Risk, ruin and leveraged madness for the Arabian Gulf’s bond investors. – The Property Chronicle
Real estate, alternative real assets and other diversions

Risk, ruin and leveraged madness for the Arabian Gulf’s bond investors.

The Macro View

I was a tad unnerved by the thousands of views and hundreds of responses to my article that “This crazy bull market will crash and die in 2020”. Guess what? The Dow is down 700 points in the past two sessions – so my warning was priceless and prescient. For now…

When the world goes long greed, it is time to bail out. At 19.6 times earnings on the S&P 500 index, an euphoria peak means a 20% hit risk for me, when I would again load up on Big Tech/momentum darlings. Positioning in the futures markets is at levels last seen in September 2018 and July 2007 bubble peaks. So I think it is entirely rational for me to project a 300 point hit to the S&P 500 index sometime between now and March. My projected 2020 range for the big guy is 2600 – 3200.

Look at the fate of US retail stocks, down 70 – 80% from their peak. Casinos will be the next Big Short. Macau is toast and PRC high rollers are double toast since no Chinese VIP/big hamour can be seen partying in Macau while Hong Kong burns in revolt. Softbank is another 50% short in Japan and the free fall has begun in the TSE as Masa-san’s $100 billion Vision Fund implodes. The $4 billion WeWorks write off is only the tip of the iceberg. So I reiterate my strategy call. Get real. Get derisked. Get out. El Torro is mucho loco and crazy bulls allow nobody to get out alive.

There is a speculative mania in the junkiest tranches of the emerging bond markets. Angola, a country looted by the Dos Santos clan for a generation, with a 100% debt to GDP ratio, a collapsed currency vulnerable to oil/diamond export revenue swings, is now under an IMF bailout program. Yet Angola attracted $8 billion in bids for a $3 billion Eurobond new issue. Frothy? Insane. Will Angolan debt trade higher (spreads compress) in the secondary market? Yes – this market is obsessed with yield, not risk.

Ironically, the IMF just warned about a “borrowing binge” by frontier markets with low junk/no ratings. This borrowing binge is the catalyst for the next sovereign debt servicing/default crisis in frontier markets whose debt has tripled to $200 billion since 2014. Scary? Scary as hell. I expect credit shocks here to trigger contagion on an intercontinental scale, like Mexico’s tesebonos default in 1994, the Russian rouble GKO default in 1998, Argentina’s sovereign debt meltdown in 2000 – and the Pacific Rim financial Armageddon in 1997-98.

A market where Poland (invaded by Prussia/Germany and Tsarist/Soviet Russia multiple times in the past two centuries, conquered by the Nazis in 1939, enslaved by Stalin in 1944), now borrows money at negative yields. Uzbekistan, ruled by ruthless ex-KGB bosses, is the current heartthrob of the Eurobond new issue market. Mark my words – the bubble’s bust will be as swift as it will be brutal. Zambia, Argentina, Bolivia, Ecuador and Lebanon are on the precipice of sovereign default but the leveraged dumb money from the Gulf is flooding into EM debt. (Salam Private Bankerji!). When the circus stops, EM clowns will descend from the stage with axes and behead their trusting fans. Leveraged EM debt is both farce and tragedy, Karl Marx’s definition of history.

The US Treasury bond market has taken a steep hit in Thanksgiving week, with the yield on the 10 year T-bond note rising from 1.74% to 1.87%. The Treasury bond market is reacting to better economic data in China and Europe. This could be the onset of a new spasm of selling from real money/hedge funds, who are positioned to buy the ten-year Uncle Sam debt any time the 10 year yield rises to 1.95 – 2.10%.

While there is zero chance of a preemptive rate hike by the Powell Fed, Wall Street is way too complacent about inflation – and any nasty surprise will gut long duration bonds. There has been a quantum increase in leverage positioning in the Treasury bond futures market in Chicago. If inflation pops in 2020, expect an old-fashioned bloodbath in global debt.

I am a huge fan of the Dallas Fed President Bob Kaplan because he calls a spade a spade in financial markets, without the camouflaged groupthink of central banking gobbledygook.

As a student of credit cycles, I am stunned by the fact that the post-Lehman Obama/Tweeter in Chief economic expansion, goosed by Trump’s tax cuts, is the longest in American history.

True, growth is mediocre at 2% and the unemployment rate is the lowest since 1969, the year of Woodstock, the Apranet, the NASA moon landing and Tricky Dick replacing LBJ in the White House as Pan Americana was quagmired in the rice paddies of Vietnam’s Mekong Delta.

This has been a benign, profitable environment to own leveraged corporate bonds, US high yield and leveraged GCC sukuk. A 30% leveraged return in the Aramco new issue Eurobond in four months is a far superior risk reward calculus for me than bidding for an IPO priced at 18 times earnings on the Tadawul.

The Aramco IPO will be a winner and atleast 2 times oversubscribed and shares will rise upto 15% for a few weeks as long as Russia and the OPEC quota cheaters play ball with Prince Abdelaziz in Vienna. Yet when 4.9 million retail investors scramble into a deal, I head for Disneyland.

When Fed Chairman Jay Powell lost his nerve (patience!) in January 2019 and later slashed the Fed Funds rate in three successive FOMC conclaves, I knew it was time to accumulate real estate investment trusts (REIT’s) with a vengeance as it would be another 20% total return year for the Nareit index, as it was. Prologis, Equinix and some Singapore puppies did far better than the index.

As mortgage rates plunge, Simple Simon/Credit Zeus led me to US homebuilder stocks (homies like Snoop Dogg). So I bought Lennar and DH Horton – check out the charts. As Ice Cube said, “aint nothin’ to it, gangsta rap made me do it!” Yet I can see the wicked witch of Wall Street’s broomstick haunt so many credit segments I track.

Credit spreads are too tight relative to the macro/funding risks I envisage in 2020. Contagion risk soars across the credit markets when risk aversion spikes from historically low levels in interest rates – and they have never been lower than now in centuries. As I scan real estate cap rates, high yield and IG corporate debt credit spreads, MBS/ABS spreads, I have an eerie déjà vu premonition for 2014, the monetary midpoint of this credit cycle when Dr. Yellen was in monetary tiptoe mode, gently signaling a QE exit.






The Macro View

About Matein Khalid

Matein Khalid

Matein Khalid is Chief Investment Officer of Asas Capital in the DIFC; he is responsible for global investment strategy and the development of the multi family office platform. He has worked in Wall Street money centre banks, securities firms and hedge funds in New York, London, Chicago and Geneva. In addition, he has been an advisor for royal investment offices in the Gulf for 8 years. Mr Khalid has four degrees in finance, economics, banking and international relations from the Wharton School, University of Pennsylvania. He is a director at the American College of Dubai and has taught MBA level courses in commercial/investment banking at the American University of Sharjah and British University of Dubai. He writes the Global Investing columns for Khaleej Times, Gulf Business and Oman Economic Review.

Articles by Matein Khalid

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