Comment of the Day
Video commentary for September 6th 2022
A link to today's video commentary is posted in the Subscriber's Area.
Some of the topics discussed include: EUR swap breads at 2008 levels and bitcoin breaking lower suggest very tight liquidity, oil and gold weak, Dollar at new highs stocks reverse lower, UK Gilts surge on outsized spending measures.
How £170 Bln of Energy-Aid Could Upend BOE's Outlook
This article from Bloomberg may be of interest to subscribers. Here is a section:
According to a Bloomberg News report, Truss has drafted plans to cap annual electricity and gas bills for a typical household at or below the current level of £1,971 ($2,300). That would have a significant impact on inflation, which our baseline scenario forecasts will reach 15% in January. Mechanically inputting the cap freeze into our forecast shows inflation peaking in July (at 10.1%) and then falling back at a faster pace -- approaching 2% within a year.
The cost of implementing that measure would be a whopping £130 billion over the next 18 months, according to Bloomberg News. If we then add fresh support to businesses, which may total £40 billion based on draft government plans, the full size of the package could reach 7% of GDP. That’s a massive fiscal boost, close to the level of government support seen during the pandemic.
But it’s early days. There’s a high probability that the reported plans will face significant push-back from the Treasury or from within the Conservative Party -- especially as these measures would be poorly targeted. A key question will be how the energy cap is funded. It could be clawed back from households later, keeping energy prices higher for longer, or purely financed by government borrowing. The latter option would create a significant hole in the government’s finances -- even if the cap delivers around £30 billion of savings from lower inflation-linked debt payments in 2023-24.
Another possibility is the government intervening in wholesale energy markets. That could dampen the impact on the public finances, because it would open up the possibility of reducing bumper profits from some electricity producers. The snag here is it would be akin to a windfall tax, which Truss has previously said she would not pursue.
My view - 7% of GDP is a lot of money to spend on standing still. The fact the £170 billion price tag coincides almost identically with the excess profits for energy companies quoted last week. It suggests the government is aware of what sector can be targeted should financing this stimulus become an issue.
Energy Trading Stressed by Margin Calls of $1.5 Trillion
This article from Bloomberg may be of interest to subscribers. Here is a section:
Aside from fanning inflation, the biggest energy crisis in decades is sucking up capital to guarantee trades amid wild price swings. That’s pushing European Union officials to intervene to prevent energy markets from stalling, while governments across the region are stepping in to backstop struggling utilities. Finland has warned of a “Lehman Brothers” moment, with power companies facing sudden cash shortages.
“Liquidity support is going to be needed,” Helge Haugane, Equinor’s senior vice president for gas and power, said in an interview. The issue is focused on derivatives trading, while the physical market is functioning, he said, adding that the energy company’s estimate for $1.5 trillion to prop up so-called paper trading is “conservative.”
Many companies are finding it increasingly difficult to manage margin calls, an exchange requirement for extra collateral to guarantee trading positions when prices rise. That’s forcing utilities to secure multi-billion euro credit lines, while rising interest rates add to costs.
“This is just capital that is dead and tied up in margin calls,” Haugane said in an interview at the Gastech conference in Milan. “If the companies need to put up that much money, that means liquidity in the market dries up and this is not good for this part of the gas markets.”
My view - The ECB is looking primed to begin hiking rates while at the same time it will also be prevailed upon to provide significant additional liquidity. This is akin to taking with one hand and giving with the other. Even that’s a stretch.
Ethereum Implements Bellatrix Network's Upcoming Paris Upgrade to Trigger The Merge, Validator Block
This article from bitcoin.com may be of interest to subscribers. Here is a section:
The blockchain network Ethereum has officially activated the Bellatrix upgrade, the final change before The Merge, the highly anticipated transition from proof-of-work (PoW) to proof-of-stake (PoS). Bellatrix was successfully codified into the codebase at epoch 144,896 on the Beacon chain and Ethereum co-founder Vitalik Buterin detailed it was important for network participants to update their clients.
From Bellatrix to Paris — Ethereum Participants Get Ready for the Final Step of the Merge
The Merge is estimated to take place on September 13, 2022, according to the wenmerge.com countdown, which notes there’s a hair over seven days left until the ruleset change. On September 6, Ethereum developers implemented the Bellatrix upgrade which is the final step until The Merge happens next week.
My view - The migration from proof of work to proof of stake is a major evolution of Ethereum. It’s the reason it has become the favoured crypto asset of institutions. They see the transition as a way of allowing Ethereum to be valued on a discounted cashflow basis because of the payments that will be granted for staking tokens.
Email of the day on abandoning paper money
The UK is not abandoning £20 and £50 bank notes. It's only the old paper ones that are no longer to be used. The new (beautiful and cleaner) plastic ones remain in use.
My view - Thank you for this clarification. I don't think I've used cash in the UK in at least five years so please forgive my oversight of the new notes.
Speaking Engagements - World Money Show October 2022
I have agreed to speak at The World Money Show in Orlando on October 30th.
Eoin's personal portfolio: stock market index short opened August 11th 2022
One of the questions subscribers ask most often is how to find details of my open trades. To make it easier I will simply repost the latest summary daily until there is a change.
The Chart Seminar London November 21st and 22nd 2022
We are living through fast moving markets so I am gauging interest for The Chart Seminar on November 21st and 22nd this year in London.
In the meantime, if you have any questions, would like to attend, or have a suggestion for another venue please feel to reach out to Sarah at sarah@fullertreacymoney.com.
The full rate for The Chart Seminar is £1799 + VAT. (Please note US, Australian and Asian delegates, as non-EU residents are not liable for VAT). Annual subscribers are offered a discounted rate of £850. Anyone booking more than one place can also avail of the £850 rate for the second and subsequent delegates.