Author: the_red_deer

I previously journaled a bit about the BlockFi insolvency (which continues to unfold). The summary is BlockFi had a razor thin equity layer backing a highly levered balance sheet (with the assets being speculative crypto coins).

Today the WSJ reported that Celsius, “a giant on a pitch that it was less risky than a bank with better returns for customers.” I remember looking at a company called Eco, which promised ~4-5% yields on cash, but with a murky explanation as to where the income was sourced from, though it was clear it was from derived from crypto activities. It seemed too good to be true, and I suspect Celsius was a high octane version. Apparently Celsius redirected *revenue* back to customers in the form of yield – driving double digit cash yields.

Back to the leverage, the WSJ indicated that the company had $19B of assets and $1B of equity. Yikes. I say *had* because it’s obvious now that the old school Wall Street restructuring guard are in the mix (Alvarez & Marsal), meaning they are likely near or completely insolvent right now.

What to learn of this? The story of bubbles and bubbles popping are a feature of human psychology and groupthink. While it is happening, it’s really hard to know if there is excess and whether you are the odd person out missing the boat. However in retrospect, the story is often the same, with overstretched expectations fueled by leverage that is hard to see from the outside. But alas, here we are and it’s likely we will continue to see crypto ecosystem constituents reveal themselves as insolvent due to leverage in the system.

Sources:

https://www.wsj.com/articles/defis-existential-problem-it-only-lends-money-to-itself-11656503840

John Zito, effectively the guy that runs Apollo credit from an investment perspective, was on the Prof G podcast recently.

Since I don’t traffic in credit as a primary focus, I found it an interesting overview of the broad state of credit from his view. Specifically, he outlined a few notable items:

• Large cap credit, such as Oracle, trading as low as 65% of par due to low coupons and rising rates (I couldn’t find ORCL bonds in the 60s…), increasing pull-to-par opportunity
• Few credit / structured equity originators exist for flat to negative EBITDA growth companies, as most credit players require standard debt service ratios to pass investment muster
• Positive outlook for credit going forward given government tailwinds driving higher rates and lower liquidity / animal spirits

I for one am excited to deploy more into credit with the experienced sponsors over the next year.

Many people have reached out over the past year in the context of what to invest idle cash in, prompted by a headline article describing how their cash is melting in their bank accounts. Case in point:

My personal view is holding cash over a long period of time that is not strategic in any way is not an optimal decision. Cash can be strategic as an asset allocation, a rainy day fund based on personal circumstances, or an earmark for a large purchase in the near / medium term. Here’s the S&P500, high yield bonds, and investment grade bonds over the past 10 years – an effectively zero percent interest rate environment (including this year’s bond rout):

Morningstar had a nice article out this past week (“Cash as an Inflation Hedge – Revisited”) which countered the idea that holding cash today in a rising rate world isn’t the worst decision. As rates rise, everything tends to go down – stocks and bonds. Other asset such as commodities, true “hedge” fund strategies, etc. can provide some uncorrelated return. But here’s cash vs all in this year’s regime change:

Sure, you’re losing money holding cash, but not as much as mindlessly deploying into a market where the cost of capital is rising just to not burn a couple percent of inflation on your cash.

That said, like mentioned above, I do think that eventually a decision point must come where cash gets invested, or it does end up being trash.

This morning Roe v Wade was overturned. From what I understand, the legality is now pushed to the state level. A few days ago, on the back of the snake oil book I read and in currently reading a book largely centered around the 1800s and early 1900s, I wondered whether the current lack of a center in the US can result in each side resolving to move farther away from one another.

Tangibly the worst case scenario is a separation of the nation into two parts. But I think practically people care more about not being in a wholesale multi-decade depression than the reasons to separate. More likely, in my own mind, was the idea that the federal government’s authority is reduced by some way, allowing states to make their own decisions. Perhaps it’s shaded by the lines of today’s abortion ruling:

With today’s decision, perhaps that is a taste of how the future decades may play out. Perhaps one group of states has a certain social and economic regime, while another group of states has an “opposite” regime. Over time some migration to preferred states based on values occurs. In this, I assume that there is no good resolution between the divide that exists today. It’s unclear to me how trust is restored in federal lawmakers, not that state or local lawmakers are any better – they are in some cases probably far worse.

Ultimately, for the interests of investing, corporations like stability, it gives them confidence to invest in long term projects. Today’s growing divide may be a contributor to one of the many geopolitical de-stabilizing factors that make the future economic outlook less dependable than it has been in past decades.

Citadel is moving its headquarters from Chicago to Miami. It’s a blow to the city as a metropolis of trading. Citadel is a bonafide heavyweight in trading all sorts of products, manages north of $50B in opportunistic capital, and Ken Griffin has been a face of Chicago for decades.

More broadly speaking, it is just one example of many of companies finding frustration with local government, political traps, and lack of forward municipal progress. If the old guard of US industry continue to move in the same way, it’s just signal of greater shifts to come.

There’s all sorts high multiple assets that depend on this not happening, namely urban real estate of all kinds in these city centers. Our former condo in San Francisco was likely a <2% cap rate asset, will it be that in the future?

Just finished reading this book over the past few days:

In was good in the sense that it forces me to zoom out a bit and consider some of the un-discussed tail risk that may exist in the world. It was bad in the sense that it basically says the world is going to hell in very short order, buy a farm in rural mountains and hide.

Knowing this book is essentially snake oil is fairly simple as the author describes decades forward predictions with “will happen” and “inevitable” versus outlining potential scenarios with probabilities. He also opines on everything from global debt to naval superiority to near “certain” demographic changes in the future. Nobody is that knowledgable in a way that can predict the future.

In any case, as mentioned, it does breath a bit of caution that punches outside the usual current news cycle of inflation and recession, which is getting quite stale at this point.