Spot Markets Live Transcript: 16/01/23

apparently everyone important is snubbing it this year. Apart from Olaf Scholz.

Maybe because Davos membership fees are suffering from inflation.

That news comes via Bill Browder, who is still there, but on the periphery this year because he won’t pay up the extortionate surcharge.

BREAKING NEWS FROM SEMAFOR. DAVOS IS EXPENSIVE!

Can you imagine how much a Swiss CHEESE SANDWICH WILL COST?

https://www.reuters.com/markets/rates-bonds/bojs-yield-curve-control-danger-policy-backfires-2023-01-16/

From Reuters:

Unlike other central banks that have been aggressively raising rates to battle inflation, the BOJ continues its decades-long attempt to stoke price rises in the world’s third-biggest economy, even as inflation has exceeded the bank’s target.

With investors pushing up Japanese government bond yields, testing the BOJ’s policy of yield curve control (YCC), the central bank last month shocked markets by raising its cap on the 10-year yield to 0.5% from 0.25%, doubling the band it would permit above or below its target of zero.

“If bond market function continues to deteriorate ahead of the BOJ’s policy meeting, the risk of an early end to YCC could heighten,” said veteran BOJ watcher Naomi Muguruma, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities.

Here’s the latest chart.

Trading volumes have shrunk as market participants have struggled with the BOJ’s sudden and large interventions, so the market now waits on the central bank every day.

“A little after 10 a.m., we check what the BOJ will announce, and that determines the market move of the day,” said Tomohiro Mikajiri, head of yen and non-yen fixed income trading in Japan for Barclays.

“It is hard to take positions without checking whether the BOJ conducts emergency bond buying operations, and if so which tenors the BOJ targets, and at which prices.”

So essentially, the BoJ has had to become the market.

11:17Average wages in Japan are still the lowest in the G7, but the problem is inflation expectations have finally begun to moderate elsewhere.

https://www.bloomberg.com/news/articles/2023-01-11/japanese-feel-the-worst-off-since-2010-as-inflation-bites?

11:19Though of course, recession forecasts have failed to deliver thus far. Germany has defied recession, and so has the UK. And in December the Japanese govt had also been upgraded its forecast.

https://english.kyodonews.net/news/2022/12/a1963ae42582-japan-govt-upgrades-fy-2023-gdp-growth-forecast-to-15.html

So the question is … is inflation good for growth?

Or is it just less bad than we thought?

Or is the recession coming but just not yet?

After all, the ultimate counter indicator is now here:

https://www.reuters.com/business/davos-2023-global-recession-seen-likely-2023-wef-survey-2023-01-16/

If consensus at Davos is that there will be a recession, then most likely there won’t be one.

I note the general mood there is being described as incredibly dour. As if all hope is lost. Which again suggests maybe it’s time to be optimistic?

Rightmove said this morning that asking prices had risen for the first time in two months  – 0.9% m/m – since Trussonomics sent shockwaves through the British economy

https://www.reuters.com/world/uk/asking-prices-uk-homes-rise-after-mini-budget-shock-rightmove-2023-01-16/

It was the biggest gain at this time of the year since 2020. However, average asking prices were still 2% below their October 2022 peak.

Over the past week or so, we’ve had loads of house price predictions from economists ranging from a fall of 5% to a fall of 30%.

But as Paul Murphy used to like to remind me, stocks performed super well during the Zimbabwe inflation period too, because everything gets repriced against inflation. You buy assets.

https://www.theguardian.com/business/2023/jan/16/marks-spencer-to-open-stores-3400-jobs

Izzy is looking for a cable chart

Found this one tho

So after a Christmas wobbler, GBP is back on track a bit.

And so is bitcoin btw

It’s back way over $20k at $20,819.84

Now, while I am desperately trying not to talk about Davos, I can’t help but point out that SBF was not only on a Davos panel in May 2022, FTX was on the Partnership list.

This year’s crypto presence apparently is more muted. But it’s worth paying attention to who is representing crypto this year.

11:35

That’s a panel featuring my former colleague Stacy-Marie and Brad Garlinghouse of Ripple, who is still subject to a civil action by the SEC.

Which I’ve written about before.

I have a feeling that could be auspicious.

So now, I have two things we can talk about prepped. First, WISE earnings tomorrow, and the other is more Davos stuff (sorry).

They are now a plc (via a direct listing).

They report their Q3 tomorrow. And the big thing about Wise is that they are or at least have been one of the few European fintechs that have been defying the fintech valuation armageddon of the past year, largely because they’ve been profitable for a while.

All my fintech sources tell me it’s been an utterly awful time for the sector. And one of the reasons is the lack of general profitability.

Monzo was at death’s door, as was Klarna.

Though what’s interesting is that suddenly both of those are predicting a recovery — no doubt due to higher interest rates. But what higher interests giveth in Net Interest margin, they taketh in credit deterioration.

But let’s get back to Wise

11:41 For me, the great mystery of Wise is how they’ve been able to generate profits, when there’s fundamentally nothing new about their business model. They’re in the FX transaction business, where there are and have always been plenty of competitors to keep margins razor thin. And yet, Wise have genuinely come into the market with incredibly competitive rates, and now profits. Is it down to secret technological innovation? Or is something else afoot?

And it was prompted by the fact that a family member had to wait over a month for a USD payment of about $1000 in November. It finally arrived at the end of Dec, or thereabouts.

@darren – yes, they have made profits

I think it’s all down to the Treasury dept.

Anjuli Davies11:44

The plot thickens.

Note that in August 2022, he was also very keen to flag that his treasury team were excited at the prospect of buying a few $100m worth of peso at negative spreads.

And here’s a job description of someone who works in the Treasury Department

Do you see where I’m going with this?

11:48So yes, managing risk is normal for a treasury dept. But in the case of Wise, it may also be generating internal profits via what some of Wise’s execs have described as proprietary tech as superior risk/VaR management and hedging. Is that tech tho or is that trading?

11:49They need this “risk management” (euphemism for trading) of course because if you are mainly operating a matching model, which is what they came to market claiming they did (i.e. a peer-to-peer FX processor), then you won’t always have perfectly matched flows. When you don’t you only have two options. One is to buy the liquidity in at a price. The other is to take the other side of the trade until the offsetting flow comes your way… ideally hedged.

All fine and dandy in low-volitility markets, but if something unexpected happens your team of FX trading treasury specialists might be caught out.

11:51Obviously, October/November was a very volatile period in Wise’s signature cross-currency window GBP/USD and EUR/GBP – so, while I have no proof bar some speculation on Twitter and my family member’s lived experience — I’m keeping an eye out for tomorrow’s results to see if there has been any impact from vol on internal risk limits.

That’s not to slate their customer service or UX advantages. I think they have many, and clearly the marketing campaign was hugely successful at buying customers. But it’s all a bit Russian roulette.

11:54As a customer, if you happen to execute a trade in a low-volitility fairly matched period, you get the best of the best. But if you find yourself wanting to trade in a low vol period or at a time when Wise might not be able to absorb the risk, your trade might get cancelled or take one month to clear. So like algos in normal markets, it’s there for you in the good days, but maybe not so much in the bad days.

11:55And rather than averaging overall costs across the entire customer base, it seems to me, a small share of customers who get a very bad deal pay for those who get better than average deals most days.

@Bruce I will check it out, but I don’t see how the tech can be all that unique. They match flows, and/or risk manage the difference.

What else?

what’s she up to?

https://twitter.com/DavosDeville/status/1614793425248833537

11:59Last Davos point, if you haven’t seen – I ended up co-authoring a piece with Michael Shellenberger of Twitter Files (and a recent guest on the A Long Time in Finance podcast about WEF.

https://twitter.com/ShellenbergerMD/status/1614781988501852161

And Elon himself replied:

https://twitter.com/elonmusk/status/1614787021410832384?s=20&t=_ndul1EI9xn2-LS_pT3jGQ

I actually agree with this. We do need a Cantina-style/Rick’s cafe safe space for govt/important people to meet and dialogue. We even need private off-the-record spaces.

What I don’t think we need is a singular outfit or person influencing all those people with their own agenda. And we certainly don’t need hypocritical messaging about transparency for everyone else, but not for that entity.

That’s the issue I have with Davos. It claims to be neutral and agenda-less, but that’s not true at all.

Klaus is all about stakeholder capitalism innit?

That said, I also like to remind people that Klaus is actually more welcoming and neutral than old regime Twitter. He platformed Vladimir Putin and Xi in 2021. And Adrian Monck, the WEF’s former media honcho now senior director, told me in August he probably wouldn’t say never again to Putin. He has also platformed donald trump/bolsonaro.

This is the Shellenberger piece btw:

https://public.substack.com/p/davos-is-a-grift-and-a-cult-but-its

Since it’s paywalled, i will just finish on the key scoopettes.

1) Davos membership prices now range between CHF120k -CHF850k depending on how much crypto you have.

2) WEF itself does not disclose its investment portfolio, which is substantial enough for it to employ an external wealth manager, Al Gore’s Generation Investment Management, and an unnamed hedge fund. All we know about its investments are that they are focused on swiss equities, swiss bonds, global equities and precious metals.

So there you have it.

On that cheery note, it’s goodbye from me.