September 2019 - Fall is here and so is more uncertainty

As the summer has faded into fall, the outlook for the economy remains as murky as ever. Economic uncertainty abounds around the globe as we move through September 2019.

Negative interest rates are the reality in much of the world and there has even been talk that rates could soon turn negative even in the United States.

Former Fed chairman Alan Greenspan gave an interview recently, in which he theorized something quite interesting that may explain one of the main drivers behind negative rates – the aging world population. Mr. Greenspan also indicated that the negative rates are probably an eventuality in our own home country.

I have thought for a while that overpopulation is behind most of the larger world issues. The fact is that there are more people alive today on planet earth than the sum of all people who have ever died during the brief history of mankind. The fact is that we have never had even close to this many human beings in the world, and we are all living longer. Of course, this is more true than ever in the largest countries and largest economies in the world.

The populations of Japan, Germany, China, Great Britain and the United States are getting older. We are living longer than ever and most of us are planning to live longer. Therefore, we must plan financially as if we are going to live longer. In fact, this may be one of the primary reasons that there is more and more money flowing into perceived “safe” investments like government bonds, which of course drives down interest rates. Food for thought but suffice to say, it is looking like rates are going to remain low for the foreseeable future and they may eventually turn more and more negative, even in the U.S.

September 2019 - Chart of the Month

September 2019 Chart of the Month.png

As our September “Market Research and Commentary” piece will touch on, the investor base of a country’s debt might have an impact on yields. For example. Japan’s central bank, the Bank of Japan, has an out-sized ownership of its sovereign debt. The Treasury investor base is quite different, albeit the market for Treasury’s is the largest in the world. The Bank of Japan’s participation in its sovereign debt market is significant. This interaction is suppressing yields and for some maturities leading to very little trading volume.

September 2019 - Market Research & Commentary

Following the FED’s decision to decrease the Fed Funds rate by 0.25%, speculation, headlines and general concern surfaced about potential for negative interest rates in the U.S. As we mentioned in last month’s newsletter, 10-Year German Bunds are yielding a negative nominal yield. The 10-Year Treasury has seen a significant drop in its yield as investors flock to safety, under the assumption that a cut in the benchmark rate by the FED means the economy is headed for a slowdown. The saying hasn’t been mentioned much recently, but we really do appear to be in a “lower for longer” environment. Fixed income is poised for another season of very low yields and by no means would this be the first time that the U.S. has seen negative real rates. Despite the persistence of abnormally low interest rates (by historical standards) the likelihood of negative nominal rates in the U.S. is remote. 

August 2019 - Trade wars heat up; Summer of negative rates

This summer has heated up rather quickly, and not in a good way. Even before the horrific events of this past weekend, there was an air of tension and conflict in many areas around the world. Massive protests have been happening in Moscow, Hong Kong, Pakistan, San Juan, Paris and elsewhere. And the trade tensions between the U.S. and China have hit a boiling point that only appears to be getting worse. For a while now, it has been hard to see either side backing down and it is causing real damage to both of the largest 2 economies in the world.

August 2019 - Chart of the Month

Chart I -  Total PE Activity First-Half 2019, Source: Pitchbook

Chart I - Total PE Activity First-Half 2019, Source: Pitchbook

Private Equity deal activity for the first-half of 2019 is well off pace from previous years. According to data from Pitchbook, 2,142 deals were completed in the first-half of 2019, well behind the pace of 2018, which totaled 5,180. From a return standpoint, exits have been particularly low, totaling only 371 for the first-half of the year. As economic and political uncertainty has plagued the markets, these concerns are suppressing deal activity. Additionally, after 10 years of growth the market might finally have reached a short-term limit, especially given the height of multiples in recent years.

Chart II -  Total PE Exits First-Half 2019, Source: Pitchbook

Chart II - Total PE Exits First-Half 2019, Source: Pitchbook

August 2019 - Market Research and Commentary

In the last five years, an intriguing trend has emerged in fixed income markets around the world. Across all classes of fixed income securities, from municipal bonds to corporate bonds, markets have seen an immense inflow of cash into bonds and various fixed income funds. With investors pouring money into fixed income and bond funds, there has also been a notable concentration of buyers, especially in the municipal bond market.

July 2019 - How to say "no" and how not to say "no"

Lenders pay attention – how you say “no” to a loan request often says more than how you say “yes”.

In a marketplace, everyone is watching and paying attention all the time. We do not operate in a vacuum. Borrowers, investment bankers and other lenders pay attention to how lenders operate. They are paying attention to how you say “no” as much or more than how you say “yes”. There is definitely an art to how to say “no” to a loan request. In many respects, it is harder to decline a loan request effectively than it is to approve it. And the memory of declined loans can leave as significant of an impact as loan approvals.

July 2019 - Market Research and Commentary

In the wake of trade tension and recent tariffs, global markets have been in a state of limbo. In both debt and equity markets, different indicators have given investors mixed signals about the state of the global economy. These mixed signals, in conjunction with the China-U.S. trade conflict and other geopolitical tensions that we discussed in our June newsletter, have left global markets in an uncertain state as summer begins.

June 2019 - The challenge of being a leader in 2019

Lending is always about finding an equilibrium between the search for profit and the avoidance of losses.  A lender’s platform stands at the fulcrum between risk and return.  Each loan comes with risk, as well as risk management.  We need lending for growth, but inevitably that growth leads to excess, which produces losses, which often leads to some type of crisis.

Ignorance may be bliss in the short-term, but lenders don’t get paid to be ignorant.  In fact, they will pay a hefty price if they are ignorant.  They must ask questions, perform due diligence, pay attention to a multitude of factors and create an effective monitoring structure for all investments.   

So as the current credit cycle lumbers through its umpteenth year of steady growth in lending, as leveraged finance companies continue to show low default rates, no signs of relief from intense competition and pressure to deploy capital, as budget deficits grow larger and larger, all amidst a slowing global economy and warning signs about future economic growth, the challenge of being a lender is truly as substantial as ever in the summer of 2019.

Increasing the debt to record-breaking levels was a calculated risk taken by policy-makers, lenders and borrowers alike.  We knew what we were doing, but the alternative of economic stagnation was unpalatable.  Short-term pleasure is always hard to resist, in all facets of life, personal and professional.

We believe that it is during times like this that commercial lenders have a real opportunity to differentiate themselves.  The lending decisions that are made now will determine the long-term winners and losers. Faced with the formidable challenge of balancing the necessities of capital preservation, prudence to investors and the search for growth and profits, it is during the late stages of a credit cycle that the best lenders will stand out. By focusing on disciplined underwriting, customer service and rigorous adherence to core principles, the best of breed lenders will survive and thrive, in both the short-term and the long-term, no matter what future periods bring to bear.


No matter what happens to the economy locally, nationally and globally, the best lenders will stand out by serving their various constituencies and staying consistent, active and responsible.  Lenders have to keep lending and not make knee-jerk reactions, while at the same time accepting the realities of the current marketplace.  Hard work, hustle and discipline always pay off in the long run for all market participants, for lenders and borrowers alike.