Unicorns thriving in their London Ranch
I was sitting enjoying the last rays of the evening sun last weekend when I heard news of a Toxic cloud enveloping parts of Sussex, near where we reside. I rushed inside, shut all the windows and waited and waited. Nothing appeared as the light breeze didn’t carry it far enough inland to affect us. The next day there was much speculation as to whether it was a ship or a plane discharging waste or indeed a French factory belting out poisonous fumes on a Sunday evening. My money, naturally being English, is on that it was a toxic cloud from France which would align nicely with the toxic gesturing towards Great Britain emanating from M Barnier and the rest of Europe’s elite, but unelected, leaders.
If one believed the majority of the media, be it social ,TV or press, England is rapidly declining and will soon become a total basket case both economically and politically, indeed a Banana republic without the Bananas. Sadly what is not reported, because it doesn’t fit the doom and gloom narrative, is that the UK is still a magnet for new businesses and in particular Fintech. Indeed there are 18, so called Unicorn, companies valued at $1bln in the UK compared to just one in France. Just to put this into perspective London has four Fintech Unicorns whereas the rest of Europe combined hosts two. To finish my allegory a cloud of toxic rhetoric hangs over the UK and is covering the great strides that the UK is making going forward. Europe, in particular Germany and France, has designs on taking industry away from the UK and are making no bones about it and if you believed the press they are succeeding. Well simply put, sorry but they are not.
A report from UK Fintech said that industry investment has increased by over 50% each year since 2008. There are, of course other hubs in the UK such as Cambridge and Edinburgh but London is the leader. There is twice as much growth in the UK as in the Silicon Valley, which houses some of the world’s largest technology companies and Brexit hasn’t materially affected it. Abdul Haseeb Basit, the Innovative Finance’s chief financial officer, had this to say about Brexit: “We saw a period of uncertainty over the summer last year but I would say that by around the third quarter, things were starting to recover,”
Fintech covers a wide gamut of products many of which are true innovation as well as some which are a few old bits of technology cobbled together to produce a new product. The challenger banks such as Monzo and Starling seem to be growing from London and seek to serve a definite need whilst clever apps that bridge the gap between social media and banking are also present in one form or another. Apps such as Transferwise have gained huge publicity and valuations which when one looks at the advertising spend is hardly surprising. A cynic would say that they are an old idea that has been presented brilliantly but none the less it was nurtured in London. More innovative businesses such as Moneymailme see the advantage of having a sales office in London. 3M ( Moneymailme) is an app that links sending money with socialising – sort of Whatsapp meets Transferwise – is also interesting in that it secured a senior figure from the retail currency markets ,Mark Bolsom ex Travelex , to head up its London office . I asked Mark why they had chosen London and he told me it was “because of London’s unique position as a dynamic, cosmopolitan city but also as financial and technological hub. Over 30% of people living in London come from overseas and Moneymailme can naturally help when it comes to sending or receiving money with friends and family back home. London is also the place to be when it comes to exciting developments in Fintech, sourcing partners and also securing investment. London remains the place to do business.” He added , when asked why he had switched to an app based business that “Moneymailme was the first app that I saw that understands the social role that money plays in everyday life and makes it easy to share both money and the experience.”
The U.K. and London in particular, have unique attractions for Fintech companies and the fact that in the first half of 2017, £433 million had been put into Fintech in the UK leaves the U.K. only behind China and Silicon Valley for inward investment. The government now prioritises Fintech which already employs 60,000 people and creates £9bln for the economy. The attractions of London can be split into two distinct parts that dovetail neatly and produce a hotbed of creativity. The UK tax regime is, despite my many personal complaints, in truth a pretty benign regime and has very generous tax breaks for Research and development (roughly companies can claim 33% of development expenditure back from the government) and when combined with business friendly labour laws it is understandable that London is the European centre for Fintech. The second main influence is historical. London has been, and remains, the preeminent financial centre in Europe due to a mixture of language, a culture of innovation, experience and sensible regulation. The FCA (The UK regulator) is also business friendly and helps test new ideas within a “sandbox” with real consumers, an idea now being copied by the Swiss authorities in an attempt to compete. In short the infrastructure is present and it is no coincidence that the Fintech hub, Silicon Roundabout in Clerkenwell, is based on the edge of the financial district where the all needed facilities are located. Whether its high speed broadband capacity, lawyers, banks or staff they are all on the doorstep and all used to dealing with innovation in the financial markets.
London is nearly always the European centre through which funds are raised and distributed into industry and in this instance into new technological ideas. There are good tax breaks for UK investors through enterprise investment schemes and London is also at the forefront of crowdfunding. In conclusion one would think it’s all looking very rosy for these new businesses. I do however want to sound a slight note of caution to investors because, unsurprisingly, investing in an idea is risky and having seen some angel funding at very close quarters it certainly was not rigorous enough in its due diligence. Secondly some of the valuations are , in my opinion, optimistic and with Transferwise being valued at £1bln a comment I made to my granddaughter Poppy comes to my mind , just be careful when you buy a Unicorn and certainly don’t try leapfrogging one.
Trick or treat in the Markets
By Richard Matthews, 29 August 2017
With the seemingly early Autumnal weather in London my mind has drifted towards the fast approaching celebration of All Saints Day and the now widespread practice of Trick or Treat played on that evening. But what has this children’s game got to do with the markets? Well In February 1637, the price of the recently discovered Tulip Bulbs reached extraordinary heights and then collapsed with some bulbs reportedly reaching the price of a house. The events surrounding this event are described in Charles Mackay’s “Madness of Crowds” and are universally accepted as a textbook case of false asset price inflation, trick or treat on an industrial scale . Speculative bubbles have ballooned and burst many times over the centuries, and there has nearly always been an element of Spoofing. In plainer English speculators offering to buy or sell markets without any intention of actually doing so. To some part and parcel of any market but increasingly frowned upon by the authorities.
Most seasoned traders first experience of learning how to spoof was believe it or not from a game played and enjoyed in pubs and bars wherever traders gather. It’s certainly still played and as a colleague pointed out, when I asked him about spoof “how would you ever decide who pays for the taxi without it?” Simply explained a number of traders, in this instance let’s say three, get together and put three coins in their hands. The hands are then placed behind the back and a number of coins out of the three are moved around, after a period of time each participant holds a fist out containing between zero and three coins. If there were 3 people playing the maximum coins in the three hands would obviously be nine and the minimum zero, then everyone calls out a number that they believe is the total number being held in the playing fists. The skill is in calling out a number which doesn’t expose the number you are holding and keeping a straight face. The winner is the person who guessed the correct number and he would then drop out of the game. The loser is the last man standing and their forfeit? Well it is to pay for the next round in the bar, a taxi fare or maybe even a meal accompanied by a wish that they had taken trick or treat more seriously as a kid.
On the old trading floor locals, banks and brokers would show huge orders above the market or just below to try and influence its direction. For example, a local may have shouted five for a thousand when there was only a small offer at six hoping that gullible players would pay six and the market would head in his direction. Did he really want them? The only way to find out was to try and lift the offer and then watch his reaction – either a look of panic would creep over his face or smug satisfaction that he had suckered you in. All fair in my book and I would venture the books of most professional traders. You played or died on your ability to read people and markets and react quickly enough not to get hammered. Believe me people did spoof and get caught, be it in the futures, commodity or FX markets and paid the price.
A simpler more straight forward time I hear you argue and the advent of electronic trading, algorithms and chat rooms have indeed changed the market forever. The CFTC in America has for a long time taken a dim view of the practice of spoofing and see it akin to market manipulation which at times it is .Under section 747 of Dodd-Frank the CFTC and the largest futures exchange, the CME, were given the ability to crack down. The act amended the Commodity Exchange Act making it unlawful for a person to engage in any trading, practice or conduct subject to the rules of a registered entity such as a futures exchange that “is of the character of, or is commonly known to the trade as, ‘spoofing’ (bidding or offering with the intent to cancel the bid or offer before execution).
The innocent trader’s game of holding undisclosed numbers of coins in your hand has changed significantly with the rapid incursion of technology into the markets. It is no longer always a human brain behind the spoofing indeed more often than not it’s an algorithm designed to publish orders and kill them in the same instant. Alongside this there are increasing cases of traders colluding through chat rooms to actively rig the markets through spoofing. As these cases have increased so have the punishments and they are indeed, at times, draconian. Continual spoofing of markets by specially written computer programmes and coordinated spoofing through collusion are without a doubt damaging and seem to be being taken seriously by the authorities but does the punishment fit the crime? In previous incarnations as far back as one can go in the markets the punishment for getting caught spoofing was that you ended up wearing the position and taking the financial implications of that decision. But times have changed. Whilst Michael Coscia, the first person convicted under the anti-spoofing provision of the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act, petitions the US federal appeals court that recently upheld his conviction (Three years imprisonment) for a re-hearing, it’s hard not to realise that the game has changed and its deadly serious for those who now play.
Richard Matthews, who began in career in 1973, is a former trader-broker in the London money, futures and foreign exchange markets. Twitter @dickiematthews5
This column is the opinion of the author and does not necessarily reflect the opinion of LiveSquawk.
Together we stand, divided we fall
Come on now people, let’s get on the ball and work together
Come on, come on let’s work together, now now people
Because together we will stand, every boy every girl and a man
Before when things go wrong, as they sometimes will
And the road you travel, it stays all uphill
Let’s work together, come on, come on, let’s work together
You know together we will stand, every boy, girl, woman and a man
United we stand divided we fall .
Viewing the world through the prism that living and working in London forces you to, no serious questions would be asked about your mental health if you stated that the UK is a more divided nation than at any time in the last 100 years. The North and South, Young and Old, Left and Right and any combination thereof all appear to have issues with each other which are sadly often stirred by political ambition. These divides are often most manifest when Brexit is discussed and the tangles that all the political parties get into over this subject are sadly a microcosm of British society at this present time. Britain is presented by its detractor’s as a basket case and in a perilously weak position when it comes to negotiating its exit from Europe.
As the UK recovers from a bruising election, terrorism and domestic disasters it’s seems timely to take a step back and look at whether Europe is really as united as it appears? Youth unemployment remains persistently high with levels in Italy, Greece and Spain above 40% and France almost 25%, all much higher than the UK figure of 13% .There remains areas of political risk and upheaval most notably, quelle surprise, in Italy and Greece. Poland and Hungary remain stubbornly opposed to allowing refugees into their countries and openly defy Frau Merkel’s obdurate wishes who herself appears to be starting to regret her open door policy. At the start of the year France was seen as the biggest political threat to European stability. However Macron, the markets favourite, won and with a friendly parliament the question is can he now force through the much needed changes to labour laws and practices in France
In one of his first acts as French President Emmanuel Macron called a special congress by gathering both houses of parliament in the palace of Versailles and attempted, by invoking the spirit of Charles de Gaulle and calling for a “French renaissance”, to reignite France’s glories. In his much criticised official photograph he appears to present himself as the centre of the world and has earned the nickname Jupiter a moniker that King Louis XIV used. His PR, albeit a little fanciful for this Brit, is terrific but the real question has anything really changed and can he cut the mustard with the unions whose labour laws he must reform? Within days of the formation of the new parliament four ministers were forced to resign to avoid various scandals so no real change there and with the unions flexing their muscles it will be a tough call for him to succeed in making France a country of entrepreneurs or any more attractive to international companies than it is now.
If France was the only country facing a tricky political route Europe could be viewed as a positive area but with the Netherlands unable to form a government , Catalonia calling for a referendum on independence , Greece mired in debt and Italian politics as challenging as ever are the silent majority really as content as they appear? Italy has suffered more than the rest of Europe by being the destination of choice for fleeing immigrants and refugees. The social care system is creaking and with comedian Beppe Grillo’s Five Star part deemed incompetent by a chunk of the Italian electorate and many disappointed with the PD of Matteo Renzi, Silvio Berlusconi’s centre-right could be set for an unlikely comeback with all the attendant baggage that would bring.
Immigration into Europe is a political hot potato and stirs enormously strong emotions with many attitudes being born from the horrific experiences of the Second World War. Angela Merkel’s , ill-conceived knee jerk reaction to let everyone in is having and will continue to have a profound effect on European and German life and its impossible not to equate her actions with a sense of Germanic guilt. The cultural, social and economic impact of such a large movement of people will take years to analyse but in the short term the impact on European unity is striking. Austria is closing and fortifying its boarders, Poland and Hungary stand steadfast against allowing any immigrants at all and as a consequence Frau Merkel now wishes to take them to court.
At present there are three times as many European workers resident in the UK than British workers resident in Europe and the EU runs a E120bln trade surplus with the UK which makes one wonder at the hard line stance that Europe is taking. Europe is presented as a bastion of free trade but by demanding that the UK can only have free trade by accepting the right of migrants to settle and claim benefits regardless of their skills makes nonsense of the phrase “Free Trade “. Further evidence of how the presentation of a European unity is a sham comes with the admission, delivered as an obstacle by lead EU negotiator Barnier, that there are 30,000 regulations to be overcome. A community cannot possibly be unified with that number of special regulations and by their very tough stance the leaders of the EU are showing their real fears. Away from the bluster of the politicians Britain and Europe seem equally fragile and the currencies should continue to reflect this and they will mirror the day to day negotiations for the foreseeable future but a point to remember is the worry at the back of the European leader’s minds is not a fear of Britain succeeding but that other countries see the success and follow.
You may like to gamble, you might like to dance
You may be the heavyweight champion of the world
You may be a socialite with a long string of pearls
Indeed you’re gonna have to serve somebody
Well, it may be the devil or it may be the Lord
But you’re gonna have to serve somebody
Difference cheques to “The Cartel”
With three former traders, the self-styled ”Cartel” from JPMorgan Chase, Barclays and Citigroup appearing in a Manhattan court accused of market rigging and facing hefty fines and possible imprisonment if found guilty, it seems an opportune moment to cast a glance over historical regulation in this area, what has changed in the markets and whether new initiatives such as the BIS code of conduct for Foreign Exchange trading will change attitudes.
From the inception of the Foreign Exchange markets, and indeed the interest rate markets, until the introduction of futures, CFDs and spread betting the participants were a relatively small number of people. In the 80s and 90s there were in excess of 300 banks in the City of London trading through 26 money brokers as well as a handful of the treasury departments at the largest corporates such as BP, Shell and British Airways. The major participants were pretty much the same through every trading centre in the world with the attendant power that this situation endorsed. I was well aware as a young broker that if I upset BNP, for example, in London the repercussions would be felt throughout the world for the broker (RP Martin) who had the misfortune to employ me.
The ways that you could upset a bank dealer were numerous and often bizarre. They ranged from not showing enough respect through to supporting the wrong football team but by far the most serious was not standing by a price that you made. In the brave new world of electronic trading this may be hard to comprehend so a little explanation of how the markets used to function in the days of voice broking follows! Simply a bank would ask me a price in a specific instrument (be it a spot price, CD or deposit) and I would be obliged to make a two way dealing price with an amount specified. In laymans terms we were obliged to quote a buying and selling price to that bank in a specified amount. Not difficult really until you factor in that you had to deal on that price and if you couldn’t, for whatever reason, you were obliged to pay the bank the difference between what you had quoted and what you dealt at. I can still hear dealers shouting “cheque book” before slamming the phone down. Too many difference cheques or a really bad price and the dealer would punish you by “taking the line out” in other words they would simply refuse to answer your calls for a specified time, sometimes a week sometimes months.
If this happened too many times the Bank of England would have a quiet but firm word with the powers that be in the money brokers or as importantly at the offending Bank. We all needed each other to make the market function in an orderly manner. Be assured that to have your knuckles rapped by the Bank of England hurt and not only hurt your pride. All the participants knew their role and “place” even to the point where brokers ran A and B desks and depending on the size and frequency that the banks traded they were graded onto the appropriate desk. By operating this self-regulation, where the Bank of England held sway, the markets were kept honest and very, very few abuses occurred. What abuses there were, were quickly and quietly dealt with. Move on to the opening up of the markets to thousands of participants caused by the introduction of consumer friendly instruments, one could almost say expanding the gambling industries tools, and the world of self-regulation is as arcane as a fax machine.
It is indeed a world which is unrecognisable from 25 years ago both in terms of participants, volumes and regulation but will the introduction of the BIS voluntary code of conduct in the FX market and regulations such as those in MiFID II really improve the markets and stop abuse? Richard Seaman, industry compliance veteran thinks that the code will go some way to restoring the public’s faith in the foreign exchange markets. He told me “The 55 principles, whilst not designed to replace local laws have been compiled with consultation and input from major participants globally. Central Banks are expecting much higher ethical standards to become common place although as in any new initiative the ‘tone from the top’ of a firm will be vital in ensuring that the code of conduct is properly adopted and fit for purpose.” He continued “with the MiFID II best execution requirements coming into force at the beginning of 2018, firms will have to change much of their current infrastructure to fully comply.” Interestingly none of the other 6 market participants I asked for quotes could think of any worthwhile changes that these codes and rules will bring. Not finding anything comment worthy is not to say that the changes are not needed or worthwhile but that generally the markets are in pretty good shape but that is not to say that ways round rules will be found! There are however areas that the regulators should be paying much closer attention to such as the mis-selling of Binary options to a gullible public that are a scandal which I will look at more closely in my next column .
We are the Village Green Preservation Society.
God save Donald Duck, vaudeville and variety.
We are the Desperate Dan Appreciation Society.
God save strawberry jam and all the different varieties.
Preserving the old ways from being abused.
Protecting the new ways, for me and for you.
What more can we do?
Some innovations in financial markets took years to become accepted, running alongside older methods. For instance, before futures markets, prices had been quoted in fractions. The finest prices were 1/128ths and known as a Clo/Clo, or slang for a very close price. Once futures came along, decimals were quoted side-by-side fractions, so1/128th became .0017825, until seemingly overnight fractions disappeared entirely. Also open outcry trading ran hand-in-hand with computerised trading many years before being superseded. On the other hand, some changes that were viewed as revolutionary were quickly dispensed with like the fax machine, which became redundant as cheap computing and the Internet took over. The fax machine did last long enough for me throw one at a runner only to open my briefcase later at my first senior board meeting to discover that one of my colleagues had filled my case with its broken parts. Some innovations such as slicing and dicing subprime loans have been disastrous and nothing short of criminal, while ‘The Euro’ was manufactured and propagated by politicians which says all you need to know about that project. Now we have crypto-currencies like Bitcoin and Ether, which don’t look like they are going away anytime soon. The total market value of bitcoin reached $100 billion in June, amid stories of an anonymous trader who made more than $200 million profit in a month trading the virtual currency. I had treated this concept with utter contempt when I first became aware of Bitcoin in 2009. Now eight years later, they are becoming increasingly relevant and — not that this is a necessary seal of approval — they can be traded, with the CME publishing reference rates for them. Bitcoin is the brainchild of Satoshi Nakamoto whose true identity remains unknown, and has been the subject of much speculation. It is not known whether the name “Satoshi Nakamoto” is real or a pseudonym, or indeed whether the name represents one person or a group of people. Bitcoin was invented to be a decentralized digital currency not tied to any government or central bank and first appeared in January 2009 at a time when central banks around the world were starting to under-take quantative easing and cranking up the printing presses. Bitcoins are produced roughly every 10 minutes as reward tokens for completion of a block-chain block (mined in Bitcoin parlance) and have a finite issue of 21million. On current speed of “mining” this total will be reached by 2040. Payments using Bitcoin can be done instantly anywhere across the globe using peer-to-peer technology and at a nominal cost. Tasks, like tracking of the transactions and issuing new money, are managed collectively by the network, making it safe and anonymous to an extent. However this has had some appeal to criminals on the dark internet which is concerning. Also worrying is that there has been a rapid increase in the value of bitcoin versus the Dollar to over $2,000 currently from $280 in 2014. Entrepreneurs have been quick to see the success of Bitcoin. There are now about 30 crypto-currencies floating around the internet – some of which have been invented to solve specific problems such as Potcoin which does what the label on the tin infers it will do. It handles payments in the legalised Cannabis sphere. These payments have been a problem for some time as in most US states, Cannabis is now legal but it is still illegal to bank the transactional profits from the $100bln a year legal market, hence creating a problem. Crypto-currencies are different and potentially fill a gap in the market for a method of trade for a new business mindset. In doing so, this keeps central bankers and governments scratching their heads and lessens their reins of power. It is unlikely that all the cryptocurrencies in circulation will survive or whether the survivor has even been invented yet. With a generation of traders brought up on the internet who are now questioning old fashioned methodologies and new fund raising processes such as Initial Coin Offerings are being accepted it does appear that some radical ideas on currency are prescient. For no other reason than they challenge the established order these innovations should be welcome. However a cautionary note should be sounded when crypto-currencies are seen as trading tools. Unlike traditional FX pairs, there are no underlying economics to support trading decisions: No GDP revisions, no CPI rates and no central bank minutes. So one is in effect punting purely on supply and demand and as such please be warned.
Financial Clearing faces a muddy future.
Prior to the formal Brexit negotiations starting on June 19th there has been a fair amount of sabre rattling from both sides of the channel. Alongside key issues such as the rights of migrants both European and British, ‘divorce payments’ and trade deals some opportunistic and ill-informed overtures to grab Euro clearing from London have been made.
Clearing is the name given to the process of validating the availability of funds to complete a transaction and the subsequent recording of the transfer of assets. The clearing houses in London, predominantly the LCH, handle trade clearing for most instruments from freight, interest rate swaps through to commodities and gold. London handles about 70% of global Euro trading which equates to nearly €1 Trillion daily and for each trade cleared there is charge. To put a catch all term on clearing houses they are huge repositories of risk. This is obviously a lucrative business which European centers have long had jealous eyes on. Europe’s financial leaders have consistently argued that clearing in Euros should be centered within the mainland of Europe. Apart from jingoistic reasons the clear financial thought process is that trading will inevitably follow the clearing and in the end lead to the demise of London as the European financial center.
London has been at the forefront of financial trading and innovation since the early 1800s and has a pool of resources deeper than any other center in Europe. Alongside the clearing of Euro instruments London also clears 18 major currencies and the overlap with clearing of commodities ensures that there is always liquidity. The advantages of having one major clearing house centered in London also allows trading houses to benefit from multi-currency netting efficiencies. The benefits are felt worldwide as Singapore based Spencer Campbell, MD of Kaloti Precious Metals, says “Fragmentation of credit across the bank facilities will disrupt the overall flow of commodities across boarders”.
The Euro although issued in Euro and seemingly controlled by the Germans is in fact now a widely traded instrument. This becomes a source of irritation to European politicians as they can only exert limited control over the trading of Euro but none over derivative trading in the Euro. Similar to watching the puppy you have house trained refuse to come back when you take him for his first long walk. The European Central Bank first tried to relocate clearing in 2011 when it tried to insist that all euro trades were done within the Eurozone; however this was ruled illegal when the City argued successfully that to force to relocation inside the Eurozone breached EU treaty free-movement requirements. Valdis Dombrovskis, vice-president responsible for financial stability, financial services and capital markets in Europe recently said: ‘The continued safety and stability of our financial system remains a key priority. As we face the departure of the largest EU financial center, we need to make certain adjustments to our rules to ensure that our efforts remain on track.” In effect Europe is once again trying to enforce the necessity of clearing houses being located in mainland Europe and he also issued a thinly veiled threat that some clearing houses “may be of such systemic importance” that the new regulatory requirements will not be able to safeguard the EU financial system alone, forcing some businesses to move operations within EU borders.
In response the London Stock Exchange group, majority shareholder in the LCH, made clear its feelings when it told me. “Regulatory cooperation, which the UK currently enjoys with the US, supports financial stability across the entire market, as well as providing very substantial economic efficiencies for customers, and hence for the real economy as well.” And continued “A location policy does the opposite, it increases, not decreases, risk and costs for customers. Given these facts, European and global customers have overwhelmingly expressed a clear preference for shared regulation between the EU, the UK and the US.”
Michael Spencer, the leading broker for a generation, is even more succinct in his view.” Sadly my opinion is that what the Europeans are discussing doing is a really sad and, if I might say, ill-informed piece of economic nationalism that is deeply against efficient and free markets,” and added. “We clear dollars successfully in London; we clear yen – nobody’s phoned London from Tokyo saying we must insist that your yen clearing in derivatives is moved back to Tokyo or Australia or New Zealand or Hong Kong or Singapore or Hungary.”
The general consensus is that less than 10% of trading takes place in European financial centers and as such the increased costs of trading, caused by the lack of netting facilities, would increase by as much as 20%.Thats 20% of bank capital which would be diverted away from other projects at a time when Europe is crying out for funding.
David Buik, Panmure Gordon’s revered commentator, reflected how most traders and brokers in London feel when he told me that it would be “Madness for EU to break up current clearing arrangements – the largest and safest insurance company in the world – for the sake of infantile retribution! The only gainer will be the UNITED STATES! Think again!”
As the British government attempts to negotiate the best terms for an orderly departure it feels like the discussion will drag on infinitum however what may spur on an adverse decision for the UK is the election of a staunchly left wing Socialist government led by Jeremy Corbyn. Having repeatedly attacked businesses, bankers and derivative trading how ironic would it be for Macron and Merkel to see a socialist government come to Europe’s aid by driving financial trading from London and as a consequence clearing would be less likely to stay. This would be a tragedy for London and a pyrrhic victory for Europe.
Theresa May looks poised to carry Mrs Thatcher’s mantle forward.
On June 10th 1983 markets awoke to a triumphant Margaret Thatcher celebrating a landslide General Election victory. Thirty Four years later, almost to the day, Theresa May will most likely be returning to Downing Street as Prime Minister. The parallels between the 1983 and 2017 Election are striking not least the opportunistic calling of the election by Conservative leaders, one who saw, and now one who sees an opening to strengthen their grip on authority and power. As in 1983 it appears, as the polls and council results indicate, there will be another victory for the Conservatives. The Labour party, led by a hard left socialist, again fights a series of internal battles as they did in the early 80s and look to be having a tough time convincing the electorate.
The markets reacted in 1983 by delivering the second largest stock market return in an election year, of over 20%. Cable rallied strongly up to 1.5830 on the day of the election only to fall steadily for the rest of the year. Disregarding the market’s reaction 1983 was notable for one other reason. That was the year that reforms to the way that the City of London transacted its business were started. These eventually led to Big Bang, in 1987, and the subsequent establishment of London as a major financial centre. In 2017 it’s more likely that we will see a battle for the City to maintain its pre-eminence as the European financial hub, not only for trading but for clearing as well, as European centres try to lure business away.
Thatcher gambled that victory in the Falklands war would secure her election and she duly won her mandate, increasing the Conservative majority by 40 seats. The 4% swing to the Conservative party gave Mrs Thatcher the most decisive victory since that of Labour in 1945 and allowed her to rule and introduce radical reforms which changed the UK for ever. The recent Local Council elections (May 4th 2017) were indicating a 7% swing to the Tories which inferred about a 55 to 60 seat majority. It is often argued that local elections are no guide to a general election as people vote on local issues. However it is worth noting that in 1983 and 1987, the last Tory landslides, the Conservatives underperformed their eventual general election share of the vote. UKIP and the Liberals also look to have serious problems, which again appears to play into the Conservative’s hands.
When Mrs May called the election she was riding a 20% lead in the polls even allowing for the normal narrowing of polls when a leader calls an unexpected election the closing of the gap in the last two weeks must be alarming to the Conservatives. A badly thought through manifesto, which forced her into an unprecedented U turn on social care, has certainly damaged her position and her unease in front of the cameras has made voters question how ‘strong and stable’ she really is. In contrast Corbyn, having received some excellent media training, has appeared comfortable on television and comes across as a friendly Geography teacher.
Labours problems are two fold and despite a ‘free gifts for all‘ manifesto ultimately may make them unelectable in the eyes of the British public. They are dogged by questions about the past terrorist associations of Corbyn, McDonnell (the shadow Chancellor), and Abbott (the shadow Home secretary). The media are relentless in their attacks, rightly so, about Corbyn meeting with the gunmen of the IRA and Hamas. However much your spirit is full of forgiveness laying a wreath at the grave of one of the Palestinian gunmen involved in the Munich games attack (1972) is unforgivable. His second problem is his unswerving loyalty to his old lover Diane Abbott.
Television and social media are now, sadly, much more important in deciding voting intentions than newspapers. Unfortunately Diane Abbott appears incapable of appearing without making a fool of herself and more often than not her interviews have become comedy clips on Twitter and Facebook. However amusing it is for a senior politician to claim that her views changed on terrorism and hatred of the British way of life when she ceased having an Afro hair style, people realise that she could be Home Secretary in less than two weeks.
The polls, taken pre the Manchester terrorist attack had narrowed into as tight as Labour being only 6% behind the Conservatives .It is expected that the polls will widen out this week after an ill thought out speech by Corbyn blaming foreign policy for terrorism and a disastrous TV interview Abbott gave over the last weekend . By blaming foreign policy Corbyn has reignited the ‘terrorist apologist argument ‘and played into the hands of his detractors.
In 1983 the UK was the fifth largest oil producer in the world and prices were watched closely, the stronger the oil price the stronger Sterling became and the stock market followed suit. As the UK is no longer an important producer of oil the major focus of the markets will be on Brexit. With the leaked ‘divorce settlement’ figure of €100m we are undoubtedly heading for a hard Brexit and Mrs May’s stance will rightly harden. It is now nigh on impossible to see how a figure, agreeable to the UK, will be achieved and this will overhang the markets. It is also hard to imagine, at this time, a post-election bounce as the stock markets have sure fully discounted a victory and remain primarily a cable play as around 75% of the FTSE companies are dollar orientated.
A Labour party victory, whilst long odds, should not be totally discounted. Labour have aggressively sought the youth vote and offered a promise of free University education for all prospective undergraduates this year and this may have an impact on the polls. As the maxim goes you vote Socialist with your heart when you are young and Conservative with your head when you are older. Indeed the voting intentions show a marked change at 45. If the Socialists were to win Sterling could reasonably be expected to drop in the region of 10% from today’s value and the stock market , despite the earnings boost from lower cable could well drop 15%.With this scenario and following the shocks of Brexit and Trump perhaps the clever investor is looking at deeply out of the money puts ? The country has a clear choice whether to vote for a return to the 1970s and 1980s or to move forward.
The Britain of the early 1980s would hardly be recognisable to many today, a country riven by strikes and social unrest. Distinct differences abound, for example in 1983 higher oil prices were a positive whereas we now look for lower prices, the Euro was only a dream which became a nightmare, and the Conservatives campaigned for closer ties to Europe. What hasn’t changed is that strong leadership was needed by the country and the markets then, as it is now. Time will tell if Mrs May is fit to be seen as the heir to Mrs Thatcher .The markets loved Thatcher and her reforms and I have a sneaking suspicion that despite some bumpy times given the opportunity they will learn to love Theresa May.
Richard Matthews, who began in career in 1973, is a former trader-broker in the London money, futures and foreign exchange markets. Twitter @dickiematthews5
This column is the opinion of the author and does not necessarily reflect the opinion of Live Squawk.
The lady and the Tramp.
Has Mrs May sown the seeds for her party’s future downfall by calling an election?
The open outcry futures markets in London were in their infancy when the then Prime Minister Margaret Thatcher called for an Election to take place June 9th 1983. To many people the City was a total mystery, however the film ‘Trading Places’ had caught the public’s imagination and suddenly it was relatively easy to explain your job to friends as they had seen a portrayal of it on the big screen where Eddie Murphy and Dan Aykrod exchanged their lives . On further reflection it was a pain and if I had a pound for every person who said “Looking good Billy Ray“ thinking that they could speak the language of traders I would be a very rich man! Now open outcry markets, sadly in my opinion, have gone however there are some interesting parallels between 1983 and 2017, as well as some amusing differences.
Margaret Thatcher is revered as a great leader by many and equally still loathed by many, but if we look back at her approval ratings ‘at the peak of her popularity (in June 1982, after the recapture of the Falklands), 59% were satisfied with her performance, while her rating fell as low as 20% satisfied (in March 1990).’ Source Ipsos Mori. She was though, a canny politician and seized her one chance to go to the country whilst still bathing in the public’s approval of her government’s victory in The Falklands war despite the 907 deaths that had occurred. Theresa May is enjoying similar popularity approvals which were recently running at a record 61% whilst her opposite number Jeremy Corbyn languishes at 23%.
The contrast between Thatcher and Michael Foot, the then leader of the labour opposition, also mirrors todays contest. A committed socialist and a man possessed with a strong intellect he made two fatal mistakes as leader to compound his biggest mistake of accepting the leadership. Firstly he appeared at the UK’s annual Remembrance parade in 1981 in a scruffy jacket , now I am no fashion correspondent but the contrast with the older be medalled politicians standing behind him could not be stronger and the Conservative press enjoyed a field day at his expense and the image became planted in the public’s imagination and still is. Coupled with a manifesto which a Labour colleague, Gerard Kaufman, described as ’the longest suicide note in history’ Michael Foot was in many ways in a similar position to that which Jeremy Corbyn finds himself in now with an amazingly similar approval rating of 24%.
Despite the contrasting styles of the two leaders being echoed today the policies on that ever present irritant Europe could not be more different. Margaret Thatcher, as so many of her war affected generation, was in strongly pro-European and was standing on this ticket whilst Labour was looking to withdraw completely. The Labour party was also looking, as is its tradition, for renationalisation of many industiries, higher taxes as well as the abolition of the House of Lords. These staunchly socialist policies led to a break away party, The Social Democratic Party where several prominent figures in the Labour party, known as the gang of four, broke away to form a political alliance with the Liberals. This scenario is not beyond the realms of possibility; indeed it is quite likely that we see another break away party after this election.
Mrs Thatcher duly won her mandate and increased the conservative majority by 40 seats whilst the labour party just about polled the second largest number of votes. Despite polling just under 600,000 votes less than the labour party, The SDP only managed 23 seats and as a result never really got the foothold in the country that many thought they deserved. The 4% swing to the conservative party gave Mrs Thatcher the most decisive victory since that of Labour in 1945 and allowed her to rule and introduce radical reforms which changed the UK for ever.
The parallels and contrasts between the 1983 and 2017 Election are striking not least the opportunistic calling of the election by leaders, one who saw and now one who sees an opening to strengthen their grip on authority and power. As in 1983 it appears, if the polls are to be believed that there will be another crushing victory for the Conservatives as the Labour party fights a series of internal battles whilst led by a hard left leader. However there is hope for the Labour Party and it comes from History. As another famous British Prime Minister, Pitt the Elder, said in 1770 “Unlimited power is apt to corrupt the minds of those who possess it” or to put it in traders language the higher you are up the tree the more you show of your arse. This was the case in 1983. Two future Labour Prime Ministers, Tony Blair and Gordon Brown, were both part of the new intake in 1983 as was a fresh faced Jeremy Corbyn. Margaret Thatcher ruled for another seven years with decreasing authority and was finally deposed by an internal coup in 1990. With the minefield of Brexit to negotiate and a Conservative party never at ease with itself over Europe it is not beyond the realms of possibility that Mrs May , as did Mrs Thatcher , has sown the seeds of her own downfall.
“No reason to get excited, ”
The thief – he kindly spoke,
“There are many here among us
Who feel that life is but a joke
But you and I we’ve been through that
And this is not our fate
So let us not talk falsely now
The hour’s getting late.”
Trop c’est trop ?
Whether it’s toothache, a trading position or politics there comes a point when enough is enough and action has to be taken, and so you go to the dentist, cut your position or vote for a drastic alternative. The degree of pain that a country can take is the sum of its population’s tolerance and when this reaches breaking point profoundly different politicians offering palliative solutions are elected.
By the late 1970’s Britain was a country showing serious signs of decay and social unrest and perceived by many as being run by all powerful trade unions. The winter of 1978/1979, remembered as the ‘winter of discontent’, due to the number of strikes, was the final straw PM Jim Callaghan’s government. The Government lost a vote of no confidence and was forced into an election which it failed to win. The country had had enough and felt the need to turn to the hard right policies of Margaret Thatcher.
The 1997 election of New Labour centrist Tony Blair was as much a reaction to the harsh years of Margaret Thatcher’s reform as it was to the sleaze and scandal of John Major’s administration. By the mid-1990s every single banana skin that a government could attract littered Downing Street and Conservative MPs and Ministers duly obliged by consistently slipping up. During the later years of that administration Tony Blair slowly moved the Labour party towards the right and in doing so gathered much of the centre ground and having done so won a landslide majority. The appeal of something completely different to a disaffected and desperate country was neatly summed up by Blair himself after that election when he pompously said ‘A new dawn has broken, has it not?’
Is France ready to leap forward and chose a really radical candidate for their next President? For centuries before the revolution in 1793, it appears that political leaders in France were chosen on the basis of who had the curliest hair in many ways this was as good as any method! Since the revolution, more particularly since the last war the French establishment has maintained political control. This has led to a moribund country and rise of the present two candidates for the presidency both presented as “outsiders”. Despite Macron presenting himself as the radical candidate he is a fully paid up member of the Kleptocracy and for France to embrace real change they will need to plump for Marine Le Pen
Is France sleepwalking towards ending Schuman’s dream ?
To my generation and the generation of my parent’s and grandparent’s the formation of European Union, or a common market for coal , steel and other goods was seen as a powerful tool to stop the fighting that had decimated Europe in the preceding 50 years. To put this into context Europe lay in ruins and only Marshall aid from the USA stopped it descending into further chaos. The older generations at the end of the Second World war surveyed not only countries laid to waste but also population’s .High amongst the suffering were France.
At the end of the First World War France had suffered over 2million boys and men killed with nearly 4million injured, 1.5 million of those permanently maimed. That translates into 60% of the male population between the ages of 18-28 that had been killed and 73% of all men mobilized. Just pause for a moment and reflect on these huge numbers and the impact this had on the nation, walk down as street and count 10 men and then take 6 away and see the gap that leaves or look at the stand at a football match and mentally empty it by over half .Tragic is the only word . France didn’t suffer so much in the Second World War from deaths and casualties as in reality it couldn’t as there were precious few boys left to die but they did suffer the ignominy of a brutal occupation and still lost a further 600,000 mainly men.
At the end of the First World War France, alongside the other victorious nations, wanted to exact revenge from Germany and in doing so laid the seeds for the establishment of the Nazis and the Second World War by demanding punitive reparations . Thankfully after the Second World War we had learnt something from history and out of a broken nation came the forerunner of the European community, as we now know it , the ECSC. The European Coal and Steel community was first proposed by Robert Schuman (French Foreign Minister at the time) on May 9th 1950 and seen as a tool to bind Europe together by trade following the thought process that countries that are reliant on each other for trade tend not to fight each other as Schuman said at the time his aim was to “make war not only unthinkable but materially impossible”. After over 70 years of peaceful coexistence in Europe with closer ties than Schuman ever envisaged amongst more nations than he could ever have dreamt of it seems somewhat sadly ironic that France stands on the edge of an electoral decision that could have a profoundly damaging impact on the project.
It looks increasingly likely that the French election will be very close with all three candidates on pretty much level pegging in the polls. To an outsider Franҫois Fillon seems too tainted to succeed having paid his wife €1m for a non-existent job in the scandal known as Penelopegate . In French politics it seems acceptable to keep a mistress but paying your wife for being your wife is too much for the electorate and so it looks unlikely that either he or Hamon will make it through the first round. This leaves a centrist Macron, a left winger Mélonchon and a right winger Le Pen.If Macron , often perceived a Justin Trudeau light ,makes it through the first round he will beat whoever joins him in the second round vote which would be a nice easy outcome for the markets which would bumble on till the next European crisis , possibly in Greece or Italy as they are never far from imploding , and being cynical nothing much would change and as such it should lead to a strengthening of the Euro. And here lies the rub, is nothing changing good enough for the French Public ? Secondly if Hollande endorses Macron, his former economy minister will that reinforce the feeling of continuity of political thought process and be the kiss of death for him?
Suddenly it looks possible that Europe’s worst political nightmare is a possibility, a long shot but an increasing possibility. Fillon and Hamon out, the light weight Macron struggling under the endorsement of Hollande and then what do we have left? Mélonchon and Le Pen. There is never too much point in studying the small details of campaign promises but the headline policies are enough to send a severe shudder through the markets and put the Euro under strain. Le Pen has stated that “The French have been dispossessed of their patriotism. They are suffering in silence from not being allowed to love their country … The divide is no longer between the left and the right, but between the patriots and the globalists.” Le Pen’s manifesto p ledges to take France out of the Eurozone and – unless the EU agrees to revert to a loose coalition of nations with neither a single currency nor a border-free area – to hold a referendum on France’s EU membership.
Mélenchon looks like he is making a strong run in as we head for the first round vote next Sunday. He has been electrifying recently and has a ready wit as well as a fast mind as was shown by his strong showing in the TV debate. He has plans to not only tax the rich with a tax of 100% on incomes over €400,000, exchange controls but also crucially a referendum on whether France stays in the Euro and Europe unless Europe makes radical changes .Ouch .
History and numbers tend to have symmetry about them and wouldn’t it be Ironic that the new president will be decided by a run-off Vote on May 7th and if as it is starting to look more possible the run off is between Le Pen and Mélenchon it may well be that 67 years to the day that the dream started , May 9th 2017, that the first steps to unravel it are taken .We could be in for a very interesting ride indeed!
The French Election: Round Two of Europe’s Internal Leadership Battle
By Richard Matthews, London
Live Squawk News, 18 April 2017
The French elections are unlike any others and, with two of the parties under 18 months old, certainly full of new ideas and thoughts. The lines seem to be blurred between parties and it does seem plausible that the election will come down to the personalities of the leaders as much as the policies of the parties.
However is there now a very real possibility that the French electorate, emboldened by seeing how Britain is thriving, will turn their back on centrist politicians and their policies and chose the more radical options or after the terror attack in Paris will they plump safe with Fillon? In a week where an ultra-safe politician, Theresa May, has gambled on an unnecessary election will the French also gamble on the unknown?
Over the last couple of weeks Melenchon has made great advances in the opinion polls and pre the attack of last night looked like a good outside bet to make the final run off. However one gets the feeling that after the recent terrorist outrages in France, with the memories of Bataclan being awakened last night, he may have run his course and won’t make the last two .As a consequence of this, ironically, the votes of the Ultra Left may drift to the ultra-right and strengthen Marine’s chances .At first sight this seems bonkers but often if you compare the attractions of extreme left and right wing policies they appeal to the same people. This has been evident in the UK where traditional Labour voters have been seen to be more likely to vote UKIP than Conservative. Basically Blue collar workers share the same fears.
Looking back over the last twenty-odd years, candidates for the French presidency promised to make changes and get the French economy back and properly working again. Unfortunately, these promises have led to very few changes. The previous conservative President Sarkozy promised sweeping reforms when he became President in 2007, but little came of them, apart from a reform of the retirement age.
His unpopularity led to the victory of his Socialist opponent François Hollande. Hollande, whilst President, has achieved even less. He promised to cut France’s high unemployment rate, and to revitalise the economy. But if he has just about got the economy back into positive territory, he has failed dismally on the unemployment front, and the number of jobless in France today is far higher than it was when he took office and stays stubbornly around the 10% level. This has led to disenchantment amongst the youth and when combined with a seam of Radical Islamists the country appears uneasy with itself.
Hollande is now the most unpopular French president in nearly 75 years, his approval ratings hovering around the 4% mark. His Socialist party is now bitterly divided between the moderate reformers and the hard-line left, and by trying to please both wings of his party, Hollande has managed to achieve that rare thing of displeasing almost everyone.
Unlike the two party political systems that the UK and US enjoy, France has a selection of parties that seemingly cover every single voting wish of its population. Perhaps this accurately reflects the nation as much as having nearly 250 regional cheeses does. Recall President General Charles De Gaulle’s remark of: “How can you rule a country that has 246 varieties of Cheese. “ What appears at first simple in analysis of France’s party system is in reality far from it. Often right-wing policies are favoured by left-wing parties, and vice versa.
“Les Républicains”, the Republicans, are the main Conservative or centre-right political party and are led by Francois Fillon. They are the closet heirs to the politics of the legendry French leader De Gaulle. Sarkozy engineered the name change in 2015 to draw distance from predecessor party Union for a Popular Movement (UMP), founded in 2002 by ex-president Jacques Chirac .They have been in turmoil since the 2012 election defeat and the scandal of Penelopegate may have fatally wounded Fillon.
Marine Le Pen’s National Front party was formed by her father, Jean-Marie Le Pen, in 1972. Historically of the extreme far right — virtually Nazi apologists — it has tried hard to become more mainstream since her father resigned in 2011. Despite persistent attempts to moderate its image, including the expulsion of former key members including Le Pen senior, the shadow of the previous leader still seems to hang over it.
France Insoumise! (France Unsubmissive) was newly founded, only a year or so ago, by Jean-Luc Mélenchon. It’s a hard-left party with green overtones, and a charismatic leader who at times appears to overcomplicate its polices. He is committed to high tax levels and changing fundamentally France’s relationship with Europe.
BenoÎt Hamon’s Socialist Party is a more traditional socialist party tracing trace back to the 1880s and the fallout from the Paris commune and over the years has seen Francois Mitterrand and Hollande elected as presidents, but now seems a bit dated and could disappear completely after this election.
En Marche! Is the centrist independent party fighting its first election? Economically liberal, but left-wing on social issues, En Marche! was founded in 2016 by the charismatic Emmanuel Macron. The party appears to be seeking to cross-traditional political boundaries to become a trans-partisan organisation — in other words a mix of left and right wing politics.
The establishment money has been talking a safe no change in the status quo election. They would wouldn’t they? They may well turn out to be correct with the “Justin Trudeau Light “politician Macron being their choice. Regardless of this after the seismic political events of the last two years it would be foolhardy to discount another political earthquake. If Le Pen , which most commentators are forecasting , makes the last two do not rule out her chances of winning . In terms of markets my sentiment is to be short the Euro and European Bourses (including London) and long of Gold, Dollars and Sterling. It is hard to ignore the fact that there have been large flights of capital from France in recent days and as they say, money talks.
Richard Matthews, who began in career in 1973, is a former trader-broker in the London money, futures and foreign exchange markets. Twitter @dickiematthews5
This column is the opinion of the author and does not necessarily reflect the opinion of Live Squawk.
The French Election: Round Two of Europe’s Internal Leadership Battle
By Richard Matthews, London
Live Squawk News, 17 April 2017
After the relative calm election result from The Netherlands, the French presidential election — beset by political scandals and discontent over the state of its economy and the EU’s perceived role in it — will be the next major test of the European populist movement followed by German elections on 24th September. This presupposes that there won’t be Italian elections, which many would say is foolish considering Italy has had over 60 Governments since 1945. Regardless, the French elections are a key test of the European Project, given France was one of it founding members. Its outcome could make for interesting trading for both Euro and Sterling, and could affect European bourses, not to mention Brexit negotiations.
Marine Le Pen appears good to get to the second round, but looks like the outsider to win. However, after the surprises of Trump and Brexit, it would be foolhardy to discount such an outcome yet one senses the markets have done just that. Despite toning down her views, she is still committed to holding a referendum on France’s membership to the single currency. This uncertainty would weaken the Euro and stock indices, including London’s, while lifting sterling.
On Sunday 23rd April, French citizens from Paris to Basse-Terre in Guadeloupe will go to the polls for round one. Unless one of the candidates has polls in excess of 50%, exceedingly unlikely, the two candidates who have the largest number of votes will head for the final showdown two weeks later on 7th May.
The final showdown may be between two candidates whose parties are not only polar opposites, but have never held power: Le Pen of the far-right, anti-EU National Front, and Emmanuel Macron and his pro-EU movement party, En Marche! If this is the case , with Macron the likely winner , the Euro will strengthen against Sterling as the French commitment to the European project would remain unswerving. However with the polls so close it would be a brave person to rule out a Mélenchon , Le Pen run off in the second round . If this were to happen the Euro would come under intense pressure as both candidates are committed to referendums on France’s membership of the Euro and the terms of its European membership. The markets look jittery with large outflows of Euros to neighbouring countries in recent days so is the smart money seeing this as a real outcome ? It appears so.
French voters elect presidents every five years, and this year the incumbent Francois Hollande, the most unpopular President in living memory, is the first President who will not be standing for re-election. Under French law he could stand for another term, but he has appeared, and in reality has been, a sad shadow of the man who narrowly defeated Nicolas Sarkozy in in 2012. Each candidate for the presidency must have obtained at least 500 sponsoring signatures of elected officials from at least 30 departments or overseas territories.
In both rounds, polling booths are open around the country from 8:00 AM to 6:00 PM. Most French overseas departments and territories get to vote a day early, along with expatriates living in the Americas. This ruling was introduced several years back after it appeared that voters in time zones behind Europe showed a reluctance to cast votes once they knew the probable results.
Unlike many other democracies, France doesn’t allow any publication of results or estimates of polling from the day prior until the booths are closed in the cities. First-round campaigning must end by midnight the Friday before the election. Given most polls have been so inaccurate, this might be a blessing.
Once the new President is sworn in, 10 days after the second vote on 17th May, he, or she, will announce their team. A month later are two rounds of legislative or parliamentary elections to choose deputies for the National Assembly. The new President will then see how easy he or she will be able to govern and enact their promises.
France’s election is one of the most difficult to call for many years. Its campaign has seen support for its two traditional ruling parties, the Republicans and Socialists, drop. Yet, France is a conservative country, with many fundamental economic and social problems. This year may be the year the people seeks radical solutions, even if Le Pen doesn’t win. Far-left candidate Jean-Luc Melenchon, also anti-EU, has seen a rise in polls that suggest support for the status quo is further weakening in the final days of the campaign.
Richard Matthews, who began in career in 1973, is a former trader-broker in the London money, futures and foreign exchange markets. Twitter @dickiematthews5
This column is the opinion of the author and does not necessarily reflect the opinion of Live Squawk.
I read the news today, oh boy
About a lucky man who made the grade
And though the news was rather sad
Well, I just had to laugh
A day in the Liffe – a broker’s memories
Over the last weekend I watched a good, not great but good Gangster movie called Sexy Beast which features Ben Kingsley playing a foul mouthed London criminal called Don Logan . Don Logan has difficulty uttering a sentence without swearing often using multiple repetitions of words in dialogue such as “Not this time, Gal. Not this time. Not this fucking time. No. No no no no no no no no no! No! No no no no no no no no no no no no no! No! Not this fucking time! No fucking way! No fucking way, no fucking way, no fucking way! You’ve made me look a right cunt!”. Oddly enough this dialogue transported me back to my days on the Financial Futures floor as a broker and in particular one client on one day .
The day in particular was the day that Britain was ushered out of the ERM in disgrace and the client in question was the Euro Dollar Dealer at a British Clearing Bank . Peter , known to all and sundry as Nosher ,was a huge trader and afraid of no one and no institution in London , Chicago or Tokyo . .At the time the London clearing Banks were just starting to realise that their ability to dominate the London markets had come to end with the growing influence of the large American trading houses such as Salomans , Goldmans, Lehman . Nosher didn’t care and would get on the phone and scream a torrent of abuse at whoever had the misfortune to answer the phone, normally me , and growl a buy or sell order out . Somewhere I have an old cassette of him screaming a string of abuse at me . It may seem odd that I have kept this old recording for 25 odd years but it always reminds of what a day on the floor encompassed.
I would normally wake at 5.30 in the morning, amazingly I often still do , to catch up on the news . In 1992 it was a different world as there were no 24 hour news channels and so I would rely on the fax that our office in New York, with the closing rates, had sent over and listen to a BBC news programme called “Dawn Traders”. This would be followed by a call to the Tokyo office of the Prebon Yamane where a friend would give me a feel for the market. After digesting this and 3 cups of black coffee with the dog walked I would answer the knock on the door where the driver would be with my partner Bunker and off we would go. Now I should just explain the driver. At the time the Government were running a scheme called YTS (youth training scheme) to get kids off the dole queue and into work. My partner Bunker and I decided to employ one whose main job was to drive us into work and then take the car back and collect us at the end of the day. This served two purposes it got us to work and more importantly avoided mini cabs and for me the embarrassment of the banter with the driver when occasionally my partner would claim “ I’ve got suits in my wardrobe worth more than this car mate “.
Having arrived on the trading floor at about 7.30, after a delicious Bacon Bagel from Birleys next to the exchange , we would check our position for out-trades and errors and start working out where the market would open . How were the opening prices calculated back then? We would call the FRA (Forward Rate Agreement on interest rates ) and Swap desks of a money broker who would give us a run-down of the prices that they were trading and we would then calculate where the markets would open taking into account whether the yield curve had changed and if so whether the spreads between months would have widened or tightened . Having done this we would hit the phones to our clients and tell them our views and try and pick their brains on how they saw the market opening. Our clients ranged from our overseas offices, to banks and finally locals (an independent trader) and other floor companies who may wish to disguise their orders by using us . After 25 years I can still see the dealing board and remember the codes for our clients. For example button 4 was Kop ….who was Kop? Kop was a Hedge Fund in Bermuda whose dealer was Jerry Peele and as any upstanding Brit knows the first police were formed by Robert Peele and known as Peelers but this of course may draw attention to who we had on the other end of the phone so we were amazingly inventive and change this to Kop which of course is modern slang for police!
By the time the first pits opened at 8.20 we had all our buy and sell orders ready and our pit trader knew them. Danny, (Danny The Rot, so called because at 18 he was as aggressive as a Rottweiler), was ready with his cards and the junior trader behind him was using his hands to communicate the pre-market orders . In the booth 3 of us were on two phones each to our biggest clients whilst a junior also had two phones one to our overseas offices and one to Prebons, the money broker. At the time a voice commentary was quicker than the screens and also could add in colour such as the size of the order and who was buying. I must say it was one of the most awful jobs going as the money brokers would be dealing off the prices and if he or she gave a wrong quote the would have a telephone launched at them . It sounds awful behaviour and it was but I still see my old yellow jacket (Junior traders and Runners had to wear a yellow jacket ), David , at Football matches and he holds no grudges. Well apart from the motorbike story which I may well expand on in the next column!
The market erupts as the bell goes into a cacophony of noise, numbers and colour with what seems likes bodies flying around as traders are physically pulled from the pit, hand signals flashed in and fills shouted back. As each fill or part fill is given as few words as possible were screamed down the clients squawk box often using cockney slang. The client would just hear something like “monkey at 48 done “which translated to “You’ve sold 500 lots at 8548”. Or possibly a part fill “Ayrton done working 90 “ meaning you’ve done 10 lots ( Ayrton short for Ayrton Senna meaning Tenner ) and I am still trying on the other 90 .
All day long this seemingly chaotic madness would go on and I can only liken it to music such as when the Beatles were at the most experimental or the primal noise and aggression of The Who, not being a great classical expert perhaps Shostakovich mirrors it as well. Whilst the noise was like The Who the colour was like Kandinsky at his wildest – just a blur of jackets with each colour representing a company and a role on the floor. Buying and Selling often multiple times for the same client within minutes as the news or rumours of news changed the feel of the market until at last the closing bells start chiming from 4.00 . No lunch breaks, no coffee breaks anything but standing shouting, gesturing and screaming for 8 and a bit hours. By the close of business you were too tired to eat and just want to make sure that all your trades match up and either get home or get to the Jam Pot for a few pints. At this point I must come back to why I still have a cassette after all the years.
It is not that I hold Nosher’s verbal garbage in particular high regard; although he could be a very funny man out of the market over dinner it is because it reminds me of what it took to be a floor broker. At the end of the day with Britain’s withdrawal still up in the air we were reading back to the clients what they had bought and sold to make sure that there had been no errors and no unwanted positions . All the phone calls were taped so that any dispute could be settled by the evidence that tape revealed. This particular tape had maybe 30 uses of a particular F word and a dozen or so where various people are described as useless C***s including myself , Norman Lamont and John Major and probably my father for fathering me! During this string of expletives there is an order of “ Buy 50 at 48 “ and a couple of seconds later the response “filled” from me . Peter thought he had bought 50 lots when in fact I had heard only 50 at 48 which meant sell in our terminology. (We were very strict and a client had to say paid for and sold at).Having listened to the tape I was wheeled down to see the chief dealer to explain the error who, thank god, accepted that we were right and that the order had been given incorrectly. That was about £60,000 pounds saved.
By 9.00 we were still sorting and matching orders but it seemed clear that we had had a record day in terms of volumes traded and had only a few errors .Bunker and I got into the car and went home hardly able to speak just ready for a TV dinner and bed with prayers that our punt came good .
If you want to know ’bout the bishop and the actress
If you want to know how to be a star
If you want to know ’bout the stains on the mattress
You can read it in the Sunday papers
It occurred to me that many of you , my dear readers , will have no idea of how news was gathered and disseminated in previous eras and as information played such an important role in the day that I last described I would like to share a few more memories revolving around its gathering , use and importance .
News has been the lifeblood of the financial markets since time immemorial. Despite appearances my experiences only go back to the mid-1970s. Even in that, to me, short period of time the way news has been gathered, presented and disseminated has radically changed. Late last year I attended the funeral of my first City boss. William Romney Cooper Dyson. Even the name now seems reminiscent of a bygone era. After the funeral I was sharing a glass or two with some old colleagues from what seemed another life. I will not embarrass myself with describing some of their memories of the shy and callow youth that I was, but I will share a memory of one of William (Bill) Dyson’s great pontifications –which I will always remember him saying , as he looked at a newly installed monitor ‘This is the day the market died’.
What was Bill referring to? None other than the introduction of the first Reuters screens displaying prices from other brokers and banks .This innovation occurred in the mid 1970’s and up to that point Reuters had been purely a news service and the pricing of financial instruments from overnight funds through to bonds and gilts had been the preserve of each individual broker . To clarify this, which may seem shocking these days, we kept a book in front of us and made the prices from the buying and selling orders that our colleagues gleaned. We were in fact blind and our equivalent to the now ubiquitous price screens was an old blackboard which the juniors kept up to date with price movements. I was one of these “board boys “and I can assure you it was amongst the worst jobs that I have had. When the market was slow you were the buck of all jokes as well as being the general errand boy. That was bad enough, but when the market was busy you were constantly chalking up changing prices and remember this was a “held “market. A held market was where the broker had to justify and deal on the price he made …or pay the difference between the prices quoted and those dealt at .I can still hear the shout of “ difference “ or “cheque book “ when things went wrong . The reason Bill was so anti the screens was the all of a sudden our knowledge was shared outside of the environs of the dealing room and the other market participants had price transparency .Knowledge was then, and still is, power.
News and pricing, as I have described, started to make quantum leaps forward with the innovation of small fast hand held computers and radically changed the financial markets. However some institutions were reluctant to change and even in the late eighties and early nineties The Bank of England relied heavily on the nods and whispers of the top hatted discount house brokers (The Discount Houses acted as the Bank of England’s money market intermediaries, until 1996, and their dealers wore Top Hats whilst out of the office on business). The days of the Minimum Lending Rate (precursor to Base rate, the UK’s headline interest rate) for the following week being displayed in a window in the bank of England every Thursday, having had curtains dramatically drawn back, lasted till the late seventies. In those days the city was awash with runners and messengers who would dash back from the bank of England to their offices with the news .Obviously those situated closest to the bank had the edge and it is no coincidence that all the Discount Houses and The Stock Exchange floor were located within about 100 yards of the Bank of England.
Gradually as the internet became more reliable and powerful computers shrank in cost and size not only the markets changed but also its participants. But let us stay back in time for a while and loiter in the late 1980s. The worldwide futures markets were in their ascendency and the colourful chaos was in full voice .Then, as now, there were two distinct types of news which I call the predicted, such as Non-Farm payrolls which the market geared itself up for and the random walk events such as a resignation or unexpected government change of policy. The atmosphere on the floor pre the release of an important economic figure was part fear, part humour and part excitement. All your buy and sell orders were ready in ascending and descending price order, hand signals agreed , throats cleared and sightlines readied and then , from nowhere the murmuring of the tune to “ The Twilight Zone “ would start to be heard until it seemed the whole floor was humming and then , suddenly an eruption of noise as the figures broke . I genuinely don’t think anyone ever got information on the markets really early but you would occasionally see the big houses buying or selling a split second early but was that because they had better latency ? I like to think so.
The random walk of a sudden and unexpected news event is harder to describe, partly as they always seem to happen whilst I was either having breakfast or, believe it or not, afternoon tea. The look on the poor runners face as they found me sipping a cup was often of sheer panic, tea mugs and sandwiches were left as we sprinted back to the trading pits where the action was .Hard to believe now but mobile phones were in their early stages, as well as being the size of bricks, so we relied on the juniors literally to run. As a floor broker the interpretation of the flow of orders and the implication of the event needed to be immediate .Only the briefest of overviews was possible and again the feelings of exhilaration and fear overwhelmed everything.
Now the markets are automated and pricing movements are analysed instantaneously. Floor traders are no more and the last vestige of voice brokers just about hang on in the money markets with the sale and merger of the last two to become TP ICAP and as some observers have said this was a smart way of Michael Spencer ( CEO of ICAP)avoiding the redundancy claims of his brokers. Despite all this innovation there is one truism that overrides. From the days of the Rothschilds knowing that Wellington had won the Battle of Waterloo a full two days before the rest of England to thinking that you have an edge because you have non-farm payrolls first remember one thing. Wait.
There is a wide spread assumption that the Rothschild’s greatly increased their fortune by acting on the key political news that Wellington had triumphed in 1815. They had got the news days before the rest of the world first they told King George III and then waited a full two days before they acted, and then a further 18 months before realising their 40% profit. So what relevance does an act over 200 years ago have? The lesson to remember is that even in these days of 24 hour rolling news, instant analysis and rapid execution always wait for the news to sink in and be wary of the revision of the revision of the headline number .Indeed I remember on the day Great Britain left the ERM a rumour hit the market the signal went into the pit for my trader, aptly named as Nuts (he was the mutts nuts not mad!), to buy everything. In the furore that followed Nuts had his glasses knocked off and being blind as a bat had to scrabble around on the floor to retrieve them and in doing so missed the market …by the time he was back bespectacled the rumour had been denied and our buy order had changed to a sell and as such his semi blindness had saved the client a fortune!
Just remember there is no such thing as fake news just fake reactions.
As we head inexorably for the day that all romantics hold dear to their hearts another event associated to that date, The St Valentine’s day massacre, has sprung to mind. The massacre in legend is when Al Capone brutally murdered 7 of Bugs Moran gang, but in my memory a date earlier in February started a financial massacre,February 4th 1994 . I can remember the unearthly, almost primal, scream that emanated from trading floors across the globe when the Federal Reserve unexpectedly moved rates upwards that day back then.
That rise was the first that the market had seen for nearly 6 years whilst the authorities had tried to waken the sleeping economy and housing market in America with artificially low rates. All of sudden the cheap financing of long dated bonds went and there was a mad dash for the exit. As always in a panic some didn’t make the door in time, great names such as Kidder Peabody and the hedge fund Askin failed to.
People argue that it can’t happen again and 1994 was prehistoric when traders relied on little green numbers on a screen and the sophistication of computers , derivatives and rocket scientists will these days save the world . Well, here’s a thing, none of these saved Lehman Bros or many of the other casualties of the last crash in 2008. Being prehistoric myself I almost felt safer in a world where complex derivatives structures were normally the basis bad Breakfast cereals not instruments constructed to bamboozle those seemingly less bright .
As a humble commentator it appears to me that the world is set for yet another severe shock to the system where we discover that the masters of the universe are really just Emperors with no clothes. Whatever your political views it seems clear that President Trump is embarking on a massive building and rebuilding project across America. I am not just referring to the proposed wall but the more important reconstruction of America’s heartlands where infrastructure has declined for many years. Whether you agree with the policy or not two things are certain there will be an inflationary push to not only wash but also raw materials .As night follows day inflation equals higher interest rates which must lead to higher bond yields.
As in 1994 this is not just a problem in America. Japan has its own problems but the disaster that is Europe as well as The UK’s withdrawal brings a whole new dimension of worry. Italian Bonds have been edging up in the last few months and are now back at levels that were last seen around July 2015 , at the height of the Greek debt crisis or should I say the nadir ? This time though things are slightly different as there is more political uncertainty in Italy than in 2015, with elections soon as well as the looming reawakening of Greece’s well documented troubles.
The United Kingdom also faces some difficult choices as imported inflation, mainly due to the drop in the Pound’s value, must push rates up. Having grown up in the markets when Interest rates would often be in double digits, to control inflation, I fail to understand how The Bank of England thinks that it will control inflation with interest rates at 1% or 1 1/4%. I think maybe 3% or 4% would be in order and although the markets are run, rightly so, by much cleverer and younger people than I it’s hard to find someone who disagrees with this logic.
It seems somehow fitting that I am writing this on a miserable February morning when, almost 23 years to the day of the first major shock. Of course one cannot predict or probably even dream of the event that in the future people will inexorably link with the upcoming massacre but I, and many of my peers, are convinced that we have seen the highs of Bonds for many years to come.
One memory sticks in my mind above all others about February 1994. I was sitting in a beautiful French fishing village called Honfleur, on the Sunday after the Fed rise, enjoying a winter’s evening. I out of the bluegot a call from a client in Bermuda to give me instructions for the next morning .He sold coldly and calmly “Just get me out, I don’t care about the price, just get me out “. They say history repeats itself; now guess where I am taking my wife on Valentine ’s Day this year?
Brexit, Black Wednesday and a Thursday letter to Norman Lamont – Part One
By Richard Matthews, London
Live Squawk News, 3 February 2016
While there’s much uncertainty about Britain’s exit from the European Union, it might help to recall that we have been in similar situations many times. In the City and trading, I’ve witnessed the last vote on Europe in 1973 when Harold Wilson was too canny a politician to lose. Then in 1979, when the UK joined the Exchange Rate Mechanism or ERM that aimed for a more stable monetary and exchange rate system and laid the groundwork for the single euro currency. Then, there was the UK’s unseemly exit from the ERM in 1992, which felt anything but stable that day – Black Wednesday.
When Sir Geoffrey Howe, at the time Chancellor of the Exchequer, refused to take Britain into the ERM in 1979, it was considered to be somewhat of a risk since the U.K still had a very weak economy. But the real damage came when the Chancellor, now Nigel Lawson, decided that instead the British pound sterling was to shadow the Deutsche Mark in a futile attempt to replicate Germany’s low inflation and employment. Eventually, John Major (later to be Prime Minister) replaced Lawson and took Britain into the ERM on 8 October 1990. Membership of the ERM guaranteed that the pound would not deviate more than 6% from its entry level of DM 2.95. Little did we realize at the time that this would set the country on course for the perfect currency market storm, which would quickly gather force over the coming months.
By the early 1990’s, the ERM itself was already under significant stresses due to the cost of German reunification after the Berlin Wall came down, while Britain, Italy and France brought their own particular problems to the party. Great Britain’s economy was being savaged by a weak US dollar, and our feelings of national prestige and fear of Europe started to rise over the summer months. Indeed, I remember the feeling of fear that pervaded the country as house prices tumbled and people were forced into negative equity. When Denmark voted against the Maastricht treaty that aimed at further European Integration, the markets started to smell blood as Europe suddenly looked weak.
It is widely claimed that George Soros was the man who broke the Bank of England, but throughout the summer 1992 large short positions of sterling, as well as French francs and Italian lira, were being built as well as significant shorts of the interest rate contracts. Actually, a lot of traders may have been quite happy for Soros to take the publicity, and become the scapegoat. In the afternoon of Tuesday, 15 September 1992, enormous sell orders were being seen across the futures market the size of which were previously unheard of. The phrase brokers loved to hear was: “your amount is my amount.” In other words, unlimited sell orders were being received.
When the market opened on the Wednesday, the 16th, it became obvious that there was only one buyer and that entity didn’t have the resources to take the heat out of the market. So the markets in sterling, including interest rates, were sold — and sold again — until the government started to panic. The Bank of England (BOE) first raised interest rates to 12% from 10%, and then at the close of the day hiked them to 15% in a last-ditch effort to save the pound. Neither the BOE nor the UK Treasury realised that buy orders of £300m were just a drop in the ocean in the brave new world of derivatives. By the close of business, having had the most thrilling day of our lives, my partner and I decided that interest rates of 15% were unsustainable and put on the largest trade we ever did: we bought short sterling. Don’t ask me how much.
At the end of that day, my first reactions were relief and fear — not fear that our trade would go wrong, but that we hadn’t correctly matched all our trades. With days of extreme market volatility and working on the floor where you were literally screaming to be heard, fear was always the overriding emotion. My business partner and I travelled home together in silence, exhausted. As he got out the car, we just looked at each other knowing the no one else would understand what we had gone through that day — or worse what we may now be facing due to an error.
By 7:00 o’clock that evening, the BOE announced that Britain would leave the ERM and cut interest rates to 12%. This was to be followed the next day with another cut back to 10%.
I can’t imagine that we’ll see another day when the currency remains trapped going down a one-way street, the wrong way, during our protracted exit from Europe over the next few years. We are free of the yoke of an exchange rate mechanism and it is hard to pinpoint a particular incident that could lead to a few months or days of concerted movement.
However, the risks remain and a small point that should be taken from the preceding paragraph’s history lesson is the power of the almighty dollar. Look at the movement of sterling against the dollar between 1981 and 1985 when its value effectively halved. Although we collectively blamed all our ills on the ERM, the influence of the dollar stayed strong. Why, one may ask, did this massive prolonged drop occur? Was it to do with UK interest rates below U.S. interest rates for a long period? There is strong evidence to suggest that this was the case, and I’m sure you are aware that is the case again, this time brought on by Brexit fears.
Maybe that was the day that Britain really started its exit from Europe, without an Article 50. Britain prospered and Europe lurched towards the Euro, while the UK could never quite commit to that.
My trading partner and I survived. There is an old maxim: “Don’t bet the farm.” Well, we did, and that day certainly gave me option money – a floor term for I-don’t-care money but said in language I can’t print here. One of my options was to write Chancellor Norman Lamont, thanking him for giving me the finances to buy the beautiful Red Dino Ferrari 246 that was about to appear in my drive. Vintage Ferrari? That was my first ‘options’ trade. There had to be some compensation for constantly being over-worked, still single and hoarse.
This column is the opinion of the author and does not necessarily reflect the opinion of Live Squawk.
Standing on the waters casting your bread
While the eyes of the idol with the iron head are glowing
Distant ships sailing into the mist
You were born with a snake in both of your fists while a hurricane was blowing
Freedom just around the corner for you
But with the truth so far off, what good will it do?
Jokerman dance to the nightingale tune
Bird fly high by the light of the moon
Oh, oh, oh, Jokerman
Live Squawk, London, 18 January 2017
Eight years ago on January 20th, I was lying in hospital waiting for a charming surgeon to repair some arthritic damage to my neck. Scalpels and sawbones were scheduled at lunchtime, but due to delays I ended up watching all of the Obamas’ hope-filled Inauguration and so the date of both events are firmly implanted in my brain, which is still very much attached to my neck.
President Obama was to oversee an extremely deep recession, verging on depression, and by pumping money into the economy managed to create an asset bubble the likes of which has probably never been seen before. One now feels the storm clouds are gathering and surely the fool’s gold of central bank QE policy will shortly go ‘pop’. Can Donald Trump be able to carry the economy forward, despite a pop, especially coming into office with social media and its unerring ability to spread hate, rumours and ‘fake news’ at lightening speed.
Conventional wisdom on the 45th president seems to be a mix of Ronald Reagan and Jimmy Carter when they both assumed office. Those with memories as long as mine remember the contempt held for James Earl “Jimmy” Carter Jr., as well as the fear that Ronald Reagan engendered with his Russian rhetoric. However, neither of them had Twitter accounts, and Trump has already shown strength, albeit an unorthodox manner, in his treatment of car manufacturers as well against the entrenched interests of the ‘Deep State’ that wants to renew the Cold War. Rather, Trump isn’t afraid to express a wish to build bridges with Russia and support a UK trade deal post-Brexit, yet shows toughness to China.
While the world’s elite and their wives attend the self-congratulatory love-fest at Davos, Trump did not send a delegate or representative to the World Economic Forum. There is a slight wringing of hands over this in Davos, and possibly for reason. Trump may just turn out to be the most important President in the Post War World. His authority and leadership could pave the way for other populist leaders, such as Marie Le Pen in France. With the world seemingly in a perilous state, one prays that the more unlikeable traits and impetuousness of Trump will be subdued and a stronger leader emerges. (( I didn’t fully understand: However prayers are really answered and one must fear that he is receiving an economic hospital pass reminiscent of Blair’s to Brown in 2007 and that the world’s economies and Europe’s in particular are in a rickety state.)))
Back to January 20, 2009, the hopes were for a reforming liberal president (and a ‘reformed’ neck). Gold then stood at $854.60 an ounce, the Dow Industrials were at 7949 and crude oil at $38.47 a barrel. Flash forwards eight years, and QE is in full bloom. The Dow is knocking on 20,000, also on optimism for jobs returning to the US. Gold though at $1,185.50 possibly reflects a slight fear factor, while oil above $50 a barrel is nudging back towards levels where fracking becomes profitable. It’s all sunny in the playground that is the market at the moment, quite different to expectations after the election in November.
My gut tells me to buckle in for a bumpy ride, with a possible ‘pop’ and yet more examples of markets not exactly moving according to expectations. But as we well know, uncertainty and unpredictability increase volatility and lead to market opportunities. Just be careful of trying to read Trump, or anyone else for that matter.