“Toute nation a le gouvernement qu’elle mérite (Every nation gets the government it deserves).” Joseph de Maistre, political philosopher
A lot has been going on in the world this past year. Huge shifts in power, from China to the Middle East, are shaping economic strategies throughout the various markets we participate in. To shed some light on global happenings, I would like to share with you what I learned at the American Jewish Committee (AJC) Global forum this May in Washington DC and what I learned when I travelled to Germany in June. Then I will offer some investing insights and suggestions.
The general theme throughout the AJC conference in May, from the speeches given by former Secretary of State Hillary Clinton and Senator John McCain to a private presentation given by current Texas Senator Ted Cruz to our Dallas AJC group, was that the West will not allow Iran to develop nuclear weapons. Each speaker stopped short of saying that the US would have to bomb Iran in order to prevent this, but all alluded to the possibility. Senator Cruz reminded us, “Iran calls us the Big Satan and Israel the little Satan. Only a fool will not take these threats seriously. If we do not act, then Israel will be forced to.” In light of all the chaos in the Middle East to date, forceful action against Iran will most likely happen in the very near future. Unlike in 1981 when Israel was able to neutralize Iraq’s nuclear capability, destroying Iran’s atomic energy/nuclear military hardware infrastructure will be quite difficult since it is spread all over the country. If and when this happens, energy stocks and holdings will experience a lot of volatility. Also, if Israel decides to act, they will have a difficult time with the public relations war as they always have. Ironically, Israel uses its military to protect its citizens, but in most Islamic ruled regions, like Gaza run by Hamas, their leaders use citizens to protect weapons. While Israel tries to neutralize Hamas’ weapons, Hamas’ mission is to kill civilians. Hamas has launched hundreds of missiles against Israel the past few days. According to Israel’s Minister of International Relations, Intelligence and Strategic Affairs Yuval Steinitz, in the last ten years, Hamas has sent over 11,000 missiles toward civilians. It is not surprising that Israel invaded Gaza on 18 July 2014. All three of the American speakers on this topic, McCain, Cruz and Clinton, all said we need better leadership than what we are getting from the White House. Many conference attendees speculated that we will see Clinton in the next Presidential contest.
During this AJC conference, we also heard from the Prime Minister of Ukraine Arseniy Yatsenyuk. He addressed us via video pleading with the West not to abandon Ukraine in this crisis with the dictator Putin. Many experts predict Russia’s economy will collapse if the price of oil goes below $70 and/or if the world stops buying Russian gas. If the proposed sanctions are effective on Russia, they will cut off the money from Western Europe to Russia for their energy.
It seems like this will be the case, and Bloomberg’s new agency says the sanctions stop just short of “economic warfare.” All that Russia seems to export besides energy is chaos and dictatorships as it did throughout the 20th century. We would be wise to treat Russia as an enemy until they start treating neighboring nations like Georgia, Latvia and Ukraine with more respect. Russian supported Rebels shot down Malaysian Airlines Flight 17 with Russian hardware killing people from at least nine different nations. As long as Putin is in power, there is little hope for good relations with Russia. Putin has abolished freedom of speech and freedom of the press. Musicians, like the women of the rock band Pussy Riot, are put in jail because they speak out against Putin. Russia’s willingness to do business with Iran and the likes of Assad in Syria means we should be very wary of any economic dealings with Russia. As many have stated, most notably Sectary of State Hillary Clinton, Putin’s claim he took over the Crimea to “protect ethnic Russians” from enemies is uncomfortably like Hitler saying he was protecting “ethnic Germans” in Memelland, Sudetenland, Rhineland and Austria when he took over these regions for the Third Reich. Putin is taking most Western leaders as fools and Obama and Merkel as straw men who will not intervene to challenge the changes he has made. In June, I and a group of other AJC members, diplomats and scholars met at the AJC office in Berlin, Germany with German Senator Mariueluise Beck. Based on her recent visit to the Ukraine, she reiterated that Putin is behaving like Stalin and Hitler and that the world needs to take stronger action. Marine Corps Commandant James Amos is encouraging President Obama to get back in the fight in Iraq. Who knows what actions should be taken in the Middle East right now with Iraq, Palestine, Iran or with what is going on in Europe with Russian and the Ukraine, but sitting on the sidelines does not seem to be a good idea. It will be interesting to see how the markets react to this uncertainty. Quite frankly, I am pleasantly surprised that the markets have not been more chaotic with all the uncertainty. However, it looks like the world is going to get more violent and chaotic before things start calming down, so I suggest we prepare for increased market volatility.
On a positive note at the conference, the French minister of Foreign Affairs Laurent Fabius also said France is 100% in support of preventing Iran from getting nuclear weapons (nice that they are working with the western world on this point) and then went out of his way to thank the US for saving France in the two world wars fought last century. Many academics are frustrated with France’s apparent lack of gratitude for the sacrifices America made in freeing France from Germany in WWI and then Vichy Fascist Southern France under Petain and Nazi Occupied Northern France under Hitler in WWII. By way of illustration, in 1966, when President Charles DeGaulle took France out of NATO and demanded that all US soldiers should be removed from French soil, President Lyndon Johnson had Secretary of State Dean Rusk ask DeGaulle if the US should also take the 60,000 dead American soldiers buried throughout France from the wars home too. DeGualle, rightly embarrassed, got up from that meeting and never answered. In light of these events, to hear Minister Laurent say in front of thousands that he appreciated America’s sacrifice was significant.
Turning to less violent but equally disruptive developments in the financial world, many large banks have had to pay fines as a way to accept responsibility for the consequences of their actions. Even discussing openly whether and how to hold these financial institutions accountable for economic damage is a revolutionary concept. Citigroup has had to pay $7 billion this week for its horrible handling of the mortgage meltdown in 2008. Since leaving Credit Suisse, I have been disappointed in the negative public announcements about the bank’s activities. The incidents that stand out are Credit Suisse paying the largest fine by the US for violating Economic sanctions against Iran (2009), paying another fine to the US for “bundling mortgage loans with securities [and] misrepresenting the risk” of those “mortgages during the housing boom” (2012), and last, but not least, paying a staggering 2.6 billion dollar fine that the Justice Department levied against the bank for violating our tax laws (2014). Also, the more I learn about how the bank treated Holocaust victims, I regret that I ever worked at that firm. A dear friend and mentor of mine, Holocaust historian Michael Berenbaum, has educated me about how Credit Suisse pursued anti-Semitic policies and got away with one of the largest “robberies” in history. The reparations paid in the 1990’s leave a lot to be desired. UBS has similar charges and fines levelled at it throughout the past few years too, so Switzerland has a lot to be desired in how it treats other nation’s laws and victims of Nazi genocide.
Now I would like to turn to some important investing ideas in light of all these events. Many of you have heard me quote Mark Twain, “history may not repeat itself, but it definitely rhymes.” As a result, I have established relationships with a few, quality providers for access to Senior Loan investment products which I think are very attractive in the current market. As a historian, I know the past offers us insights into what to expect from our current economic environment. Looking at current economic trends, we will definitely have inflation pressures and the Fed will eventually have to raise rates from the current rate of .25%. When they do, the value of bonds will decrease, and depending on how much they raise the rates, bonds could actually be “devalued dramatically.” Senior Loans “provide a hedge against rising rates at a time of historically low interest rates.” They are also more secure than many bonds. As Tim Jenkins at Angelo, Gordan & Company writes, these instruments are “senior secured debt instruments that sit at the top of a corporate issuer’s capital structure. They are senior to the unsecured or subordinate bonds, and, of course, to the preferred stock and equity.” Senior Loans “currently pay investors more than bonds for taking what is actually less credit risk.” Moreover, the income provided from these investment vehicles of between 7-8% is keeping many portfolios above inflation and preserving their purchasing power. As Jenkins continues “within a representative company’s capital structure, loans have the most secure and dependable income stream of any corporate security, debt or equity.” Ironically, as bonds get devalued when the Fed raises rates, these Senior Loans’ “economic value will actually increase.” Moreover, the investment management teams provide increased diversification with these senior Loans by investing in between 150-200 companies. They also have “low correlation” to REITS, stocks, commodities and bonds which helps me diversify portfolios even more. These investment projects are all BDC’s under the 1940 ACT, and no company under this act has been found guilty of fraud as a result of how this 1940 ACT requires entities under it to administer its dealings with outside checks and balances. This is not to say it may not happen in the future, but as of today, this statement stands.
If we have a crisis as we did in 2008, these managers are positioned to protect portfolios. For example, Senior Loans from 2008-2010 made about 6% annually “despite some of the highest default rates in history.” As bonds experienced severe problems with defaults and the Reserve Fund debacle with the Lehman demise almost created a run on the banks, Senior Loans performed well. Jenkins explains that the reason why Senior Loans do better than bonds, especially High Yielding bonds, is that “loans are most often secured by the borrowers’ assets as well as by protective covenants that are incorporated into the loan documents, whereas high yield bonds are almost always unsecured and sometimes even explicitly subordinated to other debt.”
The best time to invest in Senior Loans is right after a major downturn as Blackstone Senior Manager Dan Smith notes. He further states, “Returns are higher, credit risks are lower and receding, companies are de-leveraging and the economy is improving.” One manager I have recently been using focuses on companies that support the energy infrastructure having found that if you support the infrastructure, regardless the price of oil and natural gas, the investment has a high success rate. Also, when one looks at the energy demands of the future, especially with India and China doubling or even tripling their energy consumption within the next decade, one would be wise to invest in energy production. Every portfolio should have some investment in energy. As with any investment, Senior Loans may not be suitable for all investors, however, if you are interested in exploring how Senior Loans could benefit your portfolio, please feel free to give me a call.
In conclusion, even though the world seems to have become very chaotic recently, I can assure you, as a historian, that the world has always been full of chaos, murder, war and change. With this in mind, I think it amazing what the US has been able to do in its short history of a few centuries. The environment we have created for people of diverse ethnicities and religions to thrive and prosper is unique and empowering. We have Thomas Jefferson largely to thank for his separation of church and state. One just has to look at theocracies in the Middle East, like Iran or Hezbollah or ISIS or Hamas or the Taliban just to name a few, to see how when the Parties of God (or Allah) try to enforce their will on all, a society cannot thrive or be productive. Many are frustrated with Washington right now, and they are right to feel this way, but in the end, I feel the US is doing a lot of good. We face major challenges including reforming our educational system, fixing immigration policy, developing thriving democracies outside our borders and keeping a strong military. It can be overwhelming at times, but in the end, I think on the macro level, we must never forget what Winston Churchill said, “America usually does the right thing after exhausting all other options.” And on the micro level, I think we all can make this world a little better if we each remember to do the “next right thing.”
Bryan Mark Rigg
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 India A. R. Lakshmanan, “US Sanctions Squeeze Putin, Stop Short of Economic War,” 17 July 2014.
 Philip Rucker, “Hillary Clinton says Putin’s Actions are like ‘What Hitler did back in the 30’s’,” 5 March 2014.
 David Francis, “Top Marine to Obama: Get in the Fight,” The Fiscal Times, 16 July 2014.
 Andrew Grossman and Christina Rexrode, “Citigroup to Pay $7 Billion in Mortgage Probe,” Wall Street Journal, 14 July 2014.
 New York Times, “New York Sues Credit Suisse Over Mortgages,” 29 Nov. 2012.
 New York Times, “Iranian Dealings Lead to a Fine for Credit Suisse” by Claudio Gatti and John Eligon, 15 Dec. 2009; The Wall Street Journal, “Credit Suisse’s Secret Deals,” Aaron Lucchetti and Jay Solomon, 17 Dec. 2009; Financial Times, “Credit Suisse Pleads Guilty to Tax Evasion,” tom Braithwaite, 19 May 2014.
 Discussion with Michael Berenbaum with Bryan Mark Rigg, 24 May 2014.
 Interview, Ryan Connelly, Franklin Square CFO, 27 August 2012.
 Tim Jenkins, Angelo, Gordan & Company, Through the Cycle: Senior Secured Loans Posed to Perform, 2011, p. 10.
 Jenkins, 10.
 Ibid., 10.
 Ibid., 4.
 For example of companies they invest in, please see Franklin Square Prospectus 2011, pp. 90-93, 124-140.
 Franklin Educational Forum, San Francisco, fall 2011, Track One, Franklin Square Capital Partners, page, 37.
Ibid., pp., 16-17.
 Jenkins, p. 5.
 See Andrew Sorkin’s “Too Big to Fail.”
 Jenkins, p. 13