result was a surprise. However, this morning the Conservative Party reached agreement with the Democratic Unionist Party of Northern Ireland to form a minority government which should mean a soft Brexit stance with the EU. We think this explains the muted reaction in the FX, rates, credit and equity markets this morning. Banco Popular […]Read More
And is there a quantifiable measure of “love” between human groups that can be analysed and does it follow its own cycle, like the business cycle, the debt cycle or the default cycle? We will leave that to social scientists and historians to ponder in the new data rich world we inhabit. The Climate Sceptic […]Read More
European Renaissance The original renaissance was a cultural movement that lasted from the 14th to the 17th century and is regarded as the cultural bridge between the middle ages and modern history. The latest renaissance was evident at the recent SALT investment conference in Las Vegas. Among the reasons cited were lower P/E ratios, higher […]Read More
Data mining This is because historic simulations show it is statistically not significant. In the words of Ron Burgundy it’s a case of “60% of the time it works all the time”. On a more serious note in the world of big data, machine learning and systematic trading, if a simple seasonal pattern existed it […]Read More
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