This time is different

🧠 The Big Brain
GBP optimism & why it won't last

Because the UK is a nation of pessimists…

And because we did deep market research (asked TikTok) about the state of the jobs market.

Don’t laugh, it’s the modern version of a consumer survey.

Anyway, although people are worried, the UK economy’s ticking along, and, according to the PMI’s today, doing better than the Eurozone.

GBP has been riding high for a few months now. Is that about to change?

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⚡ The Spark
This Time Is Different

Lessons are rarely learnt the easy way.

Let’s not pretend anyone can predict the future.

That said, there’s a LOT of economists and smart people pointing to the US economy & saying the four most dangerous words that investing folklore has ever produced:

This time is different.

They say that when the US government is running massive deficits and spending right into the economy, a recession is basically impossible.

Maybe they’re right. Maybe ‘fiscal dominance’ matters more than anything else.

BUT…

There are things happening that look incredibly familiar, almost like they’ve happened before, just as the economy was heading towards recession…

Like… the unemployment rate by state:

Or the famous yield curve inversions, that tend to un-invert just before recessions hit…

Maybe this is all just a coincidence. Genuinely. This cycle has been weird. It might not even be a cycle.

It’s just intriguing to watch people loudly proclaim that the worst is behind us when these two massive dominoes are teetering…

💡 The Lightbulb
Know Your Counterparty

Who’s on the other side of your bet?

Counterparty risk is often discussed in the shadiest corners of the global economy and financial markets.

If you enter into a contract/trade with some giant financial behemoth, your counterparty risk is minimal. They’re unlikely to go bust.

If you enter into a contract/trade with, say, a commodity trader, your counterparty risk is higher, but you should expect things to work out most of the time.

(And if you lend money to your mate who loves a pint and a punt, calculating counterparty risk is pointless, that money’s gone).

Onto Archer Daniels Midland: (American multinational food processing and commodities trading corporation founded in 1902)

Their shares absolutely DUMPED this week on rumours of accounting irregularities.

Understandably, this led to some testy debates about trust.

See, commodity trade is often… misunderstood by the public. It’s a dirty, complex business, driven by the necessity of meeting market demand for the commodity in question.

Morals are… Loose.

Which is why it’s best done away from public scrutiny.

Finding out that your planet saving electric vehicle revolution is built on the back of bribes to tinpot dictators and/or child labour can be distressing.

And that’s only part of the argument. Should these even be publicly traded companies?

Here’s one opinion:

Volatile markets/returns & extreme risk takers don’t mix well with investors. It’s like oil & water.

So, the commodity firms might - uh - tell shareholders what they want to hear sometimes…

In fact, it’s so common, there’s a study on fourteen of the largest trading disasters:

If you understand their role in the world, it absolutely makes sense to keep commodity firms private, in every sense of the word.

While we’re on the subject of counterparty risk, it always helps to know who you’re speaking to.

John Arnold, the guy in that tweet, had a nickname back in his Enron trading days.

He was known as ‘The King of Natural Gas” - Wikipedia notes that he “is credited with making three quarters of a billion dollars for Enron in 2001 and was rewarded with the largest bonus in Enron history, some $8 million”

He wasn’t involved in the accounting scandals that Enron’s famous for, but he had a front-row seat, while also being one of their TOP traders.

If that doesn’t qualify him to have an opinion, well, here’s more.

He subsequently started his own fund, and in 2007, became the youngest billionaire in the U.S.

Reckon he knows a thing or two about how the commodity sector operates, and managing risk.

Always know your counterparty…