Category: General (Page 1 of 17)

Reason for concern?

August 5, 2024 / Mark Sloss

Looking at the markets the last several sessions, it would be easy to think this was a “hold my beer” moment after we posited the question in our last blog post about what could take these booming markets out. Right now we are saying take a moment and a healthy step back, look at the charts over the last six, twelve or eighteen months, and decide how agitated to get. Could it get worse? Sure, always could. Is there a clear reason that it should? In our opinion, not really. It does seem like the AI theme is a little exhausted after a massive run, Japan is a little exhausted after a massive run (and the carry trade may be winding down), and the jobs numbers in the US may be a bit exhausted after a massive run. In other words, a healthy consolidation after better outcomes than world markets and economies had any reason to expect after the pandemic, an overshoot on stimulus, and the consequent slamming on policy brakes. If the Middle East erupts into a hot shooting war that pulls in the West, we will need to re-rate our risk view, but right now, keep calm and look at the charts.

And how was your week?

July 22, 2024 / Mark Sloss

After a hiatus on the blog and social media, we are back. And boy howdy what a moment. There was an attempted assassination of a Presidential candidate/former President, the sitting President stepped away from his re-election campaign, and an update to an omnipresent piece of cybersecurity software took down airlines, healthcare providers, and financial institutions. The damage is still being tallied and the “2024 CrowdStrike incident” already has its own Wikipedia page (https://en.wikipedia.org/wiki/2024_CrowdStrike_incident). And how was your week?

Meanwhile, markets continue to rip with seemingly not a care. In our prior global capital markets risk assessment we had flagged geopolitical conditions that would be destabilizing to markets like the battlefront shifting toward Europe in the Russia-Ukraine conflict, China moving against Taiwan, or a regional conflict erupting in the Middle East. Sure enough, Israel is embroiled in a multi-front proxy war with Iran and markets hum and rates stay benignly elevated. The price of oil is hovering barely above pre-Pandemic levels. One of the few traditional signs that the kids are not all right is gold holding an all-time high since April.

For any of our readers who have followed us for a while in our blogs and newsletters, we are always poking at one of two questions – when times are good we are asking what will take the market out, and when they are bad, we are asking what will put a bottom in the market. Right now we have to ask if markets are punch drunk and can’t react any more or truly are that resilient.

If we were playing disaster bingo we would not have guessed much less expected this kind of sequence of extraordinary events in the span of less than two weeks with barely a wince.

That the market was able to withstand that much adverse news suggests fundamentals still matter even from the top down. Presidential elections of late have not been a strong market factor, and the misfortunes of a single $90B public company do not dictate the overall direction of share prices. In the case of CrowdStrike, the market, as reflected in that company’s share price, seems to see the need for clients to diversify away from a single provider in their space, and for governments to seriously question the monotonic strategic technology infrastructure exposure to a single company where a fat-fingered software update can wreak global havoc. CrowdStrike is being taken to the proverbial shed around back, but the rest of the market continues apace.

We are still left with the question of what could take this market out, but our concerns are ameliorated to a certain degree by market participants not burning the house down to light a single candle. We don’t think that means there is no risk, but we believe that the kind of risk that broadly hits capital markets will be systemic.

This is Not That

March 12, 2023 / Mark Sloss

One of the (very few) benefits of being in the business of capital markets and investing across more than three decades is the ability to quickly recognize the similarity of an event to something in the past. Or, in the case of this past week, the lack of similarity. The rapid unraveling of Silicon Valley Bank and the apparent encore of Signature Bank has people talking of 2008 and the Financial Crisis. It is actually hard for us to believe it has been around 15 years since the Crisis. It seems much more recently that we were standing with our colleagues watching Bloomberg screens of credit default swaps wondering who would fall next and what the likelihood was it would be our own employer. The whole system was unraveling. This is not that.

Superficially, there is enough in common to suggest history may not be repeating itself but at least it is rhyming. High-flying bank gets too far over its skis, customers and markets lose confidence, run on the bank, regulators step in and shut it down and look for a buyer. Looking another layer deep there is still some commonality – the bank failed at its most basic function, providing safekeeping of and access to customer money.

So, reasonably, people are concerned about contagion and a more widespread run on banks. But, unless some startling levels of as-yet unknown malfeasance or malpractice emerge to change the narrative, there is an important difference between what took down SVB and what took down Lehman Brothers, Bear Stearns, WaMu and others. In the depths of the Financial Crisis, the main problem was that nobody knew what bank balance sheets were actually worth. Complex securitized loan pools were valued based on assumptions and risk models that proved to be fragile or entirely wrong all at once. It wasn’t possible to look at these holdings and get even the slightest idea of what they were worth, which meant there was no way to understand how much capital the banks actually held against their depository and other obligations. The banks’ use of leverage also multiplied these unknowns making the consequences even more far reaching.

SVB on the other hand appears to be a good old fashioned case of staggering incompetence. Don’t get us wrong – that is no excuse. But in this case, it does not appear that the balance sheet of SVB cannot be valued. It is simply that they entirely blew the most basic and central internal role they needed to perform, which was to properly match assets and liabilities. They ended up with too many long-dated assets and short-dated liabilities and simply did not have the liquidity to satisfy customer demands that then blossomed into a run on the bank. By all accounts everybody knows what is on the balance sheet and what it is worth – and the answer is… not enough in the current market environment. Not zero, but not enough.

It also doesn’t appear that there is a quality issue like what plagued banks in 2008 where the securities on the books turned out to be far junkier than their ratings would suggest. They simply held too much high quality but long-dated Treasury and other obligations that got hit hard with the spike up in rates this past year. After the Crisis, the rules did change on what types of holdings counted and to what degree when assessing an institution’s capital adequacy. Treasuries are right at the top of the chart of holdings that satisfy those ratios. The bonds are still there, and there is no reason to think they wouldn’t pay out 100 cents on the dollar if held to maturity. But, SVB couldn’t sell them today to satisfy withdrawals for what they will be worth a decade from now. Again, basic asset-liability management seems to have eluded them.

Bank management may have assumed since cash was coming in hard and fast over the last couple years that liquidity was never going to be an issue, so they could step further out on duration to squeeze extra basis points of yield out of the balance sheet. A little stress testing would have shown that a meaningful rise in rates would hit the value of those long bonds, which meant everything rested on either the cash continuing to come in or at the very minimum their customers not looking for withdrawals in size. SVB, because of their business strategy, is unusually concentrated in its client exposure to the Tech and tech-adjacent sectors. It wasn’t a mystery that the whole Tech space was undergoing market stress, investors were tightening purse strings, and companies and their funders would be looking to tap their cash reserves to keep things going. They got caught in a simple squeeze – their principal clients needed to access liquidity at a time the bank couldn’t satisfy it without taking a hit on those assets.

As of late this weekend the regulators have stepped in and assured liquidity for all depositors, insured and uninsured. They do have a facility paid into by the banks that was set up precisely for this kind of situation. SVB (and Signature) is essentially defunct, and likely will be bought whole or in parts by one or more big, solvent institutions at a very attractive price and without having to assume the kind of risks banks faced buying the failed banks in 2008. In a bank run psychology does become reality, and even though the problems are not systemic in the way they were in the Financial Crisis, it is right and reasonable to be concerned about contagion. Customers could manufacture a crisis where one didn’t exist just out of fear. Regulators are doing the politically unpalatable and interceding in a way that will benefit a lot of unsympathetic parties in order to keep a very specific problem with a very specific group of institutions from blossoming into something much more damaging.

Dodd-Frank has never been popular, seen as too odious and heavy-handed and in the way of free enterprise in the view of industry stakeholders, and with the benefit of more than a decade in use it could definitely be improved. However, this past week serves as a graphic example of why it is necessary, and why regulation and supervision are essential to the orderly functioning of our financial systems. In the all-too-apropos words of the comedian Ron White, there’s no cure for stupid.

The Doomsday Glacier — It’s Not a Bond Villain’s Plot. It’s Worse.

March 31, 2022 / Mark Sloss

While many other things dominated the headlines from the Russian/Ukrainian conflict to inflation and policy response to COVID-19 Omicron part deux, something that was considered mostly unthinkable by scientists happened in Antarctica. According to the US National Ice Center (https://usicecenter.gov/PressRelease/IcebergC38): “(USNIC) has confirmed that iceberg C-38… has calved from the Conger Ice Shelf in the Wilkes Land Region of Antarctica. As of March 17, C-38 was centered at 65° 40′ South and 102° 46′ East and measured 16 nautical miles on its longest axis and 10 nautical miles on its widest axis. C-38 comprised virtually all that remained of the Conger ice shelf, which was adjacent to the Glenzer Ice Shelf which calved last week as iceberg C-37.” Eyes had been on another part of Antarctica over concerns about the potential collapse of the so-called “Doomsday glacier” — Thwaite’s glacier. But, Conger beat Thwaite to the punch with a break-away described as nearly the size of Los Angeles. Our attached chart from NOAA NCEI chronicles the decline in global sea ice just since 1979. When split into hemispheres, Northern loss is faster at -2.68% vs. “only” -0.33% for Southern (decadal trend). The fact Conger collapsed and Thwaite’s is trying is deeply concerning because it illustrates just how fragile the system is. Failure to adjust climate-changing activities and to start building resiliency and adaptation into industries and communities poses real threats to economic stability and prosperity and the performance of investments over a shorter-term horizon than many expect.

Welcome to the Wilde Capital Management blog

March 21, 2022 / WCM

Thanks for visiting our blog. Here you will find a wide range of content discussing market conditions and the world events that affect them, sustainability issues and Environmental, Social and Governance (ESG) oriented investing, and other topics that have a direct bearing on how capital flows around the world and how investing creates and even protects wealth. Please browse the blog at your leisure, and then visit the rest of the site by navigating the menus at the top of the window, or by clicking here.

Wilde Capital Management

WCM Chart of the Week for February 14, 2022

February 14, 2022 / Doug Wilde

The February 10^th inflation report for January was higher than expected. Key stock market gauges declined and were particularly weak toward the day’s close. Notably, all major inflation segments continue to rise — Services, Goods, and Food — with the exception of Energy, but oil and gas prices are up so far in February.

The benchmark 10Y UST yield rose above 2.0%, which has been an adverse trigger level for stocks in the recent past. The real yield on US Treasuries is more than -5%, a historic anomaly. Meanwhile, the US Federal Reserve will begin reducing its balance sheet in March. It currently stands at $8.9T, increasing over $5T since the pre-pandemic low of $3.75T, about a 134% increase since the Fall of 2019. Furthermore, the Fed is set to increase policy rates several times this year, perhaps as many as six times.

It is difficult to envision the Fed backing away from its intent to restrain monetary liquidity, especially considering that inflation trends appear to be gaining momentum. Consumer prices initially began to accelerate in March of last year, rising from 2% to about 4.5%, and had another upswing last Fall through the latest report. Headline inflation, now stands at 7.5%, a 40-year high level that very few, if any, at the Fed have had to deal with in a professional capacity.

Policy conditions are visibly changing, yet the equity market over the past couple of weeks attempted a rally from late January’s bottoms. The recent bid on US stocks could be value seekers, although the market is still fully valued if not overvalued considering a higher rate environment. It could be a response to more and more US states announcing a wind-down of COVID-era policies, or simply that capital needs a place to land and US stocks are more attractive than international equity markets or global bonds.

Absent a meaningful catalyst (we are still looking) we do not anticipate a sustained rally and expect the general trend of US equity prices to be range bound to downward. Investors must come to grips with a tighter monetary policy environment, higher interest rates and inflation. We note that other major central banks, notably the BOE, have increased policy rates, and the ECB is publicly debating the need to address inflationary trends on the European continent. And, many emerging market CBs have already embarked on a tightening cycle. [chart data from US BLS © 2022]

Charting COP-26 and the Path to Zero, November 5, 2021

November 5, 2021 / Mark Sloss

Yesterday a consortium of mostly Anglo and European countries signed a statement affirming a commitment to “deliver sustainable, green and inclusive economic growth to meet the challenge of decarbonising our economies, in line with limiting the global average temperature increase to 1.5°C above the preindustrial levels.” The statement covers six categories of targets — Support for workers in the transition to new jobs, social dialogue and stakeholder engagement, economic strategies, local, inclusive, and decent work, supply chains, and Paris Agreement reporting. The important thing we note in this statement is the recognition of the necessity of public/private partnership. The path to zero requires industry and market-wide activation of capital and corporate infrastructure in the private sector and regulatory and reporting frameworks from the public sector that facilitate the private sector’s work. This chart from a May 2021 International Energy Agency (IEA) report “Net Zero by 2050: A Roadmap for Global Energy Sector” provides an excellent overview of the business and industry targets that must be met with the facilitation and support of both governments and NGOs over the next 30 years. The signatories to the statement make sense in that these are many of the wealthiest industrialized nations that have both the capital to pursue this agenda and a high degree of responsibility for having brought us to the climate precipice. However, the lack of presence from Australia, China and Japan is concerning as they must help lead among the community of nations as the most developed and prosperous (polluting) countries of the Asia-Pacific region.

WCM Chart of the Week for August 18, 2021

August 18, 2021 / Mark Sloss

The Intergovernmental Panel on Climate Change (IPCC) released the Working Group I contribution to the Sixth Assessment Report which will arrive fully in 2022. Among the reaffirmed findings in the report is that we are already most of the way to the 1.5 degree Celsius threshold over pre-industrial global temperatures where climate-related damage becomes more widespread and harder to turn back. We wanted to examine what that means in practical human terms. According to NOAA (R. Lindsey, Jan. 25, 2021), we have seen 8 – 9 inches of sea level rise since 1880, and in some ocean basins nearly that much just since the beginning of the satellite record. Taking the IPCC findings into account and with NOAA’s own models, sea level could rise another foot over 2000 levels by the end of the century. The two images provided are from NOAA’s Sea Level Rise Viewer. The first is a view of the heart of the Northeast Corridor from Long Island Sound down to the Chesapeake at the current “Mean Higher High Water”. The principal shading illustrates the population vulnerability to sea level rise. The second is the same view under a 1 foot MHHW scenario. Note the amount of coastal inundation, particularly around high density and vulnerable populations. The amount of property and population at risk in human and dollar terms is staggering in this relatively concentrated area, and has implications for municipalities, commercial real estate, infrastructure, corporations, maritime interests, tourism, and residential neighborhoods, and all the supply chains and institutions elsewhere like banks and insurance companies that are exposed to that risk. Smart investing requires thinking about mitigation, resiliency, and adaptation, hallmarks of ESG investing and increasingly becoming part of mainstream investing.

WCM ESG Week — Theme 5: Climate Justice

June 18, 2021 / Julie Sorgi

Climate change has pervasive and profound consequences for our planet, economies, and cultures. The systems of climate do not discriminate across racial lines, income levels, or geographical locations, nor abide by governmental policies and regulations. But it is important to draw a distinction between the worsening storms, sea level rise, drought, fire, ice loss and mass extinctions that occur on a planetary level, and the injustice of more prosperous businesses, communities, and nations driving that climate change and imperiling already marginalized communities at home and abroad. We lay witness to social, economic, public health, and environmental effects disproportionately impacting vulnerable and underprivileged populations. We acknowledge these inequalities of influence, largely on minority and low-income communities, as climate or environmental (in)justice.

Continued increases in global warming contribute to already existing challenges in eradicating poverty, reducing inequalities, and ensuring healthy individuals and ecosystems due to higher food insecurity and reduced water supply, community income losses, lost livelihood opportunities, adverse health impacts and population displacements, and increased competition for arable land. Poverty and disadvantage are projected to rise in some populations due to increased global warming. Some of the most severe impacts of climate change and a lack of climate resiliency are expected to be felt among agricultural and coastal dependent regions, indigenous people, children and the elderly, poor laborers and urban dwellers in African cities, and people and ecosystems in the Arctic and Small Island Developing States (SIDS), dryland regions, and least developed countries (IPCC, 2018).

For example, land degradation refers to the deterioration of soil quality due to both natural and anthropic impacts, accelerated during the 20^th and 21^st centuries as a result of increasing agricultural and livestock production, urbanization, deforestation, and extreme weather events such as droughts and coastal surges. Land degradation occurs over 25 percent of the Earth’s ice-free land area, affecting 1.3 to 3.2 billion people, the majority of whom are living in poverty in developing countries (IPCC). Land degradation and climate change, both independently and in conjunction, have severe consequences for natural resource-based regions including higher threats of malnutrition, increased risk of water and food borne diseases resulting from poor hygiene and lack of clean water, increased respiratory diseases due to atmospheric dust from wind erosion and air pollutants, and spread of infectious diseases as communities experience lack of food production and are forced to migrate to more hospitable regions (WHO, 2020).

Furthermore, increasing global warming intensifies the exposure of small islands, low-lying coastal areas, and deltas to the hazards related to rising sea levels including increased saltwater intrusion, flooding and damage to infrastructure, loss of coastal resources, and a reduction in the productivity of fisheries and aquaculture. One global fishery model projected a decrease in global annual catch for marine fisheries of about 1.5 million tonnes for 1.5°C of global warming, with a loss of more than 3 million tonnes for 2°C of global warming. The risk of irreversible loss of many marine and coastal ecosystems escalates with global warming, specifically coral reefs which are projected to decline by a further 70–90% at 1.5°C and larger losses (>99%) at 2°C warming. Furthermore, changing ocean biochemistry due to increased acidification adversely affects marine species’ physiology, survivorship, habitat, reproduction, and disease incidence, and increases the risk of invasive species. Risks from vector-borne diseases, such as malaria and dengue fever, are projected to increase with warming in addition to potential shifts in their geographic range (IPCC, 2018).

In addition to global warming and changing ecosystems, global industries also contribute to environmental injustice. Oil exploration and drilling fields have produced severe impacts on indigenous peoples and vulnerable communities around the world who depend on healthy ecosystems to survive. Oil drilling in the Amazon basin spurs deforestation of the land, introduces toxic pollutants impacting indigenous peoples’ health and wellness, and allows for hazardous working conditions for local employees. Incursions into indigenous lands are frequent and have been recorded in more than 20 communities in at least 10 countries including the United States, Australia, Bolivia, Brazil, Ecuador, and Peru (UN, 2021).

Closer to home, labor groups in Louisiana have reported dangerous working conditions in oil refineries, as they emit numerous types of toxic chemicals including benzene, formaldehyde, hydrogen sulfide, sulfur dioxide, and sulfuric acid. Oil production companies, although permitted to release these chemicals to the environment in designated amounts, are plagued with accidental spills and leaks often exceeding the allowable volumes. This toxic contamination puts nearby communities at high risk of environmental health problems. Additionally, in regions where fracking is used as a method to extract shale gas, such as Pennsylvania, surface and well waters are continually contaminated with the toxic chemicals used in fracking fluids and petrochemical run-off including salts, heavy metals, and radioactive chemicals. Oil pollution contaminates both drinking and agricultural water supplies for livestock and irrigation, which has been found to be particularly detrimental in the Melut Basin of South Sudan in Africa (UN, 2021).

Oil refineries and other chemical releasing facilities are predominantly surrounded by minority populations. Communities located in close proximity to such facilities, coined “fenceline communities”, are exposed to various kinds of toxic pollution, and in the U.S. are disproportionately composed of African Americans, Latinos, and low-income groups. The highest concentration of U.S. oil refineries is located in the Gulf of Mexico, with one of the most notable fenceline communities residing outside Houston, Texas. Three quarters of the city’s residents live within three miles of the 191 hazardous chemical facilities and are known to be at higher risk for heart disease, cancer, and respiratory problems related to poor air quality, such as asthma and emphysema. The combination of lack of access to healthy food, high poverty rates, and increased exposure to deadly contaminants makes for a serious problem in fenceline vulnerable communities, especially African Americans. Fenceline communities are found in many states across the U.S. as well as globally (UN, 2021).

We have also observed a trebling effect with fenceline and other economically disadvantaged communities when climate change and environmental pollution collide. Storm surge, inundation, flood, and wind often cause this pollution to breach containment and further toxify neighborhoods and cities, waterways and water supplies, and farmable land as with Hurricane Katrina in 2005in Louisiana and Harvey and Imelda in 2017 and 2019 in Houston, TX. These types of climate-related disruptions cause communities to fracture as vulnerable people move to seek cleaner, safer, healthier, more sustaining situations. This destabilization can lead to diasporas, conflict and even war, as well as the disintegration of cultures and art. From port cities to open grasslands to the frozen tundra, the ability to be resilient and adaptive in the face of these environmental and climate forces requires access to capital and opportunity. Even better, developed economies taking their collective foot off the literal and figurative gas pedal will help to manage down the risk and give these at-risk communities a shot at better outcomes. Climate justice involves doing both. Less extractive and more regenerative. Systems that work on a global level for the benefit and welfare of all.

Climate justice gives us the words and concepts to frame and then address countless intertwined challenges that affect access to nutrition, access to clean water, access to education, access to economic opportunity, an expectation of peace and prosperity, and the ability and in fact the right to care for our collective legacy and culture and gift it to the generations that come after. Our final discussion for ESG Week is with Professor Warren Senders of the New England Conservatory of Music. We explore the interconnectedness of climate science, indigenous wisdom, and world art and culture, and our collective responsibility to care for the planet we have, and to care equitably and justly for the people on it.

https://www.who.int/news-room/q-a-detail/climate-change-land-degradation-and-desertification

https://www.ipcc.ch/site/assets/uploads/sites/2/2019/06/SR15_Full_Report_High_Res.pdf

https://wedocs.unep.org/xmlui/bitstream/handle/20.500.11822/35417/EJIPP.pdf

WCM announces ESG Week — June 14 – 18, 2021

May 19, 2021 / Mark Sloss

5 days. 5 topics. All ESG. How do we take steps toward a more prosperous, just and regenerative world? WCM ESG Week coming June 14 – 18, 2021. (1) Banking the Un/der Banked; (2) The Business of Human Trafficking; (3) Medical Justice and Access to Healthcare; (4) Regenerative Agriculture; (5) Climate Justice.

Watch our introductory video here, and follow us for more details to come on the week and each theme.