In June 2020 Amicus celebrated the anniversary of the twelfth year since its founding in 2008. In some ways June 2008 was very similar to June 2020 and in other ways quite different.
For background, Amicus Advisory (then called Structured Credit Research and Advisory) was established in June 2008 when it immediately began helping numerous middle market wholesale clients navigate their way through the global financial crisis giving many holders of structured products the confidence to retain their investments rather than sell at distressed prices, which we assessed in most cases was less than their intrinsic worth.
In 2013, we changed our name to Amicus to reflect the changed nature of our business (which had broadened out into general fixed income advice for conservative wholesale clients) and to emphasise our company philosophy of being “a friend” to our clients. Amicus is the Latin word for “friend” and its root has been used in many modern languages meaning friendly or friend: amicable (English), ami/amie (French), amigo/amiga (Spanish/Portuguese), amico/amica (Italian).
In June 2008, financial markets were nervous as they were aware losses in the US sub-prime mortgage area had the capacity to affect financial institutions (although few commentators seriously thought stronger financial institutions would be threatened at this time). The investment bank Bear Sterns collapsed in March 2008 under the strain of sub-prime losses, but it had been acquired by JP Morgan without any real disruption to the financial system. However, prices of leveraged structured products, such as SCDO’s, were depressed as credit spreads had widened considerably, but there had been few defaults of companies and the ratings agencies were slow to downgrade many others corporate institutions, particularly financial ones. The markets and and those using purely fundamental analysis to assess the situation were forecasting different outcomes.
Fast-forward to 2020 and again the markets and fundamental analysis are telling very different stories. However, this time the global economic future appears dire, but the markets have a sanguine outlook with equities at or near record highs, interest rates low and credit margins compressed.
Possibly one of the differences is that back in 2008, the concepts of zero interest rates, quantitative easing, central banks buying all types of debt to control yield curves and virtually unlimited money printing were seen as outlandish. Had these policies been seriously contemplated they would have been viewed with horror as they were more akin to the policies of the central bank of Zimbabwe rather than the US Federal Reserve or the RBA. However, these policies largely worked during and following the 2008 and 2009 financial crisis or more specifically worked to stop the financial system and investment markets collapsing even if a side-effect has been many developed western economies enjoying positive but sub-par growth over the last decade despite a near zero interest rate environment.
As was the case following the 2008 crisis, it is highly likely the investment markets and the global economy will come back into alignment in the next few months (or years), but the unanswered question is whether this will happen as a result of investment markets falling either gradually or precipitously or through a swift economic recovery with little residual “scarring” from the COVID crisis or some combination of both.
We confess to not knowing the answer but we recognise the risks caused by what is accepted as an obvious mis-alignment and Amicus stands ready to assist our clients going forward should markets become more volatile and adverse. We think the latter is more likely than not given the current mis-alignment, although predicting when this may happen is not easy.
