???? MoneyFitt Morning - Tuesday 11th Oct 2022

1???MARKET

The markets are taking a break from frenzied macro-economic indicator-watching mode to prepare for frenzied earnings results-watching mode, starting with the big US banks from this Friday.

Except for the Consumer Price Inflation numbers due on Thursday, where analysts expect September prices to be 8.1% higher than the previous year. More important is “core” inflation, which strips out volatile food and energy prices (but obviously shows the knock-on effects of those on everything else.) Economists surveyed by Bloomberg expect core CPI to rise by 6.5% from the year before, slightly faster than August's 6.3%. Whatever. It’s all very far from the Fed’s 2% target.

Bad loans. Bad!

IMAGE CREDIT: imgflip

As usual, the "earnings season" starts off with the big US banks reporting their third-quarter results, starting with JP Morgan, Morgan Stanley, Citi and Wells Fargo on Friday, followed by BofA next Monday and then Goldman Sachs the day after that. The market will watch for earnings growth since higher interest rates are typically positive for a bank, but the key things to watch out for are their "loan loss provisions."

• MINI EXPLAINER: This is money banks need to set aside from their revenues when they make loans and when some of those loans start showing signs they may not get repaid. This money is an informed guess, basically. It is a liability in the bank's balance sheet and if the borrower defaults and the bank has to make a loss on the bad debt, at least the bank will have hopefully prepared for it with its accumulated provisions (known as loan loss reserves.)

You don't need to know all that - the main thing is that when things are turning down for the economy, banks are often the first to feel it, via the loans they’ve made. These six banks are the biggest in the US and analysts are expecting them to announce over US$4bn in loan loss provisions between them.

Support from the Old Lady of Threadneedle Street

Also known as The Bank of England, the UK's central bank. She staged a dramatic rescue of the UK pension fund system during the chaos and panic that took place in the days following the UK's mini-budget and has now announced three fresh measures to keep financial markets functioning. One of those is the extension of the ￡65 billion plan to buy ￡5 billion a day of long-dated UK government bonds (called "gilts") which was to have ended this Friday.

Even though the BoE in the end only bought around ￡5 billion in total, having successfully calmed the market panic, it's extending the timeline and the amount to ￡10 billion a day, which signals that the worst may not be behind us. And reminds us that squeezing a fragile balloon in one place can result in potentially disastrous unintended consequences elsewhere.

Tesla and China, Musk and China

Tesla announced that sales in China hit a record monthly high of 83,000 cars in September, up 8% from the previous month and suggesting that supply chain issues in China, for Tesla at least, were easing.

Competition continues to heat up, though. Warren Buffett's BYD, the world’s top electric carmaker by sales, sold 201,000 units. More importantly, the positioning of Tesla as the Apple of EVs in China is under threat as more carmakers compete for that segment (and without the equivalent of Apple's "walled garden" ecosystem to defend it.)

Coincidentally (?), Elon Musk got praise from Beijing for suggesting a simple plan to solve the decades-long crisis over Taiwan by making it a special administrative zone similar to Hong Kong. After getting similar praise from the Kremlin for his suggestions regarding Ukraine, one wonders which intractable geopolitical crisis he will “solve” next.

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2???FOCUS

The E-Rupee and Digital Euro are coming!

The Reserve Bank of India, the central bank, has proposed a pilot of its version of a?Central Bank Digital Currency??(CBDC), the E-Rupee or e-?. There would be two versions, one for general use, including the public, and another just for financial institutions like banks. The European Commission has also announced legislation for the digital euro to be a CBDC issued by ECB in 2023. China and 16 other central banks are currently piloting their own digital alternatives to paper money with many others in the planning stages.

IMAGE CREDIT: Tenor

Besides making payments "more efficient, robust, and trusted" there is also a clear nod to the popularity of crypto in recent years, which central banks see as a huge problem in their battle with money laundering and the financing of terrorism.

Central bankers also see crypto assets as potentially creating a parallel economy (to which crypto enthusiasts would say: "well, yeah") which would then be a threat to monetary policy objectives, foreign exchange regulations and currency stability. The Europeans in particular point to ‘the risk of disintermediation of banks and financial stability risks.’

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3???MoneyFitt?EXPLAINS?Central Bank Digital Currencies (CBDCs)?

A central bank digital currency (CBDC) is not a cryptocurrency.

A CBDC is simply a digital version of normal government-backed money, issued by a central bank and tied to that country's currency. Like paper money, this type of digital currency is known as "fiat money" because it has value purely because the central bank says so (really!) so it can be used to buy goods and services and as a store of value.

In practical terms, for the average person in an increasingly digital and cashless society, payments and money transfers using CBDCs would be much faster and cheaper. This is because it would all happen almost instantly on one digital ledger instead of going through multiple banks to get from one place to another.

Consumers could also use CBDCs without needing to pay for an account in a commercial bank either, which would help many of those who are currently unbanked to receive and transfer money digitally.

For crypto watchers, CBDCs are basically stablecoins, which are cryptocurrencies pegged to fiat money, but which happen to be government issued. By being government-issued, control is centralised, and that is the biggest difference with cryptocurrencies, which are decentralized. In crypto, there's no one central party in control since transactions are done and recorded on a blockchain.

By design, privacy (or anonymity) is much less with a CBDC than with crypto (or physical paper money, for that matter!) since among the duties of a central bank are the monitoring and prevention of money laundering and terrorist financing.

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