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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
Good morning. It would be traditional, for Unhedged’s first newsletter of the year, to talk about the outlook for the year to come. But I have not fully gathered my thoughts yet. You can help me out by sending me yours, so I can steal them: unhedged@ft.com.
Venezuela and markets
A few weeks I wrote this about Trump in Venezuela:
It is not the job of a column about markets and finance to interrogate the strategic, moral or practical legitimacy of any of the administration’s objectives. The point here is just that they line up neatly in Venezuela . . .
It has been a core thesis of this column that Trump’s ideological and strategic commitments are only weakly held, and will be given up easily in the face of economic, market or political pressure. This is the key reason why markets are so comfortable with Trump. Venezuela might just put this thesis to the test.
The test has come, and the thesis has failed it. The Trump administration has embarked on a very risky gambit in pursuit of strategic aims. As every commentator has pointed out, Trump is now on the hook for what happens next in Venezuela. It is possible that the president and his team don’t fully understand the risks they are taking — that they think the decision to “run” Venezuela is akin to, say, launching missiles at Iran.
But a more plausible reading is that the president is knowingly putting his legacy on the line for what may become a very unpopular policy, because he believes in it. When an action sits at a point of multiple overlaps in Trump’s messy strategic patchwork, he will act in the face of real and present political risks, it turns out. I did not believe this until this weekend, but I believe it now. The alternative — that he and his team are stumbling in blindly — strikes me as unlikely, given how obvious the risks are (simply assuming people are fools should always be the analyst’s last option, in any case).
If this were merely about markets, I would make a Taco joke here. But for the people of Venezuela (and, potentially, American soldiers) this situation is too serious for jokes. I am not remotely qualified to speculate about the strategic or moral implications of regime change. What is relevant for this newsletter is whether the demise of the “Taco” thesis (for lack of a more serious label) in the geopolitical domain has significant implications in the domain of markets. Some basic thoughts:
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Even significant instability in Venezuela in the near term seems unlikely to cause a major disturbance in the oil market or the price of gasoline in the US. Venezuela’s reserves are the largest in the world, but it only accounts for about 1 per cent of a global market that is currently oversupplied. As of this writing, markets are not pricing in instability — instead anticipating lower oil prices as trapped Venezuelan supply is released.
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Big question: do we think Trump’s newfound risk appetite is domain specific? Trump has just demonstrated a surprising (to me, at least!) degree of tolerance for political danger to realise his geopolitical vision. What about his economic vision? Should the market price in the possibility that he will cast caution aside on tariffs or his approach to the Federal Reserve? Or will the pattern of backing down in the face of markets — particularly the bond market — continue? I’m not sure, but I would not be surprised if a bit more volatility is gradually priced into markets in coming weeks and months.
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It’s the second-order geopolitical effects of regime change in Venezuela that have the biggest potential implications for markets — specifically implications for Ukraine and Taiwan. Again, not my area, but this is where I would guess the big action is likely to be, if there is any big action at all.
I’m keen to hear from readers. What will you be watching as we try to figure this out?
Activists and banks
The US banking industry would be healthier, and a better place to invest, if it were to consolidate (so Unhedged has argued, for example, here). Banking is a scale game, both because of high fixed technology and compliance costs and because the best bits of the business are sophisticated, fee-based activities where the small players struggle to complete with monsters like JPMorgan Chase and Bank of America.
Looking, for example, at the 145 banks in the S&P Regional Banks Select Industry Index, 40 have price-to-book value ratios of less than one, according to S&P CapitalIQ. That is, they are trading at a discount to the net value of their assets. These banks are, on average, about a third smaller by assets than the index constituents not trading at a discount ($34bn vs $21bn).
Of course there is something a bit tautological about this: banks usually trade at a premium because they are growing, and growing banks get bigger. But it is also suggestive of the problems that small banks face — as is the fact that the bigger banks by assets in the index are growing book value per share faster than the smaller ones are.
So I was pleased, over my holiday break, to read in the Wall Street Journal about the emergence of a small but determined activist fund, HoldCo Asset Management, that is taking on regional bank managements:
A relatively unknown hedge fund pushed Comerica to sell itself this summer, pressuring the Texas-based lender to strike the biggest bank deal of 2025. That was just the start . . .
It turns out HoldCo Asset Management didn’t like that particular deal, arguing it undervalued Comerica. Its battle with the bank has since turned into an all-out war.
HoldCo has also agitated for change at KeyCorp and several other regional banks, and co-founders Vik Ghei and Misha Zaitzeff are on the hunt for more targets. Their message is often to address underperformance or sell.
It is an industry cliché that the reason more deals don’t get done is that being a regional bank CEO is a nice job to have: you get paid well, are treated as a pillar of the community, are a star at the country club, and so on. If you sell “your” bank, you have to give all that up, just to earn your shareholders a takeout premium. So a little activist agitation should be welcome.
But there is a complication: scale may be good, but merger integration is hard. Certainly the stock price of Truist, a super-regional bank created by the last bank megamerger, the 2019 tie-up of BB & T and SunTrust, is a poor advertisement for consolidation:
The HoldCo team appears well aware of this. While they have pushed for some deals, they see others as malpractice. In an interview with CNBC, Zaitzeff and Ghei suggest that CEOs of acquiring banks have incentives to do bad deals (just as the CEOs of target banks have incentives not to do good deals).
So the tricky question is this: what distinguishes the good deals from the bad ones? More on this in days to come.
One good read
“What could trigger a crash? Higher-than-expected inflation is one obvious candidate.”
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