September 16, 2022
The Return of Credit & Cash Flow Investing:
Central Bank QE, ZIRP and NIRP have created massive multi-asset bubbles. These debt-financed bubbles across many industries, are and will continue to pop, and the subsequent re-pricing of these credit markets will be very bullish for credit opportunity in markets. Old fashioned credit and cash flow work, will reward those patient investors with new cash to invest. Maybe market participants should get out their old “Inside the Yield Book” by Homer and Leibowitz, for a refresher course on the time value of money. As a result of cheaper and cheaper credit markets, equity markets will simply become an unattractive and an unpredictable place to invest.
The page is turning, and the only way out is through the “flaming door” of rising interest rates. The Fed and other Central Banks led the world into this easy money environment, they will have to try and gently lead the world away without something breaking. Over the years, as these unconventional policies have proved more and more fruitless, the Central Planners simply added more, as Jim Reid from DB described” “Spinning Plates” from their newfound policy toolboxes. Unfortunately, inflation called their hand.
Nassim Nicholas Taleb’s recent tweet sums it up perfectly:
“Basically, experience in finance with a discount rate near zero is like having studied physics except without gravity.”
This will prove to be a time of opportunity for credit and cash flow investors. Those investors who know how to invest in negative trending markets will thrive.
June 10, 2019
Pemex – Is the Well Running Dry?
Global oil prices are down 20% from their recent geopolitical risk rally high, oil production in Mexico continues its decline, and the cost of funding for Pemex is on the rise. All of these trends paint a dire picture for Pemex, and ultimately Mexico’s government finances.
In a recent report, Morgan Stanley analysts referred to oil as the new aluminum. They suggest that deflationary forces are gathering momentum, and that the medium-term outlook for oil prices is to trend lower. They site potential shale growth of > 1 mb/d per year all the way out to 2025, and with break evens in the $40-45/bbl. range, this US region will continue to attract larger amounts of global oil capex supporting this growth. In addition, they state that in order to remain competitive, sovereign taxes on national oil companies will have to decline. This will further lower the cost curve around the globe, which will increase supply.
Recent downgrades by both Moody’s and Fitch place debt of Pemex in a very precarious position. With ratings now just a hair above junk bond status, financing costs are increasing and the potential liquidation of debt positions by investment grade only holders is a risk. At $106.50 billion, Pemex is one of the most debt laden companies in the world. Total proved reserves of 6.8 barrels of oil equivalent(boe) at December 31, 2018, represent a reserve life of just 7.7 years. Stable to higher oil prices might allow Pemex to muddle along, but if oil prices fall back to late 2018 or even early 2016 lows, the finances of Pemex will be heavily strained. How will Pemex stabilize or increase oil production from current levels to match growth as we have seen in Russia and the Permian basin, instead of following the path of Venezuela?
May 23, 2019
Will China Call Trump’s Bluff?
Expect a long and protracted war between China and the USA on trade, intellectual property rights and geo-political posturing. It is our view that China will challenge this administration, and will not back down from its current position on trade and other issues. The $64,000 question is what will China decide to do with its $3 trillion in foreign exchange reserves? In the past 15 years, China has directed some of its foreign currency reserves away from the USD by increasing five-fold its holdings of gold from 10 tons to 60 tons, and has built and financed infrastructure projects and extended direct loans to Latin America, Africa and other areas of interest. China, with its large pile of reserves, its importance to the global supply chain, and its ability to restructure-if necessary, internal debt, is in a unique position to challenge the US$ reserve currency status. We do not believe that China will succumb to US demands and lose face, but rather, will dig in its heals with the strategy that global financial chaos will result in the loss of the 2020 election for Trump.
On rare occasions, global financial markets experience both a strong USD$ and higher Gold prices as investors seek safe havens. It appears as though we are at the door step of this trend once again.
In the following pages you will find various charts highlighting China’s ability to withstand a long and protracted trade war with the United States.
May 13, 2019
A Perfect Storm
As evidenced by the two charts below, Pemex/Mexico is facing a perfect storm that could result in a massive unwind of both foreign investment in Mexican local currency debt, and foreign holdings of USD$ denominated Pemex debt. AMLO seems to have the backing of the general population, but has lost most support from the Mexican business community, so internal financial allies are few and far between. A decline in exports to China as a result of the current US/China trade war will only add fuel to the fire, and exacerbate an already imbalanced structural situation.
May 10, 2018
AMLO – Andres Manuel Lopez Obrador – “Mexico’s Donald Trump”
The citizens of Mexico have thrown their support behind Andres Manuel Lopez Obrador, who
currently holds a 15-point lead over the next candidate with 46.5% of the vote in the
Bloomberg poll-tracker. As Bloomberg states in a recent article, “Big Business Hates AMLO
and the Voters Don’t Care”. Similar to voters in the 2016 US Presidential election, voters in
Mexico have become exhausted and frustrated with promises that are never delivered,
worsening daily living conditions, and a lack of trust in the elite who govern their country.
Since the election of Donald Trump in November 2016, AMLO’s support has increased while
candidates Ricardo Anaya and Jose Antonio Meade support has either declined or held steady.
Barring an unforeseen event, AMLO is a shoe in to win the July 1, 2018 Mexican Presidential
Election.
AMLO’s has vowed to root out corruption, and place Mexico’s interests first. This rhetoric is
similar to the populist sentiment that elected Donald Trump to the US Presidency. AMLO has
stated that he will renegotiate unfair Pemex contracts, review all other government contracts
with the private sector, and cancel or make changes to the massive Mexico City airport
construction project. These comments have created a bit of chaos with the Mexican business
community’s strategic planning and business as usual environment. In short, the status quo
leaders of Mexico’s political and business communities, are preparing for a very difficult and
turbulent 6 years under an AMLO presidency.
AMLO’s lead in the polls, uncertainty over the renegotiation of NAFTA, increased security at
the US/Mexican border-combined with stricter immigration policy, and general weakness in
emerging markets due to higher rates and tighter lending conditions, have all painted a picture
of tension and nervousness in cross border capital markets, as shown by recent weakness in the
MXN/USD$ exchange rate, and an unsteady Mexican Bolsa.
What will be the political, economic and social landscape under an AMLO Presidency – relief
that needed reforms are being enacted, or chaos as a result of the upheaval of business practices
going back many decades?
Respectfully yours,
Emerson Letter Editor
