Markets Wrap: Gold Rallies, AI Briefly Blows Up and the UK Market Still Needs Saving

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1:15Merryn Somerset Webb: Bloomberg Audio Studios. Podcasts. Radio. News.

1:31Merryn Somerset Webb: Welcome to the Merrin Talks Money Market Wrap, where we talk about the biggest moves in the markets this week and what is driving them. I'm Merrin Somerset-Webb, UK money editor at large. I'm John Stebbik, senior reporter and author of the Money Distilled newsletter. All right, John, I've made a terrible mistake. I went on holiday. Yes, yes. How very dare you. I know. And not only did I leave you to do all sorts of things about yourself, endless, endless podcasts alone. and I'm slightly concerned that someone might suddenly look around and go, why do we need her? He seems to do it just fine. But I'm hoping that won't happen.

2:01Merryn Somerset Webb: And you'll back me up if anyone says anything like that. You've seen a minute here I've lost in the last week. I think it's fairly safe to say that your job is safe. Yes, we just need to practice. You need to practice things like, I can't do it without her. She's vital, that kind of thing. Anyway, the problem is that while I've been away, so much has happened, so much has happened, that I'm not even quite sure where I am anymore. It's been a busy few weeks, but it mostly boils down to a wee guy borrowed too much money to bet on AI stocks and blew up his hedge fund. A whole load of South Koreans borrowed too much to bet on AI stocks and blew up their stock market.

2:41But now everything's basically fine because everyone thinks that the Federal Reserve is biased towards cutting interest rates or at least keeping them where they are. And so now the market's getting all excited again. Because in their heads, all the leverage is out, which is not true at all. But this overhang of AI debt is kind of gone to an extent. And meanwhile, the Fed is quite reluctant to raise interest rates. And you've also got Scott Besant, the US Treasury Secretary, trying to basically nudge Japan into holding on to its US government debt. And so keep interest rates kind of capped. And hence, easy-ish monetary policy combined with, you know, okay, somebody blew up, but we're all safe.

3:31It means everyone's excited. Oh, yeah, and Iran. Iran. Oh, yeah, that. We're back in sort of peace mode. Geopolitics, pa.

3:37Merryn Somerset Webb: Yeah. Okay. Anyway, so that was a very gabbled round of applause. No, that was a great summary of what had happened. So basically, everything is pretty much as it was when I left. Yeah, actually, yeah. The last two weeks are kind of irrelevant. Yeah, it's basically back to exuberance. Back to exuberance, back to momentum, back to interest rates are going to stay low, everything's going to be fine, back to AI is the dream, everyone's earnings are going to go berserk forever and it's going to ricochet out through the economy and we don't need to worry about anything until we are suddenly made extinct.

4:12Yeah, I see. Yeah, I think that's peacefully it. Okay, good. Business as usual.

4:18Merryn Somerset Webb: Business as usual. See, you should go on holiday more often. You come back. Nothing's changed. Everything's changed and nothing has changed. I did feel so. This wee guy, Leonard Ashenberger, I think was his name. So he's ended up blowing up his hedge fund the night before he gets married. But to be fair, he lived to fight another day. I mean, because he owns private stakes in all the big companies, but he also owned a load of public stuff. And basically what happened is that he got kind of margin called because he borrowed too much. and then ken griffin who is like a hedge fund tycoon and obviously a guy who's been around the block quite a lot clearly said to him okay son i can buy your public equities off you but you're gonna have to give me them for a significant discount presumably that's what happened so they did the deal and he's but his fund has effectively survived because apparently today he dropped another half a billion on one of the private companies and he's i saw that so people People are still giving him money.

5:19Merryn Somerset Webb: Yeah. And his new wife doesn't have cause to think she might have made a terrible mistake. No, no, no. I mean, to be fair, if you're going to do something like this, you should do it in your 20s because that will stop you from doing it in your 40s. Yeah, yeah. And the wedding venue still had all its bills paid, so everything's fine. Yeah, exactly. All's well at the end. Well, or is it? Or is it? Exactly. But the people we should worry about more, and I had this conversation in another podcast earlier in the week, the people we should worry about, of course, is the Korean retail investors. who got caught up in a momentum rally and a story as old as market history, right?

5:53Merryn Somerset Webb: Over and over and over again, the retail investor ends up getting pulled into a she's momentum rally with borrowed money. They get a margin call and it all collapses around them. On the one hand, there's all that personal responsibility stuff. On the other hand, you know, you kind of launch these two times leverage single stock ETFs into a bull market. and you know I I just think that sometimes despite this going against my inner libertarian I think guardrails are there for a reason and if you're going to have them then they should actually be imposed and probably the regulators should have at some point before these were launched said hang on a minute this is not a good idea I mean it is definitely the case you get caught in these momentum rallies towards the end and you do make permanent capital losses don't you stuff doesn't necessarily come back you don't get saved and it's fine if you're you know in your 20s and you can probably make it back but if you are in your 40s or worse still somewhere near retirement then that's a significant problem the interesting one is gold right and that we'd be obviously we follow gold relentlessly here and silver and having had a fairly torrid time falling off their highs they're now both bouncing back quite quite nicely and i assume as you said earlier that's partly to do with interest rates.

7:11Merryn Somerset Webb: It's partly to do with geopolitics. I think central banks are still buying, so the Korean central bank has been buying, et cetera. So the story that we were hearing and telling at the beginning of the year remains basically intact. I was talking to Simon White, who's a Bloomberg macro strategist for one of the podcasts while you're away. And he was kind of making the point and I'd agree with him that obviously gold had reached that. It had become a momentum trade at the start of the year. So So a lot of that needed to be blown off anyway. But then you've got Iran breaking out. You've got the fear that inflation is going to go up.

7:48Therefore, interest rates are going to go up. And you kind of notice that gold's basically unusually traded in the opposite direction than oil since the war's been going on. So I think that definitely this week, I mean, the kind of ceasefire coming back into play helped. But I do think it's this thing of people deciding that the Kevin Warsh Fed is going to be an easy money one. And I mean, a lot of that's on the basis, I think, more of their own kind of wishful thinking or biases. I mean, I think they're probably right, but I'm not sure where the kind of full evidence for this is. But, you know, it kind of seems to make sense and everyone's happy with that story.

8:33Merryn Somerset Webb: but that said treasury yields are still high aren't they and that's the other thing that happened while I was away you saw this sharp rise, relatively sharp rise in treasury yields I guess that's one reason why people are starting to make the easy money connection because we've got Scott Besson, the US equivalent the chancellor going over to Japan and getting together with the Japanese chancellor and saying we're not going to let the yen get any weaker and the whole US angle there is Japan's the largest foreign holder of US Treasuries. If Japan is getting stressed about the yen being weak, which it is because the voters are starting to get irritated with inflation.

9:17Merryn Somerset Webb: Yeah, they didn't mind a little bit of inflation, but not too much. Yeah, exactly. Especially after being... I mean, the other interesting thing about that is it shows just how agreeable mild deflation is for consumers. It might make everyone else miserable, but you know the japanese people have been pretty happy i think for the despite the lost decades and all the rest of it um but sorry getting back to the point about the weekend if the japanese need to defend the yen then one way to do it is to sell u.s treasuries and of course what besant's done is he said look rather than selling the treasuries you can use them as collateral with the Fed to borrow US dollars, which you can then sell and strengthen the yen that way.

10:01And it means that you don't end up driving up the yield on US Treasuries. So the fact that they're worried about that, I think, is kind of tipping people back towards the financial repression, dollar debasement argument against a positive for gold.

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12:23Merryn Somerset Webb: I suppose speaking of financial repression and your desperate desire for there to be more of it in the UK, right? Or for people to be forced to say thank you for their tax relief inside their rappers by buying by buying financial repression all right it's not quite financial repression but it's a similar it's a similar thing you know being forced to do particular things with your money i mean i agree with you on this by the way i agree with you i think it should happen but it does fall under the wider umbrella of financial repression every time you are it's not quite forced is it but heavily nudged into doing something it's a type of it in case anyone doesn't know we're talking about uh pushing domestic savers money into the uk stock market and doing it by restricting tax breaks or making them a bit less generous and a bit less widespread or even just making better ones for investing in the uk but i think the difference with this and actually one person who changed my mind on this was simon french over at panier laborham who's quite often on the podcast and this point was just that it'd be one thing if everyone else did it the way we do it but they don't it's you know it's kind of we've basically unilaterally disarmed and you can't really do that in a world where capital is kind of pretty free flowing still um and then expect there not to be consequences so if we want to have a stock market left and i do i think increasingly i really do mean that it's you need a source of long-term domestic capital because otherwise it's just short-term money and passive funds and private equity predators, basically.

14:06And it's getting, you know, I mean, two stocks today, two FTSE 250 stocks today. Gone. Gone, pretty much. Yeah.

14:15Merryn Somerset Webb: On the plus side, that means that the FTSE 250 has been on the face of it performing very well. Absolutely. It's hit a new record. So it's still the linings. Yeah. Still the linings. I mean, the good thing about this is it is kind of a win-win for private investors in the short term. In the short term. But you know, you own the UK and if it ends up just being an investment trust that's closing down and liquidating at NAV, then great, okay, so you profit from the discount closing. But preferably it would be turned back into an actual machine that enables companies to grow and rewards companies for long-term value creation rather than just kicking them around based on short-term moves elsewhere.

14:59Merryn Somerset Webb: Yeah, and what we'd really like to see, of course, is stamp duty being abolished so that you can trade equities tax-free in the UK like you can pretty much everywhere else in the world. But it's a difficult political environment for that, isn't it? Because people will present that as a tax relief for the rich, forgetting that pretty much everyone in the UK is an equity investor via their defined contribution pension. Yeah, I mean, I think the problem is with that is, yeah, that's purely comms because the actual amount of money is about three and a half billion a year. Yeah, it's nothing. And it is buttons and it's going to automatically get lower because the bigger companies, I mean, AstraZeneca has already got a dual listing in the US that effectively means nobody does actually have to pay stamp duty.

15:43And you can see, you know, other companies doing similar things.

15:46Merryn Somerset Webb: Well, that's bad happening with Glencore, isn't it? I don't know if, I mean Glencore's going to get a secondary listing in Australia and I guess I say you're right, that probably could be a side effect, couldn't you? Yeah, everyone will throw a Glencore in Australia. Yeah, just buy it there. Yeah, why would you not? Why would you pay a half a percent every time you buy and sell it and do it in the UK when you could just do it somewhere else and not pay that half a percent? Yeah. And I mean, I suppose the other important thing is the more FTSE 100 companies that do it, they are where most of the stamp duty comes from.

16:13I think Astra alone accounted for something like 200 million out of the 3.5 billion. So it's going to be a diminishing take anyway. But yeah, the problem with doing it is that it looks like, or sorry, it's very easy to paint it as a tax cut for the rich, which of course it just isn't.

16:33Merryn Somerset Webb: That's like all politics in the UK, isn't it? All politics is comms. Well, no, it's kind of pathetic, isn't it? We're kind of hobbled by storytelling. and like, you know, storytelling isn't true, which is the other big problem. Should we end on something positive? Oh, no. It's always the demand for positivity. When do we ever give you positivity? Come on. I said that and now I'm trying to think of something. Well, the Edinburgh show is sold out, isn't it? That's quite positive. Yes, it is. That is very positive. You can come to the show, as you can't come to the show if you haven't got a ticket, but you could conceivably come to the show if you do have a ticket and then you can listen to us saying negative things in person.

17:17Yeah, but it's positive because there's an appetite for the wisdom of Adam Smith even 250 years later.

17:25Merryn Somerset Webb: Yeah, yeah. I see there's a waiting list for Thursday and I think there's a waiting list for the Friday show. For those who don't listen to our show all the time, we're talking about our show at the Edinburgh Fringe which is on for three days at the end of the month where John and I chat with a variety of people about a variety of things and it's a hoot. it's a good there's a waiting list for a couple of days and then i think there are a few tickets left for the saturday if you rush well there were six yesterday but i imagine they're gone by now but you know you could give it a go i mean positive i do think oasis style dynamic pricing is the way forward here i mean i'm not trying to you know gouge the market uh controlling the yeah but you know what would happen john you know what would happen right if we did dynamic pricing it wouldn't take long before andy burnham announced that we were making too much money and that we're going to have to cap our ticket prices but then you could say you were bringing great things to the actual north the real north yeah it's extraordinary isn't it from manchester suddenly became the north i don't know anyway that takes us off another rabbit hole not starting on that one gonna have to stop um anyway so basically there if we were to summarize uh the last two weeks a lot happened but in the end kind of nothing happened is that fair yeah yeah usual markets

19:06Excellent

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