Novum Digital Asset Alpha - Daily Analysis 5 August 2020
I hope you're having a wonderful Wednesday and as global markets roll into the midweek malaise, there are both patches of positive news and dark clouds of despair on all fronts.
In brief (TL:DR)
In today's issue...
As an economic tsunami looms over the horizon, members of Congress are arguing over what bathing suit to wear.
With jobless benefits for millions of unemployed Americans lapsing, Congressional Republicans and Democrats are struggling to resolve differences over a new coronavirus relief package, with the Trump administration weighing in, and threatening executive action if Congress can't come to a consensus.
All eyes will be on the end of the week as U.S. Treasury Secretary Steven Mnuchin has reiterated the goal to strike a deal on legislation by the end of the week.
Asian markets were unimpressed and opened mixed, with Seoul's KOSPI (+0.66%) and Hong Kong’s Hang Seng Index (+2.00%) up, while Japan’s Nikkei 225 (-0.75%) and Sydney’s ASX 200 (-0.89%) down on rumors of a planned review of the hard-won U.S.-China trade deal amidst simmering U.S.-China tensions.
On the pandemic front however, there are signs that the spread of the coronavirus may be slowing in California, Florida and Arizona, states hardest hit in recent weeks.
But tempering that glimmer of good news has been an increased number of cases in Europe, in particular in Germany, Poland and the Netherlands, which all reported record increases in new coronavirus infections.
Yet somehow stimulus measures are keeping stocks afloat and overvalued, while uncertainty is buoying bond markets.
As more dollars chase more assets feeding into whichever narrative that investors subscribe to, it's yet uncertain which asset story will have a happy ending - maybe they all will.
And that story, would truly be a work of fiction.
1. Gold Hits US$2,000 for First Time, Is Now The Time To Be A Gold Bug?
For something that, in the words of legendary value investor Warren Buffett, just "sits there and looks at you," gold has certainly done a lot more than sit and look this year.
Because so-called gold bugs are sitting and looking at record gains this year in the precious metal.
Hitting US$2,000 an ounce yesterday, a milestone that capped a record-breaking rally driven by depressed bond yields, overvalued stocks and fears of the coronavirus pandemic decimating the global economy, gold has risen some 32% this year.
One of the key drivers for gold is of course uncertainty - uncertainty over whether the world plunges into a deep economic depression or recovers on the back of stimulus money - either scenario however still plays out well for gold's allure as an asset class.
Lat month alone, investors stashed some US$7.4 billion in gold-backed ETFs, adding to the record US$40 billion invested in the precious metal in the first half of this year.
With bond yields continuing to slide and real rates now in negative territory, the cost of holding gold decreases.
Plus the unlikelihood of dividend yields from stocks and negative real interest rates from bonds, means that gold sits pari passu with other asset classes at the moment in that it doesn't cost anything to hold it.
Plus the inflation story suggests that gold's rally still has some ways to run.
Many government bonds already carry negative yields - meaning buyers are guaranteed a loss on their debt if they hold it to maturity.
And globally, governments have announced US$20 trillion worth of stimulus to battle the coronavirus pandemic, which sets the stage for inflation.
Inflation typically punishes bond holders who receive a fixed coupon rate.
Yet gold holdings are still disproportionately low in most asset portfolios.
According to analysts at Bank of America (+0.08%), investors globally have less than 3% in gold, whereas in 1980, allocations were over double that amount at 6.2%.
Add to that simmering Sino-American tensions and historical under-ownership of the precious metal in portfolios, and gold's rally looks to have legs.
Dr. Evil was struggling to get the math right on ransoms during an age of unprecedented stimulus packages.
2. Stocks AND Bonds Are Rising, How Is That Possible?
"It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness..."
- A Tale of Two Cities, by Charles Darwin
Judging by investor sentiment, the words of Charles Darwin couldn't be any more apt.
Looking at bond and stock investors, you'd be forgiven for thinking that they weren't just living in two different cities, but potentially two entirely different planets.
While stocks have continued to rise on the back of seemingly unending rounds of monetary and fiscal stimulus from central banks, bond investors have painted an altogether more pessimistic outlook.
On Tuesday, anxious bond investors continued to drive a relentless rally in government debt that stood in stark contrast to America's much more optimistic stock market, plunging the benchmark U.S. 10-year Treasury yield to a low of 0.514% from 0.562%, the second lowest level this year.
The flight to bonds is reflective of broader concern over increasing signs of a stalling economic recovery and political gridlock in Congress.
Something as crucial as federal unemployment benefits, which provide a key source of funds for millions of unemployed Americans, stalled last week, yet Congressional leaders have thus far been unable to compromise in extending them.
Like Nero fiddling while Rome burns, American politics has taken an ugly turn, at the most unfortunate time.
But somehow political fecklessness hasn't satiated demand for U.S. government debt, which is still viewed as a safe haven asset.
The primary reason of course is that American politics may go to hell in a handbasket, but its institutions, particularly the Fed are strong enough to withstand anything that Washington can throw at it.
But how can stocks and bonds be rising at the same time?
The primary reason is the Federal Reserve.
Worried over the effects of a fresh wave of coronavirus infections, the Fed has vowed to keep monetary policy extremely accommodative for the foreseeable future and that liquidity has to go somewhere - the stock market is one place, but so are other assets like Bitcoin and gold.
Uncertainty means that investors are still buying bonds and with the Fed pledging to buy an unlimited quantity of government debt, there is a sense among investors that Treasuries are akin to central bank-backed deposits.
But it's not all rainbows and cotton candy for bond investors, because should inflation creep up, bond investors will be punished, and the recent run-up in gold prices suggests that there are more than a few investors betting on that.
It really is the best of times and the worst of times, but it also depends on who you're asking.
3. Bitcoin's Pause - Turnaround Time or Time To Buy?
Bitcoin's surge over the weekend had many Bitcoin maximalists excited that the world's first cryptocurrency could regain new highs this week.
And while Bitcoin did test US$12,000 in weekend trading, it has since pulled back from that level of resistance, on the back of profit-taking.
Yet technical indicators are suggesting that Bitcoin could make another major move higher, and soon.
Based on its recent price trend, Bitcoin appears to be consolidating just below US$12,000 before its next jump, which could sustain it over that level, for the first time since August 2019.
In the immediate term however, Bitcoin appears to be overbought, due in large part to fears over inflation, fears over the coronavirus pandemic, fear that stocks are overvalued, and fear in general.
But technical gauges of Bitcoin seem to suggest that while Bitcoin may be consolidating below US$12,000, it is still below the upper limit of its intermediate trading band.
That it has sustained a level over US$10,000 and now US$11,000 for this long bodes well for Bitcoin bulls.
Over the next week or two, it's unlikely that Bitcoin will make any further moves upwards, with the weekend push past US$12,000 a signal to many investors to take profit.
Volatility is just a reminder that Bitcoin continues to be fueled by narratives and with increasing mainstream media attention, that volatility will increase.
But Bitcoin's price will still continue to trend bullish as media attention generates greater retail investor interest.
With scant historical data, Bitcoin is relatively youthful as an asset class, so flash moves, in both directions shouldn't shock investors - the important thing to note is that it's cleared US$10,000 - a psychologically important level of resistance.
Given that Bitcoin is still considered one of the major asset classes that is dollar-denominated, a weaker dollar and continued stimulus should persist in adding to Bitcoin's bullish story.
The pause for now may be time to take a small bet on a bigger Bitcoin.
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Aug 05, 2020
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