It’s Golden Turkey Awards Time, Folks!
Our Turkeys are a little late this year but hey, we’ve been busy worrying about the collapse of the world’s economy. This is the 10th edition of our Turkeys and much thanks to our disorderly, often dysfunctional, regularly inscrutable and absurd government, polity and marketplace for continuing to provide us with materials for this annual compilation of that we find most silly, absurd and worthy of a Turkey.
Last year at this time, the market was on fire. I was shocked that we actually found time to put out a Turkey. This year, the market looks more like a smoldering ruin rather than a roaring bonfire, but hey, maybe that means we have an upside to look forward to. So, with irrational exuberance and hope that sometime in 2023 it’s better than now, here are our 2022 Turkeys.
The New Normal Award. Goes to the Federal Reserve Board of Governors. How shocking to the panjandrums of the economic heights to have to abandon the transitory to embrace “oh God, my hair’s on fire” as inflation roared toward 10%. Proof yet again that you can get ten opinions on virtually any point from five economists. After hovering at the zero bound for over a decade, it’s shocking, appalling and deeply annoying that the curve is so rapidly shifting upwards. How high is high? Interesting question. TBD. Will the Fed overshoot? Of course, it will. If past is prologue, it’s about 100% certain. It reminds me of my Boy Scout days when on a winter campout, we’d put our feet close to the roaring fire to salve the pain of our freezing toes, but then never pull them away fast enough to avoid the soles getting hotter and hotter until we ended up pulling off our boots and sticking our feet back into the snow. Here, the only question is when we have to stick our feet back into the snow this time.
Birds Gotta Fly and Regulators Gotta Regulate Award. So many finalists in this category, we’ve chosen two.
Let’s start with the European Commission and its insistence that its new Article 7 Transparency rules apply to issuers, sponsors and originators of US securitizations. Why? This is a classic example of a solution in search of a problem. The US IRP for CMBS is actually the best reporting package on the planet for investors, and is lauded by the SEC on a regular basis as an exemplar of how to convey information to an investor community. Now, we’re going to be forced to map the IRP to this annoying new EU regulatory transparency template, which contains a bunch of entirely inscrutable (it speaks in deep EU) and often irrelevant data fields. Moreover, Article 7 asks for some data that should be kept confidential for the benefit of investors. Do I really know the shoe size of the guarantor? Do I really have to tell the world what our strategy will be to enforce a loan watchlist? At a minimum, it’s going to be a lot of work. It will actually turn out to produce more confusion than light. Will it reduce investment opportunities for non-US investors? Probably.
Not to be outdone, and to give equal time to the US apparatchiki, what in the world is the SEC thinking about with its new 15c2-11 rule? In order to continue to provide critical price quotations in 2023, the broker-dealers will have to ensure that a significant amount of 144A market information is publicly available. There is no undertaking to hold information as confidential and to use it only in connection with purchase or sale of a security. So…we’re going to make available to the general public a bunch of information that will take us a fair amount of work to cull and assemble even though the general public can’t buy bonds in the 144A market because they’re not QIBs. Now, QIBs, the actual buyers and sellers of the securities, have fabulous access to necessary information and while there are some cavils about how it’s organized and consistency across issues, they are generally content with the amount and quality of the information. So, at considerable expense, we’ll make sure that folks who actually can’t use this information have it. This reminds me of the old Catch 22 line that you could only make an appointment with Major Major when the Major was not in. Ma and Pa Kettle can now get all of this terrific information, but can’t do anything with it.
Helping the Little Guy Award. This award also goes to the SEC for its incredible courage and sympathy in issuing a new private funds rule to protect the poor, meek and feeble private fund, CLO investors and limited partners from the big bad fund managers. Do these “helpless investors,” who clearly have resources to absorb the risk of these investments and the intellectual professional resources to understand and assess what’s on offer, really need help from our government? Well, we won’t have to worry about these poor dears any longer because the government has arrived and is intent upon helping. These new regulations will require a material amount of additional and reconfigured information to be provided to investors and will significantly impair the ability of managers to actually do their job. The rule is some 500 pages long, so God knows what’s really in it (ask Mrs. Pelosi). The private investor did not ask to be saved. The private investor did not want to be saved. So, congrats to the SEC!
The Amazing, Shrinking CRE CLO Investor Base. While the corporate CLO market goes gangbusters, the CRE CLO investor base is considerably smaller than it ought to be and stubbornly resists growing. Come on, investors. Don’t be shy. Let’s do the virtuous circle thing. The more you buy, the bigger the market; the bigger the market, the better the liquidity; the better the liquidity, the more you buy. Isn’t that how it works? The data provided in the CRE CLO is the best information available in all structured finance. Large loan summaries, hundreds of data fields in Annex A, cross-collateralization, significant diversity and, at the end of the day, instead of owning debt on zombie, wildly overextended small operating companies with largely ephemeral collateral, at least you own some real estate. Come on in, folks. The water’s fine.
The ESG Abuser Award. Goes to the cadre of excessively enthusiastic investors, legislators, regulators and professionals helping ESG, a phenomenon, grow at lightning speed. Federal, state and even local governments are creating laws and the regulators are doing what regulators do. We’re creating incentives and disincentives. Yet another effort at guiding the market remains which so rarely works. Negative externalities anyone? We all know that greenwashing is bad, but even well intended efforts to do the right thing in accordance with new rules, laws, regulations and the predilections of market participants all, presumably in the pursuit of a greenium, is going to lead to bad outcomes. Caveat emptor my friends.
The Creative Destruction Award. Goes to (tentatively) Elon Musk for whatever the heck he’s doing at Twitter. The guy who invented the electric car, who’s getting us into space more efficiently and cheaply than our vaunted NASA, the man who wants to die on Mars, is certainly doing something important at Twitter. Maybe this works or maybe it doesn’t. But it is a classic example of Mr. Schumpeter’s notion of creative destruction in action. It’s either really good or really bad, depending on where you sit when the wheels come off. If Twitter comes out of all of this as a viable business, then hands down Mr. Musk gets the award. If not, others should apply (maybe Al Gore should dust off his resume and throw his hat in the ring as the inventor of the internet?).
The Margaret Thatcher Told You So Award. Goes to virtually every government in the western world for forgetting that the problem with governmental largesse is that eventually you run out of other people’s money. Oh, no, wait! That’s not a problem, we just make-up money. Cue the printing press. Keynes might not have been entirely wrong, but neither was Milton Friedman, and after trillions of dollars had been added to global liquidity, largely a product of simple governmental borrowing, we’re shocked, shocked that inflation ensues. So, interest rates are skyrocketing, liquidity is fleeing and austerity programs are beginning to proliferate. (Look at poor, old England.) Be very careful. If we push it too far, it might begin to feel a little 1930-ish.
The Matrix Award. Goes to the crypto currency industry and our erstwhile friends at FTX, Doge Coin, Pay Coin, Ethereum’s DAO and the other failed crypto platforms, NFT art and whatever the heck the “Metaverse” is. I remember first hearing about someone spending tens of millions of dollars on NFTs and thinking that yes, indeed, we have finally entirely lost our minds. We may have long ago left the gold standard and embraced fiat currencies, but at least those that issue fiat currencies have armies. If fiat currency is an illusory repository of value, crypto is a first derivative, an illusory repository of an illusory repository. Maybe someday that’ll be great, but this is not then. I’m sticking with the greenback until I discover that I’m a figment of the imagination of an AI program pretending to be an 8-year-old gamer.
Once More Onto the Breach Award. Goes the ARRC, the Bank of England and all those other seriously minded wonky bureaucrats who are high-fiving themselves on the almost immediate extirpation of LIBOR. I know we’ve talked about this before, but it deserves one last mention in our list of Turkeys as we roll into the dying days of LIBOR. The transition has been an enormous waste of time and energy. I’m still looking for a market participant to tell me how wildly distressed they were with LIBOR and how compellingly better the world is because of SOFR and SONIA. Couldn’t we just have thrown a few miscreants in the slammer and moved on? Hey, on the other hand, it did give a bunch of lawyers and consultants something fun to do for the past three years, and that’s not nothing.
The Cronkite Award. Goes to virtually everyone in the media. This is a return from a prior award season, but worth revisiting as it doesn’t seem to get any better, does it? The old adage that everyone is entitled to their own opinions but not their own facts seems to be so 20th century. Flipping from MSNBC and FoxNews is like flipping between alternate universes. The Man in the High Castle stuff (for afficionados). CNN shocked the world this past fall by saying it was going to return to hard news. Such a shocking concept! Maybe it’s time we just get over ourselves and acknowledge that we’re returning to the good old days of the 19th century where no news outlet ever claimed that it was anything other than the political bullhorn of its ownership. Time to embrace nostalgia? On the other hand, it would be nice to know that when we next land on the moon, I don’t have to worry that it happened on the backlot of Paramount.
The Remembrance of Things Past Award. Goes to the closing dinner. It’s been a delightful several years for the institution of the closing dinner. Bon ami, chotchkes, sea food towers, pounds of post-mortem cow and gallons of red wine, often paid by the lawyers because hey, they’re lawyers. As memory serves, in periods of financial stress, closing dinners are the first to go and I think we may have seen our last closing dinner for quite a while. So, if one is lucky enough to get invited to one last legacy dinner, take some pictures and record some oral history so that when good times return, we might even remember how it’s done (it could be quite a while).
The Civility Award. Goes to the US Political Class. We have just finished another seemingly endless, mentally enervating and entirely predictably annoying midterm election. As our political class knows, the articulation of policy prescriptions or saying good things barely moves the needle, but accusing your opponents of sundry and nefarious behavior is a winning strategy. Every year we appear to plumb new depths, but let’s give the wannabes a small shout out, no one actually accused anyone else of being a cannibal. Apparently, that was a thing in the Brazilian election and we can take heart that no one accused anyone of actually eating people here in the States in 2022. Eating their souls for sure, but that comes with the territory.
Here Be Dragons Award. Goes to all the bloviating talking head class who, yet again, utilize predictive powers about expectations. How’s that working out for you this year? Not particularly well for me. The New York Jets and Giants are really good. The Philadelphia Phillies made it to the World Series. The Red Wave was barely a red ripple. Serious war in Europe was inconceivable because of the interconnectivity of economies. The English have had three prime ministers in the course of four months. UFOs (or now UAPs) could be real (but I’m still waiting for these reproductively-fascinated aliens to show up in Harvard Yard). Is that really disabling? Such a disappointment. The weather, or climate depending upon your politics, was either worse or better than predicted somewhere in the world this year. Shockingly, the Russians have used oil as a weapon. Who knew? Harold Stassen may run for president in 2024 (okay, he’s dead, but given the type of folks we’ve nominated recently, is that really disabling?). So, take a shot and get into the prediction game. Explain to us what’s going to happen to the economy, but if you are silly enough to try, you probably need to explain how the job market can be hot, while inflation is unmanageably high, sentiment is horribly negative and the interest curve is both inverted and shifted up several hundred basis points. How about the economy? This is a movie we haven’t seen before. Take a shot at that for 2023 and make the awards next year. Anyway, the bloviating class can always take some comfort from the fact that if it turns out they were right, they’ll get to trumpet their brilliant omniscience for years. If it turns out they’re wrong, no one remembers anyway.
The Follow the Science Award. Goes to the CDC and our gloriously elected leaders who use that delightfully adult sounding phrase to harangue us a wide range of policy prescriptions during the COVID-19 emergency. “Follow the science” was used to support a series of continuously changing, constantly morphing and often contorted, inconsistent and often inscrutable policy initiatives. Anyone still silly enough to pontificate under a “follow the science” banner should remember that it could have gotten you burnt at the stake 500 years ago, bled to death by your doctor a little more than a century ago and almost resulting in the closing of our Patent Office around the turn of the last century. Follow the Science! A current equivalent of “Inconceivable!” from the Princess Bride. It obviously doesn’t mean what it sounds like it means. Michael Crichton famously said that “if it’s consensus, it isn’t science; if it’s science, it isn’t consensus.” He was wise. Our gloriously elected representatives and their apparatchiki are not.
The market’s a mess, but hey, enjoy the season!