As we slide through the summer doldrums, the news has slowed down to a mellow drumroll. That is, unless you count the events from June of 2016 and the manner in which White House has handled them. It appears that the Russian election scandal will continue to expand, albeit drip-by-drip, until we have a clearer picture from the Mueller investigation in a year or more. Until then, we continue to learn how this administration views others in the world who do not drink the Kool-Aid, with disdain along with a complete disregard for ethics.

On brighter topics, the news out of China yesterday is very encouraging. Their economy continues to grow at a steady pace of 6.9% per annum, consistent with the prior quarter. We know that the data coming from China is always suspect, but the trend is what matters the most. Given the issues we see with the U.S. economy (see our July 2017 Market Update), the ability for global economies to decouple from the U.S. is going to be the most important factor in managing investments through the next market cycle. China’s numbers are a good step in that direction and show that while the U.S. is important to China that importance has peaked.

A more troubling bit of news is the collapse of a $2 billion private equity fund run by EnerVest Ltd that was created to purchase oil and gas wells at the peak of oil prices in 2013. In typical private equity fashion the fund took on $1.3 billion in debt to “leverage” the returns of the fund. It turns out that the assets have lost so much value with the decline in oil and gas prices that the debt load is more than the value of the assets. This effectively wipes out the fund — the first total collapse of a large private equity fund ($1 billion or more), ever.

We saw something similar in the hedge fund world in July 2007. Back then a pair of hedge funds trading in sub-prime mortgage debt collapsed as defaults rose. At the time, it shook the markets as unprecedented but later to signal the beginning of a massive collapse across most hedge funds in the subprime area. Although private equity is far less risky and unlikely to spread beyond the energy market it does point to stresses in the current market conditions.

Time will tell, but it does highlight one market risk that continues to create turmoil throughout the various asset classes.
DBM