American Consequences - August 2017


Financial follies and disaster in the making

‘Dumb money’ is dangerously complacent today... Betting on lower volatility has been “easy money” for months now. That has enticed speculators to jump into the trend in droves. You can gauge sentiment in markets like U.S. Treasury bonds, crude oil, and precious metals by following the U.S government’s Commitments of Traders (“COT”) report... Today, non-commercial traders are betting on lower volatility like never before. They’re currently holding near an all-time high net short position. These traders are called the “dumb money” because they tend to be wrong at extremes. As a group, they get super bullish at market tops and super bearish at market bottoms.

The ongoing oil bust claims its highest-profile victim yet...

The $2 billion EnerVest private-equity fund that “borrowed heavily” to buy oil and gas wells is now worth virtually nothing. Its lenders are negotiating to take control of the fund’s assets to satisfy its debts. And the fund’s investors – many of whom are high-profile institutional investors – are likely to recover just pennies on the dollar from their initial investments. Losses like this are practically unheard of among large private-equity funds. Investment firm Cambridge Associates reports that only seven billion-dollar funds have ever lost a penny for investors. And of those, losses of more than 25% are even more rare. Suffice it to say, this is a big deal . And other energy-focused private-equity funds are in a similar predicament today.

20 | August 2017

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