Last week, the leasehold and reform bill became law in the UK. This is not the end of leasehold reform. It is not even the beginning of the end. But it is, perhaps, the end of the beginning. This passage of the bill happened against the odds. It was crawling through parliament and when Rishi Sunak, somewhat unexpectedly, announced the general election on July the 4th, campaigners for leasehold reform—a group which yours truly have been loosely working with for a while—thought the bill would be lost. If you want to understand what happens to outstanding bills in the brief final sessions of parliament before prorogation, you need to read to up on something called wash-up. Put simply, it’s the period where outstanding bills are either rammed through as is, or kicked into the abyss never to be seen again. It is a borderline insane policy process, which breaks all the rules of legislation, simply to get the order book emptied as quickly as possible. The leasehold and reform bill made it, just, though without key additions such as a cap on ground rent or a ban on forfeiture. This is bitterly disappointing, especially in case of the former given that an agreement to cap ground rents to £250 pa was virtually agreed by the department and HMT, or so we’re told. But I guess we live to fight another day rather than having to start over.
Read MoreUnfortunately, the stand-out move in markets since my last report—the crash in oil prices—is one on which I have little to say, let alone expertise. I didn’t see it coming, and I am not exactly sure why it happened. That said, I am not here to make excuses, so I’ll try to connect the dots as well as I can. A sudden fear of over-supply due to a shift in OPEC policy doesn’t seem to cut it as an explanation. I am more inclined to buy the idea of linking it with the jump natural gas prices, deeming it an erstwhile winning spread-trade gone wrong, at least in part. Pierre Andurand’s name has been mentioned too, which certifies that this has been a real rout in the oil market. Mr. Andurand’s $1B commodities fund reportedly shed a cool 20.9% last month. Whatever the causes of the swoon in oil, it serves as a decent entry the broader market discourse. I am sympathetic to the argument by Cameron Crise, a strategist with Bloomberg, that “Recent energy-price mayhem is just the latest sign that something about these markets looks broken.” Cameron goes on: “The presumption of a continuous liquidity spectrum is clearly an errant one.” Most readers of these pages will have plenty of recent examples that fit this picture, so I’ll jump straight to the grand conclusion.
Read MoreI have two objectives with this week’s missive. I want to contrast what I think are the two prevailing narratives used to explain markets in the first half of the year. And then I want to have a look at the durability of large-cap equity earnings because it seems to be crucial to what happens next. The first story pits the storm chasers against the connectors. The former primarily sees events such as the equity volatility surge in February, the widening LIBOR/OIS spread and the leap in Italian two-year yields as a result of a change in market structure. The ratio of liquidity-providing market makers to crowded trades has shrunk dramatically, creating the condition for face-ripping reversals in consensus and complacent positioning. The storm chasers sees this, and are trying to exploit it. They don’t necessarily ignore the big picture, but they are sufficiently confident in its stability to believe that storms can arise independently of it. Proponents of this view would argue that it is the combination of 15-sigma events and a stable overall environment that is the central story. For example, the fact that the February blow-up of the short vol trade was linked to a bigger story—that the market as a whole would crash—is what makes the initial trade, and the rebound, so attractive.
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