The Institutional Risk Analyst

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. 

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

The Interview: Leland Miller on China & the Coming Trade War

Last week financials continued their relentless march toward the sky as investors chased the happy prospect of higher interest rates from the Federal Open Market Committee and maybe even tax cuts from Congress. In a world with too much debt and regulation, and too little economic growth as a result, driving financials (and all other asset classes) up to valuations not seen since the roaring 2000s is a fool’s errand, especially when you notice that credit spreads remain large

Housing & Mobility

“While the US and the UK have been mired in political chaos this year, the EU has enjoyed improved economic conditions and some political windfalls. The question now is whether this good news will inspire long-needed EU and eurozone reforms, or merely fuel complacency – and thus set the stage for another crisis down the road.”

July 5, 2017 | News last week that European Central Bank chief Mario Draghi was considering an end to the ECB’s extraordinary purchases of securities quickly let some air out of the Great Rotation into EU stocks. Sure the euro surged against a weakening dollar, but Europe’s mountain of bad debt remains unresolved -- even after the election of Emmanuel Macron to the French presidency. Yet hope springs eternal in some quarters after Draghi’s claim of a successful “reflation

The IRA is writing today from Camp Kotok, which is held each year at Leen’s Lodge in Grand Lake Stream, Maine. We are in Washington County, which is on the border of New Brunswick, Canada, and about 200 miles north of Bangor up Rt 9. This is Down East Maine, the land of Thoreau with rolling hills and lots of beautiful rivers and lakes.

"[F]rom early spring throughout 2009 and until mid-year 2010, the Fed engaged in the first major quantitative easing program of purchases of government agency debt and agency-guaranteed mortgage-backed securities. The Fed’s purchases reached a cumulative total of $1.285 trillion, and excess reserves reached nearly $1 trillion. Essentially, the new reserves provided by the purchases program enabled the banking system to fund the repayment of about $1 trillion of various forms

May 29, 2017 | In the mid 2000s, just before the financial crisis began, US banks were reporting credit metrics for all asset classes in loan portfolios that were quite literally too good to be true. And they were. The cost of bad credit decisions was hidden, for a time, by rising asset prices. The same aggressive, low-rate environment used by the Fed to artificially stoke growth in the early 2000s has been repeated in the aftermath of the 2008 crisis, only to a greater e