Ep.86: Liz Sacks Kwasi & What Next For US Stocks?

Okay, hello and welcome to episode 86 of the Market Maker podcast. And we've not planned this in terms of preparation of what we're specifically going to say, but I told Piers— we normally record this conversation first thing on a Friday morning just to cut us some slack later on in the day, but it's been a super busy day, particularly for me being the person that's keeping a watchful eye on what's going on in markets. And that's because the UK Prime Minister Liz Truss has just held a— I guess you can call it an emergency press conference, uh, because the Chancellor has been sacked earlier on today. And she just came out and made a statement. So I haven't caught up yet with you, Piers, on what you thought, but she's literally just finished. She spoke for 8 minutes and took just 4 questions. Yeah, but what we want to do before we delve into what's been said and actually what's happened all week and what is going on— initial thoughts, what do you think?

Well, the, uh, the emergency press conference, what, finished about 20 minutes ago, and I think I've only just stopped laughing at just the ridiculousness of all of this. I mean, it's— yeah, I mean, she's, she's just— it's like a rabbit in the headlights now, isn't it? I think, um, she's thrown Kwasi under the bus, um, fair enough, um, but obviously the big question is, well, why didn't she throw herself under that same bus? But because it's not like this plan was Kwasi's. It's not like he just came up with this master budget and then put it on Liz's desk just to sign off. I mean, we're led to believe this is entirely— the whole budget thing was an entirely joint endeavor, a joint almost like ideology. And they masterminded it together. And then, yeah, obviously it's a disaster would be a big understatement. And yeah, I, you know, someone's got to go. But yeah, how she can still stay there, I don't know. But I— it's hard because if she doesn't want to go, which clearly she doesn't at this point— remember Boris a few, well, a few months ago now, the only way The only way he got forced out was by the cabinet just en masse resigned, pretty much. It was just like one after the other, after the other, after the other. And it was like, oh, OK. All right, I don't have a choice. But unless that happens, I mean, she's just going to continue to wade on through this kind of— this swamp that she's created.

Well, yeah, there is the, um, I think there's the technical process now that she can't technically be challenged because of the fact she's just come into leadership because of the time frame of the, the process of what that entails. However, it only— I read one thing saying it only takes an afternoon meeting of the backbenchers committee to then flip that rule and toss her out anyway. So Um, you can't— one of the things I thought with, with, uh, this conversation was I didn't really want to really talk about it too much because probably by Monday when we— yeah, everything would have changed. So it's hard to really say anything concrete at this point. Um, but yeah, I mean, one of the things from where I sit is I have lots of different news sources and, and Twitter and things like that. It's particularly useful to get the initial wave of what the political correspondents thought, and they are then plugged into MPs who WhatsApp them from the Conservative Party. You get some pretty— it's pretty damning, um, what's been reported in the first 5 minutes. Exactly like you said, rabbit in the headlights. She just kind of bolted. Yeah, if you watched it, it was—

she literally sprit— she was like— she answered the fourth question, which was from Robert Peston, who basically said 'Why are you still there talking?' No, he said, 'Are you going to apologize to your party?' Right. She again delivered a swerve.

Right. So the former Chancellor Philip Hammond's already commented saying he's basically just thrown the entire reputation of Conservative Party. She's just torn it up because they're supposed to be the ones who are the fiscally prudent of the political spectrum. Um, one thing, a couple other things that, that was said was that she didn't actually assign any blame to Kwasi. And some were saying because of their relationship, because of the fact that she's scared of what he then might start to bring out. Yeah, she didn't actually, because if this was Boris, Boris would have gone full-on dagger and just, just absolutely, you know, pivoted to deflect attention away from him. She didn't actually do that. And she did say— God, one of the things she did say as a main thing was that she made clear she has not changed her fundamental position that the economic priority is growth.

Yeah.

So she's kind of like holding on. And there wasn't a great deal of information. I think the market had been waiting for this all day. And I was looking through and I was like, okay, there's like multiple ways in which she can trim and create, you know, free up that black hole of what was $60 billion or so. But she's just come out and literally talked about the $18 billion in corporation tax cuts being reversed, which goes against her own platform, of course, which is what Rishi Sunak was pushing. She talked about the two things that they were saying from a market perspective is the down payment. She was referring to that as I could nod to perhaps there's more reversals to come, but they haven't really thought of what detail and context that, that's going to happen. And then the other thing, um, was about spending will not grow as quickly as planned, she said. Yeah, so they were the only bits that really stood out.

Yeah, I mean, they— all that's happened in terms of that mini-budget, what has changed other than now the Chancellor, is that they've scrapped that 45%, the idea of getting rid of the 45% tax band for the rich, and then now, you know, doing a U-turn on corporation tax. So corporation tax will rise from 19% to 25%. Right, so that's it. But certainly the corporation tax one, that is gonna hurt Liz Truss because she— that's like a cornerstone piece of her kind of campaign when she was campaigning to be leader of the party. And that— look, she's created her own downfall here by the spectacular sort of ill-thought-out way they went about that budget. And now she's having to just peel it all back just to stay alive. So she's entirely kind of, you know, sacrificing her own political ethos just to cling on to power. And as I said, well, no, you said technically, can the Conservative Party get her out? And the answer is probably no, right? But, and so the only way to do it is the cabinet ministers just resign. It's the only way. That's what happened to Boris in the end. So keep an eye out for cabinet ministers resigning. But obviously Liz Truss is hoping that's a line now drawn and let's move on. I mean, she's hoping that. Of course, that's incredibly naive. This definitely isn't a line drawn and we're all going to move on now. This is going to hound her. And I don't know, I guess she does get hounded out at some point.

But I'm looking at markets and Yeah, I think that they say, as you look at that, this is the definitive part of what will seal her fate. Yeah. What do markets do now?

Right. So it's markets that have forced this whole episode because they reacted phenomenally badly to the budget. Right. So what's happened today, just today, yields. So if we talk about bond yields and kind of that's where all the action's been. I'm looking at the 30-year government bond yield. Okay, that's all that stuff around the kind of pension funds and everything else where the yield spiked above 5% last week. It then kind of came off and came down this morning off the news that Kwasi's on a flight back from the States and is going to get sacked. Of that news, bond yields dropped and continued to drop from last week's peak. And so just today, the first half of today, it dropped from 4. 6% all the way down to about 4.25%, which is a big move, by the way, just in a few hours. Now it's reversed the whole lot. So bond yields have reversed all of that downside from earlier on. They're now back up above 4.6%, new highs for the session. So bond yields are saying, Liz Truss, what the hell are you doing? Get out of office because you're not responsible to govern. That's what bond yields are saying. I'm looking at the currency markets, and if you look at the pound against the dollar and how that's been fluctuating, and it's the same thing but in reverse. The pound was strengthening this morning, um, and now it's all come off. And yeah, it's reversed. So the pound is now down on lows for the session. Still, I would point out quite a bit above where we were trading last week. I mean, we got down to 1.0, below 1.04. That's the pound versus the dollar, um, last week, or a couple of weeks ago, sorry, I should say, when the mini-budget was first announced. Um, and we're still up above the 1.11 handle as I speak. But yeah, a little bit of sterling weakness, but it's the bond yields that look to be more interesting for— in my mind. So yeah, yields moving higher, the pound moving lower. The markets are saying that Truss has got to go.

Do you think there's any, um, connection to Jeremy Hunt? He was the former Health and Foreign Secretary. It's probably not everyone's cup of tea in terms of his successes over the years.

Yeah, um, I mean, I guess she's gone for him, just because he's a hugely experienced politician and indeed cabinet minister, and has held, if you want to say, the, the two other big offices, which are Foreign Secretary and Health Secretary. Health Secretary, obviously, these days is one of the big ones, of course. But, um, so yeah, I think he's probably just seen as that kind of super experienced person who can come in and balance off her inexperience. I, I can only assume that's the strategy.

Yeah, because the only other person I heard tabled late morning was Sajid Javid.

Again?

Yep. Yeah, but I guess he's too tight with Rishi.

Yeah, well, this is it. He, he might have been asked, actually. Maybe he said no. Maybe he's buying it because, because who would want to, who would want to jump on the Truss trolley when, uh, the wheels have already come off?

I mean, well, look, I mean, looking at the charts now, yeah, I mean, you mentioned the reversal and I think that's definitely a contributing factor, but stocks have also— not on this news, yeah, of course, but we'll get to it in a minute because stocks ramped yesterday after they initially tanked. On CPI, which we'll delve into. But I don't feel my spidey senses are tingling for this.

So you're saying markets aren't like really reacting to this? It's just a little bit of reaction?

No, I think markets— I think we're gonna have a sell-off for the rest of this afternoon, and maybe I'll have egg on my face, but I don't like the setup of how the charts look across the board at the moment.

You're talking about The UK markets or globally here?

Global. US stocks in particular. I just don't like the vibes that I'm getting, which is a very untechnical way of summarizing. But, you know, when you— I guess when you've watched markets for a long time, you sometimes just get these feelings where, particularly as well as I said, we'll get to, because I do want to talk about the Bank of England a little bit before that. But after a big ramp day like we had yesterday, that never leaves me with a particularly strong feeling about the second day to follow that up. But let's get to that in a sec. Tell me about the Bank of England, because I caught one of your posts on LinkedIn, and yeah, this was an extension of while I was away, and they had that whole fallout in the, in the, the pension space. And then the Bank of England— I saw a comment, I think you said it— that Andrew Bailey told pension funds you got 3 days to get out. Yeah. So what's he talking about and why is that such a powerful statement?

Well, and by the way, the 3 days to get out— well, this is the last day of the 3. So it's actually markets close in what, an hour and a half?

It's already done. They've already had their last auction.

Ah, is that right? So that's it. Done, right? So yeah, 3 days ago, 30 million. Say again?

130 million.

Is that all?

Yeah, the previous one prior to that was 3.1 billion.

Yeah, there was one big day, but it's pretty much been the only big day. So look, what are they doing? Well, this is the Bank of England's emergency move following the budget, um, when, uh, bond markets just went into meltdown and UK government bond yields surged to kind of crazy levels. And this had this knock-on impact on pension funds and how they go about their business. There's this thing called liability-driven investments. I'm not going to go into it again now. We talked about it in the pod a couple of weeks ago. But ultimately, it's resulting in pension funds having to essentially liquidate assets to raise cash to pay margin calls for their swap strategies that they're running. Right. But the point is that obviously a lot of the assets that pension funds own are bonds, government bonds, UK gilts. And so they're having to sell their gilts to raise the cash. But it's the gilts being sold drives prices down and drives yields up. So this, the selling of those gilts is that vicious cycle because it makes yields surge more, which means then their margin calls are even larger. So the Bank of England stepped in and said, look, we'll come in and provide some buy-side liquidity in this market. Because if you're in a market and everyone's selling, well, the collapse is right. For every person selling, you can't sell unless there's a counterparty that's buying. But what happens if no one wants to buy? Well then this is where markets just collapse, right? So the Bank of England stepped in to avoid the collapse and said, all right, we'll buy. And normally they'd be expected to be what's called the buyer of last resort, right? Where they're stepping in and going, bang, we are stopping this market falling, we're drawing a line, we're going to be the buyers and we've got unlimited money. Or well, in this case they said we're going to use 65 billion, okay? And so that's the case. And so everyone thought, oof, God, relief. Okay, the pension funds aren't going to collapse. The Bank of England, they've— they're coming to the rescue yet again. But actually, that's not what's turned out to have happened, because this £65 billion that they've said they were going to spend to prop up this market, they haven't got anywhere near. I think they're less than £10 billion, actually, all in all. Of the £65, it's less than £10 that they've spent. And everyone's like, what? What's going on. And it's not like yields have dramatically reversed. And what's going on here, I think, is part of this— it's part of a much bigger thing, in my opinion. But that bigger thing is the era of central banks just always coming to the rescue and bailing everyone out. You can make the biggest errors, the biggest mistakes, you can take the most ridiculous risk, you can— you can do whatever you want because the consequences in the end are, don't worry, the central bank's got your back. And so this has been the case time and time and time and time again, quantitative easing programs, you know, um, etc. And, and it's got to the point here in the UK now that they're, they're bailing out governments, right? They're bailing out government incompetency. And this is where you get this slight kind of conflict, because the government wants to stay in power, they want to win votes, they want to be elected. So sure, Truss's kind of mini-budget of tax cuts is populist, and so fine, that's a good thing for the government if their objective is to get re-elected. But of course, we've just had a COVID crisis and debt levels is through the roof. So in the end But this is where government— sorry, central banks have just been propping it up, propping it up, propping it up. So I think this is a stand from the central bank to say, you know what? We're not going to continue to do this indefinitely. Just because the government's messed up here, we're not going to ride to the rescue. Just because pension funds have got these complicated investment strategies, that's That's their choice. Pension funds, it's their choice that they're running these strategies. It's their risk that they're taking. They're not stupid, these pension funds. They know the risks. Fine, they weren't expecting the yield moves we've seen, but it should be in their risk models. And if it's not, well, I'm sorry, whose fault is that? It's theirs. And it shouldn't be the central bank that just comes along and just bails them out all the time. So what the central bank have been doing for the last couple of weeks in this emergency window is saying, yeah, we are We are buying. We are buyers. We are going to prevent this market from collapsing, but we're not just going to buy at crazy high prices and let you off the hook. We'll buy, but we'll buy at very low prices. You're going to have to wear a lot of pain if you want to use us as your exit point from this strategy. Um, and as you've seen, hardly anybody sold. So what does that tell you? That tells you that, okay, there isn't a pension fund meltdown crisis here, because if there was, they'd be selling to the central bank even at their low prices. They've chosen not to, and that speaks volumes in my opinion.

Yeah, no, it's so interesting, and I think you're absolutely right. I agree with that conclusion. Um, Andrew Bailey then. I know you've never really been a big fan. I've been a big hater on the Pog, actually.

Yeah, I'm not— they— I— we'll see. I think he's done a good job here.

He's bold, bold and the brave.

I know the, um, like the press, like the default with Bailey is from the press and from myself, I would definitely say, is, you know, always what the hell is he doing, you know, lack of credibility, making mistakes. Not believable. And so the press kind of, I guess, jumped on it again when he said on Tuesday, pension funds, we're not extending this emergency window, you've got 3 days, get out. And then the press were all over it, going, oh my God, what's he doing? This is going to be a disaster, bond market's going to collapse, the whole thing's going to implode. But I actually, this is easily easily, easily, easily the best thing he's ever done. In my opinion, if he pulls this off, I think it will be— he'll go from zero to hero in my mind. This could be— and I don't know yet whether it will work— but it could be one of the most dramatic kind of monetary policy stands.

It's a U-turn in the theme of U-turns.

Yeah, that's right. It's a— it's this— him just going, look, just— I'm stopping this crazy train that we're on. I'm pulling the brake.

I guess the one thing from, um, if I was thinking about it from a PR perspective, um, I didn't see the live conference with Bailey, but given the language that was adopted, I can imagine it was delivered in a very authoritative way. And it's almost the opposite of what we've just seen from Liz Truss. Yeah, which is there's a heightened degree of uncertainty, I'm sure, with Bailey of, am I doing the right thing when I say these words? Will the bond market freak out? Obviously there's a tangible risk of that happening because you don't know until you say it, and you find out pretty quickly, hence, you know, the way markets react. But I guess this is one of the things that, um, I guess is so important about that leadership role is even if you're unsure, even if you're scared, if you're anxious, it's not your job as the point man to show those types of feelings. Um, because that was exactly what one of the, um, journalists was talking about from some of the initial WhatsApps that were firing in the background when she came off stage. It was like, that's it's just not good enough.

Yeah, I've never seen someone exit stage left so fast after that press conference. She lit— I mean, she was sprinting to get out of there. It was like the most uncomfortable thing I've seen for, for a while. And yeah, that's not what you want from your leader.

Um, it's got to be confident, assertive, Um, so maybe, maybe Bailey's just got incredibly thick skin these days, taking the bashing from you every episode.

The thing is, right, that markets are so powerful, and they basically, they tell you what to do based on how they behave, right? And that's really what's been happening for years, central banks and governments, right? If you make a mistake, markets will tell you, and then you need to reverse and change. If central banks say, right, we're going to start hiking rates, and markets freak out, and they go, oh God, all right, fine, we won't. But I think this is Bailey trying to just reverse the tables and to say, markets, you're not going to dictate to me what we're going to do. We're going to dictate the terms to you. And it worked in so much as bond yields dropped from 4.5% to below 4% after Bailey said his thing. It's only now Truss has kind of flipped it and is on the way back up again. But yeah, from Bailey's point of view, if he— if this works— and look, he's got Truss to deal with here, so whilst he may have played the perfect move, um, maybe Truss will kind of ruin it anyway. But from Bailey's point of view, yeah, that's the best thing he's ever done, in my opinion.

Shout out to Andy if you're listening.

Um, he's no Mario Draghi, all right, let's get this very clear.

Um, it's not like my man in more ways than just managing markets as well. Very different characters. But, um, Let's talk about Thursday's move in the US equity market, because let me kind of paint the scene. So all week we've been waiting for one official data point to hit, very important one, because it's the greatest weightest factor basically that, um, builds the perception of what the Fed are going to do. And a rate hike from the Fed come early November of the magnitude of 75 basis points. That was priced in before, it's priced in now. It's not about the November meeting, it's about that terminal rate, which we've talked about before in a previous episode, which is about where do rate rates go beyond this, how high do they go, and where's the resting point when we get to the top. So everyone was waiting CPI, the Consumer Price Index report from the US, um, on Thursday, and that came in at 8.2% on the headline. Which was down from the previous 8.3, was 0.1 above expectations. But let's just park that because the one I'm sure that you can give some more color on is what's under the bonnet of the inflation reports when you start, um, taking out some of the more volatile components. So typically food, energy— people look at the core reading, and that rose to a 40-year high, 6.6%, up from 6.3%. And above Street expectations. Immediate reaction, well, it was the kind of everything dumps. So stocks down, gold down, bonds down. Uh, the only thing moving up really in that scenario is the US dollar, of course. Um, so that was the first part, was quite a very, uh, forceful move lower in US equities. But if you fast forward Trying to look at the time frame, it was within about 2 and a half hours. Yeah, or so. Yeah, we'd taken the whole move back and then added some, which, you know, you and I didn't have the time yesterday to sit there for the entire afternoon just watching tick for tick. But when we came out of a meeting and we looked then, and it's like What? And then I always know there's a, you know, the one thing that always makes me smile is when I, I'll check my, my Slack messages just before I go to bed, uh, you know, because I'm a good employee, just in case there's any last minute messages I need to field before I go to sleep. And then lo and behold, Piers Curran messaging me about The Close on Wall Street.

What happened?

Did I miss something? What's going on? So I know you've still got your eye in. When you go home, you know, talk about my layer. I don't know what's going on when you go home messaging me at half 9, 10 PM about the close. So why did we rally? I know there was a couple of things to talk about.

So I mean, one of the most crazy days— let me just talk about that in a second because about 10 minutes ago you said you were feeling a little bit funny about how the charts were shaping up. Um, so since you said that, in the last 10 minutes the NASDAQ sold off about 150 points. So, uh, yeah, you, you still got it. Um, but let's talk about yesterday. Um, so yeah, and if I talk about the NASDAQ, all right, when we talk about— but, but you can you can swap that in for any other stock market basically because they all did the same thing. But if I just talk about the NASDAQ, which is a bit more sensitive to inflation data than the S&P, the more broader-based S&P, and that's just because tech stocks are just more price sensitive to inflation. So the NASDAQ, the inflation numbers hit and the NASDAQ sold off from 10,850 to 10— let's just call it 10,450. I'm rounding things up and down here, but basically a 400-point sell-off, bang, in pretty much a straight line straight away. And that initial reaction was because of the core CPI reading. And the core CPI reading, as you said, 6.6%, 40-year high. But I think more importantly was higher than the March peak. So for core CPI, we had a big surge higher in the start of the year to 6.5% in March. Then it tracked lower for the next few months, which is what led to the stock market rally in the summer. And now in the last couple of months, it's just gone step, step right back up and above the spring high. And so the first reaction in markets is, oh my God, this is a disaster. This inflation crisis, I mean, it's definitely not over. The Fed are going to have to carry on hiking rates at 75 basis points per meeting till God knows when. And the terminal rate that you were talking about is now going to be higher and it's all doom and gloom and stock markets collapse.

Okay.

Then the devil's in the detail and it is difficult with inflation because there's so many elements to it and there's so many different components and there's headline inflation and there's core and then there's goods and there's services. And so it is difficult to kind of delve into the data, but What happened in markets after that 400-point sell-off in the NASDAQ? Sell-off paused, then it started to push back higher and bounce. And not only did it rebound the whole lot, so a 400-point sell-off, 400-point rally, then into the close where I was kind of messaging you, it then added another like 200 points on top of that. So basically 400-point sell-off, 600-point rally. Finishing on the highs for the session. No other news, because I was thinking, hang on a minute, maybe I missed some news later on. Nothing to do with the inflation. Maybe there was something else that happened that led to that, that bounce. But there wasn't anything. So when I delved into the inflation situation, it became a little bit more clear, I think. So if you look at the— if we just take core inflation, that's taking out food and energy, Okay, so what you got left? And in core inflation, you can kind of split it into goods or services. Okay, um, two things on the goods side, and I think this is probably the most powerful catalyst for that rebound yesterday. If you look at the goods side, so stuff like what we saw was shipping costs have now started to fall, uh, commodity prices are falling. And we've had then what we call a real build-up in inventories, okay? This is where companies are stockpiling, uh, product. So that's where they're manufacturing product and then maybe they're sticking it in the warehouse that's ready for goods to be sold and shipped, right?

And the—

or the inventory levels of components or whatever, right? They've been building and building to super high levels, which is normally a sign that sales are starting to weaken, right? And so it's perhaps a lead indicator that companies are going to start to buy less. So that demand side of the inflation situation, there's signals that it's going to weaken. And what we saw with the goods inflation element of the core inflation reading, we now have goods disinflation. So actually, net over all goods in the basket, prices now dropped. And that's the first time that's happened since 2020. So goods inflation is now negative, right? So that's a clear sign that maybe this inflation crisis has peaked or is peaking. Okay. So then we look at the— but hang on then, if goods prices went down, why was the inflation print so high and why was it higher than expected? So it's all about the services side. Okay. Services inflation definitely did not go down. Now the biggest component of the services side of inflation is shelter. So everything to do with your house and you living in a house, right? And that came in super hot. And that's been one of the elements of the inflation basket that's been really driving this inflation spike.

Right.

So the shelter portion of the inflation basket was up 0.7% both in August and in September, actually. Now, that shelter portion, that makes up half of the core services. Okay. So that's a really important one. And that's the one that's pushing higher. I'll come back to that in a sec. Medical care, which makes up 12% of the core services, that went up big time, weirdly, because of— mostly because of surging costs of eye appointments. Don't know what's going on with eye appointments, but the price has jumped. But the point is, because there's no obvious reason, it's like, well, that's probably not going to last then, that's probably just a temporary thing, right? So looking ahead now, you know, what's inflation going to be next month, what it will be at the end of the year. And it's like, well, okay, what's driving it up now, and are those factors sustainable? So medical care, probably not going to continue to be a factor that's pushing inflation higher. Transportation services, that's 10% of the core services side of the basket, that shot up 1.9%. That was a lot bigger jump than we saw in August where it was only 0. 5%. And again, it's a bit tricky as to why— or to kind of judge why that's happened. And there's no evidence to suggest it will continue to happen, right? So look, if you've got goods prices now declining, if you've got medical care and transportation services spiking but for no good reason, so probably won't again going forwards, then really all it comes down to is shelter. Basically shelters the last portion of this basket that's driving prices higher. I think that's why markets rebounded yesterday, because a lot of the elements in the basket are really flashing that in the future inflation is going to start to come back down. But it does leave shelter, and will that continue to rise? Now, last thing, last point about shelter, um, shelter CPI is calculated using rental data. So how much does it cost to rent? Okay, now in the CPI basket, that shelter component is looking at existing rents, rental amounts, and then new rental contracts. Okay, now if you took out the existing, there are other readings that aren't used in the CPI inflation basket, but are used— you can find elsewhere. There's other kind of measures that get rid of existing. Just what are the new rental contracts, how are they being priced? Because that's obviously a much better lead indicator, right? If you've signed up to a 2-year rent agreement, well then you can't change the price, right? So the price isn't going to go anywhere, but it's the new deals that are getting signed now, the prices are starting to come down. So the lead indicator by looking at new rental costs is showing that And the lag's about 9 months, by the way. The lag between CPI shelter measures and actual rental costs in new deals being done, it's about 9 months. So basically, the long and the short of it is, it looks like the shelter market is turning as well now, if you just look at new rent deals, and therefore we're kind of 9 months away from the whole shelter CPI component starting to come all the way back down. So we've still got 9 months, but the point in the way markets operate is we don't wait for 9 months to see if it actually happens. We kind of look into the finer detail and the more lead indicators to see if it's beginning to happen. And if we're happy it's beginning to happen, right, let's start pricing it in. So this is why markets rebounded. Yesterday.

Yeah, and I was looking at other rationale that was trying to be pinned to the move. I think fundamentally, definitely, I think there perhaps there's a couple of other elements that exist in an intraday environment that can exacerbate these types of wild price movements. And so for— there's 4 other things that were tabled, so feel free to add any source to, um, to any of these as I describe them. Chart support, option hedges, so unwinding short positions, right? Those perhaps piled in on the back of the inflation figure on first instance. Yeah. Earnings season.

What about earnings season?

Well, I think I saw BlackRock finish up like 6.5% or something yesterday, but I think that's tied up in some of the move. But yeah, I don't— we haven't even begun earnings season really.

Yeah, yeah.

So I think that's a bit much. Um, and then rule-based strategies just exacerbating some of the move. The only thing I can think of by that reference is perhaps there's short-term intraday participants running automated systems on momentum-based trading.

And then momentum was down to start with.

Well, in terms, in terms of the, the, the speed of the recovery and some when it added.

Yeah.

And then, you know, so I don't know, I guess the main things to the people listening, I guess there's a couple of different types. Some will be traders, and I think actually there's a couple of things. I think one thing is, is that when you get a situation, if you're looking at intraday markets like yesterday, um, I can say, as often as tempting as it can be to jump in and just ride the reversal, um, I'd say that's a highly risky strategy, more broadly speaking, because what you described about the CPI report all makes complete crystal clear sense. The ability for you to really make that assessment in real time— yeah, is impossible. Yeah, certainly in very, very tight time frames.

Yeah.

Um, and your initial rationale is based on than buying into a market that fundamentally doesn't make sense to the initial interpretation, which is never a good thing, never a good place to be more often than not. Um, which, which is the second point, which is, well, if you are trading intraday, then probably the best course of action is if you see the types of volatility— I did have a stat, I think I saw it somewhere, someone tweeted it— where it's like the, the down-up move has led to extreme level of volatility, probably you're best served not trading. Because even though you mentioned a 600-point move in a market, which sounds very appetizing, you could be 600 points on the wrong side of that move.

Yeah.

Um, and you kind of want to pick, you know, you want to pick opportunities where the probabilities hopefully are leaning in your favor. Um, you know, you're not rolling the dice here trying to just chase markets. So that's for the intraday. I think beyond that, you know, for anyone who's more interested in like the mechanics from a top-level picture, I think exactly as you described makes, makes sense, both from a longer-term investment point of view, for a fund manager point of view, and for a student to understand about these things, um, you know, I think is a good explanation. Because now when you look at the market— actually, I'm looking at the NASDAQ now and it's trading scratch. Yeah, where we were when the CPI bomb dropped yesterday.

I just noticed that as well. So it's gone nowhere.

So basically, if you had a, you know, if you had a big night out and then had a big sleep and a hangover and missed work yesterday, you'd be absolutely exactly where you were before any of this madness happened.

So one of my favorite things is that, like, when you get a market episode like yesterday, and it doesn't happen often, one of my favorite things is then to, um, is to read the mainstream financial press and just for entertainment comedy value just read some of the attempts that the journos are making at trying to explain what happened when it's super hard to explain. And blatantly, I think unless you've been a trader and you've been right in amongst it and for years, then it's almost— yeah, it just seems like impossible to explain. But the journos' job, that's what they've got to do. And I love some of the things they come out with. To try and explain it, I find hilarious. But yeah, definitely. I don't know. Obviously we're selling off now. I guess the bigger question— here's a question for you. Is this— because one angle from yesterday was, well, if the market can't sell off, on the back of more bad inflation data. Well, maybe, maybe that's it. Maybe we're at a bottom. There just aren't any sellers left. Anybody did want to sell, they've already sold. Even more bad inflation data and the market doesn't go down. So is that a signal? Well, okay, maybe, maybe this is a bottom. What do you think to that?

Yeah, I mean, I have always been a perma bull, but, you know, after the 30— what was it, 37, 38,000 got smashed in the S&P. Yeah, I'm a little bit less inclined to be talking it up, but I guess put it this way, a lot of the bank stuff I've been reading— I was posting something from Bank of America on the Amplify Me LinkedIn page. So shameless plug, you should follow that account because we put stuff out, me and the team, about, you know, bank calls, things like that. Really useful, um, for when you're interviewing at these places. But Bank of America were basically saying along the lines of, you know, there's more pain to come. And I think a lot of them, like Morgan Stanley, I think is the same, they're talking about corporate valuations are still too rich and need to come down. And I guess that we're just about to begin earnings season. Yeah, we've got an important couple of weeks ahead, which I think we could probably sell off into. Yeah, we've then got the midterms coming in, what, first week of November. So I think I— it's from a timing-wise, and just given the, the usual market reactions that we get post-midterms as well. Now with this UK debacle coming, you know, I think we're over the worst— famous last words. I think there's a lot of bad stuff that's happened.

Yeah.

And that's had its impact now.

Yeah.

So I think we— I, I'm more of the mind of we sell off short term, next 3 weeks, month. I still think that then there's a little bit of time where the dust will settle on this. I mean, I just had— saw a comment here from one of the Fed officials talking about 4.5 to 5% likely the top of the Fed funds rate cycle, which I guess is in keeping with their guidance. But I think we hit first week, second week of November, you want to call sell-off till then. Okay, then, then we hit that. That's when the bottom—

so you think the midterms will provide the bottom?

I'm gonna have to get out that GS bingo card that you, you had the other day and just see where we are on the, uh, on the scorecard. Um, because then I think as well those corporate valuations got time to come down, be a bit more depressed, and the more depressed they become with this, you know, this greater sell-off that still might emerge, I think then you'll start to see.

But I do, I do agree, like, with the earnings season that's about to start. I mean, that's definitely going to be pretty significant, I think. Um, and it just got— and it's not just their earnings for Q3, which is probably going to come in weak, but it's really about their— what, what are these companies guiding for 2023? You know, what's their guidance for '23 and how bearish are they and how worried are they, especially in the US with the dollar being so uber strong. So for these massive giant organizations that generate a lot of international revenues, that's really hurting. So yeah, it's interesting to see what they say about their 2023 guidance. And I think that may be the the kind of most powerful force. And if it's, if it's doom and gloom, then yeah, I think you're right, we may get another leg down, um, over the next 2-3 weeks. But on that earnings front, so it's some of the banks reporting today, right, which is really just kicking off the season. And then what, who are reporting next?

So yeah, without going into all of the numbers, what I can say is that, um, I've posted actually on my LinkedIn, my personal one, so feel free to connect, but I've on there I've put out the press releases of every large financial institution reported in the last 48 hours. JP Morgan, Morgan Stanley, Citi, Wells Fargo, and BlackRock was on Thursday. Um, so the reason why this is super important, if you're a student listening and you're in the midst of the application season, which I know is very much well underway right now, either applying running cover letters, or at this point of the year, typically in interview or looming assessment centres. I think Will mentioned the other day there's still students out there who won't be able to tell an employer the difference between the Global Markets division and the IPD division. Yeah, which are like night and day. But beyond that, what I always try to say to students is that, look, if you read one of these investor relation documents around corporate earnings from a JPMorgan, for example, or a Morgan Stanley, then essentially it gives you not just the top-level performance of that business, it allows you to understand in a more granular fashion how each division is performing, of which are these specific divisions that you are applying to. It also allows you to do a competitive kind of landscape assessment of, okay, So how big is MS in this space compared to GS?

Right.

Or what actually, you know, why is a classic investment bank so different to a Citi or a Wells Fargo, for example? What's the commercial banking aspect of them? How big is it in context? And, you know, I always try to say to students is that, you know, if you were an employer and you were employing someone to work in your company, let's say you owned your own small company, right? And you ask that famous question, what do you know about my company? You should be able to tell me, particularly I'm giving you public documentation of facts and figures of what exactly we do, what services we provide, what's our best product, how are we positioned in the market. If you are listening to this podcast and you can't answer those questions about the bank you're applying to, you're not probably not going to get that job.

Yeah.

So look, I've shared it all there. It's in one post. I'm going to circulate it in the, um, the Market Maker newsletter as well. Um, but look, I can only take a horse to water. Yeah, look, this is all to help.

Wise words.

You know, I think, um, it doesn't take more than I would say 15 minutes to just have a little look over the document because generally people are concentrating on specific division, and you're going to be like much more educated, and you'll feel much more confident, and you will have that, uh, that special differentiator from the other candidates then. So yeah, check— I'll put— I'll drop the link in the show notes just to make life easier for everyone. Um, but yeah, earnings season will pick up a bit of pace next week. Um, usually it's still a bit slow. You'll get the other financial names amongst some other firms, but then it's the week after, it's then the busiest week of all of the season. And then probably the week after that is when we'll start. So we're probably talking like, I guess, late October. The Apples, Amazons, Alphabets, Metas of the world, um, will probably come in about 2 weeks or so, I'd say. Yeah, but yeah, we'll cover that when the time comes. The world might be a different place by then. Boris Johnson will be Prime Minister. All right, look, we'll leave it there, uh, for this week, and we'll be back as ever, uh, next week to talk over the main events of the week. Um, so yeah, thanks for listening. Thanks, Piers, and have a good weekend.

Yep, cheers guys, bye.