Hypocrisy is the compliment vice pays to virtue.
François de La Rochefoucauld, 2nd Duke of La Rochefoucauld, Prince de Marcillac
Let’s divert our attention from Saturday night’s events, to attend to more mundane matters, shall we? I don’t know this de La Rochefoucauld dude, never met him. My research, though, indicates that: 1) he lived and died in 17th Century France; 2) his name, if one can pronounce it, trips elegantly off the tongue; 3) he was both a Duke and a Prince; and 4) he took a nice portrait/lived in a swell castle:
To me, our purloined quote, attributed to our Ducal Prince, is both pithy and timeless. Perhaps we will revert to it in the denouement of this piece; we usually do.
Because, in a week where we also lost long-ignored icons Dr. Ruth Westheimer and Big Rich Simmons, I wanted to spare a word for Shelly Duvall. She had a rich and storied life. Dated Ringo AND Paul (even if it was Paul Simon). Played a prominent role in several outstanding films, including The Shining, Time Bandits and Nashville. But to me, she will always be remembered for the role she (like Donald Sutherland’s Oddball) was born to play: Olive Oyl — to Robin Williams’ eponymous Popeye:
There they are – a couple for the ages. Both, of course, are now gone, and I cannot but think that those of us that remain are rendered the worse for their absence.
So, I ask my readers to join me in wishing a bon voyage to Shelly, and, for that matter, to Robin as well. Here’s hoping they’re in a better place – where the spinach flows like waters from the River Jordan. Where the beastly but somehow vaguely attractive Bluto is banished, and where the long-unaddressed issue of Sweet Pea’s paternity is settled – once and for all — in Popeye’s favor.
Meantime, in the markets, there’s information aplenty flying off the wires, but as of now, nobody seems to know what to make of it (other than, of course, to buy everything in sight). Inflation came in with a dose of ambiguity. Powell uttered soothing words on Capitol Hill. The Republican National Convention begins today. In the great city of Milwaukee, with Big Orange at the helm – head bloodied but unbowed. On the other side, there appears to be an end game afoot. I won’t delve too deeply here, but my gut tells me that too many powerful people and institutions, unaccustomed to being rolled over and stiffed, have called for his head for him to survive their having turned on him.
Earnings are commencing to roll in, but not too much in the way of discernable trends just yet.
In time-honored fashion, the nation’s largest banks are among the early reporters (investors thus far have reacted with a resounding “meh”), and it is to them that I direct my most acute attention.
Because the Long Arm of Justice finally arrived this past week, for one Bill Hwang, late of an investment platform called Archegos (a term which translates into chief, leader or prince) — in the form of guilty verdicts handed down on 10 out of 11 counts with which he was charged.
His crime? Concealing outsize positions in names such as Verizon, using leverage that he obtained by lying about the size and concentration of his portfolio – to multiple counterparties. My hat is off to him.
Because it’s one thing to corner the market in fluky small cap securities, but to try to pull off this stunt with some of the best capitalized companies in the entire equity complex takes some serious stones. Each of the forlorn banks, at Hwang’s instance, thought they were holding the entire Archegos position, but when the lid lifted, there were about a half dozen institutions lending him mad Benjaminz to load his princely boat.
When, as was inevitable, these names hit a rough patch, each bank was shocked when he was unable to cover his losses. The estimated cost of his adventures has been reported to be as high as $100B, and the banks took the brunt of it. For one of them – the always misanthropic Credit Suisse (which had been ground zero for every banking scandal since the Polk Administration) – it was the last straw. The yodeling regulators in that historically neutral jurisdiction gifted the institution to rival UBS a few fortnights later.
And now, Prince Bill is going to jail – God knows for how long. But if I were him, I’d pack a toothbrush.
More to the point, there’s a risk management lesson in this saga: Don’t. Fuck. With. The. Banks. Case and point, the recently adjudicated judgment against him was his second brush with the law; the first being an insider trading rap from early last decade. But no banks were harmed in result, and that episode only cost him a 4-year ban from the securities industry.
Whereas you stiff the banks, you go to jail.
They win and you (we) lose. It was ever thus. Consider, if you will, that every single government intervention in the modern capital markets era has redounded to the benefit of uber financial institutions. I remember back in ’94 – before I even began drawing Social Security benefits, when the perfidious Mexicans pulled a surprise devaluation of the Peso. It backfired spectacularly, and after lots of bleating about the plight of the Guatemalan guitar players and such, the powers that be came up with a now-quaint but then galactic $50B bailout package.
I don’t think much of it made its way into the pockets of the run-of-the-mill Mexican citizen. But the banks made out like banditos.
The same narrative plays out in a review of government intervention into the banking system over the ensuing thirty years, with the most prominent example being the response to the near collapse in the wake of the Great Financial Crisis. The multitude of sins committed by financial institutions in the lead up to this is the stuff of legend. The leverage applied to dubious speculations alone was criminally astonishing and put Hwang’s stunt to shame. But, unlike Billy Boy, no one went to jail.
So, I worry very little about the banks. Particularly the big ones. UBS now owns the Alps. JPM scoops up every such asset that catches its fancy (recent acquisition of First Republic comes to mind) – often getting paid for the privilege. It is the rest of us who bear the brunt of the risks.
And the big exposures, approaching as inexorably as the galaxy Milky Way moves into a collision course with neighbor Andromeda, is a credit crisis. It may take a couple of billion years but it’s coming:
It does seem to me that a~365% Global Debt to GDP ratio is, you know, kinda problematic. Put in perspective, if the world dedicated every single centime it produces – from this moment onward – to debt reduction, it would be square with The Man by the Spring of 2028.
Just in time for Biden to either pull a Trump and try to recapture his lost position, or, to channel FDR and seek a third term, which, if he succeeds, will put him at a robust 90 at the end. At which point, he will have no alternative other than to go for Term Number 4.
But all that is further down the road, and I suspect that higher valuations will come our way ere the reckoning that awaits us arrives on our threshold. And I suggest we avail ourselves of this bounty. It may be hypocritical to do so, but as Prince/Duke dLR might advise us, we can deem it to be nothing more than the tribute owed by our ubiquitous vices to that elusive blessing of virtue.
And, at some point, we may pay for our sins with more than our hypocrisy. Hopefully not, though, to the extent of Bill H.
Because, speaking strictly for myself, I’d like to avoid the Gulag Archegos with all the energy I can muster. I suggest you do the same. And you can start by limiting your leverage, lest you incur the wrath of the banks, who lever and concentrate at their will and pay the wages of these transgressions through the receipt of bailouts. And, if purely as an experiment, you wish to try your luck at fraudulently seeking to engage in excessive borrowing from them, well, I don’t advise it, but let me know how you make out.
There’s a motif of hypocrisy in all this, of course, but I’ll let Prince Duke dLR have the last word on that score, and simply bid adieu.
TIMSHEL