The DailyAlts Playbook – A Ponzi Scheme that Bilked Berkshire Hathaway, Infrastructure Expectations, Larry Fink’s Climate Change Letter, and Bridgewater’s Take on Gold

January 15, 2020 | Insights, News, The DailyAlts Playbook

THE DAILYALTS PLAYBOOK

January 15, 2020

Today, the DailyAlts Playbook talks a Ponzi Scheme that bilked Berkshire Hathaway, infrastructure expectations, Larry Fink’s climate change letter, and Bridgewater’s take on gold.

PRIME OVERVIEW

This morning, markets are keeping a close eye on any last-minute developments between the U.S. and China on trade. The two nations are set to sign a Phase One accord today in Washington. We haven’t seen the text of the deal just yet, but we do know that it’s a rather thin document. We also know that it will leave tariffs on roughly two-thirds of imports from China and could easily fall apart if China doesn’t address currency, IP, and trade balance issues. After the two sides do sign a deal, expect a lot of questions about the timeline for the second phase, which may not come until after the 2020 election.

Markets will continue to parse through earnings reports this morning with a special focus on Goldman Sachs, BlackRock, and Bank of America. The Federal Reserve will also release its Beige Book this morning.

We can scratch optimism over Germany’s economy off the list of early 2020 wishes. This morning, new economic data showed that Germany’s economy hit its weakest pace in six years. That news complemented data from England showing that inflation isn’t going any higher in the world’s sixth-largest economy. With Brexit on tap and low inflation, we’re likely seeing a path for another interest rate cut by the Bank of England. Finally, the Swiss Franc continues to surge amid ongoing jitters across Europe. The currency pushed past the 1.075 per euro mark for the first time since April 2017. The rally came after Washington placed Switzerland on a currency watchlist and encouraged its leaders to shift its policies. Ongoing growth and inflation may force Swiss central bankers to buy foreign currency to stop the franc from continuing its breakneck rise in recent weeks.

MORNING MOMENTUM

“BEAUTIFUL MONSTER”: That’s one way to describe economic policy. President Donald Trump is prepared to sign a Phase One trade deal with China Wednesday. Trump has called the deal a “Big Beautiful Monster,” but it’s not a standard trade deal. At just 86 pages, the deal centers primarily around U.S. commitments to halve 15% tariffs, China’s promises to buy another $200 billion in U.S. goods and services in the next two years, and structural reforms around China’s currency and economy. It doesn’t eliminate tariffs, but it does promise to hit Beijing with punishments should it not address the trade balance, intellectual property, or technology. But it will come with an awkward “9 x 12” picture of U.S. and Chinese trade leaders later this afternoon.

ROADS AND BRIDGES: The Tuesday night debate was the political equivalent of Ambien and warm milk. The light fireworks centered around foreign policy and several candidates expressed their willingness to challenge President Trump on the economy – which will likely be the center of his campaign. That said, infrastructure didn’t get much time – which is surprising given that both Republicans and Democrats have plans to rebuild American roads, bridges, and railways. And the markets expect that a big overhaul is coming. According to Preqin, the infrastructure fundraising market hit a new record in 2019. Investors helped close 88 funds at $98 billion. At the start of the year, the research firm said a record 253 funds are now targeting $203 billion.

RECESSION, WAR, ETC: You’ll be shocked to learn that Dr. Nouriel Roubini is worried about a global recession, stalled growth, and geopolitical tensions with Iran. He places the odds of a full-scale war with Iran at 20% (doesn’t that seem high?) and a return to the status quo before the killing of Quds Force commander Qassem Suleimani at just 5%.

ACCRUED INTEREST

2117 OR BUST: The good news is that Oxford University is getting creative about how it raises money. The bad news is that none of us will be around when its new bonds finally mature. The Millenium-old university is selling sterling bonds that will mature in 2117. It’s just proof that you can get away with anything when everyone is so paranoid about the Brexit. The school’s 100-year bonds will carry an initial price of about 110 basis points above the government bond rate. In fact, the yield has already declined from 2.544% to 2% due to the school’s reputation, weaker Pound, and expectation that it will attract global students during the Brexit fallout.

REALLOCATION: This week, we’ve discussed BlackRock’s increasing shift related to climate change. After months of criticism over its fossil fuel investment policies and protestors gluing themselves to its London office doors, Chairman and CEO Larry Fink has taken a more proactive stance on sustainable investing. Fink sent an annual letter to CEOs and argued that sustainable investments that address climate change will provide better returns in the future. Fink wrote that “In the near future — and sooner than most anticipate — there will be a significant reallocation of capital” due to climate change. Naturally, a swath of climate advocates argues that he doesn’t go far enough in his letter, because it seems that ]some people want us to go all the way back to sustenance farming.

CARRIED INTEREST

BOUNCE BACK: The Barclay Hedge Fund Index showed that the industry had its best year since 2013. But, you already know that the sector dramatically trailed the broader S&P 500. The HFI came in at 11.2% compared to the 31.49% return for the S&P. Hedge funds finished December up 1.73%. Sol Waksman of BarclayHedge cited trade developments between the U.S. and China, the House passage of the USMCA, and Japan’s fiscal stimulus plans as positive tailwinds for the market. Emerging market funds had a very positive December. The Emerging Markets Latin American Equities Index showed a 13.68% return for the month.

TESLA TRIUMPH: Tesla is on the verge of hitting a $100 billion valuation. It the stock hits $554.80 and holds for six months, Elon Musk will receive the first of several shareholder payments worth roughly $350 million. Musk’s payment plan came to life in 2018. The structure replaced regular salary, bonuses, and share plans. If he gets it, he should send a Thank You letter to the Federal Reserve.

QUOTES OF THE DAY

“There is so much boiling conflict.”

That’s Bridgewater co-CIO Greg Jensen offering his thoughts on why gold prices could hit $2,000 or more. Jensen told the Financial Times that geopolitical uncertainty and inflationary policies could press gold at least 30% higher. The sentiment appears to align with Ray Dalio’s “paradigm shift” statements a few months ago. JPMorgan Chase data shows that 49 central banks cut rates 71 times in 2019, and more could come if weakness continues to emerge. That said, Bridgewater could also be sitting on a massive amount of GLD and seeking support.

 

“Private companies can now get ample funding and don’t need to do the IPO route.”

 

That’s John Finley, Blackstone Group’s chief legal officer. Bloomberg writes that private equity shops like Blackstone and Apollo are stopping just short of calling out the SEC. Their argument is that private investment strategies are beating the public markets, but current regulations don’t let retail investors get in on the action.

ACTIVE MANAGEMENT

STILL SAYING “NO:” Hewlett Packard won’t accept the latest takeover offer from Xerox, despite Carl Icahn’s latest push. In a letter, HP executives say that the offer undervalues the company. Xerox has secured a $24 billion loan to buy HP in its quest to create the world’s largest printer company. In a letter to Xerox CEO John Visentin and Chairman Keith Cozza, its leaders said the Xerox loan fails to “address the key issue – that Xerox’s proposal significantly undervalues HP – and is not a basis for discussion.”

ACTIVIST DEFENSE: The top activist defense legal shop in 2019 was Vinson & Elkins. According to Bloomberg, the firm was the legal adviser to 27 firms last year, including the very public battle over Anadarko Petroleum. In addition, Wachtell, Lipton, Rosen & Katz had a successful year as well. The law firm represented firms that faced activist stakes worth $12.9 billion.

LIABILITIES

INSIDER FIX: The House of Representatives has closed the so-called 8-K trading loophole. Company executives would no longer be allowed to purchase stock ahead of the disclosure of significant events. In a rare bipartisan effort, House representatives voted in favor of closing the loophole 384-7. Congressional action was deemed necessary because “the SEC doesn’t have authority to ban somebody from insider trading here,” according to Joshua Mitts, an associate professor of law at Columbia Law School. The current loophole gives executives a four-day advantage to buy the firm’s stock before their company announces a significant event via an 8-K.

ANOTHER DAY, ANOTHER SCHEME: DC Solar Vice President Ryan Guidry is facing 15 years in prison for a massive Ponzi scheme that defrauded investors of roughly $1 billion. DC dolar billed itself as a manufacturer of solar generators for emergency power. The generators were marketed as solutions for cellphone companies or emergency lighting at sporting events. From there, a bizarre Ponzi scheme began around the leasing of these products. Over eight years, the firm engaged in $2.5 billion in investment transactions to pay early investors. Warren Buffett’s Berkshire Hathaway lost $340 million in this scheme.

BOOTSTRAPPING

Stephen Docherty, the head of global equities at Aberdeen Standard, is stepping down for “personal reasons. He joined the $526 billion firm in 1994. His deputy Dominic Byrne will take over his position.

Blackstone Group has hired Gilles Dellaert to run the alternative investment manager’s $60 billion insurance business. Dellaert is the former co-president and CIO of insurance company Global Atlantic.

SOCIAL RESPONSIBILITY

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ABOUT THE DAILYALTS PLAYBOOK

Garrett Baldwin is the author of the DailyAlts Playbook.

An economist and author based in Naples, Florida, Garrett has an extended history of financial analysis, business journalism, public relations and consulting experience in hedge funds, private equity, alternative investments, housing policy, commodities, and public equity coverage. He holds degrees from Northwestern University, Johns Hopkins University, Purdue University, and Indiana’s Kelley School of Business. He also has a Certificate in Global Business from Harvard Business School.

An avid Baltimore Orioles and Buffalo Bills fan, he would prefer to discuss other sports, please.

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