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Novum Alpha - Weekend Edition 13-14 March 2021 (10-Minute Read)

Just when you thought the U.S. Treasury markets were settling down again - bond traders were out in force to dump all manner of U.S. sovereign debt, betting on higher levels of inflation as a recovering U.S. economy meets a historically high U.S. savings rate and a U.S. Federal Reserve that shows no signs of dousing the ambers of an economy that could very quickly turn inflationary. 

A wonderful weekend to you! 
In brief (TL:DR)
  • U.S. stocks finished Friday in the midst of the reflation trade with the S&P 500 (+0.10%), and blue-chip Dow Jones Industrial Average (+0.90%) up slightly while the tech-centric Nasdaq Composite (-0.59%) pulled back slightly due to the selloff in Treasuries. 
  • Asian stocks went into the weekend in positive territory. 
  • The U.S. 10-year Treasury yields spiked to 1.629% as Biden's US$1.9 trillion stimulus package made its presence felt in the markets and sparked a bond selloff. 
  • The dollar surged as U.S. Treasuries were sold down. 
  • Oil was more or less unchanged with April 2021 contracts for WTI Crude Oil (Nymex) (-0.62%) at US$65.61, on a firmer dollar. 
  • Gold was flat with April 2021 contracts for Gold (Comex) (-0.16%) at US$1,719.80 as the dollar lurched higher. 
  • Bitcoin (+6.71%) cracked US$60,000 over the weekend before pulling back slightly as investors bet big on the cryptocurrency against the prospect of inflation being played out by U.S. Treasuries. Outflows from exchanges led inflows (outflows suggest that traders are looking to hold Bitcoin in anticipation of higher prices).


In today's issue...
  1. Tech Investing Has Its Come to Jesus Moment 
  2. Biden's US$1.9 Trillion Economic Experiment
  3. Cryptocurrency Exchange Binance May Regulate Before Getting Regulated
Market Overview
Just when you thought the U.S. Treasury markets were settling down again - bond traders were out in force to dump all manner of U.S. sovereign debt, betting on higher levels of inflation as a recovering U.S. economy meets a historically high U.S. savings rate and a U.S. Federal Reserve that shows no signs of dousing the ambers of an economy that could very quickly turn inflationary. 
Tech stocks curbed their gains abruptly on Friday as the selloff in Treasuries squeezed the premiums that investors were willing to pay for growth. 
Over in Asia, investors were spared most of the carnage with Tokyo's Nikkei 225 (+1.73%), Seoul's Kospi Index (+1.35%) and Sydney’s ASX 200 (+0.79%) closing higher into the weekend, while and Hong Kong's Hang Seng Index (-2.20%) was pulled down by Chinese investors. 
1. Tech Investing Has Its Come to Jesus Moment
  • Long term investing and hot technologies are not typical bedfellows
  • ARK Innovation ETF is an embodiment of the contradiction of investing in novel innovations for the long run and guided by a Christian ethos 
Cathie Wood is not someone you would typically imagine rubbing elbows with some of the biggest tech CEOs in the United States, let alone investing in their firms. 
Wood, a bespectacled 65-year-old mother-of-three, who wouldn’t look out of place at a book club with a glass of chardonnay, is also the brains behind one of the most successful if controversial ETFs on the market right now.
Earlier this week and for what seemed like no apparent reason, Wood’s US$23 billion flagship ARK Innovation ETF (-1.32%) rose by 10% in a single day, not bad for someone who’s embraced the term “buy the dip” like a cryptocurrency junkie (Wood is into Bitcoin as well by the way).
The public face of what some have suggested is a speculative tech boom many liken to the dotcom bubble of the early 2000s, Wood’s ARK Innovation ETF has risen on the back of Tesla (-0.84%) and other tech stocks that it invests in. 
Coupled with massive investor inflows, ARK Innovation ETF has rocketed to a staggering US$60 billion from just US$3 billion a year ago, performance which has propelled Wood from a middling money manager to a cult figure among some investors.
Among her biggest fans and most ardent followers are the same set that helped propel shares of GameStop (+3.24%) and AMC Entertainment (+9.09%) to unbelievable gains.
And Wood shows no sign of stopping. 
Preaching from her newfound pulpit the virtue of her investment mantra, at a recent webinar Wood noted that “Innovation finally got some recognition.”
But where does Wood get her investment philosophy from?
It may surprise some that her investment beliefs aren’t founded in such tomes as “The Intelligent Investor” by Benjamin Graham, instead, they’re grounded in the good book, the Bible.
The divorced Wood is a devout Christian, starting every day by reading the Bible and her religiosity is reflected in the name of her flagship fund – the Ark of the Covenant is a gold-covered chest described in the Bible’s Book of Exodus as containing the stone tablets of the Ten Commandments.
But unlike some growth investors, Wood is patient, and appreciates how innovation is underestimated and how exponentially explosive growth can be when the rest of the world finally catches on.
That patience is reflected in Wood’s own career, only striking it out on her own at age 58 and even then struggling through her early years with an emphasis on disruptive companies that could shape the future, including electric vehicle maker Tesla, one that turned out spectacularly well for ARK Innovation ETF.
In early 2018, Wood shocked Wall Street by predicting that Tesla, whose shares were worth around US$300 at the time, would be worth over US$4,000 in five years and based on its five-for-one stock split last year, Tesla blasted through the adjusted US$800 target last January, far exceeding Wood's forecast.
But the last few weeks which saw a sharp spike in U.S. 10-year Treasury yields have been more challenging and critics say that ARK Innovation ETF’s tech holdings are wildly overvalued.
At one point, the ARK Innovation ETF fell some 30% off its mid-February peak.
Wood however hasn’t had a “come to Jesus” moment, and is open with investors that some of her bets are long shots, while all of them are long term.
And there are good historical precedents for Wood to draw her confidence from – shares of e-commerce juggernaut Amazon (-0.77%) took a decade to recover from their 1990s internet bubble peak but investors who held their nerve eventually made huge gains.
But that’s what you get when you make faith-based investments, hallelujah. 
2. Biden's US$1.9 Trillion Economic Experiment
  • Global economy is entering an unprecedented phase with a mountain of fiscal measures, central bank tolerance of inflation and high American savings 
  • Biden has few options other than to take a risk with fiscal stimulus to avoid the "lost years" of low inflation and low rates of Europe and Japan 
“God does not play dice with the universe.”
- Albert Einstein
Maybe, but it appears that American presidents will play dice with the global economy.
As fourteen-hundred-dollar stimulus checks make their way out to Americans across these United States, U.S. President Joseph R. Biden Junior is about to embark on the biggest economic experiment since Nixon abandoned the gold standard in 1971.
America is defying pessimism that the pandemic has knocked the wind out of its sails.
Based on current plans, the U.S. Federal Reserve and the Treasury Department will pour some US$2.5 trillion into the banking system this year even while interest rates stay near zero.
If American policymakers were restrained in the aftermath of the 2008 financial crisis, they’ve clearly thrown off those restraints, with the probable result a bounce back in the U.S. and by extension global economy that was unthinkable just a year ago.
In January retail sales in America were already 7.4% higher as compared to a year earlier.
Stuck at home and with few places to spend their stimulus checks, Americans, who aren’t particularly frugal even in the worst times, stashed away some US$1.6 trillion in excess savings.
And if vaccines continue to go into American arms and new coronavirus variants can be avoided or defeated, there’s also a good chance that unemployment will fall below 5% by the end of the year.
Biden’s fiscal boost will also light up American appetite for global goods as the economy inhales imports.
And while Biden and friends will have a guaranteed place in history, the U.S. is now entering an unpredictable three-pronged economic experiment that marries unprecedented levels of fiscal stimulus, a more tolerant Fed that accepts overshoots of inflation targets, and huge pent-up savings which no one knows what Americans will use to do.
In no point in history has this trifecta of loose money, hot money and unspent money co-existed simultaneously and the danger for the rest of the world is that the U.S. economy turns white hot and overheats beyond its safe limits.
And it’s a risk that investors have already considered, as evidenced by the recent spike in benchmark U.S. 10-year Treasury yields, on expectations of higher inflation and eventually higher interest rates.
Because of America’s continued dominance in the global financial system, its monetary policy outlook spills over into other jurisdictions, as was seen when Australia’s central bank had to increase its bond purchases to prevent yields from running away, as had the European Central Bank.
The Fed has remained obstinate and held that it will keep rates low and continue to buy assets until the economy is much healthier, particularly unemployment, but has been vague on what those precise targets are.
Because how much unemployment is acceptable? Pre-pandemic levels? Or zero?
To make matters worse, the Fed is looking to bring in an amorphous “average inflation targeting” regime that was adopted last year, which says that inflation can exceed the Fed’s 2% targets in some years, as long as on the average it’s around 2%.
But how will anyone know what inflation will be in the years to come to make up this 2% average?
Is 10% this year ok if over the next five years inflation falls to 0%?
Fed Chairman Jerome Powell argues that even if inflation spikes, it’s likely to be temporary, because longer term inflation dynamics “don’t change on a dime.”
But we really don’t know that – no one expected Treasury yields to spike on a dime either, but they did.
Then again, no one expected a pandemic last year either (maybe Bill Gates), but it happened.
There are too many unknown unknowns to make a declaration that inflation is a non-starter.
Eventually if inflation gets out of hand and the Fed starts to see that it may not have a firm grip on things, it might have to jack up rates to get inflation down, tearing apart asset markets that might make things difficult for a government that is increasingly in hock over its head.
To be sure, Biden has to take the gamble if America wants to avoid the low-rate, low-inflation trap that has been the past decade in Japan and Europe, also known of as the “lost years.”
And massive fiscal response may become the new normal response to recessions, regardless of how they’re caused, but the bigger risk is the world’s largest economy will be left with soaring debts, an inflation problem it can’t cap, and a central bank whose credibility is being called into question.
When the dice is in your hands, the only thing you can do is roll them, so God help us all.  
3. Cryptocurrency Exchange Binance May Regulate Before Getting Regulated
  • U.S. Commodity Futures Trading Commission is investigating whether world's largest cryptocurrency exchange by market cap Binance is allowing U.S. citizens to trade on its platform 
  • Binance has a U.S. office, but typically bans U.S. IP addresses from accessing its site, because of certain derivatives offered there 
Ah, the wonders of the internet. A free and vast open space of almost limitless potential and perversion.
But unbeknownst to many Americans, in parts of the world, access to certain corners of the web is either restricted, censored or outright blocked, except when it comes to cryptocurrency exchanges, where the roles are sometimes reversed.
On the world’s largest cryptocurrency exchange by volume Binance, an American IP address is a surefire way to get rejected for trading.
But Americans have long used VPNs or virtual private networks to circumvent such restrictions.
The web is replete with how-to videos on defeating geo-blocking of users based on their IP addresses.
So it’s no surprise then that Americans make up a sizeable portion of traders on Binance, which is now being investigated by the U.S. Commodity Futures Trading Commission (CFTC) over concerns that it allows Americans to place bets that violate U.S. laws.
Binance is not registered with the CFTC and the agency is trying to determine if the cryptocurrency exchange permitted U.S. residents to buy and sell derivatives that the regulator polices.
Like the very cryptocurrencies that Binance facilitates the trade in, the cryptocurrency exchange is decentralized, having no single corporate headquarters, despite a sizeable office in Singapore.
The latest action by the CFTC seems to suggest that regulators in the U.S. are looking to set the rules and protect their own heavily regulated cryptocurrency exchanges, locking their own trading liquidity within their own borders, and preventing Americans from being potentially exploited offshore.
Cryptocurrencies like Bitcoin and Ether are considered commodities by the CFTC, which also claims jurisdiction over their derivatives.
Binance co-founder Changpeng Zhao, known better as “CZ” said at an event on the social media platform Clubhouse, that the exchange intends to follow American rules and has strong controls to prevent money laundering.
The cryptocurrency exchange has long blocked American IP addresses from trading on its platform, but it’s a well known fact that Americans use VPNs to regularly circumvent these restrictions. 
Binance may be looking to work with regulators as opposed to against them with ex-U.S. Senator Max Baucus, tapped to advise on policy and government relations for Binance, revealing that the exchange is looking to see whether or not to register with the CFTC.
Registering with the CFTC would provide a big boost for Binance, especially for its North American presence, but many of the derivatives which Binance offers, including those which provide prodigious amounts of leverage, may still be beyond the reach of American cryptocurrency traders.
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Mar 13, 2021

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