We’re off again on our whirlwind tour of the markets. We are now out of stealth mode and back every Monday at 11am UK time.

Today I’m joined by Anjuli Davies, formerly of the Telegraph and Reuters.

And as we may have mentioned, the last time we worked together was in 2008.

And just as well because …

We should have a minute’s silence for whoever died at 2am UK time trading sterling.

@P lucky escape

I guess we will be looking for the impact of that trade on the clearing side of things.  Reuters has done what it always does best and collated a factbox on the history of sterling moves

https://www.reuters.com/markets/europe/pounded-history-uk-currency-crises-crashes-2022-09-26

Before we move on with a dissection, this snap caught my eye just as we were starting:

As usual, the EU is a bit slower to move on executive actions that require mass consensus. The UK is obviously already off with its price cap and its Energy Markets Financing Scheme, which will be beginning in Oct 17.

The BoE has an update on that too…

EQE as I like to call it

(H/T Mr B)

https://www.bankofengland.co.uk/news/2022/september/energy-markets-financing-scheme

The key bit is the variation margin thingy. We had a few more details from last Friday’s famous “Fiscal Event”:

The scheme will provide a backstop source of additional liquidity to energy firms in otherwise sound financial health to meet extraordinary variation margin calls. It will be limited to those making a material contribution to the liquidity of UK energy markets and who are thereby systematically important to the UK economy. The scheme will provide liquidity to firms through a 100% guarantee, delivered via commercial banks and will open to applications from 17 October. HM Treasury will convene an advisory committee as part of standing up a robust assessment process. Firms will have to agree to a wider set of conditions before accessing the scheme.

That’s direct from the Growth Plan (which btw you can also buy a physical copy of, from the single supplier of such services to the Government, dandy Booksellers)

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1105989/CCS207_CCS0822746402-001_SECURE_HMT_Autumn_Statement_2022_BOOK_Web_Accessible.pdf

Would be interesting to know what the trader population is like these days given over the last 20 years since the financial crisis , the profile and experience of trading has shifted. But I digress… @p for example, you aren’t in there anymore

If the last 30 years were all about the financialisation of everything, 2022 has been the year of market politicisation.

Political news has been dominating the weekend.

In our last session on Friday we took a closer look at dangerous demoguge Georgia Meloni…

Well as predicted she’s won.

The MIB is actually slightly up on that news on Monday:

(or at least was when i was compiling the data)

In fact, Italy is the only green now (table via CNBC):

(Quotes not fresh FYI, from about 15 mins ago)

But the bigger news over the weekend was that the internet was plagued by rumours that Xi Jinping had been subjected to a party coup.

And/or was under house arrest.

Separately I had heard from pretty credible sources that Putin had gone AWOL.

 Bill Bishop at the excellent Sinocism substack also smells bullshit.

“It’s CPC elite politics so never say never but I think this round of rumors is BS.”

Worth reminding newbies that the Blind Spot’s ruling mantra for all war geopolitical news is based on the principle that the first casualty of war is the truth.

 (And that investors, more than anyone else, need to be wary of this.)

War propaganda is all about morale. And we’re fine with that. We get it.

But investors need to be smarter and more discerning. Propaganda blowback blurs signals.

 And falling for your own side’s propaganda will lose you money. Badly allocated capital can cost our side in the longer run too.

So our job here is to assess the news that’s circulating in a dispassionate and sensible way. Cut through the propaganda.

Most of the info was coming from this account:

https://twitter.com/jenniferatntd

You can generate a deepfake of almost anything in a few minutes.

Anjuli Davies11:15

Who is the real Jennifer Zeng, please stand up?

Another theory I’ve heard, however, is that the reason Vlad and Xi were both missing at the same time is because they were rendezvous-ing in some secret location to figure out the next step of the escalation plan and (i guess) the strength and commitment of their alliance.

https://www.instagram.com/reel/Ci7YuGzjZBS/?igshid=MDJmNzVkMjY%3D

https://www.reuters.com/world/middle-east/iran-guards-launch-artillery-attack-militants-iraqi-kurdistan-2022-09-24/

The FTSE100 was up but has now reversed course …remember a lot of its companies earn a large proportion of revenues in dollars…conversely the FTSE250 is declining as it has been for a while.

In corp news, the search for a new CEO at Unilever is on, after Alan Jope announced plans to retire at the end of 2023.

Shares were up 3.5% earlier but have since come back a bit.

The consumer goods giant has been under shareholder pressure to improve returns after it failed to buy GSK’s £50 billion consumer health division.

Activist investor Nelson Peltz joined the board in May.  Big question mark over what they will do now to combat competition from lower cost products and stagnant growth. Will they go for some fantasy M&A? Nestle/Unilever anyone? Or the sale of its food business, which analysts have always mooted. Jope’s 5 years as CEO in a chart

Izabella Kaminska

Anything else?

Anjuli Davies

A quick look at one other stock in the news. Pendragon.

The UK-listed car dealership was up 20% after it received a £400 million takeover offer from its largest shareholder.

Second hand cars have been like gold dust in recent times because of supply chain disruptions which have pushed up waiting times for new cars . It’s inverted the usual depreciation of used cars as customers have been clamouring for vehicles.

I know people who have sold their used cars in 20 minutes . The dealerships can’t get enough.

Average used car prices continue to grow year-on-year (YoY), increasing 15.6% in August on a like for like basis. It marks the 29th month of consecutive price growth, latest autotrader data shows, though prices are  cooling off somewhat…

Top 10 price growth (all fuel types) | August 2022 vs August 2021 like-for-like (also via autotrader):

I kind of think that’s what Truss is betting on, but what does that say about “Security and independence”.

And the protection of national champions?

A bit of informal RAW – I actually bumped into █████████ of Brexit suspension attempt fame last Friday.

I don’t think she knew who I was. But I was with █████████ who had just come back from Kyiv.

And so she clearly knew she was around journalists.

So I don’t feel too bad sharing

█████████

█████████

Apparently, she’s got something big to be unveiled in October. But the reason I mention it, is because she was going on about this new European Alliance?

Heard of it?

It might be this. Not sure.

Okay so more broadly…

Somebody I was talking to mentioned what would be supportive would be some sort of G7 statement , tied in with concerns for dollar strength

Are we going to go back to those days?

coordinated action?

Coordinated action does seem like the flavour of things to come.

And interoperability.

But I’m a bit concerned about corporate default risk.

The iTraxx crossover is back at summer highs and pushing 700 again.

via Twitter (reminder we are raw data impoverished until we get a sponsor)

Word reached us a few months ago there are a number of very exposed hedge funds in the corporate default space. We may have some more on that soon.

There’s some concern in the market about synthetics not tracking the core indices, and people wondering if there’s a bit of reluctance to mark books properly.

But there has been a lot of regulation since then. And clearing. Probably time for me to brush up on how things have changed on the mark-to-model front versus how they were in 2008.

If anyone is any wiser, please do share.

N makes a good point about sovereign risk though.

Coincides with the fact that IMF bailouts are at a peak high.

https://www.ft.com/content/eddedee3-669d-42cc-9597-33609a8bff99

IMF bailouts hit record high as global economic outlook worsens

Fund hands out $140bn in loans as interest rate rises push up countries’ borrowing costs

So this time we’re walking into an already overstretched IMF.

11:37Strong dollar is obviously an issue, but as regular readers will know, if I start talking about that, I will just get into the eurodollar offshore backstory and never stop.

Worth mentioning that China has moved to shore up the yuan overnight, by setting a 20% reserve.

Though, hang on while I factcheck myself.

Yep, that’s right.

https://www.reuters.com/article/china-yuan-policy/china-acts-to-rein-in-yuan-slump-set-to-raise-fx-risk-reserve-ratio-to-20-idUKKBN2QR02X

The People’s Bank of China (PBOC) said it would raise the foreign exchange risk reserves for financial institutions when purchasing FX through currency forwards to 20% from the current zero, starting on Sept. 28, to “stabilise FX market expectations and strengthen macro prudential management.”

China has adjusted the FX risk reserve ratio multiple times over the past few years before last scrapping it in October 2020, when the yuan rose sharply.

Anyway, maybe we all overreacted. The markets are calmer than I anticipated. Which means it’s a fine time to move on to the other part of the budget that could be an investor op.

We’re talking about the normalisation of investing in WARTECH

(as opposed to fintech, regtech, suptech or adtech).. Tho maybe Deftech is more PC.

In an interview with the Sunday Telegraph published on Sunday, Ben Wallace, the defence secretary, said the British government will shell out at least £52bn  ($56.5bn) to shore up the military, which is “actually going to grow.”

The plans are in keeping with Prime Minister Liz Truss’ campaign promise to boost defense spending, the Telegraph says.

My theory is that Liz is actually underwriting everything with the original John Law war funding trade.

The one that bankrupted France. Remember that?

According to Wallace, Britain’s annual defense budget will amount to £100bn by 2030.

https://www.telegraph.co.uk/politics/2022/09/25/ben-wallace-take-everything-putin-does-seriously-man-without/

It’s a fascinating piece as he lambasts Rishi and other chancellor predecessors for having initiated a corporate raid of the armed forces starting back in the 1990s

But COLD WAR GOOD FOR MILITARY INDUSTRIAL COMPLEX.

The MoD is moving into the budget big time.

But seriously. Wartech is on the agenda in a big way.

Anjuli – remember the days when we were young, and it was the norm to say that whatever tech we had, imagine how much more advanced the military’s tech must be? “they’re like 30 years ahead of us?”

Just like Top Gun, even Top Gun couldn’t get the “machs” in the new model

And on the other hand, they still have to pretend like they’re better than Russia, which according to the consensus line has a potemkin military.

It’s all a bit like The Russia House, but in reverse. And if you haven’t see the film, i won’t spoil it.

But the market news here is that the VCs are finally in on the opportunity to service the great new wartech trend.

After years of being a bit afraid to invest (for ESG stigma reasons…perhaps?) they’re all up for it.

There’s a good piece in Sifted about it all.

(Headed by my former mentor John Thornhill. )

But also NATO is setting up a VC fund. Oh yes.

https://sifted.eu/articles/nato-1bn-defence-venture-fund/

Nato is setting up a €1bn VC fund to invest in early-stage defence tech companies. Backed by 22 of the military alliance’s 30 members (but excluding the US), this innovation fund is currently putting together an investment team, which will operate on an independent and commercial basis.

In recent years, Palantir — the company everyone loves to hate — has been the only real exception to this tech stagnation.

BTW if you don’t know about how Palantir hacked its way into the Military Industrial Complex (not the consensus one that everyone likes to pass around), it’s actually quite amazing.

This is apparently one of the better articles about the origins story:

https://www.nytimes.com/interactive/2020/10/21/magazine/palantir-alex-karp.html

In the late aughts, Palantir began pitching its technology to the U.S. military. The Army had equipped its troops with a battlefield-intelligence platform that was doing a poor job of protecting them, but it had sunk billions of dollars into the system and was unreceptive to Palantir. So Palantir started offering its software directly to individual battalions in Iraq and Afghanistan. By the end of 2011, about three dozen units across the military were using Palantir, and some were raving about its ability to steer them clear of ambushes and roadside bombs.According to Fortune magazine, a few senior military figures had become fans, too, among them Gen. James Mattis, Lt. Gen. H.R. McMaster and Lt. Gen. Michael Flynn.

In 2012, the Army commissioned an assessment of Palantir. According to a draft of the report that Palantir produced during litigation, 96 percent of military personnel surveyed deemed Palantir’s software to be effective. But rather than embracing Palantir, officials appeared to ignore the report. Two years later, the Army finally conceded that the intelligence system it was providing to troops was inoperable and began soliciting bids to develop a replacement. It refused, however, to allow Palantir to take part because its software was an off-the-shelf product, and the Army was only willing to entertain proposals for building a new system from scratch. In June 2016, Palantir sued the Army, and three months later, a federal court ruled in its favor. The judge said the Army had acted in “an arbitrary and capricious manner” and ordered it to open up the competition to Palantir.

11:52Though, I’ve heard the problem with Palantir is that its tech is not very scalable. But anyway…

All of this is also a big opportunity for Poland, which is going to become the mecca of NATO defense investment. They’ve also moved ahead on the US-Polish pledge to construct six large nuclear reactors using US technology and a framework for strategic cooperation in civil nuclear energy.

Over the weekend, Westinghouse signed an MOU with 22 Polish companies in a bid to make it happen. From World Nuclear News:

The MoUs were signed in the Polish capital Warsaw in the presence of the US Ambassador to Poland Mark Brzeziński.

The memoranda establish cooperation with the following companies: Kersten, Famur Famak SA, Mostostal Puławy SA, Sefako SA, ZPUE SA, Grupa Powen-Wafapomop SA, Emerson Automation Solutions, Monta Materials Handling, GL Steel, Bureau Veritas Polska, Prochem SA, ZRE Katowice SA, Energoprojekt Katowice SA, APS Energia SA, TÜV NORD Polska, Izotechnik, Grafton Recruitment, Ecol, Mostostal Kraków, Eaton Electric and Energomontaż-Północ-Bełchatów SA.

Force the BoE to act on their agenda?

Speaking of which, i was at an interesting off the record briefing by those who really know about these things.

anyway, they seemed quite reluctant to accept the degree to which the central banks have been politicised.

But it’s undeniable, isn’t it? Regardless of what their intentions are, the cbanks are being influenced by the fiscal side. And can’t say no.

What do you think?

Btw – when does libor get totally eliminated?

Is sonia the new libor at this point?

Anyway two mins until then end. Let’s address some comments and feedback.

So seems like the rabble thinks it’s going to be a 175 basis point move in November.

is that too late?

btw saw this chart and thought it was interesting. It’s not fresh though. From 2010.

So the US is fairly protected because everyone’s on a 30-year fix. We’re not Australia, but we’re very much on the variable/short-end area. Most people presumably have 2-year fixes?

presumably a lot of people who were fixed for two years will be up

@m but spanish real-estate is always so endearing?

i.e. a “right to sell” to the government, in exchange for certain conditions on your property. You’ll get to live there on a more preferable rent, but you’ll have to install a heat pump.

Or something like that.

Ok we’re out of time now. So thank you again for joining us.

Last bit of housekeeping.

Remember to spread the word. We are only as good as our rabble and our sources.

The more scaled up this gets, the better and more insightful for everyone.

12:07We will be closing free logins once we get to about 200 accounts in the system. So do pass on. And remember we can be reached on [email protected] and [email protected]. The Monday sessions are now set in stone. Impromptu additionals will be occurring based on Neil Collins’ holiday schedule. Also Ben Harrington will be stopping by. Next session is on Wednesday! See you then.