Trust Issues

June 2, 2021
4 min

In this issue, we connect the dots on current events that surround that precious commodity which frequently seems to be in short supply: trust.

The Pandemic Ends(?)

Could this be a cure?  Pfizer is developing an anti-viral pill that will combat COVID-19 and its variants when a person first shows signs of the illness. Public availability is expected by the end of 2021. Scientific focus on anti-viral therapeutics continues to build, and with this a potential to change both policy and opinions. We continue to watch (with great concern) the progress of global vaccination rollouts.  

And speaking of vaccines, data from the CDC in the U.S. indicates that they do indeed work. They appear effective against variants, reduce transmission rates, and are now widely available. As infection rates drop and vaccination numbers rise in the U.S., pressure is mounting for the CDC to implement new guidelines. ABC News reports:

  1. The CDC announced that fully vaccinated persons should no longer be subject to standard mask policies. It is unknown how this announcement will affect businesses, enforcement policies, and those working in vulnerable sector(s).
  1. Even if the CDC updates guidelines to reduce mask requirements for the fully vaccinated, risks remain. This is an unavoidable issue as society begins to return to normalcy.

With improved medical technologies and policy revisions on the horizon, consensus suggests that offices both here in Canada and in the U.S., will begin reopening this Summer (leading into the Fall). Some factors will impact reopening (office size, location, industry type, etc.). During the transition, we should expect remote work and fewer days in the office to continue. As businesses design plans for their safe reopening, mandatory vaccination for in-office personnel is a hot debate. We don’t yet know how these policies will take shape or what their end result will be.

Shot or Pill: It’s exciting news to hear that ground-breaking therapeutic health technologies are on the horizon. These prospective changes, however, don’t resolve the confusion we currently face. We are heading for a period where public policy on masks is uncertain, and the return to in-person office work is no foregone conclusion. As it stands, our current circumstances make ‘trust’ difficult to win, and there is no easy solution.

A Bad Egg

After an investigation by the Ontario Securities Commission, Natasha and David Sharpe founders of Bridging Finance (a $1.8 Billion-dollar private debt firm), were fired by a court-ordered receiver on allegations of mismanagement and self-dealing. This investigation will likely lead to further scrutiny of Canadian private lending firms. And while this situation is unfortunate to say the least for investors and borrowers alike, we view any improvement in transparency, compliance and ethics in the industry to be a good thing. Investors are now asking questions about a firm’s lending practices, which policies and safeguards are currently in place to protect their money, and perhaps most importantly, how they will prevent self-dealing. We should also expect additional regulation and SRO oversight of the industry due to the allegations against Bridging Capital.

Caveat Emptor: Although the investigation is ongoing and all the facts are not yet publicly available, this event will promote careful examination for any investor who seeks the higher yields of a private debt fund. Undoubtedly, investor trust has been shaken. We also expect that this event will lead to further oversight by regulators. This should be welcomed by the industry as it continues to evolve and mature.

Inflation Everywhere

Not only have bond investors grown uneasy as the central banks consider their path forward, but the manufacturing industry has also been directly impacted. Over the last 12 months, a Bloomberg index of 20 commodities reported a 53% increase in input prices. Consumer prices (excluding food and energy) increased 0.9% in April which was the most since 1982. Additionally, job shortages continue to make headlines. This likely means that businesses will be required to increase wages to fill vacancies or continue to leave positions (and orders) unfilled. Costs are up across the board.

While central banks have a stated goal of maintaining price stability by keeping inflation in the 2% range, recent numbers have rolled in above this target. Central bankers must now balance what appears to be the growing risk of inflation with the unenviable task of increasing interest rates to contain it, while simultaneously trying to be accommodative in a recovering economy.

Our takeaways: The cure for higher prices is, ultimately, higher prices. Although we expect the supply chain to self-correct, we do not know how high or for how long prices will rise before they are corrected. We have heard anecdotally that manufacturers are hoarding, and we know that data often lags. Soon we’ll have an idea of what we’re facing. Central banks say that a little inflation is okay. The question is this, if inflation becomes persistent, will central banks deploy the correct tools, and do it without causing undue harm on other parts of the economy?

What we’re watching this quarter:

Disclaimer:

The opinions expressed are those of Henon Capital Partners (“Henon”). The information and/or analysis contained in this material have been compiled or arrived at from sources believed to be reliable but Henon does not make any representation as to their accuracy, correctness, usefulness or completeness and does not accept liability for any loss arising from the use hereof or the information and/or analysis contained herein. Henon disclaims any responsibility to update such information. Neither Henon or its affiliates, nor any of their directors, officers or employees shall assume any liability or responsibility for any direct or indirect loss or damage or any other consequence of any person acting or not acting in reliance on the information contained herein.

All overviews and commentary are intended to be general in nature and for current interest. While helpful, these overviews are no substitute for professional tax, investment or legal advice. Clients should seek professional advice for their unique situation. Neither Henon, Henon Capital Ltd., nor any of their affiliates or representatives is providing tax, investment or legal advice. Past performance does not guarantee future results. This material was prepared solely for informational purposes, does not constitute an offer or an invitation by or on behalf of Henon to any person to buy or sell any security and is no indication of trading intent in any fund or account managed by Henon. No investment strategy or risk management technique can guarantee returns or eliminate risk in any market environment. Unless otherwise specified, all data is sourced from Henon.

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Sources:

https://www.bloomberg.com/news/ articles/2021-05-12 /is-inflation-coming-here-s-how-to- make-sense-of-the- economic-data

https://www.bloomberg.com/news/ articles/2021-05-14/ this-inflation-scare-is-exactly-what-the-fed-was-hoping-to-avoid?sref=cxtFVrVh

https://www.bloomberg.com/news/ articles/2021-05-07/ toronto-private-lender-s-founders- fired-amid- mismanagement-probe?sref=cxtFVrVh

https://www.bnnbloomberg.ca/ private-lenders-tremble-over-self-dealing-probe-at-toronto-firm-1.1599557   

https://www.forbes.com/sites/ tommybeer/2021/04/27/pfizer-ceo-says-antiviral-pill-to-treat- covid-could-be- ready-by-end-of-the-year/?sh=7df536012a0d

https://abcnews.go.com/Politics/ surprise-cdc-reversal-masks-leaves-states-businesses-scrambling/ story?id=77691769

https://abcnews.go.com/Politics/ fully-vaccinated-americans-return-life-masks-cdc/story?id=77665771

https://www.bloomberg.com/news /articles/ 2021-05-14/return-to-the-office-what-managers- are-telling- workers-right-now?sref=cxtFVrVh

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