What the illuminati don’t want you to know

 

_{This is not substantive investment research or a research recommendation, as it does not constitute substantive research or analysis. This material should be considered as general market commentary.}

 

Kepler’s own twisted genius, Callum Stokeld, offers some ‘long shot’ scenarios for 2021…

 
 

Shirley Jackson’s short story ‘The Lottery’ describes a community which comes together once a year to take part in a ritual which brings their society together in the hope of a good harvest. A little common purpose would be a splendid thing for the United Kingdom at this time, though perhaps stoning a random person to death would raise eyebrows among the more health and safety conscious among us – even Telegraph readers.
 

Still, sometimes there is something to be said for standing out with the crowd (ill-advised though it may be in the above context), and in this spirit we provide some brief, probably outlandish predictions for 2021 below.

These are not things we necessarily consider likely, merely events where we consider the probability to be above 0 and the potential implications to be huge.

 

Methodology

 

We have assigned a probability score to each one. This has been assigned through a highly scientific approach, combining the separate factors of ‘gut instinct’, ‘finger in the wind’ and ‘having a punt’.

 

Turkish civil war | Probability: 6%

 

Turkey has severe credit issues, running extremely negative real interest rates and desperately trying to attract foreign capital.

President Erdogan has been determined to run the economy ‘hot’, which is rarely a sign of an autocrat feeling secure in his position.

Turkish society is of course very split in any event, and it is not exactly a secret that the military has historically been opposed (even if its upper echelons were purged a few years back).

With protests already occurring over food price inflation, were the Turkish economy to reach the tipping point of either escalating credit defaults or hyperinflation, this could prove the light that sparks a fire.

Turkey is an essential land conduit for international trade; with global ports already struggling to cope with a resumption of trade volumes, supply chain disruption and a sharp inflationary tailwind could be consequences of a civil war.
 

Italy leaves the Euro and the EU (Italeave)| Probability: 4%

 

It is most likely too soon for this, but the Eurozone remains intractably split into different blocs on the question of debt and fiscal spending.

The Italian government is pushing for debt forgiveness from the ECB, but the chances of this happening we regarded as too outlandish for even this piece.

Polls consistently confirm that Italian society has become consistently more Eurosceptic, and the Italian economy has suffered a long malaise since joining the Euro (remember that Italians earned more per capita than Germans in 1999, and consistently ran primary budget fiscal surpluses throughout the 2000s; the necessary labour cost deflation to achieve competitiveness from this point is simply not societally sustainable, particularly when they had actually demonstrated what is being extolled as ‘good behaviour’ consistently in earlier years).

Italy was, of course, the second country to leave the Exchange Rate Mechanism after the UK; could history repeat itself? Make sure you have protection that should benefit from increased volatility if it does.
 

China has a growth meltdown | Probability: 10%

 

China has a very sizeable overhang of debt. It wishes to reduce this burden. We have seen triple-AAA rate state owned enterprises default on their debts in recent weeks and months, as the authorities attempt to remove some excesses from the system.

Yet expansion of debt is how the CPC essentially looks to grow the Chinese economy; it is a blunt tool that they will repeatedly batter the supine body of the corporate sector with.

Having a set growth target and encouraging good lending standards are mutually exclusive. In the first half of the year, expect the authorities to pursue the latter (and simply lie about the former).

However, as the debt edifice starts to creak, the spigot will resume. Chinese core inflation ex-food is flat year-on-year, whilst imports are falling. It is external demand that is keeping the Chinese economy going at this point, and that may not be sufficient. Other GEM countries are available.

 

Tesla joining the S&P 500 proves its share price downfall | Probability: 15%

 

Tesla has in many ways been the poster child for the market rally seen post Q1 2020. Its market capitalisation is now greater than the nine largest automakers in the world combined.

We have previously highlighted that this has, in large part, been a function of market structure. Having attracted a significant following of retail investors, the ready availability of options trades through free platforms such as Robinhood has seen huge demand for call options on Tesla stock.

When market makers sell call options, they hedge their exposure through building up stock of the underlying stock.

Doing so into a market dominated by passive flows, and subsequently relatively bereft of active sellers, this has created a disproportionate squeeze on supply liquidity, and ramped Tesla share prices higher in an often self-fulfilling cycle with Tesla share price movements closely positively correlated to share price implied volatility.

However, as Tesla joins the S&P 500, it will be easier for market makers to hedge their exposure through an index basket whilst also opening up far greater arbitrage opportunities, given lower implied dispersion.

This in turn would depress the implied volatility of Tesla stock, mechanically depressing the value of call options. The virtuous cycle turns vicious.

 

An international commodities contract is settled in Bitcoin | Probability: 2%

 

Bitcoin has seen a rapid rally this year. Its volatility makes it hardly optimal for an international settlement currency, yet the rally has seemingly in large part been in recognition that all major economies have a need to devalue.

Since FX devaluation between major currency pairs is essentially a zero sum game, ‘alternative currencies’ have been beneficiaries. The vast majority of world trade remains transacted in USD.

Unfortunately, this creates a squeeze on USD demand at crucial junctures in the global economic cycle, as parties seek to ensure they have sufficient stockpiles of USD to settle trades.

The world enjoys an effective easing of economic conditions when the USD falls and becomes more readily available. Yet, if this drives a recovery in activity this will ultimately increase trade and, thus, demand for USD, driving the USD higher.

Bitcoin may offer a long-term resolution to this situation, and many governments would at least consider the possibility of freeing themselves from their vulnerability to any squeeze on USD availability.

The Yuan is not even remotely an option – China operates a closed capital account. Cryptocurrencies may yet prove so, however. If this were to happen, expect exporting EM countries to do well, and those with particular positive sensitivity to global trade, such as Brazil and much of ASEAN.

 

The US makes a serious attempt to buy Greenland | Probability: 1%

 

President Trump was, in many quarters, much mocked for his reputed offer to buy Greenland and incorporate into a US territory. Yet two considerations remain:

1) as the battle for geo-political supremacy heats up, Greenland’s source of rare earths could actually prove incredibly valuable.

2) the world still needs US dollars to function, to settle trades and conduct international transactions. If the leaders of the main economic players agree to run the recovery hot in 2021, they will need more USD in the world.

What better solution, then? The Fed directly monetises $1trillion or so of zero-coupon perpetual debt, the US Government pays this for Greenland, the money leaks out into the rest of the world and trade surges. What could go wrong? Gold-bugs would be rubbing their hands.

 

Alien technology fuels move to a Huxley-esque dystopia | Probability: <1%

 

Former chief of Israeli space security, Haim Eshed, recently claimed that aliens have for years been in touch with US and Israeli authorities, but have sought to keep the presence of a ‘Galactic Federation’ quiet as they do not believe that humanity is ready to deal with such a revelation.

Could this be encroaching dementia in the 87-year-old? Possibly. Or perhaps 2020 was an elaborate test, and our extra-terrestrial friends will now descend to bestow upon us sufficient artificial intelligence technological development to handle literally all the tasks in our economic chain. With nothing else to do, we will all sit around looking to stupefy ourselves to the sudden newfound emptiness of existence.

Could pub chains and Hipgnosis benefit?

 

Baillie Gifford to adopt an all-out ‘value’ approach for all of its strategies | Probability: 0%

 

 

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