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Market Focus: “Big Shot” and the big short

Xiang Guangda who controls Chinese metals giant, Tsingshan Holding Group, is nicknamed “Big Shot”. It’s too bad about his big short. 

His company went into the Ukraine crisis with a short position on 100,000 tonnes of nickel. This led to margin calls and trading losses worth billions due to a 250% price spike following the West’s ban on Russia’s commodities.

Traders say Tsingshan has reduced its short. It is confident in its financial position. But the problem illustrates the way a supply squeeze causes sudden pain. It also shows how events – in this case the weaponization of finance – can trigger unexpected problems in tightly-wound markets. 

The world also has a habit of under-estimating the resilience of the US economy and its institutions – including the biggest and most vibrant family office community. 

We saw this last March at Bill Hwang’s Archegos Capital, a leveraged family office wiped out when several of its favourite stocks fell in value at once, leading to margin calls.

The evaporation of liquidity undermines assumptions used in complex deals as prices fall. It exposes lenders to risks. Would-be buyers vanish. Banks demand punitive terms, and collateral, in refinancings. 

Prices for a range of Russian exports – oil, gas, nickel and wheat – are all hitting record levels and leading to stresses, near and far. Central banks trying to control inflation through higher interest rates could accelerate us into a severe recession. If the Fed doesn’t move, stagflation would follow and the dollar would crumble. The exposure of banks to bad debts could then lead to a rerun of the 2008 credit crisis.

The encouraging narrative which supported the stock market at the start of the year has evaporated. Growth stocks have been hammered and SPACs are down a third.

Bond managers say illiquidity is a potential problem for their investments. No one is keen to be trapped in things like Russian debt, US junk or open-ended property funds.

To date, venture capital has continued to pull in new money but this relates to deals negotiated before the Ukraine crisis. Raising seed capital and early-stage finance will get tougher because investors will not want to get trapped in illiquid situations with uncertain prospects. Investors need to be braced for write-downs.

That said, VC is the home of innovation and the US is hungry to achieve it. Clean energy falls into this category, following the Russian embargo. Success in nuclear fusion and battery storage would reduce oil needs. Biofuel firm LanzaTech, tipped for an IPO in Family Capital on 11 January, has confirmed its debut via a SPAC. Other key sectors like AI and health care will continue to throw up winners if the price is right.

But good news gets rare when the bears go prowling. Zoltan Pozsar, head of short-term interest rate strategy at Credit Suisse, says we should brace ourselves for dollar decline. In his latest research report, he warns that price instability will feed financial instability. Debt levels in the West are high and the Federal Reserve will struggle to contain the problem.

As the dollar weakens, Pozsar believes a new currency system will emerge, increasingly dominated by economies collateralised by cash and commodities. 

China could benefit, along with Brazil and Saudi Arabia. Oil-rich Venezuela can expect to come in from the cold, following a visit by US officials. Iran is better positioned for a nuclear deal. Bitcoin could also benefit from the upheaval, assuming it continues to exist.

If the Ukraine crisis eases, Pozsar’s narrative will fade. The world also has a habit of under-estimating the resilience of the US economy and its institutions – including the biggest and most vibrant family office community. 

But, to be on the safe side, investors may do well to tilt asset allocations in favour of countries, and companies, best positioned to weather financial shocks, while continuing to back smart innovations at a sensible price.

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