Well the past couple of weeks has brought many changes. We have seen the transition of leadership in the US finally go ahead, without too much drama, positive Vaccine progress in the UK and riots in Holland of all places.
Meanwhile, we are all still in a state of ‘lockdown’ which is extremely tedious and I know is having a devastating impact on different parts of our society.
I do feel that the mood is changing, however.
A recent communication from our local health board shows that cancer treatments and operations have resumed in Carmarthen and Haverfordwest is to follow imminently.
Numbers of positive CV19 tests are firmly falling across Wales and the UK in general. Reports of several new vaccines that will be made again in the UK, really boosts our chances of getting out of this quagmire.
I think we have all come to the acceptance that 2021 is going to be fairly restricted. However, we need to get our children back in school, our workers back in jobs and our retail economy running again.
It is fairly clear now that the collective intention is to get this done by the spring. The cost to the UK finances of the ongoing Furlough scheme is eye watering and just cannot continue.
But what about markets and our portfolios? Anyone watching the FTSE 100 over the past couple of weeks may feel concerned at its steady decline. Those early Brexit deal rises have now been lost, but why?
Well the lockdown will have a large part to play here and I don’t think the media have focused enough on this.
However, there is an issue happening in America that I want to address called short selling and a synthetic stock bubble.
Whenever an economy is struggling, central bankers will turn on the money taps. This is termed as ‘widening the money supply’.
Imagine pouring water from a watering can into a bottle. The spout of the watering can is very thin and the water only comes as a trickle. The water does go into the bottle – but very slowly.
Now imagine the central banker comes along with a pair of scissors and cuts the end of the spout. Suddenly water is pouring out very quickly. A lot more goes into the bottle, but a huge amount is also wasted, gushing down the side of the bottle. This is called widening the money supply and it is caused by lowering interest rates and pumping capital into markets so that people feel richer.
Now lock those same people up in their homes for months on end and target them with adverts on social media telling them that they could make a lot more money with that spare cash that they can’t spend because they can’t go anywhere.
Normally, synthetic stock is the preserve of highly experienced fund managers and traders. The way this traditionally worked was as an insurance for a trader.
Let’s say I think that Tesco shares are going to go up and I am a fund manager. I could buy those Tesco shares but then go to a broker and also buy an insurance that pays me if I am wrong. This is effectively called hedging and it dilutes my gain because I will lose my money on the insurance if the shares do rise. However, the insurance gives me some return if they fall.
Enter the hedge fund manager.
During the Great Financial Crisis of 2008, we saw how hedge fund managers manipulated markets through short selling. They would buy the insurance that pays out if a stock falls. They would then buy as much of that stock as they could and swiftly sell it again to cause losses on that stock. They even borrowed vast amounts of these shares as synthetic stock from other companies and dumped these in the market too – in order to cause that particular share to crash.
I recall this happening with some of the banking shares such as HBOS which were already in trouble. The only winners in this scenario, were the hedge fund managers.
The FCA stepped in and rightly banned this practise of short selling in the UK which helped to steady markets.
In the US; short selling has been starting up again as hedge fund managers look to make money through short term moves on distressed stocks. However, here is the really interesting quirk….
Many retail investors (that’s those folk stuck at home who are not professional traders) have started buying up the distressed stock in an outright bid to counter the hedge fund managers. The retail investors have bought the other side of the insurance that prospers if the share goes up!
This is all utter madness!
Effectively, you have a whole bunch of people buying synthetic paper that could be utterly worthless if they end up on the wrong side of the bet – and causing huge ripples in the market whilst doing it.
Water sloshing down the side of the bottle. This is an unintended consequence of widening the money supply.
My humble guess is that this practise will be shut down in short order (pardon my pun!)
I don’t see it leading to a crash. I think it is just one of a few reasons why markets are currently struggling. However, I thought you might read about this short selling or the ‘Reddit’ story and want to know a bit more.
In admin based news, I also wanted to mention the amount of paper that I know some of you are still receiving from Old Mutual. If you sign up for online access, you will greatly reduce your paperwork in the post. However, there are some documents that still have to be posted to you by law – particularly when a new investment is made. This is something we are noticing currently and we just wanted to put your mind at rest.
Finally, in Thomas and Thomas news, we are waiting for an imminent update on Katy and Danny’s new arrival and we will be sure to let you know as soon as we hear anything, but Katy is doing fine.
As always, we are here for you 100% if you need anything at all. Please don’t hesitate to call or email me. Hang on in there, the worst is behind us.
My very best wishes
Darren
