Learning From Nazis And Bond Markets

I was taught by a Nazi. No, a real one. Not a NatC (National Conservative member), or even Nancy Mace, one of the extremist Republicans who ousted Speaker of the House, Kevin McCarthy this week. No, these fascist wannabes have nothing on this teacher. It turns out my 1970s(!) educator’s French nationality hid the fact that just over 30 years earlier he was an officer in a regional Waffen SS unit during World War II and earned a post-war death penalty for his enthusiastic services to the Third Reich. Revelations of Louis Feutren’s war criminal past and noose-defying flight to Dublin only emerged in recent days but coincided with the publishing of an intriguing financial chart which contained some fascist reminders. In fact, there might even be a few lessons for us.

First, the chart from the WSJ/Daily Shot newsletter. It was highlighting that financial markets are currently pushing US equities to a record valuation premium over non-US equities. These levels of outlier valuations have only been seen twice in the last 100 years. The latter period was 1965. The world then was in the hottest part of the Cold War post a Cuban missile crisis in 1962, and about to see the escalation of the Vietnam War while also gearing up for a huge technological leap out of this world and to the moon by 1969. Given the emergence of a new major European war in Ukraine and the current global dominance of US technology, you can kinda make some comparisons and be a little hopeful.

However, if we think about the period earlier in the last century when the US valuation ‘premium’ was similarly pronounced we might be more concerned. Despite the global economic depression of the 1930s, it would appear all things are relative and the US was deemed a slightly safer home for capital than the rest of the world. The Nazi invasion of Poland and official beginning of WW2 in September 1939 confirmed those fears but why should the 1930s resonate more than 1965 in this writer’s head right now. Well, it’s not the state of my French linguistic skills.

In fact, it could be how my native tongue is being tortured and twisted into Orwellian double-speak at the Conservative Party conference in Manchester. The lurch to the right of the UK’s governing party is truly remarkable. The Tory insistence that the party out of power for 13 years, Labour, are guilty of the hooligan-like damage done to great British institutions is a delusional stretch but what about human rights becoming “luxury beliefs”? This from the party of Winston Churchill, drafter of the original text in the European Convention on Human Rights….. And, my personal favourite “we are the trade union of the British people”. You’d laugh only it is too serious. It’s not just me. The bond market, the ultimate financial arbiter of credibility, truth and stability is exhibiting some 1930s-style volatility….

While Sunak, Braverman, Mordaunt et al stood up and fought reality in Manchester (yep, watch Penny without the Coronation sword and file a copyright breach with Munster Rugby and Bizet’s 1975 opera, Carmen) the bond markets were busy voting. And, the results are in. UK government borrowing costs are set by the yields on 30 year instruments traded between financial institutions; the benchmark instrument, the UK’s 30 year Gilt(bond), is now carrying an interest cost(yield) above 5.1%. For context, that level of yield has not been seen in 25 years. That’s even higher than the Liz Truss pension fund catastrophe a few short lettuce-lives ago. For further context, the yield on the same instrument was just 3.75% back in September. And, for balance, it should be acknowledged that other countries’ bond markets are experiencing renewed inflation fears and higher yields. However, the UK bond market is weakening faster and hitting 25 year milestones earlier.

Former Clinton advisor, James Carville, used to quip that if reincarnated he’d come back as the bond market, and not as the Pope or a baseball hitter, “because you can intimidate everybody”. If Sunak, Coffey, 30p Lee and Braverman are scared of Channel dinghies and the ‘hurricane’ of 780 million refugees(no, really she thinks they all want to come to the UK) you’d hope they’d be wary of the bond market. Maybe they are? The cancellation of the HS2 high speed rail project might be short-sighted but something has to give if you’re determined to bribe your last remaining voting support with inheritance tax cuts and triple-lock pension promises. However, back in the real world what should worry UK observers is that these higher bond yields/income are failing to attract overseas buyers of the Great British Peso(GBP). Sterling has dropped from $1.30 to $1.21 in the last two months but note that the premium on security is not just in dollar assets.

As a slight digression, and as a hat tip to a recent Spark funding round with Irish cyber-security play Binarii Labs, if the bond world is feeling less secure they are not alone. Cisco just did its biggest M&A deal ever with a $28 billion acquisition of security information player, Splunk. Not to be outdone, Palo Alto Networks is acquiring two Israeli cybersecurity startups, Dig Security and Talon Cyber Security. In fact, market analytics firm, CB Insights, reported cybersecurity M&A activity doubling quarter-on-quarter to 78 deals in Q2. So, every fascist cloud has a cyber lining. So does every vote. Let’s finish with a feel good technology story.

We might be frustrated with portions of the voting populations in the UK, US and other democracies believing the promises of some pretty awful human beings with a track record of incompetence. Indeed, we can only hope that future votes will restore some sanity and even be inspired by a recent vote. This week the Nobel Prize committee voted to award the Nobel Prize in Medicine to Katalin Kariko and Drew Weissman for their research which helped develop mRNA Covid-19 vaccines. For Kariko it was particularly sweet recognition. Back in 1995 the leadership of the University of Pennsylvania, instead of offering her a position as a tenured professor, offered her the choice to leave or take a demotion AND pay-cut. Oh, and she had been just diagnosed with cancer. Luckily for the world she chose to stay at Penn, carried on her mRNA research work and collaborated with Weissman from 1997 onwards. That was an amazing demonstration of resilience. Now, we must hope that voting and healing in the world can show similar resilience as the bond market measures truth in real time, and with history on its side.

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