Battle of wills rages between Fed and markets

Friday 13th… Doesn’t worry me. I’m not superstitious, it’s unlucky.

There is so much going on in so many spheres, political, economic and marketwise and yet it remains hard to escape the centripetal force of the battle of wills between the Federal Reserve and markets.

Thursday’s release of the December CPI number at -0.1% MoM and 6.8% YoY pleased markets which seem hellbent on finding their much-vaunted “pivot” point. The news on the core rate – ex-food and energy – was less clear, for that came in at 5.7%. The month over month number was in fact +0.3%.

Given the ongoing reversal of energy prices – and remember that the US did not suffer the dire price rises which hit Europe – seeing the core inflation rate rising rather falling isn’t anything like as encouraging as initial price action on the day might have had one believe.

By the close of business, all main US stock indices had risen, with the Dow and the Nasdaq both up by 0.64% and the S&P 500 by 0.34% although the real mood music was being made in the bond market where the 10-year yield, having dropped intraday to 3.41%, closed at 3.43% which still marks a massive 20bp drop in 48 hours of trading.

There is no doubt a wall of risk building up that many participants have not yet appreciated that the market paradigm which has prevailed for the best part of 15, if not 20, years has gone and that expecting the monetary authorities to spend their life worrying about the level of risk asset markets is over. When the Fed indicates that rates are headed towards 5% – whether above that level or not remains moot – and that they are set to stay there for quite some time, then only a fool would be banking on early easing. PT Barnum nailed it when he famously observed that there’s a sucker born every minute.

The fun and games will continue today when an unusually large clutch of big US banks simultaneously report Q4 earnings. On the docket we find JP Morgan, Bank of America, Wells Fargo, Citigroup and BoNY-Mellon with BlackRock thrown in for good measure. That covers the four largest banks with assets between them of the best part of $12trn and, by way of BlackRock, the nation’s largest money manager too. JP’s CEO, Jamie Dimon, has already been on the wires and has expressed his opinion that rates could well go above 5% although I have, I’m afraid, given up listening to him as he has over the past months hedged his bets by verbally backing pretty much every horse in the race.

The truth of what the banks are thinking will be reflected in the loan loss reserve policy. Will they be building up or releasing funds? The Fed and the OCC, the Office of the Comptroller of the Currency which is the principal overseer of the sector, will have been having conversations with the boards of the banks and they would not dare not do as they have been advised. Forget chief economists’ presentations and research papers released left, right and centre. The true expectations as to what the economy will do this year, whether or not there is a recession on the way and how deep it might turn out to be, will be reflected in the management of the reserves. There sits the canary in the coalmine.

The figure of the day is already with us and that is the report of China’s December exports. They fell 9.9% year over year as global demand has continued to slow. That does not bode well for the great post-Covid-zero recovery, so it would be logical to expect the Beijing administration to begin to backtrack on measures which had been implemented in order to manage domestic demand. The free economy might have brought its problems but they suddenly no longer look quite so dramatic in comparison to what the revitalised command economy is building up. The defenestration of Jack Ma, founder of Alibaba and Ant Financial was more or less completed a few days ago with Ma giving up control of the latter. It was right in the middle of the subsequently cancelled IPO of Ant that Ma was brought down and his entirely voluntarily stepping away from the company points to the central authorities wanting to bring movement back into that business.

Although at 9.9%, the December figure was pretty dreadful, year over year growth is still at 7.5%. Making sense of this remains difficult. The on-and-off lockdowns have disrupted Chinese production whilst the Ukraine conflict and the concomitant volatility in food and energy prices have been taxing Western consumers. The key to China’s growth lies in the future behaviour of domestic players and the development of demand in the post-Covid era. Twist or stick? Will Li SixPack save or spend? By all accounts the authorities are beginning to loosen up on their control over the tech sector as they go looking for the spark which will reignite the struggling economy. But if you see something that looks like a liberalisation, don’t trust it. This is not utilitarianism in the Jeremy Bentham meaning that any action that benefits the largest number of people is right. It will be an act of blunt pragmatism in which President Xi and his merry men will do whatever is needed to calm the herd – the threat to central authority caused by manifold anti-lockdown protests will not be forgotten – albeit with no compunction with respect to reversing the whole thing once it has done its job. The carrot on the end of the stick is just a hologram.

There is great excitement in the crypto space where bitcoin, having begun the year at around $16,600 is now, at the beginning of the 9th trading day of the year, to be found at $18,800 which marks an increase of over 13% and takes it to its highest level since early November. Can anybody remember how the crypto gurus were telling us a year ago that BTC was the new gold and was about to prove itself as the best hedge against inflation. Taurian faeces of the first order. Now the same people are trying to make us believe that the bitcoin comeback will be fuelled by falling inflation. Please make up your minds.

There are new developments afoot and just as Liam Allan had predicted in a recent podcast of Inside Baseball with Old Chestnut – IBWOC.com – it is the Winklevoss twins who are now in the law’s crosshairs. The trouble which has been experienced by Genesis on the back of the fiasco at FTX have reached through to Gemini, the twins’ principal vehicle which, by all accounts, was offering what the authorities now interpret as having been investment services without an appropriate licence.

The crypto environment, ranging from simple two-way bitcoin trading to buying and selling retail space on shopping streets in the metaverse to buying and selling non-fungible tokens, has more than once been likened to the Wild West with thousands endeavouring to stake their claim on the virtual equivalent of the Yukon. Early entrants made fortunes, not because they’d done anything clever, but simply because they were the first to join the fray. The Winklevoss twins famously sued Mark Zuckerberg over the rights to Facebook, won $65,000,000 in compensation and stuck that into bitcoin when it was trading at $1,000. Working out what they were worth by the time it hit $68,500 does not require a PhD in arithmetic, nor how much they’ve given back since.

There has been a troubling issue with the rise of bitcoin and that is that too many people who got rich by being long also thought they’d got rich by being very smart. I have often encountered those who bemoan that they should have bought bitcoin when they first saw it and when it was at $5 or $8. If only they had then held it and sold it at $64,000, then they’d now be millionaires many times over, or even billionaires. Sure they would. For my part, if I’d have bought it at $8, I’d have most probably sold it at $16, have thanked my lucky stars to have doubled my money and never have seen it cheap enough to buy back in.

The “cryptoverse”, to coin a phrase, is evidently a bit of a can of worms. It has survived multiple scandals with holders’ accounts being plundered by way of their exchanges and wallets being hacked but until the spectacular demise of FTX the authorities have held back.  Now they are sending in the sheriffs and the Masters of the Universe are finding that much of what had been common practice had in fact never actually been legal and crypto currencies are once again being shown up to what they have been from the outset which is a solution looking for a problem.

That said, one must be careful. My own crypto guru earlier this week proudly sent me an article detailing the Bank of England’s efforts to be one of the first monetary authorities to issue a digital version of a national currency.  There is a huge difference between a digitalise national currency and a crypto and woe betide anybody who is still long of bitcoin or any of the other abstract tokens when the digital pound, dollar or euro hit the road. It might be worth having a quick look here.

Having spent a little bit of time being associated with a crypto exchange, I experienced how solutions had to be found to resolve issues brought on by the authorities’ understandable but frustrating reluctance to embrace this evolving creature. Many of the subjects which are now taxing the sector are the direct result of participants having been forced into the shadows. The loopy returns which the Winklevoss’s “investment” product offered – they were by no means alone at this game – should have of themselves warned that not everything could be right. Don’t they say that what looks too good to be true must be too good to be true. Dedicated disciples of digital asset trading for some reason continue to refuse to believe that the same applies to them. Did I read somewhere that FTX claims to have suddenly recovered $5bn. “I once was lost but now am found…” Amazing Grace indeed!

And finally to the World Economic Kindergarten in Davos. No TV interviews in front of a pretty snow-covered backdrop this year. Much hot air will be generated around the headline theme which is “Partnering for progress”. Should the response read “WTF!” or “WTF?”.  If it’s going to take all the great and the good to help me understand what that actually means when it’s at home, why do it in the first place. Much has changed since in 1971 the Davos tourist board and association of hoteliers along with the founder of what had originally been the European Management Forum saw an opportunity to fill some of the empty beds during the quiet time between the Christmas/New Year rush and the beginning of the peak skiing season in February.

This time last year one of the key speakers – albeit online – was Vlad Putin. He closed his address with the following words:

“We all know that competition and rivalry between countries in world history never stopped, do not stop and will never stop. Differences and a clash of interests are also natural for such a complicated body as human civilisation. However, in critical times this did not prevent it from pooling its efforts – on the contrary, it united in the most important destinies of humankind. I believe this is the period we are going through today.

It is very important to honestly assess the situation, to concentrate on real rather than artificial global problems, on removing the imbalances that are critical for the entire international community. I am sure that in this way we will be able to achieve success and befittingly parry the challenges of the third decade of the 21st century.”

A month later he invaded Ukraine.

Alas, it is that time of the year again and whilst I wish you and yours a happy and peaceful weekend, I shall be packing my bags and heading off for a month on my little island in the sun. During the four and a bit weeks I shall be writing nothing but letters to friends and I shall be taking time to read some of the fatter tomes which are rarely opened during the rest of the year. Over the years I have made a number of friends on my beach. One couple in particular have become close to my better three quarters and myself. I was amused when they commented that I had always stood out in the crowd as the only person on a sunbed not reading the latest Lee Childs paperback but stuck into a 600-page hardback. There will a few of those in my luggage, some not started, some yet to finish. Back around St Valentine’s Day. Parting thought: beware of the risk inherent in the rising consensus that oil is headed for $120 to $150 by Q3. Inflation is not necessarily dead and don’t get sucked into believing it is. The Fed has told us clearly that is doesn’t. That’s it, Folks.

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