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Novum Alpha - Daily Analysis 18 October 2021 (10-Minute Read)

Investors continue to grapple with worries about inflation amid surging energy shortages that are prompting more production cuts and sending bond yields higher.

 
A magnificent Monday to you as markets make their way through challenging conditions. 
 

In brief (TL:DR)

 
  • U.S. stocks finished well last Friday with the Dow Jones Industrial Average flat (+1.09%), the S&P 500 (+0.75%) and the tech-centric Nasdaq Composite (+0.50%) all up on robust corporate earnings. 
  • Asian stocks slid Monday as surging energy prices cemented worries about inflation, sending bond yields higher.
  • Benchmark U.S. 10-year Treasury yields rose about one basis point to 1.58% (yields rise when bond prices fall) even as the Fed may start tapering asset purchases as soon as next month. 
  • The dollar edged higher.
  • Oil continued to rise with November 2021 contracts for WTI Crude Oil (Nymex) (+1.25%) at US$83.31 as the recent spike in energy prices starts looking increasingly like a commodity supercycle. 
  • Gold was slightly up with December 2021 contracts for Gold (Comex) (+0.17%) at US$1,771.30 on inflation concerns. 
  • Bitcoin (+1.86%) rose to US$62,271 into the week with outflows leading inflows and confirmation of a U.S. Bitcoin ETF (albeit trading in futures) set to start trading this week (outflows typically signal that investors are looking to hold Bitcoin in anticipation of higher prices). 
 

In today's issue...

 
  1. China’s Energy Crisis is Turning into a Supply Chain One
  2. Southeast Asia’s Richest Families Are Venturing into VCs
  3. In the Stablecoin World, a Fine is Just Fine
 

Market Overview

 
Investors continue to grapple with worries about inflation amid surging energy shortages that are prompting more production cuts and sending bond yields higher.
 
At the same time, the economic recovery remains patchy while central bankers are inching closer to paring back stimulus.
 
U.S. consumer sentiment fell unexpectedly in early October, but retail sales prevailed, crucial for the U.S. economy where a full 70% consists of consumption. 
 
In China, the economy slowed in the third quarter, as headwinds from a property slump to an energy crisis and subdued consumer spending weighed on growth.
 
In Asia, markets were mostly lower on Monday morning as surging energy prices cemented worries about inflation, sending bond yields higher with Tokyo's Nikkei 225 (-0.31%), Hong Kong's Hang Seng (-0.53%) and Seoul's Kospi Index (-0.16%) down, while Sydney’s ASX 200 (+0.24%) was slightly up thanks to a rally in commodities. 
 

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1. China's Energy Crisis is Turning into a Supply Chain One

 
  • As Beijing remains doggedly determined to wean the Middle Kingdom off its addiction to the highly pollutive coal, Chinese President Xi Jinping is warning manufacturers to expect power disruptions, and more of them.
  • The bigger question is whether these persistently higher prices will unnerve global central banks, some of which have already buckled and raised interest rates.
 
Just when you thought that supply chain woes couldn’t get any worse ahead of the holiday shopping season, everything from toys to electronics could face strong headwinds as China’s energy crisis threatens to break already strained supply chains.
 
Never mind that shipping rates have already soared thanks to a shortage of containers and a spike in the price of fuel oil, China, long assumed to be the world’s factory to make things cheaply, is suddenly running out of steam.
 
As Beijing remains doggedly determined to wean the Middle Kingdom off its addiction to the highly pollutive coal, Chinese President Xi Jinping is warning manufacturers to expect power disruptions, and more of them.
 
But the ripple effect of Beijing’s push towards cleaner, renewable energy has been supply chain snarls that now threaten to add to already persistently high levels of inflation.
 
The good news is that Chinese Communist Party apparatchiks have in the interim adopted a pragmatic approach to the problem, expanding coal mines to cope with the shortage.
 
Market reforms in China’s heavily-regulated energy markets are underway, with Beijing forcing coal-fired power stations to sell into the wholesale markets directly, and removing caps on big users, which has seen energy prices soar by as much as a fifth.
 
And the increase in energy prices will no doubt translate into higher costs for manufacturers, which will almost inevitably be passed on to consumers and retailers, which will exert even more upward pressure on prices.
 
The bigger question is whether these persistently higher prices will unnerve global central banks, some of which have already buckled and raised interest rates.
 
Headline inflation in the U.S. has already been over 5% for five consecutive months and there will be pressure from hawks within the U.S. Federal Reserve to do something, despite a belief by a majority of policymakers that inflation is likely to be transitory.
 

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2. Southeast Asia's Richest Families Are Venturing into VCs

 
  • Some of Southeast Asia’s old-money tycoons are boosting investment in technology startups, looking to ride a wave of surging valuations. 
  • The pandemic laid painfully bare the lack of investment in digitalization in Southeast Asia, and wealthy families may have just as much to gain from the injection of new ideas as they do from the upside potential of a successful exit of a tech firm.
 
For decades, the formula for Southeast Asia’s richest families had been pretty straightforward, build a powerful business, preferably some kind of conglomerate, and invest in property.
 
As Southeast Asia’s economies have boomed, the growth of its economies and the real estate sector has meant that for the well-heeled, there’s been no surer bet than real estate.
 
But moves to reign in runaway property prices in some major capital cities, as well as the declining rate of capital gains ahead has meant that Southeast Asia’s richest families are looking into areas previously unventured into, including venture capital.
 
Until fairly recently, venture capital has been an afterthought for the vast majority of Southeast Asia’s richest, depriving an entire generation of entrepreneurs from badly-needed startup capital.
 
But the rise of companies like Grab, a ride-hailing turned super-app and Indonesian ecommerce giant Tokopedia have upended previous views on venture capital funding, with many of Southeast Asia’s wealthiest looking to get in on the action.
 
Businesses battered by the pandemic and the rise of digitalization have also put pressure on typically staid consumer and tourism centric business empires to reform and diversify.
 
Given the years of neglect that Southeast Asia’s otherwise vibrant startup scene has suffered, wealthy families are partnering with Silicon Valley’s seasoned hands in an attempt to find the region’s next Grab.
 
An increasingly level of sophistication, through more formalized family office structures is also helping the process.
 
Whereas a wealthy Southeast Asian family may have in the past adopted a more informal and ad-hoc approach towards investing.
 
Second and third generation scions taking over family businesses, many, especially those educated in the West, are preferring professional managers and family office structures that meld the family’s substantial networks with a more formal infrastructure.
 
And investing in startups may not just be a matter of growing family wealth, it may be a means to preserve it as well.
 
The pandemic laid painfully bare the lack of investment in digitalization in Southeast Asia, and wealthy families may have just as much to gain from the injection of new ideas as they do from the upside potential of a successful exit of a tech firm.
 
With the Asian Development Bank slashing its growth outlook for the region to just 3.1% for this year, it’s as yet unclear whether these venture capital-like investments by the embattled wealthy families of Southeast Asia will be enough to create a path out of empires which until fairly recently had relied almost exclusively on bricks and mortar business models.
 

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3. In the Stablecoin World, a Fine is Just Fine

 
  • Tether got away with the crypto equivalent of a slap on the wrist when it was recently fined by the U.S. Commodity Futures Trading Commission for just US$41 million.
  • At this point, there are likely few (if any), holders of USDT who expect that each one is backed by a dollar in a bank account somewhere.
 
Ay, ay, a scratch, a scratch. Marry, ’tis enough.
 
 – Mercutio, Romeo & Juliet, William Shakespeare, Act 3, Scene 1
 
In the cryptocurrency world, a fine by regulators, more often than not, is the best outcome.
 
Which is why when Tether, the world’s most heavily utilized stablecoin and whose market cap was a whopping US$69 billion at last count, got away with the crypto equivalent of a slap on the wrist when it was recently fined by the U.S. Commodity Futures Trading Commission for just US$41 million.
 
Last Friday, the CFTC imposed the fine on Tether and alleged the company made misleading statements from at least June 2016 to February 2019 about having sufficient dollar reserves to back each of its stablecoins in circulation.
 
To be sure, the stablecoin universe has always been similar to playing a game of pass the parcel – no trader would give up the liquidity and market pairs that USDT or Tether would afford just on the odd chance that it wasn’t entirely backed up by dollars.
 
Much as no bank is expected to have all of its depositors monies ready for withdrawal at the drop of a hat, Tether became almost widely accepted as a form of “fractional reserve stablecoin” and for the most part, cryptocurrency traders accepted that.
 
Despite fines by both the New York Attorney General as well as the CFTC, demand for USDT has soared along with the price of bitcoin and while Tether, as well as Bitfinex, the cryptocurrency exchange intertwined with Tether, have both paid fines, they haven’t admitted or denied liability – the perfect outcome for all involved.
 
At this point, there are likely few (if any), holders of USDT who expect that each one is backed by a dollar in a bank account somewhere.
 
In fact, Tether holds some US$30 billion of its US$69 billion market cap in commercial paper, which are short term interest-bearing securities akin to cash, but not quite, making it the sixth or seventh largest holder of such debt in the world.
 
As a substantial holder of commercial paper, Tether has introduced systemic risk from the cryptocurrency world into the financial one and any possible dumping of its holdings could significantly impair liquidity in the debt markets, which power industries and business across the world.
 
 

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Oct 18, 2021

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