Money Clip

Blog by Matthias Paul Kuhlmey


Matthias Paul Kuhlmey is a Managing Director & Partner at HighTower Advisors, where he serves as wealth manager to High Net Worth and Ultra-High Net Worth Individuals, Family Offices, and Institutions.

Tag Archives: Debt



Big Themes – Outlook 360 Spring Edition

Wednesday, May 15, 2013

Posted By: Matthias Paul Kuhlmey

I. Introduction

Five years ago, we founded HighTower in the midst of the 2008/2009 financial crisis. This, in itself, was a courageous undertaking at that particular time, and we certainly (in retrospect) contributed to a Big Theme ourselves (knowingly or not). The transformation of the financial industry is in full motion, with an increasing number of independent financial services businesses being established throughout the marketplace and across our nation. In this competitive landscape, HighTower was recognized as one of the fastest-growing, privately-held companies in the U.S., recently ranked #13 (lucky number) on the prestigious Inc. 500 list. Today, we are one of the leaders in the evolution of the independent model for financial advice.

To refresh our collective memories, in case the 360 format does not “ring a bell”: Our partnership is not bound to follow any single viewpoint. As we do not have to sell product, but rather provide advice to our clients, our business model allows us to reduce or avoid many conflicts we may have faced earlier in our careers as financial advisors. More importantly, we enjoy insight into leading opinions from Wall Street and beyond. On this basis, we made the decision, some time ago, to discontinue publishing a standard market outlook in lieu of a more reflective approach  ̶  a “look around the industry,” or 360, as we named it.

In this 360 edition, we focus on themes that may not be relevant with respect to immediate financial market and related investment outcomes. Instead, we provide a selection of viewpoints from our respected HighTower Partners, with a focus on aspects that could lead paradigm shifts and may have an impact on investment allocation choices and outcomes in the long run. Whereas we recognize the importance of tactical and strategic allocation choices, it is monumental to also consider the “big picture,” specifically in an increasingly interconnected world, either to avoid risk or to seek an investment-relevant opportunity.

Topics covered include the challenge of feeding a growing world population, demographics and economic development, and the potential end of an independent Federal Reserve Bank.

Please follow this link for the full article:  2013 Q2 Big Themes

Electric Avenue

Wednesday, August 8, 2012

Posted By: Matthias Paul Kuhlmey 

 

It all starts quite unassuming – a 7-minute boarding delay due to late aircraft arrival, some “weather”, but a lot of good will and optimism regarding the newly declared “wheels up” time. After one hour sitting on the tarmac (known as “runway” for our European friends), the moods are heating up … three hours into the dilemma, anger and frustration are quite apparent, … moods have reached a “tipping point”. What one can envision from an individual perspective quite vividly, takes place in societies as well – with things going from good to bad, to sometimes experiencing the “tipping point.” 

 

The Sovereign Debt Crisis in Europe has brought some ugly aspects to the surface, and we must be concerned not only with the economic impact but with the “societal tipping point”; according to recent reports, the Spanish jobless rate has reached close to 25%, but youth unemployment now ranks at 53% (!) with youth being defined as the group of job seekers between the ages of 16-24. The picture is quite similar in other debt-laden European nations …

 

In 1981, the United Kingdom was affected by a more significant recession, and to this day, the Brixton Riot, a violent outbreak involving 5,000 people and leaving several hundred injured, is considered directly linked to the difficult socio-economic situation of Brixton, a part of South London. “In the aftermath of the riot, Margaret Thatcher dismissed the notion that unemployment and racism lay beneath the Brixton disturbances, claiming ‘Nothing, but nothing, justifies what happened’ – although figures showed high unemployment amongst Brixton’s black population; overall unemployment in Brixton stood at 13%, with 25.4% for ethnic minorities, and unemployment among black youths at an estimated at 55%.” 

 

Whereas other factors contributed to issues in Brixton, it needs to be noted that “tipping points” may be forming in several European metropolis as a direct result of the economic malaise being experienced; very soon, policymakers will have to “juggle” their efforts between “external justification” of sovereign finances, and “internal needs” to bring ease to their respective societies – a task that will make the integration of Europe to a much needed fiscal and federal system even more difficult. 

 

“Electric Avenue is a song by Eddy Grant, released in 1982. The song reached #2 on both United States and United Kingdom singles charts. Grant’s lyrics refer to the 1981 Brixton Riot, the title referring to Electric Avenue, a market street in the Brixton area.” 

 

P.S. … further, related to “electricity”, courtesy of our friends at GaveKal, it is to note that growth in Chinese electricity production is “flat-lining.” In June, output of electricity “grew” by precisely 0% YoY, after meager gains of 2.7% in May and 0.7% in April. Over the same period, industrial value-added has been growing by around 9% YoY; this apparent disconnect has prompted incredulity and doubt among many observers of the Chinese economy: is it really possible for a manufacturing-heavy economy like China’s to be growing at a decent pace when electricity is not?

 

Big in Japan

Wednesday, July 18, 2012

Posted by: Matthias Paul Kuhlmey 

 

Here is a good riddle: What two sovereign nations did the IMF just declare can practically be considered “Zombielands,” as their debt burdens have reached levels that cannot even be balanced over the next 5 years? Hola, Spain and Konnichiwa, Japan! Japan, in fact, is one of the most indebted countries on the planet with gross government debt at 230% of GDP. The interesting (or rather bizarre) thing, however, is that the Japanese currency (Yen) has traded at multi-month highs, when compared to the U.S.-Dollar, and Japanese Sovereign Bonds (JGBs) have seen strong demand in global markets; this is not exactly a logical outcome, at least from the perspective of an informed investor.

 

Japanese authorities are clever people, as they realize the financial game is all about marketing.  Due to the dire situation of Japan’s debt, earlier this year the Japanese Government turned to a very popular girl group, AKB48, to help promote the interest in Japanese Government Debt:  “AKB48, one of the world’s highest-grossing acts with more than $200M in CD and DVD sales last year, is a phenomenon in Japan and across Asia, with members appearing in commercials for everything from chocolate to mobile phones.” And you really thought finance was boring!?

 

As we are not suggesting that AKB48 did the trick with investors’ increased interest in JGBs and, consequently, the Japanese Yen, our riddle needs more perspective:  It is all a “game of relativity.” The most liquid bond markets in the world are found in the U.S. (39%) and -surprise, surprise- Japan (20%). With a continued need for global finance to “park” liquidity, but also persistent problems in “Euroland,” European Sovereign Debt has been largely avoided.

 

What have we learned today? First, things are not as they appear (they are actually worse), and, secondly, music really does matter.  No, not AKB48, but Alphaville.  The (German) synth-pop band, Alphaville, entered the music scene in the 1980s, with their smash hit, “Big in Japan.” “The title comes from the phrase, Big in Japan, which was used to describe Western bands who are popular with Japanese audiences while garnering little attention in their home country.” 

 

One may want to think about the fact that the “value” of Japanese Bonds and the Yen are not here to stay. Sayonara.

 

Dead Bodies?!

Monday, July 9, 2012

Posted by: Matthias Paul Kuhlmey

 

Strong words: Both the German Chancellor, Angela Merkel, and her Federal Minister of Finance, Wolfgang Schäuble, have recently made comments that the issuance of Eurobonds (a way of sharing the debt burden of Europe, collectively) would only occur over their dead bodies. To my surprise, when sipping the Sunday morning coffee and checking on the “status of the world,” a story in the German Der Spiegel surfaced, suggesting that Mr. Schäuble (and other German politicians) is becoming more open to the idea of Eurobonds. Wie bitte?

 

At the beginning of last week, I indicated in our regular Moneylife radio interview on Europe that the (4th of July) “firework” unleashed in financial markets would most likely “fizzle out.” Sure enough, this was the case in equities, but even more recognizable in the Euro/Dollar exchange rate. Last Friday, the currency pair broke significant levels to the downside, and is now trading at 1.2270 (for reference, this exchange rate was at 1.30+ levels in February of this year and 1.40+ in late 2011). Do market participants (and Herr Schäuble) know something we don’t? Certainly, they do.

 

One of the main issues of the European Union (and European Monetary Union for the purpose of our discussion) is that its banking system is, simply speaking, “bust.” It is absolutely instrumental to re-capitalize European banks (as the U.S. essentially did in 2008/2009), and, at a minimum, attempt to make them a strong anchor to the European economy (which, by the way, is larger than the U.S. with USD 17.6 trillion in combined GDP vs. 15.1 for the U.S.). With failing banks in mind, we are convinced that even the most conservative (German) politician is realizing that the game is over (in hindsight, it seems last October’s aptly titled blog, Game Over, was spot on) and that only drastic choices can help to “buy” time, and (hopefully) possibly relieve financial markets from continued stress.

 

Goldman’s Huw Pill, recognizes Europe’s Long March ahead – a position of further socializing the aspects of fiscal integrity and sharing the mutual debt burden. Whereas the process has been insufficient, so far, months may pass with market participants continuing to celebrate early and little victories. Let all stay healthy to “embrace” the volatility to come – especially you, Mrs. Merkel and Mr. Schäuble, as you have already offered your (political) life to your cause …

 

Dr. Twist

Thursday, June 21, 2012

Posted by:  Matthias Paul Kuhlmey

 

Instead of “we told you so,” let us take the high road and begin this blog with “here we (I) go again” (for the music lover, this would be Whitesnake, 1987). Mr. Ben Bernanke, aka Dr. Twist (from now on), is “in it” deep. Ben, it is time to stop the “flip flopping” – either the economy is recovering, or not, and needs financial stimulus, or not. The same request needs to go out to our somewhat spoiled investment community: Market direction cannot indefinitely be determined by simple expansion of a Central Bank’s balance sheet (here, the FED), or the prospect thereof. At the end of the day, a buyer of an asset should be driven by the notion that he or she is paying less than the real or inherent value of that asset; this, most certainly, has not been the case since the onset of the big reflation trade in March 2009.

 

To be clear (apologies if somewhat repetitive): Most developed economies are exposed to the aftermath of a balance sheet recession, not a regular recession; with this in mind, all good effort put forth by the FED cannot heal the issue. Market participants are attempting to reduce debt and are not necessarily tempted by lower rates to “lever-up” further. With U.S. 10-y rates already at 1.60 levels, one may ask how low rates need to go (from the FED’s perspective), and what yesterday’s ill-guided Operation Twist is really all about. In case you missed it, Dr. Twist announced that the FED is extending a 2011 policy of selling shorter-dated Treasuries, with proceeds being used for the purchase of longer-dated paper in the amount of $276 million, thus potentially lowering rates on the long-end of the curve.

 

The main issue remaining is that there is too much debt in the global system; this is what is haunting Europe today. In Monday’s radio interview, we took the position that it is not about Greece any longer (already priced-in to equity and currency markets) – it is about Spain and Italy. According to David Rosenberg, the “average Eurozone country has a median 500% total Debt/GDP ratio across the household, business and corporate sectors,” and “Italy’s sovereign gross financing-needs this year come to 29% of GDP” – unsustainable! Therefore, our global financial system will require a reset, most likely politically motivated, with the “wave being initiated’ in Europe (don’t be fooled, this is also a U.S. issue, but potentially less so and later).

 

Expect volatility to remain high. The strategic, long-term investor needs to consider selective buying into this weakness; the biggest risk in the years to come is loss of real purchasing power. Cash and bond holdings will not “do the trick” to prevent it from happening.

 

P.S. one important addition: For Germany, it is all about Greece. Tune in to watch the EURO 2012 soccer match between Germany and Greece on Friday, June 22, 2012. Even German Chancellor, Angela Merkel, is preparing for a trip to be watching the game live and in color. Bravo!

 

‘Seen the Future

Tuesday, May 15, 2012

Posted By: Matthias Paul Kuhlmey

 

I. Status-Quo

 

It was quite the fascinating spectacle, not only for little boys, when about two weeks ago, the final journey of the Space Shuttle Enterprise took course over New York skies. The “retired” shuttle will be installed at the Intrepid Sea, Air and Space Museum on the Hudson River and will go on display July 19, 2012.

 

“Nice,” one may think, as something “quite distant,” at least under previously normal circumstances, will become closer to the eye of an observer. On the other hand, this is a somewhat “tragic retirement,” as nothing comparable, at least so far, has replaced the Shuttle or the entire related Space Mission. The same is true for the once fastest passenger plane, the Concorde, which was taken out of service in 2003 and not yet replaced with an equivalent. No longer being able to fly between London and New York in about 3.5 hours, or to lift-off to space in a manned spacecraft, makes us wonder whether we are truly creating a technological evolution, or if we may be moving backwards (hopefully to prepare for the next “wave forward”).

 

When observing today’s state of global financial markets, especially when ignoring the “noise” of intraday trading of financial instruments and their price movements/valuations, one may wonder if we are moving backwards in this area, as well. If the situation is evaluated on a purely nominal basis (for most onlookers, a relevant indicator is the level of stock markets), the anticipated economic recovery since the onset of the Credit Crisis of 2008/2009 may well be underway. If, however, this aspect is judged from a broader perspective, the global economy and related financial markets may have become a place with increased levels of imbedded systemic risk – with expansive credit creation being only one of the contributors to this issue.

 

‘Seen the Future is most certainly a daring title for this Quarterly Outlook, but as a mounting number of our respected clients and friends continue asking about “how the entire dilemma could play out,” we will attempt to bring some answers, or at least raise questions that should be asked when prudently allocating money.

 

One of the most important things to explore is whether we have indeed been moving backwards and if this may continue for some time to come or, alternatively, if the “move forward” has already started.

 

We realize that we must accept a certain degree of personal and/or professional risk, since our messaging may appear overly concerned, or even negative, at times. In applying an elevated standard of care, as a fiduciary to our clients, we have no choice but to “tell it like it is.” Thus, a broad investment framework on how investors should be positioned will be part of this update.

 

Please follow this hyperlink  for the full report.

2012 Outlook: 360

Monday, January 23, 2012

Posted By: Matthias Paul Kuhlmey

 

In a continuously changing environment, we need to change as well. Rather than continuing to provide you with a standard investment outlook for the New Year, we wish to offer a new format – a “look around the industry,” or 360, as we like to call it. 

 

At HighTower, we continue to be in a most fortunate position, which is to have insights into leading opinions from Wall Street and beyond. More importantly, we are not bound to follow any single opinion. As we do not have to sell product, but rather have to give advice, our business model remains un-conflicted. On this basis, we have access to the brightest minds and opinions, including the ones of our very established and thoughtful clientele.

 

Going forward, we will allow you insights into this pool of intellect. For this purpose, the attached thought piece will also be linked to our established blog, Money Clip, and continuously updated. On this basis, we are creating a living mechanism, not only related to content delivered, but choice of media. This world is challenging, and we are ready! 

 

Enjoy our first compilation of thoughts, opinions, and ideas from industry leaders: Click Here.

 

Follow-up

Wednesday, January 18, 2012

Posted By: Matthias Paul Kuhlmey

 

Three very interesting developments that have occurred over the past 24 hours require our follow-up: Some time ago, we reported on the matter of Currency Wars “brewing” - not an entirely new concept. In 1931, leaders in the U.K. were the first to realize that economic competitiveness could be improved by devaluing the Pound Sterling against Gold (competitive devaluation). It is commonly understood that, beyond several peripheral conflicts, the most prominent Sovereign Currency War is taking place between the U.S. and China. At center-stage of this dispute is China’s strategy to continue pegging its currency, the Renminbi (RMB), to a basket of major currencies (before 2005, the RMB was pegged to the USD exclusively). Much of the trans-Pacific controversy has been about the resulting misaligned RMB exchange rate, as well as the need to correct related trade and financial imbalances between China and its major export markets, particularly the U.S.

 

Apparently, the frontier is changing. According to a fascinating article recently published in a German newsmagazine, many Germans, including high-ranking politicians, perceive the latest downgrade of 9 European nations (by rating agency Standard&Poors) as an “attack” on their “beloved” Euro. From a German perspective, this is technically incorrect, as Germany is an export-driven nation, but facts do not change prevailing opinions. Sure enough, the U.S.-based agency “amid a wave of criticism is defending its decision … and insisted Saturday that the region’s leaders aren’t doing enough to solve their debt crises” (I’m glad that enough is done, here, in the U.S., right?). This development alludes to another topic we have recently shared our concerns about: All three major rating agencies that “rule” today’s global landscape are, without exception, in “American Hands;” this is most certainly problematic, especially considering that practically all nations of the developed world are dealing with the consequences of a multi-decade “debt super-cycle,” including the U.S.

 

With the above topic in mind, we previously pointed to the fact that, relative to Sovereign-related debt issues, the Europeans have far more options left, when compared to U.S. policy makers – granted there is the political will to take action; i.e., dealing with the issues “Anglo-Saxon” style, or, more specifically, inflating the system. A news flash, yesterday, gives further basis to this concept: According to the FT Deutschland, the European Central Bank (ECB) is prepared to consider Quantitative Easing as a measure to bring aid to many ailing European nations; if this is truly the case, the Europeans will “fire their bullets” and enter deeper into Currency Wars. Not that it will help the Euro, after all, but determination is key as part of the ongoing circular game of competitive devaluations.

 

 
 
 
 

Featured Content

Matthias Paul Kuhlmey

  • 505 5th Avenue
  • 14th Floor
  • New York, NY 10017
  • Office: +1 917.286.2707
  • Fax: +1 917.677.8754
Send email

Connect with
Matthias Paul Kuhlmey

Copyright ©2013 HighTower