Private Equity

Ordinary Americans frequently ask why politicians and government officials appear to be so obtuse, rarely recognizing what is actually occurring in the country. That is partly due to the fact that the political class lives in a bubble of its own creation, but it might also be because many of America’s leaders actually accept that there is an unelected, unappointed, and unaccountable presence within the system that actually manages what is taking place behind the scenes. That would be the American deep state. America’s deep state is completely corrupt: it exists to sell out the public interest, and includes both major political parties as well as government officials.

Despite the approval of various Asian nation officials (e.g. Japan's Amari: "Fed decision appropriate"), it appears non-hawkishness is not enough to keep the dream alive. Japan's Nikkei 225 is down over 600 points from its post-FOMC spike highs, and USDJPY has tumbled over 1 handle - back below 120.00. Chinese stocks are extending losses after last night's late tumble, as ironically, China's securities regulator has uncovered a number of market manipulators who boosted prices of some stocks to sky-high levels during the peak of the bull market, attracting numerous followers who have suffered heavy losses in the recent market crash. The PBOC strengthened the Yuan fix for the 2nd day in a row (by the most in 2 weeks).

"The shale sector is now being financially stress-tested, exposing shale’s dirty secret: many shale producers depend on capital market injections to fund ongoing activity because they have thus far greatly outspent cash flow."

Just 4 short months ago, Avon stock soared after a fake private equity offer from a fake entity appeared. With a 20% short base, the stock exploded higher. Today, with 17.4% of the stocks' float short, The Wall Street Journal sparks some panic-buying...

*AVON HALTED; DISCUSSES STAKE SALE WITH PE FIRMS, WSJ REPORTS

Avon has now been halted twice and is trading up 12% (before re-opening). It appears our observation that AVP has a Debt-to-Ebitda of a stunning 3.7x that has blown away hope/hype of the LBO copming to fruition... AVP is fading fast.

• Global stocks rally as investors scent fresh stimulus (Reuters)
• Japan's Nikkei 225 Rises 7.7% for Biggest Gain Since October 2008 (BBG)
• China's Stocks Advance for Second Day Amid Stimulus Speculation (BBG)
• Abe Pledges Corporate Tax Cut as Investments Slump (BBG)
• U.S. to shift 50 staff to boost office handling Clinton emails (Reuters)
• Chinese Premier Li Keqiang Says China Doesn't Want a Currency War (BBG)
• One Thing China Got Right (BBG)

• Sure, why not: China Rebounds as Trade Data Disappoints (BBG)
• Oh, that's why: China's Stock-Rescue Tab Surges to $236 Billion, Goldman Says (BBG)
• Can't make this up: German finmin says must avoid reliance on debt, cenbank stimulus (Reuters)
• Stocks rise after contrasting China, Germany trade data (Reuters)
• Euro zone second-quarter GDP revised up as Italy grows faster (Reuters)
• Brent oil rises on European, Chinese data; oversupply weighs (Reuters)
• Corporate Prosecution Deals Headed for a Legal Test (WSJ)

As an investor, you have enough to be concerned about just taking into account factors like inflation, deflation, Fed policy and the overall state of the economy. Now you have another major threat looming – financial warfare, enabled by cyberattacks and force multipliers. What can you do to preserve wealth when these cyberfinancial wars break out? The key is to have some portion of your total assets invested in nondigital assets that cannot be hacked, wiped out or disrupted by financial warfare. The time to take defensive action by acquiring some non-digital assets is now.

• U.S. Treasury's Lew says China will be held accountable on currency (Reuters) ... but not Japan
• Bank of Japan Not Convinced of Need for Further Easing (WSJ)
• Stocks Advance With Commodities on Signs of European Revival (BBG)
• IMF Says China Slowdown, Other Risks Threaten Global Outlook (WSJ)
• Xi Says China No Threat, Announces Military Cuts at Parade (BBG)
• China holds massive military parade, to cut troop levels by 300,000 (Reuters)
• Migrants leave Budapest for Austrian frontier; pressure builds for EU action (Reuters)

The global economy’s finance based spine is so out of whack that it is in need of a major readjustment. Cash or better yet “near cash” such as 1-2 year corporate bonds are my best idea of appropriate risks/reward investments. The reward is not much, but as Will Rogers once said during the Great Depression – “I’m not so much concerned about the return on my money as the return of my money.”

...one theory is that some within the Fed realized that QE wasn’t working, and never worked, thus another path was needed. But what alternative did they have, since rates were already ZERO? So maybe they changed course and took a strong dollar policy vs. a weak one to intentionally weaken the commodity sector and thus boost consumer spending. Throughout this down turn, that message has been repeated by Yellen herself many times, as a source of economic stimulus and for sure has been repeated over and over in the media and the talking heads of Wall Street.

• Stock Halts Added to Monday’s Market Chaos (WSJ)
• Fed Up Investors Yank Cash From Almost Everything Just Like 2008 (BBG)
• Drop in Stock Futures Signal Halt to S&P 500's Relief Rally (BBG) - at least until the BOJ ramps USDJPY up again
• Hacker Killed by Drone Was Islamic State’s ‘Secret Weapon’ (WSJ)
• Greece's Syriza to win election but face setback, poll shows (Reuters)
• Puerto Rico Spends More Than $60 Million on Debt Restructuring (BBG)

Following the biggest (and only) market correction in years, the biggest weekly surge in the VIX ever, the second wholesale market flash crash in history coupled with the first ever limit down trade in the Nasdaq and the E-Mini, not to mention the biggest intraday bearish reversal since Lehman, it would appear that the "smart money" actually was aptly named.

"The hedge fund guys didn't build this country. These are guys that shift paper around and they get lucky. They are energetic. They are very smart. But a lot of them - they are paper-pushers. They make a fortune. They pay no tax. It's ridiculous, ok?"

With oil prices pushing cycle lows and Shale firms as loaded with debt as they have ever been, the spike in energy sector credit risk should come as no surprise as the hopes of the last few months are destroyed. At 1076bps, credit risk for the energy sector has never been higher. As UBS recently warned, more defaults are looming and, as we discussed this week, private equity is waiting to pick up the heavily discounted pieces.