Thoughts for the week ahead: It’s not a credit bubble, it’s an asset bubble | Carbon Credits | Upgrading Fonterra and Macquarie

27 March 2023

Upgrades in our equities coverage

We upgraded Fonterra from sell to neutral on the back of a good result and fundementals coming into line after several bad years. We upgraded Macquarie from a hold to a buy because we think the “big bank” sell- off was overdone, and big banks with strong balance sheets ought to ride it out and even benefit from it.


It’s an asset bubble, not a credit bubble

One of the helpful ways to think about what’s been going on with the small banks (SVB, First Republic, etc) is that it isn’t so much a credit crisis but the unwinding of an asset bubble. Let’s call it the “everything bubble”.  The basic idea is, people needed to put cash somewhere during a period of low interest-rates. They need to put them in assets. Stocks, bonds, private equity — whatever — so long as it’s an asset yielding more than practically 0.00% interest. What happened during this sustained period of low interest rates is that asset classes decoupled from their fundamentals — some asset classes still are; look at Nvidia for instance, which trades at 153x fwd earnings. Then we entered into this high interest rate environment and a few banks showed cracks, and a couple collapsed, though depositors by-and-large were fine. But to think of this as a credit crisis is missing the forest from the trees — assets move, and the risk-free rate is now substantially more (hence why +$250B in flows moved to money market funds last week, which pay +4.5% interest). The bigger worry here is an asset bubble which is slowly unwinding. The first question we have here is private equity (i.e. Blackstone, Blackrock, Apollo, etc). Take a look at the chart from Crescat Capital — debt has ballooned since the GFC. We’re looking at $700B of it. Our question is — what happens to that debt? Where is that debt positioned? What happens, as interest rates continue to be high, to the debt? In our opinion this is a much bigger contagion worry than small regional banks — we recommend avoiding private equity stocks (wouldn’t touch them with a ten-foot barge pole). 

Private Markets Don’t like to go Down

Another useful experiment is extrapolating this data to private market investments (venture capital, etc) — most of which has not been “written down”. This is the illusion of VC, of course. As Matt Levine famously wrote “private markets don’t like to go down”. Of course, private markets are an asset-class, but they’re still funded (largely) by debt, which does not have the luxury of being revalued at whatever Sequioa or Tiger Global say its worth. Our question here is the same: where is the debt expressed (who owns it?) and when do the “chickens come home to roost”?


Another example of the everything bubble – Carbon Credits

We found this recent article in Bloomberg to be quite illuminating. Carbon credits are, of course, a big business in NZ – NZ’s biggest “farmer” of carbon credits is called NZ Carbon Farming — they lease or own +100 thousand hectares of land which “produces” the carbon credits they sell. The largest producer of carbon credits in the world is called South Pole, and Bloomberg alleges the company – ahem – made misleading claims around the amount of carbon credits produced; sometimes exaggerating them by as much as 3x. One unnamed commentator said the whole thing had whiffs of Enron. They are basically “phantom credits”. Now, the whole carbon farming project is a little bonkers in our opinion — we were recently at a Bloomberg Sustainable Finance conference where a higher-up at Fonterra said “a block of cheese from NZ to the UK has less of a carbon footprint than cheese made down the road”; and we had to ask ourselves – really? Achieved without carbon credits? The point is, here, is that the carbon credit project seems to be unwinding a little – especially if the credits aren’t real. NZ’s own carbon credit price has fallen gradually over the last year, suggesting it could well be another bubble in dire need of popping. 

Carbon Credit Price – NZ

Odds & Ends

The British govt has slapped a 10% tax increase on wine — should be net-negative for Aussie wine producers as well as those in NZ. Per data provider Unleashed, Australian manufacturers are dangerously overstocked – +$231,000 in additional inventory. Where does all that inventory go? Sales ahoy?

Casino operator Aristocrat had a optimistic investor day, seeing most analysts increase their earnings assumptions +1%. Assuming higher US sales and lower Australia sales. Read-through is good for our casino “Value Pick”, Sky City (buy).


What we’re watching for the week ahead

Monday

Australia:

Premier Investments 1H Earnings; NZ:

Synlait Milk 1H Earnings

Tuesday

US:

Conference Board Consumer Confidence, Richmond Fed; Australia:

Retail Sales, AUB Group EGM. 

Wednesday

US:

Pending Home Sales; Australia:

CPI; NZ:

NZ King Salmon FY Earnings, Property for Industry AGM.

Thursday

US:

Initial Jobless Claims, Q4 GDP; Eurozone:

Consumer Confidence; Japan:

Tokyo CPI; NZ:

Building Permits, ANZ Business Confidence.

Friday

US:

Personal Income/Spending, PCE Deflator, Chicago PMI; Eurozone:

CPI, Unemployment Rate; UK:

Q4 GDP; China: Composite PMI; Australia:

Private Sector Credit, AMP AGM; NZ:

ANZ Consumer Confidence.

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