Tuesday 5, July 2022

UK political news

Sajid Javid and Rishi Sunak, NHS Secretary and Chancellor have resigned their cabinet posts. Boris Johnson has been the target of relentless contempt from mainstream media, principally for telling bare-faced lies (allegedly).

The pound sank 1.3% to less than $1.20. Gilts rallied to a 10Y yield of 2.05%. Given that the assumption is that Johnson will try to buy votes with borrowed money, this seems an odd reaction, but it may simply be following a global trend. US Treasuries rallied to, with 10Y yields falling by 12bp (vs 14 for the gilts). The chaos in the Conservative government must increase the chance of a more left-wing government. Conventional market reaction would be to mark gilts down, although its hard to imagine a Labour government running deficits nearly as high as the current government has done over the last couple of years (for entirely justifiable reasons, I should add).

Non-mainstream reporting of Westminister is definitely getting better.

Wrap

The oil complex crashed. Brent and WTI dropped by 8% and 9.3%. There seems to be no obvious catalyst for this, apart from the general fact that every other real asset with the exception of oil fallen further. Given that the Middle East seems to be at or near capacity, that Russia is both struggling to keep its production going and struggling to find willing buyers, that oil production workers in Norway are about to go on strike, and that most (but not all) forecasts are for a fairly steep recovery in oil prices, given that the world now is largely running on negative real interest rates.

Of course, a recession is expected, Russia has claimed to have found new reserves, and the US dollar is going up rapidly. These will weigh on the price of oil (and in the case of the first and last, on the price of pretty much every commodity).

Links

We’re doomed! (Actually, we may well be. ‘Dr’ Copper thinks so. I don’t think he’s got a proper doctorate, though. Not a PhD.)

Relativistic Finance

This article by Matt Levine explains why what we learn about how finance works as mere mortals simply gives us the wrong intuition into how it works if we are very rich. It’s about the detailed response of the International Nickel Exchange and his banks to the market event that resulted in Xiang Guangda losing $11B, on paper. It’s worth reading, as everything that Levine is. What is interesting is how once you get to be too big to fail, you can’t fail. The big banks which were deeply insolvent as a result of the Global Financial Crisis are now, logically, still the biggest banks in the world. Only Iceland, which is more a small town than a country, refused to bail out its banks. In every other case, taxpayers picked up the tab. In the case of Xiang Guangda, it was the smaller traders, for whom a liquidation was no threat to the banks or exchange.

If you are shocked by this, you simply haven’t been paying attention.

Money and its relationship to pink slime

This is a wonderful discussion of why a bank deposit is money, whereas a lot of things which are superficially like bank deposits are not. Money is possibly the most misunderstood thing in finance. Patrick McKenzie is not an economist. He’s a technologist, who has thought very deeply about the nature of money and the plumbing of the financial system. I think his account is vastly superior to the accounts one reads in Econ 101 text books.

From society’s perspective, the wide availability of cheap credit is generally considered a good thing, as it allows for productive investment, consumption smoothing over consumers’ lifetimes, and a form of risk-pooling not entire dissimilar to public support or insurance programs. (It is underappreciated that consumer credit is, effectively, one of the largest welfare programs in the United States. Chargeoffs of e.g. credit card debt effectively transfer a private benefit to the defaulting consumer in return for a diffuse cost to the rest of the public, mediated by the financial industry; the net amount of them is almost as much as food stamps.)