Novum Alpha - Daily Analysis 9 August 2021 (10-Minute Read)
One of the most bizarre Olympic games in history have just concluded. With scarcely any spectators and a pandemic raging in the background, athletes head home.
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A magnificent Monday to you as markets are headed for a muted start to the week as the Tokyo 2020 Olympics wind down.
In brief (TL:DR)
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In today's issue...
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Market OverviewOne of the most bizarre Olympic games in history have just concluded. With scarcely any spectators and a pandemic raging in the background, athletes head home.
And while these Olympic games provided some glimmer of hope as to the world's road to recovery, there are nagging concerns that things may get worse before they get better.
Investors are mulling better-than-expected U.S. non-farm payroll data from last Friday and betting on an earlier taper of asset purchases by the Fed which will force a rethink of some of the considerations that had been fueling investor decisions - buying Big Tech and Treasuries.
But bearing in mind that payroll data is a lagging indicator and business investment has been low in the U.S., the true test will be how the world's largest economy responds to the delta variant, data that will only be available at the end of the third quarter.
Asian stocks were a mixed headed into Monday with Tokyo's Nikkei 225 (+0.33%) and Sydney’s ASX 200 (+0.17%) up, while Hong Kong's Hang Seng (-0.64%) and Seoul's Kospi Index (-0.16%) were down slightly in the morning trading session.
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Did you miss us at the Super Crypto Conference 2021? Watch it here... |
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1. What would Buffett do?
Maybe it’s age catching on, but judging by legendary value investor Warren Buffett’s latest moves, he’s certainly slowing down.
Despite having over US$144 billion in Berkshire Hathaway’s war chest, Buffett has slowed capital deployment in the second quarter of 2021, with just US$6 billion of share buybacks – the lowest since mid-2020.
Second quarter earnings at Berkshire Hathaway (+2.10%) also revealed that the investment holding company was a net seller of stocks, for the third quarter in a row.
Berkshire Hathaway’s problems are enviable – too much cash and too few opportunities.
Pressure is mounting on Berkshire Hathaway to orchestrate a large deal to help in the firm’s next phase of growth, but a shortage of attractively-priced options, and an exuberant market are forcing the company to spend billions on buying back its own shares, behavior that until fairly recently had been frowned upon by Buffett as an inefficient use of capital.
Net sales of stocks last quarter at Berkshire Hathaway amounted to US$1.1 billion, and serves as a reminder of one of Buffett’s age old adages – “Be fearful when others are greedy.”
Yet a closer examination of Berkshire Hathaway’s portfolio looks like a chapter from a history textbook – railroads, energy service companies and auto insurers.
Railroads did well in the past quarter, helped in large part by efficiency gains and surging freight demand, but auto insurers suffered as the lifting of pandemic restrictions saw more Americans hitting the road and each other, leading to more claims.
Buffett bought into Apple (-0.48%) in 2016, after confessing for the better part of a decade that he didn’t understand technology, and a significant chunk of Berkshire Hathaway’s value now rides on the fortunes of the Mountain View-headquartered technology company.
And while Buffett has been quick to admit mistakes and reverse in and out of positions as a consequence, for instance buying into airlines before the pandemic, and selling when the coronavirus all but crashed them, Berkshire Hathaway’s portfolio of companies still looks dated.
As investment holding companies go, Berkshire Hathaway looks increasingly like a steam engine, whereas Cathie Wood’s Ark Investment Management’s ETFs look like rocket engines.
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Did you miss us at the Super Crypto Conference 2021? Watch it here... |
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2. Method to the Maoist Madness of China's Market
The recent purge of the afterschool education industry in China, and growing assertiveness against the video gaming industry is unnerving investors who had otherwise been sold on the Chinese economic miracle.
But at its core lies the implicit social compact that the Chinese Communist Party has made with its people – to deliver what they “truly” want from life, even though they may not know it.
As one of the world’s oldest continuous civilizations, China has suffered numerous periods of fracture and unification from its first emperor Qin Shi Huang to the Chinese Communist Party.
And as political parties and ideologies battled for supremacy across the Middle Kingdom, the one constant throughout those battles has been the suffering of the people.
During the Qing dynasty of the Kangxi Emperor, Ming rebels which were actively trying to overthrow the incumbents were met with apathy from the populace because Kangxi’s reign was a prosperous one and reflects what truly drives the Chinese people – the desire for a better life.
At its core, most Chinese don’t really care who’s in-charge, they care that they have good meals, comfortable homes and a good life with their families.
While that sentiment may seem anathema to most western democracies, it’s the China that the Chinese Communist Party knows only too well.
And while investors may rue Beijing’s purge of both the afterschool education industry and video games, secretly, middle class Chinese are cheering.
For millions living in China’s largest cities, urban life can be riddled with anxieties that belie the broader sense of progress — from unaffordable homes to the pressure of securing the best education for their children and coveted places at leading universities.
And in the background, there is the fear that nags at almost every ambitious parent — the possibility that their progeny will grow tired of the race and seek refuge in the world of video games and the internet, which Chinese President Xi Jinping has railed against for harboring so many “dirty things”.
At its core, Beijing needs to keep its citizens fed and happy, because history has proved that hungry and angry Chinese tend to rebel against the regime of the day.
And while that would suggest that Beijing may target China’s property sector next, that would be overly simplistic.
Because Chinese also aspire to see the values of their property rise, it’s less likely that Beijing would handle that sector with an iron fist, but more likely iron gloves – tweaking the property market to cut down leverage and speculation, but providing opportunities for first-time homeowners to get on the real estate ladder.
Yet there’s no guarantee that Beijing will handle the property sector with finesse either – oftentimes it’s not the core leadership of the Chinese Communist Party that’s handling the intricacies of executing policy measures, but sycophantic apparatchiks chasing higher office.
And these sycophants often act out of all proportion to the intended measures, often resulting in unexpected and unintended consequences.
For investors still looking for a “safe” way into China’s massive market, it may still be safer to steer clear of the controversial corners and stick to sectors everyone can agree on – like hot pot.
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3. The US$550 billion Infrastructure Bill that Hinges on Cryptocurrencies
It was meant to be a moment for celebration. After over a decade of lobbying, the moneyed crypto class were about to have their cake and eat it – a US$550 billion infrastructure bill that recognized the nascent asset class but confined its taxable exposure.
Slipped in at the last minute, a cryptocurrency tax that was supposed to add an estimated US$28 billion to Washington’s coffers, hitched a ride on a bipartisan US$550 billion infrastructure bill by requiring cryptocurrency transactions over US$10,000 to be declared.
But the addition was considered too wide and was to be curtailed somewhat thanks to an increasingly vocal and deep-pocketed crypto lobby that had garnered bipartisan support to amend the width of those declarations, until a competing version proposed by Democrats and backed by the Biden administration, look set to delay the entire infrastructure bill.
The Blockchain Association, an increasingly powerful trade group for the cryptocurrency industry, has been mounting an eleventh-hour pressure campaign, to pass the infrastructure bill as is, which would exclude miners, software designers, protocol developers and other select parties from having to make those cryptocurrency transaction declarations to the IRS.
The competing version doesn’t make quite as many exceptions and would require a far broader number of stakeholders to declare their cryptocurrency transactions.
Both versions of the cryptocurrency portions of the infrastructure bill are mutually exclusive and it’s not entirely clear what happens next, but failure to come to a decision on the wording of the cryptocurrency provisions could delay the infrastructure bill even further.
Either way, the move to tax cryptocurrency transactions should be welcome because it’s a precursor to formalizing recognition of the asset class and providing the regulatory framework for broader institutional adoption and mainstream acceptance.
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Aug 09, 2021