Under the Macroscope with Matthew Pearce and Jabir Sardharwalla
Matthew: Welcome once again to Under the Macroscope, our weekly look at the world from a macro point of view with Skybound Capital’s Chief Strategist based in the London office, Jabir Sardharwalla. The podcast is available on Apple, Spotify and the Google podcast platform for Android. We’d also encourage you; if you would like to listen to our past podcasts, you can go to skyboundcapital.com and visit our website and look at some of the available podcasts there. We encourage you to subscribe. Thank you to all of you who are supporting us so far.
Jabir, during the course of this podcast, we’re going to take a fairly detailed look at one of the big stories of the past week or so, rising yields and the implications thereof for share markets. We’ll come to that in just a moment because I want to start with your thoughts on GameStop, which is back in the news.
Jabir: Good morning, Matt. Yes, you’re absolutely right. It has come just when we had thought it had gone away. I think therein tells us one thing. That this is never going to go away. It gives you a sense of the diversification that exists within the investor group, generally. There is a force at the retail end that’s determined to make its mark one way or another. The share price of GameStop more than doubled in value on Wednesday. It hit $170 per share on Thursday, then came down to $120 and then closed by the end of the day around the $92 mark. Today I see its last price is about $108–109. In fact, trading was so hectic that repeatedly it had to be halted. On Thursday, it had to be stopped three times in the morning.
What actually happened? We know the CFO resigned, but I don’t think that of its own accord was actually a catalyst here. No one quite knows what’s driven this. Mind you is that it is really around the derivatives trading that has gone on in the stock, which I think takes this to a different level. For instance, this price move spread to a bunch of other stocks as well. Specifically, on GameStop, it was very, very active. There was a big amount of trading, a lot of call option buying volumes. It actually hit a high of something like 262,000 contracts on Wednesday alone. That’s five times the level on Thursday. This is really about the only identifiable factor behind all of this.
You had some people piling into bullish options, where the strike price was in excess of $500 per share. Bearing in mind what I said just now about where the price is right now, that’s a big gap. The last time it ever hit $500 was just briefly when it was going through a lot of activity in January. I think what’s happened here is that the options activity has really amplified the share price moves and compounded volatility. This is something to watch out for going ahead. The lessons from this so far are that because trading was halted several times by the authority reminds me of the old Piggly Wiggly story and how it happened once before. I think that shows how seriously the authorities are taking it and what they can actually do.
The other thing is that the fact that options trading has now gone to this level tells you how this has moved. Typically, when you issue options, the issuer has to cover it in their books unless they’re doing naked writing, which is extremely dangerous. Normally you would cover it in your books. That can accentuate the buying spree. It obviously results in more volatility. We’ve seen that around the stock price.
Last but not least it’s the smaller market value end of the market, which has lower liquidity versus the big, giant names. I think within the option space, you’re going to start seeing much more volatility become really apparent.
Matthew: At the risk of repeating a question that I asked when we spoke about this on a podcast three weeks ago, do you see this as being a catalyst for more intervention, more regulation from authorities?
Jabir: Yes, I think it is lining it up that way because it almost sort of fits into our next topic about what’s happening with yields. There is definitely at one end of the market a quest to delve into higher asset rising potential instruments. I think it highlights just how almost desperate people are to want to see mega stock price increases. What can the regulators do? The only weapon they have is to come in and halt trading. Short of actually legislating to say, “We start curtailing activity altogether with certain types of stocks.” Then we get into a very dangerous ground there. That’s going to set off a lot of argument and debate.
Matthew: Let’s move seamlessly then into another big macro story and rising yields and their implications.
Jabir: It has all happened this week. I’ve been worried about yields and inflation for a while. I think you know that. Other colleagues know that all too well. I’m just amazed at the pace with which it has all played out this week. To the point that we’re actually close to hitting year-end targets.
I’ll read out some figures for you in terms of where things stand. For instance, if you look at government ten-year yields. In the U.S. today, it’s now at 1.48%. It started the year at 0.99%. At one point this week, it actually hit about 1.6%. It has come back a bit. In the last 24 hours, we’ve seen some risk off again as people got nervous.
The Headline inflation rate in America is 1.4%. That means the real rate is 0.08%. It doesn’t sound like a lot, but that was negative, just not that long ago. If you look at a few others. For instance, in Australia, it has now hit 1.81%. Their inflation rate is 0.9%. You’re earning a very nice real rate of 0.91%. In Europe, if you take Germany, that’s remarkable. I mean, they were trading at a negative -0.6% not that long ago. They are now at a negative -0.25%. It’s still a negative but much, much less so, which means it has rocketed. The inflation rate there is about 1%. You’re still earning a negative real yield of -0.75%.
Now this is what’s really spooking activity. You have to look at what the potential drivers are here.
I don’t think at this stage it is actually playing out through inflation. I know there are fears around inflation, and it is certainly not the kind of inflation that I had in mind. I think that will come later in the year. I think it is the highly successful rollout of the vaccination program which is going so well. In a few months’ time lockdowns will start to ease. When they do, growth is going to start to rocket. I’m seeing quite a few upward revisions to growth.
With rising growth comes better earnings. The markets are factoring that in as well. Then when we all get back up and running again and we start buying. We even had one of the Fed members, Bostic, yesterday made a very interesting what I would call behavioural comment around the psychology of what consumers might do. In paraphrasing what he said, people are going to go a bit wild when they start going back out there and spending on drinks and food and so on.
Given the supply constraints in the economy that’s when I think later on inflation will really start to come into the picture. You are seeing it in certain areas.
It has got certain regions quite nervous. The ECB, the European Central Bank, has become quite jittery. Several of their members have come out with comments. The real concern there is the rise in the real rate. Bearing in mind, their mammoth bond-buying program is designed to keep those rates down. This is having the opposite effect. What the impact of this is, is that it could end up strengthening the euro. This is where they start to hit a problem because if you look at the European GDP, the consumer drives about 50–55% of it, but there’s a big reliance also on exports. If their currency is going up, it could seriously choke off the bloc’s GDP growth, at least in that segment. There’s not much else going on in terms of services. It is industrial production that’s driving them right now. This is why they’ve really become spooked.
Matthew: You mentioned there one of the drivers of this move is the vaccination program. Perhaps a good way to finish off this week’s podcast is to just take an update of how vaccination programs are progressing globally in key markets.
Jabir: It is all going to plan. We’re hearing more and more positive news around certain vaccines, like the Pfizer BioNTech. They are now saying it seems to have longer-lasting results and could be the best one they thought against some of these variants. That’s all very positive news.
In terms of vaccination rates, very high up there.
There was an article by Goldman’s where they did their estimates on the level of immunity that already exists from people who have had the virus plus where the vaccination program is so far and where it is headed, and they did their prediction of when we’ll get to herd immunity. In the UK and U.S., they were hitting April-May, which is remarkable. Bear in mind that herd immunity is 70+%. It does tie in also with Boris Johnson’s easing program. I think he’s gone down the cautious route. He said he would like the whole economy opened up by the third week of June. This is all very much on course. Frankly, there is no let-up. The vaccine rollout is continuing at pace.
Matthew: Jabir, hopefully, that means that at some point this year, we might be able to record this podcast in person.
Jabir: I hope so.
Matthew: As always, great getting your views. These are macro stories that are going to evolve as the next few weeks roll out. We’ll be keeping an eye on these and other macros in the coming weeks. Jabir also does his week in review, which is distributed to those who subscribe to it. We’d encourage you once again to go to www.skyboundcapital.com. All the previous Under the Macroscope podcasts are there, and available for download on Apple, Spotify, and the Google podcast platform for Android.
Thanks again for listening and for your time. We hope you’ve found it informative and thought-provoking. Until next week, have a great week, everyone.