Time to replace investor with speculator
Some mornings I get to my desk with my head buzzing and ideas tripping over one another. Other mornings the process of compiling a cogent piece is tortuous and I find myself heaving a sigh of relief when I finally hit the “send” button. In the same way, there are pieces of which I am certain to have knocked the cover off the ball and again ones which, to me at least, feel rather workmanlike. The variety of responses I receive from readers, however, is rarely, if ever, congruent to my own opinion. Thus it was that I was yesterday pretty satisfied, albeit not exactly ecstatic when I had finished my writing. The range of written responses which on the other hand appeared in my mailbox was both significantly larger than usual and also unusually varied.
The range of correspondence that followed was hugely varied and much of it came in from the United States, the commercial real estate and regional banking sectors of which had been at the centre of the article. Of that, more later.
Centre stage on Thursday was the ADP National Employment report showing private payrolls having jumped by 497,000 jobs in June after rising 267,000 in May. With that and with the weekly claims trajectory flattening, expectations for today’s nonfarm payroll release needed to be recalibrated. Job openings are also at a remarkably low level and all of a sudden the prevailing consensus forecast for today’s number at 225,000 looked undercooked. If things are that good, then the FOMC which next meets on July 25/26 will without a doubt not be taking its foot off the monetary policy tightening pedal. By the close of play, the Dow had shelled out 355.28 pts or 1.07% which was, nevertheless, a good 150 pts above the intraday low. The S&P500 and the Nasdaq didn’t have a great day either although it was the Dow which had taken it on the chin. I guess it doesn’t take a PhD in economics of maybe an MBA to work out that a higher cost of money will impact long-term investment-heavy industrials more than it will tech companies where the assets which did not exactly need to be purchased get in the lift at the end of the day and go home.
But the real damage was done in the bond market where the yield on the 10 year Treasury note sliced though 4.00% like a hot knife through soft butter. In the immediate panic, the 2 year note which before the news had hit the screens had been trading at around 4.96% shot up to 5.10% but has now settled, at the time of writing, at 5.03% for a yield differential of exactly 100 bps of inversion to the 10 year. Hang on! Why, if the shout is for boom times in the US economy, is the yield curve inverting further? Is the inversion of the yield curve not supposed to be the indisputable harbinger of a pending recession?
Some of you might know that on a weekly basis the online magazine reaction.life picks up one or more of my columns and republishes them with a hearty title and a dreadful photo of me along with the by-line. At this point I suppose I am obliged to say something nice about reaction.life although I am happy to do so without feeling obliged. I am myself an avid reader. One of my fellow columnists is Ian Stewart, currently chief economist at Deloittes who, as opposed to myself, is a proper economist with a CV to match. Last week, he put up a column which was released under the title of “Investors flock to Equities” and which began with:
“Equities have made strong gains since the start of the year. Growing hopes of a soft landing for the global economy have buoyed riskier, growth-dependent assets. Global equities markets have returned almost 13 per cent since January.
This is a reversal of the dominant trend of 2022 in which equities were dragged lower by worries about energy prices, rising interest rates, inflation and recession. Consumer discretionary stocks, such as travel, leisure and entertainment, were especially hard hit and lost 30 per cent of their value in 2022. Tech stocks fell by almost a quarter, hammered by the prospect of sharply higher interest rates. Investor funds flowed out of equities and into the dollar, cash deposits, commodities and commodity-related stocks.”
I kind of get where he’s coming from although both the bond and equity markets’ responses to yesterday’s employment indicators and the manifest fear of a strong nonfarm payroll number today tell a very different story. Pardon the cracked record – few under the age of 50 or even 55 would know what happens when a record is cracked, the bane of our teenage parties – but there remains little consensus as to whether the economy is about to go up or down and whether these markets are a buy or a sell. People don’t decide to join the investment industry because they are instinctive sceptics and chronically bearish so the generic default position will generally be “If in doubt, buy it…”. That said, the strongly inverted yield curve does make holding short positions one hell of a lot cheaper than it is in a normal interest rate environment.
European markets looked even more dreadful with the FTSE on the day losing 2.17%, the Dax 2.57% and the CaC a terrifying 3.13%. There is little doubt that the European economy is – or economies are – struggling and the prospect of the end of tighten cycle being pushed further out on the calendar is a cloud without much of a silver lining. Thus one cannot but wonder whether Mr Stewart’s excitement over the year to date 13% rise in the market might not maybe be over-celebrating a dead cat bounce? Anyhow, his article was published last week and after four days of selling off, a significant part of those 13% have just gone up in smoke.
Amongst the many emails that came in, one which struck me was from Michael Pascoe in Australia. I once referred to Michael as a “veteran financial journalist” which he is, but I recall his taking mild umbrage to being referred to as a veteran. He above all should know how to differential fact from opinion. Anyhow, he shared with me the following article which I am happy to pass on without comment.
There was another one from a New York reader:
“Your piece yesterday (July 6) is the poster boy for the “money delusion.”
When you write “growth financed by debt is no growth at all,” you recall the ironic comment by Galbraith in The Great Crash 1929:
“A gambler . . . wins only because someone else loses. Where it is investment, all gain. One investor . . . buys General Motors at $100, sells it to another at $150, who sells it to a third at $200. Everyone makes money.
As Walter Bagehot once observed: ‘All people are most credulous when they are most happy.’”
I have repeatedly urged my friends on the FT (including (name withheld)) to ask the typesetters to automatically replace “investor” with “speculator” in the paper, but they persist in calling by the wrong name people who have no real interest in the future of companies in which they own shares.
The decline in the value of office properties in the impending depression will not only destroy hundreds of small banks in the US. You may recall the attached Joseph Sternberg piece in The Wall Street Journal in April headlined “You Don’t Need a Banking Crisis for a Financial Meltdown.” It is well worth re-reading.”
The crux of the Sternberg piece sort of dovetails with a line of argument I have been pursuing since the introduction of post-GFC financial regulation and which centres around the observation that making it inefficient for banks to lend to the highest and the lowest rated of borrowers does not remove the demand for credit, it simply pushes it towards different and in many cases unregulated lending vehicles ranging from private debt to good old structured credit products such as CLOs, Collateralised Loan Obligations. No deposit insurance safety net there. I don’t have the evidence but if asked to guess, I’d join Sternberg in suggesting that the outstanding quantum of high risk credit today exceeds that which brought on the 2007/2008 banking crisis. It is not without reason – my last “proper job” had been in the structured credit group at Bank of America – that I formulated Peters’ First Law which states that credit risk is like energy; it can be converted but it cannot be destroyed. In other words, repackage it and hide it as much as you like, if a debtor defaults, someone will lose that money. More to the point, the more highly structured the vehicle in which the loan in question is embedded, the more parties will have made a tidy living out of putting it there and the lower the net return to the holder of the product will be. For the second time “Where are all the clients’ yachts?”
Finally, how could one go without mentioning Meta’s release of its “Twitter killer” called Threads. Another case of two billionaires slugging it out. Mark Zuckerberg has a near-flawless track record of taking other people’s tried and tested products – not that Elon Musk had many ideas when it comes to Twitter other than overpaying for it and then mismanaging what he got – and successfully replicating them. Best not ask the Winklevoss twins for their opinion the subject. By all accounts, a million people had within 30 minutes of its release signed up to Threads. When I was still writing for the International Financing Review, I was urged to open a Twitter account. I’ve had this for years but must admit to still not having quite fathomed how it works. I can’t understand why and how I get tweets from people I have never heard of and which then read something like “I told you so!” I suspect that as an occasional user of Meta’s Facebook and Instagram I will by osmosis become a user of Threads. I most probably still won’t fully understand it.
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