Rondonomics

"The Germans make everything difficult, both for themselves and everyone else" - Goethe  The German economic machine has many admirers. They seem to operate in a beautiful fusion of capitalism and socialism resulting in a cohesive and productive society. Their European counterparts run unsustainable budget deficits, while Germany registers a capital surplus (greater than even China's). The southern periphery struggles with a rigid labor system; Germany's dynamism and highly touted apprenticeship programs churn out productive workers. Unemployment in Germany is under 4%, while in Greece it is over 23%. In the United States, the problem is not so much the lack of jobs but the lack of worker skills to fill open jobs. Many look to German training programs as a future model. In an age of blustering politicians who accomplish little, Angela Merkel is commended for holding the fabric of Europe together while taking tactical risks. She has navigated bailing out insolvent Eu...

The inevitable death of brick & mortar retail has been in the news for years. Even if you don't watch TV, take a drive through any suburb and the misery is unavoidable. You will see malls that used to have big box anchor tenants and empty parking lots. If you drive closer, you might mistake the big empty cement buildings for the headquarters of a dictator who rules in some future dystopia. Everyone knows Amazon is the company that is transcending business in every sector it's tentacles touch. When I come home to my apartment at night, I am surprised when I DON'T see a package from Amazon Prime waiting for one of my fellow tenants. They could have ordered that package 24 hours ago, what kind of crazy person would take time out of their day to go to a store and buy clothes? Moody's recently released a report highlighting the pressures ex-Amazon retailers are facing, citing "intense competition, erratic management, and limited financial flexibility." Tradit...

Amid the seemingly endless barrage of negative or embarrassing news stories during the Trump administration, a ray of hope may be shining from the Middle East. The Iraqi city of Mosul has been liberated by a coalition whose only commonality may be it's determination to eradicate the scourge of ISIS from the geopolitical landscape. ISIS leader Abu Bakr Al-Bagdadi, has reportedly been killed, his jihadist soldiers sent scurrying from their city strongholds and into the hinterlands. To some, victory or something close to it, appears to be in short order regarding the United States versus Islamic Jihadism. A closer look beyond the surface reveals cracks and failures of logic. The narrative of joint US and Iraqi forces teaming together to push back ISIS ignores the multipolar realities of the military effort to recapture ISIS controlled lands. Iranian backed Shia militias and Kurdish forces have played an instrumental part of recapturing land in both Iraq and Syria. This creates ser...

The election of Donald Trump as President of the United States on November 9th, 2016 was a shock wave for the political landscape as well as financial markets. Stock prices, bond yields, and inflation expectations soared. Even if you believed as I do, that these market moves were already underway on the back of Chinese reflationary efforts, the acceleration of the moves was striking. A businessman president and a Republican congress looked set to pass massive tax cuts, slash burdensome regulations, and deliver badly needed infrastructure spending. These collective actions would release "animal spirits" and a CapEx revival. Financials, Industrials, and small-caps outperformed and the 10 year US treasury was on it's way back to 3%. US Small Business Optimism exploded, and for a few short months it appeared that reflation, CapEx, and tax cuts could return the American economy to its former glory. Maybe after a few years, 3 - 4% growth would again be possible. Whatever you th...

"It was the best of times, it was the worst of times" - Charles Dickens Over the past few years, income inequality within developed nations has come to the forefront of contemporary political and social debate. While the problems of inequality between individuals and groups of people have been frequently discussed, the increasing inequality between companies has not. Nowhere is the stark contrast of fortunes better exemplified than the US credit market. The US economy has registered years of economic growth, credit index cash levels look flush, interest coverage ratios are manageable, and global investors insatiable demand for yield has provided adequate financing. Despite the natural resource driven spread widening, US credit index spreads have marched back to ultra-tight levels. Besides the lack of relative value, is macro level credit data hiding weakness? The devil is always in the details... 1. US credit index cash levels are deceiving - the top 5% of companies h...

During the past few years, as investors have searched for yield, private equity provided attractive returns in exchange for illiquidity risk. Regulations stifling Sales & Trading at big banks, combined with passive investing outperforming active has driven talented young financiers into the private equity field in search of riches. Despite the recent financial deregulation push from the Trump administration – during the 2016 election it seemed both candidates agreed on getting  rid   of  the “carried interest loophole” – the holy grail for private equity investors. Is this a threat to the private equity industry?   The current carried interest tax rate is the same as the capital gains tax rate of 20% (was 15% throughout the 2000s as part of the George W. Bush tax cuts and was increased by 5% in 2013 as part of a broader deal to raise the US debt ceiling) Theory for carried interest:  Same as theory for a lower tax on capital gains: In ex...

Allegations abound that Brazil’s president, Michael Temer, has been caught on tape encouraging the payment of “hush money” to Eduardo Cunha. The former congressman is currently serving a 15 year jail sentence for his role in the Petrobas scandal. Prospects for much needed fiscal reforms have been thrown into a cloud of uncertainty. The BRL and Brazilian rates sold off sharply while Brazilian equities plummeted. Predicting the legal implications of Brazil’s latest political scandal may be impossible. Investors have been given yet another reason to wash their hands of the once great star of the EM complex. They see a country roiled by corruption, anemic growth, unsustainable public debt, and a rigid labor market. Yet below surface level, there are reasons to be optimistic of the nation’s future. Corrupt politicians being brought to justice is a testament to the strength of rule of law. Inflation is finally below the central bank’s target of 4.5% and wage growth is picking...