Spot Markets Live Transcript, 17/10/23 (Azerbaijan and Armenia, oil, meme stocks)

This morning, we are bereft of the services, input and multitasking wherewithal of Ms Kaminska but instead have resource to The Blind Spot’s exotically-appellated geopolitical expert, Dario Garcia Giner.

So, pull up a chair and if you’re sitting comfortably with a coffee (or a slug of something more fortifying like I just did – we don’t judge here at The Blind Spot) then we can begin. Remember to speak freely and if you have any questions then please direct them to Dario because I’m not capable of spontaneous thought.

We have delicately avoided the subject of the Israeli war against Hamas like an elephant ponderously sidestepping the tea things in a drawing room. The terrain of the immediate situation in Gaza is booby-trapped with sensitivities, though, and too fraught with controversy to explore in this forum.

(without potentially destroying the reputation of Izzy’s website when she’s not looking).

However, without diminishing the gravity of events in the Middle East in any way, it’s less emotionally charged, less liable to provoke a ding-dong, to calculate the effects on the wider world than it is to weigh in on the rights and wrongs of events on the ground/ battlefield

At this stage, it has to be said, the impact of this conflict is far more contained than that of Russia’s invasion and occupation of Ukraine. While the savagery on offer and newsflow intensity are comparable, the financial and market ramifications are not. Yet.

My IG feed had become wild with vitriol and hate from both sides

And hello to all below 🙂

Gaza borders Egypt and Israel only, its economy is a few billion dollars, its population barely 2 million and shrinking daily. It’s a sad fact to acknowledge that the cost to the world of this war is nugatory unless a regional conflagration is ignited and most likely, there is too much diplomacy taking place already for that to happen.

Random acts of violence by individuals/ small groups almost anywhere are possible

but while a regional escalation cannot be discounted, I’d be surprised for it to spread widely. The oil price, relatively phlegmatic thus far and only about $6 higher in the last fortnight, would appear to endorse that

If Iran were to declare itself a participant rather than merely a sponsor then oil’s at $150 and the consequences would be tectonic but I doubt this is their intention. Scuppering the embryonic Saudi/ Israeli accord was their ambition and, in the short-term at least, this has been realised.

@richardhowarth – I think Iran is more than happy to be kept out

No one has mentioned Ukraine in the news for ten days now, however, it has been sidelined completely  and, therefore, the biggest beneficiary of these developments has been Russia, a known and well-documented backer of Hamas.

Such as this Hamas break-in to a classified Israeli intelligence facility:

????FOOTAGE JUST IN: Infiltration of Israeli Military Intelligence Hub by Ten Hamas Gunmen

Ten Hamas gunmen with detailed knowledge of the Israeli intelligence hub's location and layout infiltrated Israel on motorcycles.

After crossing into Israel, they traveled east and veered… pic.twitter.com/yjtZEEhddc

— Mario Nawfal (@MarioNawfal) October 15, 2023

“After crossing into Israel, they traveled east and veered off-road to approach an unmanned gate at a military base. Armed with a color-coded map, they located an unlocked door to the fortified building, which led them to a room filled with computers.”

Putin flew to China yesterday, where there is still a warm welcome for mass murderers and war criminals, for talks with President Xi tomorrow. Yesterday he spoke with leaders of Syria, Egypt, the Palestinians and Iran urging them to smoke the peace pipe – although perhaps he should give us his crack pipe first.

That is one conversation on which I would have loved to eavesdrop

to anyone else in the room. raised eyebrow? belly-laugh? corpsing?

The USA now has another major claim on its military and financial resources, and a huge drain on its diplomatic bandwidth, just as the fighting season in Ukraine is drawing to a close and MAGA Republicans are impeding support for Zelensky.

In the US*

https://podcasts.apple.com/gb/podcast/in-moscows-shadows-118-clueless-in-gaza-russia-and/id1510124746?i=1000631291126

and Galeotti’s forebears were galley-slaves at some point

but I’d be surprised in time if this (tangible evidence of Russian backing) didn’t materialise. For Russia, congenital malefaction, with its inevitable corollary – plausible (or implausible) deniability – is the default operational mode.

no one had evidence of Novichok or polonium 210k or a BUK missile system immediately

But it didn’t take long.

As you likely know, Azerbaijan recently deleted the Armenian enclave of Nagorno Karabakh this month.

And – you may not know – this is a victory for Turkish nationalists, who have wanted this since the early 19th century

Are they gonna stop there?

OF COURSE NOT

Here’s a relevant map that can shed light on future moves

This 2002 proposal would have given both Armenia and Azerbaijan land corridors to their respective isolated enclaves.

But with the rise of Azeri power – the proposals will have moved sharply towards an Azeri position – with the “Zangezur corridor.”

Now, this corridor is ostensibly the same as the aforementioned 2002 “Meghri” corridor. But there are much darker overtones

President Aliyev has openly stated that this latest corridor will be opened whether Armenia likes it or not

But it gets deeper than a simple land swap or land invasion

There are 2 points to note here

The first is that Syunik – the Armenian province that separates the two Azeri enclaves – is an extraordinarily tasty morsel of land

Of 36 Armenian mining projects – 13 are in Syunik

It also hosts several of the largest mining facilities in Armenia.

Currently, the mines are all Russian-owned

There are also significant gold – and URANIUM – deposits in the region!

we like uranium – see last Friday’s transcript for a very convincing argument as to why it could treble

But, surprisingly, they are receiving great backing from Israel and the United States

But it becomes less surprising when you realise what would come of a pan Turkic alliance

Essentially, a gigantic thorn in the side of Russia AND Iran

The events there overshadow the region’s murkiest asset in development – the American embassy in Beirut

Well, the embassy is twice as expensive as the next-most expensive American embassy ; the $750mn, 104 acre Iraqi embassy – while being the second-largest American embassy in terms of project size at 42 acres.

And locals are simply flummoxed about it. Why all this money?

The Americans have Israel 30 minutes helicopter ride south, Incirclick an hour north, and Cyprus 30 minutes west

The recent conflict gives us a teeny clue, maybe!

You see, the embassy was announced in late 2015

And just after this, in early 2016, Saudis stopped sending Lebanon money on account of Hezbollah’s almost total handle on the country by then (which has since only become worse)

If there’s anything we’ve learned from the recent fight, it’s that Hezbollah poses a genuine military threat to Israel from the north

Couldn’t it simply be an investment in acknowledging Hezbollah’s long-term hold on the country?

Why else build a fort, right?

All in all, the most secretive construction project continues to plod along quietly.

Since the Hamas attack, oil has not reacted as violently as one might have expected. Granted, Brent was already in an uptrend since the summer but even with relatively tight supply, the move from antebellum levels in the mid $80s to $90 now is more subdued than one might have expected

I spoke with Roger Lee, market strategist at Investec

There should also be a strong correlation between the oil price and rising yield. Global growth on the one hand and inflationary pressure on the other should favour value sectors more rather than growth…. And that is exactly what you see for the five years up to the end of last year. But the correlations this year are completely different and other than Energy being most correlated I don’t think shows very much in terms of style at all

He sent two charts:

The big difference YTD is that oil price inflation is much more damaging to consumer demand than it was as the pent-up demand built up in Covid rolls off

Another commodity provoking huge amounts of commentary at present is Bitcoin. I once referred to it in a quote for Bloomberg as “…the perfect vehicle for exploiting mankind’s infinite stupidity,” says Julian Rimmer, a sales trader at Investec Plc. “A small percentage of one’s portfolio must be held in this ‘asset’ because gullibility never goes out of fashion” which kept me near the top of the Bitcoin news aggregator for several weeks while encountering very little by way of pushback.

My mother was very proud although she had no idea what I was talking about.

Which made two of us.

In any case, XBT, the death of which has been prophesied many times, has rallied ~75% YTD

A chart that would have Roubini grinding his teeth

Its role in funding Hamas is widely acknowledged to the extent that going back to the spring Hamas was forced to warn donors that it could no longer accept contributions to its e-wallet given recurrent freezes imposed by Israel among other actors. If Bitcoin is no longer useful as a source of anonymous and nefarious funding then one wonders whether this may remove one of its primary attractions.

@richardhowarth – Roger Lee clearly has the ability to see into the future which is why he’s such a good strategist, I suppose

Nonetheless, XBT is holding up well and obviously, the longer it hovers just below $30,000 the more the emotional momentum of all those zoomer investors seeks to push it over.

This chart is also instructive:

What do you think, Dario? you might actually know what Bitcoin is which puts you at a distinct advantage over me

Bitcoin’s transparency has certainly been a critical issue for darknet users for a while now

I looked into a few missing Bitcoin cases – usually in the tens or hundreds of mn of $.

And Bitcoin was usually easy to follow.

This has led to the widespread use of crypto “mixers”

Here, the followable trails of illicit Bitcoin are mixed with other “fresh” Bitcoins to conceal the origin and destination of these funds

But it’s not good enough!!!

If we saw a Monero transaction, I was told to say “Shit.”

And it’s why I heard rumours at Kroll that Putin has a couple of billion in Monero.

Which includes jihadist financing.

However, I still think Bitcoin has a significant role in these markets. It will simply specialise away from its weak point

Ultimately, these privacy coins are a pain and a half to cash in or out of – almost no regulated exchange allows transactions in them.

I remember once – when I tried to buy Monero – it was structured like a drug deal. I was supposed to meet a guy on the street and purchase a hard disk drive with cash – which I obviously ended up not doing.

So what we may ultimately see is Bitcoin specialising in its on/off ramp niche for dark markets

But – more crucially – an increasing number of relevant transactions inside these markets will become totally inscrutable as dark organisations increasingly switch to privacy coins.

The fallout from last week’s CPI print continues to percolate through the market with several big houses demonstrating concern about the underlying trends in the data and the Fed’s apparent reluctance now to add one more hike especially, as BNP points out, this is the median forecast in the SEP dots.

From BNP: “However, the synchronous chorus of recent Fedspeak re-focusing on financial conditions – and in particular, the notion that there is less urgency to raise short-term rates against a backdrop of rising longer term rates – has shifted the market’s reaction function. Accordingly, after receiving the front-end of the curve shortly after the September FOMC meeting, we took profits on the trade last Friday and have pivoted into curve steepeners, where we now see better risk/reward

It’s clear both data and geopolitics threaten to disrupt the Fed’s soft landing.

JPM begs to differ… believe that we are currently in a transition phase, rising bond yields at these levels are problematic for investor sentiment and for the economy, and are therefore ultimately not sustainable. Bond RSIs are becoming oversold, and could start pricing in a policy mistake, where bond yields are likely to start to move lower.

We think the recent move up in bond yields is a bit of a capitulation trade, and during Q4 the levels would be very attractive to lock in higher yields. The move up in bond yields might not be sustainable, our fixed income team is looking for yields to fall from current levels in most places.

JPM’s position is straightforward: “Time is coming to position for the long duration trade.”

At the other end other end of the market… anything going on in your chosen specialised subject of meme stocks?

anathema to boomers like me

Because there is a new trend with these new so-called meme stocks

All of these have similar characteristics to the GME, AMC, Blackberry, and BBBY pumps

They are heavily shorted stocks and are then purchased in large quantities by retail investors

BUT

And it is a big but

The political overtones of the meme stocks have gone silent

This is a big deal – and differentiates traditional ‘pump and dumps’ from the meme stock classics of GME and AMC

Just see the difference in scale:

So for all these recent so-called ‘meme stocks’ – you barely have a reaction on wallstreetbets. Retail investors have plunged into Novo Nordisk – but this has barely made waves on Reddit.

So what we’re seeing now – instead of true ‘meme stocks’ – are more traditional pump and dumps

And on that bombshell – it’s adios from me!