2022-10-28
Elon Musk didn’t pull out. He now has a new baby, Twitter, which is de-listed and privately held. I love the service, and I am utterly dismayed by the idea of it being controlled by a criminal mastermind, but I guess there are synergies in being a stockprice manipulator and owning the stockprice manipulation machine. I had better not express opinions like that on Twitter again though, as it’s only my lack of followers that has allowed my views to be relatively uncensored in the past. (I was suspended for quite a while, but somehow I served my time and was released from Twitter jail. I still have no idea what the offending tweet was.)
LDI
It seems logical that funds should match their liabilities to their assets. Pension funds have long-dated cashflows as liabilities, and to match them with assets which provide a certainly of paying out they have to buy long bonds. But those bonds are driven up in price, because they are competing with central banks which are hoovering up long dated treasuries in the pointless exercise known as quantitative easing.
People who are responsible for managing these funds match the liabilities with (e.g.) gilt futures, and then use the cash they have left over to invest in more … exciting assets, such as equities, private equity, venture capital, hedge funds … well OK, crypto! This is all fine unless gilts drop in value. In theory, there is no problem with this. The liabilities drop in value in a matching way. But in practice, it’s a disaster, because the funds get margin called. If you don’t know what a margin call is, lucky you! It’s not nice. But, at least if you’re a big fund, you can call the Bank of England and it will bale you out, by buying more gilts and pushing the price back up. “That sounds like blatant market manipulation,” you say. “Surely, that’s illegal,” you think. Well, it is unless the Bank does it, when it becomes perfectly OK!
Anyway, it’s a mess, and the market has absorbed the fact that whenever anything which is on the asset side of a bank’s balance sheet goes down in value, the government, or an entity close to it, like the central bank, will ride to the rescue.
The bank is supposed to be doing ‘quantitative tightening,’ which is basically the opposite of what it did the other week. Well, maybe it will, be now we all know that it will do a U-turn if the gilts market starts to look wobbly, which essentially defeats the whole purpose of the exercise. I’m so glad the Bank is run by such clever folk.
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Wrap
Equities were up, oil was down, US and UK 10Y treasury notes were up ~8bp in yield. Oil (for a year forward delivery) was up a lot, but spot was down. I have no idea what developments can explain these moves.
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