Good morning, Aloha and greetings fellow market wizards
Monday 30th Oct. It’s been an execrable month for stocks but it’s all season of mists and mellow fruitfulness as we begin our daily passegiata around financial markets
we shall be peering down narrow alleys, sauntering along the tree-lined boulevards, walking up then back down no end of one-way streets and window-shopping for whatever catches our eye.
Izabella is not with us today
Don’t worry, she’s not suffering from liver failure after eating poisonous mushrooms.
She’s reliving scenes from her Polish childhood by standing in a very long queue in poor weather conditions in East London, I believe.
She’s attending something called the Arc Forum which my computer, a notoriously rigid censor of moral laxity, won’t even allow me to explore.
‘It’s this alternative vision for tomorrow thing’
which for me might be waking up in a Hawaiian hammock, chugging on a pina colada while girls in grass skirts are doing the hula
(puts me in mind of Larkin’s Breadfruit
but for the Arc Forum, an alternative vision for tomorrow seems to involve Niall Ferguson and Jordan Peterson and a long wait for security below the lowering skies
the opening speaker said: “We are all here because we have been personally invited because we are all people of courage and vision who are convinced there is a better story”
No wonder I wasn’t invited.
I am joined again then by the exotically- monikered Dario Garcia Giner, Don Giovanni to this Leporello
Dario Garcia Giner 10:34
^^ I aspire to this
Bussin – awesome
Sus – suspicious.
I’m reminded of my grandad’s words again: ‘It’s not my world anymore’
Dario Garcia Giner 10:35
Central bank powwows this week… there are a lot of expectations for things to remain unchanged
but as one of my favourite authors wrote ‘For things to stay the same, everything must change’.
Well actually he wrote ‘Se vogliamo che tutto rimanga com’è bisogna che tutto cambi” because he was Italian – that was Lampedusa from the Leopard
It’s the central paradox of history.
Dario Garcia Giner 10:37
^ This is a Zoomer summary of what we will shortly see
§§ TRANSLATION FOR LOST BOOMERS §§
On god: I promise
Mid: Not great/bad news
No cap: I’m not lying
Fr: For real
I thought ‘on God’ was a typo and tried to amend it to oh god – much more like it.
That must be one of those there memes I hear young people discussing earnestly…
the BoJ on Tues: Is it the end of the road for YCC? Several houses expect the BoJ to scrap YCC, Barc esp and Deutsche Bank.
Fiscal policy continues to show an expansionary bias even amid a phase of economic recovery and inflation. And with monetary policy headed toward normalisation, the demand-side structure in the long end appears prone to change. We continue to expect the yield curve to retain a bear-steepening bias.
USDJPY has broken the 150 threshold on higher yields and month-end dollar-buying.
BoJ changes to YCC could contain the upside by reducing the ‘yen-depreciation procyclicality of the policy’, while a dovish stance could fuel JPY weakness and trigger FX intervention.
‘yen-depreciation procyclicality of the policy’ – I love that phrase.
Dario Garcia Giner 10:41
Sounds like a tongue twister.
Try saying that when you’re pissed.
We interrupt this discussion to bring you the news that Izzy has just been introduced to John Howard, former PM of Australia
She doesn’t want anyone to know this.
FOMC is Weds
Where no change is expected as Jerome Powell hopes against hope that tighter financial conditions will head off inflation and slow the economy.
Payrolls data Friday, mkt expecting 190k jobs to have been added in Sept, so lower than last time but still pretty strong, leading consensus and pushing the spectre of 2024 recession further away.
Dario Garcia Giner 10:43
Is this basically it?
Is that an adult film?
Dario Garcia Giner 10:44
Pretty sure it’s Austin Powers
Never saw any of those.
They weren’t in B&W.
Dario Garcia Giner 10:45
Almost more important than all of this, though, (the Fed and payrolls, I mean) will be the US treasury’s dept’s 1/4erly borrowing plans.
We’ve written extensively in this parish of late about how yields have been rising due to supply concerns rather than inflationary fears.
This road leads us, as all roads do, to the dollar.
What will end the dollar rally redux? What ends US exceptionalism?
Geopolitical volatility and China’s slowdown undergird DXY around 106
We’re probably yet the apogee of the dollar’s hegemony but it could well stay here for a good while yet.
And while the Fed sticks, the Asian central banks, China excepted, are obliged to keep a tightening bias.
Dario Garcia Giner 10:48
What’s going on with Latin America?!
And the BOE on Thurs:
with the body set to revise down UK GDP again. The UK may just about avoid a technical recession in 2024 but it’s going to be a close-run thing and it will feel like a recession even if it isn’t
It already feels like a recession in this parish
The UNR is heading up towards 5% and house prices are falling in most areas of the UK as high mortgage costs hit values, according to a Zoopla report.
UK mortgage approvals data were released today and showed a decline in September to the lowest level since January. Overall approvals fell to 43,328 in September compared to 45,447 in August
The UK mkt, though, may hold up despite the blizzard of bad news. The FTSE may yield 6% next year, (4% div yield, 2% from share buybacks) 15% of the index derives its earnings from energy. FTSE may be a decent place to hide
Dario Garcia Giner 10:52
The FT is reporting that Mortgage rate rises in the US have finally caused US homebuilder stocks to go into reverse.
They had been rallied at first by rapid mortgage rate rises – because current homeowners with cheap fixed-rate loans were less willing to sell properties and buyers sought new houses as an alternative
But the higher rates are finally having an effect
“We don’t think this bounce in housing activity will persist,” said Oren Klachkin, financial market economist at Nationwide. “Builders won’t have an incentive to break ground on new projects so long as demand remains subdued, and we don’t see a sustained turnaround until credit becomes less restrictive and affordability improves.”
It’s still not a real estate problem on a Chinese scale.
Dario Garcia Giner 10:53
And speaking of the Chinese scale –
Chinese lenders had been forced to lower interest rates on existing mortgages in a bid by the CCP to revive the debt-laden real estate sector
But news has come out that four of China’s largest lenders have posted worryingly shrinking margins in Q3 as a result of renewed turmoil in Chinese property markets:
“We expect the sector’s net interest margins to narrow further in 2024, as the impact from this year’s loan prime rate and mortgage rate reductions kick in,
Further reductions in deposit rates and reserve requirement ratios may offset some of the margin pressure.”
Said Fitch’s Director of financial institutions.
Another central bank with a house on fire is the CBR.
Nabiullina was obliged to hike rates 200bp Friday to 15%. This follows 100bp in Sept and 350bp emergency hike in Aug.
Inflation refuses to be cowed and CBR’s official and v conservative forecast for 2023 is now 7-7.5% September’s inflation figure reached 14.6%.
Most analysts expected the bank to increase rates at its board meeting on Oct. 27, but only to 14%. CBR was more aggressive than expected. This is likely because the bank is not only looking at inflation and the exchange rate but also the 2024 budget, which signals an increase in record military expenditure.
“An additional pro-inflationary factor on the forecast horizon is the easing of budget policies. Thus, we need a more rigid monetary policy in response,” Nabilullina said.
(which goes nicely with their rigid militaristic imperialism)
It’s entirely possible that there will be further rises. Updated macroeconomic prognoses suggest the Central Bank is reviewing the possibility of taking rates to 16% at the year’s final board meeting in December.
Dario Garcia Giner 10:59
We will be able to gauge the success of Nabiullina’s tenure at the CBR. If she mysteriously falls out of a window soon, we can safely assume she didn’t do so well.
She defo needs a ground-floor apartment
Is the oil cap working?
It was but now it isn’t.
It’s obvious no one adheres to the $60 limit. Russia officially claims its Urals crude averages over $80.
U.S. officials insist the ceiling nonetheless works, albeit indirectly owing to increases in transport and higher insurance costs delivering oil to Asia. They were right but now they’re less so
(] interrupt this forum to announce Izzy has just seen Holly Vallance)
(whom I had to google)
Dario Garcia Giner 11:01
Even before the restrictions took effect, U.S. officials warned that up to 90% of Russian oil supplies could bypass the cap. It was also unclear what the position of India and China would be — they both started buying large amounts of Russian oil following the full-scale invasion of Ukraine in February 2022.
It became clear almost immediately that Russian oil supplies could be successfully traded to Asia, evading the new rules, and neither India nor China observed the cap.
Dario Garcia Giner 11:03
I also wrote about this for The Blind Spot last November, if any of you are interested
There were hopes that the price cap would enable India and China to negotiate discounts on oil supplies from Russia, reducing its oil-linked revenue. Not for long, The leverage handed to India and China weakened because when they asked: ‘my dear Russia, you no longer have anybody else to sell oil and gas to, so how about lowering your prices?’ Russia replied: ‘Of course we can, but you have nobody else to buy from.’”
India was paying Russia $80 last month.
I understand the sanctions thing and I also understand how their efficacy deteriorates over time but you can’t blame the West for implementing them.
What other options are there?
While we’re on the subject, despite what’s happening in Gaza, Brent is still lower than at the end of Sept.
End of central banking as we know it.
Dario, do elections promise any better news? I know you were looking at Argentina again?
Dario Garcia Giner 11:07
Now all Western watchers were treated to what seemed like a surprise first defeat for libertarian Javier Milei.
Who barely reached 30% in the recent election vs the Kirchenist and Economic minister Sergio Massa’s 36%
A series of viral tweets y’all may have seen yesterday suggested that Milei’s candidacy is over after a series of interview gaffes
Where he claimed to be hearing ‘voices’ in an otherwise quiet studio:
Did he bring his chainsaw into the studio?
that would count as a gaffe.
Dario Garcia Giner 11:08
No, but it seemed like he was finally taking the chainsaw to his own chances as President
Personally, it’s far too easy to say a man with gigantic mutton chops is descending into schizophrenia – even if he just meant voices in the studio, it really was an awkward interview.
It reminds me of Yossarian in Catch-22 when he insisted they were all out to get him.
Dario Garcia Giner 11:09
(BIG OOF: IZABELLA HAS JUST RUN INTO ERIK PRINCE OF BLACKWATER FAME)
But there’s been huge news coming over my Spanish telegrams this morning
Former President Mauricio Macri’s Pro Coalition, who is headed up by Patricia Bullrich (third place – 23.84%), has just imploded
This was after a shocking and secret decision by Bullrich and the former President to put all their support behind Milei with a ‘tabula rasa’: “anything better than more Kirchenism”
The centrist parties in Pro – which do NOT take kindly to Milei’s radical libertarianism, have vowed to not support their party leadership’s decision to back Milei against Massa
Hence, former President Macri’s once-vaunted anti-Kirchenerist coalition is now in shambles. But it means Milei still has a shot at the presidency
Fine line between libertarianism and anarchism
Dario Garcia Giner 11:11
(Tbh, I see him as more of an anarchist)
In fact, show me the difference.
Dario Garcia Giner 11:12
Brazil’s Lula, who had promised not to get involved unless former President Macri did, has now publicly thrown in his lot with Massa – for all the good that could do him.
You can say anything on a campaign but you do need a policy to govern (cf Trump)
Dario Garcia Giner 11:12
And after how Macri was supposed to do so much to improve the country and ended up ingloriously booted out I don’t have much hope for Argentinian economic medicine men. So where do we stand now with Milei.
Remember in the election in 2015, Scioli had a lead on Macri of 3%.
This is less than Massa’s 6.7% lead, but it’s certainly not a done deal for Massa.
Election polls are straight up 50/50 – it’s all down to the margin of error.
And other news:
Heavy fuel shortages continue in the country owing to government decisions done by Massa’s ministry (locking fuel prices under inflation, which lowered production – and not allowing USD transfers to import fuel).
Massa bungled the response, blaming people for “going on more holidays than usual” – almost the same as Maduro’s notorious response to food shortages in Venezuela.
And the last question is who the Governor of Cordoba province, Schiaretti, will back. Rumours say he will come down for Milei – which may give him the winning votes
(Cordoba made Macri win in 2015)
From one electoral fiasco to another
this weekend occasioned the centenary of the foundation of the Turkish Republic
Cue big celebrations all over Turkey.
(unless you happen to be an exile or a political prisoner or a Kurd etc)
It’s very clear what Ataturk would have thought about its present ruler, the Islamofascist, mentally inelastic, economically illiterate, jutting-jawed, cartoonishly corrupt, monstrously egotistic Erdogan.
Quote of the week from Erdogan, in an exultant mood ahead of the celebrations was this:
We as the Turkish nation are the only people in the world that has never practised racism,”
This may be newsworthy to the Armenians, the Kurds, the Syrians, the Greeks, the Bulgars, the Romanians, the Egyptians, the Ukrainians
Just half a millennium of Ottoman imperialism to overlook before we even get to the neo-Ottoman imperialism…
That was my quote of the week, but my fact of the week was this one. A survey conducted on MAGA rednecks discovered that one in every three Trump supporters
Is just as stupid as the other two.
Dario Garcia Giner 11:20
Here’s a chart demonstrating Erdogan’s economic expertise and the price of unconventional economics.
I give you the ever-swooning, intensely frangible Turkish lira.
Dario Garcia Giner 11:21
Now I’m sure he’s bungled the economy. But I can’t help but notice that Turkey hasn’t been this influential in world affairs since the 18th century.
At least, it’s certainly on the rise.
I’m not sure this is a force for good, though
Especially the 50% of Turks who despise the man who is mentally unfit to handle cutlery.
Dario Garcia Giner 11:22
Me neither. There was something tolerant about Ottomanism that I’m afraid has totally fallen by the wayside with modern Turkish patriotism.
And speaking of scandal-prone courts and economic catastrophes
Another week – another Hancock-linked disaster
An app promised to revolutionise the NHS. It was called Babylon
unsurprisingly, it has now Fallen
The Babylonian empire collapsed. I wonder if they ever thought of that.
Dario Garcia Giner 11:23
Shockingly terrible name for an app
Dario Garcia Giner 11:23
Wanna buy my new app? It’s called ‘The Fall of Rome’
After millions in NHS contracts and a calamitous SPAC listing, the company once valued at $1.2bn has entered administration for little under $10mn.
Dario Garcia Giner 11:24
The founder Ali Parsa, an Iranian immigrant and British national, promised to “revolutionise healthcare” for British health officials
he claimed Babylon’s groundbreaking AI would create a “doctor in your pocket.”
‘A doctor in your pocket’ sounds, I don’t know, a bit rapey to me.
Dario Garcia Giner 11:24
“Is that a banana in your pocket… or is it a.. a doctor?!?!”
Or a scene from Carry On Doctor.
Dario Garcia Giner 11:24
Parsa was aided along this way by Matt Hancock, who repeatedly and publicly promoted the ‘revolutionary’ company, alongside Dominic Cummings.
At his height, Parsa was worth an estimated £825mn in 2021, with Babylon employing 2,600 workers around the world.
Dario Garcia Giner 11:25
Unfortunately for Parsa, described as an indefatigable salesman, Babylon’s much-vaunted AI was actually a decision tree based on Microsoft Excel.
I’m reminded of Theranos $700mn fraud. At $1.2bn, this makes Babylon an even greater collapse of Holmes’ legendary company.
Parsa is not accused of criminal wrongdoing, but questions about how a $1.2bn company turned into less than $10mn abound. He’s not answering calls or emails about the business.
Theranos at least had a proper idea and tried to execute it. It doesn’t seem like Babylon ever did anything!
This won’t be the first – or last – time we hear about tech companies’ dodgy sales tactics used to inflate a paper company’s valuation to stratospheric heights.
Yes, Theranos was a proper fraud…
A fraud with ambition!
Dario Garcia Giner 11:26
Think big, Julian
A legitimate fraud!
Dario Garcia Giner 11:26
“Parsa’s event at the Royal College of Physicians in 2018 was one such instance. He showed how Babylon’s AI used a phone’s camera to analyse the facial expression of a female patient to pick up subtle cues that a doctor might miss. “This is a real consultation,” Parsa said on stage. “This is what we have built. None of this is a show.”
It was a show. The facial-analysis tool, a prop for a demo, never made it to market. The “patient” in the video was an executive assistant at Babylon, according to former colleagues and her employment record on LinkedIn. This sleight of hand was a small example of a culture fixated on form over substance, a trait common in Silicon Valley but dangerous in healthcare.”
This reminds me of when my mates worked for an AI company and realised some months in their clicking buttons that THEY were actually the AI being sold to clients.
Would the AI do a better job than the average bloke of interpreting the expression on a woman’s face?
All I ever see is a mixture of pity and contempt
Dario Garcia Giner 11:27
It seemed like it didn’t work straight up, Julian.
Nothing fancy about this fraud. It just didn’t work.
But the episode doesn’t leave British public health regulators looking great either.
An outspoken critic of the app in 2017 reported his concerns about Babylon to medical regulators.
While the Care Quality Commission (CQC) only raised concerns about potential misuse of the app and on how it shared information with GPs, the Medicines and Health Regulatory Agency said that:
“Babylon’s medical device did not require independent assessment, allowing the company to “self-declare” that it conformed with relevant standards.”
Babylon labelled the critic a “troll”, and moved on
I do the same.
Dario Garcia Giner 11:29
It leaves me wondering how many other paper tigers in the tech industry there are, which just haven’t been discovered yet
I honestly feel like most of the tech we see online is just vapourware
How crazy is it that an Excel sheet managed to masquerade as an AI for ALMOST SEVEN YEARS
That tells me this is a story of the broader economy, the tech universe, calamitous procurement and lobbying procedures, rather than of a fraudster
I can’t even use Excel so it was still a level of technology sufficiently superior to mine.
Dario Garcia Giner 11:31
For example, the former head of the CQC was actually running Babylon’s NHS relations.
The man, Paul Bate, now Chief Executive of the UK Space Agency
@helmholtz – we did discuss last week with Neil Collins
And with that, the two batsmen declare their innings over…
Remove their helmets, raise their bats in salute to the crowd’s rapturous applause from the stands, and make their way back up the pavilion steps to the tranquillity of the dressing room.
Dario Garcia Giner 11:33