Ep.80: Is GBP Heading For Parity?

Okay, hello and welcome to episode 80 of the Market Maker podcast. And in this episode, going to have a predominant focus on the forex market over 3 key areas. One, I read a pretty scary headline on Bloomberg earlier this week which was talking about pound parity against the US dollar, which is crazy talk, but we'll see how crazy that is when we talk to our head of trading, Piers Curran. And then going to talk a little bit about the Japanese yen. It's broken a very symbolic level against the US dollar, 140, this morning, Friday we're recording this. That's a 24-year low for the Japanese yen, and there's lots of talk on the rumor mill about a potential currency intervention. So what is that? Is it important? How does it work? Does it mean there's going to be subsequent impact elsewhere on other currency markets? We'll discuss. And then in mainland Europe, even though we're in the midst of a severe energy crisis, the fixed income market is pricing in the likelihood of a 75 basis point rate hike now from the ECB. So incredibly late, as we've always talked about, to the party on pulling the trigger. Now it seems they're playing a bit of catch-up, but at what cost? And that's what we're going to discuss. And then if we've got time, I also want to throw in an interesting FT piece that came out talking about why quant funds are now the biggest fans of the Oracle of Omaha, Warren Buffett, which seems like a bit of an odd pairing, but Piers is going to explain all. However, before I begin, and if you're watching this on the video format on our YouTube channel, you can probably see there's 3 of us on the call and a new face to the Amplify team, Stephen, who—

Hello!

Yeah, Stephen, great to have you on.

Great to be here. Thank you so much for having me. This is a delight because usually I'm listening to the podcast and to actually be able to be on, I'm slightly kind of overawed by it, but delighted to be here.

So tell us a little bit about you and then tell us a little bit about the reason you're here.

Yeah, absolutely. Well, thank you guys. I'm going to start right back at the beginning. It's always a good place to start. So let's start back in schools and maybe you guys can go back to your kind of classroom lessons and things like that. I just remember knowing nothing about finance, knowing nothing about investing, got on with my university applications, knew nothing, applied for a job in finance, knew very little, and just really was incredibly ignorant of the world of finance and investing. And so I went through the early part of my career. I worked for an investment bank. I started a financial technology company. And then I went into teaching. I taught business and economics. And I saw firsthand just how necessary basic teaching about finance and investing and the industry of finance, where it fits within the wider world. It doesn't get taught at schools. Even if you study economics, it doesn't get taught. So I was kind of scratching my head thinking, God, these kids need a little bit more than what I can provide them in the classroom. So thankfully I got in touch with Amplify. They came over and did a couple of finance accelerators, a couple of simulations in our big hall at school. Got 150 kids in there and it was buzzing. The kids had a brilliant time, 16 to 18-year-olds, economics and business backgrounds, but also politics students, art students, math students. They all came away going, my gosh, this was better than I thought it would be, which is a good thing, which is a good thing. And most of them ended up putting it on their personal statements, connecting with the guys at Amplify on LinkedIn, doing the Amplify summer course. So, you know, what better kind of way to continue that momentum than by joining Amplify? So I joined Amplify about 5 weeks ago as Head of Schools, and my goal is to get into as many schools as possible and talk to the kids about finance, use these simulations that Amplify's got to really, really educate 16 to 18-year-olds at that really, really pivotal age. So in order to do so, I need your help. So please, we want to get introductions to as many schools as possible. Please do direct message me on LinkedIn. My name's Stephen Barnett, connect with me, follow me. I would love to see myself in as many schools as possible, uh, and really, really look forward to hearing from everyone on the pod.

Yeah, and in the, in the show notes, I'll put the direct LinkedIn, um, of Stephen. I'll also put his email address there as well, so please do reach out. And yeah, whatever school you go to, if you think that we can help in any way, then just get in touch with Stephen. You know, we'd love to to really help at that level where we can have, you know, hopefully a huge impact on people's then decisions that they do going forward in life, in their education as well. So thank you, Stephen.

Yeah, this isn't usually, you know, we don't usually support spamming, but please do. Clog my inbox up if possible, that would be fantastic.

Cool, thank you very much, Stephen. Thank you very much. I'm sure we'll have you back again The next time there's a big deal going on, we'll get you back on for your expertise on that area as well, for sure.

Looking forward to it.

Thanks, guys. Cool. Thank you, Stephen. The other thing I wanted to add as well is that we've just announced today that we've actually got 30 new team members joining Amplify today in the form of our regional representatives. So these are people basically who are students still in study that help us run the free Finance Accelerator we put out to places all around the world. So I was just having a look at the list with George and our team this morning, and there's, there's everywhere from Spain, Sweden, Ireland, out to Miami, which I know is a favorite of yours, of course.

Uh, yeah, I love, love a bit of Miami.

So yeah, I've just wanted to welcome all of those people. Um, I did jump on a call with them a few weeks back, and, uh, yeah, super excited to have having the, the simulation pushed out all over, really. So yeah, the mission continues, and Serena is still alive at the US Open. So if you're a long-time listener, our search for Serena, um, needs to accelerate because time is ticking on the real Serena, and we needed a replacement at the top of the table.

I, I missed that. Did she win in the second round as well?

I think so, yeah.

I think. Wow. God, imagine that. I mean, this would be one of the greatest sporting stories in history if she can— if she wins this tournament.

I think the second round, the, the person she beat was seeded number 2, I think.

Yeah, well, that— I saw who she was coming up. Yeah, next. I thought, okay, that's, that's obviously that then. But she beat her, did she?

Yeah.

Wow, it's on.

And he's still alive as well, for now, I think. Yeah, with his metal hip. But anyhow, let's get straight into it and let's talk about the pound first, because yeah, I saw this word parity and I thought, wow, they're really, they're really pushing the envelope looking for parity. I mean, as far as, um, the British pound against the US dollar this morning, we're trading a 115 handle at the moment. So a full 15 points, that's a big distance, uh, to go. Um, but you know, we were talking euro, and the euro at the time when you called for parity, I think was at what, 110 or something like that? I mean, it was a long way off at the time, so these things aren't completely off the table. But the areas the article was highlighting were the looming threat of recession. Obviously everyone in the UK is feeling the pain at the moment of, of the cost of living crisis for sure. The acute dependence on foreign capital, soaring debt costs, and the likelihood of the Bank of England's independence being called into question given some of the noises coming out with the likelihood, not guaranteed, successor of Boris Johnson, Liz Truss, of which we'll hear confirmed on Monday, actually, 5th, and she will begin work at Number 10 the day after. It also comes After this week, we had Goldman Sachs, the US investment bank, came out and they are now leading on the street calling for UK inflation to hit a top at 22.4%. Uh, they're saying that's if natural gas prices remain elevated in the coming months. And if that view on inflation materializes, the consequence on growth would be 3.4% decline uh, in GDP. So in context, Goldman's are at 22.4, Citi were a bit of a shock last week at 18.6, the BoE are still sat at 13.3 on their official forecasting at the moment. So UK pound, what do we reckon?

Well, I mean, obviously parity, it's obviously, it's a great sensationalist headline. Let's just— can we just start there? Please. I think it was the guy from Capital Economics, wasn't it?

Capital Economics are infamous for being huge bears. They're like the bear of all bears.

Right, the uber bear. So I think it was him. I can't remember his name now. Apologies for whatever his name is. But he's calling parity, right? It's such a great— it's clickbait on the one hand, sensational. I'm like, what, parity? Do I click on that? What's what? So great for click-throughs. But look, we're at 1— I guess we're at 115 now, right? And I mean, this is a really big level. That 114 is a really huge level. Um, this was the 2016 low, uh, the 2020 low, and, you know, really incredibly important levels that we're at now. Can it break lower, definitely. And it definitely will— well, hang on, not definitely, but I'm very confident that the travel— the direction of travel is definitely down. Uh, the pound's been incredibly weak. I think it was down about 4.5% against the dollar in August, continues the slide that we've seen for the whole year. And I can't see anything at all, there's zero on the pathway ahead that leads me to believe that that direction is going to reverse. So I definitely think we're going to continue to go down, which means we'll break those, those lows, right? Breaking the Brexit 2016 low, which means we'll be at the lowest that the pound has been against the dollar, um, since 1985. And actually, in 1985, uh, well, it was like December '85 January '86, February '86. It was like 3 months, right? There's only ever been 3 months in the history of the sterling-dollar exchange rate that it's been lower than basically where we're trading now. 3 months in history where it's been lower. Okay, very briefly in 1985, 1986, it blipped down spent 3 months there and then popped. Okay, so we're talking like radical, like unbelievably unusual price levels here. So I mean, we know why it's happening, um, and the direction of travel is going to continue because all of the reasons as to why the pound's been weak this year already are going to continue to get worse. So as you're saying, inflation, um, is going to be a much bigger problem in the UK and Europe than it is in you— in the US. So it's got to be all about a comparison lesson here is the differential. When you're thinking about exchange rates, the differential— what's happening in the UK versus what's happening in the US when you're looking at those two currencies. And Europe is way more vulnerable to, um, the kind of gas price explosion, which is a function of the Russia-Ukraine crisis. Europe's way more exposed than the US is. It's just fact. Um, secondly, the US economy is recovering and is more resilient and is larger and is more self-sufficient. And will recover better, has recovered better from COVID They're not going to have as big an inflation problem as we do. They will probably have a softer recession as a result. So all the way along, you plot the course, and the US is always better off than the UK. So the Fed are going to hike rates more, they're going to end their hiking cycle probably later, they'll start a cutting cycle later probably because their economy is in better shape. So for all these reasons, you're going to see the exchange rate continue to slide. So how low can it go? And as I said, we're really into open, almost uncharted territory. Uh, in 1985, it hit 1.08. Uh, it might have spiked. I'm trying to get the data, like intraday. It may well have hit 1.05. It's hard to get the sort of intraday data back then, but we're kind of— let's just call it 1.05, right? And that's the all-time ever low, ever, ever, ever in history. Now, when I say that, you're thinking, wow, that's centuries' worth of operation here, but it's not. Because this whole fiat currency system has only been going since 1970. We're not going to get into the history of it today. You'd need a whole— about 5 podcasts to get through the history behind currency and exchange rates and the gold standard and XYZ, and then we got pegged to the dollar post-Second World War, and then that dollar peg got lifted in 1970. This is where the kind of fiat currency system started, where your currency's value at any moment in time is driven entirely by market forces. So really, the modern exchange rate system, it's only been alive for 50 years. So in that 50 years, only 3 months has been We've seen a weaker pound. Will it go to parity? I mean, I think you're going to need to see the absolute worst-case scenario play out in the UK for parity. So base case, no. But worst case, yes. I mean, worst case, when you think about 22% inflation, when you think about that, I was reading a piece in the Times that my brother sent me. Now, you know, you know, it's kind of like out there in the wider psyche, like outside of the kind of financial bubble, when you start getting your friends and family sending you stuff. You know, my brother doesn't work in the financial sector, but he sent me a piece and there was this— I can't remember his name now, actually. Uh, anyway, an uber bear talking about how, you know, we're about to get a depression. And the bounce in stocks in the last, you know, through the summer is a classic. It's exactly the same pattern that we saw in stock markets during previous major crashes like the Depression in the end of the 1920s and into the 1930s. It's a classic, you know, huge bear market bounce and then the worst hasn't even started yet kind of scenario. Doomsday, And look, it could happen. I mean, the chances of a doomsday scenario have never been higher in my lifetime than now in the UK. If you think about what's happening, inflation at 22%, interest rates are going to have to rise super sharply, cost of living crisis. It looks pretty desperately bad, right? So if it all plays out in the worst-case scenario, then who knows? All bets are off. It could go anywhere, but my base case is it probably won't— it'll carry on down but won't get down there.

As I hear you talk all of that through, I can't help but think, is there not going to be a huge opportunity in UK assets or the UK market? Let's say the visibility over the next 18 months is going to be severely challenging. Does that not offer in some shape or form a good opportunity? I'm looking at the longer-term multi-decade pattern of a lot of these products, or sterling, for example. Would that not be severely undervalued?

Yeah, I would say, well, two angles on that. That's an interesting one. Is it undervalued?

But I mean, I guess in the sense of we are, I'd say, in the period of between now and the end of the year, probably going to be in like peak bearish psyche about the prospects for the UK economy. Um, because what's happened is we know the direction of travel It's just accelerated each time beyond what we thought. But I mean, can inflation go to like 40%, 50%? I mean, it could. I mean, in, in some circumstance, on, on, certainly if Russia played a part. But I guess my question is, is like, tactically, could you wait? And is there some degree of opportunity on the horizon in 18 months, 2 years, that type of time horizon?

Yeah, I think like the value of something, right? Certainly when you're thinking about financial assets, and to be honest, the value of anything is what humans perceive its value to be. Okay. Um, and if the perception is that the value of the pound, yes, it's radically cheap, right? Looking at that historical 50-year chart. Radically cheap. Um, so, but human perception is it's going to get even cheaper. And until you mentioned there, you know what, until we hit peak bearishness on the UK economy, I think that's the moment where it reaches its lowest point. But I, in my opinion at least, I don't think we've reached peak bearishness yet. So that's my opinion. I might be wrong. And maybe the Goldman's 22% inflation forecast, who knows? Maybe in hindsight that turns out to be the peak worst sort of forecast moment and then things improve. But I don't know. You can't say that now and I doubt it. But so that's one thing. The other thing I got really cool, because is it cheap? I don't know. Is it cheap? Is it not? One thing to look at on the, um, purchasing price parity perspective, um, there's a really cool thing. It's called the Big Mac Index because it's like, right, well, how much does it cost for you to buy an item that you can buy any— in any country on the planet? And the Big Mac is considered to be— this is The Economist came up with this great purchasing price parity measure. How much is a Big Mac in every single country? And therefore, how cheap or expensive is any currency at any moment in time? Okay, right now— well, here's a test for you. How much is a Big Mac in the UK right now if you stepped into Mac E.D.'s? Forget about, forget about supersizing or meal deals here. If you stepped up and said, just one Big Mac, please, how much is that going to sell?

Like, I'm a UK MP or politician, and I'm going to say like a pint of milk is like 10 quid or something, and everyone will like think that's ludicrous.

Come on, come on. So not a meal, just a Big Mac outright, just straight up, not interested in fries or a milkshake. 4.75. 75. All right, I don't know what Big Macs you're knocking about in. It's £3.69. Okay, £3.69.

Well, that's, that's my perception is that's a, that's a steal then. I'll take two please.

Now in the— so then what happens with this index? You go, all right, it's £3.69. Well, how much is it in the US in dollars, right, the base currency? So in the US at the moment it's $5.15. Okay, so from that they work it out using the current exchange rate between the two. They work out, right, is Big Mac— are Big Macs cheap in the UK or are they expensive in the UK, and by how much? And that calculation is currently showing that the Big Mac in the UK with the current exchange rate is 13.8% cheaper than it is in the US, which means from this measure that the UK's pound, the sterling, is 13.8% undervalued based on the Big Mac Index. Okay. Now, this is like right now. I mean, it doesn't mean, right, oh, it's undervalued on the Big Mac Index, right? Buy it, it's got to go up. We still think that it's going to get even cheaper. Right. So this is quite a cool measure. Google it, the Big Mac Index. It's something that— it sounds a bit of a fad, but it is something that actually the industry do kind of look at and use.

I reckon that the New York Big Mac is probably like 13% bigger than the London Big Mac. So actually, it's a parity trade there, looking at product basis.

I mean, I can't comment on that, the size of the Big Mac. Well, that's the whole thing about McDonald's though, isn't it? It's the fast food formula. It's you spit out exactly the same thing. The unit output is so formulaic that it's just copy and paste. And all these franchises around the planet, it's just, right, here's the— here's how you do it. Copy, paste, bang. You spit out a Big Mac that's exactly the same as it is everywhere else. Maybe you can sneak in a few extra pickles. But yeah, so that's one thing. We'll come on and talk about the yen later, which on the Big Mac Index is— I mean, that is out of there. You think Big Macs are cheap in London? So it's 13.8% undervalued, the pound. Let me just— I'm just trying to find it. Yeah, the yen. We'll come on and talk about it. But the yen is currently 45.1% undervalued According to the Big Mac Index, um, you're talking about ¥390 for, uh, for a Big Mac in Tokyo. Um, well, but—

well, go on, finish, finish your—

yeah, I will finish your Big Mac. No, I'm done with Big Macs. Lunchtime's over. Um, I was just going to move on and talk about Well, what happened last time in 1985 when the pound got to this level? Um, do you want to go there now?

Yeah, yeah, hit me.

It kind of ties into something we're going to talk about a bit more broadly, which is intervention, because, well, maybe we should talk about, you know, well, hang on, is it, is it good to have a cheap currency? Is it? Obviously, for anyone who's got a cheap currency, you've got to have an equal and opposite other side of that where they've got an expensive currency. And you know, right now at the moment, I mean, looking at the Big Mac Index, there's only 1, 2, 3, 4— there's only 5 currencies, there's only 5 countries that have a Big Mac that's more expensive than the US right now. Kakao hao andai, can you name any 5? There's another little tester for you. Well, sorry, it's 4, not 5. Apologies.

I need to find a table of outrageous inflation rates.

Well, I'll tell you. It's the Swedish krona, where the Big Mac is 8.5% more expensive. The Uruguayan peso, 18.1% more expensive. Norwegian krona, 21.6% more expensive. And then the Swiss franc, actually. It's 30% more expensive for a Big Mac in Geneva than New York. But otherwise, the other whatever, 100+ currencies, or however, I don't even know how many currencies there are. I guess it's more than 100, right? But yeah, are all undervalued. But is it good to have an undervalued currency? And yes is the short answer, but there are some negatives. And then it depends how quickly your currency is devaluing as to whether it's— because if your currency devalues too quickly, then it can very quickly turn into an absolute economic disaster. But if you've got a mild downward trending currency value that's stably downward trending, then it can be a good thing, particularly for your exporters, because obviously goods that you manufacture in the UK become cheaper for your international customers because the pound's value is getting cheaper relative to their currency, right? And your product's in pounds. Okay, so your exporters often really enjoy periods of currency weakness, and they can often see sales going up as well as then, you know, well, yeah, sales going up, so, you know, revenues increasing, profits are increasing. You could also say a couple of other ones, maybe in terms of positives, it starts to attract in foreign investment. I think you kind of hinted at that earlier, where at some point it's like, wow, so cheap, people are going to come in and I'm buying— your big guns will start coming in and I'm going to start hoovering up real estate in London because it's like 20% cheaper for me. Qataris will come in and start hoovering up more London property. Okay, so that will attract in investment perhaps, which can be a positive internally for the economy. And then a tiny one that's probably insignificant, but maybe more staycations because it's more expensive to go abroad now, for the UK people I mean. So they maybe they'll holiday in the UK, which can be good obviously internally for tourism industry. So they're your positives. The nega— the big negative which is a monster negative right now. It's inflationary. And oops, we've already got a massive inflation problem. So this— if the pound continues to devalue, it is just going to pour more fuel onto the inflation surge. And this is why your Goldman Sachs of this world are going, look, 20-plus percent inflation. So if the currency did collapse to parity, That inflation problem is going to be worse and more prolonged. It's inflationary because we import a lot of stuff, obviously, as a developed nation. And the cost of imports goes up because our currency doesn't buy us as much anymore. So prices going up is inflationary. But if the currency drops super fast, people start to panic. The whole mindset reverses. And rather than those foreign investors looking to come in and invest, it's the opposite. Foreign investors panic and flee, and they want to get the money the hell out of there as quickly as possible, which involves them selling UK sterling-denominated assets. So let's say you own a property or you own US stocks or whatever, right? You sell these assets. Sterling-denominated. So that means you have now sterling, you then sell sterling to get out. So you sell sterling and buy dollars or buy euros or buy kronas or whatever, right? Wherever you are. But that is the selling of the sterling there in that exchange rate transaction that piles more downside pressure onto sterling and the value of it continues to slide. And then you can often get freefall and then those inflationary issues really spiral. And then you have to come in with proper intervention like capital controls and things like this. But that's more extreme. But like Russia implemented capital controls, you've had other currencies like the lira, Turkish lira, recently in recent years has been under severe, severe pressure. So intervention, because what do you do about this? Because obviously it's not great for the dollar. Well, it's not great for the US though, right? Because if ours is cheap, theirs is expensive. So for US exporters, this is a nightmare. Um, so there is precedent here where European currencies became so cheap against the dollar that they actually did something about it. And it was in 1985, the last time we got to these levels. Um, have you ever heard of something called the Plaza Accord?

Yes, but give, give me the, give me this, the—

well, 22nd of September, 1985. There's a bit of a meeting. Well, it's in the Plaza Hotel, New York City.

So are we talking Die Hard? Are we talking—

We're talking— Well, you know that. Yeah. I mean, the Plaza Hotel, right, is the iconic New York hotel. That's where you take the presidential suite, don't you, when you're over in the Big Apple?

Well, not at the moment. The exchange rate is too bad.

But that was, you know, that's the one on the corner of Central Park and obviously very iconic. I was actually just looking at the Plaza Hotel, 'cause I was just interested in who owns it. I'm always interested in these kind of big iconic pieces of real estate in big global cities and like who owns it. Guess who owns it?

Donald Trump.

Ooh. Well, funny you should say, he used to own it. Doesn't anymore. But the big Donald did have his paws on that one for a while. But it's currently owned by the— I was trying to get the official name of the company, but I can't find it now. But it's the Qataris. Who seem to have hoovered up, you know, premium real estate in a lot of these big cities. Um, anyway, uh, big meeting, 22nd of September, 1985, and this is where the US, France, West Germany, Japan, and the United Kingdom, and all the kind of the heads of the central banks convened, and they decided enough's enough. The currency exchange rates, because it wasn't just the pound that was collapsing then, it was everything else, all the other currencies against the dollar. Um, and by the way, the move there was more extreme than we're seeing now. I mean, to give you a context, March 1984, Cable was trading at 1.48. That's March 1984. By December, it was trading at 1.06. 1.48 to 1.06. Okay, so obviously a much more accelerated slide than, than what we're seeing this year so far. Um, but they came together and they said, right, enough's enough, we're going to intervene. And they went ahead and intervened, um, and that led to then the bottom being put in place and actually quite radical reversal because February 1985 we were at 105, and by the time you got to that By the time you got to February— uh, by the time you got to that summer, we're basically back up to 150. Oh wow. Yeah, so this was quite radical in terms of volatility. But, um, yeah, they intervened. And I guess, yeah, this is where we perhaps need to talk about how maybe that— when you say you intervene, I mean, what does that even mean?

Yeah, so with the Japanese yen I mean, that has been on a continuous weakening trend, and we've hit 140 area, which, as I mentioned before, is like a 24-year low for the, for the yen. But if you cast your mind back only about 2 months, that was when there was a 3-way party meeting between, in Japan, the Ministry of Finance, the Bank of Japan, and their financial services agency, the FSA. That was in June. And so one of the things I was explaining to some of our kind of interns at the moment was about this, this central banking approach of verbal intervention before actually physically going in the market and buying or selling of a currency. And so they basically kind of posture that they're serious enough that they would do something. And obviously the market is using a reference point of the previous historic milestones of when action took place before. Yeah, 140 is one of these, these areas. Um, I was just reading the last time, well, one of the major times Japan propped up the yen was the Asian financial crisis in the late '90s. Uh, it reached 146 at the time, but they have previously intervened at 130, which were well above at the moment because we've breached 140, um, this morning. So Yeah, it was one of those, um, things where it's about— there's an incremental kind of build-up to the point of then pulling the trigger. And I think one of the ones that you'll remember, I'm sure, because I remember you were trading at the time, was in Switzerland.

Yeah.

And the floor in Euro Swiss, was it 120 at the time? And I remember it was like— I remember a lot of the prop trading guys at the time, it was like no-brainer. Hits 120 and it just bounces back up again, hits 120, bounces back up again. So it was like a surefire thing, only until completely unannounced they decided, you know what, we're not going to protect the floor. And I guess someone like, um, Switzerland is a bit of a unique case because in that case it was that their currency is getting too strong, right? But they're an exporting-led nation. Yeah, which is problematic.

Well, I mean, I remember that very, very well. It was in 2011 during the eurozone crisis where the euro was collapsing in value against the Swiss franc that the Swiss Central Bank stepped in and this is enough and we are going to— and their words I remember very clearly— we're going to use unlimited amounts of money to protect this floor. We're going to put a floor in at 120 we will use unlimited amounts of money to protect that floor. And obviously they're a central bank, so in theory they can print money. So in theory they do have unlimited amounts. And so that floor was in place, and as you say, it was like, it was like a brick wall. You shall not pass. So obviously from a trader's point of view— and actually it was a bit like a few episodes ago, those Regular listeners will remember us talking about Mario Draghi's bazooka. And if you whip out the bazooka, you don't need to fire it as long as people believe that you're prepared to fire it. And so actually, the Swiss francs, yeah, they pulled off this trick. They actually spent very little money protecting that floor because market forces did it for them until— William De Lucy's birthday on the 15th of January 2015, which was Will's best ever trade of his life on his birthday, 15th of January, because as you said, the central bank— because by then the euro was devaluing The eurozone was in deflation. They were forced into finally rolling out a massive quantitative easing program. The euro was devaluing again, and this time the central bank were having to prop it up and it was costing them money. And they thought, we're fighting against an impossible tide here. So they just pulled the peg and it dropped from 1,20 down to— what was it like? 80— 0.82, I think it was.

It's even—

well, I think, yeah, I know it dropped like 30% in like bang, like minutes. And Will got in early, like shorted.

Can I just say, how did he get in early?

Well, I mean, early as in— as in very quick—

in what? He heard the news very quickly, did he?

Yeah, I see. Yeah, I mean, we had such a phenomenal, uh, news service provider Um, yeah, you might have heard of him, Anthony Cheung. Uh, yeah, got well ahead of that. I mean, seriously, I mean, yeah, it probably was your intervention, your kind of skill that led to us getting— being aware of the news, being conscious of it, you know, early in that kind of news cycle. And he shorted the currency pair, um, and then it, it just started to going to freefall. But actually the market closed because these markets, they got these mechanisms. If they drop or go up by too much too quickly, there's like this circuit breaker where the market then closes like for 15 minutes, and then they kind of reopen it. So he was naked— he, he was in a short position but unable to do anything about it because the market was closed. Not that he was worried because we were looking at the futures markets, or like the spread betting markets that were still open but didn't have the same kind of breakers. And it was going downtown. So we— it was like, this is an amazing trade. No matter what happens, this is like the best trade I've ever done. I just got to wait until the market reopens and then I can decide what to do and cash in. And yeah, it was on his birthday. Happy birthday.

I can only imagine what that night out looked like. But, well, look, on that, on that note, let's, let's— there's two more things I want to cover. So one, the final conclusion to the kind of forex mix, which is talking a little bit about the euro. And it's this idea now, because I know we've been, if anything, probably a little bit critical about the ECB, uh, in terms of how they've approached this inflation crisis. And, you know, inflation is heading double digits now in, in the eurozone and likely still some way to go. The market has now shifted its focus towards next Thursday's meeting. Um, next week they're going to hike by an anticipated 75 basis points, which is obviously bigger than that first executed move of 0.5%. Um, one of the things I thought was quite interesting was that ECB board member Isabel Schnabel She spoke this week and she said that central banks must tighten policy even into a recession. And you remember the Jackson Hole Powell speech, he said that taming inflation will cause, quote, some pain. So I mean, this language that's coming out now is pretty unprecedented, right? Talking about pain, talking about doing whatever it takes irrespective of the consequence, essentially.

Yeah, it's Volcker 2.0. Uh, the— this is what Paul Volcker did in the '70s, '80s to tame the inflation beast. We're gonna hike, it's gonna hurt, deal with it. We've got a bigger problem here, it's inflation. We're going to cause a recession, but we know that, and we consciously know that, and we are consciously going ahead anyway. Because there's a bigger problem. So yeah, yeah, with the ECB, I mean, look, they hiked once, as you said, by 50 basis points. They're always behind, you know, behind the curve. I mean, like the Bank of England have already hiked 5 times, taken rates now up to 1.75%, but the ECB have hiked once to get rates up to 0.5%. Meetings next week, Are they going to hike by 0.75%? I think they are. I think that's a shoo-in, personally. It's like the new modus operandi, isn't it? 75 basis points. It's just what we do as central bankers. Here's a pop quiz. Who hiked by 75 basis points yesterday?

Yesterday?

Yeah, come on. You're supposed to be the man of the news. The Mexican Central Bank hiked by 75. I mean, 75's the new norm, isn't it? So I just think they'll go 75. They're behind the curve. I mean, I don't think they should, but they will. It's probably my—

So one thing thinking about these kind of basket of currencies against the dollar. What probably doesn't help as well with sterling's prospects is the fact that, um, I was looking at net short positions of the euro. So this is where you can look at weekly data that comes out from the CFTC in the US, which basically is just tracking, um, open positions, and you can determine whether they're long or short. And essentially, they're currently the most bearish since the first week of March 2020. You remember what was going on in March 2020, of course.

Yeah.

So yeah, the faith in the euro is equally bearish at this point.

Yeah, it's the same with the pound. It's at parity, but it doesn't really matter. It's going to carry on going down. Like the pound is against the dollar. I mean, how low? I've got— to be honest, I don't know. 95, 90, I don't know. In the year 2001, which is the record low for the euro against the dollar, it hit 84. So 0.84. So I mean, there's— from that historical range point of view, there's, there's plenty of room still. To go. I know parity seems so radical in recent times, but go back 20 years and that's— well, that wasn't radical.

Yeah, and you mentioned earlier about the, the extra layer of, uh, I guess, given its proximity to Russia and dependency on its gas flow, of that situation. So a couple of things there, stats. European gas prices last week, they're more— they've more than doubled in one month. They're 7 times the price at the same time this time last year. And right now we're in the middle of the latest 3-day halt of the Nord Stream pipeline. So those antics are still happening at the moment. Um, one thing to put a number on it, Goldman Sachs were talking about the level of risk they see of Russia permanently going beyond maintenance to just turning the tap off They said the permanent Nord Stream halt is not their base case. I'd say that's very much uniform shared on the street, and they're expecting flows to restart at pre-maintenance levels of 20%. Um, so I would suggest the same. This is all just tactical on behalf of Russia at this point. The context, of course, comes as Germany's gas reserves are only about 83% full. And even reaching the country's 95% target would cover less than 3 months of heating, industrial power, um, all these sorts of things. So yeah, it's— again, it remains optimal conditions almost for leverage for, for Putin right now, which is obviously uncomfortable for Europe going into, uh, this, this situation. Actually, the thing I was reading is the one thing that's out of all parties' control— Europe, Putin— as much as these are real risks, is actually the weather.

Indeed.

Because if we get an early onset of cooler temperatures and a more long-lasting, deeper winter, essentially, that could be the uncontrollable silver bullet that really keeps a whole ton of more pressure on the euro.

It's just going to be Sod's Law, isn't it? We're going to have the coldest winter. Yeah, like on record or something, you know. You could just— just—

well, after we hit, what was it, 40 degrees? Yeah, I hate to say that anecdotally when we have an extremely hot period, it's followed by extreme cold snap. But at the moment, just to alleviate some tension, Temperatures are expected to be above average in early October, at least is what the major weather stations are forecasting at the moment in Europe.

But just to point, like, from an economic damage perspective, right, this high gas price situation, obviously the, the, the obvious thing is to go, well, people are spending more money on energy, so then, then therefore spending less money elsewhere. Um, and that's a huge problem. Right, going into the winter. But when you're talking about the level of reserves being way under what they really should be or need to be, this is when you get a secondary negative economic impact where you don't have enough power and industrial businesses have to close or just not operate at full capacity, which is happening in China, right? Right, right. Yeah. And so that, that just has a double whammy kind of negative impact on, on the economy. Because then what you do as a business, if all of a sudden you've got to cut your output, you know, from 100% to 75%, well, I don't need as many staff now, so right, I'm going to make those lot redundant, thanks very much. And then this is where your unemployment situation turns, and this is where it's like this big snowball effect. People losing their jobs, then not only can they not afford to buy as much because of energy. Well, now they haven't got a wage coming in, you know, and it starts to kind of spiral. And this is where these kind of— yeah, that kind of outlayer of the nightmare scenario is the depression scenario, as if that snowball really, really gathers momentum as we go through, let's say, a really cold winter.

So, okay, final, final topic then. Just quickly, is that the FT reported this morning that quant funds have been hoovering up shares in Warren Buffett's Berkshire Hathaway, and they were putting out some big names in that space. The Renaissance Technologies, DE Shaw, Bridgewater, others are said to have bought stock worth more than $900 million US in the second quarter. Why?

Yeah, it's a bit of a funny one, isn't it? Because like, and actually Buffett himself's been pretty critical of quant funds. I mean, he's an old guy, and I think, um, you know, when he started investing, literally computers didn't exist. But they hadn't been invented, like the personal— he was investing back in the '50s, right? Um, anyway, he's kind of been a— let's just call him a slow adopter. Um, but so it's a bit ironic then when, yeah, you're getting the quant funds piling into Berkshire Hathaway. So Renaissance Technologies, for example, bought— I'm just trying to look here— it's like 1.7 million shares in Berkshire Hathaway.

And by the way, what do their shares trade at? They're insane, aren't they?

Yeah, I'm just going to check now. It's upwards— it's like 200-odd thousand per share, isn't it? Let me just check that. The most expensive share in the FTSE 100. Hang on, this is where I forget how to spell Berkshire. Berkshire Hathaway. Let's see, A-class shares are knocking it out at the pro. OK, they're £424,000. $290 per share. So, uh, yeah, good luck.

They're $280.

Okay, so yeah, all right, a bit cheaper, but if you want the voting rights, then it's going to cost you. But, um, but anyway, yeah, Renaissance Technologies piling in, another firm called Hudson Bay Capital, DE Shaw, big buyers, um, in Q2. And so yeah, why is this happening? Well, really, it's nothing to do with necessarily Buffett. Well, I guess it is. Basically, Berkshire Hathaway happened to be the largest component in the S&P 500's value index. So obviously Berkshire Hathaway, Warren Buffett, this is his company, invest in other companies. And so, well, who are the other companies they're investing in? Because if you're buying a slice of Berkshire Hathaway, you're actually buying a slice of their investment portfolio. So who's in the portfolio? And it's packed full of value stocks. And obviously in Q2, big risk-off, and so we had this big rotation out of growth stocks, tech stocks getting hammered, and into value stocks. These value stocks are companies that have relatively stable revenues relative to cyclicals and are typically like, um, dividend payers, very consistent dividend payers. So they're the safe havens of the kind of stock market world. Okay, and so it's a very attractive, um, thing if you want a defensive strategy, you know, during times of bearishness and uncertainty. Also, there's a lot of momentum, um, strategies out there in the quant world So this is like trying to identify, you know, which share prices have momentum in terms of their movement, and you're trying to jump on board and ride that momentum because you're thinking it's gonna, um, gonna continue. So, so, um, their stock has way outperformed in 2022, although it has dropped 6% year to date. Um, the S&P's dropped 17%, so it's a big, big outperformer on that front. Um, but yeah, who's in? And we talked about Buffett, or Berkshire Hathaway, the other couple of weeks ago because there was that thing about Apple. I mean, if you're buying Berkshire Hathaway, isn't that just an expensive way of buying Apple shares? Because the portfolio is now 42% Apple. But you could say these days, you know, is Apple the new safe haven? Um, but anyway, because they're a dividend payer and they ain't stopping paying dividends, I can assure you of that. And they're not stopping buying back shares. And so for those reasons, weirdly, even though they're a tech stock, they've kind of almost perversely become a bit of a value play in some ways. But it's their other holdings. So they're big ones, this is Berkshire Hathaway. Um, they own a bit of energy, so Chevron. Um, so they own 8.4% of Chevron. Which for their— in terms of Berkshire's portfolio, that makes up a 7.4% weighting in their portfolio. Uh, they own a big move into Occidental this year, Occidental Petroleum. So they own 20% of that business now, and that makes up 3.7% of Berkshire's portfolio. Other stuff like Coca-Cola, very famously he's owned Coke for decades and decades. He owns 9.2%. Of Coca-Cola, and they're obviously great. Yeah, it's amazing. Um, Kraft Heinz, that was a big M&A deal that kind of he was kind of involved with a few years back, so that he owns 26% of Kraft Heinz. That makes up just 3.6% of his portfolio. Um, he owns like Moody's, he owns some banks like U.S. Bancorp, he owns Bank of New York Mellon, uh, you know, Citigroup, you know, it's 2.9% of Citigroup. So anyway, you've got these companies in there that are good value plays. Banks are good when interest rates are going up, you know. So there's some— there's— because of the makeup of the portfolio, that's why right now it's been a really attractive destination for a lot of money, including quant funds.

I was just thinking, like, when you were talking about Apple there, given the— a lot of our listeners, it's a favorite name, but given the high proportion of his holding and his general firm's characteristics of hold-forever type of strategy, in combination with the dividend and the buyback, with the competitive— with the competitive market share their branding, the whole nine yards. What's the reason not to hold Apple then over the long term? I mean, everything seems so— like, if you were thinking about, you know, buy and hold.

Yeah.

Is there any other better options out there? I mean, there probably are, but I mean, Apple seems so compelling on many different levels.

Yeah, I think certainly these tech giants more broadly have been— maybe, obviously, maybe not Facebook, but, you know, Google, Microsoft, Amazon, Apple. Those four specifically, um, have been phenomenal in the last 20 years, and the thought is they'll be phenomenal in the next 20 years. So they're giants, and They've got a direction of travel. It's hard to see how that's not going to continue. So yeah, they've become the big kind of buy and holds of the new era, perhaps.

But then from a Buffett perspective, because of Apple's dividend and that side of it, that's why Apple is the select choice out of the big 4.

Right. Absolutely. That's a really good point. And they're the only dividend payer. Uh, is that right? Do Google pay any dividends? You might have to fact-check that, but, um, I think they're the only dividend payer. Um, certainly been the most aggressive share buybacker. Um, so yeah, cool.

All right, we'll, uh, we'll wrap it up there. So just to, to recap, please do check out the, the links in the show notes, whether via the podcast directly on Spotify, Apple, or on, on YouTube, you're watching the video, for Stephen's details. Please do help us out. Again, we have typically been targeting university-level students, but we want to really want to take this to the high school level, uh, really make an impact early. So yeah, feel free to get in contact with Stephen, let us know if he could reach out, or you can introduce us to to a school. That would be amazing if you can help. And yeah, we will see you next week, same time as usual. Thanks, Piers.

Have a good weekend.

All right, take care.