It’s that time again for Dechert’s CrunchedCredit Annual Golden Turkey Awards. In a year made most remarkable by the extraordinary performance of the US economy, idiocy, silliness, pigheadedness and stupidity have tended to be somewhat obscured by the economic good news machine. At the other end of the spectrum, the continued high volume of outrage over almost everything from both the left and right (and I’m sure the middle would do their fair share here if there was anyone at home) makes it harder to suss out the truly memorable and award-winning, but it’s our job to try. As we have said in the past, this would be really hard if the world actually behaved in a predictable, rational, Newtonian universe sort of way, but blessedly it does not.
So before we all over indulge in food and wine and achieve that zen-like state of consciousness that can only be attained through Buddhism, turkey dinner, a chapter from Ulysses or living in Malibu, we should take a moment to honor the profoundly dumb and silly. With that said, here’s our list for 2018:
The Yelling Fire in the Theatre Award goes to…pretty much all of our elected representatives. Stop shouting at us, would you please? When everyone is outraged over everything from whether a presidential wannabe has 1/1024 Native American blood to whether this President has behaved badly in the past (that’s news?), it gets increasingly hard to discern what really matters. When everything is an emergency, nothing is.
The Imitation is the Sincerest Form of Flattery Award goes to…Italy which, having elected a very weird left-right/north-south coalition form of government this year, is doing about what one would expect from such a political platypus…being incoherent. That can’t be a good thing, no matter how you look at it. But last month, under pressure from Brussels over its potential cap-busting budget for next year, Vice Prime Minister Giuseppe Conte announced that Italy was simply following in the steps of Mr. Trump’s America and would spend its way and cut taxes out of his current difficulties. Moreover, he helpfully suggested that all the other Europeans should applaud his genius (another very stable genius?) because they undoubtedly would be following in Italy’s footsteps soon enough. First, let’s begin by noting that invoking Donald Trump to convince European aristos to do something is probably not tactical brilliance, but as we observed a few weeks before, someone needs to give these folks a quick lesson in basic economic theory. Hello, Italy! You don’t control your monetary policy. What might work for the owner of the world’s reserve currency (however much that notion distresses both allies and adversaries, it remains true), ain’t gonna work for Italy. If this isn’t already a turkey, it certainly a turkey egg.
The Hope as a Strategy Award goes to…the United States Federal Reserve, which appears to remain clueless as to what will happen as it begins to significantly unwind its balance sheet. The Fed’s balance sheet had been in the trillion dollar range for decades before 2008 and it’s been in the $4.5 trillion range for the past six or seven years. The Fed apparatchiki began last year to roll it back and that effort is accelerating. Already high quality liquid assets in the banking system are diminishing in an unplanned way. While this effort to shrink the balance sheet when the sun is out does seem commonsensical, we all really know, don’t we, that this is the equivalent of jumping off the high board and wondering whether the pool is filled with water. The Fed is neither telling us to hold our hats, nor telling us to gird or loins or strap one on. Indeed, they are saying, “No worries!” Now, we are not blaming them for not knowing what will happen when this is done, because no one has ever done it before, but let’s show a bit of humility! Won’t markets freak out if the money supply rapidly contracts? The money supply is a funny and complicated thing. M3, one measure, hasn’t been tracked by the Fed since 2006, because it was apparently…annoying. Maybe we should simply stop looking at the money supply at all and dispatch those pesky M1s and M2s to the dustbin of statistical irrelevance where M3 resides. If we don’t look, we won’t get upset. What we don’t know won’t hurt us? Let’s just hope for the best. Hey, that’s a strategy.
The Orange Swan Award. A repeat award winner to the public for electing Donald Trump as our president while half the country (or thereabouts) thinking he’s terrific and half the country thinking he is the spawn of hell (Satan strongly denied this). We are still trying to figure out what that all means, and certainly the 2018 elections didn’t make this much clearer, but it really can’t be a good thing if half the country now hates and disparages the other half for their views on this dude. This gives religion and global warming a run for their money as things which may not be discussed in polite company. We really will soon be back to discussing the Kardashians and the weather and the sad state of the NY Football Giants.
These Prostitutes Should Drink More Responsibly Award goes to…the Treasury’s continued effort to fix the Volcker Rule. First, we’re not kidding about the award here. The United States government was recently reported to have actually spent $2.6 million last year to encourage sobriety among prostitutes. I promise that we don’t make these things up, but even I, a jaundiced critic of our government’s many inanities, am impressed. Here’s one closer to home – the government recently refloated a proposal to “fix” Volcker. The Treasury gave this a shot last summer and the industry threw up all over it, as indeed it actually made the problem worse. This is a solution in search of a problem. Market-making and fund investments by banks had zero to do with the Great Recession. Stop it. Stop wasting my money. Imagine the cost! Legions of bureaucrats, meetings, free lunches, bagels and donuts without end, study groups, impact statements, expert testimony, argh! I am singularly unable to discern a strong connection between tipsy prostitutes and America’s strategic interest, but that’s probably my sorry lack of acumen. If our government says it’s important, it’s bound to be, right?
The Here Be Dragons Award – Part II goes to…the Brexiteers. The old adage in the law is never ask a question to which you don’t know the answer. While the hubris of governments and their apparatchiki is world renowned and a constant, it would be nice to think more folks had at least a thought as to the exact path on which this smelly camel would pass through the eye of a needle before voting to leave. Brexit seems to be in a place now where there is no good outcome. The British government will self-immolate regardless of whether they come up with a stopgap Brexit plan, or a hard Brexit. Note to my colleagues in London, if this works out badly, you might consider the alternate pleasures of Dublin or Paris, but as we have observed before, they all speak French there. Honest! Similarly, regardless of where this comes out, it will remain a massively divisive and disruptive issue across Europe, where many seem to be cluck-clucking with a gleam in their eye and enjoying the whole Brexit mess in a schadenfreude sort of way. Who loves Perfidious Albion, and in fact there may be some political gain to be had here. Isn’t that sad? Hey, but good news for us. Brexit is scheduled for Friday, March 29, 2019 at 11 pm London time, that’s six pm for us and perfectly timed for the evening news.
As we said in a recent commentary, if the UK really didn’t like all this Pan-European kumbaya, all it had to do was wait a bit. This thing is breaking up anyway.
The Self-Inflicted Wound Award goes to…the Financial Account Standards Board (FASB) (admittedly an often visited punching bag of ours). My guess is you didn’t know this, but apparently during the time of the Russian Empire, it was very common for potential draftees to injure themselves to avoid getting drafted. It was so common it had a name. It was called “Abstinence” (which seems an odd choice of words and it has nothing, to my knowledge, to do with sober prostitutes. See above). The trick with Abstinence was to make certain you shot yourself in the foot, not the head. Both would be effective strategies for draft evasion, but the latter would certainly limit the enjoyment of the celebratory dinner. Our version of the self-inflicted wound is a little less dire but nonetheless meaningful. FASB is continuing to push the so-called Current Expected Credit Loss Rule which becomes effective in 2020 and which even now is requiring banks to change their policies. Incredibly, this provision would require a lender, at the time it makes a loan, to immediately book a loss. Now this is certainly counterintuitive but while I am sure the self-appointed accounting consigliere might say that my mind is insufficiently subtle to understand why this is important, but sometimes, something is counterintuitive because it is just plain dumb. I have always thought the whole purpose of lending is to make money and not lose it. Apparently, FASB has concluded that our nefarious lenders actually know their loans are shit from the beginning and make them anyway. We’re going to show them. First, we’ll all have to go through this communist-type self-criticism program, admitting to serious error in our judgment and then we will have to actually book losses. It’s hard to earn a return on a loss, isn’t it? This will drive up the cost of borrowing. If you have to cover a front-end loaded loss that may never happen, someone has to pay for it. Guess who? This will impair capital formation, no question about it. Moreover, we will have this massive new disclosure and reporting regime which will cost a fortune. Just what we need, more new and improved paperwork obligations. Call up HR and order up another half dozen compliance officers. Get them practicing saying, “No.” And hey, I have an even better idea; let’s just not let lenders make loans, then we’ll have no losses. Congrats, FASB!
The “These Are Really Cool Tulips” Award goes to…Bitcoin! Okay, okay, is it a bit unfair to compare Bitcoin to the infamous Tulip collapse of 1637. Maybe. And let’s face it, the jury is out. It’s hard to ignore the resemblance, isn’t it: Highly speculative assets, massive price increases and…subsequent crash? And what’s with this “mining” thing? While I’m not sure what it is and why this activity has some relationship to the amount of Bitcoin in circulation, I do know this: Right now Bitcoin mining accounts for one percent of the world’s energy consumption. One percent! So while Bitcoin’s market cap isn’t yet big enough to have a global effect, its energy usage sure is. It currently costs twice as much to “mine” Bitcoin than to actually mine the same value of copper, gold, or platinum. By the end of the year, Bitcoin’s energy consumption could rise to 7.7GW. Really want to put that number into perspective? Doc Brown needed only 1.21GW to travel back to the future. So congrats Bitcoin, in a few years you could be the first financial instrument to both take down the financial system and the global energy grid.
The Big Brother Award goes to…the multifarious social media outlets for their increasingly Orwellian work in breaching the data of millions of users and creating a truly disturbing age of information harvesting through technology. And the rest of us share in this award for helping the Silicon Valley guys and girls build their Machiavellian Dues Ex Machine creating a new level of surveillance that Big Brother 1.0 (1984) was never able to achieve. By packaging social media as a tool for friends and a perfect medium for snooping all this was enabled. Sadly we bought it. Apparently being able to share dating experiences, recipes and reaction to marvelous sunrises is worth the price. It is extremely hard to punish these privacy pirates, and all we can hope for is that they implement a dislike button, so then at least we can put some dislikes on their home pages. That’ll show them.
The “Nah, we’re good, thanks!” Award goes to…the Federal Reserve, FDIC and OCC. In May, Congress stepped in and cleaned up the mess left by the regulators in their attempt to reform HVCRE
(remember HVADC? Yeah, not a good memory) by passing the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA…erg-pah?). Finally, with HVCRE ADC, we have some idea of how the rules apply and how to follow them. Then, the Federal Reserve, FDIC and OCC (probably feeling left out of the whole thing) issued a statement in July and then a notice of proposed rulemaking signaling their willingness to provide “clarification” to the new HVCRE ADC regime. Clarification? You buying that? We’re here from the government and we’re here to help you?
Dimes to dollars, this is regulatory rollback. Even if the regulators don’t want to make it worse, they will. They can’t help themselves. Even if they say the same thing that the statute says, they’ll use different words and then we’ll unleash the lawyers. We’ll pass on this new bit of regulatory clarity, thanks. How about we try on HVCRE ADC and walk around the block a couple of times before we start messing with it? The public is welcome to submit comments to the regulators on their proposed rulemaking until November 27, 2018. Feel free to send the regulators a note that says, “Nah, we’re good!”