Markets are often nervous in October, partly because of muscle memory stretching back as far as the 1987 crash (my first week at a stockbroking firm) and particularly in US Election years on the basis of what has become known as ‘The October Surprise’, external shocks - often connected with influencing the Election. As we look into the final quarter with a return on the S&P500 of around 20% year to date, we would expect some profit taking and de-risking, likely in the form of continued rotation. Indeed, the return in the last quarter for the equal weighted S&P was almost double that of the market cap weight.

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As to one of the likely surprises, a strong candidate might be the announcement of a BRICS currency, around October 22, increasing the focus on the prospects for weaker $.

The concept of an October surprise in an Election year gained popularity in the Reagan era, but has a longer history in US politics as recentcy bias means that ‘events’ that occur in the month ahead of an election have a more powerful influence and many of them are seen to be timed for that effect. Sometimes, like busses, several come at one, sixty years ago for example, President Johnson saw the triple surprise of the ousting of Khrushchev in a coup, the Chinese testing of a Nuclear Weapon and the Election of the Labour Party in the UK.

Events, dear boy, events

While the first two were probably deliberately timed, the third was more of a consequence of previous October events. The British Conservative Party had been rocked by the Profumo scandal the previous year and had seen Prime Minister Harold Macmillan resign the previous October. Macmillan himself was famous for his quote that the biggest challenge to a statesman are “Events, dear boy. Events”, and had himself come to power in the wake of the Suez Crisis - another October event in 1956 ahead of the Eisenhower election. And obviously this year people are braced for the anniversary of last year’s October 7th events.

October seems to be ‘when stuff happens’

Wikipedia tells us The History of the October surprise goes back to the 19th century, with a long catalogue of ‘Events’ and while one aspect of Behavioral Science is Recentcy Bias, the notion that much greater weight is given to recent events, another is prospect theory, the recognition that a (further) gain is less important than avoiding a loss and thus we would expect to see a degree of caution among allocators to set in, with some profits being taken, especially as uncertainty increases about taxation policies. Markets don’t like events very much.

So, as the famously daft question goes, “What surprises do you expect?” Well, in the Rumsfeld framework of ‘known unknowns and unknown unknowns’, we can position a potential October surprise as something that we know is happening in the background and which might be timed for an October Surprise effect and that is the possible announcement of a new BRICS trading currency at the BRICS conference on October 22. Essentially this is an update of the old notion from J M Keynes before the Bretton Woods conference of the Bancor - something we discussed on the Market Thinking blog back in March 2022, (Is it time for the Bancor?) when the freezing of Russian Assets sounded the starting gun for the end of the Petro Dollar.

These discussions often get sidetracked into perceived slights on the US or are confused into narrow bi-lateral trade arguments and focussing on the need to replace the $ as a reserve currency. Dismissing the initiatives - especially mBridge, the BIS initiative to launch a digital version of a BRICS+ currency - is unwise, as this article by Geo Political insiders Chatham House goes on to explain.

The Unit is not about replacing the $ per se, it is about replacing SWIFT

The reality is that there is around $6trn a year of Global trade, almost half of which is bilateral trade between BRICS+ members, but which nevertheless involves the $ as a form of ‘middle man’. It is also important to note that this ‘flow’ is the lifeblood of the $7.5trn a day FX markets, as Global Banks deploy enormous amounts of leverage to profit from this flow. Any substitute for this flow would have multiple impacts, but would certainly be extremely material for the profitability of the big Global banks. (Note as usual this is not to be considered investment advice. Please do your own research and use a financial advisor).

The UNIT

There has been quite a lot of background discussion (largely missed by most market commentators) about the concept of the UNIT, essentially a trading unit said to comprise a basket of 60% BRICS currencies and 40% Gold and a White Paper from the BIS has looked at this in some detail, in particular discussing the concept of a digital Bancor - known as the UNIT, see here for their manifesto. A broader discussion on the subject can be found here and while this may all seem to be reminescent of the excitement around the Fintech bubble of a few years ago, it should be noted that there are a lot of very senior people in BRICS+ countries taking this very seriously indeed.

The Gold bugs are, naturally very excited about Gold having some more official monetary status, but in fact this is already happening via the Shanghai Gold exchange, wherein China trade partners (and from the picture at the top of the page that is the majority of the world) who find themselves ‘long’ rmb and can find nothing to spend it on, can always exchange it for Gold. It’s not quite the Gold window that was closed by Nixon in 1971, but it isn’t far off it.

A UNIT, combined with reforms to China Capital Markets would offer an investment as well as a currency alternative to the $

But perhaps more interesting is that China offers not only physical assets to buy with the Rmb or indeed the UNIT, but also investment opportunities and the real threat to the west is that they attract all the long term investment capital without the need for currency hedging.

To be clear, we are not certain this will happen in October, but we are certain it is happening and October would be a good time to mention it - especially as China seems to be moving to build out its capital markets (as discussed in Not a Bazooka) and an inflow of UNITS from fellow BRICS+ members, not just to buy goods and services but into Chinese investment opportunities would cement its role as an alternative economic system to the US based Washington Consensus.

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