YC Has Perfect Batting Average Going Into the All-Star Game

YC Has Perfect Batting Average Going Into the All-Star Game

The yield curve (YC) has a perfect record since 1955!
Will it affect the next presidential election?

The MLB All-Star game is one week from today.  No player in history has ever had a perfect batting average at the All-Star break.  No one.  Ever.

The yield curve has been in the game since 1955 and has “correctly signaled all nine recessions since 1955 and had only one false positive, in the mid-1960s, when an inversion was followed by an economic slowdown but not an official recession,” according to the Federal Reserve Bank[i]. A perfect record  predicting recessions.  Sounds like it might be worth knowing about.

See the red line below and how it is flatter than the others, in particular the yellow line?  The yellow line shows rates as they were a year ago and is a normal yield curve meaning longer term bonds pay more interest than shorter term bonds.  The red line is the current yield curve.  Short term rates on the left side of the line have increased significantly while long-term rates have remained nearly constant.  The curve is flattening.  When the left side of the line rises above the right side, the yield curve is then inverted.


Source: bondsupermart.com

Economists focus mostly on the spread between the 2-year US Treasury and the 10-year US Treasury to define an inversion.  Here’s what the yield curve looked like at this time in 2006, two years before the Great Recession invited us to the party.  Notice how the red line dips slightly from the 2-year mark to the 10-year mark?  That is the classic definition of an inverted yield curve.

bondsupermarket2Source: bondsupermart.com

What makes the yield curve move?

In short: The Fed.  The Federal Reserve Bank sets one rate and one rate only: the Federal Reserve Bank Discount Rate.  Until 2008 banks rarely used the Fed “Discount Window” so the rate was purely academic – except for the fact that is drives the global macroeconomy.  That’s right – nearly all economic activity globally takes its signal from this one obscure rate that historically has rarely been used.

The “Great Recession” was triggered by the Fed raising the Discount Rate 17 times, 25 basis points or 0.25% at every Fed Meeting or every other meeting for two years.  This is what it looked like:

fred pic

Source: fred.stlouisfed.org/series/INTDSRUSM193N

Then the Great Recession “hit” and the Fed raced to lower rates then held them at record low levels:

fred pic2

Source: fred.stlouisfed.org/series/INTDSRUSM193N

Notice how rates remained low for nearly a decade?  And now are marching back upward?  The Fed meets July 31, September 25, November 7 and December 18 this year.  Four more opportunities to increase the Discount Rate on top of the seven increases in the last two years:


Source: ycharts.com/indicators/us_discount_rate

The minutes from last Fed meeting in May 2018 reveal the Fed’s thoughts on the direction of interest rates:

“It would likely soon be appropriate for the Committee to take another steptranslation in removing policy accommodation”

Translation: We are increasing interest rates

The Fed pushes the short end of the yield curve up and if macroeconomic conditions do not cause long term rates to rise in sync, a recession results.  Long term rates are not rising so a couple more Fed rate hikes should be all it takes to invert the yield curve.  And given the one to two year precursor effect of an inverted yield curve, the timing of the next recession is likely to coincide with the next presidential election cycle.  What fun!

Test on this on Friday.

What does this mean for you?

Adjust your company’s spending, hiring and investment plans now while you still have time to plan.  Planning on building a new plant to double output?  Might want to put that on the back burner.

Consumer discretionary spending usually declines in a recession as does business spending.  Hiring and expansion get put on hold and employers lay off employees.  Banks tighten up lending because they can’t make as much on long-term loans as they can on short-term loans.  Mortgage lending decreases because home buyers have to pay a higher mortgage payment as a result of higher interest rates.  Riskier assets tend to get punished disproportionately.  Anything in an oversupply condition will be especially hard hit – excess inventory gets extremely hard to move.  On the other hand, less expensive consumer discretionary alternatives typically outperform during recessions.  Going to the movies is much cheaper than a European or beach vacation.  Alcohol sales also tend to trend up.  Maybe the cannabis legal states will see an uptick, who knows, it’s possible.

Most important: Call Vertical Capital Advisors.  We will harmonize your business plan and strategies with the market.


* * *


Vertical Capital Advisors is an Atlanta-area boutique investment banking firm built on creating tangible value for our clients, serving clients in just about every industry.  Our clients are both capital growers and capital allocators.  How can Vertical help your firm maximize value?


Joe Briner
Managing Director
Vertical Capital Advisors LLC
866-912-9543 ext 108


[i] www.frbsf.org/economic-research/files/el2018-07.pdf

How Vibrant is Atlanta’s VC Ecosystem? $1 gets you $7.48

We often hear that Atlanta does not have the vibrant venture capital ecosystem that the Bay Area or Boston or even Austin have.  So how vibrant is Atlanta’s VC ecosystem?

PitchBook just released research[i] that reveals exactly where the major VC regions in the U.S. measure up.  There are only 12 cities/regions that had more than 30 VC deals that experienced successful exits in the last 10 years, a successful exit being defined as 1x or greater return of invested capital at exit.  Atlanta had 35 deals which ranks Atlanta #8 nationally, ahead of Chicago, Raleigh/Durham and Austin.

The most vibrant market is the Bay Area where the 613 successful exits exceed the rest of the markets combined.

The most impressive data from this study was that that the average multiple of invested capital at exit is 8x.  In dollar terms, $1,000,000 of VC cash invested returned $8,000,000 at exit.  The figure for Atlanta is 7.48x.  What was most impressive about Atlanta’s VC exits is that 97% yielded a return greater than 2x, the highest of all 12 regions.

We have honestly been a little bashful about projecting exit multiples in the double digits.  We walk that fine line between being credible and incredible.  Even VC firms frequently look askance at projections that show 10x or 20x multiples at exit.  We have a pharma opportunity that should generate 25x to over 50x in three to five years.  So guess what?  Vertical Capital Advisors is going to set the curve going forward.  We are going to work with the VC community to move the needle.  We are located in a wonderfully creative, talented and resource-rich region and VCA will be an agent for transformative growth in our region.




Vertical Capital Advisors is an Atlanta-area business advisory firm built on creating tangible value for our clients, serving clients in just about every industry.  Our clients are both capital growers and capital allocators.  How can Vertical help your firm maximize value?


Joe Briner
Managing Director
Vertical Capital Advisors LLC
866-912-9543 ext 108


[i] http://pitchbook.com/news/articles/which-us-cites-generate-the-best-vc-returns

World Debt Exceeds $152 trillion – Does it even matter to you?

The IMF (International Monetary Fund) issued a report today[i] that shows we learned nothing from the Great Recession.  In fact, as the world slid into recession and growth slowed into reverse, instead of deleveraging, we collectively amped up borrowing – private borrowing by consumers and businesses and sovereign borrowing by countries – in massive quantities.  Counterintuitively, economies shrunk and debt blossomed:


The IMF report is chock full of beautiful charts and graphs and loads of scholarly research.  Really great stuff.  Exactly what you expect from a group that has such exciting committees as: Dissemination Standards Bulletin Board (DSBB), General Data Dissemination System (GDDS), Reports on Observance of Standards and Codes (ROSCs), and Special Data Dissemination Standard (SDDS).

The one thing that the IMF got right is placing the blame on globalization of banking and easy access to credit.  Which brings us to you.  And me.  The easy access to credit pre-recession was universal – consumer mortgages leading the way.  Post-recession, the credit bubble has been inflated primarily by large corporate borrowing, governmental borrowing and two areas of consumer borrowing: cars and student loans. bright-note

Notice what is missing from the above list? It is the heart of the American economy – small and mid-sized business borrowing.  It has been incredibly difficult to obtain.  The bright note today is we have found a few brave sources of capital who will work with great management teams who have a great products and better business plans.  It’s not easy, in fact it is harder than it has ever been.  And we have to navigate often unconventional terms.  When we get your deal financed, it is all worth it.

Joe Briner
Managing Director
Vertical Capital Advisors LLC
866-912-9543 ext 108


[i] Source IMF  http://www.imf.org/external/pubs/ft/fm/2016/02/pdf/fmc1.pdf

Have you ever wondered if you should call a professional to help your business restructure its debt?


You see reports in the financial press and mainstream media about companies that have spectacular missteps and flame-outs but for every story you see, there are perhaps hundreds or even thousands that you don’t.  In fact, there were 12,764 business bankruptcies filed in the first six months of this year, that’s over 2,000 per month on average:


Source: http://www.uscourts.gov/report-name/bankruptcy-filings
Chart © Vertical Capital Advisors LLC 2016

Every one of these cases is a tragedy involving the loss of up to hundreds of millions of dollars and countless jobs.  The human toll, the distress caused in the lives of thousands of people, is incalculable.

So have you ever wondered if you should call a professional to help your business restructure its debt?  If the answer is yes, you have wondered, then the next step is to make a call.

You see, if the right financial professional is involved early enough in the process, many more options are open to the leaders of the business.  The right plan can shed unproductive assets, invest resources in revenue and profitability drivers and create a leaner, more focused, more agile enterprise that can once again compete effectively in the marketplace.  It is always a tough process but guess what, it is much easier than bankruptcy.  We know.  We often get the call from creditors who have had enough and are ready to pull the plug.  We have liquidated many businesses and the shock and tears and disbelief sadden the soul.

In most cases, your creditors and investors are delighted to see you take affirmative action to resolve a crisis.  They much prefer you call us to craft a solution over them calling us to liquidate your business.  They almost always give us another length of runway to develop and implement a recovery plan (that they approve) and sometimes they even provide additional funds to make it happen!

If you have the right team, a credible plan and the resources to implement it, save some modest amount of capital to prime the pump (modest being defined by the size of the enterprise – ranging from tens of thousands to hundreds of millions of dollars), your business can be reinvented so it can once again thrive.

Joe Briner
Managing Director
Vertical Capital Advisors LLC
866-912-9543 ext 108

Hate Tina? The smartest people in the room do, too

A buddy of mine runs bond funds for a huge multinational financial firm.  He hates Tina.

Tina is an acronym for “there is no alternative”.

Bond fund managers lament having no good choices to invest billions of dollars.  Bond yields are notoriously low and they have been for eight years.  Central banks across the globe have kept short term rates at or near zero that long.  Sure, the Fed raised the fed funds rate 0.25% in December and the market threw up all over it.  The Fed wants to raise it another 0.25% but is concerned that the market may tank if they do.  All central banks are confronted with the same problem: no real economic growth, stagnant wages, rampant underemployment, anemic business investment.


What is crazy is that central bankers, always the smartest people in the room, worldwide have been prancing around while the emperor who has no clothes leads the parade.  The really crazy thing is that the smartest people on the planet, global central bankers, have no clue how to fix it.  They just met for three days in Jackson Hole, Wyoming, and this is the best they could come up with:

Their message to global governments: “HELP!”[i]

Central bankers hate Tina, too.

It appears their solution may be for central banks to buy corporate debt[ii], in effect supplying capital directly corporations which is equivalent to nationalizing corporate debt.  You heard that right, taxpayers will be taking on the risk of large (and maybe small) corporations if central banks buy corporate bonds.  It’s another form of bailout.

The low rate environment is forcing big banks to double down on financial risk on scale never before seen.  Want evidence?  Look at the ProShares Ultra Short QQQ (SQQQ) whose objective is to generate three times the negative performance of the S&P 500 (ProShares symbol QQQ) every day.  The top five positions (counter party positions, technically) are held by commercial banks.  Banks are putting their capital to work on the financial markets instead of lending it to small and medium-sized businesses because their models show less risk and higher return with higher certainty than making loans.

Top Holdings

Institutional investors the world over are doing the same.  Hundreds of trillions of dollars have been allocated to “investments” that do not produce anything: no real products or services, no jobs, and in many cases, no taxes.  All financial engineering.

George Soros has made the same bet in a very big way[iii].  He has shorted 4 million shares of SPY, the SPDR S&P 500 ETF by buying puts which gives him the right to put the stock back to the counterparty if the price falls below the strike price.  This is essentially the strategy the John Paulson employed to pull of the Big Short.  But it wasn’t a quick trip for Paulson and it may not be a quick one for Soros either.  Paulson had to borrow over $200 million to keep his bets in play, to avoid margin calls in effect.

In an earlier blog I promised to give you a glimpse of where to park funds in order to prosper in the next recession.  But beware, this could be a case of being right but still being wrong because if the markets tank, as markets do, and if the world’s top commercial banks are wiped out, it may be a very long time before one could be able to access funds tied up in them and in the meantime, legislators may invent a way to nationalize your funds as well.  And keep in mind that even Paulson was never completely certain where the bottom was or whether he would be able to collect on all of his correct bets.

The advantage of SQQQ over shorting stocks is that when you short a stock, you can only profit between your acquisition price and zero.  SQQQ is designed to triple that return.  And the advantage of SQQQ over buying puts as Soros is doing is that puts expire after a period of time, taking the premium you paid to buy them with them, meaning you have to be prepared to re-buy several times if you are too early.

Tina is making people do crazy things.



[i]  Global central bankers, stuck at zero, unite in plea for help from governments https://ca.news.yahoo.com/global-central-bankers-stuck-zero-unite-plea-help-123135496–business.html

[ii]    https://ca.news.yahoo.com/fed-nears-rate-hikes-policymakers-plan-brave-world-005117150–business.html

[iii]  Believe in George Soros? Short S&P 500 with These ETFs  www.nasdaq.com/article/believe-in-george-soros-short-sp-500-with-these-etfs-cm666674#ixzz4IjRqKmFA 


Could the U.S. Government Take Part of My Retirement Savings?

I have seen this movie before, Maestro – and I don’t like how it ends!


I received a notice today from a retail broker informing me that under new federal regulations our company cash reserves can no longer be invested in money market mutual funds that maintain a stable $1 net asset value.

I had to choose whether to receive a check for the funds or move them to a money market fund that invests in US Treasury obligations.  Simple enough, I chose the UST fund and went on with my day.

bloomberg 81814Then a friend sent me an article about a rumored tax on retirement funds.  Sure, I had seen these articles before, we all have.  The financial press has written amply about the prospect of a European “bail in” but here, in the U.S., come on, no way.  Yes, Argentina, Hungary, Poland, Portugal, Bulgaria and Russia have all “nationalized” private pensions and retirement savings, but here, in the gold old U S of A?  No way.argentine

Then it hit me.  This is exactly how we started down the slippery slope that plunged us all into the Great Recession.  It started with innocuous little changes.  Greenspan advocating 65% then eventually 85% home ownership.  Social engineering, not monetary policy, to be sure, but for a great and noble cause: greater stability and bank bail ininvestment in communities that comes with home ownership.

Then came the financial creativity.  No longer would mortgage lenders be bound by the decades old strictures of 20% down (or 10% with PMI) and maximum 36% debt ratios.  Mortgage lenders were loosed to run amok in society, preying on any group unsophisticated enough to know the dangers they were signing up for.  Greenspan, Clinton’s “Maestro”, changed federal policy to allow banks to invest Tier 1 capital in mortgage-backed securities, flooding the secondary mortgage market with trillions of dollars in liquidity.  He changed the net capital rule for broker-dealers, essentially allowing infinite leverage and exposure to risk.

Greenspan set the stage for the catastrophe, then, as the economic bloodbath raged, the henchmen slammed us with mountains of new regulations and flooded the markets with trillions of dollars printed out of thin air.  Although he largely denies personal culpability for the Great Recession, he sheepishly, once upon a time did admit that some of his models may have been wrong:

greenspan testifying

The parallels of the precursors to the 2008-2010 Great Recession to what we are experiencing today are there, sure enough.  Innocuous government regulation aimed at improving the markets but with serious ramifications when the economy hits the inevitable rough patch.

I have seen this movie before, Maestro – and I don’t like how it ends!

Where’s the safe zone?

That will be the topic of a future blog.

What next? Sell in May and Go Away

Sell in May and go away

That’s the mantra of many traders.  Nothing happens in the summer months because everyone is in the Hamptons.  It’s 5:00 Friday, July 1 and if I needed to reach one of my former bosses right now, my call would likely be returned sometime around Wednesday next week.  I know.  It happened more than once.

But this summer the roads back to NYC and Greenwich from the Hamptons may be clogged soon.

Here’s why.

blog 7 1 pic 2

Signaling a massive capital flight to an asset with universal value, gold has skyrocketed $300 or 30% in the last three months:

Source: Monex.com

Large amounts of capital are moving into the asset that has never gone to zero.

Global banks have plummeted over the last five years.  Deutshce Bank lost$7 Trillion in value in the fourth quarter by itself.  That’s Trillion – as in One Thousand Billion, times 7!!

blog 7 1 pic

Source: https://dentresearch.s3.amazonaws.com/EconomyandMarkets/images/2016/070116_ENM.gif

Why?  Because eight years into this “recovery” the global financial system has ingested $550 Trillion in credit default swaps and other derivatives.  Duetsche Bank has ten percent of the total.  One institution has 10% of the global total of what Warren Buffett called “financial weapons of mass destruction”.  “How is that possible, Joe?” you ask.  “I thought it was all about deleveraging after the Great Recession”.

That was what we all read in the financial press.  Financial regulators worldwide were forcing systemically important financial companies to rein it in, to decrease risk, to reduce reliance on borrowed funds.  It appears that was all window dressing.  Even the blog I wrote earlier this week about the eight largest US banks passing the new “stress tests” was evidence of the prevalence of this new story line that on the surface looks great but just below the surface is in reality probably not worth the paper the plans are written on.

To put the risk we are facing in perspective, the Gross World Product was $107.5 trillion in 2014 according to the CIA World Factbook.  Based on the $550 trillion figure above, we have hedged every financial transaction in the world more than four times over.  I just bought a $3 pack of gum at the Atlanta airport.  Global financial traders have already placed bets totaling $12 for and against that transaction.  Why?  Because financial engineering has taken precedence over actual engineering, actual goods and services.

If you don’t follow Harry Dent at DentResearch.com, you should.  Harry has spotted macro trends worldwide for almost 30 years.

Harry identified that many of the world’s largest banks are in deep trouble but regulators, even the vaunted European Supervisory Authorities are apparently ignoring the problem.

How big is the problem?

Italy’s banks have 18% non-performing loans.  That means bad loans are over two times larger than their systemwide collective capital.  I can tell you from personal experience (as the founder of Georgia’s largest community bank – one that failed in the Great Recession, I can say this with no risk of contradiction) that a bank has no hope of survival in this condition.  And this is the entire Italian banking system. Italy is part of the EU.  Losses of this magnitude could wipe out the entire capital base of the EU.

But Italy only takes third place in the deficit Olympics.  Greece has 34% non-performing loans and Ireland has 19%!  No slacker, Portugal has 12%.

If regulatory bodies had the resources to shut these institutions down, they would.  The fact is they are also undercapitalized.  It’s a house of cards that everyone hopes will miraculously remain standing but it simply can’t.  Our own FDIC operated in the red for a couple years but there was nothing anyone could do about it.  The option was to shut it down and start over.  Every bank in the U.S. would have had a run that day.  The next day, all banks would have failed.  Global financial meltdown.  We have been 48 hours away from this scenario a few times.  The first time was in September 2007.  I remember it well.  There was briefly no LIBOR.  Banks would not lend excess reserves to other banks overnight because they were afraid they would not get their money back the next morning.  The Fed and the European Central Bank engaged in coordinated flooding of over $250 billion into the financial markets over one weekend to maintain market liquidity.  I told my bank board that this had never happened before.  That was just a precursor of the tidal wave barreling down on all of us.

The Greater Recession

Enough doom and gloom.  I write about this so that it might give rise to the thought about what to do when the Greater Recession starts.  In the last one, the Great Recession, cash was king.  One client called me and excitedly exclaimed, “I just bought my four million dollar loan from the FDIC for eight cents on the dollar!”  He wasn’t bragging, he was genuinely excited at saving 92%.  He had just saved his company from certain financial ruin.

Be prepared.  Cash gives you optionality.  You can choose to spend it or invest it or you can simply hold it.  If another recession hits, you will have your pick of assets to purchase at very deep discounts if you have cash that you can access.  This is a great time to be building your reserves.  And if we miraculously avoid another recession, you have the option of investing in assets that have a more certain future.

The New Normal

What will the banks do this time?
 Life Post-Brexit

Will we have to adjust to a “new normal” the way we did in 2008 and beyond?

By 2010 it was clear that the recession was not ending anytime soon.  We began to talk to clients and capital providers about the “new normal” in many industries.  The metrics had just simply changed.  Most industries have recovered and the industry benchmarks have returned to where they were pre-recession and many industries have entirely new metrics.

Fortunately there have been structural changes, especially in the banking system.  In fact, the eight largest “systemically important” banks had to specifically test for the impact of severe UK recession coupled with similar conditions in the Euro Zone and Japan and a less intense recession in Asia, and they all passed according to a Federal Reserve report.  Click here for a link to the Bloomberg article on the topic.

banks post brexit

And these banks had to draft their own obituaries – a detailed plan of what to do in the event the bank failed (now wouldn’t that just put you in a bright cheery mood if you had had to do that?).  Bankers had to get much more deliberate about how they manage their operations and they have to plan for extraordinary events in ways they never did before.  The most important factor at the end of the day is cash capital, or, in banking terms, liquidity – the ability to meet cash demands when they are made.  Probably not a bad idea for your company to do the same.  Plan to have enough cash to meet the needs of your business for up to two years without borrowing or selling assets.

Can you do it?

We may have seen a permanent shift in banking in the last several years.  U.S. banks have more regulations and are under more pressures than they ever have been.  They are forced to look more closely at everything they do.  There has been an explosion of growth in the shadow banking system – non-bank capital allocators like hedge funds – that are filling in the gaps left by the banks withdrawal from certain sectors.  It’s a different game with these operators.  Vertical Capital Advisors LLC is built to help you navigate your company through the new new normal in the capital markets.