Tuesday 15, March 2022

Globalization

The FT ran a piece yesterday saying that removing Russia from Most Favoured Nation status in the WTO was not a great idea. It’s here but it might be behind a paywall. Sorry.

The article makes (at least) two arguments. One is that Russia mainly exports oil and minerals, which are almost never subject to import tariffs anyway (because developed countries don’t generally produce much, and because manufacturing can lobby to keep down the cost of its raw materials). It exports some wheat, which is subject to tariffs in developed countries, but it seems mainly to export to poorer ones. The other is that we shouldn’t use the WTO as political football, we should fund it properly, and let it do its thing. We (in the west) should comply with its rules and not try to bypass them by doing stupid stuff like claiming that the manufacturing of biscuits and yoghourts must be protected on grounds of national defence.

I don’t know about that stuff. I do know that globalization, the shifting of manufacturing jobs to China and other developing nations has had a devastating impact on the working class in the UK and the rest of the west. I know that China has raised many hundreds of millions out of abject rural poverty, but I also know that Brits generally don’t give a damn, and would like their well-paying, reliable factory jobs back, please, at least in those places far from Westminster where those jobs used to exist.

I know that the UK is not very unionized. I’d guess that it’s really only the public sector which has a high union membership. I wouldn’t be surprised that a quarter of the UK workforce was employed in the public sector, and that a similar proportion are unionized. Union power has been fairly muted, apart from a few groups which seem to get special treatment (police, general practitioners, judges, Tube drivers). With employment quite strong now, the ‘great resignation (and retirement)’ we may be moving to the stage where the marginal worker is unionized and successful in pushing up his wage. This may leak out into the private sector, especially as the ‘living wage’ legislation has, in effect, shrunk the size of the labour force. The NI rises, of 2.5%, will make it harder for ordinary workers to pay their heating bills, which should make them more militant.

To me, the key will be if the unions in the public sector, especially the NHS, start to push for real-terms pay increases for their members. This will start to establish a benchmark for the rest of the public sector (the teachers, for example, but also the firefighters, police, council workers) which will then raise prices in the less organized private sector. Once a few strikes succeed, and that success is amplified by press coverage, we can see a norm established.

The other factor, which is frequently cited, is the fact that the government is in a bind. Through QE, it is financing its deficit at the Bank of England discount rate. The fact that 10Y gilts pay 1.5% is irrelevant if the BoE owns them all, and remits the coupon, net of carry, back to the Treasury (which has had to pay the coupon in the first place!). The 2Y gilt yield is around 1.4%. This indicates that the market is very sanguine about inflation

Illumina

I don’t much comment on individual stocks. There are so many factors which go into pricing equities that it’s a mugs game to make predictions (“especially about the future!”). However, Illumina seem to have some neat, and really new, technology. From today’s Refinitiv morning news call:

Genome sequencing group Illumina launched a cancer test in Europe that checks for a wide range of tumour genes in one tissue sample, potentially helping patients with rare diseases to be matched up with treatment options. The test, which Illumina says scans for more mutations than any available kits, comes amid drug industry efforts to develop precision oncology drugs for ever smaller patient groups defined by a genetic profile. This has created pent-up demand for more sophisticated diagnostic tools. Illumina’s TruSight Oncology Comprehensive test kit scans for 517 cancer-relevant genes across nearly 30 solid tumour types, it said in a statement. Illumina said it was preparing to file for U.S. regulatory approval for the test kit later this year.

While I think this is probably a breakthrough, cancer treatment, diagnosis, prevention, and screening are all incredibly difficult, and this may yet fail to prove beneficial in practice.

Nickel and VIX ETNs

The LME has retrospectively cancelled nickel futures trades to protect a Chinese billionaire, Xiang Guangda. Doomberg has a good piece on this here. For a futures exchange to retrospectively cancel trades is amazingly serious. Another indication of how bad things are is that Barclays have stopped issuing new units of a volatility ETN they used to have as well as a short-term crude futures ETN.

Alex Manzara believes this is a big deal (here). The point about ETFs and ETNs is that they do financial magic: turning illiquid assets and liabilities into liquid instruments that trade like $AAPL. While markets are steady, and not under stress, this works fine. But when everyone decides to sell $SPY at the same time, it will crash the market There is no other outcome.

Fragility comes from everyone investing the same way. Everyone putting their life savings into a tracker, sounds like a good idea, but when the last family office has closed, and nobody trades the underlying stocks, where is the price discovery then?

Wrap …

Today stocks bounced, but oil continued to fall. Most commodities were down, apart from corn and wheat. The major stories still seem to be the war, and rumours of some sort of talks between Ukraine and Russia about ending the war, and the Covid-induced paralysis in China as it keeps trying its lockdown strategy to contain Omicron. There is a lot of comment about the Fed interest rate decision which will be announced tomorrow. There seems more or less universal consensus that it’ll be a 25bp rise to 0.5%: the first ‘hike’ since 2018. Eurodollar futures (near month) moved about 2 bp, the 10Y yield about the same.

Commodities have been crazier than usual over the last week. Heating oil dropped in price by nearly 9% today, a teeny bit more than crude, which dropped 7.8%. Copper, at $4.48/lb, is just 10% up on a year ago (compared to, e.g. 300% for coal, and 500% for UK gas) and barely changed today (down 0.6%). The theory that commodities give a unique insight into the real economy seems just wrong. Prices of oil seem as distorted by short-term speculative money flows as any asset.

Weirdly, the Nasdaq, which has seen such violent moves over the last month, is up a modest 2.3% YoY, about the same as the DJIA.