Novum Alpha - Daily Analysis 18 March 2021 (10-Minute Read)
Why is it so hard to trust? The U.S. Federal Reserve has reiterated time and time again to investors that it will keep markets well informed of any changes to both asset purchases and interest rates.
A terrific Thursday to you as we trundle into the U.S. Federal Reserve's important policy meeting for clues as to where America's economy is headed to next.
In brief (TL:DR)
In today's issue...
Why is it so hard to trust?
The U.S. Federal Reserve has reiterated time and time again to investors that it will keep markets well informed of any changes to both asset purchases and interest rates.
In fact, the Fed has said on numerous occasions that it will keep rates low until 2023, yet somehow investors believe that the Fed will walk back on those promises, making for choppy markets.
So was it any surprise then when U.S. Federal Reserve Chairman Jerome Powell reiterated that it would keep rates low until 2023?
But wait, there's more, the Fed has also made clear that it doesn't expect inflation to run away, in fact it expects inflation to start settling down after this year.
In Asia, markets cheered to the Fed's confirmation of more of the same with Tokyo's Nikkei 225 (+1.78%), Hong Kong's Hang Seng Index (+0.98%) and Seoul's Kospi Index (+1.21%) all up while Sydney’s ASX 200 (-0.31%) was slightly down on weakness in materials and bank stocks.
1. Stand Back & Stand By, Retail Investors Are Headed to the Markets
“Wall Street, the stimulus has landed.”
Even as Americans generations from now will pay for the cost of the pandemic’s massive debt load, Americans flush with Biden’s fiscal stimulus checks are heading to the nearest casino – the American stock market.
American retail investors are expected to pour billions of dollars into the stock market as soon as stimulus checks start hitting bank accounts later this week, with estimates by Vanda Research putting that figure at some US$3 billion, double the typical daily inflow from last month.
And Deutsche Bank said in a report last month that over time, American retail investors with online brokerage accounts are expected to pump some US$170 billion into equities, underscoring the significant influence that retail investors now hold over markets.
Last March, when the first stimulus checks arrived, retail investors spent some US$838 million more on stocks above the average, rising by US$381 million towards the end of the year, when the second wave of stimulus passed checks were cleared.
But Biden’s stimulus package is the largest direct relief package to Americans since the start of the pandemic, and Robinhood, a top zero-fee online trading app that has been blamed for the “gamification” of investing, has already thrown in promotions to capture a retail investing audience flush with free money.
Despite a recent pullback in tech and growth stocks, activity is picking up again as stimulus checks are expected to land in bank accounts towards the latter half of the week, with similar themes likely to spring up again, including Tesla (+3.68%), Apple (-0.65%) and maybe even GameStop (+0.79%) (again?).
2. Crunch Time for Chips
Sand, sand, everywhere, but not a chip to use.
The complex process of taking silica (which is sand) to make chips, has come under increasing pressure of late, with shortages paralyzing everything from vehicle manufacture to smartphones.
Fueling that global shortage of chips has been a seemingly insatiable demand for work-from-home electronics such as laptops because of the pandemic, to pre-existing Internet-Of-Things trends.
Samsung Electronics (+1.58%) has become the latest company to warn of a semiconductor shortage and cautions that it may delay production of its newer smartphone models, including potential delays to the hugely popular Galaxy Note model.
There are growing concerns that the chip shortage, which first hit the automotive industry, may now be spreading outwards to other sectors as well.
Recent supply pressures have also shone a spotlight on how interconnected and over optimized the chipmaking industry is.
Take for instance Qualcomm (+0.20%), whose Snapdragon chips are found in the majority of smartphones, but which relies on components from Samsung Electronics and Taiwan Semiconductor Manufacturing Co. (+0.50%) and whose production is already struggling with existing demand.
The only company so far that appears to be unaffected is Apple, which presciently moved to make its own chips some time before the pandemic, and before the recent surge in demand for semiconductors for anything from TVs to gaming consoles.
That makes shares of more integrated chipmakers like Intel attractive.
Unlike companies like Nvidia (+0.38%) and AMD (-0.15%), Intel controls most of its own manufacturing facilities, ensuring that it’s less susceptible to supply disruptions in component manufacturers than its competitors, which offshored and outsourced most of their production to cut costs.
And automobile manufacturers such as Ford (+1.60%) and General Motors (+5.13%) could lose billions of dollars in unrealized sales because of supply disruptions and poor inventory planning.
While investors may see this as a boom time for chipmakers, it’s not.
The global chipmaking business depends on finely tuned supply lines that rely on a manufacturing philosophy called “just in time” manufacturing that until recently ensured low inventories and excess capacity so as to optimize production processes.
Now that the pandemic has overturned such assumptions and severed optimized supply chains, chipmakers are being forced to consider building some fat into their production processes and even (gasp) redundancy.
These considerations will weigh on chipmakers’ profits in a business where margins are already razor thin and where billions of dollars’ worth of research and development can take years to recoup.
3. Bitcoin May Not be the Inflation Hedge You Think It Is
Ask any newbie bettor on Bitcoin why they bought into the nascent asset class and nine out of ten will tell you as a “hedge against inflation” and perhaps even throw in a “guard against currency debasement” argument for good measure.
And while these soundbites are sexy in their simplicity, the reality is that the empirical evidence backing up Bitcoin as an inflation hedge is patchy at best and fabricated at worst.
The inflation narrative for Bitcoin goes something like this – unlike dollars or any other fiat currency, the supply of Bitcoin is limited, so it can’t be devalued by a government or central bank by overdistributing it.
And with fresh stimulus checks headed into American pocket books, the seductive simplicity of the allure of Bitcoin is understandable.
As U.S. Treasury yields have spiked because of longer term inflation concerns, Bitcoin maximalists are pointing to that, to talk up their favorite cryptocurrency.
But in reality, inflation is coming off a very low base – just 1.7% over the past year in the United States.
And even if we were to forget about what the actual inflation rate is, the bigger question is whether Bitcoin would work as a hedge against it.
First off, there’s the relatively limited history of Bitcoin, which has only been around for over a decade – a period during which inflation has been historically low.
And if Bitcoin is likened to gold then the good news is that gold does act as an inflation hedge, if you think in time frames of beyond a century or more.
But over relatively shorter periods, gold is susceptible to both bouts of euphoria and sharp crashes (sound familiar?).
For reference, gold is down almost 10% this year, despite Treasury yields spiking and concerns over inflation.
If nothing else, inflation might see a sharp decline in Bitcoin, if investors move out of riskier assets such as cryptocurrencies.
In recent weeks, as U.S. Treasury yields spiked on inflation concerns, Bitcoin saw its worst falls in months.
That doesn’t of course mean that Bitcoin can’t be a hedge against inflation – because an asset sometimes is what you make of it.
A growing chorus of high profile voices from Wall Street and the Silicon Valley are talking up the inflation-proof quality of Bitcoin and celebrities are also getting in on the asset class.
And there is a growing list of global macro investors who have a non-zero amount stashed away in Bitcoin as a store of value, led most notably by billionaire hedge fund investor Paul Tudor Jones.
Ultimately, Bitcoin could or could not be a hedge against inflation, but the odds are the answer to that question would depend very much on who you are asking and more importantly, when you are asking that question.
Empirically however, Bitcoin’s value as an inflation hedge is less certain, and you can bet your last Satoshi on that.
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Mar 18, 2021
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