Tories Abandon Fiscal Targets

Today is economy day, Shadow Chancellor McDonnell will be up later promising to spend hundreds of billions of borrowed money and raised taxes. Sajid Javid has just promised to increase spending by hundreds of billions in borrowed money. No mention of that fiscal deficit the Tories promised to close in 2015.

All this borrowing will, they both claim, be financed from the sale of government gilts at the currently prevailing cheap interest rates. The market is suspicious and interest rates will inevitably rise if the market is flooded with gilts. The world’s biggest bond investment fund is Pimco, here’s what their chief investment officer for global fixed income told the FT this morning:

“The prospect of increased sales of gilts to fund more government spending makes the current high prices even less attractive. Gilt yields look too low in general. If you don’t need to own them it makes sense to be underweight”

Incidentally, the name of that chief investment officer is Andrew Balls, brother of Ed Balls. Saj knows that investors will not perpetually buy gilts at the high prices and the low yields prevailing today… 

mdi-timer 7th November 2019 @ 11:23 am 7th Nov 2019 @ 11:23 am mdi-comment Comments
Carole’s Short of Logic on “Brexit Disaster Capitalism”

In the wilder corners of Twitter, the remainiacs have a meta-conspiracy theory they call “Brexit Disaster Capitalism”, it has a number of components and is based on some far-fetched premises;

  • Brexit will be a disaster and lead to economic collapse.
  • Prominent rich Brexiteers know this, they intend to profit from it by selling short stocks high to buy back low after the disaster.
  • City tycoons and hedge fund managers financed the Brexit campaign to bring about the collapse from which they will profit massively whilst the rest of us suffer.

The fact that Jacob Rees-Mogg, for example, has an interest in a fund management firm is cited as proof. The latest incarnation and attempt to shore up the theory is based on the publicly-disclosed short interests of various fund managers who have given money to the Tories, Vote Leave or Boris Johnson’s campaigns. Carole Cadwalladr tweeted last night that they have aggregate short positions of some £4,563,350,000. Four and a half billion quid of shorts by Brexit-backing fund managers sounds like a huge amount. Except it isn’t in relative terms.

The UK stock market is capitalised at over £4 trillion, so that aggregate short position is equivalent to something like a tenth of 1% of the market. Nothing unusual. Long/short funds usually trade stock pairs, so the funds most likely won’t even be that short in net terms because a fund goes short one stock and hedges the position long another stock (hence the term “hedge* fund”). The profit (or loss) is from the difference in the stocks’ relative performances.

More obviously, these funds are overall net long the market, if these rapacious plutocrats were betting on disaster, why would they be positioned to profit massively when the broad stock market went up and lose when it went down? Publicly available data, for example, shows that the prominent Brexiteer donor Paul Marshall’s firm has £1.3 billion in short positions on the UK stock market. His firm manages some £30 billion of assets. Which suggests he is in reality geared to profit far more from rising than falling stock markets.

Incidentally, if the fund managers had been short since referendum night they would have lost their fortunes, given the FTSE is up over a 1000 points since the referendum. The whole “Brexit Disaster Capitalism” conspiracy theory does not make sense even if you accept the premise that Brexit will be a disaster. The hedge fund managers are long the market in the expectation stocks will continue to rise…

*The hedge might also be against derivatives or the relevant market index. To go short without hedge is to be nakedly short. A brave trade.
mdi-timer 12th September 2019 @ 11:35 am 12th Sep 2019 @ 11:35 am mdi-comment Comments
Strong July Growth as Recession Threat Dies

Threats of a recession in the UK have faded after the UK economy showed solid growth in July. Defying remainer expectations.

As the BBC’s Economics Editor, Faisal Islam, concedes, “strongly suggesting [a] return to growth in Q3, albeit Q3 hasn’t finished yet – so recession not looking likely”.

The 0.5% growth rate – driven greatly by construction growth – comes after a 0.2% contraction in the second quarter of the year, and marks the strongest month of growth since January. 0.3% growth is three times higher than predicted – expect more economic predictions to be defied over the coming months…

mdi-timer 9th September 2019 @ 11:00 am 9th Sep 2019 @ 11:00 am mdi-comment Comments
EU Exports Down Strongly, UK Exports Up Strongly

Remainers pointing to soft economic numbers in the UK should note that trade between euro-zone member states fell by 6.6% in June compared to the same period last year. That was the fastest such contraction since 2013. Exports from the eurozone to the rest of the world also dropped by 4.7%, the fastest rate since 2016. The EU can’t blame the fall in intra-bloc trade on China…

This is massively under-performing compared to exports of goods and services from the UK which grew 4.5% in June, the most since October 2016. Shipments of goods in particular surged 7.6%, driven by machinery & transport equipment. The euro looks over-valued…

mdi-timer 19th August 2019 @ 9:56 am 19th Aug 2019 @ 9:56 am mdi-comment Comments
Nonsense of the Disaster Capitalism Brexit Narrative

There is a belief popular with some Remainiacs that Brexit backing financiers – particularly those who donate to Brexit causes – are doing so to profit. Somehow they will make a killing when Brexit goes disastrously wrong and that is the reason why they are funding Brexit causes. The latest manifestation of this is that Crispin Odey is short* £300 million of shares in British companies, proof that he stands to make a killing when Brexit collapses the economy. Literally caught short!

Guido has not spoken to Odey for this article. It is however well known that he runs a long/short fund. A common strategy of such funds is to do pairs trades; a trader might go long Fed-Ex shares and short Royal Mail shares because he thinks Fed-Ex will do better than Royal Mail whether the general market goes up or down. Even if both shares go down he expects Royal Mail to go down more, even if both go up he expects Fed Ex to go up more. The difference between the moves – the spread – is where his profits or losses will be made. The difference in the shares’ relative performance.

Sometimes long/short funds will short a stock versus the general market. If the market goes up more than the shorted stock, they profit. The reason the financial press knows Odey is short £300 million of shares is that funds have to make regulatory declarations of short interests. They do not have to declare their long interests unless they become so exceptionally large as to be notifiable interests. However we know that Odey has billions under management. It is therefore very likely that his firm is net long the UK stock market given he has only £300 million in declared shorts. Not a position you take if you expect disaster.

Odey is often reported as having made millions from the referendum. Guido is sure Crispin is happy for potential investors to think that. However the facts are that his Swan Long/Short Equity fund lost 42.1% in 2016 and 21.8% in 2017. It has only just started clawing back losses by some 39.7% in 2018, leaving it well down since the referendum. So much for profiting from Brexit…

*Shorting is when you borrow and sell shares in the hope of buying them back later at a lower price. Hedge funds were originally so called bcause they hedged a short position against a long position.

mdi-timer 6th August 2019 @ 11:00 am 6th Aug 2019 @ 11:00 am mdi-comment Comments
So Much for Downing Street’s “TARP Moment”

Do you remember when Downing Street briefed the media that the defeat of the meaningful vote would produce a “TARP Moment”, and that markets crashing would push panicking MPs to vote for the PM’s deal the second time round? Just as the US congress agreed the bail-out only after markets crashed in a second vote. The theory was that the pound and equities would slide as investors priced in the likelihood of Britain leaving the European Union without a deal in March 2019. Scared of being blamed, rebel MPs would fall into line. Sterling finished the day where it started and if firm this morning, the FTSE 100 is basically flat as well. So much for Downing Street’s insight into market dynamics.

Market players clearly now expect a softer Brexit. Which suggests Downing Street has totally failed to convince observers to believe that a WTO terms Brexit is really a likely outcome…

mdi-timer 16th January 2019 @ 9:30 am 16th Jan 2019 @ 9:30 am mdi-comment Comments
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