By JOHN FOLEY

David Solomon is like the owner of a Ferrari who hasn’t been given the keys. The new Goldman Sachs boss starts 2019 with one of Wall Street’s most prestigious jobs, and something to prove. This could be the first year in over a decade that the $63 billion bank starts with a smaller market capitalization than its chief rival, Morgan Stanley.

Goldman set out in 2017 to create $5 billion of new revenue streams, and Solomon starts with half that figure already in the bag. But there’s a lot to play for. Morgan Stanley boss James Gorman runs a bank with earnings that are lower but less subject to the vicissitudes of the market. Goldman makes around 57 percent of its revenue from predictable businesses other than trading and investment. At Morgan Stanley it’s nearly two-thirds.

Solomon is growing Goldman’s private wealth business, which services the ultra-rich, adding almost one-third more advisers by 2020. He could go further by addressing one of Goldman’s least lustrous businesses: asset management. That generates stable, predictable fee income. But its operating margin of just over 20 percent is half what the group’s investment bank makes, and below the 33 percent industry average, as measured by McKinsey.

The bar for doing a big deal is extremely high, Solomon has said. But buying a rival like the $22 billion T. Rowe Price, which has double Goldman’s profitability in asset management, would help. It would take Goldman’s client assets to $2.6 trillion and boost stable revenue sources to over 60 percent of the total.

There’s one big, shadowy problem: 1MDB. Goldman is being investigated by the Department of Justice and the Federal Reserve for its role raising funds for the Malaysian fund in 2012 and 2013, some of which ended up paid out as bribes. Two former Goldmanites have been indicted; others knew about the misdeeds, the DOJ says. A 10-digit fine is likely, but a time-suck for Solomon is certain.

Expect Goldman to settle as early as it can. But Solomon will probably have to oversee a sweeping internal cleanup, and — even though not implicated in 1MDB himself — could be called to Washington to answer publicly to a newly Democrat-run House of Representatives. All when he’d rather be growing his way to greatness, and showing Morgan Stanley a clean pair of heels.

First published Dec. 18, 2018.

BY NEIL UNMACK

Leveraged buyout lenders are in the firing line in 2019. With central banks raising rates and shrinking balance sheets, the happy times for the likes of Blackstone , KKR and Apollo Global Management will subside. But buyout barons will be laughing compared to those who financed their deals.

Low rates and the hunt for yield in recent years triggered a boom in risky lending. The volume of leveraged loans in particular reached $1.3 trillion in the United States and Europe in 2018, versus $734 billion in 2007, according to LCD, part of S&P Global. The average U.S. leveraged buyout piled debt equivalent to almost seven times EBITDA in 2018, only marginally below the record in 2007, according to Refinitiv data.

The fuel powering bigger and riskier deals should now dissipate. Helped by the downgrading of General Electric , BBB-rated debt is at record levels. Now that investors can earn yields of nearly 5 percent from companies deemed investment grade, junk-fueled buyouts will get harder.

Yet dealmakers have less to fear than in 2007. Assuming 2019 is a slowdown rather than a 2008-style financial crash, companies are less likely to suddenly run out of cash. That will keep defaults far lower than the 13 percent they reached in 2009. And it may help that collateralised loan obligations (CLOs), a kind of securitised investment vehicle that buys loans, account for half of the market now. These vehicles create a stable demand for credit, reducing scope for fire sales.

Creditors face a much trickier time. Senior lenders who provide the bulk of the funding are in particular more at risk than in the last cycle, because they now provide a bigger share of the credit. With U.S. deals’ senior debt on average 5.2 times EBITDA, according to Refinitiv, versus 4.4 times in 2007, those at the top of the capital structure will absorb more losses if companies implode.

But creditors also have less control. In previous cycles, a company in danger of failing a so-called maintenance covenant would need to keep lenders on side, and pay them extra fees. Now, most deals are “cov-lite”. Debt documents give companies more freedom to take risks or siphon off assets, even when they are struggling. Private equity-held companies can also sell assets without repaying debt and pay themselves dividends. They can even move assets out of creditors reach, and use them to borrow more. That’s what happened with TPG Capital and Leonard Green’s acquisition of retailer J.Crew.

The upshot is that there will be fewer defaults, but losses will be much higher than the roughly 20 percent that senior lenders are used to. Unpredictable recoveries mean that loans will be harder to value, and vulture funds will pay lower prices for distressed debt.

There’s also still a way for both dealmakers and funders to get hosed. A sudden spate of low recoveries could spook the market and cause prices to collapse. Investors in CLOs, particularly those in the lower-ranking tranches, could lose their income and take severe losses, freezing new securitisations and funding for new deals. But of the two, lenders have far more to fear.

BY RICHARD BEALES

U.S. President Donald Trump’s “America first” mantra involves barriers to trade and immigration and a sort of manufacturing nationalism. Experiences like Argentina’s show that this approach creates market dysfunction and can hit economic output and jobs. More of that kind of fallout is likely in 2019 as the White House rolls out further protectionist measures.

Agricultural tariffs have already hit American farmers, prompting the promise of $12 billion in aid to offset the damage – one glaring market distortion.

Car prices, meanwhile, could increase by up to 20 percent if the U.S. administration imposes the threatened 25 percent levy on foreign content and manufacturers pass this through to U.S. consumers, the Peterson Institute for International Economics calculated in July. This is bad news for automakers and their employees. The increased cost would also vaporize up to a quarter of the tax reductions handed to car buyers in the 2017 cuts, the PIIE reckons.

That shows how import tariffs interact with global supply chains, also critical in consumer electronics. Several analysts have suggested the cost of Apple’s $1,000 iPhone X might double if the gadget could be made entirely in the United States — assuming the company didn’t absorb any of the extra cost.

There’s more to it, though. When President Cristina Fernandez insisted in the early part of this decade that electronics be made inside Argentina, then-trendy BlackBerry gave it a go. Despite Fernandez’s Trump-worthy photo opportunity when the first handset rolled out, the device was already out of date as well as too expensive, National Public Radio explained in a 2017 podcast. BlackBerry production ended within a few years.

Apple Chief Executive Tim Cook has noted that the company’s outsourcing — much of it centred on China — is these days not so much about cost savings. It’s about the quantity and skill level of labor that’s available. That, along with certain kinds of manufacturing know-how, can be hard to replicate at scale, even in the United States.

Uncle Sam has resources Argentina can only dream of, but the basic lessons still apply. The United States’ own history shows the failure of episodes of protectionism, the Cato Institute argued in 2017, highlighting the steep economic costs researchers have identified. A made-in-America market will be a badly distorted one.

First published Dec. 31, 2018.

BY LAUREN SILVA LAUGHLIN

General Electric has had a terrible year: the stock has lost more than half its value and is flirting with financial crisis lows. It can get worse. As its power business struggles and its finance unit consumes cash, the $60 billion conglomerate is heavily reliant on its aviation arm. The risk is that cyclical, financial and competitive headwinds kick the strongest leg of the stool out from under shareholders.

That’s a painful prospect after its annus horribilis, which included writing down assets and the firing of its chief executive, replacing him with the first outsider in the job, Larry Culp. With other operations struggling, plane product sales and repairs accounted for some 60 percent of segment earnings in the first nine months of 2018.

Aviation is GE’s pride, benefiting from booming air travel and robust engine orders, particularly from Middle Eastern customers. These included longstanding contracts with Saudi Arabia’s carrier to build and fix airplanes, and a 2018 deal to provide engines to Turkish Airlines.

What could go wrong? Start with geopolitics. Increased tensions between the Saudis, Iranians, Turks, Qataris and others could dampen travel and slow new orders. A general economic slowdown, amid unresolved trade disputes, would do the same. Air travel is cyclical: More than a dozen U.S. cargo and passenger airlines filed for bankruptcy during the last U.S. recession.

There’s also the albatross of GE Capital. To help finance the sale of engines, GE Capital uses its parent as the backstop. That worked fine when it carried an A rating, enabling the finance arm to tap short-term markets with low rates. But ratings agencies downgraded the company after fresh writedowns in October, forcing it to slash its use of commercial paper.

This gives competitors like Rolls-Royce and United Technologies’ Pratt & Whitney an opportunity. Pratt & Whitney may be especially eager to poach GE customers following its merger with Rockwell Collins, and its parent’s decision to spin the company off as an independent entity.

Growing engines sales over the past decade could keep GE relatively busy fixing them. The global economy may continue to hum along. GE Capital may right itself, and rivals fail to chip away at GE’s aviation dominance. But like any jet trying to make a safe landing with a single engine, an unhealthy dollop of faith is required.

First published Dec. 11, 2018.

BY MARTIN LANGFIELD

Energy-sector reform is up in the air in both Brazil and Mexico. In the coming year, new regimes in Latin America’s two biggest economies will wrestle with balancing 1970s-style nationalism against the need to open up to foreign and private capital to exploit their oil and gas resources. Jair Bolsonaro, Brazil’s far-right president-elect, has better prospects of getting it right than left-winger Andrés Manuel López Obrador in Mexico.

There is a strong nationalist element in ex-army captain Bolsonaro’s thinking about Brazil’s natural resources, which include massive untapped oil and gas reserves. Yet the appointments he has announced before taking office on Jan. 1, 2019 show that the influence of his pro-market economic guru, Paulo Guedes, is powerful too.

The outcome will be a compromise. Petroleo Brasileiro, the state-controlled oil firm, won’t be privatized, as Guedes and the company’s chief executive-designate, Roberto Castello Branco, have argued in the past it should be. But Petrobras will sell off non-core businesses, shedding refineries and distribution operations worth billions of dollars and paying down more of its net debt of some $78 billion. A successful program of auctions that has lured oil majors such as Exxon Mobil, Royal Dutch Shell and BP to invest in Brazilian oil fields is likely to continue.

Prospects are murkier in Mexico, where the man widely known as AMLO, a populist like Bolsonaro though of opposite ideology, took over as president on Dec. 1. The new leader has chilled investor sentiment by saying his government will examine more than 100 contracts awarded since liberalization of the oil and gas sector five years ago. He will respect them if no corruption is found, he says, but has shown little enthusiasm for more auctions.

Instead of private and foreign investment, López Obrador wants to rely on state oil company Petroleos Mexicanos to boost dwindling production by some 40 percent during his six-year term. After decades of neglect, Pemex is in poor shape to do so. To help boost gasoline production, meanwhile, AMLO pledged to build a new $2.5 billion crude refinery in the southern state of Tabasco, a plan approved in an informal referendum in late November, albeit with a turnout of just 1 percent of voters. Not only is that no way to run an energy policy, it also leaves the sector even more stubbornly under government control.

First published Dec. 28, 2018.

BY ANTONY CURRIE

Initial public offerings by Lyft and Uber Technologies will drain Tesla’s scarcity value in the next 12 months. Elon Musk’s electric-vehicle maker, whose market value hit $64.8 billion in August 2018, has, to date, been virtually the only way to invest directly in the car industry of the future. But the two ride-hailing firms will give U.S. public shareholders who factor in environmental, social and governance concerns new options.

What started as very different business models — app-enabled taxi services and vehicle production — are now converging, also joined by traditional players like General Motors and upstarts like Alphabet’s Waymo. The common vision of the future is autonomous, electric-powered vehicles that are shared, not owned.

Tesla only produces electric cars, making it an obvious choice for environmentally conscious investors. Lyft and Uber, by contrast, currently rely on people driving predominately gasoline-powered vehicles.

But the two have a lock on other car-of-the-future components. Lyft, for example, had 1.4 million drivers at the end of 2017. Assume they drive just half of the historical average for traditional U.S. taxi drivers of 70,000 miles a year. That means the company co-founded and run by Logan Green was responsible for almost 50 billion miles driven in 2017 in America, five times more than Tesla owners have clocked globally in total. Uber accounts for even more. That’s critical data for the autonomous-vehicle race.

And ESG investment, as it’s known, is not just about the environment. The “G” is for governance, and here Tesla is a laggard. The majority of its directors are friends and family of Musk. A series of missteps culminated in the chief executive’s cack-handed tweets in August about a possible buyout, resulting in the Securities and Exchange Commission imposing fines and forcing Tesla to replace Musk as chairman.

Uber had a poor record under founder and former boss Travis Kalanick, too, although current CEO Dara Khosrowshahi has tried to turn a new page. At Lyft, by contrast, Green has been more of a cooperator than a bull-in-a-china-shop disruptor, working with authorities rather than challenging them and earning social bragging rights, too.

Lyft has also long invested in measures to offset its drivers’ fossil-fuel dependence. As of April all of its rides, Green says, are carbon neutral. For ESG-mindful investors eyeing the car market, a publicly traded Lyft could be the most desirable ride.

BY GINA CHON

A financing drought may crack farmers’ loyalty to Donald Trump. The U.S. president’s trade war has evaporated export markets for a number of crops, leaving growers struggling even more than before.

Sales of soybeans, the biggest U.S. agricultural export to the Middle Kingdom, were down 98 percent through mid-November 2018, according to Deutsche Bank. Wheat, pork and cherry sales have also been hurt. The Trump administration set aside $12 billion to offset the pain, but only about $840 million has been doled out.

Yet people in rural U.S. states have largely stuck by Trump. Montana farmer Lyle Benjamin told Breakingviews that he supports the president’s efforts to take on China. That echoes the general feeling among his peers, who tend to agree with the president’s criticisms of China’s unfair trade practices and believe he can deliver a better deal. They’ll take heart from the U.S.-China détente at December’s G20 summit. Trump said the People’s Republic will immediately start buying U.S. agricultural products. But Beijing has not confirmed that — and its 25 percent tariff remains.

Benjamin also noted, though, that credit has become tight and many farmers have used what liquidity they had. In the first few months of 2019 they’ll be looking for financing for the next harvest.

Thanks to tariffs worsening the pain low commodity prices have already inflicted, it’ll be hard to get. U.S. net farm income in 2018 is expected to almost halve to $66.3 billion compared to five years ago, according to U.S. Department of Agriculture forecasts. During that same period, farm debt rose by 30 percent to $410 billion.

That has pushed the farm sector’s return on assets down to 2.6 percent, well below the nearly 30-year average of 7.1 percent. Interest rates and delinquencies on agricultural loans are steadily increasing. In the year to the end of June, farm bankruptcies in the Midwest more than doubled to 84 compared to two years ago, according to the Minneapolis Federal Reserve.

U.S. farmers will be at a bigger disadvantage when the new Trans Pacific Partnership goes into effect at the end of 2018. It no longer includes the United States, and American products face higher tariffs than competitors. Without a quick resolution to trade tensions, farmers’ doubts about Trump may start to grow like a weed.

First published Dec. 24, 2018.