Global credit funds & CLO's
November 2020 | Issue 229
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Opinion CLOs
Welshcake
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I foresee various spooky spectacles hitting our screens — and your long portfolios
November 2020 | Issue 229
By the time this Creditflux newsletter is with readers the US presidential election and Halloween will officially be over. But I write from a position of concern they could haunt our state of mind for the rest of this year.
Speaking of position, the past few days have found me bunker-bound once again due to Wales’s three-week firebreak lockdown. Rumour was, the latest measures would include certain shop aisles being cordoned off, but luckily the Welsh government’s definitions of what constitutes an essential item broadly tally with mine.
Nevertheless a mix of winter, remote countryside, narrow confinement and the menace of my own company has engendered morbid fascination with various spooky spectacles I foresee hitting our screens — and your long portfolios.
Starting with known monsters, nobody looks likely to cry, “It’s alive!” on the next US stimulus till after the 3 November elections. Any hopes senate majority leader Mitch McConnell, AKA the Pale Man from Pan’s Labyrinth, would turn his hands to a fairytale agreement once he confirmed Amy Coney Barrett to the Supreme Court were dashed as the senate recessed till 9 November. Credits rolled with the Pale Man feeling his way to the Republican’s Policy Luncheon.
A legislative Dead Zone runs to the 20 January start of the new presidential term. This means an eventual stimulus sign-off by the president — whoever that may be — could be any time from 10 November to 3 February. That is a big blind spot while the coronavirus and economic toll rises, the US parties stand miles apart on objectives for the bill, and faith in a vaccine is tempered with realism it won’t reach many people till months into 2021.
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Welshcake is settling in for a horror movie marathon. But in the previews he sees monsters lurking behind tight credit spreads
Ohio makes me mistrust polls and pundits
Investor and strategist commentaries follow a base case that Democrats will vindicate polls with a clear victory, or credit will ride the coattails of the equity market boost customarily following each election regardless of result. But I have less confidence in either prognosis as Donald Trump extends his lead in Ohio — a state that has never backed the losing candidate. Such is the tension, a close electoral college tally or Trump stoking civil unrest with claims of voter fraud, could leave parts of the US resembling The Purge quicker than Joe Biden can say: “Here’s the deal.”
This barrage of factors, along with late cycle signals and the bearish weight of November bond supply, are reminders the journey back from today’s tight spreads to those of April is vertiginous. This is especially true for some US corporate credits in covid-impacted sectors. Beta rallying has allowed these to blend with the crowd, so investors should don special sunglasses like it’s John Carpenter’s They Live to spot the aliens (‘have nots’) in their midst.
And before we Europeans settle in with the popcorn, let’s not forget Brexit. This promises to be as well organised as Jack Skellington delivering festivities in The Nightmare Before Christmas.
Meanwhile, countries are ramping up coronavirus lockdowns and credit spread blow-outs must follow. European defaults have so far been fewer than in the US, but with the first true wave of covid defaults — as opposed to companies that were already circling the brink — a rebalancing of the picture could be painful.
Long/short credit is a sweet deal
Such are the seasonal visions while I try to carve a pumpkin face more unsettling than my own. It may be a dour outlook for buy-and-holders, but in the world of long/short credit and relative value, one man’s trick is another’s treat.
Or console yourself that these are Halloween ravings. Credit spreads are fantastic. The ECB and Fed will prop everything up. Etc etc. As Jack Skellington puts it: “The monsters are all missing and the nightmares can’t be found/and in their place there seems to be a good feeling all around.”
I’m just glad I managed to fit in a trip to a scarily empty cinema before lockdown to catch an actual new horror film. With superb lead work by Morfydd Clark, the covid-delayed Saint Maud was excellent and original, although it eschews most of the genre’s traditional motifs and methods. Far worse than Nietzsche’s well-known statement that ‘god is dead’, it turns out god is Welsh. Before you complain, that’s less a spoiler for the film than for life.
See you on the other side.
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