Novum Alpha - Daily Analysis 18 December 2020 (8-Minute Read)
Fantastic Friday to you and I hope you've had a great week!
In brief (TL:DR)
In today's issue...
Foreign investors are making it rain in emerging markets, fueling concerns of hot money flows that have the ability to severely disrupt local economies.
As U.S. stocks, particularly growth stocks are looking expensive, investors are hunting for bargains in emerging markets, without realizing that everyone else is already there.
But the risks in the wild west of markets are aplenty, and hot money threatening to paper over much needed economic reforms.
In Asia, markets started Friday a mixed bag with Tokyo's Nikkei 225 (+0.02%) and Seoul’s KOSPI (+0.02%) up slightly, while Sydney’s ASX 200 (-0.47%) and Hong Kong's Hang Seng Index (-0.29%) were both lower.
1. Sorry for South Korea as Covid-19 Strikes Back
South Korea is often held up as a shining example of how to manage the coronavirus pandemic.
The East Asian economic powerhouse imposed strict lockdowns during the early days of the pandemic and was one of the first economies to return to some semblance of normalcy.
Fund flows have also increased into South Korean stocks, with approximately US$4 billion worth of inflows flowing into Seoul’s stock exchange as investors hunted for prospects in a near-zero interest rate environment.
And while coronavirus vaccines are being loaded on planes and into vials, the nature of the enemy is making itself felt once again as South Korea logs the highest number of Covid-19 related deaths ever.
When it comes to the coronavirus pandemic, things could get a whole lot worse before they get any better.
The recent spike in daily infections is fueling concerns that the coronavirus is spreading out of control outside of the capital of Seoul and into the surrounding regions where over half of South Korea’s 52 million people live.
And while Seoul has imposed stricter social distancing measures, a combination of lockdown fatigue and the sheer virulence of the coronavirus has meant that healthcare officials are struggling to so-called “flatten the curve.”
Health authorities in South Korea have made clear that they will not hesitate to level stricter control measures that could see businesses return to lockdown and hamper an already embattled economy.
To be sure, the cooler winter temperatures (it’s snowing in Seoul) were always going to be a petri dish for the coronavirus to spread more quickly – the virus can live for longer periods on surfaces in colder temperatures - but those conditions combined with pandemic fatigue have led to heightened risks.
The experience in South Korea demonstrates the dangers involved with letting our guard down when it comes to the coronavirus.
And the announcement that a vaccine is on the way may lead pandemic-fatigued populations to shrug social distancing or many of the precautions taken in the early days of the outbreak.
2. The Fed is Your Friend Till the End
Despite disappointing jobs data, U.S. Federal Reserve Chairman Jerome Powell is the most optimistic he’s ever been since the coronavirus pandemic first hit in March, but pledges that the U.S. central bank will keep providing the economy with plenty of support for the foreseeable future.
Speaking to reporters after Wednesday’s last policy meeting for what has been a challenging year, Powell said he expected the U.S. economy to perform “strongly” in the second half of 2021 as more Americans are vaccinated against the coronavirus, but cautioned that the next few months would be difficult until that occurred.
And contrary to some analyst expectations, the Fed voted to maintain monthly bond purchases at their current levels until “substantial further progress” in reducing unemployment and increasing inflation was witnessed.
Powell estimates that almost US$2 trillion of funding for businesses, states and local governments have been made available thus far through emergency lending facilities.
The Fed has also bought trillions of dollars of Treasury and mortgage-backed debt, depressing interest rate costs for the federal government, home buyers and borrowers of every stripe.
Despite an upgraded economic growth forecast for the next two years, Fed officials have signaled they intend to keep interest rates low until 2023, which means all of that money will need to flow somewhere.
Asset prices, particularly for growth stocks have already shot past traditional measures of bubble valuations and so-called “value” stocks of firms most badly hit by the pandemic are starting to see some spillover interest.
Low interest rates are already seeing the early rumblings of fresh real estate bubbles in some parts of the United States even as unemployment is creeping up.
And while the Fed has little choice but to continue its accommodative policies until economic conditions improve, the inflation of these bubbles will eventually have real world consequences.
3. Bitcoin is the Ultimate Veblen Good
A veblen good typically refers to any luxury good, the price of which increases as demand increases.
And judging by the recent run up in Bitcoin’s price over the past few weeks, Bitcoin is turning out to be the ultimate veblen good.
As Bitcoin tested US$24,000 institutional investors and high net worth individuals were phoning up money managers and asking if they’d already missed the Bitcoin boat.
Unlike 2017, Bitcoin’s most recent rally has largely been led by institutional investors, who are increasingly concerned over the unprecedented levels of monetary debasement.
Coupled with demonstrable success of Bitcoin’s deflationary qualities, some analysts are suggesting that there may be continued upside for the cryptocurrency.
The wall of sellers that many had expected for Bitcoin at US$20,000 turned out to be nothing more than traders betting that Bitcoin would not ascend past that level and not “natural sellers” who had bet on Bitcoin earlier on.
In other words, sellers who may have bought Bitcoin close to its previous all-time-high weren’t looking to dump it as soon as they had covered back their losses of the past three years and that in and of itself says a lot about this Bitcoin rally.
As more investors believe that monetary and fiscal stimulus debases fiat currencies, more will consider cryptocurrencies like Bitcoin, which have a fixed supply, attractive inflation hedges.
And as stocks become increasingly overvalued, there will be more than a handful of investors looking to move out of equities and into cryptocurrencies.
But if central banks tighten monetary policy or governments take action to reduce deficits, that narrative could very quickly unwind.
For now, there is no immediate threat of that happening and that’s why Bitcoin continues to climb.
The Fed has already indicated that it intends to keep rates low right through to 2023 and a Democrat-controlled White House and Congress show no indications that they’re likely to want to stop spending anytime soon.
Against this backdrop, populations still bruising from the pandemic will put pressure on their governments to keep the fiscal taps flowing.
And that could see Bitcoin continue to keep setting fresh records.
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Dec 18, 2020