Spot Markets Live, 3/11/23 (McCauley’s ‘Bond Swap’, Australian trade, ‘Preferred Minimum Range of Reserves’)

With open arms we welcome back to The Blind Spot, its founder Izzy Kaminska to the place I hope she thinks of as home.

Recall, that ‘Home is the place where, when you have to go there, they have to take you in’

(Robert Frost, not me)

As you know, because Izzy was very forthcoming in telling us, Izzy mingled with the glitterati and the nomenklatura at the Arc Forum this week and is now, therefore, an ‘ally of responsible citizenship’?

That right, Izzy?

And endowed with a community vision for a better world?

That’s your mission statement.

Does this approximate how you feel this morning, Izzy?

Actually, to be honest, I’m in recovery.

(That was john updike. Not me)

Which does make me wonder if in reality, I had participated in some strange occult ceremony.  Unwittingly I should add.

Though have to say, not too much flooding this morning in leafy West London.

The moral arc of the universe is long but it bends towards justice?

About that MLK was dead wrong.

it’s asymptotic.

What learnings did you receive?

And don’t hate me but…  I thought Paul Marshall’s address was actually really good, probably the best from the conf (mainly because he just repeated a lot of the points I’ve been making for about 10 years or more about capitalism, i.e. crony capitalism BAD, monopoly capitalism BAD, woke (aka ESG) capitalism BAD.)

If you want to see that address, it’s here. One of the few that made it online.

https://www.youtube.com/watch?v=G2DIEzdJLaA

I’m also a big fan of Merryn Somerset Webb so her anti ESG panel was to my liking too.

And finally, I liked the emphasis on protecting kids from the ills of technology and social media.

And generally on empowering women who don’t want to be career ball busters.

 (Seriously Julian, these days I dream about becoming a housewife. Something my 20-something self would be appalled by.)

(Badge hierarchy and everything. Tho top-tier VIPs, “the ARC-Angels” as I call them, were pink for example. I was a humble yellow).

Yes yes, it was more down to earth. No private jets or Piano bars. But what I really want to see is a panel where Justin Trudeau and Klaus Schwab fight it out with John Anderson and Jordan Peterson.

Also, there was too much of a gung-ho attitude for my liking and no nuance about the Middle East.

Funnily enough, despite preaching about the importance of traditional families and not going overly woke, overall it achieved a higher DEI score than most openly woke events. Power women and diversity everywhere you looked. Much like the irony of the Tory party having had three female leaders and an Indian leader and the Labour party having had none.

And the real piece de resistance was Jordan Peterson’s tearful closer speech which gave way to an operatic rendering of “DO YOU HEAR THE PEOPLE SING!”

Yes. Really.

BUT ENOUGH ABOUT ARC!

Just wanted to flag that overall the BoE yesterday was super boring, with the big news being that the forecasts project almost no growth. Lovely.

yes

It’s here.

I learned a lot from this.

The main thrust is that rather than have everyone worry about whether central bank losses really matter or not, why not nip them in the bud, specifically in the ECB, by engaging in a very elegant “Bond Swap”

It’s such an obvious solution, I can’t believe I didn’t think of it before.

Euro area central banks are reporting losses as they pay banks 4% but collect only 1% on trillions of euros of bonds bought to spur growth with lower yields. Once central banks exhaust their capital, they may need to go cap in hand to their governments. Recently, the ECB ceased to pay interest on commercial banks’ 1% required reserve against deposits. Now some propose jacking this up tenfold to stanch central bank losses. With fat profits and rich, dividends, commercial banks can easily pay, it is said.

So Robert’s idea (and he’s in the rabble so do fling further questions his way) is basically one cbank’s loss is another respective government’s gain.

So why not crystalize that, by essentially allowing governments to book the hypothetical gains of being able to buy back their bonds at a discount, something that would reduce the overall debt burden, and curb further exposure to more losses if rates continue to rise.

The context of course is that this mostly applies to the ECB. Why? Because the BoE has already had its potential losses indemnified by the government.

While the Fed has engaged in some excellent accounting shenanigans to ensure it never appears to be in a loss.

Great footnote on that Robert, btw.

From his paper:

In a private communication, Peter Stella, former head of the Central Banking Division of the International Monetary Fund, terms this device unoriginal, disingenuous, and disgraceful accounting worthy of a Banana Republic.

Gotta love Peter Stella.

I actually reached out to Peter to get some thoughts, and as usual was bombarded with so much insight I felt fully ashamed of my ignorance.

For example, did you know Chile has the strictest central bank independence relationship in the world? Its mandate doesn’t even allow it to own government bonds.

10:49I welcome other thoughts on Robert’s idea from the rabble. Personally, I think it’s a much better solution than de facto taxing banks by raising the minimum reserve requirement and not paying interest on those reserves.

It’s also a tidy way to get going with quantitative tightening without having to stress the market out in terms of processing large amounts of supply.

But for now, let’s quickly move on to some other news.

Julian, how’s the week been?

I have a busy week lined up next but it’s nowhere near as busy as the Australian PM’s.

Anthony Albanese, Aussie PM, is on his way to China for a prickly dialogue with President Xi. Xi will of course flash that beatific but wholly insincere smile when they meet during the visit scheduled 4-7 in Shanghai and Beijing.

Have you ever been to China, Izzy?

Their main feedback was that the food was nothing like you get in Soho.

But I did visit in 2012 eventually, spent 48 hrs in the French quarter, ate tapas and listened to jazz and didn’t see anything of China

However

Albanese finds himself batting on a sticky wicket.

 A quarter of Australia’s exports travel to China but cultural and political differences between the two countries are pronounced and likely only to be accentuated for all the faux bonhomie that will no doubt be on display for the cameras.

Reasons for disagreement are legion: Poor behaviour from the Chinese in the South China Sea, Chinese political interference in Aus, the imprisonment of an Aussie journalist in China, the Aussies’ demand for an investigation into the origin of Covid-19, which had nothing at all to do  with people eating Wuhan batshit crazy soup or pangolin carpaccio, that problematic thing about freedom of speech etc etc

But there is always room for trade talks and even with all the argy-bargy of the last few years, Australian exports have barely been dented:

The ban on Aussie wine was a boon for Kiwi wine producers which is one of the reasons belly wash Kiwi sauvignon blanc became so expensive in the last few years.

But they (aussie exports) have become more complicated. Aussies will want the restrictions in wine exports lifted, the Chinese will demand access to investment in the other’s mineral industries.

The Aussie dollar, a pro-cyclical currency if ever there were, has been depreciating for a decade now but some favourable optics next week and the probability of a 25bp hike from the RBA next Tues, some of the pressures on AUD should start to alleviate.

CPI peaked ~6^ in 2Q23 and should halve by the end of 2024.

I like a trading long in AUD

That will leave the punters wondering

Moving onto terra cognita.

mkts… 3Q earnings  season threw up some strange performances. In the US they were generally stronger than analysts were expecting

But it appears margin resiliency was the key with many sectors struggling to generate top-line growth, as one might imagine given interest rates and inflation

The S&P, as of last Friday, had conceded 10% which qualifies as an authentic ‘correction’.

November, however, has been altogether a tiger of a different stripe with markets very keen to discount what is perceived as the end of the rates cycle for the biggest central banks.

UST10YR holding 5% was the Rorke’s Drift of bond market battles last week.

Albert Edwards makes a good point (a locution I’m not fond of) this week:

‘from August onward US treasuries have faced increased competition from higher JGBs yields. That pressure intensified at exactly the same time as it became apparent just how gargantuan US Treasury issuance had become’.

Someone should tell Janet Yellen.

(or Anne Widdecombe. This image from yesterday still troubles me)

I saw that on my bedroom ceiling last night and it made for a difficult night. As ubs put it:

For equities lower yields reduce the headwind faced by longer-duration equities—whose valuations are more reliant on profits further out into the future.

 I couldn’t have put it better myself.

That’s not a figure of speech. I really couldn’t have put it better myself.

Last week, we wrote about how positioning was favourable, US data were surprisingly encouraging, share buybacks were now a pillar of support with the reporting season ending and the seasonality effect of Nov and Dec tended to be helpful.

(I say we wrote, I mean I read and then set it down here).

All this is playing out thus far but this embryonic rally is less than a high-conviction at this point and a bad data point or a scary inflation reading would reverse sentiment in short order.

Non-farm payrolls data comes an hour earlier than normal today which scuppered my client lunch plans at least once a year.

– when I was in the City

– and when I had clients

– and when entertainment on expenses was still yet to be considered a financial crime.

Consensus is around 180k and the markets’ interpretation of this will decide whether this nascent rally is nipped in the bud or develops the Big MoMo.

If the markets, like a Meta avatar this year, develop legs. Where should the punter be placing his chips?

The unloved number among them REITS, banks, retail, China, small cap.

It’s worth noting that while the S&P doesn’t look overly compelling at 17x PE 2024 (e) but if we strip out the Magnificent Seven it’s more like 15x  for the remaining, erm 70% of the mkt.

Michael Hartnett’s asset return quilt, something I find strangely mesmeric, gives an excellent pictorial guide and  to what’s been most out of favour:

You ever made a quilt, Izzy?

Don’t worry – we aren’t going down another AI rabbit-hole this morning but UBS advise the following:

‘Within equities, given recent selling pressure on the tech sector, we think investors considering adding exposure can look to beaten-down AI beneficiaries, such as select global semiconductor stocks. Recent tech results confirmed robust AI infrastructure spending ahead and support our expectation for a sharp recovery in revenue next year. With AI demand broadening, we continue to like mid-cycle tech segments like software and internet: We anticipate new AI-enhanced productivity tools, such as co-pilots or generative design tools, will drive adoption in the coming quarters and boost direct AI revenue. ‘

UBS still  see a ‘positive return outlook for stocks over the coming 6-12 months, supported by a softish landing for the US economy along with our forecast for a 9% rise in earnings per share for S&P 500 companies in 2024’ 

It sounds relatively pedestrian, doesnt it?

But I still see problems for companies growing sales.

Albert Edwards’ weekly spotted that headline inflation in Belgium and the Netherlands (see chart below). Both saw headline CPI move into deflation (down to -1.7% and -1.0% yoy respectively) as high energy costs unwound. Although core CPI inflation remains sticky in both countries, it is notable that this pace of decline in the headline CPI has rarely ever been seen’

He notes while CPI is falling, price levels remain very high

This is something everyone intuitively understands when they go to a supermarket.

Of course, I understand most viewers here this morning never enter a supermarket and avail themselves of Ocado or Harrods home delivery – or if they do  degrade themselves by entering a Waitrose they walk round with several trolleys and simply sweep whole shelves of luxury goods into their cargo with nary a thought for the prices or the offers in the shit bin at the end of the aisle.

HAUSER HAS SPOKEN!

But this is important stuff!

That’s very much a Fed term. The BoE, via Hauser’s speech (at least this is the first time I’ve heard it referenced this way) has of course coined its own equivalent.

‘Preferred Minimum Range of Reserves’

Aka – yes another acronym – PMRR

So, I don’t want to pre-empt as haven’t properly read, but based on those flashes and this bit that I CTRL F-ed it sounds like they are preparing the market for the realization that some extended balance sheet will be with us for longer.

Because the system (in a RTGS world) needs that extra liquidity

Not to accuse Hauser of plagiarism or anything.. but I can’t help notice this point is kinda similar to my lovely tweet thread from last week.

Specifically this tweet:

Actually here’s the screenshot

And this is from Hauser’s speech. Different conclusions tho.

 

Merrill’s proprietary trading Bull & Bear indicator gives a contrarian buy signal for the 3rd week running and it’s noteworthy that among BAML’s private clients, a pretty decent representation of retail trends generally, equity holdings at 58% of total assets are at their lowest since March 2020.

And back to banker talk

(I guess there’s only one of him)

Sadly for us.

But he did make it to Bletchley. I hope you have fully digested his interview with Rishi?

But i did see this one memorable quote and it’s my favourite of the week:

“The pair discussed the potential benefits of AI, with Mr Musk saying: “One of my sons has trouble making friends and an AI friend would be great for him.”

What about you, Elon? Do you struggle making friends?

Was the question Rishi didn’t ask.

Next week Julian is indulging in off-site activities of a personal nature on Tuesday and Wednesday, so sadly, we will close the show for those two days. But fear not he will be back!