Spot Markets Live Transcript, 16/10/23 (Polish elections, VC armageddon, Reserve requirements)

Is there anyone out there?

Good morning, aloha and greetings fellow market wizards. Well, the Indian summer is very definitely over, the nights are shortening, and there’s an uncomfortable sense of impending doom.

But, I have to say, the weather was absolutely splendid yesterday. A great day for queuing. It was like 1988 all over again.

I’m recovering from Polish election drama.

72% turnout! Ealing (mini Polska of London) was overwhelmed with queues.

And if you were an oldie you got to cut the queue, just like in the days of communist inflationary bread queues. But more on that in a bit.

But what’s the bigger picture Julian?

Well, amid the catastrophic teletext that is geopolitical newsflow at present, this opening to a piece in Foreign Affairs by Robert Gates caught my eye this weekend:

Here’s the link FYI

https://www.foreignaffairs.com/united-states/robert-gates-america-china-russia-dysfunctional-superpower

For instance, the WB/ IMF meetings in Marrakesh last week were completely overshadowed by newsflow from the Middle East. Delegates noted the US was presented as weak and divided, (at this stage the Republicans’ inability to elect a Speaker means the US has not even been able to issue a condemnatory statement about the Hamas attacks yet) .Geopolitical risk is rising and analogies are made with the 1970s and even the 1930s.

Though oil prices not freaking out entirely just yet.

An economist at Marrakesh described the palpable fear there of a Trump re-election, recognised an unmistakable resentment towards the funding of Ukraine mounting. Attendees were also a bit huffy about G10 hypocrisy that lectures EM on climate change while Germany restarts coal powered stations.

MARRAKECH — Disagreements over language referring to Russia’s invasion of Ukraine prevented the issuance of a joint statement from the annual meeting of the International Monetary Fund and World Bank.

Officials gathered in Morocco to discuss economic and monetary policy have failed to come to a consensus after countries including Ukraine, the Netherlands, Canada and the Nordics objected to the way the invasion was described in a draft text.

The language was “totally unacceptable” said an official from Ukraine, who was granted anonymity to speak about confidential talks. “It was just not strong enough,” said an official from another country.

Spain, which chaired the talks, had proposed replicating the language agreed to by G20 leaders in Delhi last month, which did not condemn Russia but instead stated that there are “different views and assessments of the situation.”

“We have tried our best to reach a communique,” Spanish Finance Minister Nadia Calviño said. “This was not possible.” 

Instead, the IMF issued a “chair’s statement,” as it did after IMF and World Bank meetings in the spring. 

For the life of me, I cannot fathom investors who think Turkey and Erdogan have undergone some kind of Damascene conversion to economic orthodoxy and conventional central banking.

10:39 For the record, the IMF sees global gdp 3 percent 2023, 2.9 percent 2024 and inflation moderating from 6.5% this year to 5.8% next.

The heavy debt burdens of advanced economies – from the United States to China and Italy – was a recurrent theme in the meetings, which came after financial markets in recent weeks pushed U.S. bond yields higher. Italian central bank governor Ignazio Visco said there was an impression markets were “reevaluating the term premium” in a very general sense as investors become more nervous about holding longer term debt. More on ‘re-evaluating the time premium’ in a bit. That’s a big euphemism in my book

POLAND REQUEST

excellent

Just so happens today was “cultural dress up” day at school. So I had to dispatch my daughter in the traditional garb, so anyone watching me coming to school probably thinks it was some sort of PiS protest move.

But it wasn’t.

that maid looks like she’s done some serious milking

That means even though they are the winning party, they are unlikely to forge a controlling coalition.

Donald Tusk on the other hand has been doing a victory lap since late last night.

Kaczynski, while celebrating the party’s top position, to his credit has said he will respect the result and is happy to work either in power or in opposition to continue to defend his party’s values. Which (if he sticks to what he says) slightly undermines the claims he’s anti-democracy.

any Polish proud boys?

The actual ballots still have to be counted. And there is already talk of potential bad practice at polling booths which may undermine the integrity of the vote. Or at least introduce uncertainty to it all.

 I think the big blind spot on the Polish elections is the assumption that the results will confirm the exit polls.

But there’s already talk that polling booths were inappropriately asking if people really wanted the referendum card.

The opposition had led a campaign to try and discredit the vote, by getting people not to submit the referendum result so as to not meet the 50% threshold for it to hold.

(Embarrassing admission. I didn’t even know there was a referendum. So I was confused at the polling booth yesterday when someone did indeed suggest to me not to fill out the referendum ballot.)

10:51 The question is, will there be any meaningful divergence on that referendum submission between the diaspora and Poland proper? If so it could indicate some sort of integrity issue, which might be seized on by PiS if they do badly to claim the vote did not count.

It’s a stretch though.

And since Kaczynski has made positive noises about respecting the vote, i think the bigger risk is if the ballot count is better than the exit poll suggests. I think then there might be a protest by the opposition.

Pis leader Kazcynski insisted his party would work to ensure that its program (like backsliding on democratic practices, polarising the electorate on immigration and gender politics and deconstructing an independent judiciary) won’t be abandoned.

Brussels will be exhaling loudly.

The real driving issue turning people off PiS was abortion.

The turnout itself was the real story in town. The showing was strongest in second-tier Polish cities, and women came out slightly more than men supporting the abortion point. The biggest turn out was, however, in the 50-60 age bracket where it hit as much as 82 percent.

The government needs to win a vote of confidence to operate. And it’s the winning party that has the first stab at having a go, so that would be PiS.

PSL may be the kingmaker’s, and so far it does look like Tusk will be in power. But if the exit vote tally is confirmed it might not be until December that a government is formed either way.

If Tusk does come through chances are high he will move on his threat to lead a purge of the current government. That means throwing out PiS loyalists from most of the state owned governments and media. Though, imho, replacing one set of loyalists with another set of loyalists is hardly indicative of a return to civilised liberalism. Just more tit-for-tat. It also undermines media pluralism in this case, as the conservative perspective would be crowded out.

Though, people like the National Bank of Poland’s head Adam Glapinski will be much harder to budge.

Tusk has, however, promised to pursue criminal charges against those who have “broken the law” and operated in a corrupt way. That includes President Duda, who he says acted illegally in signing the judicial laws in the first place. [Though expectations are that they’ll use this as leverage to ensure he doesn’t veto too much legislation.]

If there’s any more news on that while we’re on we will revisit, but for now we just have to wait.

and, the best setting imaginable for a bumper payout in December is the legendary, almost mythical 4thQ rally into year-end

11:00 Goldmans, and in particular, their equity strategist, the most delightfully-appellated Pasquariello is bullish on S&P into YE, especially the ‘compelling setup’ for US tech stocks into Q3 earnings, even if he’s wary of higher rates. I know he’s the GS strategist while I sit here in my rented suit but I’m a tad sceptical of those drivers on which his bullish call is predicated.

Chiefly his optimism about growth (even though 4Q GDP will be <1%), earnings (1% growth for the S&P in 2023, 5% in 2024), flow-of-funds (GS Prime Brokerage reported an increase in single stock shorts for ten straight weeks, which I don’t think will sustain) seasonals (Oct/ Nov/ Dec best 3mths of calendar year, esp for Nasdaq) technicals (S&P bouncing off 200 DMA) and so on and so forth

He is of the opinion the Fed is unlikely to hike but the mkt will force yields higher and financial conditions are tighter. Broader questions about US debt sustainability will dominate the discussion for 2024 and will no doubt generate pockets of discomfort throughout next year.

Geopolitics would appear to represent the primary obstacle to YE rally but GS are minded to view higher rates as a headwind to growth, not a recessionary shock. Both NDX and S&P can handle of bit of rate discomfort if you look at this chart…

11:04 Obviously, someone who feels the pulse of the market coursing through his veins didn’t spend the weekend drinking wine and watching rugby, but was instead listening to financial news commentary. I listened devotedly to Paul Tudor Jones on CNBC, it’s clear he thinks the biggest problem for the US is that the two likeliest candidates for next year’s election (Tramp and Biden) are the people responsible for the recent excrescence of the deficit and therefore  neither is qualified to really tackle the issue with any credibility nor are they likely to campaign on the issue in 2024

I suspect Tramp would struggle to articulate any coherent policy on this subject and it’s not an argument Dems traditionally make. Immigration and identity politics are more readily available causes for Trump to espouse and the Dems will feel they can win again if this is the ideological battleground. Paul Krugman: ‘the chances of serious action on the deficit anytime soon are near zero.”’

Anyway, I’m convinced the story of 2024 will be the US deficit and that markets will eventually force Washington to address the issue but it may take a crisis to persuade them and irrespective of whose fault it was or is, it will be the  incumbents who will bear the brunt of the criticism

Democrats will receive the brickbats because they are in govt now and it’s much harder to defend than it is to attack on an issue like this.

Certainly Yellen is making noises that it’s not all doom just yet.

(She’s in Luxembourg today btw, looking at whether to conjoin the EU in America’s tariff war with China)

(The idea is that the EU would be swept into a steel and aluminium “club” with the US, and thus benefit at the cost of China)

But really, all this signifies to me, is the clearcut end of free markets. Tariffs are no longer a dirty word.

Because the latter became too stigmatised on social media.

Both CSI300 and HSCEI are now trading -5.5% and -10% YTD vs TPX +25% and SPX +14% (see exhibit 1). Considering a) the strong travel demand during the summer season, b) companies’ cautious and conservative guidance for 4Q23, and c) potential further policy changes, we are bullish going into year-end and beyond in China. GIR expects more fiscal easing measures in coming months, with conviction of a 25bp RRR cut and a 10bp policy rate cut in Q4.

I’m not going too die on the hill of a Chinese rally but since we are in the business of highlighting what’s in investors’ blind spots, I still think this is worthy of one’s attention. End of.

11:14 I chatted with a banker this weekend – not something I’d normally recommend but it was a dinner party and I had no choice because he was sat next to me. He oscillated somewhere between concerned and alarmist about the Armageddon looming in the venture cap space where many funds are faced with huge valuation markdowns in the near future.

I tried to get him back on football transfer speculation and my favourite vintages but he would not be turned.

He very much feels there is a crash hiding in plain sight.  Instacart valuation rounds, the well-documented problems at Sequioa, the recent travails of Graphcore, as per this story from the FT:

https://www.ft.com/content/f57f1c53-0783-42f5-9732-7c048d18f376

The Instacart IPO at ~$9bn vs last mark of ~$39bn and the collapse of Hopin all indicate a huge valuation mismatch but he was adamant that funds are still positioned as if there’s nothing happening.

There has been too much money allocated in recent years and a distinct dearth of exits. This banker estimated 100% of returns have probably come from 100 companies (or a very small number, in any case, given his tendency to exaggerate). If you’re not a Tier 1 venture fund you wont see the best companies. Exaggerations notwithstanding.

Lots of private wealth managers/ family offices have money tied up in projects that are now funding at much lower levels than previous rounds.

Private Equity buys companies with cashflows. Servicing the debt is very painful with rates doubling but there are almost always industry bids to exit. VCs are in at a much earlier stage, faster-growing but often no cashflows at all and even harder to exit.

This is a Big Short kind of story developing here with billions most likely having to be written off. Owing to the illiquidity/ infrequency of marks/ lack of industry standards there is a huge, delayed reaction to the much lower valuations now being attached to VC investments.

I know PE is finding it ever hard to raising funding now too.

Fraudsters accused of conning wine merchant in €95,000 Petrus scam

And it was noffink to do wiv me, guv, honest

I would sell fake wine if I thought there were a market for it.

(I Sell alcohol free wine which is the same thing)

It’s called ‘Born Free it costs £6.50 and when people ask me if it’s any good, I reply, ‘I’ve no idea, I will never drink it’

A tiny anecdote from the day in the life of a desperate wine merchant yesterday

A woman puts her head inside the door

I am surrounded by approximately 2000 bottles of wine.

She asks me ‘ do you sell wine here?’

‘Sometimes’

Two things caught my attention this weekend.

First, the ever-affable but slightly pretentious Andrew Bailey made some interesting comments in Marrakech last Friday.

Asked about financial stability in the wake of SVB collapse, he said that really we were at the limits of where we could go with imposing greater liquidity buffers.

SVB saw 30% of its deposits flee in one morning.

In fact, notably, Bailey came out in support of the Mervyn King solution.

Do you know what that is?

Paul Tucker is also in favour.

SO it’s interesting that Bailey should float this in an official discussion.

How it would work is that banks would have to keep most of their assets as collateral at the cbank, which would haircut them according to the risk.

SO monetary policy would be conducted via cbank valuation effectively of the riskiness of the assets.

Only the differential would have to be funded properly in the market (via debt, equity or contingent capital).

So it’s a fundamental change. But a lot of people don’t like it — even though, in some ways the ECB model is already heading in that direction.

What about the ECB?

Robert Holzmann, the Austrian cbanker, wants it raised to as much as 10%.

It’s currently at 1%, and banks are already up in arms about the remuneration on those reserves being cut to 0 in July.

If it went up to 10% that would be a significant amount of wedge that they would be losing. And unsurprisingly they’re a bit miffed.

The ECB has seemingly responded to those concerns, so now the expectation is increasingly that when it comes to liquidity removal it will come back to the end of PEPP reinvestments.

Though, even here, there is a controversy, as now is a bit of a precarious time to stop reinvesting the pandemic relief program bonds since there are fears spreads between Italy and German bonds could blow out again. Whatever happens though, consensus is that we are for the time being at least higher for longer.

The next meeting is in Athens next Thursday.

but we are OUT OF TIME.