The Institutional Risk Analyst

Another week goes by and there is still no peace agreement between the US and Iran. The Strait of Hormuz remains closed and much of the world’s capacity for producing key refined products remains offline. The Iranians have made clear that they are not going to give up the nuclear program nor the Strait of Hormuz. We spoke with our friend John Dizard this week and he wonders why the Trump Administration is refusing to begin planning for rationing for key refined products.

In fact, we expect the war with Iran to result in higher interest rates, higher inflation and rationing of key petroleum byproducts in coming months, something that nobody in the Trump Administration seems willing to discuss. If Washington was populated by serious people, the federal government would already be making plans for rationing key refined products.

Brent was down to about $94/barrel ($103 last week). Gasoline prices also fell to $4.39 vs $4.52 last week, with diesel down to $5.52 vs $5.63 last week. But technology stocks are at all-time highs led by the likes of Micron Technology, Inc. (MU), which is up over 800% in the past year. Are the US equity markets approaching an inevitable reset?

Meanwhile, Michael Saylor, Executive Chairman of Strategy (MSTR), f/k/a MicroStrategy, stated that the company will "probably sell some Bitcoin" to fund dividends and "inoculate the market," after the firm (now holding hundreds of thousands of coins) faced consecutive quarterly losses. This change marks a stark reversal in Saylor’s public position regarding the value of bitcoin.

We took some of our profits in gold last month, but will be adding to our positions in silver and related miners not dependent upon acid leaching to produce metal. We'll leave the second and third-tier arbitrage trades to the big research houses. In addition, we'll also be updating the WGA Bank Top 100 this weekend.

Bank earnings this week have been mostly what we expected, with income up, credit loss rates continuing to trend lower and most banks refusing to provide additional disclosure on private credit exposures. As the private credit mess proceeds in the weeks and months ahead, a lot of the “debt” in these deals will turn to equity – which is what it should’ve been all along.

The latest turn of events in Washington has left the Saudis and Israelis profoundly annoyed. The US kicked over the hornets nest in Iran, but now Washington is seeking peace even as the Iranians continue to attack the Gulf states. A few ships carrying LPG for Pakistan have been allowed through the Strait after paying Tehran the extortionate sum of $1 per barrel, payable either in Chinese yuan or bitcoin.

The past week has been a decidedly volatile period, but with spreads widening in response to growing concern about the US fiscal trainwreck ℅ the US Congress and President Donald Trump. Even the possible intervention of the Federal Reserve Board does not impress a market about to see the largest IPO ever in Elon Musk’s SpaceX.

When we want to know what is happening in the world of energy, John Dizard is our first call. His views on the approaching economic collapse due to the US-Israeli war against Iran are disturbing but also suggest some investment themes that we address at the end of the discussion. "Unless there's some miracle within the next few days, we're heading towards diesel rationing in Europe, jet fuel rationing, serious shortages."

“Since the start of the Iran war, base rates are up 48 bps and spreads (the six rates I use) are up 80 bps, for a total impact of 128 bps. The impact on EBITDA to support equity is roughly $5 billion per bp. At an EBITDA multiple of 8-1, each bp reduces equity valuations by $40 billion. SIMPLY STATED, the “cost” of the war now stands at $5.12 trillion in reduced “fair value” of US investments. ARE WE HAVING FUN YET?”

Within a couple of months, the supplies of crucial petrochemical inputs currently on the water will be delivered and there will be nothing in the delivery pipeline after that point in time. Refined products are a far greater concern than oil. Kuwait, for example, produces a lot of aviation fuel for the EU. The Saudis are now shipping phosphates by truck to Yanbu, but this is not even a modest replacement for the disrupted supply chain in the Gulf.

Fed Vice Chair for Supervision Michelle Bowman outlined bank-friendly Basel endgame and GSIB surcharge proposals, reports Ian Katz at CapAlpha in Washington, which she said will be released in a week. Overall, the changes will result in a small decrease in capital requirements for the largest banks and more significant changes for smaller institutions. We’ll be responding to the request for comment on Basel III.

The year 2025 was another year of magical thinking ℅ Donald Trump, a man whose mere presence in the room causes everyone else to descend to their most base level. Trump came to Washington as a president who spurned convention and embraced crypto currencies. He rejected New Deal regulation and encouraging greed and self-interest in a way not seen since the years following the Civil War. The impact on financial markets is profound and may continue for some time.

Ford just reported lackluster earnings, making more money per unit on lower sales. How do you assess the situation facing the US automakers? Is this a case of the industry shrinking or is there a more nuanced explanation for the competitive situation is facing the US automakers?

Chair Yellen Spills the Punch Bowl

Dollars, Deficits and "Duh" in Davos

In December this past year, Chinese lender Citic Bancorp warned that the high-flying HNA Group was having trouble paying its considerable short-term debts. After building a $40 billion pile of investments around the world largely funded with debt, HNA seems to have reached the end of its ability to grow further, both in financial and political terms.

Tax Cuts, Offshore Cash & Jobs

December 10, 2017 | In this issue of The Institutional Risk Analyst , let’s first ponder last week’s revelations that the European Central Bank is taking a loss on its purchase of bonds issued by Steinhoff International , the high flying (and highly levered) South African-based home retailer that was struck down by an accounting fraud scandal. This event illustrates how central banks have distorted the credit markets and allowed inferior borrowers access credit at investment

The Yellen Put & Market Risk