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

Talk when it comes to geopolitics, isn't cheap. But that leaders from the world's two largest economies are meeting at least to iron out differences should provide some level of reassurance that open conflict is not in anyone's interest.

A terrific Thursday to you as U.S. markets started to slip while awaiting inflation data.

In brief (TL:DR)

  • U.S. stocks slid into Wednesday with the blue-chip Dow Jones Industrial Average (-0.44%), the S&P 500 (-0.18%) and tech-centric Nasdaq Composite (-0.09%) all lower as investors braced for higher inflation data due out later today. 
  • Asian stocks rose Thursday after U.S. Treasuries rallied ahead of a U.S. inflation report that may provide clues on the monetary policy outlook.
  • Benchmark U.S. 10-year Treasuries gained with yields slipping to 1.49% for the first time in a month (yields generally fall when bond prices rise), helped by a strong auction, signaling support for the view that the rebound from the pandemic will stoke only a transient bout of elevated inflation. 
  • The dollar was steady.
  • Oil slipped with July 2021 contracts for WTI Crude Oil (Nymex) (-0.80%) at US$69.40 amid an increase in U.S. fuel stockpiles. 
  • Gold was lower with August 2021 contracts for Gold (Comex) (-0.30%) at US$1,889.80 and traders awaiting fresh inflation data before committing to hedges. 
  • Bitcoin (+13.32%) rallied hard to US$36,962 on the announcement that El Salvador would be accepting Bitcoin as legal tender and as inflows into exchanges slowed behind outflows (outflows suggest that investors are looking to hold Bitcoin in anticipation of higher prices). 


In today's issue...

  1. Wages in the U.S. Are Soaring - Is it time to panic yet on inflation? 
  2. How do Zero-Fee Trading Apps Make Money?
  3. Make Bitcoin Legal Tender

Market Overview

Talk when it comes to geopolitics, isn't cheap.
But that leaders from the world's two largest economies are meeting at least to iron out differences should provide some level of reassurance that open conflict is not in anyone's interest. 
Although the Biden administration is urging allies for form a coalition to contain China, Beijing's turn of heart to become more "lovable" may be a path for the two superpowers to find common ground. 
Earlier this month, Chinese President Xi Jinping urged officials to create a "trustworthy, lovable and respectable" image for the country, a marked difference from its assertiveness in the South China Sea and use of massive infrastructure projects to create economic vassal states in Africa. 
But that change of diplomatic tact, whether a public relations exercise or a response to growing U.S. pressure to contain the superpower, is at least leading high level officials from both Beijing and Washington to come to the negotiating table. 
For other economies in Asia, a battle between Washington and Beijing leaves everyone worse for the wear. 
When Godzilla battles Ultraman over Tokyo, it's the city that forms the backdrop and soaks up most of the damage, along with millions of fleeing Japanese. 
Presumably, no one in Asia wants that and the prospect of bringing down the temperature for Sino-American relations is buoying stock markets in the region with Tokyo's Nikkei 225 (+0.41%), Seoul's Kospi Index (+0.31%), Hong Kong's Hang Seng Index (+0.67%) and Sydney’s ASX 200 (+0.42%) all up in Thursday's morning trading session. 

Did you miss us at the World Family Office Forum? Watch it here...


1. Wages in the U.S. Are Soaring - Is it time to panic yet on inflation?

  • Signs point to rising wages as contributing to higher levels of inflation, ahead of the release of key U.S. inflation data
  • Rising wages may be symptomatic of post-pandemic and seasonal influences and having been dismissed by the U.S. Federal Reserve, are unlikely to shift central bank policy in the immediate term 
The dust hasn’t yet settled but analysts are watching data due to be released later today that is expected to show U.S. prices rose another 0.4% last month, pushing annual inflation over April’s 4.2%, the highest in over a decade.
Part of the force behind higher prices has been wage growth, which had been relatively stagnant for years, especially at the lower end of the pay scale.
While U.S. employment is still a ways down from pre-pandemic levels, which would otherwise imply an ample pool of workers from which to draw from, most jobs being created right now are in low-wage industries like food service and hospitality, as a mostly vaccinated America gets out and about again.
Last week’s U.S. jobs report showed a larger-than-forecast pickup in average hourly wages for a second straight month, which suggests that even if there are plenty of workers, they’re not all lining up to work in the industries that need them the most.
And that’s forcing employers in booming summer businesses to boost pay in order to staff up.
While some economists are raising the prospect of a wage-price spiral – the idea that higher wages will spur more spending growth that strains production capacity that drives up business costs, that drives workers to demand higher wages, there is little evidence to support such a view. 
Those dynamics contributed to persistently high U.S. inflation in the 1970s, which these same economists invoke as the precedent which a post-Covid-19 pandemic recovery could follow.
But such fears may be unfounded, especially since the snapshot data in our current epoch and the inflation of the Nixon administration are chalk and cheese, especially since a debilitating energy crisis also hit America during that period, where Middle East oil producers sent the price of crude soaring. 
For starters, most of the wage rises are for seasonally-specific jobs.
There’s a reason Americans refer to them as “summer jobs.”
Mass vaccinations, with as many as 42.6% of Americans fully vaccinated against Covid-19 has meant freedom of movement and a demand for summer holidays within the United States not seen in the last 15 months.
Americans are going on cruises, heading to beaches, and exploring their country like never before, and restaurants, bars and attractions have been filled out to maximum capacity with service staff in greater demand than ever. 
But also, American tourists who would otherwise have headed to Europe or Asia can’t travel there anyway, leading to robust demand domestically.
Which is why this most recent bout of inflation data can be so misleading – it’s a combination of pent-up pandemic-distorting demand meeting the peak summer season.
And more importantly, U.S. Federal Reserve officials aren’t swayed by the momentary snapshots of apparent inflation.
While acknowledging that pandemic policies like stimulus checks and enhanced benefits could push wages up, the Fed also notes that wage increases are concentrated in the lower-paid service industries, exactly where the Biden administration is looking to see wages rise.
In other words, if the Fed is tempted to raise rates or pare down its asset purchases, it won’t be based on wage increases alone and that should give investors comfort that the status quo will prevail for now. 

Did you miss us at the World Family Office Forum? Watch it here...


2. How do Zero-Fee Trading Apps Make Money?

  • Zero-fee trading apps make money by consolidating order flows and selling them to market makers 
  • Controversial practice of selling order flows coming under greater scrutiny after being blamed for the meme stock frenzy 
Facebook (-1.03%), Google (+0.40%), Snapchat (+2.69%), Twitter (+1.53%), all of these great and indispensable services and for the ridiculous price of FREE?
How is it possible?
The pact that users have made with these tech firms has always been an implied one – they deliver the digital goodies, and we, our data and our privacy, are the product, which they then package and sell to the highest-bidding advertisers.
Anytime you’re getting something for free, just remember that someone is paying for it and if you can’t identify who that someone is, chances are it’s you.
Which is why the advent of zero-fee trading apps has been so deceptive.
Since the first stock market was established, brokers have sat themselves in the middle of the ecosystem, claiming their piece of the action (albeit a small one) and shaving just a few basis points off each trade, but making a fortune in the process.
So when zero-fee trading apps came about, they had to make money to keep their platforms running and they did so by selling order flow.
Last year, Wall Street market makers paid almost US$3 billion to retail brokers like Robinhood and SoFi for their trades.
The lucrative practice allows brokers catering to retail investors to earn substantial fees without charging a commission for bets on equities and options.
Payment for order flow involves a trading firm known as a market maker, paying a broker in return for orders for shares or options from retail traders.
Market makers like Citadel Securities, Virtu Financial (-7.69%) and Susquehanna agree in turn to execute the trade at or better than current market prices.
The market makers use computing power to execute trades at extraordinary speed and according to the Financial Industry Regulatory Authority, sit on one side of more than three out of every ten trades that take place outside traditional exchanges.
But there’s a new sheriff in town and head of the U.S. Securities and Exchange Commission, the freshly-appointed Gary Gensler, is now reviewing the controversial issue of payment for order flow.
Gensler and his deputies are also reviewing apps like Robinhood that encourage the “gamification” of trading through email alerts, prompts and triggers that the tech industry has perfected to lure retail investors to make trades or review their portfolios.
Potential regulation or prohibition of payment for order flow could crack open the business models of brokerages like Robinhood, which is readying itself for IPO, because their entire ability to subsidize zero-fee trading for customers depends on such payments.  
But it could also have broader implications for the market at large.
Unlike Asian markets, the influence of retail investors in U.S. markets has been a relatively new development.
Born out of boredom from pandemic lockdowns, trading apps like Robinhood made it easy and fun to trade in stocks and options, but most importantly – they made it free.
Frictionless trading led to retail investor flows rising to as much as a fifth of total volume on U.S, markets at its peak, and the advent of the meme stock frenzy that drove up shares of companies like GameStop (+0.85%) and AMC Entertainment (-10.37%) wouldn't have been possible without zero-fee trading.
While those retail investors addicted to the rush of betting on stocks may be open to eventually paying some form of brokerage commissions, volumes would inevitably drop off as user growth would plateau because of fresh barriers to entry.
Speaking with CNBC on the sidelines of the Piper Sandler Global Exchange & FinTech Conference, SEC Chairman Gary Gensler said,
“I think that’s a mis-perception – it’s not free trading. It is zero commission, but not necessarily free.”
Gensler also noted that the data brokerages gained was invaluable.

3. Make Bitcoin Legal Tender

  • El Salvador declares that Bitcoin is legal tender and mandates its acceptance for payment for goods and services, as well as tax
  • Experience of El Salvador may provide a template for other remittance-reliant countries to consider co-opting Bitcoin as legal tender to reduce reliance on the dollar and reduce the costs of remittances 
A decentralized digital currency that is outside of the realms of the traditional levers of power may not be the most obvious choice for an authoritarian regime, yet somehow El Salvador’s government has become the first country in the world to accept Bitcoin as legal tender.
Yesterday, El Salvador’s legislature passed a bill to accept Bitcoin as legal tender, in a move which President Nayib Bukele proclaimed was a historic step towards financial inclusion and economic growth for the poor Central American country.
Bitcoin entrepreneurs were thrilled by El Salvador’s decision to embrace their favorite cryptocurrency in a country where some 70% of the population does not have access to any form of financial service.
According to the El Salvador law,  
“In order to promote the economic growth of the nation, it is necessary to authorize the circulation of a digital currency whose value answers exclusively to free-market criteria, in order to increase national wealth for the benefit of the greatest number of inhabitants.”
Under the new law, Bitcoin can be used for purchases or tax payments and Bitcoin exchanges operating in El Salvador will not be subject to capital gains tax.
Some poorer countries have proposed cryptocurrencies as a means to end decades of reliance on the dollar, which El Salvador also made legal tender in 2000, but El Salvador has been the first country to accept Bitcoin as legal tender. 
With El Salvadorans highly reliant on overseas remittances, and payments from family members in the U.S. making up 20% of GDP, according to the World Bank, the embrace of Bitcoin could help to reduce the fees paid in these cross-border transfers, enabling payment, trading and even investment in a range of cryptocurrencies outside of Bitcoin.
The government of El Savador will set up a trust in the Development Bank of El Salvador, enabling the automatic conversion of Bitcoin into dollars.
While the overall impact of El Salvador’s embrace of Bitcoin is likely to be small globally, given the minute size of the country’s economy, it could provide a template for broader Bitcoin adoption in other remittance-reliant countries, including the Philippines, Tajikistan and Kyrgystan, which coincidentally also have authoritarian-leaning regimes.
Part of the reason for these authoritarian regimes considering making Bitcoin legal tender is that they can move value more easily beyond Washington’s prying eyes and punishing sanctions, but also reduce reliance on the dollar, while still using it with Bitcoin as the intermediary.
In any event, the acceptance of Bitcoin as legal tender, even in a country as economically insignificant as El Salvador represents a huge coup for cryptocurrency and Bitcoin has rebounded sharply since. 


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Jun 10, 2021

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