Spot Markets Live Transcript (06/02/23)

10:59Good morning and welcome to Spot Markets Live, the weekly round-robin of stocks and markets news. Today I’m excited to be joined by Helen Thomas, CEO of BlondeMoney, an elite macroeconomic consultancy which you can sign up for here:

 https://blondemoney.co.uk/

Welcome Helen !

Thank you Anjuli for the invite

Sell side, I started out in 2001 at Merrill Lynch on the FX desk

Buy side, I ended up at SSGA running currency alpha

But in between I worked in politics

For George Osborne when he was Shadow Chancellor

So it’s a real mix

I was there when Lehman went under

I remember George walked in that morning and I was reading the newspaper (how old fashioned) and he simply said “I bet you’re glad you’re not doing that anymore”

During that period I ended up listening into the calls with John Varley but also with Swedish politicians who were sharing experience from when they had their banking crisis decades before

anyway

this is probably very dull and historical for all the cool young people on here

They only see markets go up 😉

Ok so where shall we start?

Markets are having a down day off the back of that surprisingly strong US Labour data on Friday, some hawkish comments from the BoE this morning and ahead of some economic data out later this week.

 I think you are absolutely the perfect person to have with us today Helen…should we go straight into Liz Truss’ 4,000 word essay? Have you read it? I like the part where she was instructed to “get back home woman and start hustling”

Here’s the opus

but anyway

the essay is kind of the good the bad the ugly

it’s pretty wide ranging

on the 45p rate

11:07when I was watching Kwasi give the statement, of course my jaw dropped because it was such a surprise… but then I started thinking about when that rate got put in and how it was under Brown

well it was 50%

then Osborne cut it to 45%

but basically that in the scheme of things this is pretty recent history and it was all done in response to banking crisis

and yet it was treated as if it had been around forever

and it is fascinating how certain things become conventional wisdom

conventionally accepted

but the bigger question

is what has happened to the electorate

I think Liz and Kwasi were surprised that even people in the City on the 45% rate didn’t want it abolished

they’re kind of stuck in a Thatcherite time warp and the truth is that the old 1980s left vs right needs to be redrawn for a new world

it’s not just in UK, it is across the western world

so then any leader who could portray themselves as outside of the establishment could win big

hence Trump, Brexit, even Macron, Syriza in Greece etc

but then 2020 pandemic comes along

and it’s the perfect storm for those who hated the establishment, because ONLY the establishment could step in

the State had to get bigger

the State puts the vaccine in your arm

so now the electorate is splintered again

authoritarian v libertarian

I like to frame it like this

“Take Back Control”, such a simple solution

but for some people it meant “Take back control for my parliament” = authoritarian, for others it’s “take back control for me” = libertarian

backlash already begun

that’s why we have 3 party coalition in Germany for first time

Macron attacked by left and by right in his own parliament

Italy, first quasi-fascists in power for decades

none of them can govern

yes that’s a good way to put it Anjuli

you can see the havoc it plays in Germany in response to Ukraine

leaders are consumed domestically

hard to do anything with foreign policy

I see Darren has asked a question that optimistically suggests politicians might solve some social issues

I doubt it

because we need a whole new generation of politicians

and a whole lot of crises first

I would put Italy back on list of tail risks this year

Italy debt default risk / spread widening

Bund-BTPs

The ECB will have to activate its TPI tool

the new Transmission Protection Instrument

so TPI is yet another piece of alphabet soup the central bank has come up with to try to solve issues

but that’s exactly what the new tool will do

the thing is, nobody really knows how it will work because they haven’t had to activate it yet

they hoped by announcing it, would be a bit of a Whatever It Takes moment and its mere existence would mean it wouldn’t have to be used

but that’s before they had to jack up interest rates as inflation got into double digits

from their website:

The TPI will be an addition to the Eurosystem’s toolkit and can be activated to counter unwarranted, disorderly market developments if these pose a serious threat to the smooth transmission of monetary policy across the euro area. In such a case, the Eurosystem could purchase securities from individual countries in order to combat deteriorations in financing conditions not warranted by country-specific fundamentals. These purchases would be made on the secondary market and would focus on public sector bonds. Purchases of private sector securities could be considered, if appropriate. The scale of TPI purchases would depend on the severity of the risks facing monetary policy transmission. Purchases are not restricted ex ante.

and similarly tricky to announce bond purchases even as they’re trying to sell bonds via Quantitative Tightening

BOE managed to get it done and exit for a profit, amazingly

but then there’s still a lot of liquidity sloshing around the system so these blow ups haven’t yet become systemic

Italy is the main one to focus on

As someone has pointed out in the comments, Italy is the big one

that always needed to have some kind of backstop because it can’t really finance itself

Also, before we move on just wanted to get your take on Truss’ LDI comments

However, brewing in the background there was an issue relating to pension funds, which neither of us had been made aware of – a problem that would ultimately bring my premiership to an abrupt and premature end because of the panic it induced.

At no point during any of the preparations for the mini-Budget had any concerns about liability-driven investments (LDIs) and the risk they posed to bond markets been mentioned at all to me, the chancellor or any of our teams by officials at the Treasury. But then, late on the Sunday night, came the jitters from the Asian markets as they opened. I was alerted to this on the Monday morning, at which point the Bank of England governor was wanting to make a statement on LDIs.

Readers will not be surprised that, given their impact on events, since leaving office I have spent some time looking into LDIs. I was shocked by what I discovered.

Only now can I appreciate what a delicate tinderbox we were dealing with in respect of the LDIs.

Was this really such a Blind Spot ?

And how much is the BoE responsible?

they had mentioned LDI issues previously but never said what they would do about it

they’re doing the same thing now when they talk about financial stability risks

Andrew Hauser is a great guy at the BOE, well worth reading his speeches

but even he said that what they’re doing is “monitoring”

Can I post in here an article from Risk magazine

Whilst you’re finding the article thought it would be interesting to get some of the reaction

https://www.telegraph.co.uk/business/2023/02/05/will-take-labour-government-tories-realise-liz-truss-right-along/

Hedge fund tycoon Crispin Odey has said that “we probably need a Labour” government to force the Conservative party to rally behind the low-tax economic agenda advocated by Liz Truss.

Reacting to the former prime minister breaking her silence on her 49 days in Downing Street, the City investment manager conceded that last autumn “wasn’t the right moment” to thrust Trussonomics onto the British economy.

Mr Odey had been a prominent supporter of Ms Truss’s plans, but said in hindsight that announcing when “everyone is very poor” had proven a mistake.

“This Conservative Party looks like Ted Heath’s Conservative Party,” he said. “It has stolen the policies of Labour the whole way along.

“It has stolen the policies of Labour the whole way along… The trouble is that we probably need a bit of Labour.”

He added: “Strangely, Liz Truss isn’t a million miles away from where they [the Conservative Party] should be. This will be the agenda for the Tories when they’re trying to get back in.”

that’s punchy

!!

nor does Crispin’

saying it “at a time when people were very poor”

how crass

I have often found that Westminster and the City talk in very different languages

you’ve got to make the argument

the truth is that central banks do this all the time

Powell tried to convince everyone inflation was transitory

now he’s trying to convince everyone they’re doing Whatever It Takes To Kill Inflation

and for some reason the market didn’t believe the transitory story even though that is to some extent what we will see

we weren’t going to sit at 8-10% inflation

from a 1-2% world previously

hahaha Izzy always has a good metaphor ready !

I think the UK isn’t always as bad as it looks. You have to remember our national press love to tear everything down

just look at our poor England football managers

I would love to be England football manager

or indeed Prime Minister

Rishi was my year at Oxford

same degree

Not a best mate or anything like that but yes would see him at various things

there you go!

exactly

Rishi a bit like that too. the quiet studious one

Catherine Mann has been talking this morning

From The Telegraph: Catherine Mann, a member of the Bank’s Monetary Policy Committee, said uncertainty around when the turning point for inflation would come “should not motivate a wait-and-see approach” over setting interest rates.

the BOE speakers were all getting asked Qs about policy mistakes, not tightening quick enough etc etc

and she just said, well I always voted for big hikes so I didn’t make the policy mistake

sorry that was meant to emphasise the “I”

I am not the best typist

I feel a bit for the BOE

and then got all the criticism

well not first, but before ECB and Fed

they should have done bigger hikes sooner and started QT earlier

but

they were probably worried about systemic reaction

step forward LDI when they did start going for it !!

The central banks are in a complete pickle

They have schooled the Pavlovian response in the market that when the sh1t hits the fan, they’ll cut rates

So now for some mad reason, even with rates having only just got towards the peak, there’s the obsession with when they’ll be cutting

Go back to 1994 US rate hike cycle… after they hit the peak, they stayed within 75bp of that for 7 years

it’s not like ZERO is the baseline interest rate

yes… I locked into a mortgage at 5.75% in August 2007 so don’t talk to me about it

That’s why I’m not a trader !!

unlike the audience for this chat

you might also remember that UK CPI hit 5% in aftermath of financial crisis, or I might need to check that it could have been 2012

but either way, it was weird how everyone got hysterical when CPI started to go up because in the UK at least it had been at that level in recent memory

obvs it got a lot higher

SO

here’s the thing

I’m not worried about debt

for once

it’s not a cycle at all in fact

I wish we would stop banging on about inflation and/or unemployment rates

it’s like an aeroplane going into a stall and someone just looks at one irrelevant indicator on the dashboard

The whole world changed as of March 2022

we got the technological revolution compressed into a 12 month period

and governments had to take on a lot of debt to manage the schism between two regimes

it’s going to take a decade for the economy to settle into its new shape

I mean even that US jobs number

so it turns out that there was MASSIVE immigration

and 91% of the migrants got jobs

so that is how you get lots more jobs, but NOT much higher wages – average weekly earnings fell

participation rate went up

and the reason for the big migration is that the whole world is reassembling itself

US will get to its new equilibrium first because it has such a flexible labour market

you see it already

there’s now more jobs in Florida than NYC

I’ll post chart in a sec

people don’t want to be care home assistants when they can be Amazon delivery driver

Feb 14 I think is the next CPI print

no I don’t think they pause

or rather I think this relates to what one of the contributors said

about no fed dot plot cuts until 2024 at least

Kashkari’s new year blog is the key here

let me post link

thanks Anjuli !

Powell speaks tomorrow in Washington DC

5.40pm UK time

I think he reiterates that message. It’s pause, or hike.

that’s it for the year

rather than “Pause and then cut”

BTW if that kind of migration continues into the US, then you might just get the nice soft landing…

growth, employment, but not too much inflation

as labour supply comes to meet labour demand

The BLS report said that most of the migration was male, from Asia… would be intriguing to know if that trend continues or what prompted it

we need to watch migration data for rest of the world to see what happens to labour market

but this is why the unemployment rate tells us so little

if you look at the predictions for NFPs last week

I have a lot of sympathy about predicting data right now

I mean

it’s tough enough at the best of times

but

we shut down the world economy several times in separate stages and then pumped a load of heroin into the patient and then turned it off and then made the patient get out the hospital and go for a run

to mangle metaphors

Go back to 2008-09

about 4 years later the US statistics office revised GDP growth

it had fallen far more

than they thought at the time

and that was just because a bank went bust

this time we have had a global breakdown

it never ceases to amaze me that the beautiful optimism of humanity means we should expect everything to be “normal”

I think it’s like poker

it’s all about what’s in the other guy’s hand

as my boss put it to me at Merrill when we used to play liars poker on the desk

What’s everyone else thinking and how does this particular piece of data relate to that

but that’s just for short term

you also need to keep an eye on options gamma

that’s one of my fave topics

not to talk down to the learned people of this group

but basically

options market makers are the only people who have to trade every day because one of the factors they’re managing is time

as time decays, the option price changes and therefore the hedges change

that’s the first thing to say

second thing is, what’s the overall position. are the options market makers short or long of gamma

without boring everyone to death

short gamma means they sell on the way down and buy when it goes up = exacerbates price action

long gamma is opposite = rangebound

and most of the time they’re long gamma because that has paid off

it goes back to central banks and all the money they pump into the system, that bears down on volatility so these guys tend to soak up all the vol selling and then just buy low and sell high all day long

https://squeezemetrics.com/monitor/dix

and yes that’s right about Citadel

although the added way to make money is to know when to take a bit of prop risk alongside

and because they see so much flow, they tend to know which way the market is

etc etc

but the reason this all became so important is because of explosion of interest in volatility trading itself

so look at open interest on the VIX, it exploded after 2008

so now it’s “tail wagging the dog”

people are trading zero day to expiry options

and it’s all adding up to having a big impact on day to day trading

anyway I know we are almost out of time!!!

that’s where I introduce impairment in the velocity of people, that’s still ongoing

Then this week

I will release our Rishi Ratings

where we have analysed all Conservative MPs to quantify how much support there is for the PM

😀

Follow me on Twitter

or LinkedIn

We will show the support for Rishi in one chart

nice and easy

Have a great day!