Wednesday, 12 December 2018

The smell of year end

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We are now only 10 days from Thanksgiving, which traditionally marks the beginning of the end of the year. 

At this time we should be looking for the key themes that will carry financial markets through to the height of the holiday season, followed by book closing. And that is where we begin to get stuck. There are still too many moving parts for investors and traders to be able to contemplate setting up their year-end positioning and to focus on filling the social diary. 

Largest of course looms the last FOMC meeting of 2017 on December 12-13, still one month away. Then there is the struggling US tax reform legislation, which over the weekend hit another snag with the Senate and the House on a collision course over state taxation authority, the original cause for the Boston Tea Party and eventually the independence of the US. President Trump, having remained sweetly “on message” through most of his Asia trip, has suddenly gone rogue again and has tweeted away much of the good work he had done in the preceding week. In the UK there is a budding palace revolt against Prime Minister Theresa May, supposedly triggered by former allies-turned deadly enemies-turned allies, Boris Johnson and Michael Gove. 

All the while the pettiness on both sides of the Brexit negotiations reaches new heights with a report of Michel Barnier having threatened that if no deal is reached, the free movement of pets across the Channel will be at risk. The British might be making fools of themselves in the Brexit process but one must have some sympathy with them when facing a team on the other side of the table that seems to have no desire to find a way of making Brexit work but appears hell-bent on being awkward. Having recently undergone radical surgery, I understand the value of working with somebody who focuses not on what might be removed but on what might be saved. That said, anybody who has fought a legal battle, especially a divorce, will know how both sides can be miles apart and irreconcilable but how they can then, on the courthouse steps, suddenly find the illusive solution that has been sitting there for many months, seemingly never having been considered.


Fed meet 

But back to the main subject. Despite everything, it is hard to envisage the Federal Reserve not tightening by another quarter point at the December meeting. Tax reform in the US looks to be pretty much dead and even if they do move forward it will barely be in the form in which the Trumpster would have had in mind. And as far as the repatriation of overseas funds is concerned, has anybody considered that these have been offset by borrowings that were used to fund dividend payments? It is perfectly within the realms of possibility that even if funds were to be repatriated under a revised corporate taxation regime, they’d be used to pay down that debt and not go into capex as the administration’s model would like to have it. 

As for oil, output doesn’t currently appear to play any significant part in price formation. The decline in ISIS’ relevance has taken another proxy war between Shia and Sunni Muslims off the table and Saudi Arabia and Iran are coming ever closer to trading direct blows. Yemen has already seen the two of them come face to face and now Lebanon has joined the cast of areas of conflict. Mesopotamia and Arabia are looking very much like the powder keg none of us had wanted to see and the oil price is - how else could it be? - the canary in the coal mine. The trading pattern of WTI in the last four or five days is virtually identical to the one in the days immediately following September 25 in the US$52 per barrel area, which was followed by a sell-down to just below US$50 after which the price rose for a month and by well over 10%. Thus there is an even chance that we’ll end the year with WTI breaking above US$60, a number that pure supply and demand could have barely brought about.



Meanwhile the taxi drivers will have lost their shirts as bitcoin has taken a wicked beating. Having traded to its high of US$7,887.99 as recently as last Wednesday, it traded this morning as low as US$5,605, a peak to trough spread of 28% in just four days. At the time of writing it’s at US$6,242.20. That said, and with all the vicious volatility accounted for, any bitcoin owned before October 10 remains in the money. 

Where does all this come from? The answer is closer than one might think. The increasing number of ICOs, each of which brings its own coin or cryptocurrency to the market, is spreading the love. Large numbers of buyers of ICOs are already in the crypto space and much of the wealth that is going into these coin offerings is not coming out of fiat currencies but is reflected in a reallocation of resources between coins. Pure punters, of whom there are already far too many in bitcoin and who don’t really understand what they’re playing around in, will be running scared and dumping. The price should stabilise fairly quickly now but the real game is to be found in ICOs. 

There are many similarities to the dotcom period where you invested in 10 companies and hoped that one of them would come good by more than you had lost in the other nine. If unlucky, you had 10 lemons. If you were lucky, you had two winners. Most gamblers ended up with bucket loads of worthless stock which is why, after the bubble burst of 2001, they followed the rule that nobody has ever lost money owning real estate, only to find themselves instead caught in the real estate bubble that burst in 2007 and which cleaned out many of all they had had left after 2001. 

There will be fortunes to be made in ICOs – or at least I hope so, given my developing involvement with Blockex which is in the process of launching its own ICO – but it will not be like shooting fish in a barrel. A carefully managed spread of investments and risk is just as important in hot markets as it is in more traditional asset classes and I could well imagine that returns could prove to be superior. If you wouldn’t bet your house on 15 black at Monte Carlo, why do it on the bitcoin/dollar cross or on a single technological solution in the blockchain space? 

Finally, it’s a big week on the economic release front. One number that most won’t look at but is worth keeping an eye on is US Q3 mortgage delinquencies, due today. US retail sales on Wednesday, industrial production on Thursday and housing starts on Friday. 

Have a good week. 

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