Novum Alpha - Daily Analysis 7 June 2021
A magnificent Monday to you and I hope that you're enjoying the very best of summer.
In brief (TL:DR)
In today's issue...
U.S. tech stocks are likely to come under renewed pressure this week as the Group of Seven rich nations secured a landmark deal that could help countries collect more taxes from big tech firms, empowering governments to impose levies on tech giants such as Amazon (+0.60%) and Facebook (+1.32%).
The Biden administration remains resolute in its determination to continue ploughing ahead with its massive US$4 trillion spending plan that U.S. Treasury Secretary Janet Yellen was quick to point out was not "stimulus," and instead a move to build the things that America needs.
Sans inflation, the Biden administration's plan to restore and rebuild many parts of America's crumbling infrastructure could see the ushering in of a fresh golden age in the U.S. with low levels of inflation and high levels of growth and reasonable levels of taxes.
While politics threatens to get in the way, there is one issue that both Republicans and Democrats appear to agree on - that Big Tech pays far too little in taxes.
Because of the digital nature of their business models, Big Tech has for decades enjoyed tax arbitrage, booking income in tax-lite locations, while making its founders and shareholders immensely rich in the process.
But that may be set to change as global governments wise up to their tax practices.
Asia was a mixed bag in Monday's morning trading session with Tokyo's Nikkei 225 (+0.32%), Seoul's Kospi Index (+0.03%) and Hong Kong's Hang Seng Index (-0.79%) and Sydney’s ASX 200 (-0.14%) edged lower.
Did you miss us at the World Family Office Forum? Watch it here...
1. Chipmaking's Coming Home
“Go west, life is peaceful there.
Go west, in the open air.
Go west, where the skies are blue.
Go west, this is what we’re gonna do.”
– Go West (Reprise) by the Pet Shop Boys © 1993 off the album “Very” by Sony Music
While the Silicon Valley is better known for its software giants, it derived its name from the semiconductors that used to be manufactured there, before such processes landed overseas in the emerging manufacturing hubs of South Korea and Taiwan.
But history has a curious way of coming full circle as Taiwan Semiconductor Manufacturing Co., the world’s largest contract chipmaker is breaking ground on a US$12 billion chipmaking facility in Arizona, United States.
The first TSMC factory in the U.S. in two decades is also a sign of the times, with Intel announcing in March that it too would be investing US$20 billion to add two more chip foundries in Arizona.
As the pandemic has torn asunder already highly optimized supply chains, a global shortage of chips has forced a rethink of the pre-pandemic production planning for major companies and as chips become an increasingly important strategic asset, going into everything from cars to kettles, Washington and Beijing are doing their best to ensure continuity of supply.
But what is bringing companies to what may one day be called the state with the Grand Chip Canyon?
Abundance of electricity and more importantly, an established ecosystem that includes everything from equipment suppliers, needed to update and perform maintenance on chipmaking machines, to the firms that provide the chemicals and other materials needed to make semiconductors, have proved to be magnet for not just TSMC, but the clutch of other chipmakers in the state including Qualcomm (+1.94%), Broadcom (+2.19%) and Benchmark Electronics (+1.34%).
But perhaps weighing heavily on TSMC’s bid to go west has been geopolitics.
Coming at the height of Sino-American tensions and a tech decoupling during the previous U.S. administration, TSMC saw the risks involved of continuing to center the core of its manufacturing in Taiwan, which Beijing sees as a renegade province.
The Biden administration has also made it a crucial pillar of its policy to reinvigorate domestic chip manufacturing prowess and to become less reliant on China-heavy supply chains.
But building a chip foundry in the U.S. is easily two and a half to three times more costly than building one in Taiwan, which is why the incentives from the Biden administration as well as local and state authorities are crucial to the commercial success of the TSMC venture.
A major reason for the success of chipmaking in Taiwan and South Korea was built on the support that those governments provided for their fledgling chipmakers, with heavy investments in the sector and streamlined fab-building processes for companies.
Did you miss us at the World Family Office Forum? Watch it here...
2. U.S. Treasury Secretary Unflapped by Prospect of Higher Interest Rates
The key, at least according to U.S. Treasury Secretary Janet Yellen, is to fix the U.S. economy with things that it needs, and if interest rates and inflation go up as a result of that, that isn’t necessarily a bad thing.
Speaking Sunday in an interview with Bloomberg News fresh off a meeting with Group of Seven finance ministers in London, Yellen said,
“If we ended up with a slightly higher interest rate environment it would actually be a plus for society’s point of view and the Fed’s point of view,”
With the debate surrounding inflation heating up in recent months, officials like Yellen argue that current price increases are being driven primarily by transitory anomalies created by the pandemic, and the way that inflation is measured.
Supply chain bottlenecks and a surge in spending as economies reopen are also likely to spike sharply in the initial phases of emerging from the pandemic, but normalize soon thereafter.
If China’s economy is any precedent to go by, Yellen may be right.
As the epicenter of the coronavirus, China was also one of the first few countries to bring the pandemic under control and reopen its economy.
Yet despite an admirable rate of vaccination, with some 40% of the Chinese population already having received a single dose, the initial uptick in consumer spending has since plateaued and the savings rate continues to be high.
Yellen argues that the Biden administration’s US$4 trillion spending package would add up to just US$400 billion in spending per year, insufficient to cause runaway inflation and any “spurt” in prices would likely fade away next year,
“We’ve been fighting inflation that’s too low and interest rates that are too low now for a decade.”
U.S. headline consumer prices rose 4.2% in the 12 months through April, with numbers for May set to be published this Thursday.
The U.S. Federal Reserve has committed to only begin scaling back its US$120 billion monthly asset purchases of U.S. Treasuries and mortgage-backed securities only if there’s “substantial further progress” on inflation and employment.
And the central bank has repeatedly assured investors that it’s keeping rates where they are at least until 2023.
For investors, there is reason to believe in the Fed’s commitment to its timeline.
Although unemployment in the U.S. fell to 5.8% in May, according to a U.S. Labor Department report last Friday, along with wages, some of those gains could be attributed to seasonal factors, such as the peak summer hiring season at a time when the U.S. is reopening.
Whether those job gains are durable however will take longer to show up and the recovery has also been patchy and uneven.
While business confidence in the U.S. is rising, helped along by the relentless pace of vaccinations, the U.S. is still well short of the critical mass that it needs to achieve herd immunity, mainly because of a resistant (and mostly Republican) bloc that refuses inoculation.
And that could provide a fertile ground for a resurgence or variants of the coronavirus to emerge as the winter months approach.
3. China's Crackdown on Crypto May Have Little to Do with Bitcoin
“How much USDT do you want?”
The conversation flows freely on Weibo, a Chinese microblogging site where over-the-counter or OTC dealers provide crypto-crazy Chinese with access to all manner of cryptocurrencies, but their cryptocurrency of choice isn’t Bitcoin, it’s dollar-backed stablecoins.
From USDT to USDC and everything in between, the lack of a freely convertible Chinese currency has meant that entrepreneurial Chinese have long fed the demand for foreign currency using a digital halfway house, dollar-backed stablecoins, which many Chinese see as “just as good” as the greenback.
But Beijing has been trying to clamp down on the demand for dollar-backed stablecoins, which it sees as posing a far greater threat than Bitcoin, and Weibo, where such transactions are facilitated has been cleaning house, suspending cryptocurrency-related accounts.
While Chinese authorities have recently cautioned on cryptocurrency trading and Bitcoin miners are facing increasing pressure from national and provincial authorities, Beijing’s true target may have little to do with Bitcoin and its ilk.
As it stands, Bitcoin is hardly a useable currency, with only a small clutch of merchants accepting it and its volatility means that its role as a medium of exchange is still questionable at its current state of development.
Not so dollar-backed stablecoins.
Dollar-backed stablecoins provide the Chinese with a level of convertibility of currency and freedom of flow that until fairly recently was impossible.
According to sources inside the Middle Kingdom, Beijing can’t ostensibly be seen to be going after any specific cryptocurrency, but dollar-backed stablecoins are definitely a thorn in its side, with authorities in China seeing them as facilitating capital flight and beyond its realm of control.
At least with Bitcoin, Beijing sees its substantial clout through its Bitcoin miners, which some put at over 50% of the Bitcoin hashrate, as within its jurisdiction, with dollar-backed stablecoins, it’s more of an extrapolation of something that it has little command over – the dollar.
Nonetheless, Beijing’s overt crackdown on cryptocurrencies has put downwards pressures on Bitcoin, which is now struggling with technical levels and remains below its 20-day and 200-day moving averages.
Although still up some 25% this year, Bitcoin is well off its high of almost US$65,000 from earlier this year.
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Jun 07, 2021