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May 25th, 2023

Eve of Disruption

Eve of Disruption is not a parody of the famous 1960’s anti-war ballad by Barry McGuire, but instead a pithy summary for the federal elected officials latest juvenile attempt to manage the debt ceiling and maintain confidence in the financial markets of the world’s largest economy.  At a moment when slowing economic activity would normally decrease interest rates and ease the cost of borrowing for all commerce, rates are instead rising as both the White House and the Congress do their best to convince their moms they are not the guilty party.  Incredibly, Microsoft debt now trades as a better credit than the United States. Both the need to pay the country’s bills and the need to fund the profligate spending during covid are apparent, yet those in charge of solving the problem do not lose their jobs if they fail, so a stalemate persists.  The U.S. does not have a monopoly on quirky leaders.  Recently resigned British Prime Minister Liz Truss refused to hire any candidate who could not quickly solve the math problem: “What is 1/7 – 1/8?”  This may be the origin of the now infamous private equity denominator problem.  Sadly, Liz did not even serve 56 days.  Among the downstream victims of the debt ceiling fiasco are the corporate borrowers, most of whom hold floating rate debt. The rising debt costs and the lower debt multiples being offered by banks have dampened the investing activity in private equity, a trend that is likely to persist while market confidence rebuilds. 

Sutter’s Mill, a sawmill in the foothills of the Sierra Nevada in California, owned by Johan Sutter, was the site of a gold discovery in 1848 that led to the California Gold Rush, a decade long period of dreams, speculation, high valuations, foolish risk taking, fraud, and some joy.  The descendants of the Gold Rush crowd have remained in California engaging in similar idiopathic risk taking – some to great reward, Google, some to great disaster – FTX, SVB, Theranos, etc.  The thrill of chasing unicorns and relying on all trees growing to the sky is why casinos are profitable.  However, in the wake of the recent crash, fortune cookie wisdom appears in the recent press, “profits and cash flow matter again” uttered by Chamath Palihapitiya who sold his Spacs to the hopeful. Profits and cash flow and a reasonable plan to achieve them have always mattered.  They are frequently abandoned when the “sell to a greater fool” market persists as we saw in 2019 – 2021. Will Rogers told the country to “always drink upstream from the rest of the herd.”  That advice still holds for careful investors.

I’m Rob Morris and I approved this blog.

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