2020_03_23 — “Perfect Storm”

INVESTMENT PHILOSOPHY

Perfect Storm

  • The risks: Widespread and indiscriminate asset value declines, economic and social disruption, bear markets around the world, and the possibility that recession has already begun. We are in the midst of a simultaneous collapse of supply and demand, and the cash crunch that arises from that
  • The opportunities: Distressed credit recapitalizations, rescue financing for real estate and first lien deals, and public companies significantly cheaper than recent highs that will resume their growth trajectories once this squall has passed
  • The response: Governments will do whatever it takes, eventually! Monetary, fiscal, and regulatory policy need to create a credible response, ideally with monetary and fiscal stimulus in coordination with regulatory rules regarding health, pay, and sick leave
  • Over the next few weeks, volatility may decrease; nonetheless, don’t let large moves surprise you as uncertainty is always a given (especially now)
  • Treasury yields may fall again as new corporate and municipal bond issuance slows to a trickle. Normal bank lending will also shrivel, as the economy declines and we see some defaults, as is inevitable in a downturn
  • Government intervention from the Fed, Congress, and the Administration will soften the blow. Interest rate decreases, quantitative easing, support of the financial system, SBA loans, direct subsidies, payment forgiveness and moratoriums, shutdowns and lock downs will all help
  • Slow global growth, weak spending, and supply side disruption will pressure manufacturing and services for a while, allowing distressed credit lending firms to ink attractive financing deals and bargain hunters to pick up equity cheap
  • Cash positions will increase, and eventually a good portion of that cash will find its way into the markets
  • - — — Private equity and credit funds have over a trillion dollars of investor commitments they can use to buy and lend to distressed companies, thereby helping provide a price floor for assets
  • An economic recovery could start in the late third or fourth quarter
  • Stocks may bottom at the first sign of green shoots (), vaccination, or cure, at which point, treasury yields will probably rise
  • - — — Once we see COVID-19 cases plateau, a more confident health care response, and additional targeted monetary and fiscal stimulus, expect buyers to return to take advantage of price dislocations and attractive corporate and municipal yields

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Avid traveler and art fan, also Partner & Chief Investment Officer @Running Point Capital, a multifamily office and ultra high-net-worth money-management firm

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Michael Ashley Schulman

Michael Ashley Schulman

Avid traveler and art fan, also Partner & Chief Investment Officer @Running Point Capital, a multifamily office and ultra high-net-worth money-management firm

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