One of the highlights of my week was the annual Teenage Scribblers’ Christmas lunch, which was held on Tuesday in London.
One of them is Russell Taylor MBE who is best known as the writer behind the long-running and much-loved Alex cartoon. To Russell these little get-togethers are of some value as they offer him the opportunity to take the temperature of the City and to catch up on the latest trends and concerns, some of which might one day find themselves transposed into the mouths of Alex and his many colleagues at Megabank. Thus Russell quite innocently asked those present what we all thought the main market themes of 2018 might be and whether we thought the big rally in asset prices which we have seen in 2017 will carry on.
Crystal balls
The assembled bunch of well-oiled scribblers probably can sport the aggregate market and trading experience of a medium-sized trading floor in the Square Mile. General consensus was that the current rally will not end when the big figure on the calendar changes. In the centre of proceedings sat Billy Blain of Mint Partners and author of the “Morning Porridge” who never fails to remind us that markets will always conspire to inflict the maximum amount of pain on the maximum amount of people. My own view remains that the central banks have been instrumental in inflating the current asset price bubble, if bubble it indeed is, and that they will do anything and everything in their power to insure that it does not blow up in our, and therefore also by dint of guilt by association, their faces. The ECB is the next one challenged with finding a way of weaning its economy and financial system off the monetary equivalent of heroin without a huge outbreak of the withdrawal symptoms. So far the Fed has done quite well at that from which the Europeans should take some courage.
It might be indiscreet to repeat some of the views expressed on the value and the efficacy of MiFID II which hangs over the industry like the sword of Damocles but suffice to say that general expectations are for trading volumes to collapse further. The generally held view is that active trading ultimately does more for the benefit of traders than for the investors in whose name the trading takes place but that only tells part of the story. Strict mark to market requires accurate pricing and when volumes decline, so does the transparency of price formation. It was pricing assets based on an assumed correlation to other assets where a price had been established that ultimately led to many of the pitfalls of the global financial crisis. Who can’t remember the scandals brought about by hedge funds, which valued certain assets at will, justifying that process by demonstrating that no trade had taken place in the asset and that therefore there was no market price to be applied?
The number of “off-market” assets, be they in the form of private debt or private equity, are increasing rather than decreasing and something akin to Gresham’s law is taking hold of regulated financial markets. Liquidity is being chased out of markets, which is supposed to supply strictly pertinent valuations. The shift from active to passive investing, especially through the putative index-tracking features of ETFs, risk distorting true value, hence hiding discrepancies and creating future minefields.
By the end of lunch and facing a phalanx of empty wine bottles we acknowledged that there are more important things in the world than MiFID II and that the primary objective has to be the ability to still fit into one’s suit once seasonal jollifications are completed. If that really is the objective, then we most certainly all got off to a horrible start.
Cryptic clues
A further topic for debate was, of course, the developments in the cryptocurrency space. When we sat down to lunch three days ago bitcoin was trading at US$16,700. At the time of writing the rate is US$17,130. Thus for the five days since the introduction of the Cboe futures contract there has been some stability in the currency if a 17% five-day trading range can be deemed to be stable. I suppose that if held up against a 10-day trading range of over 53% high-to-low it is pretty well-balanced. That slowing in its rate of appreciation alone has been sufficient to push bitcoin off the front pages even though South Korean authorities are beginning to act to reduce the risks to their financial system from excessive and leveraged private speculation in cryptos. During the course of my travels I also had the privilege of spending time with a crypto market-maker who is convinced that within the next six months the market will have moved on and that other currencies within the crypto universe will have replaced bitcoin as the centre of focus. His opinion, by the way, did not presuppose some cataclysmic collapse of the value of bitcoin.
When I was being trained I was advised never to trade in stuff I don’t understand. I applied that as much to African sovereign credits and dotcom stocks as I do to cryptocurrencies. BlockEx, with whom I am closely aligned, is not a bitcoin gamble but a cutting-edge technology company in the distributive ledger technology or blockchain space. And although there is a speculative element to involving oneself in the ICO market in the same way as it was in the spice trade in the 16th century or in American colonies in the 17th, it is entirely legitimate and some of the future’s major technology winners are surely lurking out there somewhere waiting to be discovered.
Common law
Finally, Theresa “Kitten Heel” May is wandering around at the fringes of the EU summit looking rather sheepish. Her defeat in the House of Commons might look horrid but it does remind all of us that the price of democracy is that not everything works out as the government plans. I agree with the view that parliament has a right to scrutinise the terms of Brexit but I do hope that it is done for the benefit of the British people and not as an exercise in party political grandstanding.
Next week I shall begin the annual exercise of not only looking ahead to the coming year but also reviewing, as I do annually, my best and worst calls for the past one. I do wish more of us would have the integrity to do the same. Wasn’t it Goldman Sachs who told us oil is going to US$30? I suppose they must have meant it was for half a barrel…
Alas, it is that time of the week again and all that remains is for me to wish you and yours a happy and peaceful weekend. 2017 is gone in all but name and ski slopes and Caribbean beaches beckon for either the rich or those with a bit of room left on the credit card. For the rest of us it’s about getting the house ready for the invasion of the ravening hordes. Remember to lock away the finest wines for “Junior, could you pop out and get us another bottle of red…” more often than not ends in disaster. Why it is that they inevitable find the rarest and most expensive bottles and have the corks pulled before we can point out that this is not exactly the one we had in mind is and will remain an eternal mystery. So little time now and so much to do…