Investment Newsletter – October 2022
The Nord Stream (NS) pipelines have been flashpoints in an escalating energy war between capitals in Europe and Moscow that has damaged major Western economies and sent gas prices soaring. Every crime implies motive. The Russian government wanted, at least up to the sabotage, to sell oil and natural gas to the EU. The notion that Russian intel would destroy Gazprom pipelines is beyond ludicrous. All they had to do was to turn off the valves. NS2 was not even operational, based on a political decision from Berlin. The gas flow in NS was hampered by western sanctions. Such an act would imply Moscow losing key strategic leverage over the EU. On the other hand, it is obvious that the primary beneficiary, in the economic sense, was the US, who is replacing Russian natural gas with its more expensive liquified natural gas, as the Europe moves to decouple its economy from Russian energy sources.
The US dollar’s unrelenting surge is raising worries over corporate earnings, warned a closely followed Wall Street analyst, who noted that similar performances by the currency have historically led to some kind of financial or economic crisis. Morgan Stanley chief equity strategist Michael Wilson, one of the Wall Street’s most vocal bears who correctly predicted this year’s stock market selloff, calculated that every 1% rise in the ICE U.S. Dollar Index has a negative 0.5% impact on S&P 500 earnings. Furthermore, the problem is that equity investors tend to only be good at translating economic data into earnings forecasts six months ahead, meaning that any current earnings tailwinds could be supporting “a false sense of security”. Yet policy operates with longer lags, sometimes of as much as two years.
Volatility has surged to the highest level since March 2020 across currency and bond markets. Bank of America’s global cross-asset market risk indicator also jumped to a level not seen since the start of the pandemic. Currently, one of the biggest risks is a bond market or financial dislocation caused by weak banks in Europe and Asia, and/or by inadequate bond market liquidity in parts of the global financial structure. A big dislocation in either of these areas would cause the Fed to lower rates and increase liquidity.
The biggest concern nowadays is when BoE went into full financial crisis mode as of 28 September 2022, rushing out an announcement that the central bank was restarting its money-printing presses at “whatever scale is necessary”, and launch a TEC Repo Facility which will hope to ease liquidity pressures. Irony, “Some of the inflation has been caused by increases in the money supply,” UK new Prime Minister Truss said in July, but by September, her government had authorised the BoE to fire up the money-printing presses again.
Particularly for Credit Suisse, the world is in a very different place than 2008, when there was a sudden realization of widespread losses throughout the entire financial system, says James Angel, finance professor at Georgetown University. Although there are “painful realizations” going around markets today given a looming recession on the horizon, there is no big systemic issue yet that is affecting everyone like it was in 2008. However, Credit Suisse continues to face cyclical and structural challenges. The next big question is how regulators would respond to diminishing liquidity, as the big swings across asset markets are raising the risk of a financial accident.
