It’s good to be back!
Finance, economics, markets etc:
- The second part of “A Long Time in Finance’s” interview with Paul Tucker.
Worth listening to just to hear Tucker admit that he was not onboard with continuous QE policy.
- Tyler Cowen on the infant formula shortage.
- Andrew Bailey’s report for the Treasury Select Committee refers to energy future curves and implies they are predictive. Oh dear.
From the report: “The futures curves for energy prices are downward sloping, in contrast to the MPC’s conditioning assumptions. In an alternative scenario where energy prices follow their futures curves throughout the projection, CPI inflation would fall back towards the target more rapidly than in the central projection and would be around ½ and over 1 percentage point below the target in two and three years’ time respectively.”
- Oil refining runs ramp-up set to boost diesel stockpiles.
The diesel problem is becoming a circular problem that threatens the entire energy complex. In an attempt to make as much diesel as possible, we’ve created a gasoline shortage that the market is now trying to solve for, reducing our ability to produce diesel or build diesel inventories back up for next winter.
- Zerohedge writes up a gasoline note from Goldman. This is the key chart:
- John Dizard’s last column for the FT.
I’m a big fan of Dizard’s. He was one of the first media voices to raise the alert about the fertiliser and food implications of a war with Ukraine. And much more.
- Zoltan Pozsar neatly sums up central bank policy in an inflationary but post-QE world as “If the origin of QE is to lean against deflation by generating asset price inflation (positive wealth effects), leaning against inflation must involve generating asset price deflation (negative wealth effects) – the core of Bill Dudley’s arguments.”
The whole purpose of central bank policy in an inflationary environment is to reduce demand for real economy goods and services without having prices do all the work to achieve the same objective. This is because letting prices do all the work introduces the risk of a negative feedback loop that eventually collapses the currency. And nobody wants that.
So Zoltan is right to state that the mission of a central bank in such an environment is to synthesise the opposite of a wealth effect. The intent is to make it very hard and risky for anyone who is not “adding value” — a.k.a the rentier demographic — to make money. But this, unfortunately, introduces its own paradoxes. Chief amongst these is recession risk and an increase in the cost of funding for experimental or risk-on businesses that might have the solutions to today’s woes.
Capital becomes scarce and only the most trusted names with proven track records for delivering value can get cost-efficient funding (at least in ways that can still make a return for their investors). This is because stock price appreciation is no longer enough to attract investors. They need the promise of some sort of dividend return or anything else that synthesises a yield.
This, I suspect, makes stock picking more essential than ever.
But the most important point is that — irrespective of whether it is debt or equity return — it is the market that leads the way on rates, not the central bank. This is because it is the market that determines what rate of return is necessary to compensate for the inflation effect on any capital outlay.
The key job for the central bank in such an environment is to not undercut the market, since doing so only encourages the creation of long-term underperforming assets vis-a-vis inflation.
Of course, if central banks raise rates more quickly than the market, that potentially overburdens the system and makes corporates more inclined to seek financing through equity raisings or convertibles. All of which has a dilutive effect on stock prices — and increases the negative wealth effect. This increases the chance of a recession.
Either way, a likely side effect of all this may be a reduction in share buybacks — just in time for the effect to be linked to government policy (because the Biden government has openly declared a war on buybacks) instead of market forces alone.
- Cory Doctorow on those kill switch tractors.
It’s a bit of an oldie (from May 8) but it’s a really important piece about how the Ukraine war is inadvertently doing an excellent PR job for data monopolism and market centralisation. And that we are all potentially falling for this hook, line and sinker. But as Doctorow points out the fact that immense market power (and kill switches) can sometimes be used against common enemies, doesn’t necessarily mean it’s a virtuous system that we should defend. That immense market power can still be used against us because everything that can be used for good can also be used for bad. The more good you can do, the more bad you can do too.
The most amazing story that Doctorow recounts is how someone figured out that if you play popular copyrighted music very loudly when engaging with ideological enemies, the copyright-busting algos on YouTube will prevent any footage taken at such events from being distributed on the platform. It is a type of shrouding that can stop replication. Except, it is a technique that can also be used by the bad guys to stop you from sharing your footage for awareness reasons.
There are all sorts of unintended consequences coming at us as a result of immense power concentration, big data and surveillance. It was recently pointed out to me that fear of FOIAs or hacks has led to officials in incredibly powerful jobs refusing to use email or any online documentation system for conversations that might be construed as controversial or sensitive. As a result, they are increasingly depending on their own human memories to bank the details of secret talks — which is not exactly optimal when so many of them are in their 70s.
Either way, it’s another case of: are we the baddies?
- Must read from Jeremy Clarkson on the fertiliser crisis.
As Clarkson notes: “The problem is that next year many farmers will decide that, because of the costs involved, they’ll use less fertiliser. Some will doubtless try to use none at all. Others will try to use cardboard or lawn clippings or faeces instead. Either way they will produce less food. Some farmers — I know of three in my area alone — have already decided to fallow their fields next year and grow nothing at all.”
- Craig Pirrong compares the TerraUSD madness to Enron. As he notes:
“If this problem sounds familiar, it should, and is another illustration of nothing new under the financial sun. Anybody know what I’m thinking about?That’s right. Enron. Enron set up various special purpose entities in which it placed dodgy assets. Enron protected investors in the SPEs by promising to sell Enron stock to cover losses. When the losses crystalized, Enron had to sell more and more stock, driving down its stock price, a process that eventually resulted in Enron’s messy demise.”
It’s a brilliant analogy. But the Raptors are not the only thing that TerraUSD has in common with Enron. There’s the whole schadenfreude of being so cocksure that you knew how to fix market inefficiency with the creation of new markets, new derivatives, new platforms and more.
And the fact that the first thing Jeff Skilling did after becoming a free man again was look at starting a crypto oil venture kind of tells you everything you need to know.
- Electronic cash is just another Stablecoin from a regulatory perspective, and the regulatory history is both ample and jurisdictionally varied, argues Simon Lelieveldt.
From the X-files
- Pippa Malmgren on how things are getting strange in space coverage.
Pippa notes that “the other extraordinary revolution in space is being led by the US Congress, which is now forcefully compelling the Department of Defence and the various US Intelligence Agencies to reveal what they have and know about UAPs (Unidentified Aerial Phenomenon).”
At the Blind Spot we have been following the subtle formalisation of the UAP story with curiosity. Something is definitley up, because serious channels are becoming ever louder about the topic.
- Eric Weinstein says “something huge is up”. Concludes either our government is engaged in deception and is utterly brilliant about it or aliens are real.
- Good summary of current events from Lue Elizondo on this Talk TV discussion (from 1hr 5mins).
From the “Fake News” zone:
- Medvedev says the West is “self-harming” its way to the “collapse of the US-centric world”.
The biggest takeaway from my trip to Poland is that emotions are running so high there that it has become entirely taboo to question anything but MOAR sanctions policy. If you do, you’re a Putin apologist. Which is of course absurd.
At the same time, however, the public are moaning about inflation (now running about 12 per cent) incessantly. It’s as if they can’t see the connection between the two scenarios.
I did an interview with RMF FM, a big national radio broadcaster, where I tried to convey this contradictory point. But I met with stiff resistance from the interviewer, who seemed convinced that Poland can easily handle going cold turkey from Russian gas and oil.
Again, there is no doubt in my mind that we have to wean ourselves off this dependency. My point is that we have to do this smartly. Self-sabotaging to the point that we weaken the morale of our own people and with it support for any drawn out conflict is silly.
Meanwhile, on the domestic media front, I found it interesting that some of the old family friends of my mother that I meet when I am in Poland (my surrogate aunties so to speak), were of the opinion that everything on TV is now propaganda. Whether that’s the news from the government side or from the opposition.
- Glenn Greenwald on the funding package for Ukraine.
- Fresh probe into spike in newborn baby deaths in Scotland.
- At least 12 children have died from mystery hepatitis.
- General observation: I find it interesting that I’ve recently been approached by a number of outfits seeking comment about the crypto collapse as an offset to an uber bull voice, but seemingly on the basis that I’m “not too much” of a doomsayer. I strongly believe the harshest critics and doomsayers should also be given a platform.
- Elon Musk picks up on the “latest tweet” vs curated feed manipulation.
I personally can’t wait to see how Elon reacts when X Æ A-12 encounters Huggy Wuggy via the Youtube search recommendation algorithm.
What I’ve been up to
- I have a piece up at Unherd about the crypto collapse.
- I did a podcast chat with WTFinance.
- I moderated a bunch of panels at Impact’22 in Poznan.
- I did an even longer form chat with Top Traders unplugged.
I’m a bit confused by the baby formula thing. It’s literally 2x the price for the equivalent Nestle, so Gerber baby formula in the US than continental Europe an Norway, yet the author argues its price controls. When I was in the uS last summer I was shocked how it was literally twice the price. If anything, WEP and their strange rules have inflated the price. I think you need to look further, why there are shortages and the answer is not price controls, come on.
I haven’t looked closely enough at this. I didn’t realise there was a legacy situation with overpriced formula. I know there are quality criteria – but I also know that despite all the different brands it’s also mostly a fixed formula that is highly commoditised. Interesting you think there may be more to it. Really don’t know enough about it to rule it out.