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Novum Alpha - Daily Analysis 12 February 2021 (10-Minute Read)

Does it feel like a Bull Year to you? Because markets in the west may have got a case of the yellow fever, as bullish sentiment is increasing on the prospect of fresh fiscal stimulus and just the right amount of economic malaise that will provide the U.S. Federal Reserve sufficient air cover to keep monetary policy loose. Asian markets are mostly closed today, with punting confined to mostly small private gatherings as investors get their fix on the mahjong tables instead of the markets.

Novum Alpha - Daily Analysis 12 February 2021 (10-Minute Read)

To all who are celebrating the Lunar New Year, a happy, healthy and prosperous Year of the Bull (Ox) to you from all of us here at Novum Alpha.

Meanwhile, western markets remain open for trading in case you can't get your fix at the mahjong table this year because of pandemic restrictions.

In brief (TL:DR)

U.S. stocks were marginally higher on Thursday with the S&P 500 (+0.17%) and tech-centric Nasdaq Composite (+0.38%) up slightly as technology stocks saw an uptake while the blue-chip Dow Jones Industrial Average (-0.02%) was down slightly on concerns that vehicle manufacturing is stalling because of chip shortages.
Asian markets are closed today for the Lunar New Year holiday.
The benchmark U.S. 10-year Treasury yield surged higher 1.162% (yields rise when bond prices fall) on the prospect of fresh stimulus from Washington picking up steam.
The dollar held steady against major trading peers.
Oil continued to slide with March 2021 contracts for WTI Crude Oil (Nymex) (-0.58%) at US$57.90 as the dollar held its own and initial confidence over consumption waned.
Gold was mostly flat with April 2021 contracts for Gold (Comex) (-0.20%) at US$1,825.40 as interest in defensive plays slid.
Bitcoin (+6.87%) surged to US$48,000, driven primarily by Mastercard (+2.59%) and Bank of New York Mellon (+0.93%) moving to support cryptocurrencies with outflows into exchanges leading inflows (outflows typically suggest that traders are looking to hold Bitcoin in anticipation of higher prices).

In today's issue...

White House Moves to Make America Chips Again
Markets Have Become Casinos, But Can the House Bail Itself Out?
Bitcoin Blasts Off in the Year of the Bull

Market Overview

Does it feel like a Bull Year to you?

Because markets in the west may have got a case of the yellow fever, as bullish sentiment is increasing on the prospect of fresh fiscal stimulus and just the right amount of economic malaise that will provide the U.S. Federal Reserve sufficient air cover to keep monetary policy loose.

Asian markets are mostly closed today, with punting confined to mostly small private gatherings as investors get their fix on the mahjong tables instead of the markets.

Tokyo's Nikkei 225 (-0.09%) and Sydney’s ASX 200 (-0.27%) were the only markets open today and were down slightly in the morning trading session.

1. White House Moves to Make America Chips Again

Biden administration moves to onshore more chip manufacturing as supply line disruption affects vehicle manufacture
Political shift presents tremendous opportunity for Intel which has persisted in manufacturing chips in America

“Designed in California, Made in China” is plastered on so many American products these days that it’s almost become cliché.

As China opened its doors in the late 1980s to foreign investment, it also enabled access to a large pool of cheap labor that has since moved up the value chain, making everything from mop heads to microchips in the process.

And as the semiconductor industry evolved, firms such as Nvidia (+3.30%) and AMD (+0.34%), focused on the higher margin design of chips while offshoring most of their production to manufacturers in Taiwan and China.

But one manufacturer held out – Intel (+3.06%) – and its investors were punished accordingly – as years of missteps with expensive and complex manufacturing processes, saw the once indomitable semiconductor giant struggle to compete with the likes of TSMC (+0.80%) and Samsung Electronics (-1.33%).

Yet the fortunes of Intel (and its long suffering shareholders) may be set to change as the Biden administration has pledged to take immediate action to address a global shortage of semiconductors that has had spillover effects and halted production on several U.S. car manufacturing lines.

A surge in demand for consumer electronics because of the pandemic has led to a shortage of chips, exacerbated by U.S. sanctions on SMIC (+4.05%), a Chinese chipmaker.

General Motors (-2.53%) and Ford (-2.64%) have been forced to idle factories in response to the chip shortage, this despite a resurgence in American demand for Ford’s popular F-150 pickup truck and which will hurt revenues.

U.S. President Joe Biden is expected to sign an executive order next week that will focus on immediate actions that can be taken, including the physical production of chips in America.

The impact the chip shortage has had on the American vehicle manufacturing industry has drawn the attention of lawmakers, with senators urging the Biden Administration to secure funding authorized by Congress late last year in the CHIPS Act to boost domestic semiconductor manufacturing.

And the crisis facing carmakers has also fueled resurgent calls for the U.S. to onshore its semiconductor manufacturing on national security grounds.

The move could potentially provide a significant boost for Intel, which has persisted in onshore manufacturing of chips and is now reviewing its entire business process.

Persistence can pay off, especially for Intel’s shareholders.

2. Markets Have Become Casinos, But Can the House Bail Itself Out?

Misallocation of capital rife as fiscal and monetary stimulus have distorted normal incentive mechanisms in the market
Asset inflation can lead to greater income inequality and any potential crash leaves governments with limited options as interest rates are at close to zero

If you step into a casino, the rules are pretty simple for most patrons – you gamble with what you have.

But when you’re a high roller, the story is slightly different – you don’t actually bet with money, you get to play on credit. The casino will loan you their chips in the hopes that you will play more and naturally lose more money.

And even if you can’t afford to pay a hundred cents in the dollar, the casino can (and often does) provide a small haircut on the loan, unbeknownst to most other gamblers – which is generally no problem, because the casino was the one that lent the high roller the money anyway and the high roller played at the casino – an entirely controlled environment.

But things are different when markets themselves have become casinos, and the recent boom and bust of GameStop (-0.20%) should highlight the dangers of politicians and central bankers becoming their own junket operators.

Loose monetary policy by central banks and fiscal stimulus are the functional equivalent of providing “free chips” to punters who then head to the tables (markets) to place their wagers.

That combination of leverage enabled by low interest rates and “free money” coupled with passive investing strategies of the last decade have resulted in grotesque distortions of capital allocation while exacerbating income inequality.

More disconcerting is the fact that there is growing sentiment on Capitol Hill that the house will never run out of chips (dollars) to issue.

Yet we don’t know whether governments can perpetually bailout markets without consequence.

And with interest rates already hovering near zero, the traditional levers of monetary policy may not be able to rescue markets or prevent another depression.

To ignore the societal impacts of bubbles is to foment the discontent that starts revolutions – let’s not forget that the French Revolution was a function of the world’s first stock market bubble that ended disastrously for the French people and put them off paper money for decades, slowing their economic development.

But the most insidious effects of market bubbles is the transfer of wealth from the many to the few – societies will face dark years while they try to navigate the disenfranchisement generated by inequality.

3. Bitcoin Blasts Off in the Year of the Bull

Bitcoin rises sharply on news of Mastercard moving to support cryptocurrency payments and Bank of New York Mellon facilitating cryptocurrency custody for institutional clients
Regulation remains wildcard as more institutions cotton on to cryptocurrencies and could provide short term price shocks

It’s as auspicious a sign as any with Bitcoin blasting to a new all-time-high after crossing into the Year of the Bull (or Ox if you will).

Bitcoin surged to a new record as Mastercard and Bank of New York Mellon (“BNY Mellon”) moved to make it easier for customers to use cryptocurrencies.

Mastercard will be focusing on stablecoins, whose values are pegged to that of another asset, including the dollar or gold, and has already partnered with cryptocurrency card providers Wirex and BitPay, with the caveat that cryptocurrencies will need to be converted to fiat currency before processing payments for transactions on the Mastercard network.

BNY Mellon on the other hand will be focusing on custody, to facilitate transfer and issuance of Bitcoin and other cryptocurrencies for its institutional investors.

The latest boost for Bitcoin comes hot on the heels after Tesla (+0.85%) announced last Monday in a regulatory filing that it had invested some US$1.5 billion of its cash reserves in Bitcoin, with as much as 8% of its cash assets in the cryptocurrency.

BNY Mellon and Mastercard join a growing list of high profile institutions and investors who are betting on Bitcoin, supporting arguments that Wall Street and mainstream investors are becoming more receptive to the nascent asset class.

Even before Tesla’s announcement, Elon Musk had publicly inquired on Twitter (+1.18%) about acquiring large amounts of Bitcoin – often the difficulty with large buy or sell orders is that they can cause substantial slippage in prices as they move the markets.

A single buy or sell order for Bitcoin on open markets of the size of Tesla’s could have potentially caused a much larger surge in prices and to quote Nicholas Nassim Taleb – prices aren’t determined by the market, but by its most stubborn buyer or seller.

In a blog post on Wednesday, Mastercard also revealed that it is “actively engaging” with central banks around the world on their plans to launch new digital currencies (likely stablecoins).

Twitter has also done some “upfront thinking” over how to handle Bitcoin, including if employees and vendors ask to be paid in the cryptocurrency and whether the firm needs to have the digital asset on its balance sheet, according to CFO Ned Segal, who made the comments on an interview with CNBC.

Twitter CEO Jack Dorsey, who also runs Square (+3.44%), has long been an outspoken proponent of Bitcoin, and last year Square had already put some of its treasury into Bitcoin.

But before investors start betting the farm on cryptocurrency, it’s important to note that regulation has been long been the wild card with U.S. Treasury Secretary Janet Yellen having warned of its misuse as being a growing problem.

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Yours faithfully,

Feb 12, 2021